NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Greenwood Hall, Inc., a Nevada corporation
(hereinafter referred to as the “Company”, “Greenwood Hall”, “we”, “us” or “our”)
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
158 employees and has served more than 62 education clients and over 75 degree programs.
Basis of Presentation
On July 23, 2014, Greenwood Hall (formerly
Divio Holdings, Corp. (“Divio”)) and its wholly owned subsidiary (“Merger Sub”) consummated the transactions
contemplated under a 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 “Merger”). Upon the consummation of the Merger, the separate existence of Merger Sub ceased, and PCS Link became
a wholly owned subsidiary of Divio. As a result of the Merger, 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 of Divio, representing approximately 71% of the total
outstanding shares on the effective date of the Merger. Immediately following 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, the Company acquired PCS
Link from a legal 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 from an accounting perspective. This is because Greenwood Hall did not have operations
immediately prior to the Merger, and PCS Link became the operating company as a result thereof. The board of directors of Greenwood
Hall immediately after the Merger consisted of five directors, four of whom were nominated by PCS Link. Additionally, PCS Link’s
stockholders owned 71% of the outstanding shares of Greenwood Hall immediately after completion of the transaction.
This Quarterly Report on Form 10-Q for the
quarter ended November 30, 2016 should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended
August 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on December 6, 2016. As contemplated by
the SEC under Article 8 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed
and therefore do not contain all disclosures required by generally accepted accounting principles. The interim financial data are
unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily
indicative of those to be expected for the full year.
Reclassifications
Certain amounts from prior years have been reclassified to conform
to current year presentation.
Principles of Consolidation
The consolidated financial statements include
the accounts of Greenwood Hall, PCS Link, a wholly owned subsidiary of Greenwood Hall (“PCS Link”), and University
Financial Aid Solutions, LLC (“UFAS”), collectively referred to herein as the “Company”, “we”,
“us”, “our”, or “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, UFAS is presented in the accompanying consolidated financial
statements as discontinued operations.
Going Concern
The consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”),
which contemplates the continuation of the Company as a going concern. The Company has an accumulated deficit and a working capital
deficit as of November 30, 2016 and has continued to incur a loss from operations during the first three months of fiscal year
2017. Although such accumulated deficit has decreased by 14.9% from $(27,666,656) as of August 31, 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 three months ended November 30, 2016, the Company generated $1,184,723 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 or a flat monthly subscription fee. Some of the
Company’s service contracts are subject to guaranteed minimum amounts of service volume.
The Company recognizes revenue when all of
the following have occurred: persuasive evidence of an agreement with the customer exists, services have been rendered, the selling
price is fixed or determinable, and collectability of the selling price is reasonably assured. For fixed-fee service contracts,
the Company recognizes revenue on a straight-line basis over the period of contract performance. Costs incurred under these service
contracts are expensed as incurred.
Deferred Revenue
Deferred revenue primarily consists of prepayments
received from customers for which the Company’s revenue recognition criteria have not been met. The deferred revenue will
be recognized as revenue once the criteria for revenue recognition have been met.
Accounts Receivable
The Company extends credit to its customers.
An allowance for doubtful accounts is maintained for estimated losses resulting from the inability of the Company’s customers
to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer
credit-worthiness, and changes in customer payment terms when making estimates of the collectability of the Company’s trade
accounts receivable balances. If the Company determines that the financial condition of any of its customers has deteriorated,
whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect
a receivable have failed, the receivable is written off. Based on the information available, management believes the Company’s
accounts receivable, net of the allowance for doubtful accounts, are collectable.
Property and Equipment
Property and equipment are stated at cost.
Depreciation and amortization are being provided using the straight-line method over the estimated useful lives of the assets.
The estimated useful lives used are as follows:
Classification
|
|
Life
|
Equipment
|
|
5-7 Years
|
Computer equipment
|
|
7 Years
|
Expenses for repairs and maintenance are charged
to expense as incurred, while renewals and betterments are capitalized.
Income Taxes
The Company accounts for income taxes in accordance
with ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period
and the change during the period in deferred tax assets and liabilities.
