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EX-32 - EXHIBIT 32 - GREENWOOD HALL, INC.s102505_32.htm
EX-31.1 - EXHIBIT 31.1 - GREENWOOD HALL, INC.s102505_31-1.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 November 30, 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)

 

310-905-8300
(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 ¨ No x

 

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 November 30, 2015, there were 47,943,273 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. 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 35
Item 4. Controls and Procedures. 35
 
PART II - OTHER INFORMATION 35
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures. 36
Item 5. Other Information. 36
Item 6. Exhibits. 37
 
SIGNATURES

 

 

 

 

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 November 30, 2015 include all adjustments, consisting of normal recurring 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 4
Statements of Operations  5
Statements of Cash Flows 6
Notes to Financial Statements 7

 

3 

 

  

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, 2015 AND AUGUST 31, 2015

 

   (Unaudited)     
   November 30,   August 31, 
   2015   2015 
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $30,328   $211,725 
Accounts receivable, net   251,626    594,035 
Prepaid expenses and other current assets   87,922    125,891 
Current assets to be disposed of   36,860    36,860 
           
TOTAL CURRENT ASSETS   406,736    968,511 
           
PROPERTY AND EQUIPMENT, net   126,693    142,872 
           
OTHER ASSETS          
Deposits and other assets   74,783    75,034 
           
TOTAL OTHER ASSETS   74,783    75,034 
           
TOTAL ASSETS  $608,212   $1,186,417 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
           
CURRENT LIABILITIES          
Accounts payable  $1,502,751   $1,332,057 
Accrued expenses   789,133    634,780 
Accrued payroll and related expenses   523,299    441,279 
Deferred revenue   67,526    11,100 
Accrued interest   346,659    251,751 
Due to shareholders / officer   172,345    169,970 
Notes payable, net of discount of $1,054,213 and $1,364,771, respectively   3,814,088    2,955,240 
 Line of Credit   2,000,000    2,000,000 
Derivative liability   97,346    1,664,993 
Current liabilities to be disposed of   335,857    335,857 
           
TOTAL CURRENT LIABILITIES   9,649,004    9,797,027 
           
Notes payable, non-current   37,329    552,329 
           
TOTAL LIABILITIES   9,686,333    10,349,356 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' EQUITY (DEFICIT)          
Common stock, $0.001 par value; 937,500,000 shares authorized, 47,943,273 and 45,114,297 shares issued and outstanding, respectively   47,944    45,115 
Subscription Receivable   (190,000)     
Additional paid-in capital   13,464,921    9,934,174 
Accumulated deficit   (22,400,986)   (19,142,228)
           
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)   (9,078,121)   (9,162,939)
           
Noncontrolling interest   -    - 
           
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)   (9,078,121)   (9,162,939)
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $608,212   $1,186,417 

 

See report of independent registered public accounting firm

and notes to consolidated financial statements.

 

4 

 

 

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2015 AND

THREE MONTHS ENDED NOVEMBER 30, 2014

UNAUDITED

 

   2015   2014 
           
REVENUES  $1,290,001   $2,664,968 
           
OPERATING EXPENSES          
Direct cost of services   875,299    1,578,471 
Personnel   691,468    858,960 
Selling, general and administrative   1,026,477    769,449 
Equity-based expense   88,184    - 
           
TOTAL OPERATING EXPENSES   2,681,428    3,206,880 
           
INCOME (LOSS) FROM OPERATIONS   (1,391,427)   (541,912)
           
OTHER INCOME (EXPENSE)          
Interest expense   (2,052,792)   (109,528)
Change in value of derivatives   202,249    - 
Miscellaneous income (expense), net   (16,788)   82,227 
           
TOTAL OTHER INCOME (EXPENSE)   (1,867,331)   (27,301)
           
INCOME (LOSS) FROM CONTINUING OPERATIONS          
  BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES   (3,258,758)   (569,213)
           
Provision for (benefit from) income taxes   -    - 
           
INCOME (LOSS) FROM CONTINUING OPERATIONS   (3,258,758)   (569,213)
           
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax   -    - 
           
NET INCOME (LOSS)   (3,258,758)   (569,213)
           
Net income (loss) attributable to noncontrolling interests   -    - 
           
Net income (loss) attributable to PCS Link, Inc. common stockholders  $(3,258,758)  $(569,213)
           
Earnings per share - basic and diluted          
Income (loss) from continuing operations attributable to Greenwood Hall, Inc. common stockholders  $(0.07)  $(0.01)
Income (loss) from discontinuing operations attributable to Greenwood Hall, Inc. common stockholders   -    - 
           
Net income (loss) attributable to Greenwood Hall, Inc. common stockholders  $(0.07)  $(0.01)
           
Weighted average common shares - basic and diluted   47,656,478    39,536,450 

 

See report of independent registered public accounting firm

and notes to consolidated financial statements.

