ST. JOSEPH, INC. Notes to Condensed Consolidated
Financial Statements (Unaudited)
(1) Basis
of Presentation
The
condensed balance sheet at December 31, 2015 has been derived from financial statements included in the Form 10-K. The accompanying
unaudited financial statements at June 30, 2016 presented herein have been prepared by St. Joseph, Inc. (the “Company”)
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements should
be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report
on Form 10-K for the year ended December 31, 2015.
The
accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim
periods presented. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes. The results of operations
presented for the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year
ending December 31, 2016.
There
is no provision for dividends for the quarter to which this quarterly report relates other than the accrued dividends relating
to the preferred shares.
Financial
data presented herein are unaudited.
Going
Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company has
incurred recurring losses and has negative working capital and a net capital deficiency at June 30, 2016 and December 31, 2015.
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.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
(2) 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.
During
operation the Company, through its wholly-owned subsidiary, Staf*Tek, specialized in the recruitment and placement of professional
data processing and technical personnel for clients on both a permanent and contract basis. Due to economic conditions and in
anticipation of reverse acquisition and in an effort to eliminate expenses management shutdown the operational expense at Staf*Tek
by reducing the number of recruiters specializing in placement of professional technical personnel, as well as finance and accounting
personnel on a temporary and permanent basis. Staf*Tek is primarily a regional professional service firm located in the Tulsa,
Oklahoma area. Over the course of the last several years the area has experienced a downturn in the demand for highly specialized
and qualified personnel further identifying the need for the reduction in personnel and expense.
Due
to economic conditions the Company has discontinued its temporary and permanent staffing services and may or may not restart operations.
Recently
Adopted and Recently Enacted Accounting Pronouncements
In
September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) (“ASU 2015-16”). Topic 805 requires
that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period.
To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer
recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which
the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements,
the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to
the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is
required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion
of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if
the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal
years beginning December 15, 2015. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s
consolidated financial statements.
In
August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
(“ASU 2015-14”). The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year.
Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU
2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period.
Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting
periods with that reporting period.
In
April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation
of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a
direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported
as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted.
The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating
the impact of adoption of ASU 2015-03 on its balance sheets.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
Proposed
Reverse Acquisition of Zone USA, Inc.
On
June 15, 2016 the Company filed an 8K indicating that the Company was provided written notice of the termination of a nonbinding
letter of intent (the “Letter of Intent”) with Karavos Holdings Limited and its wholly owned subsidiary Zone USA,
Inc. (“Zone USA”). The contemplated acquisition was to include 100% of Karavos Holdings Limited, a holding company
which wholly owns Zone USA. The Letter of Intent was effected on August 7, 2012 and extended on February 26, 2015, and has been
subsequently mutually terminated on June 15, 2016.
Principles
of Consolidation
The
consolidated financial statements for the periods ended June 30, 2016 and 2015 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.
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 June 30, 2016 and December 31,
2015.
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:
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Level
1:
|
Quoted
prices in active markets for identical assets or liabilities.
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|
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Level
2:
|
Quoted
prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
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Level
3:
|
Unobservable
inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
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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.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
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 periods ended June 30, 2016 and 2015.
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 $315 and $702 for the periods ended
June 30, 2016 and December 31 2015, respectively.
Income/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 outstanding, 5,708 shares at June 30, 2016
is included in the diluted loss per share as the Company has net income for the six months ended June 30, 2016. Preferred stock
and common stock options outstanding at June 30, 2015 are not includable in the diluted loss per share as the Company had net
loss for the for the six months ended June 30, 2015.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
Income
Taxes
Income
taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets
and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the deductible when
the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available
to offset future taxable income and tax credits that are available to offset future federal income taxes.
The
Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns,
as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state tax return
in Oklahoma as “major” tax jurisdictions, as defined. The Company believes that its income tax filings positions and
deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on
the Company’s financial conditions, results of operations, or cash flow. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to ASC 740.
Stock-Based
Compensation:
The
Company recognizes share-based compensation based on the options’ fair value, net of estimated forfeitures on a straight
line basis over the requisite service periods, which is generally over the awards’ respective vesting period, or on an accelerated
basis over the estimated performance periods for options with performance conditions. The stock option fair value is estimated
on the grant date using the Black-Scholes option pricing model based on the underlying common stock closing price as of the date
of grant, the expected term, stock price volatility, and risk-free interest rates. The Company has modified its outstanding stock
options several times over the prior three years resulting in recognition of additional expenses (see Note 5).
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.
