UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K /A
Amendment No. 1
ANNUAL REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2016
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 84-0922335 |
| (State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
| 179 Summers Street, Suite 307, Charleston, WV 25301 |
| (Address of principal executive offices) (Zip Code) |
| Registrant’s telephone number, including area code: (304) 343-8171 |
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK $.0001 PAR VALUE
Indicate by check mark if registrant is a well-known seasoned insurer, as defined in rule 405 of the Securities Act.
| Yes [_] | No [X] |
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Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
| Yes [_] | No [X] |
Indicate by a check mark whether the issuer (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.
| Yes [] | No [_X] |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
| [X] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer | [_] | Accelerated filer | [_] | |
| Non-accelerated filer | [_] | Smaller reporting company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
| Yes [_] | No [X] |
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of November 30, 2015: $ 1,859,076 ( 379,403,267 shares at $.0049 / share)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 379,908,267 shares of common stock as of May 31, 2016.
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| Page | ||
| TABLE OF CONTENTS | ||
| PART I | ||
| Item 1 | Business | 4 |
| Item 1A | Risk Factors | 4 |
| Item 2 | Properties | 5 |
| Item 3 | Legal Proceedings | 5 |
| Item 4 | Submission of Matters to a Vote of Security Holders | 5 |
| PART II | ||
| Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 6 |
| Item 6 | Selected Financial Data | 7 |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 7 |
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 24 |
| Item 8 | Financial Statements and Supplementary Data | 25 |
| Item 9 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 25 |
| Item 9A(T) | Controls and Procedures | 25 |
| Item 9B | Other Information | 27 |
| PART III | ||
| Item 10 | Directors, Executive Officers and Corporate Governance | 28 |
| Item 11 | Executive Compensation | 30 |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 31 |
| Item 13 | Certain Relationships and Related Transactions and Director Independence | 34 |
| Item 14 | Principal Accounting Fees and Services | 35 |
| PART IV | ||
| Item 15 | Exhibits, Financial Statement Schedules | 36 |
EXPLANATORY NOTE
Jacobs Financial Group, Inc. (the "Company") is filing this Amendment No.1 to its Form 10-K for the year ended May 31, 2016 filed with the Securities and Exchange Commission on July 3, 2017 for the purpose of providing Exhibit 101 as listed in Item 15 - Exhibits. All other information in this filing speaks as of the original date of the filing
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PART I
Item 1. BUSINESS
The predecessor of Jacobs Financial Group, Inc. (the “Registrant”, “JFG” or the “Company”), NELX, Inc., was incorporated in the State of Kansas in March 1983 as Nelson Exploration, Inc. In October 1993 the Company changed its name to NELX, Inc. On or about December 29, 2005, NELX was merged with and into its newly-formed wholly-owned subsidiary, JFG, a Delaware corporation. JFG survived the merger as the Registrant. The merger effected a change in the Registrant’s name, a change in the state of incorporation of the Registrant from Kansas to Delaware, and amendments to the Articles of Incorporation and Bylaws of the Registrant. The Company holds four wholly owned subsidiaries, FS Investments, Inc. (“FSI”), Jacobs & Company (“Jacobs & Co.”), First Surety Corporation (“FSC”) and Crystal Mountain Spring Water, Inc. (“CMW”).
FSI, incorporated in 1997 in West Virginia, is a holding company that was organized to develop surety business through the formation or acquisition of subsidiaries engaged in the issuance of surety bonds collateralized by investment accounts that are professionally managed by Jacobs & Co. Through its wholly-owned subsidiary, Triangle Surety Agency, Inc. (“Triangle Surety” or “TSA”), FSI is actively engaged in the placement with insurance companies of surety bonds, with an emphasis on clients engaged in regulated industries.
Jacobs & Co., incorporated in 1988 in West Virginia, and whose executive offices are located in Charleston, West Virginia, provides fee based investment advisory services to institutions, companies and individuals.
On December 31, 2005 the Company acquired the former West Virginia Fire and Casualty Company (WVFC), subsequently renamed First Surety Corporation (FSC), from The Celina Mutual Insurance Company (Celina). The acquisition consisted of the purchase of marketable investments and insurance licenses and did not include any existing policies or customer base as the insurance lines being offered by WVFC were not lines that new ownership intended to pursue. FSC is a West Virginia domiciled property and casualty company with licenses (multi-line) in West Virginia, Indiana and Ohio, targeting primarily coal and oil & gas industry surety markets in the Eastern United States. In 2006, the Company was licensed for the surety line of business in West Virginia. In 2008, the Company’s license for surety was expanded to include Ohio.
CMW has an undeveloped leasehold interest in a mineral water spring located near Hot Springs, Arkansas.
The Company is headquartered in Charleston, West Virginia, and through its wholly-owned subsidiaries, employs a total of nine (9) full-time employees.
| Item 1A. | RISK FACTORS |
As the Registrant qualifies as a small reporting company as defined by §229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the information required by this item.
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| Item 2. | PROPERTIES |
Through its wholly-owned subsidiary, CMW, the Company has an undeveloped leasehold interest in a mineral water spring located near Hot Springs, Arkansas. Under this leasehold arrangement, CMW is obligated for minimum lease payments in the amount of approximately $180 per month with automatic options to extend the leasehold through October 2026. CMW has the right to cancel the lease upon sixty (60) days written notice at any time. The property is presently not being actively explored or developed. During the 2002 fiscal year, management evaluated the lease and determined the development was not then feasible. Accordingly, the Company recorded an impairment of $116,661 to its investment in the lease. Opportunities will continue to be explored as they arise with respect to the development or sale of the leasehold interest.
| Item 3. | LEGAL PROCEEDINGS |
In May 2015, an investor and lender to the Company brought action seeking payment of a Promissory Note. The Company does not deny the claim and the matter has been continued while the Company negotiates terms with the lender. The principal and interest related to this claim are fully accrued in the financials of the Company.
In December 2015, a lessor to the Company brought action seeking payment of defaulted lease payments and termination of lease. The matter was reduced to a judgement lien and will be paid from operations with no material effect on the Company. The lease payments are fully accrued in the financials of the Company.
| Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Since the last annual meeting in December 2005, two new members were appointed to the Company’s board of directors in July 2009, Mario J. Marra and Bradley W. Tuckwiller. The appointed directors will serve until the next called meeting of shareholders.
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PART II
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s common stock is traded in the over-the-counter market under the symbol JFGI (OTC Bulletin Board Symbol). The table below sets forth the high and low price information for the Company’s common stock for the periods indicated. Such prices are inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions.
| HIGH | LOW | |||||||||
Fiscal Year Ended May 31, 2016 | ||||||||||
| 4th Quarter | .004 | .002 | ||||||||
| 3rd Quarter | .003 | ..003 | ||||||||
| 2nd Quarter | .005 | .003 | ||||||||
| 1st Quarter | .004 | .002 | ||||||||
Fiscal Year Ended May 31, 2015 | ||||||||||
| 4th Quarter | .004 | .003 | ||||||||
| 3rd Quarter | .005 | .003 | ||||||||
| 2nd Quarter | .005 | .002 | ||||||||
| 1st Quarter | .020 | .003 | ||||||||
As of May 31, 2016, there were approximately 900 holders of record of the Company’s common stock.
The Company has neither declared nor paid any cash dividends on its common stock during the last two fiscal years, and it is not anticipated that any such dividend will be declared or paid in the foreseeable future.
As of May 31, 2016, the Registrant’s 2005 Stock Incentive Plan authorizing the availability of 35,000,000 shares and approved by the stockholders of the Company on December 8, 2005, had expired under its own terms ten years after its adoption. There were 12,400,000 shares un-issued by the plan at its expiration.
There are no other equity compensation plans approved by stockholders of the Company.
Unregistered Sales of Equity Securities
The Certificate of Designations, Powers, Preferences and Rights of Series A Preferred Stock adopted by the Board of Directors of the Company on December 22, 2005 is set forth as Exhibit 4.1.
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The Certificate of Designations, Powers, Preferences and Rights of Series B Preferred Stock adopted by the board of directors of the Company on December 22, 2005 is set forth as Exhibit 4.2.
The Certificate of Designations, Powers, Preferences and Rights of Series C Preferred Stock adopted by the board of directors of the Company on October 29, 2009 is set forth as Exhibit 4.3.
In the year ended May 31, 2016, 1,878,000 common shares were issued as additional consideration to various lenders in private placements pursuant to short term borrowings. A total of 11,956,049 common shares were issued in connection with the additional 2% stock quarterly dividend associated with Series A and B Preferred shares that have requested to be redeemed upon maturity. Additionally, 2,500,000 common shares were issued to various individuals and entities who purchased investment units consisting of such shares and common stock of a subsidiary of the Company.
The Registrant’s Common Shares are issued under the restrictions of Rule 144 and bear a legend to the effect that such securities are not registered under the Securities Act pursuant to an exemption from such registration.
The issuance of the aforementioned securities is exempt from registration provisions of the Securities Act of 1933, as amended (the “Securities Act”), by reason of the provision of Section 4(2) of the Securities Act, as transactions not involving any public offering, in reliance upon, among other things, the representations made by the investors, including representations regarding their status as accredited investors (as such term is defined under Rule 501 promulgated under the Securities Act), and their acquisition of the securities for investment and not with a current view to distribution thereof. The securities contain a legend to the effect that such securities are not registered under the Securities Act pursuant to an exemption from such registration. The issuance of the securities was not underwritten.
Item 6. SELECTED FINANCIAL DATA
As the Registrant qualifies as a small reporting company as defined by §229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the information required by this item.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During fiscal 2016, the Company has focused its primary efforts on the development and marketing of its surety business in West Virginia and Ohio, securing potential strategic relationships that will accelerate the progression of the Company’s business plan strengthening its insurance subsidiary’s reserves for potential claims and raising additional capital to facilitate that subsidiary’s entry into other state markets.
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Results of Operations and Financial Condition as of and for the Year Ended May 31, 2016
Results of Operations
Total revenues decreased from $1,576,000 in fiscal 2015 to $1,336,000 in fiscal 2016, while total operating expenses decreased from $3,080,000 in fiscal 2015 to $1,907,000 in fiscal 2016. This resulted in a net loss from operations of $571,000 in 2016 as compared with a net loss from operations of $1,505,000 in fiscal 2015.
The decrease in revenues is largely attributable to a decrease in net investment income of approximately $490,000 in 2016, mainly due to an unrealized decline in market value of an investment account held as a result of a contractual arrangement, where the Company receives any appreciation and earning in excess of the initial deposit of collateral by a principal bondholder. The Company also realized losses of $79,000 on the sale of investments in 2016 compared to gains of $136,000 in 2015. Insurance premiums written for new and existing customers increased by approximately $100,000 in 2016. In addition, the Company recognized other income of approximately $287,000 from the removal of dormant account payable balances and commissions no longer payable on receivables that were written off as uncollectible, and approximately $81,000 in interest income on notes receivable issued during 2016.
The decrease in expenses is mainly attributable to a 2015 strengthening the reserve for incurred but not reported policy losses by approximately $800,000 that was recommended as a result of an examination by the West Virginia Insurance Commissioner. In addition, the Company wrote off accounts receivable of approximately $300,000 as uncollectible in 2015, and reported decreased legal and accounting fees of approximately $200,000 in 2016, partially as a result of inadequate cash flow to enable the contracting with independent auditors for fiscal year 2014, 2015, and 2016.
Interest expense increased from $833,000 in fiscal 2015 to $915,000 in fiscal 2016, as a result of the issuance of stock as part of the 2% dividend on Series A and B Preferred shares that were requested to be redeemed, as well as an increase in stock issued as incentive for lending and continuation of terms for previously lent funds.
During the years ending May 31, 2016 and May 31, 2015 the Company recorded gains on extinguishment of debt in the amount of $1,919,532 and $1,257,536 respectively. These gains resulted from the waived interest and forgiven principal on notes payables occurring upon the settlement of the bridge loans in 2016 and from the purchase of a majority interest in the bridge loans and the payoff of other notes payables in 2015.
Capital Resources and Financial Condition
Mandatorily Redeemable Preferred Stock
In conjunction with the acquisition of FSC at December 31, 2005, a restructuring of the Company’s financing was accomplished through the private placement of 350 shares of Series A Preferred
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stock and 3,980 shares of Series B Preferred stock, each accompanied by warrants to acquire common stock of the Company in exchange for cash totaling $3,335,000. Of the total funds received, $2,860,000 was used in the acquisition and funding of the insurance subsidiary, with the remaining funds used to pay expenses attributable to the acquisition and the funding of on-going operations. Additionally, approximately $3,668,000 of indebtedness of the Company was converted into preferred stock and warrants reducing the Company’s borrowings under short-term financing arrangements to approximately $167,000 as of December 30, 2005.
The Series A designation was designed for issuance to principals desiring surety bonds under FSC’s partially collateralized bonding programs. As designed, proceeds from the sale of Series A preferred stock is down-streamed to FSC to increase its capital and insurance capacity, although to the extent that proceeds from the sale of Series B preferred shares was used in the initial acquisition and funding of FSC, the Company was allowed to use such proceeds to redeem Series B preferred stock (Company option to redeem) or for funding of on-going operations. Effective June 1, 2007, the Company agreed to the requirement of the West Virginia Insurance Department to downstream all future proceeds from sales of Series A preferred stock in order to increase capital and reserves of the insurance subsidiary to more substantial levels.
The Series A designation contains a conditional redemption feature providing for the redemption of the Series A shares at any time after the seventh (7th) anniversary of the issue date, provided that the principal no longer requires surety bonds issued by FSC. Surety bonds currently being issued by FSC are primarily for coal mining and reclamation permits, which are long-term in nature and continually evolving whereby outstanding bonds are periodically released as properties are mined and reclaimed and new bonds issued for properties to be mined in the future. Accordingly, this source of financing was designed to be long-term by nature.
The Company’s outstanding Series A Preferred stock matures on the seventh anniversary of the issuance date if the holder has no outstanding surety bonds with the Registrant. Thereafter holders of the Series A Stock are eligible to request that the Company redeem their Series A Shares. As of May 31, 2016, the Company has received requests for redemption of 1,026 shares of Series A Preferred. The aggregate amount to which the holders requesting redemption are entitled as of June 30, 2016, is $1,535,688.
Under the terms of the Series A Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series A Stock are sufficient to redeem the total number of shares of Series A Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph,
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(Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series A Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series A Stock to be redeemed shall be increased by 2% of the Series A Face Amount, with the amount of such increase (i.e., 2% of the Series A Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series A Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series A Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series A Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series A Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series A Stock elected to be redeemed shall have been paid in full, such share of Series A Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
On April 4, 2013, the Company’s Board of Directors determined based on the criteria established under the terms of the Preferred Stocks that there were insufficient funds available for the redemption of Preferred Stocks.
The Series B designation was designed for issuance to investors in JFG and contains both conversion rights to common stock and redemption features. Each share of the Series B preferred stock is convertible, at the option of the holder, into 1,000 shares of JFG common stock and can be converted at any time. The Series B preferred shares were issued at a twenty-five percent (25%) discount to the stated face value of $1,000 per share or approximately $2,217,650 in total. Additional shares of the Series B were subsequently sold at a discount of approximately four and one-half percent (4.5%) or approximately $36,000. Additionally, the Series B preferred stock can be redeemed, at the option of the holder, at full-face value plus accrued and unpaid cumulative dividends, commencing with the fifth (5th) anniversary of the original issue date. The Company has the option to redeem the Series B preferred shares at any time after the first (1st) anniversary of the original issue date, subject to the holder choosing to exercise conversion privileges prior to the stated redemption date.
The Company’s outstanding Series B Preferred stock matured on December 30, 2010, meaning that the holders of the Series B Stock became entitled to request that the Company redeem their Series B Shares. As of May 31, 2016, the Company has received requests for redemption of 2,219
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shares of Series B Preferred. The aggregate redemption amount to which the holders are entitled as of June 30, 2016, is $5,099,573.
Under the terms of the Series B Preferred Stock, receipt of a redemption request required the Company’s Board to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series B Stock are sufficient to redeem the total number of shares of Series B Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series B Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series B Stock to be redeemed shall be increased by 2% of the Series B Face Amount, with the amount of such increase (i.e., 2% of the Series B Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series B Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series B Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series B Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series B Stock subject of redemption in accordance herewith. Until the Redemption Price for each share of Series B Stock elected to be redeemed shall have been paid in full, such share of Series B Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
On March 8, 2011, the Company’s Board of Directors determined, based on the criteria established under the terms of the Series B Preferred Stock, that there were insufficient funds available for the redemption of Series B Preferred Stock.
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As an inducement to the initial preferred stock shareholders, warrants to purchase 45,402,996 shares of common stock at an exercise price of one-tenth of one cent ($.001) per share were issued. Warrants issued to Series A Preferred holders had a seven year expiration; warrants issued to Series B Preferred holders had a five-year expiration period. Such warrants were valued at approximately $533,000 using the Black-Scholes pricing model. 386,667 warrants issued in connection with Series B Preferred Stock expired unexercised on December 31, 2010, while 600,000 warrants issued in connection with Series A Preferred Stock expired unexercised on December 31, 2012.
The Company experienced a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $108,386 in fiscal 2016 as compared to $1,669,587 in fiscal 2015.
Equity Preferred Stock
In November 2009, as a means of alleviating obligations associated with the Company's Series B Preferred Stock, which by its terms matured at the end of 2010, management proposed a recapitalization to assist in stabilizing the financial position of the Company. The Board deemed it advisable to designate a Series C Preferred Stock, with 10,000 authorized shares. The Recapitalization consisted of the exchange of 6,805 Series B Shares Preferred for a combination of Series C Preferred Shares and Common Stock Shares. For each Series B Preferred Share, the participating holder received (i) one Series C Preferred Share and (ii) 2,000 shares of JFG Common Stock. The accumulated dividend rights and preferences associated with the Series B Preferred Shares transferred undiminished to the corresponding Series C Preferred Shares. This exchange amounted to $6,269,051 of carrying value of Series B Preferred stock being exchanged for Series C Preferred and Common Stock. 13,609,872 shares of Common Stock were issued to the Series C Preferred Stock holders at the rate of 2,000 Common shares for each exchanged Series B Preferred Stock, with the related cost associated with the Common issuance offsetting the Series C Preferred carrying value by $265,120. The shares were valued at approximately $.01948 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction. Series C Preferred stock may be redeemed by the Company but does not have a fixed maturity date and is considered permanent equity. Holders of over 70% of the outstanding Series B Preferred Shares elected to participate in the recapitalization.
Unlike the Series B Preferred Shares with their fixed maturity date, the Series C Preferred Shares are permanent equity, with accruing dividends only increasing the preference amount that must be satisfied before junior securities may participate in dividends or on liquidation. Accordingly, the effect of the accrual of dividends with respect to the Series C Preferred Shares on the Company’s balance sheet is to increase the aggregate claim by the Series C Preferred Shares on the equity of the corporation and to increase the deficit in common equity, while having no effect on the net equity of the corporation as a whole. The entitlement of the Series C Preferred Shares to a priority in relation to junior securities with respect to dividends and on liquidation does not create an obligation by the Company and therefore no liability is recorded until the dividends are declared by the Board of the Company. The Series C Preferred Shares are pari passu with the Series A Preferred Shares and Series B Preferred Shares and no dividends or other distributions will be paid upon Common Shares or any other class of Shares that is junior in priority to the Series C Preferred Shares while dividends are in arrears.
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The accrual of dividends on the equity preferred stock resulted in a charge to common stockholders’ equity and a credit to the equity of equity preferred stock of $1,164,143 in fiscal 2016 as compared to $1,072,461 in fiscal 2015.
Dividend Preference and Accretion
During the year ended May 31, 2012, two holders of Series A Preferred stock released all of their outstanding bonds held with FSC. The carrying value of these shares of Series A Preferred Shareholders are listed in the liability section of the balance sheet, and therefore the dividends associated with these shares of Series A Preferred stock after February 29, 2012 is a deduction from net income. The carrying value of the Series B Preferred Shares that did not convert are listed in the liabilities section of the balance sheet, and therefore the accretion and dividends associated with the Series B Preferred stock after November 30, 2009 are deductions from net income. Series C Preferred stock has no accretion. The recorded values of the Series A preferred stock was increased to their stated liquidation values using the interest method over a period of five years and such amounts were categorized as accretion of mandatorily redeemable preferred stock in the consolidated statement of operations. This accretion was concluded in December 2010.
The Series A Preferred designation is entitled to receive cumulative dividends at the rate of 4.00% per annum and the Series B Preferred and Series C Preferred designations are entitled to receive cumulative dividends at the rate of 8.00% per annum, with the Series A, B and C Preferred designations having equal ranking and preference as to dividends, liquidation rights and priority to the Company’s common stockholders. The accrued (but undeclared) dividends associated with the Series C Preferred exchange amounted to $2,295,624 and are included in the total amount exchanged for Series C Preferred Shares.
At this time, management has chosen to defer payment of dividends to the holders of the Series A, B and C Preferred Shares until the Company has sufficient cash flow from operations to service the obligation.
Bridge-financing, Commitments and Material Agreements
Of primary importance to the Company's ability to fully implement its business plan is the expansion of that business into additional states. Regulatory approval and licensing is required for each state where FSC seeks to conduct business. Management found entry into additional states (as a surety) was proving difficult without the benefit of more substantial capital and reserves due to FSC's status as a recent entry into this market and due to the cyclical nature of the coal industry. Accordingly, management began pursuing avenues that would provide additional capital to facilitate such expansion.
Beginning in fiscal 2008 and completed during the first quarter of fiscal 2009, the Company obtained two rounds of bridge financing totaling an aggregate of $3,500,000. The purpose of the financing was to pay expenses of operations and to pay fees and expenses incurred or expected to be incurred in connection with a larger permanent financing and, in addition, to increase the capital surplus of FSC to make possible the reactivation of FSC’s surety license in the state of Ohio. The terms of the bridge-financing arrangement provided for payment in full upon consummation by
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the Company of a qualified equity offering providing net proceeds of at least $15 million on or before September 10, 2013. Because such a qualified equity offering was not consummated by September 10, 2008, accrued interest-to-date was payable, and quarterly installments of principal and interest became payable over five years commencing in December 2008. The interest rates on such notes were fixed at 10.00%. Payments due December 2008 and March 2009 were not made by the Company as scheduled, but a forbearance agreement was subsequently entered into with the bridge lenders on June 5, 2009, modifying payment terms to cure the default (including increasing the interest rate on the loans to 17%), issuing additional common stock to the loan holders, and pledging the stock of the Company’s subsidiary, CMW, as security for repayment of the loans. The modification required the Company to pay interest of $224,515 on June 10, 2009 and increase the quarterly payments by $67,185 beginning September 10, 2009 to satisfy the arrearage. The Company failed to make the payment that was due September 10, 2009 and the payments that were due in the ensuing quarters.
Certain equity inducements in the form of common stock of the Company were provided under the terms of the bridge loan documents, including a requirement that the Company issue to the bridge lenders an additional 2.8% of the Company’s outstanding common shares upon each six-month anniversary date until retirement of the notes.
In anticipation of a proposed financing and as a condition thereof, the Company and each of the bridge lenders entered into a Loan Modification Agreement dated February 25, 2012 which provided for modification of the Promissory Notes, including an extension of the term of the Promissory Notes, and Subscription Agreements in exchange for a partial cash payment to each bridge lender. On August 10, 2012, the Company entered into an agreement with the bridge lenders, pursuant to which the bridge lenders formally agreed to forbear from exercising their rights and remedies arising from the accumulated acknowledged events of default with respect to the bridge loans until such date. As consideration for this forbearance, the Company entered into an Amended and Restated General Hypothecation and Pledge Agreement dated August 9, 2012 (the “August 2012 Pledge”), but effective September 23, 2011, granting to the bridge lenders as security for the repayment of the loans a lien and security interest in all of the Company’s shares of capital stock of First Surety Corporation. Under the August 2012 Pledge, the bridge lenders acknowledged that the effectiveness of certain of the rights and remedies provided by such agreement were subject to prior approval by the Office of the Commissioner of Insurance for the State of West Virginia.
On July 9, 2014 the Company completed a $4,500,000 financing. In effect, FSI, a subsidiary of the Registrant, borrowed the funds at 8.00% interest with principal repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase from certain bridge lenders, after waiving interest of approximately $1.6 million, 50.7% ($1.775 million face amount) of the outstanding senior promissory notes comprising a $3.5 million financing dating from 2008, together with the associated collateral, (ii) to pay in full delinquent tax liabilities owed to the Internal Revenue Service and State of West Virginia, (iii) to pay an outstanding judgment, and (iv) to pay certain other current liabilities. FSI therefore became a member of the Bridge Loan and notified the Collateral Agent for the group of its purchase and majority holding. The transaction restored majority control of FSC to the Company and improved its balance sheet through waiver of accrued interest.
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On August 5, 2015 the Company completed a $1,600,000 transaction which resulted in its acquisition of the remaining 49.3% ($1.725 million face amount) of the senior promissory notes of the $3.5 million financing dating from 2008, after waiving interest of approximately $1.8 million. Upon closing of the acquisition, the collateral securing the senior promissory notes, 1,000 shares (100%) of FSC and 1,000 shares (100%) of CMW, was released to the Company.
The transaction was funded through sale in a private offering of investment units (Units) that consisted of 5.00% of the outstanding shares of FSC and 500,000 common shares of the Company. $1,600,00 was raised through the sale of units in exchange for consideration that included a combination of the cash purchase of units, cancellation of indebtedness owed by the Company to the purchaser in exchange for units and loans to the Company by potential purchasers that are convertible into the purchase of Units. The Registrant’s Board of Directors has authorized the sale of up to nine Units, which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC.
Restrictions on Use of Assets
Regulatory approval for the acquisition of FSC by JFG was provided by a Consent Order issued December 23, 2005 by the Commissioner of Insurance of the State of West Virginia and imposed several conditions for the operation of FSC, including the condition that no dividends or monies were to be paid to JFG without regulatory approval. This consent order was terminated on March 26, 2012 and dividends in the amounts of $173,000 and $198,000 were paid during the years ended May 31, 2015 and May 31, 2014, respectively. For further information, see Notes C and O to the Consolidated Financial Statements.
Accordingly, the payment of ordinary dividends is no longer restricted. However, cash, marketable investments, and other receivables held by FSC are restricted from the Company’s use to fund operations or meet cash needs outside of the insurance company’s domain. As of May 31, 2016, such assets amounted to approximately $9.38 million.
Under the West Virginia insurance code, ordinary dividends to stockholders are allowed to be paid only from that part of FSC’s available surplus funds which is comprised of realized net profits from the business and whereby all such dividends or distributions made within the preceding twelve months do not exceed 1) the lesser of 10% of FSC’s surplus as regards to policyholders as of December 31st of the preceding year-end or 2) net income from FSC’s operations from the previous two calendar years, not including capital gains. Any payment of extraordinary dividends requires prior approval from the WV state insurance commissioner.
Critical Accounting Policies and Estimates
Investments
Management believes the Company has the ability to hold all fixed income securities to maturity. However, the Company determined it may dispose of securities prior to their scheduled maturity
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due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported in stockholders’ equity as a separate component of accumulated other comprehensive income.
Insurance Premiums
Insurance premiums are recognized as revenue ratably over the term of the related policies in proportion to the insurance protection provided. Premium revenues are net of amounts ceded to reinsurers. Unearned premiums represent the portion of premiums written, before ceded reinsurance which is shown as an asset, applicable to the unexpired terms of policies in force determined on a pro rata basis.
Insurance premium receivables are presented net of an estimated allowance for doubtful accounts, which is based on a periodic evaluation of the aging and collectability of premium receivables.
Reinsurance
The Company limits the maximum net loss that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers. Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd’s of London for its coal reclamation surety bonding programs. This agreement has provided additional bonding capacity to FSC and has enabled FSC to write more bonds and of greater size for its coal reclamation bonding clients. Management expects this reinsurance arrangement to continue FSC’s expansion of market share and to result in increased cash flow for each of the Company’s operating subsidiaries.
Ceded reinsurance is treated as the risk and liability of the assuming companies. The Company cedes insurance to other companies but these reinsurance contracts do not relieve the Company from its obligations to policyholders. Ceded premiums, at a rate of 35% of written premium with a minimum of $490,000, are recognized as reductions in revenue ratably over the term of the related policies. Ceded unearned premiums represent the portion of ceded premiums written applicable to the unexpired terms of policies in force determined on a pro rata basis.
Under the terms of its reinsurance treaty, the Company is entitled to a No Claims Bonus from the reinsurers for each contract year in which no claims are received. The bonus is 20% of the contract year’s reinsurance premium. No claims had been made since the inception of the treaty until February 2014 when a performance bond claim of approximately $83,000 was paid during the year ended May 31, 2014. In August 2015, the Company paid a claim on a called bond in the amount of $550,000, of which $75,000 was paid using collateral of the principal. The remaining $475,000 has been established as a salvage receivable to be repaid with the assignment of proceeds from the potential sale of a closely held stock owned by the principal and the assignment of a promissory note payable to the principal, with the total assigned values in excess of the salvage receivable.
The Company incurred loss adjustment expenses of $26,590 related to costs of engaging experts, attorney fees, and consultants for potential claims. These costs were charged against established case reserves or bulk reserves.
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Deferred Policy Acquisition Costs
Policy acquisition costs, consisting of commissions, premium taxes and other underwriting expenses which vary with, and are primarily related to, the production of business, are deferred and amortized as a charge to income as the related premiums are earned. The Company periodically tests that deferred policy acquisition costs are recoverable based on the expected profitability embedded in the reserve for unearned premium. If the expected profitability is less than the balance of deferred policy acquisition costs, a charge to income is taken and the deferred policy acquisition cost balance is reduced to the amount determined to be recoverable. Anticipated investment income is considered in the determination of the recoverability of deferred policy acquisition costs.
Intangible Assets
In exchange for the purchase price of $2.9 million for the acquisition of FSC, the Company received cash and investments held by FSC totaling $2.75 million, with the difference being attributed to the property and casualty licenses of FSC in the states of West Virginia, Ohio and Indiana. Such licenses have indefinite lives and are evaluated annually for recoverability and impairment loss. Impairment loss, if any, is measured by estimating future cash flows attributable to such assets based on forecasts and projections and comparing such discounted cash flow amounts to the carrying value of the asset. Should actual results differ from such forecasts and projections, such assets may be subject to future impairment charges.
Reserve for Losses and Loss Expenses
Reserves for unpaid losses and loss adjustment expenses of the insurance subsidiary are estimated using information derived from Company experience in addition to management’s estimate of expected future claims on those policies in force. Management’s estimate considers relevant industry information but is largely dependent upon management’s experience and judgment since prior Company experience and industry data available are extremely limited. In August 2015, the Company paid a claim on a called bond in the amount of $550,000, of which $75,000 was paid using collateral of the principal. The remaining $475,000 has been established as a salvage reserve to be repaid with the assignment of proceeds from sales of stock and an assignment of a promissory note as additional collateral with total assigned values in excess of the salvage reserve. In February, 2014, a performance bond obligee made claim under a bond relating to non-performance by the principal. The total claim of approximately $83,000 was paid during the year ended May 31, 2014. Prior to 2014, FSC had experienced no claims for losses since its acquisition.
FSC is currently licensed to write coal permit and miscellaneous fixed-liability limit surety bonds in West Virginia and Ohio. Coal permit bonds are required by regulatory agencies to assure the reclamation of land that has been disturbed by mining operations, and accordingly, is a highly regulated process by federal and state agencies. Such bonds are generally long-term in nature with mining operations and reclamation work being conducted in unison as the property is mined. Additionally, no two principals and properties are alike due to varied company structures and unique geography and geology of each site.
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In underwriting coal reclamation bonds, management obtains estimates of costs to reclaim the properties in accordance with the specifications of the mining permit, prepared by independent outside professionals experienced in this field of work. Such estimates are then periodically updated and compared with marketable securities pledged, and held for the benefit of FSC as collateral for the surety bond, to mitigate the exposure to significant loss. Should the principal default in its obligation to reclaim the property as specified in the mining permit, FSC would then use the funds held in the collateral account to reclaim the property or forfeit the face amount of the surety bond. Losses can occur if the costs of reclamation exceed the estimates obtained at the time the bond was underwritten or upon subsequent re-evaluations, if sufficient collateral is not obtained, or if the collateral held has experienced significant deterioration in value and if FSC is not otherwise able to recover under its contractual rights to indemnification.