Earnings (Loss) per Share
Basic earnings (loss) per share is
computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share
are computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the
period. Warrants to purchase common stock are excluded from the computation of diluted shares during the three months ended
November 30, 2016 and 2015, respectively, when 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 $7,209 and $12,833 for the three months ended November 30, 2016, and the three
months ended November 30, 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 $35,494 and $20,084 for the three months
ended November 30, 2016, and November 30, 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 three months ended November 30,
2016 and November 30, 2015, the Company recognized a change in value of the derivative liability of $478,762 and $202,249, 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, 2016 and August 31, 2016 for assets and liabilities measured at fair value on a recurring basis.
November 30, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,181,175
|
|
|
$
|
1,181,175
|
|
August 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
846,583
|
|
|
$
|
846,583
|
|
The assumptions used in
valuing derivative instruments issued during the three months ended November 30, 2016 were as follows:
Risk free interest rate
|
|
0.51% - 1.22%
|
Expected life
|
|
.01 Years-5.00 years
|
Dividend yield
|
|
None
|
Volatility
|
|
68% - 137%
|
The following is a reconciliation of the derivative
liability related to these instruments for the three months ended November 30, 2016:
Value at August 31, 2016
|
|
$
|
846,583
|
|
Issuance of instruments
|
|
|
1,161,043
|
|
Change in value
|
|
|
(478,762
|
)
|
Net settlements
|
|
|
(347,690
|
)
|
Value as of November 30, 2016
|
|
$
|
1,181,175
|
|
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
There were no recently issued accounting standards during the
period ended November 30, 2016 that impacted our consolidated financial statements or ongoing financial reporting.
2. PROPERTY AND EQUIPMENT
Depreciation and amortization of the Company’s
property and equipment amounted to $15,850 and $16,179 for the three months ended November 30, 2016 and the three months ended
November 30, 2015, respectively, and is included in the accompanying consolidated statements of operations in selling, general
and administrative expenses.
At November 30, 2016 and August 31, 2016, property
and equipment consists of the following:
|
|
November
2016
|
|
|
August
2016
|
|
Computer equipment
|
|
$
|
553,255
|
|
|
|
553,255
|
|
Software and Equipment
|
|
|
42,398
|
|
|
|
42,398
|
|
Furniture & Fixtures
|
|
|
9,177
|
|
|
|
9,177
|
|
|
|
|
604,830
|
|
|
|
604,830
|
|
Accumulated depreciation
|
|
|
(539,633
|
)
|
|
|
(524,515
|
)
|
Net property and equipment
|
|
$
|
65,197
|
|
|
|
80,315
|
|
3. NOTES PAYABLE
On October 14, 2016, the Company executed
a new credit agreement (“Moriah Agreement”) with Moriah Educational Management LLC (“Moriah”). The Moriah
Agreement provided for a revolving loan (“Revolving Loan”) for up to $3,500,000. The Revolving Loan may be drawn in
tranches of not less than $500,000. On October 14, 2016 (“Advance Date”) the Company borrowed the full $3,500,000 (“Principal”).
Interest on the Revolving Loan shall be computed on the basis of the actual number of days elapsed and a year of 360 days and shall
accrue on the outstanding principal balance of advances at an annual rate equal to the greater of (i) the sum of (A) the “Prime
Rate” as reported in the “Money Rates” column of The Wall Street Journal, adjusted as and when such Prime Rate
changes, plus (B) Seven and Three Quarters Percent (7.75%), or (ii) Ten Percent (10.0%), but in no event in excess of Fourteen
Percent (14%) per annum unless an event of default has occurred and is continuing. The prime rate was 3.5% on the Advance date.
The Principal is due and payable, with all accrued and unpaid interest on October 13, 2018 with monthly payments of $29,167 starting
on April 1, 2017. The Moriah Agreement contains a prepayment penalty. If the Company pays the entire unpaid Principal before April
30, 2017, a penalty of three percent (3%) of the then-outstanding Principal under the Revolving Loan.
