ITEM 1A. RISK FACTORS 4
ITEM 1B. UNRESOLVED STAFF COMMENTS 14
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. MINE SAFETY DISCLOSURES 15
ITEM 6. [RESERVED] 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9A. CONTROLS AND PROCEDURES 55
ITEM 9B. OTHER INFORMATION 56
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 56
PART III 56
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 56
ITEM 11. EXECUTIVE COMPENSATION 56
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 56
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 57
SIGNATURES 59
FG
FINANCIAL GROUP, INC.
PART
I
This
Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These statements may be identified
by the use of forward-looking terminology such as “anticipate,” “believe,” “budget,” “can,”
“contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,”
“evaluate,” “forecast,” “goal,” “guidance,” “indicate,” “intend,”
“likely,” “may,” “might,” “outlook,” “plan,” “possibly,” “potential,”
“predict,” “probable,” “probably,” “pro-forma,” “project,” “seek,”
“should,” “target,” “view,” “will,” “would,” “will be,” “will
continue,” “will likely result” or the negative thereof or other variations thereon or comparable terminology. In particular,
discussions and statements regarding the Company’s future business plans and initiatives are forward-looking in nature. We have
based these forward-looking statements on our current expectations, assumptions, estimates, and projections. While we believe these to
be reasonable, such forward-looking statements are only predictions and involve a number of risks and uncertainties, many of which are
beyond our control. These and other important factors may cause our actual results, performance, or achievements to differ materially
from any future results, performance or achievements expressed or implied by these forward-looking statements, and may impact our ability
to implement and execute on our future business plans and initiatives. Management cautions that the forward-looking statements in this
Annual Report on Form 10-K are not guarantees of future performance, and we cannot assume that such statements will be realized or the
forward-looking events and circumstances will occur. Factors that might cause such a difference include, without limitation, general
conditions in the global economy, including the impact of health and safety concerns from the COVID-19 coronavirus pandemic; our lack
of operating history or established reputation in the reinsurance industry; our inability to obtain or maintain the necessary approvals
to operate reinsurance subsidiaries; risks associated with operating in the reinsurance industry, including inadequately priced insured
risks, credit risk associated with brokers we may do business with, and inadequate retrocessional coverage; our inability to execute
on our investment and investment management strategy and potential loss of value of investments; risk of becoming an investment company;
fluctuations in our short-term results as we implement our new business strategy; risks of not being unable to attract and retain qualified
management and personnel to implement and execute on our business and growth strategy; failure of our information technology systems,
data breaches and cyber-attacks; our ability to establish and maintain an effective system of internal controls; our limited operating
history as a public company; the requirements of being a public company and losing our status as a smaller reporting company or becoming
an accelerated filer; any potential conflicts of interest between us and our controlling stockholders and different interests of controlling
stockholders; potential conflicts of interest between us and our directors and executive officers; volatility or decline of the shares
of FedNat Holding Company common stock received by us as consideration in the sale of our insurance business or limitations and restrictions
with respect to our ownership of such shares; and risks of being a minority stockholder of FedNat Holding Company.
Our
expectations and future plans and initiatives may not be realized. If one of these risks or uncertainties materializes, or if our underlying
assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. You are cautioned not to
place undue reliance on forward-looking statements. The forward-looking statements included or incorporated by reference to the Form
10-K are made only as of the date hereof and do not necessarily reflect our outlook at any other point in time. We do not undertake and
specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements
to reflect new information, future events or developments.
FG
FINANCIAL GROUP, INC.
ITEM
1. BUSINESS
Overview
FG
Financial Group, Inc. (“FGF”, the “Company”, “we”, or “us”) is a reinsurance and investment
management holding company. We focus on opportunistic collateralized and loss-capped reinsurance, while allocating capital in partnership
with Fundamental Global® to SPAC and SPAC sponsor-related “SPAC Platform” businesses. The Company’s
principal business operations are conducted through its subsidiaries and affiliates. The Company also provides investment management
services. From our inception in October 2012 through December 2019, we operated as an insurance holding company, writing property and
casualty insurance throughout the states of Louisiana, Florida, and Texas. On December 2, 2019, we sold our three former insurance subsidiaries,
and embarked upon our current strategy focused on reinsurance and asset management.
As
of December 31, 2021, Fundamental Global GP, LLC, a privately owned investment management company, and its affiliates, or “FG,”
beneficially owned approximately 56% of our common stock. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive
Officer, Co-Founder and Partner of FG.
Sale
of the Insurance Business
On
December 2, 2019, we completed the sale of our insurance subsidiaries to FedNat Holding Company for a combination of cash and FedNat
common stock (the “Asset Sale”). The shares of FedNat common stock we received in the Asset Sale were issued to us pursuant
to a standstill agreement which provides certain limitations and restrictions with respect to the voting and sale or transfer of the
securities until December 2024. As of December 31, 2021, we continue to hold 1,007,871 shares of FedNat common stock.
