NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
Greenwood Hall is an emerging education
management solutions provider that delivers end-to-end services that support the entire student lifecycle including offerings that
increase student enrollment, improve student experience, optimize student success and outcomes, and help schools maximize operating
efficiencies. Since 2006, we have developed and customized turnkey solutions that combine strategy, personnel, proven processes
and robust technology to help schools effectively and efficiently improve student outcomes, expand into new markets such as online
learning, increase revenues, and deliver enhanced student experiences. Our Company currently has 163 employees and has served more
than 60 education clients and over 75 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.
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.
Reclassifications
Certain numbers in the prior year have
been reclassified to conform to the current year’s presentation.
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 August 31, 2016 and has incurred a loss from operations during 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 stockholders.
During the year ended August 31, 2016, the Company received approximately $905,000 in gross 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.
Property and Equipment
Property and equipment are stated at cost.
Depreciation and amortization are being provided using the straight-line method over the estimated useful lives of the assets.
The estimated useful lives used are as follows:
Classification
|
|
Life
|
Equipment
|
|
5-7 Years
|
Computer equipment
|
|
7 Years
|
Expenses for repairs and maintenance are
charged to expense as incurred, while renewals and betterments are capitalized.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable
for the period and the change during the period in deferred tax assets and liabilities.
Earnings (Loss) per Share
Basic earnings (loss) per share is computed
using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed
using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. During 2016,
the Company had no instruments that could potentially dilute the number of common shares outstanding. Warrants to purchase common
stock were excluded from the computation of diluted shares during the years ended August 31, 2016 and 2015, respectively, as their
effect is anti-dilutive.
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 stockholders / directors.
Based on our assessment, we have determined that UFAS is a VIE
and that we are the primary beneficiary, as defined in current accounting rules. Accordingly, we are required to consolidate the
revenues and expenses of UFAS. To date, the Company has not allocated any income or loss of UFAS to noncontrolling interests as
the noncontrolling interests never had any equity at risk. As previously discussed, UFAS ceased operations during 2013 and is presently
winding down its affairs. The Company does not anticipate having any future involvement with UFAS after it is dissolved.
Marketing and Advertising
Marketing and advertising costs are expensed
as incurred. Marketing and advertising amounted to $61,724 and $137,553 for the years ended August 31, 2016 and August 31, 2015,
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 $250,031 and $190,386 for the years ended August 31, 2016,
and August 31, 2015, respectively. This expense is included in the condensed consolidated statements of operations as Equity-Based
Compensation.
Derivative Liabilities
We account for warrants and conversion
features as either equity or liabilities based upon the characteristics and provisions of each instrument. Warrants and conversion
features 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 and conversion features were determined to be ineligible for equity classification
because of provisions that may result in an adjustment to their exercise price. Instruments 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.
During the years ended August 31, 2016
and August 31, 2015, the Company recognized a change in value of the derivative liability of $962,135, $112,735 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 August 31, 2016 and 2015 for assets and liabilities measured at fair value on a recurring basis.
August 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
846,583
|
|
August 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,664,993
|
|
The assumptions used in valuing derivative
instruments issued during the year ended August 31, 2016 and August 31, 2015 were as follows:
August 31, 2016
Risk free interest rate
|
|
|
0.68% - 0.71
|
%
|
Expected life
|
|
|
0.08 – 2.00 Years
|
|
Dividend yield
|
|
|
None
|
|
Volatility
|
|
|
100
|
%
|
August 31, 2015
Risk free interest rate
|
|
|
0.38% - 1.54
|
%
|
Expected life
|
|
|
0.65 – 5.75 Years
|
|
Dividend yield
|
|
|
None
|
|
Volatility
|
|
|
30% -60
|
%
|
The following is a reconciliation of the
derivative liability related to these instruments for the year ended August 31, 2016:
Value at August 31, 2014
|
|
$
|
118,363
|
|
Issuance of instruments
|
|
|
1,461,820
|
|
Change in value
|
|
|
112,735
|
|
Net settlements
|
|
|
(27,925
|
)
|
Value at August 31, 2015
|
|
$
|
1,664,493
|
|
Issuance of instruments
|
|
|
1,313
|
|
Change in value
|
|
|
962,135
|
|
Net settlements
|
|
|
(1,781,358
|
)
|
Value at August 31, 2016
|
|
$
|
846,583
|
|
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 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 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 February 2015, the FASB issued
ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
.
This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should
consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning
after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is
permitted. The company is currently evaluating the potential impact of this standard on its Consolidated Financial Statements,
as well as the available transition methods.
In April 2015, the FASB issued ASU No 2015-3,
Simplifying
the Presentation of Debt Issuance Costs
. This update changes the presentation of debt issuance costs in the balance sheet.