 

5 

 

 

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2015 AND

THREE MONTHS ENDED NOVEMBER 30, 2104

UNAUDITED

 

   2015   2014 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $(3,258,758)  $(569,213)
Net (income) loss from discontinued operations   -    - 
Net income (loss) from continuing operations   (3,258,758)   (569,213)
Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities of continuing operations:          
Non-cash interest on convertible promissory notes   335,559    6,523 
Stock-based compensation   20,084    - 
Shares issued for services   68,100    - 
Shares issued for settlement   1,500,000    - 
Depreciation and amortization   16,179    15,840 
Change in value of derivatives   (202,249)   - 
Changes in operating assets and liabilities:          
Accounts receivable   342,410    439,804 
Prepaid expenses and other current assets   37,969    196,660 
Deposits and other assets   251    - 
Accounts payable   169,157    (204,546)
Accrued expenses   154,353    20,177 
Accrued payroll and related   82,020    16,653 
Deferred revenue   56,426    (993,897)
Accrued interest   94,908    (14,848)
Advances from officers, net   2,375    (42,890)
Net cash provided by (used in) operating activities of continuing operations   (581,216)   (1,129,737)
Net cash provided by (used in) operating activities of discontinued operations   -    - 
           
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (581,216)   (1,129,737)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of notes payable   100,000    - 
Payments on notes payable   (10,181)   (192,750)
Proceeds from the sale of stock   310,000    - 
Proceeds from the sale of units   -    1,000,000 
Net cash provided by (used in) financing activities of continuing operations   399,819    807,250 
Net cash provided by (used in) financing activities of discontinued operations   -    - 
           
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   399,819    807,250 
           
NET INCREASE (DECREASE) IN CASH FROM CONTINUING OPERATIONS   (181,397)   (322,487)
NET INCREASE (DECREASE) IN CASH FROM DISCONTINUED OPERATIONS   -    - 
NET INCREASE (DECREASE) IN CASH   (181,397)   (322,487)
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   211,725    367,286 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $30,328   $44,799 
           
Supplemental disclosures:          
Interest paid in cash  $297,009   $117,853 
Income taxes paid in cash  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities:          
Conversion of convertible note and accrued interest into common stock  $80,000   $- 

 

See report of independent registered public accounting firm

and notes to consolidated financial statements.

 

6 

 

 

GREENWOOD HALL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

  

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 Organization

 

Greenwood Hall is an education technology company. We provide technology-enabled solutions that enable public and private, not-for-profit colleges and universities to support student learning anywhere. Greenwood Hall does this by providing the services and technology that enable schools to revolutionize how they are able to manage the student lifecycle. Each one of our solutions are designed to help our education partners increase revenue, improve efficiencies, enhance student experience, and improve student outcomes. 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 111 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.

  

7 

 

 

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 November 30, 2015 and has incurred a loss from operations during the first quarter of fiscal year 2016. 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 quarter ended November 30, 2015, the Company received approximately $400,000 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.

  

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.

  

8 

 

 

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.

  

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. Potential dilutive instruments including warrants, stock options, and shares issuable upon conversion of promissory notes, have been excluded from the computation of diluted shares as their effect is anti-dilutive during fiscal 2016 and 2015.

  

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.

 

9 

 

 

Marketing and Advertising

 

Marketing and advertising costs are expensed as incurred. Marketing and advertising amounted to $12,833 and $29,685 for the three months ended November 30, 2015, and the three months ended November 30, 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 $20,084 and $0 for the three months ended November 30, 2015 and the three months ended November 30, 2014, respectively. This expense is included in the condensed consolidated statements of operations as Equity-based expense.

 

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.

 

During 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 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 (“CUB”). 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 ratified by CUB and CFG (collectively “Lenders”). As part of the amendment dated April 13, 2015, CFG may convert its outstanding balance under this note at the lessor of 85% of the 10 day average trading price or $1.50.

 

10 

 

 

In December 2014, the Company entered into a Secured Convertible Note with CFG and Robert Logan pursuant to which the Company issued a convertible promissory note of $500,000 and the right to purchase shares 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 $295,000 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 August 2015, this note was converted into shares of common stock. In connection with the conversion, the liability associated with the conversion feature was measured at $27,925 on the conversion date and reclassified into stockholders’ equity.

 

In August 2015, the Company entered into a Convertible Note with Redwood pursuant to which the Company issued a convertible promissory note of $588,236 and the right to purchase shares upon the payment or conversion of the note principal. The conversion price (the “Conversion Price”) shall be subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events. Relative to the thirty (30) trading days immediately prior to a Notice of Conversion, the Conversion Price shall mean: (i) $0.50 if the Company’s common stock trading price during the term hereof, on its applicable exchange or principal marketplace, as may be the case from time to time, as such closing price is reported by The Wall Street Journal, closes above $1.00; or (ii) $0.35 if such closing price is below $1.00. 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 $295,000 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.

  

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In August 2015, the Company entered into a Convertible Note with Lincoln Park pursuant to which the Company issued a convertible promissory note of $295,000 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 three months ended November 30, 2015 and the three months ended November 30, 2014, the Company recognized a change in value of the derivative liability of $202,249 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 November 30, 2015 and 2014 for assets and liabilities measured at fair value on a recurring basis.

  

November 30, 2015

 

   Level 1   Level 2   Level 3 
Derivative Liabilities  $   $   $97,346 

 

August 31, 2015

 

   Level 1   Level 2   Level 3 
Derivative Liabilities  $   $   $1,664,993 

 

The assumptions used in valuing derivative instruments issued during the twelve months ended November 30, 2015 were as follows:

  

Risk free interest rate   0.51% - 1.65% 
Expected life   0.38 – 5.50 Years 
Dividend yield   None 
Volatility   100%

 

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The following is a reconciliation of the derivative liability related to these instruments for the three months ended November 30, 2015:

  

Value at August 31, 2015  $1,664,993 
Issuance of instruments   0 
Change in value   (202,249)
Net settlements   (1,365,398)
Value as of November 30, 2015  $97,346 

 

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 $16,179 and $15,840 for the three months ended November, 2015 and the three months ended November 30, 2014, respectively, and is included in the accompanying consolidated statements of operations in selling, general and administrative expenses.

