Document and Entity Information
Document and Entity Information - USD ($) | 12 Months Ended | ||
May 31, 2014 | Sep. 30, 2014 | Nov. 30, 2013 | |
Document and Entity Information | |||
Entity Registrant Name | JACOBS FINANCIAL GROUP, INC. | ||
Entity Trading Symbol | JFGI | ||
Document Type | 10-K/A | ||
Document Period End Date | May 31, 2014 | ||
Amendment Flag | true | ||
Entity Central Index Key | 857,501 | ||
Current Fiscal Year End Date | --05-31 | ||
Entity Common Stock, Shares Outstanding | 360,185,395 | ||
Entity Filer Category | Smaller Reporting Company | ||
Entity Current Reporting Status | Yes | ||
Entity Voluntary Filers | No | ||
Entity Well-known Seasoned Issuer | No | ||
Document Fiscal Year Focus | 2,014 | ||
Document Fiscal Period Focus | FY | ||
Entity Public Float | $ 1,003,331 | ||
Amendment Description | Providing Correct XBRL Files |
Consolidated Balance Sheets
Consolidated Balance Sheets - USD ($) | May 31, 2014 | May 31, 2013 |
Investments and Cash: | ||
Bonds and mortgaged-back securities available for sale, at fair value (amortized cost - 5/31/14 $6,192,278; 5/31/13 $5,374,252) | $ 6,305,106 | $ 5,472,116 |
Equity investments available for sale, at fair value, net (cost - 5/31/14 $790,368; 5/31/13 $455,708) | 816,460 | 454,639 |
Short-term investments ($2,038,614 total held before restrictions) | 301,262 | 1,255,234 |
Cash ($669,897 total held before restrictions) | 341,817 | 292,226 |
Restricted cash and short term investments | 2,065,432 | 23,000 |
Total Investments and Cash | 9,830,077 | 7,497,215 |
Investment income due and accrued | 62,091 | 41,605 |
Premiums and other accounts receivable, net of allowance for doubtful accounts of $32,594 | 228,752 | 258,698 |
Prepaid reinsurance premium | 215,616 | 196,565 |
Funds deposited with Reinsurers | 10,615 | 90,647 |
Deferred policy acquisition costs | 152,608 | 138,497 |
Furniture, automobile, and equipment, net of accumulated depreciation of $113,302 and $102,616, respectively | 4,735 | 11,719 |
Due from related party | 175,312 | |
Other assets | 92,099 | 99,187 |
Intangible assets | 150,000 | 150,000 |
TOTAL ASSETS | 10,746,593 | 8,659,445 |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||
Reserve for losses and loss expenses | 1,286,018 | 1,207,903 |
Reserve for unearned premiums | 658,467 | 621,974 |
Advanced premium | 122,240 | 117,920 |
Accrued expenses and professional fees payable | 758,900 | 737,925 |
Accounts payable | 213,834 | 295,960 |
Due to related party | 154,790 | 124,409 |
Term and demand notes payable to related party | 435,000 | |
Notes payable | 5,220,350 | 4,847,170 |
Accrued interest payable | 3,237,163 | 2,286,052 |
Accrued interest payable to related party | 277,769 | |
Other liabilities | 663,680 | 395,368 |
Funds held in trust for customers | 2,065,432 | 23,000 |
Total Liabilities | 21,315,561 | 17,583,943 |
Total Mandatorily Redeemable Convertible Preferred Stock | 1,994,140 | 1,916,330 |
Stockholders' Equity (Deficit) | ||
Common stock, $.0001 par value per share; 490 million shares authorized; 352,741,649 and 322,107,908 shares issued and outstanding at May 31, 2014 and May 31, 2013, respectively | 35,274 | 32,211 |
Additional paid in capital | 4,171,296 | 4,013,242 |
Accumulated deficit | (29,144,834) | (26,228,523) |
Accumulated other comprehensive income | 138,920 | 96,795 |
Total Stockholders' Equity (Deficit) | (12,563,108) | (10,840,829) |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | 10,746,593 | 8,659,445 |
Mandatorily Redeemable Preferred A Stock [Member] | ||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||
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, 2014 and May 31, 2013, respectively; stated liquidation value of $1,000 per share; aggregate liquidation value at May 31, 2014 and May 31, 2013, of $1,994,140 and $1,916,330, respectively. | 1,994,140 | 1,916,330 |
Series A Preferred Stock [Member] | ||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||
Mandatorily redeemable Series A Preferred Stock and Series B Preferred Stock; stated liquidation value ;aggregate liquidation value | 1,542,922 | 1,482,718 |
Series B Preferred Stock [Member] | ||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||
Mandatorily redeemable Series A Preferred Stock and Series B Preferred Stock; stated liquidation value ;aggregate liquidation value | 5,402,046 | 4,990,463 |
Series C Preferred Stock [Member] | ||
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, 2014 and May 31, 2013, respectively; includes $6,205,305 and $5,214,516 accrued Series C dividends, respectively; aggregate liquidation value at May 31, 2014 and May 31, 2013, of $12,236,236 and $11,245,447, respectively. | $ 12,236,236 | $ 11,245,447 |
Consolidated Balance Sheets (Pa
Consolidated Balance Sheets (Parenthetical) - USD ($) | May 31, 2014 | May 31, 2013 |
Amorized cost Bonds and mortgaged-back securities | $ 6,192,278 | $ 5,374,252 |
Amorized cost Equity investments | 790,368 | 455,708 |
Short-term investments held before restrictions | 2,038,614 | |
Cash held before restrictions | 669,897 | |
Allowance for doubtful accounts | 32,594 | |
Accumulated depreciationFurniture, automobile, and equipment | $ 120,286 | $ 113,302 |
Common stock Shares, par value | $ .0001 | $ .0001 |
Common stock Shares authorized | 490,000,000 | 490,000,000 |
Common stock Shares issued | 352,741,649 | 322,107,908 |
Common stock Shares outstanding | 352,741,649 | 322,107,908 |
Mandatorily Redeemable Preferred A Stock [Member] | ||
Preferred stock Shares, par value | $ .0001 | $ .0001 |
Preferred stock Shares,authorized | 1,000,000 | 1,000,000 |
Preferred stock Shares,issued | 1,549 | 1,549 |
Preferred stock Shares,outstanding | 1,549 | 1,549 |
Preferred Stock Liquidation Preference, per Share | $ 1,000 | $ 1,000 |
Series A Preferred Stock [Member] | ||
Preferred stock Shares, par value | $ .0001 | $ .0001 |
Preferred stock Shares,authorized | 1,000,000 | 1,000,000 |
Preferred stock Shares,issued | 1,126 | 1,126 |
Preferred stock Shares,outstanding | 1,126 | 1,126 |
Preferred Stock Liquidation Preference, per Share | $ 1,000 | $ 1,000 |
Series B Preferred Stock [Member] | ||
Preferred stock Shares, par value | $ .0001 | $ .0001 |
Preferred stock Shares,issued | 3,136 | 2,817 |
Preferred stock Shares,outstanding | 3,136 | 2,817 |
Preferred Stock Liquidation Preference, per Share | $ 1,000 | $ 1,000 |
Series C Preferred Stock [Member] | ||
Preferred stock Shares, par value | $ .0001 | $ .0001 |
Preferred stock Shares,authorized | 10,000 | 10,000 |
Preferred stock Shares,issued | 6,805 | 6,805 |
Preferred stock Shares,outstanding | 6,805 | 6,805 |
Preferred stock,Accrued Dividends | $ 6,205,305 | $ 5,214,516 |
Consolidated Condensed Statemen
Consolidated Condensed Statements of Operations - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Revenues | ||
Investment advisory services | $ 153,635 | $ 178,328 |
Insurance premiums and commissions | 859,717 | 877,010 |
Net investment income | 226,192 | 230,373 |
Net realized investment gains (losses) | (45,206) | 43,238 |
Other income | 75,568 | 15,706 |
Total Revenues | 1,269,906 | 1,344,655 |
Operating Expenses: | ||
Incurred policy losses | 161,181 | 181,414 |
Insurance policy acquisition costs | 260,668 | 267,587 |
General and administrative | 1,272,818 | 1,330,234 |
Mutual fund costs | ||
Depreciation | 6,984 | 10,685 |
Total Operating Expenses | 1,701,651 | 1,789,920 |
Net Income (Loss) from Operations | (431,745) | (445,265) |
Gain on debt extinguishment | ||
Accrued dividends of Series A Mandatorily Redeemable Preferred Stock | (60,204) | (57,855) |
Accrued dividends and accretion of Series B Mandatorily Redeemable Preferred Stock | (411,583) | (380,239) |
Interest expense | (944,180) | (1,073,338) |
Net Income (Loss) | (1,847,712) | (1,956,697) |
Accretion of Mandatorily Redeemable Convertible Preferred Stock, including accrued dividends | (77,811) | (74,774) |
Accrued dividends on Series C Preferred Stock equity | (990,788) | (915,335) |
Net Income (Loss) Attributable to Common Stockholders | $ (2,916,311) | $ (2,946,806) |
Basic and Dilutive Net Income (Loss) Per Share: | ||
Net Income (Loss) Per Share | $ (0.01) | $ (0.01) |
Weighted-Average Shares Outstanding | 335,710,079 | 297,316,429 |
Consolidated Condensed Stateme5
Consolidated Condensed Statements of Comprehensive Income (Loss) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Net Income (loss) | ||
Net Income (loss) | $ (1,847,712) | $ (1,956,697) |
Accretion of Mandatorily Redeemable Convertible Preferred Stock, including accrued dividends | (77,811) | (74,774) |
Accrued dividends on Series C Preferred Stock equity | (990,788) | (915,335) |
Income (Loss) | (1,068,599) | (990,109) |
Net loss attributable to common stockholders | (2,916,311) | (2,946,806) |
Other comprehensive income (loss): | ||
Reclassification of investments from Held to Maturity to Avaialble for Sale | ||
Net unrealized gain of available-for-sale investments arising during period | 36,909 | (43,844) |
Reclassification adjustment for realized loss included in net loss | 5,215 | (7,736) |
Net unrealized loss attributable to available-for-sale investments recognized in other comprehensive income (loss) | 42,124 | (51,580) |
Comprehensive loss attributable to common stockholders | $ (2,874,187) | $ (2,998,386) |
Consolidated Statements of Cash
Consolidated Statements of Cash Flows - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
CASH FLOWS FROM OPERATING ACTIVITIES | ||
Net Loss | $ (1,847,712) | $ (1,956,697) |
Adjustments to reconcile net loss to net cash provided by operating activities: | ||
(Increase) decrease in short-term investments | (783,380) | (263,359) |
Unearned premium | 21,762 | (123,285) |
Stock option expense | ||
Stock issued in connection with financing arrangements | 112,027 | 249,133 |
Stock issued in connection with dividend arrangements | 49,090 | 33,312 |
Accrual of Series A preferred stock dividends | 60,204 | 57,855 |
Accrual of Series B preferred stock dividends and accretion | 411,583 | 380,239 |
Stock issued in connection with services rendered | 71,049 | |
Provision for loss reserves | 78,115 | 181,414 |
Amortization of premium | 93,887 | 90,162 |
Depreciation | 6,984 | 10,685 |
Accretion of discount | (8,163) | (23,055) |
Realized gain on sale of securities | 45,206 | (43,238) |
Gain on extinguishment of debt | ||
Loss on disposal of equipment | ||
Change in operating assets and liabilities: | ||
Other assets | 7,088 | (2,817) |
Premium and other receivables | 29,946 | 30,765 |
Investment income due and accrued | (23,309) | 4,114 |
Deferred policy acquisition costs | (14,111) | 28,513 |
Related party accounts payable | 20,100 | 15,100 |
Accounts payable and cash overdraft | (82,126) | 123,333 |
Accrued expenses and other liabilities | 3,085,093 | 981,727 |
Net cash flows from operating activities | 1,262,284 | (155,050) |
CASH FLOWS FROM INVESTING ACTIVITIES | ||
Short-term loan | ||
Costs of bonds acquired | (2,049,954) | (1,137,860) |
Costs of mortgaged-backed securities acquired | (1,295,427) | (759,207) |
Purchase of equity securities | (891,474) | (365,751) |
Purchase of securities available for sale | ||
Redemption of bonds upon call or maturity | ||
Proceeds from sale of securities available for sale | 2,118,596 | 1,974,793 |
Repayment of mortgage-backed securities | 834,643 | 868,743 |
(Purchase)/Collection - accrued interest | 2,823 | (2,737) |
Purchase of furniture and equipment | ||
Net cash flows used in investing activities | (1,280,793) | 577,981 |
CASH FLOWS FROM FINANCING ACTIVITIES | ||
Proceeds from related party debt | 1,040,612 | 1,310,924 |
Repayment of related party debt | (855,019) | (1,429,190) |
Proceeds from borrowings | 314,000 | 452,500 |
Repayment of borrowings | (126,413) | (701,018) |
Proceeds from issuance of Series B preferred stock | ||
Redemption of Series B preferred stock | ||
Proceeds from issuance of common stock | ||
Proceeds from exercise of common stock warrants | ||
Net cash flows from (used in) financing activities | 373,180 | (366,784) |
NET INCREASE (DECREASE) IN CASH | 354,671 | 56,147 |
CASH AT BEGINNING OF PERIOD | 315,226 | 259,079 |
CASH AT END OF PERIOD | 669,897 | 315,226 |
SUPPLEMENTAL DISCLOSURES | ||
Interest paid | 109,534 | 134,138 |
Income taxes paid | ||
Non-cash investing and financing transaction: | ||
Additional consideration paid for issuance of debt | $ 112,027 | $ 249,133 |
Consolidated Statement of Serie
Consolidated Statement of Series A Redeemable Preferred Stock and Stockholders' Equity (Deficit) - USD ($) | Series A Mandatorily Redeemable Preferred Stock | Common Stock Amount | Additional Paid-In Capital | Series C Preferred Stock [Member] | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total |
Beginning Balance at May. 31, 2012 | $ 1,841,555 | $ 27,035 | $ 3,664,923 | $ 10,330,112 | $ (23,281,717) | $ 148,375 | $ (9,111,272) |
Beginning Balance, Shares at May. 31, 2012 | 1,549 | 270,352,831 | 6,805 | ||||
Issuance of common stock as compensation for services | $ 2,265 | 57,869 | 60,134 | ||||
Issuance of common stock as additional consideration in financing arrangements | 2,911 | 260,553 | 263,464 | ||||
Accrued dividends of Series A mandatorily redeemable convertible preferred stock | 74,775 | (74,775) | (74,775) | ||||
Accrued dividends of Series C equity preferred stock | 915,335 | (915,335) | |||||
Accrual of common shares to be issued in connection with financing arrangements | 29,897 | 29,897 | |||||
Unrealized gain on available for sale securities | (51,580) | (51,580) | |||||
Net (loss) | (1,956,697) | (1,956,697) | |||||
Ending Balance at May. 31, 2013 | $ 1,916,330 | $ 32,211 | 4,013,242 | $ 11,245,447 | (26,228,524) | 96,795 | (10,840,829) |
Ending Balance, Shares at May. 31, 2013 | 1,549 | 322,107,908 | 6,805 | ||||
Issuance of common stock as additional consideration in financing arrangements | $ 3,063 | 171,542 | 174,605 | ||||
Issuance of common stock as additional consideration in financing arrangements, Shares | 30,633,741 | ||||||
Accrued dividends of Series A mandatorily redeemable convertible preferred stock | 77,810 | (77,810) | (77,810) | ||||
Accrued dividends of Series C equity preferred stock | 990,789 | (990,789) | |||||
Accrual of common shares to be issued in connection with financing arrangements | (13,488) | (13,488) | |||||
Unrealized gain on available for sale securities | 42,125 | 42,125 | |||||
Net (loss) | (1,847,712) | (1,847,712) | |||||
Ending Balance at May. 31, 2014 | $ 1,994,140 | $ 35,274 | $ 4,171,296 | $ 12,236,236 | $ (29,144,834) | $ 138,920 | $ (12,563,108) |
Ending Balance, Shares at May. 31, 2014 | 1,549 | 352,741,649 | 6,805 |
Organization and Business
Organization and Business | 12 Months Ended |
May 31, 2014 | |
Organization And Business | |
Organization and Business | Note A – Organization and Business Organization and Nature of Business Jacobs Financial Group, Inc. (the “Company” or “JFG”), formerly NELX, Inc., was incorporated in Kansas on March 25, 1983. In 2001, the Company acquired all the outstanding stock of two corporations located in Charleston, West Virginia: Jacobs& Company (“Jacobs”) and FS Investments, Inc. (“FSI”). Jacobs is a registered investment advisory firm that derives its revenue from asset-based investment advisory fees. FSI, through its wholly-owned subsidiary Triangle Surety Agency, Inc. (“Triangle”), is engaged in the business of placing surety bonds with insurance companies for clients engaged in regulated industries, such as the extraction of coal, oil and gas. FSI receives commission income from the placement of these bonds and is licensed in ten states primarily in the eastern United States. On December 30, 2005, the Company acquired all of the outstanding stock of West Virginia Fire & Casualty Company (“WVFCC”), an insurance company licensed to engage in business in West Virginia, Ohio and Indiana. The acquisition of WVFCC consisted of the purchase of marketable investments and insurance licenses and did not include any existing policies or customer base as the insurance lines of business offered by WVFCC were not insurance lines that the Company intended to pursue. Following the acquisition, the name of WVFCC was changed to First Surety Corporation (“FSC”). FSC receives insurance premium income in connection with the issuance of surety bonds. The Company and its subsidiaries are subject to the business risks inherent in the financial services industry. Liquidity and Going Concern These consolidated financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Presently, the Company has insufficient liquidity and capitalization, and has suffered recurring losses from operations. Losses are expected to continue until the Company develops a more substantial book of business. While improvement is anticipated as the Company’s business plan is implemented, other conditions, such as restrictions on the use of assets (See Note C), and the Company’s significant deficiency in working capital and stockholders’ equity raise substantial doubt about the Company’s ability to continue as a going concern. 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. Cash and Short Term Investments The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Included in cash and cash equivalents are restricted amounts held in trust for customers in the form of collateral for the bonding program of FSC. Use of Estimates Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates are loss reserves, stock options, valuation of investments, and the valuation of deferred tax assets. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. Revenue Recognition Fees for investment advisory services are based on an agreed percentage of the value of client assets under management and are accrued monthly based on the market value of client assets. The Company accounts for its surety bond issuances as short duration contracts. Surety premiums are recorded as receivables when due and are earned pro rata over the term of the policies of generally one year, subject to annual renewal. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. The reserve for unearned premium is determined using the monthly pro rata method. Advance premiums represent renewal premiums paid in advance of the effective renewal date. Agency commissions for surety bond services are based on a percentage of premiums charged for bonds placed with insurance companies, and are recorded upon issuance or effective renewal date of the bonds. No significant continuing services subsequent to the issuance or renewal of surety bonds are required. Policy acquisition costs include costs that vary with and are primarily related to the acquisition of new business. Such costs generally include commissions, underwriting expenses, and premium taxes and are deferred and amortized over the period in which the related premiums are earned. The deferred policy acquisition cost assets are reviewed for recoverability based on the profitability of the underlying surety policy. Investment income is not anticipated in the recoverability of deferred policy acquisition costs. Investments Debt securities are designated at purchase as held-to-maturity, trading or available for sale. Held-to-maturity debt securities are carried at amortized cost where the Company has the ability and intent to hold these securities until maturity. Premiums and discounts arising from the purchase of debt securities are treated as yield adjustments over the estimated lives or call date, if applicable. Debt and equity securities that are bought and held principally for sale in the near future are classified as trading securities and are carried at fair value, with changes in fair value recorded in current operations. Debt and equity securities that the Company may not have a positive intent to hold until maturity and not classified as trading, are considered to be available for sale and carried at fair value. Management has determined it may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported in stockholders’ equity as a separate component of accumulated other comprehensive income. An investment is considered impaired when its fair value is less than its cost or amortized cost, as applicable. When an investment is impaired, a determination is made as to whether the impairment is other than temporary (“OTTI”). Factors considered in identifying OTTI include: 1) for debt securities, whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the security prior to the anticipated recovery in value; 2) the likelihood of the recoverability of principal and interest for debt securities (i.e., whether there is a credit loss) or cost for equity securities; 3) the length of time and extent to which the fair value has been less than amortized cost for debt securities or carrying value for equity securities; and 4) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices. Short-term investments consist primarily of debt securities having maturities of one year or less at date of purchase, money-market investment funds and other similar investments that have immediate availability. Interest income with respect to fixed maturity securities is accrued as earned. Dividend income is generally recognized when receivable. Realized gains and losses are determined by specific identification of the security sold. Derivatives The Company uses derivatives in the form of covered call options sold to generate additional income and provide limited downside protection in the event of a market correction. These transactions expose the Company to potential market risk for which the Company receives a premium up front and the Company realizes the option premium received as income. The market risk relates to the requirement to deliver the underlying security to the purchaser of the call within a definite time at an agreed market price regardless of the then current market price of the security. As a result the Company takes the risk that it may be required to sell the security at the strike price, which could be a price less than the then market price. Should the security decline in market price over the holding period of the call option, the Company can lessen or mitigate the risk of loss with a closing transaction for the covered call and sale of the underlying security. The Company invests in large capitalized US securities traded on major US exchanges and writes standardized covered calls only against these positions (covered calls), which are openly traded on major US exchanges. The use of such underlying securities and standardized calls lessens the credit risk to the furthest extent possible. The Company is not exposed to significant cash requirements through the use of covered calls in that it sells a call for a premium and may use these proceeds to enter a closing transaction for the call at a later date. Allowance for uncollectible premium and other receivables The majority of the Company’s fee revenue is generated by services provided to companies and individuals throughout the Eastern United States. Management evaluates the need for a reserve for the amount of these receivables that may be uncollectible, based on historical collection activity adjusted for current conditions. Premium and other receivables are charged-off when deemed uncollectible. Based on this evaluation, management believes that most accounts receivable are collectible, and has established an allowance for estimated uncollectible accounts. Impairment The Company evaluates long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the assets may not be recoverable. The impairment is measured by discounting estimated future cash flows expected to be generated, and comparing this amount to the carrying value of the asset. Cash flows are calculated utilizing forecasts and projections and estimated lives of the assets being analyzed. Should actual results differ from those forecasted and projected, The Company may be subject to future impairment charges related to these long-lived assets. Furniture and Equipment Furniture and equipment is recorded at cost. Maintenance and repairs are charged to operations when incurred. When property and equipment are sold or disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using the straight-line and double-declining balance methods, which approximates estimated economic depreciation. Reserve for Losses and Loss Expenses Losses and loss adjustment expenses represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred. Reserves for unpaid losses and loss adjustment expenses are estimated using industry averages, however, will include individual case-basis valuations in the event if claims are received. These estimates and methods of establishing reserves are continually reviewed and updated. Stock-based Compensation The fair value of stock options is estimated at the grant date using the Black Scholes Option Pricing Model. This model requires the input of a number of assumptions, including expected volatility and dividend yields, expected stock price, risk-free interest rates, and an expected life of the options. Although the assumptions used reflect management’s best estimate, they involve inherent uncertainties based on market conditions generally outside the control of the Company. Income Taxes The Company currently has net operating loss (“NOL”) carry-forwards that can be utilized to offset future income for federal and state tax purposes. These NOLs represent a significant deferred tax asset. However, the Company has recorded a valuation allowance against this deferred tax asset as it has determined that it is more likely than not that it will not be able to fully utilize the NOLs. Should assumptions regarding the utilization of these NOLs change, the Company may reduce some or all of this valuation allowance, which would result in the recording a deferred income tax benefit. The Company follows a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the 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, 2014 or 2013. Earnings (Loss) Per Share Reclassifications Certain amounts in the 2013 Consolidated Financial Statements have been reclassified to be consistent with the presentation in the Consolidated Financial Statements as of May 31, 2014 and for the year then ended. These reclassifications had no impact on previously reported financial position, results of operations or cash flows. |
Newly Adopted and Recent Accoun
Newly Adopted and Recent Accounting Pronoucments | 12 Months Ended |
May 31, 2014 | |
Newly Adopted And Recent Accounting Pronoucments | |
Newly Adopted and Recent Accounting Pronoucments | Note B – Newly Adopted and Recent Accounting Pronouncements In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-11 (ASU 2011-11), Disclosures about Offsetting Assets and Liabilities In January 2013, the FASB issued Accounting Standards Update 2013-01 (ASU 2013-01), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities In February 2013, the FASB issued Accounting Standards Update 2013-02 (ASU 2013-02), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income In July 2013, the FASB issued Accounting Standards Update 2013-11 (ASU 2013-11), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists a consensus of the FASB Emerging Issues Task Force In May 2014, the FASB issued Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. In August 2014, FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) ( Management has assessed the potential impact of recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to the Company, or are not anticipated to have a material impact on the consolidated financial statements. |
Investments
Investments | 12 Months Ended |
May 31, 2014 | |
Investments | |
Investments | Note C – Investments The Company held the following investments, by security type, that were classified as available-for-sale and carried at fair value at May 31, 2014: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal securities $ 2,793,365 $ 45,878 $ 25,204 $ 2,814,039 Equity securities 817,452 53,636 22,414 848,674 Derivatives (27,084 ) (5,219 ) (89 ) (32,214 ) Mortgage Backed Securities 3,398,913 97,190 5,036 3,491,067 $ 6,982,646 $ 191,485 $ 52,565 $ 7,121,566 The Company held the following investments, by security type, that have been classified as available-for-sale and carried at fair value at May 31, 2013: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal securities $ 1,760,341 $ 5,293 $ 36,627 $ 1,729,007 Equity securities 474,311 52,190 21,979 504,522 Derivatives (18,603 ) (31,442 ) (162 ) (49,883 ) Foreign Obligations 200,750 — 6,913 193,837 Mortgage Backed Securities 3,413,161 145,390 9,279 3,549,272 $ 5,829,960 $ 171,431 $ 74,636 $ 5,926,755 There are no securities classified as held to maturity at May 31, 2014 or May 31, 2013. Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain of these invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term may significantly affect the amounts reported in the Consolidated Balance Sheets and Statements of Operations. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable: o Level 1 – Quoted prices for identical instruments in active markets. o Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. o Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable. Fair values are provided by the Company’s independent investment custodians that utilize third-party quotation services for the valuation of the fixed-income investment securities and money-market funds held. The Company’s investment custodians are large money-center banks. The Company’s equity investment is valued using quoted market prices. The following section describes the valuation methodologies used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instrument is generally classified. Fixed Income Securities Securities valued using Level 1 inputs include highly liquid government bonds for which quoted market prices are available. Securities using Level 2 inputs are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs. Most fixed income securities are valued using Level 2 inputs. Level 2 includes corporate bonds, municipal bonds, asset-backed securities and mortgage pass-through securities. Equity Securities Level 1 includes publicly traded securities valued using quoted market prices. Short-Term Investments The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and U.S. Treasury bills. Level 2 includes commercial paper, for which all significant inputs are observable. Assets measured at fair value on a recurring basis are summarized below: May 31, 2014 Fair Value Measurements Using Level 1 Level 2 Level 3 Assets At Fair Value Assets: Fixed income securities at fair value $ — $ 6,305,106 $ — $ 6,305,106 Equity securities at fair value (includes derivatives) 816,460 — — 816,460 Short-term investments at fair value 2,038,614 — — 2,038,614 Total Assets $ 2,855,074 $ 6,305,106 $ — $ 9,160,180 May 31, 2013 Fair Value Measurements Using Level 1 Level 2 Level 3 Assets At Fair Value Assets: Fixed income securities at fair value $ — $ 5,472,116 $ — $ 5,472,116 Equity securities at fair value (includes derivatives) 454,639 — — 454,639 Short-term investments at fair value 1,255,234 — — 1,255,234 Total Assets $ 1,709,873 $ 5,472,116 $ — $ 7,181,989 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, 2014 or at May 31, 2013. At May 31, 2014, the Company’s insurance subsidiary had securities and short term investment with a fair value of $1,051,556 on deposit with the State insurance department to satisfy regulatory requirements. In connection with regulatory approval of the Company’s acquisition of its insurance subsidiary, certain restrictions were imposed on the ability of the Company to withdraw funds from FSC without prior approval of the state Insurance Commissioner. Accordingly, investments and cash in the amount of $9,756,694 and $7,495,538 as of May 31, 2014 and 2013, respectively, are restricted to the use of FSC. At May 31, 2014, the Company’s insurance subsidiary had cash, securities and short term investments held as collateral for their bonding program in the amount of $2,065,432. Principal repayments on U.S. government agency mortgage-backed securities held by the Company as of May 31, 2014 are estimated as follows: Amortized Cost Fair Market Value Due in one year or less $ 863,666 $ 887,464 Due after one year through five years 1,277,857 1,323,043 Due after five years through ten years 903,255 925,697 Due after ten years 354,135 354,863 $ 3,398,913 $ 3,491,067 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: 2014 2013 Bonds – fixed maturities $ 102,480 $ 85,761 Mortgage-backed securities 97,135 117,696 Equity investments 14,569 15,929 Short-term investments 103 88 Other investment income 50,398 20,175 Total investment income 264,685 239,649 Investment expense 38,493 9,276 Net investment income $ 226,192 $ 230,373 The unrealized appreciation (depreciation) of investments were as follows: 2014 2013 Bonds-fixed maturities $ 58,921 $ (58,185 ) Mortgage-backed securities (43,958 ) (47,164 ) Equity securities 27,161 33,776 Increase (decrease) in unrealized appreciation $ 42,124 $ (71,573 ) 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 Gross Gross 2014 Bonds-fixed maturities $ 1,158,222 $ — $ (57,091 ) Mortgage-backed securities 382,804 533 (9,404 ) Equity securities 509,560 21,567 (5,155 ) Derivatives (equity securities) 91,403 29,710 (25,366 ) Total $ 2,141,989 $ 51,810 $ (97,016 ) 2013 Bonds-fixed maturities $ 1,487,611 $ 22,940 $ (7,512 ) Mortgage-backed securities 28,581 — (1,627 ) Equity securities 381,580 14,833 (5,054 ) Derivatives (equity securities) 72,967 27,695 (8,036 ) Total $ 1,970,739 $ 65,468 $ (22,229 ) 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, 2014 and May 31, 2013. Less than 12 Months 12 Months or More Total Cost Unrealized Cost Unrealized Fair Unrealized 2014 Equity securities $ 278,689 $ 13,171 $ 37,209 $ 9,243 $ 293,484 $ 22,414 Bonds- Fixed Maturities 413,440 6,075 759,956 19,129 1,148,191 25,204 Mortgage-backed securities 313,082 1,951 319,102 3,085 627,148 5,036 Total $ 1,005,211 $ 21,197 $ 1,116,267 $ 31,457 $ 2,068,823 $ 52,654 2013 Equity securities $ 71,398 $ 1,665 $ 89,751 $ 20,314 $ 139,171 $ 21,979 Bonds- Fixed Maturities 856,467 20,752 836,301 22,788 1,649,229 43,540 Mortgage-backed securities 488,878 5,440 142,854 3,838 622,454 9,278 Total $ 1,416,743 $ 27,857 $ 1,068,906 $ 46,940 $ 2,410,854 $ 74,797 (a) For bonds-fixed maturities and mortgage-backed securities, represents amortized costs. As of May 31, 2014, the Company held ten mortgage-backed securities with gross unrealized losses of $5,036, seven of which have been in a continuous loss position for more than 12 months. These securities consist of fixed-rate securities issued by Government National Mortgage Association (GNMA) that are sensitive to movements in market interest rates. As of May 31, 2014, the Company held nine fixed maturity bonds with gross unrealized losses of $25,204, five of which has been in a continuous loss position for more than 12 months. As of May 31, 2014, the Company held six equity security investments with gross unrealized losses of $22,414, one of which has been in a continuous floss position for more than 12 months. These securities consist of common stock whose fair value is sensitive to movements in market interest rates. |
