ITEM 1. BUSINESS
Our Background and Business Development
St. Joseph, Inc. (“us,” “we,” “our” or the “Company”) was organized under the laws of the State of Colorado on March 19, 1999, as Pottery Connection, Inc. Our Company was originally organized to produce and sell pottery of all forms, as well as arts and crafts.
On March 19, 2001, we changed our corporate name to St. Joseph Energy, Inc. in anticipation of changing our business purpose to the exploration and development of oil and gas properties. However, after unsuccessful investing in two oil wells located in the State of Louisiana, we elected to abandon that endeavor and return to our original business purpose.
On November 6, 2003, we changed our corporate name to St. Joseph, Inc. We acquired Staf*Tek Services, Inc. (“Staf*Tek”) as a wholly owned subsidiary on January 2, 2004. We presently conduct all of our business through Staf*Tek.
Staf*Tek Services, Inc.
Staf*Tek was organized under the laws of the State of Oklahoma on January 2, 1997. On December 2, 2003, we acquired all of the issued and outstanding shares of common stock of Staf*Tek stock in exchange for (1) 380,500 shares of our Series A Preferred Shares (“Series A Shares”); (2) 219,500 shares of our common stock; and (3) $200,000 in cash. The acquisition closed on January 2, 2004, at which time Staf*Tek became a wholly owned subsidiary of St. Joseph.
Staf*Tek specializes in the recruiting and placement of professional technical personnel, as well as finance and accounting personnel on a temporary and permanent basis. Staf*Tek provides its customers with employee candidates with information technology (“IT”) skills in areas ranging from multiple platform systems integration to end-user support, including specialists in programming, networking, systems integration, database design, help desk support, including senior and entry level finance and accounting candidates. Staf*Tek's candidate databases contain information on the candidates experience, skills, and performance and are continually being updated to include information on new referrals and to update information on existing candidates. Staf*Tek responds to a broad range of assignments from technical one-person assignments to major projects including, without limitation, Internet/Intranet development, desktop applications development, project management, enterprise systems development, SAP implementation and legacy mainframe projects. Staf*Tek also provides employee candidates computer training, online assessments, certification and the opportunity to be tested and certified in over 50 skill sets.
Staf*Tek was founded on the premise that there is an increasing demand for high quality outsourced professional services. Staf*Tek's business premise combines client service orientation and commitment to quality. Staf*Tek is positioned to take advantage of what we believe are two converging trends in the outsourced professional services industry - increasing demand for outsourced professional services by corporate clients and increasing the supply of professionals interested in working on an outsourced basis. Staf*Tek believes that its business premise allows it to offer challenging yet flexible career opportunities, attract highly qualified, experienced professionals and, in turn, attract clients with varying professional needs.
Staf*Tek is primarily a regional professional service firm that provides experienced and highly qualified personnel who can demonstrate diversity, and flexibility in the work force. Staf*Tek has the ability to place candidates throughout the United States although the company has primarily focused its resources in the Oklahoma.
Supply of Professionals
Concurrent with the growth in the demand for outsourced services, Staf*Tek is of the belief, based on discussions with its associates that the number of professionals seeking work on a project and non-project basis has increased due to a desire for:
oMore flexible hours and work arrangements, coupled with competitive wages and benefits; and
oChallenging engagements that advance careers, develop skills, and add to experience.
Staf*Tek maintains its own database of approximately 20,000 trained independent contract professionals as well as using the data bases of Dice and Monster. Once a professional is placed, he or she either becomes an employee of our Company or the client's employee.
Marketing and Recruiting
Staf*Tek markets its temporary and permanent staffing services to business clients as well as employment candidates. Marketing and recruiting directed to business clients and employment candidates consists primarily of yellow pages advertisements, classified advertisements, websites, internet job sites, trade shows and website promotion on the Internet.
We and our subsidiary company have registered the following domain names: getsmartonline.com, staftek.com and stjosephinc.com.
Management of the Staf*Tek’s temporary and permanent staffing operations is coordinated from our headquarters in Tulsa, Oklahoma. Our headquarters provides support and centralized services related to administrative, marketing, public relations, accounting and training.
Competition
Staf*Tek’s temporary and permanent staffing services face competition in attracting clients as well as high-quality specialized employment candidates. The temporary and permanent placement businesses are highly competitive, with a number of firms offering services similar to those provided by Staf*Tek on a national, regional or local basis. In many areas the local companies are the most successful competitors. The most significant competitive factors in the temporary and permanent placement businesses are price and the reliability of service, both of which are often a function of the availability and quality of professional personnel. We believe that Staf*Tek derives a competitive advantage from its extensive experience and commitment to the specialized employment market, temporary employees placed by it are, in fact, Staf*Tek’s employees for all purposes while they are working on assignments. Once a professional is permanently placed, he or she either becomes an employee of Staf*Tek or of Staf*Tek’s client. During the temporary phase, Staf*Tek pays the related costs of employment, such as workers' compensation insurance, state and federal unemployment taxes, social security and certain fringe benefits. Staf*Tek provides access to voluntary health insurance coverage to interested employees.
Major Clients
We are dependent on a small number of clients for all of our revenues and on one client for a significant percentage of our revenues. During our year ended December 31, 2011, approximately 88% of our revenues were derived from our largest client and all of our revenues were derived from a total of three clients.
Employees and Revenue Generating
We currently have five paid employees, and no part-time employees.
Acquisition Strategy
The Company has decided to pursue suitable candidates for future acquisition that potentially create value for our existing shareholders. The Company hopes to acquire other operating companies as subsidiaries. Acquisition targets may be in sectors other then the Company’s current sector of providing employment agency services. Although not the Company’s goal, the Company would also consider a reverse merger, if it were seen to be a growth opportunity for our existing shareholders.
To date, we have not consummated any acquisition and cannot provide any assurance that we will be successful in this endeavor. Any acquisition may be structured as a share exchange and may result in significant dilution to our existing shareholders.
Reports to Security Holders
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with the Exchange Act we file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Our security holders or any member of the public may inspect and copy the reports, proxy statements and other information filed by us with the Commission at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the Commission's Regional Offices. Our security holder or any member of the public may also call the Commission at 1-800-SEC-0330 for more information about the public reference room, how to obtain copies of documents by mail or how to access documents electronically on the Commission's Web site at (http://www.sec.gov).
ITEM 1A.
ITEM 1A. RISK FACTORS
Our business prospects are subject to various risks and uncertainties that impact our business. The most important of these risks and uncertainties are as follows:
Our auditor has expressed substantial doubt as to our ability to continue as a going concern. An inability to continue as a going concern would likely lead to a loss of your entire investment.
Our independent certified public accountant's report on our financial statements for the fiscal years ended December 31, 2011 and 2010 contains an explanatory paragraph indicating that we have incurred recurring losses, and as of December 31, 2011, had negative working capital and a net capital deficiency. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our revenues and our total assets have declined precipitously over the last several years while our stockholder’s deficit has increased, creating doubt as to our ability to continue our operations or achieve profitability.
