Attached files

file filename
EX-32 - EXHIBIT 32 - GREENWOOD HALL, INC.s101464_ex32.htm
EX-31.1 - EXHIBIT 31.1 - GREENWOOD HALL, INC.s101464_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - GREENWOOD HALL, INC.s101464_ex31-2.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 31, 2015

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to ____________

 

Commission file number 333-184796 

 

GREENWOOD HALL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 99-0376273
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.

 

12424 Wilshire Blvd,. Suite 1030, Los Angeles, CA 90025
(Address of principal executive offices) (Zip Code)

 

424-268-3000
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

  

As of May 31, 2015, there were 41,503,980 shares of the issuer’s $.001 par value common stock issued and outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the last business day of the registrant’s most recently completed second fiscal quarter. 

 

 
 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION 2
Item 1. Financial Statements. 2
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations. 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 9
Item 4. Controls and Procedures. 9
   
PART II - OTHER INFORMATION 9
Item 1. Legal Proceedings 9
Item 1A. Risk Factors 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Mine Safety Disclosures. 10
Item 5. Other Information. 10
Item 6. Exhibits. 10
   
SIGNATURES 11

 

 
 

  

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Our unaudited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

 

It is the opinion of management that the unaudited interim financial statements for the quarter ended May 31, 2015 include all adjustments necessary in order to ensure that the unaudited interim financial statements are not misleading.

 

2
 

  

GREENWOOD HALL, INC.

INDEX TO FINANCIAL STATEMENTS 

 

Balance Sheets F-2
Statements of Operations  F-3
Statements of Cash Flows F-4
Notes to Financial Statements F-5 to F-15

 

 
 

 

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

May 31, 2015 AND AUGUST 31, 2014

 

   (Unaudited)   (Audited) 
   MAY 2015   AUG 2014 
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $-   $367,286 
Accounts receivable, net   727,140    1,039,065 
Prepaid expenses and other current assets   91,636    305,691 
Current assets to be disposed of   36,860    36,860 
           
TOTAL CURRENT ASSETS   855,636    1,748,902 
           
PROPERTY AND EQUIPMENT, net   149,717    211,525 
           
OTHER ASSETS          
Deposits and other assets   40,812    57,659 
           
TOTAL OTHER ASSETS   40,812    57,659 
           
TOTAL ASSETS  $1,046,165   $2,018,086 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
           
CURRENT LIABILITIES          
Accounts payable  $957,736   $835,423 
Accrued expenses   401,955    284,362 
Accrued payroll and related expenses   440,129    411,280 
Book Overdraft   173,948    - 
Deferred revenue   -    1,102,500 
Accrued interest   101,630    35,773 
Due to shareholders / officer   169,238    155,476 
Notes payable, net of discount of $689,002 and $71,758, respectively   3,088,753    2,053,134 
Line of credit   2,000,000    1,500,000 
Derivative liability   709,060    118,363 
Current liabilities to be disposed of   335,857    335,857 
           
TOTAL CURRENT LIABILITIES   8,378,306    6,832,168 
           
Notes payable, non-current   515,000    1,297,988 
           
TOTAL LIABILITIES   8,893,306    8,130,156 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' EQUITY (DEFICIT)          
Common stock, $0.001 par value; 937,500,000 shares authorized, 41,503,980 and 38,536,450 shares issued and outstanding, respectively   41,974    38,536 
Additional paid-in capital   6,182,259    3,149,711 
Accumulated deficit   (14,071,374)   (9,300,317)
           
TOTAL GREENWOOD HALL, INC. STOCKHOLDERS' EQUITY (DEFICIT)   (7,847,141)   (6,112,070)
           
Noncontrolling interest   -    - 
           
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)   (7,847,141)   (6,112,070)
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $1,046,165   $2,018,086 

 

See the unaudited notes to consolidated financial statements.

 

F-2
 

  

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2015 AND 2014

(UNAUDITED)

 

   Three Months Ended   Nine Months Ended 
   May 31, 2015   May 31, 2014   May 31, 2015   May 31, 2014 
                 
REVENUES  $2,170,894   $1,644,090   $6,316,282   $5,692,214 
                     
OPERATING EXPENSES                    
Direct cost of services   1,166,113    877,990    3,724,551    2,771,977 
Personnel   1,339,866    942,940    2,364,335    3,346,772 
Selling, general and administrative   364,863    711,925    2,706,176    2,843,778 
Stock Based Compensation   1,031,226    -    1,565,723    - 
                     
TOTAL OPERATING EXPENSES   3,902,068    2,532,855    10,360,785    8,962,527 
                     
INCOME (LOSS) FROM OPERATIONS   (1,731,174)   (888,765)   (4,044,503)   (3,270,313)
                     
OTHER INCOME (EXPENSE)                    
Interest expense   (198,477)   (562,667)   (510,275)   (935,649)
Change in value of derivatives   (57,956)   -    (194,826)   - 
Miscellaneous income (expense), net   10,518    (50,495)   (21,343)   (104,309)
                     
TOTAL OTHER INCOME (EXPENSE)   (245,915)   (613,162)   (726,444)   (1,039,958)
                     
INCOME (LOSS) FROM BEFORE   (1,977,089)   (1,501,927)   (4,770,947)   (4,310,271)
                     
 PROVISION FOR INCOME TAXES   (111)   (523)   (111)   (523)
                     
NET LOSS   (1,977,200)   (1,502,450)   (4,771,058)   (4,310,794)
                     
Net income (loss) attributable to noncontrolling interests   -    -    -    - 
                     
Net income (loss) attributable to Grenwood Hall, Inc.  $(1,977,200)  $(1,502,450)  $(4,771,058)  $(4,310,794)
                     
Earnings per share - basic and diluted                    
Basic earnings per share attributable to Greenwood Hall, Inc.  $(0.05)  $(0.06)  $(0.12)  $(0.17)
                     
Weighted average common shares - basic and diluted   41,221,068    25,051,591    40,048,299    25,051,591 

 

See the unaudited notes to consolidated financial statements.

 

F-3
 

  

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MAY 31, 2015 AND 2014 (UNAUDITED)

 

   Nine Months Ended 
   May 31, 2015   May 31, 2014 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss) from continuing operations  $(4,771,058)  $(4,310,794)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of continuing operations:          
Stock-based compensation   1,565,723    - 
Depreciation and amortization   47,866    94,624 
Amortization of note discount   98,945    410,125 
Change in value of derivative liabilities   194,826    - 
Changes in operating assets and liabilities:          
Accounts receivable   311,925    348,796 
Prepaid expenses and other current assets   230,903    154,684 
Accounts payable   124,544    308,778 
Accrued expenses   117,592    429,555 
Accrued payroll and related   28,849    11,555 
Deferred revenue   (1,102,500)   82,780 
Accrued interest and related   65,859    133,433 
Advances from officers, net   60,882    86,782 
           
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (3,025,644)   (2,249,682)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   -    (21,772)
           
NET CASH USED IN INVESTING ACTIVITIES   -    (21,772)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Book overdraft   173,948    (208,436)
Proceeds from issuance of notes payable   1,701,500    5,661,354 
Payments on notes payable   (455,535)   (3,510,732)
Repurchase of common stock   -    (39,000)
Proceeds from the sale of stock   1,238,445    - 
           
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   2,658,358    1,903,186 
           
NET INCREASE (DECREASE) IN CASH   (367,286)   (368,268)
           
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR   367,286    368,268 
           
CASH AND CASH EQUIVALENTS, END OF YEAR  $-   $- 
           
Supplemental disclosures:          
Interest paid in cash  $297,009   $935,649 
Income taxes paid in cash  $-   $- 

 

See the unaudited notes to consolidated financial statements.

 

F-4
 

  

GREENWOOD HALL, INC. AND SUBSIDIARIES 

Notes to Financial Statements

MAY 31, 2015

(Unaudited)

 

GREENWOOD HALL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

Greenwood Hall is an emerging education management solutions provider that delivers end-to-end services that support the entire student lifecycle including offerings that increase student enrollment, improve student experience, optimize student success and outcomes, and help schools maximize operating efficiencies. Since 2006, we have developed and customized turnkey solutions that combine strategy, personnel, proven processes and robust technology to help schools effectively and efficiently improve student outcomes, expand into new markets such as online learning, increase revenues, and deliver enhanced student experiences. Our Company currently has 121 employees and has served more than 40 education clients and over 70 degree programs.