Miscellaneous fixed-liability limit surety bonds are generally fully collateralized by the principal’s cash investment into a collateral investment account to mitigate FSC’s exposure to loss. Generally the collateral investment account is managed by the Company’s investment advisory subsidiary, Jacobs & Co. Losses can occur should the principal default on the performance required by the bond and the collateral in the investment account experiences deterioration in value.
In establishing its reserves for losses and loss adjustment expense, management continually reviews its exposure to loss based on reports provided in conjunction with the periodic monitoring and inspections performed along with industry averages and historical experience. Management has estimated such losses based on management’s experience, adjusted for factors that are unique to the Company’s approach, and in consultation with its consulting actuary experienced in the surety field. As a result of the limited Company and industry data and experience there is a significant risk that amounts reserved for future expected losses and loss adjustment expenses could vary from those amounts reserved and the variance could be material. Adjustments to reserves are reflected in earnings in the period of determination.
Liquidity and Going Concern
The Company experienced operating income (loss) from operations of approximately ($571,000) and ($1,505,000) for the years ended May 31, 2016 and 2015, respectively. The Company’s income (or loss) decreases (or increases) when accretion of mandatorily redeemable convertible preferred stock and accrued dividends on mandatorily redeemable preferred stock, as well as income attributable to non-controlling interests, (i.e. 10% of FSC), are taken into account, to losses of approximately ($108,000) and ($1,670,000) for the years ended May 31, 2016 and 2015. The Company has not been able to pay certain amounts due to professionals and others and continues to be unable to pay its preferred stock dividend obligation. Due to this inability to pay professional fees, the financial audits and subsequent required filings for the fiscal years ended May 31, 2014, 2015, and 2016 were not completed or filed in a timely manner. A substantial portion of the Company’s cash flow is generated by its insurance subsidiary. Such cash flow is subject to restrictions including on the ability of FSC to pay dividends to its parent, resulting from insurance regulatory requirements. While management expects revenue growth and cash flow to increase significantly as its business plan is fully implemented, it is anticipated that losses will continue and the Company will be cash constrained until FSC is able to develop a substantial book of business.
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During 2016, the Company sold in a private offering investment units (Units) that consisted of 10.00% of the outstanding shares of FSC and common shares of the Company. The Registrant’s Board of Directors has authorized the sale of up to nine Units, which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC. This sale, as well as the increase in the generation of cash flows in 2017 allowed the Company to secure the services of independent auditors and all filings that are past due are to be expedited and filed during 2017.
Expansion of FSC’s business to other states is a key component to fully implementing the Company’s business plan. In fiscal 2009, the Company was able to increase the capital of FSC and reactivate FSC’s insurance license in Ohio and obtain authority to issue surety bonds in that state. However, management has found that entry into other states (as a surety) has been difficult without the benefit of more substantial capital and reserves due to FSC’s specialization in coal reclamation bonds, the cyclical nature of that industry and the financial condition of the Company. Management believes that if FSC’s capital and surplus reserves were significantly more substantial and the financial condition of the Company was stabilized, entry into other states would be less challenging. Accordingly, management continues to pursue avenues that can provide additional capital to increase the capacity of its insurance subsidiary and to fund continuing operations as the business is being fully developed.
Through the sharing of resources (primarily personnel) to minimize operating costs, the Company and its subsidiaries attempt to minimize operating expenses and preserve resources. Although FSC is cash flow positive, the use of its assets and profits are restricted to its stand-alone operation by regulatory authority. While growth of the FSC business continues to provide additional revenue opportunities to the Company’s other subsidiaries, Jacobs & Company and Triangle Surety, it is anticipated that working capital deficiencies will continue to be met either through the raising of additional capital or borrowings. However, there can be no assurance that additional capital (or debt financing) will be available when and to the extent required or, if available, on terms acceptable to the Company. Accordingly, there is substantial doubt as to the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Comparison of Results of Operations for Fiscal 2016 With 2015
The Company experienced a loss from operations of approximately ($572,000) in 2016 as compared with loss from operations of ($1,505,000) in fiscal 2015. The net loss attributable to common stockholders was ($1,364,660) in fiscal 2016 as compared to ($2,742,048) in fiscal 2015. Net loss attributable to the Company after deducting participation attributable to non-controlling interests is taken into account is ($1,273,529).
Revenues
Revenues decreased 15% in fiscal 2016 to $1,335,829 as compared with $1,575,620 in fiscal 2015. The decrease is largely attributable to the decrease in net investment income of approximately
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$490,000, mainly due to the severe unrealized loss in market value of an investment account held as a result of a contractual arrangement, where the Company receives any appreciation and earning in excess of the initial deposit of collateral by a principal bondholder. The Company also had losses of $(79,000) in 2016 on the sale of investments compared to realized gains of $136,000 in 2015.
The Company recognized other income of approximately $287,000 from the removal of dormant accounts payable and commissions no longer payable on premium receivables that were written off as uncollectible, and approximately $81,000 in interest income on notes receivable issued during 2016.
Revenue from the investment management segment, net of advisory referral fees, declined 10% with fiscal 2016 reporting $109,194 as compared to $121,514 in fiscal 2015. This decline in investment advisory fees related to the decrease in the market value of assets in portfolios under management. Investment advisory fees are based on the market value of assets under management and some fluctuation will occur due to overall market conditions. Generally such revenues will remain relatively constant from year to year with large fluctuations attributable to the growth or loss of assets under management.
Revenue from the surety insurance segment, consisting of FSC and TSA, decreased 42%, with $829,456 in fiscal 2016 as compared with $1,434,730 for the prior year. Revenues attributable to the insurance segment are as follows:
| Year Ended May 31, | ||||||||
| 2016 | 2015 | |||||||
| Premiums earned | $ | 989,552 | $ | 915,920 | ||||
| Commissions earned | 134,346 | 9,483 | ||||||
| No Claims Bonus from Reinsurers | — | 98,000 | ||||||
| Net investment income | (215,382 | ) | 274,946 | |||||
| Net realized investment gains | (79,060 | ) | 136,381 | |||||
| Total | $ | 829,456 | $ | 1,434,730 | ||||
Premium revenue is recognized ratably over the term of the policy period and thus is relatively stable from period to period with fluctuations for comparable periods generally reflecting the overall growth or loss of business. Commission revenue, which is dependent on the timing of issuance or renewal of bonds, is expected to be more seasonal from quarter-to-quarter with fluctuations for comparable periods largely reflecting the overall growth or loss of business
Investment income is expected to remain relatively consistent from period to period, but can fluctuate based on interest rates, market conditions, growth or loss of business, and investment funds expended in the payment of claims. The decrease in revenues reflected above is mainly attributable to the severe drop in market value of an investment account held as a result of a contractual arrangement, where the Company receives any appreciation and earning in excess of
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the initial deposit of collateral by a principal bondholder as well as realized losses of ($79,060) in 2016 compared to realized gains of $136,000 in 2015 on the sale of investments. Gross premium written in fiscal 2016 amounted to $1,386,837 as compared to $1,382,725 in fiscal 2015 and is reflective of a slight increase in the volume of bonds required for new and existing clients. Commission income earned for the placement of bonds with outside insurers also increased from $9,483 in 2015 to $134,346 in 2016. This increase in commission revenue for 2016 is derived from one subsidiary’s facilitation of a contract with an outside company and a separate subsidiary to provide replacement bonding for premium income. The Company did not record a No Claims Bonus for the year ended May 31, 2016 due to the recording of a claim reserve in excess of the minimum amount specified in the reinsurance contract period covering October 1, 2014 through December 31, 2015.
FSC’s investment holdings in fiscal 2016 averaged $9.748 million as compared to $9.860 million for fiscal 2015, with investment yields relatively flat, from 3.05% to 2.65%. The ultimate effect of zero coupon bonds will be reflected over the life of the bond through accretion rather than yield. During the period, equity securities in the portfolio provided dividends and gains from the covered call strategy utilized on the equities.
Expenses
Incurred policy losses represent the provision for loss and loss adjustment expense for “incurred but not reported” (IBNR) losses attributable to surety bonds issued by FSC. Due to overall concern for the coal industry brought about by substantial pricing competition from natural gas and resultant bankruptcies of publicly traded coal companies, the Company has agreed with its actuary and regulators to increase FSC’s reserves in 2015 and 2016 by recording $179,334 as IBNR for fiscal 2016, or 18% of earned premium, as compared to $968,017 or 106% of earned premium for fiscal 2015, strengthening its reserves by a net of approximately $820,000. In addition, FSC has adjusted the percentage of premium reserved for IBNR by increasing the reserve rate from 12% of earned premium to 23% for partially collateralized bonds beginning January 1, 2016. IBNR loss estimates have been based on actuarial recommendations and management’s judgment that are unique to the FSC’s underwriting approach. Prior to 2014, FSC had not received any claims for losses on any bonds underwritten since business began in 2006.
Insurance policy acquisition costs represent charges to operations for underwriting, commissions and premium tax attributable to surety polices issued by FSC and are recognized ratably over the period in which premiums are earned. In fiscal 2016, such costs amounted to $284,127 or 29% of earned premium as compared with $298,756 or 33% in fiscal 2015.
General and administrative expenses for fiscal 2016 were $1,442,606 as compared with $1,809,121 for fiscal 2015, representing an decrease of $366,515 and are comprised of the following:
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| Year Ended May 31, | ||||||||||||
| 2016 | 2015 | Difference | ||||||||||
| Salaries and related costs | $ | 628,855 | $ | 642,777 | $ | (13,922 | ) | |||||
| General office expense | 99,417 | 114,476 | (15,059 | ) | ||||||||
| Legal and other professional fees | 225,739 | 350,665 | (124,926 | ) | ||||||||
| Audit, accounting and related services | 63,256 | 169,137 | (105,881 | ) | ||||||||
| Travel, meals and entertainment | 92,866 | 82,964 | 9,902 | |||||||||
| Other general and administrative | 332,473 | 449,102 | (116,629 | ) | ||||||||
| Total general and administrative | $ | 1,442,606 | $ | 1,809,121 | $ | (366,515 | ) | |||||
Salaries and related costs, net of deferred internal policy acquisition costs, decreased $13,922 and are comprised of the following:
| Year Ended May 31, | ||||||||||||
| 2016 | 2015 | Difference | ||||||||||
| Salaries and wages | $ | 572,764 | $ | 563,982 | $ | 8,782 | ||||||
| Commissions | 122,599 | 36,600 | 85,999 | |||||||||
| Payroll taxes | 53,131 | 49,375 | 3,756 | |||||||||
| Fringe benefits | 59,431 | 81,750 | (22,319 | ) | ||||||||
| Key-man life insurance | 61,137 | 63,088 | (1,951 | ) | ||||||||
| Deferred policy acquisition costs | (240,207 | ) | (152,018 | ) | (88,189 | ) | ||||||
| Total salaries and related costs | $ | 628,855 | $ | 642,777 | $ | (13,922 | ) | |||||
The increase in commissions is partially attributable to FSC’s commission structure that pays a larger commission percentage on the origination of a policy but reduced for subsequent policy, as well as to the timing of payment of commissions based upon collections. The decrease in fringe benefits is attributable to decreased cost of health insurance for employees after changing insurance providers.
Legal and professional fees decreased in 2016 compared to the prior year due to the Company’s above normal efforts and related expenses in 2015 to expand the Company’s business, remove debt of the Company via refinancing and sale of subsidiary stock, and penetrate new markets. In 2015 the Company reclassified an $80,000 deposit from prior years as legal expense for work on a financing arrangement that was not completed. Audit, accounting and related services decreased in 2016 due to a change in accounting and audit service provider in 2015 for the Company which resulted in the delay of audit related expenses for all of 2016.
Other general and administrative expense decreased by approximately $117,000 in 2016 compared to the corresponding 2015 period. This decrease is mainly due to the Company’s writing off accounts receivable of approximately $300,000 as uncollectible in 2015. The Company anticipates that some of these accounts receivable will be paid by an obligor in the future based on verbal agreements with this obligor.
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Interest expense and interest income
Interest expense for fiscal 2016 was $915,098 compared to $833,242 in fiscal 2015. Components of interest expense are comprised of the following:
| Year Ended May 31, | ||||||||||||
| 2016 | 2015 | Difference | ||||||||||
| Interest expense on bridge financing | $ | 24,103 | $ | 319,705 | $ | (295,602 | ) | |||||
| Expense of common shares issued or to be issued in connection with bridge financing and other arrangements | 51,322 | 29,174 | 22,148 | |||||||||
| Interest expense on demand and term notes | 555,323 | 426,577 | 128,746 | |||||||||
| Other finance charges | 284,350 | 57,786 | 226,564 | |||||||||
| Total interest expense | $ | 915,098 | $ | 833,242 | $ | 81,856 | ||||||
Interest expense increased from $833,242 in fiscal 2015 to $915,098 in fiscal 2016, attributable to several factors; i) interest expense on bridge financing decreased due to elimination of the debt in July 2015, ii) an adjustment in 2016 to correctly record as interest expense part of a mineral asset (land) sale transaction made in 2015 iii) deferral of the issuance of stock as 2% dividend on Series A and B Preferred shares that have requested to be redeemed. In addition, there was a decrease in the market value of common stock used to calculate the price of shares issued as incentive for lending in the year ended 2016, despite an increase in the amount of borrowings in 2016 and the interest associated with those borrowings.
Preferred Stock Accretion and Dividends
Accretion of mandatorily redeemable convertible preferred stock is comprised of accretion of discount and accrued but unpaid dividends on preferred stock as follows:
| Year Ended May 31, | ||||||||
| 2016 | 2015 | |||||||
| Accrued dividends – mandatorily redeemable preferred stock | $ | 84,492 | $ | 80,970 | ||||
| Accrued dividends – equity preferred stock | 1,164,143 | 1,072,461 | ||||||
| $ | 1,248,635 | $ | 1,153,431 | |||||
The Series B class of stock became treated as a liability effective November 30, 2009 when the majority was exchanged for Series C equity stock. Therefore, for the year ended May 31, 2016, dividends of $483,596 associated with the Series B outstanding after that date are deductions from net income and not included in the table above. For the year ended May 31, 2015, dividends of $445,510 associated with the Series B outstanding after November 30, 2009 are deductions from net income and not included in the table above. During the year ended May 31, 2012, two holders
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of Series A stock released all of their outstanding bonds held with FSC. Therefore, these shares of Series A Preferred Shareholders are listed in the liability section of the consolidated balance sheet and the dividends after February 29, 2012 associated with these shares are a deduction from net income in the amounts of $65,374 and $62,649, for the years ended May 31, 2016 and 2015, and not included in the table above. Series C equity stock is not mandatorily redeemable and does not accrete.
Off Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Future Direction of the Company
Management believes that the Company’s successful elimination of the $3.5 million Bridge debt has been a substantial positive that will permit its insurance subsidiary to raise significant capital and more fully execute its business plan within the next 12 months. Additional capital will permit FSC to apply for licensing in additional states targeted for our coal reclamation surety program, plus file for approval with the U.S. Treasury to provide bonds for projects on federal lands.
The substantial increase of funds placed in IBNR (a reserve for potential claims) directly strengthened FSC, allowing it to execute larger and more strategic groups of bonds going forward. This charge to income was taken in calendar 2015 and reflected in this fiscal year filing.
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As the Registrant qualifies as a small reporting company as defined by §229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the information required by this item.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included herein in response to Item 8:
| Page | ||
| Table of Contents | F-1 | |
| Report of Independent Registered Public Accounting Firm | F-2 | |
| Financial Statements | ||
| Consolidated Balance Sheets | F-3 | |
| Consolidated Statements of Operations | F-4 | |
| Consolidated Statements of Comprehensive Loss | F-5 | |
| Consolidated Statements of Cash Flows | F-6 | |
| Consolidated Statements of Series A Redeemable Preferred Stock and Stockholders’ Equity (Deficit) | F-7 | |
| Notes to Consolidated Financial Statements | F-9 | |
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TABLE OF CONTENTS
| Page | ||
| Table of Contents | F-1 | |
| Report of Independent Registered Public Accounting Firm | F-2 | |
| Financial Statements | ||
| Consolidated Balance Sheets | F-3 | |
| Consolidated Statements of Operations | F-4 | |
| Consolidated Statements of Comprehensive Loss | F-5 | |
| Consolidated Statements of Cash Flows | F-6 | |
| Consolidated Statements of Series A Redeemable Preferred Stock and Stockholders’ Equity (Deficit) | F-7 | |
| Notes to Consolidated Financial Statements | F-9 |
| F-1 |
EKS&H
8181 East Tufts Avenue, Suite 600
Denver, Colorado 80237-2521
P: 303-740-9400
F: 303-740-9009
www.EKSH.com
EKS&H LLLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Jacobs Financial Group, Inc.
Charleston, West Virginia
We have audited the accompanying consolidated balance sheets of Jacobs Financial Group, Inc. (the “Company”) as of May 31, 2016 and 2015 and the related consolidated statements of operations, comprehensive income (loss), cash flows, and Series A redeemable preferred stock and stockholders' deficit for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jacobs Financial Group, Inc. as of May 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has insufficient liquidity and capitalization, and has suffered recurring operating losses. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note A. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ EKS&H LLLP
EKS&H LLLP
June 30, 2017
Denver, Colorado
| F-2 |
| Jacobs Financial Group, Inc. | ||||||||
| Consolidated Balance Sheets | ||||||||
| May 31, 2016 | May 31, 2015 | |||||||
| ASSETS | ||||||||
| Investments and Cash: | ||||||||
| Bonds and mortgaged-back securities available for sale, at fair value | $ | 7,230,261 | $ | 7,028,728 | ||||
| (amortized cost - 5/31/16 $7,170,789; 5/31/15 $6,983,957) | ||||||||
| Equity investments available for sale, at fair value, net | 1,488,440 | 755,301 | ||||||
| Mortgage-back securities held to maturity, at amortized costs | — | — | ||||||
| (market value - 5/31/10 $0; 05/31/09 $5,157,936) | ||||||||
| (cost - 5/31/16 $1,550,217; 5/31/15 $778,659) | ||||||||
| Short-term investments $197,752 total held before restrictions) | — | — | ||||||
| Cash ($465,810 total held before restrictions) | 250,603 | 197,644 | ||||||
| Restricted cash and short term investments (additional $1,655,293 | ||||||||
| restricted in bonds and equity cost) | 412,959 | 2,119,327 | ||||||
| Total Investments and Cash | 9,382,263 | 10,101,000 | ||||||
| Investment income due and accrued | 63,545 | 56,172 | ||||||
| Premiums and other accounts receivable, net of allowance for | ||||||||
| doubtful accounts of $40,658 | 291,856 | 372,108 | ||||||
| Contractual receivable/(liability) for collateral invested | (431,814 | ) | 54,208 | |||||
| Prepaid reinsurance premium | 232,647 | 207,413 | ||||||
| Demand note receivable from related party | — | — | ||||||
| Funds deposited with Reinsurers | — | 5,689 | ||||||
| Deferred policy acquisition costs | 171,883 | 154,977 | ||||||
| Furniture, automobile, and equipment, net of accumulated depreciation of $112,627 and $111,929, respectively | 1,233 | 1,936 | ||||||
| Note receivable | 360,671 | — | ||||||
| Related party note receivable | 1,121,294 | — | ||||||
| Due from relate party | 515,488 | 633,039 | ||||||
| Other assets | 14,617 | 14,550 | ||||||
| Intangible assets | 150,000 | 150,000 | ||||||
| TOTAL ASSETS | $ | 11,873,683 | $ | 11,751,092 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Reserve for losses and loss expenses, net | $ | 1,931,779 | $ | 2,254,035 | ||||
| Reserve for unearned premiums | 681,075 | 622,144 | ||||||
| Advanced premium | 45,968 | 186,271 | ||||||
| Accrued expenses and professional fees payable | 527,874 | 708,961 | ||||||
| Accounts payable | 244,096 | 178,252 | ||||||
| Ceded reinsurance payable | 27,898 | — | ||||||
| Due to related party | 124,723 | 172,609 | ||||||
| Term and demand notes payable to related party | 2,331,473 | 75,000 | ||||||
| Demand notes payable to related party | — | — | ||||||
| Notes payable | 5,045,969 | 7,706,619 | ||||||
| Accrued interest payable | 561,307 | 2,187,200 | ||||||
| Accrued interest payable to related party | 24,073 | 1,932 | ||||||
| Deferred sale of FSC stock | 1,500,000 | — | ||||||
| Other liabilities | 92,588 | 98,372 | ||||||
| Funds held in trust for customers | 2,068,252 | 2,352,487 | ||||||
| Mandatorily redeemable Series A Preferred Stock, $.0001 par value per share; 1 million shares authorized; 1,126 shares issued and outstanding at May 31, 2016 and May 31, 2015, respectively; stated liquidation value of $1,000 per share; aggregate liquidation value at May 31, 2016 and May 31, 2015, of $1,670,945 and $1,605,571, respectively. | 1,670,945 | 1,605,571 | ||||||
| Mandatorily redeemable Series B Preferred Stock, $.0001 par value per share; 3,136 shares authorized; 2,817 shares issued and outstanding at May 31, 2016 and May 31, 2015; stated liquidation value of $1,000 per share; aggregate liquidation value at May 31, 2016 and May 31, 2015, of $6,331,152 and $5,847,557, respectively. | 6,331,152 | 5,847,557 | ||||||
| Total Liabilities | 23,209,172 | 23,997,010 | ||||||
| Mandatorily redeemable convertible Series A Preferred Stock, $.0001 par value per share; 1 million shares authorized; 1,549 shares issued and outstanding at May 31, 2016 and May 31, 2015, respectively; stated liquidation value of $1,000 per share; aggregate liquidation value at May 31, 2016 and May 31, 2015, of $2,159,602 and $2,075,110, respectively. | 2,159,602 | 2,075,110 | ||||||
| Total Mandatorily Redeemable Convertible Preferred Stock | 2,159,602 | 2,075,110 | ||||||
| Commitments and Contingencies (See Notes) | ||||||||
| Stockholders' Equity (Deficit) | ||||||||
| Series C Preferred Stock, $.0001 par value per share; 10,000 shares authorized; 6,805 shares issued and outstanding at May 31, 2016 and May 31, 2015, respectively; includes $8,441,909 and $7,277,766 accrued Series C dividends, respectively; aggregate liquidation value at May 31, 2016 and May 31, 2015, of $14,472,840 and $13,308,697, respectively. | 14,472,840 | 13,308,697 | ||||||
| Common stock, $.0001 par value per share; 490 million shares authorized; 385,092,203 and 368,758,154 shares issued and outstanding at May 31, 2016 and May 31, 2015, respectively | 37,991 | 36,357 | ||||||
| Additional paid in capital | 4,615,374 | 4,199,387 | ||||||
| Accumulated deficit | (33,159,411 | ) | (31,886,882 | ) | ||||
| Accumulated other comprehensive income | (2,305 | ) | 21,413 | |||||
| Noncontrolling Interest | 540,420 | — | ||||||
| Total Stockholders' Equity (Deficit) | (13,495,091 | ) | (14,321,028 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 11,873,683 | $ | 11,751,092 | ||||
| F-3 |
| Jacobs Financial Group, Inc, | ||||||||
| Consolidated Statements of Operations | ||||||||
| Year Ended May 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenues: | ||||||||
| Investment advisory services | $ | 109,194 | $ | 121,514 | ||||
| Insurance premiums and commissions | 1,123,898 | 1,023,403 | ||||||
| Net investment income (losses) | (215,382 | ) | 274,946 | |||||
| Net realized investment gains (losses) | (79,060 | ) | 136,381 | |||||
| Other income | 316,267 | 19,376 | ||||||
| Interest and dividend income | 80,912 | — | ||||||
| Total Revenues | 1,335,829 | 1,575,620 | ||||||
| Operating Expenses: | ||||||||
| Provision for policy losses | 179,335 | 968,017 | ||||||
| Insurance policy acquisition costs | 284,127 | 298,756 | ||||||
| General and administrative | 1,442,606 | 1,809,121 | ||||||
| Mutual fund costs | — | — | ||||||
| Depreciation | 1,251 | 4,478 | ||||||
| Total Operating Expenses | 1,907,319 | 3,080,372 | ||||||
| Income (Loss) from Operations | (571,490 | ) | (1,504,752 | ) | ||||
| Gain on debt extinguishment | 1,919,532 | 1,257,536 | ||||||
| Accrued dividends of Series A Mandatorily Redeemable | ||||||||
| Preferred Stock | (65,374 | ) | (62,649 | ) | ||||
| Accrued dividends and accretion of Series B Mandatorily | ||||||||
| Redeemable Preferred Stock | (483,596 | ) | (445,510 | ) | ||||
| Interest expense | (915,098 | ) | (833,242 | ) | ||||
| Net Income (Loss) | (116,026 | ) | (1,588,617 | ) | ||||
| Less: | ||||||||
| Accretion of Mandatorily Redeemable Convertible | ||||||||
| Preferred Stock, including accrued dividends | (84,492 | ) | (80,970 | ) | ||||
| Accrued dividends on Series C Preferred Stock equity | (1,164,143 | ) | (1,072,461 | ) | ||||
| Plus: | ||||||||
| Net (loss) Attributable to Noncontrolling Interest | 92,131 | — | ||||||
| Net Income (Loss) Attributable to JFGI Stockholders | $ | (1,272,530 | ) | $ | (2,742,048 | ) | ||
| Basic and Dilutive Net Income (Loss) Per Share: | ||||||||
| Net Income (Loss) Per Share | $ | — | $ | (0.01 | ) | |||
| Weighted-Average Shares Outstanding | 381,912,411 | 364,552,677 | ||||||
| F-4 |
| Jacobs Financial Group, Inc, | ||||||||
| Consolidated Statements of Comprehensive Income (Loss) | ||||||||
| Year Ended May 31, | ||||||||
| 2016 | 2015 | |||||||
| Net Income (loss) | $ | (116,026 | ) | $ | (1,588,617 | ) | ||
| Accretion of Mandatorily Redeemable Convertible | ||||||||
| Preferred Stock, including accrued dividends | (84,492 | ) | (80,970 | ) | ||||
| Accrued dividends on Series C Preferred Stock equity | (1,164,143 | ) | (1,072,461 | ) | ||||
| (1,248,635 | ) | (1,153,431 | ) | |||||
| Net (loss) attributable to common stockholders | $ | (1,364,661 | ) | $ | (2,742,048 | ) | ||
| Other comprehensive income (loss): | ||||||||
| Reclassification of investments from Held to Maturity to Avaialble for Sale | — | — | ||||||
| Unrealized gain (loss) of available-for-sale investments arising during period | (28,359 | ) | (51,473 | ) | ||||
| Reclassification adjustment for realized loss included in net loss | 4,641 | (66,034 | ) | |||||
| Unrealized loss attributable to available-for-sale investments recognized in other comprehensive income (loss) | (23,718 | ) | (117,507 | ) | ||||
| Comprehensive (Loss) | (1,388,379 | ) | (2,859,555 | ) | ||||
| Comprehensive (Loss) Attributable to Noncontrolling Interest | $ | (94,503 | ) | $ | — | |||
| Comprehensive (Loss) Attributable to JFGI | $ | (1,293,876 | ) | $ | (2,859,555 | ) | ||
| F-5 |
| Jacobs Financial Group, Inc, | ||||||||
| Consolidated Statements of Cash Flows | ||||||||
| Year Ended May 31, | ||||||||
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | (116,026 | ) | $ | (788,617 | ) | ||
| Adjustments to reconcile net loss to | ||||||||
| net cash provided by operating activities: | ||||||||
| (Increase) decrease in short-term investments | 1,414,868 | 425,994 | ||||||
| Unearned premium | (106,606 | ) | 35,911 | |||||
| Stock option expense | — | — | ||||||
| Stock issued in connection with financing arrangements | 12,987 | 3,768 | ||||||
| Stock issued in connection with dividend arrangements | 37,184 | 25,406 | ||||||
| Accrual of Series A preferred stock dividends | 65,374 | 62,649 | ||||||
| Accrual of Series B preferred stock dividends and accretion | 483,596 | 445,511 | ||||||
| Stock issued in connection with services rendered | — | — | ||||||
| Provision for loss reserves | (322,256 | ) | 168,017 | |||||
| Amortization of premium | 96,216 | 99,685 | ||||||
| Depreciation | 1,251 | 4,478 | ||||||
| Accretion of discount | — | (2,870 | ) | |||||
| Realized (gain) loss on sale of securities | 79,061 | (136,381 | ) | |||||
| Gain on extinguishment of debt | (1,919,532 | ) | (1,257,536 | ) | ||||
| Loss on disposal of equipment | — | — | ||||||
| Change in operating assets and liabilities: | ||||||||
| Other assets | (67 | ) | 77,549 | |||||
| Premium and other receivables | 566,273 | (197,564 | ) | |||||
| Investment income due and accrued | (11,353 | ) | 15,892 | |||||
| Deferred policy acquisition costs | (16,906 | ) | (2,369 | ) | ||||
| Related party accounts payable | (47,886 | ) | 28,100 | |||||
| Accounts payable | 65,844 | (35,582 | ) | |||||
| Accrued expenses and other liabilities | (246,738 | ) | (113,761 | ) | ||||
| Net cash flows from operating activities | 35,284 | (1,141,720 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Short-term loan | — | — | ||||||
| Costs of bonds acquired | (1,775,947 | ) | (1,772,826 | ) | ||||
| Costs of mortgaged-backed securities acquired | — | (1,308,567 | ) | |||||
| Purchase of equity securities | (1,899,637 | ) | (1,266,618 | ) | ||||
| Purchase of securities available for sale | — | — | ||||||
| Redemption of bonds upon call or maturity | — | — | ||||||
| Proceeds from sale of securities available for sale | 1,910,797 | 2,834,890 | ||||||
| Repayment of mortgage-backed securities | 631,121 | 772,717 | ||||||
| (Purchase)/Collection - accrued interest | 3,980 | (9,973 | ) | |||||
| Purchase of furniture and equipment | (548 | ) | (1,679 | ) | ||||
| Net cash flows used in investing activities | (1,130,234 | ) | (752,056 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from related party debt | 1,957,658 | 1,008,718 | ||||||
| Repayment of related party debt | (971,207 | ) | (1,652,038 | ) | ||||
| Proceeds from borrowings | 1,171,192 | 7,118,400 | ||||||
| Repayment of borrowings | (2,319,269 | ) | (4,546,850 | ) | ||||
| Proceeds from issuance of Series B preferred stock | — | — | ||||||
| Redemption of Series B preferred stock | — | — | ||||||
| Proceeds from issuance of common stock | — | — | ||||||
| Payment of lendings | (500,000 | ) | — | |||||
| Payment of related party lendings | (1,250,000 | ) | ||||||
| Proceeds from repayment of lendings | 139,329 | — | ||||||
| Proceeds from repayment of related party lendings | 128,706 | |||||||
| Proceeds from sale of subsidiary stock | 1,000,000 | — | ||||||
| Proceeds from deferred sale of subsidiary stock | 1,500,000 | — | ||||||
| Proceeds from exercise of common stock warrants | — | — | ||||||
| Net cash flows from (used in) financing activities | 856,409 | 1,928,230 | ||||||
| NET INCREASE (DECREASE) IN CASH | (238,541 | ) | 34,454 | |||||
| CASH AT BEGINNING OF PERIOD | $ | 704,351 | $ | 669,897 | ||||
| CASH AT END OF PERIOD | $ | 465,810 | $ | 704,351 | ||||
| SUPPLEMENTAL DISCLOSURES | ||||||||
| Interest paid | $ | 918,048 | $ | 290,627 | ||||
| Income taxes paid | — | — | ||||||
| Non-cash investing and financing transaction: | ||||||||
| Additional consideration paid for issuance of debt | $ | 12,987 | $ | 3,768 | ||||
| F-6 |
| Jacobs Financial Group, Inc. | |||||||||||||||||||||||||||||||||||||
| Consolidated Statement of Series A Redeemable Preferred Stock and Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
| For the Year Ended May 31, 2016 | |||||||||||||||||||||||||||||||||||||
| Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
| Series A | |||||||||||||||||||||||||||||||||||||
| Mandatorily Redeemable | Common Stock | Series C Preferred | Accumulated | Total | |||||||||||||||||||||||||||||||||
| Additional | Other | JFGI | Total | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Paid-In | Amount | Accumulated | Comprehensive | Noncontrolling | Shareholder's | Shareholder's | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | and APIC | Deficit | Income (Loss) | Interest | Interest | Interest | ||||||||||||||||||||||||||
| Balance, May 31, 2015 | 1,549 | $ | 2,075,110 | 363,574,218 | $ | 36,357 | $ | 4,199,387 | 6,805 | $ | 13,308,697 | $ | (31,886,882 | ) | $ | 21,413 | $ | — | $ | (14,321,028 | ) | $ | (14,321,028 | ) | |||||||||||||
| Issuance of common stock as compensation for services | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| Issuance of common stock as additional consideration in financing arrangements | — | — | 16,334,049 | 1,634 | 48,538 | — | — | — | — | — | 50,172 | 50,172 | |||||||||||||||||||||||||
| Accrued dividends of Series A mandatorily redeemable convertible preferred stock | — | 84,491 | — | — | — | — | — | (84,491 | ) | — | — | (84,491 | ) | (84,491 | ) | ||||||||||||||||||||||
| Accrued dividends of Series C equity preferred stock | — | — | — | — | — | — | 1,164,143 | (1,164,143 | ) | — | — | — | — | ||||||||||||||||||||||||
| Sale of noncontrolling interest of subsidiary | — | — | — | — | 367,449 | — | — | — | — | 632,551 | 367,449 | 1,000,000 | |||||||||||||||||||||||||
| Unrealized (loss) on available for sale securities | — | — | — | — | — | — | — | — | (23,718 | ) | — | (23,718 | ) | (23,718 | ) | ||||||||||||||||||||||
| Net (loss), year ended May 31, 2016 | — | — | — | — | — | — | — | (23,895 | ) | — | (92,131 | ) | (23,895 | ) | (116,026 | ) | |||||||||||||||||||||
| Balance, May 31, 2016 | 1,549 | $ | 2,159,602 | 379,908,267 | $ | 37,991 | $ | 4,615,374 | 6,805 | $ | 14,472,840 | $ | (33,159,411 | ) | $ | (2,305 | ) | $ | 540,420 | $ | (14,035,511 | ) | $ | (13,495,091 | ) | ||||||||||||
| F-7 |
| Jacobs Financial Group, Inc. | ||||||||||||||||||||||||||||||||||||||||
| Consolidated Statement of Series A Redeemable Preferred Stock and Stockholders' Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| For the Year Ended May 31, 2015 | ||||||||||||||||||||||||||||||||||||||||
| Stockholders' Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| Series A | ||||||||||||||||||||||||||||||||||||||||
| Mandatorily Redeemable | Common Stock | Series C Preferred | Accumulated | |||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Paid-In | Amount | Accumulated | Comprehensive | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | and APIC | Deficit | Income (Loss) | Total | |||||||||||||||||||||||||||||||
| Balance, May 31, 2014 | 1,549 | $ | 1,994,140 | 352,741,649 | $ | 35,274 | $ | 4,171,296 | 6,805 | $ | 12,236,236 | $ | (29,144,834 | ) | $ | 138,920 | $ | (12,563,108 | ) | |||||||||||||||||||||
| Issuance of common stock as compensation for services | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock as additional consideration in financing arrangements | — | — | 10,832,569 | 1,083 | (1,711 | ) | — | — | — | — | (628 | ) | ||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Accretion of Series A mandatorily redeemable convertible preferred stock | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Accrued dividends of Series A mandatorily redeemable convertible preferred stock | — | 80,970 | — | — | — | — | — | (80,970 | ) | — | (80,970 | ) | ||||||||||||||||||||||||||||
| Accrued dividends of Series C equity preferred stock | — | — | — | — | — | — | 1,072,461 | (1,072,460 | ) | — | 1 | |||||||||||||||||||||||||||||
| Exchange of Series C Preferred Stock for Series B Mandatorily Redeemable Convertible Preferred Stock | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Reclassification of Series A from temporary equity to liabilities | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Accrual of common shares to be issued in connection with financing arrangements | — | — | — | — | 29,802 | — | — | — | — | 29,802 | ||||||||||||||||||||||||||||||
| Common stock option expense | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Unrealized (loss) on available for sale securities | — | — | — | — | — | — | — | — | (117,507 | ) | (117,507 | ) | ||||||||||||||||||||||||||||
| Net (loss), year ended May 31, 2014 | — | — | — | — | — | — | — | (1,588,618 | ) | — | (1,588,618 | ) | ||||||||||||||||||||||||||||
| Balance, May 31, 2015 | 1,549 | $ | 2,075,110 | 363,574,218 | $ | 36,357 | $ | 4,199,387 | 6,805 | $ | 13,308,697 | $ | (31,886,882 | ) | $ | 21,413 | $ | (14,321,028 | ) | |||||||||||||||||||||
| F-8 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Note A – Organization and Business
Organization and Nature of Business
Jacobs Financial Group, Inc. (the “Company” or “JFG”), formerly NELX, Inc., was incorporated in Kansas on March 25, 1983. In 2001, the Company acquired all the outstanding stock of two corporations located in Charleston, West Virginia: Jacobs & Company (“Jacobs”) and FS Investments, Inc. (“FSI”). Jacobs is a registered investment advisory firm that derives its revenue from asset-based investment advisory fees. FSI, through its wholly-owned subsidiary Triangle Surety Agency, Inc. (“Triangle”), is engaged in the business of placing surety bonds with insurance companies for clients engaged in regulated industries, such as the extraction of coal, oil and gas. FSI receives commission income from the placement of these bonds and is licensed in five states primarily in the eastern United States. On December 30, 2005, the Company acquired all of the outstanding stock of West Virginia Fire & Casualty Company (“WVFCC”), an insurance company licensed to engage in business in West Virginia, Ohio and Indiana. The acquisition of WVFCC consisted of the purchase of marketable investments and insurance licenses and did not include any existing policies or customer base as the insurance lines of business offered by WVFCC were not insurance lines that the Company intended to pursue. Following the acquisition, the name of WVFCC was changed to First Surety Corporation (“FSC”). FSC receives insurance premium income in connection with the issuance of surety bonds. The Company and its subsidiaries are subject to the business risks inherent in the financial services industry.
