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Item 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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During fiscal 2017, the Company has focused
its primary efforts (i) on the development and marketing of its surety business in West Virginia and Ohio, (ii) securing potential
strategic relationships that will accelerate the progression of the Company’s business plan, including by giving access
to other state markets, (iii) strengthening its insurance subsidiary’s reserves for potential claims and (iv) raising additional
capital to facilitate that subsidiary’s entry into other state markets.
Results of Operations and Financial Condition as of and for
the Year Ended May 31, 2016
Results of Operations
Total revenues increased from $1,336,000 in
fiscal 2016 to $2,869,000 in fiscal 2017, while total operating expenses increased from $1,907,000 in fiscal 2016 to $2,362,000
in fiscal 2017. This resulted in net income from operations of $508,000 in 2017 as compared with a net loss from operations of
$571,000 in fiscal 2016.
The increase in revenues is largely attributable
to an increase in net investment income of approximately $709,000 in 2017, mainly due to the rebounding of a 2016 unrealized decline
in market value of an investment account held as a result of a contractual arrangement, where the Company receives any appreciation
and earning in excess of the initial deposit of collateral by the principal on a surety bond. The Company also realized gains of
$138,000 on the sale of investments in 2017 compared to losses of $79,000 in 2016. Insurance premiums written for new and existing
customers increased by approximately $762,000 in 2017, partially due to the recording of $329,000 in No Claims Bonus (recorded
in 2017 for contract years 2015 and 2016) as part of the reinsurance contract. In addition, during 2016, the Company recognized
other income of approximately $287,000 from the removal of dormant account payable balances and commissions no longer payable on
receivables that were written off as uncollectible.
The increase in expenses is mainly attributable
to increased policy acquisition costs and provision for policy losses that are corollary to the previously mentioned increase in
insurance premiums written for new and existing customers. However, general and administrative expenses decreased in 2017 due to
reduced legal fees of approximately $200,000, as a result of a reduction in litigation and legal advice during 2016 relating to
financing and settlement of debt.
Interest expense decreased from $916,000 in
fiscal 2016 to $575,000 in fiscal 2017, due to the discontinuance of the issuance of stock as consideration for the additional
2% dividend on Series A and B Preferred shares for those holders requesting to be redeemed, as well as an decrease in stock issued
as incentive for lending and continuation of terms for previously lent funds.
During the year ending May 31, 2016, the Company
recorded gains on extinguishment of debt in the amount of $1,919,532. These gains resulted from the waived interest and forgiven
principal on notes payables occurring upon the settlement of the bridge loans in 2016.
During the year ending May 31, 2017, the Company
recorded a settlement expense in the amount of $350,000 to be paid to a former employee as the result of a mediation.
Capital Resources
and Financial Condition
Mandatorily
Redeemable Preferred Stock
In
conjunction with the acquisition of FSC at December 31, 2005, a restructuring of the Company’s financing was accomplished
through the private placement of 350 shares of Series A Preferred
stock
and 3,980 shares of Series B Preferred stock, each accompanied by warrants to acquire common stock of the Company in exchange for
cash totaling $3,335,000. Of the total funds received, $2,860,000 was used in the acquisition and funding of the insurance subsidiary,
with the remaining funds used to pay expenses attributable to the acquisition and the funding of on-going operations. Additionally,
approximately $3,668,000 of indebtedness of the Company was converted into preferred stock and warrants reducing the Company’s
borrowings under short-term financing arrangements to approximately $167,000 as of December 30, 2005.
The Series A designation was designed for issuance
to principals desiring surety bonds under FSC’s partially collateralized bonding programs. As designed, proceeds from the
sale of Series A preferred stock is down-streamed to FSC to increase its capital and insurance capacity, although to the extent
that proceeds from the sale of Series B preferred shares was used in the initial acquisition and funding of FSC, the Company was
allowed to use such proceeds to redeem Series B preferred stock (Company option to redeem) or for funding of on-going operations.
Effective June 1, 2007, the Company agreed to the requirement of the West Virginia Insurance Department to downstream all future
proceeds from sales of Series A preferred stock in order to increase capital and reserves of the insurance subsidiary to more substantial
levels.
The Series A designation contains a conditional
redemption feature providing for the redemption of the Series A shares at any time after the seventh (7
th
) anniversary
of the issue date, provided that the principal no longer requires surety bonds issued by FSC. Surety bonds currently being issued
by FSC are primarily for coal mining and reclamation permits, which are long-term in nature and continually evolving whereby outstanding
bonds are periodically released as properties are mined and reclaimed and new bonds issued for properties to be mined in the future.
Accordingly, this source of financing was designed to be long-term by nature.
The Company’s outstanding Series A Preferred
stock matures on the seventh anniversary of the issuance date if the holder has no outstanding surety bonds with the Registrant.
Thereafter holders of the Series A Stock are eligible to request that the Company redeem their Series A Shares. As of May 31, 2017,
the Company has received requests for redemption of 1,026 shares of Series A Preferred. The aggregate amount to which the holders
requesting redemption are entitled as of June 30, 2017, is $1,598,043.
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.
On April 4, 2013, the Company’s Board
of Directors determined based on the criteria established under the terms of the Preferred Stocks that there were insufficient
funds available for the redemption of Preferred Stocks.
The Series B designation was designed for issuance
to investors in JFG and contains both conversion rights to common stock and redemption features. Each share of the Series B preferred
stock is convertible, at the option of the holder, into 1,000 shares of JFG common stock and can be converted at any time. The
Series B preferred shares were issued at a twenty-five percent (25%) discount to the stated face value of $1,000 per share or approximately
$2,217,650 in total. Additional shares of the Series B were subsequently sold at a discount of approximately four and one-half
percent (4.5%) or approximately $36,000. Additionally, the Series B preferred stock can be redeemed, at the option of the holder,
at full-face value plus accrued and unpaid cumulative dividends, commencing with the fifth (5
th
) anniversary of the
original issue date. The Company has the option to redeem the Series B preferred shares at any time after the first (1
st
)
anniversary of the original issue date, subject to the holder choosing to exercise conversion privileges prior to the stated redemption
date.
The Company’s outstanding Series B Preferred
stock matured on December 30, 2010, meaning that the holders of the Series B Stock became entitled to request that the Company
redeem their Series B Shares. As of May 31, 2017, the Company has received requests for redemption of 2,219
shares of Series B Preferred. The aggregate
redemption amount to which the holders are entitled as of June 30, 2017, is $5,519,942.
Under the terms of the Series B Preferred Stock,
receipt of a redemption request required the Company’s Board to make a good faith determination regarding (A) whether the
funds of the Company legally available for redemption of shares of Series B Stock are sufficient to redeem the total number of
shares of Series B Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would,
if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines
that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the
redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the
Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the
redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance
Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the
consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which
would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares
of Series B Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based
upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable
on such shares of Series B Stock to be redeemed shall be increased by 2% of the Series B Face Amount, with the amount of such increase
(
i.e.
, 2% of the Series B Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common
Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days)
equal to the amount of such increase. The shares of Series B Stock not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the
redemption of shares of Series B Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary,
such funds will immediately be used to redeem the balance of the shares of Series B Stock to be redeemed. No dividends or other
distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or
any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share
of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of
any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series B
Stock subject of redemption in accordance herewith. Until the Redemption Price for each share of Series B Stock elected to be redeemed
shall have been paid in full, such share of Series B Stock shall remain outstanding for all purposes and entitle the holder thereof
to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such
shares are redeemed, shall be included as part of the Redemption Price.
On March 8, 2011, the Company’s Board
of Directors determined, based on the criteria established under the terms of the Series B Preferred Stock, that there were insufficient
funds available for the redemption of Series B Preferred Stock.
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 $1,357,656
in fiscal 2017 as compared to $108,386 in fiscal 2016.
Equity Preferred Stock
In
November 2009, as a means of alleviating obligations associated with the Company's Series B Preferred Stock, which by its terms
matured at the end of 2010, management proposed a recapitalization to assist in stabilizing the financial position of the Company.
The Board deemed it advisable to designate a Series C Preferred Stock, with 10,000 authorized shares. The Recapitalization consisted
of the exchange of 6,805 Series B Preferred Shares for a combination of Series C Preferred Shares and Common Stock Shares.
For each Series B Preferred Share, the participating holder received (i) one Series C Preferred Share and (ii) 2,000 shares of
JFG Common Stock. The accumulated dividend rights and preferences associated with the Series B Preferred Shares transferred undiminished
to the corresponding Series C Preferred Shares. This exchange amounted to $6,269,051 of carrying value of Series B Preferred stock
being exchanged for Series C Preferred and Common Stock. 13,609,872 shares of Common Stock were issued to the Series C Preferred
Stock holders at the rate of 2,000 Common shares for each exchanged Series B Preferred Stock, with the related cost associated
with the Common issuance offsetting the Series C Preferred carrying value by $265,120. The shares were valued at approximately
$.01948 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of
the transaction. Series C Preferred stock may be redeemed by the Company but does not have a fixed maturity date and is considered
permanent equity. Holders of over 70% of the outstanding Series B Preferred Shares elected to participate in the recapitalization.
Unlike
the Series B Preferred Shares with their fixed maturity date, the Series C Preferred Shares are permanent equity, with accruing
dividends only increasing the preference amount that must be satisfied before junior securities may participate in dividends or
on liquidation. Accordingly, the effect of the accrual of dividends with respect to the Series C Preferred Shares on the Company’s
balance sheet is to increase the aggregate claim by the Series C Preferred Shares on the equity of the corporation and to increase
the deficit in common equity, while having no effect on the net equity of the corporation as a whole. The entitlement of the Series
C Preferred Shares to a priority in relation to junior securities with respect to dividends and on liquidation does not create
an obligation by the Company and therefore no liability is recorded until the dividends are declared by the Board of the Company.
The Series C Preferred Shares are pari passu with the Series A Preferred Shares and Series B Preferred Shares and no dividends
or other distributions will be paid upon Common Shares or any other class of Shares that is junior in priority to the Series C
Preferred Shares while dividends are in arrears.
The accrual of dividends on the equity preferred
stock resulted in a charge to common stockholders’ equity and a credit to the equity of equity preferred stock of $1,256,829
in fiscal 2017 as compared to $1,164,143 in fiscal 2016.
Dividend Preference and Accretion
During the year ended May 31, 2012, two holders
of Series A Preferred stock released all of their outstanding bonds held with FSC. The carrying value of these shares of Series
A Preferred Shareholders are listed in the liability section of the balance sheet, and therefore the dividends associated with
these shares of Series A Preferred stock after February 29, 2012 is a deduction from net income. The carrying value of the Series
B Preferred Shares that did not convert are listed in the liabilities section of the balance sheet, and therefore the accretion
and dividends associated with the Series B Preferred stock after November 30, 2009 are deductions from net income. Series C Preferred
stock has no accretion. The recorded values of the Series A preferred stock was increased to their stated liquidation values using
the interest method over a period of five years and such amounts were categorized as accretion of mandatorily redeemable preferred
stock in the consolidated statement of operations. This accretion was concluded in December 2010.
The Series A Preferred designation is entitled
to receive cumulative dividends at the rate of 4.00% per annum and the Series B Preferred and Series C Preferred designations are
entitled to receive cumulative dividends at the rate of 8.00% per annum, with the Series A, B and C Preferred designations having
equal ranking and preference as to dividends, liquidation rights and priority to the Company’s common stockholders. The accrued
(but undeclared) dividends associated with the Series C Preferred exchange amounted to $2,295,624 and are included in the total
amount exchanged for Series C Preferred Shares.
At this time, management has chosen to defer
payment of dividends to the holders of the Series A, B and C Preferred Shares until the Company has sufficient funds to meet its
redemption obligations with respect to the Series A and Series B Preferred Shares and has sufficient cash flow from operations
to service its dividend obligations.
Bridge-financing, Commitments and Material Agreements
Of primary importance to the Company's ability
to fully implement its business plan is the expansion of that business into additional states. Regulatory approval and licensing
is required for each state where FSC seeks to conduct business. Management found entry into additional states (as a surety) was
proving difficult without the benefit of more substantial capital and reserves due to FSC's status as a recent entry into this
market and due to the cyclical nature of the coal industry. Accordingly, management began pursuing avenues that would provide additional
capital to facilitate such expansion.
Beginning in fiscal 2008 and completed during
the first quarter of fiscal 2009, the Company obtained two rounds of bridge financing totaling an aggregate of $3,500,000. The
purpose of the financing was to pay expenses of operations and to pay fees and expenses incurred or expected to be incurred in
connection with a larger permanent financing and, in addition, to increase the capital surplus of FSC to make possible the reactivation
of FSC’s surety license in the state of Ohio. The
terms of the bridge-financing arrangement provided
for payment in full upon consummation by the Company of a qualified equity offering providing net proceeds of at least $15 million
on or before September 10, 2013. A qualified equity offering was not consummated. 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. As consideration for this forbearance, the Company entered
into an Amended and Restated General Hypothecation and Pledge Agreement, granting to the bridge lenders a lien and security interest
in all of the capital stock of First Surety Corporation. Under the August 2012 Pledge, the bridge lenders acknowledged that the
effectiveness of certain of the rights and remedies provided by such agreement were subject to prior approval by the Office of
the Commissioner of Insurance for the State of West Virginia.
On July 9, 2014 the Company completed
a $4,500,000 financing. In effect, FSI, a subsidiary of the Registrant, borrowed the funds at 8.00% interest with principal
repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase from certain bridge lenders, after
waiving interest of
approximately $1.6 million,
50.7%
($1.775 million face amount) of the outstanding senior promissory notes comprising the $3.5 million financing dating from 2008,
together with the associated collateral, (ii) to pay in full delinquent tax liabilities owed to the Internal Revenue Service and
State of West Virginia, (iii) to pay an outstanding judgment, and (iv) to pay certain other current liabilities.
FSI
therefore became a member of the Bridge Loan and notified the Collateral Agent for the group of its purchase and majority holding.
The transaction restored majority control of FSC to the Company and improved its balance sheet through waiver of accrued interest.
On August 5, 2015 the Company completed a $1,600,000
transaction which resulted in its acquisition of the remaining 49.3% ($1.725 million face amount) of the senior promissory notes
of the $3.5 million financing dating from 2008, after waiving interest of approximately $1.8 million. Upon closing of the acquisition,
the collateral securing the senior promissory notes, 1,000 shares (100%) of FSC and 1,000 shares (100%) of CMW, was released to
the Company.
The transaction was funded through sale in
a private offering of investment units (Units) that consisted of 5.00% of the outstanding shares of FSC and 500,000 common shares
of the Company. $1,600,00 was raised through the sale of units in exchange for consideration that included a combination of the
cash purchase of units, cancellation of indebtedness owed by the Company to the purchaser in exchange for units and loans to the
Company by potential purchasers that are convertible into the purchase of Units. The Registrant’s Board of Directors has
authorized the sale of Units, which, if completed, would include up to forty-nine percent (49%) of the outstanding stock of FSC.
Restrictions on Use of Assets
Regulatory approval for the acquisition of
FSC by JFG was provided by a Consent Order issued December 23, 2005 by the Commissioner of Insurance of the State of West Virginia
and imposed several conditions for the operation of FSC, including the condition that no dividends or monies were to be paid to
JFG without regulatory approval. This consent order was terminated on March 26, 2012 and dividends in the amounts of $173,000 and
$198,000 were paid during the years ended
May 31, 2015 and May 31, 2014, respectively.
For further information, see Notes C and O to the Consolidated Financial Statements.
Accordingly, the payment of ordinary dividends
is no longer restricted. However, cash, marketable investments, and other receivables held by FSC are restricted from the Company’s
use to fund operations or meet cash needs outside of the insurance company’s domain. As of May 31, 2017, such assets amounted
to approximately $38.38 million.
Under the West Virginia insurance code, ordinary
dividends to stockholders are allowed to be paid only from that part of FSC’s available surplus funds which is comprised
of realized net profits from the business and whereby all such dividends or distributions made within the preceding twelve months
do not exceed 1) the lesser of 10% of FSC’s surplus as regards to policyholders as of December 31
st
of the preceding
year-end or 2) net income from FSC’s operations from the previous two calendar years, not including capital gains. Any payment
of extraordinary dividends requires prior approval from the WV state insurance commissioner.
Critical Accounting Policies and Estimates
Investments
Management believes the Company has the ability
to hold all fixed income securities to maturity. However, the Company determined it may dispose of securities prior to their scheduled
maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements,
or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities
as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes,
reported in stockholders’ equity as a separate component of accumulated other comprehensive income.
