Our executive offices are located at 970 Lake Carillon Drive, Suite 318, St. Petersburg, FL 33716. Our lease term expires in May 2021, however the Company intends to renew its lease for an additional six month period. Total minimum rent over the six-month term is expected to be $9,000.
Unless context denotes otherwise, the terms “Company,” “FGF,” “we,” “us,” and “our,” refer to FG Financial Group, Inc., and its subsidiaries.
FG Financial Group, Inc. (“FGF”, the “Company”, “we”, or “us”) is a reinsurance and investment management holding company focused on opportunistic collateralized and loss capped reinsurance, while allocating capital to SPAC and SPAC sponsor-related businesses. The Company’s principal business operations are conducted through its subsidiaries and affiliates. From our inception through December 2, 2019, we operated as an insurance holding company, writing property and casualty insurance throughout the states of Louisiana, Florida and Texas through our subsidiaries. On December 2, 2019 we sold our three insurance subsidiaries as further described below under the heading “Sale of the Maison Business” and embarked on a new strategy focused on insurance, reinsurance, real estate, and asset management. Accordingly, on December 14, 2020, our shareholders approved a change in our corporate name to FG Financial Group, Inc., to better align with this new business strategy.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Adverse events such as health-related concerns about working in our offices, the inability to travel and other matters affecting the general work environment have negatively impacted and could continue to harm our business and our business strategy. In addition, during the pandemic, we have experienced significant losses related to the value of our investment in shares of FedNat common stock, and we may continue to experience such losses to the extent the pandemic negatively impacts FedNat’s business. The extent to which our operations and investments may continue to be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new developments concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. In the event of a major disruption caused by the pandemic, we may lose the services of our employees, experience system interruptions or face challenges accessing the capital or credit markets, which could lead to diminishment of our business operations. Any of the foregoing could harm our business and delay the implementation of our business strategy.
Critical accounting policies are those that require us to make significant judgments, estimates or assumptions that affect amounts reported in our financial statements or the notes thereto. We base our judgments, estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable and prudent. Actual results may differ materially from these estimates. The business and economic uncertainty resulting from the novel coronavirus (COVID-19) pandemic has made such estimates and assumptions difficult to calculate. Set forth below is a summary of what we believe to be our most critical accounting policies and estimates.
The Company’s equity securities are recorded at fair value using observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. Any change in the estimated fair value of its investments could impact the amount of unrealized gain or loss the Company has recorded, which could change the amount the Company has recorded for its investments and on its consolidated balance sheets and statements of income.
Gains and losses realized on the disposition of investments are determined on the first-in first-out basis and credited or charged to the consolidated statements of income and comprehensive income. Premium and discount on investments are amortized and accreted using the interest method and charged or credited to net investment income.
The Company uses the fair-value method of accounting for stock-based compensation awards granted. The Company determines the fair value of the stock options on their grant date using the Black-Scholes option pricing model and determines the fair value of restricted stock units (“RSUs”) on their grant date using the fair value of the Company’s common stock on the date the RSUs were issued (for those RSU which vest solely based upon the passage of time), as well as using multiple Monte Carlo simulations for those RSUs with market-based vesting conditions. The fair value of these awards is recorded as compensation expense over the requisite service period, which is generally the expected period over which the awards will vest, with a corresponding increase to additional paid-in capital. When the stock options are exercised, or correspondingly, when the RSUs vest, the amount of proceeds together with the amount recorded in additional paid-in capital is recorded in shareholders’ equity.
The table below summarizes, by type, the Company’s investments as of December 31, 2020 and 2019.
On December 2, 2019, the Company received 1,773,102 shares of FedNat Holding Company common stock (Nasdaq: FNHC), along with $25.5 million cash as consideration for the Asset Sale. On July 14, 2020, the Company transferred 156,000 shares of FedNat common stock to FGRe, a wholly-owned subsidiary of the Company, as a capital contribution for no consideration, and, on September 15, 2020, the Company transferred 330,231 shares of FedNat common stock to the Hale Parties as further described under the heading “Related Party Transactions”. Following the transactions, the Company directly holds 1,286,871 shares of FedNat common stock. As of March 15, 2021, the estimated fair value of the 1,442,871 shares of FedNat common stock held in the aggregate by the Company and its subsidiary was $6.9 million.