Current
Business
Our
strategy has evolved to focus on opportunistic collateralized and loss-capped reinsurance, with capital allocation to special purpose
acquisition companies (“SPACs”) and SPAC sponsor-related businesses. As part of our refined focus, we have adopted the following
capital allocation philosophy:
“Grow
intrinsic value per share with a long-term focus using fundamental research, allocating capital to
asymmetric risk/reward opportunities.”
Currently,
the business operates as a diversified holding company of insurance, reinsurance, asset management and our SPAC Platform businesses.
Insurance
We
are establishing and seeking regulatory approvals for a Risk Retention Group (“RRG”) to provide directors and officers insurance
coverage to SPACs and their sponsors. We intend to provide capital, along with other participants, to facilitate underwriting such insurance
coverage. The Company will focus on fee income derived from originating, underwriting, and servicing the insurance business, while mitigating
our financial risk with external reinsurance partners.
Reinsurance
The
Company’s wholly owned reinsurance subsidiary, FG Reinsurance Ltd. (“FGRe”), a Cayman Islands limited liability company,
provides specialty property and casualty reinsurance. FGRe has been granted a Class B (iii) insurer license in accordance with the terms
of The Insurance Law, 2010 and is subject to regulation by the Cayman Islands Monetary Authority (the “Authority”). The terms
of the license require advance approval from the Authority, should FGRe wish to enter into any reinsurance agreements which are not fully
collateralized to their aggregate exposure limit. FGRe participates in a Funds at Lloyds syndicate covering all risks written by the
syndicate during the 2021 and 2022 calendar years. On April 1, 2021, FGRe entered into its second reinsurance contract with a leading
insurtech company that provides automotive insurance utilizing driver monitoring to predictively segment and price drivers. FGRe’s
exposure is limited by a loss-cap stipulated in the quota-share agreement.
FG
FINANCIAL GROUP, INC.
Asset
Management
Pursuant
to an investment advisory agreement, FG Strategic Consulting, LLC (“FGSC”) a wholly-owned subsidiary of the Company, has
agreed to provide investment advisory services to FedNat, including identifying, analyzing and recommending potential investments, advising
as to existing investments and investment optimization, recommending investment dispositions, and providing advice regarding macro-economic
conditions. In exchange for providing the investment advisory services, FedNat has agreed to pay FGSC an annual fee of $100,000. The
Investment Advisory Agreement expires in December 2024.
SPAC
Platform
On
December 21, 2020, we formed FG SPAC Solutions LLC (“FGSS”), a Delaware company, to facilitate the launch of our SPAC Platform.
Under the SPAC Platform, we plan to provide various strategic, administrative, and regulatory support services to newly formed SPACs,
for a monthly fee. Additionally, the Company co-founded a partnership, FG SPAC Partners, LP (“FGSP”) to participate as a
co-sponsor for newly formed SPACs. The Company also participates in the risk capital investments associated with the launch of such SPACs
through its Asset Management business, specifically FG Special Situations Fund, LP. The SPAC Platform entered into its first transaction
with Aldel Investors, LLC, the sponsor of Aldel Financial, Inc. (“Aldel”), a special purpose acquisition company, which completed
its business combination with The Hagerty Group, an automotive and marine insurer, on December 2, 2021. FGSS provided accounting, regulatory,
strategic advisory, and other administrative services to Aldel, which included assistance with negotiations with potential merger targets
for the SPAC, as well as assistance with the de-SPAC process. Additional information regarding our formation of FGSS and our SPAC Platform
can be found in Note 9 – Related Party Transactions.
Employees
As
of December 31, 2021 we had nine employees. We are not a party to any collective bargaining agreement and believe that relations with
our employees are satisfactory. Each of our employees has entered into confidentiality agreements with us.
Website
Our
corporate website is www.fgfinancial.com. A copy of our Code of Ethics can be found in the Governance Documents section of our
website. Information contained at the website is not a part of this report.
ITEM
1A. RISK FACTORS
Risks
Relating to Our Industry, Business and Operations
We
have had limited operations upon which to predict our future performance, since the sale of our former insurance business.
Since
we sold our former insurance business, at the end of 2019, we have transitioned to operate as a reinsurance and investment management
holding company. Accordingly, our historical financial statements provide little basis upon which to predict our future performance.
Our revenue has been reduced, as we have limited assets with which to generate revenue. Our failure to secure additional sources of revenue
may have a material impact on our results of operations and financial condition. In addition, the uncertainty surrounding our future
operations and business prospects may negatively impact the value and liquidity of our stock. If we are unable to implement our business
plans successfully, our financial condition and results of operations will be impaired, and your investment in our Company will be at
risk.
FG
FINANCIAL GROUP, INC.
We
have incurred substantial losses following the sale of our former insurance business.
We
sustained losses of approximately $7,188,000 and $22,457,000 for the years ended December 31, 2021 and 2020, respectively, the first
two years following the sale of our former insurance business, due, in part, to our limited business operations as we formulated our
new strategy. If we continue to incur such losses, and are unable to raise additional capital, we may be unable to continue
our business, and you could lose your entire investment in the Company.
