Results of Operations and Financial Condition as of and for the Year Ended May 31, 2014
The decrease in revenues is largely attributable to realized losses of $45,000 in 2014 compared to realized gains of $43,000 in 2013 on the sale of investments. In addition, investment advisory fees declined due to the decrease in the amount of assets in portfolios under management. The decrease in expenses is mainly attributable to decreased commissions, payroll and related payroll expenses in 2014.
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 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, 2014, the Company has received requests for redemption of 343 shares of Series A Preferred. The aggregate amount to which the holders requesting redemption are entitled as of June 30, 2014, is $473,410.
Under the terms of the Series A Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series A Stock are sufficient to redeem the total number of shares of Series A Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance
As an inducement to the initial preferred stock shareholders, warrants to purchase 45,402,996 shares of common stock at an exercise price of one-tenth of one cent ($.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 $1,925,523 in fiscal 2014 as compared to $2,031,471 in fiscal 2013.
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.
Certain equity inducements in the form of common stock of the Company were provided under the terms of the bridge loan documents. Upon issuance of the bridge notes, an aggregate of 7% of the outstanding common stock of the Company was issued to the bridge lenders. Upon retirement of the notes upon consummation of a qualified equity offering, the Company will issue to the bridge lenders a percentage of the outstanding common stock of the Company which, when added to the stock initially issued, may equal as much as 28% of the common stock of the Company that would otherwise have been retained by the holders of the Company’s common shares immediately prior to the financing. Finally, because a qualified financing was not completed by September 10, 2008, the Company was required to issue to the bridge lenders under the terms of the loan documents a total of 2.8% of the Company’s outstanding common shares at such date. An additional 2.8% of the Company’s outstanding common shares are required to be issued upon each six-month anniversary date thereof until retirement of the notes.
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 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. Prior to 2014, FSC has experienced no claims for losses since its acquisition.
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. By letter dated February 5, 2014, a performance bond obligee notified FSC of a claim under the bond relating to a non-performance by the principal. FSC investigated and agreed with the principal to enter into a settlement of the claim with the obligee. The total claim of approximately eighty-three thousand dollars was paid by FSC during the year ended May 31, 2014. Prior to 2014, FSC had experienced no claims for losses since its acquisition.
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.
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 status as a recent entry into this market and the financial condition of the Company. This is the case notwithstanding the reinsurance agreement by FSC with Lloyd’s of London and the resulting increase in bonding capacity. 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. In addition, as an alternative means of addressing access to markets, management is seeking to establish a relationship with any one of several possible sureties that are licensed in those states other than West Virginia and Ohio that comprise significant markets for the bonding programs of FSC and could issue surety
The Company experienced a loss from operations of approximately ($432,000) in 2014 as compared with loss from operations of ($445,000) in fiscal 2013. The net loss attributable to common stockholders was ($2,916,311) in fiscal 2014 as compared to ($2,946,806) in fiscal 2013.
Revenues decreased 6% in fiscal 2014, $1,269,906 as compared with $1,344,655 in fiscal 2013. The decrease is largely attributable to realized losses of ($45,000) in 2014 compared to realized gains of $43,000 in 2013 on the sale of investments.
Revenue from the investment management segment, net of advisory referral fees, declined 14% with fiscal 2014 reporting $153,635 as compared to $178,328 in fiscal 2013, a decrease of $24,693. Net income declined due to decline in investment advisory fees related to the decrease in the amount 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.
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. The decline in commissions earned in 2014 is due to a write off of commissions receivable from a client that were deemed uncollectible and covered several years of activity. 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 realized losses of $45,000 in 2014 compared to realized gains of $43,000 in 2013 on the sale of investments as well as the written off commission previously discussed. Gross premium written in fiscal 2014 amounted to $1,230,079 as compared to $1,088,202 in fiscal 2013 and is reflective of an increase in the volume of bonds required by a major customer, as well as overall decrease in new premium written for new and existing clients. Commission income earned for the placement of bonds with outside insurers has remained relatively stagnant.