The Company’s limited liability investments are comprised of investments in a limited partnership and a limited liability company which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company’s total investment in these two entities was approximately $638,000 as of December 31, 2020. The limited liability company is managed by Argo Management Group, LLC, an entity which is wholly owned by KFSI. The Company has accounted for these two investments at cost minus impairment, if any, as the investments do not have readily determinable fair values. For the years ended December 31, 2020 and 2019, the Company has received profit distributions of $80,000 and $91,000 on these investments, respectively, which has been included in income. Furthermore, both investments began the process of returning capital back to its investors in 2020. As of December 31, 2020, the Company has received approximately 18% of its initial $776,000 investment back from these investments.
The Company has determined that its investment in FGAM represents an investment in a variable interest entity (“VIE”), in which the Company is the primary beneficiary, and as such, has consolidated the financial results of FGAM as of December 31, 2020. The Company evaluates whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and continuously reconsiders that conclusion. In determining whether the Company is the primary beneficiary, the Company evaluates its control rights as well as economic interests in the entity held either directly, or indirectly through affiliates via both qualitative and quantitative analysis. Further investments in, or redemptions of investments in FGAM, by either member of the joint venture could affect the entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, the Company assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.
The Fund is considered an investment company for GAAP purposes, following the accounting and reporting guidance in ASC Topic 946, Financial Services - Investment Companies. FG Financial Group, Inc., as a noninvestment company parent of an investment company, has retained the specialized industry accounting principles of its investment company subsidiary when preparing its consolidated financial statements. This specialized accounting includes the measurement of the investment company’s investments at fair value. Furthermore, cash flows from investing activities of the Fund, such as the purchase and sale of investments, have been included in cash flows from operating activities in the Company’s consolidated statement of cash flows for the year ended December 31, 2020.
Current income taxes recoverable were approximately $1.7 million as of December 31, 2020, compared to approximately $1.3 million as of December 31, 2019, representing the estimate of both the Company’s state and federal income taxes receivable as of each date.
Other assets increased $329,000, to $517,000 as of December 31, 2020, from $188,000 as of December 31, 2019. The major components of other assets, and the change therein, are shown below.
As of December 31, 2020, the Company has invested $4.0 million as a limited partner in FGI Metrolina Property Income Fund, LP (“Metrolina”), which invests in real estate through a real estate investment trust wholly owned by Metrolina. The general partner of Metrolina, FGI Metrolina GP, LLC, is managed, in part, by Mr. Cerminara, the Chairman of the Board of Directors of the Company. For the year ending December 31, 2020, the Company paid $80,000 in performance-based fees to the general partner of Metrolina. For the year ending December 31, 2019, approximately $37,000 in performance-based fees were waived by the general partner of Metrolina. Metrolina’s investment program is managed by FGI Funds Management LLC, an affiliate of FGI, which, with its affiliates, is the largest stockholder of the Company. The Company’s investment represents an approximate 53% ownership stake in Metrolina as of December 31, 2020.
On March 31, 2020, the Company entered into the Limited Liability Company Agreement (the “LLC Agreement”) of Fundamental Global Asset Management, LLC (“FGAM”), a newly formed joint venture owned 50% by each of the Company and FGI Funds Management, LLC, an affiliate of FGI (“FGIFM” and together with the Company, each a “Member” and collectively, the “Members”). The purpose of FGAM is to sponsor, capitalize and provide strategic advice to investment managers (“Underlying Managers”) in connection with the launch and/or growth of their asset management business and the investment products they sponsor (each, a “Sponsored Fund”).
FGAM is governed by a Board of Managers consisting of four managers, two of which have been appointed by each Member. The Company has appointed two of its independent directors to the Board of Managers of FGAM. Certain major actions, including any decision to sponsor a new investment manager, require the prior consent of both Members.
The shares of Series A Preferred Stock are listed on the Nasdaq Stock Market under the symbol “FGFPP”.
(1) Refer to “Related Party Transactions” above for additional information regarding the Share Repurchase Transaction
Net investment income (loss) decreased to $(17.3) million for the year ended December 31, 2020 from $5.6 million year ended December 31, 2019. The decrease was primarily the result of unrealized holding losses on the shares of FedNat common stock which the Company received upon the closing of the Asset Sale. Furthermore, the Company recognized a realized loss of approximately $2.1 million on the sale of 330,231 shares of FedNat common stock in the Share Repurchase Transaction, as previously discussed under the heading “Related Party Transactions.” Net investment income (loss) for the years ended December 31, 2020 and 2019 is as follows:
Other income was $104,000 compared to $10,000 for the years ended December 3, 2020 and 2019, respectively, and is comprised of fees earned under the Investment Advisory and Transition Services Agreements between the Company and FedNat.