Insurance Premiums
Insurance premiums are recognized as revenue
ratably over the term of the related policies in proportion to the insurance protection provided. Premium revenues are net of amounts
ceded to reinsurers. Unearned premiums represent the portion of premiums written, before ceded reinsurance which is shown as an
asset, applicable to the unexpired terms of policies in force determined on a pro rata basis.
Insurance premium receivables are presented
net of an estimated allowance for doubtful accounts, which is based on a periodic evaluation of the aging and collectability of
premium receivables.
Reinsurance
The Company limits the maximum net loss
that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers. Effective April 1, 2009, FSC
entered into a reinsurance agreement with Lloyd’s of London for its coal reclamation surety bonding programs. This agreement
has provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal
reclamation bonding clients. Management expects this reinsurance arrangement to continue FSC’s expansion of market share
and to result in increased cash flow for each of the Company’s operating subsidiaries.
Ceded reinsurance is treated as the risk and
liability of the assuming companies. The Company cedes insurance to other companies but these reinsurance contracts do not relieve
the Company from its obligations to policyholders. Ceded premiums, at a rate of 35% of written premium with a minimum of $490,000
(the newest contract effective March 1, 2017 ceded premium at a rate of 26.75% with a $842,610 minimum), are recognized as reductions
in revenue ratably over the term of the related policies. Ceded unearned premiums represent the portion of ceded premiums written
applicable to the unexpired terms of policies in force determined on a pro rata basis.
Under the terms of its reinsurance treaty,
the Company is entitled to a No Claims Bonus from the reinsurers for each contract year in which no claims are received. The bonus
is 20% of the contract year’s reinsurance premium. No claims had been made since the inception of the treaty that rose to
the coverage level of the reinsurance agreement.
Deferred Policy Acquisition Costs
Policy acquisition costs, consisting of commissions,
premium taxes and other underwriting expenses which vary with, and are primarily related to, the production of business, are deferred
and amortized as a charge to income as the related premiums are earned. The Company periodically tests that deferred policy acquisition
costs are recoverable based on the expected profitability embedded in the reserve for unearned premium. If the expected profitability
is less than the balance of deferred policy acquisition costs, a charge to income is taken and the deferred policy acquisition
cost balance is reduced to the amount determined to be recoverable. Anticipated investment income is considered in the determination
of the recoverability of deferred policy acquisition costs.
Intangible Assets
Incident to its acquisition of FSC on December
31, 2005, in exchange for the purchase price of $2.9 million for the acquisition of FSC, the Company received cash and investments
held by FSC totaling $2.75 million, with the difference being attributed to the property and casualty licenses in the states of
West Virginia, Ohio and Indiana. Such licenses have indefinite lives and are evaluated annually for recoverability and impairment
loss. Impairment loss, if any, is measured by estimating future cash flows attributable to such assets based on forecasts and projections
and comparing such discounted cash flow amounts to the carrying value of the asset. Should actual results differ from such forecasts
and projections, such assets may be subject to future impairment charges.
Reserve for Losses and Loss Expenses
Reserves for unpaid losses and loss adjustment
expenses of the insurance subsidiary are estimated using information derived from Company experience in addition to management’s
estimate of expected future claims on those policies in force. Management’s estimate considers relevant
industry information but is largely dependent
upon management’s experience and judgment since prior Company experience and industry data available are extremely limited.
In August 2015, the Company paid a claim on
a called bond in the amount of $550,000, of which $75,000 was paid using collateral of the principal. The remaining $475,000 has
been established as a salvage receivable to be repaid by the principal with collateral comprised of the assignment of a closely
held stock owned by the principal and assignment of a promissory note payable to the principal, with the total assigned values
in excess of the salvage receivable. As of May 31, 2017, the Company had received $45,000 in recovered salvage on this claim.
In February 2017, the Company paid a claim
on a called bond in the amount of $752,400, of which $722,780 was paid using collateral of the principal. The remaining $29,620
has been established as a salvage receivable to be repaid with periodic payments from the bond principal. As of May 31, 2017, the
Company has received $3,000 in recovered salvage on this claim.
For the years ended May 31, 2017 and 2016,
the Company incurred loss adjustment expenses of $7,597 and $26,590, respectively, related to costs of engaging experts, attorney
fees, and consultants for potential claims. These costs were charged against established case reserves or bulk reserves
FSC is currently licensed to write coal permit
and miscellaneous fixed-liability limit surety bonds in West Virginia and Ohio. Coal permit bonds are required by regulatory agencies
to assure the reclamation of land that has been disturbed by mining operations, and accordingly is a highly regulated process by
federal and state agencies. Such bonds are generally long-term in nature with mining operations and reclamation work being conducted
in unison as the property is mined. No two principals or properties are alike due to varied company structures and unique geography
and geology of each site.
In underwriting coal reclamation bonds, management
obtains estimates of costs to reclaim the properties in accordance with the specifications of the mining permit, prepared by independent
outside professionals experienced in this field of work. Such estimates are then periodically updated and compared with marketable
securities pledged, and held for the benefit of FSC as collateral for the surety bond, to mitigate the exposure to significant
loss. Should the principal default in its obligation to reclaim the property as specified in the mining permit, FSC would then
use the funds held in the collateral account to reclaim the property or forfeit the face amount of the surety bond. Losses can
occur if the costs of reclamation exceed the estimates obtained at the time the bond was underwritten or upon subsequent re-evaluations,
or if sufficient collateral is not obtained, or if the collateral held has experienced significant deterioration in value and if
FSC is not otherwise able to recover under its contractual rights to indemnification.
Miscellaneous fixed-liability limit surety
bonds are generally fully collateralized by the principal’s cash investment into a collateral investment account to mitigate
FSC’s exposure to loss. Generally the collateral investment account is managed by the Company’s investment advisory
subsidiary, Jacobs & Co. Losses can occur should the principal default on the performance required by the bond and the collateral
in the investment account experiences deterioration in value.
In establishing its reserves for losses and
loss adjustment expense, management continually reviews its exposure to loss based on reports provided in conjunction with the
periodic monitoring and inspections performed along with industry averages and historical experience. Management has estimated
such losses based on management’s experience, adjusted for factors that are unique to the Company’s approach, and in
consultation with its consulting actuary experienced in the surety field. As a result of the limited Company and industry data
and experience there is a significant risk that amounts reserved for future expected losses and loss adjustment expenses could
vary from those amounts reserved and the variance could be material. Adjustments to reserves are reflected in earnings in the period
of determination.
Liquidity and Going Concern
The Company experienced operating income (loss)
from operations of approximately $508,000 and ($571,000) for the years ended May 31, 2017 and 2016, respectively. The Company’s
income (or loss) decreases (or increases) when accretion of mandatorily redeemable convertible preferred stock and accrued dividends
on mandatorily redeemable preferred stock, as well as income attributable to non-controlling interests, (i.e. 30% and 10% of FSC
in 2017 and 2016, respectively), are taken into account, to losses of approximately ($1,358,000) and ($108,000) for the years ended
May 31, 2017 and 2016. 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 redemption and dividend obligations. Due to this inability to pay professional fees, the financial
audits and subsequent required filings for the fiscal years ended May 31, 2014, 2015, 2016, and 2017 were not completed or filed
in a timely manner. A substantial portion of the Company’s cash flow is generated by its insurance subsidiary, with such
cash flow subject to insurance regulatory restrictions, including a limitation of FSC 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 more substantial book of business.
During 2017 and 2016, the Company sold in a
private offering investment units (Units) that consisted of a total of 30.00% of the outstanding shares of FSC and 3,000,000 common
shares of the Company. The Registrant’s Board of Directors has authorized the sale of Units, which, if completed, would include
up to forty-nine percent (49%) of the outstanding stock of FSC. These sales, as well as the increase in cash flows in 2017 (and
2018) allowed the Company to secure the services of independent auditors and all filings that are past due are to be expedited
and filed during 2018.
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 due to FSC’s specialization in coal reclamation bonds, the cyclical nature of that industry and the financial condition
of the Company. Management believes that if FSC’s capital and surplus were significantly more substantial and the financial
condition of the Company was stabilized, entry into other states would be less challenging.
Accordingly, during November 2016 FSC received
approval to issue up to $50 million non-voting, non-cumulative 3.5% Series A Preferred stock. A strategic partner purchased $8
million Preferred which was contributed to capital in January 2017, increasing the subsidiary’s capital and surplus from
$5 million to $13 million. Enabled by the increase in capital and desiring to expand its geographic footprint, FSC is actively
pursuing expansion to additional states. Management continues to pursue avenues that can provide additional capital to increase
the capacity of its insurance subsidiary and to fund the Company’s continuing operations as the business is being fully developed.
Through the sharing of resources (primarily
personnel) to minimize operating costs, the Company and its subsidiaries attempt to minimize operating expenses and preserve resources.
Although FSC is cash flow positive, the use of its assets and profits are restricted to its stand-alone operation by regulatory
authority. While growth of the FSC business continues to provide additional revenue opportunities to the Company’s other
subsidiaries, Jacobs & Company and Triangle Surety, it is anticipated that working capital deficiencies will continue to be
met either through the raising of additional capital or borrowings. However, there can be no assurance that additional capital
(or debt financing) will be available when and to the extent required or, if available, on terms acceptable to the Company. Accordingly,
there is substantial doubt as to the Company’s ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Comparison of Results of Operations
for Fiscal 2017 With 2016
The Company experienced income from operations
of approximately $507,000 in 2017 as compared with loss from operations of ($572,000) in fiscal 2016. Including non-cash expenses,
the net loss attributable to common stockholders was ($2,351,714) in fiscal 2017 as compared to ($1,346,660) in fiscal 2016. Net
loss attributable to the Company after deducting participation attributable to non-controlling interests is taken into account
is ($2,614,485) in fiscal 2017 as compared to ($1,273,529) in fiscal 2016.
Revenues
Revenues increased 115% in fiscal 2017 to $2,869,316
as compared with $1,335,829 in fiscal 2016. The increase is largely attributable to the increase in net investment income of approximately
$709,000, mainly due to the rebounding of a 2016 severe unrealized loss in market value of an investment account held as a result
of a contractual arrangement, where the Company receives any appreciation and earning in excess of the initial deposit of collateral
by the principal on a surety bond. The Company also realized gains of $138,000 on the sale of investments in 2017 compared to losses
of $79,000 in 2016. Insurance premiums written for new and existing customers increased by approximately $762,000 in 2017.
In 2016 the Company recognized other income
of approximately $287,000 from the removal of dormant accounts payable and commissions no longer payable on premium receivables
that were written off as uncollectible. During 2017, the Company recognized approximately $109,000 in interest income on notes
receivable issued during 2016, compared to approximately $81,000 in the previous year.
Revenue from the investment management segment,
net of advisory referral fees, declined 25% with fiscal 2017 reporting $81,918 as compared to $109,194 in fiscal 2016. This decline
in investment advisory fees related to the decrease in the market value of assets in portfolios under management. Investment advisory
fees are based on the market value of assets under management and some fluctuation will occur due to overall market conditions.
Generally such revenues will remain relatively constant from year to year with large fluctuations attributable to the growth or
loss of assets under management.
Revenue from the surety insurance segment,
consisting of FSC and TSA, increased 204%, with $2,518,089 in fiscal 2017 as compared with $829,456 for the prior year. Revenues
attributable to the insurance segment are as follows:
|
|
Year Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Premiums earned
|
|
$
|
1,461,797
|
|
|
$
|
979,552
|
|
Commissions earned
|
|
|
15,195
|
|
|
|
134,346
|
|
No Claims Bonus from Reinsurers
|
|
|
329,048
|
|
|
|
—
|
|
Other underwriting income
|
|
|
80,000
|
|
|
|
10,000
|
|
Net investment income
|
|
|
493,829
|
|
|
|
(215,382
|
)
|
Net realized investment gains
|
|
|
138,220
|
|
|
|
(79,060
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,518,089
|
|
|
$
|
829,456
|
|
Premium revenue is recognized ratably over
the term of the policy period and thus is relatively stable from period to period with fluctuations for comparable periods generally
reflecting the overall growth or loss of business. Commission revenue, which is dependent on the timing of issuance or renewal
of bonds, is expected to be more seasonal from quarter-to-quarter with fluctuations for comparable periods largely reflecting the
overall growth or loss of business
Investment income is expected to remain relatively
consistent from period to period, but can fluctuate based on interest rates, market conditions, growth or loss of business, and
investment funds expended in the payment of claims. The increase in revenues reflected above is mainly attributable to the rebounding
from a 2016 severe drop in market value of an investment account held as a result of a contractual arrangement, where the Company
receives any appreciation and earning in excess of the initial deposit of collateral by the principal on a surety bond as well
as realized gain of 138,220 in 2017 compared to realized losses of (79,060) in 2016 on the sale of investments. Gross premium written
in fiscal 2017 amounted to $2,948,921 as compared to $1,466,837 in fiscal 2016 and is reflective of an increase in the volume of
bonds required for new and existing clients. Commission income earned for the placement of bonds with outside insurers decreased
from $134,346 in 2016 to $15,195 in 2017. This decrease in commission revenue for 2017 is derived from one subsidiary’s 2016
facilitation of a contract with an outside company and a separate subsidiary to provide replacement bonding for premium income.
The Company did not record a No Claims Bonus for the year ended May 31, 2016 due to the recording of a claim reserve payable under
the terms of the reinsurance contract period covering October 1, 2014 through
December 31, 2015. However, during 2017, the
claim, which was significantly less than the No Claim Bonus, was withdrawn in favor of receiving the applicable No Claims Bonus
for the contract year ending December 31, 2015, in the amount of $106,578. The No Claims Bonus for the contract period ending March
31, 2017, in the amount of $222,470 was recorded on March 31, 2017 and this contract was commuted as well. The company also recorded
a one-time additional other underwriting income premium of $80,000 from one client, associated with a special acceptance increasing
certain reinsurance limits.
FSC’s investment holdings in fiscal 2017
averaged $26.550 million as compared to $9.748 million for fiscal 2016, with investment yields decreasing from 3.05% to 1.68%.
The ultimate effect of zero coupon bonds will be reflected over the life of the bond through accretion rather than yield. During
the period, equity securities in the portfolio provided dividends and gains from the covered call strategy utilized on the equities.
Expenses
Incurred policy losses represent the provision
for loss and loss adjustment expense for “incurred but not reported” (IBNR) losses attributable to surety bonds issued
by FSC. The Company reported $579,359 as IBNR for fiscal 2017, or 40% of earned premium (25% of gross earned premium before reinsurance),
as compared to $179,334 or 18% of earned premium (13% of gross earned premium before reinsurance) for fiscal 2016. As an abundance
of caution to reflect the change in FSC’s reinsurance treaty. with higher limits but increased underlying exposure, FSC increased
the percentage of premium reserved for IBNR from 23% of earned premium to 26% for partially collateralized bonds beginning May
1, 2017. Due to overall concern for the coal industry brought about by substantial pricing competition from natural gas and resultant
bankruptcies of publicly traded coal companies, FSC had previously agreed with its actuary and regulators to adjust the percentage
of premium reserved for IBNR by increasing the reserve rate from 12% of earned premium for partially collateralized bonds to 23%
beginning January 1, 2016. IBNR loss estimates have been based on actuarial recommendations and management’s judgment that
are unique to the FSC’s underwriting approach. Prior to 2014, FSC had not received any claims for losses on any bonds underwritten
since business began in 2006.
Insurance policy acquisition costs represent
charges to operations for underwriting, commissions and premium tax attributable to surety polices issued by FSC and are recognized
ratably over the period in which premiums are earned. In fiscal 2017, such costs amounted to $590,260 or 40% of earned premium
as compared with $284,127 or 29% in fiscal 2016.
