UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Quarterly Period Ended
Or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Stock Market LLC | ||||
| The Stock Market LLC |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☐ | Smaller Reporting
Company |
Emerging Growth
Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No
The number of shares outstanding of the registrant’s common stock as of August 9, 2024 was .
Table of Contents
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Fundamental Global Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| June 30, 2024 (unaudited) | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (net of credit allowances of $ | ||||||||
| Inventories, net | ||||||||
| Equity securities, at fair value (cost basis of $ | ||||||||
| Investments | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Finance lease right-of-use assets | ||||||||
| Deferred policy acquisition costs | ||||||||
| Reinsurance balances receivable (net of current expected losses allowance of $ | ||||||||
| Funds deposited with reinsured companies | ||||||||
| Assets of discontinued operations | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenue and customer deposits | ||||||||
| Loss and loss adjustment expense reserves | ||||||||
| Unearned premium reserves | ||||||||
| Operating lease liabilities | ||||||||
| Finance lease liabilities | ||||||||
| Short-term debt | ||||||||
| Long-term debt, net of debt issuance costs | ||||||||
| Deferred income taxes | ||||||||
| Liabilities of discontinued operations | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Series A Preferred Shares, $ par and liquidation value, shares authorized; shares issued and outstanding as of June 30, 2024 | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| (Accumulated deficit) retained earnings | ( | ) | ||||||
| Treasury stock, shares at cost as of December 31, 2023 | ( | ) | ||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Fundamental Global stockholders’ equity | ||||||||
| Equity attributable to non-controlling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
Fundamental Global Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue: | ||||||||||||||||
| Net premiums earned | $ | $ | $ | $ | ||||||||||||
| Net investment loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net product sales | ||||||||||||||||
| Net services revenue | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Net losses and loss adjustment expenses | ||||||||||||||||
| Amortization of deferred policy acquisition costs | ||||||||||||||||
| Costs of products | ||||||||||||||||
| Costs of services | ||||||||||||||||
| Selling expense | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| (Gain) loss on impairment and disposal of assets | ( | ) | ( | ) | ||||||||||||
| Total expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency transaction loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Bargain purchase on acquisition and other income, net | ||||||||||||||||
| Total other (expense) income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (expense) benefit | ||||||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income from discontinued operations (Note 4) | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Dividends declared on Series A Preferred Shares | ( | ) | ( | ) | ||||||||||||
| Loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted net (loss) income per common share: | ||||||||||||||||
| Continuing operations | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Discontinued operations | ||||||||||||||||
| Total | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
Fundamental Global Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Adjustment to postretirement benefit obligation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Currency translation adjustment: | ||||||||||||||||
| Unrealized net change arising during period | ( | ) | ( | ) | ||||||||||||
| Total other comprehensive (loss) income | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to condensed consolidated financial statements.
| 5 |
Fundamental Global Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
(in thousands)
| Preferred Stock | Common Stock | Additional | Retained Earnings | Accumulated Other | Total Fundamental Global | Non- | Total | |||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Amount | Shares Outstanding | Amount | Paid-In Capital | (Accumulated Deficit) | Treasury Stock | Comprehensive Loss | Stockholders’ Equity | controlling Interest | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Retirement of treasury stock | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Exchange of FGH common stock | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| FGF preferred and common stock outstanding at merger date | ||||||||||||||||||||||||||||||||||||||||||||
| Retirement of FGF common stock held by FGH prior to merger | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with merger | - | |||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest allocation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Dividends on Series A Preferred Shares ($ per share) | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Non-controlling interest allocation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Dividends on Series A Preferred Shares ($ per share) | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | Accumulated Other | Total | Non- | Total | ||||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Amount | Shares Outstanding | Amount | Paid-In Capital | Retained Earnings | Treasury Stock | Comprehensive Loss | Stockholders’ Equity | controlling Interest | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Cumulative effect of adoption of accounting principle | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| IPO of Strong Global Entertainment, Inc. and issuance of Landmark warrant, net of costs | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest allocation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Payments of withholding taxes for net share settlement of equity awards | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 6 |