General and administrative expenses increased by $3.5 million to $6.0 million for the year ended December 31, 2020, from $2.5 million for the year ended December 31, 2019. The increase was primarily due to professional fees incurred in the current year for various legal fees associated with the formulation and regulatory approval of FGRe, our Cayman Islands-based reinsurance subsidiary, and the general formulation and development of our new business strategy. Employee and facility costs also account for a portion of the increase, which includes $1.4 million paid to FGM under the Shares Services Agreement discussed under the heading “Related Party Transactions’ above. These costs have been included in general and administrative expense for the year ended December 31, 2020, while employee and facility costs have been presented as part of discontinued operations for year ended December 31, 2019. Finally, the Company incurred a charge of $0.2 million along with associated legal fees in the current year which were related to the Share Repurchase Transaction, as previously described under the heading “Related Party Transactions.”
As a result of the Share Repurchase Transaction, discussed under the heading “Related Party Transactions,” the Company has permanent non-deductible expenses of approximately $2.5 million which are comprised of the cost of purchasing the Company’s own stock as well as the legal fees associated with the transaction. These are shown at the tax effected rate of 21%, or $516,000 in the preceding table.
For the year ended December 31, 2020, the Company recorded an unrealized loss of approximately $12.2 million on its investment of FedNat common stock, resulting in a deferred tax asset of approximately $2.5 million. The Company’s gross deferred tax assets are $3.9 million as of December 31, 2020; however the Company has recorded a valuation allowance against all of its deferred tax assets, resulting in a net deferred income tax asset of $0 as of December 31, 2020, due to the uncertain nature surrounding our ability to realize these tax benefits in the future.
Net income for the years ended December 31, 2020 and 2019 is as shown in the following table.
On November 29, 2019, the Company entered into an Amended and Restated Loan Agreement and a related Amended and Restated Commercial Note (collectively, the “Amended and Restated Loan Agreement”) with Lender, which increased the existing non-revolving line of credit by an additional $10.0 million (the “Line of Credit Increase”), resulting in an amended and restated non-revolving line of credit loan in the aggregate principal amount of up to $17.0 million. Immediately prior to the closing of the Asset Sale, the Company drew $7.0 million under the line of credit, which was repaid to the Lender as of the closing of the Asset Sale. Upon repayment, the line of credit was terminated. Borrowings under the Loan Agreement bore interest at a rate per annum equal to 5.25%.
For the year ended December 31, 2020, the Company’s net cash used by operating activities was approximately $11.3 million. The major drivers of which were as follows:
● Our net loss of approximately $22.5 million for the year, offset by approximately $16.0 million for a non-cash charge related to the unrealized losses associated with our shares of FedNat common stock.
● A cash outflow of approximately $2.4 million representing cash placed in trust as collateral, pursuant to our Funds at Lloyd’s quota share agreement effective January 1, 2021.
● A cash outflow of approximately $4.0 million for our investment in the Class A and Class A-1 interests in the Sponsor of FGNA. As this investment was made by our investment company subsidiary, we are required to show these cash outflows as operating activities.
For the year ended December 31, 2020, the Company’s net cash used by financing activities consist of:
● The purchase of treasury shares associated with the Share Repurchase Agreement for approximately $2.5 million.
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates.
● Inspection of relevant contractual agreements, such as, the governing documents, any investment management agreements, offering materials, other communications with investors, and other available market information.
On December 2, 2019, we completed the sale of all of the issued and outstanding equity of three of the Company’s then wholly-owned subsidiaries, Maison Insurance Company (“Maison”), Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor” and, together with Maison and MMI, the “Maison Business” or the “Insurance Companies”), to FedNat Holding Company, a Florida corporation (“FedNat”), pursuant to the terms and conditions of the Equity Purchase Agreement, dated as of February 25, 2019 (the “Purchase Agreement”), by and among the Company and each of Maison, MMI and ClaimCor, on the one hand, and FedNat, on the other hand (the “Asset Sale”).