 

At November 30, 2015 and August 31 2015, property and equipment consists of the following:

  

   November
2015
   August
2015
 
Computer equipment  $553,255    553,255 
Software and Equipment   39,400    39,400 
Furniture & Fixtures   9,177    9,177 
    601,832    601,832 
Accumulated depreciation   (475,139)   (458,960)
Net property and equipment  $126,693    142,872 

  

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3. NOTES PAYABLE

 

Opus Bank:

  

On May 28, 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 Global Credit Master Fund, LP. Monthly payments of principal and interest are required through the maturity date in May 2017. The amounts owed to Colgan Financial Group (“CFG”) and California United Bank (“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 ratified by CUB and CFG (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.

 

On September 24, 2015, PCS Link, Inc. dba Greenwood & Hall (“PCS Link”), a subsidiary of Greenwood Hall, Inc., the Company, and Opus Bank (“Opus”) agreed to terms for a Third Amendment, Waiver and Ratification agreement (“Opus Third Amendment”) amending the Amended and Restated Credit Agreement, as amended, between the parties dated as of July 18, 2014 (“Opus Credit Agreement”). The Opus Amendment amends the Opus Credit Agreement as follows:

 

·Opus waived all prior covenant defaults.

 

·Opus shall have no obligation to advance any further credit to PCS Link, either by way of overdraft coverage or advances on any loans currently outstanding.

 

·The maturity date (“Maturity Date”) means the earlier of (i) April 15, 2016, (ii) the date on which  the issuance of securities occurs resulting in aggregate proceeds not less than the outstanding debt owed Opus, or  (iii) the date on which the sale of all of the capital stock or substantially all of the assets of PCS Link occurs.

 

·By October 2, 2015, PCS Link will issue equity and/or unsecured debt resulting in aggregate gross proceeds not less than $1,250,000. 

 

·PCS Link shall have no further obligation to comply with the financial covenants.

 

·PCS Link shall not be required to make any principal payments until the Maturity Date. All accrued principal, along with all accrued and unpaid interest, shall be due and payable in full on the Maturity Date.

 

·The outstanding balance of PCS Link shall accrue interest at the rate of 8% per annum beginning on August 1, 2015. PCS Link shall make such interest payments on a monthly basis commencing as of September 1, 2015.

 

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·Opus will receive 1,200,000 warrants for shares of common stock at an exercise price of $1.00 per share, not to include anti-dilution or cash-less exercise provision.  Opus’s existing warrant with an issue date of July 18, 2014 shall be surrendered upon issuance of the 1,200,000 warrants. 

 

As of November 30, 2015, the Company has not yet raised the required equity or unsecured debt and, as of January 19, 2016, is not in compliance with this requirement. No event of default has been formally declared by Opus Bank as of November 30, 2015.

  

As of November 30, 2015, the balance outstanding on the term loan and line of credit amounted to $1,562,280 and $2,058,115, respectively. At November 30, 2015, amounts owed pursuant to the Credit Agreement bear interest at a rate of 8.00% 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 three months ended November 30, 2015, the Company recognized $6,523 of amortization related to this discount, leaving a balance of $39,140 at November 30, 2015. 

    

California United 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.

 

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On May 22, 2014, the Company and CUB amended the promissory note of $1,250,000 to extend the maturity date to the earlier of i) October 31, 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 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 ratified by CUB and CFG (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 April 15, 2016.

 

In conjunction with the Opus Third Amendment dated September 24, 2015, the following terms were agreed to with California United Bank:

 

·CUB will provide the Company a forbearance period beginning September 1, 2015 and continuing through April 15,2016 (the “ Forbearance Period ”) and extend the maturity of its facility to April 15, 2016.

 

·CUB will receive during the Forbearance Period monthly interest payments of interest in full for the period starting September 1, 2015.

 

·CUB shall be paid deferred interest due upon the Company raising $2,000,000 in working capital, but only if the Company has satisfied its obligations in accordance with Company’s prepared cash projections.

 

·CUB will receive a full payoff of all its outstanding principal, interest (including accrued and unpaid interest as of the date of this letter), fees, and expenses (including, but not limited to, CUB’s outside counsel legal fees and costs) by April 15, 2016 or at the successful consummation of any public offering, strategic private investments, or take private scenario, whichever occurs first.

 

CUB will receive 523,587 warrants for shares of common stock at an exercise price of $1.00 per share, not to include anti-dilution or cash-less exercise provision

 

As of November 30, 2015, the balance remaining is $906,774.

 

Colgan Financial Group, Inc.:

 

In December 2014, in consideration for funds in the amount of $500,000 received by Greenwood Hall, Inc. from Colgan Financial Group, Inc. (“CFG”) 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 three (3) year note and is secured by substantially all assets of the Company. This note is subordinate to the notes held by Opus and CUB.

  

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 ratified by CUB and CFG (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 ten (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 approximately $323,000 and is being amortized over the term of the note using the effective interest method. Amortization of the note discount during the three months ended November 30, 2015 amounted to approximately $81,000.

 

In conjunction with the Opus Third Amendment of September 25, 2015, the following terms were agreed to with Colgan Financial Group:

 

·CFG will provide the Company a forbearance period beginning September 1, 2015 and continuing through April 15,2016 and extend the maturity of its facility to April 15, 2016.

 

·Payment obligation of quarterly interest payments due under the Note from the date hereof through the Forbearance Termination Date is modified so that (i) until Borrower has raised an additional $2,000,000 in working capital since August 12, 2015 and satisfied its obligations in accordance with its cash projections, interest shall continue to accrue in accordance with the Note, and upon completion of such additional capital raise, the amount of such accrued and unpaid interest shall be added to the principal amount of the Note as of the date of completion of such capital raise and shall accrue interest and be payable thereafter; and (ii) upon completion of such capital raise, interest shall continue to accrue thereafter and be payable at fifty percent (50%) of the amount of interest due among all Notes with lender shall not exceed in the aggregate eleven thousand one-hundred seventy-six and 50/100 dollars ($11,176.50) per month, and the remaining unpaid balance of such accrued interest shall be paid in full on the Opus Maturity Date.