As part of the Moriah Agreement, the Company
issued two warrants to Moriah for the purchase of the Company’s common stock:
The Moriah Warrant is for the purchase,
for a period of seven years, of up to 3,500,000 shares of the Company common stock at a purchase price of $0.12 per share, which
is adjustable downward (“Ratchet-down”) if the Company issues share of its common stock, or securities convertible
into or exercisable for the Company’s common stock at a price below $0.12. The Company has determined the Ratchet-down provision
causes the Moriah Warrant to be a derivative, accordance with ASC 815 Derivatives and Hedging (ASC 815”). ASC 815 requires
the Moriah Warrant to be recorded as a liability on the date of issuance and revalued every reporting period, with the increase
or decrease in fair value recorded as a loss or gain in the Company’s statement of operations. As of the October 14, 2016,
the fair value of the Moriah Warrant was approximately $23,000, which was recorded as a discount to the Revolving Loan and amortized
as an expense over the life of the Revolving Loan. As of November 30, 2016, the fair value of the Moriah Warrant was approximately
$43,000.
Moriah
Put is for the purchase, for a period of five years, of up to 8,125,000 shares of the Company common stock at a purchase price
of $0.14 per share, which is adjustable downward (“Ratchet-down”) if the Company issues share of its common stock,
or securities convertible into or exercisable for the Company’s common stock at a price below $0.14. Also, the Moriah Put
grants the holder of the option to sell
all or any portion of the Moriah Put or the Moriah Put Shares (“Put Option”)
for which the Moriah Put has been exercised to the Company for a total purchase price of up to One Million One Hundred Thirty
Seven Thousand Five Hundred Dollars ($1,137,500), pro-rated for any portion thereof, representing a purchase price of Fourteen
Cents ($0.14) per Moriah Put Share, subject to adjustment. The Put Option may be exercised at any time and, if for a portion thereof,
from time to time, during the fifteen-day period (the “Put Period”) commencing on the earliest of (1) the date when
Moriah receives written notice from the Company of the Company’s intention to prepay the Revolving Loan, which notice shall
be delivered by the Company to Moriah so as to be received by Moriah no later than fifteen days prior to the proposed date of
prepayment; (2) the date of Moriah’s acceleration of the Obligations following an event of default, or (3) September 29,
2018
The Company has determined the Ratchet-down
and Put Option provisions causes the Moriah Put to be a derivative, accordance with ASC 815 Derivatives and Hedging (ASC 815”).
ASC 815 requires the Moriah Put to be recorded as a liability on the date of issuance and revalued every reporting period, with
the increase or decrease in fair value recorded as a loss or gain in the Company’s statement of operations. As of the October
14, 2016, the fair value of the Moriah Put was approximately $1,137,500, which was recorded as a discount to the Revolving Loan
and amortized as an expense over the life of the Revolving Loan. As of November 30, 2016, the fair value of the Moriah Put was
approximately $1,137,500.
Also, the Moriah Put provides the Company
call the Moriah Put (“Call Option”) so long as any portion of this Warrant is outstanding, if the Company’s Common
Stock has both (a) an average closing price greater than $0.50 per share, and (b) an average daily trading volume in excess of
300,000 shares, in each case for the immediately preceding ninety (90) consecutive trading days and continuing through the call
notice period or such earlier date as the Moriah Put is exercised or transferred, the Company shall have the irrevocable right,
but not the obligation, to demand automatic exercise, in whole or in part, by the Holder. The Company has determined the Call Option
to be a derivative asset in a accordance with ASC 815 Derivatives and Hedging (ASC 815”). ASC 815 requires the Call Option
to be recorded as an asset on the date of issuance and revalued every reporting period, with the increase or decrease in fair value
recorded as a loss or gain in the Company’s statement of operations. As of the October 14, 2016 and November 30, 2016, the
Company has determined the Call Option fair value to be approximately$0.
Under the Moriah Agreement the Company
has the following reporting and financial covenants:
Annual Financial Statements. Annual financial
statements of Company, certified by the Chief Financial Officer of each and audited by an outside accounting firm acceptable to
Lender, as soon as available, but in any event within ninety (90) days after the end of Borrower’s Fiscal Year during the
Term. Such financial statements shall fairly present the financial position of Company as of the dates thereof and the results
of its operations, cash flows and stockholders’ equity for each of the periods then ended in all material aspects; and be
prepared in accordance with GAAP.
Quarterly Financial Statements. Quarterly financial statements of the Company, as soon as available but
in any event no later than forty-five (45) days after the close of each calendar quarter, consisting of the unaudited balance
sheet and the related statement of income of the Company, prepared in accordance with GAAP, subject to year-end audit adjustments,
together with such other information with respect to the business of Company as Moriah may request.