We
intend to participate in a risk retention group which will provide director’s and officer’s insurance to special purpose
acquisition companies and represents a line of insurance for which we do not have previous experience.
Risk
retention groups (“RRG”) are mutual companies, or companies owned by the members of the group that allow businesses with
similar insurance needs to pool their risks and form an insurance company that operates under state regulated guidelines. Risk retention
groups are treated differently from traditional insurance companies in that they are exempted from having to obtain a license in every
state in which they write insurance, and are also exempt from other various state laws that regulate insurance. As a result, a RRG may
not be adequately capitalized and able to remain solvent if faced with continuing losses. While we intend to mitigate this risk through
the purchase of reinsurance, there can be no guarantee that we will be able to purchase adequate reinsurance on favorable terms. Due
to our inexperience in providing director’s and officer’s insurance, we run the risk of underwriting our coverage at levels
that do not provide adequate returns for our shareholders. Furthermore, we run the risk of not generating external interest in our RRG
after incurring significant start-up and regulatory costs associated with the formation of the group.
We
do not have an operating history or established reputation in the reinsurance industry, and our lack of an established operating history
and reputation may make it difficult for us to attract or retain business.
As
part of our business plan, we intend to provide specialty property and casualty reinsurance through FGRe. We do not have an operating
history on which we can base an estimate of our future earnings prospects. We also do not have an established reputation in the reinsurance
industry. Reputation is a very important factor in the reinsurance industry, and competition for business is, in part, based on reputation.
Although we expect that our reinsurance policies will be fully collateralized, we are a relatively newly formed reinsurance company and
do not yet have a well-established reputation in the industry. Our lack of an established reputation may make it difficult for us to
attract or retain business. We will compete with major reinsurers, all of which have substantially greater financial marketing and management
resources than we do, which may make it difficult for us to effectively market our products or offer our products at a profit. In addition,
we do not have or currently intend to obtain financial strength ratings, which may discourage certain counterparties from entering into
reinsurance contracts with us.
As
a reinsurer, we will depend on our clients’ evaluations of the risks associated with their insurance underwriting, which may subject
us to reinsurance losses.
In
the proportional reinsurance business, in which we will assume an agreed percentage of each underlying insurance contract being reinsured,
or quota-share contracts, we do not plan to separately evaluate each of the original individual risks assumed under these reinsurance
contracts. We will therefore be largely dependent on the original underwriting decisions made by ceding companies, which will subject
us to the risk that the clients may not have adequately evaluated the insured risks and that the premiums ceded may not adequately compensate
us for the risks we assume. We also do not plan to separately evaluate each of the individual claims made on the underlying insurance
contracts under quota-share arrangements, in which case we will be dependent on the original claims decisions made by our clients.
The
involvement of reinsurance brokers may subject us to their credit risk.
As
a standard practice of the reinsurance industry, reinsurers frequently pay amounts owed on claims under their policies to reinsurance
brokers, and these brokers, in turn, remit these amounts to the ceding companies that have reinsured a portion of their liabilities with
the reinsurer. In some jurisdictions, if a broker fails to make such a payment, the reinsurer might remain liable to the client for the
deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions, when the client
pays premiums for policies to reinsurance brokers for payment to the reinsurer, these premiums are considered to have been paid and the
client will no longer be liable to the reinsurer for these premiums, whether or not the reinsurer has actually received them from the
broker. Consequently, as a reinsurer, we expect to assume a degree of credit risk associated with the brokers that we intend to do business
with.
FG
FINANCIAL GROUP, INC.
We
may not be successful in carrying out our investment and investment management strategy, and the fair value of our investments will be
subject to a loss in value.
Through
our SPAC sponsorships, we may be subject to lock-up agreements, and our ability to access the capital used to sponsor SPACs may be limited
for a defined period, which may increase a risk of loss of all or a significant portion of value. Our investments may also become concentrated.
A significant decline in the values of these investments may produce a large decrease in our consolidated shareholders’ equity
and can have a material adverse effect on our consolidated book value per share and earnings.
We
have formed an investment advisory subsidiary, FGSC, to carry out our investment advisory services. As discussed above, under Item 1.
“Business,” FGSC has agreed to provide investment advisory services to FedNat, including identifying, analyzing and recommending
potential investments, advising as to existing investments and investment optimization, recommending investment dispositions, and providing
advice regarding macro-economic conditions. Any fees received for such services may not be commensurate with the services provided. We
also may not be able to enter into such advisory management agreements with other entities on favorable terms, or at all. Any of these
events could have a material adverse effect on our business.
The
insurance and reinsurance businesses are highly competitive, and we may not be able to compete successfully in those industries.
