NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and Basis of Presentation
St. Joseph, Inc. (the “Company”)
was incorporated in Colorado on March 19, 1999 as Pottery Connection, Inc. On March 19, 2001, the Company changed its name to St.
Joseph Energy, Inc. and on November 6, 2003, the Company changed its name to St. Joseph, Inc.
The Company, through its wholly-owned subsidiary,
specializes in the recruitment and placement of professional data processing and technical personnel for clients on both a permanent
and contract basis.
Principles of Consolidation
The consolidated financial statements for the
years ended December 31, 2013 and 2012 include the activities of St. Joseph, Inc. and its wholly-owned subsidiary, Staf*Tek Services,
Inc. (“Staf*Tek”). All significant intercompany balances and transactions have been eliminated in consolidation.
Going Concern
The accompanying financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. As shown in the accompanying financial statements, the Company has incurred recurring losses and has negative
working capital and a net stockholders’ deficiency at December 31, 2013 and 2012. In our financial statements for the fiscal
years ended December 31, 2013 and 2012, the Report of the Independent Registered Public Accounting Firm includes an explanatory
paragraph that describes substantial doubt about our ability to continue as a going concern. These factors, among others, may indicate
that the Company will be unable to continue as a going concern.
The financial statements do not include any
adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability. The Company plans
to generate the necessary cash flows with increased sales revenue and a reduction of general and administrative expenses over the
next 12 months. However, should the Company’s operations not provide sufficient cash flow; the Company has plans to raise
additional working capital through debt and/or equity financings. Insiders have loaned working capital to the Company on an as-needed
basis over the past two years; however, there are no formal committed financing arrangements to provide the Company with working
capital. There is no assurance the Company will be successful in producing increased sales revenues, attaining profitability, or
obtaining additional funding through debt and equity financings.
Cash Equivalents and Fair Value of Financial
Instruments
For the purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to
be cash equivalents. The Company had no cash equivalents at December 31, 2013 and 2012.
The carrying amounts of cash, receivables and
current liabilities approximate fair value due to the short-term maturity of the instruments.
The Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which
these assets and liabilities must be grouped, based on significant levels of inputs as follows:
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2:
|
Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
|
|
|
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The determination of where assets and liabilities
fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuations
of the majority of the assets are considered Level 1 fair value measures under ASC 820.
Accounts Receivable
Accounts receivable consists of amounts due
from customers related to the Company’s employee placement services. The Company considers accounts more than 30 days old
to be past due. The Company uses the allowance method for recognizing bad debts. When an account is deemed uncollectible, it is
written off against the allowance. The Company generally does not require collateral for its accounts receivable.
Property, Equipment and Depreciation
Property and equipment are stated at cost.
Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets as follows:
Furniture and fixtures
|
7 years
|
Office equipment
|
5 years
|
Computer equipment
|
3 years
|
Upon retirement or disposition of an asset,
the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.
Repairs and maintenance are charged to expense as incurred and expenditures for additions and improvements are capitalized.
Impairment and Disposal of Long-lived Assets
The Company evaluates the carrying value of
its long-lived assets when indicators of impairment are present. Impairment is assessed when the undiscounted future cash flows
estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying value or fair value, less costs to sell. There were no impairments
recognized for the years ended December 31, 2013 and 2012.
Revenue Recognition
Staffing service revenues are recognized when
the services are rendered by the Company’s contract employees and collection is probable. Permanent placement revenues are
recognized when employment candidates accept offers of permanent employment.
Direct Costs of Services
Direct costs of staffing services consist of
payroll, payroll taxes, contract labor, and insurance costs for the Company’s contract employees. There are no direct costs
associated with permanent placement staffing services.
Advertising Costs
The Company expenses all advertising as incurred.
The Company incurred advertising costs totaling $905 and $902 for the years ended December 31, 2013 and 2012, respectively.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Common Share
The Company reports earnings (loss) per share
using a dual presentation of basic and diluted earnings per share. Basic loss per share excludes the impact of common stock equivalents.