During our 2011 fiscal year, we had revenues of $467,907, down from $534,001 in our 2010 fiscal year, and down from $836,955 in our 2009 fiscal year. As of December 31, 2011 we had total assets of $86,553, down from $102,134 on December 31, 2010 and down from $225,156 on December 31, 2009. Over this period of time, our total stockholders’ deficit increased to $419,083 as of December 31, 2011, as compared to $374,571 as of December 31, 2010 and $248,498 as of December 31, 2009. These declines in our revenues and asset value, combined with our growing stockholders’ deficit create doubt that we will be able to remain in operation or achieve profitability. We have been relying primarily on funds raised from the sale of our shares in private placements and on our secured line of credit for operating capital. However, our declining business operations may increase the difficulty of raising additional funds. If we are unable to reverse these trends, we may go out of business, and our stockholders may lose their entire investment.
We may engage in a “reverse merger” acquisition, resulting in severe dilution to existing stockholders.
In the event we engage in a merger or acquisition, it is likely that the transaction will be structured as a” reverse merger” that would result in severe dilution to existing stockholders. In connection with any such reverse merger, our stock may be subject to a reverse stock split, and the value of our stockholder’s shares may be negatively impacted. We can provide no assurance that we will engage in any reverse merger, or any other merger or acquisition transaction.
If we default on our secured bank loan, the bank may foreclose on substantially all of our assets, putting us out of business.
We have an outstanding bank loan that is secured by substantially all of our assets. As of December 31, 2011, the outstanding balance on this loan was $155,020. The loan carries interest in the amount of 6.5% per annum. We must make monthly payments of principal and interest in the amount of $2,698 per month with a balloon payment in the amount of $115,406 coming due on August 31, 2013. In the event we default on this loan, the bank may foreclose on our assets. If any such foreclosure were to occur, we would not be able to continue operating.
We operate solely through our subsidiary, Staf*Tek Services, Inc.; our revenues are dependent on the performance of our subsidiary.
We operate and generate revenues solely through our subsidiary, Staf*Tek. St. Joseph, Inc. has not generated any revenues since its inception and does not expect to generate any revenues in the future. Our success depends on the success of Staf*Tek and there is no assurance that we can achieve profitability through Staf*Tek in the future. Our performance will depend on our ability to manage this anticipated growth effectively by hiring key management personnel, implementing and maintaining operational, administrative, marketing and control systems on a timely basis, building and maintaining our network infrastructure, conducting successful marketing and sales programs, attracting and retaining qualified employees and having access to working capital to support the growth in inventory, receivables, capital requirements and operating costs necessitated by the assumed increased sales.
From time to time, we may need additional capital to meet the objectives of our business plan, and there is no assurance that we will be able to raise such capital or that such financing will be on terms that are favorable or acceptable to us.
The placement of temporary employees requires substantial additional capital to fund our working capital needs. When an employee is placed on a temporary basis, an invoice is generated for the placement fee, which may not be paid for a number of weeks while the employment costs are immediately incurred. Thus, even though, in the long run, our success in placing temporary employees will enhance our revenues; in the short term, our increasing placement of temporary employees is decreasing our liquidity. Accordingly, to remain viable, we must substantially increase our revenues, raise additional capital, increase our credit facilities, and/or reduce our operations. In the event that our plans or assumptions change or prove to be inaccurate, or if delays increase the payment of our placement fees, we may be required to raise additional funds through the issuance of equity securities, in which case the percentage ownership of our current stockholders will be diluted. Such equity securities may also have rights, preferences or privileges senior to common stock. Furthermore, there can be no assurance that additional financing will be available when needed on terms favorable to us or at all. If we are unable to raise more money, our growth could be impeded, and our business could be materially adversely affected.
Our failure to effectively manage growth could have a material adverse effect on our business and operations.
If we are able to grow our business, such growth could occur rapidly at an uneven pace. Such growth will place a significant strain on our management systems and resources. We will need to continue to improve our operational and financial systems and managerial controls and procedures, and we will need to continue to expand, train and manage our workforce. We will have to maintain close coordination among our technical, accounting, finance, marketing and sales personnel.
If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired.
Our future success depends upon the continued service of our key management and other critical personnel such as John Blackmon. Whether we are able to execute our business strategy effectively will depend in large part on how well key management and other personnel perform in their positions and are integrated within our company. There is no assurance that we will be able to retain these key management and personnel. The loss of any key employee could result in significant disruptions to our operations, the successful implementation and completion of company initiatives and the results of our operations. In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations and may be unsuccessful.
Factors outside of our control may adversely affect our operations and operating results.
The demand for our temporary and permanent staffing services is highly dependent upon the state of the economy and upon the staffing needs of our clients. Any variation in the economic condition or unemployment levels in the United States or in the economic condition of the region where our clients are located, or in any specific industry may severely reduce the demand for our services and thereby significantly decrease our revenues and profits. Furthermore, our temporary and permanent staffing services business consists of the placement of individuals seeking temporary and permanent employment. There can be no assurance that qualified candidates for employment will continue to seek employment through Staf*Tek. Qualified candidates generally seek temporary or permanent positions through multiple sources, including Staf*Tek and its competitors. Any shortage of qualified candidates could materially adversely affect our revenues.
Our market is competitive, and our financial results and financial condition could be adversely affected if we are unable to anticipate or react to this competition.
The market for temporary and permanent staffing services is highly competitive and, because it is a service business, the barriers to entry are quite low. There are many competitors, some of which have greater resources than us, and new competitors are constantly entering the market. In addition, long-term contracts form a negligible portion of our revenues. Therefore, there can be no assurance that we will be able to retain clients or market share in the future. Nor can there be any assurance that we will, in light of competitive pressures, be able to remain profitable or maintain our current profit margins. If we fail to compete successfully in this highly competitive market, our business, financial condition, and results of operations will be materially and adversely affected.
We depend on attracting and retaining qualified candidates; during periods of economic growth, our costs to do so increases and it becomes more difficult to attract and retain people.
The success of our staffing services depends on our ability to attract and retain qualified employees for placement with our customers. Our ability to attract and retain qualified personnel could be impaired by rapid improvement in economic conditions resulting in lower unemployment and increases in compensation. During periods of economic growth, we face growing competition for retaining and recruiting qualified personnel, which in turn leads to greater advertising and recruiting costs and increased salary expenses. If we cannot attract and retain qualified employees, the quality of our services may deteriorate and our reputation and results of operations could be adversely affected.
Our inability to attract and retain qualified employees could have a material adverse effect on our business, financial condition and results of operations.
Our business involves the delivery of professional services and is very labor intensive. Our success depends in large part upon our ability to attract, develop, motivate and retain highly skilled technical employees. We can experience high turnover of our personnel and are often required to recruit and train replacement personnel as a result of a changing and expanding work force. Accordingly, we may experience increased compensation costs that may not be offset through either increased productivity or higher customer pricing. Furthermore, the market for IT services change rapidly because of technological innovation, new product introductions, changes in customer requirements, evolving industry standards and many other factors. New products and new technology often render existing information services or technology infrastructure obsolete, excessively costly or otherwise unmarketable. As a result, our success depends on our ability to attract and retain qualified employee candidates who are knowledgeable and familiar with these new products and technologies. We cannot guarantee that we will be successful in recruiting and retaining sufficient numbers of qualified employee candidates in the future, especially when we need to expand our services in a short time period. Our inability to attract and retain qualified personnel, or increases in wages or other costs of attracting, training or retaining qualified personnel, could have a material adverse effect on our business, financial condition and results of operations.
88% of our revenues come from one client.