Liquidity and Going Concern
These consolidated financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Presently, the Company has insufficient liquidity and capitalization, is in default with respect to certain loan and preferred stock agreements, and has suffered recurring losses from operations. Losses are expected to continue until the Company develops a more substantial book of business. While improvement is anticipated as the Company’s business plan is implemented, other conditions, such as restrictions on the use of FSC’s assets (See Note C), and the Company’s significant deficiency in working capital and stockholders’ equity raise substantial doubt about the Company’s ability to continue as a going concern.
Management intends to improve cash flow through the implementation of its business plan. Additionally, management continues to seek to raise additional funds for operations through private placements of stock, other long-term or permanent financing, or short-term borrowings. However, the Company cannot be certain that it will be able to continue to obtain adequate funding in order to reasonably predict whether it will be able to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
1998
| F-9 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Principles of Consolidation
The consolidated financial statements include the accounts of Jacobs Financial Group, Inc. and its majority owned subsidiaries, after the elimination of intercompany transactions.
Non-Controlling Interest
First Surety Corporation, a subsidiary of the Jacobs Financial Group, Inc. has a non-controlling ownership interest. The Company’s board of directors has authorized the sale of up to nine Units (5% per Unit), which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC.
Cash and Short Term Investments
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Included in cash and cash equivalents are restricted amounts held in trust for customers in the form of collateral for the bonding program of FSC.
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates are loss reserves, stock options, valuation of investments, and the valuation of deferred tax assets. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
Revenue Recognition
Fees for investment advisory services are based on an agreed percentage of the value of client assets under management and are accrued monthly based on the market value of client assets.
The Company accounts for its surety bond issuances as short duration contracts. Surety premiums are recorded as receivables when due and are earned pro rata over the term of the policies of generally one year, subject to annual renewal. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. The reserve for unearned premium is determined using the monthly pro rata method. Advance premiums represent renewal premiums paid in advance of the effective renewal date.
| F-10 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Agency commissions for surety bond services are based on a percentage of premiums charged for bonds placed with insurance companies, and are recorded upon issuance or effective renewal date of the bonds. No significant continuing services subsequent to the issuance or renewal of surety bonds are required.
Policy acquisition costs include costs that vary with and are primarily related to the acquisition of new business. Such costs generally include commissions, underwriting expenses, and premium taxes and are deferred and amortized over the period in which the related premiums are earned. The deferred policy acquisition cost assets are reviewed for recoverability based on the profitability of the underlying surety policy. Investment income is not anticipated in the recoverability of deferred policy acquisition costs.
Investments
Debt securities are designated at purchase as held-to-maturity, trading or available for sale. Held-to-maturity debt securities are carried at amortized cost where the Company has the ability and intent to hold these securities until maturity. Premiums and discounts arising from the purchase of debt securities are treated as yield adjustments over the estimated lives or call date, if applicable.
Debt and equity securities that are bought and held principally for sale in the near future are classified as trading securities and are carried at fair value, with changes in fair value being recorded in current operations.
Debt and equity securities that the Company may not have a positive intent to hold until maturity and not classified as trading, are considered to be available for sale and carried at fair value.
Management has determined it may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported in stockholders’ equity as a separate component of accumulated other comprehensive income.
An investment is considered impaired when its fair value is less than its cost or amortized cost, as applicable. When an investment is impaired, a determination is made as to whether the impairment is other than temporary (“OTTI”).
Factors considered in identifying OTTI include: 1) for debt securities, whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the security prior to the anticipated recovery in value; 2) the likelihood of the recoverability of principal and interest for debt securities (i.e., whether there is a credit loss) or cost for equity securities; 3) the length of time and extent to which
| F-11 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
the fair value has been less than amortized cost for debt securities or carrying value for equity securities; and 4) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.
Short-term investments consist primarily of debt securities having maturities of one year or less at date of purchase, money-market investment funds and other similar investments that have immediate availability.
Interest income with respect to fixed maturity securities is accrued as earned. Dividend income is generally recognized when receivable.
Realized gains and losses are determined by specific identification of the security sold.
Derivatives
The Company uses derivatives in the form of covered call options sold to generate additional income and provide limited downside protection in the event of a market correction.
These transactions expose the Company to potential market risk for which the Company receives a premium up front and the Company realizes the option premium received as income. The market risk relates to the requirement to deliver the underlying security to the purchaser of the call within a definite time at an agreed market price regardless of the then current market price of the security. As a result the Company takes the risk that it may be required to sell the security at the strike price, which could be a price less than the then market price. Should the security decline in market price over the holding period of the call option, the Company can lessen or mitigate the risk of loss with a closing transaction for the covered call and sale of the underlying security.
The Company invests in large capitalized US securities traded on major US exchanges and writes standardized covered calls only against these positions (covered calls), which are openly traded on major US exchanges. The use of such underlying securities and standardized calls lessens the credit risk to the furthest extent possible.
The Company is not exposed to significant cash requirements through the use of covered calls in that it sells a call for a premium and may use these proceeds to enter a closing transaction for the call at a later date.
Allowance for uncollectible premium and other receivables
The majority of the Company’s fee revenue is generated by services provided to companies and individuals throughout the Eastern United States. Management evaluates the need for a reserve for the amount of these receivables that may be uncollectible, based on historical collection activity adjusted for current conditions. Premium and other receivables are charged-off when deemed uncollectible. Based on this evaluation, management believes
| F-12 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
that most accounts receivable are collectible, and has established an allowance for estimated uncollectible accounts.
Impairment
The Company evaluates long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the assets may not be recoverable. The impairment is measured by discounting estimated future cash flows expected to be generated, and comparing this amount to the carrying value of the asset. Cash flows are calculated utilizing forecasts and projections and estimated lives of the assets being analyzed. Should actual results differ from those forecasted and projected, The Company may be subject to future impairment charges related to these long-lived assets.
Furniture and Equipment
Furniture and equipment is recorded at cost. Maintenance and repairs are charged to operations when incurred. When property and equipment are sold or disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using the straight-line and double-declining balance methods, which approximates estimated economic depreciation.
Reserve for Losses and Loss Expenses
Losses and loss adjustment expenses represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred. Reserves for unpaid losses and loss adjustment expenses are estimated using industry averages, however, will include individual case-basis valuations in the event if claims are received. These estimates and methods of establishing reserves are continually reviewed and updated.
Stock-based Compensation
The fair value of stock options is estimated at the grant date using the Black Scholes Option Pricing Model. This model requires the input of a number of assumptions, including expected volatility and dividend yields, expected stock price, risk-free interest rates, and an expected life of the options. Although the assumptions used reflect management’s best estimate, they involve inherent uncertainties based on market conditions generally outside the control of the Company.
Income Taxes
The Company currently has net operating loss (“NOL”) carry-forwards that can be utilized to offset future income for federal and state tax purposes. These NOLs represent a significant deferred tax asset. However, the Company has recorded a valuation allowance against this deferred tax asset as it has determined that it is more likely than not that it will
| F-13 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
not be able to fully utilize the NOLs. Should assumptions regarding the utilization of these NOLs change, the Company may reduce some or all of this valuation allowance, which would result in the recording of a deferred income tax benefit.
The Company follows a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the Company.
Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed as of May 31, 2016 or 2015. The Company's tax returns subject to examination by tax authorities include May 31, 2011 through the current period for state and federal tax reporting purposes.
Earnings (Loss) Per Share
Basic earnings (loss) per share of common stock are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share are computed on the basis of the average number of common shares outstanding plus the dilutive effect of convertible debt, stock options and warrants. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive.
Note B – Newly Adopted and Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted. Companies have the option of using either a full or modified retrospective approach in applying this standard. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (ASU 2014-15). ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial
| F-14 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for us for the annual period ending May 31, 2017 and interim and annual periods thereafter. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest”, which require debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new rules were effective for the Company in the first quarter of 2016. In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. The guidance clarifies accounting for debt issuance costs related to line-of-credit arrangements. The standard states that the FASB deems deferring debt issuance costs related to line-of-credit arrangements as an asset and amortizing over the term of the agreement to be appropriate. The adoption of these accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810)”, an update to their existing consolidation model, which changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new rules will be effective for the Company in the first quarter of 2016. The adoption of the new accounting rules will not have a material impact on the Company’s financial condition, results of operations or cash flows.
In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820)”, which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and requires separate disclosure of those investments instead. These disclosures were effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have an impact on the Company’s financial condition, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”, which simplify the accounting for measurement period adjustments by eliminating the requirements to restate prior period financial statements for these adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard, which should be applied prospectively to measurement period adjustments that occur after the effective date, was effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
On October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”, that affects reporting
| F-15 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
entities that are required to evaluate whether they should consolidate a Variable Interest Entity (VIE) in certain situations involving entities under common control. The amendments in this Update will be effective for the Company in the first quarter of 2017. The adoption of the new accounting rules will not have a material impact on the Company’s financial condition, results of operations or cash flows.
In November 2015, the FASB issued an ASU 2015-17, “Income Taxes (Topic 740)”, an update to simplify income tax accounting. The update requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts.
This update is effective for the Company first quarter 2017 and is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323)”, that eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be made to the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The new standard will be effective for the Company on January 1, 2017. The adoption of the new accounting rule is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new rules are effective for the Company in the first quarter of 2017. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10)”, which updated the accounting guidance related to the recognition and measurement of financial assets and financial liabilities. The updated accounting guidance, among other things, requires that all nonconsolidated equity investments, except those accounted for under the equity method, be measured at fair value and that the changes in fair value be recognized in net income. The updated guidance will be effective for the Company as of January 1, 2018. The updated accounting guidance requires, with certain exceptions, a cumulative effect adjustment to beginning retained earnings when the guidance is adopted. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations and cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The guidance is intended to reduce the diversity in practice as to how certain cash receipts and cash payments are
| F-16 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues. In addition, in November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new rules will be effective for the Company in the first quarter of 2018. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s cash flows.
Management has assessed the potential impact of recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to the Company, or are not anticipated to have a material impact on the consolidated financial statements.
Note C – Investments
The Company held the following investments, by security type, that were classified as available-for-sale and carried at fair value at May 31, 2016:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| State and municipal securities | $ | 4,013,256 | $ | 64,789 | $ | 58,217 | $ | 4,019,828 | ||||||||
| Equity securities | 1,628,713 | 91,339 | 155,299 | 1,564,753 | ||||||||||||
| Derivatives | (78,497 | ) | (7,329 | ) | (9,513 | ) | (76,313 | ) | ||||||||
| Mortgage Backed Securities | 3,157,534 | 67,689 | 14,790 | 3,210,433 | ||||||||||||
| $ | 8,721,006 | $ | 216,488 | $ | 218,793 | $ | 8,718,701 | |||||||||
The Company held the following investments, by security type, that have been classified as available-for-sale and carried at fair value at May 31, 2015:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| State and municipal securities | $ | 3,128,282 | $ | 3,234 | $ | 43,452 | $ | 3,088,064 | ||||||||
| Equity securities | 795,971 | 18,193 | 42,123 | 772,041 | ||||||||||||
| Derivatives | (17,312 | ) | (1,146 | ) | (1,718 | ) | (16,740 | ) | ||||||||
| Mortgage Backed Securities | 3,855,674 | 91,454 | 6,465 | 3,940,663 | ||||||||||||
| $ | 7,762,615 | $ | 111,735 | $ | 90,322 | $ | 7,784,028 | |||||||||
| F-17 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
There are no securities classified as held to maturity at May 31, 2016 or May 31, 2015.
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain of these invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term may significantly affect the amounts reported in the Consolidated Balance Sheets and Statements of Operations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:
| o | Level 1 – Quoted prices for identical instruments in active markets. |
| o | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. |
| o | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
Fair values are provided by the Company’s independent investment custodians that utilize third-party quotation services for the valuation of the fixed-income investment securities and money-market funds held. The Company’s investment custodians are large money-center banks. The Company’s equity investment is valued using quoted market prices.
The following section describes the valuation methodologies used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instrument is generally classified.
Fixed Income Securities
Securities valued using Level 1 inputs include highly liquid government bonds for which quoted market prices are available. Securities using Level 2 inputs are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs. Most fixed income securities are valued using Level 2 inputs. Level 2 includes corporate bonds, municipal bonds, asset-backed securities and mortgage pass-through securities.
Equity Securities
Level 1 includes publicly traded securities valued using quoted market prices.
Short-Term Investments
The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and U.S. Treasury bills. Level 2 includes commercial paper, for which all significant inputs are observable.
| F-18 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Assets measured at fair value on a recurring basis are summarized below:
| May 31, 2016 | ||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Assets At Fair Value | |||||||||||||
| Assets: | ||||||||||||||||
| Fixed income securities at fair value | $ | — | $ | 7,230,261 | $ | — | $ | 7,230,261 | ||||||||
| Equity securities at fair value (includes derivatives) | 1,488,440 | — | — | 1,488,440 | ||||||||||||
| Short-term investments at fair value | 197,752 | — | — | 197,752 | ||||||||||||
| Total Assets | $ | 1,686,192 | $ | 7,230,261 | $ | — | $ | 8,916,453 | ||||||||
| May 31, 2015 | ||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Assets At Fair Value | |||||||||||||
| Assets: | ||||||||||||||||
| Fixed income securities at fair value | $ | — | $ | 7,028,728 | $ | — | $ | 7,028,728 | ||||||||
| Equity securities at fair value (includes derivatives) | 755,301 | — | — | 755,301 | ||||||||||||
| Short-term investments at fair value | 1,612,620 | — | — | 1,612,620 | ||||||||||||
| Total Assets | $ | 2,367,921 | $ | 7,028,728 | $ | — | $ | 9,396,649 | ||||||||
The Company had no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at either May 31, 2016 or at May 31, 2015.
At May 31, 2016, the Company’s insurance subsidiary had securities and short-term investment with a fair value of $1,171,307 on deposit with the State insurance department to satisfy regulatory requirements. In connection with regulatory approval of the Company’s acquisition of its insurance subsidiary, certain restrictions were imposed on the ability of the Company to withdraw funds from FSC without prior approval of the state Insurance Commissioner. Accordingly, investments and cash in the amount of $9,386,503 and $10,100,908 as of May 31, 2016 and 2015, respectively, are restricted to the use of FSC.
At May 31, 2016, the Company’s insurance subsidiary had cash, securities and short term investments held as collateral for their bonding program in the amount of $2,068,252.
Principal repayments on U.S. government agency mortgage-backed securities held by the Company as of December 31, 2016 are estimated as follows:
| F-19 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
| Amortized Cost | Fair Market Value | |||||||
| Due in one year or less | $ | 725,940 | $ | 730,887 | ||||
| Due after one year through five years | 1,076,573 | 1,117,073 | ||||||
| Due after five years through ten years | 958,413 | 964,405 | ||||||
| Due after ten years | 396,608 | 398,068 | ||||||
| $ | 3,157,534 | $ | 3,210,433 | |||||
Estimated repayments are forecast based on varying prepayment speeds for each particular security held assuming that interest rates remain constant. Expected repayments will differ from actual repayments because borrowers of the underlying mortgages have a right to prepay obligations.
An analysis of net investment income follows:
| 2016 | 2015 | |||||||
| Bonds – fixed maturities | $ | 154,300 | $ | 102,187 | ||||
| Mortgage-backed securities | 113,654 | 132,726 | ||||||
| Equity investments | 38,910 | 36,703 | ||||||
| Short-term investments | 151 | 60 | ||||||
| Other investment income | (485,479 | ) | 41,619 | |||||
| Total investment income | (178,464 | ) | 313,295 | |||||
| Investment expense | 36,918 | 38,349 | ||||||
| Net investment income | $ | (215,382 | ) | $ | 274,946 | |||
The unrealized appreciation (depreciation) of investments were as follows:
| 2016 | 2015 | |||||||
| Bonds-fixed maturities | $ | 46,790 | $ | (60,892 | ) | |||
| Mortgage-backed securities | (32,089 | ) | (7,164 | ) | ||||
| Equity securities | (38,419 | ) | (49,450 | ) | ||||
| Increase (decrease) in unrealized appreciation | $ | (23,718 | ) | $ | (117,506 | ) | ||
Gains and losses are calculated based on sales proceeds received less the cost of the security sold, which is determined by specific identification for each investment. The gross gains and gross losses realized on available-for-sale securities were as follows:
| F-20 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
| Gross Proceeds | Gross Realized Gains | Gross Realized Losses | ||||||||||
| 2016 | ||||||||||||
| Bonds-fixed maturities | $ | 858,870 | $ | 6,346 | $ | (9,253 | ) | |||||
| Mortgage-backed securities | — | — | — | |||||||||
| Equity securities | 391,758 | 8,965 | (36,135 | ) | ||||||||
| Derivatives (equity securities) | 598,984 | 113,407 | (162,390 | ) | ||||||||
| Total | $ | 1,849,612 | $ | 128,718 | $ | (207,778 | ) | |||||
| 2015 | ||||||||||||
| Bonds-fixed maturities | $ | 1,453,069 | $ | 35,239 | $ | (2,352 | ) | |||||
| Mortgage-backed securities | — | — | — | |||||||||
| Equity securities | 1,221,704 | 138,421 | (2,572 | ) | ||||||||
| Derivatives (equity securities) | 169,889 | 29,316 | (61,670 | ) | ||||||||
| Total | $ | 2,844,662 | $ | 202,976 | $ | (66,594 | ) | |||||
The following table summarizes the gross unrealized losses and fair value on investment securities aggregated by major investment category and length of time that individual securities have been in a continuous loss position at May 31, 2016 and May 31, 2015.
| F-21 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Cost (a) | Unrealized Losses | Cost (a) | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| 2016 | ||||||||||||||||||||||||
| Equity securities | $ | 571,913 | $ | 80,340 | $ | 244,664 | $ | 74,960 | $ | 661,277 | $ | 155,300 | ||||||||||||
| Bonds- Fixed Maturities | 493,941 | 10,003 | 2,004,819 | 48,214 | 2,440,543 | 58,217 | ||||||||||||||||||
| Mortgage-backed securities | 894,532 | 5,118 | 535,416 | 9,672 | 1,415,158 | 14,790 | ||||||||||||||||||
| Total | $ | 1,960,386 | $ | 95,461 | $ | 2,784,899 | $ | 132,846 | $ | 4,516,978 | $ | 228,307 | ||||||||||||
| 2015 | ||||||||||||||||||||||||
| Equity securities | $ | 364,217 | $ | 16,905 | $ | 94,064 | $ | 25,217 | $ | 416,159 | $ | 42,122 | ||||||||||||
| Bonds- Fixed Maturities | 1,765,902 | 54,453 | 779,118 | 13,704 | 2,476,863 | 68,157 | ||||||||||||||||||
| Mortgage-backed securities | 784,332 | 5,105 | 91,997 | 1,360 | 869,864 | 6,465 | ||||||||||||||||||
| Total | $ | 2,914,451 | $ | 76,463 | $ | 965,179 | $ | 40,281 | $ | 3,762,886 | $ | 116,744 | ||||||||||||
(a) For bonds-fixed maturities and mortgage-backed securities, represents amortized costs.
As of May 31, 2016, the Company held twenty-seven mortgage-backed securities with gross unrealized losses of $14,790, four of which have been in a continuous loss position for more than 12 months. These securities consist of fixed-rate securities issued by Government National Mortgage Association (GNMA) that are sensitive to movements in market interest rates.
As of May 31, 2016, the Company held fifteen fixed maturity bonds with gross unrealized losses of $58,217, seven of which have been in a continuous loss position for more than 12 months.
As of May 31, 2016, the Company held seventeen equity security investments with gross unrealized losses of $155,300, two of which have been in a continuous loss position for more than 12 months. These securities consist of common stock whose fair value is sensitive to movements in market interest rates.
| F-22 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Note D-Deferred Policy Acquisition Costs
The following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged to operations.
| 2016 | 2015 | |||||||
| Balance at beginning of year | $ | 154,978 | $ | 152,608 | ||||
| Acquisition costs deferred | 301,032 | 301,126 | ||||||
| Amortization charged to operations | (284,127 | ) | (298,756 | ) | ||||
| Total | $ | 171,883 | $ | 154,978 | ||||
Note E – Other Assets
Included in other assets as of May 31, 2016 and May 31, 2015 are $14,617 and $14,550 of prepaid expenses and deposits.
Note F – Intangibles
As the result of the acquisition of FSC on December 30, 2005, in exchange for the purchase price of $2,900,000, the Company received cash and investments held by FSC with a fair value of $2,750,000, with the difference of $150,000 being attributed to the property and casualty licenses of FSC in the states of West Virginia, Ohio and Indiana. Such licenses have indefinite lives and are evaluated annually, or more frequently if circumstances indicate that a possible impairment has occurred, for recoverability and possible impairment loss. No impairment has been recorded in fiscal years ended May 31, 2016 and 2015.
Note G - Reserve for Losses and Loss Expense
Reserves for unpaid losses and loss adjustment expenses are estimated based primarily on management’s judgment as the Company has incurred limited losses since its inception and available industry data is also extremely limited. In the event of the Company receiving a claim it will use individual case basis estimates including all estimated future expenses to settle such claims. As of May 31, 2016, the Company’s insurance subsidiary, FSC, is only licensed to write surety in West Virginia and Ohio and has focused its primary efforts towards coal permit reclamation bonds while also providing other miscellaneous surety bonds, most of which are partially collateralized by investment accounts that are managed by Jacobs & Company. Reclamation of land that has been disturbed by mining operations is highly regulated by federal and state agencies and the required bonds are generally long-term in nature with mining operations and reclamation work conducted in unison as the property is being mined.
Additionally, no two principals or properties are alike due to varied company structures and unique geography and geology of each site. In underwriting such bonds, management
| F-23 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
develops, through consultation with professionals experienced in the specific field of work, estimates of costs to reclaim the properties subject of the permit(s) in accordance with those mining permit(s), in addition to other underwriting and financial risk considerations. FSC requires the principal to provide cash, or other acceptable collateral such as irrevocable letters of credit, in amounts determined through the underwriting process to reclaim the disturbed land and thus mitigate the exposure to significant loss.
FSC maintains reinsurance agreement with various syndicates at Lloyd's of London. The reinsurance agreement is an excess of loss contract that protects FSC against losses up to certain limits over stipulated amounts. Such cash is invested in investment collateral accounts managed by Jacobs utilizing investment strategies consistent with the state code governing investments of an insurance company.
Inspections of mining activity and reclamation work are performed on a regular basis with initial cost estimates being updated periodically. Should the principal default in the obligation to reclaim the property in accordance with the mining permit, FSC would then use the funds held in the collateral account to reclaim the property or would be required to forfeit the face amount of the bond to the agency to which the bond is issued.
Losses can occur if the costs of reclamation exceed estimates obtained at the time the bond was underwritten or upon subsequent re-evaluations, if sufficient collateral is not obtained and increased if necessary, or if collateral held has experienced a significant deterioration in value. FSC has experienced two claims for loss through May 31, 2016 (one fiscal 2016, detailed below) and thus provisions for losses and loss adjustment expense have been based on management’s experience adjusted for other factors unique to the Company’s approach, and in consultation with actuaries experienced in the surety field. In August 2015, the Company paid a claim on a called bond in the amount of $550,000, of which $75,000 was paid using collateral of the principal. The remaining $475,000 has been established as a salvage reserve to be repaid with the assignment of proceeds from sales of stock and an assignment of a promissory note as additional collateral with total assigned values in excess of the salvage reserve.
The Company incurred loss adjustment expenses of $26,590 ($25,000 in Fiscal 2014) related to costs of engaging experts, attorney fees, and consultants for potential claims. These costs were charged against established case reserves and bulk reserves.
As a result of an examination by the West Virginia Insurance Commissioner, a reserve strengthening in the form of an increase to the Loss Reserve was recorded in Fiscal 2015 and 2016 in the amounts of approximately $800,000 and $20,402.
| F-24 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
At May 31, 2016 and May 31, 2015, the reserve for losses and loss expenses consisted of:
| 2016 | 2015 | |||||||
| Balance at beginning of year | $ | 2,254,035 | $ | 1,286,018 | ||||
| Incurred policy losses-current year | 243,632 | 968,017 | ||||||
| Incurred policy losses-prior year | 20,402 | — | ||||||
| Paid policy losses – current year | (1,590 | ) | — | |||||
| Paid policy losses-prior year | (25,000 | ) | — | |||||
| Balance at end of year | $ | 2,491,479 | $ | 2,254,035 | ||||
| F-25 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Note H – Notes Payable
At May 31, 2016 and 2015, the Company had the following unsecured notes payable to individuals:
| 2016 | 2015 | ||||||||
| Secured notes payable to individuals; interest rate fixed @ 8%; secured by 500 shares FSC stock ($1,387,573 related party for 2016) | $ | 4,334,997 | $ | 4,185,684 | |||||
| Secured notes payable to same individuals as above with same collateral; no interest; | 235,000 | 250,000 | |||||||
| Unsecured demand notes payable to individuals and others; no interest ($83,900 related party in 2016) | 113,050 | 22,000 | |||||||
| Unsecured demand notes payable to individuals and others; interest rate fixed @ 10% ($75,000 to related party) | 1,506,859 | 1,533,422 | |||||||
| Unsecured demand notes payable to individuals and others; interest rate fixed @ 12% | 15,000 | 15,000 | |||||||
| Unsecured demand note payable to individuals; interest rate fixed @ 14%; | 1,658 | 6,254 | |||||||
| Secured demand note payable to individuals; interest rate fixed @ 10%; secured by accounts receivable for investment advisory fees | 36,628 | 44,260 | |||||||
| Unsecured demand note payable to individuals; interest rate fixed @ 2% ($785,000 related party) | 885,000 | — | |||||||
| Secured notes payable to individuals; interest rate fixed @ 10%; secured by shares FSC stock | 249,250 | — | |||||||
| Unsecured note(s)payable to individual(s) under bridge- financing arrangements described below | — | 1,725,000 | |||||||
| Total | $ | 7,377,442 | $ | 7,781,619 | |||||
| F-26 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
During the year ended May 31, 2015, the Company borrowed $75,000 from a board member. Accrued related party interest of $9,452 is payable to this individual at May 31, 2016.