The
reinsurance business, in which we participate, and the insurance business that we plan to enter are highly competitive. We compete and
will compete with major U.S. and non-U.S. reinsurers and insurers, many of which have greater financial, marketing and management resources
than we do. There has been significant consolidation in the insurance and reinsurance sector in recent years, and we may experience increased
competition as a result of that consolidation, with consolidated entities having enhanced market power. These consolidated entities may
use their enhanced market power and broader capital base to negotiate price reductions for products and services that compete with ours,
and we may experience rate declines and possibly write less business. Any failure by us to effectively compete could adversely affect
our financial condition and results of operations.
The
insurance and reinsurance industries are highly cyclical, and we may at times experience periods characterized by excess underwriting
capacity and unfavorable premium rates.
Historically,
insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or
severity of catastrophic events, levels of capacity, general economic conditions, changes in equity, debt and other investment markets,
changes in legislation, case law and prevailing concepts of liability, and other factors. Demand for reinsurance is influenced significantly
by the underwriting results of primary insurers and prevailing general economic conditions. The supply of insurance and reinsurance is
related to prevailing prices and levels of surplus capacity that, in turn, may fluctuate in response to changes in rates of return on
both underwriting and investment sides. As a result, the insurance and reinsurance businesses historically have been cyclical, characterized
by periods of intense price competition, due to excessive underwriting capacity, as well as periods when shortages of capacity permitted
favorable premium levels and changes in terms and conditions. Until recently, the supply of insurance and reinsurance had increased over
the past several years, and may again in the future, either as a result of capital provided by new entrants or by the commitment of additional
capital by existing insurers or reinsurers. Continued increases in the supply of insurance and reinsurance may have consequences for
us, including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable
policy terms and conditions.
FG
FINANCIAL GROUP, INC.
Climate
change, as well as increasing regulation in the area of climate change, may adversely affect our insurance and reinsurance business,
financial condition and results of operations.
Changing
weather patterns and climatic conditions, such as global warming, may have added to the unpredictability and frequency of natural disasters
in certain parts of the world and created additional uncertainty as to future trends and exposures. Although the loss experience of catastrophe
insurers and reinsurers has historically been characterized as low frequency, there is a growing concern today that climate change increases
the frequency and severity of extreme weather events, and, in recent years, the frequency of major catastrophes appears to have resumed
historical levels or increased and may continue to increase in the future.
Claims
for catastrophic events, or an unusual frequency of smaller losses in a particular period, could expose us to large losses, cause substantial
volatility in our results of operations and could have a material adverse effect on our ability to write new business if we are not able
to adequately assess and reserve for the increased frequency and severity of catastrophes resulting from these environmental factors.
Additionally, catastrophic events could result in declines in the value of investments we hold and significant disruptions to our physical
infrastructure, systems, and operations. Climate change-related risks may also specifically adversely impact the value of the securities
that we hold.
Changes
in security asset prices may impact the value of our investments, resulting in realized or unrealized losses on our invested assets.
These risks are not limited to, but can include: (i) changes in supply/demand characteristics for fossil fuels (e.g., coal, oil, natural
gas); (ii) advances in low-carbon technology and renewable energy development; and (iii) effects of extreme weather events on the physical
and operational exposure of industries and issuers, and the transition that these companies make towards addressing climate risk in their
own businesses.
However,
we cannot predict how legal, regulatory and/or social responses to concerns around global climate change may impact our business. There
can be no assurance that our reinsurance coverage and other measures taken will be sufficient to mitigate losses resulting from one or
more catastrophic events. As a result, the occurrence of one or more catastrophic events and the continuation and worsening of recent
trends could have an adverse effect on our results of operations and financial condition.
Environmental,
Social and Governance and sustainability have become major topics that encompass a wide range of issues, including climate change and
other environmental risks. We are also subject to complex and changing laws, regulation and public policy debates relating to climate
change which are difficult to predict and quantify and may have an adverse impact on our business. Changes in regulations relating to
climate change or our own leadership decisions implemented as a result of assessing the impact of climate change on our business may
result in an increase in the cost of doing business or a decrease in premiums in certain lines of business.
Underwriting
risks and reserving for losses are based on probabilities and related modeling, which are subject to inherent uncertainties.
Our
success is dependent upon our ability to assess accurately the risks associated with the businesses that we insure and reinsure. We establish
reserves for losses and loss adjustment expenses which represent estimates based on actuarial and statistical projections, at a given
point in time, of our and our cedent’s expectations of the ultimate future settlement and administration costs of losses incurred.
We utilize actuarial models as well as available historical insurance industry loss ratio experience and loss development patterns to
assist in the establishment of loss reserves. Most or all of these factors are not directly quantifiable, particularly on a prospective
basis, and the effects of these and unforeseen factors could negatively impact our ability to accurately assess the risks of the policies
that we write. Changes in the assumptions used by these models or by management could lead to an increase in our estimate of ultimate
losses in the future. In addition, there may be significant reporting lags between the occurrence of the insured event and the time it
is reported to the insurer and additional lags between the time of reporting and final settlement of claims. In addition, the estimation
of loss reserves is more difficult during times of adverse economic and market conditions due to unexpected changes in behavior of claimants
and policyholders, including an increase in fraudulent reporting of exposures and/or losses, reduced maintenance of insured properties
or increased frequency of small claims. Changes in the level of inflation also result in an increased level of uncertainty in our estimation
of loss reserves. As a result, actual losses and loss adjustment expenses paid can deviate, perhaps substantially, from the reserve estimates
reflected in our financial statements.