Diluted loss per share utilizes the average market price per share when applying the treasury stock method in determining common
stock equivalents. Preferred stock and common stock options outstanding at December 31, 2013 were not included in the diluted loss
per share as all 5,708 preferred shares and all 502,500 options were anti-dilutive as the Company incurred losses during the year.
Preferred stock and common stock options outstanding at December 31, 2012 were not included in the diluted loss per share as all
5,708 preferred shares and all 452,500 options were anti-dilutive as the Company incurred losses during the year. Therefore, basic
and diluted losses per share at December 31, 2013 and 2012 were equal.
Income Taxes
Income taxes are provided for the tax effects
of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities represent the deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that
are available to offset future federal income taxes.
The
Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns,
as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state tax return
in Oklahoma as “major” tax jurisdictions, as defined. The Company believes that its income tax filings positions and
deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on
the Company’s financial conditions, results of operations, or cash flow. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to ASC 740.
Stock-Based Compensation:
The Company recognizes share-based
compensation based on the options’ fair value, net of estimated forfeitures on a straight line basis over the requisite service
periods, which is generally over the awards’ respective vesting period, or on an accelerated basis over the estimated performance
periods for options with performance conditions. The stock option fair value is estimated on the grant date using the Black-Scholes
option pricing model based on the underlying common stock closing price as of the date of grant, the expected term, stock price
volatility, and risk-free interest rates. The Company has modified its outstanding stock options several times over the prior three
years resulting in recognition of additional expenses (see Note 7).
Use of Estimates
The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities; disclosure of contingent assets and liabilities at the date of the consolidated
financial statements; and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results
could differ from those estimates.
NOTE 2 – RELATED PARTY TRANSACTIONS
On September 6, 2013, COLEMC Investments, LTD.
(COLEMC), a Canadian company owned by Gerry McIlhargey, President and Director of the Company, advanced the Company $4,800 for
working capital in exchange for a promissory note. The note matured on December 31, 2013, does not bear interest and has been extended
until December 31, 2014.
In prior years, COLEMC advanced the Company
a total of $45,000 for working capital in exchange for three promissory notes. The notes matured on December 31, 2011 and December
2010 and did not bear any interest. The notes have been extended until December 31, 2014.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2012 and
2011, an officer advanced the Company $7,500 and $16,700, respectively, for working capital in exchange for two promissory notes.
During the year ended December 31, 2013, the officer advanced the Company an additional $5,500. The total balance of the notes
is $29,700 and do not bear any interest. The notes matured on December 31, 2013 and have been extended until December 31, 2014.
During the year ended December 31, 2012, a
Director of the Company exercised 7,500 shares of its common stock at a strike price of $1.05 per share (see Note 7) for total
consideration of $7,875.
During the year ended December 31, 2011, the
Company sold 20,000 shares of its common stock in a private placement for $0.50 per share to an officer of the Company’s
subsidiary for total consideration of $10,000.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following
at December 31, 2012 and 2011:
|
|
2012
|
|
|
2012
|
|
Furniture and fixtures
|
|
$
|
35,447
|
|
|
$
|
35,447
|
|
Office equipment
|
|
|
61,465
|
|
|
|
61,465
|
|
Computer equipment
|
|
|
37,629
|
|
|
|
37,629
|
|
Leasehold improvements
|
|
|
19,585
|
|
|
|
19,585
|
|
Total property and equipment
|
|
|
154,126
|
|
|
|
154,126
|
|
Less accumulated depreciation
|
|
|
(154,126
|
)
|
|
|
(154,126
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Depreciation expense totaled $-0- and $1,073,
respectively, for the years ended December 31, 2013 and 2012.