Monthly Financial Statements. Not later
than eighteen (18) days after the end of the first three (3) calendar months ending after the date hereof, and thereafter not later
than fifteen (15) days after the end of each subsequent calendar month, the unaudited balance sheets and the related statements
of income of Company, certified by the Chief Financial Officer of Borrower, subject to year end audit adjustments, with an aging
schedule for all accounts receivable and accounts payable and calculation of LTM EBITDA as of the date of such financial statements,
together with such other information with respect to the business of Company as Moriah may request.
Bi-Monthly Accounts Receivable and Accounts
Payable Aging Reports. Twice a month, not later than the 15th day and the last day of each calendar month, respectively, an aging
schedule for all accounts receivable and accounts payable, in form and substance satisfactory to Moriah.
Borrower shall timely file
all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act. The Company was late in the
filing of the Company’s Form 10Q for the quarter ended November 30, 2016, and such untimely filing was cured to the
satisfaction of the lender.
Adjusted Gross Revenues.
Borrower will maintain (i) minimum monthly gross revenues of not less than eighty percent (80%) of the projected monthly plan
provided by Borrower to Lender prior to the date hereof and annexed to our Annual Report on Form 10-k as Exhibit 9.18, as
measured monthly as of the last day of each month during the Term, and (ii) minimum quarterly gross revenues of not less than
eighty-five percent (85%) of the projected quarterly plan provided by Borrower to Lender prior to, as measured quarterly as
of the last day of each fiscal quarter during the Term .
EBITDA. Borrower will maintain minimum
quarterly EBITDA of not less than eighty-five percent (85%) of the projected quarterly plan provided by Borrower to Lender, as
measured quarterly as of the last day of each fiscal quarter during the Term.
From the Principal advances, the
Company was required to make certain payments to the Company’s existing note holders, specifically $1,200,000 to Opus
Bank (“Opus”), $177,578 to California United Bank (“CUB”), $150,000 to Colgan Finacial Group, Inc.
(“Colgan”), $305,000 to First Fire Capital (“First Fire”), $187,257 to Redwood Fund (“Redwood).
Also, the Company prepaid approximately $131,000 of interest under the Revolving Loan.
As consideration for Moriah to enter in
to the Moriah Agreement, the Company was required to settle the Opus and CUB loans, settle or extend the maturity dates on all
other existing notes to date after the repayment of Moriah Principal and the for the other notes holders to execute an agreement
to subordinate their security position to Moriah.
On October 7, 2014, CUB, agreed to
tender its secured promissory note in the amount of $1,250,000 dated October 21, 2010 with a remaining balance of $876,251
and all accrued and unpaid interest of approximately $75,000 for a one-time payment of $177,578. Also, the Company was
required to issue a new warrant to purchase 523,587 shares of the Company’s common stock at an exercise price of $0.10
per share.
On October 13, 2016 Opus agreed to tender
its secured promissory note and letter of credit agreement for total principal of $3,515,152 and all accrued and unpaid interest
of approximately $218,000 for a one-time payment of $1,205,778. Also, the Company was required to issue a new warrant for to purchase
2,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
On October 16, 2016 Colgan agreed to
amend the secured promissory note dated December 23, 2013. Colgan agreed to accept a payment of $150,000, forgive $150,000 of
accrued and unpaid interest and subordinate its secured position to Moriah. Also, the maturity date was extended to the earlier
of (a) the date that the Company’s obligation to Mariah is paid or (b) December 31, 2017. The note shall accrue
interest at a rate of 12% per annum.
On October 6, 2016 Colgan agreed to amend
the secured promissory note dated December 18, 2014. Colgan agreed that the maturity date was extend to the earlier of (a) the
date that the Company’s obligation to Mariah is paid or (b) December 31, 2017, with an interest rate of 12% per annum.
On October 13, 2016, First Fire agreed
to tender its secured promissory note in the amount of $392,500 dated December 21, 2015 and all accrued and unpaid interest of
approximately $18,000 for a one-time payment of $305,000. In addition, $24,500 of the outstanding balance of the note was converted
into 3,122,222 shares of common stock.