 

Basis of Presentation

 

On July 23, 2014, Greenwood Hall, Inc. (formerly Divio Holdings, Corp. (“Divio”)) and its wholly owned subsidiary, Merger Sub, completed the Merger Agreement, dated July 22, 2014, by and among Divio, Merger Sub, and PCS Link, Inc. (“PCS Link”). Pursuant to the Merger Agreement, Merger Sub merged with and into PCS Link with PCS Link remaining as the surviving corporation (the “Surviving Corporation”) in the Merger. Upon the consummation of the Merger, the separate existence of Merger Sub ceased, and PCS Link became a wholly owned subsidiary of Divio. In connection with the Merger and at the Effective Time, the holders of all of the issued and outstanding shares of PCS Link Common Stock exchanged all of such shares (other than “dissenting shares” as defined in California Corporations Code Section 1300) for a combined total of 25,250,000 shares of Common Stock, representing approximately 71% of the total outstanding shares on the date of the Merger. In connection with the merger, Divio Holdings, Corp. changed its name to Greenwood Hall, Inc.

 

The Merger was accounted for as a “reverse merger” with PCS Link as the accounting acquirer and the Company as the legal acquirer. Although, from a legal perspective, the Company acquired PCS Link, from an accounting perspective, the transaction is viewed as a recapitalization of PCS Link accompanied by an issuance of stock by PCS Link for the net assets of Greenwood Hall, Inc. This is because Greenwood Hall, Inc. did not have operations immediately prior to the merger, and following the merger, PCS Link is the operating company. The board of directors of Greenwood Hall, Inc. immediately after the merger consisted of five directors, with four of the five directors nominated by PCS Link. Additionally, PCS Link’s stockholders owned 71% of the outstanding shares of Greenwood Hall, Inc. immediately after completion of the transaction.

 

The presentation of the consolidated statements of stockholders' deficit reflects the historical stockholders' deficit of PCS Link through July 23, 2014. The effect of the issuance of shares of Divio common stock in connection with the Merger and the inclusion of Divio’s outstanding shares of common stock at the time of the Merger on July 23, 2014 is reflected during the eight months ended August 31, 2014.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Greenwood Hall, PCS Link, and University Financial Aid Solutions, LLC (“UFAS”), collectively referred to herein as the Company, we, us, our, and Greenwood Hall. All significant intercompany accounts and transactions have been eliminated in consolidation. Through our affiliate UFAS we provided complete financial aid solutions. During 2013, UFAS ceased operations and is presently winding down its affairs. As a result, it is presented in the accompanying consolidated financial statements as discontinued operations.

 

Going Concern

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplates the continuation of the Company as a going concern. The Company has an accumulated deficit and a working capital deficit as of May 31, 2015 and has incurred a loss from operations during 2015. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company has historically funded its activities through cash generated from operations, debt financing, the issuance of equity for cash, and advances from shareholders. During the nine months ended May 31, 2015 the Company received approximately $2,658,358 in net proceeds from financing activities.

 

Management intends to become profitable by continuing to grow its operations and customer base. If the Company is not successful in becoming profitable, it may have to further delay or reduce expenses, or curtail operations. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that could result should the Company not continue as a going concern.

 

F-5
 

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Management uses its historical records and knowledge of its business in making these estimates. Accordingly, actual results may differ from these estimates.

 

Cash and Cash Equivalents

 

For the purpose of the statement of cash flows, the Company considers cash equivalents to include short-term, highly liquid investments with an original maturity of three months or less.

 

Research and Development

 

Costs relating to designing and developing new products are expensed in the period incurred.

 

Revenue Recognition

 

The Company’s contracts are typically structured into two categories, i) fixed-fee service contracts that span a period of time, often in excess of one year, and ii) service contracts at agreed-upon rates based on the volume of service provided. Some of the Company’s service contracts are subject to guaranteed minimum amounts of service volume.

 

The Company recognizes revenue when all of the following have occurred: persuasive evidence of an agreement with the customer exists, services have been rendered, the selling price is fixed or determinable, and collectability of the selling price is reasonably assured. For fixed-fee service contracts, the Company recognizes revenue on a straight-line basis over the period of contract performance. Costs incurred under these service contracts are expensed as incurred.

 

Deferred Revenue

 

Deferred revenue primarily consists of prepayments received from customers for which the Company’s revenue recognition criteria have not been met. The deferred revenue will be recognized as revenue once the criteria for revenue recognition have been met.

 

Accounts Receivable

 

The Company extends credit to its customers. An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of the Company’s customers to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the collectability of the Company’s trade accounts receivable balances. If the Company determines that the financial condition of any of its customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect a receivable have failed, the receivable is written off. Based on the information available, management believes the Company’s accounts receivable, net of the allowance for doubtful accounts, are collectable.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization are being provided using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used are as follows:

 

Classification   Life
Equipment   5-7 Years
Computer equipment   7 Years

 

Expenses for repairs and maintenance are charged to expense as incurred, while renewals and betterments are capitalized.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

 

Earnings (Loss) per Share

 

Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted- average number of common shares and dilutive potential common shares outstanding during the period. Warrants to purchase common stock were excluded from the computation of diluted shares during the three and nine months ended May 31, 2015 and 2014 as their effect is anti-dilutive .

 

F-6
 

 

Variable Interest Entities

 

Generally, an entity is defined as a variable interest entity (“VIE”) under current accounting rules if it has (a) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (b) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity. When determining whether an entity that is a business qualifies as a VIE, we also consider whether (i) we participated significantly in the design of the entity, (ii) we provided more than half of the total financial support to the entity, and (iii) substantially all of the activities of the VIE either involve us or are conducted on our behalf. A VIE is consolidated by its primary beneficiary, which is the party that absorbs or receives a majority of the entity’s expected losses or expected residual returns.

 

University Financial Aid Services, LLC was 60% owned by John Hall and Zan Greenwood, who at the time held a combined 92.5% of our common stock and served as directors of PCS Link. John Hall is the CEO of the Company and Zan Greenwood served as the Company’s Chief Operating Officer through June 2013. The equity owners of UFAS have no equity at risk, Greenwood Hall has funded UFAS’ operations since it was formed in 2010, and we have the ability to exercise control over UFAS through our two shareholders / directors.

 

Based on our assessment, we have determined that UFAS is a VIE and that we are the primary beneficiary, as defined in current accounting rules. Accordingly, we are required to consolidate the revenues and expenses of UFAS. To date, the Company has not allocated any income or loss of UFAS to noncontrolling interests as the noncontrolling interests never had any equity at risk. As previously discussed, UFAS ceased operations during 2013 and is presently winding down its affairs. The Company does not anticipate having any future involvement with UFAS after it is dissolved.

 

Marketing and Advertising

 

Marketing and advertising costs are expensed as incurred. Marketing and advertising amounted to $117,596 and $331,918 for the nine months ended May 31, 2015 and the nine months ended May 31, 2014 respectively, and are included in selling, general and administrative expenses.

 

Stock-Based Compensation

 

Compensation costs related to stock options and other equity awards are determined in accordance with FASB ASC 718-10, “Compensation-Stock Compensation.” Under this method, compensation cost is calculated based on the grant-date fair value estimated in accordance FASB ASC 718-10, amortized on a straight-line basis over the awards’ vesting period. Stock-based compensation was $1,565,723 and $0 for the nine months ended May 31, 2015 and 2014, respectively, and was $1,031,226 and $0 for the three months ended May 31, 2015 and 2014, respectively. This expense is included in the condensed consolidated statements of operations as Stock-Based Compensation.

 

Derivative Liabilities

 

We account for warrants as either equity or liabilities based upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded as additional paid-in capital on our Consolidated Balance Sheet and no further adjustments to their valuation are made. Some of our warrants were determined to be ineligible for equity classification because of provisions that may result in an adjustment to their exercise price. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as assets or liabilities are recorded on our Consolidated Balance Sheet at their fair value on the date of issuance and are revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. We estimate the fair value of these liabilities using option pricing models that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for expected volatility, expected life and risk-free interest rate.

 

As part of a debt financing during May 2014, the Company issued warrants to acquire 248,011 shares of Common Stock. These warrants contain a mechanism to increase the number of warrants upon the issuance of certain dilutive equity securities. If during the terms of the warrants, the Company issues additional shares of Common Stock or equivalents, the warrant holders are entitled to additional warrants with the same terms as the original warrants. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the date of issuance was estimated using an option pricing model and recorded on the Company’s Consolidated Balance Sheet as a derivative liability. The fair value of the Warrants is estimated at the end of each reporting period and the change in the fair value of the Warrants is recorded as a non-operating gain or loss as change in value of derivatives in the Company’s Consolidated Statement of Operations.