During the year ended May 31, 2016, an individual who holds secured notes payables from the Company, became a greater than 10% owner of outstanding common stock of the Company. During the year ended May 31, 2016, the Company borrowed additional money from this individual and entities controlled by this individual. Amounts owed to this individual (and the individual’s companies and relatives) at May 31, 2016 consisted of $868,900 in demand notes, $1,387,573 in notes payable secured by FSC stock, and $14,621 in accrued interest.
All notes payables, with the exception of the bridge-financing arrangement and those secured by FSC stock are on demand terms and therefore current. The terms of the bridge-financing arrangement (which was paid off in 2016) are detailed in the following paragraphs.
In accordance with the terms of the first round bridge-financing of $2.5 million on March 10, 2008, the holders of such notes were paid accrued interest-to date and issued 5.00% of the Company's common shares. During 2009, holders of the second round of bridge-financing notes of $1.0 million received 2.00% of the Company's common shares. Upon retirement of the notes subsequent to consummation of a qualified equity offering, the Company was to issue to the holders of the bridge financing notes additional Company common stock that when added to the stock initially issued to the holders of the notes, would equal the note holders’ pro rata share of the applicable percentage of the outstanding common stock of the Company as follows: If the qualified financing consists of $50 million or more, the holders of such notes will receive 28% of the common stock of the Company that would otherwise be retained by the holders of the Company's common shares immediately prior to the financing; if the qualified financing is for an amount less than $50 million, the percentage will be reduced on a sliding scale to a fraction of 28% of the amount retained by the holders of the Company's common shares (where the numerator is the amount of financing and the denominator is $50 million). This feature was analyzed and determined to be an embedded derivative, but the value was considered to be immaterial, and therefore was not recorded.
Beginning September 10, 2008, because a qualified financing had not been completed, the Company became required under the terms of the bridge financing to issue 2.80% of the Company's outstanding common shares and shall issue 2.80% of the Company's outstanding common shares upon each six-month anniversary date thereof until retirement of the notes. This feature was analyzed and determined to be an embedded derivative, but the value was considered to be immaterial and therefore was not recorded for the remaining shares to be issued. Pursuant to the terms of the Promissory Notes, the first two of 20 equal quarterly installments of principal and interest payable thereunder were to have been paid on December 10, 2008 and March 10, 2009 (the “Initial Amortization Payments”). As the result of upheavals and dislocations in the capital markets, the Company was unable to either refinance the indebtedness evidenced by the Promissory Notes or make the Initial
| F-27 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Amortization Payments to the Holders when due; and an Event of Default (as defined in the Promissory Notes) occurred under the Promissory Notes as a result of the Company’s failure to pay the Initial Amortization Payments within 14 days after same became due and payable.
On June 5, 2009 the Company entered into an agreement with the bridge lenders to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default. The Original forbearance was amended October 13, 2009. As consideration for the forbearance, the Company issued 5,171,993 shares of Common stock, and pledged the stock of an inactive subsidiary of the Company, Crystal Mountain Water (CMW), as security for repayment of the loans.
In anticipation of a proposed financing and as a condition thereof, the Company and each of the bridge lenders entered into a loan modification agreement dated February 25, 2012 which provided for modification of the Promissory Notes, including an extension of the term of the promissory notes, and subscription agreements in exchange for a partial cash payment to each bridge lender. On August 10, 2012, the Company entered into an agreement with the bridge lenders, pursuant to which the bridge lenders formally agreed to forbear from exercising their rights and remedies arising from the accumulated acknowledged events of default with respect to the bridge loans until such date. As consideration for this forbearance, the Company entered into an Amended and Restated General Hypothecation and Pledge Agreement dated August 9, 2012 (the “August 2012 Pledge”), but effective September 23, 2011, granting to the bridge lenders as security for the repayment of the loans a lien and security interest in all of the Company’s shares of capital stock of First Surety Corporation. Under the August 2012 Pledge, the bridge lenders acknowledged that the effectiveness of certain of the rights and remedies provided by such agreement would be subject to prior approval by the Office of the Commissioner of Insurance for the State of West Virginia.
On July 9, 2014 the Company completed a $4,500,000 financing. In effect, FSI, a subsidiary of the Company, borrowed the funds at 8.00% interest with principal repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase from certain bridge lenders, after waiving interest of approximately $1.6 million, i.e. 50.7%, ($1.775 million face amount) of the outstanding senior $3.5 million financing dating from 2008, together with the associated collateral, (ii) to pay in full delinquent tax liabilities owed to the Internal Revenue Service and State of West Virginia, (iii) to pay an outstanding judgment, and (iv) to pay certain other current liabilities. FSI therefore became a member of the Bridge Loan and notified the Collateral Agent for the group of its purchase and majority holding. The transaction restored majority control of FSC to the Company.
On August 5, 2015 the Company completed a $1,600,000 transaction which resulted in its acquisition of the remaining 49.3% ($1.725 million face amount) senior promissory notes of the $3.5 million financing dating from 2008, after waiving interest of approximately $1.8 million. Upon closing of the acquisition, the collateral securing the senior promissory notes, 1,000 shares (100%) of FSC and 1,000 shares (100%) of CMW, was released to the Company. This extinguishment of debt resulted in a gain from forgiven principal and
| F-28 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
interest in the amounts of $125,000 and $1,795,000, respectively for a total gain of $1,920,000.
The transaction was funded through sale in a private offering of investment units (Units) that consisted of 5.00% of the outstanding shares of FSC and 500,000 common shares of the Company. $1,600,000 was raised through a combination of cash, partial assignments of loans back to the Company that were debt of the Company and loans that are convertible into purchase of Units. The Registrant’s Board of Directors has authorized the sale of up to nine Units, which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC.
Scheduled maturities are as follows:
| 2016 | ||||
| Fiscal year 2016-2017 (including demand notes) | $ | 2,696,038 | ||
| Fiscal year 2017-2018 (including demand notes) | 280,256 | |||
| Fiscal year 2018-2019 (including demand notes) | 366,392 | |||
| Fiscal year 2019-2020 (including demand notes) | 500,181 | |||
| Fiscal year 2020-2021 (including demand notes) | 541,696 | |||
| Thereafter | 2,477,391 | |||
| Total | $ | 6,861,954 | ||
Note I - Other Liabilities
As of May 31, 2016, the Company had accrued and withheld approximately $31,000 in Federal payroll taxes and approximately $31,000 in estimated penalties and interest, which are reflected in the financial statements as other liabilities.
As of May 31, 2016, the Company had accrued and withheld approximately $44,000 in West Virginia payroll withholdings and approximately $7,000 in interest and penalties, which are reflected in the accompanying financial statements as other liabilities.
As of May 31, 2016 and May 31, 2015 the Company held approximately $2,068,192 and $2,352,427 respectively in its cash and investment accounts that was for the benefit of clients as collateral for their surety bonding program.
Note J - Preferred Stock
Redeemable Preferred Stock
On December 30, 2005, through a private placement, the Company issued 350 shares of 4% Non-Voting Series A Preferred Stock (Series A Preferred Stock), along with 1,050,000 warrants for common shares of Company stock as additional consideration, for a cash investment in the amount of $350,000, in connection with the Company's acquisition of FSC. Holders of Series A Preferred Stock are entitled to participate in FSC's partially
| F-29 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
collateralized bonding programs, subject to continuing satisfaction of underwriting criteria, based upon the bonding capacity of FSC attributable to capital reserves of FSC established with the subscription proceeds (i.e., bonding capacity equal to ten times subscription proceeds) and for so long as the subscriber holds the Series A shares. Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the board of directors, cumulative preferential cash dividends at a rate of four percent of the $1,000 liquidation preference per annum (equivalent to a fixed annual rate of $40 per share). The Series A Preferred Stock ranks senior to the Company's common stock and pari passu with the Company's Series B Preferred and Series C Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The holder may redeem the Series A Preferred Stock on or after the seventh anniversary of the Issue Date, if the holder provides a written statement to the Company that it will no longer require surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, if no such surety bonds are then outstanding, the Company, at the option of the holder, will redeem all or any portion of the Series A Preferred Stock of such holder at a price per share equal to the Series A Preferred Stock Issue Price plus all accrued and unpaid dividends with respect to the shares of the Series A Preferred Stock of such holder to be redeemed. The conditional redemption shall not be available to any holder of Series A Preferred Stock for so long as surety bonds of the Company's insurance subsidiary issued on a partially collateralized basis remain outstanding for the benefit of such holder, and upon redemption, such holder shall no longer be eligible to participate in the partially collateralized bonding programs of the insurance subsidiary. The Company is authorized to issue up to 1,000,000 shares of the Series A Preferred Stock. As of May 31, 2016, the Company has issued 2,675 shares of Series A Preferred Stock in exchange for cash investments in the amount of $2,675,000, of which no shares were issued in fiscal 2016 or 2015.
The Company’s outstanding Series A Preferred stock matures on the seventh anniversary of the issuance date and thereafter holders of the Series A Stock are eligible to request that the Company redeem their Series A Shares. As of May 31, 2016, the Company has received requests for redemption of 1,026 shares of Series A Preferred. The aggregate amount to which the holders requesting redemption are entitled as of June 30, 2016, is $1,535,688.
Under the terms of the Series A Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series A Stock are sufficient to redeem the total number of shares of Series A Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the
| F-30 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series A Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series A Stock to be redeemed shall be increased by 2% of the Series A Face Amount, with the amount of such increase (i.e., 2% of the Series A Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series A Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series A Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series A Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series A Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series A Stock elected to be redeemed shall have been paid in full, such share of Series A Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
The Company’s Board of Directors determined based on the criteria established under the terms of the Preferred Stocks that there were insufficient funds available for the redemption of Preferred Stocks.
On December 30, 2005, through a private placement, the Company issued 3,980 shares of 8% Non-Voting Series B Convertible Preferred Stock (Series B Preferred Stock), along with 19,900,000 warrants for common shares of Company stock as additional consideration, for a cash investment in the amount of $2,985,000; and issued 4,891 shares of Series B Preferred Stock, along with 24,452,996 warrants for common shares of Company stock as additional consideration, for a conversion of $3,667,949 of indebtedness of the Company, in connection with the Company's acquisition of FSC. Holders of the Series B Preferred Stock are entitled to receive, when and as declared by the board of directors, cumulative preferential cash dividends at a rate of eight percent of the $1,000 liquidation preference per annum (equivalent to a fixed annual rate of $80 per share). The Series B Preferred Stock ranks senior to the Company's common stock and pari passu with the Company's Series A Preferred and Series C Preferred Stock with respect to dividend
| F-31 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
rights and rights upon liquidation, dissolution or winding up of the Company. Each share of the Series B Preferred Stock is convertible at the option of the holder, at any time after the original issue date, into 1,000 fully paid and non-assessable shares of the Company's common stock at a conversion price of $1.00 per common share. The Company may redeem the Series B Preferred Stock at any time after the first anniversary of the Original Issue Date at a price per share equal to the Series B Preferred Stock Face Amount plus all accrued and unpaid dividends with respect to the shares of the Series B Preferred Stock of such holder to be redeemed. To the extent that the Series B Preferred Stock has not been redeemed by the Company, the holder may redeem the Series B Preferred Stock on or after the fifth anniversary of the Original Issue Date at a price per share equal to the Series B Preferred Stock Face Amount plus all accrued and unpaid dividends with respect to the shares of the Series B Preferred Stock of such holder to be redeemed. The Company is authorized to issue up to 10,000 shares of the Series B Preferred Stock. The Company has not issued any additional shares of Series B Preferred Stock during fiscal 2016.
The Company’s outstanding Series B Preferred stock matured on December 30, 2010, meaning that the holders of the Series B Stock that had not requested exchange to the Company’s Series C Preferred stock became entitled to request that the Company redeem their Series B Shares. As part of the exchange to Series C Preferred Stock in September 2009, the shares that did not exchange were treated as a liability on the balance sheet. As of May 31, 2016, of the 2,817 shares of Series B Preferred that remained outstanding, the Company has received requests for redemption of 2,219 shares of Series B Preferred. The aggregate amount to which the holders requesting redemption are entitled as of June 30, 2016, is $5,099,573.
Under the terms of the Series B Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series B Stock are sufficient to redeem the total number of shares of Series B Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series B Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series B Stock to be redeemed shall be increased by 2% of the Series B Face Amount, with the amount of such increase
| F-32 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
(i.e., 2% of the Series B Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series B Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series B Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series B Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series B Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series B Stock elected to be redeemed shall have been paid in full, such share of Series B Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
The Company’s Board of Directors determined based on the criteria established under the terms of the Series B Preferred Stock that there were insufficient funds available for the redemption of Series B Stock.
The Company experienced a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $108,386 in fiscal 2016 as compared with a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $1,669,587 in fiscal 2015.
Equity Preferred Stock
As a means of alleviating obligations associated with the Company's Series B
| F-33 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Preferred Stock, which by its terms matured at the end of 2010, management proposed a recapitalization to assist in stabilizing the financial position of the Company. The Company’s Certificate of Incorporation provides for two classes of capital stock, known as common stock, $0.0001 par value per share (the “Common Stock”), and preferred stock, $0.0001 par value per share (the “Preferred Stock”). The Company’s Board is authorized by the Certificate of Incorporation to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in such series and to fix the designations, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The Board deemed it advisable to designate a Series C Preferred Stock and fixed and determined the preferences, rights, qualifications, limitations and restrictions relating to the Series C Preferred Stock as follows:
1. Designation. The shares of such series of Preferred Stock are designated “Series C Preferred Stock” (referred to herein as the “Series C Stock”). The date on which the first share of Series C Stock is issued shall hereinafter be referred to as the “Original Issue Date”.
2. Authorized Number. The number of shares constituting the Series C Stock is 10,000.
3. Ranking. The Series C Stock ranks, (a) as to dividends and upon Liquidation senior and prior to the Common Stock and all other equity securities to which the Series C ranks prior, with respect to dividends and upon Liquidation (collectively, “Junior Securities”), (b) pari passu with the Corporation’s Series A Preferred Stock, par value $0.0001 per share (the “Series A Stock”), the Corporation’s Series B Stock, and any other series of Preferred Stock subsequently established by the Board with equal ranking (any such other series of Preferred Stock, together with the Series C Stock, the Series B Stock and Series A Stock are collectively referred to as the “Equal Ranking Preferred”) and (c) junior to any other series of Preferred Stock subsequently established by the Board with senior ranking.
4. Dividends.
(a) Dividend Accrual and Payment. The holders of the Series C Stock shall be entitled to receive, in preference to the holders of Junior Securities, dividends (“Dividends”) on each outstanding share of Series C Stock at the rate of 8% per annum of the sum of (i) the Series C Face Amount plus (ii) an amount equal to any accrued, but unpaid, dividends on such Series C Stock, including for this purpose the exchanged Series B Amount outstanding with respect to such Series C Stock. For purposes hereof, the “Series B Amount” means an amount equal to the dividend that would have accrued on such Series C Stock held by such holder from and after the Series B Original Issue Date applicable to such share of Series C Stock, through the Original Issue Date as if such Series C Stock had been issued on such Series B Original Issue Date, less all amounts thereof distributed by the Corporation with respect to such Series C Stock. Dividends shall be payable quarterly in arrears on each January 1, April 1, July 1 and October 1 following the Original Issue Date, or, if any such date is a Saturday, Sunday or legal holiday, then on the next day which is not a Saturday, Sunday or legal holiday (each a “Dividend Payment Date”), as declared by the Board and, if not paid on the Dividend Payment Date, shall accrue. Amounts available for payment of Dividends (including for this purpose the Series
| F-34 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
B Amount) shall be allocated and paid with respect to the shares of Series C Preferred and any other Equal Ranking Preferred, first, among the shares of Equal Ranking Preferred pro rata in accordance with the amounts of dividends accruing with respect to such shares at the current Dividend Payment Date, and, then, any additional amounts available for distribution in accordance with the accrued, but unpaid, dividends (and the Series B Amount then outstanding) at each prior Dividend Payment Date, in reverse chronological order, with respect to all shares of the Equal Ranking Preferred then outstanding in accordance with amounts accrued, but unpaid. For purposes hereof, the term “Series B Original Issue Date” shall mean, with respect to any share of Series C Stock issued by the Corporation in exchange for a share of Series B Stock, the date on which the Corporation originally issued such share of Series B Stock.
The Recapitalization consisted of the exchange of Series B Shares for a combination of Series C Shares and Common Stock. For each Series B Share, the participating holder received (i) one Series C Share and (ii) 2,000 shares of JFG Common Stock (for no additional consideration).
For the year ended May 31, 2010, 6,805 shares of Series B Stock were surrendered and exchanged for 6,805 shares of Series C Stock. This exchange amounted to $6,269,051 of carrying value of Series B stock being exchanged for Series C and Common Stock. 13,609,872 shares of Common Stock were issued to the Series C Stock holders at the rate of 2,000 Common shares for each exchanged Series B Stock, with the related cost associated with the Common issuance offsetting the Series C carrying value by $265,120. The shares were valued at approximately $.01948 per share based on the average quoted closing price of the Company's stock for the 20-day period proceeding the date of the transaction. Series C stock may be redeemed by the Company but does not have a fixed maturity date and, thus, is classified as permanent equity. For the year ending May 31, 2016, 2,817 shares of Series B Stock had not been exchanged.
The accrual of dividends on the equity preferred stock resulted in a charge to common stockholders’ equity and a credit to the equity of equity preferred stock of $1,164,143 in fiscal 2016 as compared with a charge to common stockholders’ equity of $1,072,461 in fiscal 2015.
Dividend Preference and Accretion
The Series A Shares are entitled to receive cumulative dividends at the compounding rate of 4.00% per annum.
The Series B Shares have an 8.0% per annum compounding dividend preference, are convertible into Common Shares of JFG at the option of the holders at a conversion price of $1.00 per Share (as adjusted for dilution) and, to the extent not converted, must be redeemed by the Corporation at any time after December 31, 2010 at the option of the holder. Any such redemption is subject to legal constraints, such as the availability of capital or surplus out of which to pay the redemption, and to a determination by the Board of Directors that the redemption will not impair the operations of First Surety Corporation.
| F-35 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
The Series C Shares issued in the Recapitalization have the same 8.0% per annum compounding dividend preference and carry over from the Series B Shares the same accrued but unpaid dividends. While dividends had never been declared on the Series B shares, they had been accrued, increasing the dividend preference and the redemption price and liquidity preference of such shares and increasing the liability represented thereby based upon the Series B Shares fixed maturity date. The accrued (but undeclared) dividends associated with the Series C exchange amounted to $2,295,624 and are included in the total amount exchanged for Series C Shares. Unlike the Series B Shares with their fixed maturity date, the Series C Shares are permanent equity, with accruing dividends only increasing the preference amount that must be satisfied before junior securities may participate in dividends or on liquidation. Accordingly, the effect of the accrual of dividends with respect to the Series C Shares on the Company’s balance sheet is to increase the aggregate claim of the Series C Shares on the equity of the corporation and to increase the deficit in common equity, while having no effect on the net equity of the corporation as a whole. The entitlement of the Series C Shares to a priority in relation to junior securities with respect to dividends and on liquidation does not create an obligation to the Company and therefore no liability is recorded until the dividends are declared by the Board of the Company. The Series C Shares are pari passu with the Corporation’s Series A Preferred Stock and Series B Shares (to the extent any remain outstanding following the Recapitalization) and no dividends or other distributions will be paid upon Common Shares or any other class of Shares that is junior in priority to the Series C Preferred while dividends are in arrears. In addition, the Series C Shares are convertible into Common Shares of JFG at the option of the holders at a conversion price of $0.10 per Share. The Series C Shares may be redeemed by the Corporation, at its option, when it is in a financial position to do so.
Holders of over 70% of the outstanding Series B Preferred Shares elected to participate in the recapitalization. The shares of Series B Preferred Shareholders that chose not to convert are listed in the Liabilities section of the Balance Sheet, and therefore the accretion and dividends associated with the Series B stock after November 30, 2009 are deductions from net income. Dividends on Series B mandatorily redeemable preferred stock deducted from net income amounted to $483,596 for the year ended May 31, 2016. The remaining Series B shares not converted were accreted from carrying value to the face amount for the 5 year period from the date of issuance. Series C stock has no accretion. There were no shares of Series B Stock surrendered or exchanged in the year ended May 31, 2016.
During the year ended May 31, 2012, two holders of Series A stock released all of their outstanding bonds held with FSC. These shares of Series A Preferred Shareholders are listed in the liability section of the Balance Sheet as of May 31, 2016, in the amount of $1,670,945, which consists of the fully accreted $1,126,000 face value of stock and $544,945 in dividends payable. The dividends associated with these shares of Series A stock for the year ended May 31, 2016, is a deduction from net income in the amount of $65,374. There was no current accretion on these shares of Series A stock.
| F-36 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
As of May 31, 2016 the Company has chosen to defer payment of dividends on Series A Preferred Stock with such accrued and unpaid dividends amounting to $1,155,545 through May 31, 2016. These dividends are included in the amounts reported on the face of the balance sheet for each classification of Series A stock.
As of May 31, 2016 the Company has chosen to defer payment of dividends on Series B and Series C Preferred Stock with such accrued and unpaid dividends amounting to $3,516,674 and $8,441,909 through May 31, 2016, respectively. These dividend are included in the amounts reported on the face of the balance sheet for each respective classification if stock.
Accounting Treatment
U.S. GAAP requires that an entity classify as liabilities certain financial instruments with characteristics of both liabilities and equity. The Company's Series A and B Preferred stock each have mandatory redemption features that subject the Company to the analysis of equity versus liability. Both Series A and B have features that embody a conditional obligation to redeem the instrument upon events not certain to occur and accordingly, are not classified as liabilities until such events are certain to occur. With respect to the Series A Preferred Stock, such condition is contingent upon the holder having no further need for surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, having no such surety bonds then outstanding. With respect to the Series B Preferred Stock, if the stock provides an option to the holder to convert to common shares at a rate equivalent to fair value, then the financial instruments are not mandatorily redeemable during the period in which the holder can convert the shares into common shares. Accordingly, the Company has determined that only the Series A preferred stocks held by principals with outstanding surety bonds should not be classified as liabilities. However, in accordance with Securities and Exchange Commission (SEC) Issued Topic No. D- 98, SEC Staff Announcement, "Classification and Measurement of Redeemable Securities", a company that issues preferred shares that are conditionally redeemable is required to account for the conditionally redeemable preferred shares in accordance with Accounting Series Release 268, which states that the shares are to be reflected on the Company's balance sheet between total liabilities and stockholders' equity as temporary equity.
Note K - Stock Warrants
On December 30, 2005, the Company issued warrants to purchase 45,402,996 shares of common stock in connection with the Series A and B Preferred Stock private placements. The exercise price of the warrants is $.001 per share. The warrants were valued using the Black-Scholes pricing model. The warrants issued in connection with the Series A Preferred Stock were valued at $.08 per share or $83,043. The warrants issued in connection with the Series B Preferred Stock were valued at $.01 per share or $449,972.
| F-37 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
386,667 warrants issued in connection with Series B Preferred Stock expired unexercised on the fifth anniversary at December 31, 2010; 600,000 warrants issued in connection with Series A Preferred Stock expired unexercised on the seventh anniversary at December 31, 2012.
As of May 31, 2015, there were no warrants outstanding.
Note L-Stock-Based Compensation
On October 12, 2005, the board of directors adopted its 2005 Stock Incentive Plan (the "Plan") to allow the Company to make awards of stock options as part of the Company's compensation to key employees, non-employee directors, contractors and consultants. The Plan was approved by the stockholders on December 8, 2005. The aggregate number of shares of Common Stock issuable under all awards under the Plan is 35,000,000. No awards may be granted under the Plan after December 8, 2015.
On December 28, 2006, the compensation committee of the board of directors awarded 2,100,000 of incentive stock options to acquire common shares at an exercise price of $.04 per share, of which 450,000 shares vested immediately and the remaining 1,650,000 options vesting over the next three years ending in December 2009. As of May 31, 2010, the awarded options had been reduced to 1,800,000 due to changes in employment status, all of which expired in December 2011.
On June 30, 2009 the compensation committee of the board of directors awarded 10,000,000 of incentive stock options to acquire common shares at an exercise price of $.04 per share, of which 4,700,000 shares vested immediately and the remaining 5,300,000 options vesting over the next three years ending in June 2011. As of May 31, 2015, the awarded options had been reduced to 9,800,000 due to changes in employment status, all of which expired in June 2014.
The Plan’s terms defined that it would terminate upon the earlier of (1) the adoption of a resolution by the Company terminating the Plan; or (2) ten years from the date on which the Plan is initially approved by the stockholders of the Company, therefore the Plan terminated on October 12, 2015.
There were no options exercised in fiscal 2016 or 2015. There is no unrecognized compensation expense related to non-vested awards at May 31, 2016 or May 31, 2015 as all awards are fully vested.
Note M – Income Taxes
Deferred tax assets and liabilities are recorded for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Such differences include the income recognition of a portion of the
| F-38 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
unearned premium reserve, loss reserve deductibility, accruals not currently deductible relating to stock option expense and certain accrued expenses that are not paid within specified time frames by the Internal Revenue Service, and the deductibility of deferred policy acquisition costs paid. As of May 31, 2016, the Company had estimated operating loss carry forwards of approximately $16.3 million. These carry forwards began expiring in 2015 and, as a result of the ownership change resulting from the 2001 acquisitions of FSI and Jacobs, the utilization of approximately $6.4 million of the operating loss carry forwards are substantially limited.
The Company has fully reserved the $5.5 million tax benefit of the operating loss carry forward, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit cannot be determined.
Note N – Stockholders’ Equity
In fiscal 2016, the Company issued 1,878,000 shares of the Company's common stock as additional consideration in connection with new and continued borrowings totaling $1,878,000. The shares were valued at approximately $.002887 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $5,422.
In fiscal 2016, the Company issued 11,956,049 shares of the Company’s common stock in connection with the additional 2% stock dividend associated with Series A and B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares were valued at approximately $.003208 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $38,352.
In fiscal 2016, the Company issued 2,500,000 shares of the Company's common stock as additional consideration for the purchase and loans convertible into the purchase of 25% of FSC subsidiary stock. The shares were valued at approximately $.002566 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $6,415.
In fiscal 2015, the Company issued 495,856 shares of the Company's common stock as additional consideration in connection with new and continued borrowings totaling $495,856. The shares were valued at approximately $.005258 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $2,607.
In fiscal 2015, the Company issued 5,298,804 shares of the Company’s common stock in connection with the additional 2% stock dividend associated with Series A and B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares were valued at approximately $.004795 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $25,406.
| F-39 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
In fiscal 2015, the Company issued 10,221,845 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.005525 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $56,476. Of
these shares, 5,183,936 were issued to a subsidiary as the successor owner of 50.7% of the bridge financing arrangement. These shares were valued at approximately ..005525 per share based on the average quoted closing price of the Company’s stock for the 20-day period preceding the date of the transaction and totaled $28,641.
In fiscal 2015, the Company issued 5,183,936 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.005525 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $(28,641).
Note O-Statutory Financial Data (Unaudited)
The Company’s insurance subsidiary files calendar year financial statements prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities. The principal differences between statutory financial statements and financial statements prepared in accordance with generally accepted accounting principles are that statutory financial statements do not reflect deferred policy acquisition costs and certain assets are non-admitted.
Statutory capital and surplus as of May 31, 2016 and 2015 and net income for the Company’s insurance subsidiary for the calendar year ended December 31, 2015 and 2014 and five-month periods ended May 31, 2016 and 2015 are as follows:
| Statutory Capital and Surplus | May 31, 2016 | $ | 4,958,584 | |||
| Statutory Capital and Surplus | May 31, 2015 | $ | 5,830,379 | |||
| Net Income | Calendar year 2015 | $ | (762,295 | ) | ||
| Net Income | Calendar year 2014 | $ | 232,337 | |||
| Net Income | Five-month period 2016 | $ | 37,446 | |||
| Net Income | Five-month period 2015 | $ | 189,559 |
Statutory surplus exceeds the West Virginia state law minimum capital requirements of $2.0 million.
Under the West Virginia insurance code, ordinary dividends to stockholders are allowed to be paid only from that part of the insurance subsidiary’s (FSC’s) available surplus funds
| F-40 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
which constitutes realized net profits from the business and whereby all such dividends or distributions made within the preceding twelve months do not exceed the lesser of 10% of FSC’s surplus as regards to policyholders as of December 31st of the preceding year-end or net income from operations from the previous two calendar years, not including capital gains. Any payment of extraordinary dividends requires prior approval from the WV state insurance commissioner.
On March 26, 2012 the Commissioner of the State of West Virginia (WVOIC) terminated in its entirety the Amended Consent Order of June 7, 2007 and terminated the restrictive conditions of the Consent Order issued December 23, 2005 which approved acquisition of FSC by the Company. Among other consequences, removal of these restrictions allowed dividends to be declared by and paid from FSC to the Company. Dividends in the amounts of $173,000 were declared and paid for the twelve month period ending May 31, 2015. No dividends were declared or paid for the twelve month period ending May 31, 2016.
The dividends for 2015 were deemed by the WVOIC to be extraordinary, causing the insurance subsidiary (FSC) to be fined $5,000 due to not obtaining consent prior to payment.
Note P – Commitments and Contingencies
Lease Commitments
The Company leases certain office equipment with combined monthly payments of approximately $545 that have varying remaining terms of less than five years. The Company leases office, parking and storage space under month-to-month lease arrangements that approximate $6,897 each month.
The Company’s inactive subsidiary, Crystal Mountain Spring Water, holds an undeveloped leasehold interest in a mineral water spring located near Hot Springs, Arkansas. Under the leasehold arrangement, the Company makes minimum lease payments of $180 per month. The Company has options to extend the leasehold arrangement through October 2026 and also has a right to cancel the lease at any time upon sixty (60) days written notice.
Rental expense for these lease commitments totaled approximately $45,086 and $55,301 during fiscal years 2016 and 2015.
Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2016 are:
| Fiscal year 2016-2017 | $ | 32,136 | ||
| Fiscal year 2017-2018 | 32,136 | |||
| Fiscal year 2018-2019 | 29,458 | |||
| Total | $ | 93,730 |
| F-41 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
During 2013, the Company and one of its surety principals entered into a contractual arrangement whereby the Company would hold collateral for use in paying future claims and expenses and upon the Company’s determination that its liability had been fully extinguished, the company would return the amount of the deposits less any paid claims or expenses. While the Company holds the collateral, the Company will pay 1.35% annual simple interest to the principal. The Company receives any appreciation and earnings in excess of the contractual deposit, less payments, and interest paid to the principal. This deposit and the earning or expenses associated with the deposit are included in the calculation of the Company’s investment income.
Note Q – Financial Instruments
Fair Value
The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value:
Investment Securities
Fair values for investment securities (U.S. Government, government agencies, government agency mortgage-backed securities, state and municipal securities, and equity securities) held for investment purposes (available-for-sale) are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Other Financial Instruments
The carrying amount of cash, short-term investments, receivables, prepaid expenses, short-term and demand notes payable, accounts payable, accrued expenses and other liabilities approximate fair value because of the immediate or relatively short-term maturity of these financial instruments. Fair value of term notes payable, including notes payable under the bridge-financing arrangement, were deemed to approximate their carrying value based on the Company’s incremental borrowing rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.