(3) Related
Party Transactions
In
prior years, COLEMC Investments, LTD., a Canadian Company owned by Gerry McIlhargey, President and Director of the Company, advanced
the Company a total of $45,000 for working capital in exchange for three promissory notes. The notes do not bear interest and
matured on December 31, 2014 and have been extended until December 31, 2016. The notes are not able to be converted to shares
of the Company.
During
the years ended December 31, 2012 and 2011, an officer advanced the Company $7,500 and $16,700, respectively, for working capital
in exchange for two promissory notes. During the year ended December 31, 2013, the officer advanced the Company an additional
$5,500. The total balance of the notes is $29,700 and do not bear any interest. The notes matured on December 31, 2014 and are
currently in default. The notes are not able to be converted into shares of the Company.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
(4) Notes
Payable
Bank
Loan
The
Company originally had a $200,000 line of credit with the bank since 2005. In August 2010, the Company converted its line of credit
with the bank to a bank loan, which is collateralized by all of assets of the Company’s subsidiary company, Staf*Tek, including
all receivables and property and equipment. On September 9, 2013, the Company received a default letter from the bank.
On
April 9, 2015, the Company entered into a Settlement Agreement for repayment of the bank loan, reducing the loan obligation to
$30,000. As of December 31, 2015, the Company fulfilled the settlement agreement and recognized $85,402 gain for debt restructuring
on default of the bank loan.
(5) Shareholders’
Deficit
Preferred
Stock
The
Board of Directors is authorized to issue shares of Series A Convertible Preferred Stock and to fix the number of shares in such
series, as well as the convertibility features of and divided yield of such series. In December 2003, the Company issued 386,208
shares of Series A Convertible Preferred Stock as part of the initial staffing company acquisition and 5,708 have not been converted
to common stock at June 30, 2016 and remain preferred shares.
Series
A Convertible Preferred Stock is convertible to one share of common stock and 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 state value of the Series A Shares payable on each anniversary
of the date of issuance of such shares.
The
Company is currently delinquent in making dividend payments pursuant to the terms of a settlement agreement, as disclosed in an
8-K released on May 9, 2009. The accrued balance due on Series A Convertible Preferred Stock dividends total $44,947 (unaudited)
and $44,359 as of June 30, 2016 and December 31, 2015, respectively. Interest accrued on Series A Convertible Preferred Stock
dividends total $578 for the six months ended June 30, 2016 and $2,312 for the year ended December 31, 2015. The Company will
commence dividend payments pursuant to the terms of a settlement agreement as funds are available.
Common
Stock
In
a private placement during the six months ended June 30, 2016, the Company sold 60,000 (unaudited) shares of common stock to accredited
investors at a price of $0.25 per share for gross proceeds totaling $15,000 (unaudited).
In
a private placement during the three months ended June 30, 2015, the Company sold 310,000 shares of common stock to accredited
investors at a price of $0.25 per share for gross proceeds totaling $77,500.
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.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
The
shares were offered and sold only to accredited investors; as such term is defined by Rule 501 of Regulation D. All of the shares
sold in the private placement are restricted securities pursuant to Rule 144.
Debt
Conversion
None
Equity
Awards Granted to Employees
On
September 9, 2014, the Company’s Board of Directors extended the deadline for the exercise of the 502,500 options by one
year from December 31, 2014 to December 31, 2015. In addition, the Board reduced the exercise price of the options from $1.05
to $0.50. Accordingly, the Company revalued the stock options, which resulted in a charge to share-based compensation totaling
$118,350 during the year ended December 31, 2014. On December 31, 2015 the options expired and each member of the Board of Directors
was granted a similar amount of shares for a period of one year, expiring on-December 31, 2016. The exercise price of $0.25 per
share is greater than the thirty day moving market price of $0.15 per share.
The
Company’s equity awards were not excersied and expired on December 31, 2016. There is no accounting impact because the exercise
price was greater than the market price. On June 7, 2017 417,500 were options were awarded to Board Members at an exercise price
of $0.10 per share.
(5) Income
Taxes
The
Company records its income taxes in accordance with ASC 740 Income Taxes. The Company is carrying over net operating losses from
all periods, resulting in no income taxes.
(6) Legal
Proceedings
On
or about January 24, 2012, our subsidiary, Staf*Tek Services, Inc. was served notice that Danny McGowan, a former employee hired
and assigned to work for Staf*Tek’s client as a contractor, filed a lawsuit against Staf*Tek Services, Inc. and it’s
client in the district court in Tulsa County, Oklahoma, Case No. CJ-2011-7039, in connection with a wrongful termination complaint.