 

F-7
 

 

In December 2014, the Company entered into a Secured Convertible Note with Colgan Financial Group, Inc. (“ Colgan ”) and Rob Logan pursuant to which the Company issued a convertible promissory note of $500,000 and the right to purchase warrants upon the payment or conversion of the note principal. The conversion feature and warrants both include provisions that call for the instrument to be converted to equity at a price equal to the lesser of i) $1.50 per share or ii) 85% of the weighted average price per share of the Company’s trading price for the 10 trading days prior to conversion / exercise. As a result of this feature, the warrants and conversion feature are subject to derivative accounting pursuant to ASC 815. Accordingly, the fair value of the warrants and conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s Consolidated Balance Sheet as a derivative liability and a note discount. The fair value of the warrants and conversion feature is estimated at the end of each reporting period and the change in the fair value is recorded as a non-operating gain or loss as change in value of derivatives in the Company’s Consolidated Statement of Operations.

 

In March 2015, the Company entered into a Convertible Note with Redwood Fund, LP (“ Redwood ”) pursuant to which the Company issued a convertible promissory note of $250,000 and the right to purchase warrants upon the payment or conversion of the note principal. The conversion feature includes provisions that call for the instrument to be converted to equity at a price equal to (i) $1.00 if the Company’s common stock price closes above $1.00; (ii) the average of the publicly reported closing bid and ask price if the Company’s publicly reported common stock price closes between $0.50 and $0.99; or (iii) $0.50 if the Company’s publicly reported common stock price closes below $0.50. As a result of this feature, the conversion feature is subject to derivative accounting pursuant to ASC 815. Accordingly, the fair value of the conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s Consolidated Balance Sheet as a derivative liability and a note discount. The fair value of the conversion feature is estimated at the end of each reporting period and the change in the fair value is recorded as a non-operating gain or loss as change in value of derivatives in the Company’s Consolidated Statement of Operations.

 

In April 2015, the Company entered into a Convertible Note with Lincoln Park Capital Fund, LLP (“ Lincoln Park ”) pursuant to which the Company issued a convertible promissory note of $250,000 and the right to purchase warrants upon the payment or conversion of the note principal. The conversion feature includes provisions that call for the instrument to be converted to equity at a price equal to (i) $1.00 if the Company’s common stock price closes above $1.00; (ii) the average of the publicly reported closing bid and ask price if the Company’s publicly reported common stock price closes between $0.50 and $0.99; or (iii) $0.50 if the Company’s publicly reported common stock price closes below $0.50. As a result of this feature, the conversion feature is subject to derivative accounting pursuant to ASC 815. Accordingly, the fair value of the conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s Consolidated Balance Sheet as a derivative liability and a note discount. The fair value of the conversion feature is estimated at the end of each reporting period and the change in the fair value is recorded as a non-operating gain or loss as change in value of derivatives in the Company’s Consolidated Statement of Operations.

 

During the nine months ended May 31, 2015 and 2014, the Company recognized a change in value of the derivative liability of $194,826 and $0, respectively.

 

Fair Value of Financial Instruments

 

The Company groups financial assets and financial liabilities measured at fair value into three levels of hierarchy in accordance with ASC 820-10, “Fair Value Measurements and Disclosure”. Assets and liabilities recorded at fair value in the accompanying balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

 

Level Input:   Input Definition:
Level I   Observable quoted prices in active markets for identical assets and liabilities.
     
Level II   Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
     
Level III   Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

 

For certain of our financial instruments, including working capital instruments, the carrying amounts are approximate fair value due to their short-term nature. Our notes payable approximate fair value based on prevailing interest rates.

 

The following table summarizes fair value measurements at May 31, 2015 for assets and liabilities measured at fair value on a recurring basis.

 

May 31, 2015

 

   Level 1   Level 2   Level 3 
Derivative Liabilities  $-   $-   $709,060 

 

F-8
 

 

The assumptions used in valuing derivative instruments issued during the nine months ended May 31, 2015 were as follows:

 

Risk free interest rate   0.26%
Expected life   1.0 Years 
Dividend yield   None 
Volatility   60%

 

The following is a reconciliation of the derivative liability related to these instruments for the nine months ended May 31, 2015:

 

Value at August 31, 2014  $118,363 
Issuance of instruments   395,871 
Change in value   194,826 
Net settlements   - 
Value at May 31, 2015  $709,060 

 

The derivative liabilities are estimated using option pricing models that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for expected volatility, expected life and risk-free interest rate. Changes in the assumptions used could have a material impact on the resulting fair value. The primary input affecting the value of our derivatives liabilities is the Company’s stock price, term and volatility. Other inputs have a comparatively insignificant effect.

 

Effect of Recently Issued Accounting Standards

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 will explicitly require management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-15. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. The revenue recognition standard is required to be applied retrospectively, including any combination of practical expedients as allowed in the standard. We are evaluating the impact, if any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which eliminates diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from disallowance of a tax position. ASU 2013-11 affects only the presentation of such amounts in an entity’s balance sheet and is effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. We adopted this standard during fiscal 2015 and believe that it did not have a significant effect on our financial position or results of operation.

 

2. PROPERTY AND EQUIPMENT

 

Depreciation and amortization of property and equipment amounted to $47,866 and $94,624 for the nine months ended May 31, 2015 and 2014, respectively, and is included in the accompanying consolidated statements of operations in selling, general and administrative expenses.

 

At May 31, 2015, property and equipment consists of the following:

 

   MAY 2015 
Computer equipment  $553,255 
Software and Equipment   39,400 
    592,655 
Accumulated depreciation   (442,938)
Net property and equipment  $149,717 

 

F-9
 

 

3. NOTES PAYABLE

 

Bank

 

In May 2014, the Company entered into a Credit Agreement and related term loan and line of credit with Opus Bank (“ Opus ”). Pursuant to the terms of the agreement, the Company issued a promissory note in the amount of $2,000,000, the proceeds of which were required to be used to finance repayment of the amounts owed to TCA. Monthly payments of principal and interest are required through the maturity date in May 2017. The amounts owed to Colgan and CUB are subordinated to amounts owed to Opus under the Credit Agreement and related debt facilities. Amounts outstanding under the Credit Agreement are secured by substantially all assets of the Company.

 

On April 13, 2015, the Company and its lenders executed a second amendment (“Second Amendment”) of the Company’s Credit Facilities (the “Credit Agreement”) with Opus Bank ratified by California United Bank and Colgan Financial Group (collectively “Lenders”). The Second Amendment was designed to provide the Company with increased cash and credit availability as the Company seeks to expand and raise additional equity for working capital purposes. Under the terms of the Second Amendment, the Lenders agreed to waive any and all covenant violations that existed prior to the Second Amendment or that may occur through June 30, 2015. The Amendment also permitted the Company to not make any principal and/or interest payments to the Lenders through August 1, 2015, provided there are no Events of Default by the Company. The line of credit is for a maximum amount of $3,000,000. Payments of interest only will be due monthly with the unpaid balance due, in full, on the maturity date in January 2016.

 

As of May 31, 2015, the balance outstanding on the term loan and line of credit amounted to $1,537,416 and $2,025,084, respectively. At May 31, 2015, amounts owed pursuant to the Credit Agreement bear interest at a rate of 5.75% per annum.

 

In connection with the Credit Agreement, the Company issued 248,011 warrants to purchase common stock at an exercise price of $1.00 per share, which increased to 375,000 warrants due to dilutive issuances of equity by the Company during the eight months ended August 31, 2014. The warrants are exercisable immediately. In the event of future dilutive issuances, the number of warrants issuable shall be increased based on a specified formula. The warrants were valued at $78,281 on the date of issuance, which was recorded as a note discount During the nine months ended May 31, 2015, the Company recognized $19,569 of amortization related to this discount, leaving a balance of $52,189 at May 31, 2015. 

 

Bank

 

In October 2010, the Company issued a promissory note to California United Bank (“CUB”) for $1,250,000 and has been amended several times since issuance. The note was last amended in May 2013. The note bears interest at a variable rate, subject to a minimum of 7.25% per annum. The interest rate at December 31, 2013 was 7.25%. Payments of interest are due monthly with one payment of all outstanding principal plus accrued interest due on March 5, 2014. The note is secured by substantially all assets of the Company and is guaranteed by one former shareholders/officer, by one shareholders/officer, a trust of one of the officers/shareholders, and UFAS. 

 

In May 2014, the Company and CUB amended the promissory note of $1,250,000 to extend the maturity date to the earlier of i) October 2014 or ii) the completion of specified debt / equity funding. CUB also agreed to subordinate its security interest to another lender if certain criteria were met. In December 2014, the Company entered into a Change in Terms Agreement with California United Bank (“CUB”) which included an extension of the maturity date of the facility to April 30, 2015 and an adjustment of the interest rate to five percent (5%) in excess of the Prime Rate.