During our year ended December 31, 2011, approximately 88% of our revenues were derived from our largest client. The loss of this client or the decline in business from this client would have a material adverse effect on our revenues and profits. Accordingly, any events that create an adverse affect on this client’s operations or financial performance may also create a material adverse effect on our revenues and profits.
Our revenues are generated by only three clients.
At the present time, our revenues come from only three clients. The loss of any of these clients or the decline in business from any of these clients will have a material adverse effect on our revenues and profits.
Our common stock is subject to the SEC’s Penny Stock Regulations which may affect the liquidity for our stock, the ability of our stockholders to resell their shares through a broker-dealer, and their ability to obtain accurate price quotations.
Our common stock is subject to the SEC’s “penny stock” rules. These regulations define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, these rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to the broker-dealer and the registered underwriter, current quotations for the securities, information on the limited market in penny stocks and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealers’ presumed control over the market. In addition, the broker-dealer must obtain a written statement from the customer that such disclosure information was provided and must retain such acknowledgment for at least three years. Further, monthly statements must be sent disclosing current price information for the penny stock held in the account. The penny stock rules also require that broker-dealers engaging in a transaction in a penny stock make a special suitability determination for the purchaser and receive the purchaser's written consent to the transaction prior to the purchase. The foregoing rules may materially and adversely affect the liquidity for the market of our common stock, if any such public market develops. Such rules may also affect the ability of broker-dealers to sell our common stock in any such public market, the ability of holders of such securities to obtain accurate price quotations and may therefore impede the ability of holders of our common stock to sell such securities in the secondary market.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
ITEM 2.
ITEM 2. PROPERTIES
We lease approximately 2,286 square feet of office space from a non-affiliated third party at 4870 South Lewis, Suite 250, Tulsa, OK 74105. Our monthly lease payment is $2,667. The lease commenced May 1, 2004 and expires April 30, 2012.
ITEM 3.
ITEM 3. 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 judgement, which was granted by the judge. On March 9, 2012, Stat*Tek Services, Inc. filed a motion to vacate the default judgement 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 still has not been served the lawsuit by Mr. McGowan's counsel. Mr. McGowan is seeking damages against Staf*Tek in an amount in excess of $75,000. Management deems the suit to be without merit and the costs of defending against the complaint could be substantial.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC Bulletin Board under the symbol STJO.OB.
The following table shows the high and low bid information for our common stock for each quarter during 2010 - 2011.
The above information was obtained from the NASD. Because these are over-the-counter market quotations, these quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions. There is currently no public trading market for our preferred stock.
As of December 31, 2011, representing the last trading day of our most recently completed fiscal quarter, there were 11,612,302 shares of common stock issued and outstanding, held by approximately 355 shareholders of record. Within the holders of record of our common stock are depositories, such as Cede & Co., that hold shares of stock for several brokerage firms which, in turn, hold shares of stock for a multitude of additional beneficial owners. Accordingly, it is impossible for us to determine exactly how many beneficial stockholders we actually have. As of December 31, 2011, there were 5,708 shares of our Series A Convertible Preferred Stock issued and outstanding, held by one shareholder of record.
As of December 31, 2011, there were 460,000 outstanding options or warrants to purchase shares of common stock and 5,708 outstanding shares of Series A Preferred Stock convertible into shares of the Company's Common Stock. The options may be converted into common shares at a weighted average exercise price of $1.05 per share and the preferred shares may be converted into common shares on a one for one basis.
Dividend Policy
We have never paid a cash dividend on our common stock nor do we anticipate paying cash dividends on our common stock in the near future. It is our present policy to not to pay cash dividends on our common stock but to retain earnings, if any, to fund growth and expansion. Any payment of cash dividends of the common stock in the future will be dependent upon our financial condition, results of operations, current and anticipated cash requirements, plans for expansion, as well as other factors the Board of Directors deems relevant.
Penny Stock
Our common stock is subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as the "penny stock rule." Section 15(g) sets forth certain requirements for transactions in penny stocks, and Rule 15g-9(d) (1) incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the Exchange Act. The Securities and Exchange Commission ("SEC") generally defines "penny stock" to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our Common Stock is deemed to be a penny stock, trading in the shares will be subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. "Accredited investors" are persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information on the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealers to trade and/or maintain a market in our Common Stock and may affect the ability of our shareholders to sell their shares.
Recent Sales of Unregistered Securities
Set forth below is information regarding the sale of equity securities during the year ended December 31, 2011 that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), and which were not previously disclosed either in a quarterly report on Form 10-Q or on a current report on Form 8-K:
In a private placement during the year ended December 31, 2011, the Company sold 440,000 shares of common stock to accredited investors at a price of $0.50 per share for gross proceeds totaling $220,000. 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. Of these shares sold in 2011, 20,000 were sold to an officer of the Company's subsidiary.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with our audited Consolidated Financial Statements and accompanying Notes, included herein. Except for the historical information contained herein, the discussion in this report contains certain forward-looking statements that involve risks and uncertainties, such as statements of our business plans, objectives, expectations and intentions as of the date of this filing. The cautionary statements about reliance on forward-looking statements made earlier in this document should be given serious consideration with respect to all forward-looking statements wherever they appear in this report, notwithstanding that the "safe harbor" protections available to some publicly reporting companies under applicable federal securities law do not apply to us as an issuer of penny stocks. Our actual results could differ materially from the results anticipated in these statements as a result of a variety of factors, including those discussed in our filings with the Securities and Exchange Commission and as discussed in the sections under the heading "Risk Factors" in this Report.
Any reference to "we," "us" and "our" herein shall mean St. Joseph, Inc., together with its consolidated subsidiary, Staf*Tek Services, Inc.
Overview
For the year ended December 31, 2011, we generated revenues of $467,907, which is significantly less than the $534,001 we generated in the year ended December 31, 2010. The decrease is primarily due to the decrease in revenues from the loss in Staf*Tek’s contracted employees whom either fulfilled their contracts or were laid off. For the year ending December 31, 2011, Staf*Tek's total service revenues decreased by $66,094, when compared to the total service revenues for 2010.
Our ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements, and the development of operational solutions to achieve and maintain profitable operations. We currently do not have adequate resources to fund our operations and we will need to raise funds and/or increase our revenues in order to sustain our operations. Management plans to finance our operating and capital requirements through business alliances, such as strategic or financial transactions with third parties, the sale of securities, or other financing arrangements. Amounts raised will be used for working capital purposes, to further develop our services, and to provide financing for marketing and promotion of our business. While our Management is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations.
These conditions raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue in existence. (See "Risk Factors" and "Financial Statements Footnote 1.")
Since inception the Staf*Tek business has been the recruiting and the placement of professional technical personnel on a temporary and permanent basis in the Tulsa, Oklahoma area. Staf*Tek assists its clients with projects that require specialized expertise ranging from multiple platform systems integration to end-user support, including specialists in programming, networking, systems integration, database design and help desk support, as well as providing qualified candidates in senior and entry level finance and accounting.
Results of Operations for the Twelve Months Ended December 31, 2011 and 2010
Net Revenues
Net Revenues for the twelve months ended December 31, 2011 decreased to $467,907 from $534,001 for the twelve months ended December 31, 2010. The decrease in net revenues of 66,094 or approximately 12%, over the 2010 period is due primarily to decreased revenues generated by the loss of contracted employees and a decrease in hiring due to economic conditions since the prior period.