Deferred Policy Acquisition Cos
Deferred Policy Acquisition Costs | 12 Months Ended |
May 31, 2014 | |
Deferred Policy Acquisition Costs | |
Deferred Policy Acquisition Costs | Note D - Deferred Policy Acquisition Costs The following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged to operations. 2014 2013 Balance at beginning of year $ 138,497 $ 167,010 Acquisition costs deferred 274,779 239,074 Amortization charged to operations (260,668 ) (267,587 ) Total $ 152,608 $ 138,497 |
Other Assets
Other Assets | 12 Months Ended |
May 31, 2014 | |
Other Assets | |
Other Assets | Note E – Other Assets |
Intangibles
Intangibles | 12 Months Ended |
May 31, 2014 | |
Intangibles | |
Intangibles | Note F – Intangibles As the result of the acquisition of FSC on December 30, 2005, in exchange for the purchase price of $2,900,000, the Company received cash and investments held by FSC with a fair value of $2,750,000, with the difference of $150,000 being attributed to the property and casualty licenses of FSC in the states of West Virginia, Ohio and Indiana. Such licenses have indefinite lives and are evaluated annually, or more frequently if circumstances indicate that a possible impairment has occurred, for recoverability and possible impairment loss. No impairment has been recorded in fiscal years ended May 31, 2014 and 2013. |
Reserve for Losses and Loss Exp
Reserve for Losses and Loss Expense | 12 Months Ended |
May 31, 2014 | |
Reserve For Losses And Loss Expense | |
Reserve for Losses and Loss Expense | Note G - Reserve for Losses and Loss Expense Reserves for unpaid losses and loss adjustment expenses are estimated based primarily on management’s judgment as the Company has only incurred one loss 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, 2014, the Company’s insurance subsidiary, FSC, is only licensed to write surety in West Virginia and Ohio and has focused its primary efforts towards coal permit bonds while also providing other miscellaneous surety bonds, most of which are partially collateralized by investment accounts that are managed by Jacobs & Company. Reclamation of land that has been disturbed by mining operations is highly regulated by federal and state agencies and the required bonds are generally long-term in nature with mining operations and reclamation work conducted in unison as the property is being mined. Additionally, no two principals or properties are alike due to varied company structures and unique geography and geology of each site. In underwriting such bonds, management develops, through consultation with professionals experienced in the specific field of work, estimates of costs to reclaim the properties subject of the permit(s) in accordance with those mining permit(s), in addition to other underwriting and financial risk considerations. FSC requires the principal to provide cash, or other acceptable collateral such as irrevocable letters of credit, in amounts determined through the underwriting process to reclaim the disturbed land and thus mitigate the exposure to significant loss. FSC maintains a reinsurance agreement with various syndicates at Lloyd's of London. The reinsurance agreement is an excess of loss contract that protects FSC against losses up to certain limits over stipulated amounts. Such cash is invested in investment collateral accounts managed by Jacobs utilizing investment strategies consistent with the state code governing investments of an insurance company. Inspections of mining activity and reclamation work are performed on a regular basis with initial cost estimates being updated periodically. Should the principal default in the obligation to reclaim the property in accordance with the mining permit, FSC would then use the funds held in the collateral account to reclaim the property or would be required to forfeit the face amount of the bond to the agency to which the bond is issued. Losses can occur if the costs of reclamation exceed estimates obtained at the time the bond was underwritten or upon subsequent re-evaluations, if sufficient collateral is not obtained and increased if necessary, or if collateral held has experienced a significant deterioration in value. FSC has experienced only one claim for loss as of May 31, 2014 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. At May 31, 2014 and May 31, 2013, the reserve for losses and loss expenses consisted of: 2014 2013 Balance at beginning of year $ 1,207,903 $ 1,026,489 Incurred policy losses-current year 161,181 181,414 Paid policy losses – current year (83,066 ) — Balance at end of year $ 1,286,018 $ 1,207,903 |
Notes Payable
Notes Payable | 12 Months Ended |
May 31, 2014 | |
Notes Payable | |
Notes Payable | Note H – Notes Payable At May 31, 2014 and 2013, the Company had the following unsecured notes payable to individuals: 2014 2013 Unsecured demand notes payable to individuals and others; no interest $ 7,500 $ — Unsecured demand notes payable to individuals and others; interest rate fixed 10% ($75,000 to related party in 2013, no related party in 2014) 1,484,529 1,227,482 Unsecured demand notes payable to individuals and others; interest rate fixed 12% 15,000 15,000 Unsecured demand note payable to individuals; interest rate fixed 14%; 203,040 185,000 Secured demand note payable to individuals; interest rate fixed 10%; secured by accounts receivable for investment advisory fees — 95,000 Unsecured note(s)payable to individual(s) under bridge- financing arrangements described below ($360,000 to related party in 2013, no related party in 2014) 3,500,000 3,500,000 Total $ 5,210,350 $ 5,022,482 During the year ended May 31, 2014, a board member that held $435,000 in unsecured notes payables from the Company resigned. During the years ended May 31, 2014 and May 31, 2013, the Company incurred approximately $63,000 and $69,000 in related party interest expense to this individual. All notes payables, with the exception of the $3,500,000 bridge-financing arrangement are on demand terms and therefore current. The terms of the bridge-financing arrangement are detailed in the following paragraphs. In accordance with the terms of the first round bridge-financing of $2.5 million on March 10, 2008, the holders of such notes were paid accrued interest-to date and issued 5.00% of the Company's common shares. Holders of the second round of bridge-financing notes of $1.0 million received 2.00% of the Company's common shares. Upon retirement of the notes subsequent to consummation of a qualified equity offering, the Company shall issue to the holders of the bridge financing notes additional Company common stock that when added to the stock initially issued to the holders of the notes, will equal the note holders’ pro rata share of the applicable percentage of the outstanding common stock of the Company as follows: If the qualified financing consists of $50 million or more, the holders of such notes will receive 28% of the common stock of the Company that would otherwise be retained by the holders of the Company's common shares immediately prior to the financing; if the qualified financing is for an amount less than $50 million, the percentage will be reduced on a sliding scale to a fraction of 28% of the amount retained by the holders of the Company's common shares (where the numerator is the amount of financing and the denominator is $50 million). This feature was analyzed and determined to be an embedded derivative, but the value was considered to be immaterial, and therefore has not been recorded. Beginning September 10, 2008, because a qualified financing had not been completed, the Company became required under the terms of the bridge financing to issue 2.80% of the Company's outstanding common shares and shall issue 2.80% of the Company's outstanding common shares upon each six-month anniversary date thereof until retirement of the notes. This feature was analyzed and determined to be an embedded derivative, but the value was considered to be immaterial and therefore has not been recorded for shares remaining to be issued. The following table summarizes the common shares issued to those note holders as a result incurring these penalties. Date of Issuance Shares Issued September 10, 2008 4,870,449 March 10, 2009 5,010,640 September 10, 2009 5,354,642 March 10, 2010 6,005,925 September 10, 2010 6,213,285 March 10, 2011 6,738,900 September 10, 2011 7,043,710 March 10, 2012 7,430,017 September 10, 2012 8,573,594 March 10, 2013 8,947,444 September 10, 2013 9,316,337 March 10, 2014 9,630,856 85,135,799 Pursuant to the terms of the Promissory Notes, the first two of 20 equal quarterly installments of principal and interest payable thereunder were to have been paid on December 10, 2008 and March 10, 2009 (the “ Initial Amortization Payments On June 5, 2009 the Company entered into an agreement with the bridge lenders to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default. The Original forbearance was amended October 13, 2009. As consideration for the forbearance, the Company issued 5,171,993 shares of Common stock, and pledged the stock of an inactive subsidiary of the Company, Crystal Mountain Water (CMW), as security for repayment of the loans. The original repayment schedule called for quarterly payments of $224,515. The Holders agreed that under the forbearance the Company may satisfy its obligation by increasing the quarterly payments by $67,185, (to a total of $291,700) for eight consecutive quarters beginning September 10, 2009 to satisfy the arrearage. In addition, the interest rate was increased to 17.00%. Although the Company failed to make the payment that was due September 10, 2009 and the payments that were due in the ensuing quarters, management remained in close contact with the bridge lenders, providing reports regarding its efforts to refinance or otherwise repay the bridge loans. In anticipation of a proposed financing and as a condition thereof, the Company and each of the bridge lenders entered into a Loan Modification Agreement dated February 25, 2012 which provided for modification of the Promissory Notes, including an extension of the term of the Promissory Notes, and Subscription Agreements in exchange for a partial cash payment to each bridge lender. To date, the proposed financing has not closed, and the Company has been unable to remit the partial payment. On August 10, 2012, the Company entered into an agreement with the bridge lenders, pursuant to which the bridge lenders formally agreed to forbear from exercising their rights and remedies arising from the accumulated acknowledged events of default with respect to the bridge loans until such date. As consideration for this forbearance, the Company entered into an Amended and Restated General Hypothecation and Pledge Agreement dated August 9, 2012 (the “August 2012 Pledge”), but effective September 23, 2011, granting to the bridge lenders as security for the repayment of the loans a lien and security interest in all of the Company’s shares of capital stock of First Surety Corporation. Under the August 2012 Pledge, the bridge lenders acknowledge that the effectiveness of certain of the rights and remedies provided by such agreement may be subject to prior approval by the Office of the Commissioner of Insurance for the State of West Virginia. As of May 31, 2014 no payments were made to bridge lenders. Scheduled maturities are as follows: 2014 Fiscal year 2014-2015 (including demand notes) $ 5,210,069 Total $ 5,210,069 |
Other Liabilities
Other Liabilities | 12 Months Ended |
May 31, 2014 | |
Other Liabilities | |
Other Liabilities | Note I - Other Liabilities As of May 31, 2014, the Company had accrued and withheld approximately $560,000 in Federal payroll taxes and approximately $46,000 in estimated penalties and interest, which are reflected in the financial statements as other liabilities. Subsequent to the year ended May 31, 2014, the Company satisfied its obligation to the IRS in full. As of May 31, 2014, the Company had accrued and withheld approximately $91,000 in West Virginia payroll withholdings and approximately $32,000 in interest and penalties, which are reflected in the accompanying financial statements as other liabilities. Subsequent to the year ended May 31, 2014, the Company satisfied its obligation to the State of West Virginia in full. As of May 31, 2014 the Company held approximately $2,065,000 in collateral for its surety bonding program. |
Preferred Stock
Preferred Stock | 12 Months Ended |
May 31, 2014 | |
Preferred Stock | |
Preferred Stock | Note J - Preferred Stock Redeemable Preferred Stock On December 30, 2005, through a private placement, the Company issued 350 shares of 4% Non-Voting Series A Preferred Stock (Series A Preferred Stock), along with 1,050,000 warrants for common shares of Company stock as additional consideration, for a cash investment in the amount of $350,000, in connection with the Company's acquisition of FSC. Holders of Series A Preferred Stock are entitled to participate in FSC's partially collateralized bonding programs, subject to continuing satisfaction of underwriting criteria, based upon the bonding capacity of FSC attributable to capital reserves of FSC established with the subscription proceeds (i.e., bonding capacity equal to ten times subscription proceeds) and for so long as the subscriber holds the Series A shares. Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the board of directors, cumulative preferential cash dividends at a rate of four percent of the $1,000 liquidation preference per annum (equivalent to a fixed annual rate of $40 per share). The Series A Preferred Stock ranks senior to the Company's common stock and pari passu with the Company's Series B Preferred and Series C Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The holder may redeem the Series A Preferred Stock on or after the seventh anniversary of the Issue Date, if the holder provides a written statement to the Company that it will no longer require surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, if no such surety bonds are then outstanding, the Company, at the option of the holder, will redeem all or any portion of the Series A Preferred Stock of such holder at a price per share equal to the Series A Preferred Stock Issue Price plus all accrued and unpaid dividends with respect to the shares of the Series A Preferred Stock of such holder to be redeemed. The conditional redemption shall not be available to any holder of Series A Preferred Stock for so long as surety bonds of the Company's insurance subsidiary issued on a partially collateralized basis remain outstanding for the benefit of such holder, and upon redemption, such holder shall no longer be eligible to participate in the partially collateralized bonding programs of the insurance subsidiary. The Company is authorized to issue up to 1,000,000 shares of the Series A Preferred Stock. As of May 31, 2014, the Company has issued 2,675 shares of Series A Preferred Stock in exchange for cash investments in the amount of $2,675,000, of which no shares were issued in fiscal 2014 or 2013. The Company’s outstanding Series A Preferred stock matures on the seventh anniversary of the issuance date and thereafter holders of the Series A Stock are eligible to request that the Company redeem their Series A Shares. As of May 31, 2014, the Company has received requests for redemption of 343 shares of Series A Preferred. The aggregate amount to which the holders requesting redemption are entitled as of May 31, 2014, is $473,410. Under the terms of the Series A Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series A Stock are sufficient to redeem the total number of shares of Series A Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series A Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series A Stock to be redeemed shall be increased by 2% of the Series A Face Amount, with the amount of such increase (i.e., 2% of the Series A Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series A Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series A Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series A Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series A Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series A Stock elected to be redeemed shall have been paid in full, such share of Series A Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price. The Company’s Board of Directors determined based on the criteria established under the terms of the Preferred Stocks that there were insufficient funds available for the redemption of Preferred Stocks. On December 30, 2005, through a private placement, the Company issued 3,980 shares of 8% Non-Voting Series B Convertible Preferred Stock (Series B Preferred Stock), along with 19,900,000 warrants for common shares of Company stock as additional consideration, for a cash investment in the amount of $2,985,000; and issued 4,891 shares of Series B Preferred Stock, along with 24,452,996 warrants for common shares of Company stock as additional consideration, for a conversion of $3,667,949 of indebtedness of the Company, in connection with the Company's acquisition of FSC. Holders of the Series B Preferred Stock are entitled