On September 30, 2016, Redwood agreed to
accept a new promissory note, maturing on September 30, 2017 and an interest rate of 12% per annum, in the amount of $1,418,496
in exchange for a payment of $300,000 and the cancelation of the promissory notes dated March 31, 2015, August 14, 2015, November
6, 2015, December 14, 2015, and February 4, 2016 and all accrued and unpaid interest under these notes. Also, Redwood agreed to
to tender its promissory notes dated November 6, 2015 and January 18, 2016 for total principal of $170,000 and all accrued and
unpaid of approximately $17,000 for a one-time payment of $187,257.
On October 3, 2016, Lincoln Park Capital Fund, LLC agreed to accept new promissory notes maturing on September 30, 2019 and
an interest rate of 12% per annum, in the amount of $685,000 in exchange for the cancellation of the promissory notes dated
April 24, 2015 in the amount of $295,000 and August 21, 2015 in the amount of $295,000 and all accrued and unpaid interest
under these notes of approximately $75,000. In addition, Lincoln Park was issued a new promissory note maturing September
30, 2019 of $250,000 reflecting $200,000 in net proceeds to the Company.
The following is a schedule, by year, of the aggregate maturities
of the notes payable as of November 30, 2016:
Periods ending November 30,
|
|
|
|
|
2017
|
|
$
|
1,651,830.00
|
|
2018
|
|
$
|
4,204,487.00
|
|
2019
|
|
$
|
935,000.00
|
|
2020
|
|
$
|
0
|
|
2021
|
|
$
|
0
|
|
Thereafter
|
|
$
|
0
|
|
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.
Stock Issued for Services
During the three months ended November 30,
2016, the Company did not issue any shares of its common stock in exchange for services.
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 are reserved for issuance. The 2014
Stock Option Plan will terminate in September 2024.
Stock Options
As of November 30, 2016, the members of the
Board of Directors hold options to purchase an aggregate of 1,750,000 shares of Common Stock at exercise prices ranging from $0.01
to $0.75, which were granted prior to August 31, 2016.
Transactions in Q1 2017
|
|
Quantity
|
|
|
Weighted-
Average
Exercise Price
Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Outstanding, August 31, 2016
|
|
|
4,985,000
|
|
|
$
|
0.23
|
|
|
|
8.78
|
|
Granted
|
|
|
0
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, November 30, 2016
|
|
|
4,985,000
|
|
|
$
|
0.23
|
|
|
|
8.78
|
|
Exercisable, November 30, 2016
|
|
|
2,660,000
|
|
|
$
|
0.36
|
|
|
|
8.35
|
|
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 100%, risk free interest rate between 1.21% and 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 November 30, 2016. The exercise prices for the options outstanding
at November 30, 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
|
|
|
|
7.65
|
|
|
|
700,000
|
|
|
|
0.01
|
|
|
|
7.65
|
|
|
600,000
|
|
|
$
|
0.50
|
|
|
|
8.28
|
|
|
|
600,000
|
|
|
|
0.50
|
|
|
|
8.28
|
|
|
450,000
|
|
|
$
|
0.75
|
|
|
|
8.34
|
|
|
|
450,000
|
|
|
|
0.75
|
|
|
|
8.34
|
|
|
910,000
|
|
|
$
|
0.35
|
|
|
|
8.94
|
|
|
|
910,000
|
|
|
|
0.35
|
|
|
|
8.94
|
|
|
1,825,000
|
|
|
$
|
0.08
|
|
|
|
9.24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
500,000
|
|
|
$
|
0.11
|
|
|
|
9.34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
4,985,000
|
|
|
$
|
0.23
|
|
|
|
8.78
|
|
|
|
2,660,000
|
|
|
$
|
0.36
|
|
|
|
8.35
|
|
Warrants Outstanding
The following is a summary of warrants outstanding
at November 30, 2016:
Exercise Price
|
|
|
Number of
Warrants
|
|
|
Expiration
Date
|
$
|
1.000
|
|
|
|
1,264,023
|
|
|
Dec-24
|
$
|
0.010
|
|
|
|
100,000
|
|
|
Jul-16
|
$
|
1.000
|
|
|
|
-
|
|
|
Apr-20
|
$
|
0.010
|
|
|
|
150,000
|
|
|
Feb-18
|
$
|
0.500
|
|
|
|
1,176,473
|
|
|
Aug-20
|
$
|
1.000
|
|
|
|
-
|
|
|
Aug-20
|
$
|
1.000
|
|
|
|
1,200,000
|
|
|
Aug-21
|
$
|
1.000
|
|
|
|
-
|
|
|
Aug-21
|
$
|
1.000
|
|
|
|
20,000
|
|
|
Aug-21
|
$
|
1.000
|
|
|
|
10,000
|
|
|
Aug-21
|
$
|
0.010
|
|
|
|
-
|
|
|
Dec-19
|
$
|
1.100
|
|
|
|
-
|
|
|
Mar-21
|
$
|
0.100
|
|
|
|
800,000
|