ASU 2015-03 requires debt issuance costs related to a recognized debt obligation to be presented in the balance sheet as a direct
deduction from the carrying amount of the related debt liability rather than being presented as an asset. Amortization of debt
issuance costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU 2015-15, “Presentation
and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This ASU clarified guidance
in ASC 2015-03 stating that the SEC staff would not object to a company presenting debt issuance costs related to a line-of-credit
arrangement on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end.
This update is effective for annual and interim periods beginning after December 15, 2015, which will require us to adopt these
provisions in the second quarter of 2016. This update will be applied on a retrospective basis, wherein the balance sheet of each
period presented will be adjusted to reflect the effects of applying the new guidance.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842)
, which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally
requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting
periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a
modified retrospective approach. The Company is currently evaluating the impact of the adoption of this standard on its consolidated
financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation
— Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which outlines new provisions
intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements.
The standard is effective for the Company beginning December 15, 2016, and interim periods within those annual periods. Early adoption
is permitted. The Company is evaluating the impact of the adoption of this guidance on its financial statements.
In April 2016, the FASB issued AS 2016-10,
Revenue from Contracts
with Customers (Topic 606)
, which amends certain aspects of the Board’s new revenue standard, ASU 2014-09, Revenue from
Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual
and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company has not yet selected a transition
method nor has it determined the effect of the standard on its ongoing financial reporting
.
2. PROPERTY AND EQUIPMENT
Depreciation and amortization of property
and equipment amounted to $65,555 and $63,888 for the years ended August 31, 2016 and, August 31, 2015, respectively, and is included
in the accompanying consolidated statements of operations in selling, general and administrative expenses.
At August 31, 2016 and 2015, property and
equipment consists of the following:
|
|
August
2016
|
|
|
August
2015
|
|
Computer equipment
|
|
$
|
553,255
|
|
|
|
553,255
|
|
Software and Equipment
|
|
|
42,398
|
|
|
|
39,400
|
|
Furniture & Fixtures
|
|
|
9,177
|
|
|
|
9,177
|
|
|
|
|
604,830
|
|
|
|
601,832
|
|
Accumulated depreciation
|
|
|
(524,515
|
)
|
|
|
(458,960
|
)
|
Net property and equipment
|
|
$
|
80,315
|
|
|
|
142,872
|
|
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.
As of August 31, 2016, the balance outstanding
on the term loan and line of credit amounted to $1,606,387 and $2,126,560, respectively. At August 31, 2016, 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 year ended
August 31, 2016, the Company recognized $26,094 of amortization related to this discount, leaving a balance of $19,570 at August
31, 2016.
As of August 31, 2016, the Company was
not in compliance with the covenants of the Credit Agreement with Opus. In connection with the Third Amendment, Waiver and Ratification
dated September 15, 2015, Opus has agreed to waive the covenant defaults through August 31, 2015 and extend the maturity date to
April 15, 2016. In December 2015, Opus agreed to cancel the 375,000 warrants in exchange for 1,200,000 warrants at an exercise
price of $1.00.
On July 11, 2016, PCS Link, the Company, and Opus agreed to
terms to amend the Third Amendment, Waiver and Ratification Agreement (the “Fourth Amendment”), which extended the
Maturity Date to October 31, 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 stockholders/officer,
by one stockholders/officer, a trust of one of the officers/stockholders, and UFAS.
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 January 1, 2016.
In Deccember 2015, the Company and CUB agreed to extend the
maturity date until April 15, 2016 in consideration of 523,587 warrants issued at exercise price of $1.00. The warrants were valued
at $23,463 and booked to interest expense during the year ended August 31, 2016.
On July 14, 2016, CUB extended the Maturity Date of the CUB
Note to October 31, 2016.
As of August 31, 2016, the balance remaining is $876,251.
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 two (2) 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 $295,927 and is being amortized over the term of
the note using the effective interest method. Amortization of the note discount during the year ended August 31, 2016 amounted
to approximately $155,896.
On October 9, 2015, Colgan converted $80,000 in notes payable
for 800,000 shares and one set of warrants with the right to purchase 800,000 shares at $0.10 per share and another set of warrants
with the the right to purchase 800,000 shares at $0.125 per share. The warrants were booked to additional paid in capital of approximately
$41,000 which resulted in a loss on extinguishment of debt.
On June 23, 2016, Colgan converted $35,000
in notes payable and $67,035 in accrued interest for 3,184,126 shares and one set of warrants with the right to purchase 3,184,126
shares at $0.032 per share and and another set of warrants with the right to purcashe 3,184,126 shares at $0.04 per share. Upon
conversion approximately $3,000 was booked to common stock and $204,000 to additional paid in capital which resulted in a loss
of approximately $105,000 on extinguishment of debt. Each set of warrants were booked to additional paid in capital of approximately
$142,000 and $132,000 respectively which resulted in a loss on extinguishment of debt. The conversion also resulted in an approximately
$412,000 decrease in derivative liablity and increase in additional paid in capital.
The remaining principal on the note is
$400,000 and has a remaining discount of approximately $32,000.
