During fiscal 2013, 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 and raising additional capital to increase the capital base of its insurance subsidiary, First Surety Corporation (FSC), to facilitate entry into other state markets.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF AND FOR THE YEAR ENDED MAY 31, 2013
Total revenues decreased from approximately $1,833,000 in fiscal 2012 to approximately $1,345,000 in fiscal 2013, while total operating expenses decreased from approximately $1,817,000 in fiscal 2012 to approximately $1,790,000 in fiscal 2013. This resulted in a net loss from operations of approximately $445,000 in 2013 as compared with income from operations of approximately $16,000 in fiscal 2012.
The decrease in revenues is largely attributable to the receipt in 2012 of a cumulative No Claims Bonus from its reinsurers for the two years ending June 30, 2010 and June 30, 2011, as well as the need to recognize additional ceded premium in 2013 in order to meet the minimum amount set forth in the Reinsurance contract. For the twelve month period ended May 31, 2013 net investment income declined due to the re-allocation of assets in the investment portfolio compared
to the previous year. Some interest bearing mortgage backed securities were sold at various times during the previous twelve-month period and replaced with U.S. Treasury-backed zero coupon bonds. In addition, investment advisory fees declined due to the decrease in the amount of assets in portfolios under management. The decrease in expenses is attributable to decreased policy losses incurred and policy acquisition costs as a result of a decrease in premium written for existing clients.
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.
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 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.
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.
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. Accordingly, management began pursuing avenues that would provide additional capital to facilitate such expansion.
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.
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. On May 26, 2012, all conditions imposed by the Consent Order were terminated by the Commissioner of Insurance. Accordingly, the payment of ordinary dividends is no longer restricted but 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, 2013, such assets amounted to approximately $7.50 million.
months does not exceed the lesser of 10% of the insurance subsidiary's (FSC's) surplus as regards to policyholders as of December 31st of the preceding year-end or net income from the insurance subsidiary's (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.
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 but these reinsurance contracts do not relieve the Company from its obligations to policyholders. Ceded premiums, at a rate of 35% of written premium, 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.
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.
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.
The Company experienced operating income (loss) from operations of approximately ($445,000) and $16,000 for the years ended May 31, 2013 and 2012, 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 are taken into account, to losses of approximately $2,031,000 and $1,220,000 for the years ended May 31, 2013 and 2012. 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 and to cure its defaults in certain quarterly payments due its bridge-financing lenders. A substantial portion of the Company's cash flow is generated by its insurance subsidiary and is subject to certain withdrawal restrictions and regulatory restrictions including the ability to pay dividends to its parent. 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.
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
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 now 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.
Revenues decreased 27% in fiscal 2013, $1,344,655 as compared with $1,833,194 in fiscal 2012. The decrease is largely attributable to the receipt in 2012 of a cumulative No Claims Bonus from its reinsurers totaling $213,281 for the two years ending June 30, 2010 and June 30, 2011, as well as the need to recognize additional ceded premium in 2013 in order to meet the minimum amount set forth in the Reinsurance contract. In addition, premium written to existing clients decreased during the current fiscal year.
Revenue from the surety insurance segment, consisting of FSC and TSA, decreased 27%, with $1,150,621 in fiscal 2013 as compared with $1,576,107 for the prior year. Revenues attributable to the insurance segment are as follows:
Premiums earned $ 748,112 $ 956,615 Commissions earned 30,898 33,422 No Claims Bonus from Reinsurers 98,000 213,281 Net investment income 230,373 279,410 Net realized investment gains 43,238 93,379 --------------------- -------------------
FSC's investment holdings in fiscal 2013 averaged $7.570 million as compared to $7.749 million for fiscal 2012, with investment yields decreasing from 3.58% to 2.75%. This decrease in investment yield is mostly attributable to the diversification of some invested assets from interest earning, mortgage backed securities to non-interest earning, zero coupon bonds. 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.
Year Ended May 31, 2013 2012 Difference ------------- ------------- ------------- Salaries and wages $ 596,103 $ 528,871 $ 67,232 Commissions 32,261 134,564 (102,303) Payroll taxes 44,061 48,033 (3,972) Stock option expense - 370 (370) Fringe benefits 97,629 89,266 8,363 Key-man life insurance 60,355 56,889 3,466 Deferred policy acquisition costs (120,033) (215,454) 95,421 ------------- ------------- -------------
The increase in salaries is due to the issuance of Company stock to its employees as compensation for services rendered. The decrease in payroll taxes is due to the rate used for State Unemployment tax reducing from 4.5% to 3.7% in 2013, as well as certain employee wages reaching the taxable limit for social security due to the stock compensation awarded. The decrease 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. In addition, two customers were purchased by a multi-national firm with existing surety capacity, resulting in the release of those bonds and the subsequent reduced commissions. The increase in fringe benefits is attributable to increased cost of health insurance and additional life insurance for employees.