General and administrative expenses for fiscal
2017 were $1,187,379 as compared with $1,442,606 for fiscal 2016, representing a decrease of $255,227 and are comprised of the
following:
|
|
Year Ended May 31,
|
|
|
|
|
2017
|
|
2016
|
|
Difference
|
|
|
|
|
|
|
|
Salaries and related costs
|
|
$
|
605,501
|
|
|
$
|
628,855
|
|
|
$
|
(23,354
|
)
|
General office expense
|
|
|
112,959
|
|
|
|
99,417
|
|
|
|
13,542
|
|
Legal and other professional fees
|
|
|
38,388
|
|
|
|
225,739
|
|
|
|
(187,351
|
)
|
Audit, accounting and related services
|
|
|
168,967
|
|
|
|
63,256
|
|
|
|
105,711
|
|
Travel, meals and entertainment
|
|
|
51,008
|
|
|
|
92,866
|
|
|
|
(41,858
|
)
|
Other general and administrative
|
|
|
210,556
|
|
|
|
332,473
|
|
|
|
(121,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative
|
|
$
|
1,187,379
|
|
|
$
|
1,442,606
|
|
|
$
|
(255,227
|
)
|
Salaries and related costs, net of deferred
internal policy acquisition costs, decreased $23,354 and are comprised of the following:
|
|
Year Ended May 31,
|
|
|
|
|
2017
|
|
2016
|
|
Difference
|
Salaries and wages
|
|
$
|
702,067
|
|
|
$
|
572,764
|
|
|
$
|
129,303
|
|
Commissions
|
|
|
152,392
|
|
|
|
122,599
|
|
|
|
29,793
|
|
Payroll taxes
|
|
|
65,712
|
|
|
|
53,131
|
|
|
|
12,581
|
|
Fringe benefits
|
|
|
72,109
|
|
|
|
59,431
|
|
|
|
12,678
|
|
Key-man life insurance
|
|
|
60,378
|
|
|
|
61,137
|
|
|
|
(759
|
)
|
Deferred policy acquisition costs
|
|
|
(447,157
|
)
|
|
|
(240,207
|
)
|
|
|
(206,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and related costs
|
|
$
|
605,501
|
|
|
$
|
628,855
|
|
|
$
|
(23,354
|
)
|
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 renewals, as well as to the timing of payment of commissions based upon collections. The increase in salaries and wages
is attributable to the hiring of three new employees in June of 2016, and one additional employee in January of 2017. The increase
in payroll taxes and fringe benefits is attributable to the additional employees and the increased cost of health insurance related
to adding a new employees to the plan.
Legal and professional fees decreased in 2017
compared to the prior year due to the Company’s above normal efforts and related expenses in 2016 to expand the Company’s
business, restructure debt of the Company via refinancing and sale of subsidiary stock, and penetrate new markets. Audit, accounting
and related services increased in 2017 due to a change in accounting and audit service provider in 2015 for the Company which resulted
in the delay of audit related expenses for all of 2016.
Other general and administrative expense decreased
by approximately $121,000 in 2017 compared to the corresponding 2016 period. This decrease is mainly due to the Company’s
writing off accounts receivable of approximately $55,000 in 2017 compared to $156,000 as uncollectible in
2016. The Company anticipates that some of
these accounts receivable will be paid by an obligor in the future based on verbal agreements with this obligor.
Interest expense and interest income
Interest expense for fiscal 2017 was
$574,971 compared to $915,098 in fiscal 2016. Components of interest expense are comprised of the following:
|
|
Year Ended May 31,
|
|
|
|
|
2017
|
|
2016
|
|
Difference
|
|
|
|
|
|
|
|
Interest expense on bridge financing
|
|
$
|
—
|
|
|
$
|
24,103
|
|
|
$
|
(24,103
|
)
|
Expense of common shares issued or to be issued in connection with bridge financing and other arrangements
|
|
|
2,109
|
|
|
|
51,322
|
|
|
|
(49,213
|
)
|
Interest expense on demand and term notes
|
|
|
461,022
|
|
|
|
555,323
|
|
|
|
(94,301
|
)
|
Other finance charges
|
|
|
111,840
|
|
|
|
284,350
|
|
|
|
(172,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
571,971
|
|
|
$
|
915,098
|
|
|
$
|
(343,127
|
)
|
Interest expense decreased from $915,098 in
fiscal 2016 to $571,971 in fiscal 2017, attributable to several factors; i) interest expense on bridge financing decreased due
to elimination of the debt in July 2015, ii) an adjustment in 2016 to correctly record as interest expense part of a mineral asset
(land) sale transaction made in 2015 iii) deferral of the issuance of stock as 2% dividend on Series A and B Preferred shares that
have requested to be redeemed. In addition, there was a decrease in the market value of common stock used to calculate the price
of shares issued as incentive for lending in the year ended 2016, as well as a decrease in the amount of borrowings in 2017 and
the interest associated with those borrowings.
Preferred
Stock Accretion and Dividends
Accretion of mandatorily redeemable convertible preferred stock
is comprised of accretion of discount and accrued but unpaid dividends on preferred stock as follows:
|
|
Year Ended May 31,
|
|
|
2017
|
|
2016
|
Accrued dividends – mandatorily redeemable preferred stock
|
|
$
|
87,688
|
|
|
$
|
84,492
|
|
Accrued dividends – equity preferred stock
|
|
|
1,256,829
|
|
|
|
1,164,143
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,344,517
|
|
|
$
|
1,248,635
|
|
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, 2017, dividends of $522,099 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, 2016, dividends of
$483,593 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 $67,847 and $65,374, for the years ended May 31, 2017 and 2016,
and not included in the table above. Series C equity stock is not mandatorily redeemable and does not accrete.
Off Balance Sheet Arrangements
The Company does not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
Future Direction of the Company
Management believes that the Company’s successful restructuring
of the $3.5 million Bridge debt has been a substantial positive that will permit its insurance subsidiary to raise significant
capital and more fully execute its business plan within the next 12 months. Additional capital will permit FSC to apply for licensing
in additional states targeted for our coal reclamation surety program, plus file for approval with the U.S. Treasury to provide
bonds for projects on federal lands.
The substantial increase of funds placed in IBNR (a reserve for
potential claims) directly strengthened FSC, allowing it to execute larger and more strategic groups of bonds going forward.
FSC intends to branch into infra-structure
bonds in the near future.
|
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The following financial statements are included herein in response
to Item 8:
|
|
Page
|
Table of Contents
|
|
F-1
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Financial Statements
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
F-3
|
Consolidated Statements of Operations
|
|
F-5
|
Consolidated Statements of Comprehensive Loss
|
|
F-6
|
Consolidated Statements of Cash Flows
|
|
F-7
|
Consolidated Statements of Series A Redeemable Preferred Stock and Stockholders’ Equity (Deficit)
|
|
F-8
|
Notes to Consolidated Financial Statements
|
|
F-10
|
|
|
|
|
|
|
JACOBS FINANCIAL GROUP, INC.
FINANCIAL STATEMENTS
FOR THE YEARS
ENDED MAY 31, 2017 and 2016
(AUDITED)
TABLE OF CONTENTS
|
|
Page
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Financial Statements
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
F-3
|
Consolidated Statements of Operations
|
|
F-5
|
Consolidated Statements of Comprehensive Loss
|
|
F-6
|
Consolidated Statements of Cash Flows
|
|
F-7
|
Consolidated Statements of Series A Redeemable Preferred Stock and Stockholders’ Equity (Deficit)
|
|
F-8
|
Notes to Consolidated Financial Statements
|
|
F-10
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Stockholders and Board of Directors
Jacobs Financial Group, Inc.
Charleston, West Virginia
We have audited the accompanying consolidated
balance sheets of Jacobs Financial Group, Inc. (the "Company") as of May 31, 2017 and 2016, 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 financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements,
the Company has insufficient liquidity, financial resources, is in default with certain loan and preferred stock agreements, and
has suffered significant recurring operating losses. These conditions, among others, raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans regarding these matters are also discussed in Note A. The accompanying
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ EKS&H LLLP
EKS&H LLLP
Denver, Colorado
June 26, 2018
Jacobs Financial Group, Inc.
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
May 31, 2016
|
ASSETS
|
|
|
|
Investments and Cash:
|
|
|
|
Bonds and mortgaged-back securities available for sale, at fair value
|
|
|
33,546,645
|
|
|
$
|
7,230,261
|
|
(amortized cost - 5/31/17 $33,634,403; 5/31/16 $7,170,789)
|
|
|
|
|
|
|
|
|
Equity investments available for sale, at fair value, net
|
|
|
2,422,476
|
|
|
|
1,488,440
|
|
Cash
|
|
|
240,153
|
|
|
|
250,603
|
|
Restricted cash and short term investments
|
|
|
2,165,770
|
|
|
|
412,959
|
|
Total Investments and Cash
|
|
|
38,375,044
|
|
|
|
9,382,263
|
|
|
|
|
|
|
|
|
|
|
Investment income due and accrued
|
|
|
299,555
|
|
|
|
63,545
|
|
Premiums and other accounts receivable, net of allowance for
|
|
|
|
|
|
|
|
|
doubtful accounts of $15,053 and $40,658, respectively
|
|
|
540,775
|
|
|
|
291,856
|
|
Prepaid reinsurance premium
|
|
|
418,124
|
|
|
|
232,647
|
|
Deferred policy acquisition costs
|
|
|
367,609
|
|
|
|
171,883
|
|
Furniture, automobile, and equipment, net of accumulated depreciation of $83,845 and $112,627, respectively
|
|
|
37,245
|
|
|
|
1,233
|
|
Note receivable
|
|
|
364,525
|
|
|
|
360,671
|
|
Related party note receivable
|
|
|
960,540
|
|
|
|
1,121,294
|
|
Due from related party
|
|
|
939,945
|
|
|
|
515,488
|
|
Other assets
|
|
|
16,780
|
|
|
|
14,617
|
|
Intangible assets
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
42,470,142
|
|
|
$
|
12,305,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses, net
|
|
$
|
2,521,921
|
|
|
$
|
1,931,779
|
|
Reserve for unearned premiums
|
|
|
1,346,668
|
|
|
|
681,075
|
|
Advanced premium
|
|
|
21,740
|
|
|
|
45,968
|
|
Contractual liability for collateral invested, net
|
|
|
327,217
|
|
|
|
431,814
|
|
Accrued expenses and professional fees payable
|
|
|
1,059,206
|
|
|
|
527,874
|
|
Accounts payable
|
|
|
242,708
|
|
|
|
244,096
|
|
Ceded reinsurance payable
|
|
|
422,017
|
|
|
|
27,898
|
|
Due to related party
|
|
|
124,323
|
|
|
|
124,723
|
|
Term and demand notes payable to related party
|
|
|
2,343,999
|
|
|
|
2,331,473
|
|
Notes payable
|
|
|
5,059,385
|
|
|
|
5,045,969
|
|
Accrued interest payable
|
|
|
651,834
|
|
|
|
561,307
|
|
Accrued interest payable to related party
|
|
|
31,853
|
|
|
|
24,073
|
|
Deferred sale of FSC stock
|
|
|
—
|
|
|
|
1,500,000
|
|
Other liabilities
|
|
|
267,133
|
|
|
|
92,588
|
|
Amounts held for accounts of others
|
|
|
21,926,872
|
|
|
|
2,068,252
|
|
Mandatorily redeemable Series A Preferred Stock, $.0001 par value per share; 1 million shares authorized; 1,126 shares issued and outstanding at May 31, 2017 and May 31, 2016, respectively; stated liquidation value of $1,000 per share; aggregate liquidation value at May 31, 2017 and May 31, 2016, of $1,738,792 and $1,670,945, respectively.
|
|
|
1,738,792
|
|
|
|
1,670,945
|
|
Mandatorily redeemable Series B Preferred Stock, $.0001 par value per share; 3,136 shares authorized; 2,817 shares issued and outstanding at May 31, 2017 and May 31, 2016; stated liquidation value of $1,000 per share; aggregate liquidation value at May 31, 2017 and May 31, 2016, of $6,853,251 and $6,331,152, respectively.
|
|
|
6,853,251
|
|
|
|
6,331,152
|
|
Total Liabilities
|
|
|
44,938,919
|
|
|
|
23,640,986
|
|
See accompanying notes.
|
|
|
|
|
|
|
|
|
Mandatorily redeemable convertible Series A Preferred Stock, $.0001 par value per share; 1 million shares authorized; 1,549 shares issued and outstanding at May 31, 2017 and May 31, 2016, respectively; stated liquidation value of $1,000 per share; aggregate liquidation value at May 31, 2017 and May 31, 2016, of $2,247,290 and $2,159,602, respectively.
|
|
|
2,247,290
|
|
|
|
2,159,602
|
|
Total Mandatorily Redeemable Convertible Preferred Stock
|
|
|
2,247,290
|
|
|
|
2,159,602
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Notes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock, $.0001 par value per share; 10,000 shares authorized; 6,805 shares issued and outstanding at May 31, 2017 and May 31, 2016, respectively; includes $9,698,738 and $8,441,909 accrued Series C dividends, respectively; aggregate liquidation value at May 31, 2017 and May 31, 2016, of $15,729,669 and $14,472,840, respectively.
|
|
|
15,729,669
|
|
|
|
14,472,840
|
|
Common stock, $.0001 par value per share; 490 million shares authorized; 385,892,203 and 385,092,203 shares issued and outstanding at May 31, 2017 and May 31, 2016, respectively
|
|
|
38,071
|
|
|
|
37,991
|
|
Additional paid in capital
|
|
|
5,231,327
|
|
|
|
4,615,374
|
|
Accumulated deficit
|
|
|
(35,773,897
|
)
|
|
|
(33,159,411
|
)
|
Accumulated other comprehensive income
|
|
|
(130,503
|
)
|
|
|
(2,305
|
)
|
Preferred stock of FSC, par value $1,000 per share; 50,000 authorized, 8,000 shares outstanding (all non-controlling)
|
|
|
8,000,000
|
|
|
|
-
|
|
Noncontrolling Interest
|
|
|
2,189,266
|
|
|
|
540,420
|
|
Total Stockholders' Equity (Deficit)
|
|
|
(4,716,067
|
)
|
|
|
(13,495,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
42,470,142
|
|
|
$
|
12,305,497
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
Jacobs Financial Group, Inc,
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory services
|
|
$
|
81,918
|
|
|
$
|
109,194
|
|
Insurance premiums and commissions
|
|
|
1,886,040
|
|
|
|
1,123,898
|
|
Net investment income (losses)
|
|
|
493,829
|
|
|
|
(215,382
|
)
|
Net realized investment gains (losses)
|
|
|
138,220
|
|
|
|
(79,060
|
)
|
Other income
|
|
|
160,493
|
|
|
|
316,267
|
|
Interest and dividend income
|
|
|
108,816
|
|
|
|
80,912
|
|
Total Revenues
|
|
|
2,869,316
|
|
|
|
1,335,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for policy losses
|
|
|
579,359
|
|
|
|
179,335
|
|
Insurance policy acquisition costs
|
|
|
590,260
|
|
|
|
284,127
|
|
General and administrative
|
|
|
1,187,379
|
|
|
|
1,442,606
|
|
Depreciation
|
|
|
4,598
|
|
|
|
1,251
|
|
Total Operating Expenses
|
|
|
2,361,596
|
|
|
|
1,907,319
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
|
|
|
507,720
|
|
|
|
(571,490
|
)
|
|
|
|
|
|
|
|
|
|
Gain on debt extinguishment
|
|
|
—
|
|
|
|
1,919,532
|
|
Settlement Expense
|
|
|
(350,000
|
)
|
|
|
—
|
|
Accrued dividends of Series A Mandatorily Redeemable
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
(67,847
|
)
|
|
|
(65,374
|
)
|
Accrued dividends and accretion of Series B Mandatorily
|
|
|
|
|
|
|
|
|
Redeemable Preferred Stock
|
|
|
(522,099
|
)
|
|
|
(483,596
|
)
|
Interest expense
|
|
|
(574,971
|
)
|
|
|
(915,098
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(1,007,197
|
)
|
|
|
(116,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Mandatorily Redeemable Convertible
|
|
|
|
|
|
|
|
|
Preferred Stock, including accrued dividends
|
|
|
(87,688
|
)
|
|
|
(84,492
|
)
|
Accrued dividends on Series C Preferred Stock equity
|
|
|
(1,256,829
|
)
|
|
|
(1,164,143
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(2,351,714
|
)
|
|
|
(1,364,661
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
(262,771
|
)
|
|
|
92,131
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to JFGI Stockholders
|
|
$
|
(2,614,485
|
)
|
|
$
|
(1,272,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares Outstanding
|
|
|
385,197,135
|
|
|
|
381,912,411
|
|
See accompanying notes.