On July 12, 2016, CFG extended the Maturity Date of the Consolidated
CFG Note to October 31, 2016.
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, 2016. 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 unsecured 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 year ended August 31, 2016, the Company recognized approximately $564,000 of
amortization of note discount and is fully amortized as of August 31, 2016. The maturity date of this note was October 15, 2016.
On November 6. 2015 the Company entered
into a six month $125,000 unsecured promissory note with Redwood with a $25,000 issue discount and an interest rate of 10%. As
of August 31, 2016 the discount was fully amortized. As of August 31, 2016, the balance on this note was $ 125,000. The maturity
date of this note was October 15, 2016.
On December 14, 2015 the Company entered
into a three month $30,000 unsecured promissory note with Redwood with an interest rate of 18% and added an additional $15,000
on January 18, 2016 increasing the total note to $45,000. As of August 31, 2016 the discount was fully amortized. As of August
31, 2016, the balance on this note was $ 45,000. The maturity date of this note was October 15, 2016.
On February 4, 2016 the Company entered
into a one year $235,294 unsecured promissory note with Redwood with an interest rare of 10% and $35,294 issue discount. As of
August 31, 2016, the Company recognized approximately $20,000 of note discount. As of August 31, 2016, the balance on this note
was $ 235,294. As of August 31, 2016, the Company recognized approximately $ 20,000 of amortization.The maturity date of this note
was October 15, 2016.
Lincoln Park Capital Fund, LLP:
In April 2015, the Company entered into an unsecured 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. 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, 2016, the Company recognized approximately $153,000 of
amortization of note discount leaving a zero balance at August 31, 2016.
On August 21, 2015, the Company entered into a one-year $295,000
unsecured 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 year ended August 31, 2016, the Company recognized approximately $243,000 of amortization of note discount or the remaining
discount balance.
On July 15, 2016, Lincoln Park agreed to extend the maturity
date of both Lincoln Park Notes to October 31, 2016.
As of August 31, 2016, the balance owed on the Lincoln Park
notes was $ 590,000. As of August 31, 2016, if Lincoln Park converted its debt into common stock of the Company, it would be issued
1,180,000 shares.
FirstFire Global Opportunities Fund,
LLC
In December 2015, the Company issued a
convertible unsecured promissory note to FirstFire Global Opportunities Fund, LLC (“
FirstFire
”) in the principal
amount of $275,000 (the “
FirstFire Note
”) and a warrant to purchase 250,000 shares of Common Stock at an exercise
price of $0.01. The FirstFire Note is convertible a price of $0.40 per share (the “
Fixed Conversion Price
”);
provided, however that from and after the occurrence of any Event of Default thereunder, the conversion price shall be the lower
of: (i) the Fixed Conversion Price or (ii) 75% multiplied by the lowest sales price of the Common Stock in a public market during
the twenty-one (21) consecutive Trading Day period immediately preceding the Trading Day that the Company receives a Notice of
Conversion; and provided, further, however, and notwithstanding the above calculation of the conversion price, if, prior to the
repayment or conversion of the FirstFire Note, in the event the Company consummates a registered or unregistered primary offering
of its securities for capital raising purposes (a “
Primary Offering
”), FirstFire shall have the right, in its
discretion, to (x) demand repayment in full of an amount equal to any amounts outstanding under the FirstFire Note as of the closing
date of the Primary Offering or (y) convert any amounts outstanding under the FirstFire Note into Common Stock at the closing of
such Primary Offering at a conversion price equal to the lower of (A) the Fixed Conversion Price and (B) a ten percent (10%) discount
to the offering price to investors in the Primary Offering; provided, however, that from and after the occurrence of any Event
of Default thereunder, the conversion price shall equal the lower of (Y) the Fixed Conversion Price and (Z) a twenty percent (20%)
discount to the offering price to investors in the Primary Offering. The Company booked $52,320 in discounts related to the FirstFirst
Note. During the twelve months ended August 31, 2016, the Company amortized all the of note discount.
On June 30, 2016, FirstFire agreed to extend the maturity date
of the FirstFire Note to August 28, 2016. In consideration for this extension the Company gave FirstFire the right to purchase
100,000 shares at an exercise price of $0.05, along with adding an additional $25,000 principal to the loan. This additional $25,000
discount was fully amortized as of August 31, 2016. The warrants were booked as approximately $5,000 in additional paid in capital
and charged to interest expense.
On August 28, 2016, FirstFire agreed to extend the maturity
date from August 28, 2016 to September 26, 2016 in consideration of additional $100,000 in principal. As of August 31, 2016 aproximately
$10,000 of the $100,000 discount was amortized. FirstFire was not allowed to convert greater that $25,000 per week.
On August 31, 2016, FirstFire converted $7,500 in debt to 500,000
shares. This resulted in a $4,000 loss on extinguishment of debt.
As of August 31, 2016, the balance on the First Fire note was
$ 392,500.