Other general and administrative expense increased approximately $17,000 compared to the corresponding 2012 period. This increase is due to the non-recurring use of temporary personnel for clerical projects in the current year. Other less significant increases and decreases were experienced in other general administrative categories in fiscal 2013 as compared to fiscal 2012.
Year Ended May 31, 2013 2012 Difference ------------- ----------- ---------- Interest expense on bridge financing $ 595,000 $ 596,630 $ (1,630) Expense of common shares issued or to be issued in connection with bridge financing and other arrangements 301,333 122,621 178,712 Interest expense on demand and term notes 159,924 179,010 (19,086) Other finance charges 17,081 7,340 9,741 ------------- ----------- ----------
The increase in the expense of common shares issued (or to be issued) for fiscal year 2013 as compared to fiscal year 2012 was attributable a rise in the market value of the common stock, affecting the calculated expense of shares issued for the semi-annual bridge loan issuance in September 2012. Interest expense on demand and term notes decreased due to reduced borrowings taken during the current year. Other finance charges in the current year reflect interest charged on past due accounts payable and Federal and State payroll taxes.
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, 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. For the year ended May 31, 2012, accretion of $251 and dividends of $352,271 associated with the Series B outstanding after that date 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 Condensed Balance Sheet and the dividends after February 29, 2012 associated with these
Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Loss Consolidated Statements of Cash Flows Consolidated Statements of Series A Redeemable Preferred Stock and Stockholders' Equity (Deficit) Notes to Consolidated Financial Statements
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jacobs Financial Group, Inc. and subsidiaries as of May 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
To the Board of Directors and Stockholders Jacobs Financial Group, Inc. Charleston, West Virginia
We have audited the accompanying consolidated balance sheet of Jacobs Financial Group, Inc. and subsidiaries (the "Company") as of May 31, 2012, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and mandatorily redeemable preferred stock and stockholders' equity (deficit) for the year then ended. Our audit also included the financial statement schedules listed in the Index as Item 15. The Company's management is responsible for these consolidated financial statements and financial statement schedules. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
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 consolidated 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 audit 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of the Company as of May 31, 2012, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
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 ten 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.
These 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. Additionally, 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 FSC 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.
The consolidated financial statements include the accounts of Jacobs Financial Group, Inc. and its wholly owned subsidiaries, after the elimination of intercompany transactions.
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.
An investment is considered impaired when its fair value investment 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").
These transactions expose the Company to potential market risk for which the Company receives a premium up front. 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
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.
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.
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.
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, 2013 or 2012. 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.
Certain amounts in the 2012 Consolidated Financial Statements have been reclassified to be consistent with the presentation in the Consolidated Financial Statements as of May 31, 2013 and for the year then ended. These reclassifications had no impact on previously reported net income, cash flows from operations or changes in shareholders' equity.
In January 2013, the FASB issued Accounting Standards Update 2013-01 (ASU 2013-01), CLARIFYING THE SCOPE OF DISCLOSURES ABOUT OFFSETTING ASSETS AND LIABILITIES. The main objective in developing this Update is to address implementation issues about the scope of Accounting Standards Update No. 2011-11, Balance Sheet Topic 210: Disclosures about Offsetting Assets and Liabilities. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The amendments of ASU 2013-01 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, 2016, 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 Financial Accounting Standards Board ("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.
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.
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: Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Fair Value -------------- ------------ ----------- ----------- State and municipal $ 1,760,341 $ 5,293 $ 36,627 $ 1,729,007 securities Equity securities 474,311 52,190 21,979 504,522 Derivatives (18,603) (31,442) (162) (49,883) Foreign Obligations 200,750 - 6,913 193,837 Mortgage Backed Securities 3,413,161 145,390 9,279 3,549,272 -------------- ------------ ----------- ----------- $ 5,829,960 $ 171,431 $ 74,636 $ 5,926,755 ============== ============ =========== ===========
Gross Gross Unrealized Unrealized Amortized Cost Gains Losses Fair Value -------------- ----------- ----------- ------------ State and municipal $ 2,077,399 $ 16,051 $ 6,110 $ 2,087,340 securities Equity securities 533,669 15,176 52,377 496,468 Derivatives (14,549) (2,344) (4,699) (12,194) Foreign Obligations 205,247 - 9,997 195,250 Mortgage Backed Securities 3,632,782 185,140 1,864 3,816,058 -------------- ----------- ----------- ------------ $ 6,434,548 $ 214,023 $ 65,649 $ 6,582,922 ============== =========== =========== ============
There are no securities classified as held to maturity at May 31, 2013 or May 31, 2012.
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 Condensed Balance Sheets and Statements of Operations.