 

·CFG will receive 20,000 warrants for shares of common stock at an exercise price of $1.00 per share, not to include anti-dilution or cash-less exercise provision.

 

·The conversion price for Eighty Thousand Dollars ($80,000) of the outstanding principal will be Ten Cents ($0.10) per share.

 

Redwood Fund, LP:

 

On or about March 31, 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 connection with this note, the Company recorded an aggregate note discount of $177,647, which was amortized to interest expense during the year ended August 31, 2015. On August 18, 2015, Redwood as part of an additional investment, elected to exercise its existing conversion rights under its March 2015 convertible promissory note and warrant under revised terms which resulted in an issuance of 3,359,775 additional shares of Common Stock to Redwood. In connection with the revision of terms, which related to reducing the exercise price of warrants and the conversion price of the note, the Company recognized a charge to interest expense of $2,346,461 during the year ended August 31, 2015.

 

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On August 14, 2015, the Company entered into a one-year $588,236 Convertible Note with Redwood. In conjunction with this 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. In connection with this debt, the Company recorded a note discount equal to $588,236 associated with the measurement of the warrants and conversion issued therewith. In addition to this note and the Warrant, at the Closing, the Company issued 200,000 shares of common stock to Redwood, which were measured at the closing price on the date of issuance. The aggregate value of the shares, warrants and conversion feature exceeded the face value of the note. As a result, the Company recognized a charge to interest expense in the amount of $1,165,202 on the date of issuance related to such excess value. During the three months ended November 30, 2015, the Company recognized approximately $147,059 of amortization of note discount.

 

On November 6, 2015, the Company entered into a six month $125,000 Promissory note with Redwood with an original issue discount of 20% or $25,000. Interest will accrue monthly at 10% annually and the note is unsecured. During the three months ended November 30, 2015, the Company recognized approximately $1,667 of amortization of note discount and $822 accrued interest.

 

Lincoln Park Capital Fund, LLP:

 

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. In connection with this debt, the Company recorded a note discount equal to approximately $215,000 associated with the measurement of the warrants and conversion feature issued therewith. During the three months ended November 30, 2015, the Company recognized approximately $70,000 of amortization of note discount.

 

On August 21, 2015, the Company entered into a one-year $295,000 Convertible Note with Lincoln Park. In conjunction with this note, the Company issued Lincoln Park warrants that are exercisable for 400,000 shares of the Company’s common stock over the next five (5) years at an exercise price of $1.00 per share. Interest will accrue monthly at 10% annually and the note is unsecured. In connection with this debt, the Company recorded a note discount equal to approximately $247,000 associated with the measurement of the warrants and conversion issued therewith. During the three months ended November 30, 2015, the Company recognized approximately $53,880 of amortization of note discount.

   

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Colgan Financial Group, inc.:

 

During 2013, the Company entered into a Loan and Security Agreement with 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 an advisor to the Company and is secured by substantially all assets of the Company. This note is subordinate to the notes held by CUB. In July 2014, a payment 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 ratified by CUB and CFG (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 therewith, the Company entered into Amendment No. 4 to the Loan and Security Agreement with CFG. Pursuant to the 4th amendment, the Company consolidated two of the notes outstanding to CFG (the December 2013 promissory note and the $200,000 promissory note issued in February 2015). The balance of the amended note on the date of Amendment No. 4 was $688,120. Amendment No. 4 provided CFG with the ability to convert the note, at its option, at a conversion price equal to the lesser of (i) 85% of the weighted average price per share of the Company’s common stock as reported by the exchange or over the counter market for the ten (10) trading days prior to the date of the notice of conversion or (ii) $1.50. The conversion feature is accounted for as a derivative liability in accordance with ASC 815. On the grant date, the conversion feature was valued at approximately $188,000, which was recorded as a note discount. During the year ended August 31, 2015, amortization of the note discount amounted to approximately $70,000. As of August 31, 2015, the balance remaining is $766,680 including accrued interest. The note maturity was extended to April 2016 pursuant to an amendment to the note that became effective in September 2015.

 

During the eight months ended August 31, 2014, the Company issued two (2) convertible promissory notes to CFG, 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.

 

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Promissory Note

   

The Company also finances the purchases of small equipment. The amount of such notes is not significant at November 30, 2015. The following is a schedule, by year, of future minimum principal payments required under notes payable as of November 30, 2015:

 

Years Ending
August 31,
    
2016  $6,873,901 
2017  $37,329 
2018     
2019    
Total   6,905,630 
Note discount   (1,054,213)
   $5,851,417 

 

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. On June 9, 2015, MarkeTouch Media and Greenwood Hall came to a settlement whereby MarkeTouch Media does not own any stock or equity or other ownership right in Greenwood Hall or PCS Link in exchange for Service credits of $174,000 for use towards any monthly or other payment owed for services to Greenwood Hall for services performed between June 1, 2015 and May 31, 2018 but not to exceed $10,000 credit any one given month.

 

5. STOCKHOLDERS’ EQUITY

 

The Company is authorized to issue one class of stock, which represents 937,500,000 shares of common stock, par value $0.001.

 

Common Stock

 

Pursuant to an agreement between the Company and MarkeTouch, the Company is repurchasing the shares held by MarkeTouch. This agreement was settled per an agreement dated June 9, 2015. MarkeTouch relinquished all equity and ownership rights in exchange for service credits up to $174,000 to be used over a designated period with certain monthly limits.