As of August 31, 2016, if First Fire converted its note into
shares of common stock of the Company, it would be issued 26,166,667 shares.
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 stockholder
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 4
th
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, 2016, amortization
of the note discount amounted to approximately $117,000. As of August 31, 2016, the balance remaining is $982,623 including accrued
interest. The note maturity was extended to April 2016 pursuant to an amendment to the note that became effective in September
2015.
As of August 31, 2016, if CFG converted its 2013 note into shares
of common stock of the Company, it would be issued 29,560,206 shares.
In December 2014, the Company issued to
CFG and Robert Logan a promissory note with a principal amount of $500,000 (the “
2014 CFG Note
”), which bears
interest at a rate of 12% per year, payable monthly with a maturity date on the third anniversary of the issuance thereof. The
2014 CFG Note is secured by substantially all assets of the Company and is subordinate to the notes held by Opus and CUB.
In connection with the 2014 CFG Note, the
Company granted to CFG the right to receive a warrant to purchase shares of Common Stock upon the full payment or conversion of
the principal under the 2014 CFG Note. The conversion feature and warrants both include provisions that call for the respective
instruments to be converted or exercised, as applicable, into 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 warrant and conversion feature are subject to derivative accounting pursuant to ASC
815. Accordingly, the fair value of the warrant 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 $295,927 and is being amortized over the term of the note using
the effective interest method. Amortization of the 2014 CFG Note discount during the twelve months ended August 31, 2016 amounted
to approximately $155,896.
As of August 31, 2016, if CFG converted
the balance and accrued interest owed on the 2014 CFG Note, CFG would be issued 17,566,927 shares and two sets of warrants –
the first set excercisable for 17,566,927 shares of the Company’s Common Stock at an exercise price of $ 0.023/share and
the second set excercisable for 17,566,927 shares of the Company’s Common Stock at an exercise price of $ 0.029/share.
In April 2015, the Company issued to CFG
a promissory note for the principal amount of $200,000 (the “
2015 CFG Note
”) under the Loan and Security Agreement.
The Company also finances the purchases
of small equipment. The amount of such notes is not significant at August 31, 2016. The following is a schedule, by year, of future
minimum principal payments required under notes payable as of August 31, 2016:
Years Ending
August 31,
|
|
|
|
2017
|
|
$
|
7,512,881
|
|
2018
|
|
|
—
|
|
2019
|
|
|
—
|
|
2020
|
|
|
—
|
|
Total
|
|
|
7,512,881
|
|
Note discount
|
|
|
(183,732
|
)
|
|
|
$
|
7,329,149
|
|
4. 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
In September 2014, the Company sold 1,000,000
units, comprised of one share of common stock and one warrant to purchase common stock, at a price of $1.00 per unit, for total
proceeds of $1,000,000. The warrants have an exercise price of $1.30 per share and expire twenty-four (24) months from the date
of issuance.
In January 2015, the Company sold 250,000
units, comprised of one share of common stock and one warrant to purchase common stock, at a price of $1.00 per unit, for total
proceeds of $250,000. The Company incurred $11,555 of fees associated with this raise, which are presented net of the proceeds.
The warrants have an exercise price of $1.30 per share and expire twenty-four (24) months from the date of issuance.
During the year ended August 31, 2015,
the Company issued 545,000 shares of common stock in connection with the exercise of warrants. This resulted in total proceeds
of $5,450.
During the year ended August 31, 2015,
as more fully discussed in Note 3, the Company issued 200,000 shares as a debt kicker. The shares were measured at their issuance
date fair value of $170,000 and were considered in the measurement of the note discount on the date of issuance.
The Company issued 3,064,755 common shares
associated with the conversion of debt and accrued interest totaling $306,476. In connection with the conversion of the promissory
note and accrued interest totaling $306,476, the Company offered to the holder (Redwood), as an inducement to convert, a reduction
of the conversion price of the note from $0.85 to $0.096 per share and a reduction of the exercise price of 295,000 warrants from
$0.85 to $0.01 per share. As a result, the Company assessed the incremental cost associated with these inducements, which management
estimated as approximately $2.34 million. The incremental cost associated with the inducement was expensed as interest immediately.
Redwood elected to convert the note and exercise the warrants pursuant to these new terms.
On September 16, 2015, the Company entered into a stock purchase
agreement with Neil Rogers (“Rogers”) pursuant to which the Company issued to Rogers 500,000 shares of Common Stock
in exchange for an aggregate purchase price of $500,000. The Company agreed that payment of $190,000 of the cash consideration
is subject to the effectiveness of a registration statement for the issued shares.
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.