 

On April 13, 2015, the Company and its lenders executed a second amendment (“Second Amendment”) of the Company’s Credit Facilities (the “Credit Agreement”) with Opus Bank ratified by California United Bank and Colgan Financial Group (collectively “Lenders”). The Lenders agreed to waive any and all covenant violations that existed prior to the Second Amendment or that may occur through June 30, 2015. The Amendment also permitted the Company to not make any principal and/or interest payments to the Lenders through August 1, 2015, provided there are no Events of Default by the Company and extended the maturity date of the facility to January 1, 2016.

 

As of May 31, 2015, the balance remaining is $894,812.

 

Secured Convertible Notes

 

In December 2014, in consideration for funds in the amount of $500,000 received by Greenwood Hall, Inc. from Colgan Financial Group, Inc. and Robert Logan (“Logan,” and together with CFG, the “Holder”), the Company executed a secured convertible promissory note. The note bears interest at 12% per year, the interest of which is payable monthly. This is a 3 year note and is secured by substantially all assets of the Company. This note is subordinate to the notes held by Opus Bank and California United Bank.

 

On April 13, 2015, the Company and its lenders executed a second amendment (“Second Amendment”) of the Company’s Credit Facilities (the “Credit Agreement”) with Opus Bank ratified by California United Bank and Colgan Financial Group (collectively “Lenders”). The Lenders agreed to waive any and all covenant violations that existed prior to the Second Amendment or that may occur through June 30, 2015. The Amendment also permitted the Company to not make any principal and/or interest payments to the Lenders through August 1, 2015, provided there are no Events of Default by the Company.

 

In connection with this debt, the Company issued the right to purchase warrants upon the payment or conversion of the note principal. The conversion feature and warrants both include provisions that call for the instrument to be converted to equity at a price equal to the lesser of i) $1.50 per share or ii) 85% of the weighted average price per share of the Company’s trading price for the 10 trading days prior to conversion / exercise. As a result of this feature, the warrants and conversion feature are subject to derivative accounting pursuant to ASC 815. Accordingly, the fair value of the warrants and conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s Consolidated Balance Sheet as a derivative liability and a note discount. The fair value of the discount on the issuance date was estimated at $322,730 and is being amortized over the term of the note using the effective interest method. Amortization of the note discount during the nine months ended May 31, 2015 amounted to $53,788.

 

F-10
 

 

On March 31, 2015, the Company entered into a one-year $ 295,000 Convertible Note (“Note”) with Redwood Fund LP (“Redwood”). In conjunction with the Note, the Company issued Redwood warrants that are exercisable for 295,000 shares of the Company’s common stock over the next five (5) years at an exercise price of $ 1.00 per share. Redwood has an option to provide additional convertible debt to the Company in the amount of $ 250,000 at the same terms. Interest will accrue monthly at 10% annually and the note is unsecured.

 

On April 24, 2015, the Company entered into a one-year $ 295,000 Convertible Note (“Note”) with Lincoln Park Capital Fund LLC (“Lincoln Park”). In conjunction with the Note, the Company issued Lincoln Park warrants that are exercisable for 295,000 shares of the Company’s common stock over the next five (5) years at an exercise price of $ 1.00 per share. Redwood has an option to provide additional convertible debt to the Company in the amount of $ 250,000 at the same terms. Interest will accrue monthly at 10% annually and the note is unsecured.

 

Credit Agreement

 

During 2013, the Company entered into a Credit Agreement with TCA Global Credit Master Fund, LP (“TCA”). Pursuant to the Credit Agreement, the Company was granted an initial revolving credit facility of $1,500,000, which was subsequently increased to $1,850,000 later in 2013, and may be increased up to $7,000,000 upon i) the written request of the Company and ii) approval by TCA.

 

In December 2013, the Company and TCA entered into the Second Amendment to Credit Agreement whereby the parties aggregated all amounts owed to TCA under the Credit Agreement, which totaled $2,210,798 inclusive of $330,000 of loan fees incurred in connection with the second amendment. In addition, TCA waived the Company’s default of the terms of the Credit Agreement as of December 2, 2013 in connection with the execution of Second Amendment to Credit Agreement.

 

Amounts outstanding under the Second Amendment to Credit Agreement bore interest at 15% per annum and are payable in monthly payments of principal and interest commencing in March 2014, with the final payment due in October 2014, and share first priority with California United Bank on a pari passu basis.

 

As of December 31, 2013, the amount of principal and accrued interest outstanding amounted to $2,210,798 and $25,431, respectively. The $330,000 of loan fees was recorded as a note discount on the date of the promissory note and is being amortized to interest expense over the term of the note. As of December 31, 2013, the unamortized note discount amounted to $298,417.

 

During the eight months ended August 31, 2014, in connection with the funding of the Opus Credit Agreement, all amounts owed to TCA were paid off and the note discount of $298,417 was recognized as interest expense.

 

Loan and Security Agreement

 

During 2013, the Company entered into a Loan and Security Agreement with Colgan Financial Group, Inc. (“ Colgan ”) pursuant to which the Company issued a promissory note of $600,000. The note bears interest at 2.5% per month, is payable in monthly installments of principal and interest through June 2014, is guaranteed by one shareholder of the Company and an advisor to the Company and is secured by substantially all assets of the Company. This note is subordinate to the notes held by California United Bank. In July 2014, a paydown of $144,000 was made in connection with an equity funding. In April 2015, the Company received an additional $200,000 in funding under this agreement.

 

On April 13, 2015, the Company and its lenders executed a second amendment (“Second Amendment”) of the Company’s Credit Facilities (the “Credit Agreement”) with Opus Bank ratified by California United Bank and Colgan Financial Group (collectively “Lenders”). The Lenders agreed to waive any and all covenant violations that existed prior to the Second Amendment or that may occur through June 30, 2015. The Amendment also permitted the Company to not make any principal and/or interest payments to the Lenders through August 1, 2015, provided there are no Events of Default by the Company. As of May 31, 2015, the balance remaining is $715,071.

 

During the eight months ended August 31, 2014, the Company issued two convertible promissory notes to Colgan, one in the amount of $175,000 and one in the amount of $200,000. In connection with these two convertible promissory notes, the Company issued 198,409 shares of common stock valued at $186,270 (the estimated fair value of the shares on the issuance date), which was recorded as interest expense during the eight months ended August 31, 2014. In addition, the Company incurred an aggregate of $80,000 in fixed loan fees / interest expense. The notes were paid in full during the eight months ended August 31, 2014.

 

Unsecured Promissory Note

 

In March 2014, the Company issued an unsecured promissory note in the amount of $1,350,000. The note bore interest at a rate of 10% per annum and was due in September 2014. This note and related accrued interest was converted to units, comprised of one share of common stock and one warrant at an exercise price of $1.30, in July of 2014 (refer to note 5 for further discussion).

 

F-11
 

 

The Company also finances the purchases of small equipment. The amount of such notes is not significant at May 31, 2015. The following is a schedule, by year, of future minimum principal payments required under notes payable as of May 31, 2015:  

 

Years Ending
August 31,
2015 (remainder of)
  $3,187,755 
2016   590,000 
2017   - 
2018   515,000 
2019   - 
Total   4,292,755 
Note discount   (689,002)
   $3,603,753 

  

4. RELATED PARTY TRANSACTIONS

 

One of the Company’s customers, MarkeTouch Media, Inc. (“MarkeTouch”), held a 7.5% interest in our common stock during 2013.As of May 31, 2015 and 2014, the Company owed $0 and $14,333, respectively, relating to this share repurchase obligation, which is recorded in accrued expenses.

 

5. STOCKHOLDERS’ EQUITY

 

The Company is authorized to issue one class of stock, which represents 937,500,000 shares of common stock, par value $0.0001.

 

Common Stock

 

Pursuant to an agreement between the Company and MarkeTouch, the Company is repurchasing the shares held by MarkeTouch. As of May 31, 2014 the Company owed $14,333 relating to this share repurchase obligation, which is recorded in accrued expenses.

 

In July 2014, the Company sold 3,036,450 units, comprised of one share of common stock and one warrant to purchase common stock, at a price of $1.00 per unit. As a result, the Company raised $1,645,611 net of fees and converted $1,386,450 of debt and accrued interest. The warrants have an exercise price of $1.30 per share and expire 24 months from the date of closing of the Merger.