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. Incurred policy losses for fiscal 2014 have been recorded as $161,181 or 21% of earned premium as compared to $181,414 or 24% of earned premium for fiscal 2013. The decrease is due to the reduction as of January 1, 2014 of the IBNR reserve rate from 15% to 12% of earned premium for partially collateralized bonds. IBNR loss estimates have been based
on 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, therefore its actuary has adjusted the percentage of premiums reserved for IBNR due to this historical pattern.
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 2014, such costs amounted to $260,668 or 33% of earned premium as compared with $267,587 or 36% in fiscal 2013.
General and administrative expenses for fiscal 2014 were $1,272,818 as compared with $1,330,234 for fiscal 2013, representing a decrease of $57,416 and are comprised of the following:
The decrease in salaries is due to the issuance of Company stock to its employees as compensation for services rendered in 2013. 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 increase in fringe benefits is attributable to increased cost of health insurance for employees.
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, 2014, dividends of $411,583 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, 2013, dividends of $380,239 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 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 $60,204 and $57,855, for the years ended May 31, 2014 and 2013, and not included in the table above. Series C equity stock is not mandatorily redeemable and does not accrete.
We have audited the accompanying consolidated balance sheets of Jacobs Financial Group, Inc. (the “Company”) as of May 31, 2014 and 2013, 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.
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, 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 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.
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 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.
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.
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.
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.
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.
Certain amounts in the 2013 Consolidated Financial Statements have been reclassified to be consistent with the presentation in the Consolidated Financial Statements as of May 31, 2014 and for the year then ended. These reclassifications had no impact on previously reported financial position, results of operations or cash flows.
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-11 (ASU 2011-11), Disclosures about Offsetting Assets and Liabilities. The amendments in this Update will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for fiscal years beginning after January 1, 2013 and for interim periods within those fiscal years. The amendments of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements.
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.
The Company held the following investments, by 	security type, that were	classified as available-for-sale and carried at fair value at May 31, 2014:
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, 2013:
There are no securities classified as held to maturity at May 31, 2014 or May 31, 2013.
o Level 1 - Quoted prices for identical instruments in active markets.
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.
Accordingly, investments and cash in the amount of $9,756,694 and $7,495,538 as of May 31, 2014 and 2013, respectively, are restricted to the use of FSC.
At May 31, 2014, the Company’s insurance subsidiary had cash, securities and short term investments held as collateral for their bonding program in the amount of $2,065,432.
As of May 31, 2014, the Company held ten mortgage-backed securities with gross unrealized losses of $5,036, seven 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, 2014, the Company held nine fixed maturity bonds with gross unrealized losses of $25,204, five of which has been in a continuous loss position for more than 12 months.
As of May 31, 2014, the Company held six equity security investments with gross unrealized losses of $22,414, one of which has 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.
Included in other assets as of May 31, 2014 and May 31, 2013 are $92,099 and $99,187 of prepaid expenses and deposits. The balance on May 31, 2014 includes an $80,000 deposit for legal fees.
May 31, 2014, 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 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.
At May 31, 2014 and May 31, 2013, the reserve for losses and loss expenses consisted of:
At May 31, 2014 and 2013, the Company had the following unsecured notes 	payable to individuals:
During the year ended May 31, 2014, a board member that held $435,000 in unsecured notes payables from the Company resigned. During the years ended May 31, 2014 and May 31, 2013, the Company incurred approximately $63,000 and $69,000 in related party interest expense to this individual.
All notes payables, with the exception of the $3,500,000 bridge-financing arrangement are on demand terms and therefore current. The terms of the bridge-financing arrangement 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. 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 shall issue to the holders of the bridge financing notes additional Company common stock that when added to the stock initially
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 has not been recorded for shares remaining to be issued. The following table summarizes the common shares issued to those note holders as a result incurring these penalties.