Cost of Revenues
Cost of Revenues for the twelve months ended December 31, 2011 decreased to $342,470 from $403,291 for the twelve months ended December 31, 2010. The overall decrease in cost of revenues of $60,821, or approximately 15%, over the 2011 period is directly attributable to the cost associated with the decrease in number of newly contracted employees described above.
Gross Margin
The overall gross margin for the twelve months ended December 31, 2011 decreased to $125,437 from $130,710 for the twelve months ended December 31, 2010. The overall decrease in gross margin of $5,273 or approximately 4% over the 2011 period is directly attributable to increased costs in hiring and retaining our newly contracted employees.
Operating Expenses
Total operating expenses for the twelve months ended December 31, 2011 increased to $545,389 from $356,545 for the twelve months ended December 31, 2010. Reasons for the overall increase in operating expenses of $188,844 or approximately 53%, over the 2010 period is covered below in our discussions of General and Administrative Expenses and Stock-Based Compensation.
General and Administrative Expenses
General and administrative expenses for the twelve months ended December 31, 2011 increased to $544,240 from $355,396 for the twelve months ended December 31, 2010. The increase in general and administrative expenses of $188,844 or approximately 53%, over the 2010 period is due primarily to the $156,067 charge resulting from the modification of stock options.
Stock-Based Compensation - Modification of Common Stock Options
On August 10, 2011 the Company's board of directors extended the deadline for the exercise of the 460,000 stock options outstanding by one year, from August 24, 2011 to August 24, 2012. The extension was considered a modification of the original stock options. Accordingly, the Company re-valued the stock options, which resulted in a charge to stock-based compensation totaling $156,067.
Total Operating Income and Losses
Total operating losses for the twelve months ended December 31, 2011 increased to $419,952 from operating losses of $225,835 for the twelve months ended December 31, 2010. The overall increase in operating losses of $194,117 or approximately 86% over the 2010 period is primarily due to the reduction in gross margin and $156,067 charge resulting from the modification of stock options.
Net Other Expenses
Net other expenses for the twelve months ended December 31, 2011 decreased to $25,626 from $58,238 for the twelve months ended December 31, 2010. The overall decrease in our other expenses of $32,612, or approximately 56% over the 2010 period is primarily due to a decrease in expense during 2010.
Interest Expense
Interest expense for the twelve months ended December 31, 2011 decreased to $25,701 from $27,738 for the twelve months ended December 31, 2010. The overall decrease in our interest expense of $2,037 or approximately 7% over the 2010 period is due primarily to the decrease of interest bearing debt.
Net Loss
Net loss for the twelve months ended December 31, 2011 increased to $445,578 from $284,073 for the twelve months ended December 31, 2010. This increase in net loss of $161,505 or approximately 57% over the 2010 period is due primarily to the $156,067 charge resulting from the modification of stock options.
Liquidity and Capital Resources
General
For the twelve months ended December 31, 2011, we had negative cash flows resulting from $236,955 of cash used in our operating activities and $231,358 of cash provided by our financing activities. Accordingly, for the twelve months ended December 31, 2011, our funds from operations were not sufficient to cover our daily operations as further explained below.
Cash Flows from Operating Activities
Net cash used in our operating activities of $236,955 for the twelve months ended December 31, 2011 was primarily attributable to the net loss and partially offset by depreciation and stock-based compensation expenses, increases in accounts receivable, accounts payable and accrued liabilities.
Cash Flows from Investing Activities
Net cash used in our investing activities of $0 for the twelve months ended December 31, 2011.
Cash Flows from Financing Activities
Net cash provided by our financing activities of $231,358 for the twelve months ended December 31, 2011 primarily from proceeds of common stock sales and related party loans.
Internal Sources of Liquidity
For the twelve months ended December 31, 2011, the revenues generated from our operations were insufficient to fund our daily operations. Gross profit for fiscal year 2011 was $125,437, which was insufficient to meet our operating expenses of $545,389 for the same period. There is no assurance that funds from our future operations will meet the requirements of our daily operations in the future. In the event that funds from our operations will be insufficient to meet our operating requirements, we will need to seek other sources of financing to maintain liquidity.
External Sources of Liquidity
We actively pursue all potential financing options as we look to secure additional funds to both stabilize and grow our business operations. Our management will review any financing options at their disposal, and will judge each potential source of funds on its individual merits. There can be no assurance that we will be able to secure additional funds from debt or equity financing, as and when we need to, or if we can, that the terms of such financing will be favorable to us or our existing stockholders.
As of December 31, 2011, we have debt in the total aggregate amount of $192,720, as summarized in Notes 2 and 4 to the financial statements. This debt was incurred to pay our operating costs, compliance costs and legal fees. Of this debt, as of December 31, 201, $155,020 represented the balance of a bank loan which is secured by all of our assets. This bank loan carries interest of 6.5% per annum and requires monthly payment of $2,698 per month with a balloon payment in the amount of $115,406 coming due on August 31, 2013. In the event we default on this loan, the bank may foreclose on our assets.
During the year ended December 31, 2011, we sold 440,000 shares of our common stock to 12 accredited investors at a price of $0.50 per share for gross proceeds of $220,000.
Our business plan involves, in part, increasing the number of employees placed both on a temporary and permanent basis. Such increased placement is expected to result in increased profit to us, although it also results in increased short- term cash needs. We have utilized net revenues, the proceeds from a number of private sales of our equity securities, the exercise of options, the issuance of promissory notes and our line of credit to meet our working capital requirements. We are reluctant to incur further debt and intend to rely upon net revenues and private sales of equity securities to meet our liquidity needs for the next 12 months.
Our liquidity and capital resources, as well as business prospects, are all subject to the risks disclosed in Item 1A, among others.
Preferred A Stock Dividends
Our Series A Shares have a stated value of $3.00 per share. Each holder of Series A Shares is entitled to receive a dividend equal 6.75% of the stated value of the Series A Shares payable on each anniversary of the date of issuance of such shares. The Company paid $16,128 in Series A dividends during the year ending December 31, 2011 leaving an accrued balance in the amount of $42,047, of which $21,504 was due as of December 31, 2011. The Series A dividend payments schedule was determined from a settlement agreement, as disclosed in an 8-K released on May 9, 2010.
The preferred A stock may be converted to the Company's common stock at the rate of one share of e preferred A stock for one share of common stock at any time by the shareholder. The convertible preferred A stock can be called for redemption by the Company no sooner than two (2) years after the date of issuance, and only if the Company's common stock is trading on a recognized United States stock exchange for a period of no less than thirty consecutive trading days at a market value of $5.00 or more per share. However, as of this date, the stock has not traded at that amount. In September 2009, the three largest holders of the Series A shares converted 380,500 shares of Series A shares to common stock on a one-to-one basis. Following this conversion, only 5,708 shares of Series A stock remain outstanding.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Financial Statements and supplementary data are included beginning immediately following the signature page to this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer and the Company’s Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2011 and had concluded that the Company’s disclosure controls and procedures are effective. There have been no changes in our internal control over financial reporting during the year ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during the year ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Evaluation of Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and disposition of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of our Company’s subsidiaries.