 

In September 2014, the Company sold 1,000,000 units, comprised of one share of common stock and one warrant to purchase common stock, at a price of $1.00 per unit, for total proceeds of $1,000,000.

 

In January 2015, the Company sold 250,000 units, comprised of one share of common stock and one warrant to purchase common stock, at a price of $1.00 per unit, for total proceeds of $250,000. The Company incurred $11,555 of fees associated with this raise, which are presented net of the proceeds.

 

Stock Issued for Services

 

In April 2015, the Company entered into a 3-month agreement with a vendor for advisory and consulting services. For the nine months ended May 31, 2015, the vendor had received 80,000 shares which were recognized as an operating expense of $72,000.

 

Stock Option Plan

 

In July 2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan (the "Option Plan") under which a total of 5,000,000 shares of common stock had been reserved for issuance. The 2014 Stock Option Plan will terminate in September 2024.

 

Stock Options

 

As of May 31, 2015, employees hold 0 shares of common, which were granted prior to May 31, 2015. As of May 31, 2015, the members of the Board of Directors hold options to purchase 1,750,000 shares of common stock at exercise prices ranging from $0.01 to $0.75, which were granted prior to May 31, 2015.

 

F-12
 

 

Transactions in FY2015  Quantity   Weighted-Average
Exercise Price Per
Share
   Weighted-Average
Remaining
Contractual Life
 
Outstanding, August 31, 2014   1,085,000    0.01    9.15 
Granted   1,050,000    0.61    9.81 
Exercised   0           
Cancelled/Forfeited   (385,000)   0.01    9.15 
Outstanding, May 31, 2015   1,750,000    0.37    9.54 
Exercisable, May 31, 2015   700,000    0.01    9.15 

 

The fair value of the options, granted during the nine months ended May 31, 2015 is estimated at $210,692. The fair value of these options was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions for Fiscal quarter ended May 31, 2015: no dividend, expected volatility of 30%, risk free interest rate of 2.72%, and expected life of 5.5 years.

 

The weighted average remaining contractual life of options outstanding issued under the Plan, both Qualified ISO and NonQualified SO, was 9.54 years at May 31, 2015. The exercise prices for the options outstanding at May 31, 2015 ranged from $0.01 to $0.75, and the information relating to these options is as follows:

 

          Options Exerciseable       Options Outstanding 
Exercise Price    Quantity   Weighted-
Average
Exercise
Price Per
Share
   Weighted-
Average
Remaining
Contractual
Life
   Quantity   Weighted-
Average
Exercise
Price Per
Share
   Weighted-
Average
Remaining
Contractual
Life
 
$  0.01    700,000   $0.01    9.15    700,000    0.01    9.15 
$  0.50                   600,000    0.50    9.78 
$  0.75                   450,000    0.75    9.84 
Total    700,000   $0.01    9.15    1,750,000    0.37    9.54 

 

Warrants Issued for Services

 

During the period ended May 31, 2015, the Company issued 1,264,023 warrants to a consultant for services. The warrants are exercisable at $1.00 per share, have a term of 10 years, and were 100% vested upon issuance. The Company valued these warrants at $493,329 using the Black-Scholes model and the significant inputs to that model below. The Company recognized these warrants as an expense during the period ended February 28, 2015. In addition, these warrants include provisions that call for the issuance of an additional 1,264,024 warrants at substantially the same terms in the event of certain achievements by the consultant.

 

During the period ended February 28, 2015, the Company issued 100,000 warrants for services. The warrants are exercisable at $0.01 per share, have a term of 1.7 years, and were 100% vested upon issuance. The Company valued these warrants at $41,168 using the Black-Scholes model and the significant inputs to that model below. The Company recognized these warrants as an expense during the period ended February 28, 2015.

 

The assumptions used in valuing warrants issued for services during the nine months ended May 31, 2015 were as follows:

 

Risk free interest rate   1.10%
Expected life   1.5 - 10 Years 
Dividend yield   None 
Volatility   60%

 

Warrants Outstanding

 

In March 2015, the Company issued an S-1 to register 5,673,980 shares of common stock. As part of this offering, the Company agreed to issue 1,387,530 shares to Company shareholders holding warrants for the purchase of the Company’s common stock. This resulted in the warrant holders forfeiting warrants equal that could have been exercised for 4,286,450 shares of common stock of the Company. The company recognized $693,765 of expense associated with this exchange.

 

Mr. Kyle Murphy agreed to accept 250,000 warrants in exchange for previously agreed to stock-based compensation upon his resignation from the Company.

 

F-13
 

 

The following is a summary of warrants outstanding at May 31, 2015:

 

Exercise Price   Number of Warrants   Expiration Date
$1.00    375,000   May 2021
$1.00    1,264,023   November 2024
$0.01    100,000   July 2016
$1.00    295,000   March 2020
$1.00    295,000   April 2020
           

6. CONCENTRATIONS

 

Concentration of Credit Risk

 

The Company maintains its cash and cash equivalents at a financial institution which may, at times, exceed federally insured limits. Historically, the Company has not experienced any losses in such accounts.

 

Major Customers

 

For the nine months ended May 31, 2015, 1 customer, and 3 specific projects with that customer, represented 41% of net revenues and for the nine months ended May 31, 2014, 2 customers represented 34% of net revenues. As of May 31, 2015, 3 customers represented 53% of accounts receivable, and for the nine months ended May 31, 2014, 1 customer, and 6 specific projects with that customer, represented 47% of accounts receivable.

 

7. INCOME TAXES

 

The difference between income tax expense attributable to continuing operations and the amount of income tax expense that would result from applying domestic federal statutory rates to pre-tax income (loss) is mainly related to an increase in the valuation allowance, partially offset by state income taxes. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Deferred income tax assets are mainly related to net operating loss carryforwards. Management has chosen to take a 100% valuation allowance against the deferred income tax asset until such time as management believes that its projections of future profits make the realization of the deferred income tax assets more likely than not. Significant judgment is required in the evaluation of deferred income tax benefits and differences in future results from management’s estimates could result in material differences.

 

A majority of the Company’s deferred tax asset is comprised of net operating loss carryforwards, offset by a 100% valuation allowance at May 31, 2015 and August 31, 2014.

 

As of May 31, 2015, the Company is in process of determining the amount of Federal and State net operating loss carry forwards (“NOL”) available to offset future taxable income. The Company’s NOLs will begin expiring in 2032. These NOLs may be used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of the Company’s NOLs would be subject to an annual limitation under Section 382. Any unused annual limitation may be carried over to later years. The Company could experience an ownership change under Section 382 as a result of events in the past in combination with events in the future. If so, the use of the Company’s NOLs, or a portion thereof, against future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of the NOLs before utilization.

 

Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding reduction of the valuation allowance.

 

The difference between income tax expense attributable to continuing operations and the amount of income tax expense that would result from applying domestic federal statutory rates to pre-tax income (loss) is mainly related to an increase in the valuation allowance, partially offset by state income taxes. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Deferred income tax assets are mainly related to net operating loss carryforwards. Management has chosen to take a 100% valuation allowance against the deferred income tax asset until such time as management believes that its projections of future profits make the realization of the deferred income tax assets more likely than not. Significant judgment is required in the evaluation of deferred income tax benefits and differences in future results from management’s estimates could result in material differences.

 

8. COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

F-14
 

 

The Company leases its operating facilities under non-cancelable operating leases that expire through 2024. Total rent expense for the nine months ended May 31, 2015 and 2014 amounted to $398,708 and $382,033, respectively. The Company is responsible for certain operating expenses in connection with these leases. The following is a schedule, by year, of future minimum lease payments required under non-cancelable operating leases as of May 31, 2015:

 

Years Ending
August 31,
2015 (remainder of)
  $103,733 
2016   475,769 
2017   572,058 
2018   586,837 
2019   602,277 
Thereafter   2,253,372 
   $4,594,046 

 

Employment Agreements

 

At May 31, 2015, the Company maintained an employment agreement with an officer, the terms of which may require the payment of severance benefits upon termination.

 

Legal Matters

 

The Company is involved from time to time in various legal proceedings in the normal conduct of its business.