to receive, when and as declared by the board of directors, cumulative preferential cash dividends at a rate of eight percent of the $1,000 liquidation preference per annum (equivalent to a fixed annual rate of $80 per share). The Series B Preferred Stock ranks senior to the Company's common stock and pari passu with the Company's Series A Preferred and Series C Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. Each share of the Series B Preferred Stock is convertible at the option of the holder, at any time after the original issue date, into 1,000 fully paid and non-assessable shares of the Company's common stock at a conversion price of $1.00 per common share. The Company may redeem the Series B Preferred Stock at any time after the first anniversary of the Original Issue Date at a price per share equal to the Series B Preferred Stock Face Amount plus all accrued and unpaid dividends with respect to the shares of the Series B Preferred Stock of such holder to be redeemed. To the extent that the Series B Preferred Stock has not been redeemed by the Company, the holder may redeem the Series B Preferred Stock on or after the fifth anniversary of the Original Issue Date at a price per share equal to the Series B Preferred Stock Face Amount plus all accrued and unpaid dividends with respect to the shares of the Series B Preferred Stock of such holder to be redeemed. The Company is authorized to issue up to 10,000 shares of the Series B Preferred Stock. The Company has not issued any additional shares of Series B Preferred Stock during fiscal 2014. The Company’s outstanding Series B Preferred stock matured on December 30, 2010, meaning that the holders of the Series B Stock that had not requested exchange to the Company’s Series C Preferred stock became entitled to request that the Company redeem their Series B Shares. As part of the exchange to Series C Preferred Stock in September 2009, the shares that did not exchange were treated as a liability on the balance sheet. As of May 31, 2014, of the 2,817 shares of Series B Preferred that remained outstanding, the Company has received requests for redemption of 2,219 shares of Series B Preferred. The aggregate amount to which the holders requesting redemption are entitled as of May 31, 2014, is $4,351,502. Under the terms of the Series B Preferred Stock, upon receipt of such a request, the Company’s Board was required to make a good faith determination regarding (A) whether the funds of the Company legally available for redemption of shares of Series B Stock are sufficient to redeem the total number of shares of Series B Stock to be redeemed on such date and (B) whether the amounts otherwise legally available for redemption would, if used to effect the redemption, not result in an impairment of the operations of the Insurance Subsidiary. If the Board determines that there is a sufficiency of legally available funds to accomplish the redemption and that the use of such funds to affect the redemption will not result in an impairment of the operations of the Insurance Subsidiary, then the redemption shall occur on the Redemption Date. If, however, the Board determines either that there are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series B Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series B Stock to be redeemed shall be increased by 2% of the Series B Face Amount, with the amount of such increase ( i.e. 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 $1,925,523 in fiscal 2014 as compared with a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $2,031,471 in fiscal 2013. 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 Preferred Stock 1. Designation. The shares of such series of Preferred Stock are designated “Series C Preferred Stock” (referred to herein as the “ Series C Stock Original Issue Date 2. Authorized Number. The number of shares constituting the Series C Stock is 10,000. 3. Ranking. The Series C Stock ranks, (a) as to dividends and upon Liquidation senior and prior to the Common Stock and all other equity securities to which the Series C ranks prior, with respect to dividends and upon Liquidation (collectively, “ Junior Securities Series A Stock Equal Ranking Preferred 4. Dividends. (a) Dividend Accrual and Payment Dividends Series B Amount Dividend Payment Date first then Series B Original Issue Date The Recapitalization consisted of the exchange of Series B Shares for a combination of Series C Shares and Common Stock. For each Series B Share, the participating holder received (i) one Series C Share and (ii) 2,000 shares of JFG Common Stock (for no additional consideration). For the year ended May 31, 2010, 6,805 shares of Series B Stock were surrendered and exchanged for 6,805 shares of Series C Stock. This exchange amounted to $6,269,051 of carrying value of Series B stock being exchanged for Series C and Common Stock. 13,609,872 shares of Common Stock were issued to the Series C Stock holders at the rate of 2,000 Common shares for each exchanged Series B Stock, with the related cost associated with the Common issuance offsetting the Series C carrying value by $265,120. The shares were valued at approximately $.01948 per share based on the average quoted closing price of the Company's stock for the 20-day period proceeding the date of the transaction. Series C stock may be redeemed by the Company but does not have a fixed maturity date and, thus, is classified as permanent equity. For the year ending May 31, 2014, 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 $990,788 in fiscal 2014 as compared with a charge to common stockholders’ equity of $915,335 in fiscal 2013. Dividend Preference and Accretion The Series A Shares are entitled to receive cumulative dividends at the compounding rate of 4.00% per annum. The Series B Shares have an 8.0% per annum compounding dividend preference, are convertible into Common Shares of JFG at the option of the holders at a conversion price of $1.00 per Share (as adjusted for dilution) and, to the extent not converted, must be redeemed by the Corporation at any time after December 31, 2010 at the option of the holder. Any such redemption is subject to legal constraints, such as the availability of capital or surplus out of which to pay the redemption, and to a determination by the Board of Directors that the redemption will not impair the operations of First Surety Corporation. The Series C Shares issued in the Recapitalization have the same 8.0% per annum compounding dividend preference and carry over from the Series B Shares the same accrued but unpaid dividends. While dividends had never been declared on the Series B shares, they had been accrued, increasing the dividend preference and the redemption price and liquidity preference of such shares and increasing the liability represented thereby based upon the Series B Shares fixed maturity date. The accrued (but undeclared) dividends associated with the Series C exchange amounted to $2,295,624 and are included in the total amount exchanged for Series C Shares. Unlike the Series B Shares with their fixed maturity date, the Series C Shares are permanent equity, with accruing dividends only increasing the preference amount that must be satisfied before junior securities may participate in dividends or on liquidation. Accordingly, the effect of the accrual of dividends with respect to the Series C Shares on the Company’s balance sheet is to increase the aggregate claim of the Series C Shares on the equity of the corporation and to increase the deficit in common equity, while having no effect on the net equity of the corporation as a whole. The entitlement of the Series C Shares to a priority in relation to junior securities with respect to dividends and on liquidation does not create an obligation to the Company and therefore no liability is recorded until the dividends are declared by the Board of the Company. The Series C Shares are pari passu with the Corporation’s Series A Preferred Stock and Series B Shares (to the extent any remain outstanding following the Recapitalization) and no dividends or other distributions will be paid upon Common Shares or any other class of Shares that is junior in priority to the Series C Preferred while dividends are in arrears. In addition, the Series C Shares are convertible into Common Shares of JFG at the option of the holders at a conversion price of $0.10 per Share. The Series C Shares may be redeemed by the Corporation, at its option, when it is in a financial position to do so. Holders of over 70% of the outstanding Series B Preferred Shares elected to participate in the recapitalization. The shares of Series B Preferred Shareholders that chose not to convert are listed in the Liabilities section of the Balance Sheet, and therefore the accretion and dividends associated with the Series B stock after November 30, 2009 are deductions from net income. Dividends on Series B mandatorily redeemable preferred stock deducted from net income amounted to $411,583 for the year ended May 31, 2014. 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, 2014. 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, 2014, in the amount of $1,542,922, which consists of the fully accreted $1,126,000 face value of stock and $416,922 in dividends payable. The dividends associated with these shares of Series A stock for the year ended May 31, 2014, is a deduction from net income in the amount of $60,204. There was no current accretion on these shares of Series A stock. As of May 31, 2014 the Company has chosen to defer payment of dividends on Series A Preferred Stock with such accrued and unpaid dividends amounting to $862,060 through May 31, 2014. These dividends are included in the amounts reported on the face of the balance sheet for each classification of Series A stock. As of May 31, 2014 the Company has chosen to defer payment of dividends on Series B and Series C Preferred Stock with such accrued and unpaid dividends amounting to $2,587,568 and $6,205,305 through May 31, 2014, respectively. These dividend are included in the amounts reported on the face of the balance sheet for each respective classification if stock. Accounting Treatment U.S. GAAP requires that an entity classify as liabilities certain financial instruments with characteristics of both liabilities and equity. The Company's Series A and B preferred stock each have mandatory redemption features that subject the Company to the analysis of equity versus liability. Both Series A and B have features that embody a conditional obligation to redeem the instrument upon events not certain to occur and accordingly, are not classified as liabilities until such events are certain to occur. With respect to the Series A Preferred Stock, such condition is contingent upon the holder having no further need for surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, having no such surety bonds then outstanding. With respect to the Series B Preferred Stock, if the stock provides an option to the holder to convert to common shares at a rate equivalent to fair value, then the financial instruments are not mandatorily redeemable during the period in which the holder can convert the shares into common shares. Accordingly, the Company has determined that only the Series A preferred stocks held by principals with outstanding surety bonds should not be classified as liabilities. However, in accordance with Securities and Exchange Commission (SEC) Issued Topic No. D- 98, SEC Staff Announcement, "Classification and Measurement of Redeemable Securities", a company that issues preferred shares that are conditionally redeemable is required to account for the conditionally redeemable preferred shares in accordance with Accounting Series Release 268, which states that the shares are to be reflected on the Company's balance sheet between total liabilities and stockholders' equity as temporary equity. |
Stock Warrants
Stock Warrants | 12 Months Ended |
May 31, 2014 | |
Stock Warrants | |
Stock Warrants | Note K - Stock Warrants On December 30, 2005, the Company issued warrants to purchase 45,402,996 shares of common stock in connection with the Series A and B Preferred Stock private placements. The exercise price of the warrants is $.001 per share. The warrants were valued using the Black-Scholes pricing model. The warrants issued in connection with the Series A Preferred Stock were valued at $.08 per share or $83,043. The warrants issued in connection with the Series B Preferred Stock were valued at $.01 per share or $449,972. 386,667 warrants issued in connection with Series B Preferred Stock expired unexercised on the fifth anniversary at December 31, 2010; 600,000 warrants issued in connection with Series A Preferred Stock expired unexercised on the seventh anniversary at December 31, 2012. As of May 31, 2014 there were no warrants outstanding. |
Stock-Based Compensation
Stock-Based Compensation | 12 Months Ended |
May 31, 2014 | |
Stock-Based Compensation | |
Stock-Based Compensation | Note L-Stock-Based Compensation On October 12, 2005, the board of directors adopted its 2005 Stock Incentive Plan (the "Plan") to allow the Company to make awards of stock options as part of the Company's compensation to key employees, non-employee directors, contractors and consultants. The Plan was approved by the stockholders on December 8, 2005. The aggregate number of shares of Common Stock issuable under all awards under the Plan is 35,000,000. No awards may be granted under the Plan after December 8, 2015. On July 9, 2012, the Company issued 22,600,000 shares to employees and a board member as additional compensation, reducing the number of shares of Common Stock issuable under all awards under the plan to 12,400,000. On 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. The term of the options is five years and expires in June 2014. No options were exercised subsequent to May 31, 2014. As of May 31, 2014, the awarded options had been reduced to 9,800,000 due to changes in employment status. The following table summarizes option activity under the Plan for the fiscal year ended May 31, 2014. Weighted-Avg. Number Weighted-Avg. Aggregate Balance at June 1, 2013 $ .04000 9,800,000 Options granted — — Options exercised — — Options canceled/expired — — Balance, May 31, 2014 $ .04000 9,800,000 Exercisable at May 31, 2014 $ .04000 9,800,000 .08 $ — Expected to vest $ — — — $ — There were no options exercised in fiscal 2014 or 2013. All shares were vested as of May 31, 2012. There is no unrecognized compensation expense related to non-vested awards at May 31, 2014 or May 31, 2013 as all awards are fully vested and the related compensation recognized previously. The Company estimates the fair value of stock options using a Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company's stock, the risk-free interest rate and the company's dividend yield. |
Income Taxes
Income Taxes | 12 Months Ended |
May 31, 2014 | |
Income Taxes | |
Income Taxes | Note M – Income Taxes Deferred tax assets and liabilities are recorded for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Such differences include the income recognition of a portion of the unearned premium reserve, loss reserve deductibility, accruals not currently deductible relating to stock option expense and certain accrued expenses that are not paid within specified time frames by the Internal Revenue Service, and the deductibility of deferred policy acquisition costs paid. As of May 31, 2014, the Company had operating loss carry forwards of approximately $15.7 million. These carry forwards begin expiring in 2015 and, as a result of the ownership change resulting from the 2001 acquisitions of FSI and Jacobs, the utilization of approximately $6.4 million of the operating loss carry forwards are substantially limited. The Company has fully reserved the $5.3 million tax benefit of the operating loss carry forward, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit cannot be determined. |
Stockholders' Equity
Stockholders' Equity | 12 Months Ended |
May 31, 2014 | |
Stockholders Equity | |
Stockholders' Equity | Note N – Stockholders’ Equity In fiscal 2014, the Company issued 691,000 shares of the Company's common stock as additional consideration in connection with new and continued borrowings totaling $666,000. The shares were valued at approximately $.006549 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 $4,525. In fiscal 2014, the Company issued 10,995,548 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 $.004465 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 $49,090. In fiscal 2014, the Company issued 9,316,337 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.009410 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 $87,667. In fiscal 2014, the Company issued 9,630,856 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.003460 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 $33,323. In fiscal 2013, the Company issued 2,527,500 shares of the Company's common stock as additional consideration in connection with new and continued borrowings totaling $2,147,500. The shares were valued at approximately $.005295 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 $13,383. In fiscal 2013, the Company issued 9,056,539 shares of the Company’s common stock in connection with the additional 2% stock dividend associated with Series A and B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares were valued at approximately $.004883 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $44,227. In fiscal 2013, the Company issued 8,573,594 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.01874 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 $160,669. In fiscal 2013, the Company issued 8,947,444 shares of the Company's common stock in connection with the semi-annual issuance of shares under terms of the bridge-financing arrangement. The shares were valued at approximately $.00505 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $45,185. In fiscal 2013, the Company awarded 50,000 shares to an individual as compensation for services instrumental to advancing the Company’s business plan. The shares were valued at approximately $.004875 per share based on the average quoted closing price of the Company's stock for the 20-day period proceeding the date of the transaction and totaled $244. On July 9, 2012 the Company issued 22,600,000 shares of the Company’s common stock to employees and other individuals for services rendered. The shares were valued at approximately $.002650 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $59,890. |