On December 31, 2019, the shares of FedNat common stock issued to the Company in connection with the Asset Sale were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the terms of the Registration Rights Agreement entered into by the Company and FedNat at the closing of the Asset Sale.
Pursuant to the Investment Advisory Agreement, FG Strategic Consulting (“FGSC,” formerly Fundamental Global Advisors LLC), a wholly-owned subsidiary of the Company, was formed 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. FGI Funds Management, LLC serves as the manager to FGSC. FGI Funds Management, LLC is affiliated with Fundamental Global Investors, LLC (“FGI”), the Company’s largest stockholder. The term of the Investment Advisory Agreement is five years.
“Grow intrinsic value per share with a long-term focus using fundamental research, allocating capital to asymmetric risk/reward opportunities.”
Historically, the Company has operated a real estate business through its subsidiary, FGI Metrolina Property Income Fund, LP, however, the Company does not anticipate that its real estate business will be a significant component of its future business plans.
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. The Company co-founded a partnership 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 first transaction entered into under the SPAC Platform occurred on January 11, 2021 by and among FGSS and Aldel Investors, LLC, the sponsor of Aldel Financial, Inc. (“Aldel”), a special purpose acquisition company which filed its initial registration statement with the Securities and Exchange Commission on February 16, 2021, but has not yet consummated an initial public offering. Under the agreement between FGSS and Aldel Investors, LLC (the “Agreement”), FGSS has agreed to provide certain accounting, regulatory, strategic advisory, and other administrative services to Aldel, which include assistance with negotiations with a potential merger target 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 under the heading “Formation of FG SPAC Partners, LP.”
On June 18, 2020, the Company entered into a consulting agreement (the “Consulting Agreement”) by and between the Company and Itasca Financial LLC (“Itasca Financial”), an advisory and investment firm founded by Mr. Swets in 2005, pursuant to which Mr. Swets would provide the services described on behalf of Itasca Financial. The Consulting Agreement provided that Mr. Swets act as the Company’s Interim Chief Executive Officer. In consideration for the services, the Company has paid Itasca Financial $111,333 during the term of the Consulting Agreement. The Consulting Agreement was terminated on November 10, 2020 with Mr. Swets’ appointment as CEO.
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.
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. The Company continuously reassesses whether it should consolidate under either model. See Note 5 for additional information regarding the Company’s consolidated investments.
On December 2, 2019, we sold all of the issued and outstanding equity of Maison, MMI and ClaimCor. As a result, these operations have been classified as discontinued operations in the Company’s financial statements presented herein. Certain transactions between the Company and its subsidiaries, which have historically been eliminated upon consolidation, are shown on a gross basis in the accompanying financial statements as such transactions have occurred between discontinued operations and those operations which the Company has continued to utilize following the closing of the Asset Sale. These items include surplus notes in the amount of $18 million plus accrued interest, all of which were settled upon the closing of the Asset Sale. Interest associated with these surplus notes has been recorded as part of net investment income from continuing operations as well as interest expense as part of discontinued operations on the Company’s consolidated statement of operations for the year ended December 31, 2020. All other significant intercompany balances and transactions have been eliminated upon consolidation.
Financial instruments which potentially expose the Company to concentrations of credit risk include investments, cash, 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 $250,000. As of December 31, 2020 the Company held funds in excess of these FDIC insured amounts. The terms of these deposits are on demand to mitigate some of the associated risk. The Company has not incurred losses related to these deposits.
Premium revenue, up to the date of the Asset Sale transaction was recognized on a pro rata basis over the term of each policy contract.
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, as well as a Monte Carlo valuation model to estimate the fair value of those RSUs which vest solely upon market-based conditions. 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. In the case of those RSUs which vest upon market-based conditions, should the market-based condition be achieved prior to the expiration of the derived service period, any unrecognized cost will be recorded as compensation expense in the period in which the RSUs actually 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 December 31, 2020.
As previously discussed, on December 2, 2019, we completed the sale of all of the issued and outstanding equity of our three former wholly owned subsidiaries, Maison, MMI and ClaimCor. Accordingly, the Company has classified the Maison Business as discontinued operations for all periods presented in this report as set forth in ASC 205-20 - Discontinued Operations.
The following table summarizes the Company’s investments as of December 31, 2020 and 2019.