The carrying values and fair values of the Company’s financial instruments at May 31, 2016 and 2015 are as follows:
| F-42 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
2016
| 2015 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| ASSETS | ||||||||||||||||
| Bonds available for sale | $ | 7,170,789 | $ | 7,230,261 | $ | 6,983,957 | $ | 7,028,728 | ||||||||
| Cash and short-term investments | 663,562 | 663,562 | 2,316,971 | 2,316,971 | ||||||||||||
| Premiums and other receivables | (76,413 | ) | (76,413 | ) | 482,488 | 482,488 | ||||||||||
| Equity securities (including derivatives) | 1,550,217 | 1,488,440 | 778,659 | 755,301 | ||||||||||||
| LIABILITIES | ||||||||||||||||
| Notes payable | 6,861,954 | 6,861,954 | 7,148,580 | 7,148,580 | ||||||||||||
| Accounts payable and advance premiums | 414,787 | 414,787 | 537,132 | 537,132 | ||||||||||||
| Accrued expenses and other liabilities | 3,274,094 | 3,274,094 | 5,348,952 | 5,348,952 | ||||||||||||
Note R – Other Risks and Concentrations
Concentration of Credit Risk
As of May 31, 2016 the Company’s investment securities of approximately $8,900,000 are comprised solely of mortgage-backed securities, fixed maturity municipal bonds, equity investments, and money-market mutual funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities. Such instruments are generally considered to be of the highest credit quality investment available.
The Company transacts the majority of its business with three financial institutions, one for commercial banking services and the others for brokerage and custodial services. Periodically, the amount on deposit in financial institutions providing commercial banking services exceeds federally insured limits. Management believes these financial institutions are financially sound. With respect to the financial institutions providing brokerage and custodial services, amounts on deposit are invested in money market funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities.
Management believes that substantially all receivables are collectible, and therefore has not established an allowance for estimated uncollectible accounts.
Concentration in Products, Markets and Customers
The Company’s insurance subsidiary currently writes only the surety line of business, is licensed to write surety only in West Virginia and Ohio and has focused its primary efforts towards coal permit bonds. Such business, including investment advisory fees from managed collateral accounts, accounted for approximately 66% and 54% of the Company’s
| F-43 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
fiscal 2016 and 2015 revenues, respectively. Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute 36% and 39% of the Company’s fiscal 2016 and 2015 revenues, respectively, as follows:
2016 | 2015 | |||||||||||||||
Surety Premium | Investment Advisory Fees |
Surety Premium | Investment Advisory Fees | |||||||||||||
| Customer group #1 | $ | 116,000 | $ | — | $ | 166,000 | $ | — | ||||||||
| Customer group #2 | 190,000 | 17,000 | 183,000 | 21,000 | ||||||||||||
| Customer group #3 | 180,000 | 3,000 | 224,000 | 3,000 | ||||||||||||
| Customer group #4 | 205,000 | 4,000 | 204,000 | 3,000 | ||||||||||||
| Total | $ | 691,000 | $ | 24,000 | $ | 777,000 | $ | 27,000 | ||||||||
Note S – Segment Reporting
The Company has two reportable segments, investment advisory services and surety insurance products and services. The following table presents revenue and other financial information by industry segment.
| F-44 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
| Year Ended | ||||||||
| Industry Segment | May 31, 2016 | May 31, 2015 | ||||||
| Revenues: | ||||||||
| Investment advisory | $ | 506,373 | $ | 140,890 | ||||
| Surety insurance | 829,456 | 1,434,730 | ||||||
| Corporate | — | — | ||||||
| Total revenues | $ | 1,335,829 | $ | 1,575,620 | ||||
| Operating Income (Loss): | ||||||||
| Investment advisory | $ | (49,976 | ) | $ | (56,377 | ) | ||
| Surety insurance | (1,678,551 | ) | (907,081 | ) | ||||
| Corporate | 468,785 | (625,159 | ) | |||||
| Total operating income (loss) | $ | (1,259,742 | ) | $ | (1,588,617 | ) | ||
| Identifiable Assets: | ||||||||
| Investment advisory | $ | 43,129 | $ | 45,871 | ||||
| Surety insurance | 9,831,940 | 11,071,469 | ||||||
| Corporate | 1,483,127 | 713 | ||||||
| Total assets | $ | 11,358,196 | $ | 11,118,053 | ||||
| Capital Acquisitions: | ||||||||
| Investment advisory | $ | — | $ | — | ||||
| Surety insurance | — | 1,679 | ||||||
| Corporate | 548 | — | ||||||
| Total capital acquisitions | $ | 548 | $ | 1,679 | ||||
Depreciation Charged to Identifiable Assets: | ||||||||
| Investment advisory | $ | — | $ | — | ||||
| Surety insurance | 1,236 | 4,478 | ||||||
| Corporate | 15 | — | ||||||
| Total Depreciation | $ | 1,251 | $ | 4,478 | ||||
| Interest Expense: | ||||||||
| Investment advisory | $ | — | $ | 64 | ||||
| Surety insurance | 350,099 | 309,349 | ||||||
| Corporate | 564,999 | 523,829 | ||||||
| Total interest expense | $ | 915,098 | $ | 833,242 | ||||
| F-45 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Note T – Related Party Transactions
Borrowing and other transactions of Largest Shareholder and CEO
For the past several years the Company’s operating expenses were partially funded by advances from its largest shareholder and chief executive officer, John M. Jacobs. The source of funding for these advances originated with obligations incurred by Mr. Jacobs with third parties (such obligations together with the loans by Mr. Jacobs to the Company, “back-to-back loans”) with interest rates ranging from 6% to 12%. This amount is unsecured and payable on demand.
To assure that repayments of the various borrowings by the Company that were either guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs, because Mr. Jacobs entered into an Assumption Agreement with the Company. Pursuant to the assumption agreement Mr. Jacobs assumes, and agrees to hold the Company harmless from, principal of specified indebtedness of the Company and to fully offset when necessary what might otherwise be deemed an advance of funds arising out of the Company’s financing activities.
During fiscal 2016, advances to the Company from Mr. Jacobs amounted to $1,088,758, and repayments to Mr. Jacobs amounted to $971,207. As of May 31, 2016, the balance due from Mr. Jacobs was $515,488. The largest aggregate amount outstanding from Mr. Jacobs in fiscal 2016 was $549,143.
During fiscal 2015, advances to the Company from Mr. Jacobs amounted to $1,008,717, and repayments to Mr. Jacobs amounted to $1,652,037. As of May 31, 2015, the balance due from Mr. Jacobs was $633,039. The largest aggregate amount outstanding from Mr. Jacobs in fiscal 2015 was $666,262.
As of June 30, 2017, $22,500 was owed to Mr. Jacobs by the Company.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 6% and 12% respectively for both the 2016 and 2015 fiscal years.
Other related parties
During the years ended May 31, 2016 and May 31, 2015, a company owned by a board member provided consulting services. This company provided services totaling $62,100 and $62,100 in 2016 and 2015. Amounts owed to this company at year end are treated as related party payables in the amounts $124,723 and $169,375 at May 31, 2016 and 2015 respectively.
During the year ended May 31, 2015, the Company borrowed money from an individual that is a board member. Total amounts owed to this individual at May 31, 2016 consisted of $75,000 in demand notes and $9,452 in accrued interest.
| F-46 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
During the year ended May 31, 2016,
an individual who holds secured notes payables from the Company, became a greater than 10% owner of outstanding common stock of
the Company. During the year ended May 31, 2016, the Company borrowed additional money from this individual and entities controlled
by this individual. Amounts owed to this individual (and the individual’s companies and relatives) at May 31, 2016 consisted
of $868,900 in demand notes, $1,387,573 in notes payable secured by FSC stock, and $14,621 in accrued interest. This individual
also arranged to purchase a 15.00% interest in First Surety Corporation for $1,500,000 through a combination of cash and a Promissory
Note for $1,250,000 secured by assignment of debt payable by the Company.
As of May 31, 2016, the purchase was not yet approved by the West Virginia Office of the Insurance Commissioner in compliance with
insurance regulations requiring approval when exceeding 10.00% ownership, and the sale was deferred until subsequent to year end.
This sale also resulted in the issuance of 1,500,000 shares of common stock of the Company. As of May 31, 2016, the amounts receivable
from this individual amounted to $1,121,294.
Note U – Reinsurance
The Company limits the maximum net loss that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers. Ceded reinsurance is treated as the risk and liability of the assuming companies. The Company cedes insurance to other companies and these reinsurance contracts do not relieve the Company from its obligations to policyholders.
Effective April 1, 2009, FSC entered into a reinsurance agreement with various syndicates at Lloyd’s of London (“Reinsurer”) for its coal reclamation surety bonding programs. The agreement has been renewed annually with the Reinsurer, with the most recent renewal effective April 1, 2017. The reinsurance agreement is an excess of loss contract which protects the Company against losses up to certain limits over stipulated amounts and can be terminated by either party by written notice of at least 90 days prior to any July 1. The contract calls for a premium rate of 35% subject to a minimum premium of $490,000. Deposits to the reinsurers are made quarterly in arrears in equal amounts of $140,000. At May 31, 2016 and May 31, 2015, the Company had prepaid reinsurance premiums of $232,647 and $207,413 and ceded reinsurance deposited of $5,689 at May 31, 2015.
There were no ceded Loss and Loss Adjustment Expenses for the years ended May 31, 2016 or 2015.
The effects of reinsurance on premium written and earned for fiscal 2016 and 2015 are as follows;
| 2016 Written | 2016 Earned | 2015 Written | 2015 Earned | |||||||||||||||
| Direct | $ | 1,466,837 | $ | 1,407,905 | $ | 1,382,725 | $ | 1,419,049 | ||||||||||
| Ceded | 453,587 | 428,353 | 494,926 | 503,129 | ||||||||||||||
| Net | $ | 1,013,250 | $ | 979,552 | $ | 887,799 | $ | 915,920 | ||||||||||
| F-47 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Note V – Events Subsequent to May 31, 2016
Subsequent to May 31, 2016, the Company obtained various borrowings from individuals and businesses through June 30, 2017 totaling $361,538 at rates varying from 10% to 14%, which mature at various dates subsequent to this filing, and made repayments on notes in the amount of $242,649. These borrowings, and the renewal of other borrowings, included no issuances of shares of its common stock as additional consideration. Additionally, the Company obtained borrowings of $323,463 from its principal shareholder and chief executive officer under a pre-approved financing arrangement bearing interest at the rate of 12% and made repayments totaling $351,332. After taking into account the net accrued payroll owed, reimbursement of company expenses, and the personal assumption of Company debt that is to be offset against these borrowings, the balance owed to the principal shareholder from the Company is $22,500 at June 30, 2017.
The Company elected to continue to defer payment of quarterly dividends on its Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock with such accumulated accrued and unpaid dividends amounting to $1,350,832, $4,175,512 and $10,027,907 as of June 30, 2017.
On September 25, 2016 the Registrant sold 15.00% interest in First Surety Corporation for $1,500,000 through a combination of cash and a Promissory Note secured by assignment of debt payable by the Registrant. The purchase was approved by the West Virginia Office of the Insurance Commissioner in compliance with insurance regulations requiring approval when exceeding 10.00% ownership. The purchaser is also a Related Party of the Registrant, exceeding 10% common stock ownership. This sale also resulted in the issuance of 1,500,000 shares of common stock of the Company.
On March 17, 2017 the Registrant sold 5.00% interest in First Surety Corporation for $500,000. This sale also resulted in the issuance of 500,000 shares of common stock of the Company.
| F-48 |
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
In connection with the audits for the years ended May 31, 2016 and May 31, 2015, there have been no disagreements with independent accountants with respect to any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
Item 9A (T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, an evaluation was carried out by JFG’s management, with the participation of JFG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of JFG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of May 31, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time frames specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
During the evaluation of disclosure controls and procedures as of May 31, 2016, control deficiencies were identified that constitute a material weakness in internal control over financial reporting. Such control deficiencies relate to the use of internally developed non-integrated accounting systems, lack of internal review of account reconciliations, and lack of internal review of general journal entries, elimination entries and the financial statement consolidation process. As a result, JFG’s Chief Executive Officer and Chief Financial Officer concluded that as of May 31, 2016, JFG’s disclosure controls and procedures were ineffective. Changes will be considered as additional financial resources and accounting staff become available.
Notwithstanding the above, JFG believes the consolidated financial statements in this Annual Report on Form 10-K fairly present, in all material respects, JFG’s financial condition as of May 31, 2016 and 2015, and the results of its operations and cash flows for the years ended May 31, 2016 and 2015 in conformity with U.S. generally accepted accounting principles (GAAP).
Management’s Report on Internal Control Over Financial Reporting
Management of JFG is responsible for establishing and maintaining adequate internal control over financial reporting. JFG’s internal control over financial reporting is a process under the supervision of JFG’s Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of JFG’s financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
| 26 |
subject to risk that controls may become inadequate because of change in conditions, or the degree of compliance with the policies and procedures may deteriorate.
JFG management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of May 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework issued in 1992. Based on this assessment, management concluded that the Company’s internal control over financial reporting was not effective as of May 31, 2016. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected.
JFG management identified control deficiencies that, in the aggregate, constitute a material weakness in internal control over financial reporting as of May 31, 2016. Such control deficiencies relate to the use of internally developed non-integrated accounting systems, lack of internal review of account reconciliations, and lack of internal review of general journal entries, elimination entries and the financial statement consolidation process.
Changes are to be considered as additional financial resources and accounting staff become available. Management believes that overall controls over financial reporting are in place, but are not, at this time, sufficient to effectively mitigate this material weakness.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to exemption rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Item 9B. OTHER INFORMATION
None.
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PART III
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE |
The directors and executive officers of the Company, their ages and positions are as follows:
| Name | Age | Position |
| John M. Jacobs | 63 | President and CEO/CFO, Director |
| C. David Thomas | 64 | Director |
| Mario J. Marra | 63 | Director |
| Bradley W. Tuckwiller | 63 | Director |
| Robert J. Kenney | 69 | President, First Surety Corporation |
John M. Jacobs
Mr. Jacobs is a Certified Public Accountant, the founder of Jacobs & Co., a Registered Investment Advisor and is licensed as a property and casualty insurance agent in twelve (12) states. Mr. Jacobs has served as a Director and President of both Jacobs & Co. and FS Investments, Inc. since their inception. Prior to establishing Jacobs & Co., in 1988, Mr. Jacobs was a practicing public accountant for over thirteen years, during which he was a managing partner of his accounting firm and a business and personal advisor to his clients. Mr. Jacobs has served as a director and President of JFG since May 2001.
C. David Thomas
Mr. Thomas is a licensed resident insurance agent in West Virginia and holds non-resident agent licenses in several other states. Mr. Thomas began his surety career in 1976 with United States Fidelity and Guaranty Company and served as the surety underwriter in the Charleston, WV branch office until 1979. At that time he joined George Friedlander & Company, a regional insurance agency based in Charleston, WV, where he presently serves as Vice President and Manager of the Surety Department. Mr. Thomas is a shareholder and Director of George Friedlander & Company. He has served as a Director of FS Investments, Inc. since its inception in December 1997, and has served as a director of JFG since July 2002.
Mario J. Marra
Mr. Marra holds a Master’s in Business Administration from the University of Findlay and is the production supervisor for the Bridgeport WV facility of a multinational aerospace and building industries company where he has been employed since 1986. Mr. Marra joined the JFG board in June 2009.
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Bradley W. Tuckwiller
Mr. Tuckwiller is a licensed resident insurance agent in West Virginia. Mr. Tuckwiller served in various bank management and credit administration capacities for a small regional bank based in West Virginia from 1977 through 2001, concluding as Executive Vice President. Mr. Tuckwiller is the owner of a consulting firm, providing assistance in financial and regulatory compliance matters. He has served as a Director of Jacobs and Company since January 2008, Director of First Surety Corporation since June 2010 and Director of JFG since June 2009.
Robert J. Kenney
Mr. Kenney joined FSI and Jacobs & Co. in 2000, and is President of First Surety Corporation Mr. Kenney is a licensed resident insurance agent in West Virginia and also holds Series 63 and 65 securities licenses. Prior to joining the Company Mr. Kenney had over 20 years’ experience in the oil and gas industry with Columbia Energy Group. With Columbia, Mr. Kenney held various positions in Treasury, Human Resources, and Law Departments and served as both Manager of Risk Management and Special Projects Manager.
There are no family relationships among any of the Company’s directors and executive officers.
During the past five years, there have been no filings of petitions under federal bankruptcy laws or any state insolvency laws, by or against any business of which any director or executive officer of the Company was a general partner or executive officer at the time or within two years before the time of such filing.
During the past five years no director or executive officer of the Company has been convicted in a criminal proceeding or been subject to a pending criminal proceeding.
During the past five years, no director or executive officer of the Company has been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated by a court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
During the past five years, no director or executive officer of the Company has been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.
Code of Ethics
The Company adopted a Code of Business Conduct and Ethics (“Code”) that applies to the Employees, Officers and Directors of Jacobs Financial Group, Inc., Triangle Surety Agency, Inc. and First Surety Corporation on November 13, 2007. Further, the Code contains additional guidelines and standards for the Company’s principal executive officer and senior financial officer. A copy of the Code of Business Conduct and Ethics can be obtained, without charge, upon written request as follows:
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Jacobs Financial Group, Inc.
Attn: Compliance Director
179 Summers Street, Suite 307
Charleston, WV 25301
Jacobs & Co., as an investment advisor, has its own compliance policy that was revised and updated in September 2006 and is specifically designed to assure compliance by Jacobs & Co. and its employees with the Investment Advisors Act of 1940 and the rules promulgated thereunder.
| Item 11. | EXECUTIVE COMPENSATION |
Summary Compensation Table
The following table sets forth the compensation paid by the Company during the fiscal years ended May 31, 2016 and 2015 to the Principal Executive Officer and the most highly compensated executive officers of the Company (the “Named Executive Officers”).
| Names and Principal Position |
Year |
Salary ($) |
Bonus/Commissions ($) |
Stock Awards ($) |
All Other Compensation ($) (1) |
Total ($) |
|
John M. Jacobs, CEO
|
2016 2015
|
$150,000 $150,000
|
$ 62,127 $ - |
$ - $ -
|
$ 33,079 $ 29,494
|
$ 245,206 $ 179,494 |
|
Robert J. Kenney,
|
2016 2015 |
$ 99,000 $ 99,000 |
$ 16,200 $ 16,200
|
$ - $ - |
$ - $ - |
$ 115,200 $ 115,200
|
| (1) | Other compensation includes insurance premiums paid by the Registrant on behalf of the named executive officer under verbal agreement with the Executive Officer. |
Other Executive Compensation Plans
The Company has no plans that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including but not limited to tax-qualified defined benefit plans, supplemental executive retirement plans, tax-qualified defined contribution plans and nonqualified defined contribution plans.
The Company has no contract, agreement, plan or arrangement, whether written or unwritten, that provides for payment(s) to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer, or a change in control of the Company or a change in the named executive officer’s responsibilities following a change in control.
Director Compensation
Directors of JFG are not compensated for board meetings or other duties as board members.
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Non-employee board members of FSC, which include some JFG board members, are compensated at the rate of $150 per meeting.
The following table sets forth compensation received by non-employee directors for the fiscal year ended May 31, 2016.
Name |
Fees Earned or Paid in Cash ($) |
Total ($) | ||||||
| Brad Tuckwiller | $ | 1,050 | $ | 1,050 | ||||
| C. David Thomas | $ | 1,050 | $ | 1,050 | ||||
| Timothy Maddox | $ | 900 | $ | 900 | ||||
| Linda G. Aguilar | $ | 900 | $ | 900 | ||||
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following tables set forth the beneficial ownership of common stock of the Company as of September 30,2016 by (i) each person known by the Company to own more than 5% of the Company’s common stock, (ii) each of the directors, (iii) the Named Executive Officers and (iv) all directors and executive officers as a group. Unless otherwise noted, such persons have sole voting and investment power with respect to such shares.
| Authorized | 490,000,000 | |||
| Amount and Nature of | ||||
| Name and Address of | Beneficial Ownership 1 | Percent of | ||
| Title of Class | Beneficial Owner | Class 2 | ||
| More than 5.00% Beneficial Ownership | ||||
| Common | John M. Jacobs | 37,775,746 | 3 | 9.77% |
| 179 Summers St., Suite 307 | ||||
| Charleston, WV 285301 | ||||
| Common | Ungurean, Charles D. | 51,489,338 | 13.55% | |
| 8400 Dunsinane Drive | ||||
| Dublin, OH 43017 | ||||
| Common | Fay S. Alexander | 55,775,588 | 4 | 14.60% |
| 6318 Timarron Cove Lane | ||||
| Burke, VA 22015-4073 | ||||
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| Common | Charles L. Stout | 67,779,527 | 5 | 17.84% |
| Post Office Box 4609 | ||||
| Bridgeport, WV 26330 | ||||
Directors and Named Executive Officers |
||||
| John M. Jacobs | 37,775,746 | 3 | 9.77% | |
| Common | 300 Summers St. Suite 970 | |||
| Charleston, WV 285301 | ||||
| Robert J. Kenney | 5,150,000 | 6 | 1.36% | |
| Common | 809 Sherwood Drive | |||
| Charleston, WV 25314 | ||||
| Mario J. Marra | 989,795 | * | * | |
| Common | 204 Olive Street | |||
| Bridgeport, WV 26330 | ||||
| C. David Thomas | 917,295 | * | * | |
| Common | P. O., Box 5157 | |||
| Charleston, WV 25361 | ||||
| Bradley W. Tuckwiller | 4,869,152 | 7 | 1.28% | |
| Common | P O Box 1294 | |||
| Lewisburg, WV 24901 | ||||
| Common | All Directors and Executive Officers as a Group | 49,701,988 | 16.18% | |
| * Represents beneficial ownership of less than one percent of the Company’s common stock. | ||||
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| 1) Beneficial ownership is determined in accordance with the rules of the Securities Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock issuable upon the exercise of options or warrants currently exercisable within 60 days of September 30, 2016 are deemed outstanding for computing the percentage ownership of the person holding such options or warrants but are not deemed outstanding for computing the percentage ownership of any other person. |
| 2) Based on 379,408,263 shares of common stock issued and outstanding as of September 30, 2016. |
| 3) Includes 12,233,044 shares of common stock held in the name of FS Limited Partnership (“FSLP”) of which Mr. Jacobs is the sole general partner. Mr. Jacobs has the power to vote and to direct the voting of and the power to dispose and direct the disposition of the shares beneficially owned by FSLP. Includes 785,000 shares of common stock held in the name of JF Limited Partnership (“JFLP”) of which Mr. Jacobs is the sole general partner. Mr. Jacobs has the power to vote and to direct the voting of and the power to dispose and direct the disposition of the shares beneficially owned by JFLP. Includes 5,193,416 shares held in joint tenancy with spouse, Kathleen M. Jacobs. Includes the right to convert Series C Preferred Stock holdings to 6,733,340 shares of common stock exercisable within 60 days of September 30,2016. John M. Jacobs is the CEO and a member of the board of directors for the Registrant. |
| 4) Includes 47,557,786 shares of common stock held in the name of Graphite Investment, LLC (“Graphite”) and 4,841,761 shares held in the name of Southall Management Corporation (“Southall”) of which Fay S. Alexander is President (both entities). Includes the right to convert Series B Preferred Stock holdings of Graphite and Southall to 2,141,341 shares of common stock exercisable within 60 days of September 30,2016. Includes 1,214,700 shares held in joint tenancy with spouse, Dan C. Alexander. |
| 5) Includes 12,500,000 shares of common stock held in joint tenancy with spouse, Marilyn Stout. Includes 55,279,527 common shares held in the name of Applied Mechanics Corporation of which Mr. Stout is President and 100% shareholder. |
| 6) Includes 75,000 shares of common stock held in joint tenancy with spouse, Lee Anne Kenney. Includes 335,000 shares of common stock held in the Individual Retirement Account (“IRA”) of Robert J. Kenney. Includes 510,000 shares of common stock held in the Individual Retirement Account (“IRA”) of spouse, Lee Anne Kenney. |
| 7) Includes 75,000 shares of common stock held in joint tenancy with Lynn D. Tuckwiller. |
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| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
For the past several years the Company’s operating expenses were partially funded by advances from its largest shareholder and chief executive officer, John M. Jacobs. The source of funding for these advances originated with obligations incurred by Mr. Jacobs with third parties (such obligations together with the loans by Mr. Jacobs to the Company, “back-to-back loans”) with interest rates ranging from 6% to 12%.
To assure that repayments of the various borrowings by the Company that were either guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs, Mr. Jacobs entered into an Assumption Agreement with the Company, pursuant to which Mr. Jacobs assumes and agrees to hold the Company harmless from principal of specified indebtedness of the Company as and when necessary to fully offset what might otherwise be deemed an advance of funds arising out of the Company’s financing activities.
During fiscal 2016, advances to the Company from Mr. Jacobs amounted to $1,088,758, and repayments to Mr. Jacobs amounted to $971,207. As of May 31, 2016, the balance due to the Company from Mr. Jacobs was $515,488. The largest aggregate amount outstanding from Mr. Jacobs in fiscal 2016 was $549,143.
During fiscal 2015, advances to the Company from Mr. Jacobs amounted to $1,008,717 and repayments to Mr. Jacobs amounted to $1,652,037. As of May 31, 2015, the balance due to Mr. Jacobs from the Company was $633,039. The largest aggregate amount outstanding to Mr. Jacobs in fiscal 2015 was $666,262.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 6% and 12% respectively for both the 2016 and 2015 fiscal years.
As of June 30, 2017, $22,500 was owed to Mr. Jacobs by the Company.
Director’s Independence
The board of directors is comprised of four members, John M. Jacobs, Bradley W. Tuckwiller, Mario J. Marra and C. David Thomas. Mr. John M. Jacobs, who serves as Chief Executive Officer for the Company and Bradley W Tuckwiller, who is owed fees for consulting services, are not independent within the meaning of The Nasdaq Stock Market, Inc. listing standards.
There were no transactions, relationships or arrangements with Mr. Marra or Mr. Thomas that would affect their independence.
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| Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Our independent registered public accounting firm, EKS&H LLLP, billed $60,000 and $55,000 for their audits of our financial statements for the fiscal years ended May 31, 2016 audit 2015, respectively. The firm did not provide any audit-related, tax or non-audit services for either fiscal 2014 or 2013.
We do not have an audit committee and as a result our board of directors performs the duties of an audit committee. Our board of directors evaluates the scope and cost of the engagement of an auditor before the auditor renders any audit or non-audit services.
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PART IV
| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a)(1) The following financial statements are included in response to Item 8 herein:
| Page | ||
| Report of Independent Registered Public Accounting Firm | F-2 | |
| Financial Statements | ||
| Consolidated Balance Sheets | F-3 | |
| Consolidated Statements of Operations | F-4 | |
| Consolidated Statements of Comprehensive Loss | F-5 | |
| Consolidated Statements of Cash Flows | F-6 | |
| Consolidated Statements of Series A Redeemable Preferred Stock and Stockholders Equity (Deficit) | F-7 | |
| Notes to Consolidated Financial Statements | F-8 | |
(b) The following exhibits are filed as a part of this Annual Report.
Exhibits
| 2.1 | Agreement and Plan of Merger dated as of May 18, 2001 by and among NELX, Inc., FSI Acquisition Corp. and FS Investments, Inc. (1) |
| 2.2 | Agreement and Plan of Merger dated as of May 18, 2001 by and among NELX, Inc., J&C Acquisition Corp. and Jacobs & Company (1) |
| 2.3 | Agreement and Plan of Merger dated as of December 8, 2006 by and among NELX, Inc. and Jacobs Financial Group, Inc. (2) |
| 3.1 | Company’s Articles of Incorporation (3) |
| 3.2 | Company’s By-laws (3) |
| 3.3 | Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (3) |
| 3.4 | Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (3) |
| 4.1 | Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (3) |
| 4.2 | Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (3) |
| 10.1 | Stock Purchase Agreement with National Indemnity Company to purchase Unione Italiana Insurance Company of America dated August 20, 2008 (11) |
| 10.2 | Engagement Agreement between Friedman, Billings, Ramsey & Co., Inc. and Jacobs Financial Group, Inc. dated December 5, 2007 (7) (9) |
| 10.3 | Agreement to acquire by merger Reclamation Surety Holding, Inc. (5) (6) (10) |
| 21.1 | Subsidiaries of the Registrant |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934 |
| 36 |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934 | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 99.1 | Form of Subscription Agreement and Promissory Note (4) | |
| 99.2 | Form of Amended Subscription Agreement and Promissory Note (8) | |
| 99.3 | Form of Subscription Agreement and Promissory Note (Second Round) (8) | |
| 101.INS | XBRL Instance Document (16) | |
| 101.SCH | XBRL Taxonomy Extension Schema Document (16) | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (16) | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (16) | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document (16) | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (16) | |
| (1) | Incorporated by reference to the Company’s Current Report On Form 8-K dated May 29, 2001. | |
| (2) | Incorporated by reference to the Company’s Definitive Proxy Statement dated November 7, 2005. | |
| (3) | Incorporated by reference to the Company’s Current Report on Form 8-K dated December 29, 2005. | |
| (4) | Incorporated by reference to the Company’s Current Report on Form 8-K dated September 10, 2007. | |
| (5) | Incorporated by reference to the Company’s Current Report on Form 8-K dated December 14, 2007. | |
| (6) | Incorporated by reference to the Company’s Current Report on Form 8-K dated February 8, 2008. | |
| (7) | Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended February 29, 2008 | |
| (8) | Incorporated by reference to the Company’s Current Report on Form 8-K dated May 30, 2008 | |
| (9) | Incorporated by reference to the Company’s Current Report on Form 8-K dated April 15, 2008 | |
| (10) | Incorporated by reference to the Company’s Current Report on Form 8-K dated June 24, 2008 | |
| (11) | Incorporated by reference to the Company’s Current Report on Form 8-K dated August 26, 2008 | |
| (12) | Incorporated by reference to the Company’s Current Report on Form 8-K dated November 20, 2008 | |
| (13) | Incorporated by reference to the Company’s Current Report on Form 8-K dated March 23, 2009 | |
| (14) | Incorporated by reference to the Company’s Current Report on Form 8-K dated June 16, 2009 | |
| (15) | Incorporated by reference to the Company’s Current Report on Form 8-K dated July 7, 2009 | |
| (16) | Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. | |
| 37 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Jacobs Financial Group, Inc.