Statutory Financial Data (Unaud
Statutory Financial Data (Unaudited) | 12 Months Ended |
May 31, 2014 | |
Statutory Financial Data (Unaudited) | |
Statutory Financial Data (Unaudited) | Note O-Statutory Financial Data (Unaudited) The Company’s insurance subsidiary files calendar year financial statements prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities. The principal differences between statutory financial statements and financial statements prepared in accordance with generally accepted accounting principles are that statutory financial statements do not reflect deferred policy acquisition costs and certain assets are non-admitted. Statutory surplus as of May 31, 2014 and 2013 and net income for the Company’s insurance subsidiary for the calendar year ended December 31, 2013 and 2012 and five-month periods ended May 31, 2014 and 2013 are as follows: Statutory Surplus May 31, 2014 $ 5,905,066 Statutory Surplus May 31, 2013 $ 5,804,785 Net Income Calendar year 2013 $ 198,375 Net Income Calendar year 2012 $ 350,214 Net Income Five-month period 2014 $ 36,583 Net Income Five-month period 2013 $ 75,003 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 On March 26, 2012 the Commissioner of the State of West Virginia (WVOIC) terminated in its entirety the Amended Consent Order of June 7, 2007 and terminated the restrictive conditions of the Consent Order issued December 23, 2005 which approved acquisition of FSC by the Company. Among other consequences, removal of these restrictions allowed dividends to be declared by and paid from FSC to the Company. Dividends in the amounts of $198,000 and $590,000 were declared and paid for the twelve month periods ending May 31, 2014 and May 31, 2013. The dividends for 2013 were deemed by the WVOIC to contain $85,140 in extraordinary dividends. As a result of the extraordinary dividends, the insurance subsidiary (FSC) was fined $20,000 and the $85,140 was returned to FSC. The return of dividends was recorded as a capital contribution to FSC. |
Commitments and Contingencies
Commitments and Contingencies | 12 Months Ended |
May 31, 2014 | |
Commitments And Contingencies | |
Commitments and Contingencies | Note P – Commitments and Contingencies Lease Commitments The Company leases certain office equipment with combined monthly payments of approximately $465 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 $3,844 each month. The Company’ 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 $55,070 and $54,880 during fiscal years 2014 and 2013. Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2014 are: Fiscal year 2014-2015 $ 5,580 Fiscal year 2015-2016 5,580 Fiscal year 2016-2017 5,580 Total $ 16,740 During 2013, the Company and one of its surety principals entered into a contractual arrangement whereby the Company would hold collateral for use in paying future claims and expenses and upon the Company’s determination that its liability had been fully extinguished, the company would return the amount of the deposits less any paid claims or expenses. While the Company holds the collateral, the Company will pay 1.35% annual simple interest to the principal. The Company receives any appreciation and earnings in excess of the contractual deposit, less payments, and interest paid to the principal. This deposit and the earning or expenses associated with the deposit are included in the calculation of the Company’s investment income. |
Financial Instruments
Financial Instruments | 12 Months Ended |
May 31, 2014 | |
Financial Instruments | |
Financial Instruments | Note Q – Financial Instruments Fair Value The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value: Investment Securities Fair values for investment securities (U.S. Government, government agencies, government agency mortgage-backed securities, state and municipal securities, and equity securities) held for investment purposes (available-for-sale) are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Other Financial Instruments The carrying amount of cash, short-term investments, receivables, prepaid expenses, short-term and demand notes payable, accounts payable, accrued expenses and other liabilities approximate fair value because of the immediate or relatively short-term maturity of these financial instruments. Fair value of term notes payable, including notes payable under the bridge-financing arrangement, were deemed to approximate their carrying value based on the Company’s incremental borrowing rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued. The carrying values and fair values of the Company’s financial instruments at May 31, 2014 and 2013 are as follows: 2014 2013 Carrying Fair Carrying Fair ASSETS Bonds available for sale $ 6,192,278 $ 6,305,106 $ 5,374,252 $ 5,472,116 Cash and short-term investments 2,708,511 2,708,511 1,570,460 1,570,460 Premiums and other receivables 290,843 290,843 300,303 300,303 Equity securities (including derivatives) 790,368 816,460 455,708 454,639 LIABILITIES Notes payable 5,220,350 5,220,350 4,847,170 4,847,170 Accounts payable and advance premiums 480,583 480,583 538,289 538,289 Accrued expenses and other liabilities 6,725,175 6,725,175 3,720,114 3,720,114 |
Other Risks and Concentrations
Other Risks and Concentrations | 12 Months Ended |
May 31, 2014 | |
Other Risks and Concentrations | |
Other Risks and Concentrations | Note R – Other Risks and Concentrations Concentration of Credit Risk As of May 31, 2014 the Company’s investment securities of approximately $9,200,000 are solely comprised of mortgage-backed securities, fixed maturity municipal bonds, equity investments, and money-market mutual funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities. Such instruments are generally considered to be of the highest credit quality investment available. The Company transacts the majority of its business with three financial institutions, one for commercial banking services and the others for brokerage and custodial services. Periodically, the amount on deposit in financial institutions providing commercial banking services exceeds federally insured limits. Management believes these financial institutions are financially sound. With respect to the financial institutions providing brokerage and custodial services, amounts on deposit are invested in money market funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities. Management believes that substantially all receivables are collectible, and therefore has not established an allowance for estimated uncollectible accounts. Concentration in Products, Markets and Customers The Company’s insurance subsidiary currently writes only the surety line of business, is licensed to write surety only in West Virginia and Ohio and has focused its primary efforts towards coal permit bonds. Such business, including investment advisory fees from managed collateral accounts, accounted for approximately 66% and 56% of the Company’s fiscal 2014 and 2013 revenues, respectively. Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute 40% and 37% of the Company’s fiscal 2014 and 2013 revenues, respectively, as follows: 2014 2013 Surety Premium Investment Advisory Fees Surety Premium Investment Advisory Fees Customer group #1 $ 178,000 $ — $ 133,000 $ — Customer group #2 134,000 21,000 117,000 40,000 Customer group #3 135,000 3,000 242,000 3,000 Customer group #4 193,000 3,800 138,000 3,700 Total $ 640,000 $ 27,800 $ 630,000 $ 46,700 |
Segment Reporting
Segment Reporting | 12 Months Ended |
May 31, 2014 | |
Segment Reporting | |
Segment Reporting | Note S – Segment Reporting The Company has two reportable segments, investment advisory services and surety insurance products and services. The following table presents revenue and other financial information by industry segment. Year Ended Industry Segment May 31, 2014 May 31, 2013 Revenues: Investment advisory $ 229,203 $ 194,034 Surety insurance 1,040,703 1,150,621 Corporate — — Total revenues $ 1,269,906 $ 1,344,655 Operating Income (Loss): Investment advisory $ 123,334 $ 19,372 Surety insurance 89,953 316,038 Corporate (2,060,999 ) (2,292,107 ) Total operating income (loss) $ (1,847,712 ) $ (1,956,697 ) Identifiable Assets: Investment advisory $ 51,108 $ 51,017 Surety insurance 10,614,303 8,349,897 Corporate 81,182 83,219 Total assets $ 10,746,593 $ 8,484,133 Capital Acquisitions: Investment advisory $ — $ — Surety insurance — — Corporate — — Total capital acquisitions $ — $ — Depreciation Charged to Identifiable Assets: Investment advisory $ — $ 45 Surety insurance 5,182 7,874 Corporate 1,802 2,766 Total Depreciation $ 6,984 $ 10,685 Interest Expense: Investment advisory $ — $ — Surety insurance — — Corporate 944,180 1,073,338 Total interest expense $ 944,180 $ 1,073,338 |
Related Party Transactions
Related Party Transactions | 12 Months Ended |
May 31, 2014 | |
Related Party Transactions | |
Related Party Transactions | Note T – Related Party Transactions Borrowing and other transactions of Largest Shareholder and CEO For the past several years the Company’s operating expenses were partially funded by advances from its largest shareholder and chief executive officer, John M. Jacobs. The source of funding for these advances originated with obligations incurred by Mr. Jacobs with third parties (such obligations together with the loans by Mr. Jacobs to the Company, “back-to-back loans”) with interest rates ranging from 6% to 12%. This amount is unsecured and payable on demand. To assure that repayments of the various borrowings by the Company that were either guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs, because Mr. Jacobs entered into an Assumption Agreement with the Company. Pursuant to the assumption agreement Mr. Jacobs assumes, and agrees to hold the Company harmless from, principal of specified indebtedness of the Company and to fully offset when necessary what might otherwise be deemed an advance of funds arising out of the Company’s financing activities. During fiscal 2014, advances to the Company from Mr. Jacobs amounted to $1,040,612, and repayments to Mr. Jacobs amounted to $855,019. As of May 31, 2014, the balance due Mr. Jacobs was $10,281. The largest aggregate amount outstanding to Mr. Jacobs in fiscal 2014 was $103,539. During fiscal 2013, advances to the Company from Mr. Jacobs amounted to $1,310,925, which included assumption of company debt in the amount of $319,653, and repayments to Mr. Jacobs amounted to $1,429,190. As of May 31, 2013, the balance due the Company from Mr. Jacobs was $175,312. The largest aggregate amount outstanding to Mr. Jacobs in fiscal 2013 was $20,925. As of June 30, 2017, $22,500 was owed to Mr. Jacobs by the Company. The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 6% and 12% respectively for 2014. The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 12% for 2013. Other related parties During the years ended May 31, 2014 and May 31, 2013, a company owned by a board member provided consulting services. This company provided services totaling $62,100 and $62,100 in 2014 and 2013. Amounts owed to this company at year end are treated as related party payables in the amounts $136,775 and $124,409 at May 31, 2014 and 2013 respectively. During the year ended May 31, 2009, the Company borrowed money from an individual that became a board member during 2010. On March 22, 2013 this individual resigned his duties as a board member. Total amounts owed to this individual at May 31, 2014 consisted of $75,000 in demand notes and $360,000 in bridge financing. |
Reinsurance
Reinsurance | 12 Months Ended |
May 31, 2014 | |
Reinsurance | |
Reinsurance | Note U – Reinsurance The Company limits the maximum net loss that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers. Ceded reinsurance is treated as the risk and liability of the assuming companies. The Company cedes insurance to other companies and these reinsurance contracts do not relieve the Company from its obligations to policyholders. Effective April 1, 2009, FSC entered into a reinsurance agreement with various syndicates at Lloyd’s of London (“Reinsurer”) for its coal reclamation surety bonding programs. The agreement has been renewed annually with the Reinsurer, with the most recent renewal effective April 1, 2017. The reinsurance agreement is an excess of loss contract which protects the Company against losses up to certain limits over stipulated amounts and can be terminated by either party by written notice of at least 90 days prior to any July 1. The contract calls for a premium rate of 35% subject to a minimum premium of $490,000. Deposits to the reinsurers are made quarterly in arrears in equal amounts of $140,000. At May 31, 2014 and May 31, 2013, the Company had prepaid reinsurance premiums of $215,616 and $196,565 and ceded reinsurance deposited of $62,091 and $41,605. There were no ceded Loss and Loss Adjustment Expenses for the years ended May 31, 2014 or 2013. The effects of reinsurance on premium written and earned for fiscal 2014 and 2013 are as follows; 2014 Written 2014 Earned 2013 Written 2013 Earned Direct $ 1,230,079 $ 1,193,586 $ 1,088,202 $ 1,237,316 Ceded 430,032 410,981 441,893 489,204 Net $ 800,047 $ 782,605 $ 646,309 $ 748,112 |
Events Subsequent to May 31, 20
Events Subsequent to May 31, 2014 | 12 Months Ended |
May 31, 2014 | |
Events Subsequent To May 31 2014 | |
Events Subsequent to May 31, 2014 | Note V – Events Subsequent to May 31, 2014 Subsequent to May 31, 2014, the Company obtained various borrowings from individuals and businesses through June 30, 2017 totaling $7,745,030 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 $7,233.769. These borrowings, and the renewal of other borrowings, included the issuance of 2,373,856 shares of its common stock as additional consideration. Additionally, the Company obtained borrowings of $2,420,938 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 $2,974,577. After taking into account the net accrued payroll owed, reimbursement of company expenses, and the personal assumption of Company debt that is to be offset against these borrowings, the balance owed to the principal shareholder from the Company is $22,500 at June 30, 2017. The Company elected to continue to defer payment of quarterly dividends on its Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock with such accumulated accrued and unpaid dividends amounting to $1,350,832, $4,175,512, and $10,027,907 as of June 30, 2017. The Company issued 17,254,853 Common shares representing the additional 2% stock dividend for the quarters ending June 30, 2014 through June 30, 2015 to the holders of Series A and B Preferred shares that had requested to be redeemed upon maturity (see Note J). Subsequent to June 30, 2015, the practice of issuing the 2% dividend was suspended. On September 10, 2014, in accordance with the Bridge financing agreement, the Company issued in the aggregate 10,221,845 shares of its common stock to the holders of such notes (of which 5,813,936 were issued to a subsidiary of the Company, which became a holder of Bridge loans as discussed in the subsequent note). Subsequent to September 10, 2014, the practice of semi-annually issuing stock to bridge loan holders was suspended. On July 9, 2014 the Company completed a $4,500,000 financing. In effect, a subsidiary of Company borrowed the funds at 8.00% interest with principal repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase from certain of the Company’s note holders 50.7% ($1.775 million face amount) of the outstanding senior promissory notes comprising a $3.5 million financing dating from 2008 (the Bridge financing agreement), together with interest accrued thereon and the associated collateral, which senior promissory notes have been in default, (ii) to pay in full delinquent tax liabilities owed to the Internal Revenue Service and State of West Virginia, (iii) to pay an outstanding judgment, and (iv) to pay certain other current liabilities. The financing was a product of the Registrant’s ongoing efforts to restructure its balance sheet to position itself to take advantage of business opportunities. 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 outstanding senior promissory notes comprising part of a $3.5 million Bridge financing dating from 2008, together with interest accrued thereon. The notes representing the $1.775 million balance of this financing (together with accrued interest) had been acquired by an affiliate in July 2014. The entire issue of senior promissory notes had been in default. 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 a sale in a private offering of investment units (Units) that consisted of 5% of the outstanding shares of FSC and 500,000 common shares of the Company per Unit. $1,600,000 was raised through a combination of cash, partial assignments of loans back to the Company that were debt of the Company and loans that are convertible into purchase of Units. The Registrant’s Board of Directors has authorized the sale of up to nine Units, which, if completed, would include forty-five percent (45%) of the outstanding stock of FSC. This initial sale of 2 investment Units resulted in 10% of FSC being sold, and the accompanying issuance of 1,000,000 shares of common stock of the Company. On September 25, 2016 the Registrant sold 15.00% interest in First Surety Corporation for $1,500,000 through a combination of cash and a Promissory Note secured by assignment of debt payable by the Registrant. The purchase was approved by the West Virginia Office of the Insurance Commissioner in compliance with insurance regulations requiring approval when exceeding 10.00% ownership. The purchaser is also a Related Party of the Registrant, exceeding 10% common stock ownership. This sale also resulted in the issuance of 1,500,000 shares of common stock of the Company. On March 17, 2017 the Registrant sold 5.00% interest in First Surety Corporation for $500,000. This sale also resulted in the issuance of 500,000 shares of common stock of the Company. |