 

On September 16, 2015, the Company closed a stock purchase agreement with Neil Rogers (“Rogers”) for an aggregate purchase price of $500,000 for a total of 500,000 shares of Common Stock. The Company agreed that $190,000 of the cash consideration is subject to the effectiveness of a registration statement for the issued shares. The use of proceeds was for general working capital purposes.

 

On September 16, 2015, pursuant to the termination of a registration rights agreement between the Company, Rogers, and Byrne United S.A. ("Byrne"), the Company agreed to issue 625,000 shares of Common Stock to Rogers and 625,000 shares of Common Stock to Byrne. The Company recognized an interest expense of $ 1,500,000 associated with this issuance.

 

The Company made the above offerings to Byrne and Rogers in an offshore transaction relying on Regulation S and/or Section 4(a)(2) of the Securities Act as Byrne and Rogers are non-U.S. persons (as that term is defined in Regulation S of the Securities Act).

 

On September 24, 2015, CFG converted $ 80,000 in debt at a price of $ 0.10 per share of Common Stock, pursuant to the Opus Third Amendment.

 

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Stock Issued for Services

 

In April 2015, the Company entered into a three (3) month agreement with a vendor for advisory and consulting services. The agreement was extended into the Company’s current fiscal year. For the quarter that ended November 30, 2015, the vendor received 28,976 shares which were measured based on their grant-date fair value and recognized as an operating expense of $48,100.

 

In September 2015, the Company entered into a three (3) month agreement with a vendor for advisory and consulting services. For the quarter that ended November 30, 2015, the vendor received 250,000 shares which were measured based on their grant-date fair value and recognized as an operating expense of $20,000.

  

Stock Option Plan

  

In July 2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock 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 November 30, 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 August 31, 2015.

 

Transactions in Q1 2016  Quantity   Weighted-
Average
Exercise Price
Per
Share
   Weighted-
Average
Remaining
Contractual
Life
 
Outstanding, August 31, 2015   1,750,000    0.37    9.29 
Granted   0    0      
Exercised   0    0      
Cancelled/Forfeited   0    0      
Outstanding, November 30, 2015   1,750,000    0.37    9.04 
Exercisable, November 30, 2015   1,750,000    0.37    9.04 

 

The fair value of these options was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions: no dividends, 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 was 9.04 years at November 30, 2015. The exercise prices for the options outstanding at November 30, 2015 ranged from $0.01 to $0.75, and the information relating to these options is as follows:

 

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OPTIONS OUTSTANDING   OPTIONS EXERCISABLE 
Quantity   Weighted-
Average
Exercise
Price Per
Share
   Weighted-
Average
Remaining
Contractual
Life
   Quantity   Weighted-
Average
Exercise
Price Per
Share
   Weighted-
Average
Remaining
Contractual
Life
 
 700,000   $0.01    8.65    700,000    0.01    8.65 
 600,000   $0.50    9.28    600,000    0.50    9.28 
 450,000   $0.75    9.34    225,000    0.75    9.34 
 1,750,000   $0.37    9.04    1,750,000   $0.37    9.04 

  

Warrants Outstanding

  

The following is a summary of warrants outstanding at November 30, 2015:

 

Exercise Price   Number of
Warrants
   Expiration Date
$1.30    375,000   May 2021
$1.00    1,264,023   Nov 2024
$0.01    100,000   Jul 2016
$1.00    295,000   Apr 2016
$1.00    400,000   Aug 2016
$0.50    1,176,473   Aug 2016

 

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.

 

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Major Customers

 

For the three months ended November 30, 2015, four (4) customers represented 53% of net revenues and for the three months ended November 30, 2014 one (1) and two (2) projects represented 57% of net revenues, respectively. A decision by this customer to cease business relations with the Company may have a material adverse effect on the Company’s financial condition and results of operations.

 

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 November 30, 2015.

 

As of November 30, 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.

 

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8.          COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

The Company leases its operating facilities under non-cancelable operating leases that expire through 2024. Total rent expense for the three months ended November 30, 2015, the three months ended November 30, 2014, amounted to $184,111and $80,068, 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 August 31, 2015:

 

Years Ending
August 31,
    
2016  $576,899 
2017   676,425 
2018   694,857 
2019   713,753 
2020   716,767 
Thereafter   1,642,397 
   $5,021,098 

 

Employment Agreements

 

At November 30, 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 (“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 2016, 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. In October 2015, Hall, in his individual capacity, was dismissed from the litigation as a defendant upon a successful motion to dismiss him. At this time, he is no longer a defendant in the litigation. The lawsuit is in the midst of discovery, with all parties providing documents and taking depositions. The court has not yet scheduled a trial date, but has indicated that the case will be set for trial in the latter half of 2016. Given that he is no longer a defendant, it appears very likely that Hall will not experience a negative outcome of a judgment against him. Robin Hood reserves the right to appeal Hall’s dismissal from the case, but at this time, no Notice of Appeal has been filed. 

 

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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. 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.

 

10.          SUBSEQUENT EVENTS

 

On December 10, 2015, Seminole State College renewed its services agreement with the Company.

 

On December 12, 2015, the Company accepted the resignation of Brett Johnson, the Company’s President.

 

On December 22, 2015, the Company accepted the resignation of Tina Gentile, the Company’s Interim Chief Financial Officer.

 

On December 31, 2015, the Company issued an unsecured convertible promissory note in the amount of $275,000. The holder of the note has the option to convert the note at $ 0.40 per share of the Company’s common stock. The note bears an interest at a rate of 10% per annum and is due May 31, 2016.

 

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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.

 

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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.