Dated: June 30, 2017 By: /s/ John M. Jacobs
John M. Jacobs
President and CEO
Director
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: June 30, 2017: By: ___/s/ John M. Jacobs_________________________
John M. Jacobs
President and CEO
Director
Dated: June 30, 2017: By: ___/s/ John M. Jacobs________________________
John M. Jacobs
Chief Financial Officer
Dated: June 30, 2017: By: ___/s/ Mario J. Marra_________________________
Mario J. Marra
Director
Dated: June 30, 2017: By: ___/s/ C. David Thomas_________________________
C. David Thomas
Director
Dated: June 30, 2017: By: ___/s/ Bradley W. Tuckwiller_____________________
Bradley W. Tuckwiller
Director
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Exhibit 21.1 – Subsidiaries of the Corporation
| Name | State of Formation |
| Jacobs & Company | West Virginia |
| FS Investments, Inc. | West Virginia |
| Triangle Surety Agency, Inc. | West Virginia |
| First Surety Corporation | West Virginia |
| Crystal Mountain Water, Inc. | Arkansas |
Exhibit 31.1
CERTIFICATION
I, John M. Jacobs, certify that:
1. I have reviewed this Annual Report on Form 10-K of Jacobs Financial Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: June 30, 2017: | |
| By: | /s/ John M. Jacobs |
| John M. Jacobs, Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, John M. Jacobs, certify that:
1. I have reviewed this Annual Report on Form 10-K of Jacobs Financial Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: June 30, 2017: | |
| By: | /s/ John M. Jacobs |
| John M. Jacobs, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Jacobs Financial Group, Inc. (the "Company") on Form 10-K for the year ended May 31, 2016 (the "Report") filed with the Securities and Exchange Commission, I, John M. Jacobs, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Company's Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: June 30, 2017: | |
| By: | /s/ John M. Jacobs |
| John M. Jacobs, Chief Executive Officer |
Exhibit 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Jacobs Financial Group, Inc. (the "Company") on Form 10-K for the year ended May 31, 2016 (the "Report") filed with the Securities and Exchange Commission, I, John M. Jacobs, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Company's Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: June 30, 2017: | |
| By: | /s/ John M. Jacobs |
| John M. Jacobs, Chief Financial Officer |
Document and Entity Information - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
Nov. 30, 2015 |
|
| Document and Entity Information | ||
| Entity Registrant Name | JACOBS FINANCIAL GROUP, INC. | |
| Entity Trading Symbol | JFGI | |
| Document Type | 10-K/A | |
| Document Period End Date | May 31, 2016 | |
| Amendment Flag | true | |
| Entity Central Index Key | 0000857501 | |
| Current Fiscal Year End Date | --05-31 | |
| Entity Common Stock, Shares Outstanding | 379,908,267 | |
| Entity Filer Category | Smaller Reporting Company | |
| Entity Current Reporting Status | Yes | |
| Entity Voluntary Filers | No | |
| Entity Well-known Seasoned Issuer | No | |
| Document Fiscal Year Focus | 2016 | |
| Document Fiscal Period Focus | FY | |
| Entity Public Float | $ 1,859,076 | |
| Amendment Description | Jacobs Financial Group, Inc. (the "Company") is filing this Amendment No.1 to its Form 10-K for the year ended May 31, 2016 filed with the Securities and Exchange Commission on July 3, 2017 for the purpose of providing Exhibit 101 as listed in Item 15 - Exhibits. All other information in this filing speaks as of the original date of the filing |
Consolidated Statement of Series A Redeemable Preferred Stock and Stockholders' Equity (Deficit) - USD ($) |
Series A Mandatorily Redeemable Preferred Stock |
Common Stock Amount |
Additional Paid-In Capital |
Series C Preferred Stock [Member] |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interest |
JFGI Shareholder's |
Total |
|---|---|---|---|---|---|---|---|---|---|
| Beginning Balance at May. 31, 2014 | $ 1,994,140 | $ 35,274 | $ 4,171,296 | $ 12,236,236 | $ (29,144,834) | $ 138,920 | $ (12,563,108) | ||
| Beginning Balance, Shares at May. 31, 2014 | 1,549 | 352,741,649 | 6,805 | ||||||
| Issuance of common stock as additional consideration in financing arrangements | $ 1,083 | (1,711) | (628) | ||||||
| Issuance of common stock as additional consideration in financing arrangements, Shares | 10,832,569 | ||||||||
| Accrued dividends of Series A mandatorily redeemable convertible preferred stock | 80,970 | (80,970) | (80,970) | ||||||
| Accrued dividends of Series C equity preferred stock | 1,072,461 | (1,072,460) | 1 | ||||||
| Accrual of common shares to be issued in connection with financing arrangements | 29,802 | 29,802 | |||||||
| Unrealized gain on available for sale securities | (117,507) | (117,507) | |||||||
| Net (loss) | (1,588,618) | (1,588,618) | |||||||
| Ending Balance at May. 31, 2015 | $ 2,075,110 | $ 36,357 | 4,199,387 | $ 13,308,697 | (31,886,882) | 21,413 | $ (14,321,028) | (14,321,028) | |
| Ending Balance, Shares at May. 31, 2015 | 1,549 | 363,574,218 | 6,805 | ||||||
| Issuance of common stock as additional consideration in financing arrangements | $ 1,634 | 48,538 | 50,172 | 50,172 | |||||
| Issuance of common stock as additional consideration in financing arrangements, Shares | 16,334,049 | ||||||||
| Accrued dividends of Series A mandatorily redeemable convertible preferred stock | 84,491 | (84,491) | (84,491) | (84,491) | |||||
| Accrued dividends of Series C equity preferred stock | 1,164,143 | (1,164,143) | |||||||
| Sale of noncontrolling interest of subsidiary | 367,449 | 632,551 | 367,449 | 1,000,000 | |||||
| Unrealized gain on available for sale securities | (23,718) | (23,718) | (23,718) | ||||||
| Net (loss) | (23,895) | (92,131) | (23,895) | (116,026) | |||||
| Ending Balance at May. 31, 2016 | $ 2,159,602 | $ 37,991 | $ 4,615,374 | $ 14,472,840 | $ (33,159,411) | $ (2,305) | $ 540,420 | $ (14,035,511) | $ (13,495,091) |
| Ending Balance, Shares at May. 31, 2016 | 1,549 | 379,908,267 | 6,805 |
Organization and Business |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Organization And Business | |
| Organization and Business | Note A – Organization and Business
Organization and Nature of Business
Jacobs Financial Group, Inc. (the “Company” or “JFG”), formerly NELX, Inc., was incorporated in Kansas on March 25, 1983. In 2001, the Company acquired all the outstanding stock of two corporations located in Charleston, West Virginia: Jacobs & Company (“Jacobs”) and FS Investments, Inc. (“FSI”). Jacobs is a registered investment advisory firm that derives its revenue from asset-based investment advisory fees. FSI, through its wholly-owned subsidiary Triangle Surety Agency, Inc. (“Triangle”), is engaged in the business of placing surety bonds with insurance companies for clients engaged in regulated industries, such as the extraction of coal, oil and gas. FSI receives commission income from the placement of these bonds and is licensed in five states primarily in the eastern United States. On December 30, 2005, the Company acquired all of the outstanding stock of West Virginia Fire & Casualty Company (“WVFCC”), an insurance company licensed to engage in business in West Virginia, Ohio and Indiana. The acquisition of WVFCC consisted of the purchase of marketable investments and insurance licenses and did not include any existing policies or customer base as the insurance lines of business offered by WVFCC were not insurance lines that the Company intended to pursue. Following the acquisition, the name of WVFCC was changed to First Surety Corporation (“FSC”). FSC receives insurance premium income in connection with the issuance of surety bonds. The Company and its subsidiaries are subject to the business risks inherent in the financial services industry.
Liquidity and Going Concern
These consolidated financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Presently, the Company has insufficient liquidity and capitalization, is in default with respect to certain loan and preferred stock agreements, and has suffered recurring losses from operations. Losses are expected to continue until the Company develops a more substantial book of business. While improvement is anticipated as the Company’s business plan is implemented, other conditions, such as restrictions on the use of FSC’s assets (See Note C), and the Company’s significant deficiency in working capital and stockholders’ equity raise substantial doubt about the Company’s ability to continue as a going concern.
Management intends to improve cash flow through the implementation of its business plan. Additionally, management continues to seek to raise additional funds for operations through private placements of stock, other long-term or permanent financing, or short-term borrowings. However, the Company cannot be certain that it will be able to continue to obtain adequate funding in order to reasonably predict whether it will be able to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of Jacobs Financial Group, Inc. and its majority owned subsidiaries, after the elimination of intercompany transactions.
Non-Controlling Interest
First Surety Corporation, a subsidiary of the Jacobs Financial Group, Inc. has a non-controlling ownership interest. The Company’s board of directors has authorized the sale of up to nine Units (5% per Unit), which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC.
Cash and Short Term Investments
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Included in cash and cash equivalents are restricted amounts held in trust for customers in the form of collateral for the bonding program of FSC.
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates are loss reserves, stock options, valuation of investments, and the valuation of deferred tax assets. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
Revenue Recognition
Fees for investment advisory services are based on an agreed percentage of the value of client assets under management and are accrued monthly based on the market value of client assets.
The Company accounts for its surety bond issuances as short duration contracts. Surety premiums are recorded as receivables when due and are earned pro rata over the term of the policies of generally one year, subject to annual renewal. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. The reserve for unearned premium is determined using the monthly pro rata method. Advance premiums represent renewal premiums paid in advance of the effective renewal date.
Agency commissions for surety bond services are based on a percentage of premiums charged for bonds placed with insurance companies, and are recorded upon issuance or effective renewal date of the bonds. No significant continuing services subsequent to the issuance or renewal of surety bonds are required.
Policy acquisition costs include costs that vary with and are primarily related to the acquisition of new business. Such costs generally include commissions, underwriting expenses, and premium taxes and are deferred and amortized over the period in which the related premiums are earned. The deferred policy acquisition cost assets are reviewed for recoverability based on the profitability of the underlying surety policy. Investment income is not anticipated in the recoverability of deferred policy acquisition costs.
Investments
Debt securities are designated at purchase as held-to-maturity, trading or available for sale. Held-to-maturity debt securities are carried at amortized cost where the Company has the ability and intent to hold these securities until maturity. Premiums and discounts arising from the purchase of debt securities are treated as yield adjustments over the estimated lives or call date, if applicable.
Debt and equity securities that are bought and held principally for sale in the near future are classified as trading securities and are carried at fair value, with changes in fair value being recorded in current operations.
Debt and equity securities that the Company may not have a positive intent to hold until maturity and not classified as trading, are considered to be available for sale and carried at fair value.
Management has determined it may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported in stockholders’ equity as a separate component of accumulated other comprehensive income.
An investment is considered impaired when its fair value is less than its cost or amortized cost, as applicable. When an investment is impaired, a determination is made as to whether the impairment is other than temporary (“OTTI”).
Factors considered in identifying OTTI include: 1) for debt securities, whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the security prior to the anticipated recovery in value; 2) the likelihood of the recoverability of principal and interest for debt securities (i.e., whether there is a credit loss) or cost for equity securities; 3) the length of time and extent to which the fair value has been less than amortized cost for debt securities or carrying value for equity securities; and 4) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.
Short-term investments consist primarily of debt securities having maturities of one year or less at date of purchase, money-market investment funds and other similar investments that have immediate availability.
Interest income with respect to fixed maturity securities is accrued as earned. Dividend income is generally recognized when receivable.
Realized gains and losses are determined by specific identification of the security sold.
Derivatives
The Company uses derivatives in the form of covered call options sold to generate additional income and provide limited downside protection in the event of a market correction.
These transactions expose the Company to potential market risk for which the Company receives a premium up front and the Company realizes the option premium received as income. The market risk relates to the requirement to deliver the underlying security to the purchaser of the call within a definite time at an agreed market price regardless of the then current market price of the security. As a result the Company takes the risk that it may be required to sell the security at the strike price, which could be a price less than the then market price. Should the security decline in market price over the holding period of the call option, the Company can lessen or mitigate the risk of loss with a closing transaction for the covered call and sale of the underlying security.
The Company invests in large capitalized US securities traded on major US exchanges and writes standardized covered calls only against these positions (covered calls), which are openly traded on major US exchanges. The use of such underlying securities and standardized calls lessens the credit risk to the furthest extent possible.
The Company is not exposed to significant cash requirements through the use of covered calls in that it sells a call for a premium and may use these proceeds to enter a closing transaction for the call at a later date.
Allowance for uncollectible premium and other receivables
The majority of the Company’s fee revenue is generated by services provided to companies and individuals throughout the Eastern United States. Management evaluates the need for a reserve for the amount of these receivables that may be uncollectible, based on historical collection activity adjusted for current conditions. Premium and other receivables are charged-off when deemed uncollectible. Based on this evaluation, management believes that most accounts receivable are collectible, and has established an allowance for estimated uncollectible accounts.
Impairment
The Company evaluates long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the assets may not be recoverable. The impairment is measured by discounting estimated future cash flows expected to be generated, and comparing this amount to the carrying value of the asset. Cash flows are calculated utilizing forecasts and projections and estimated lives of the assets being analyzed. Should actual results differ from those forecasted and projected, The Company may be subject to future impairment charges related to these long-lived assets.
Furniture and Equipment
Furniture and equipment is recorded at cost. Maintenance and repairs are charged to operations when incurred. When property and equipment are sold or disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using the straight-line and double-declining balance methods, which approximates estimated economic depreciation.
Reserve for Losses and Loss Expenses
Losses and loss adjustment expenses represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred. Reserves for unpaid losses and loss adjustment expenses are estimated using industry averages, however, will include individual case-basis valuations in the event if claims are received. These estimates and methods of establishing reserves are continually reviewed and updated.
Stock-based Compensation
The fair value of stock options is estimated at the grant date using the Black Scholes Option Pricing Model. This model requires the input of a number of assumptions, including expected volatility and dividend yields, expected stock price, risk-free interest rates, and an expected life of the options. Although the assumptions used reflect management’s best estimate, they involve inherent uncertainties based on market conditions generally outside the control of the Company.
Income Taxes
The Company currently has net operating loss (“NOL”) carry-forwards that can be utilized to offset future income for federal and state tax purposes. These NOLs represent a significant deferred tax asset. However, the Company has recorded a valuation allowance against this deferred tax asset as it has determined that it is more likely than not that it will not be able to fully utilize the NOLs. Should assumptions regarding the utilization of these NOLs change, the Company may reduce some or all of this valuation allowance, which would result in the recording of a deferred income tax benefit.
The Company follows a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the Company.
Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed as of May 31, 2016 or 2015. The Company's tax returns subject to examination by tax authorities include May 31, 2011 through the current period for state and federal tax reporting purposes.
Earnings (Loss) Per Share
Basic earnings (loss) per share of common stock are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share are computed on the basis of the average number of common shares outstanding plus the dilutive effect of convertible debt, stock options and warrants. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive. |
Newly Adopted and Recent Accounting Pronoucments |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Newly Adopted And Recent Accounting Pronoucments | |
| Newly Adopted and Recent Accounting Pronoucments | Note B – Newly Adopted and Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted. Companies have the option of using either a full or modified retrospective approach in applying this standard. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (ASU 2014-15). ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for us for the annual period ending May 31, 2017 and interim and annual periods thereafter. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest”, which require debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new rules were effective for the Company in the first quarter of 2016. In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. The guidance clarifies accounting for debt issuance costs related to line-of-credit arrangements. The standard states that the FASB deems deferring debt issuance costs related to line-of-credit arrangements as an asset and amortizing over the term of the agreement to be appropriate. The adoption of these accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810)”, an update to their existing consolidation model, which changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new rules will be effective for the Company in the first quarter of 2016. The adoption of the new accounting rules will not have a material impact on the Company’s financial condition, results of operations or cash flows.
In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820)”, which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and requires separate disclosure of those investments instead. These disclosures were effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have an impact on the Company’s financial condition, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”, which simplify the accounting for measurement period adjustments by eliminating the requirements to restate prior period financial statements for these adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard, which should be applied prospectively to measurement period adjustments that occur after the effective date, was effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
On October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”, that affects reporting entities that are required to evaluate whether they should consolidate a Variable Interest Entity (VIE) in certain situations involving entities under common control. The amendments in this Update will be effective for the Company in the first quarter of 2017. The adoption of the new accounting rules will not have a material impact on the Company’s financial condition, results of operations or cash flows.
In November 2015, the FASB issued an ASU 2015-17, “Income Taxes (Topic 740)”, an update to simplify income tax accounting. The update requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This update is effective for the Company first quarter 2017 and is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323)”, that eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be made to the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The new standard will be effective for the Company on January 1, 2017. The adoption of the new accounting rule is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new rules are effective for the Company in the first quarter of 2017. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10)”, which updated the accounting guidance related to the recognition and measurement of financial assets and financial liabilities. The updated accounting guidance, among other things, requires that all nonconsolidated equity investments, except those accounted for under the equity method, be measured at fair value and that the changes in fair value be recognized in net income. The updated guidance will be effective for the Company as of January 1, 2018. The updated accounting guidance requires, with certain exceptions, a cumulative effect adjustment to beginning retained earnings when the guidance is adopted. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations and cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The guidance is intended to reduce the diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues. In addition, in November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new rules will be effective for the Company in the first quarter of 2018. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s cash flows.
Management has assessed the potential impact of recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to the Company, or are not anticipated to have a material impact on the consolidated financial statements. |
Investments |
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| Investments | Note C – Investments
The Company held the following investments, by security type, that were classified as available-for-sale and carried at fair value at May 31, 2016:
The Company held the following investments, by security type, that have been classified as available-for-sale and carried at fair value at May 31, 2015:
There are no securities classified as held to maturity at May 31, 2016 or May 31, 2015.
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain of these invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term may significantly affect the amounts reported in the Consolidated Balance Sheets and Statements of Operations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:
Fair values are provided by the Company’s independent investment custodians that utilize third-party quotation services for the valuation of the fixed-income investment securities and money-market funds held. The Company’s investment custodians are large money-center banks. The Company’s equity investment is valued using quoted market prices.
The following section describes the valuation methodologies used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instrument is generally classified.
Fixed Income Securities Securities valued using Level 1 inputs include highly liquid government bonds for which quoted market prices are available. Securities using Level 2 inputs are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs. Most fixed income securities are valued using Level 2 inputs. Level 2 includes corporate bonds, municipal bonds, asset-backed securities and mortgage pass-through securities.
Equity Securities Level 1 includes publicly traded securities valued using quoted market prices.
Short-Term Investments The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and U.S. Treasury bills. Level 2 includes commercial paper, for which all significant inputs are observable.
Assets measured at fair value on a recurring basis are summarized below:
The Company had no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at either May 31, 2016 or at May 31, 2015.
At May 31, 2016, the Company’s insurance subsidiary had securities and short-term investment with a fair value of $1,171,307 on deposit with the State insurance department to satisfy regulatory requirements. In connection with regulatory approval of the Company’s acquisition of its insurance subsidiary, certain restrictions were imposed on the ability of the Company to withdraw funds from FSC without prior approval of the state Insurance Commissioner. Accordingly, investments and cash in the amount of $9,386,503 and $10,100,908 as of May 31, 2016 and 2015, respectively, are restricted to the use of FSC.
At May 31, 2016, the Company’s insurance subsidiary had cash, securities and short term investments held as collateral for their bonding program in the amount of $2,068,252.
Principal repayments on U.S. government agency mortgage-backed securities held by the Company as of December 31, 2016 are estimated as follows:
Estimated repayments are forecast based on varying prepayment speeds for each particular security held assuming that interest rates remain constant. Expected repayments will differ from actual repayments because borrowers of the underlying mortgages have a right to prepay obligations.
An analysis of net investment income follows:
The unrealized appreciation (depreciation) of investments were as follows:
Gains and losses are calculated based on sales proceeds received less the cost of the security sold, which is determined by specific identification for each investment. The gross gains and gross losses realized on available-for-sale securities were as follows:
The following table summarizes the gross unrealized losses and fair value on investment securities aggregated by major investment category and length of time that individual securities have been in a continuous loss position at May 31, 2016 and May 31, 2015.
(a) For bonds-fixed maturities and mortgage-backed securities, represents amortized costs.
As of May 31, 2016, the Company held twenty-seven mortgage-backed securities with gross unrealized losses of $14,790, four of which have been in a continuous loss position for more than 12 months. These securities consist of fixed-rate securities issued by Government National Mortgage Association (GNMA) that are sensitive to movements in market interest rates.
As of May 31, 2016, the Company held fifteen fixed maturity bonds with gross unrealized losses of $58,217, seven of which have been in a continuous loss position for more than 12 months.
As of May 31, 2016, the Company held seventeen equity security investments with gross unrealized losses of $155,300, two of which have been in a continuous loss position for more than 12 months. These securities consist of common stock whose fair value is sensitive to movements in market interest rates. |
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Deferred Policy Acquisition Costs |
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| Deferred Policy Acquisition Costs | Note D-Deferred Policy Acquisition Costs
The following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged to operations.
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Other Assets |
12 Months Ended |
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May 31, 2016 | |
| Other Assets | |
| Other Assets | Note E – Other Assets
Included in other assets as of May 31, 2016 and May 31, 2015 are $14,617 and $14,550 of prepaid expenses and deposits. |
Intangibles |
12 Months Ended |
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May 31, 2016 | |
| Intangibles | |
| Intangibles | Note F – Intangibles
As the result of the acquisition of FSC on December 30, 2005, in exchange for the purchase price of $2,900,000, the Company received cash and investments held by FSC with a fair value of $2,750,000, with the difference of $150,000 being attributed to the property and casualty licenses of FSC in the states of West Virginia, Ohio and Indiana. Such licenses have indefinite lives and are evaluated annually, or more frequently if circumstances indicate that a possible impairment has occurred, for recoverability and possible impairment loss. No impairment has been recorded in fiscal years ended May 31, 2016 and 2015. |
Reserve for Losses and Loss Expense |
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| Reserve for Losses and Loss Expense | Note G - Reserve for Losses and Loss Expense
Reserves for unpaid losses and loss adjustment expenses are estimated based primarily on management’s judgment as the Company has incurred limited losses since its inception and available industry data is also extremely limited. In the event of the Company receiving a claim it will use individual case basis estimates including all estimated future expenses to settle such claims. As of May 31, 2016, the Company’s insurance subsidiary, FSC, is only licensed to write surety in West Virginia and Ohio and has focused its primary efforts towards coal permit reclamation bonds while also providing other miscellaneous surety bonds, most of which are partially collateralized by investment accounts that are managed by Jacobs & Company. Reclamation of land that has been disturbed by mining operations is highly regulated by federal and state agencies and the required bonds are generally long-term in nature with mining operations and reclamation work conducted in unison as the property is being mined.
Additionally, no two principals or properties are alike due to varied company structures and unique geography and geology of each site. In underwriting such bonds, management develops, through consultation with professionals experienced in the specific field of work, estimates of costs to reclaim the properties subject of the permit(s) in accordance with those mining permit(s), in addition to other underwriting and financial risk considerations. FSC requires the principal to provide cash, or other acceptable collateral such as irrevocable letters of credit, in amounts determined through the underwriting process to reclaim the disturbed land and thus mitigate the exposure to significant loss.
FSC maintains reinsurance agreement with various syndicates at Lloyd's of London. The reinsurance agreement is an excess of loss contract that protects FSC against losses up to certain limits over stipulated amounts. Such cash is invested in investment collateral accounts managed by Jacobs utilizing investment strategies consistent with the state code governing investments of an insurance company.
Inspections of mining activity and reclamation work are performed on a regular basis with initial cost estimates being updated periodically. Should the principal default in the obligation to reclaim the property in accordance with the mining permit, FSC would then use the funds held in the collateral account to reclaim the property or would be required to forfeit the face amount of the bond to the agency to which the bond is issued.
Losses can occur if the costs of reclamation exceed estimates obtained at the time the bond was underwritten or upon subsequent re-evaluations, if sufficient collateral is not obtained and increased if necessary, or if collateral held has experienced a significant deterioration in value. FSC has experienced two claims for loss through May 31, 2016 (one fiscal 2016, detailed below) and thus provisions for losses and loss adjustment expense have been based on management’s experience adjusted for other factors unique to the Company’s approach, and in consultation with actuaries experienced in the surety field. In August 2015, the Company paid a claim on a called bond in the amount of $550,000, of which $75,000 was paid using collateral of the principal. The remaining $475,000 has been established as a salvage reserve to be repaid with the assignment of proceeds from sales of stock and an assignment of a promissory note as additional collateral with total assigned values in excess of the salvage reserve.
The Company incurred loss adjustment expenses of $26,590 ($25,000 in Fiscal 2014) related to costs of engaging experts, attorney fees, and consultants for potential claims. These costs were charged against established case reserves and bulk reserves.
As a result of an examination by the West Virginia Insurance Commissioner, a reserve strengthening in the form of an increase to the Loss Reserve was recorded in Fiscal 2015 and 2016 in the amounts of approximately $800,000 and $20,402.
At May 31, 2016 and May 31, 2015, the reserve for losses and loss expenses consisted of:
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| Notes Payable | Note H – Notes Payable
At May 31, 2016 and 2015, the Company had the following unsecured notes payable to individuals:
During the year ended May 31, 2015, the Company borrowed $75,000 from a board member. Accrued related party interest of $9,452 is payable to this individual at May 31, 2016.
During the year ended May 31, 2016, an individual who holds secured notes payables from the Company, became a greater than 10% owner of outstanding common stock of the Company. During the year ended May 31, 2016, the Company borrowed additional money from this individual and entities controlled by this individual. Amounts owed to this individual (and the individual’s companies and relatives) at May 31, 2016 consisted of $868,900 in demand notes, $1,387,573 in notes payable secured by FSC stock, and $14,621 in accrued interest.
All notes payables, with the exception of the bridge-financing arrangement and those secured by FSC stock are on demand terms and therefore current. The terms of the bridge-financing arrangement (which was paid off in 2016) are detailed in the following paragraphs.
In accordance with the terms of the first round bridge-financing of $2.5 million on March 10, 2008, the holders of such notes were paid accrued interest-to date and issued 5.00% of the Company's common shares. During 2009, holders of the second round of bridge-financing notes of $1.0 million received 2.00% of the Company's common shares. Upon retirement of the notes subsequent to consummation of a qualified equity offering, the Company was to issue to the holders of the bridge financing notes additional Company common stock that when added to the stock initially issued to the holders of the notes, would equal the note holders’ pro rata share of the applicable percentage of the outstanding common stock of the Company as follows: If the qualified financing consists of $50 million or more, the holders of such notes will receive 28% of the common stock of the Company that would otherwise be retained by the holders of the Company's common shares immediately prior to the financing; if the qualified financing is for an amount less than $50 million, the percentage will be reduced on a sliding scale to a fraction of 28% of the amount retained by the holders of the Company's common shares (where the numerator is the amount of financing and the denominator is $50 million). This feature was analyzed and determined to be an embedded derivative, but the value was considered to be immaterial, and therefore was not recorded.
Beginning September 10, 2008, because a qualified financing had not been completed, the Company became required under the terms of the bridge financing to issue 2.80% of the Company's outstanding common shares and shall issue 2.80% of the Company's outstanding common shares upon each six-month anniversary date thereof until retirement of the notes. This feature was analyzed and determined to be an embedded derivative, but the value was considered to be immaterial and therefore was not recorded for the remaining shares to be issued. Pursuant to the terms of the Promissory Notes, the first two of 20 equal quarterly installments of principal and interest payable thereunder were to have been paid on December 10, 2008 and March 10, 2009 (the “Initial Amortization Payments”). As the result of upheavals and dislocations in the capital markets, the Company was unable to either refinance the indebtedness evidenced by the Promissory Notes or make the Initial Amortization Payments to the Holders when due; and an Event of Default (as defined in the Promissory Notes) occurred under the Promissory Notes as a result of the Company’s failure to pay the Initial Amortization Payments within 14 days after same became due and payable.
On June 5, 2009 the Company entered into an agreement with the bridge lenders to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default. The Original forbearance was amended October 13, 2009. As consideration for the forbearance, the Company issued 5,171,993 shares of Common stock, and pledged the stock of an inactive subsidiary of the Company, Crystal Mountain Water (CMW), as security for repayment of the loans.
In anticipation of a proposed financing and as a condition thereof, the Company and each of the bridge lenders entered into a loan modification agreement dated February 25, 2012 which provided for modification of the Promissory Notes, including an extension of the term of the promissory notes, and subscription agreements in exchange for a partial cash payment to each bridge lender. On August 10, 2012, the Company entered into an agreement with the bridge lenders, pursuant to which the bridge lenders formally agreed to forbear from exercising their rights and remedies arising from the accumulated acknowledged events of default with respect to the bridge loans until such date. As consideration for this forbearance, the Company entered into an Amended and Restated General Hypothecation and Pledge Agreement dated August 9, 2012 (the “August 2012 Pledge”), but effective September 23, 2011, granting to the bridge lenders as security for the repayment of the loans a lien and security interest in all of the Company’s shares of capital stock of First Surety Corporation. Under the August 2012 Pledge, the bridge lenders acknowledged that the effectiveness of certain of the rights and remedies provided by such agreement would be subject to prior approval by the Office of the Commissioner of Insurance for the State of West Virginia.
On July 9, 2014 the Company completed a $4,500,000 financing. In effect, FSI, a subsidiary of the Company, borrowed the funds at 8.00% interest with principal repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase from certain bridge lenders, after waiving interest of approximately $1.6 million, i.e. 50.7%, ($1.775 million face amount) of the outstanding senior $3.5 million financing dating from 2008, together with the associated collateral, (ii) to pay in full delinquent tax liabilities owed to the Internal Revenue Service and State of West Virginia, (iii) to pay an outstanding judgment, and (iv) to pay certain other current liabilities. FSI therefore became a member of the Bridge Loan and notified the Collateral Agent for the group of its purchase and majority holding. The transaction restored majority control of FSC to the Company.
On August 5, 2015 the Company completed a $1,600,000 transaction which resulted in its acquisition of the remaining 49.3% ($1.725 million face amount) senior promissory notes of the $3.5 million financing dating from 2008, after waiving interest of approximately $1.8 million. Upon closing of the acquisition, the collateral securing the senior promissory notes, 1,000 shares (100%) of FSC and 1,000 shares (100%) of CMW, was released to the Company. This extinguishment of debt resulted in a gain from forgiven principal and interest in the amounts of $125,000 and $1,795,000, respectively for a total gain of $1,920,000.
The transaction was funded through sale in a private offering of investment units (Units) that consisted of 5.00% of the outstanding shares of FSC and 500,000 common shares of the Company. $1,600,000 was raised through a combination of cash, partial assignments of loans back to the Company that were debt of the Company and loans that are convertible into purchase of Units. The Registrant’s Board of Directors has authorized the sale of up to nine Units, which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC.
Scheduled maturities are as follows:
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Other Liabilities |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Other Liabilities | |
| Other Liabilities | Note I - Other Liabilities
As of May 31, 2016, the Company had accrued and withheld approximately $31,000 in Federal payroll taxes and approximately $31,000 in estimated penalties and interest, which are reflected in the financial statements as other liabilities.
As of May 31, 2016, the Company had accrued and withheld approximately $44,000 in West Virginia payroll withholdings and approximately $7,000 in interest and penalties, which are reflected in the accompanying financial statements as other liabilities.
As of May 31, 2016 and May 31, 2015 the Company held approximately $2,068,192 and $2,352,427 respectively in its cash and investment accounts that was for the benefit of clients as collateral for their surety bonding program. |
Preferred Stock |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Preferred Stock | |
| Preferred Stock | Note J - Preferred Stock
Redeemable Preferred Stock
On December 30, 2005, through a private placement, the Company issued 350 shares of 4% Non-Voting Series A Preferred Stock (Series A Preferred Stock), along with 1,050,000 warrants for common shares of Company stock as additional consideration, for a cash investment in the amount of $350,000, in connection with the Company's acquisition of FSC. Holders of Series A Preferred Stock are entitled to participate in FSC's partially collateralized bonding programs, subject to continuing satisfaction of underwriting criteria, based upon the bonding capacity of FSC attributable to capital reserves of FSC established with the subscription proceeds (i.e., bonding capacity equal to ten times subscription proceeds) and for so long as the subscriber holds the Series A shares. Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the board of directors, cumulative preferential cash dividends at a rate of four percent of the $1,000 liquidation preference per annum (equivalent to a fixed annual rate of $40 per share). The Series A Preferred Stock ranks senior to the Company's common stock and pari passu with the Company's Series B Preferred and Series C Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The holder may redeem the Series A Preferred Stock on or after the seventh anniversary of the Issue Date, if the holder provides a written statement to the Company that it will no longer require surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, if no such surety bonds are then outstanding, the Company, at the option of the holder, will redeem all or any portion of the Series A Preferred Stock of such holder at a price per share equal to the Series A Preferred Stock Issue Price plus all accrued and unpaid dividends with respect to the shares of the Series A Preferred Stock of such holder to be redeemed. The conditional redemption shall not be available to any holder of Series A Preferred Stock for so long as surety bonds of the Company's insurance subsidiary issued on a partially collateralized basis remain outstanding for the benefit of such holder, and upon redemption, such holder shall no longer be eligible to participate in the partially collateralized bonding programs of the insurance subsidiary. The Company is authorized to issue up to 1,000,000 shares of the Series A Preferred Stock. As of May 31, 2016, the Company has issued 2,675 shares of Series A Preferred Stock in exchange for cash investments in the amount of $2,675,000, of which no shares were issued in fiscal 2016 or 2015.