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.
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.
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:
Amortized Fair Market Cost Value --------------- --------------- Due in one year or less $ 337,348 $ 351,522 Due after one year through five years 209,720 219,830 Due after five years through ten years 130,678 137,147 Due after ten years 2,735,415 2,840,773 --------------- --------------- $ 3,413,161 $ 3,549,272 =============== ===============
The increase (decrease) in unrealized appreciation of investments were as follows:
Bonds-fixed maturities $ (58,185) $ 26,899 Mortgage-backed securities (47,164) (23,802) Equity securities 33,776 (37,393) --------------- --------------- Increase (decrease) in unrealized appreciation $ (71,573) $ (34,296) =============== ===============
As of May 31, 2013, the Company held nine mortgage-backed securities with gross unrealized losses of $9,278, three 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.
2013 2012 -------------------------------------- ------------- ------------- Balance at beginning of year $ 167,010 $ 190,711 -------------------------------------- ------------- ------------- Acquisition costs deferred 239,074 287,684 -------------------------------------- ------------- ------------- Amortization charged to operations (267,587) (311,385) -------------------------------------- ------------- ------------- Total $ 138,497 $ 167,010 -------------------------------------- ------------- -------------
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, 2013 and 2012.
Reserves for unpaid losses and loss adjustment expenses are estimated based primarily on management's judgment as the Company has not incurred a loss since its inception and available industry data is 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, 2013, 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
At May 31, 2013 and May 31, 2012, the reserve for losses and loss expenses consisted of:
Balance at beginning of year $ 1,026,489 $ 815,512 Incurred policy losses-current year 181,414 210,977 --------------- -------------
At May 31, 2013 and 2012, the Company had the following unsecured notes payable to individuals:
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 issued to the holders of the notes, will 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
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. The following table summarizes the common shares issued to those note holders as a result incurring these penalties.
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.
management has remained in close contact with the bridge lenders, providing reports regarding its efforts to refinance or otherwise repay the bridge loans.
Fiscal year 2013-2014 (including demand notes) $ 4,701,755 Fiscal year 2014-2015 145,415 Total $ 4,847,170 ==============
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 2013.
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 of May 31, 2013, of the 2,807 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, 2013, is $4,990,463.
The Company experienced a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $2,031,471 in fiscal 2013 as compared with a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $1,219,559 in fiscal 2012.
For the year ending 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, 2013, 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 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.
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.
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 July 9, 2012, the Company issued 22,600,000 shares to employees and a board member as additional compensation, reducing the number of shares of Common Stock issuable under all awards under the plan to 12,400,000.
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. The term of the options is five years and expires in June 2014. As of May 31, 2013, the awarded options had been reduced to 9,800,000 due to changes in employment status.
Stock-based compensation expense attributable to such awards amounted to $370 in the fiscal year ended May 31, 2012. There is no unrecognized
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, 2013, the Company had operating loss carry forwards of approximately $18.6 million. These carry forwards begin 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 $6.6 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.
On 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 proceeding the date of the transaction and totaled $44,227.
In fiscal 2013, the Company issued 8,947,444 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 $.00505 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 and totaled $45,185.
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 quoted closing price of the Company's stock for the 20-day period proceeding the date of the transaction and totaled $244.
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.
In fiscal 2012, the Company issued 3,545,000 shares of the Company's common stock as additional consideration in connection with new and continued borrowings totaling $2,798,000. The shares were valued at approximately $.005088 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 and totaled $18,036.
In fiscal 2012, the Company issued 9,029,800 shares of the Company's common stock in connection with the additional 2% stock dividend associated with Series B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares were valued at approximately $.00444 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 and totaled $40,098.
In fiscal 2012, the Company issued 7,043,710 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 $.00506 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 and totaled $35,561.
In fiscal 2012, the Company issued 7,430,017 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 $.00360 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 and totaled $26,748.
In fiscal 2012, the Company awarded 1,000,000 shares to an individual as compensation for services rendered. The shares were valued at approximately $.004447 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 and totaled $4,470.
differences between statutory financial statements and financial statements prepared in accordance with generally accepted accounting principals are that statutory financial statements do not reflect deferred policy acquisition costs and certain assets are non-admitted.
Statutory surplus as of May 31, 2013 and 2012 and net income for the Company's insurance subsidiary for the calendar year ended December 31, 2012 and 2011 and five-month periods ended May 31, 2013 and 2012 are as follows:
Statutory surplus exceeds the minimum capital requirements provided by West Virginia state law of $2.0 million.
On March 26, 2012 the Commissioner of the State of West Virginia 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 the insurance subsidiary by the Company. Among other consequences, removal of these restrictions allowed dividends to be declared by and paid from the insurance subsidiary to the Company. Dividends in the amounts of $590,000 and $380,000 were declared and paid for the twelve month periods ending May 31, 2013 and May 31, 2012.