The Company’s limited liability investments are comprised of investments in a limited partnership and a limited liability company which seek to provide equity and asset-backed debt investment in a variety of privately-owned companies. The Company’s total investment in these two entities was approximately $638,000 as of December 31, 2020. The limited liability company is managed by Argo Management Group, LLC, which is wholly owned by KFSI. The Company has accounted for these two investments at cost minus impairment, if any, as the investments do not have readily determinable fair values. For the years ended December 31, 2020 and 2019, the Company has received profit distributions of $80,000 and $91,000 on these investments, respectively, which has been included in income. Furthermore, both investments began the process of returning capital back to its investors in 2020. As of December 31, 2020, the Company has received approximately 18% of its initial $776,000 investment back from these investments.
In September 2020, the Company invested $5.0 million into its joint venture, Fundamental Global Asset Management, LLC (“FGAM’), to capitalize FG Special Situations Fund Advisor, LLC (“Advisor”), a Delaware limited liability company formed on September 2, 2020, and to sponsor the launch of FG Special Situations Fund, LP (the “Fund”), a Delaware limited partnership formed on September 2, 2020. The Fund is wholly owned by FGAM through the Fund’s general partner and Advisor, both of which are ultimately controlled by Mr. Cerminara, the Chairman of the Company’s Board of Directors. Of the total $5.0 million investment, approximately $4.0 million was used by FG New America Investors, LLC (the “Sponsor”) as part of a total $8.6 million of risk capital used to launch FG New America Acquisition Corp (NYSE: FGNA), a special purpose acquisition company which consummated its initial public offering on October 2, 2020, and entered into a definitive business combination with Opportunity Financial LLC on February 10, 2021. The Fund’s specific investment consists of both class A and class A-1 interests of the Sponsor, purchased for approximately $4.0 million. The interests represent a potential beneficial ownership of approximately 1.4 million common shares of FGNA as well as approximately 0.4 million warrants to purchase common shares of FGNA at a price of $11.50 per share. Both the class A and class A-1 interests of the Sponsor are subject to complete loss if FGNA is not able to consummate a business combination in accordance with the terms of its initial public offering. The class A and class A-1 interests have not been registered under the Securities Act of 1933, as amended, and are not transferrable except as provided for in the operating agreement of the Sponsor. The remaining $987,000 invested in FGAM consists of cash equivalents owned by the Fund as of December 31, 2020 which are expected to be invested by the Fund in the future. Mr. Cerminara, the Chairman of our Board, is the President and a director of FGNA and a manager of the Sponsor. Mr. Swets, our Chief Executive Officer, is the Chief Executive Officer and a director of FGNA and a manager of the Sponsor.
Subsequent to the issuance of the September 30, 2020 consolidated financial statements, the Company determined that the Fund should be considered an investment company for GAAP purposes, following the accounting and reporting guidance in ASC Topic 946, Financial Services - Investment Companies. FG Financial Group, Inc., as a noninvestment company parent of an investment company has retained the specialized industry accounting principles of its investment company subsidiary when preparing its consolidated financial statements. This specialized accounting includes the measurement of the investment company’s investments at fair value. Furthermore, cash flows from investing activities are required to be shown as cash flows from operating activities in an investment company’s statement of cash flows, whereas they will be shown as cash flows from investing activities in the cash flow statement of a non-investment company. Specifically, in the case of the Fund, this includes a $4.0 million investment in the class A and class A-1 interests of the Sponsor, which the Company has shown as cash used by operating activities in the Company’s consolidated statement of cash flows for the year ended December 31, 2020.
The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The FASB has issued guidance that 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 in an orderly transaction between market participants. This guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance categorizes assets and liabilities at fair value into one of three different levels depending on the observation of the inputs employed in the measurements, as follows:
● Level 2 - inputs to the valuation methodology which include quoted prices for similar assets or liabilities in active markets. These inputs are observable, either directly or indirectly, for substantially the full-term of the financial instrument.
At each subsequent measurement date, the Fund will review the valuation of these investments and will record adjustments as necessary to reflect the expected exit value of the investment under current market conditions. The Fund uses an independent pricing service to value its private operating company investments which may include an income approach, a market approach, or a combination thereof. The Fund may use multiple valuation approaches and estimate fair value based on a weighted average or a selected outcome within a range of multiple valuation results. Due to the inherent uncertainty of valuations, the fair values reflected in the financial statements as of the measurement date may differ materially from: 1) values that would have been used had a readily available market existed for these investments; and 2) the values that may ultimately be realized upon sale of the investments.