On April 18, 2016, Greenwood Hall,
Inc.’s subsidiary, PCS Link, Inc. (“PCS”), entered into a confidential settlement agreement (the "F500
Settlement Agreement") with Finance 500, Inc. (“F500”) and Bridgewater Capital Corporation
(“BCC”) related to the resolution of disputes under a consulting agreement dated August 5, 2013 (the "F500
Consulting Agreement") between PCS, F500, and BCC. Pursuant to the the F500 Settlement Agreement and in order avoid the
continued cost and uncertainty of litigation, the Company agreed to issue a total of 750,000 shares of Common Stock to F500
and BCC, in return for (a) general release of all claims F500 and PCS may have against PCS and (b) dismissal of the lawsuit
filed by F500 and BCC against the Company and referenced in this annual report on Form 10-K. The shares were valued at
$72,675 and recorded as a charge to operating expenses on the date of issuance.
Stock Issued for Services
During the year ended August 31, 2016,
the Company entered into agreements with vendors for advisory and consulting services in which the vendors received shares totaling
1,410,332 which were measured based on their grant-date fair value and recognized as operating expense of $578,947.
Stock Option Plan
In July 2014, the Board of Directors adopted, and the stockholders
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 August 31, 2016, the members of the Board of Directors
hold options to purchase 2,660,000 shares of common stock at exercise prices ranging from $0.01 to $0.75, which were granted prior
to August 31, 2016.
As of August 31, 2016, employees and officers hold options to
purchase 2,325,000 shares of common stock at exercise prices ranging from $0.08 to $0.11.
Transactions in FY2016
|
|
Quantity
|
|
|
Weighted-
Average
Exercise Price
Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Outstanding, August 31, 2015
|
|
|
1,750,000
|
|
|
|
0.37
|
|
|
|
9.29
|
|
Granted
|
|
|
3,235,000
|
|
|
|
0.16
|
|
|
|
9.42
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding, August 31, 2016
|
|
|
4,985,000
|
|
|
|
0.23
|
|
|
|
9.03
|
|
Exercisable, August 31, 2016
|
|
|
1,750,000
|
|
|
|
0.37
|
|
|
|
8.29
|
|
The fair value of the options granted during the years ended
August 31, 2016 and August 31, 2015 is estimated at approximately $401,440 and $210,000 respectively. The fair value of these options
was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions for the fiscal years
ended August 31, 2016 and August 31, 2015: no dividends, expected volatility of 100 %, risk free interest rate range of 1.21% to
1.65%, and expected life of 5.5 years.
The weighted average remaining contractual life of options outstanding
issued under the Plan was 9.03 years at August 31, 2016. The exercise prices for the options outstanding at August 31, 2016 ranged
from $0.01 to $0.75, and the information relating to these options is as follows:
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
|
|
|
|
7.90
|
|
|
|
700,000
|
|
|
|
0.01
|
|
|
|
7.90
|
|
|
600,000
|
|
|
$
|
0.50
|
|
|
|
8.53
|
|
|
|
300,000
|
|
|
|
0.50
|
|
|
|
8.53
|
|
|
450,000
|
|
|
$
|
0.75
|
|
|
|
8.59
|
|
|
|
450,000
|
|
|
|
0.75
|
|
|
|
8.59
|
|
|
910,000
|
|
|
$
|
0.35
|
|
|
|
9.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,825,000
|
|
|
$
|
0.08
|
|
|
|
9.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
$
|
0.11
|
|
|
|
9.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,985,000
|
|
|
$
|
0.23
|
|
|
|
9.03
|
|
|
|
1,750,000
|
|
|
$
|
0.37
|
|
|
|
8.29
|
|
Warrants Issued for Services
During fiscal year 2016, the Company issued
1,753,587 warrants to various creditors to further extend their payment term. The warrants are exercisable at $1.00 per share,
have a term of 5.5 years, and were 100% vested upon issuance. The Company valued these warrants at $78,580 using the Black-Scholes
model and the significant inputs to that model below. The Company recognized these warrants as an expense during the year period
ended August 31, 2016. Also during that period the Company issued to Colgan Financial based on an old Consultant agreement 150,000
warrants which were expensed at $11,436.
During the year ended August 31, 2016,
the Company issued 250,000 warrants for services. The warrants are exercisable at $0.01 per share, have a term of 5 years, and
were 100% vested upon issuance. The Company valued these warrants at $30,349 using the Black-Scholes model and the significant
inputs to that model below. The Company recognized these warrants as an expense during the year ended August 31, 2016. There were
also another 500,000 warrants issued at $1.10 and expensed for $3,407
In March 2015, the Company
issued an S-1 to register 5,673,980 shares of common stock. As part of this offering, the Company agreed to issue 1,387,530 shares
to Company stockholders holding warrants for the purchase of the Company’s common stock. This resulted in the warrant holders
forfeiting warrants equal that could have been exercised for 4,286,450 shares of common stock of the Company. The company recognized
$693,765 of expense associated with this exchange.