If
our loss reserves are determined to be inadequate, we will be required to increase loss reserves at the time of such determination with
a corresponding reduction in our net income in the period when the deficiency becomes known. It is possible that claims in respect of
events that have occurred could exceed our claim reserves and have a material adverse effect on our results of operations, in a particular
period, or our financial condition in general. As a compounding factor, although most insurance contracts have policy limits, the nature
of property and casualty insurance and reinsurance is such that losses and the associated expenses can exceed policy limits for a variety
of reasons and could significantly exceed the premiums received on the underlying policies, thereby further adversely affecting our financial
condition.
FG
FINANCIAL GROUP, INC.
Risks
Related to Investment Performance
Our
results of operations will fluctuate from period to period and may not be indicative of our long-term prospects.
We
anticipate that the performance of our reinsurance operations and our investment portfolio will fluctuate from period to period. In addition,
because we plan to underwrite products and make investments to achieve favorable return on equity over the long-term, our short-term
results of operations may not be indicative of our long-term prospects. Our results of operations may also be adversely impacted by general
economic conditions and the conditions and outlook of the reinsurance markets and capital markets.
Changes
in the value of the investments we own could materially affect our income and increase the volatility of our earnings.
As
of December 31, 2021 we have invested approximately $4 million as a seed investment to sponsor the launch of FG New America Acquisition
Corp, a special purpose acquisition company which completed its business combination in July 2021 and now operates as OppFi, Inc. (NYSE:
OPFI). Our investment consists of approximately 1.4 million common shares of OPFI as well as approximately 0.4 million warrants to purchase
common shares of OPFI at a price of $11.50 per share. We are potentially restricted from selling our OPFI common shares for one year
following the date of OPFI’s business combination, or July 20, 2022.
We
also own approximately 1.0 million shares of FedNat common stock as of December 31, 2021. The value of this investment has declined considerably
since our initial investment, and could continue to decline, materially affecting our income and causing volatility in our earnings.
We agreed to transfer restrictions on the shares and may be unable to reduce or liquidate our investment, if needed to maintain our liquidity
or for any other reason.
Adverse
developments in the financial markets could have a material adverse effect on our results of operations, financial position and our businesses,
and may also limit our access to capital.
Adverse
developments in the financial markets, such as disruptions, uncertainty or volatility in the capital and credit markets, may result in
realized and unrealized capital losses that could have a material adverse effect on our results of operations, financial position and
our businesses, and may also limit our access to capital required to operate our business. Depending on market conditions, we could incur
additional realized and unrealized losses on our investment portfolio in future periods, which could have a material adverse effect on
our results of operations, financial condition and business. Economic conditions could also have a material impact on the frequency and
severity of claims and therefore could negatively impact our underwriting returns. The volatility in the financial markets could continue
to significantly affect our investment returns, reported results, and shareholders’ equity.
The
capital requirements of our businesses depend on many factors, including regulatory and rating agency requirements, the performance of
our investment portfolio, our ability to write new business successfully, the frequency and severity of catastrophe events and our ability
to establish premium rates and reserves at levels sufficient to cover losses.
FG
FINANCIAL GROUP, INC.
Our
investments in special purpose acquisition companies as well as the sponsors of special purpose acquisition companies involve a high
degree of risk.
We
expect to invest in initial public offerings (“IPOs”) of special purpose acquisition companies (“SPACs”), including
SPACs that are sponsored by our affiliates. In general, a SPAC is a special purpose vehicle that is formed to raise capital from the
public through an IPO with the purpose, usually, of using the proceeds to acquire a single unspecified business or assets to be identified
after the IPO. The IPO proceeds are held in a trust account until released to fund a business combination or used to redeem shares sold
in the IPO. SPACs are required to either consummate a business combination or liquidate within a set period of time following their IPO.
Because, at the time of the IPO, the SPAC has no operating history or any plans, arrangements or understandings with any prospective
investment targets, we will have no basis upon which to evaluate the SPAC’s ability to achieve its business objectives. If a SPAC
fails to complete its initial business transaction within the required time period, it will never generate any operating revenues and
our SPAC investment may receive only a fixed dollar amount per share upon redemption, or less than such fixed amount in certain circumstances
which could significantly affect our operating results and shareholders’ equity.