Mr. McGowan alleges that he was terminated after one month of employment, but feels he had a guaranteed contract for six months.
The wording in his employment agreement that he identifies as guaranteeing his employment for six months was inserted at the request
of Staf*Tek’s client.
Staf*Tek’s
client terminated Mr. McGowan for performance issues after one month of employment. Mr. McGowan filed a lawsuit against Staf*Tek
and the client and subsequently filed a motion for default judgment, which was granted by the judge. On March 9, 2012, Stat*Tek
filed a motion to vacate the default judgment and requested a new trial. Staf*Tek has engaged counsel and intends to vigorously
defend this action. As of this date, the client that terminated Mr. McGowan has been dismissed from the lawsuit by the judge because
they had not been served within a six months of the original filing of the lawsuit by Mr. McGowan’s counsel. Mr. McGowan
and his attorney were three weeks late responding to our request for discovery and we requested dismissal. However, the judge
did not grant dismissal. Mr. McGowan filed a motion for partial summary judgment on June 12, 2014. The Company responded on June
27, 2014 and the motion for partial summary judgment was denied on July 29, 2014. Mr. McGowan is seeking damages against Staf*Tek
in an amount in excess of $75,000. Management deems the suit to be without merit, however, the costs of defending against the
complaint could be substantial. In the event judgment is made against the Company and payment deemed appropriate, it may force
the Company out of business. There has been no accrual for expenses related to this law suit.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
(7) Commitment
& Contingencies
The
Company currently leases office space in McKinney, Texas on a month-to-month basis. Rent expense for the six months ended June
30, 2016 and 2015 totaled $3,000 respectively (unaudited).
The
Company owes the following to the IRS for payroll taxes:
|
|
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6/30/2016
|
|
|
12/31/2015
|
|
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Federal
Withholding
|
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$
|
67,282
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|
$
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67,282
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Interest
|
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6,808
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5,798
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Penalties
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13,615
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11,597
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$
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87,705
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$
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84,677
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Federal
FICA
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$
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35,656
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$
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35,656
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Interest
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3,351
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2,816
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Penalties
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6,784
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|
|
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5,632
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$
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45,791
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$
|
44,104
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Interest
accrued on Federal Withholding taxes owed was $505 and $5,798 for the six months ended June 30, 2016 and twelve months ended December
31, 2015 respectively. Penalties accrued on Federal Withholding taxes owed was $369 and $11,597 for the six months ended June
30, 2016 and twelve months ended December 31, 2015 respectively. Interest accrued on Federal FICA taxes owed was $268 and $2,816
for the six months ended June 30, 2016 and twelve months ended December 31, 2015 respectively. Penalties accrued on Federal FICA
taxes owed was $535 and $5,632 for six months ended June 30, 2016 and twelve months ended December 31, 2015 respectively.
The
Company owes payroll taxes, interest and penalties to Oklahoma as follows:
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6/30/2016
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12/31/2015
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Oklahoma
Withholding
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$
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32,859
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$
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20,044
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The
Company owes unemployment taxes to Oklahoma as follows:
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6/30/2016
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12/31/2015
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Oklahoma
Unemployment
|
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$
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9,541
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$
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12,723
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The
Company has made twelve of eighteen installment payments toward its Oklahoma unemployment obligations. Due to cash flow restrictions
the payments have not been reinstated as of June 30, 2016.
ST.
JOSEPH, INC. Notes to Condensed Consolidated Financial Statements (Unaudited)
(8) Subsequent
Events
The
Company has evaluated subsequent events through June 15, 2017. Other than those described below, there have been no material subsequent
events after June 30, 2016 for which disclosure is required.
The
Company’s equity awards to employees and Board Members expired December 31, 2015. On June 7, 2017 417,500 options were awarded
to Board Members at an exercise price of $0.10 per share.
The
Company had no material changes in the status of any legal proceedings.
The
Company has the following liabilities as of June 30, 2016.
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Loan
Payable to Officer
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$
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45,000
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|
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Advance
from Officer
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$
|
29,700
|
|
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Accrued
Preferred Dividend Payable
|
|
$
|
44,648
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|
The
Company has 5,708 shares of Preferred Stock issued.
The
$45,000 advance from COLEMC Investments, LTD, a Canadian company owned by Gerry McIlhargey, President and Director of the Company,
as reflected in Related Party Transactions, has been extended until December 31, 2017.
There
are no changes in regard to unpaid state and federal taxes by way of settlements. The penalties and interest continue to accrue
and nothing has been paid as of the date of this filing.