Fundamental Global Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
| Net unrealized holding loss on equity investments | ||||||||
| Loss from equity method investments | ||||||||
| Gain on acquisition of ICS assets | ||||||||
| Net realized (gain) loss on sale of equity investments | ( | ) | ||||||
| Provision for (recovery of) doubtful accounts | ( | ) | ||||||
| Benefit from (provision for) obsolete inventory | ( | ) | ||||||
| Provision for warranty | ||||||||
| Depreciation and amortization | ||||||||
| Amortization and accretion of operating leases | ||||||||
| Impairment of property and equipment | ||||||||
| Gain on merger of FGF and FGF (Note 3) | ( | ) | ||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Stock compensation expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Reinsurance balances receivable | ||||||||
| Deferred policy acquisition costs | ||||||||
| Other assets | ||||||||
| Loss and loss adjustment expense reserves | ||||||||
| Unearned premium reserves | ( | ) | ||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Current income taxes | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Deferred revenue and customer deposits | ( | ) | ||||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Net cash used by operating activities from continuing operations | ( | ) | ( | ) | ||||
| Net cash used by operating activities from discontinued operations | ( | ) | ( | ) | ||||
| Net cash used by operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from sales of equity securities | ||||||||
| Proceeds from sales of property and equipment | ||||||||
| Cash acquired in Merger of FGF and FGH | ||||||||
| Net cash provided by investing activities from continuing operations | ||||||||
| Net cash used in investing activities from discontinued operations | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Payment of dividends on preferred shares | ( | ) | ||||||
| Principal payments on short-term debt | ( | ) | ( | ) | ||||
| Payment payments on long-term debt | ( | ) | ( | ) | ||||
| Proceeds from Strong Global Entertainment initial public offering | ||||||||
| Payments of withholding taxes for net share settlement of equity awards | ( | ) | ||||||
| Payments on finance lease obligations | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities from continuing operations | ( | ) | ||||||
| Net cash provided by financing activities from discontinued operations | ||||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents from continuing operations | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents from discontinued operations | ( | ) | ||||||
| Net (decrease) increase in cash and cash equivalents from continuing operations | ( | ) | ||||||
| Net decrease in cash and cash equivalents from discontinued operations | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents from continuing operations at beginning of period | ||||||||
| Cash and cash equivalents from continuing operations at end of period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 7 |
Fundamental Global Inc.
Notes to Consolidated Financial Statements
Note 1. Nature of Business
Fundamental Global Inc. (“Fundamental Global”, the “Company”, “we”, or “us”), formerly known as FG Financial Group, Inc. (“FGF”), is engaged reinsurance, asset management/merchant banking, manufacturing and managed services.
On February 29, FGF and FG Group Holdings, Inc. (“FGH”) closed the plan of merger to combine the companies in an all-stock transaction (the “Merger”). In connection with the Merger, FGH common stockholders received one share of FGF common stock for each share of common stock of FGH held by such stockholder. Upon completion of the Merger, the combined company was renamed to Fundamental Global and the common stock and Series A cumulative preferred stock of the combined company continue to trade on the Nasdaq under the tickers “FGF” and “FGFPP,” respectively. See Note 3 for additional details.
On May 3, 2024, Strong Global Entertainment, Inc. (“Strong Global Entertainment”) entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI, FGAC Investors LLC, and CG Investments VII Inc. (together with FGAC Investors LLC, the “Sponsors”), pursuant to which FGAC intends to acquire, directly or indirectly, all of the outstanding shares in the capital of one of its wholly-owned subsidiary, Strong/MDI Screen Systems, Inc. (“Strong/MDI”). As a result of the acquisition, Strong/MDI will become a wholly-owned subsidiary of FGAC. See Note 4 for additional details.
On May 30, 2024, the Company and Strong Global Entertainment entered into a definitive arrangement agreement and plan of arrangement to combine the companies in an all-stock transaction (the “Arrangement”). Upon completion of the arrangement, the stockholders of Strong Global Entertainment will receive 1.5 common shares of the Company for each share of Strong Global Entertainment. The transaction is expected to close in the third quarter of 2024, subject to customary closing conditions, including any necessary stockholder approval. Following the closing, Strong Global Entertainment will cease to exist, and its Common Shares will be delisted from NYSE American and deregistered under the Exchange Act.