Jacobs Financial Group, Inc.
|
|
|
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
Year Ended May 31,
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) attributable to common stockholders
|
|
$
|
(2,351,714
|
)
|
|
$
|
(1,364,661
|
)
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss of available-for-sale investments arising during period
|
|
|
(34,548
|
)
|
|
|
(28,359
|
)
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized loss included in net loss
|
|
|
(93,649
|
)
|
|
|
4,641
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss attributable to available-for-sale investments recognized in other comprehensive income (loss)
|
|
|
(128,197
|
)
|
|
|
(23,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
$
|
(2,479,911.00
|
)
|
|
$
|
(1,388,379.00
|
)
|
See accompanying notes.
Jacobs Financial Group, Inc,
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,007,197
|
)
|
|
$
|
(116,026
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to
|
|
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in short-term investments
|
|
|
(1,659,849
|
)
|
|
|
1,414,868
|
|
Unearned premium
|
|
|
455,888
|
|
|
|
(106,606
|
)
|
Stock issued in connection with financing arrangements
|
|
|
2,108
|
|
|
|
12,987
|
|
Stock issued in connection with dividend arrangements
|
|
|
—
|
|
|
|
37,184
|
|
Accrual of Series A preferred stock dividends
|
|
|
67,847
|
|
|
|
65,374
|
|
Accrual of Series B preferred stock dividends and accretion
|
|
|
522,098
|
|
|
|
483,596
|
|
Provision for loss reserves
|
|
|
590,142
|
|
|
|
(322,256
|
)
|
Amortization of premium
|
|
|
158,488
|
|
|
|
96,216
|
|
Depreciation
|
|
|
4,598
|
|
|
|
1,251
|
|
Accretion of discount
|
|
|
(16,620
|
)
|
|
|
—
|
|
Proceeds from funds held in trust
|
|
|
19,858,620
|
|
|
|
—
|
|
Realized (gain) loss on sale of securities
|
|
|
(138,220
|
)
|
|
|
79,061
|
|
Gain on extinguishment of debt
|
|
|
—
|
|
|
|
(1,919,532
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(2,163
|
)
|
|
|
(67
|
)
|
Premium and other receivables
|
|
|
(353,515
|
)
|
|
|
566,273
|
|
Investment income due and accrued
|
|
|
(110,809
|
)
|
|
|
(11,353
|
)
|
Deferred policy acquisition costs
|
|
|
(195,726
|
)
|
|
|
(16,906
|
)
|
Related party accounts payable
|
|
|
(400
|
)
|
|
|
(47,886
|
)
|
Accounts payable
|
|
|
(1,388
|
)
|
|
|
65,844
|
|
Accrued expenses and other liabilities
|
|
|
1,198,302
|
|
|
|
(246,738
|
)
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
19,372,204
|
|
|
|
35,284
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of bonds acquired
|
|
|
(47,146,079
|
)
|
|
|
(1,775,947
|
)
|
Costs of mortgaged-backed securities acquired
|
|
|
(1,864,276
|
)
|
|
|
—
|
|
Purchase of equity securities
|
|
|
(2,667,650
|
)
|
|
|
(1,899,637
|
)
|
Redemption of bonds upon call or maturity
|
|
|
17,000,000
|
|
|
|
—
|
|
Proceeds from sale of securities available for sale
|
|
|
6,614,202
|
|
|
|
1,910,797
|
|
Repayment of mortgage-backed securities
|
|
|
681,537
|
|
|
|
631,121
|
|
(Purchase)/Collection - accrued interest
|
|
|
(125,201
|
)
|
|
|
3,980
|
|
Purchase of furniture and equipment
|
|
|
(40,610
|
)
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
(27,548,077
|
)
|
|
|
(1,130,234
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from related party debt
|
|
|
599,452
|
|
|
|
1,957,658
|
|
Repayment of related party debt
|
|
|
(1,011,383
|
)
|
|
|
(971,207
|
)
|
Proceeds from borrowings
|
|
|
195,060
|
|
|
|
1,171,192
|
|
Repayment of borrowings
|
|
|
(181,643
|
)
|
|
|
(2,319,269
|
)
|
Payment of lendings
|
|
|
(200,000
|
)
|
|
|
(500,000
|
)
|
Payment of related party lendings
|
|
|
—
|
|
|
|
(1,250,000
|
)
|
Proceeds from repayment of lendings
|
|
|
196,146
|
|
|
|
139,329
|
|
Proceeds from repayment of related party lendings
|
|
|
160,754
|
|
|
|
128,706
|
|
Proceeds from sale of subsidiary common stock
|
|
|
500,000
|
|
|
|
1,000,000
|
|
Proceeds from sale of subsidiary preferred stock
|
|
|
8,000,000
|
|
|
|
—
|
|
Proceeds from deferred sale of subsidiary stock
|
|
|
—
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from (used in) financing activities
|
|
|
8,258,386
|
|
|
|
856,409
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
82,513
|
|
|
|
(238,541
|
)
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
$
|
465,810
|
|
|
$
|
704,351
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
548,323
|
|
|
$
|
465,810
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
918,048
|
|
|
$
|
918,048
|
|
Income taxes paid
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing transaction:
|
|
|
|
|
|
|
|
|
Additional consideration paid for issuance of debt
|
|
$
|
12,987.00
|
|
|
$
|
12,987.00
|
|
See accompanying notes.
Jacobs Financial Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Series A Redeemable Preferred Stock and Stockholders' Equity (Deficit)
|
|
|
For the Year Ended May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily Redeemable
|
|
Common Stock
|
|
Series C Preferred
|
|
|
|
Accumulated
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Preferred
|
|
|
|
|
|
|
|
Other
|
|
JFGI
|
|
|
|
Total
|
|
|
Preferred Stock
|
|
|
|
|
|
Paid-In
|
|
Stock of
|
|
|
|
Amount
|
|
Accumulated
|
|
Comprehensive
|
|
Sharesholder's
|
|
Noncontrolling
|
|
Sharesholder's
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Subsidiaries
|
|
Shares
|
|
and APIC
|
|
Deficit
|
|
Income (Loss)
|
|
Interest
|
|
Interest
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2016
|
|
|
1,549
|
|
|
$
|
2,159,602
|
|
|
|
379,908,267
|
|
|
$
|
37,991
|
|
|
$
|
4,615,374
|
|
|
|
—
|
|
|
|
6,805
|
|
|
$
|
14,472,840
|
|
|
$
|
(33,159,411
|
)
|
|
$
|
(2,305
|
)
|
|
$
|
(14,035,511
|
)
|
|
$
|
540,420
|
|
|
$
|
(13,495,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock as compensation for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock as additional consideration in financing arrangements
|
|
|
—
|
|
|
|
—
|
|
|
|
800,000
|
|
|
|
80
|
|
|
|
2,029
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,109
|
|
|
|
—
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Accretion of Series A mandatorily redeemable convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Accrued dividends of Series A mandatorily redeemable convertible preferred stock
|
|
|
—
|
|
|
|
87,689
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(87,689
|
)
|
|
|
—
|
|
|
|
(87,689
|
)
|
|
|
—
|
|
|
|
(87,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Accrued dividends of Series C equity preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,256,828
|
|
|
|
(1,256,828
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exchange of Series C Preferred Stock for Series B Mandatorily Redeemable Convertible Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Reclassification of Series A from temporary equity to liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Sale of noncontrolling interest of subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
613,925
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
613,925
|
|
|
|
1,386,075
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Sale of preferred stock of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,000,000
|
|
|
|
—
|
|
|
|
8,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Common stock option expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) on available for sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(128,198
|
)
|
|
|
(128,198
|
)
|
|
|
—
|
|
|
|
(128,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net (loss), year ended May 31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,269,968
|
)
|
|
|
—
|
|
|
|
(1,269,968
|
)
|
|
|
262,771
|
|
|
|
(1,007,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2017
|
|
|
1,549
|
|
|
$
|
2,247,292
|
|
|
|
380,708,267
|
|
|
$
|
38,071
|
|
|
$
|
5,231,328
|
|
|
$
|
8,000,000
|
|
|
|
6,805
|
|
|
$
|
15,729,668
|
|
|
$
|
(35,773,896
|
)
|
|
$
|
(130,503
|
)
|
|
$
|
(6,905,332
|
)
|
|
$
|
2,189,266
|
|
|
$
|
(4,716,066
|
)
|
See
accompanying notes.
Jacobs Financial Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Series A Redeemable Preferred Stock and Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily Redeemable
|
|
Common Stock
|
|
Series C Preferred
|
|
|
|
Accumulated
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Other
|
|
JFGI
|
|
|
|
Total
|
|
|
Preferred Stock
|
|
|
|
|
|
Paid-In
|
|
|
|
Amount
|
|
Accumulated
|
|
Comprehensive
|
|
Sharesholder's
|
|
Noncontrolling
|
|
Sharesholder's
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
and APIC
|
|
Deficit
|
|
Income (Loss)
|
|
Interest
|
|
Interest
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2015
|
|
|
1,549
|
|
|
$
|
2,075,110
|
|
|
|
363,574,218
|
|
|
$
|
36,357
|
|
|
$
|
4,199,387
|
|
|
|
6,805
|
|
|
$
|
13,308,697
|
|
|
$
|
(31,886,882
|
)
|
|
$
|
21,413
|
|
|
$
|
(14,321,028
|
)
|
|
$
|
—
|
|
|
$
|
(13,521,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock as compensation for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock as additional consideration in financing arrangements
|
|
|
—
|
|
|
|
—
|
|
|
|
16,334,049
|
|
|
|
1,634
|
|
|
|
48,538
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,172
|
|
|
|
—
|
|
|
|
50,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series A mandatorily redeemable convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends of Series A mandatorily redeemable convertible preferred stock
|
|
|
—
|
|
|
|
84,491
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(84,491
|
)
|
|
|
—
|
|
|
|
(84,491
|
)
|
|
|
—
|
|
|
|
(84,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends of Series C equity preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,164,143
|
|
|
|
(1,164,143
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of Series C Preferred Stock for Series B Mandatorily Redeemable Convertible Preferred Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Reclassification of Series A from temporary equity to liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Sale of noncontrolling interest of subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
367,449
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
367,449
|
|
|
|
632,551
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock option expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) on available for sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,718
|
)
|
|
|
(23,718
|
)
|
|
|
—
|
|
|
|
(23,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss), year ended May 31, 2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,895
|
)
|
|
|
—
|
|
|
|
(23,895
|
)
|
|
|
(92,131
|
)
|
|
|
(116,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2016
|
|
|
1,549
|
|
|
$
|
2,159,602
|
|
|
|
379,908,267
|
|
|
$
|
37,991
|
|
|
$
|
4,615,374
|
|
|
|
6,805
|
|
|
$
|
14,472,840
|
|
|
$
|
(33,159,411
|
)
|
|
$
|
(2,305
|
)
|
|
$
|
(14,035,511
|
)
|
|
$
|
540,420
|
|
|
$
|
(13,495,091
|
)
|
See
accompanying notes.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Note
A – Organization and Business
Organization
and Nature of Business
Jacobs
Financial Group, Inc. (the “Company” or “JFG”), formerly NELX, Inc., was incorporated in Kansas on March
25, 1983. In 2001, the Company acquired all the outstanding stock of two corporations located in Charleston, West Virginia: Jacobs
& Company (“Jacobs”) and FS Investments, Inc. (“FSI”). Jacobs is a registered investment advisory
firm that derives its revenue from asset-based investment advisory fees. FSI, through its wholly-owned subsidiary Triangle Surety
Agency, Inc. (“Triangle”), is engaged in the business of placing surety bonds with insurance companies for clients
engaged in regulated industries, such as the extraction of coal, oil and gas. Triangle receives commission income from the placement
of these bonds and is licensed in five states primarily in the eastern United States. On December 30, 2005, the Company acquired
all of the outstanding stock of West Virginia Fire & Casualty Company (“WVFCC”), an insurance company licensed
to engage in business in West Virginia, Ohio and Indiana. The acquisition of WVFCC consisted of the purchase of marketable investments
and insurance licenses and did not include any existing policies or customer base as the insurance lines of business offered by
WVFCC were not insurance lines that the Company intended to pursue. Following the acquisition, the name of WVFCC was changed to
First Surety Corporation (“FSC”). FSC receives insurance premium income in connection with the issuance of surety
bonds. The Company and its subsidiaries are subject to the business risks inherent in the financial services industry.
Liquidity,
Financial Resources and Substantial Doubt about Going Concern
These
consolidated financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Presently,
the Company has insufficient liquidity, financial resources, is in default with certain loan and preferred stock agreements,
and has suffered significant recurring losses from operations. Losses are expected to continue until the Company develops a more
substantial book of business. While improvement is anticipated as the Company’s business plan is implemented, other conditions,
such as restrictions on the use of FSC’s assets (See Note C), and the Company’s significant deficiency in working
capital and stockholders’ equity raise substantial doubt about the Company’s ability to continue as a going concern.
Management
intends to improve cash flow through the implementation of its business plan. Additionally, management continues to seek to raise
additional funds for operations through private placements of stock, other long-term or permanent financing, or short-term borrowings.
However, the Company cannot be certain that it will be able to continue to obtain adequate funding in order to reasonably predict
whether it will be able to continue as a going concern. The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Jacobs Financial Group, Inc. and its majority owned subsidiaries, after
the elimination of intercompany transactions.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Non-Controlling
Interest
First
Surety Corporation, a subsidiary of the Jacobs Financial Group, Inc. has a non-controlling ownership interest. The Company’s
board of directors has authorized the sale of Units (5% per Unit), which, if completed, would include forty-nine percent (49%)
of the outstanding stock of FSC. As of May 31, 2017, the Company still had ownership of 70% of First Surety Corporation. For
further discussion of these Units, see Note H.
Summarized
balance sheet and income statement amounts for First Surety Corporation are as follows;
FSC Balance Sheet
|
|
As of May 31,2017
|
Total
Assets
|
|
$
|
39,599,254
|
|
|
|
|
|
|
Total Liabilities
|
|
|
25,930,920
|
|
Total Equity
|
|
|
13,668,334
|
|
Total Liabilities
and Equity
|
|
$
|
39,599,254
|
|
FSC
Income Statement
|
|
Year Ended May 31,2017
|
Total
Revenue
|
|
$
|
2,459,801
|
|
Total Expenses
|
|
|
(1,828,415
|
)
|
Net Income
|
|
$
|
631,386
|
|
Cash
and Short Term Investments
The
Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.
Use
of Estimates
Preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities. Significant areas requiring the use of management estimates are loss reserves, valuation of investments, and
the valuation of deferred tax assets. Actual results inevitably will differ from those estimates, and such differences may be
material to the financial statements.
Revenue
and Expense Recognition
Fees
for investment advisory services are based on an agreed percentage of the value of client assets under management and are accrued
monthly based on the market value of client assets.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
The
Company accounts for its surety bond issuances as short duration contracts. Surety premiums are recorded as receivables when due
and are earned pro rata over the term of the policies of generally one year, subject to annual renewal. The reserve for unearned
premiums represents the deferred revenue portion of premiums written relating to the unexpired terms of coverage. The reserve
for unearned premium is determined using the monthly pro rata method. Advance premiums represent renewal premiums paid in advance
of the effective renewal date.
Agency
commissions for surety bond services are based on a percentage of premiums charged for bonds placed with insurance companies,
and are recorded upon issuance or effective renewal date of the bonds. No significant continuing services subsequent to the issuance
or renewal of surety bonds are required.
Policy
acquisition costs include costs that vary with and are primarily related to the acquisition of new business. Such costs generally
include commissions, underwriting expenses, and premium taxes and are deferred and amortized over the period in which the related
premiums are earned. The deferred policy acquisition cost assets are reviewed for recoverability based on the profitability of
the underlying surety policy. Investment income is not considered in the determination of recoverability of deferred policy acquisition
costs.
Investments
Debt
securities are designated at purchase as held-to-maturity, trading or available for sale. Held-to-maturity debt securities are
carried at amortized cost where the Company has the ability and intent to hold these securities until maturity. Premiums and discounts
arising from the purchase of debt securities are treated as yield adjustments over the estimated lives or call date, if applicable.
Debt
and equity securities that 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. 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.
Debt
and equity securities that are bought and held principally for sale in the near future are classified as trading securities and
are carried at fair value, with changes in fair value being recorded in current operations. Short-term investments consist primarily
of debt securities having maturities of one year or less at date of purchase, and other similar investments that have immediate
availability.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
An
investment is considered impaired when its fair value is less than its cost or amortized cost, as applicable. When an investment
is impaired, a determination is made as to whether the impairment is other than temporary (“OTTI”).