 

Corporate Overview

 

Greenwood Hall is an education technology company. We provide technology-enabled solutions that enable public and private, not-for-profit colleges and universities to support student learning anywhere. Greenwood Hall does this by providing the services and technology that enable schools to revolutionize how they are able to manage the student lifecycle. Each one of our solutions are designed to help our education partners increase revenue, improve efficiencies, enhance student experience, and improve student outcomes. 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 111 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:

 

Greenwood Hall solutions provide the infrastructure, technology, and execution schools need so they optimize how they acquire, serve, and retain students enabling schools to better focus on what they do best – delivering high quality academic programming.

 

Greenwood Hall technology-enabled solutions are segmented into three (3) distinct but often integrated elements:

 

Online Program Management: Turnkey solutions that help schools launch, grow, and support online learning enterprises including student acquisition/marketing, enrollment counseling/recruitment, on-going student advising/support, career placement, and the technology required to deliver eLearning content.

 

Student Services: Solutions that enable schools to rely on Greenwood Hall advisors to handle student financial aid, technical support, registration, career placement, and other support inquiries.

 

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Retention & Reenagement: Solutions that seek to provide targeted advising, intervention and coaching to students at-risk of dropping out of their academic program or who have already left a program.

 

Subsequent Events

 

On December 10, 2015, Seminole State College renewed its services agreement with the Company.

 

On December 12, 2015, the Company accepted the resignation of Brett Johnson, the Company’s President.

 

On December 22, 2015, the Company accepted the resignation of Tina Gentile, the Company’s Interim Chief Financial Officer.

 

On December 31, 2015, the Company issued an unsecured convertible promissory note in the amount of $275,000. The holder of the note has the option to convert the note at $ 0.40 per share of the Company’s common stock. The note bears an interest at a rate of 10% per annum and is due May 31, 2016.

 

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 2014, the efforts had a negative impact on the Company’s financial performance in the 2014 and 2015 calendar years.

 

Going Concern

 

Our financial statements have been prepared on a going concern basis, we must raise additional capital to fund our operations in order to continue as a going concern. The Company has an accumulated deficit and a working capital deficit as of November 30, 2015 and incurred a loss from continuing operations during the first quarter. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. 

 

Rose, Snyder & Jacobs LLP, our independent registered public accounting firm for the fiscal year ended August 31, 2015, has indicated that our current liquidity position raises substantial doubt about our ability to continue as a going concern. See Note 1 to the financial statements appearing in this report for the three months ended November 30, 2015 related to the uncertainty of our ability to continue as a going concern. If we are unable to improve our liquidity position, we may not be able to continue as a going concern. Our ability to raise the capital needed to improve our financial condition may be hindered by the existing anti-dilution protections in existing investor agreements. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.

 

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We currently do not have sufficient sources of liquidity to fund our activities and debt service needs and we will need to raise additional equity or debt capital immediately in order to continue as a going concern and we cannot provide any assurance that we will be successful in doing so. 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.

 

Results of Operations

 

The following summary of our results of operations should be read in conjunction with our financial statements for the Three Months ended Nov 30, 2015 and Nov 30, 2014.

 

   Three Months   Three Months 
   Ended   Ended 
   Nov 30, 2015   Nov 30, 2014 
Revenue  $1,290,001   $2,664,968 
Cost of goods sold   875,299    1,578,471 
Gross margin   414,702    1,086,497 
General & Administrative   1,806,129    1,628,409 
Expenses   1,867,331    27,301 
Loss from operations   (3,258,758)   (569,213)
Income tax provision          
NET INCOME (LOSS)  $(3,258,758)   (569,213)

 

Three Months Ended Nov 30, 2015 Compared to Three Months Ended Nov 30, 2014

 

Comparison of the Three Months Ended November 30, 2015 (Unaudited) to the Three Months Ended November 30, 2014 (Unaudited)

 

Revenues: Revenues decreased $1,374,967, or 51.6%, during the three months ended November 30, 2015, primarily due to the one-time nature of a significant portion of revenue that was not associated with the Company’s core higher education business that was booked during the same period in 2014. Recurring revenues from the Company’s core higher education business increased by 21% during three months ended November 30, 2015, compared to the same period in 2014, primarily due to the addition of new customer contracts in FY2015 and during the three months ended November 30, 2015.

  

Direct Cost of Services: Direct cost of services decreased $703,172, or 45%, during the three months ended November 30, 2015, primarily due to the decreased revenues and improvements in operating efficiencies for the same time period.

 

Personnel: Personnel costs decreased $167,942 or 19%, during the three months ended November 30, 2015, primarily due to a reduction in the number of employees.

 

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Selling, General and Administrative: Selling, general and administrative expenses increased $305,128, or 40%, during the three months ended November 30, 2015, primarily due to a significant expansion of the Company’s sales and marketing activities including substantial expansion of the Company’s sales force as well transactional expenses associated with equity and debt transactions that took place during the period.

 

Other Income (Expense): Other expense increased $1,840,030, or 6740%, during the three months ended November 30, 2015, due primarily to non-cash interest expenses of $ 1,748,503 including $ 1,500.000 that was recognized as an interest expense for the issuance of Common Stock associated with the termination of a registration rights agreement.

 

Income (Loss) From Continuing Operations: As a result of the aforementioned items, we experienced a net loss of $3,258,758 from continuing operations which includes non-cash interest expenses of $ 1,802,383 during the three months ended November 30, 2015, compared with a net loss from continuing operations of $569,213 during the three months ended November 30, 2014, a increase of $2,689,545, or 473%

 

Liquidity and Capital Resources

 

Working Capital

 

   Nov 30, 2015   Aug 31, 2015 
Total Current Assets  $406,736    968,511 
Total Current Liabilities   9,649,004    9,797,028 
Working Capital Deficit   (9,242,268)   (8,828,517)

 

The decrease in working capital was due to a reduction in fundraising activities and the Company’s restructuring activities.

