FRAG OUT! is a running gag amongst the Creatures. It is said whenever someone throws a grenade during a game, so the others know that a grenade has been released. The phrase is mainly said by Sp00n and Seamus.
The origins of the phrase aren't really known. The Creatures have been saying it for a while. Seamus was most likely the first one to say the phrase. It has been said in various playthroughs, including Seamus' [PROTOTYPE2] with Sp00n, and Nova and Sp00n's Saints Row the Third. Dan also mentioned during his Arkham City playthrough, that one of Joker's henchmen threw a grenade using the "Seamus Frag Out Strategy."