
Report of Independent Registered Public Accounting Firm Opinion on the Consolidated Financial Statements The independent auditor, HASKELL & WHITE LLP, issued an unqualified opinion, stating that the consolidated financial statements of FG Group Holdings Inc. for the years ended December 31, 2023, and 2022, are presented fairly in all material respects, in conformity with U.S. generally accepted accounting principles - The auditor's opinion on the financial statements is unqualified, indicating a fair presentation of the company's financial position and results of operations5 Emphasis of Matters The auditor's report highlights three significant matters without modifying the opinion: the May 2023 separation of Strong Global Entertainment, Inc. into a standalone public company where the Company remains a majority shareholder; the classification of the Content Business (Strong Studios, Inc. and Unbounded Media Corporation) as discontinued operations; and the February 2024 merger where the Company became a wholly owned subsidiary of Fundamental Global Inc., leading to the deregistration of its common stock - Strong Global Entertainment, Inc. became a standalone public company in May 2023, but its financial results remain consolidated as the Company is the majority shareholder6 - The company's Content Business, including Strong Studios and Unbounded Media, has been classified as discontinued operations for all periods presented7 - On February 29, 2024, the Company completed a merger and became a wholly owned subsidiary of Fundamental Global Inc., subsequently filing to deregister its common stock with the SEC8 Critical Audit Matters The audit identified two critical audit matters involving complex and subjective judgments: Revenue Recognition and Accounting for Equity Investments. Revenue recognition was complex due to contracts with non-standard terms and multiple performance obligations. Accounting for equity investments was challenging due to the significant judgment required to determine the level of influence and to value privately held entities - Critical Audit Matter 1: Revenue Recognition. This was challenging due to contracts with non-standard terms and multiple performance obligations, requiring significant judgment in identifying obligations, allocating transaction prices, and determining the timing of revenue recognition1415 - Critical Audit Matter 2: Accounting for Equity Investments. This was challenging because equity investments are a material portion of total assets, and significant judgment is needed to determine the accounting method (fair value, equity, cost) and assess the valuation of private entities1718 Consolidated Financial Statements Consolidated Balance Sheets As of December 31, 2023, total assets decreased to $62.1 million from $71.8 million in 2022, primarily due to a decline in equity holdings. Total liabilities remained stable at approximately $25.1 million. Total stockholders' equity decreased significantly from $46.7 million to $37.0 million, driven by a reduction in retained earnings and the recognition of a non-controlling interest Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $62,143 | $71,753 | | Cash and cash equivalents | $6,644 | $3,789 | | Equity holdings | $28,021 | $37,522 | | Assets of discontinued operations | $940 | $3,167 | | Total Liabilities | $25,136 | $25,055 | | Short-term debt | $4,732 | $2,510 | | Liabilities of discontinued operations | $1,392 | $1,805 | | Total Stockholders' Equity | $37,007 | $46,698 | | Retained earnings | $2,336 | $16,437 | | Equity attributable to non-controlling interest | $1,858 | $0 | Consolidated Statements of Operations For the year ended December 31, 2023, the company reported a net loss of $14.6 million, a significant increase from the $7.2 million net loss in 2022. The wider loss was driven by a larger loss from operations, a $6.2 million unrealized loss on equity holdings, and a $4.9 million net loss from discontinued operations. Total net revenues increased to $43.3 million from $40.3 million year-over-year Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total net revenues | $43,328 | $40,323 | | Gross profit | $11,564 | $10,832 | | Loss from operations | $(3,449) | $(1,805) | | Unrealized loss on equity holdings | $(6,176) | $(4,468) | | Net loss from continuing operations | $(9,781) | $(6,599) | | Net loss from discontinued operations | $(4,860) | $(555) | | Net loss | $(14,641) | $(7,154) | | Net loss attributable to FG Group Holdings | $(14,077) | $(7,154) | | Total Basic & Diluted EPS | $(0.75) | $(0.37) | Consolidated Statements of Comprehensive Loss The comprehensive loss for 2023 was $14.1 million, compared to a comprehensive loss of $8.7 million in 2022. The 2023 figure includes the net loss of $14.6 million, partially offset by a positive currency translation adjustment of $0.6 million. In 2022, the comprehensive loss was exacerbated by a negative currency translation adjustment of $1.4 million Consolidated Comprehensive Loss (in thousands) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Net loss | $(14,641) | $(7,154) | | Currency translation adjustment | $593 | $(1,370) | | Total other comprehensive income (loss) | $576 | $(1,510) | | Comprehensive loss | $(14,065) | $(8,664) | | Comprehensive loss attributable to FG Group Holdings | $(13,501) | $(8,664) | Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from $46.7 million at the end of 2022 to $37.0 million at the end of 2023. The primary drivers of this