NOTE 4 – NOTES PAYABLE
Bank Loan
The Company originally had a $200,000 line
of credit of with the bank. In August 2010, the Company converted its line of credit with the bank to a bank loan which is collateralized
by all of assets of the Company’s subsidiary company, Staf*Tek, including all receivables and property and equipment. The
bank loan agreement included the following provisions 1) an agreement to provide insurance coverage for the collateralized assets
in the amount of $180,000; 2) covenants to provide certain financial documents to the bank on a monthly and annual basis. On September
9, 2013, the Company received a default letter from the bank. Since that time the bank has requested the company bring the loan
current by making monthly payments of $2,698 plus late fees of $50 per month for the nine months which the Company is delinquent,
for the total amount as of March 31, 2014 of $24,732, which includes principal, interest and fees. At such time the Company is
able to bring the loan current the bank has stated the remaining balance will be refinanced, which terms are yet to be determined.
The loan is in default at December 31, 2013 and the principal loan balance continues to bear 6.5% interest. In the event the Company
is unable to bring the bank loan current the bank may foreclose which would likely force the Company out of business.
As of December 31, 2013 and 2012, the Company
owed the bank $118,202 and $131,997, respectively.
Interest expense on the Company’s bank
borrowing was $8,332 and $9,538, during the years ended December 31, 2013 and 2012, respectively.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Notes Payable
On July 31, 2013, an individual loaned the
Company $25,000 for working capital in exchange for a promissory note. The note matures on July 31, 2014 and bears interest at
seven percent. Accrued interest on the note totaled $730 at December 31, 2013.
On October 1, 2013, two individuals loaned
the Company $30,000 for working capital in exchange for promissory notes. The notes mature on October 1, 2014 and bear interest
at seven percent. Accrued interest on the note totaled $525 at December 31, 2013.
On November 15, 2013, an individual loaned
the Company $50,000 for working capital in exchange for a promissory note. The note matures on November 15, 2014 and bears interest
at seven percent. Accrued interest on the note totaled $438 at December 31, 2013.
On November 18, 2013, an individual loaned
the Company $25,000 for working capital in exchange for a promissory note. The note matures on November 18, 2014 and bears interest
at seven percent. Accrued interest on the note totaled $63 at December 31, 2013.
On December 13, 2013, an individual loaned
the Company $10,000 for working capital in exchange for a promissory note. The note matures on December 13, 2014 and bears interest
at seven percent. Accrued interest on the note totaled $35 at December 31, 2013.
NOTE 5 – CONCENTRATION OF CREDIT
RISK
The Company conducts a significant portion
of its operations with one customer. During the year ended December 31, 2013 and 2012 approximately 86.4% and 80% of the Company’s
service revenues were conducted with this one customer, respectively.
NOTE 6 – INCOME TAXES
A reconciliation of U.S. statutory federal
income tax rate to the effective rate is as follows:
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
U.S. Federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State income tax, net of federal benefit
|
|
|
3.96
|
%
|
|
|
3.96
|
%
|
Permanent book-to-tax differences
|
|
|
-0.00
|
%
|
|
|
-0.00
|
%
|
Timing Differences
|
|
|
-0.00
|
%
|
|
|
-0.00
|
%
|
Net operating loss for which no tax benefit is currently available
|
|
|
-37.96
|
%
|
|
|
-37.96
|
%
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
At December 31, 2013, the Company’s current
tax benefit consisted of a net tax asset of $957,327 due to operating loss carryforwards of approximately $3,070,916 which have
been fully provided against in the valuation allowance of $957,327. The valuation allowance results in deferred tax expense, which
offsets the net deferred tax asset for which there is no assurance of recovery. The changes in the valuation allowance for the
years ended December 31, 2013 and 2012 were $259,509 and $153,583, respectively. Net operating loss carry forwards will expire
through 2033.
The valuation allowance will be evaluated at
the end of each year, considering positive and negative evidence about whether the asset will be realized. At that time, the allowance
will either be increased or reduced; reduction could result
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the complete elimination of the allowance
if positive evidence indicates that the value of the deferred tax asset is no longer impaired and the allowance is no longer required.
Should the Company undergo an ownership change,
as defined in the Internal Revenue Code, the Company’s tax net operating loss carry forwards generated prior to the ownership
change may be subject to an annual limitation, which could reduce or defer the utilization of those losses.