Our management performed an assessment as of December 31, 2011 of the effectiveness of our internal controls over financial reporting based upon the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and concluded that our internal control over financial reporting was effective as of December 31, 2011.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following information sets forth the names of the directors, executive officers, promoters control persons of the Company, their present positions with the Company, and their biographical information.
Name
Age
Position(s) Held
Date Service Began
Gerald McIlhargey
President, Chief Executive Officer and Director
March 2004
Kenneth L. Johnson
Secretary, Treasurer and Director
April 2000
Bruce Schreiner
Director
October 2003
Donal Ford
Director
August 2006
Maureen O’Brien
Director
August 2006
John Blackmon
President of Staf*Tek Services Inc.
June 2004
Gerald McIlhargey - Mr. McIlhargey has been a Director of St. Joseph since March of 2004. Mr. McIlhargey has spent over 26 years in management consulting for public companies. In his various management roles, Mr. McIlhargey has extensive experience in marketing and manufacturing as well as the financing of public companies. Mr. McIlhargey has had a key role with several public companies, including International Corona Resources, Collingwood Energy, Sense Technologies Inc. and Maple Leaf Petroleum. Mr. McIlhargey received a Bachelor of Education degree from Simon Fraser University in British Columbia, Canada in 1972.
Kenneth L. Johnson - Mr. Johnson has been a Director and Secretary/Treasurer of the Company since April of 2000. Mr. Johnson has been the Secretary/Treasurer and Director of Staf*Tek from December of 2003, to the present. For the past nine years, Mr. Johnson has been employed as a senior support representative with College Bookstore Management Systems (CMBS), a division of Nebraska Book Co., Inc., a provider of point of sale and inventory control computer software for the college bookstore industry. Mr. Johnson is involved in product development, customer support and training. Mr. Johnson graduated from Hastings College in 1985, earning a Bachelor of Arts Degree in Business Administration.
Bruce E. Schreiner, CPA - Mr. Schreiner, CPA, has been a Director of the Company since October of 2003. Mr. Schreiner has also been a Director of Staf*Tek Services, Inc. since October, 2003, to the present. Mr. Schreiner is a partner in the accounting firm of Schroeder & Schreiner, P.C. He served as an Agent with the Internal Revenue Service for over five years, culminating in an appointment to the Technical and Review Staff of Omaha, Nebraska, for the Nebraska District. Mr. Schreiner is a member of the American Institute and Nebraska Society of Certified Public Accountants and the Grand Island Area Chamber of Commerce. Mr. Schreiner is currently on the Board of Directors of Sense Technologies, Inc., a public company. Mr. Schreiner graduated magna cum laude from Hastings College in 1975 earning a Bachelor of Arts Degree in both Economics and Business Administration with emphasis in accounting.
Donal Kent Ford - Mr. Ford has been a Director of the Company since August 24, 2006. For the past ten years Mr. Ford has been President of Pinnacle Financial Services, Inc., a third party administrator for pension and profit-sharing plans located in Lantana, FL. Mr. Ford is a Credentialed Member of the American Society of Pension Actuaries and is actively involved in the South Florida Benefits Council. Mr. Ford has a Bachelor of Science in Business Administration from the University of Florida and a Doctor of Chiropractic from Life University. He is also a Certified Pension Consultant with the American Society of Pension Professionals and Actuaries.
Maureen O’Brien - Ms. O’Brien has been a Director of the Company since August 24, 2006. For the past seven years Ms. O'Brien has worked as Executive Assistant to David Core, CEO of Pinnacle Financial Services, Inc. For seven years prior to that Ms. O'Brien specialized in startup ventures with Real Applications, Inc. which included integrating an acquired programming services company.
John Blackmon - Mr. Blackmon has been Staf*Tek’s President since August 24, 2006. Recently he has expanded staffing services to include senior and entry-level finance and accounting services. Before joining Staf*Tek, Mr. Blackmon was a Senior Manager of IT with MCI/WorldCom. Mr. Blackmon joined MCI/WorldCom, now Verizon, in 1997 in the Operations organization and was quickly moved to the IT organization where his responsibilities included operations management, management of both technical and support organizations, and progressing to lead the development and implementation of all E*Commerce application solutions for the Wholesale division of WorldCom.
Term of Office
Our directors are elected for a one-year term to hold office until the next annual general meeting of our shareholders, or until removed from office in accordance with our bylaws and applicable law. Our officers are appointed by our Board of Directors and hold office until removed by the Board.
Family Relationships
There are no family relationships among the officers and directors, nor are there any arrangements or understanding between any of the directors or officers of our Company or any other person pursuant to which any Officer or Director was or is to be selected as an officer or director.
Involvement in Certain Legal Proceedings
During the last ten years, none of our Directors, persons nominated to become Directors, or executive officer were subject to any of the following events material to an evaluation of the ability or integrity of any such person:
●A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
●Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
●Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
●Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
●Engaging in any type of business practice; or
●Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
●Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) Item 401 of Regulation S-K, or to be associated with persons engaged in any such activity;
●Such person was found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission (the “Commission”) to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;
●Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
●Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
●Any Federal or State securities or commodities law or regulation; or
●Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
●Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
●Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Committees of the Board of Directors; Meetings
During the year ended December 31, 2011, the Board met four times. During fiscal year 2011, no director attended fewer than 75% of the aggregate number of meetings of the Board and committees on which such director served.
The Board has two standing committees, the Audit Committee and the Compensation Committee. The Board does not have a separate Nominating Committee and performs all of the functions of that committee.
The Audit Committee
The Audit Committee has as its primary responsibilities the appointment of the independent auditor for the Company, the pre-approval of all audit and non-audit services, and assistance to the Board in monitoring the integrity of our financial statements, the independent auditor's qualifications, independence and performance and our compliance with legal requirements. The Audit Committee has adopted a written charter, which was mailed to its shareholders in 2006. During the year ended December 31, 2011, the Audit Committee met one time. Bruce Schreiner, Donal Ford, and Maureen O’Brien are the current members of the Audit Committee.
Since we are not a "listed" company, we are not subject to rules requiring the members of our Audit Committee to be independent; however we use the rules of The NASDAQ Stock Market in determining whether directors are independent for disclosure purposes. Based on its review of the applicable rules of The NASDAQ Stock Market governing audit committee membership, the Board believes that all members of the Audit Committee are "independent" within the meaning of such rules.
The Securities and Exchange Commission (“SEC”) requires a company to disclose whether it has an "Audit Committee Financial Expert" serving on its audit committee. Based on its review of the criteria of an Audit Committee Financial Expert under the rule adopted by the SEC, the Board believes that one member of the Audit Committee, Mr. Schreiner, qualifies as an Audit Committee Financial Expert. Each of the other current members have made significant contributions and provided valuable service to St. Joseph and its stockholders as members of the Audit Committee and the Board believes that each of them has demonstrated that he is capable of (i) understanding generally accepted accounting principles ("GAAP") and financial statements, (ii) assessing the general application of GAAP principles in connection with the accounting for estimates, accruals and reserves, (iii) analyzing and evaluating our financial statements, (iv) understanding internal controls and procedures for financial reporting, and (v) understanding audit committee functions, all of which are attributes of an Audit Committee Financial Expert under the rule adopted by the SEC. Given the business experience and acumen of these individuals and their service as members of the Audit Committee, the Board believes that each of them is qualified to carry out all duties and responsibilities of the Audit Committee.