Factors
considered in identifying OTTI include: 1) for debt securities, whether the Company intends to sell the investment or whether
it is more likely than not that the Company will be required to sell the security prior to the anticipated recovery in value;
2) the likelihood of the recoverability of principal and interest for debt securities (i.e., whether there is a credit loss) or
cost for equity securities; 3) the length of time and extent to which the fair value has been less than amortized cost for debt
securities or carrying value for equity securities; and 4) the financial condition, near-term and long-term prospects for the
issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.
Realized
gains and losses are determined by specific identification of the security sold.
Interest
income with respect to fixed maturity securities is accrued as earned. Dividend income is generally recognized when receivable.
Derivatives
The
Company uses derivatives in the form of covered call options sold to generate additional income and provide limited downside protection
in the event of a market correction.
These
transactions expose the Company to potential market risk for which the Company receives a premium up front and the Company realizes
the option premium received as income. The market risk relates to the requirement to deliver the underlying security to the purchaser
of the call within a definite time at an agreed market price regardless of the then current market price of the security. As a
result the Company takes the risk that it may be required to sell the security at the strike price, which could be a price less
than the then market price. Should the security decline in market price over the holding period of the call option, the Company
can lessen or mitigate the risk of loss with a closing transaction for the covered call and sale of the underlying security.
The
Company invests in large capitalized US securities traded on major US exchanges and writes standardized covered calls only against
these positions (covered calls), which are openly traded on major US exchanges. The use of such underlying securities and standardized
calls lessens the credit risk to the furthest extent possible.
The
Company is not exposed to significant cash requirements through the use of covered calls in that it sells a call for a premium
and may use these proceeds to enter a closing transaction for the call at a later date.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Allowance
for uncollectible premium and other receivables
The
majority of the Company’s fee revenue is generated by services provided to companies and individuals throughout the Eastern
United States. Management evaluates the need for a reserve for the amount of related 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 has established an allowance for estimated uncollectible accounts of $15,053 and $40,658 for
fiscal 2017 and 2016, respectfully.
Long-lived
Assets
The
Company evaluates long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the
assets may not be recoverable. 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 recovery of these long-lived assets. During the periods presented management determined
impairment had not occurred.
Furniture
and Equipment
Furniture
and equipment is recorded at cost. Maintenance and repairs are charged to operations when incurred. When property and equipment
are sold or disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is
included in operations. The cost of property and equipment is depreciated over the estimated useful lives of the related assets,
ranging from three to seven years, using the straight-line or double-declining balance methods, which approximates estimated economic
depreciation.
Reserve
for Losses and Loss Expenses
Losses
and loss adjustment expenses represent management’s best estimate of the ultimate net cost of all reported and unreported
losses incurred. Reserves for unpaid losses and loss adjustment expenses are estimated using industry averages, however, will
include individual case-basis valuations in the event claims are received. These estimates and methods of establishing reserves
are continually reviewed and updated.
Stock-based
Compensation
The
fair value of stock options is estimated at the grant date using the Black Scholes Option Pricing Model. This model requires the
input of a number of assumptions, including expected volatility and dividend yields, expected stock price, risk-free interest
rates, and an expected life of the options. Although the assumptions used reflect management’s best estimate, they involve
inherent uncertainties based on market conditions generally outside the control of the Company. As of and for the periods presented
there were no stock options outstanding.
Income
Taxes
The
Company currently has net operating loss (“NOL”) carry-forwards that can be utilized to offset future income for federal
and state tax purposes. These NOLs represent a significant deferred tax asset. However, the Company has recorded a valuation allowance
against this deferred tax asset as it has determined that it is more likely than not that it will not be able to fully utilize
the NOLs. Should assumptions regarding the utilization of these NOLs change, the Company may reduce some or all of this valuation
allowance, which would result in the recording of a deferred income tax benefit.
The
Company follows a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions
taken or expected to
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company,
the additional income taxes, if any, would be imposed on the Company.
Interest
and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. However,
no interest or penalties have been assessed as of May 31, 2017 or 2016.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act, among other things,
reduces the U. S. federal income tax rate from 35 percent to 21 percent, effective January 1, 2018. The Company has made a
reasonable estimate of the effects of the Tax Act on existing deferred tax balances. These amounts are provisional and
subject to change. The most significant impact of the legislation for the Company was a $2,050,000 reduction of the value of
the Company’s net deferred tax assets (which represent future tax benefits).
Earnings
(Loss) Per Share
Basic
earnings (loss) per share of common stock are computed using the weighted average number of shares outstanding during each period.
Diluted earnings per share are computed on the basis of the average number of common shares outstanding plus the dilutive effect
of convertible debt, stock options and warrants. In periods of net loss, there are no diluted earnings per share since the result
would be anti-dilutive.
Note
B – Newly Adopted and Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“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 Update will be
effective for the Company’s fiscal 2019 annual and interim financial statements. 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. We anticipate the impact will be quantitatively immaterial to our consolidated financial statements as
a whole and expect the timing of our revenues to remain the same.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic
205-40) (
ASU 2014-15). ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial
doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. We adopted this
guidance for our fiscal 2017 financial statements.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
In
January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10)”, which updated the accounting
guidance related to the recognition and measurement of financial assets and financial liabilities. The updated accounting guidance,
among other things, requires that all nonconsolidated equity investments, except those accounted for under the equity method,
be measured at fair value and that the changes in fair value be recognized in net income. The Update will be effective for the
Company’s fiscal 2019 annual and interim financial statements. The updated accounting guidance requires, with certain exceptions,
a cumulative effect adjustment to beginning retained earnings when the guidance is adopted. The Company is currently in the process
of evaluating the impact of adoption of the new rules.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”. The guidance is intended to reduce the diversity in practice as to how certain cash receipts and cash
payments are presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues.
In addition, in November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”.
The amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. The Update will be effective for the Company’s fiscal 2020 annual financial statements and interim periods
thereafter.
In
March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on
Existing Hedge Accounting Relationships”, which clarifies that a change in the counterparty to a derivative contract, in
and of itself, does not require the designation of a hedging relationship. The new standard which can be adopted prospectively
or on a modified retrospective basis, is effective for the Company’s fiscal 2019 annual and interim financial statements.
The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial
condition, results of operations and cash flows. Also in March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging
(Topic 815): Contingent Put and Call Options in Debt Instruments”, which clarify the requirements for assessing whether
contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related
to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded
call (put) options solely in accordance with the four-step decision sequence. The new standard, which should be applied on a modified
prospective basis is effective for the Company’s 2019 annual financial statements and interim periods thereafter.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.
The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable
asset or group of similar identifiable assets, the set is not a business. The new rules will be effective for the Company’s
fiscal 2021 financial statements and interim periods thereafter.
In
February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220)
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to address a specific consequence
of
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
the Tax Cuts and Jobs Act (TCJA) by allowing a reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from the TCJA’s reduction of the U.S. federal corporate income tax rate. The
ASU is effective for all entities for the Company’s fiscal 2020 financial statements, with early adoption permitted, and
is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S.
federal corporate income tax rate in the TCJA is recognized.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments”. This guidance requires the measurement of all expected credit losses for
financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable
forecasts. This guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating
credit losses. The new guidance is effective for the Company’s fiscal 2020 financial statements. The Company is
currently evaluating the impact that the adoption of this guidance will have on its financial statements.
In
February 2016, the FASB issued ASU 2016-02, which amends the FASB Accounting Standards Codification and creates Topic 842,
“Leases.” The new topic supersedes Topic 840, “Leases,” and increases transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information
about leasing arrangements. The guidance is effective for the Company’s fiscal 2020 financial statements. ASU 2016-02 mandates
a modified retrospective transition method. The Company is currently assessing the impact this guidance will have on its financial
statements.
Management
has assessed the potential impact of recently issued, but not yet effective accounting standards and, except as noted, has determined
that the provisions are either not applicable to the Company, or are not anticipated to have a material impact on the consolidated
financial statements.
Note
C – Investments
The
Company held the following investments, by security type, that were classified as available-for-sale and carried at fair value
at May 31, 2017:
|
|
Amortized
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
State and municipal securities
|
|
$
|
17,893,683
|
|
|
$
|
71,906
|
|
|
$
|
215,421
|
|
|
$
|
17,750,168
|
|
Bond – US Treasuries
|
|
|
11,479,990
|
|
|
|
—
|
|
|
|
2,083
|
|
|
|
11,477,907
|
|
Equity securities
|
|
|
2,569,438
|
|
|
|
104,041
|
|
|
|
146,775
|
|
|
|
2,526,704
|
|
Derivatives
|
|
|
(104,217
|
)
|
|
|
(9,745
|
)
|
|
|
(9,734
|
)
|
|
|
(104,228
|
)
|
Mortgage backed securities
|
|
|
4,260,730
|
|
|
|
68,904
|
|
|
|
11,064
|
|
|
|
4,318,570
|
|
|
|
$
|
36,099,624
|
|
|
$
|
235,106
|
|
|
$
|
365,609
|
|
|
$
|
35,969,121
|
|
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
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, 2016:
|
|
|
Amortized Cost
|
|
|
|
Gross Unrealized Gains
|
|
|
|
Gross Unrealized Losses
|
|
|
|
Fair Value
|
|
State and municipal securities
|
|
$
|
4,013,256
|
|
|
$
|
64,789
|
|
|
$
|
58,217
|
|
|
$
|
4,019,828
|
|
Equity securities
|
|
|
1,628,713
|
|
|
|
91,339
|
|
|
|
155,299
|
|
|
|
1,564,753
|
|
Derivatives
|
|
|
(78,497
|
)
|
|
|
(7,329
|
)
|
|
|
(9,513
|
)
|
|
|
(76,313
|
)
|
Mortgage backed securities
|
|
|
3,157,534
|
|
|
|
67,689
|
|
|
|
14,790
|
|
|
|
3,210,433
|
|
|
|
$
|
8,721.006
|
|
|
$
|
216,488
|
|
|
$
|
218,793
|
|
|
$
|
8,718,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
are no securities classified as held to maturity at May 31, 2017 or May 31, 2016.
Invested
assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated
with certain of these invested assets and the level of uncertainty related to changes in the value of these assets, it is possible
that changes in risks in the near term may significantly affect the amounts reported in the Consolidated Balance Sheets and Statements
of Operations.
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs, with the highest
priority given to Level 1, as these are the most transparent or reliable:
|
o
|
Level
1 – Quoted prices for identical instruments in active markets.
|
|
o
|
Level
2 – Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations
in which all significant inputs are observable in active markets.
|
|
o
|
Level
3 – Valuations derived from valuation techniques in which one or more significant
inputs are unobservable.
|
Fair
values are provided by the Company’s independent investment custodians that utilize third-party quotation services for the
valuation of the fixed-income investment securities and money-market funds held. The Company’s investment custodians are
large money-center banks. The Company’s equity investment is valued using quoted market prices.
The
following section describes the valuation methodologies used to measure different financial instruments at fair value, including
an indication of the level in the fair value hierarchy in which the instrument is generally classified.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
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:
|
|
May 31, 2017
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets At
Fair Value
|
|
|
|
|
|
|
|
|
|
Fixed income securities at fair value
|
|
$
|
—
|
|
|
$
|
33,546,645
|
|
|
$
|
—
|
|
|
$
|
33,546,645
|
|
Equity securities at fair value (includes derivatives)
|
|
|
2,422,476
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,422,476
|
|
Short-term investments at fair value
|
|
|
1,857,601
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,857,601
|
|
Total Assets
|
|
$
|
4,280,077
|
|
|
$
|
33,546,645
|
|
|
$
|
—
|
|
|
$
|
37,826,722
|
|
|
|
May 31, 2016
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets At
Fair Value
|
|
|
|
|
|
|
|
|
|
Fixed income securities at fair value
|
|
$
|
—
|
|
|
$
|
7,230,261
|
|
|
$
|
—
|
|
|
$
|
7,230,261
|
|
Equity securities at fair value (includes derivatives)
|
|
|
1,488,440
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,488,440
|
|
Short-term investments at fair value
|
|
|
197,752
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197,752
|
|
Total Assets
|
|
$
|
1,686,192
|
|
|
$
|
7,230,261
|
|
|
$
|
—
|
|
|
$
|
8,916,453
|
|
The
Company had no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level
3) at either May 31, 2017 or at May 31, 2016.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
At
May 31, 2017, the Company’s insurance subsidiary had cash, securities and short-term investments held as collateral for
their bonding program in the amount of $21,926,872.
In
connection with regulatory approval of the Company’s acquisition of its insurance subsidiary, certain restrictions were
imposed on the ability of the Company to withdraw funds from FSC without prior approval of the state Insurance Commissioner. Accordingly,
investments and cash in the amount of $38,374,571 and $9,384,909 as of May 31, 2017 and 2016, respectively, are restricted to
the use of FSC.
At
May 31, 2016, the Company’s insurance subsidiary had securities and short-term investment with a fair value of $1,153,324
on deposit with the State insurance department to satisfy regulatory requirements.
Principal
repayments on U.S. government agency mortgage-backed securities held by the Company as of May 31, 2017 are estimated as follows:
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
725,940
|
|
|
$
|
730,887
|
|
Due after one year through five years
|
|
|
2,179,769
|
|
|
|
2,225,209
|
|
Due after five years through ten years
|
|
|
958,413
|
|
|
|
964,40
|
|
Due after ten years
|
|
|
396,608
|
|
|
|
398,068
|
|
|
|
$
|
4,260,730
|
|
|
$
|
4,318,570
|
|
Estimated
repayments are forecast based on varying prepayment speeds for each particular security held assuming that interest rates remain
constant. Expected repayments will differ from actual repayments because borrowers of the underlying mortgages have a right to
prepay obligations.
An
analysis of net investment income follows:
|
|
2017
|
|
2016
|
Bonds – fixed maturities
|
|
$
|
242,266
|
|
|
$
|
154,300
|
|
Mortgage-backed securities
|
|
|
108,236
|
|
|
|
113,654
|
|
Equity investments
|
|
|
64,398
|
|
|
|
38,910
|
|
Short-term investments
|
|
|
1,070
|
|
|
|
151
|
|
Other investment income (loss)
|
|
|
113,001
|
|
|
|
(485,479
|
)
|
Total investment income (loss)
|
|
|
528,971
|
|
|
|
(178,464
|
)
|
Investment expense
|
|
|
35,142
|
|
|
|
36,918
|
|
Net investment income
|
|
$
|
493,829
|
|
|
$
|
(215,382
|
)
|
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
The
unrealized appreciation (depreciation) of investments were as follows:
|
|
2017
|
|
2016
|
|
|
|
|
|
Bonds – US Treasury
|
|
$
|
(2,082
|
)
|
|
$
|
—
|
|
Bonds-fixed maturities
|
|
|
(150,087
|
)
|
|
|
46,790
|
|
Mortgage-backed securities
|
|
|
4,940
|
|
|
|
(32,089
|
)
|
Equity securities
|
|
|
19,032
|
|
|
|
(38,419
|
)
|
Increase (decrease) in unrealized appreciation
|
|
$
|
(128,197
|
)
|
|
$
|
(23,718
|
)
|
Gains
and losses are calculated based on sales proceeds received less the cost of the security sold, which is determined by specific
identification for each investment. The gross gains and gross losses realized on available-for-sale securities were as follows:
|
|
Gross
Proceeds
|
|
Gross
Realized
Gains
|
|
Gross
Realized
Losses
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds – US Treasury
|
|
$
|
17,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bonds-fixed maturities
|
|
|
4,778,067
|
|
|
|
79,561
|
|
|
|
24,831
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity securities
|
|
|
1,015,216
|
|
|
|
103,532
|
|
|
|
15,762
|
|
Derivatives (equity securities)
|
|
|
848,325
|
|
|
|
193,123
|
|
|
|
197,403
|
|
Total
|
|
$
|
23,641,608
|
|
|
$
|
376,216
|
|
|
$
|
237,99
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds-fixed maturities
|
|
$
|
858,870
|
|
|
$
|
6,346
|
|
|
$
|
9,253
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity securities
|
|
|
391,758
|
|
|
|
8,965
|
|
|
|
36,135
|
|
Derivatives (equity securities)
|
|
|
598,984
|
|
|
|
113,407
|
|
|
|
162,390
|
|
Total
|
|
$
|
1,849,612
|
|
|
$
|
128,718
|
|
|
$
|
207,778
|
|
The
following table summarizes the gross unrealized losses and fair value on investment securities aggregated by major investment
category and length of time that individual securities have been in a continuous loss position at May 31, 2017 and May 31, 2016.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Cost
(a)
|
|
Unrealized
Losses
|
|
Cost
(a)
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,004,58
5
|
|
|
$
|
60,327
|
|
|
$
|
301,525
|
|
|
$
|
86,449
|
|
|
$
|
1,159,335
|
|
|
$
|
146,775
|
|
Bonds-
Fixed Maturities
|
|
|
9,185,478
|
|
|
|
152,367
|
|
|
|
1,344,509
|
|
|
|
62,774
|
|
|
|
10,314,847
|
|
|
|
215,141
|
|
Mortgage-backed
securities
|
|
|
1,686,199
|
|
|
|
10,291
|
|
|
|
134,742
|
|
|
|
773
|
|
|
|
1,820,941
|
|
|
|
11,064
|
|
Total
|
|
$
|
11,876,262
|
|
|
$
|
222,985
|
|
|
$
|
1,780,776
|
|
|
$
|
149,995
|
|
|
$
|
13,295,123
|
|
|
$
|
372,98
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$
|
571,913
|
|
|
$
|
80,340
|
|
|
$
|
244,664
|
|
|
$
|
74,960
|
|
|
$
|
661,277
|
|
|
$
|
155,300
|
|
Bonds-
Fixed Maturities
|
|
|
493,941
|
|
|
|
10,003
|
|
|
|
2,004,819
|
|
|
|
48,214
|
|
|
|
2,440,543
|
|
|
|
58,217
|
|
Mortgage-backed
securities
|
|
|
894,532
|
|
|
|
5,118
|
|
|
|
535,416
|
|
|
|
9,672
|
|
|
|
1,415,158
|
|
|
|
14,790
|
|
Total
|
|
$
|
1,960,386
|
|
|
$
|
95,461
|
|
|
$
|
2,784,899
|
|
|
$
|
132,846
|
|
|
$
|
4,516,978
|
|
|
$
|
228,30
7
|
|
(a)
For bonds-fixed maturities and mortgage-backed securities, represents amortized costs.