NOTE 7 – SHAREHOLDERS’ EQUITY
Preferred
Stock
The Board of Directors is authorized to issue
shares of Series A Convertible Preferred Stock and to fix the number of shares in such series as well as the designation, relative
rights, powers, preferences, restrictions, and limitations of all such series. In December 2003, the Company issued 386,208 shares
of Series A Convertible Preferred Stock and 5,708 have not been converted to common stock at December 31, 2013. During the year
ended December 31, 2013, the Company did not issue any Series A Convertible Preferred Stock. Series A Convertible Preferred Stock
is convertible to one share of common stock and has a yield of 6.75% dividend per annum, which is paid quarterly on a calendar
basis for a period of 5 years.
The Company is currently delinquent in making
dividend payments pursuant to the terms of a settlement agreement, as disclosed in an 8-K released on May 9, 2009. The accrued
balance due on Series A Convertible Preferred Stock dividends total $42,047 and $42,047 as of December 31, 2013 and 2012, respectively.
The Company will commence dividend payments pursuant to the terms of a settlement agreement as funds are available.
Common Stock
In a private placement during the year ended
December 31, 2013, the Company sold 410,000 shares of common stock to accredited investors at a price of $0.50 per share for gross
proceeds totaling $205,000. No underwriters were used and no underwriting discounts or commissions were payable. The shares have
been offered and sold by the Company in reliance upon the exemption from registration provided by Regulation D promulgated under
the Securities Act of 1933, as amended. The shares were offered and sold only to accredited investors; as such term is defined
by Rule 501 of Regulation D. All of the shares sold in the private placement are restricted securities pursuant to Rule 144.
In a private placement during the year ended
December 31, 2012, the Company sold 190,000 shares of common stock to accredited investors at a price of $0.50 per share for gross
proceeds totaling $95,000. No underwriters were used and no underwriting discounts or commissions were payable. The shares have
been offered and sold by the Company in reliance upon the exemption from registration provided by Regulation D promulgated under
the Securities Act of 1933, as amended. The shares were offered and sold only to accredited investors; as such term is defined
by Rule 501 of Regulation D. All of the shares sold in the private placement are restricted securities pursuant to Rule 144.
During the year ended December 31, 2012, a
Director of the Company exercised 7,500 shares of its common stock at a strike price of $1.05 per share (see Note 7) for total
consideration of $7,875.
Equity Awards Granted to Employees
On November 13, 2013, the Company granted options
to one employee to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.05 per share. The options
vested on the date of grant. The quoted market price of the Company’s common stock was $0.70 per share on the grant date.
The weighted average exercise price and weighted average fair value of these options on the date of grant were $1.05 per share.
Stock option compensation totaling $16,719 was recognized during the quarter ended December 31, 2013.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule summarizes the changes
in the Company’s equity awards for the year ended December 31, 2012.
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Awards
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
and
|
|
|
Price
|
|
|
Price
|
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Exercisable
|
|
|
Per Share
|
|
|
Per Share
|
|
|
Life
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2013
|
|
|
452,500
|
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
1.50 yrs.
|
|
$
|
-
|
|
Granted
|
|
|
50,000
|
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2013
|
|
|
502,500
|
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
0.50 yrs.
|
|
$
|
-
|
|
On August 10, 2011 the Company’s board
of directors extended the deadline for the exercise of the 460,000 options by one year from August 24, 2011 to August 24, 2012.
The Company further extended the deadline to December 31, 2012 in a board of directors meeting on August 23, 2012; and most recently
extended the deadline to June 30, 2013 in a board meeting on December 12, 2012. The extensions were considered a modification of
the original stock options. Accordingly, the Company revalued the stock options, which resulted in a charge to share-based compensation
totaling $214,563 for the year ended December 31, 2012.
On May 2, 2013 the Company’s board of
directors extended the deadline for the exercise of the 452,500 options by six months from June 30, 2013 to December 31, 2013.
The Company further extended the deadline to June 30, 2014 in a board meeting on December 21, 2013. The extensions are considered
a modification of the original stock options. Accordingly, the Company revalued the stock options, which resulted in charges to
share-based compensation totaling $193,997 for the year ended December 31, 2013.