Compensation Committee
The Compensation Committee recommends to the Board annual salaries for senior management and reviews all company benefit plans. During the year ended December 31, 2011, the Compensation Committee met one time and reviewed the compensation of all St. Joseph employees. The current members of the Compensation Committee are Bruce Schreiner, Kenneth Johnson, and Donal Ford.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act") requires our officers and directors and persons owning more than 10% of our Common Stock to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and persons who are the beneficial owners of more than 10% of the common stock of the Company are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely upon review of the copies of such reports furnished to us during, and with respect to, the fiscal year ended December 31, 2011 or any written representations we received from a director, officer, or beneficial owner of more than 10% of our common stock that no other reports were required during that period, we believe that, for the fiscal year ended December 31, 2011, all Section 16(a) filing requirements applicable to our reporting persons were met.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The code of ethics can be viewed on our website: www.stjosephinc.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation of our named executive officers during 2009, 2010 and 2011:
Summary Compensation Table
Compensation Summary
Gerald McIlhargey. Mr. McIlhargey was appointed President and Chief Executive Officer of our Company on May 17, 2006. Mr. McIlhargey has served as a Director of our Company since March of 2004. We do not have an employment agreement with Mr. McIlhargey and he is not receiving any compensation for serving as our Acting President. On August 24, 2006, he received options to purchase 100,000 shares of our common stock for agreeing to serve as a Director on our Board. The options have an exercise price of $1.05 per share and expire on August 24, 2012.
Kenneth L. Johnson. We do not have an employment agreement with Mr. Johnson and he is not receiving any compensation for serving as our Secretary and Treasurer. On August 24, 2006, he received options to purchase 50,000 shares of our common stock for agreeing to serve as a Director on our Board. In December 2009 Mr. Johnson exercised 25,000 options. His remaining 25,000 options have an exercise price of $1.05 per share and expire on August 24, 2012.
John Blackmon. Mr. Blackmon is the President of our wholly-owned subsidiary, Staf*Tek Services, Inc. We do not have an employment agreement with Mr. Blackmon. He receives an annual salary of $77,000 as compensation for serving as Staf*Tek Services, Inc.’s President. On August 24, 2006, he received options to purchase 50,000 shares of our common stock for agreeing to serve as President of Staf*Tek Services, Inc. The options have an exercise price of $1.05 per share and expire on August 24, 2012.
OUTSTANDING EQUITY AWARDS AT FISCAL-END
The following table provides information concerning equity awards as of our 2011 fiscal year end, December 31, 2011, held by each of our named executive officers.
Director Compensation
The directors receive no annual compensation other than the options they received for serving on the board of directors of St. Joseph; however, they are reimbursed for out-of-pocket expenses incurred in connection with the Company's business.
On August 24, 2006 each of the directors listed below received fully vested options to purchase up to 50,000 shares of our common stock for agreeing to serve as our Directors. The options have an exercise price of $1.05 and expire on August 24, 2012. All of these options were still outstanding and unexercised as of December 31, 2011.
As shown by the following table, none of our directors who are not executive officers received any compensation during our fiscal year ended December 31, 2011:
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is disclosed in Item 5 under “Equity Compensation Plans.”
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 30, 2012 based on information obtained from the persons named below, with respect to the beneficial ownership of our common and preferred stock by (i) each person (including groups) known to us to be the beneficial owner of more than 5 percent of our common stock, and (ii) each Director and Officer, and (iii) all Directors and Officers of the Company, as a group. Except as otherwise indicated, all stockholders have sole voting and investment power with respect to the shares listed as beneficially owned by them, subject to the rights of spouses under applicable community property laws.
(1)The address for Messrs. McIlhargey, Johnson, Schreiner, Ford, Ms. O’Brien and Mr. Blackmon is: c/o St. Joseph, Inc., 4870 S. Lewis, Suite 250, Tulsa, Oklahoma 74105. The address for Hong Kong Base, Ltd. is Unit C, 26th Floor, CNT Tower, 338 Hennessey Road, Wanchai, Hong Kong, China. The address for Desert Projects, Inc. is 73-185, Suite D, Highway 111, Palm Desert, California, 92260. The address for Ms. Bell is Route 1 Box 650, Haskell, Oklahoma 74436. The address for Ms. Quinn is 5800 E. Skelly Drive, Suite 1230, Tulsa, OK 7413. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2)Based upon 11,612,302 shares of common stock and 5,702 shares of Series A Preferred Stock issued and outstanding on March 30, 2012. Percentages are rounded to the nearest one hundredth of a percent. As required by Item 403 of Regulation S-B, calculated on the basis of the amount of outstanding securities plus, for each person or group, any securities that person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. The percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
(3)Includes fully vested options to purchase 100,000 shares of our common stock at an exercise price of $1.05 per share.
(4)Includes fully vested options to purchase 25,000 shares of our common stock at an exercise price of $1.05 per share.
(5)Includes fully vested options to purchase 50,000 shares of our common stock at an exercise price of $1.05 per share.
(6)Hong Kong Base Ltd is a corporation organized under the laws of Hong Kong and is beneficially owned by Yvonne Chun Siu Fun.
(7)Desert Projects, Inc. is a corporation organized under the laws of the State of Nevada and is beneficially owned by James Ralph Houston.
(8)Includes 5,708 shares of common stock, which would be issuable on conversion of the 5,702 shares of Series A Preferred Stock held by Ms. Quinn.
Equity Compensation Plans
The following table sets forth information as of December 31, 2011 with respect to compensation plans under which we are authorized to issue shares of our common stock, aggregated as follows:
o all compensation plans previously approved by security holders; and
o all compensation plans not previously approved by security holders.
(1)On August 24, 2006, we adopted our 2006 Stock Option Plan, which reserved 1,125,000 shares of our common stock for issuance pursuant to the plan. On August 24, 2006, our Board of Directors granted stock options to our officers, directors and employees pursuant to the plan to purchase 410,000 share of our common stock at an exercise price of $1.05 per share and a term that ends on August 24, 2012, which were all deemed effective on August 24, 2006. 25,000 of these stock options were exercised. On December 1, 2010, a further 75,000 options were granted which will expire on August 24, 2012.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than disclosed below, none of the directors or executive officers of the Company nor any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to all outstanding shares of the Company, nor any promoter of the Company, nor any relative or spouse of any of the foregoing persons has any material interest, direct or indirect, in any transaction since the beginning of the Company’s 2011 fiscal year or in any presently proposed transaction which, in either case, has or will exceed one percent of the average of the Company’s total assets at year end for the last two completed fiscal years. The Company has not entered into transactions with any member of the immediate families of the foregoing persons, nor is any such transaction proposed
Gerald McIlhargey
COLEMC Investments, LTD., a Canadian company owned by Gerry McIlhargey, President and Director of the Company, has advanced the Company a total of $21,000 for working capital in exchange for a promissory note. The note matured on December 31, 2011 and does not bear any interest. $5,000 was advanced to the Company during the second quarter of 2011 on June 10, 2011. Previously, $5,000 was advanced on September 23, 2009; $5,000 was advanced on November 4, 2009; and $6,000 was advanced on October 13, 2010. At December 31, 2011 and 2010, the amount due to this affiliated entity totaled $21,000 and $16,000, respectively.
John Blackmon
During the year ended December 31, 2011, John Blackmon, President of StafTek Services, Inc. purchased 20,000 shares of our common stock in a private placement for $0.50 per share.