As
of June 30, 2024, Fundamental Global GP, LLC (“FG”) and its affiliated entities collectively beneficially owned approximately
Business Segments
The Company conducts business through its three reportable segments including reinsurance, asset management, which includes merchant banking services, and Strong Global Entertainment which includes manufacturing and managed services to cinemas and entertainment venues. The operating segments are determined based on the business activities, and reflect the manner in which financial information is currently evaluated by management.
Reinsurance
The Company’s wholly owned reinsurance subsidiary, FGRe, a Cayman Islands limited liability company, provides specialty property and casualty reinsurance. FGRe has been granted a Class B (iii) insurer license in accordance with the terms of The Insurance Act (as revised) of the Cayman Islands and underlying regulations thereto and is subject to regulation by the Cayman Islands Monetary Authority (the “Authority”). The terms of the license require advance approval from the Authority should FGRe wish to enter into any reinsurance agreements which are not fully collateralized.
| 8 |
As
of June 30, 2024, the Company had
Asset Management
In December 2020, the Company formed FG Management Solutions LLC (“FGMS”), formerly known as FG SPAC Solutions, LLC, a Delaware company, to facilitate the launch of the Company’s “SPAC Platform.” Under the SPAC Platform, the Company provides various strategic, administrative, and regulatory support services to newly formed SPACs for a monthly fee. Additionally, the Company co-founded a partnership, FG Merchant Partners, LP (“FGMP”), formerly known as FG SPAC Partners, LP, to participate as a co-sponsor for newly formed SPACs.
In the third quarter of 2022, the Company announced the expansion of its growth strategy through the formation of a merchant banking division, which has facilitated the launch of several merchant banking projects, including FG Communities, Inc. (“FGC”), a self-managed real estate company focused on a growing portfolio of manufactured housing communities which are owned and operated by FGC, and Craveworthy LLC (“Craveworthy”), an innovative fast casual restaurant platform company.
Strong Global Entertainment
Strong Global Entertainment is a leader in the entertainment industry providing mission critical products and services to cinema exhibitors and entertainment venues for over 90 years. The Company is a holding company and conducts business through its wholly-owned operating subsidiaries: Strong/MDI Screen Systems, Inc. (“Strong/MDI”) is a leading premium screen and projection coatings supplier in the world, and Strong Technical Services, Inc. (“STS”) provides comprehensive managed service offerings with 24/7/365 support nationwide to ensure solution uptime and availability.
On
May 15, 2023, Strong Global Entertainment completed an initial public offering (“IPO”) of its Class A Voting Common Shares
without par value (“Common Shares”). The IPO closed on May 18, 2023 and Strong Global Entertainment completed its separation
from Fundamental Global, formerly FG Group Holdings, Inc. Following this transaction, Strong Global Entertainment became a separate publicly
listed company, and FG Group Holdings holds approximately
Other
The
Company owned and operated its Digital Ignition technology incubator and co-working facility in Alpharetta, Georgia. During the first
quarter of 2024, the Company’s board authorized the sale of Digital Ignition and on April 16, 2024, the Company completed the sale
of the Digital Ignition building and wholly owned subsidiary for proceeds of $
| 9 |
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed 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. Unless the context indicates otherwise, references to the “Company” include the Company and its majority-owned and controlled domestic and foreign subsidiaries.
The condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America (also referred to as “GAAP”) for annual reporting purposes or those made in the Company’s Annual Report on Form 10-K. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
As a result of the reverse merger of FGF and FGH (see Note 3), the condensed consolidated financial statements for the periods prior to the merger represent the results of FGH, as the accounting acquirer. For periods subsequent to the merger, the condensed consolidated financial statements represent the combined results of FGH and FGF. In addition, the current and historical financial results of Strong Studios and Strong/MDI, Inc are presented as discontinued operations and are excluded from results from continuing operations in the accompanying condensed consolidated financial statements.
The condensed consolidated balance sheet as of December 31, 2023, was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results of operations and cash flows for the respective interim periods. Certain prior period balances have been reclassified to conform to current period presentation. The results for interim periods are not necessarily indicative of trends or results expected for a full year.