All stock options were fully vested as of December
31, 2013 and 2012. Aggregate intrinsic value is calculated by determining the amount by which the market price of the stock exceeds
the exercise price of the options on December 31, 2013, and then multiplying that amount by the number of options. The exercise
price exceeds the market value of the stock on December 31, 2013; therefore the aggregate intrinsic value is zero.
Upon the exercise of stock options, the Company
issues new shares that are authorized and not issued or outstanding. The Company does not plan to repurchase shares to meet stock
option requirements.
The Black-Scholes options valuation model was
developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.
Because the Company’s stock options have characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its stock options.
NOTE 8 – LETTER OF INTENT
On August 8, 2012, St. Joseph, Inc. filed an
8-K current report in connection with the signing of a nonbinding Letter of Intent with Karavos Holdings Limited, for the arrangement
of an acquisition of 100% of a holding company which owns 50% interest in a domestic telecommunications operating company. The
8-K current report can be viewed at the SEC’s website; http://www.sec.gov/Archives/edgar/data/1177135/000149315212000866/form8k.htm.
NOTE 9 – LEGAL PROCEEDINGS
On or about January 24, 2012, our subsidiary,
Staf*Tek Services, Inc. was served notice that Danny McGowan, a former employee hired and assigned to work for Staf*Tek’s
client as a contractor, filed a lawsuit against Staf*Tek Services, Inc. and it’s client in the district court in Tulsa County,
Oklahoma, Case No. CJ-2011-7039, in connection with a wrongful termination complaint. Mr. McGowan alleges that he was terminated
after one month of employment, but feels he had a guaranteed contract for six months. The wording in his employment agreement that
he identifies as guaranteeing his employment for six months was inserted at the request of Staf*Tek’s client.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Staf*Tek’s client terminated Mr. McGowan
for performance issues after one month of employment. Mr. McGowan filed a lawsuit against Staf*Tek and the client and subsequently
filed a motion for default judgment, which was granted by the judge. On March 9, 2012, Stat*Tek filed a motion to vacate the default
judgment and requested a new trial. Staf*Tek has engaged counsel and intends to vigorously defend this action. As of this date
the client that terminated Mr. McGowan has been dismissed from the lawsuit by the judge because they had not been served within
a 6 months of the original filing of the lawsuit by Mr. McGowan’s counsel. Mr. McGowan and his attorney were three weeks
late responding to our request for discovery and we requested dismissal. However, the judge did not grant dismissal. Mr. McGowan
is seeking damages against Staf*Tek in an amount in excess of $75,000. Management deems the suit to be without merit, however,
the costs of defending against the complaint could be substantial. In the event judgment is made against the Company and payment
deemed appropriate it may force the Company out of business.
NOTE 10 – COMMITMENT
The Company leases office space in Tulsa, Oklahoma
under operating lease which expired in April 2012, the Company is currently leasing the office space on a month to month basis.
Rent expense during the years ended December
31, 2013 and 2012 were $36,327 and $35,990, respectively.
NOTE 11 - SUBSEQUENT EVENT
The Company has evaluated subsequent events
through March 31, 2014. Other than those described below, there have been no subsequent events after December 31, 2013 for which
disclosure is required.
In a private placement(s) conducted subsequent
to December 31, 2013, the Company sold 190,000 shares of common stock to accredited investors at a price of $0.50 per share for
gross proceeds totaling $95,000. No underwriters were used and no underwriting discounts or commissions were payable. The shares
have been offered and sold by the Company in reliance upon the exemption from registration provided by Regulation D promulgated
under the Securities Act of 1933, as amended. The shares were offered and sold only to accredited investors; as such term is defined
by Rule 501 of Regulation D. All of the shares sold in the private placement are restricted securities pursuant to Rule 144.
Subsequent to December 31, 2013, the Company
converted loans and related accrued interest totaling $157,580 into 315,160 shares of common stock at a value of $0.50 per share.