During the year ended December 31, 2010, John Blackmon, President of StafTek Services, Inc. purchased 10,000 shares of our common stock in a private placement for $0.50 per share.
DIRECTOR INDEPENDENCE
Although we are not “listed” by any exchange with established criteria for determining director independence, we use the criteria established by The NASDAQ Stock Market governing audit committee membership for making such determination for disclosure purposes. Based on its review of the applicable rules of The NASDAQ Stock Market governing audit committee membership, the Board believes that Bruce Schreiner, Donal Ford, and Maureen O’Brien would be deemed "independent" within the meaning of such rules.
As Bruce Schreiner, Donal Ford, and Maureen O’Brien are the only directors on our audit and compensation committees, such committees have no directors who are not independent.
Because we do not have a nominating committee, our entire Board acts in such capacity, including our two directors who are not independent, Gerald McIlhargey and Kenneth L. Johnson.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
We appointed the accounting firm of Cordovano and Honeck, LLP, located at 88 Inverness Circle East, Building M-103, Englewood, Colorado 80112, to serve as our independent auditors for the fiscal years ended December 31, 2010 and 2009. On September 2, 2011, we appointed Borgers and Cutler CPAs PC, located at 2727 Bryant Street, Suite 104, Denver, CO 80211, to serve as our independent auditor for the fiscal years ended December 31, 2011. During our fiscal years 2011and 2010, accrued fees owed to Cordovano and Honeck, LLP and Borgers and Cutler CPA’s PC are as follows:
Audit Fees
Audit Fees and Audit Related Fees consist of fees billed for professional services rendered for auditing our Financial Statements, reviews of interim Financial Statements included in quarterly reports, services performed in connection with other filings with the Securities & Exchange Commission and related comfort letters and other services that are normally provided by our independent auditors in connection with statutory and regulatory filings or engagements.
Tax Fees
Tax Fees consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
All Other Fees
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NO.
DESCRIPTION OF DOCUMENT
2.1 (5)
Agreement of Share Exchange and Purchase and Sale dated January 2, 2004 between St. Joseph, Inc. and Phyllis L. Bell, and Paul D. Aelmore and Staf-Tek Services, Inc.
3.1 (1)
Articles of Incorporation of Pottery Connection, Inc.
3.2 (1)
Articles of Amendment to Articles of Incorporation as filed with the Colorado Secretary of State on January 19, 2001.
3.3 (5)
Articles of Amendment to Articles of Incorporation as filed with the Colorado Secretary of State on November 6, 2003.
3.4 (6)
Articles of Amendment to Articles of Incorporation as filed with the Colorado Secretary of State on September 29, 2006.
3.5 (7)
Articles of Amendment to the Articles of Incorporation filed with the Colorado Secretary of State on May 18, 2007.
3.6 (7)
Articles of Amendment to the Articles of Incorporation filed with the Colorado Secretary of State on May 23, 2007.
3.5 (3)
Bylaws of St. Joseph, Inc. (formerly known as Pottery Connection, Inc.)
4.1 (1)
Specimen form of St. Joseph’s stock certificate for shares of its common stock.
4.2 (10)
2006 Stock Option Plan.
10.1 (3)
Exclusive Agreement between St. Joseph Energy, Inc. and David Johnson.
10.2 (2)
Form of User Agreement for St. Joseph, Inc.
10.3 (9)
Promissory Note dated June 16, 2005 for $96,000 issued by St. Joseph, Inc. to John H. Simmons.
10.4 (9)
Promissory Note dated December 28, 2006 for $25,000 issued by Staf*Tek Services, Inc. to Gerry McIlhargey.
10.5 (8)
Form of Letter Agreement for conversion of Series B Stock to common stock on December 31, 2007.
10.6 (8)
Form of Letter Agreement for conversion of promissory notes to common stock on December 31, 2007.
14.1 (9)
Code of Ethics.
21.1 (9)
Subsidiaries of St. Joseph, Inc.
31.1*
Principal Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Principal Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Principal Executive Officer Certification under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Principal Financial Officer Certification under Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Presentation Linkbase
* Filed herewith
(1)Filed on July 23, 2002 as an exhibit to St. Joseph’s registration statement on Form 10SB and incorporated herein by reference.
(2)Filed on April 15, 2003 as an exhibit to St. Joseph’s annual report on Form 10-KSB for the fiscal year ended December 31, 2002 and incorporated herein by reference.
(3)Filed on June 3, 2003 as an exhibit to St. Joseph’s amendment to registration statement on Form 10SB12G/A and incorporated herein by reference.
(4)Filed on April 15, 2004 as an exhibit to St. Joseph’s annual report on Form 10-KSB for the fiscal year ended December 31, 2003 and incorporated herein by reference.
(5)Filed on May 5, 2004 as an exhibit to St. Joseph’s report on Form 8-K dated April 30, 2004 and incorporated herein by reference.
(6)Filed on November 20, 2006 as an exhibit to St. Joseph’s quarterly report on Form 10-QSB for the quarterly period ended September 30, 2006 and incorporated herein by reference.
(7)Filed on May 23, 2007 as an exhibit to St. Joseph’s report on Form 8-K dated May 18, 2007 and incorporated herein by reference.
(8)Filed on January 28, 2008 as an exhibit to St. Joseph’s report on Form 8-K dated December 31, 2007 and incorporated herein by reference.
(9)Filed on April 20, 2007 as an exhibit to St. Joseph’s amendment 1 to annual report on Form 10-KSB for the fiscal year ended December 31, 2006 and incorporated herein by reference.
(10)Filed on August 3, 2006 as an exhibit to St. Joseph’s proxy statement on Schedule and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
St. Joseph, Inc.
By: /s/Gerry McIlhargey
Gerry McIlhargey, President and Chief Executive Officer
/s/Kenneth L. Johnson
Kenneth L. Johnson,
Secretary-Treasurer and Director
Dated: March 30, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title
Date
/s/Gerry McIlhargey
March 30, 2012
Gerry McIlhargey, President,
Chief Executive Officer and
Director
/s/Kenneth L. Johnson
March 30, 2012
Kenneth L. Johnson,
Secretary-Treasurer and Director
/s/Bruce Schreiner
March 30, 2012
Bruce Schreiner, Director
/s/Donal Ford
March 30, 2012
Donal Ford, Director
/s/Maureen O’Brien
March 30, 2012
Maureen O’Brien, Director
ST. JOSEPH, INC.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of St. Joseph, Inc.:
We have audited the accompanying balance sheets of St. Joseph, Inc. (“the Company”) as of December 31, 2011 and 2010 and the related statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of St. Joseph, Inc., as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles in the United States of America.
The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly, we express no such opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Borgers & Cutler CPA’s PLLC
Borgers & Cutler CPA’s PLLC
Denver, CO
March 30, 2012
ST. JOSEPH, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying footnotes are an integral part of these financial statements
ST. JOSEPH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying footnotes are an integral part of these financial statements
ST. JOSEPH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
The accompanying footnotes are an integral part of these financial statements
ST. JOSEPH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
The accompanying footnotes are an integral part of these financial statements
ST. JOSEPH, INC.
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, 2011 and 2010 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, 2011 and 2010. In our financial statements for the fiscal years ended December 31, 2011 and 2010, 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, 2011 and 2010.