See Note 3 for additional information regarding the Merger of FGF and FGH and the resulting accounting for the reverse acquisition.
Unless otherwise indicated, all references to “dollars” and “$” in this Quarterly Report on Form 10-Q are to, and amounts are presented in, U.S. dollars
Use of Management Estimates
The preparation of consolidated financial statements in conformity with GAAP 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. Estimates and their underlying assumptions are reviewed on an ongoing basis. Changes in estimates are recorded in the accounting period in which they are determined.
Consolidation Policies
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.
The consolidated financial statements include the accounts of the Company and entities in which it is required to consolidate under either the Variable Interest Entity (“VIE”) or Voting Interest Entity (“VOE”) models. Both models require the reporting entity to identify whether it has a controlling financial interest in a legal entity and is therefore required to consolidate the legal entity. Under the VOE model, a reporting entity with ownership of a majority of the voting interest of a legal entity is generally considered to have a controlling financial interest. The VIE model was established for situations in which control may be demonstrated other than by the possession of voting rights in a legal entity and instead focuses on the power to direct the activities that most significantly impact the legal entity’s economic performance, as well as the rights to receive benefits and obligations to absorb losses that could potentially be significant to the legal entity.
| 10 |
The determination of whether a legal entity is consolidated under either model is reassessed where there is a substantive change in the governing documents or contractual arrangements of the entity, to the capital structure of the entity or in the activities of the entity. Management continuously reassesses whether it should consolidate under either model.
The
Company’s risk of loss associated with its non-consolidated VIEs is limited. As of June 30, 2024 the carrying value and maximum
loss exposure of the Company’s non-consolidated VIE’s was $
See Note 5 for further information regarding the Company’s investments.
Investments in Equity Securities and Other Investments
Investments in equity securities other than those accounted for using the equity method and those without readily determinable fair value, are carried at fair value with subsequent changes in fair value recorded to the condensed consolidated statements of operations as a component of net investment income.
Other
investments consist, in part, of equity investments made in privately held companies accounted for under the equity method. We utilize
the equity method to account for investments when we possess the ability to exercise significant influence, but not control, over the
operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses
more than
In applying the equity method, we record the investment at cost and subsequently increase or decrease the carrying amount of the investment by our proportionate share of the net earnings or losses and other comprehensive income of the investee. We record dividends or other equity distributions as reductions in the carrying value of the investment. Should net losses of the investee reduce the carrying amount of the investment to zero, additional net losses may be recorded if other investments in the investee are at-risk, even if we have not committed to provide financial support to the investee. Such additional equity method losses, if any, are based upon the change in our claim on the investee’s book value.
When we receive distributions from our equity method investments, we utilize the cumulative earnings approach. When classifying the related cash flows under this approach, the Company compares the cumulative distributions received, less distributions received in prior periods, with the Company’s cumulative equity in earnings. Cumulative distributions that do not exceed cumulative equity in earnings represent returns on investment and are classified as cash inflows from operating activities. Cumulative distributions in excess of cumulative equity in earnings represent returns on investment and are classified as cash inflows from investing activities.
In addition to investments accounted for under the equity method of accounting, other investments also consist of equity we have purchased in a limited partnership, a limited liability company, and a corporation for which there does not exist a readily determinable fair value. The Company accounts for these investments at their cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments by the same issuer. When the Company observes an orderly transaction of an investee’s identical or similar equity securities, the Company adjusts the carrying value based on the observable price as of the transaction date. Once the Company records such an adjustment, the investment is considered an asset measured at fair value on a nonrecurring basis. Any profit distributions the Company receives on these investments are included in net investment income.
See Note 5 for additional information regarding the Company’s investments.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid financial instruments with original maturities of 90 days or less.
| 11 |
Pursuant
to the Company’s insurance license, the Authority has required that FGRe hold a minimum capital requirement of $
Income Taxes
The Company follows the asset and liability method of accounting for income taxes, whereby deferred income tax assets and liabilities are recognized for (i) the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and (ii) loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit).