Additionally,
as of December 31, 2020, we have invested $4.0 million to acquire equity interests in the sponsor of a SPAC (“Sponsor”) and
expect to acquire additional interests in sponsors of SPACs in the future. By investing in a Sponsor, we have provided risk capital which
allows the Sponsor to launch the IPO of the SPAC. In exchange for this investment, we own interests in the Sponsor that entitle us to
receive distributions of shares and warrants in the SPAC after the lock-up period following the SPACs IPO has expired. These Sponsor
interests do not have redemption rights to receive any portion of our original investment back from the trust account of the SPAC, as
is normally associated with an IPO investment directly into a SPAC. Accordingly, an investment in a Sponsor is subject to a much higher
degree of risk than an investment in a SPAC because the entire investment may be lost if the SPAC is not successful in consummating a
business combination. Such potential loss could have a material effect on our financial results and shareholders’ equity.
Risks
Relating to Sale of our Former Insurance Business
The
shares of FedNat common stock we have received as part of the consideration for the Asset Sale are subject to certain limitations and
restrictions.
The
shares of FedNat common stock we have received in the Asset Sale were issued pursuant to the terms of a standstill agreement entered
into between the Company and FedNat upon the closing of the Asset Sale. The standstill agreement imposes certain limitations and restrictions
with respect to our ownership of FedNat common stock, including, among other things, requiring us to vote all of the voting securities
of FedNat we own in accordance with the recommendation of FedNat’s board of directors and prohibiting us from publicly advising
or influencing any person with respect to the voting of any shares of FedNat common stock and taking any action to nominate any person
for election to FedNat’s board of directors. Our status as a minority stockholder of FedNat as well as the limitations and restrictions
expected to be set forth in the standstill agreement may limit our ability to exert significant influence on FedNat’s management
and operations and matters requiring approval of FedNat’s stockholders. FedNat’s management and holders of a larger percentage
of FedNat’s common stock may also take or encourage actions that decrease the value of our shares of FedNat common stock or are
not in our best interests as a minority stockholder.
We
are subject to non-competition and non-solicitation covenants under the Asset Sale agreement, which may limit our operations in certain
respects.
We
are subject to the non-competition and non-solicitation covenants in the Asset Sale agreement, until December 2, 2024. During this period
of time, subject to certain exceptions, we will generally be prohibited from (i) marketing, selling and issuing residential property
and casualty insurance policies to residential consumers anywhere in the States of Alabama, Florida, Georgia, Louisiana, South Carolina
and Texas (a “Restricted Business”), and owning the equity securities of, managing, operating or controlling any person that
engages in a Restricted Business, (ii) hiring or soliciting certain FedNat employees, and (iii) soliciting or accepting business from
certain third parties in connection with a Restricted Business. The non-competition covenant does not apply to our reinsurance business,
and we will be permitted to enter into reinsurance contracts in the States of Alabama, Florida, Georgia, Louisiana, South Carolina and
Texas.
FG FINANCIAL GROUP, INC.
Legal
and Regulatory Risks
Our
failure to obtain or maintain approval of insurance regulators and other regulatory authorities as required for the operations of our
reinsurance subsidiary may have a material adverse effect on our future business, financial condition, results of operations and prospects.
FGRe
has a Class B (iii) insurer license in accordance with the terms of The Insurance Law, 2010 and is subject to regulation by the Cayman
Islands Monetary Authority. Failure to comply with the laws, regulations and requirements applicable to a Cayman Islands-domiciled reinsurance
subsidiary could result in consequences which may have a material adverse effect on our business and results of operations. Our future
business plans, such as the formation of a risk retention group to provide directors and officers insurance coverage will also require
advance approval of our insurance operations. Failure to receive or maintain the licenses necessary to execute on our strategy may have
a material adverse effect on our future business.
We
will be subject to the risk of becoming an investment company under the Investment Company Act.
We
will be subject to the risk of inadvertently becoming an investment company, which would require us to register under the Investment
Company Act of 1940, as amended (the “Investment Company Act”). Registered investment companies are subject to extensive,
restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, dividends
and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which
we currently operate and plan to operate our business in the future.
We
plan to monitor the value of our investments and structure our operations and transactions to qualify for exemptions under the Investment
Company Act. Accordingly, we may structure transactions in manners less advantageous than if we did not have Investment Company Act concerns,
or we may avoid otherwise economically desirable transactions due to those concerns. In addition, adverse developments with respect to
our ownership of our operating subsidiaries, including significant appreciation or depreciation in the market value of certain of our
publicly traded holdings, could result in our inadvertently becoming an investment company. If it were established that we were an investment
company, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive
relief, or both, in an action brought by the SEC, that we would be unable to enforce contracts with third parties, or that third parties
could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered
investment company.
We
have a limited operating history as a publicly traded company. Our inexperience as a public company and the requirements of being a public
company may strain our resources, divert management’s attention, affect our ability to attract and retain qualified board members
and have a material adverse effect on us and our stockholders.