Accounting Policies (Policies)
Accounting Policies (Policies) | 12 Months Ended |
May 31, 2014 | |
Accounting Policies Policies | |
Organization and Nature of Business | Organization and Nature of Business Jacobs Financial Group, Inc. (the “Company” or “JFG”), formerly NELX, Inc., was incorporated in Kansas on March 25, 1983. In 2001, the Company acquired all the outstanding stock of two corporations located in Charleston, West Virginia: Jacobs& Company (“Jacobs”) and FS Investments, Inc. (“FSI”). Jacobs is a registered investment advisory firm that derives its revenue from asset-based investment advisory fees. FSI, through its wholly-owned subsidiary Triangle Surety Agency, Inc. (“Triangle”), is engaged in the business of placing surety bonds with insurance companies for clients engaged in regulated industries, such as the extraction of coal, oil and gas. FSI receives commission income from the placement of these bonds and is licensed in ten states primarily in the eastern United States. On December 30, 2005, the Company acquired all of the outstanding stock of West Virginia Fire & Casualty Company (“WVFCC”), an insurance company licensed to engage in business in West Virginia, Ohio and Indiana. The acquisition of WVFCC consisted of the purchase of marketable investments and insurance licenses and did not include any existing policies or customer base as the insurance lines of business offered by WVFCC were not insurance lines that the Company intended to pursue. Following the acquisition, the name of WVFCC was changed to First Surety Corporation (“FSC”). FSC receives insurance premium income in connection with the issuance of surety bonds. The Company and its subsidiaries are subject to the business risks inherent in the financial services industry. |
Liquidity and Going Concern | Liquidity and Going Concern These consolidated financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Presently, the Company has insufficient liquidity and capitalization, and has suffered recurring losses from operations. Losses are expected to continue until the Company develops a more substantial book of business. While improvement is anticipated as the Company’s business plan is implemented, other conditions, such as restrictions on the use of assets (See Note C), and the Company’s significant deficiency in working capital and stockholders’ equity raise substantial doubt about the Company’s ability to continue as a going concern. Management intends to improve cash flow through the implementation of its business plan. Additionally, management continues to seek to raise additional funds for operations through private placements of stock, other long-term or permanent financing, or short-term borrowings. However, the Company cannot be certain that it will be able to continue to obtain adequate funding in order to reasonably predict whether it will be able to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. |
Principles of Consolidation | Principles of Consolidation The consolidated financial statements include the accounts of Jacobs Financial Group, Inc. and its majority owned subsidiaries, after the elimination of intercompany transactions. |
Cash and Short Term Investments | Cash and Short Term Investments The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Included in cash and cash equivalents are restricted amounts held in trust for customers in the form of collateral for the bonding program of FSC. |
Use of Estimates | Use of Estimates Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates are loss reserves, stock options, valuation of investments, and the valuation of deferred tax assets. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. |
Revenue Recognition | Revenue Recognition Fees for investment advisory services are based on an agreed percentage of the value of client assets under management and are accrued monthly based on the market value of client assets. The Company accounts for its surety bond issuances as short duration contracts. Surety premiums are recorded as receivables when due and are earned pro rata over the term of the policies of generally one year, subject to annual renewal. The reserve for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. The reserve for unearned premium is determined using the monthly pro rata method. Advance premiums represent renewal premiums paid in advance of the effective renewal date. Agency commissions for surety bond services are based on a percentage of premiums charged for bonds placed with insurance companies, and are recorded upon issuance or effective renewal date of the bonds. No significant continuing services subsequent to the issuance or renewal of surety bonds are required. Policy acquisition costs include costs that vary with and are primarily related to the acquisition of new business. Such costs generally include commissions, underwriting expenses, and premium taxes and are deferred and amortized over the period in which the related premiums are earned. The deferred policy acquisition cost assets are reviewed for recoverability based on the profitability of the underlying surety policy. Investment income is not anticipated in the recoverability of deferred policy acquisition costs. |
Investments | Investments Debt securities are designated at purchase as held-to-maturity, trading or available for sale. Held-to-maturity debt securities are carried at amortized cost where the Company has the ability and intent to hold these securities until maturity. Premiums and discounts arising from the purchase of debt securities are treated as yield adjustments over the estimated lives or call date, if applicable. Debt and equity securities that are bought and held principally for sale in the near future are classified as trading securities and are carried at fair value, with changes in fair value recorded in current operations. Debt and equity securities that the Company may not have a positive intent to hold until maturity and not classified as trading, are considered to be available for sale and carried at fair value. Management has determined it may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported in stockholders’ equity as a separate component of accumulated other comprehensive income. An investment is considered impaired when its fair value is less than its cost or amortized cost, as applicable. When an investment is impaired, a determination is made as to whether the impairment is other than temporary (“OTTI”). Factors considered in identifying OTTI include: 1) for debt securities, whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the security prior to the anticipated recovery in value; 2) the likelihood of the recoverability of principal and interest for debt securities (i.e., whether there is a credit loss) or cost for equity securities; 3) the length of time and extent to which the fair value has been less than amortized cost for debt securities or carrying value for equity securities; and 4) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices. Short-term investments consist primarily of debt securities having maturities of one year or less at date of purchase, money-market investment funds and other similar investments that have immediate availability. Interest income with respect to fixed maturity securities is accrued as earned. Dividend income is generally recognized when receivable. Realized gains and losses are determined by specific identification of the security sold. |
Derivatives | Derivatives The Company uses derivatives in the form of covered call options sold to generate additional income and provide limited downside protection in the event of a market correction. These transactions expose the Company to potential market risk for which the Company receives a premium up front and the Company realizes the option premium received as income. The market risk relates to the requirement to deliver the underlying security to the purchaser of the call within a definite time at an agreed market price regardless of the then current market price of the security. As a result the Company takes the risk that it may be required to sell the security at the strike price, which could be a price less than the then market price. Should the security decline in market price over the holding period of the call option, the Company can lessen or mitigate the risk of loss with a closing transaction for the covered call and sale of the underlying security. The Company invests in large capitalized US securities traded on major US exchanges and writes standardized covered calls only against these positions (covered calls), which are openly traded on major US exchanges. The use of such underlying securities and standardized calls lessens the credit risk to the furthest extent possible. The Company is not exposed to significant cash requirements through the use of covered calls in that it sells a call for a premium and may use these proceeds to enter a closing transaction for the call at a later date. |
Allowance for uncollectible premium and other receivables | Allowance for uncollectible premium and other receivables The majority of the Company’s fee revenue is generated by services provided to companies and individuals throughout the Eastern United States. Management evaluates the need for a reserve for the amount of these receivables that may be uncollectible, based on historical collection activity adjusted for current conditions. Premium and other receivables are charged-off when deemed uncollectible. Based on this evaluation, management believes that most accounts receivable are collectible, and has established an allowance for estimated uncollectible accounts. |
Impairment | Impairment The Company evaluates long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the assets may not be recoverable. The impairment is measured by discounting estimated future cash flows expected to be generated, and comparing this amount to the carrying value of the asset. Cash flows are calculated utilizing forecasts and projections and estimated lives of the assets being analyzed. Should actual results differ from those forecasted and projected, The Company may be subject to future impairment charges related to these long-lived assets. |
Furniture and Equipment | Furniture and Equipment Furniture and equipment is recorded at cost. Maintenance and repairs are charged to operations when incurred. When property and equipment are sold or disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using the straight-line and double-declining balance methods, which approximates estimated economic depreciation. |
Reserve for Losses and Loss Expenses | Reserve for Losses and Loss Expenses Losses and loss adjustment expenses represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred. Reserves for unpaid losses and loss adjustment expenses are estimated using industry averages, however, will include individual case-basis valuations in the event if claims are received. These estimates and methods of establishing reserves are continually reviewed and updated. |
Stock-based Compensation | Stock-based Compensation The fair value of stock options is estimated at the grant date using the Black Scholes Option Pricing Model. This model requires the input of a number of assumptions, including expected volatility and dividend yields, expected stock price, risk-free interest rates, and an expected life of the options. Although the assumptions used reflect management’s best estimate, they involve inherent uncertainties based on market conditions generally outside the control of the Company. |
Income Taxes | Income Taxes The Company currently has net operating loss (“NOL”) carry-forwards that can be utilized to offset future income for federal and state tax purposes. These NOLs represent a significant deferred tax asset. However, the Company has recorded a valuation allowance against this deferred tax asset as it has determined that it is more likely than not that it will not be able to fully utilize the NOLs. Should assumptions regarding the utilization of these NOLs change, the Company may reduce some or all of this valuation allowance, which would result in the recording a deferred income tax benefit. The Company follows a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the 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, 2014 or 2013. |
Earnings (Loss) Per Share | Earnings (Loss) Per Share Basic earnings (loss) per share of common stock are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share are computed on the basis of the average number of common shares outstanding plus the dilutive effect of convertible debt, stock options and warrants. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive. |
Reclassifications | Reclassifications Certain amounts in the 2013 Consolidated Financial Statements have been reclassified to be consistent with the presentation in the Consolidated Financial Statements as of May 31, 2014 and for the year then ended. These reclassifications had no impact on previously reported financial position, results of operations or cash flows. |
Investments and Fair values (Ta
Investments and Fair values (Tables) | 12 Months Ended |
May 31, 2014 | |
Investments And Fair Values Tables | |
Investments by security type classified as available-for-sale and carried at fair value | The Company held the following investments, by security type, that were classified as available-for-sale and carried at fair value at May 31, 2014: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal securities $ 2,793,365 $ 45,878 $ 25,204 $ 2,814,039 Equity securities 817,452 53,636 22,414 848,674 Derivatives (27,084 ) (5,219 ) (89 ) (32,214 ) Mortgage Backed Securities 3,398,913 97,190 5,036 3,491,067 $ 6,982,646 $ 191,485 $ 52,565 $ 7,121,566 The Company held the following investments, by security type, that have been classified as available-for-sale and carried at fair value at May 31, 2013: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal securities $ 1,760,341 $ 5,293 $ 36,627 $ 1,729,007 Equity securities 474,311 52,190 21,979 504,522 Derivatives (18,603 ) (31,442 ) (162 ) (49,883 ) Foreign Obligations 200,750 — 6,913 193,837 Mortgage Backed Securities 3,413,161 145,390 9,279 3,549,272 $ 5,829,960 $ 171,431 $ 74,636 $ 5,926,755 |
Assets measured at fair value on a recurring basis | Assets measured at fair value on a recurring basis are summarized below: May 31, 2014 Fair Value Measurements Using Level 1 Level 2 Level 3 Assets At Fair Value Assets: Fixed income securities at fair value $ — $ 6,305,106 $ — $ 6,305,106 Equity securities at fair value (includes derivatives) 816,460 — — 816,460 Short-term investments at fair value 2,038,614 — — 2,038,614 Total Assets $ 2,855,074 $ 6,305,106 $ — $ 9,160,180 May 31, 2013 Fair Value Measurements Using Level 1 Level 2 Level 3 Assets At Fair Value Assets: Fixed income securities at fair value $ — $ 5,472,116 $ — $ 5,472,116 Equity securities at fair value (includes derivatives) 454,639 — — 454,639 Short-term investments at fair value 1,255,234 — — 1,255,234 Total Assets $ 1,709,873 $ 5,472,116 $ — $ 7,181,989 |
Principal repayments and mortgage-backed securities | Principal repayments on U.S. government agency mortgage-backed securities held by the Company as of May 31, 2014 are estimated as follows: Amortized Cost Fair Market Value Due in one year or less $ 863,666 $ 887,464 Due after one year through five years 1,277,857 1,323,043 Due after five years through ten years 903,255 925,697 Due after ten years 354,135 354,863 $ 3,398,913 $ 3,491,067 |
Schedule of analysis of net investment income Table Text Block | An analysis of net investment income follows: 2014 2013 Bonds – fixed maturities $ 102,480 $ 85,761 Mortgage-backed securities 97,135 117,696 Equity investments 14,569 15,929 Short-term investments 103 88 Other investment income 50,398 20,175 Total investment income 264,685 239,649 Investment expense 38,493 9,276 Net investment income $ 226,192 $ 230,373 |