As
of May 31, 2017, the Company held twenty-two mortgage-backed securities with gross unrealized losses of $11,064, six 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, 2017, the Company held one hundred two fixed maturity bonds with gross unrealized losses of $215,420, six of which
have been in a continuous loss position for more than 12 months.
As
of May 31, 2017, the Company held twenty-one equity security investments with gross unrealized losses of $146,775, seven of which
have been in a continuous loss position for more than 12 months. These securities consist of common stock whose fair value is
sensitive to movements in market interest rates.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Note
D-Deferred Policy Acquisition Costs
The
following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged
to operations.
|
|
2017
|
|
2016
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
171,883
|
|
|
$
|
154,978
|
|
Acquisition costs incurred
|
|
|
785,986
|
|
|
|
301,032
|
|
Amortization charged to operations
|
|
|
(590,260
|
)
|
|
|
(284,127
|
)
|
Total
|
|
$
|
367,609
|
|
|
$
|
171,883
|
|
Note
E – Other Assets
Included
in other assets as of May 31, 2017 and May 31, 2016 are $16,780 and $14,617 of prepaid expenses and deposits.
Note
F – Intangibles
As
the result of the acquisition of FSC on December 30, 2005, in exchange for the purchase price of $2,900,000, the Company received
cash and investments held by FSC with a fair value of $2,750,000, with the difference of $150,000 being attributed to the property
and casualty licenses of FSC in the states of West Virginia, Ohio and Indiana. Such licenses have indefinite lives and are evaluated
annually, or more frequently if circumstances indicate that a possible impairment has occurred, for recoverability and possible
impairment loss. No impairment has been recorded in fiscal years ended May 31, 2017 and 2016.
Note
G - Reserve for Losses and Loss Expense
Reserves
for unpaid losses and loss adjustment expenses are estimated based primarily on management’s judgment as the Company has
incurred limited losses since its inception and available industry data is also extremely limited. In the event of the Company
receiving a claim it will use individual case basis estimates including all estimated future expenses to settle such claims. As
of May 31, 2017, the Company’s insurance subsidiary, FSC, is only licensed to write surety in West Virginia and Ohio and
has focused its primary efforts towards coal permit reclamation bonds while also providing other miscellaneous surety bonds, most
of which are partially collateralized by investment accounts that are managed by Jacobs & Company. Reclamation of land that
has been disturbed by mining operations is highly regulated by federal and state agencies and the required bonds are generally
long-term in nature with mining operations and reclamation work conducted in unison as the property is being mined.
Additionally,
no two principals or properties are alike due to varied company structures and unique geography and geology of each site. In underwriting
such bonds, management develops, through consultation with professionals experienced in the specific field of work, estimates
of costs to reclaim the properties subject of the permit(s) in accordance with those mining permit(s), in addition to other underwriting
and financial risk considerations. FSC requires the principal to provide cash, or other acceptable collateral such as irrevocable
letters of credit, in amounts determined through the underwriting process to reclaim the disturbed land and thus mitigate the
exposure to significant loss.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
FSC
maintains reinsurance agreements with various syndicates at Lloyd's of London. The reinsurance agreement is an excess of loss
contract that protects FSC against losses up to certain limits over stipulated amounts. Each client’s cash is invested in
investment collateral accounts managed by Jacobs utilizing investment strategies consistent with the state code governing investments
of an insurance company.
Inspections
of mining activity and reclamation work are performed on a regular basis with initial cost estimates being updated periodically.
Should the principal default in the obligation to reclaim the property in accordance with the mining permit, FSC would then use
the funds held in the collateral account to reclaim the property or would be required to forfeit the face amount of the bond to
the agency to which the bond is issued.
Losses
can occur if the costs of reclamation exceed estimates obtained at the time the bond was underwritten or upon subsequent
re-evaluations, if sufficient collateral is not obtained and increased if necessary, or if collateral held has experienced a
significant deterioration in value. FSC has experienced two claims for loss through May 31, 2017 as detailed below, and thus
provisions for losses and loss adjustment expense have been based on management’s experience adjusted for other factors
unique to the Company’s approach, and in consultation with actuaries experienced in the surety field.
In
August 2015, the Company paid a claim on a called bond in the amount of $550,000, of which $75,000 was paid using collateral
of the principal. The remaining $475,000 has been established as a salvage reserve to be repaid with the assignment of
proceeds from sales of stock and an assignment of a promissory note as additional collateral with total assigned values in
excess of the salvage reserve. As of May 31, 2017, the Company had received $45,000 in recovered salvage on this claim. As of
June 2018, the unrecovered balance of this salvage was $280,000, with full recovery expected in future.
In
February 2017, the Company paid a claim on a called bond in the amount of $752,400, of which $722,780 was paid using collateral
of the principal. The remaining $29,620 was established as a salvage reserve to be repaid with periodic payments from the bond
principal. As of May 31, 2017, the Company has received $3,000 in recovered salvage on this claim.
For
the years ended May 31, 2017 and 2016, the Company incurred loss adjustment expenses of $7,597 and $26,590, respectively, related
to costs of engaging experts, attorney fees, and consultants for potential claims. These costs were charged against established
case reserves or bulk reserves.
As
a result of an examination by the West Virginia Insurance Commissioner, a reserve strengthening in the form of an increase to
the Loss Reserve was recorded in Fiscal 2015 and 2016 in the amounts of approximately $800,000 and $20,402.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
At
May 31, 2017 and May 31, 2016, the reserve for losses and loss expenses consisted of:
|
|
2017
|
|
2016
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,491,479
|
|
|
$
|
2,254,035
|
|
Incurred policy losses-current year
|
|
|
494,659
|
|
|
|
243,632
|
|
Incurred policy losses-prior year
|
|
|
—
|
|
|
|
20,402
|
|
Paid policy losses – current year
|
|
|
(7,597
|
)
|
|
|
(1,590
|
)
|
Paid policy losses-prior year
|
|
|
—
|
|
|
|
(25,000
|
)
|
Balance at end of year
|
|
$
|
2,978,541
|
|
|
$
|
2,491,479
|
|
Reserve for anticipated salvage
|
|
|
(456,620
|
)
|
|
|
(475,000
|
)
|
Ceded losses outstanding
|
|
|
—
|
|
|
|
(84,700
|
)
|
Balance at year end, net of reserve
|
|
$
|
2,521,921
|
|
|
|
1,931,779
|
|
Note
H – Notes Payable
At
May 31, 2017 and 2016, the Company had the following secured and unsecured notes payable to individuals:
|
|
2017
|
|
2016
|
|
|
|
|
|
Secured notes payable to individuals; interest rate fixed @ 8%; secured by 500 shares FSC stock (including $1,248,920 related party for 2017 and $1,387,573 for 2016)
|
|
$
|
4,169,072
|
|
|
$
|
4,334,997
|
|
Secured notes payable to same individuals as above with same collateral; no interest;
|
|
|
235,784
|
|
|
|
235,000
|
|
Unsecured demand notes payable to individuals and others; no interest (including $75,000 related party in 2017 and $83,900 for 2016)
|
|
|
104,200
|
|
|
|
113,050
|
|
Unsecured demand notes payable to individuals and others; interest rate fixed @ 10% (including $75,000 to related party for 2017 and 2016)
|
|
|
1,548,372
|
|
|
|
1,506,859
|
|
|
|
|
|
|
|
|
|
|
Unsecured demand notes payable to individuals and others; interest rate fixed @ 12%
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Unsecured demand note payable to individuals; interest rate fixed @ 14%;
|
|
|
—
|
|
|
|
1,658
|
|
|
|
|
|
|
|
|
|
|
Secured demand note payable to individuals; interest rate fixed @ 10%; secured by accounts receivable for investment advisory fees
|
|
|
36,628
|
|
|
|
36,628
|
|
|
|
|
|
|
|
|
|
|
Unsecured demand note payable to individuals; interest rate fixed @ 2% (including $945,079 related party for 2017 and $785,000 for 2016)
|
|
|
1,045,079
|
|
|
|
885,000
|
|
Secured notes payable to individuals; interest rate fixed @ 10%; secured by shares FSC stock
|
|
|
249,250
|
|
|
|
249,250
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,403,385
|
|
|
$
|
7,377,442
|
|
|
|
|
|
|
|
|
|
|
During
the year ended May 31, 2015, the Company borrowed $75,000 from a board member. Accrued related party interest of $5,000 is
payable to this individual at May 31, 2017, with $0 and $3,068 interest expense for the years ended May 31,2017 and 2016,
respectively.
During
the year ended May 31, 2016, an individual who holds secured notes payables from the Company, became a greater than 10% owner
of outstanding common stock of the Company. During the year ended May 31, 2016, the Company borrowed additional money from this
individual and entities controlled by this individual. Amounts owed to this individual (and the individual’s companies and
relatives) at May 31, 2017 consisted of $1,020,079 in demand notes, $1,248,920 in notes payable secured by FSC stock, and $26,853
in accrued interest.
All
notes payables, with the exception of those secured by FSC stock are on demand terms and therefore current liabilities.
On
July 9, 2014 the Company completed a $4,500,000 financing. In effect, FSI, a subsidiary of the Company, borrowed the funds
at 8.00% interest with principal repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase
from certain bridge lenders, after waiving interest of approximately $1.6 million, i.e. 50.7%, ($1.775 million face amount) of
the outstanding senior $3.5 million financing dating from 2008, together with the associated collateral, (ii) to pay in full delinquent
tax liabilities owed to the Internal Revenue Service and State of West Virginia, (iii) to pay an outstanding judgment, and (iv)
to pay certain other current liabilities. FSI therefore became a member of the Bridge Loan and notified the Collateral Agent for
the group of its purchase and majority holding. The transaction restored majority control of FSC to the Company.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
On
August 5, 2015 the Company completed a $1,600,000 transaction which resulted in its acquisition of the remaining 49.3% ($1.725
million face amount) senior promissory notes of the $3.5 million bridge loan financing dating from 2008, after waiving interest
of approximately $1.8 million. Upon closing of the acquisition, the collateral securing the senior promissory notes, 1,000 shares
(100%) of FSC and 1,000 shares (100%) of CMW, was released to the Company. This extinguishment of debt resulted in a gain from
forgiven principal and interest in the amounts of $125,000 and $1,795,000, respectively for a total gain on debt extinguishment
of approximately $1,920,000.
The
transaction was funded through sale in a private offering of investment units (Units) that consisted of 5.00% of the outstanding
shares of FSC and 500,000 common shares of the Company. $1,600,000 was raised through a combination of cash, partial assignments
of loans back to the Company that were debt of the Company and loans that are convertible into purchase of Units. The Registrant’s
Board of Directors has authorized the sale of up to forty-nine percent (49%)of the outstanding stock of FSC.
Scheduled
maturities as of May 31, 2017 are as follows:
|
|
|
|
|
|
Fiscal
year 2017-2018 (including demand notes)
|
|
$
|
3,384,473
|
|
Fiscal
year 2018-2019 (including demand notes)
|
|
|
208,387
|
|
Fiscal
year 2019-2020 (including demand notes)
|
|
|
439,622
|
|
Fiscal
year 2020-2021 (including demand notes)
|
|
|
512,495
|
|
Fiscal
year 2021-2022 (including demand notes)
|
|
|
555,032
|
|
Thereafter
|
|
|
2,303,375
|
|
Total
|
|
$
|
7,403,384
|
|
Note
I - Other Liabilities
As
of May 31, 2017, the Company had accrued and withheld approximately $172,000 in Federal payroll taxes and approximately $32,000
in estimated penalties and interest, which are reflected in the financial statements as other liabilities and accrued expenses
and professional fees payable.
As
of May 31, 2017, the Company had accrued and withheld approximately $73,000 in West Virginia payroll withholdings and approximately
$17,000 in interest and penalties, which are reflected in the accompanying financial statements as other liabilities and accrued
expenses and professional fees payable.
As
of May 31, 2016, the Company had accrued and withheld approximately $31,000 in Federal payroll taxes and approximately $31,000
in estimated penalties and interest, which are reflected in the financial statements as other liabilities and accrued expenses
and professional fees payable.
As
of May 31, 2016, the Company had accrued and withheld approximately $44,000 in West Virginia payroll withholdings and approximately
$7,000 in interest and penalties, which are reflected in the accompanying financial statements as other liabilities and accrued
expenses and professional fees payable.
As
of May 31, 2017 and May 31, 2016, the Company held $21,926,872 and $2,068,192, respectively, in its cash and investment accounts
as collateral for clients surety bonding programs.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Note
J - Preferred Stock
Redeemable
Preferred Stock
On
December 30, 2005, through a private placement, the Company issued 350 shares of 4% Non-Voting Series A Preferred Stock
(Series A Preferred Stock), along with 1,050,000 warrants for common shares of Company stock as additional consideration, for
a cash investment in the amount of $350,000, in connection with the Company's acquisition of FSC. Holders of Series A
Preferred Stock are entitled to participate in FSC's partially collateralized bonding programs, subject to continuing
satisfaction of underwriting criteria, based upon the bonding capacity of FSC attributable to capital reserves of FSC
established with the subscription proceeds (i.e., bonding capacity equal to ten times subscription proceeds) and for so long
as the subscriber holds the Series A shares. Holders of the Series A Preferred Stock are entitled to receive, when and as
declared by the board of directors, cumulative preferential cash dividends at a rate of four percent of the $1,000
liquidation preference per annum (equivalent to a fixed annual rate of $40 per share). The Series A Preferred Stock ranks
senior to the Company's common stock and pari passu with the Company's Series B Preferred and Series C Preferred Stock with
respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The holder may redeem the
Series A Preferred Stock on or after the seventh anniversary of the Issue Date, if the holder provides a written statement to
the Company that it will no longer require surety bonds issued by the Company's insurance subsidiary (FSC) under its
partially collateralized bonding programs and, if no such surety bonds are then outstanding, the Company, at the option of
the holder, will redeem all or any portion of the Series A Preferred Stock of such holder at a price per share equal to the
Series A Preferred Stock Issue Price plus all accrued and unpaid dividends with respect to the shares of the Series A
Preferred Stock of such holder to be redeemed. The conditional redemption shall not be available to any holder of Series A
Preferred Stock for so long as surety bonds of the Company's insurance subsidiary issued on a partially collateralized basis
remain outstanding for the benefit of such holder, and upon redemption, such holder shall no longer be eligible to
participate in the partially collateralized bonding programs of the insurance subsidiary. The Company is authorized to issue
up to 1,000,000 shares of the Series A Preferred Stock. As of May 31, 2017, 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 2017
or 2016.