|
|
Jun-18
|
$
|
0.125
|
|
|
|
800,000
|
|
|
Jun-18
|
$
|
0.032
|
|
|
|
3,184,126
|
|
|
Jun-18
|
$
|
0.040
|
|
|
|
3,184,126
|
|
|
Jun-18
|
$
|
0.050
|
|
|
|
100,000
|
|
|
Jun-21
|
$
|
0.100
|
|
|
|
1,428,571
|
|
|
Oct-26
|
$
|
0.100
|
|
|
|
523,587
|
|
|
Dec-20
|
$
|
0.100
|
|
|
|
2,000,000
|
|
|
Oct-20
|
$
|
0.100
|
|
|
|
5,000,000
|
|
|
Oct-21
|
$
|
0.120
|
|
|
|
3,500,000
|
|
|
Oct-21
|
$
|
0.140
|
|
|
|
8,125,000
|
|
|
Oct-21
|
Warrants were issued pursuant to certain consulting
agreements and amendments to financing terms. Warrants are booked to additional paid in capital and to interest expense based on
stock price at date of grant, exercise price, warrant life, risk free rate and annual volatility. During the three months ended
November 30, 2016, the Company granted warrants to purchase up to 20,577,158 shares of Common Stock, valued from $0.10 to
$0.14 per share.
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 three months ended November 30,
2016, three (3) customers represented 53% of net revenues and for the three months ended November 30, 2015, four (4)
customers represented a total of 53% of revenues. 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.
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 November 30, 2016 and November
30, 2015.
As of November 30, 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.
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 three months ended November 30, 2016, the three months ended
November 30, 2015, amounted to $134,725 and $184,111, 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, 2016:
Years Ending
August 31,
|
|
|
|
2017
|
|
|
516,484
|
|
2018
|
|
|
555,762
|
|
2019
|
|
|
571,259
|
|
2020
|
|
|
467,211
|
|
2021
|
|
|
464,560
|
|
Thereafter
|
|
|
794,235
|
|
Employment Agreements
At November 30, 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 August 26, 2016, Zantine Greenwood (“Greenwood”),
a former officer and founder of the Company, commenced a proceeding in Arbitration alleging that the Company had breached its obligations
under a consulting agreement entered into by and between Greenwood and the Company on or about July 24, 2014 (the “Consulting
Agreement”). The Company did not appear at the Arbitration. On September 23, 2016, the Arbitrator issued an award
to Greenwood against the Company in the sum of $236,250.79. On October 26, 2016, Greenwood filed a petition to confirm the
award in the Los Angeles Superior Court, Case No. BS165962. The Company opposed the petition and requested that the court vacate
the award because the arbitration provision in the Consulting Agreement was void under applicable law and therefore the Arbitrator
had no subject matter jurisdiction over the dispute. In a January 9, 2017 Settlement Agreement and Mutual Release,
the Company agreed to pay Greenwood $115,000 plus 5.5% simple interest in monthly installments of $10,000 until payment in full
in exchange for a release of any and all claims against the Company arising from or relating to the dispute. Conditions to
the settlement are that the Court vacate the award and retain jurisdiction until all payments have been made. The Company
expects that the Court will agree with the conditions.
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 defense 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, but are expected to be resolved in 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 three month periods ended November 30, 2016 and 2015.
9. SUBSEQUENT EVENTS
On November 22, 2016, Frederic Boyer tendered
to the Company a written resignation (the “Resignation”) as director on the Board, effective immediately, in which
Mr. Boyer expressed disagreement with certain management practices as it related to the Board of Directors. A copy of the Resignation
is filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on November 29, 2016.
On November 28, 2016, the Board of Directors
appointed Michael Poutre II, Cary Sucoff and Jerry Rubinstein to the Board of Directors, effective as of December 7, 2016.