As a result of the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company recorded a credit of $214,000 against its income tax expense for the year ended December 31, 2020, due to a provision in the CARES Act which allows for the five-year carryback of net operating losses. Prior to the passage of the CARES Act, these net operating losses were only available to offset future taxable income generated by the Company.
As a result of the Share Repurchase Transaction, discussed in further detail in Note 9 - “Related Party Transactions”, the Company has permanent non-deductible expenses of approximately $2.5 million, which are comprised of the cost of purchasing the Company’s own stock as well as the legal fees associated with the transaction. These are shown at the tax effected rate of 21%, or $516,000 in the preceding table.
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes as compared to the amounts used for income tax purposes. For the year ended December 31, 2020, the Company recorded an unrealized loss of approximately $12.2 million on its investment of FedNat common stock, resulting in a deferred tax asset of approximately $2.5 million. The Company’s gross deferred tax assets are $3.9 million as of December 31, 2020, however the Company has recorded a valuation allowance against all of its deferred tax assets, resulting in a net deferred income tax asset of $0 as of December 31, 2020, due to the uncertain nature surrounding our ability to realize these tax benefits in the future. As of December 31, 2019, the financial statements show a net deferred tax liability in the amount of $106,000 due to the sale of the Maison Business. Significant components of the Company’s net deferred tax assets are as follows:
The Company files federal income tax returns as well as multiple state and local tax returns. The Company’s consolidated federal and state income tax returns for the years 2016 through 2019 are open for review by the Internal Revenue Service (“IRS”) and the various state taxing authorities.
On May 29, 2015, the Company’s Board of Directors granted 20,500 RSUs to certain of its executive officers under the 2014 Plan. Each RSU granted entitles the grantee to one share of the Company’s common stock upon the vesting date of the RSU. The RSUs vest as follows: (i) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $10.00 per share; and (ii) 50% upon the date that the closing price of the Company’s common stock equals or exceeds $12.00 per share. Prior to the vesting of the RSUs, the grantee will not be entitled to any dividends declared on the Company’s common stock. The RSUs do not expire; however, should the grantee discontinue employment with the Company for any reason other than death or disability, all unvested RSUs will be deemed forfeited on the date employment is discontinued. In connection with the Asset Sale and pursuant to the employment and resignation agreements entered into between the Company and its former executive officers, Douglas N. Raucy and Dean E. Stroud, a total of 16,500 RSUs issued under this grant to Messrs. Raucy and Stroud were cancelled and forfeited on December 2, 2019. As of December 31, 2020, 4,000 RSUs remain outstanding under this grant which have been issued to our Chief Financial Officer, John S. Hill.
On August 22, 2018, the Compensation Committee granted 1,000 shares of the Company’s common stock (the “Bonus Shares”) and 1,000 RSUs to Mr. Hill, under the 2018 Plan. Each RSU represents a contingent right to receive one share of the Company’s common stock. These RSUs vest in five equal annual installments beginning with the first anniversary of the grant date, subject to continued employment, with vesting subject to Mr. Hill maintaining ownership of the Bonus Shares through the full five-year vesting period.
Also, on August 22, 2018, the Company modified its compensation program for all non-employee directors of the Company, effective September 1, 2018. The modified compensation program allows for an annual grant of RSUs with a value of $40, vesting in five equal annual installments, beginning with the first anniversary of the grant date. Accordingly, on August 22, 2018, August 13, 2019, and again on August 12, 2020, the Board issued RSUs to each of the Company’s then serving non-employee directors, representing a value of $40 per director. The total number of RSUs granted were 34,284 on August 22, 2018, 61,776 on August 13, 2019, and 60,998 on August 12, 2020. Furthermore, on January 11, 2019, the Company’s Board appointed two new directors to the Board, Ambassador Rita Hayes and Dr. Marsha G. King, resulting in the issuance of 5,397 RSUs to each of these two directors, representing their pro-rata share of the RSU grant issued to each of the Company’s non-employee directors on an annual basis. The terms of the RSUs granted allow for their immediate vesting, subject to the Board’s discretion, upon a director’s resignation or retirement from the Board. Accordingly, upon the resignation of Marsha G. King and Lewis M. Johnson on December 14, 2020 and March 12, 2021, respectively, the Board accelerated the vesting of 19,210 RSUs that had been previously granted to Ms. King, and 20,987 RSUs that had been previously granted to Mr. Johnson.
