NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(Unaudited)
NOTE
1 – Basis of Presentation
The
condensed balance sheet at December 31, 2013 has been derived from financial statements included in the Form 10-K. The accompanying
unaudited financial statements at March 31, 2014 presented herein have been prepared by St. Joseph, Inc. (the “Company”)
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements should
be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report
on Form 10-K for the year ended December 31, 2013.
The
accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim
periods presented. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes. The results of operations
presented for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2014.
There
is no provision for dividends for the quarter to which this quarterly report relates.
Financial
data presented herein are unaudited.
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 capital deficiency at March 31, 2014 and December 31, 2013.
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.
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 does not bear interest
and matures on 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
do not bear interest and mature on December 31, 2014.
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 mature on December 31, 2014.
ST.
JOSEPH, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(Unaudited)
NOTE
3 – 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; and 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 March 31, 2014 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 March 31, 2014 and December 31, 2013, the Company owed the bank
$124,200
(unaudited) and $118,202, respectively.
Interest
expense on the Company’s bank borrowing was $1,921 (unaudited) and $2,107, during the three months ended March 31, 2014
and 2013, respectively.
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. The note was converted into 50,000 shares of common stock ($0.50 per share)
on January 31, 2014.
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. The note was converted into 60,000 shares of common stock ($0.50 per share)
on January 31, 2014.
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. The note was converted into 100,000 shares of common stock ($0.50 per
share) on January 31, 2014.
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. The note was converted into 50,000 shares of common stock ($0.50 per
share) on January 31, 2014.
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. The note was converted into 20,000 shares of common stock ($0.50 per
share) on January 31, 2014.
In
connection with the above loan conversions, the Company also converted $2,770 of accrued interest into 5,539 shares of common
stock on January 31, 2014.
ST.
JOSEPH, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(Unaudited)
NOTE
4 – Shareholders’ Deficit
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 five 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 (unaudited)
and $42,047 as of March 31, 2014 and December 31, 2013, 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 three months ended March 31, 2014, the Company sold 250,000 (unaudited) shares of common stock
to accredited investors at a price of $0.50 per share for gross proceeds totaling $125,000 (unaudited); $25,000s (unaudited) of
which was received in April 2014 and recorded as a stock subscription receivable.
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, 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.
Debt
Conversion
Effective
January 31, 2014, the Company converted loans and related accrued interest totaling $142,769 into 285,539 shares of common stock
at a value of $0.50 per share.
ST.
JOSEPH, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(Unaudited)
Equity
Awards Granted to Employees
The
following schedule summarizes the changes in the Company’s equity awards for the three months ended March 31, 2013.
|
|
|
|
|
|
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, 2014
|
|
|
502,500
|
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
|
1.00 yrs.
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2014
|
|
|
502,500
|
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
|
0.75
yrs.
|
|
|
$
|
-
|
|
Deadlines
for the exercise of all options were extended to December 31, 2014 subsequent to March 31, 2014 (see Note 10).
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 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.
During
the year ended December 31, 2012, a director of the Company exercised options for 7,500 shares of common stock at a strike price
of $1.05 per share for total consideration of $7,875.
On
May 2, 2013, the Company’s Board of Directors extended the deadline for the exercise of 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.
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.
All
stock options were fully vested as of March 31, 2014 and December 31, 2013. 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 March 31, 2014, and then multiplying
that amount by the number of options. The exercise price exceeds the market value of the stock on March 31, 2014; 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.
ST.
JOSEPH, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(Unaudited)
NOTE
5 – Income Taxes
The
Company records its income taxes in accordance with ASC 740 Income Taxes. The Company incurred net operating losses during all
periods presented resulting in a deferred tax asset, which has been fully allowed for; therefore, the net benefit and expense
resulted in no income taxes.
NOTE
6 – Concentration of Credit Risk
The
Company conducts a significant portion of its operations with one customer. During the three months ended March 31, 2014 and 2013,
approximately 100% and 81%, respectively, of the Company’s service revenues were conducted with this one customer.
NOTE
7 – 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 found at www.sec.gov.
NOTE
8 – 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.
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 six 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
9 – Commitment
The
Company leases office space in Tulsa, Oklahoma under operating lease which expired in April 2012. We are currently leasing the
office space on a month-to-month basis.
Rent
expense during the three months ended March 31, 2014 and 2013 totaled $8,999 (unaudited) and $8,999, respectively.
NOTE
10 – Subsequent Event
The
Company has evaluated subsequent events through May 14, 2014. Other than those described below, there have been no subsequent
events after March 31, 2014 for which disclosure is required.
On
April 23, 2014, the Company’s Board of Directors extended the deadline for the exercise of the 502,500 options by six months
from June 30, 2014 to December 31, 2014. Accordingly, the Company revalued the stock options, which will result in a charge to
share-based compensation totaling $50,986 during the quarter ended June 30, 2014.