The assumptions used in valuing warrants
issued for services during the twelve months ended August 31, 2016 were as follows:
Risk free interest rate
|
|
|
0.78% - 1.66
|
%
|
Expected life
|
|
|
2 – 5.64 Years
|
|
Dividend yield
|
|
|
None
|
|
Volatility
|
|
|
66
|
%
|
Warrants Outstanding
The following is a summary of warrants
outstanding at August 31, 2016:
Exercise
Price
|
|
|
Number of Warrants
|
|
|
Expiration
Date
|
$
|
1.00
|
|
|
|
1,264,023
|
|
|
Dec-24
|
$
|
0.01
|
|
|
|
100,000
|
|
|
Jul-16
|
$
|
1.00
|
|
|
|
295,000
|
|
|
Apr-20
|
$
|
0.03
|
|
|
|
3,184,332
|
|
|
Jun-18
|
$
|
0.04
|
|
|
|
3,184,332
|
|
|
Jun-18
|
$
|
0.10
|
|
|
|
800,000
|
|
|
Jun-18
|
$
|
0.13
|
|
|
|
800,000
|
|
|
Jun-18
|
$
|
0.01
|
|
|
|
150,000
|
|
|
Feb-18
|
$
|
0.50
|
|
|
|
1,176,473
|
|
|
Aug-20
|
$
|
1.00
|
|
|
|
400,000
|
|
|
Aug-20
|
$
|
1.00
|
|
|
|
1,200,000
|
|
|
Aug-21
|
$
|
1.00
|
|
|
|
523,587
|
|
|
Aug-21
|
$
|
1.00
|
|
|
|
20,000
|
|
|
Aug-21
|
$
|
1.00
|
|
|
|
10,000
|
|
|
Aug-21
|
$
|
0.01
|
|
|
|
250,000
|
|
|
Dec-19
|
$
|
1.10
|
|
|
|
500,000
|
|
|
Mar-21
|
$
|
0.05
|
|
|
|
100,000
|
|
|
Aug-21
|
5. CONCENTRATIONS
Concentration of Credit Risk
The Company maintains its cash and cash
equivalents at a financial institution which may, at times, exceed federally insured limits. Historically, the Company has not
experienced any losses in such accounts.
Major Customers
For the year ended August 31, 2016, three
(3) customers, and three (3) specific projects with one of those specific customers, represented 35% of net revenues. For the year
ended August 31, 2015, one (1) customer and three (3) specific projects with that customer represented 32% of net revenues. A decision
by any of these customers to cease business relations with the Company may have a material adverse effect on the Company’s
financial condition and results of operations. As of August 31, 2016, two (2) customers represented 22% of accounts receivable
and as of August 31, 2015, three (3) customers represented 44% of accounts receivable.
6. 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 August 31, 2016 and August
31, 2015.
A reconciliation of the expected income
tax (benefit) from continuing operations computed using the federal statutory income tax rate to the Company’s effective
income tax rate is as follows for the years ended August 31, 2016 and August 31, 2015:
|
|
2016
|
|
|
2015
|
|
Income tax (benefit) computed at federal statutory tax rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
State taxes, net of federal
|
|
|
(5.83
|
)
|
|
|
(5.83
|
)
|
Permanent differences
|
|
|
0.10
|
|
|
|
0.10
|
|
Change in valuation allowance
|
|
|
39.73
|
|
|
|
39.73
|
|
Effective income tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
As of August 31, 2016, the Company is in
process of determining the amount of Federal and State net operating loss carry forwards (“
NOL
”) available to
offset future taxable income. The Company’s NOLs will begin expiring in 2032. These NOLs may be used to offset future taxable
income, to the extent the Company generates any taxable income, and thereby reduce or eliminate future federal income taxes otherwise
payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences
an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the
ownership of certain stockholders in the stock of a corporation by more than 50% over a three-year period. In the event that an
ownership change has occurred, or were to occur, utilization of the Company’s NOLs would be subject to an annual limitation
under Section 382. Any unused annual limitation may be carried over to later years. The Company could experience an ownership change
under Section 382 as a result of events in the past in combination with events in the future. If so, the use of the Company’s
NOLs, or a portion thereof, against future taxable income may be subject to an annual limitation under Section 382, which may result
in expiration of a portion of the NOLs before utilization.
Due to the existence of the valuation allowance,
future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that
expire prior to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a corresponding
reduction of the valuation allowance.
The difference between income tax expense attributable to continuing
operations and the amount of income tax expense that would result from applying domestic federal statutory rates to pre-tax income
(loss) is mainly related to an increase in the valuation allowance, partially offset by state income taxes. Valuation allowances
are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Deferred income tax
assets are mainly related to net operating loss carryforwards. Management has chosen to take a 100% valuation allowance against
the deferred income tax asset until such time as management believes that its projections of future profits make the realization
of the deferred income tax assets more likely than not. Significant judgment is required in the evaluation of deferred income tax
benefits and differences in future results from management’s estimates could result in material differences.
7. 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 years ended August 31, 2016 and August 31, 2015, amounted
to $611,002, and $562,910, respectively. The Company is responsible for certain operating expenses in connection with these leases.