Total stock-based compensation expense for the years ended December 31, 2020 and 2019 was $312,000 and $413,000, respectively. As of December 31, 2020, total unrecognized stock compensation expense of $736,000 remains, which will be recognized through September 30, 2025.
On February 28, 2018, we completed the underwritten public offering of 640,000 shares of the Preferred Stock designated as 8.00% Cumulative Preferred Stock, Series A, par value $25.00 per share. Also, on March 26, 2018, we issued an additional 60,000 shares of Preferred Stock pursuant to the exercise of the underwriters’ over-allotment option. Dividends on the Preferred Stock are cumulative from the date of original issue and are payable quarterly on the 15th day of March, June, September and December of each year, commencing on June 15, 2018 when, as and if declared by our Board of Directors or a duly authorized committee thereof. The first dividend record date for the Preferred Stock was on June 1, 2018. For each of the years ended December 31, 2020 and 2019, the Company declared dividends of $1.4 million, representing all quarterly amounts due on the Preferred Stock. Dividends are payable out of amounts legally available therefor at a rate equal to 8.00% per annum per $25.00 of stated liquidation preference per share, or $2.00 per share of Preferred Stock per year. The Company’s Board of Directors declared the first quarter 2021 dividend on the shares of Series A Preferred Stock on February 8, 2021.
As of December 31, 2020, the Company has invested $4.0 million as a limited partner in FGI Metrolina Property Income Fund, LP (“Metrolina”), which invests in real estate through a real estate investment trust which is wholly owned by Metrolina. The general partner of Metrolina, FGI Metrolina GP, LLC, is managed, in part, by Mr. Cerminara, the Chairman of the Board of Directors of the Company. For the year ending December 31, 2020, the Company paid $80,000 in performance-based fees to the general partner of Metrolina. For the year ending December 31, 2019, approximately $37,000 in performance-based fees were waived by the general partner of Metrolina. Metrolina’s investment program is managed by FGI Funds Management LLC, an affiliate of FGI, which, with its affiliates, is the largest stockholder of the Company. The Company’s investment represents an approximate 53% ownership stake in Metrolina as of December 31, 2020.
The LLC Agreement provides that each Member will contribute its proportionate interest of the amount of capital determined by the Board of Managers to be required to operate FGAM (“Operating Capital”). Unless otherwise agreed, the Company will contribute the capital required to be contributed to a Sponsored Fund (“Seed Capital”), as well as any amounts required to be contributed to an Underlying Manager for working capital purposes (“Working Capital”). Proceeds attributable to a contribution, directly or indirectly through an Underlying Manager, to a Sponsored Fund will be distributed to the Members in proportion to their capital contributions in respect of Seed Capital. All other proceeds received by FGAM attributable to a Sponsored Fund, including proceeds from revenue shares or ownership interests in Underlying Managers, will be distributed as follows: (i) first, to the Members until they have received cumulative distributions up to an amount of the Operating Capital funded by them; (ii) second, to the Members until they have received cumulative distributions up to an amount of Working Capital previously funded by them, plus a return of 5% per annum; and (iii) third, to the Members in proportion to their percentage interests.
In addition, neither FGIFM nor any of its affiliates may participate in a Sponsored Fund Transaction other than through FGAM unless FGIFM has first presented the opportunity to FGAM and either the Board of Managers or the Company has rejected such opportunity. Notwithstanding the foregoing, if such opportunity requires in excess of $5.0 million, FGIFM may offer amounts in excess of $5.0 million to a third party, subject to certain conditions.