We
have a limited operating history as a publicly traded company. As a publicly traded company, we are required to develop and implement
substantial control systems, policies and procedures to satisfy our periodic SEC reporting and Nasdaq obligations. Management’s
past experience may not be sufficient to successfully develop and implement these systems, policies and procedures and to operate our
Company. Failure to do so could jeopardize our status as a public company, and the loss of such status may have a material adverse effect
on us and our stockholders.
In
addition, as a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank
Act, and Nasdaq rules, including those promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations
increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand
on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with
respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure
controls and procedures and internal controls for financial reporting. To maintain and improve the effectiveness of our disclosure controls
and procedures, we need to continually commit significant resources, maintain staff and provide additional management oversight. In addition,
implementing our business strategy and sustaining our growth will require us to commit additional management, operational and financial
resources to identify new professionals to join our organization and to maintain appropriate operational and financial systems to adequately
support expansion. These activities may divert management’s attention from other business concerns, which could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
As
a public company, we incur significant annual expenses related to these steps associated with, among other things, director fees, reporting
requirements, transfer agent fees, accounting, administrative personnel, auditing and legal fees and similar expenses. We also incur
higher costs for director and officer liability insurance. Any of these factors make it more difficult for us to attract and retain qualified
members of our Board of Directors. Finally, we expect to incur additional costs once we lose smaller reporting company status or are
required to provide an auditor attestation report on the effectiveness of our internal control over financial reporting.
FG
FINANCIAL GROUP, INC.
If
we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results
accurately, which could have a material adverse effect on our business, financial condition and results of operations.
Ensuring
that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements
on a timely basis is a costly and time-consuming effort that we will need to evaluate frequently. Section 404 of the Sarbanes-Oxley Act
requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness
of internal controls by independent auditors. We currently qualify as a smaller reporting company under the regulations of the Securities
and Exchange Commission (the “SEC”). As a smaller reporting company we are exempt from the requirement to include the auditor’s
report of the effectiveness of internal control over financial reporting until such time as we no longer qualify as a smaller reporting
company, based on our public float and reporting more than $100 million in annual revenues in a fiscal year. Regardless of our qualification
status, we have implemented control systems and procedures to satisfy the reporting requirements under the Exchange Act and applicable
requirements of Nasdaq, among other items. Maintaining these internal controls is costly and may divert management’s attention.
Our
evaluation of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report
our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC,
or violations of Nasdaq’s listing rules. There also could be a negative reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could
suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial
reporting. This may have a material adverse effect on our business, financial condition and results of operations and could also lead
to a decline in the price of our common stock.
While
we currently qualify as a smaller reporting company under SEC regulations, we cannot be certain, if we take advantage of the reduced
disclosure requirements applicable to these companies, that we will not make our stock less attractive to investors. Once we lose smaller
reporting company status, the costs and demands placed upon our management are expected to increase.
The
SEC’s rules exempt smaller reporting companies like us from various reporting requirements applicable to public companies that
are not smaller reporting companies. As long as we qualify as a smaller reporting company, based on our public float, and report less
than $100 million in annual revenues in a fiscal year, we are permitted, and we intend, to omit the auditor’s attestation on internal
control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act.
Until
such time that we lose smaller reporting company status, it is unclear if investors will find our stock less attractive because we may
rely on certain disclosure exemptions. If some investors find our stock less attractive as a result, there may be a less active trading
market for the stock, and our stock price may be more volatile and could cause our stock price to decline. Even if we remain a smaller
reporting company, if our public float exceeds $75 million and we report $100 million or more in annual revenues in a fiscal year, we
will become subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act, requiring our independent registered public accounting
firm to provide an attestation report on the effectiveness of our internal control over financial reporting, making the public reporting
process more costly.
FG
FINANCIAL GROUP, INC.
Holders
of our outstanding shares of 8.00% Cumulative Preferred Stock, Series A, have dividend, liquidation and other rights that are senior
to the rights of holders of our common shares.
As
of December 31, 2021, we have issued and outstanding 894,580 shares of preferred stock designated as 8.00% Cumulative Preferred Stock,
Series A, par value $25.00 per share (the “Series A Preferred Stock”). The aggregate liquidation preference with respect
to the outstanding shares of Series A Preferred Stock is approximately $22.4 million, and annual dividends on the outstanding shares
of Series A Preferred Stock are approximately $1.8 million. Holders of our Series A Preferred Stock are entitled to receive, when, as
and if declared by our Board of Directors cumulative cash dividends from and including the original issue date at the rate of 8.00% of
the $25.00 per share liquidation preference per annum (equivalent to $2.00 per annum per share). Upon our voluntary or involuntary liquidation,
dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled
to receive, for each share held, an amount equal to the $25.00 liquidation preference and unpaid dividends. This would reduce the remaining
amount of our assets, if any, available to distribute to holders of our common shares.
Our
Board of Directors has the authority to designate and issue additional preferred shares with liquidation, dividend and other rights that
are senior to those of our common shares, similar or senior to the rights of the holders of our Series A Preferred Stock. Because our
decision to issue additional securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate
the amount, timing or nature of any future offerings. Thus, our stockholders bear the risk that future securities issuances might dilute
their interests and reduce the market price of our stock.