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, 2011 and 2010.
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 $13,792 and $1,237 for the years ended December 31, 2011 and 2010, 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, 2010 were not included in the diluted loss per share as all 5,708 preferred shares and all 460,000 options were anti-dilutive as the Company incurred losses during the year. Preferred stock and common stock options outstanding at December 31, 2011 were not included in the diluted loss per share as all 5,708 preferred shares and all 460,000 options were anti-dilutive as the Company incurred losses during the year. Therefore, basic and diluted losses per share at December 31, 2010 and 2011 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 granted 75,000 options during 2010. The fair value was calculated at approximately $0.01 per share or $750. No compensation expense has been recorded as the amount was considered to be inconsequential during the year ended December 31, 2010. The Company modified all 460,000 of its outstanding stock options in August 2011 and recognized an expense of $156,067 (see Note 7) in its 2011 financial statements in respect of this modification.
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
COLEMC Investments, LTD., a Canadian company owned by Gerry McIlhargey, President and Director of the Company, has advanced the Company a total of $21,000 for working capital in exchange for a promissory note. The note matured on December 31, 2011 and does not bear any interest. COLEMC further advanced $5,000 to the Company on June 10, 2011. Previously, COLEMAC had advanced $5,000 on September 23, 2009; $5,000 on November 4, 2009; and $6,000 on October 13, 2010. At December 31, 2011 and 2010, the amount due to this affiliated entity totaled $21,000 and $16,000, respectively.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2011, an officer advanced the Company $16,700 for working capital in exchange for a promissory note. The note matured on December 31, 2011 and does not bear any interest. The note has been extended until December 31, 2012.
On June 30, 2011, the Company borrowed $5,800 from an employee under the terms of a promissory note. The terms of the note required that the entire amount be repaid by July 30, 2011 with no interest. The note was subsequently repaid in full on July 5, 2011.
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 (see Note 7) for total consideration of $10,000.
During the year ended December 31, 2010, the Company sold 10,000 shares of its common stock in a private placement for $0.50 per share to an officer of the Company's subsidiary (see Note 7) for total consideration of $5,000.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2011 and 2010:
Depreciation expense totaled $1,149 and $1,149, respectively, for the years ended December 31, 2011 and 2010.
NOTE 4 - BANK LOAN
The Company had a $200,000 line of credit of which $180,000 had been drawn down and was outstanding at December 31, 2009.
In August 2010, the Company converted the line of credit to a bank loan which is collateralized by all of Staf*Tek assets, 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. The interest rate on the loan is 6.5 % and the monthly principal and interest payment is $2,698. A final balloon payment of shall be due on the maturity date of August 31, 2013 in the amount equal to the then unpaid principal and accrued and unpaid interest. As of December 31, 2011, the bank loan agreement has not been executed and finalized by either party. Accordingly, the bank loan balance of $155,020 has been classified as a current liability on the accompanying consolidated financial statements. The Company continues to make the required payments according to the proposed bank loan agreement and is current on the terms of the proposed loan note as of December 31, 2011. Pending signature of the loan note, the borrowing is repayable in full on demand. Assuming the loan note is signed, the future maturity payments on the bank loan are as follow:
Interest expense on the bank loan and line of credit were $10,461 and $11,913, during the years ended December 31, 2011 and 2010, respectively.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Company conducts a significant portion of its operations with one customer. During the year ended December 31, 2011 and 2010 approximately 88% and 44% 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:
At December 31, 2011, the Company's current tax benefit consisted of a net tax asset of $544,235 due to operating loss carryforwards of approximately $1,868,124 which have been fully provided against in the valuation allowance of $544,235. 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, 2011 and 2010 were $169,141 and $84,256, respectively. Net operating loss carry forwards will expire through 2031.
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 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, 2011. During the year ended December 31, 2011, 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.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is currently 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 of Series A Convertible Preferred Stock dividends total $42,047 and $58,175 as of December 31, 2011 and 2010, respectively.
Common Stock
In a private placement during the year ended December 31, 2011, the Company sold 440,000 shares of common stock to accredited investors at a price of $0.50 per share for gross proceeds totaling $220,000. 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. Of these shares sold in 2011, 20,000 were sold to an officer of the Company's subsidiary.
During the year ended December 31, 2010, the Company sold 335,000 shares of common stock to 8 accredited investors at a price of $0.50 per share for gross proceeds of $167,500. 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 to 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. Of these shares sold in 2011, 10,000 were sold to an officer of the Company's subsidiary.
In June 2010, the Company issued 15,000 shares of common stock to Zachary Karo, a former employee of StafTek Services, Inc., as part of the settlement agreement described in Note 8 - Legal Proceedings. The shares were valued at $10,500 or $0.70 per share.
Equity Awards Granted to Employees
On December 1, 2010, the Company granted options to one employee to purchase 75,000 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 $0.55 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 $700 was not recognized as the amount was deemed to be immaterial.
The fair value for the options granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following:
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule summarizes the changes in the Company’s equity awards for the years ended December 31, 2011 and 2010.
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 extension was considered a modification of the original stock options. Accordingly, the Company re-valued the stock options, which resulted in a charge to stock-based compensation totaling $156,067.
All issued stock options were fully vested as of December 31, 2011 and 2010. 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, 2011, and then multiplying that amount by the number of options. The exercise price exceeds the market value of the stock on December 31, 2011; 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 - LEGAL PROCEEDINGS
As previously disclosed in a quarterly report on Form 10-QSB, filed with the SEC on November 20, 2006, on July 28, 2006, Zachary Karo, a former employee of StafTek Services, Inc. filed a lawsuit against the Company and its subsidiary Staf*Tek Services, Inc. in the district court in Tulsa County, Oklahoma, Case No. CJ 2006 04713, in connection with stock options allegedly granted to Mr. Karo. Mr. Karo alleged that he was granted an option to purchase up to 25,000 shares of the Company's common stock at $0.10 per share but that management refused to issue Mr. Karo such shares upon his attempt to exercise of the alleged option. In June 2010, Mr. Karo agreed to dismiss his lawsuit in consideration of a payment by the Company to Mr. Karo of $20,000 in cash and the issuance to him of 15,000 shares of common stock, valued at $10,500 or $0.70 per share.
ST. JOSEPH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 judgement, which was granted by the judge. On March 9, 2012, Stat*Tek Services, Inc. filed a motion to vacate the default judgement 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 still has not been served the lawsuit by Mr. McGowan's counsel. Mr. McGowan is seeking damages against Staf*Tek in an amount in excess of $75,000. Management deems the suit to be without merit and the costs of defending against the complaint could be substantial.
NOTE 9 - COMMITMENT
The Company leases office space in Tulsa, Oklahoma under operating lease expiring in April 2012. Future minimum payments due under the non-cancelable lease are as follows:
Rent expense during the years ended December 31, 2011 and 2010 were $35,907 and $35,758, respectively.
The Company paid $16,128 in Series A dividends during the year ending December 31, 2011 leaving accrued balance in the amount of $42,047 of which $21,504 was due as of December 31, 2011, pursuant to the terms of a settlement agreement, as disclosed in an 8-K released on May 9, 2010.
NOTE 10 - SUBSEQUENT EVENT
The Company has evaluated subsequent events through March 28, 2012. Other than those described above, there have been no subsequent events after December 31, 2011 for which disclosure is required.