Concentration of Credit Risk
Financial
instruments which potentially expose the Company to concentrations of credit risk include investments, cash, accounts receivable and
deposits with reinsured companies. The Company maintains its cash with a major U.S. domestic banking institution which is insured by
the Federal Deposit Insurance Corporation (“FDIC”) for up to $
The
Company’s top ten customers accounted for approximately
Revenue Recognition for Products and Services
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 the separate units of accounting, 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. Management estimates the amount of total contract consideration the Company expects to receive for variable arrangements by determining the most likely amount we expect to earn from the arrangement based on the expected quantities of services the Company expects to provide and the contractual pricing based on those quantities. The Company only includes some or 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. Management considers the sensitivity of the estimate, the Company’s 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 we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients, or receive cash, in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when we have 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 June 30, 2024 or December 31, 2023.
Premium Revenue Recognition
The Company participates in quota-share contracts and estimates the ultimate premiums for the contract period. These estimates are based on information received from the ceding companies, whereby premiums are recorded as written in the same periods in which the underlying insurance contracts are written and are based on cession statements from cedents. These statements are received quarterly and in arrears, and thus, for any reporting lag, premiums written are estimated based on the portion of the ultimate estimated premiums relating to the risks underwritten during the lag period.
Premium estimates are reviewed by management periodically. Such review includes a comparison of actual reported premiums to expected premiums. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustments to these estimates are recorded in the period in which they are determined. Changes in premium estimates, including premiums receivable, are not unusual and may result in significant adjustments in any period. A significant portion of amounts included in the caption “Reinsurance balances receivable” in the Company’s consolidated balance sheets represents estimated premiums written, net of commissions, brokerage, and loss and loss adjustment expense, and are not currently due based on the terms of the underlying contracts. Additional premiums due on a contract that has no remaining coverage period are earned in full when written.
Premiums written are generally recognized as earned over the contract period in proportion to the risk covered. Unearned premiums represent the unexpired portion of reinsurance provided.
| 12 |
Current Expected Credit Loss
In the first quarter of 2023, the Company adopted ASU 2016-13, as amended, Financial Instruments – Credit Losses (“ASU 2016-13”), which requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.
The financial assets included in the caption “Reinsurance balances recoverable” in the Company’s consolidated balance sheets are carried at amortized cost and therefore affected by ASU 2016-13. Management calculates an allowance for expected credit losses for its reinsurance balances receivable by applying a Probability of Default / Loss Given Default model. The model considers both the external collectability history as well as external loss history. The external loss history that Management utilizes includes a long-term probability of liquidation study specific to insurance companies. Additionally, the life of each of the Company’s reinsurance treaties is also considered as the probability of default is calculated over the contractual length of the reinsurance contracts. The credit worthiness of a counterparty is evaluated by considering the credit ratings assigned by independent agencies and individually evaluating all the counterparties. The Company updates the model each quarter and adjusts the balance accordingly. There was no change to the allowance during the second quarter of 2024.
In
the first quarter of 2023, the Company allocated $
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for 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. Past due accounts are written off when our efforts have been unsuccessful in collecting amounts due.
Deferred Policy Acquisition Costs
Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal of reinsurance contracts, and consist principally of commissions, taxes and brokerage expenses. If the sum of a contract’s expected losses and loss expenses and deferred acquisition costs exceeds associated unearned premiums and expected investment income, a premium deficiency is determined to exist. In this event, deferred acquisition costs are written off to the extent necessary to eliminate the premium deficiency. If the premium deficiency exceeds deferred acquisition costs then a liability is accrued for the excess deficiency. There were no premium deficiency adjustments recognized during the periods presented herein.