 

Cash Flows

 

   Three Months
Ended
  

Three Months

Ended

 
   Nov 30, 2015   Nov 30, 2014 
Net Cash used by Operating Activities  $(581,216)   (1,129,737)
Net Cash provided by Financing Activities   399,819    807,250 

 

The decrease in net cash used in operating activities in the Three Months ended November 30, 2015 as compared to the Three Months ended November 30, 2014 was due to a decrease in revenues as well as a decrease in operating expenses during the Three Months ended November 30, 2015. The decrease in cash provided by financing activities in the Three Months ended November 30, 2015 as compared to the Three Months ended November 30, 2014 was due to obtaining a decreased amount of financing through the issuance of common shares during the Three Months ended November 30, 2015 than was received during the Three Months ended November 30, 2014.

 

Debt of Companies

 

Opus 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 Financial Group (“CFG”) and California United Bank (“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.

 

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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 ratified by CUB and CFG (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 November 30, 2015, the balance outstanding on the term loan and line of credit amounted to $1,562,616 and $2,058,115, respectively. At November 30, 2015, amounts owed pursuant to the Credit Agreement bear interest at a rate of 8.00% 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 three months ended November 30, 2015, the Company recognized $6,523 of amortization related to this discount, leaving a balance of $39,140 at November 30, 2015.  These warrants were subsequently surrendered on December 14, 2015.

 

On September 24, 2015, PCS Link, Inc. dba Greenwood & Hall (“PCS Link”), a subsidiary of Greenwood Hall, Inc., the Company, and Opus Bank (“Opus”) agreed to terms for a Third Amendment, Waiver and Ratification agreement (“Opus Amendment”) amending the Amended and Restated Credit Agreement, as amended, between the parties dated as of July 18, 2014 (“Opus Credit Agreement”). The Opus Amendment amends the Opus Credit Agreement as follows:

 

·Opus waived all prior covenant defaults.

 

·Opus shall have no obligation to advance any further credit to PCS Link, either by way of overdraft coverage or advances on any loans currently outstanding.

 

·The maturity date (“Maturity Date”) means the earlier of (i) April 15, 2016, (ii) the date on which  the issuance of securities occurs resulting in aggregate proceeds not less than the outstanding debt owed Opus, or  (iii) the date on which the sale of all of the capital stock or substantially all of the assets of PCS Link occurs.

 

·By October 2, 2015, PCS Link will issue equity and/or unsecured debt resulting in aggregate gross proceeds not less than $1,250,000. 

 

·PCS Link shall have no further obligation to comply with the financial covenants.

 

·PCS Link shall not be required to make any principal payments until the Maturity Date. All accrued principal, along with all accrued and unpaid interest, shall be due and payable in full on the Maturity Date.

 

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·The outstanding balance of PCS Link shall accrue interest at the rate of 8% per annum beginning on August 1, 2015. PCS Link shall make such interest payments on a monthly basis commencing as of September 1, 2015.

 

·Opus will receive 1,200,000 warrants for shares of common stock at an exercise price of $1.00 per share, not to include anti-dilution or cash-less exercise provision.  Opus’s existing warrant with an issue date of July 18, 2014 shall be surrendered upon issuance of the 1,200,000 warrants. 

 

The Company has not yet raised the required equity or unsecured debt and, as of January 19, 2016, is not in compliance with this requirement. No event of default has been formally declared by Opus Bank as of January 19, 2016.

 

California United 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 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 ratified by CUB and CFG (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.

 

In conjunction with the Opus Amendment dated September 24, 2015, the following terms were agreed to with California United Bank:

 

·CUB will provide the Company a forbearance period beginning September 1, 2015 and continuing through April 15,2016 (the “ Forbearance Period ”) and extend the maturity of its facility to April 15, 2016.

 

·CUB will receive during the Forbearance Period monthly interest payments of interest in full for the period starting September 1, 2015.

 

·CUB shall be paid deferred interest due upon the Company raising $2,000,000 in working capital, but only if the Company has satisfied its obligations in accordance with Company’s prepared cash projections.

 

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·CUB will receive a full payoff of all its outstanding principal, interest (including accrued and unpaid interest as of the date of this letter), fees, and expenses (including, but not limited to, CUB’s outside counsel legal fees and costs) by April 15, 2016 or at the successful consummation of any public offering, strategic private investments, or take private scenario, whichever occurs first.

 

·CUB will receive 523,587 warrants for shares of common stock at an exercise price of $1.00 per share, not to include anti-dilution or cash-less exercise provision.

 

As of November 30, 2015, the CUB balance remaining is $906,774.

 

Colgan Financial Group, Inc.

 

In December 2014, in consideration for funds in the amount of $500,000 received by Greenwood Hall, Inc. from Colgan Financial Group, Inc. (“CFG”) 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 and CUB.

 

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 ratified by CUB and CFG (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 conjunction with the Opus Amendment of September 25, 2015, the following terms were agreed to with Colgan Financial Group:

 

·CFG will provide the Company a forbearance period beginning September 1, 2015 and continuing through April 15,2016 and extend the maturity of its facility to April 15, 2016.

 

·Payment obligation of quarterly interest payments due under the Note from the date hereof through the Forbearance Termination Date is modified so that (i) until Borrower has raised an additional $2,000,000 in working capital since August 12, 2015 and satisfied its obligations in accordance with its cash projections, interest shall continue to accrue in accordance with the Note, and upon completion of such additional capital raise, the amount of such accrued and unpaid interest shall be added to the principal amount of the Note as of the date of completion of such capital raise and shall accrue interest and be payable thereafter; and (ii) upon completion of such capital raise, interest shall continue to accrue thereafter and be payable at fifty percent (50%) of the amount of interest due among all Notes with lender shall not exceed in the aggregate eleven thousand one-hundred seventy-six and 50/100 dollars ($11,176.50) per month, and the remaining unpaid balance of such accrued interest shall be paid in full on the Opus Maturity Date.