We
may fail to satisfy the continued listing standards of Nasdaq, in which case our stock might be delisted.
Even
though we currently satisfy the continued listing standards for Nasdaq and expect to continue to do so, we can provide no assurance that
we will continue to satisfy the continued listing standards in the future. In the event that we are unable to satisfy the continued listing
standards of Nasdaq, our stock may be delisted from that market. Any delisting of our stock from Nasdaq could:
● adversely affect our ability to attract new investors;
● decrease the liquidity of our outstanding stock;
● reduce our flexibility to raise additional capital;
● reduce the price at which our stocks trade; and
In
addition, delisting our stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our stock
and might deter some institutions or others from investing in our securities at all. For these reasons and others, delisting could adversely
affect the price of our stock and our business, financial condition and results of operations.
FG
FINANCIAL GROUP, INC.
Technology
and Operational Risks
Our
information technology systems may fail or suffer a loss of security which may have a material adverse effect on our business.
Our
business is highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. Our operations
are dependent upon our ability to process our business timely and efficiently and protect our information systems from physical loss
or unauthorized access. In the event that our systems cannot be accessed due to a natural catastrophe, terrorist attack or power outage,
or systems and telecommunications failures or outages, external attacks such as computer viruses, malware or cyber-attacks, or other
disruptions occur, our ability to perform business operations on a timely basis could be significantly impaired and may cause our systems
to be inaccessible for an extended period of time. A sustained business interruption or system failure could adversely impact our ability
to perform necessary business operations in a timely manner, hurt our relationships with our business partners and customers and have
a material adverse effect our financial condition and results of operations.
Our
operations also depend on the reliable and secure processing, storage and transmission of confidential and other information in our computer
systems and networks. From time to time, we may experience threats to our data and systems, including malware and computer virus attacks,
unauthorized access, systems failures and disruptions. Computer viruses, hackers, phishing attacks, social engineering schemes, ransomware,
employee misconduct and other external hazards could expose our data systems to security breaches, cyber-attacks or other disruptions.
In addition, we routinely transmit and receive personal, confidential and proprietary information by electronic means. Our systems and
networks may be subject to breaches or interference. Any such event may result in operational disruptions as well as unauthorized access
to or the disclosure or loss of our proprietary information or our customers’ information or theft of funds and other monetary
loss, which in turn may result in legal claims, regulatory scrutiny and liability, damage to our reputation, the incurrence of costs
to eliminate or mitigate further exposure, the loss of customers or affiliated advisers or other damage to our business.
Risks
Related to Our Significant Shareholder
Fundamental
Global GP, LLC and its affiliates control a substantial interest in us and thus may exert substantial influence on actions requiring
a stockholder vote, potentially in a manner that you do not support.
As
of December 31, 2021, FG and its affiliates own approximately 56% of our issued and outstanding common stock. Accordingly, they may exert
a substantial influence on actions requiring a stockholder vote, including election of directors, potentially in a manner that you do
not support. D. Kyle Cerminara, Chairman of our Board of Directors, serves as Chief Executive Officer, Co-Founder and Partner of FG.
Due to his position as a member of our Board of Directions as well as his positions at FG, he has considerable influence on actions requiring
a stockholder vote. See Item 13. Certain Relationships and Related Transactions, and Director Independence.
Risks
Related to Human Capital
We
may be unable to attract and retain key personnel and management, which could adversely impact our ability to successfully implement
and execute our business and growth strategy.
The
successful implementation of our business and growth strategy depends in large part upon the ability and experience of members of our
management and other personnel. Our performance will be dependent on our ability to identify, hire, train, motivate and retain qualified
management and personnel with experience in the reinsurance industry, investment advisory services, and in real estate investments. We
may not be able to attract and retain such personnel on acceptable terms, or at all. If we lose the service of qualified management or
other personnel or are unable to attract and retain the necessary members of management or personnel, we may not be able to successfully
execute on our business strategy, which could have an adverse effect on our business.
FG
FINANCIAL GROUP, INC.
Some
of our directors also serve as directors and/or executive officers for other public companies or for our controlling stockholders or
their affiliates, which may lead to conflicting interests.
Some
of our directors serve as executive officers and/or directors of Fundamental Global GP, LLC (“FG”) and its affiliates, which
together, as of December 31, 2021, beneficially owned approximately 56% of our outstanding shares of common stock. One of our directors
serves as an executive officer and director of Atlas Financial Holdings, Inc. (Nasdaq: AFH) (“Atlas”), a specialty commercial
automobile insurance company. Our chief executive officer and director, Mr. Swets serves as director of GreenFirst Forest Products Inc.
(TSXV: FGP), Harbor Custom Development, Inc. (Nasdaq: HCDI) and Ballantyne Strong, Inc. (NYSE American: BTN). He also serves as chief