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, 2017, the Company has
received requests for redemption of 1,026 shares of Series A Preferred. The aggregate amount to which the holders requesting redemption
are entitled as of June 30, 2017, is
$1,598,043.
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
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
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
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
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
did not issue any additional shares of Series B Preferred Stock during fiscal 2017.
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, 2017, of the 2,817 shares of Series B Preferred that remained
outstanding, the Company has received requests for redemption of 2,219 shares of Series B Preferred. The aggregate amount to which
the holders requesting redemption are entitled as of June 30, 2017, is $5,519,942.
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
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
by
distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing
price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series B Stock
not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when
additional funds of the Company are legally available for the redemption of shares of Series B Stock and such redemption will
not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance
of the shares of Series B Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the
Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal
Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given
shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be
paid on a pari passu basis with the Redemption Price of the Series B Stock subject to redemption in accordance herewith. Until
the Redemption Price for each share of Series B Stock elected to be redeemed shall have been paid in full, such share of Series
B Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein,
and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of
the Redemption Price.
The
Company’s Board of Directors determined based on the criteria established under the terms of the Series B Preferred Stock
that there were insufficient funds available for the redemption of Series B Stock.
The
Company experienced a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on
mandatorily redeemable preferred stock of $1,357,656 in fiscal 2017 as compared with a loss after accretion of mandatorily
redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $108,386 in fiscal
2016.
Equity
Preferred Stock
As
a means of alleviating obligations associated with the Company's Series B Preferred Stock, which by its terms matured at the
end of 2010, management proposed a recapitalization to assist in stabilizing the financial position of the Company. The
Company’s Certificate of Incorporation provides for two classes of capital stock, known as common stock, $0.0001 par
value per share (the “
Common Stock
”), and preferred stock, $0.0001 par value per share (the
“
Preferred Stock
”). The Company’s Board is authorized by the Certificate of Incorporation to provide
for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares to be included in such series and to fix the
designations, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions
thereof. The Board deemed it advisable to designate a Series C Preferred Stock and fixed and determined the preferences,
rights, qualifications, limitations and restrictions relating to the Series C Preferred Stock as follows:
1.
Designation. The shares of such series of Preferred Stock are designated “Series C Preferred Stock” (referred
to herein as the “
Series C Stock
”). The date on which the first share of Series C Stock is issued shall
hereinafter be referred to as the “
Original Issue Date
”.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
2.
Authorized Number. The number of shares constituting the Series C Stock is 10,000.
3.
Ranking. The Series C Stock ranks, (a) as to dividends and upon Liquidation senior and prior to the Common Stock and all
other equity securities to which the Series C ranks prior, with respect to dividends and upon Liquidation (collectively, “
Junior
Securities
”), (b) pari passu with the Corporation’s Series A Preferred Stock, par value $0.0001 per share (the
“
Series A Stock
”), the Corporation’s Series B Stock, and any other series of Preferred Stock subsequently
established by the Board with equal ranking (any such other series of Preferred Stock, together with the Series C Stock, the Series
B Stock and Series A Stock are collectively referred to as the “
Equal Ranking Preferred
”) and (c) junior to
any other series of Preferred Stock subsequently established by the Board with senior ranking.
4.
Dividends.
(a)
Dividend
Accrual and Payment
. The holders of the Series C Stock shall be entitled to receive, in preference to the holders
of Junior Securities, dividends (“
Dividends
”) on each outstanding share of Series C Stock at the rate of
8% per annum of the sum of (i) the Series C Face Amount plus (ii) an amount equal to any accrued, but unpaid, dividends
on such Series C Stock, including for this purpose the exchanged Series B Amount outstanding with respect to such Series C
Stock. For purposes hereof, the “
Series B Amount
” means an amount equal to the dividend that would
have accrued on such Series C Stock held by such holder from and after the Series B Original Issue Date applicable to such
share of Series C Stock, through the Original Issue Date as if such Series C Stock had been issued on such Series B Original
Issue Date, less all amounts thereof distributed by the Corporation with respect to such Series C Stock. Dividends
shall be payable quarterly in arrears on each January 1, April 1, July 1 and October 1 following the Original Issue Date, or,
if any such date is a Saturday, Sunday or legal holiday, then on the next day which is not a Saturday, Sunday or legal
holiday (each a “
Dividend Payment Date
”), as declared by the Board and, if not paid on the Dividend
Payment Date, shall accrue. Amounts available for payment of Dividends (including for this purpose the Series B Amount)
shall be allocated and paid with respect to the shares of Series C Preferred and any other Equal Ranking Preferred,
first
,
among the shares of Equal Ranking Preferred pro rata in accordance with the amounts of dividends accruing with respect to
such shares at the current Dividend Payment Date, and,
then
, any additional amounts available for distribution in
accordance with the accrued, but unpaid, dividends (and the Series B Amount then outstanding) at each prior Dividend Payment
Date, in reverse chronological order, with respect to all shares of the Equal Ranking Preferred then outstanding in
accordance with amounts accrued, but unpaid. For purposes hereof, the term “
Series B Original Issue
Date
” shall mean, with respect to any share of Series C Stock issued by the Corporation in exchange for a share of
Series B Stock, the date on which the Corporation originally issued such share of Series B Stock.
The
Recapitalization consisted of the exchange of Series B Shares for a combination of Series C Shares and Common Stock. For
each Series B Share, the participating holder received (i) one Series C Share and (ii) 2,000 shares of JFG Common Stock (for no
additional consideration).
For
the year ended May 31, 2010, 6,805 shares of Series B Stock were surrendered and exchanged for 6,805 shares of Series C Stock.
This exchange amounted to $6,269,051 of carrying value of Series B stock being exchanged for Series C and Common Stock. 13,609,872
shares of Common Stock were issued to the Series C Stock holders at the rate of 2,000 Common shares for each
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
exchanged Series
B Stock, with the related cost associated with the Common issuance offsetting the Series C carrying value by $265,120. The shares
were valued at approximately $.01948 per share based on the average quoted closing price of the Company's stock for the 20-day
period proceeding the date of the transaction. Series C stock may be redeemed by the Company but does not have a fixed maturity
date and, thus, is classified as permanent equity. For the year ending May 31, 2016, 2,817 shares of Series B Stock had not been
exchanged.
The
accrual of dividends on the equity preferred stock resulted in a charge to common stockholders’ equity and a credit to the
equity of equity preferred stock of $1,256,829 in fiscal 2017 as compared with a charge to common stockholders’ equity of
$1,164,143 in fiscal 2016.
Dividend
Preference and Accretion
The
Series A Shares are entitled to receive cumulative dividends at the compounding rate of 4.00% per annum.
The
Series B Shares have an 8.0% per annum compounding dividend preference, are convertible into Common Shares of JFG at the option
of the holders at a conversion price of $1.00 per Share (as adjusted for dilution) and, to the extent not converted, must be redeemed
by the Corporation at any time after December 31, 2010 at the option of the holder. Any such redemption is subject to legal
constraints, such as the availability of capital or surplus out of which to pay the redemption, and to a determination by the
Board of Directors that the redemption will not impair the operations of First Surety Corporation.
The
Series C Shares issued in the Recapitalization have the same 8.0% per annum compounding dividend preference and carry over
from the Series B Shares the same accrued but unpaid dividends. While dividends had never been declared on the Series B
shares, they had been accrued, increasing the dividend preference and the redemption price and liquidity preference of such
shares and increasing the liability represented thereby based upon the Series B Shares fixed maturity date. The accrued (but
undeclared) dividends associated with the Series C exchange amounted to $2,295,624 and are included in the total amount
exchanged for Series C Shares. Unlike the Series B Shares with their fixed maturity date, the Series C Shares are permanent
equity, with accruing dividends only increasing the preference amount that must be satisfied before junior securities may
participate in dividends or on liquidation. Accordingly, the effect of the accrual of dividends with respect to the Series C
Shares on the Company’s balance sheet is to increase the aggregate claim of the Series C Shares on the equity of the
corporation and to increase the deficit in common equity, while having no effect on the net equity of the corporation as a
whole. The entitlement of the Series C Shares to a priority in relation to junior securities with respect to dividends and on
liquidation does not create an obligation to the Company and therefore no liability is recorded until the dividends are
declared by the Board of the Company. The Series C Shares are pari passu with the Corporation’s Series A Preferred
Stock and Series B Shares (to the extent any remain outstanding following the Recapitalization) and no dividends or other
distributions will be paid upon Common Shares or any other class of Shares that is junior in priority to the Series C
Preferred while dividends are in arrears. In addition, the Series C Shares are convertible into Common Shares of JFG at the
option of the holders at a conversion price of $0.10 per
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Share. The Series C Shares may be redeemed by the Corporation,
at its option, when it is in a financial position to do so.
Holders
of over 70% of the outstanding Series B Preferred Shares elected to participate in the recapitalization. The shares of Series
B Preferred Shareholders that chose not to convert are listed in the Liabilities section of the Balance Sheet, and therefore the
accretion and dividends associated with the Series B stock after November 30, 2009 are deductions from net income. Dividends on
Series B mandatorily redeemable preferred stock deducted from net income amounted to $522,099 for the year ended May 31, 2017.
The remaining Series B shares not converted were accreted from carrying value to the face amount for the 5 year period from the
date of issuance. Series C stock has no accretion. There were no shares of Series B Stock surrendered or exchanged in the year
ended May 31, 2016.
During
the year ended May 31, 2012, two holders of Series A stock released all of their outstanding bonds held with FSC. These shares
of Series A Preferred Shareholders are listed in the liability section of the Balance Sheet as of May 31, 2017, in the amount
of $1,738,792, which consists of the fully accreted $1,126,000 face value of stock and $612,792 in dividends payable. The dividends
associated with these shares of Series A stock for the year ended May 31, 2017, is a deduction from net income in the amount of
$67,847. There was no current accretion on these shares of Series A stock.
As
of May 31, 2017 the Company has chosen to defer payment of dividends on Series A Preferred Stock with such accrued and unpaid
dividends amounting to $1,311,080 through May 31, 2017. 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, 2017 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 $4,038,772 and $9,698,738 through May 31, 2017, respectively. These dividends are included in
the amounts reported on the face of the balance sheet for each respective classification of stock.
Accounting
Treatment
U.S.
GAAP requires that an entity classify as liabilities certain financial instruments with characteristics of both liabilities and
equity. The Company's Series A and B Preferred stock each have mandatory redemption features that subject the Company to the analysis
of equity versus liability. Both Series A and B have features that embody a conditional obligation to redeem the instrument upon
events not certain to occur and accordingly, are not classified as liabilities until such events are certain to occur. With respect
to the Series A Preferred Stock, such condition is contingent upon the holder having no further need for surety bonds issued by
the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, having no such surety bonds
then outstanding. With respect to the Series B Preferred Stock, if the stock provides an option to the holder to convert to common
shares at a rate equivalent to fair value, then the financial instruments are not mandatorily redeemable during the period in
which the holder can convert the shares into common shares. Accordingly, the Company has determined that only the Series A preferred
stocks held by principals with outstanding surety bonds should not be classified as liabilities. However, in accordance with FASB’s
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Accounting
Standards Codification Topic 480-10-S99-4,
Liabilities,
equity instruments with redemption features that are not solely
within the control of the issuer are required to be classified on the balance sheet outside of permanent equity (often referred
to as “temporary equity”).
Note
K - Stock Warrants
On
December 30, 2005, the Company issued warrants to purchase 45,402,996 shares of common stock in connection with the Series A and
B Preferred Stock private placements. The exercise price of the warrants is $.001 per share. The warrants were valued using the
Black-Scholes pricing model. The warrants issued in connection with the Series A Preferred Stock were valued at $.08 per share
or $83,043. The warrants issued in connection with the Series B Preferred Stock were valued at $.01 per share or $449,972.
386,667
warrants issued in connection with Series B Preferred Stock expired unexercised on the fifth anniversary at December 31, 2010;
600,000 warrants issued in connection with Series A Preferred Stock expired unexercised on the seventh anniversary at December
31, 2012.
As
of May 31, 2017, there were no warrants outstanding.
Note
L-Stock-Based Compensation
On
October 12, 2005, the board of directors adopted its 2005 Stock Incentive Plan (the "Plan") to allow the Company to
make awards of stock options as part of the Company's compensation to key employees, non-employee directors, contractors and consultants.
The Plan was approved by the stockholders on December 8, 2005. The aggregate number of shares of Common Stock issuable under
all
awards under the Plan is 35,000,000. No awards may be granted under the Plan after December 8, 2015.
On
December 28, 2006, the compensation committee of the board of directors awarded 2,100,000 of incentive stock options to acquire
common shares at an exercise price of $.04 per share, of which 450,000 shares vested immediately and the remaining 1,650,000 options
vesting over the next three years ending in December 2009. As of May 31, 2010, the awarded options had been reduced to 1,800,000
due to changes in employment status, all of which expired in December 2011.
On
June 30, 2009 the compensation committee of the board of directors awarded 10,000,000 of incentive stock options to acquire common
shares at an exercise price of $.04 per share, of which 4,700,000 shares vested immediately and the remaining 5,300,000 options
vesting over the next three years ending in June 2011. As of May 31, 2015, the awarded options had been reduced to 9,800,000 due
to changes in employment status, all of which expired in June 2014.
The
Plan’s terms defined that it would terminate upon the earlier of (1) the adoption of a resolution by the Company terminating
the Plan; or (2) ten years from the date on which the Plan is initially approved by the stockholders of the Company, therefore
the Plan terminated on October 12, 2015.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
There
were no options exercised in fiscal 2017 or 2016. There is no unrecognized compensation expense related to non-vested awards at
May 31, 2017 or May 31, 2016 as all awards are fully vested.
Note
M – Income Taxes
Deferred
tax assets and liabilities are recorded for the effects of temporary differences between the tax basis of an asset or liability
and its reported amount in the consolidated financial statements. Such differences include the income recognition of a portion
of the unearned premium reserve, loss reserve deductibility, 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, 2017, the
Company had estimated operating loss carry forwards of approximately $14.2 million. These carry forwards began expiring in 2015
and, as a result of the ownership change resulting from the 2001 acquisitions of FSI and Jacobs, the utilization of approximately
$6.4 million of the operating loss carry forwards are substantially limited.
The
Company has fully reserved the $3.3 million tax benefit of the operating loss carry forward, adjusted for the Tax Cuts and Jobs
Act enacted December 22, 2017, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit
is doubtful.
Note
N – Stockholders’ Equity
In
fiscal 2017, the Company issued 300,000 shares of the Company’s common stock as additional consideration in connection with
new and continued borrowings totaling $75,000. The shares were valued at approximately $.002520 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 $756.
In
fiscal 2017, the Company issued 500,000 shares of the Company’s common stock as additional consideration for the purchase
and loans convertible into the purchase of 5% of FSC subsidiary stock. The shares were valued at approximately $.002705 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 $1,353.
In
fiscal 2016, the Company issued 1,878,000 shares of the Company's common stock as additional consideration in connection with
new and continued borrowings totaling $1,878,000. The shares were valued at approximately $.002887 per share based on the average
quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $5,422.
In
fiscal 2016, the Company issued 11,956,049 shares of the Company’s common stock in connection with the additional 2% stock
dividend associated with Series A and B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares
were valued at approximately $.003208 per share based on the average quoted closing price of the Company's stock for the 20-day
period preceding the date of the transaction and totaled $38,352.
In
fiscal 2016, the Company issued 2,500,000 shares of the Company's common stock as additional consideration for the purchase and
loans convertible into the purchase of 25% of FSC subsidiary stock.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
The shares were valued at approximately $.002566 per share
based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and
totaled $6,415.
Note
O-Statutory Financial Data (Unaudited)
The
Company’s insurance subsidiary files calendar year financial statements prepared in accordance with statutory accounting
practices prescribed or permitted by regulatory authorities. The principal differences between statutory financial statements
and financial statements prepared in accordance with generally accepted accounting principles are that statutory financial statements
do not reflect deferred policy acquisition costs and certain assets.