The Company’s outstanding Series A Preferred stock matures on the seventh anniversary of the issuance date and thereafter holders of the Series A Stock are eligible to request that the Company redeem their Series A Shares. As of May 31, 2016, the Company has received requests for redemption of 1,026 shares of Series A Preferred. The aggregate amount to which the holders requesting redemption are entitled as of June 30, 2016, is $1,535,688.
Under the terms of the Series A Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series A Stock are sufficient to redeem the total number of shares of Series A Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series A Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series A Stock to be redeemed shall be increased by 2% of the Series A Face Amount, with the amount of such increase (i.e., 2% of the Series A Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series A Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series A Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series A Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series A Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series A Stock elected to be redeemed shall have been paid in full, such share of Series A Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
The Company’s Board of Directors determined based on the criteria established under the terms of the Preferred Stocks that there were insufficient funds available for the redemption of Preferred Stocks.
On December 30, 2005, through a private placement, the Company issued 3,980 shares of 8% Non-Voting Series B Convertible Preferred Stock (Series B Preferred Stock), along with 19,900,000 warrants for common shares of Company stock as additional consideration, for a cash investment in the amount of $2,985,000; and issued 4,891 shares of Series B Preferred Stock, along with 24,452,996 warrants for common shares of Company stock as additional consideration, for a conversion of $3,667,949 of indebtedness of the Company, in connection with the Company's acquisition of FSC. Holders of the Series B Preferred Stock are entitled to receive, when and as declared by the board of directors, cumulative preferential cash dividends at a rate of eight percent of the $1,000 liquidation preference per annum (equivalent to a fixed annual rate of $80 per share). The Series B Preferred Stock ranks senior to the Company's common stock and pari passu with the Company's Series A Preferred and Series C Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. Each share of the Series B Preferred Stock is convertible at the option of the holder, at any time after the original issue date, into 1,000 fully paid and non-assessable shares of the Company's common stock at a conversion price of $1.00 per common share. The Company may redeem the Series B Preferred Stock at any time after the first anniversary of the Original Issue Date at a price per share equal to the Series B Preferred Stock Face Amount plus all accrued and unpaid dividends with respect to the shares of the Series B Preferred Stock of such holder to be redeemed. To the extent that the Series B Preferred Stock has not been redeemed by the Company, the holder may redeem the Series B Preferred Stock on or after the fifth anniversary of the Original Issue Date at a price per share equal to the Series B Preferred Stock Face Amount plus all accrued and unpaid dividends with respect to the shares of the Series B Preferred Stock of such holder to be redeemed. The Company is authorized to issue up to 10,000 shares of the Series B Preferred Stock. The Company has not issued any additional shares of Series B Preferred Stock during fiscal 2016.
The Company’s outstanding Series B Preferred stock matured on December 30, 2010, meaning that the holders of the Series B Stock that had not requested exchange to the Company’s Series C Preferred stock became entitled to request that the Company redeem their Series B Shares. As part of the exchange to Series C Preferred Stock in September 2009, the shares that did not exchange were treated as a liability on the balance sheet. As of May 31, 2016, of the 2,817 shares of Series B Preferred that remained outstanding, the Company has received requests for redemption of 2,219 shares of Series B Preferred. The aggregate amount to which the holders requesting redemption are entitled as of June 30, 2016, is $5,099,573.
Under the terms of the Series B Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series B Stock are sufficient to redeem the total number of shares of Series B Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series B Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series B Stock to be redeemed shall be increased by 2% of the Series B Face Amount, with the amount of such increase (i.e., 2% of the Series B Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series B Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series B Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series B Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series B Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series B Stock elected to be redeemed shall have been paid in full, such share of Series B Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
The Company’s Board of Directors determined based on the criteria established under the terms of the Series B Preferred Stock that there were insufficient funds available for the redemption of Series B Stock.
The Company experienced a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $108,386 in fiscal 2016 as compared with a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $1,669,587 in fiscal 2015.
Equity Preferred Stock
As a means of alleviating obligations associated with the Company's Series B Preferred Stock, which by its terms matured at the end of 2010, management proposed a recapitalization to assist in stabilizing the financial position of the Company. The Company’s Certificate of Incorporation provides for two classes of capital stock, known as common stock, $0.0001 par value per share (the “Common Stock”), and preferred stock, $0.0001 par value per share (the “Preferred Stock”). The Company’s Board is authorized by the Certificate of Incorporation to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in such series and to fix the designations, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The Board deemed it advisable to designate a Series C Preferred Stock and fixed and determined the preferences, rights, qualifications, limitations and restrictions relating to the Series C Preferred Stock as follows:
1. Designation. The shares of such series of Preferred Stock are designated “Series C Preferred Stock” (referred to herein as the “Series C Stock”). The date on which the first share of Series C Stock is issued shall hereinafter be referred to as the “Original Issue Date”.
2. Authorized Number. The number of shares constituting the Series C Stock is 10,000.
3. Ranking. The Series C Stock ranks, (a) as to dividends and upon Liquidation senior and prior to the Common Stock and all other equity securities to which the Series C ranks prior, with respect to dividends and upon Liquidation (collectively, “Junior Securities”), (b) pari passu with the Corporation’s Series A Preferred Stock, par value $0.0001 per share (the “Series A Stock”), the Corporation’s Series B Stock, and any other series of Preferred Stock subsequently established by the Board with equal ranking (any such other series of Preferred Stock, together with the Series C Stock, the Series B Stock and Series A Stock are collectively referred to as the “Equal Ranking Preferred”) and (c) junior to any other series of Preferred Stock subsequently established by the Board with senior ranking.
4. Dividends.
(a) Dividend Accrual and Payment. The holders of the Series C Stock shall be entitled to receive, in preference to the holders of Junior Securities, dividends (“Dividends”) on each outstanding share of Series C Stock at the rate of 8% per annum of the sum of (i) the Series C Face Amount plus (ii) an amount equal to any accrued, but unpaid, dividends on such Series C Stock, including for this purpose the exchanged Series B Amount outstanding with respect to such Series C Stock. For purposes hereof, the “Series B Amount” means an amount equal to the dividend that would have accrued on such Series C Stock held by such holder from and after the Series B Original Issue Date applicable to such share of Series C Stock, through the Original Issue Date as if such Series C Stock had been issued on such Series B Original Issue Date, less all amounts thereof distributed by the Corporation with respect to such Series C Stock. Dividends shall be payable quarterly in arrears on each January 1, April 1, July 1 and October 1 following the Original Issue Date, or, if any such date is a Saturday, Sunday or legal holiday, then on the next day which is not a Saturday, Sunday or legal holiday (each a “Dividend Payment Date”), as declared by the Board and, if not paid on the Dividend Payment Date, shall accrue. Amounts available for payment of Dividends (including for this purpose the Series B Amount) shall be allocated and paid with respect to the shares of Series C Preferred and any other Equal Ranking Preferred, first, among the shares of Equal Ranking Preferred pro rata in accordance with the amounts of dividends accruing with respect to such shares at the current Dividend Payment Date, and, then, any additional amounts available for distribution in accordance with the accrued, but unpaid, dividends (and the Series B Amount then outstanding) at each prior Dividend Payment Date, in reverse chronological order, with respect to all shares of the Equal Ranking Preferred then outstanding in accordance with amounts accrued, but unpaid. For purposes hereof, the term “Series B Original Issue Date” shall mean, with respect to any share of Series C Stock issued by the Corporation in exchange for a share of Series B Stock, the date on which the Corporation originally issued such share of Series B Stock.
The Recapitalization consisted of the exchange of Series B Shares for a combination of Series C Shares and Common Stock. For each Series B Share, the participating holder received (i) one Series C Share and (ii) 2,000 shares of JFG Common Stock (for no additional consideration).
For the year ended May 31, 2010, 6,805 shares of Series B Stock were surrendered and exchanged for 6,805 shares of Series C Stock. This exchange amounted to $6,269,051 of carrying value of Series B stock being exchanged for Series C and Common Stock. 13,609,872 shares of Common Stock were issued to the Series C Stock holders at the rate of 2,000 Common shares for each exchanged Series B Stock, with the related cost associated with the Common issuance offsetting the Series C carrying value by $265,120. The shares were valued at approximately $.01948 per share based on the average quoted closing price of the Company's stock for the 20-day period proceeding the date of the transaction. Series C stock may be redeemed by the Company but does not have a fixed maturity date and, thus, is classified as permanent equity. For the year ending May 31, 2016, 2,817 shares of Series B Stock had not been exchanged.
The accrual of dividends on the equity preferred stock resulted in a charge to common stockholders’ equity and a credit to the equity of equity preferred stock of $1,164,143 in fiscal 2016 as compared with a charge to common stockholders’ equity of $1,072,461 in fiscal 2015.
Dividend Preference and Accretion
The Series A Shares are entitled to receive cumulative dividends at the compounding rate of 4.00% per annum.
The Series B Shares have an 8.0% per annum compounding dividend preference, are convertible into Common Shares of JFG at the option of the holders at a conversion price of $1.00 per Share (as adjusted for dilution) and, to the extent not converted, must be redeemed by the Corporation at any time after December 31, 2010 at the option of the holder. Any such redemption is subject to legal constraints, such as the availability of capital or surplus out of which to pay the redemption, and to a determination by the Board of Directors that the redemption will not impair the operations of First Surety Corporation.
The Series C Shares issued in the Recapitalization have the same 8.0% per annum compounding dividend preference and carry over from the Series B Shares the same accrued but unpaid dividends. While dividends had never been declared on the Series B shares, they had been accrued, increasing the dividend preference and the redemption price and liquidity preference of such shares and increasing the liability represented thereby based upon the Series B Shares fixed maturity date. The accrued (but undeclared) dividends associated with the Series C exchange amounted to $2,295,624 and are included in the total amount exchanged for Series C Shares. Unlike the Series B Shares with their fixed maturity date, the Series C Shares are permanent equity, with accruing dividends only increasing the preference amount that must be satisfied before junior securities may participate in dividends or on liquidation. Accordingly, the effect of the accrual of dividends with respect to the Series C Shares on the Company’s balance sheet is to increase the aggregate claim of the Series C Shares on the equity of the corporation and to increase the deficit in common equity, while having no effect on the net equity of the corporation as a whole. The entitlement of the Series C Shares to a priority in relation to junior securities with respect to dividends and on liquidation does not create an obligation to the Company and therefore no liability is recorded until the dividends are declared by the Board of the Company. The Series C Shares are pari passu with the Corporation’s Series A Preferred Stock and Series B Shares (to the extent any remain outstanding following the Recapitalization) and no dividends or other distributions will be paid upon Common Shares or any other class of Shares that is junior in priority to the Series C Preferred while dividends are in arrears. In addition, the Series C Shares are convertible into Common Shares of JFG at the option of the holders at a conversion price of $0.10 per Share. The Series C Shares may be redeemed by the Corporation, at its option, when it is in a financial position to do so.
Holders of over 70% of the outstanding Series B Preferred Shares elected to participate in the recapitalization. The shares of Series B Preferred Shareholders that chose not to convert are listed in the Liabilities section of the Balance Sheet, and therefore the accretion and dividends associated with the Series B stock after November 30, 2009 are deductions from net income. Dividends on Series B mandatorily redeemable preferred stock deducted from net income amounted to $483,596 for the year ended May 31, 2016. The remaining Series B shares not converted were accreted from carrying value to the face amount for the 5 year period from the date of issuance. Series C stock has no accretion. There were no shares of Series B Stock surrendered or exchanged in the year ended May 31, 2016.
During the year ended May 31, 2012, two holders of Series A stock released all of their outstanding bonds held with FSC. These shares of Series A Preferred Shareholders are listed in the liability section of the Balance Sheet as of May 31, 2016, in the amount of $1,670,945, which consists of the fully accreted $1,126,000 face value of stock and $544,945 in dividends payable. The dividends associated with these shares of Series A stock for the year ended May 31, 2016, is a deduction from net income in the amount of $65,374. There was no current accretion on these shares of Series A stock.
As of May 31, 2016 the Company has chosen to defer payment of dividends on Series A Preferred Stock with such accrued and unpaid dividends amounting to $1,155,545 through May 31, 2016. These dividends are included in the amounts reported on the face of the balance sheet for each classification of Series A stock.
As of May 31, 2016 the Company has chosen to defer payment of dividends on Series B and Series C Preferred Stock with such accrued and unpaid dividends amounting to $3,516,674 and $8,441,909 through May 31, 2016, respectively. These dividend are included in the amounts reported on the face of the balance sheet for each respective classification if stock.
Accounting Treatment
U.S. GAAP requires that an entity classify as liabilities certain financial instruments with characteristics of both liabilities and equity. The Company's Series A and B Preferred stock each have mandatory redemption features that subject the Company to the analysis of equity versus liability. Both Series A and B have features that embody a conditional obligation to redeem the instrument upon events not certain to occur and accordingly, are not classified as liabilities until such events are certain to occur. With respect to the Series A Preferred Stock, such condition is contingent upon the holder having no further need for surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, having no such surety bonds then outstanding. With respect to the Series B Preferred Stock, if the stock provides an option to the holder to convert to common shares at a rate equivalent to fair value, then the financial instruments are not mandatorily redeemable during the period in which the holder can convert the shares into common shares. Accordingly, the Company has determined that only the Series A preferred stocks held by principals with outstanding surety bonds should not be classified as liabilities. However, in accordance with Securities and Exchange Commission (SEC) Issued Topic No. D- 98, SEC Staff Announcement, "Classification and Measurement of Redeemable Securities", a company that issues preferred shares that are conditionally redeemable is required to account for the conditionally redeemable preferred shares in accordance with Accounting Series Release 268, which states that the shares are to be reflected on the Company's balance sheet between total liabilities and stockholders' equity as temporary equity. |
Stock Warrants |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Stock Warrants | |
| Stock Warrants | Note K - Stock Warrants
On December 30, 2005, the Company issued warrants to purchase 45,402,996 shares of common stock in connection with the Series A and B Preferred Stock private placements. The exercise price of the warrants is $.001 per share. The warrants were valued using the Black-Scholes pricing model. The warrants issued in connection with the Series A Preferred Stock were valued at $.08 per share or $83,043. The warrants issued in connection with the Series B Preferred Stock were valued at $.01 per share or $449,972.
386,667 warrants issued in connection with Series B Preferred Stock expired unexercised on the fifth anniversary at December 31, 2010; 600,000 warrants issued in connection with Series A Preferred Stock expired unexercised on the seventh anniversary at December 31, 2012.
As of May 31, 2015, there were no warrants outstanding. |
Stock-Based Compensation |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Stock-Based Compensation | |
| Stock-Based Compensation | Note L-Stock-Based Compensation
On October 12, 2005, the board of directors adopted its 2005 Stock Incentive Plan (the "Plan") to allow the Company to make awards of stock options as part of the Company's compensation to key employees, non-employee directors, contractors and consultants. The Plan was approved by the stockholders on December 8, 2005. The aggregate number of shares of Common Stock issuable under all awards under the Plan is 35,000,000. No awards may be granted under the Plan after December 8, 2015.
On December 28, 2006, the compensation committee of the board of directors awarded 2,100,000 of incentive stock options to acquire common shares at an exercise price of $.04 per share, of which 450,000 shares vested immediately and the remaining 1,650,000 options vesting over the next three years ending in December 2009. As of May 31, 2010, the awarded options had been reduced to 1,800,000 due to changes in employment status, all of which expired in December 2011.
On June 30, 2009 the compensation committee of the board of directors awarded 10,000,000 of incentive stock options to acquire common shares at an exercise price of $.04 per share, of which 4,700,000 shares vested immediately and the remaining 5,300,000 options vesting over the next three years ending in June 2011. As of May 31, 2015, the awarded options had been reduced to 9,800,000 due to changes in employment status, all of which expired in June 2014.
The Plan’s terms defined that it would terminate upon the earlier of (1) the adoption of a resolution by the Company terminating the Plan; or (2) ten years from the date on which the Plan is initially approved by the stockholders of the Company, therefore the Plan terminated on October 12, 2015.
There were no options exercised in fiscal 2016 or 2015. There is no unrecognized compensation expense related to non-vested awards at May 31, 2016 or May 31, 2015 as all awards are fully vested. |
Income Taxes |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Income Taxes | |
| Income Taxes | Note M – Income Taxes
Deferred tax assets and liabilities are recorded for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Such differences include the income recognition of a portion of the unearned premium reserve, loss reserve deductibility, accruals not currently deductible relating to stock option expense and certain accrued expenses that are not paid within specified time frames by the Internal Revenue Service, and the deductibility of deferred policy acquisition costs paid. As of May 31, 2016, the Company had estimated operating loss carry forwards of approximately $16.3 million. These carry forwards began expiring in 2015 and, as a result of the ownership change resulting from the 2001 acquisitions of FSI and Jacobs, the utilization of approximately $6.4 million of the operating loss carry forwards are substantially limited.
The Company has fully reserved the $5.5 million tax benefit of the operating loss carry forward, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit cannot be determined. |
Stockholders' Equity |
12 Months Ended |
|---|---|
May 31, 2016 | |
| Stockholders Equity | |
| Stockholders' Equity | Note N – Stockholders’ Equity
In fiscal 2016, the Company issued 1,878,000 shares of the Company's common stock as additional consideration in connection with new and continued borrowings totaling $1,878,000. The shares were valued at approximately $.002887 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $5,422.
In fiscal 2016, the Company issued 11,956,049 shares of the Company’s common stock in connection with the additional 2% stock dividend associated with Series A and B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares were valued at approximately $.003208 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $38,352.
In fiscal 2016, the Company issued 2,500,000 shares of the Company's common stock as additional consideration for the purchase and loans convertible into the purchase of 25% of FSC subsidiary stock. The shares were valued at approximately $.002566 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $6,415.
In fiscal 2015, the Company issued 495,856 shares of the Company's common stock as additional consideration in connection with new and continued borrowings totaling $495,856. The shares were valued at approximately $.005258 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $2,607.
In fiscal 2015, the Company issued 5,298,804 shares of the Company’s common stock in connection with the additional 2% stock dividend associated with Series A and B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares were valued at approximately $.004795 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $25,406.
In fiscal 2015, the Company issued 10,221,845 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.005525 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $56,476. Of these shares, 5,183,936 were issued to a subsidiary as the successor owner of 50.7% of the bridge financing arrangement. These shares were valued at approximately .005525 per share based on the average quoted closing price of the Company’s stock for the 20-day period preceding the date of the transaction and totaled $28,641.
In fiscal 2015, the Company issued 5,183,936 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.005525 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $(28,641). |
Statutory Financial Data (Unaudited) |
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| Statutory Financial Data (Unaudited) | Note O-Statutory Financial Data (Unaudited)
The Company’s insurance subsidiary files calendar year financial statements prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities. The principal differences between statutory financial statements and financial statements prepared in accordance with generally accepted accounting principles are that statutory financial statements do not reflect deferred policy acquisition costs and certain assets are non-admitted.
Statutory capital and surplus as of May 31, 2016 and 2015 and net income for the Company’s insurance subsidiary for the calendar year ended December 31, 2015 and 2014 and five-month periods ended May 31, 2016 and 2015 are as follows:
Statutory surplus exceeds the West Virginia state law minimum capital requirements of $2.0 million.
Under the West Virginia insurance code, ordinary dividends to stockholders are allowed to be paid only from that part of the insurance subsidiary’s (FSC’s) available surplus funds which constitutes realized net profits from the business and whereby all such dividends or distributions made within the preceding twelve months do not exceed the lesser of 10% of FSC’s surplus as regards to policyholders as of December 31st of the preceding year-end or net income from operations from the previous two calendar years, not including capital gains. Any payment of extraordinary dividends requires prior approval from the WV state insurance commissioner.
On March 26, 2012 the Commissioner of the State of West Virginia (WVOIC) terminated in its entirety the Amended Consent Order of June 7, 2007 and terminated the restrictive conditions of the Consent Order issued December 23, 2005 which approved acquisition of FSC by the Company. Among other consequences, removal of these restrictions allowed dividends to be declared by and paid from FSC to the Company. Dividends in the amounts of $173,000 were declared and paid for the twelve month period ending May 31, 2015. No dividends were declared or paid for the twelve month period ending May 31, 2016.
The dividends for 2015 were deemed by the WVOIC to be extraordinary, causing the insurance subsidiary (FSC) to be fined $5,000 due to not obtaining consent prior to payment. |
Commitments and Contingencies |
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| Commitments and Contingencies | Note P – Commitments and Contingencies
Lease Commitments
The Company leases certain office equipment with combined monthly payments of approximately $545 that have varying remaining terms of less than five years. The Company leases office, parking and storage space under month-to-month lease arrangements that approximate $6,897 each month.
The Company’s inactive subsidiary, Crystal Mountain Spring Water, holds an undeveloped leasehold interest in a mineral water spring located near Hot Springs, Arkansas. Under the leasehold arrangement, the Company makes minimum lease payments of $180 per month. The Company has options to extend the leasehold arrangement through October 2026 and also has a right to cancel the lease at any time upon sixty (60) days written notice.
Rental expense for these lease commitments totaled approximately $45,086 and $55,301 during fiscal years 2016 and 2015.
Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2016 are:
During 2013, the Company and one of its surety principals entered into a contractual arrangement whereby the Company would hold collateral for use in paying future claims and expenses and upon the Company’s determination that its liability had been fully extinguished, the company would return the amount of the deposits less any paid claims or expenses. While the Company holds the collateral, the Company will pay 1.35% annual simple interest to the principal. The Company receives any appreciation and earnings in excess of the contractual deposit, less payments, and interest paid to the principal. This deposit and the earning or expenses associated with the deposit are included in the calculation of the Company’s investment income. |
Financial Instruments |
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| Financial Instruments | Note Q – Financial Instruments
Fair Value The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value:
Investment Securities Fair values for investment securities (U.S. Government, government agencies, government agency mortgage-backed securities, state and municipal securities, and equity securities) held for investment purposes (available-for-sale) are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Other Financial Instruments The carrying amount of cash, short-term investments, receivables, prepaid expenses, short-term and demand notes payable, accounts payable, accrued expenses and other liabilities approximate fair value because of the immediate or relatively short-term maturity of these financial instruments. Fair value of term notes payable, including notes payable under the bridge-financing arrangement, were deemed to approximate their carrying value based on the Company’s incremental borrowing rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.
The carrying values and fair values of the Company’s financial instruments at May 31, 2016 and 2015 are as follows:
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| Other Risks and Concentrations | Note R – Other Risks and Concentrations
Concentration of Credit Risk
As of May 31, 2016 the Company’s investment securities of approximately $8,900,000 are comprised solely of mortgage-backed securities, fixed maturity municipal bonds, equity investments, and money-market mutual funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities. Such instruments are generally considered to be of the highest credit quality investment available.
The Company transacts the majority of its business with three financial institutions, one for commercial banking services and the others for brokerage and custodial services. Periodically, the amount on deposit in financial institutions providing commercial banking services exceeds federally insured limits. Management believes these financial institutions are financially sound. With respect to the financial institutions providing brokerage and custodial services, amounts on deposit are invested in money market funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities.
Management believes that substantially all receivables are collectible, and therefore has not established an allowance for estimated uncollectible accounts.
Concentration in Products, Markets and Customers
The Company’s insurance subsidiary currently writes only the surety line of business, is licensed to write surety only in West Virginia and Ohio and has focused its primary efforts towards coal permit bonds. Such business, including investment advisory fees from managed collateral accounts, accounted for approximately 66% and 54% of the Company’s fiscal 2016 and 2015 revenues, respectively. Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute 36% and 39% of the Company’s fiscal 2016 and 2015 revenues, respectively, as follows:
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Segment Reporting |
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| Segment Reporting | Note S – Segment Reporting
The Company has two reportable segments, investment advisory services and surety insurance products and services. The following table presents revenue and other financial information by industry segment.
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Related Party Transactions |
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| Related Party Transactions | |
| Related Party Transactions | Note T – Related Party Transactions
Borrowing and other transactions of Largest Shareholder and CEO
For the past several years the Company’s operating expenses were partially funded by advances from its largest shareholder and chief executive officer, John M. Jacobs. The source of funding for these advances originated with obligations incurred by Mr. Jacobs with third parties (such obligations together with the loans by Mr. Jacobs to the Company, “back-to-back loans”) with interest rates ranging from 6% to 12%. This amount is unsecured and payable on demand.
To assure that repayments of the various borrowings by the Company that were either guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs, because Mr. Jacobs entered into an Assumption Agreement with the Company. Pursuant to the assumption agreement Mr. Jacobs assumes, and agrees to hold the Company harmless from, principal of specified indebtedness of the Company and to fully offset when necessary what might otherwise be deemed an advance of funds arising out of the Company’s financing activities.
During fiscal 2016, advances to the Company from Mr. Jacobs amounted to $1,088,758, and repayments to Mr. Jacobs amounted to $971,207. As of May 31, 2016, the balance due from Mr. Jacobs was $515,488. The largest aggregate amount outstanding from Mr. Jacobs in fiscal 2016 was $549,143.
During fiscal 2015, advances to the Company from Mr. Jacobs amounted to $1,008,717, and repayments to Mr. Jacobs amounted to $1,652,037. As of May 31, 2015, the balance due from Mr. Jacobs was $633,039. The largest aggregate amount outstanding from Mr. Jacobs in fiscal 2015 was $666,262.
As of June 30, 2017, $22,500 was owed to Mr. Jacobs by the Company.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 6% and 12% respectively for both the 2016 and 2015 fiscal years.
Other related parties
During the years ended May 31, 2016 and May 31, 2015, a company owned by a board member provided consulting services. This company provided services totaling $62,100 and $62,100 in 2016 and 2015. Amounts owed to this company at year end are treated as related party payables in the amounts $124,723 and $169,375 at May 31, 2016 and 2015 respectively.
During the year ended May 31, 2015, the Company borrowed money from an individual that is a board member. Total amounts owed to this individual at May 31, 2016 consisted of $75,000 in demand notes and $9,452 in accrued interest.
During the year ended May 31, 2016, an individual who holds secured notes payables from the Company, became a greater than 10% owner of outstanding common stock of the Company. During the year ended May 31, 2016, the Company borrowed additional money from this individual and entities controlled by this individual. Amounts owed to this individual (and the individual’s companies and relatives) at May 31, 2016 consisted of $868,900 in demand notes, $1,387,573 in notes payable secured by FSC stock, and $14,621 in accrued interest. This individual also arranged to purchase a 15.00% interest in First Surety Corporation for $1,500,000 through a combination of cash and a Promissory Note for $1,250,000 secured by assignment of debt payable by the Company.
As of May 31, 2016, the purchase was not yet approved by the West Virginia Office of the Insurance Commissioner in compliance with insurance regulations requiring approval when exceeding 10.00% ownership, and the sale was deferred until subsequent to year end. This sale also resulted in the issuance of 1,500,000 shares of common stock of the Company. As of May 31, 2016, the amounts receivable from this individual amounted to $1,121,294. |
Reinsurance |
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| Reinsurance | Note U – Reinsurance
The Company limits the maximum net loss that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers. Ceded reinsurance is treated as the risk and liability of the assuming companies. The Company cedes insurance to other companies and these reinsurance contracts do not relieve the Company from its obligations to policyholders.
Effective April 1, 2009, FSC entered into a reinsurance agreement with various syndicates at Lloyd’s of London (“Reinsurer”) for its coal reclamation surety bonding programs. The agreement has been renewed annually with the Reinsurer, with the most recent renewal effective April 1, 2017. The reinsurance agreement is an excess of loss contract which protects the Company against losses up to certain limits over stipulated amounts and can be terminated by either party by written notice of at least 90 days prior to any July 1. The contract calls for a premium rate of 35% subject to a minimum premium of $490,000. Deposits to the reinsurers are made quarterly in arrears in equal amounts of $140,000. At May 31, 2016 and May 31, 2015, the Company had prepaid reinsurance premiums of $232,647 and $207,413 and ceded reinsurance deposited of $5,689 at May 31, 2015.
There were no ceded Loss and Loss Adjustment Expenses for the years ended May 31, 2016 or 2015.
The effects of reinsurance on premium written and earned for fiscal 2016 and 2015 are as follows;
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Events Subsequent to May 31, 2016 |
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| Events Subsequent To May 31 2016 | |
| Events Subsequent to May 31, 2016 | Note V – Events Subsequent to May 31, 2016
Subsequent to May 31, 2016, the Company obtained various borrowings from individuals and businesses through June 30, 2017 totaling $361,538 at rates varying from 10% to 14%, which mature at various dates subsequent to this filing, and made repayments on notes in the amount of $242,649. These borrowings, and the renewal of other borrowings, included no issuances of shares of its common stock as additional consideration. Additionally, the Company obtained borrowings of $323,463 from its principal shareholder and chief executive officer under a pre-approved financing arrangement bearing interest at the rate of 12% and made repayments totaling $351,332. After taking into account the net accrued payroll owed, reimbursement of company expenses, and the personal assumption of Company debt that is to be offset against these borrowings, the balance owed to the principal shareholder from the Company is $22,500 at June 30, 2017.
The Company elected to continue to defer payment of quarterly dividends on its Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock with such accumulated accrued and unpaid dividends amounting to $1,350,832, $4,175,512 and $10,027,907 as of June 30, 2017.
On September 25, 2016 the Registrant sold 15.00% interest in First Surety Corporation for $1,500,000 through a combination of cash and a Promissory Note secured by assignment of debt payable by the Registrant. The purchase was approved by the West Virginia Office of the Insurance Commissioner in compliance with insurance regulations requiring approval when exceeding 10.00% ownership. The purchaser is also a Related Party of the Registrant, exceeding 10% common stock ownership. This sale also resulted in the issuance of 1,500,000 shares of common stock of the Company.
On March 17, 2017 the Registrant sold 5.00% interest in First Surety Corporation for $500,000. This sale also resulted in the issuance of 500,000 shares of common stock of the Company. |
Accounting Policies (Policies) |
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| Accounting Policies Policies | |
| Organization and Nature of Business | Organization and Nature of Business
Jacobs Financial Group, Inc. (the “Company” or “JFG”), formerly NELX, Inc., was incorporated in Kansas on March 25, 1983. In 2001, the Company acquired all the outstanding stock of two corporations located in Charleston, West Virginia: Jacobs & Company (“Jacobs”) and FS Investments, Inc. (“FSI”). Jacobs is a registered investment advisory firm that derives its revenue from asset-based investment advisory fees. FSI, through its wholly-owned subsidiary Triangle Surety Agency, Inc. (“Triangle”), is engaged in the business of placing surety bonds with insurance companies for clients engaged in regulated industries, such as the extraction of coal, oil and gas. FSI receives commission income from the placement of these bonds and is licensed in five states primarily in the eastern United States. On December 30, 2005, the Company acquired all of the outstanding stock of West Virginia Fire & Casualty Company (“WVFCC”), an insurance company licensed to engage in business in West Virginia, Ohio and Indiana. The acquisition of WVFCC consisted of the purchase of marketable investments and insurance licenses and did not include any existing policies or customer base as the insurance lines of business offered by WVFCC were not insurance lines that the Company intended to pursue. Following the acquisition, the name of WVFCC was changed to First Surety Corporation (“FSC”). FSC receives insurance premium income in connection with the issuance of surety bonds. The Company and its subsidiaries are subject to the business risks inherent in the financial services industry. |
| Liquidity and Going Concern | Liquidity and Going Concern
These consolidated financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Presently, the Company has insufficient liquidity and capitalization, is in default with respect to certain loan and preferred stock agreements, and has suffered recurring losses from operations. Losses are expected to continue until the Company develops a more substantial book of business. While improvement is anticipated as the Company’s business plan is implemented, other conditions, such as restrictions on the use of FSC’s assets (See Note C), and the Company’s significant deficiency in working capital and stockholders’ equity raise substantial doubt about the Company’s ability to continue as a going concern.