Funds Deposited for Benefit of Reinsured Companies
“Funds
Deposited with Reinsured Companies” on the Company’s consolidated balance sheets includes amounts held to support our reinsurance
contracts. As of June 30, 2024, the total cash collateral posted to support all of our reinsurance treaties
was approximately $
| 13 |
Loss and Loss Adjustment Expense Reserves
The Company maintains reserves equal to our estimated ultimate liability for losses and loss adjustment expense for reported and unreported claims from our reinsurance business. Loss and loss adjustment reserve estimates are based primarily on estimates derived from reports the Company has received from ceding companies. The Company then uses a variety of statistical and actuarial techniques to monitor reserve adequacy. When setting reserves, the Company considers many factors including: (1) the types of exposures and projected ultimate premium to be written by our cedants; (2) expected loss ratios by type of business; (3) actuarial methodologies which analyze loss reporting and payment experience, reports from ceding companies and historical trends; and (4) general economic conditions. The Company also engages independent actuarial specialists, at least annually, to assist management in establishing appropriate reserves. Since reserves are estimates, the final settlement of losses may vary from the reserves established, and any adjustments to the estimates, which may be material, are recorded in the period they are determined. The final settlement of losses may vary, perhaps materially, from the reserves recorded.
U.S. GAAP does not permit establishing loss reserves, which include case reserves and IBNR loss reserves, until the occurrence of an event which may give rise to a claim. As a result, only loss reserves applicable to losses incurred up to the reporting date are established, with no allowance for the establishment of loss reserves to account for expected future loss events.
Generally, the Company obtains regular updates of premium and loss related information for the current and historical periods, which are utilized by the Company to update the initial expected loss ratio. These reports from cedants have varying due dates and may be received between thirty to ninety days after period end. We experience a lag between (i) claims being reported by the underlying insured to the Company’s cedent and (ii) claims being reported by the Company’s cedent to the Company. This lag may impact the Company’s loss reserve estimates.. The timing of the reporting requirements is designed so that the Company receives premium and loss information as soon as practicable once the client has closed its books. Accordingly, there is generally a lag of one-to-three-month in such reporting. Most of the contracts that have the potential for large single event losses have provisions that such loss notifications are provided to the Company immediately upon the occurrence of an event.
The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – Stock Compensation, which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model using assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate along with multiple Monte Carlo simulations to determine a derived service period as the options vest based upon meeting certain performance conditions. The fair value of each stock option award is recorded as compensation expense on a straight-line basis over the requisite service period, which is generally the period in which the stock options vest, with a corresponding increase to additional paid-in capital.
The Company has also issued restricted stock units (“RSUs”) to certain of its employees and directors which have been accounted for as equity-based awards since, upon vesting, they are required to be settled in the Company’s common shares. We have used the fair value of the Company’s common stock on the date the RSUs were issued to estimate the grant date fair value of those RSUs which vest solely based upon the passage of time. The fair value of each RSU is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest.
Based upon the Company’s historical forfeiture rates relating to stock options and RSUs, the Company has not made any adjustment to stock compensation expense for expected forfeitures as of June 30, 2024.
| 14 |
Fair Value of Financial Instruments
The carrying values of certain financial instruments, including cash, short-term investments, deposits held, accounts payable, and other accrued expenses, approximate fair value due to their short-term nature. The Company measures the fair value of financial instruments in accordance with GAAP which defines fair value as the exchange price that would be received for an asset (or paid to transfer a liability) in the principal or most advantageous market for the asset (or liability) in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s short-term debt is recorded at historical cost. The carrying values of all other financial assets and liabilities, including accounts receivable, accounts payable, and short-term debt reported in the condensed consolidated balance sheets equal or approximate their fair values due to the short-term nature of these instruments. See Note 5 for further information on the fair value of the Company’s financial instruments.
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 does not expect 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.
Basic earnings (loss) per common share is computed using the weighted average number of shares outstanding during the respective period.
Diluted earnings (loss) per common share assumes conversion of all potentially dilutive outstanding stock options, restricted stock units, warrants or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of diluted earnings (loss) per share if their effect is anti-dilutive.
Recent Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will add required disclosures of significant expenses for each reportable segment, as well as certain other disclosures to help investors understand how the chief operating decision maker (“CODM”) evaluates segment expenses and operating results. The new standard will also allow disclosure of multiple measures of segment profitability, if those measures are used to allocate resources and assess performance. The amendments will be effective for public companies for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Management is currently evaluating the impact of this accounting standard update on our consolidated financial statements.
| 15 |
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024, with early adoption permitted. The new ASU will not impact amounts recorded in the Company’s financial statements but instead, will require more detailed disclosures in the notes to the financial statements. The Company plans to provide the updated disclosures required by the ASU in the periods in which they are effective.