On September 14, 2020 and September 28, 2020, the Company provided Seed Capital of $2.0 million and $3.0 million, respectively, into FGAM, to capitalize FG Special Situations Fund Advisor, LLC (“Advisor”), a Delaware limited liability company formed on September 2, 2020, and to sponsor the launch of FG Special Situations Fund, LP (the “Fund”), a Delaware limited partnership also formed on September 2, 2020. The Fund is wholly owned by FGAM through the Fund’s general partner and the Advisor, both of which are ultimately controlled by Mr. Cerminara, the Chairman of the Company’s Board of Directors. Of the total $5.0 million invested, approximately $4.0 million was used by FG New America Investors, LLC (the “Sponsor”) as part of a total $8.6 million of risk capital used to launch FG New America Acquisition Corp (NYSE: FGNA), a newly formed special purpose acquisition company which consummated its initial public offering on October 2, 2020, and entered into a definitive business combination with Opportunity Financial LLC, on February 10, 2021. The Fund’s specific investment consists of both class A and class A-1 interests of the Sponsor, purchased for approximately $4.0 million. The class A and class A-1 interests represent beneficial ownership of approximately 1.4 million common shares of FGNA as well as approximately 0.4 million warrants to purchase common shares of FGNA at a price of $11.50 per share. Both the class A and class A-1 interests of the Sponsor are subject to complete loss if FGNA is not able to consummate a business combination in accordance with the terms of its initial public offering. The class A and class A-1 interests have not been registered under the Securities Act of 1933, as amended, and are not transferrable except as provided for in the operating agreement of the Sponsor. The remaining $1.0 million invested in FGAM consists of cash owned by the Fund as of December 31, 2020 and will be used by the Fund to sponsor additional future investments. Mr. Cerminara, the Chairman of our Board, is the President and a director of FGNA and a manager of the Sponsor. Mr. Swets, our Chief Executive Officer, is the Chief Executive Officer and a director of FGNA and a manager of the Sponsor.
Pursuant to the Investment Advisory Agreement entered into upon closing of the Asset Sale, FG Strategic Consulting (“FGSC,”, formerly Fundamental Global Advisors LLC), 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. FGI Funds Management, LLC will serve as the manager to FGSC. Both Advisor and FGI Funds Management, LLC are affiliates of Fundamental Global Investors, LLC, the Company’s largest stockholder. The Investment Advisory Agreement runs through December 2, 2024.
For the year ended December 31, 2020, the Company paid $1.4 million to FGM under the Shared Services Agreement.
On January 11, 2021, FGSP purchased 1,075,000 founder shares from Aldel, for total consideration of $4,674. Concurrent with Aldel’s initial public offering, FGSP will purchase 650,000 warrants at a price of $0.10 per warrant, each exercisable to purchase one share of Aldel’s Class A common stock at an exercise price of $15.00 per share (the “OTM Warrants”), for an aggregate purchase price of $65,000. In addition, the Company through its joint venture investment in Fundamental Global Asset Management, LLC and the FG Special Situations Fund, LP, will invest approximately $1.0 million in the risk capital of Aldel Investors, LLC. The Company’s limited partnership interests in FGSP potentially represent beneficial ownership of approximately 816,700 founder shares and approximately 321,000 OTM Warrants of Aldel. Our Chief Executive Officer and Director, Larry G. Swets, will serve as Senior Advisor to Aldel upon the closing of its offering and has received 25,000 common shares of Aldel. The Chairman of our Board of Directors, D. Kyle Cerminara will serve as director of Aldel upon the closing of its offering and has also received 25,000 shares of Aldel.
The following potentially dilutive securities outstanding as of December 31, 2020 and 2019 have been excluded from the computation of diluted weighted-average shares outstanding as their effect would be anti-dilutive.
The 1347 Property Insurance Holdings, Inc. 401(k) Plan (the “Retirement Plan”) was established effective January 1, 2015, as a defined contribution plan. The Retirement Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”); eligible employees of the Company and its subsidiaries may participate in the plan. Employees who have completed one month of service are eligible to participate and are permitted to make annual pre and post-tax salary reduction contributions not to exceed the limits imposed by the Internal Revenue Code of 1986, as amended. Contributions are invested at the direction of the employee participant in various money market and mutual funds. The Company matches contributions up to 100% of each participant’s contribution, limited to contributions up to 4% of a participant’s eligible earnings. The Company may also elect to make a profit-sharing contribution to the Retirement Plan based upon discretionary amounts and percentages authorized by the Company’s Board of Directors. For the years ended December 31, 2020 and 2019, the Company made matching contributions to the Retirement Plan in the amount of $18,000 and $97,000, respectively, but did not make any profit-sharing contributions to the Retirement Plan in either year.
We continue to monitor the recent outbreak of the novel coronavirus (COVID-19) on our operations.