 

The Company is the subject of pending litigation, which could cause it to incur significant costs in defending such litigation or in resulting actions or judgments. The Robin Hood Foundation (“Robin Hood”) filed suit against Patriot Communications, LLC (“Patriot”), a client of the Company, in the Superior Court of the State of California for the County of Los Angeles (Central District) for breach of contract and failure to perform, including among other things an intentional tort claim, in the amount of not less than $5,000,000. On May 6, 2014, Patriot filed a cross-complaint naming PCS Link as a cross-defendant. Patriot denies the allegations set forth by Robin Hood. On August 22, 2014, Robin Hood filed a First Amended Complaint, naming the Company and John Hall, in his individual capacity, as defendants. The First Amended Complaint asserts claims against the Company and Hall for fraud, fraudulent concealment, negligent misrepresentation, negligence and violation of Business & Professions Code section 17200. The First Amended Complaint also alleges a cause of action for breach of contract solely against the Company. An adverse judgment against the Company could be detrimental to the Company’s financial standing. Additionally, in the event that Patriot is held liable, Patriot alleges that PCS Link is responsible to indemnify and/or contribute to the satisfaction of any damages because PCS Link acted as a sub-contractor on behalf of Patriot with regard to the filed incident. We believe that we have strong defenses and we are vigorously defending against this lawsuit, but the potential range of loss related to this matter cannot be determined, as the pleadings are still not resolved, and will not be until late 2015, at the earliest. The outcome of this matter is inherently uncertain and could have a materially adverse effect on our business, financial condition and results of operations if decided unfavorably against the Company and John Hall.

 

The Company is the subject of pending litigation, which could cause it to incur significant costs in defending such litigation or in resulting actions or judgments. Finance 500, Inc. (“Finance 500”) filed suit against the Company, in the Superior Court of the State of California for the County of Orange (Central Justice) for breach of contract and unjust enrichment, among other things, in the amount of not less than $ 250,000. We believe that we have strong defenses and we are vigorously defending against this lawsuit, but the potential range of loss related to this matter cannot be determined, as the pleadings are still not resolved, and will not resolved anytime in the near future. The outcome of this matter is inherently uncertain and could have a materially adverse effect on our business, financial condition and results of operations if decided unfavorably against the Company.

 

9. DISCONTINUED OPERATIONS

 

During 2013, we ceased operations in our affiliated company, UFAS. The operations of UFAS are now presented as discontinued operations in the accompanying consolidated financial statements. UFAS was inactive during the periods ended May 31, 2015 and 2014.

 

10. SUBSEQUENT EVENTS

 

On June 3, 2015, the Company executed an agreement with Technical College of Lowcountry to provide student engagement services.

 

On June 5, 2015, the Company completed a private placement of units (each, a "Unit") at $1.00 per Unit (the "Financing Price") for aggregate gross proceeds of $140,000 (the "Private Placement Financing"). Each Unit consists of one share of Common Stock and one immediately vested warrant, with each such warrant entitling the holder to acquire one additional share of Common Stock on or before the date which is two years from the date of the placement for a price of $1.30 per share. The Company neither has nor will be required to pay any other fees, issue additional stock/warrants other than described in this paragraph, or enter into any consulting agreements with any third parties in connection with the aforementioned Private Placement Financing. As of May 31, 2015 the transaction had not yet funded.

 

On June 5, 2015, the Company entered into a commercial building lease agreement. The sixty-one (61) month lease, commenced on June 15, 2015, provided for the lease by the Company of approximately 2,369 square feet of space in Los Angeles, California. Base annual rent is initially set at approximately $8,355 per month. Total base rent payable over the lease period is 

$556,418. 

 

On June 30, 2015, the Company executed an agreement with Jacksonville State University to provide student retention services.

 

F-15
 

  

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements. These statements are based on the Company’s (as hereinafter defined) current beliefs, expectations and assumptions about future events, conditions and results and on information currently available to them. All statements, other than statements of historical fact, included herein regarding the Company’s strategy, future operations, financial position, future revenues, projected costs, plans, prospects and objectives are forward-looking statements. Words such as “expect,” “may,” “anticipate,” “intend,” “would,” “plan,” “believe,” “estimate,” “should,” and similar words and expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements.

 

Forward-looking statements in the report include express or implied statements concerning the Company’s future revenues, expenditures, capital or other funding requirements, the adequacy of the Company’s current cash and working capital to fund present and planned operations and financing needs, expansion of and demand for product offerings, and the growth of the Company’s business and operations through acquisitions or otherwise, as well as future economic and other conditions both generally and in the Company’s specific geographic and product markets. These statements are based on currently available operating, financial and competitive information and are subject to various risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements due to a number of factors including, but not limited to, those set forth below in the section entitled “Risk Factors and Special Considerations” in this report. Given those risks, uncertainties and other factors, many of which are beyond the Company’s control, you should not place undue reliance on these forward-looking statements.

 

As used in this Form 10-Q, the terms “we”, “us”, “our”, the “Company”, mean Greenwood Hall, Inc. (formerly Divio Holdings, Corp.), unless otherwise indicated. The forward-looking statements relate only to events as of the date on which the statements are made. Neither the Company nor PCS Link (as hereinafter defined) undertakes any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future changes make it clear that any projected results or events expressed or implied therein will not be realized. You are advised, however, to consult any further disclosures the Company makes in future public filings, statements and press releases.

 

All dollar amounts refer to US dollars unless otherwise indicated.

 

3
 

  

Corporate Overview

 

Greenwood Hall is an emerging education management solutions provider that delivers end-to-end services that support the entire student lifecycle including offerings that increase student enrollment, improve student experience, maximize student success and outcomes, and help schools maximize operating efficiencies. Since 2006, we have customized turnkey solutions that combine experienced strategy, personnel, proven processes and robust technology to help schools effectively and efficiently improve student outcomes, expand into new markets such as online learning, increase revenues, and deliver enhanced student experiences. Our Company currently has 121 employees and has served more than 40 education clients and over 70 degree programs.

 

Our services include: (a) solutions that support the entire student lifecycle including lead generation/marketing, new student recruitment, enrollment counseling, financial aid advising, new student recruitment, retention counseling, career advising, student concierge, and help desk services; (b) consulting services, including market assessments and analysis of internal operational efficiency; and (c) various data and technology enabled solutions that enable school clients to better manage/analyze data, deliver instruction to students (online, hybrid, and classroom), and make certain institutional decisions. In addition to education management services, we provide donor lifecycle management services to various major non-profit organizations. The donor lifecycle management services are mainly related to legacy operations of our Company prior to entering the higher education marketplace in 2006.

 

Our Services

 

Key components of our end-to-end student lifecycle management solution are:

 

·Student Recruitment & Enrollment – Our Student Recruitment and Enrollment services include interactive and traditional lead-generation as well as end-to-end recruitment solutions for academic programs of all types including online degree programs. We help clients identify and reach out to qualified potential students, recruit prospective students, provide enrollment counseling and advice on financial aid options and eligibility, guide students through the enrollment process, and help to ensure that students have a great first week experience. From the first interaction with prospective students, our enrollment counselors act as an extension of the client, and establish and foster close, collaborative relationships with students. These close relationships, which begin in the recruitment process and extend through the entire student lifecycle, result in significantly improved leads to enrollment rates, increased persistence, enhanced student experience, and better student outcomes over the long term.

 

·Student Success & Retention – Our student retention counselors and success coaches leverage web-based tools to monitor and assess student progress against their stated education and career goals, and provide student-specific counsel to keep them on track and navigate barriers to success. Counselors proactively contact assigned students each term to ensure students register for the next term, have all instructional materials/textbooks, have made any necessary payment arrangements, are up-to-date on any financial aid requirements, and any other obstacles to student persistence are handled. We also offer a student concierge service that provides students with professional support on a wide range of needs including financial aid, payments, registration, password resets and portal support.

 

·Career Advising and Job Placement – We offer proactive career advising services that coach and motivate students to persist and graduate, and help students plan for life after graduation. Our student retention counselors and success coaches collaborate with school-based academic advisors and students to develop customized career paths, including working with students to make sure they are fully utilizing all on-campus career services. Our career advice and job placement counselors also assist in determining career interests, arranging and preparing students for job interviews, providing support with interview preparation, resume building and garnering references. Additionally, this group tracks student success after graduation to help build career networks and job opportunities for future graduates and validate a school’s return on investment.

 

·We also provide our education clients with strategic advisory services and analysis that help them manage their institutions more efficiently and effectively. These include strategic marketing assessments, financial and operating efficiency evaluations to aid in decision making, and data and IT services that enable clients to better analyze and manage data, and improving communications with students.

 

Subsequent Events

 

The following events occurred after May 31, 2015 through July 15, 2015, the date on which the financial statements for the three months ended May 31, 2015 were issued:

 

4
 

  

·On June 3, 2015, the Company executed an agreement with Technical College of Lowcountry to provide student engagement services.