Schedule of changes in unrealized appreciation of investments Table Text Block | The unrealized appreciation (depreciation) of investments were as follows: 2014 2013 Bonds-fixed maturities $ 58,921 $ (58,185 ) Mortgage-backed securities (43,958 ) (47,164 ) Equity securities 27,161 33,776 Increase (decrease) in unrealized appreciation $ 42,124 $ (71,573 ) |
Realized Gain (Loss) on Investments | Gains and losses are calculated based on sales proceeds received less the cost of the security sold, which is determined by specific identification for each investment. The gross gains and gross losses realized on available-for-sale securities were as follows: Gross Gross Gross 2014 Bonds-fixed maturities $ 1,158,222 $ — $ (57,091 ) Mortgage-backed securities 382,804 533 (9,404 ) Equity securities 509,560 21,567 (5,155 ) Derivatives (equity securities) 91,403 29,710 (25,366 ) Total $ 2,141,989 $ 51,810 $ (97,016 ) 2013 Bonds-fixed maturities $ 1,487,611 $ 22,940 $ (7,512 ) Mortgage-backed securities 28,581 — (1,627 ) Equity securities 381,580 14,833 (5,054 ) Derivatives (equity securities) 72,967 27,695 (8,036 ) Total $ 1,970,739 $ 65,468 $ (22,229 ) |
Unrealized Gain (Loss) on Investments | The following table summarizes the gross unrealized losses and fair value on investment securities aggregated by major investment category and length of time that individual securities have been in a continuous loss position at May 31, 2014 and May 31, 2013. Less than 12 Months 12 Months or More Total Cost Unrealized Cost Unrealized Fair Unrealized 2014 Equity securities $ 278,689 $ 13,171 $ 37,209 $ 9,243 $ 293,484 $ 22,414 Bonds- Fixed Maturities 413,440 6,075 759,956 19,129 1,148,191 25,204 Mortgage-backed securities 313,082 1,951 319,102 3,085 627,148 5,036 Total $ 1,005,211 $ 21,197 $ 1,116,267 $ 31,457 $ 2,068,823 $ 52,654 2013 Equity securities $ 71,398 $ 1,665 $ 89,751 $ 20,314 $ 139,171 $ 21,979 Bonds- Fixed Maturities 856,467 20,752 836,301 22,788 1,649,229 43,540 Mortgage-backed securities 488,878 5,440 142,854 3,838 622,454 9,278 Total $ 1,416,743 $ 27,857 $ 1,068,906 $ 46,940 $ 2,410,854 $ 74,797 (a) For bonds-fixed maturities and mortgage-backed securities, represents amortized costs. |
Deferred Policy Acquisition C32
Deferred Policy Acquisition Costs (Tables) | 12 Months Ended |
May 31, 2014 | |
Deferred Policy Acquisition Costs Tables | |
Schedule Deferred Policy Acquisition Costs | The following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged to operations. 2014 2013 Balance at beginning of year $ 138,497 $ 167,010 Acquisition costs deferred 274,779 239,074 Amortization charged to operations (260,668 ) (267,587 ) Total $ 152,608 $ 138,497 |
Schedule of Reserve for Losses
Schedule of Reserve for Losses and Loss Expense (Tables) | 12 Months Ended |
May 31, 2014 | |
Schedule Of Reserve For Losses And Loss Expense Tables | |
Schedule of Reserve for Losses and Loss Expense | At May 31, 2014 and May 31, 2013, the reserve for losses and loss expenses consisted of: 2014 2013 Balance at beginning of year $ 1,207,903 $ 1,026,489 Incurred policy losses-current year 161,181 181,414 Paid policy losses – current year (83,066 ) — Balance at end of year $ 1,286,018 $ 1,207,903 |
Schedule of notes payable (Tabl
Schedule of notes payable (Tables) | 12 Months Ended |
May 31, 2014 | |
Schedule Of Notes Payable Tables | |
Schedule of unsecured notes payable Table Text Block | At May 31, 2014 and 2013, the Company had the following unsecured notes payable to individuals: 2014 2013 Unsecured demand notes payable to individuals and others; no interest $ 7,500 $ — Unsecured demand notes payable to individuals and others; interest rate fixed 10% ($75,000 to related party in 2013, no related party in 2014) 1,484,529 1,227,482 Unsecured demand notes payable to individuals and others; interest rate fixed 12% 15,000 15,000 Unsecured demand note payable to individuals; interest rate fixed 14%; 203,040 185,000 Secured demand note payable to individuals; interest rate fixed 10%; secured by accounts receivable for investment advisory fees — 95,000 Unsecured note(s)payable to individual(s) under bridge- financing arrangements described below ($360,000 to related party in 2013, no related party in 2014) 3,500,000 3,500,000 Total $ 5,210,350 $ 5,022,482 |
Schedule of the common shares issued to note holders Table Text Block | The following table summarizes the common shares issued to those note holders as a result incurring these penalties. Date of Issuance Shares Issued September 10, 2008 4,870,449 March 10, 2009 5,010,640 September 10, 2009 5,354,642 March 10, 2010 6,005,925 September 10, 2010 6,213,285 March 10, 2011 6,738,900 September 10, 2011 7,043,710 March 10, 2012 7,430,017 September 10, 2012 8,573,594 March 10, 2013 8,947,444 September 10, 2013 9,316,337 March 10, 2014 9,630,856 85,135,799 |
Scheduled maturities Table Text Block | Scheduled maturities are as follows: 2014 Fiscal year 2014-2015 (including demand notes) $ 5,210,069 Total $ 5,210,069 |
Stock-Based Compensation (Table
Stock-Based Compensation (Tables) | 12 Months Ended |
May 31, 2014 | |
Schedule of Stock-Based Compensation | |
Schedule of Share-based Compensation, Stock Options, Activity | The following table summarizes option activity under the Plan for the fiscal year ended May 31, 2014. Weighted-Avg. Number Weighted-Avg. Aggregate Balance at June 1, 2013 $ .04000 9,800,000 Options granted — — Options exercised — — Options canceled/expired — — Balance, May 31, 2014 $ .04000 9,800,000 Exercisable at May 31, 2014 $ .04000 9,800,000 .08 $ — Expected to vest $ — — — $ — |
Statutory Financial Data (Table
Statutory Financial Data (Tables) | 12 Months Ended |
May 31, 2014 | |
Statutory surplus and insurance subsidiary for five months Period | |
Schedule of Statutory surplus and insurance subsidiary | Statutory surplus as of May 31, 2014 and 2013 and net income for the Company’s insurance subsidiary for the calendar year ended December 31, 2013 and 2012 and five-month periods ended May 31, 2014 and 2013 are as follows: Statutory Surplus May 31, 2014 $ 5,905,066 Statutory Surplus May 31, 2013 $ 5,804,785 Net Income Calendar year 2013 $ 198,375 Net Income Calendar year 2012 $ 350,214 Net Income Five-month period 2014 $ 36,583 Net Income Five-month period 2013 $ 75,003 |
Commitments and Contingencies (
Commitments and Contingencies (Tables) | 12 Months Ended |
May 31, 2014 | |
Commitments And Contingencies Tables | |
Schedule of Minimum future lease payments under non-cancelable operating leases | Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2014 are: Fiscal year 2014-2015 $ 5,580 Fiscal year 2015-2016 5,580 Fiscal year 2016-2017 5,580 Total $ 16,740 |
Financial Instruments (Tables)
Financial Instruments (Tables) | 12 Months Ended |
May 31, 2014 | |
Financial Instruments Tables | |
Fair values of the Company's financial instruments | The carrying values and fair values of the Company’s financial instruments at May 31, 2014 and 2013 are as follows: 2014 2013 Carrying Fair Carrying Fair ASSETS Bonds available for sale $ 6,192,278 $ 6,305,106 $ 5,374,252 $ 5,472,116 Cash and short-term investments 2,708,511 2,708,511 1,570,460 1,570,460 Premiums and other receivables 290,843 290,843 300,303 300,303 Equity securities (including derivatives) 790,368 816,460 455,708 454,639 LIABILITIES Notes payable 5,220,350 5,220,350 4,847,170 4,847,170 Accounts payable and advance premiums 480,583 480,583 538,289 538,289 Accrued expenses and other liabilities 6,725,175 6,725,175 3,720,114 3,720,114 |
Other Risks and Concentrations
Other Risks and Concentrations (Tables) | 12 Months Ended |
May 31, 2014 | |
Other Risks And Concentrations Tables | |
Schedule of Concentration in Products, Markets and Customers | Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute 40% and 37% of the Company’s fiscal 2014 and 2013 revenues, respectively, as follows: 2014 2013 Surety Premium Investment Advisory Fees Surety Premium Investment Advisory Fees Customer group #1 $ 178,000 $ — $ 133,000 $ — Customer group #2 134,000 21,000 117,000 40,000 Customer group #3 135,000 3,000 242,000 3,000 Customer group #4 193,000 3,800 138,000 3,700 Total $ 640,000 $ 27,800 $ 630,000 $ 46,700 |
Segment Reporting (Tables)
Segment Reporting (Tables) | 12 Months Ended |
May 31, 2014 | |
Segment Reporting Tables | |
Revenue And Other Financial Information by Industry Segment | 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, 2014 May 31, 2013 Revenues: Investment advisory $ 229,203 $ 194,034 Surety insurance 1,040,703 1,150,621 Corporate — — Total revenues $ 1,269,906 $ 1,344,655 Operating Income (Loss): Investment advisory $ 123,334 $ 19,372 Surety insurance 89,953 316,038 Corporate (2,060,999 ) (2,292,107 ) Total operating income (loss) $ (1,847,712 ) $ (1,956,697 ) Identifiable Assets: Investment advisory $ 51,108 $ 51,017 Surety insurance 10,614,303 8,349,897 Corporate 81,182 83,219 Total assets $ 10,746,593 $ 8,484,133 Capital Acquisitions: Investment advisory $ — $ — Surety insurance — — Corporate — — Total capital acquisitions $ — $ — Depreciation Charged to Identifiable Assets: Investment advisory $ — $ 45 Surety insurance 5,182 7,874 Corporate 1,802 2,766 Total Depreciation $ 6,984 $ 10,685 Interest Expense: Investment advisory $ — $ — Surety insurance — — Corporate 944,180 1,073,338 Total interest expense $ 944,180 $ 1,073,338 |
Reinsurance (Tables)
Reinsurance (Tables) | 12 Months Ended |
May 31, 2014 | |
Reinsurance Tables | |
Reinsurance On Premium Written And Earned | The effects of reinsurance on premium written and earned for fiscal 2014 and 2013 are as follows; 2014 Written 2014 Earned 2013 Written 2013 Earned Direct $ 1,230,079 $ 1,193,586 $ 1,088,202 $ 1,237,316 Ceded 430,032 410,981 441,893 489,204 Net $ 800,047 $ 782,605 $ 646,309 $ 748,112 |
Investments (Details)
Investments (Details) - USD ($) | May 31, 2014 | May 31, 2013 |
Available-for-sale Securities | ||
Amortized Cost | $ 6,982,646 | $ 5,829,960 |
Gross Unrealized Gains | 191,485 | 171,431 |
Gross Unrealized Losses | 52,565 | 74,636 |
Fair Value | 7,121,566 | 5,926,755 |
State and Municipal Securities | ||
Available-for-sale Securities | ||
Amortized Cost | 2,793,365 | 1,760,341 |
Gross Unrealized Gains | 45,878 | 5,293 |
Gross Unrealized Losses | 25,204 | 36,627 |
Fair Value | 2,814,039 | 1,729,007 |
Equity Securities | ||
Available-for-sale Securities | ||
Amortized Cost | 817,452 | 474,311 |
Gross Unrealized Gains | 53,636 | 52,190 |
Gross Unrealized Losses | 22,414 | 21,979 |
Fair Value | 848,674 | 504,522 |
Derivatives | ||
Available-for-sale Securities | ||
Amortized Cost | (27,084) | (18,603) |
Gross Unrealized Gains | (5,219) | (31,442) |
Gross Unrealized Losses | (89) | (162) |
Fair Value | (32,214) | (49,883) |
Mortgage Backed Securities | ||
Available-for-sale Securities | ||
Amortized Cost | 3,398,913 | 3,413,161 |
Gross Unrealized Gains | 97,190 | 145,390 |
Gross Unrealized Losses | 5,036 | 9,279 |
Fair Value | $ 3,491,067 | 3,549,272 |
Foreign Obligations | ||
Available-for-sale Securities | ||
Amortized Cost | 200,750 | |
Gross Unrealized Gains | ||
Gross Unrealized Losses | 6,913 | |
Fair Value | $ 193,837 |
Investments (Details 2)
Investments (Details 2) - USD ($) | May 31, 2014 | May 31, 2013 |
Assets: | ||
Total Assets | $ 10,746,593 | $ 8,659,445 |
Fair Value, Measurements, Recurring [Member] | ||
Assets: | ||
Fixed income securities at fair value | 6,305,106 | 5,472,116 |
Equity securities at fair value (includes derivatives) | 816,460 | 454,639 |
Short-term investments at fair value | 2,038,614 | 1,255,234 |
Total Assets | 9,160,180 | 7,181,989 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | ||
Assets: | ||
Fixed income securities at fair value | ||
Equity securities at fair value (includes derivatives) | 816,460 | 454,639 |
Short-term investments at fair value | 2,038,614 | 1,255,234 |
Total Assets | 2,855,074 | 1,709,873 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | ||
Assets: | ||
Fixed income securities at fair value | 6,305,106 | 5,472,116 |
Equity securities at fair value (includes derivatives) | ||
Short-term investments at fair value | ||
Total Assets | 6,305,106 | 5,472,116 |
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | ||
Assets: | ||
Fixed income securities at fair value | ||
Equity securities at fair value (includes derivatives) | ||
Short-term investments at fair value | ||
Total Assets |
Investments (Details 3)
Investments (Details 3) - U.S. Government Agency Mortgage-Backed Securities [Member] | May 31, 2014USD ($) |
Amortized Cost | |
Due in one year or less | $ 863,666 |
Due after one year through five years | 1,277,857 |
Due after five years through ten years | 903,255 |
Due after ten years | 354,135 |
Net | 3,398,913 |
Fair Market Value | |
Due in one year or less | 887,464 |
Due after one year through five years | 1,323,043 |
Due after five years through ten years | 925,697 |
Due after ten years | 354,863 |
Net | $ 3,491,067 |
Investments (Details 4)
Investments (Details 4) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Total investment income | $ 264,685 | $ 239,649 |
Investment expense | 38,493 | 9,276 |
Net investment income | 226,192 | 230,373 |
Bonds - Fixed maturities | ||
Total investment income | 102,480 | 85,761 |
Mortgage Backed Securities | ||
Total investment income | 97,135 | 117,696 |
Equity Securities | ||
Total investment income | 14,569 | 15,929 |
Short-term Investments | ||
Total investment income | 103 | 88 |
Other Investments | ||
Total investment income | $ 50,398 | $ 20,175 |
Investments (Details 5)
Investments (Details 5) - USD ($) | May 31, 2014 | May 31, 2013 |
Increase (decrease) in unrealized appreciation | $ 42,124 | $ (71,573) |
Bonds - Fixed maturities | ||
Increase (decrease) in unrealized appreciation | 58,921 | (58,185) |
Mortgage Backed Securities | ||
Increase (decrease) in unrealized appreciation | (43,958) | (47,164) |
Equity Securities | ||
Increase (decrease) in unrealized appreciation | $ 27,161 | $ 33,776 |
Investments (Details 6)
Investments (Details 6) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Gross Proceeds | $ 2,141,989 | $ 1,970,739 |
Gross Realized Gains | 51,810 | 65,468 |
Gross Realized Losses | (97,016) | (22,229) |
Bonds - Fixed maturities | ||
Gross Proceeds | 1,158,222 | 1,487,611 |
Gross Realized Gains | 22,940 | |
Gross Realized Losses | (57,091) | (7,512) |
Mortgage Backed Securities | ||
Gross Proceeds | 382,804 | 28,581 |
Gross Realized Gains | 533 | |
Gross Realized Losses | (9,404) | (1,627) |
Equity Securities | ||
Gross Proceeds | 509,560 | 381,580 |
Gross Realized Gains | 21,567 | 14,833 |
Gross Realized Losses | (5,155) | (5,054) |
Derivatives | ||
Gross Proceeds | 91,403 | 72,967 |
Gross Realized Gains | 29,710 | 27,695 |
Gross Realized Losses | $ (25,366) | $ (8,036) |
Investments (Details 7)
Investments (Details 7) - USD ($) | 12 Months Ended | ||
May 31, 2014 | May 31, 2013 | ||
Less Than 12 Months, Fair Value | $ 1,005,211 | $ 1,416,743 | |
Less Than 12 Months, Unrealized Losses | 21,197 | 27,857 | |
12 Months Or Longer, Fair Value | 1,116,267 | 1,068,906 | |
12 Months Or Longer, Unrealized Losses | 31,457 | 46,940 | |
Total Fair Value | 2,068,823 | 2,410,854 | |
Total Unrealized Losses | 52,654 | 74,797 | |
Equity Securities | |||
Less Than 12 Months, Fair Value | [1] | 278,689 | 71,398 |
Less Than 12 Months, Unrealized Losses | [1] | 13,171 | 1,665 |
12 Months Or Longer, Fair Value | 37,209 | 89,751 | |
12 Months Or Longer, Unrealized Losses | 9,243 | 20,314 | |
Total Fair Value | 293,484 | 139,171 | |
Total Unrealized Losses | 22,414 | 21,979 | |
Bonds - Fixed maturities | |||
Less Than 12 Months, Fair Value | [1] | 413,440 | 856,467 |
Less Than 12 Months, Unrealized Losses | [1] | 6,075 | 20,752 |
12 Months Or Longer, Fair Value | 759,956 | 836,301 | |
12 Months Or Longer, Unrealized Losses | 19,129 | 22,788 | |
Total Fair Value | 1,148,191 | 1,649,229 | |
Total Unrealized Losses | 25,204 | 43,540 | |
Mortgage Backed Securities | |||
Less Than 12 Months, Fair Value | [1] | 313,082 | 488,878 |
Less Than 12 Months, Unrealized Losses | [1] | 1,951 | 5,440 |
12 Months Or Longer, Fair Value | 319,102 | 142,854 | |
12 Months Or Longer, Unrealized Losses | 3,085 | 3,838 | |
Total Fair Value | 627,148 | 622,454 | |
Total Unrealized Losses | $ 5,036 | $ 9,278 | |
[1] | For bonds-fixed maturities and mortgage-backed securities, represents amortized costs. |
Investments (Details Narrative)
Investments (Details Narrative) - USD ($) | May 31, 2014 | May 31, 2013 |
Investments Details Narrative | ||
Short term investments | $ 1,051,556 | |
Investments and cash | $ 9,756,694 | $ 7,495,538 |
Deferred Policy Acquisition C50
Deferred Policy Acquisition Costs (Details) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Deferred Policy Acquisition Costs Details | ||
Balance at beginning of year | $ 138,497 | $ 167,010 |
Acquisition costs deferred | 274,779 | 239,074 |
Amortization charged to operations | (260,668) | (267,587) |
Total | $ 152,608 | $ 138,497 |
Other Assets (Details)
Other Assets (Details) - USD ($) | May 31, 2014 | May 31, 2013 |
Other Assets Details | ||
Other assets | $ 92,099 | $ 99,187 |
Deposit for legal fees | $ 80,000 |
Intangibles (Details Narrative)
Intangibles (Details Narrative) - First Surety Corporation [Member] | Dec. 30, 2005USD ($) |
Purchase Price of Company | $ 2,900,000 |
Cash and Investment | $ 2,750,000 |
Reserve for Losses and Loss E53