Statutory
capital and surplus as of May 31, 2017 and 2016, and net income for the Company’s insurance subsidiary for the calendar
year ended December 31, 2016 and 2015 and five-month periods ended May 31, 2017 and 2016 are as follows:
Statutory Capital and Surplus
|
|
May 31, 2017
|
|
$
|
13,485,339
|
|
Statutory Capital and Surplus
|
|
May 31, 2016
|
|
$
|
4,958,584
|
|
|
|
|
|
|
|
|
Net Income
|
|
Calendar year 2016
|
|
($
|
113,636
|
)
|
Net Income
|
|
Calendar year 2015
|
|
($
|
762,295
|
)
|
|
|
|
|
|
|
|
Net Income
|
|
Five-month period 2017
|
|
$
|
689,746
|
|
Net Income
|
|
Five-month period 2016
|
|
$
|
37,446
|
|
Statutory
surplus exceeds the West Virginia state law minimum capital requirements of $2.0 million.
Under
the West Virginia insurance code, ordinary dividends to stockholders are allowed to be paid only from that part of the insurance
subsidiary’s (FSC’s) available surplus funds which constitutes realized net profits from the business and whereby
all such dividends or distributions made within the preceding twelve months do not exceed the lesser of 10% of FSC’s surplus
as regards to policyholders as of December 31
st
of the preceding year-end or net income from operations from the previous
two calendar years, not including capital gains. Any payment of extraordinary dividends requires prior approval from the WV state
insurance commissioner.
On
March 26, 2012 the Commissioner of the State of West Virginia (WVOIC) terminated in its entirety the Amended Consent Order of
June 7, 2007 and terminated the restrictive conditions of the Consent Order issued December 23, 2005 which approved acquisition
of FSC by the Company. Among other consequences, removal of these restrictions allowed dividends to be declared by and paid from
FSC to the Company. No dividends were declared or paid for the twelve month periods ended May 31, 2017 or May 31, 2016.
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Note
P – Commitments and Contingencies
Lease
Commitments
The
Company leases certain office equipment with combined monthly payments of approximately $425 that have varying remaining terms
of less than five years. The Company leases office, parking and storage space under month-to-month lease arrangements that approximate
$2,978 each month.
The
Company’s inactive subsidiary, Crystal Mountain Spring Water, holds an undeveloped leasehold interest in a mineral water
spring located near Hot Springs, Arkansas. Under the leasehold arrangement, the Company makes minimum lease payments of $180 per
month. The Company has options to extend the leasehold arrangement through October 2026 and also has a right to cancel the lease
at any time upon sixty (60) days written notice.
Rental
expense for these lease commitments totaled approximately $43,321 and $45,086 during fiscal years 2017 and 2016.
Minimum
future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2017 are:
Fiscal year 2017-2018
|
|
$
|
38,176
|
|
Fiscal year 2018-2019
|
|
|
38,604
|
|
Total
|
|
$
|
76,780
|
|
During
2013, the Company and one of its surety principals entered into a contractual arrangement whereby the Company would hold collateral
for use in paying future claims and expenses and upon the Company’s determination that its liability had been fully extinguished,
the Company would return the amount of the deposits less any paid claims or expenses. While the Company holds the collateral,
the Company will pay 1.35% annual simple interest to the principal. The Company receives any appreciation and earnings in excess
of the contractual deposit, less payments, and interest paid to the principal. This deposit and the earning or expenses associated
with the deposit are included in the calculation of the Company’s investment income.
Note
Q – Financial Instruments
Fair
Value
The
following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable
to estimate that value:
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Investment
Securities
Fair
values for investment securities (U.S. Government, government agencies, government agency mortgage-backed securities, state and
municipal securities, and equity securities) held for investment purposes (available-for-sale) are based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Other
Financial Instruments
The
carrying amount of cash, short-term investments, receivables, prepaid expenses, short-term and demand notes payable, accounts
payable, accrued expenses and other liabilities approximate fair value because of the immediate or relatively short-term maturity
of these financial instruments. Fair value of term notes payable, including notes payable under the bridge-financing arrangement,
were deemed to approximate their carrying value based on the Company’s incremental borrowing rates for similar types of
borrowings with maturities consistent with those remaining for the debt being valued.
The
carrying amounts and fair values of the Company’s financial instruments at May 31, 2017 and 2016 are as follows:
|
|
2017
|
|
2016
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
ASSETS
|
|
|
|
|
|
|
|
|
Bonds available for sale
|
|
$
|
33,634,402
|
|
|
$
|
33,546,645
|
|
|
$
|
7,170,789
|
|
|
$
|
7,230,261
|
|
Cash and short-term investments
|
|
|
2,405,450
|
|
|
|
2,405,450
|
|
|
|
663,562
|
|
|
|
663,562
|
|
Premiums and other receivables
|
|
|
513,113
|
|
|
|
513,113
|
|
|
|
(76,413
|
)
|
|
|
(76,413
|
)
|
Equity securities (including derivatives)
|
|
|
2,465,221
|
|
|
|
2,422,476
|
|
|
|
1,550,217
|
|
|
|
1,488,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
6,463,439
|
|
|
|
6,463,439
|
|
|
|
6,861,954
|
|
|
|
6,861,954
|
|
Accounts payable and advance premiums
|
|
|
388,771
|
|
|
|
388,771
|
|
|
|
414,787
|
|
|
|
414,787
|
|
Accrued expenses and other liabilities
|
|
|
23,936,898
|
|
|
|
23,936,898
|
|
|
|
3,274,094
|
|
|
|
3,274,094
|
|
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Note
R – Other Risks and Concentrations
Concentration
of Credit Risk
As
of May 31, 2017 the Company’s investment securities of approximately $38,000,000 are comprised solely of mortgage-backed
securities, fixed maturity municipal bonds, equity investments, and money-market mutual funds that invest principally in obligations
issued by the U.S government, its agencies or instrumentalities. Such instruments are generally considered to be of the highest
credit quality investment available.
The
Company transacts the majority of its business with three financial institutions, one for commercial banking services and the
others for brokerage and custodial services. Periodically, the amount on deposit in financial institutions providing commercial
banking services exceeds federally insured limits. Management believes these financial institutions are financially sound. With
respect to the financial institutions providing brokerage and custodial services, amounts on deposit are invested in money market
funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities.
Management
has established an allowance for estimated uncollectible accounts of less than 3% of outstanding premiums and other receivables
believing that most receivables are collectible.
Concentration
in Products, Markets and Customers
The
Company’s insurance subsidiary currently writes only the surety line of business, is licensed to write surety only in West
Virginia and Ohio and has focused its primary efforts towards coal permit bonds. Such business, including investment advisory
fees from managed collateral accounts, accounted for approximately 34% and 66% of the Company’s fiscal 2017 and 2016 revenues,
respectively. Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute
18% and 36% of the Company’s fiscal 2017 and 2016 revenues, respectively, as follows:
|
|
2017
|
|
2016
|
|
|
Surety
Premium
|
|
Investment
Advisory
Fees
|
|
Surety
Premium
|
|
Investment
Advisory
Fees
|
|
|
|
|
|
|
|
|
|
Customer group #1
|
|
$
|
85,000
|
|
|
$
|
—
|
|
|
$
|
116,000
|
|
|
$
|
—
|
|
Customer group #2
|
|
|
169,000
|
|
|
|
16,000
|
|
|
|
190,000
|
|
|
|
17,000
|
|
Customer group #3
|
|
|
175,000
|
|
|
|
3,000
|
|
|
|
180,000
|
|
|
|
3,000
|
|
Customer group #4
|
|
|
205,000
|
|
|
|
4,000
|
|
|
|
205,000
|
|
|
|
4,000
|
|
Total
|
|
$
|
634,000
|
|
|
$
|
23,000
|
|
|
$
|
691,000
|
|
|
$
|
24,000
|
|
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Note
S – Segment Reporting
The
Company has two reportable segments, investment advisory services and surety insurance products and services. The following table
presents revenue and other financial information by industry segment.
|
|
Year Ended
|
Industry Segment
|
|
May 31, 2017
|
|
May 31, 2016
|
Revenues:
|
|
|
|
|
Investment advisory
|
|
$
|
351,227
|
|
|
$
|
506,373
|
|
Surety insurance
|
|
|
2,518,089
|
|
|
|
829,456
|
|
Corporate
|
|
|
—
|
|
|
|
—
|
|
Total revenues
|
|
$
|
2,869,316
|
|
|
$
|
1,335,829
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
Investment advisory
|
|
$
|
(134,431
|
)
|
|
$
|
(49,976
|
)
|
Surety insurance
|
|
|
717,313
|
|
|
|
(1,678,551
|
)
|
Corporate
|
|
|
(1,590,079
|
)
|
|
|
468,785
|
|
Total operating income (loss)
|
|
$
|
(1,007,197
|
)
|
|
$
|
(1,259,742
|
))
|
|
|
|
|
|
|
|
|
|
Identifiable Assets:
|
|
|
|
|
|
|
|
|
Investment advisory
|
|
$
|
55,146
|
|
|
$
|
43,129
|
|
Surety insurance
|
|
|
39,978,039
|
|
|
|
9,831,940
|
|
Corporate
|
|
|
2,109,740
|
|
|
|
1,483,127
|
|
Total assets
|
|
$
|
42,142,925
|
|
|
$
|
11,358,196
|
|
|
|
|
|
|
|
|
|
|
Capital Acquisitions:
|
|
|
|
|
|
|
|
|
Investment advisory
|
|
$
|
2,296
|
|
|
$
|
—
|
|
Surety insurance
|
|
|
36,064
|
|
|
|
—
|
|
Corporate
|
|
|
2,249
|
|
|
|
548
|
|
Total capital acquisitions
|
|
$
|
40,609
|
|
|
$
|
548
|
|
|
|
|
|
|
|
|
|
|
Depreciation Charged to
Identifiable Assets:
|
|
|
|
|
|
|
|
|
Investment advisory
|
|
$
|
58
|
|
|
$
|
—
|
|
Surety insurance
|
|
|
3,811
|
|
|
|
1,236
|
|
Corporate
|
|
|
729
|
|
|
|
15
|
|
Total Depreciation
|
|
$
|
4,598
|
|
|
$
|
1,251
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Investment advisory
|
|
$
|
107
|
|
|
$
|
—
|
|
Surety insurance
|
|
|
341,515
|
|
|
|
350,099
|
|
Corporate
|
|
|
233,349
|
|
|
|
564,999
|
|
Total interest expense
|
|
$
|
574,971
|
|
|
$
|
915,098
|
|
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
Note
T – Related Party Transactions
Borrowing
and other transactions of Largest Shareholder and CEO
For
the past several years the Company’s operating expenses were partially funded by advances from its largest shareholder and
chief executive officer, John M. Jacobs. The source of funding for these advances originated with obligations incurred by Mr.
Jacobs with third parties (such obligations together with the loans by Mr. Jacobs to the Company, “back-to-back loans”)
with interest rates ranging from 6% to 12%. This amount is unsecured and payable on demand.
To
assure that repayments of the various borrowings by the Company that were either guaranteed by Mr. Jacobs or loaned to the Company
by Mr. Jacobs via such back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs, because Mr. Jacobs entered
into an Assumption Agreement with the Company. Pursuant to the assumption agreement Mr. Jacobs assumes, and agrees to hold the
Company harmless from, principal of specified indebtedness of the Company and to fully offset when necessary what might otherwise
be deemed an advance of funds arising out of the Company’s financing activities.
During
fiscal 2017, advances to the Company from Mr. Jacobs amounted to $359,298 and repayments to Mr. Jacobs amounted to $783,755. As
of May 31, 2017, the balance due from Mr. Jacobs $939,945. The largest aggregate amount outstanding from Mr. Jacobs in fiscal
2017 was $955,646.
During
fiscal 2016, advances to the Company from Mr. Jacobs amounted to $1,088,758, and repayments to Mr. Jacobs amounted to $971,207.
As of May 31, 2016, the balance due from Mr. Jacobs was $515,488. The largest aggregate amount outstanding from Mr. Jacobs in
fiscal 2016 was $549,143.
As
of May 31, 2018, $24,000 was owed to Mr. Jacobs by the Company.
The
rate of interest on such amounts due from and obligations due to Mr. Jacobs was 6% and 12% respectively for both the 2017 and
2016 fiscal years.
Other
related parties
During
the years ended May 31, 2017 and May 31, 2016, a company owned by a board member provided consulting services. This company provided
services totaling $66,100 and $62,100 in 2017 and 2016. Amounts owed to this company at year end are treated as related party
payables in the amounts $124,323 and $124,723 at May 31, 2017 and 2016 respectively.
During
the year ended May 31, 2015, the Company borrowed money from an individual that is a board member. Total amounts owed to this
individual at May 31, 2017 consisted of $75,000 in demand notes and $5,000 in accrued interest.
During
the year ended May 31, 2016, an individual who holds secured notes payables from the Company, became a greater than 10% owner
of outstanding common stock of the Company. During the year ended May 31, 2016, the Company borrowed additional money from this
individual and entities controlled by this individual. Amounts owed to this individual (and the individual’s companies and
relatives) at May 31, 2017 consisted of $1,020,079 in demand notes, $1,248,920 in notes payable secured by FSC stock, and $26,853
in accrued interest (with $122,766 and $124,444 of interest expense for the periods ending
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
May
31, 2017 and 2016, respectively). This individual also arranged to purchase a 15.00% interest in First Surety Corporation for
$1,500,000 through a combination of cash and a Promissory Note for $1,250,000 secured by assignment of debt payable by the Company.
This sale also resulted in the issuance of 1,500,000 shares of common stock of the Company. As of May 31, 2017, the amounts receivable
from this individual amounted to $960,540, with interest income of $83,894 and $75,168 for the periods ending May 31, 2017 and
2016.
Note
U – Reinsurance
The
Company limits the maximum net loss that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers.
Ceded reinsurance is treated as the risk and liability of the assuming companies. The Company cedes insurance to other companies
and these reinsurance contracts do not relieve the Company from its obligations to policyholders.
Effective
April 1, 2009, FSC entered into a reinsurance agreement with various syndicates at Lloyd’s of London (“Reinsurer”)
for its coal reclamation surety bonding programs. The agreement has been renewed annually with the Reinsurer, with the most recent
renewal effective April 1, 2017. The reinsurance agreement is an excess of loss contract which protects the Company against losses
up to certain limits over stipulated amounts and can be terminated by either party by written notice of at least 90 days prior
to any July 1. The contract calls for a premium rate of 35% subject to a minimum premium of $490,000. Deposits to the reinsurers
are made quarterly in arrears in equal amounts of $140,000. At May 31, 2017 and May 31, 2016, the Company had prepaid reinsurance
premiums of $418,124 and $232,647.
There
were no ceded Loss and Loss Adjustment Expenses for the years ended May 31, 2017 or 2016.
The
effects of reinsurance on premium written and earned for fiscal 2017 and 2016 are as follows;
|
|
2017 Written
|
|
2017 Earned
|
|
2016 Written
|
|
2016 Earned
|
|
Direct
|
|
|
$
|
2,948,921
|
|
|
$
|
2,283,329
|
|
|
$
|
1,466,837
|
|
|
$
|
1,407,905
|
|
|
Ceded
|
|
|
|
1,007,008
|
|
|
|
821,531
|
|
|
|
453,587
|
|
|
|
428,353
|
|
|
Net
|
|
|
$
|
1,941,913
|
|
|
$
|
1,461,798
|
|
|
$
|
1,013,250
|
|
|
$
|
979,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
V – Events Subsequent to May 31, 2017
Subsequent
to May 31, 2017, the Company obtained various borrowings from individuals and businesses through May 31, 2018 totaling $120,600
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 $290,218. These borrowings, and the renewal of other borrowings, included no issuances of shares of its common stock
as additional consideration. Additionally, the Company obtained borrowings of $730,693, including $388,788 assumption of Company
debt, from its principal shareholder and chief executive officer under a pre-approved financing arrangement bearing interest at
the rate of 12% and made repayments totaling $158,883. After
Jacobs Financial Group, Inc.
Notes to Consolidated Financial Statements
|
Table of Contents
|
taking
into account the net accrued payroll owed, reimbursement of company expenses, and the personal assumption of Company debt that
is to be offset against these borrowings, the balance owed to the principal shareholder from the Company is $23,393 at May 31,
2018.
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 $1,472,931, $4,603,909 and $11,059,170
as of May 31, 2018.
Subsequent
to May 31, 2017, the Registrant sold 15.50% interest in First Surety Corporation to various individuals for $1,550,000. This sale
also resulted in the issuance of 1,550,000 shares of common stock of the Company. In addition, the Company converted a note payable
from a lender for 3% interest in First Surety Corporation.