Note 3. Merger of FGF and FGH
On February 29, 2024, FGF and 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.
The 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.
Per
ASC 805, the acquirer measures the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. The
Company determined the fair value of the FGF assets and liabilities as of February 29, 2024 was approximately $
The following table summarizes the fair values assigned to the net assets acquired and the liabilities assumed as part of the merger (in thousands):
| Cash and cash equivalents | $ | |||
| Deferred policy acquisition costs | ||||
| Reinsurance balances receivable | ||||
| Equity and other holdings | ||||
| Notes receivable | ||||
| Funds deposited with reinsured companies | ||||
| Right of Use Asset | ||||
| Property and equipment, net | ||||
| Other current assets | ||||
| Total identifiable assets acquired | ||||
| Accounts payable and accrued expenses | ||||
| Loss and loss adjustment expense reserves | ||||
| Unearned premium reserves | ||||
| Operating lease obligation | ||||
| Total liabilities assumed | ||||
| Series A Preferred Shares | ||||
| Net assets acquired | $ |
| 16 |
The
value of the net assets acquired exceeded the purchase price by approximately $
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. Management is in the process of finalizing the acquisition purchase price, which remains subject to change.
The amounts of revenue and earnings of FGF included in the Company’s condensed consolidated statement of operations from the acquisition date to June 30, 2024 are as follows:
| (in thousands) | ||||
| Revenue | $ | |||
| Net income | $ | |||
The following represents the pro forma consolidated income statement as if FGF had been included in the condensed consolidated results of the Company for the six months ended June 30, 2024 and 2023 (in thousands):
Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |||||||
| Revenue | $ | $ | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
Note 4. Discontinued Operations
Strong/MDI
On May 3, 2024, Strong Global Entertainment entered into an acquisition agreement (the “Acquisition Agreement”) with FG Acquisition Corp., a special purpose acquisition company (“FGAC”), Strong/MDI, FGAC Investors LLC, and CG Investments VII Inc. (together with FGAC Investors LLC, the “Sponsors”). 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 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 $
| 17 |
Management evaluated the classification of Strong/MDI as a discontinued operation as of June 30, 2024 and determined Strong/MDI is a component of an entity and represented a discontinued operation. Accordingly, Strong/MDI has been included as part of discontinued operations for all periods presented.
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.
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 favour 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 $
Strong Studios
In March 2022, Strong Studios, Inc. (“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 Media Corporation (“Unbounded”), an independent media and creative production company. 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.
| 18 |
Management 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. Management determined its content business is a component of an entity and represented a discontinued operation effective December 31, 2023. Accordingly, the content business has been included as part of discontinued operations for all periods presented. 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 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. The assets and liabilities transferred to the purchaser during the first quarter of 2024.
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 $
The Safehaven series
was not transferred as part of the Stock Purchase Agreement as the Company and the other investors in the series were involved in a
dispute relating to the financial management of the project. As a result of the 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 was adjusted to $
The major classes of assets and liabilities included as part of discontinued operations are as follows (in thousands):
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Strong/MDI | Strong Studios | Total | Strong/MDI | Strong Studios | Total | |||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||||||
| Inventories | ||||||||||||||||||||||||
| Other current assets | ||||||||||||||||||||||||
| Property, plant and equipment, net | ||||||||||||||||||||||||
| Goodwill and intangible assets | ||||||||||||||||||||||||
| Film & TV programming rights | ||||||||||||||||||||||||
| Total assets of discontinued operations | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Deferred revenue and customer deposits | ||||||||||||||||||||||||
| Short-term debt | ||||||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||||||
| Deferred income tax liabilities, net | ||||||||||||||||||||||||
| Total liabilities of discontinued operations | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 19 |
The major line items constituting the net loss from discontinued operations are as follows (in thousands):
| Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |||||||||||||||||||||||
| Strong/MDI | Strong Studios | Total | Strong/MDI | Strong Studios | Total | |||||||||||||||||||
| Net revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||||||||||
| Selling and administrative expenses | ||||||||||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||||||||||
| Income (loss) from discontinued operations before taxes | ( | ) | ||||||||||||||||||||||