Management intends to improve cash flow through the implementation of its business plan. Additionally, management continues to seek to raise additional funds for operations through private placements of stock, other long-term or permanent financing, or short-term borrowings. However, the Company cannot be certain that it will be able to continue to obtain adequate funding in order to reasonably predict whether it will be able to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. |
| Principles of Consolidation | Principles of Consolidation
The consolidated financial statements include the accounts of Jacobs Financial Group, Inc. and its majority owned subsidiaries, after the elimination of intercompany transactions. |
| Non-Controlling Interest | Non-Controlling Interest
First Surety Corporation, a subsidiary of the Jacobs Financial Group, Inc. has a non-controlling ownership interest. The Company’s board of directors has authorized the sale of up to nine Units (5% per Unit), which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC. |
| Cash and Short Term Investments | Cash and Short Term Investments
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Included in cash and cash equivalents are restricted amounts held in trust for customers in the form of collateral for the bonding program of FSC. |
| Use of Estimates | Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates are loss reserves, stock options, valuation of investments, and the valuation of deferred tax assets. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. |
| Revenue Recognition | Revenue Recognition
Fees for investment advisory services are based on an agreed percentage of the value of client assets under management and are accrued monthly based on the market value of client assets.
The Company accounts for its surety bond issuances as short duration contracts. Surety premiums are recorded as receivables when due and are earned pro rata over the term of the policies of generally one year, subject to annual renewal. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. The reserve for unearned premium is determined using the monthly pro rata method. Advance premiums represent renewal premiums paid in advance of the effective renewal date.
Agency commissions for surety bond services are based on a percentage of premiums charged for bonds placed with insurance companies, and are recorded upon issuance or effective renewal date of the bonds. No significant continuing services subsequent to the issuance or renewal of surety bonds are required.
Policy acquisition costs include costs that vary with and are primarily related to the acquisition of new business. Such costs generally include commissions, underwriting expenses, and premium taxes and are deferred and amortized over the period in which the related premiums are earned. The deferred policy acquisition cost assets are reviewed for recoverability based on the profitability of the underlying surety policy. Investment income is not anticipated in the recoverability of deferred policy acquisition costs. |
| Investments | Investments
Debt securities are designated at purchase as held-to-maturity, trading or available for sale. Held-to-maturity debt securities are carried at amortized cost where the Company has the ability and intent to hold these securities until maturity. Premiums and discounts arising from the purchase of debt securities are treated as yield adjustments over the estimated lives or call date, if applicable.
Debt and equity securities that are bought and held principally for sale in the near future are classified as trading securities and are carried at fair value, with changes in fair value being recorded in current operations.
Debt and equity securities that the Company may not have a positive intent to hold until maturity and not classified as trading, are considered to be available for sale and carried at fair value.
Management has determined it may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported in stockholders’ equity as a separate component of accumulated other comprehensive income.
An investment is considered impaired when its fair value is less than its cost or amortized cost, as applicable. When an investment is impaired, a determination is made as to whether the impairment is other than temporary (“OTTI”).
Factors considered in identifying OTTI include: 1) for debt securities, whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the security prior to the anticipated recovery in value; 2) the likelihood of the recoverability of principal and interest for debt securities (i.e., whether there is a credit loss) or cost for equity securities; 3) the length of time and extent to which the fair value has been less than amortized cost for debt securities or carrying value for equity securities; and 4) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.
Short-term investments consist primarily of debt securities having maturities of one year or less at date of purchase, money-market investment funds and other similar investments that have immediate availability.
Interest income with respect to fixed maturity securities is accrued as earned. Dividend income is generally recognized when receivable.
Realized gains and losses are determined by specific identification of the security sold. |
| Derivatives | Derivatives
The Company uses derivatives in the form of covered call options sold to generate additional income and provide limited downside protection in the event of a market correction.
These transactions expose the Company to potential market risk for which the Company receives a premium up front and the Company realizes the option premium received as income. The market risk relates to the requirement to deliver the underlying security to the purchaser of the call within a definite time at an agreed market price regardless of the then current market price of the security. As a result the Company takes the risk that it may be required to sell the security at the strike price, which could be a price less than the then market price. Should the security decline in market price over the holding period of the call option, the Company can lessen or mitigate the risk of loss with a closing transaction for the covered call and sale of the underlying security.
The Company invests in large capitalized US securities traded on major US exchanges and writes standardized covered calls only against these positions (covered calls), which are openly traded on major US exchanges. The use of such underlying securities and standardized calls lessens the credit risk to the furthest extent possible.
The Company is not exposed to significant cash requirements through the use of covered calls in that it sells a call for a premium and may use these proceeds to enter a closing transaction for the call at a later date. |
| Allowance for uncollectible premium and other receivables | Allowance for uncollectible premium and other receivables
The majority of the Company’s fee revenue is generated by services provided to companies and individuals throughout the Eastern United States. Management evaluates the need for a reserve for the amount of these receivables that may be uncollectible, based on historical collection activity adjusted for current conditions. Premium and other receivables are charged-off when deemed uncollectible. Based on this evaluation, management believes that most accounts receivable are collectible, and has established an allowance for estimated uncollectible accounts. |
| Impairment | Impairment
The Company evaluates long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the assets may not be recoverable. The impairment is measured by discounting estimated future cash flows expected to be generated, and comparing this amount to the carrying value of the asset. Cash flows are calculated utilizing forecasts and projections and estimated lives of the assets being analyzed. Should actual results differ from those forecasted and projected, The Company may be subject to future impairment charges related to these long-lived assets. |
| Furniture and Equipment | Furniture and Equipment
Furniture and equipment is recorded at cost. Maintenance and repairs are charged to operations when incurred. When property and equipment are sold or disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using the straight-line and double-declining balance methods, which approximates estimated economic depreciation. |
| Reserve for Losses and Loss Expenses | Reserve for Losses and Loss Expenses
Losses and loss adjustment expenses represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred. Reserves for unpaid losses and loss adjustment expenses are estimated using industry averages, however, will include individual case-basis valuations in the event if claims are received. These estimates and methods of establishing reserves are continually reviewed and updated. |
| Stock-based Compensation | Stock-based Compensation
The fair value of stock options is estimated at the grant date using the Black Scholes Option Pricing Model. This model requires the input of a number of assumptions, including expected volatility and dividend yields, expected stock price, risk-free interest rates, and an expected life of the options. Although the assumptions used reflect management’s best estimate, they involve inherent uncertainties based on market conditions generally outside the control of the Company. |
| Income Taxes | Income Taxes
The Company currently has net operating loss (“NOL”) carry-forwards that can be utilized to offset future income for federal and state tax purposes. These NOLs represent a significant deferred tax asset. However, the Company has recorded a valuation allowance against this deferred tax asset as it has determined that it is more likely than not that it will not be able to fully utilize the NOLs. Should assumptions regarding the utilization of these NOLs change, the Company may reduce some or all of this valuation allowance, which would result in the recording of a deferred income tax benefit.
The Company follows a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the Company.
Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed as of May 31, 2016 or 2015. The Company's tax returns subject to examination by tax authorities include May 31, 2011 through the current period for state and federal tax reporting purposes. |
| Earnings (Loss) Per Share | Earnings (Loss) Per Share
Basic earnings (loss) per share of common stock are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share are computed on the basis of the average number of common shares outstanding plus the dilutive effect of convertible debt, stock options and warrants. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive. |
Investments and Fair values (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Investments And Fair Values Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments by security type classified as available-for-sale and carried at fair value | The Company held the following investments, by security type, that were classified as available-for-sale and carried at fair value at May 31, 2016:
The Company held the following investments, by security type, that have been classified as available-for-sale and carried at fair value at May 31, 2015:
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| Assets measured at fair value on a recurring basis | Assets measured at fair value on a recurring basis are summarized below:
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| Principal repayments and mortgage-backed securities | Principal repayments on U.S. government agency mortgage-backed securities held by the Company as of December 31, 2016 are estimated as follows:
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| Schedule of analysis of net investment income Table Text Block | An analysis of net investment income follows:
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| Schedule of changes in unrealized appreciation of investments Table Text Block | The unrealized appreciation (depreciation) of investments were as follows:
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| Realized Gain (Loss) on Investments | Gains and losses are calculated based on sales proceeds received less the cost of the security sold, which is determined by specific identification for each investment. The gross gains and gross losses realized on available-for-sale securities were as follows:
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| Unrealized Gain (Loss) on Investments | The following table summarizes the gross unrealized losses and fair value on investment securities aggregated by major investment category and length of time that individual securities have been in a continuous loss position at May 31, 2016 and May 31, 2015.
(a) For bonds-fixed maturities and mortgage-backed securities, represents amortized costs. |
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Deferred Policy Acquisition Costs (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred Policy Acquisition Costs Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule Deferred Policy Acquisition Costs | The following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged to operations.
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Reserve for Losses and Loss Expense (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reserve For Losses And Loss Expense Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Reserve for Losses and Loss Expense | At May 31, 2016 and May 31, 2015, the reserve for losses and loss expenses consisted of:
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Notes Payable (Tables) |
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May 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Payable Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of unsecured notes payable Table Text Block | At May 31, 2016 and 2015, the Company had the following unsecured notes payable to individuals:
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| Scheduled maturities Table Text Block | Scheduled maturities are as follows:
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Statutory Financial Data (Tables) |
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May 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Statutory surplus and insurance subsidiary for five months Period | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Statutory surplus and insurance subsidiary | Statutory capital and surplus as of May 31, 2016 and 2015 and net income for the Company’s insurance subsidiary for the calendar year ended December 31, 2015 and 2014 and five-month periods ended May 31, 2016 and 2015 are as follows:
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Commitments and Contingencies (Tables) |
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May 31, 2016 | |||||||||||||||||||||
| Commitments And Contingencies Tables | |||||||||||||||||||||
| Schedule of Minimum future lease payments under non-cancelable operating leases | Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2016 are:
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Financial Instruments (Tables) |
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| Financial Instruments Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair values of the Company's financial instruments | The carrying values and fair values of the Company’s financial instruments at May 31, 2016 and 2015 are as follows:
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Other Risks and Concentrations (Tables) |
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| Other Risks And Concentrations Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Concentration in Products, Markets and Customers | Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute 36% and 39% of the Company’s fiscal 2016 and 2015 revenues, respectively, as follows:
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Segment Reporting (Tables) |
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| Segment Reporting Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue And Other Financial Information by Industry Segment | The following table presents revenue and other financial information by industry segment.
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Reinsurance (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reinsurance Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reinsurance On Premium Written And Earned | The effects of reinsurance on premium written and earned for fiscal 2016 and 2015 are as follows;
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Investments (Details 3) - U.S. Government Agency Mortgage-Backed Securities [Member] |
May 31, 2016
USD ($)
|
|---|---|
| Amortized Cost | |
| Due in one year or less | $ 725,940 |
| Due after one year through five years | 1,076,573 |
| Due after five years through ten years | 958,413 |
| Due after ten years | 396,608 |
| Net | 3,157,534 |
| Fair Market Value | |
| Due in one year or less | 730,887 |
| Due after one year through five years | 1,117,073 |
| Due after five years through ten years | 964,405 |
| Due after ten years | 398,068 |
| Net | $ 3,210,433 |
Investments (Details 4) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Total investment income | $ (178,464) | $ 313,295 |
| Investment expense | 36,918 | 38,349 |
| Net investment income | (215,382) | 274,946 |
| Bonds - Fixed maturities | ||
| Total investment income | 154,300 | 102,187 |
| Mortgage Backed Securities | ||
| Total investment income | 113,654 | 132,726 |
| Equity Securities | ||
| Total investment income | 38,910 | 36,703 |
| Short-term Investments | ||
| Total investment income | 151 | 60 |
| Other Investments | ||
| Total investment income | $ (485,479) | $ 41,619 |
Investments (Details 5) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Increase (decrease) in unrealized appreciation | $ (23,718) | $ (117,506) |
| Bonds - Fixed maturities | ||
| Increase (decrease) in unrealized appreciation | 46,790 | (60,892) |
| Mortgage Backed Securities | ||
| Increase (decrease) in unrealized appreciation | (32,089) | (7,164) |
| Equity Securities | ||
| Increase (decrease) in unrealized appreciation | $ (38,419) | $ (49,450) |
Investments (Details 6) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Gross Proceeds | $ 1,849,612 | $ 2,844,662 |
| Gross Realized Gains | 128,718 | 202,976 |
| Gross Realized Losses | (207,778) | (66,594) |
| Bonds - Fixed maturities | ||
| Gross Proceeds | 858,870 | 1,453,069 |
| Gross Realized Gains | 6,346 | 35,239 |
| Gross Realized Losses | (9,253) | (2,352) |
| Mortgage Backed Securities | ||
| Gross Proceeds | ||
| Gross Realized Gains | ||
| Gross Realized Losses | ||
| Equity Securities | ||
| Gross Proceeds | 391,758 | 1,221,704 |
| Gross Realized Gains | 8,965 | 138,421 |
| Gross Realized Losses | (36,135) | (2,572) |
| Derivatives | ||
| Gross Proceeds | 598,984 | 169,889 |
| Gross Realized Gains | 113,407 | 29,316 |
| Gross Realized Losses | $ (162,390) | $ (61,670) |
Investments (Details Narrative) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Investments Details Narrative | ||
| Short term investments | $ 1,171,307 | |
| Investments and cash | $ 9,386,503 | $ 10,100,908 |
Deferred Policy Acquisition Costs (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Deferred Policy Acquisition Costs Details | ||
| Balance at beginning of year | $ 154,977 | $ 152,608 |
| Acquisition costs deferred | 301,032 | 301,126 |
| Amortization charged to operations | (284,127) | (298,756) |
| Total | $ 171,883 | $ 154,977 |
Other Assets (Details) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Other Assets Details | ||
| Other assets | $ 14,617 | $ 14,550 |
Intangibles (Details Narrative) - First Surety Corporation [Member] |
Dec. 30, 2007
USD ($)
|
|---|---|
| Purchase Price of Company | $ 2,900,000 |
| Cash and Investment | $ 2,750,000 |
Reserve for Losses and Loss Expense (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Reserve For Losses And Loss Expense Details | ||
| Balance at beginning of year | $ 2,254,035 | $ 1,286,018 |
| Incurred policy losses - current year | 179,335 | 968,017 |
| Incurred policy losses - prior year | 20,402 | |
| Paid policy losses - current year | (1,590) | |
| Paid policy losses - prior year | (25,000) | |
| Balance at ending of year | $ 1,931,779 | $ 2,254,035 |
Notes Payable (Details) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Total Notes payable | $ 5,045,969 | $ 7,706,619 |
| Secured Debt [Member] | ||
| Unsecured demand notes payable | 4,334,997 | 4,185,684 |
| Secured Debt [Member] | ||
| Unsecured demand notes payable | 235,000 | 250,000 |
| Unsecured Debt [Member] | ||
| Unsecured demand notes payable | 113,050 | 22,000 |
| Unsecured Debt [Member] | ||
| Unsecured demand notes payable | 1,506,859 | 1,533,422 |
| Unsecured Debt [Member] | ||
| Unsecured demand notes payable | 15,000 | 15,000 |
| Unsecured Debt [Member] | ||
| Unsecured demand notes payable | 1,658 | 6,254 |
| Secured Debt [Member] | ||
| Unsecured demand notes payable | 36,628 | 44,260 |
| Secured Debt [Member] | ||
| Unsecured demand notes payable | 885,000 | |
| Unsecured Debt [Member] | ||
| Unsecured demand notes payable | 249,250 | |
| Unsecured Debt [Member] | ||
| Unsecured demand notes payable | $ 1,725,000 |
Notes Payable (Details) (Parenthetical) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Secured Debt [Member] | ||
| Interest Rates | 8.00% | 8.00% |
| Secured Debt [Member] | ||
| Interest Rates | 0.00% | 0.00% |
| Unsecured Debt [Member] | ||
| Interest Rates | 0.00% | 0.00% |
| Unsecured Debt [Member] | ||
| Interest Rates | 10.00% | 10.00% |
| Unsecured Debt [Member] | ||
| Interest Rates | 12.00% | 12.00% |
| Unsecured Debt [Member] | ||
| Interest Rates | 14.00% | 14.00% |
| Secured Debt [Member] | ||
| Interest Rates | 10.00% | 10.00% |
| Secured Debt [Member] | ||
| Interest Rates | 2.00% | 2.00% |
| Unsecured Debt [Member] | ||
| Interest Rates | 10.00% | 10.00% |
Notes Payable (Details Narrative) - USD ($) |
Jun. 05, 2009 |
Mar. 10, 2008 |
|---|---|---|
| Notes Payable and Advances from Related Party Bridge Financing: | ||
| First round bridge finance | $ 2,500,000 | |
| Percentage of common shares towards interest | 5.00% | |
| Second round bridge finance | $ 1,000,000 | |
| Percentage of common shares towards interest. | 2.00% | |
| Qualfied financing | $ 50,000,000 | |
| Percentage of common shares to notes finance | 28.00% | |
| Amount of less than qualfied financing | $ 50,000,000 | |
| Denominator of financing | $ 50,000,000 | |
| Common shares issued for the forbearance | 5,171,993 | |
| Quarterly repayment of loan | $ 224,515 | |
| Increase in quartely repayment of loan | 67,185 | |
| Total of increase in quartely repayment of loan | $ 291,700 | |
| Increased interest rate | 17.00% |
Notes Payable (Details 2) |
May 31, 2016
USD ($)
|
|---|---|
| Notes Payable Details 2 | |
| Fiscal year 2016-2017 (including demand notes) | $ 2,696,038 |
| Fiscal year 2017-2018 (including demand notes) | 280,256 |
| Fiscal year 2018-2019 (including demand notes) | 366,392 |
| Fiscal year 2019-2020 (including demand notes) | 500,181 |
| Fiscal year 2020-2021 (including demand notes) | 541,696 |
| Thereafter | 2,477,391 |
| Total | $ 6,861,954 |
Other Liabilities (Details Narrative) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Amount held for collateral for its surety bonding program | $ 2,068,192 | $ 2,352,427 |
| Federal Tax [Member] | ||
| Accured Payroll Taxes | 31,000 | |
| Estimated Penalties and interest | 31,000 | |
| West Virginia Tax [Member] | ||
| Accured Payroll Taxes | 44,000 | |
| Estimated Penalties and interest | $ 7,000 |
Preferred Stock (Details Narrative) - USD ($) |
May 31, 2016 |
May 31, 2015 |
Dec. 30, 2005 |
|---|---|---|---|
| Redeemable Preferred Stock As Follows: | |||
| Issue of 4% non voting Series A Preferred Stock shares through private placement | 350 | ||
| Issue of warrants for common shares of Company stock for series A | 1,050,000 | ||
| Series A Preferred Stock value | $ 350,000 | ||
| Series A Preferred Stock liquidation preference per annum (fixed annual rate of $40 per share) | $ 1,000 | ||
| Series A preferred stock shares authorized. | 1,000,000 | ||
| Series A preferred stock shares issued. | 2,675 | ||
| Cash investments in exchange of shares issued Series A Preferred stock | $ 2,675,000 | ||
| Series A Preferred holders requesting redemption are entitled | $ 1,535,688 | ||
| Issue of 8% non voting Series B Preferred Stock shares through private placement | 3,980 | ||
| Issue of warrants for common shares of Company stock for series B | 19,900,000 | ||
| Series B Preferred Stock value | $ 2,985,000 | ||
| Shares of Series B Preferred Stock Issued | 4,891 | ||
| Series B Preferred Stock liquidation preference per annum (fixed annual rate of $80 per share) | $ 1,000 | ||
| Each share of Series B convertible into number of shares at any time after original issue date | 1,000 | ||
| Conversion Price per common share | $ 1.00 | ||
| Series B preferred stock shares authorized | 10,000 | ||
| Redemption of Series B preferred Stock | 2,817 | ||
| Amount of Series B preferred stock redemption | $ 5,099,573 | ||
| Accrued dividends on mandatorily redeemable preferred stock | 108,386 | 1,669,587 |
Preferred Stock (Details Narrative 2) - USD ($) |
12 Months Ended | |||
|---|---|---|---|---|
May 31, 2016 |
May 31, 2015 |
Dec. 31, 2010 |
May 31, 2010 |
|
| Preferred Stock Details Narrative 2 | ||||
| Common Stock Par Value Per Share. | $ 0.0001 | |||
| Preferred stock Par Value Per Share | $ 0.0001 | |||
| Series C Preferred Stock shares authorized | 10,000 | |||
| Series A Preferred Stock, par value per share | $ 0.0001 | |||
| Dividend Rate on Series C stock per annum | 8.00% | |||
| Under Recapitalization, for each Series B Share holder receives: | ||||
| Series C Preferred Stock shares | 1 | |||
| JFG common stock (for no additional consideration) | 2,000 | |||
| Series B Preferred stock shares 6805 surrendered for exchange of Series C Stock | 6,805 | |||
| Exchange value of Series B into Series C Stock | $ 6,269,051 | |||
| Number of common stock shares issued to Series C Stockholders | 13,609,872 | |||
| Common issuance offsetting the Series C carrying value | $ 265,120 | |||
| Per Share value based on average quoted closing price | $ 0.01948 | |||
| Charge to common stockholders credit to the equity of equity preferred stock | $ 1,164,143 | $ 1,072,461 | ||
Preferred Stock (Details Narrative 3) |
May 31, 2016
USD ($)
$ / shares
shares
|
|---|---|
| Preferred Stock Dividend Preference and Accretion: | |
| Series A Share cumulative dividend rate | 4.00% |
| Series B compounding dividend preference | 8.00% |
| Conversion price of Series B into common stock | $ / shares | $ 1.00 |
| Series C compounding dividend preference | 8.00% |
| Accrued (undeclared) Series C dividends | $ 2,295,624 |
| Conversion price of Series C into common stock per share | $ / shares | $ 0.10 |
| Holders of over Percentage of Series B shares elected to participate in Recaptilization | 70.00% |
| Dividends on Series B mandatorily redeemable preferred stock deducted from net income amount | shares | 411,583 |
| Series A Preferred Shareholders are listed as a liability of amount | $ 1,542,922 |
| Face value of Series A Preferred Stock | $ 1,126,000 |
| Dividends payable of Series A Preferred Stock | shares | 416,922 |
| Deduction from net income of dividends of Series A Preferred Stock | $ 60,204 |
| Defer payment of dividends on the Series A Preferred stock | 862,060 |
| Defer payment of dividends on the Series B Preferred stock | 2,587,568 |
| Defer payment of dividends on the Series C Preferred stock | $ 6,205,305 |
Stock Warrants (Details Narrative) - USD ($) |
Dec. 30, 2014 |
Dec. 30, 2012 |
Dec. 30, 2007 |
May 31, 2016 |
May 31, 2015 |
Dec. 30, 2005 |
|---|---|---|---|---|---|---|
| Common Stock Purchased | $ 37,991 | $ 36,357 | $ 45,402,996 | |||
| Exercise Price | $ .001 | |||||
| Series A Preferred Stock [Member] | ||||||
| Preferred Stock, Par Value | $ .08 | $ .0001 | $ .0001 | |||
| Preferred Stock Value | $ 83,043 | |||||
| Warrant Expired | 600,000 | |||||
| Series B Preferred Stock [Member] | ||||||
| Preferred Stock, Par Value | $ .01 | $ .0001 | $ .0001 | |||
| Preferred Stock Value | $ 449,972 | |||||
| Warrant Expired | 386,667 |
Stock Based Compensation (Details Narrative) - $ / shares |
May 31, 2016 |
May 31, 2015 |
Jun. 30, 2010 |
Dec. 28, 2007 |
|---|---|---|---|---|
| Stock Based Compensation Options Consists Details | ||||
| Common Stock Issued, Shares | 385,092,203 | 368,758,154 | 2,100,000 | |
| Common Stock Par Value | $ 0.0001 | $ 0.0001 | $ .04 | |
| Awarded Incentive Stock Options | 10,000,000 | |||
| Exercise price Per Share of awarded stock options | $ .04 |
Income Taxes (Details Narrative) |
May 31, 2016
USD ($)
|
|---|---|
| Income Taxes Details Narrative | |
| Operating loss carry forwards | $ 16,300,000 |
| Valuation allowance | $ 5,500,000 |
Stockholders' Equity (Details Narrative) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Stockholders Equity Details Narrative | ||
| Common stock shares issued additional consideration | 1,878,000 | 495,856 |
| Common stock shares value issued additional consideration | $ 1,878,000 | $ 495,856 |
| Avergage quoted closing price per share issued | $ .002887 | $ 0.005258 |
| Value of Common stock issued | $ 5,422 | $ 2,607 |
| Common stock shares issued | 11,956,049 | 5,298,804 |
| Additional percentage of stock dividend | 2.00% | 2.00% |
| Avergage quoted closing price per share issued | $ .003208 | $ 0.004795 |
| Value of Common stock issued | $ 38,252 | $ 25,406 |
| Common stock shares issued under terms of the bridge-financing arrangement | 2,500,000 | 10,221,845 |
| Avergage quoted closing price per share issued | $ .002566 | $ 0.005525 |
| Value of Common stock issued | $ 6,415 | $ 56,476 |
| Common stock shares issued under terms of the bridge-financing arrangement | 5,183,936 | |
| Avergage quoted closing price per share issued | $ 0.005525 | |
| Value of Common stock issued | $ 28,641 |
Statutory Financial Data (Details) - USD ($) |
5 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|
May 31, 2016 |
May 31, 2015 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Statutory Financial Data Details | ||||
| Statutory Surplus | $ 4,958,584 | $ 5,830,379 | ||
| Net Income | $ 37,446 | $ 189,559 | $ (762,295) | $ 232,337 |
Commitments Contingencies (Details) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Commitments Contingencies Details | ||
| Leases office equipment | $ 545 | |
| Leases office, parking and storage | 6,987 | |
| Rental expense | 44,086 | $ 55,301 |
| Fiscal year 2016-2017 | 32,136 | |
| Fiscal year 2017-2018 | 32,136 | |
| Fiscal year 2018-2019 | 29,458 | |
| Minimum future lease payments total | $ 93,730 |
Financial Instruments (Details) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| ASSETS | ||
| Bonds available for sale | $ 7,170,789 | $ 6,983,957 |
| Cash and short-term investments | 663,562 | 2,316,971 |
| Premiums and other receivables | (76,413) | 482,488 |
| Equity securities (including derivatives) | 1,550,217 | 778,659 |
| LIABILITIES | ||
| Notes payable | 5,045,969 | 7,706,619 |
| Accounts payable and advance premiums | 414,787 | 537,132 |
| Accrued expenses and other liabilities | 3,274,094 | 5,348,952 |
| Fair Value, Measurements, Recurring [Member] | ||
| ASSETS | ||
| Bonds available for sale | 7,230,261 | 7,028,728 |
| Cash and short-term investments | 663,562 | 2,316,971 |
| Premiums and other receivables | (76,413) | 482,488 |
| Equity securities (including derivatives) | 1,488,440 | 755,301 |
| LIABILITIES | ||
| Notes payable | 6,861,954 | 7,148,580 |
| Accounts payable and advance premiums | 414,787 | 537,132 |
| Accrued expenses and other liabilities | $ 3,274,094 | $ 5,348,952 |
Other Risks and Concentrations (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Investment Advisory Fees | $ 109,194 | $ 121,514 |
| Customer Group 1 [Member] | ||
| Surety Premium | 116,000 | 166,000 |
| Investment Advisory Fees | ||
| Customer Group 2 [Member] | ||
| Surety Premium | 190,000 | 183,000 |
| Investment Advisory Fees | 17,000 | 21,000 |
| Customer Group 3 [Member] | ||
| Surety Premium | 180,000 | 224,000 |
| Investment Advisory Fees | 3,000 | 3,000 |
| Customer Group 4 [Member] | ||
| Surety Premium | 205,000 | 204,000 |
| Investment Advisory Fees | 4,000 | 3,000 |
| Customer [Member] | ||
| Surety Premium | 691,000 | 777,000 |
| Investment Advisory Fees | $ 24,000 | $ 27,000 |
Segment Reporting (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Total Revenues | $ 1,335,829 | $ 1,575,620 |
| Total operating income (loss) | (571,490) | (1,504,752) |
| Total Depreciation | 1,251 | 4,478 |
| Total interest expense | 915,098 | 833,242 |
| Industry Segment | ||
| Total Revenues | 1,335,829 | 1,575,620 |
| Total operating income (loss) | (1,259,742) | (1,588,617) |
| Total Identifiable assets | 11,358,196 | 11,118,053 |
| Total capital acquisitions | 548 | 1,679 |
| Total Depreciation | 1,251 | 4,478 |
| Total interest expense | 915,098 | 833,242 |
| Industry Segment | Investment Advisory | ||
| Total Revenues | 506,373 | 140,890 |
| Total operating income (loss) | (49,976) | (56,377) |
| Total Identifiable assets | 43,129 | 45,871 |
| Total capital acquisitions | ||
| Total Depreciation | ||
| Total interest expense | 64 | |
| Industry Segment | Surety Insurance | ||
| Total Revenues | 829,456 | 1,434,730 |
| Total operating income (loss) | (1,678,551) | (907,081) |
| Total Identifiable assets | 9,831,940 | 11,071,469 |
| Total capital acquisitions | 1,679 | |
| Total Depreciation | 1,236 | 4,478 |
| Total interest expense | 350,099 | 309,349 |
| Industry Segment | Corporate | ||
| Total Revenues | ||
| Total operating income (loss) | 468,785 | (625,159) |
| Total Identifiable assets | 1,483,127 | 713 |
| Total capital acquisitions | 548 | |
| Total Depreciation | 15 | |
| Total interest expense | $ 564,999 | $ 523,829 |
Related Party Transactions (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Advances from Mr. Jacobs | $ 1,957,658 | $ 1,008,718 |
| Due to Mr. Jacobs | 124,723 | 172,609 |
| CEO Member | ||
| Advances from Mr. Jacobs | 1,088,758 | 1,008,717 |
| Assumption of company debt | 971,207 | 1,652,037 |
| Due to Mr. Jacobs | 515,488 | 633,039 |
| Aggregate amount outstanding to Mr. Jacobs | $ 549,143 | $ 666,262 |
| Rate of interest and obligations due | 6.00% | 12.00% |
Related Party Transactions (Details Narrative 2) - Board [Member] - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Consulting services | $ 62,100 | $ 62,100 |
| Related party payables | 124,723 | $ 169,375 |
| Demand notes to related party | $ 75,000 |
Reinsurance (Details Narrative) - USD ($) |
May 31, 2016 |
May 31, 2015 |
|---|---|---|
| Reinsurance Agreement: | ||
| Premium rate as per contract | 35.00% | |
| Minimum Premium as per contract | $ 490,000 | |
| Deposits to reinsurers quarterly in arrears in equal amounts | 140,000 | |
| Prepaid reinsurance premium | 232,647 | $ 207,413 |
| Ceded reinsurance payable (deposited) | $ 5,689 | $ 10,615 |
Reinsurance (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
May 31, 2016 |
May 31, 2015 |
|
| Premium Written | ||
| Direct | $ 1,466,837 | $ 1,382,725 |
| Ceded | 453,587 | 494,926 |
| Net | 1,013,250 | 887,799 |
| Earned: | ||
| Direct | 1,407,905 | 1,419,049 |
| Ceded | 428,353 | 503,129 |
| Net | $ 1,123,898 | $ 1,023,403 |
Events Subsequent to May 31, 2014 (Details Narrative) - USD ($) |
13 Months Ended | |||||
|---|---|---|---|---|---|---|
Sep. 25, 2017 |
Mar. 17, 2017 |
Jun. 30, 2017 |
May 31, 2016 |
May 31, 2015 |
Dec. 28, 2007 |
|
| Issuance of Common Stock | 385,092,203 | 368,758,154 | 2,100,000 | |||
| Subsequent Event [Member] | First Surety Corporation [Member] | ||||||
| Interest rates on borrowing | 15.00% | 5.00% | ||||
| Issuance of Common Stock | 1,500,000 | 500,000 | ||||
| Subsequent Event [Member] | Series A Preferred Stock [Member] | ||||||
| Dividend Amount | $ 1,350,832 | |||||
| Subsequent Event [Member] | Series B Preferred Stock [Member] | ||||||
| Dividend Amount | 4,175,512 | |||||
| Subsequent Event [Member] | Series C Preferred Stock [Member] | ||||||
| Dividend Amount | $ 10,027,907 |
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