There are no renewal options with any of the current leases. The following is a schedule, by year, of future minimum lease payments
required under non-cancelable operating leases as of August 31, 2016:
Years Ending
August 31,
|
|
|
|
2017
|
|
$
|
516,484
|
|
2018
|
|
|
555,762
|
|
2019
|
|
|
571,259
|
|
2020
|
|
|
571,513
|
|
2021
|
|
|
467,211
|
|
Thereafter
|
|
|
1,258,795
|
|
|
|
$
|
3,941,025
|
|
Employment Agreements
At August 31, 2016, 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.
On January 15, 2015, Finance 500, Inc. (“F500”)
and Bridgewater Capital Corporation (“BCC”) filed suit against PCS Link alleging breach of contract. On April 18, 2016,
the Company’s subsidiary, PCS Link, Inc. (“PCS Link”) entered into a confidential settlement agreement (the "F500
Settlement Agreement") with F500 and BCC related to the resolution of disputes arising under a consulting agreement dated
August 5, 2013 (the "F500 Consulting Agreement") between PCS Link, F500, and BCC. Pursuant to the F500 Settlement Agreement
and in order avoid the continued cost and uncertainty of litigation, the Company agreed to issue a total of 750,000 shares of Common
Stock to F500 and BCC, in return for (a) a general release of all claims F500 and BCC may have against PCS Link and (b) F500 and
BCC’s dismissal of the lawsuit. The Company also agreed to pay to F500 and BCC a total $ 130,000, over a twelve-month period
commencing on June 12, 2016.
On August 31, 2013, 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) alleging 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, Chief Executive Officer of the
Company (“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.
In October 2015, Hall, in his individual capacity, was dismissed from the litigation as a defendant upon a successful motion to
dismiss him. On July 5, 2016, PCS Link entered into a confidential settlement agreement (“Robin Hood Settlement Agreement”)
with the Robin Hood and Patriot regarding, among other things, the resolution of all claims associated with the lawsuit. Pursuant
to the Robin Hood Settlement Agreement, (i) Robin Hood received a settlement payment, of which approximately $380,000 was paid
by the Company’s insurance carrier and $20,000 was paid by the Company, and (ii) Robin Hood agreed to (a) release the Company
and Hall from all claims, (b) dismiss the Action against the Company, and (c) refrain from pursuing an appeal of Hall’s dismissal
from the action by the Superior Court. The action also included a cross-complaint filed by Patriot against PCS Link. As part of
a full resolution of the action and in order to avoid the continued cost and uncertainty of litigation, PCS Link entered into a
separate confidential settlement agreement (the “Patriot Settlement Agreement”) with Patriot, pursuant to which PCS
Link agreed to enter into a new five (5) year Master Services Agreement (“MSA”) with Patriot that extended the existing
service relationship between the Company and Patriot, providing for certain preferential pricing and terms to Patriot and requiring
PCS Link to provide services to Patriot through October of 2021. In return, Patriot agreed to (i) release all claims against PCS
Link and (ii) dismiss its counter-complaint against PCS Link.
On March 11, 2016, StoryCorp Consulting,
Inc. and David R. Wells filed suit against the Company and the John R. Hall, in his individual capacity, in the Superior Court
of the State of California for the County of Los Angeles (Central District) for breach of contract and promissory fraud/false promise,
among other things, seeking an amount of not less than $ 100,000. The Company believes that it has a strong defenses and is 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 resolved until 2017, at the earliest. No trial date has been set. If we fail in defending any
such claims or settling those claims, in addition to paying monetary damages or a settlement payment, the outcome of this matter
could have a materially adverse effect on our business, financial condition and results of operations.
8. DISCONTINUED OPERATIONS
During 2013, we ceased operations in our affiliated company,
UFAS. The operations of UFAS are now presented as discontinued operations in the accompanying consolidated financial statements.
UFAS was inactive during the periods ended August 31, 2016 and 2015.
9. SUBSEQUENT EVENTS
The following events occurred after August 31, 2016, through
November 29, 2016.
On October 14, 2016, the Company entered into a Loan and Security
Agreement (“Loan Agreement”) with PCS Link, Inc., a California corporation and the Company’s wholly-owned subsidiary
(“PCS”), and Moriah Education Management, LLC, a Delaware limited liability company (“Moriah”), pursuant
to which Moriah granted a loan to PCS in exchange for a promissory note in the principal amount of $3,500,000 (“Moriah Loan”).
The Company also entered into a Stock Pledge Agreement (the “Stock Pledge Agreement”) with Moriah, pursuant to which
the Company pledged 1,007,920 shares of common stock of PCS held by the Company, representing 100% of the issued and outstanding
shares of common stock of PCS, and (ii) John R. Hall, the Chief Executive Officer of the Company and the Chief Executive Officer
of PCS, executed a personal guaranty (the “Personal Guaranty”), to secure PCS’ obligations under the Loan Agreement.