Reserve for Losses and Loss Expense (Details) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Reserve For Losses And Loss Expense Details | ||
Balance at beginning of year | $ 1,207,903 | $ 1,026,489 |
Incurred policy losses - current year | 161,181 | 181,414 |
Paid policy losses - current year | (83,066) | |
Balance at ending of year | $ 1,286,018 | $ 1,207,903 |
Notes Payable (Details)
Notes Payable (Details) - USD ($) | May 31, 2014 | May 31, 2013 |
Total Notes payable | $ 5,220,350 | $ 4,847,170 |
Unsecured Debt [Member] | ||
Unsecured demand notes payable | 7,500 | |
Unsecured Debt [Member] | ||
Unsecured demand notes payable | 1,484,529 | 1,227,482 |
Unsecured Debt [Member] | ||
Unsecured demand notes payable | 15,000 | 15,000 |
Unsecured Debt [Member] | ||
Unsecured demand notes payable | 203,040 | 185,000 |
Unsecured Debt [Member] | ||
Unsecured demand notes payable | 3,500,000 | 3,500,000 |
Secured Debt [Member] | ||
Secured demand note payable to individuals; interest rate fixed @ 10%; secured by accounts receivable for investment advisory fees | $ 95,000 |
Notes Payable (Details) (Parent
Notes Payable (Details) (Parenthetical) | May 31, 2014 | May 31, 2013 |
Unsecured Debt [Member] | ||
Interest Rate | 0.00% | 0.00% |
Unsecured Debt [Member] | ||
Interest Rate | 10.00% | 10.00% |
Unsecured Debt [Member] | ||
Interest Rate | 12.00% | 12.00% |
Unsecured Debt [Member] | ||
Interest Rate | 14.00% | 14.00% |
Secured Debt [Member] | ||
Interest Rate | 10.00% | 10.00% |
Notes Payable (Details 2)
Notes Payable (Details 2) - shares | May 31, 2014 | Mar. 10, 2014 | Sep. 10, 2013 | Mar. 10, 2013 | Sep. 10, 2012 | Mar. 10, 2012 | Sep. 10, 2011 | Mar. 10, 2011 | Sep. 10, 2010 | Mar. 10, 2010 | Sep. 10, 2009 | Sep. 10, 2008 | Mar. 10, 2008 |
Notes Payable Details 2 | |||||||||||||
Shares Issued | 85,135,799 | 9,630,856 | 9,316,337 | 8,947,444 | 8,573,594 | 7,430,017 | 7,043,710 | 6,738,900 | 6,213,285 | 6,005,925 | 5,354,642 | 4,870,449 | 5,010,640 |
Notes Payable (Details Narrativ
Notes Payable (Details Narrative) - USD ($) | Jun. 05, 2009 | Mar. 10, 2008 |
Notes Payable and Advances from Related Party Bridge Financing: | ||
First round bridge finance | $ 2,500,000 | |
Percentage of common shares towards interest | 5.00% | |
Second round bridge finance | $ 1,000,000 | |
Percentage of common shares towards interest. | 2.00% | |
Qualfied financing | $ 50,000,000 | |
Percentage of common shares to notes finance | 28.00% | |
Amount of less than qualfied financing | $ 50,000,000 | |
Denominator of financing | $ 50,000,000 | |
Common shares issued for the forbearance | 5,171,993 | |
Quarterly repayment of loan | $ 224,515 | |
Increase in quartely repayment of loan | 67,185 | |
Total of increase in quartely repayment of loan | $ 291,700 | |
Increased interest rate | 17.00% |
Notes Payable (Details 3)
Notes Payable (Details 3) - USD ($) | May 31, 2014 | May 31, 2013 |
Notes Payable Details 3 | ||
Fiscal year 2014-2015 (including demand notes) | $ 5,210,069 | |
Total | $ 5,220,350 | $ 4,847,170 |
Other Liabilities (Details Narr
Other Liabilities (Details Narrative) | May 31, 2014USD ($) |
Amount held for collateral for its surety bonding program | $ 2,065,000 |
Federal Tax [Member] | |
Accured Payroll Taxes | 560,000 |
Estimated Penalties and interest | 46,000 |
West Virginia Tax [Member] | |
Accured Payroll Taxes | 91,000 |
Estimated Penalties and interest | $ 32,000 |
Preferred Stock (Details Narrat
Preferred Stock (Details Narrative) - USD ($) | May 31, 2014 | May 31, 2013 | Dec. 30, 2005 |
Redeemable Preferred Stock As Follows: | |||
Issue of 4% non voting Series A Preferred Stock shares through private placement | 350 | ||
Issue of warrants for common shares of Company stock for series A | 1,050,000 | ||
Series A Preferred Stock value | $ 350,000 | ||
Series A Preferred Stock liquidation preference per annum (fixed annual rate of $40 per share) | $ 1,000 | ||
Series A preferred stock shares authorized. | 1,000,000 | ||
Series A preferred stock shares issued. | 2,675 | ||
Cash investments in exchange of shares issued Series A Preferred stock | $ 2,675,000 | ||
Series A Preferred holders requesting redemption are entitled | $ 473,410 | ||
Issue of 8% non voting Series B Preferred Stock shares through private placement | 3,980 | ||
Issue of warrants for common shares of Company stock for series B | 19,900,000 | ||
Series B Preferred Stock value | $ 2,985,000 | ||
Shares of Series B Preferred Stock Issued | 4,891 | ||
Series B Preferred Stock liquidation preference per annum (fixed annual rate of $80 per share) | $ 1,000 | ||
Each share of Series B convertible into number of shares at any time after original issue date | 1,000 | ||
Conversion Price per common share | $ 1 | ||
Series B preferred stock shares authorized | 10,000 | ||
Redemption of Series B preferred Stock | 2,817 | 0 | |
Amount of Series B preferred stock redemption | $ 4,351,502 | ||
Accrued dividends on mandatorily redeemable preferred stock | 1,925,523 | 2,031,471 |
Preferred Stock (Details Narr61
Preferred Stock (Details Narrative 2) - USD ($) | 12 Months Ended | |||
May 31, 2014 | May 31, 2013 | Dec. 31, 2010 | May 31, 2010 | |
Preferred Stock Details Narrative 2 | ||||
Common Stock Par Value Per Share. | $ 0.0001 | |||
Preferred stock Par Value Per Share | $ 0.0001 | |||
Series C Preferred Stock shares authorized | 10,000 | |||
Series A Preferred Stock, par value per share | $ 0.0001 | |||
Dividend Rate on Series C stock per annum | 8.00% | |||
Under Recapitalization, for each Series B Share holder receives: | ||||
Series C Preferred Stock shares | 1 | |||
JFG common stock (for no additional consideration) | 2,000 | |||
Series B Preferred stock shares 6805 surrendered for exchange of Series C Stock | 6,805 | |||
Exchange value of Series B into Series C Stock | $ 6,269,051 | |||
Number of common stock shares issued to Series C Stockholders | 13,609,872 | |||
Common issuance offsetting the Series C carrying value | $ 265,120 | |||
Per Share value based on average quoted closing price | $ 0.01948 | |||
Charge to common stockholders credit to the equity of equity preferred stock | $ 990,788 | $ 915,335 |
Preferred Stock (Details Narr62
Preferred Stock (Details Narrative 3) | May 31, 2014USD ($)$ / sharesshares |
Preferred Stock Dividend Preference and Accretion: | |
Series A Share cumulative dividend rate | 4.00% |
Series B compounding dividend preference | 8.00% |
Conversion price of Series B into common stock | $ / shares | $ 1 |
Series C compounding dividend preference | 8.00% |
Accrued (undeclared) Series C dividends | $ 2,295,624 |
Conversion price of Series C into common stock per share | $ / shares | $ 0.10 |
Holders of over Percentage of Series B shares elected to participate in Recaptilization | 70.00% |
Dividends on Series B mandatorily redeemable preferred stock deducted from net income amount | shares | 411,583 |
Series A Preferred Shareholders are listed as a liability of amount | $ 1,542,922 |
Face value of Series A Preferred Stock | $ 1,126,000 |
Dividends payable of Series A Preferred Stock | shares | 416,922 |
Deduction from net income of dividends of Series A Preferred Stock | $ 60,204 |
Defer payment of dividends on the Series A Preferred stock | 862,060 |
Defer payment of dividends on the Series B Preferred stock | 2,587,568 |
Defer payment of dividends on the Series C Preferred stock | $ 6,205,305 |
Stock Warrants (Details Narrati
Stock Warrants (Details Narrative) - USD ($) | Dec. 30, 2012 | Dec. 30, 2010 | Dec. 30, 2005 | May 31, 2014 | May 31, 2013 |
Common Stock Purchased | $ 45,402,996 | $ 35,274 | $ 32,211 | ||
Exercise Price | $ .001 | ||||
Series A Preferred Stock [Member] | |||||
Preferred Stock, Par Value | $ .08 | $ .0001 | $ .0001 | ||
Preferred Stock Value | $ 83,043 | ||||
Warrant Expired | 600,000 | ||||
Series B Preferred Stock [Member] | |||||
Preferred Stock, Par Value | $ .01 | $ .0001 | $ .0001 | ||
Preferred Stock Value | $ 449,972 | ||||
Warrant Expired | 386,667 |
Stock Based Compensation (Detai
Stock Based Compensation (Details Narrative) - $ / shares | May 31, 2014 | May 31, 2013 | Jul. 09, 2012 | Jun. 30, 2009 | Dec. 28, 2006 |
Common Stock Issued, Shares | 352,741,649 | 322,107,908 | 2,100,000 | ||
Common Stock Par Value | $ .0001 | $ .0001 | $ .04 | ||
Awarded Incentive Stock Options | 10,000,000 | ||||
Exercise price Per Share of awarded stock options | $ .04 | ||||
Employees and A Board Member | |||||
Common Stock Issued, Shares | 22,600,000 |
Stock-Based Compensation (Detai
Stock-Based Compensation (Details) - $ / shares | 12 Months Ended | |
May 31, 2014 | Jun. 30, 2009 | |
Weighted-Average Exercise Price | ||
Exercisable at end of Year | $ .04 | |
Number Of Shares Under Option | ||
Exercisable at end of Year | 10,000,000 | |
Option [Member] | ||
Weighted-Average Exercise Price | ||
Beginning Balance | $ .04000 | |
Granted | ||
Excersied | ||
Cancelled/Expired | ||
Ending Balance | .04000 | |
Exercisable at end of Year | .04000 | |
Expected to vest | ||
Number Of Shares Under Option | ||
Beginning Balance | 9,800,000 | |
Granted | ||
Excersied | ||
Cancelled/Expired | ||
Ending Balance | 9,800,000 | |
Exercisable at end of Year | 9,800,000 | |
Expected to vest | ||
Weighted-Average Remaining Life | ||
Exercisable at end of Year | 9 months 18 days |
Income Taxes (Details)
Income Taxes (Details) | May 31, 2014USD ($) |
Income Taxes Details | |
Operating loss carry forwards | $ 15,700,000 |
Valuation allowance | $ 5,300,000 |
Stockholders' Equity (Details N
Stockholders' Equity (Details Narrative) - USD ($) | May 31, 2014 | Jul. 09, 2013 | May 31, 2013 |
Stockholders Equity Details Narrative | |||
Common stock shares issued additional consideration | 691,000 | 2,527,500 | |
Common stock shares value issued additional consideration | $ 666,000 | $ 2,147,500 | |
Avergage quoted closing price per share issued | $ .006549 | $ 0.002650 | $ .005295 |
Value of Common stock issued | $ 4,525 | $ 59,890 | $ 13,383 |
Common stock shares issued | 10,995,548 | 9,056,539 | |
Additional percentage of stock dividend | 2.00% | 2.00% | |
Avergage quoted closing price per share issued | $ .004465 | $ .004883 | |
Value of Common stock issued | $ 49,090 | $ 44,227 | |
Common stock shares issued under terms of the bridge-financing arrangement | 9,316,337 | 8,573,594 | |
Avergage quoted closing price per share issued | $ .009410 | $ .01874 | |
Value of Common stock issued | $ 87,667 | $ 160,669 | |
Common stock shares issued under terms of the bridge-financing arrangement | 9,630,856 | 8,947,444 | |
Avergage quoted closing price per share issued | $ .003460 | $ .00505 | |
Value of Common stock issued | $ 33,323 | $ 45,185 | |
Common stock issued for services rendered | 22,600,000 | 50,000 | |
Avergage quoted closing price per share issued | $ 0.004875 | ||
Value of Common stock issued | $ 244 |
Statutory Financial Data (Detai
Statutory Financial Data (Details) - USD ($) | 5 Months Ended | 12 Months Ended | ||
May 31, 2014 | May 31, 2013 | Dec. 31, 2013 | Dec. 31, 2012 | |
Statutory Financial Data Details | ||||
Statutory Surplus | $ 5,905,066 | $ 5,804,785 | ||
Net Income | $ 36,583 | $ 75,003 | $ 198,375 | $ 350,214 |
Commitments Contingencies (Deta
Commitments Contingencies (Details) - USD ($) | May 31, 2014 | May 31, 2013 |
Commitments Contingencies Details | ||
Leases office equipment | $ 465 | |
Leases office, parking and storage | 3,844 | |
Rental expense | 55,070 | $ 54,880 |
Fiscal year 2014-2015 | 5,580 | |
Fiscal year 2015-2016 | 5,580 | |
Fiscal year 2016-2017 | 5,580 | |
Minimum future lease payments total | $ 16,740 |
Financial Instruments (Details)
Financial Instruments (Details) - USD ($) | May 31, 2014 | May 31, 2013 |
ASSETS | ||
Bonds available for sale | $ 6,192,278 | $ 5,374,252 |
Cash and short-term investments | 2,708,511 | 1,570,460 |
Premiums and other receivables | 290,843 | 300,303 |
Equity securities (including derivatives) | 790,368 | 455,708 |
LIABILITIES | ||
Notes payable | 5,220,350 | 4,847,170 |
Accounts payable and advance premiums | 480,583 | 538,289 |
Accrued expenses and other liabilities | 6,725,175 | 3,720,114 |
Fair Value, Measurements, Recurring [Member] | ||
ASSETS | ||
Bonds available for sale | 6,305,106 | 5,472,116 |
Cash and short-term investments | 2,708,511 | 1,570,460 |
Premiums and other receivables | 290,843 | 300,303 |
Equity securities (including derivatives) | 816,460 | 454,639 |
LIABILITIES | ||
Notes payable | 5,220,350 | 4,847,170 |
Accounts payable and advance premiums | 480,583 | 538,289 |
Accrued expenses and other liabilities | $ 6,725,175 | $ 3,720,114 |
Other Risks and Concentration71
Other Risks and Concentrations (Details) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Investment Advisory Fees | $ 153,635 | $ 178,328 |
Customer Group 1 [Member] | ||
Surety Premium | 178,000 | 133,000 |
Investment Advisory Fees | ||
Customer Group 2 [Member] | ||
Surety Premium | 134,000 | 117,000 |
Investment Advisory Fees | 21,000 | 40,000 |
Customer Group 3 [Member] | ||
Surety Premium | 135,000 | 242,000 |
Investment Advisory Fees | 3,000 | 3,000 |
Customer Group 4 [Member] | ||
Surety Premium | 193,000 | 138,000 |
Investment Advisory Fees | 3,800 | 3,700 |
Customer [Member] | ||
Surety Premium | 640,000 | 630,000 |
Investment Advisory Fees | $ 27,800 | $ 46,700 |
Segment Reporting (Details)
Segment Reporting (Details) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Total Revenues | $ 1,269,906 | $ 1,344,655 |
Total operating income (loss) | (431,745) | (445,265) |
Total Depreciation | 6,984 | 10,685 |
Total interest expense | 944,180 | 1,073,338 |
Industry Segment | ||
Total Revenues | 1,269,906 | 1,344,655 |
Total operating income (loss) | (1,847,712) | (1,956,697) |
Total Identifiable assets | 10,746,593 | 8,484,133 |
Total Depreciation | 6,984 | 10,685 |
Total interest expense | 944,180 | 1,073,338 |
Industry Segment | Investment Advisory | ||
Total Revenues | 229,203 | 194,034 |
Total operating income (loss) | 123,334 | 19,372 |
Total Identifiable assets | 51,108 | 51,017 |
Total Depreciation | 45 | |
Total interest expense | ||
Industry Segment | Surety Insurance | ||
Total Revenues | 1,040,703 | 1,150,621 |
Total operating income (loss) | 89,953 | 316,038 |
Total Identifiable assets | 10,614,303 | 8,349,897 |
Total Depreciation | 5,182 | 7,874 |
Total interest expense | ||
Industry Segment | Corporate | ||
Total Revenues | ||
Total operating income (loss) | (2,060,999) | (2,292,107) |
Total Identifiable assets | 81,182 | 83,219 |
Total Depreciation | 1,802 | 2,766 |
Total interest expense | $ 944,180 | $ 1,073,338 |
Related Party Transactions (Det
Related Party Transactions (Details Narrative) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Advances from Mr. Jacobs | $ 1,040,612 | $ 1,310,924 |
Advances repayment to Mr. Jacobs | 855,019 | 1,429,190 |
Due to Mr. Jacobs | 154,790 | 124,409 |
CEO Member | ||
Advances from Mr. Jacobs | 1,040,612 | 1,310,925 |
Assumption of company debt | 855,019 | 319,653 |
Advances repayment to Mr. Jacobs | 1,429,190 | |
Due to Mr. Jacobs | 10,281 | 175,312 |
Aggregate amount outstanding to Mr. Jacobs | $ 103,539 | $ 20,925 |
Rate of interest and obligations due | 12.00% | 12.00% |
Related Party Transactions (D74
Related Party Transactions (Details Narrative 2) - Board [Member] - USD ($) | May 31, 2014 | May 31, 2013 |
Consulting services | $ 62,100 | $ 62,100 |
Related party payables | 136,775 | $ 124,409 |
Demand notes to related party | 75,000 | |
Bridge financing to related party | $ 360,000 |
Reinsurance (Details Narrative)
Reinsurance (Details Narrative) - USD ($) | May 31, 2014 | May 31, 2013 |
Reinsurance Agreement: | ||
Premium rate as per contract | 35.00% | |
Minimum Premium as per contract | $ 490,000 | |
Deposits to reinsurers quarterly in arrears in equal amounts | 140,000 | |
Prepaid reinsurance premium | 215,616 | $ 196,565 |
Ceded reinsurance payable (deposited) | $ 62,091 | $ 41,605 |
Reinsurance (Details)
Reinsurance (Details) - USD ($) | 12 Months Ended | |
May 31, 2014 | May 31, 2013 | |
Premium Written | ||
Direct | $ 1,230,079 | $ 1,088,202 |
Ceded | 430,032 | 441,893 |
Net | 800,047 | 646,309 |
Earned: | ||
Direct | 1,193,586 | 1,237,316 |
Ceded | 410,981 | 489,204 |
Net | $ 859,717 | $ 877,010 |
Events Subsequent to May 31, 77
Events Subsequent to May 31, 2014 (Details Narrative) - USD ($) | Mar. 17, 2017 | Sep. 25, 2016 | Jun. 30, 2017 | May 31, 2014 | May 31, 2013 | Dec. 28, 2006 |
Issuance of Common Stock | 352,741,649 | 322,107,908 | 2,100,000 | |||
Subsequent Event [Member] | ||||||
Borrowings from individuals and businesses | $ 7,745,030 | |||||
Notes issued | 7,233,769 | |||||
Balance Owed to Principal Shareholder | 22,500 | |||||
Subsequent Event [Member] | First Surety Corporation [Member] | ||||||
Interest rates on borrowing | 5.00% | 15.00% | ||||
Issuance of Common Stock | 500,000 | 1,500,000 | ||||
Subsequent Event [Member] | Series A Preferred Stock [Member] | ||||||
Dividend Amount | 1,350,832 | |||||
Subsequent Event [Member] | Series B Preferred Stock [Member] | ||||||
Dividend Amount | 4,175,512 | |||||
Subsequent Event [Member] | Series C Preferred Stock [Member] | ||||||
Dividend Amount | 10,027,907 | |||||
Subsequent Event [Member] | CEO Member | ||||||
Borrowings from individuals and businesses | 2,420,938 | |||||
Repayment of Debt | $ 2,974,577 | |||||
Subsequent Event [Member] | Minimum [Member] | ||||||
Interest rates on borrowing | 10.00% | |||||
Subsequent Event [Member] | Maximum [Member] | ||||||
Interest rates on borrowing | 14.00% |