 

·On June 5, 2015, the Company completed a private placement of units (each, a "Unit") at $1.00 per Unit (the "Financing Price") for aggregate gross proceeds of $140,000 (the "Private Placement Financing"). Each Unit consists of one share of Common Stock and one immediately vested warrant, with each such warrant entitling the holder to acquire one additional share of Common Stock on or before the date which is two years from the date of the placement for a price of $1.30 per share. The Company neither has nor will be required to pay any other fees, issue additional stock/warrants other than described in this paragraph, or enter into any consulting agreements with any third parties in connection with the aforementioned Private Placement Financing. As of July 13, 2015, this transaction has not been funded.

 

·On June 5, 2015, the Company entered into a commercial building lease agreement. The sixty-one (61) month lease, commenced on June 15, 2015, provided for the lease by the Company of approximately 2,369 square feet of space in Los Angeles, California. Base annual rent is initially set at approximately $8,355 per month. Total base rent payable over the lease period is $556,418.

 

·On June 30, 2015, the Company executed an agreement with Jacksonville State University to provide student retention services.

 

Restructuring

 

The Company instituted a major restructuring effort in early 2013. The purposes of the restructuring were to (a) prepare the Company so it could scale its growth significantly in coming years, (b) improved efficiencies, (c) enhance its management team and (d) shed unprofitable elements of its operations. The restructuring included major changes to the Company’s executive team, discontinuing major segments of the Company’s operations that were deemed unprofitable, and substantially enhancing the Company’s operations and IT infrastructure. The restructuring effort was costly in terms of reduced revenue, associated expenditures, and opportunity costs. While the restructuring was substantially complete by the end of 2013, the efforts had a negative impact on the Company’s financial performance in the first half of the 2014 calendar. We believe the Company has successfully completed its restructuring and will begin to see the benefits of the restructuring during the second half of the 2015 calendar year.

 

Going Concern

 

As more fully described in Note 1 to the financial statements appearing in this report for the nine months ended May 31, 2015 related to the uncertainty of our ability to continue as a going concern, the Company has an accumulated deficit and a working capital deficit as of May 31, 2015 and incurred a loss from continuing operations during the second quarter. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

Management intends to restore profitability by continuing to grow our operations and customer base. If the Company is not successful in becoming profitable, it may have to further delay or reduce expenses, or curtail operations. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that could result should the Company not continue as a going concern.

 

Lack of Working Capital

 

The Company has never been properly capitalized. As a result, the Company has at times suffered from costly cash flow challenges as well as associated costs, missed opportunities, and inability to fully scale its operations. The lack of working capital has caused the Company to have to rely heavily on operating revenue as well as other sources of capital, such as debt. The Company believes proper capital investment and less reliance on incurring new debt to finance the Company’s growth will enable the Company to improve its financial performance in the future.

 

5
 

  

Results of Operations

 

The following summary of our results of operations should be read in conjunction with our financial statements for the Three and Six Months ended May 31, 2015 and May 31, 2014.

 

   3 Months   3 Months   9 Months   9 Months 
   Ended   Ended   Ended   Ended 
   31-May-15   31-May-14   31-May-15   31-May-14 
Revenue   2,170,894    1,644,090    6,316,282    5,692,214 
Cost of goods sold   1,166,113    877,990    3,724,551    2,771,977 
Gross profit   1,004,781    766,100    2,591,731    2,920,237 
General & Administrative   364,883    711,925    2,706,176    2,843,778 
Expenses   2,371,092    942,940    3,930,058    3,346,772 
Loss from operations   (1,731,174)   (888,765)   (4,044,503)   (3,270,313)
Income tax provision   111    523    111    523 
NET INCOME (LOSS)   (1,977,200)   (1,502,450)   (4,771,058)   (4,310,794)

 

Three Months and Nine Months Ended May 31, 2015 Compared to Three Months and Nine Months Ended May 31, 2014

 

Comparison of the Three Months Ended May 31, 2015 (Unaudited) to the Three Months Ended May 31, 2014 (Unaudited)

 

Revenues: Revenue increased $ 526,804, or 32%, during the three months ended May 31, 2015, primarily due to the presence of revenue during the same period in FY2014, primarily due to signing new business and new engagements from existing clients.

 

Direct Cost of Services: Direct cost of services increased $ 288,123, or 32.8%, during the three months ended May 31, 2015, primarily due to the increased revenues for the same time period.

 

General and Administrative: General and administrative expenses decreased $347,062, or 48.7%, during the three months ended May 31, 2015, primarily due to a reduction in the number of employees and gaining efficiencies.

 

Other Income (Expense): Other expense increased $1,428,152, or 151.5%, during the three months ended May 31, 2015, due almost entirely to non-cash changes in the value of derivative liabilities and related to a warrant exchange transaction.

 

Income (Loss) From Continuing Operations: As a result of the aforementioned items, we experienced a net loss of $1,731,174 from continuing operations during the three months ended May 31, 2015, compared with a net loss from continuing operations of $888,765 during the three months ended May 31, 2014, an increase  in loss of $ 842,409, or 94.8%. It is important to note that a significant portion of the loss for the three months ended May 31, 2015 was related to non-cash equity related transactions.

 

Comparison of the Nine Months Ended May 31, 2015 (Unaudited) to the Nine Months Ended May 31, 2014 (Unaudited)

 

Revenues: Revenues increased $624,068, or 11.0%, during the nine months ended May 31, 2015, primarily due to new business obtained in 2015.

 

Direct Cost of Services: Direct cost of services increased $952,574, or 34.4%, during the nine months ended May 31, 2015, primarily due to increases in revenue and payment of severance related to the move of operations to our Phoenix facility.

 

General and Administrative: General and administrative expenses decreased $137,602, or 4.8%, during the nine months ended May 31, 2015, primarily due to the a reduction in the number of employees.

 

6
 

  

Other Income (Expense): Other expense increased by $583,286, or 17.4%, during the nine months ended May 31 2015, due almost entirely to non-cash changes in the value of derivative liabilities and related to a warrant exchange transaction.

 

Income (Loss) From Continuing Operations: As a result of the aforementioned items, we experienced a net loss of $4,044,503 from continuing operations during the nine months ended May 31, 2015, compared with a net loss from continuing operations of $3,270,313 during the nine months ended May 31, 2014, an increase in loss of $774,190, or 10.7%

 

Liquidity and Capital Resources

 

Working Capital

 

   May 31, 2015   Aug 31, 2014 
Total Current Assets    855,636    1,748,902 
Total Current Liabilities    8,378,306    6,832,168 
Working Capital Deficit   (7,522,670)   (5,083,266)

 

The decrease in working capital was due to the funding of on-going operations.

 

Cash Flows

 

   9 Months   9 Months 
   Ended   Ended 
   May 31, 2015   May 31, 2014 
Net Cash used by Operating Activities   (3,025,644)   (2,249,682)
Net Cash provided by Financing Activities   2,658,358    1,903,186 

 

The increase in net cash used in operating activities in the nine months ended May 31, 2015 as compared to the nine months ended May 31, 2014, was due to the funding of on-going operations during the nine months ended May 31, 2015,. The increase in cash provided by financing activities in the nine months ended May 31, 2015, as compared to the nine months ended May 31, 2014, was due to obtaining a greater amount of financing through the issuance of common shares and convertible notes during the nine months ended May 31, 2015, compared to the nine months ended during the nine months ended May 31, 2014.

 

Debt

 

California United Bank Loan

 

During 2010, the Company issued a promissory note to California United Bank (“CUB”) in the amount of $1,250,000, which has been amended several times since issuance. The note was last amended in May 2014. The note bears interest at a variable rate, subject to a minimum of 7.25% per annum. The interest rate at November 30, 2014 was prime plus 4%. Payments of interest are due monthly with one payment of all outstanding principal plus accrued interest due on the earlier of i) October 2014 or ii) the completion of specified debt/equity funding. The note is secured by substantially all assets of the Company and is guaranteed by two shareholders/officers, a trust of one of the officers/shareholders, and University Financial Aid Services, LLC. As of November 30, 2014, the balance outstanding was $876,250.

 

In May 2014, the Company and CUB amended the promissory note of $1,250,000 to extend the maturity date to the earlier of i) October 2014 or ii) the completion of specified debt / equity funding. CUB also agreed to subordinate its security interest to another lender if certain criteria were met. In December 2014, the Company entered into a Change in Terms Agreement with California United Bank (“CUB”) which included an extension of the maturity date of the facility to April 30, 2015 and an adjustment of the interest rate to five percent (5%) in excess of the Prime Rate.