The Company' inactive subsidiary, CMW, 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 $54,880 and $56,112 during fiscal years 2013 and 2012.
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:
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.
As of May 31, 2013 the Company's investment securities of approximately $7,200,000 are solely comprised 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 the $250,000 federally insured limit. 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.
interests that constitute 37% and 45% of the Company's fiscal 2013 and 2012 revenues, respectively, as follows:
YEAR ENDED INDUSTRY SEGMENT MAY 31, 2013 MAY 31, 2012 ---------------- --------------- --------------- REVENUES: Investment advisory $ 194,034 $ 257,087 Surety insurance 1,150,621 1,576,107 Corporate - 150,604 --------------- --------------- Total revenues $ 1,344,655 $ 1,983,798 =============== ===============
OPERATING INCOME (LOSS): Investment advisory $ 19,372 $ 73,432 Surety insurance 316,038 613,377 Corporate (2,292,107) (1,792,642) --------------- --------------- Total operating income (loss) $ (1,956,697) $ (1,105,833) =============== ===============
DEPRECIATION CHARGED TO IDENTIFIABLE ASSETS: Investment advisory $ 45 $ 45 Surety insurance 7,874 7,874 Corporate 2,766 2,817 --------------- --------------- Total Depreciation $ 10,685 $ 10,736 =============== ===============
INTEREST EXPENSE: Investment advisory $ - $ - Surety insurance - - Corporate 1,073,338 905,601 --------------- --------------- Total interest expense $ 1,073,338 $ 905,601 =============== ===============
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 6.75% to 12%.
During fiscal 2012, advances to the Company from Mr. Jacobs amounted to $1,124,925, which included assumption of company debt in the amount of $393,519, and repayments to Mr. Jacobs amounted to $1,152,006. As of May 31, 2012, the balance due the Company was $57,046. The largest aggregate amount outstanding to Mr. Jacobs in fiscal 2012 was $18,003.
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
There were no ceded Loss and Loss Adjustment Expenses for the years ended May 31, 2013 or 2012.
The effects of reinsurance on premium written and earned for fiscal 2013 and 2012 are as follows;
2013 Written 2013 Earned 2012 Written 2012 Earned ------------- ------------ ------------- ------------ Direct $1,088,202 $1,237,316 $1,343,661 $ 1,424,355 Ceded 441,893 489,204 446,853 467,739 ------------- ------------ ------------- ------------ Net $ 646,309 $ 748,112 $ 896,808 $ 956,616 ============= ============ ============= ============
Subsequent to May 31, 2013, the Company obtained various borrowings from individuals and businesses totaling $645,500 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 $497,406. These borrowings, and the renewal of other borrowings, included the issuance of 1,057,356 shares of its common stock as additional consideration. Additionally, the Company obtained borrowings of $1,470,633 from its principal shareholder and chief executive officer under its pre-approved financing arrangement bearing interest at the rate of 12% and made repayments totaling $1,122,024. After taking into account the net accrued payroll owed that is to be offset against these borrowings, the balance owed to the principal shareholder is $330,311 at the date of this filing.
On September 10, 2013, in accordance with the Bridge financing agreement, the Company became obligated to issue in the aggregate 9,316,337 shares of its common stock to the holders of such notes.
On September 10, 2014, in accordance with the Bridge financing agreement, the Company became obligated to issue in the aggregate 10,221,845 shares of its common stock to the holders of such notes.
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 $933,351, $2,806,516, and $6,732,373 as of September 30, 2014.
On January 1, 2014 the Company issued 3,415,315 Common shares representing the additional 2% stock dividend for the quarter ending December 31, 2013 to the holders of Series A and B Preferred shares that had requested to be redeemed upon maturity (see Note J).
On April 1, 2014 the Company issued 4,879,900 Common shares representing the additional 2% stock dividend for the quarter ending March 31, 2014 to the holders of Series A and B Preferred shares that had requested to be redeemed upon maturity (see Note J).
On July 1, 2014 the Company issued 2,105,485 Common shares representing the additional 2% stock dividend for the quarter ending June 30, 2014 to the holders of Series A and B Preferred shares that had requested to be redeemed upon maturity (see Note J).
On July 9, 2014 the Company completed a $4,500,000 financing. In effect, a subsidiary of 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 of the Company's note holders 50.7% ($1.775 million face amount) of the outstanding senior promissory notes comprising a $3.5 million financing dating from 2008 (the Bridge financing agreement), together with interest accrued thereon and the associated collateral, which senior promissory notes have been in default, (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. The financing was a product of the Registrant's ongoing efforts to restructure its balance sheet to position itself to take advantage of business opportunities.