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. To date, the proposed financing has not closed, and the Company has been unable to remit the partial payment. 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 acknowledge that the effectiveness of certain of the rights and remedies provided by such agreement may be subject to prior approval by the Office of the Commissioner of Insurance for the State of West Virginia. As of May 31, 2014 no payments were made to bridge lenders.
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, 2014, 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 2014 or 2013.
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
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
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, 2014, 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 May 31, 2014, is $4,351,502.
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
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
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, 2014, 2,817 shares of Series B Stock had not been exchanged.
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
As of May 31, 2014 the Company has chosen to defer payment of dividends on Series A Preferred Stock with such accrued and unpaid dividends amounting to $862,060 through May 31, 2014. 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, 2014 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 $2,587,568 and $6,205,305 through May 31, 2014, respectively. These dividend are included in the amounts reported on the face of the balance sheet for each respective classification if stock.
The following table summarizes option activity under the Plan for the fiscal year ended May 31, 2014.
There is no unrecognized compensation expense related to non-vested awards at May 31, 2014 or May 31, 2013 as all awards are fully vested and the related compensation recognized previously.
The Company estimates the fair value of stock options using a Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company's stock, the risk-free interest rate and the company's dividend yield.
In fiscal 2013, the Company issued 9,056,539 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 $.004883 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 $44,227.
In fiscal 2013, the Company awarded 50,000 shares to an individual as compensation for services instrumental to advancing the Company’s business plan. The shares were valued at approximately $.004875 per share based on the average
On July 9, 2012 the Company issued 22,600,000 shares of the Company’s common stock to employees and other individuals for services rendered. The shares were valued at approximately $.002650 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 $59,890.
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,
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 $198,000 and $590,000 were declared and paid for the twelve month periods ending May 31, 2014 and May 31, 2013.
The dividends for 2013 were deemed by the WVOIC to contain $85,140 in extraordinary dividends. As a result of the extraordinary dividends, the insurance subsidiary (FSC) was fined $20,000 and the $85,140 was returned to FSC. The return of dividends was recorded as a capital contribution to FSC.
Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2014 are:
The carrying values and fair values of the Company’s financial instruments at May 31, 2014 and 2013 are as follows:
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 56% of the Company’s fiscal 2014 and 2013 revenues, respectively. Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute 40% and 37% of the Company’s fiscal 2014 and 2013 revenues, respectively, as follows:
During fiscal 2014, advances to the Company from Mr. Jacobs amounted to $1,040,612, and repayments to Mr. Jacobs amounted to $855,019. As of May 31, 2014, the balance due Mr. Jacobs was $10,281. The largest aggregate amount outstanding to Mr. Jacobs in fiscal 2014 was $103,539.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 6% and 12% respectively for 2014. The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 12% for 2013.
During the years ended May 31, 2014 and May 31, 2013, a company owned by a board member provided consulting services. This company provided services totaling $62,100 and $62,100 in 2014 and 2013. Amounts owed to this company at year end are treated as related party payables in the amounts $136,775 and $124,409 at May 31, 2014 and 2013 respectively.
During the year ended May 31, 2009, the Company borrowed money from an individual that became a board member during 2010. On March 22, 2013 this individual resigned his duties as a board member. Total amounts owed to this individual at May 31, 2014 consisted of $75,000 in demand notes and $360,000 in bridge financing.
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.
The effects of reinsurance on premium written and earned for fiscal 2014 and 2013 are as follows;
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 10, 2014, in accordance with the Bridge financing agreement, the Company issued in the aggregate 10,221,845 shares of its common stock to the holders of such notes (of which 5,813,936 were issued to a subsidiary of the Company, which became a holder of Bridge loans as discussed in the subsequent note). Subsequent to September 10, 2014, the practice of semi-annually issuing stock to bridge loan holders was suspended.
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.