 

7
 

  

On April 13, 2015, the Company and its lenders executed a second amendment (“Second Amendment”) of the Company’s Credit Facilities (the “Credit Agreement”) with Opus Bank ratified by California United Bank and Colgan Financial Group (collectively “Lenders”). The Lenders agreed to waive any and all covenant violations that existed prior to the Second Amendment or that may occur through June 30, 2015. The Amendment also permitted the Company to not make any principal and/or interest payments to the Lenders through August 1, 2015, provided there are no Events of Default by the Company and extended the maturity date of the facility to January 1, 2016.

 

As of May 31, 2015, the balance remaining is $894,812.

 

CFG Notes

 

In December 2013, the Company entered into a Loan and Security Agreement with Colgan Financial Group, Inc. (“CFG”) pursuant to which the Company issued a promissory note of $600,000. The note bears interest at 2.5% per month, is payable in monthly installments of principal and interest through June 2014, is guaranteed by one shareholder of the Company and is secured by substantially all assets of PCS Link, however, it is subordinated to the Opus Amended Credit Agreement (as defined below). As of May 31, 2015, the balance is $523,068.

 

In December 2014, in consideration for funds in the amount of $500,000 received by Greenwood Hall, Inc. from Colgan Financial Group, Inc. and Robert Logan (“Logan,” and together with CFG, the “Holder”), the Company executed a secured convertible promissory note. The note bears interest at 12% per year, the interest of which is payable monthly. This is a 3 year note and is secured by substantially all assets of the Company. This note is subordinate to the notes held by Opus Bank and California United Bank. The note is convertible to equity at a price equal to the lesser of i) $1.50 per share or ii) 85% of the weighted average price per share of the Company’s trading price for the 10 trading days prior to conversion / exercise. As of May 31, 2015, the balance is $715,071.

 

On April 13, 2015, the Company and its lenders executed a second amendment (“Second Amendment”) of the Company’s Credit Facilities (the “Credit Agreement”) with Opus Bank ratified by California United Bank and Colgan Financial Group (collectively “Lenders”). The Lenders agreed to waive any and all covenant violations that existed prior to the Second Amendment or that may occur through June 30, 2015. The Amendment also permitted the Company to not make any principal and/or interest payments to the Lenders through August 1, 2015, provided there are no Events of Default by the Company.

 

Opus Facility

 

In May 2014, PCS Link entered into a Credit Agreement and related term loan and line of credit with Opus Bank (“Opus”). The Credit Agreement was amended on July 18, 2014 (the “Opus Amended Credit Agreement”). Pursuant to the terms of the agreement, PCS Link received $2,000,000 and issued a promissory note in that same amount to Opus. PCS Link used the funds received from Opus repay a loan that was outstanding to its then current lender. Monthly payments of principal and interest are required to be made by PCS Link through the maturity date in May 2017. The amounts outstanding under the Credit Agreement are secured by substantially all assets of PCS Link. PCS Link also received a line of credit for a maximum amount of $3,000,000. The first extension of credit under the line of credit was conditioned upon PCS Link successfully selling equity interests with gross cash proceeds of not less than $1.65 Million. On July 24, 2014, $1,500,000 was advanced to the Company under the line of credit.

 

On April 13, 2015, the Company and its lenders executed a second amendment (“Second Amendment”) of the Company’s Credit Facilities (the “Credit Agreement”) with Opus Bank ratified by California United Bank and Colgan Financial Group (collectively “Lenders”). The Second Amendment was designed to provide the Company with increased cash and credit availability as the Company seeks to expand and raise additional equity for working capital purposes. Under the terms of the Second Amendment, the Lenders agreed to waive any and all covenant violations that existed prior to the Second Amendment or that may occur through June 30, 2015. The Amendment also permitted the Company to not make any principal and/or interest payments to the Lenders through August 1, 2015, provided there are no Events of Default by the Company. Payments of interest only will be due monthly with the unpaid balance due, in full, on the maturity date in January 2016.

 

8
 

  

As of May 31, 2015, the balance outstanding on the term loan and line of credit amounted to $1,537,416 and $2,025,084, respectively. At May 31, 2015, amounts owed pursuant to the Credit Agreement bear interest at a rate of 5.75% per annum.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

This quarterly report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the fiscal quarter ended May 31,2015, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In the normal course of our business, the Company is periodically subject to various lawsuits, including contract and employment disputes. Additionally, the Company is currently a party (or its property is subject) to the following pending legal proceedings:

 

The Company is the subject of pending litigation, which could cause it to incur significant costs in defending such litigation or in resulting actions or judgments. The Robin Hood Foundation (“Robin Hood”) filed suit against Patriot Communications, LLC (“Patriot”), a client of the Company, in the Superior Court of the State of California for the County of Los Angeles (Central District) for breach of contract and failure to perform, including among other things an intentional tort claim, in the amount of not less than $5,000,000. On May 6, 2014, Patriot filed a cross-complaint naming PCS Link as a cross-defendant. Patriot denies the allegations set forth by Robin Hood. On August 22, 2014, Robin Hood filed a First Amended Complaint, naming the Company and John Hall, in his individual capacity, as defendants. The First Amended Complaint asserts claims against the Company and Hall for fraud, fraudulent concealment, negligent misrepresentation, negligence and violation of Business & Professions Code section 17200. The First Amended Complaint also alleges a cause of action for breach of contract solely against the Company. An adverse judgment against the Company could be detrimental to the Company’s financial standing. Additionally, in the event that Patriot is held liable, Patriot alleges that PCS Link is responsible to indemnify and/or contribute to the satisfaction of any damages because PCS Link acted as a sub-contractor on behalf of Patriot with regard to the filed incident. We believe that we have strong defenses and we are vigorously defending against this lawsuit, but the potential range of loss related to this matter cannot be determined, as the pleadings are still not resolved, and will not be until the end of 2015, at the earliest. The outcome of this matter is inherently uncertain and could have a materially adverse effect on our business, financial condition and results of operations if decided unfavorably against the Company and John Hall.

 

9
 

  

The Company is the subject of pending litigation, which could cause it to incur significant costs in defending such litigation or in resulting actions or judgments. Finance 500, Inc. (“Finance 500”) filed suit against the Company, in the Superior Court of the State of California for the County of Orange (Central Justice) for breach of contract and unjust enrichment, among other things, in the amount of not less than $ 250,000. We believe that we have strong defenses and we are vigorously defending against this lawsuit, but the potential range of loss related to this matter cannot be determined, as the pleadings are still not resolved, and will not resolved anytime in the near future. The outcome of this matter is inherently uncertain and could have a materially adverse effect on our business, financial condition and results of operations if decided unfavorably against the Company.

 

ITEM 1A. RISK FACTORS

 

Smaller reporting companies are not required to provide the information required by this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In March 2015, the Company issued an S-1 to register 5,673,980 shares of common stock. As part of this offering, the Company agreed to issue 1,387,530 shares to Company shareholders holding warrants for the purchase of the Company’s common stock. This resulted in the warrant holders forfeiting warrants equal that could have been exercised for 4,286,450 shares of common stock of the Company.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

Exhibit
Number 
  Description of Exhibit
10.1   Office Lease Agreement, dated as of March 30,2015, by and between Greenwood Hall, Inc. and AX Union Hills L.P.**
10.2   Second Amendment, Waiver and Ratification, dated as of April 13, 2015, by and among, PCS Link, Inc. d/b/a Greenwood & Hall, as the borrower, Greenwood Hall, Inc., as the guarantor, and Opus Bank**
10.3   Letter Agreement, dated as of April 13, 2015, by and between Opus Bank and California United Bank**
10.4   Continuing Personal Guaranty, dated as of April 13, 2015, by and between John Hall and Opus Bank**
10.5   Change in Terms Agreement, dated as of April 13, 2015, by and between PCS Link, Inc. and California United Bank**
10.6   Consent, Waiver and Amendment No. 1 to Secured Promissory Note, dated as of April 13, 2015, by and between Greenwood Hall, Inc. and Colgan Financial Group, Inc.**
10.7   Consent, Waiver and Amendment No. 4 to Secured Promissory Note, dated as of April 13, 2015, by and among PCS Link, Inc., Greenwood Hall, Inc., and Colgan Financial Group, Inc.**
10.8   Amendment Number Ten to Business Loan Agreement, dated as of April 13, 2015, by and between PCS Link, Inc., dba Greenwood & Hall, and California United Bank**
31.1   Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2   Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

* Filed herewith
** Filed as Exhibit to the Form 10-Q filed with the SEC on April 15, 2015 and incorporated herein by reference

 

 

10
 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

GREENWOOD HALL, INC.

 

/s/ John Hall  
John Hall,  
   
Chief Executive Officer  
Date: July 14, 2015  

 

11