 

·CFG will receive 20,000 warrants for shares of common stock at an exercise price of $1.00 per share, not to include anti-dilution or cash-less exercise provision.

 

·The conversion price for Eighty Thousand Dollars ($80,000) of the outstanding principal will be Ten Cents ($0.10) per share.

 

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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 approximately $323,000 and is being amortized over the term of the note using the effective interest method. Amortization of the note discount during the year ended November 30, 2015 amounted to approximately $17,886.

 

Redwood Fund, LP

 

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 connection with this note, the Company recorded an aggregate note discount of $177,647, which was amortized to interest expense during the year ended August 31, 2015. On August 18, 2015, Redwood as part of an additional investment, elected to exercise its existing conversion rights under its March 2015 convertible promissory note and warrant under revised terms which resulted in an issuance of 3,359,775 additional shares of Common Stock to Redwood. In connection with the revision of terms, which related to reducing the exercise price of warrants and the conversion price of the note, the Company recognized a charge to interest expense of $2,346,461 during the year ended August 31, 2015.

 

On August 14, 2015, the Company entered into a one-year $588,236 Convertible Note with 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. In connection with this debt, the Company recorded a note discount equal to $588,236 associated with the measurement of the warrants and conversion issued therewith. In addition to this note and the Warrant, at the Closing, the Company issued 200,000 shares of common stock to Redwood, which were measured at the closing price on the date of issuance. The aggregate value of the shares, warrants and conversion feature exceeded the face value of the note. As a result, the Company recognized a charge to interest expense in the amount of $1,165,202 on the date of issuance related to such excess value. During the three months ended November 30, 2015, the Company recognized approximately $148,726 of amortization of note discount.

 

On November 6, 2015, the Company entered into a six month $125,000 Promissory note with Redwood with an original issue discount of 20% or $25,000. Interest will accrue monthly at 10% annually and the note is unsecured. During the three months ended November 30, 2015, the Company recognized approximately $1,667 of amortization of note discount and $822 accrued interest.

 

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Lincoln Park Capital Fund, LLP

 

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. In connection with this debt, the Company recorded a note discount equal to approximately $215,000 associated with the measurement of the warrants and conversion feature issued therewith. During the year ended August 31, 2015, the Company recognized approximately $70,000 of amortization of note discount.

 

On August 21, 2015, the Company entered into a one-year $295,000 Convertible Note with Lincoln Park. In conjunction with the Note, the Company issued Lincoln Park warrants that are exercisable for 400,000 shares of the Company’s common stock over the next five (5) years at an exercise price of $1.00 per share. Interest will accrue monthly at 10% annually and the note is unsecured. In connection with this debt, the Company recorded a note discount equal to approximately $247,000 associated with the measurement of the warrants and conversion issued therewith. During the three months ended November 30, 2015, the Company recognized approximately $61,643 of amortization of note discount.  

 

Colgan Financial Group, Inc.

 

During 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 an advisor to the Company and is secured by substantially all assets of the Company. This note is subordinate to the notes held by CUB. In July 2014, a payment 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 ratified by CUB and CFG (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 therewith, the Company entered into Amendment No. 4 to the Loan and Security Agreement with CFG. Pursuant to the 4th amendment, the Company consolidated two of the notes outstanding to CFG (the December 2013 promissory note and the $200,000 promissory note issued in February 2015). The balance of the amended note on the date of amendment no. 4 was $688,120. Amendment No. 4 provided CFG with the ability to convert the note, at its option, at a conversion price equal to the lesser of i) 85% of the weighted average price per share of the Company’s common stock as reported by the exchange or over the counter market for the ten (10) trading days prior to the date of the notice of conversion or ii) $1.50. The conversion feature is accounted for as a derivative liability in accordance with ASC 815. On the grant date, the conversion feature was valued at approximately $188,000, which was recorded as a note discount. During the three months ended November 30, 2015, amortization of the note discount amounted to approximately $46,900. As of November 30, 2015, the balance remaining is $855,890 including accrued interest. The note maturity was extended to April 2016 pursuant to an amendment to the note that became effective in September 2015.

 

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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 November 30 ,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:

 

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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. 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. In October 2015, John Hall, in his individual capacity, was dismissed from the litigation as a defendant upon a successful motion to dismiss him. At this time, he is no longer a defendant in the litigation. The lawsuit is in the midst of discovery, with all parties providing documents and taking depositions. The court has not yet scheduled a trial date, but has indicated that the case will be set for trial in the latter half of 2016. Given that he is no longer a defendant, it appears very likely that John Hall will not experience a negative outcome of a judgment against him. Robin Hood reserves the right to appeal Hall's dismissal from the case, but at this time, no Notice of Appeal has been filed. 

 

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. 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

 

On September 16, 2015, the Company closed a stock purchase agreement with Neil Rogers (“Rogers”) for an aggregate purchase price of $500,000 for a total of 500,000 shares of Common Stock. The Company agreed that $190,000 of the cash consideration is subject to the effectiveness of a registration statement for the issued shares. The use of proceeds was for general working capital purposes.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

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ITEM 6. EXHIBITS.

 

Exhibit Description of Exhibit

 

31.1Certification 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*


 

 

32Certification 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*

 

 

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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: January 19, 2016  

 

 

 

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