In connection with the Loan Agreement, on October 14, 2016, the Company and Moriah entered into a Securities Issuance Agreement
pursuant to which the Company issued a five-year warrant to purchase 8,125,000 shares of the Company’s common stock at a
price of $0.14 per share and a seven-year warrant to purchase 3,500,000 shares of the Company’s common stock at a price of
$0.12 per share. The warrants were issued in reliance on Section 4(a)(2) of the Securities Act of 1933. On October 14, 2016, in
consideration for the Personal Guaranty, the Company issued to John Hall, its Chief Executive Officer, a five-year warrant to purchase
up to 5,000,000 shares of common stock of the Company at a price of $0.10 per share. The warrants were issued in reliance on Section
4(a)(2) of the Securities Act of 1933.
In connection with the Moriah Loan,
the Company entered into a Note Purchase and Restructuring Agreement, dated September 30, 2016, with Redwood Fund LP (“Redwood”),
pursuant to which Redwood agreed to (i) forgive all amounts owed to Redwood under that certain convertible promissory note issued
on November 6, 2015 with a principal amount of $125,000 and all amounts owed to Redwood under that certain convertible promissory
note issued on December 14, 2015 with a principal amount of $30,000, (ii) consolidate all other indebtedness owed by the Company
to Redwood in exchange for $300,000 (the “Additional Funding”), and (iii) accept from the Company a promissory note
(“September 2016 Promissory Note”) in the principal amount of $1,418,497, representing such consolidated indebtedness
and Additional Funding at an original issue discount of 15%. The September 2016 Promissory Note shall be due and payable on the
first anniversary thereof. In further connection with the Moriah Loan, the Company, Moriah and Redwood entered into a Subordination
Agreement, dated October 14, 2016, pursuant to which Redwood agreed to subordinate all indebtedness owed thereto so long as any
obligations of the Company owed to Moriah under the Loan Agreement remain outstanding; provided, however, that the Company may
continue to make regular payments of interest under the September 2016 Promissory Note.
In connection with the Moriah Loan,
the Company entered into an Exchange Agreement, dated October 14, 2016, with Lincoln Park Capital Fund, LLC (“Lincoln Park”),
pursuant to which the Company authorized the issuance to Lincoln Park new notes (the “September 2016 Lincoln Park Notes”)
and warrants with a principal amount of $685,000 in exchange for the cancellation of any and all obligations under notes and warrants
issued by the Company to Lincoln Park pursuant to note purchase agreements dated April 24, 2015 and August 21, 2015. In further
connection with the Moriah Loan, the Company, Moriah and Lincoln Park entered into a Subordination Agreement, dated October 14,
2016, pursuant to which Lincoln Park agreed to subordinate all indebtedness owed thereto so long as any obligations of the Company
owed to Moriah under the Loan Agreement remain outstanding; provided, however, that the Company may continue to make regular payments
of interest under the September 2016 Lincoln Park Notes.
On October 14, 2016, in connection
with the Moriah Loan, the Company amended and restated that certain secured promissory note, dated December 23, 2013 (as amended,
amended and restated, supplemented or otherwise, modified, the “2013 Colgan Note”) (the “2013 Colgan Amended
Note”), in a principal amount equal to $840,892.80, representing the outstanding balance of the 2013 Colgan Note, less $150,000
paid by the Company to Colgan Financial Group, Inc. (“CFG”) and Robert Logan (together with CFG, the “Colgan
Investor”). On the effective date of the 2013 Colgan Amended Note, in connection with the Moriah Loan, the Company amended
and restated that certain secured convertible promissory note, dated December 5, 2014 (as amended, amended and restated, supplemented
or otherwise modified, the “2014 Colgan Note”) (the “2014 Colgan Amended Note”), to extend the exercise
period of any stock purchase warrants issued to the Investor in connection with the 2014 Colgan Note to five years following the
issuance of the 2014 Colgan Amended Note in a principal amount equal to $400,000. In further connection with the Moriah Loan, the
Company, Moriah and CFG entered into a Subordination Agreement, dated October 14, 2016, pursuant to which CFG agreed to subordinate
all indebtedness owed thereto so long as any obligations of the Company owed to Moriah under the Loan Agreement remain outstanding;
provided, however, that the Company may continue to make regular payments of interest under the 2013 Colgan Amended Note and 2014
Colgan Amended Note.
On October 14, 2016, in connection with the Moriah Loan, the
Company entered into certain payoff and settlement agreements (“Payoff Agreements”) with Opus Bank (“Opus”)
and California United Bank (“CUB”). In accordance with the Payoff Agreements, the Company (a) issued to Opus a five
(5) year warrant for the purchase of 2,000,000 shares of the Company’s common stock with an exercise price of $ 0.10 per
share, and (b) amended the exercise price of a warrant issued to CUB on December 14, 2015 for the purchase of 523,587 shares of
the Company’s common stock from $ 1.00 per share to $ 0.10 per share.
The Company is currently evaluating the impact that the aforementioned
subsequent events will have on its financial position and results of operation.