decrease were the net loss of $14.1 million attributable to FG Group Holdings and the allocation of equity to a non-controlling interest following the Strong Global Entertainment IPO. The non-controlling interest was valued at $1.9 million at year-end 2023 Changes in Stockholders' Equity (in thousands) | Description | 2023 | 2022 | | :--- | :--- | :--- | | Balance at Beginning of Year | $46,698 | $52,277 | | Net loss attributable to FG Group Holdings | $(14,077) | $(7,154) | | IPO of Strong Global Entertainment, Inc. | $1,341 | - | | Non controlling interest allocation | $(1,894) | - | | Stock-based compensation expense | $1,605 | $652 | | Balance at End of Year | $37,007 | $46,698 | Consolidated Statements of Cash Flows The company's cash and cash equivalents increased by $2.9 million in 2023, ending the year at $6.6 million. This was a significant turnaround from 2022's $5.1 million decrease. The positive change was driven by $3.4 million in net cash from financing activities, primarily from the Strong Global Entertainment IPO and net borrowings, which offset cash used in operating ($0.2 million, including discontinued operations) and investing ($0.7 million) activities Consolidated Cash Flows (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $156 | $(3,572) | | Net cash used in investing activities | $(695) | $(576) | | Net cash provided by (used in) financing activities | $3,383 | $(924) | | Net increase (decrease) in cash | $2,855 | $(5,092) | | Cash at end of year | $6,644 | $3,789 | - Financing activities in 2023 were highlighted by $2.4 million in proceeds from the Strong Global Entertainment IPO and net borrowings of $2.4 million under a credit facility36 Notes to Consolidated Financial Statements Note 1: Business Description and Basis of Presentation FG Group Holdings Inc. is a holding company with primary investments in equity securities and real estate. A significant portion of its operations has been through its Strong Entertainment segment. In May 2023, Strong Global Entertainment became a separate public company, but its results remain consolidated as FG Group Holdings retains a majority stake (approx. 76% of Class A and 100% of Class B shares). The company also owns the Digital Ignition technology incubator - The company is a holding company with investments in public/private equity and real estate38 - Following the May 2023 IPO of Strong Global Entertainment (SGE), FG Group Holdings remains the majority shareholder (76% of Class A, 100% of Class B shares) and continues to consolidate SGE's financial results39 Note 3: Discontinued Operations As of December 31, 2023, the board of Strong Global Entertainment approved a plan to exit its content business, which includes Strong Studios and Unbounded Media. This move is intended to sharpen focus on core businesses and improve financial performance. The company recorded a loss on disposal of discontinued operations of $2.3 million in 2023. For the year, this segment generated a net loss of $4.9 million - The company is exiting its content business (Strong Studios and Unbounded) to focus on core operations and reduce costs106 - A loss on disposal of discontinued operations of $2.3 million was recorded in 2023110 Financials of Discontinued Operations (in thousands) | Line Item | 2023 | 2022 | | :--- | :--- | :--- | | Net revenues | $6,385 | $914 | | Loss from operations | $(4,858) | $(555) | | Net loss from discontinued operations | $(4,860) | $(555) | Assets and Liabilities of Discontinued Operations (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total assets of discontinued operations | $940 | $3,167 | | Total liabilities of discontinued operations | $1,392 | $1,805 | Note 4: Acquisition of the Assets of Innovative Cinema Solutions On November 3, 2023, the company's subsidiary, Strong Technical Services, Inc. (STS), acquired the assets of Innovative Cinema Solutions, LLC (ICS). The purchase price included $0.2 million in cash, $0.2 million in SGE common shares, and a $0.5 million promissory note. The fair value of the net assets acquired ($1.45 million) exceeded the purchase price, resulting in a bargain purchase gain of approximately $1.0 million - Acquired assets of Innovative Cinema Solutions (ICS) on November 3, 2023115 - The acquisition resulted in a gain on bargain purchase of approximately $1.0 million, as the value of net assets acquired ($1.45 million) exceeded the purchase price119 Note 5: Revenue Total revenue from continuing operations increased to $43.3 million in 2023 from $40.3 million in 2022. The Strong Entertainment segment was the primary driver, contributing $42.6 million in 2023, up from $39.0 million in 2022. Growth was seen in screen system sales and field maintenance services. The majority of revenue ($36.5 million in 2023) is recognized at a point in time Revenue by Segment (in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Strong Entertainment | $42,616 | $38,953 | | Other | $712 | $1,370 | | Total | $43,328 | $40,323 | Strong Entertainment Revenue Breakdown (in thousands) | Revenue Source | 2023 | 2022 | | :--- | :--- | :--- | | Screen system sales | $14,925 | $13,923 | | Digital equipment sales | $12,937 | $13,245 | | Field maintenance and monitoring services | $7,808 | $6,797 | | Installation services | $3,508 | $1,889 | Note 8: Equity Holdings Total equity holdings decreased to $28.0 million at year-end 2023 from $37.5 million in 2022. The portfolio consists of an equity method holding in FG Financial Holdings, LLC ($4.6M), a fair value holding in GreenFirst Forest Products Inc. ($10.6M), and a cost method holding in Firefly Systems, Inc. ($12.9M). The company recorded an unrealized loss of $6.2 million on its GreenFirst holding and an equity method loss of $3.3 million from its FGF Holdings investment in 2023 Summary of Equity Holdings (in thousands) | Holding | Accounting Method | Carrying Amount 2023 | Carrying Amount 2022 | | :--- | :--- | :--- | :--- | | FG Financial Holdings, LLC | Equity Method | $4,571 | $7,832 | | GreenFirst Forest Products Inc. | Fair Value Method | $10,552 | $16,792 | | Firefly Systems, Inc. | Cost Method | $12,898 | $12,898 | | Total Equity Holdings | | $28,021 | $37,522 | - Recorded an unrealized loss of $6.2 million on the GreenFirst holding in 2023, compared to a $4.5 million loss in 2022137 - Recorded an equity method loss of $3.3 million from FGF Holdings in 2023, a reversal from the $3.0 million income in 2022134 Note 11: Income Taxes The company recorded an income tax benefit of $0.7 million in 2023, compared to an expense of $0.5 million in 2022, despite pre-tax losses in both years. The 2023 benefit was primarily driven by changes in the valuation allowance and deferred tax adjustments. As of December 31, 2023, the company had federal net operating loss carryforwards of approximately $8.8 million and maintained a valuation allowance of $11.5 million against its U.S. deferred tax assets - A valuation allowance of $11.5 million was recorded against U.S. deferred tax assets as of Dec 31, 2023, as realization is not more likely than not145 - The company has gross federal net operating loss (NOL) carryforwards of approximately $8.8 million as of Dec 31, 2023, down from $19.7 million in 2022152 - The Separation and IPO of Strong Global Entertainment resulted in a recognized gain of $11.1 million under Section 367 of the Internal Revenue Code, which was fully offset by NOL carryforwards151 Note 12: Debt Total debt, including short-term and long-term portions, increased to $10.2 million in 2023 from $7.8 million in 2022. The increase was mainly due to borrowings of $2.4 million under the Strong/MDI revolving credit facility. The debt portfolio includes installment loans, a building loan for the Digital Ignition facility, and a promissory note related to the ICS acquisition Debt Summary (in thousands) | Debt Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total short-term debt | $4,748 | $2,510 | | Total long-term debt | $5,497 | $5,267 | | Total Debt | $10,245 | $7,777 | - In January 2023, Strong/MDI entered into a new credit agreement with CIBC, including a revolving line of credit up to CAD$5.0 million. As of Dec 31, 2023, CAD$3.2 million (approx. $2.4 million) was outstanding160 Note 16: Commitments, Contingencies and Concentrations The company faces significant customer concentration risk, with its top ten customers accounting for 48% of 2023 consolidated net revenues. It is also a defendant in asbestos-related personal injury lawsuits, for which it maintains a loss contingency reserve of $0.3 million. In 2023, the company received a $2.5 million claim from a key man life insurance policy, which was recorded as other income - Significant customer concentration exists, with the top ten customers representing 48% of 2023 net revenues186 - The company is involved in asbestos-related litigation and has a loss contingency reserve of approximately $0.3 million as of December 31, 2023191 - A gain of $2.5 million from a key man life insurance policy was recognized in the fourth quarter of 2023192 Note 17: Business Segment Information The company's operations are primarily conducted through the Strong Entertainment segment, which generated $42.6 million in net revenues and $10.6 million in gross profit in 2023. Geographically, the United States is the largest market, accounting for $36.8 million in revenue and holding $33.5 million in identifiable assets at year-end 2023 Segment Performance (in thousands) | Segment | Net Revenues 2023 | Gross Profit 2023 | Operating Income (Loss) 2023 | | :--- | :--- | :--- | :--- | | Strong Entertainment | $42,616 | $10,577 | $1,016 | | Other | $712 | $987 | $(445) | | Unallocated Admin | - | - | $(4,020) | | Total | $43,328 | $11,564 | $(3,449) | Geographical Information (in thousands) | Region | Net Revenues 2023 | Identifiable Assets 2023 | | :--- | :--- | :--- | | United States | $36,822 | $33,518 | | Canada | $1,192 | $28,625 | | Europe | $1,450 | - | | Asia (excluding China) | $2,265 | - | | Total | $43,328 | $62,143 | Note 18: Subsequent Events Several major corporate events occurred after the reporting period. On February 29, 2024, the company merged with FG Financial Group, Inc. (now Fundamental Global Inc.) and became a wholly owned subsidiary, leading to the deregistration of its stock. On April 16, 2024, it sold its Digital Ignition building for $6.5 million. On May 3, 2024, it entered an agreement to sell its subsidiary Strong/MDI to FG Acquisition Corp. for a pre-money valuation of $30 million - On Feb 29, 2024, the company merged with FG Financial Group, Inc. (now Fundamental Global Inc.) and became a wholly owned subsidiary, delisting its stock199 - On April 16, 2024, the company sold its Digital Ignition building for $6.5 million, receiving approximately $1.3 million in net cash proceeds200 - On May 3, 2024, the company agreed to sell its subsidiary Strong/MDI to FG Acquisition Corp. in a transaction valuing Strong/MDI at $30 million201202