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 152 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 May 31, 2017 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 May 31, 2017, and has continued to incur a loss from operations
during the first nine months of fiscal year 2017.
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 nine months ended May 31, 2017, the Company generated $1,131,635 in financing
activities.
Management
intends to become profitable by continuing to grow its operations and customer base. In addition, to maintain operations, the
Company continues to seek to raise additional cash through debt and equity financing. As of June 30, 2017, the Company is negotiating
the termination of the lease for office space in Los Angeles as part of a plan to reduce operating costs where possible. 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
|
|
3-5
Years
|
Computer
equipment
|
|
3-7
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
We
report earnings per share in accordance with FASB ASC 260-10. Basic earnings (loss) per share is computed by dividing income available
to common shareholders by the weighted-average number of common shares available. Diluted earnings (loss) per share is computed
similar to basic earnings per share except that the denominator in increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued and if the common shares were dilutive. The components
of basic and diluted earnings per share for the three and nine months ended May 31, 2017 and May 31, 2016 were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
31 2017
|
|
|
May
31 2016
|
|
|
May
31 2017
|
|
|
May
31 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) attributable to common shareholders
|
|
$
|
(804,637
|
)
|
|
$
|
(1,526,201
|
)
|
|
$
|
2,301,684
|
|
|
$
|
(7,007,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding during the period
|
|
|
60,691,683
|
|
|
|
49,281,151
|
|
|
|
59,565,216
|
|
|
|
48,397,602
|
|
Dilutive
effect of stock options and warrants
|
|
|
0
|
|
|
|
0
|
|
|
|
603,025
|
|
|
|
0
|
|
Common
stock and common stock equivalents used for dilutive earnings per share
|
|
|
60,691,683
|
|
|
|
49,281,151
|
|
|
|
60,168,241
|
|
|
|
48,397,602
|
|
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 $37,507 and $16,411 for the three months
ended May 31, 2017 and May 31, 2016, respectively, and, $48,266 and $53,689 for the nine months ended May 31, 2017 and May 31,
2016, 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 $70,970
and $71,465 for the three months ended May 31, 2017 and May 31, 2016, respectively, and $73,289 and $170,215 for the nine months
ended May 31, 2017 and May 31, 2016, 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 May 31, 2017 and May 31, 2016, the Company recognized a change in value of the derivative liability of
$49,670 and $(412,115), respectively. During the nine months ended May 31, 2017 and May 31, 2016, the Company recognized a change
in value of the derivative liability of $470,987 and $(189,380), respectively.
Fair
Value of Financial Instruments
The
Company groups financial assets and financial liabilities measured at fair value into three levels of hierarchy in accordance
with ASC 820-10, “Fair Value Measurements and Disclosure.” Assets and liabilities recorded at fair value in the accompanying
balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
Level
Input:
|
|
Input
Definition:
|
Level
I
|
|
Observable
quoted prices in active markets for identical assets and liabilities.
|
|
|
|
Level
II
|
|
Observable
quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in
the market.
|
|
|
|
Level
III
|
|
Model-based
techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include
use of option pricing models, discounted cash flow models, and similar techniques.
|
For
certain of our financial instruments, including working capital instruments, the carrying amounts are approximate fair value due
to their short-term nature. Our notes payable approximate fair value based on prevailing interest rates.
The
following table summarizes fair value measurements at May 31, 2017 and August 31, 2016 for assets and liabilities measured at
fair value on a recurring basis.
May
31, 2017
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,188,949
|
|
|
$
|
1,188,949
|
|
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 year ended August 31, 2016 were as follows:
Risk
free interest rate
|
0.68%
- 0.71%
|
Expected
life
|
0.08
Years – 2.00 years
|
Dividend
yield
|
None
|
Volatility
|
100%
|
The
assumptions used in valuing derivative instruments issued during the nine months ended May 31, 2017 were as follows:
Risk
free interest rate
|
1.08%
- 2.02%
|
Expected
life
|
0.59
Years- 6.37 years
|
Dividend
yield
|
None
|
Volatility
|
26.9%
- 119.7%
|
The
following is a reconciliation of the derivative liability related to these instruments for the nine months ended May 31, 2017:
Value
at August 31, 2016
|
|
$
|
846,583
|
|
Issuance
of instruments
|
|
|
1,161,043
|
|
Change
in value
|
|
|
(470,987)
|
|
Net
settlements
|
|
|
(347,690)
|
|
Value
as of May 31, 2017
|
|
$
|
1,188,949
|
|
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 May 31, 2017 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 $13,461 and $16,482 for the three months ended May
31, 2017 and the three months ended May 31, 2016, respectively, and $46,593 and $49,073 for the nine months ended May 31, 2017
and the nine months ended May 31, 2016, respectively, and is included in the accompanying consolidated statements of operations
in selling, general and administrative expenses.
At
May 31, 2017 and August 31, 2016, property and equipment consists of the following:
|
|
May
2017
|
|
|
August
2016
|
|
Computer
equipment
|
|
$
|
554,665
|
|
|
|
553,255
|
|
Software
and Equipment
|
|
|
42,398
|
|
|
|
42,398
|
|
Furniture
& Fixtures
|
|
|
9,177
|
|
|
|
9,177
|
|
|
|
|
606,240
|
|
|
|
604,830
|
|
Accumulated
depreciation
|
|
|
(571,108)
|
|
|
|
(524,515
|
)
|
Net
property and equipment
|
|
$
|
35,132
|
|
|
|
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.
The Moriah Agreement contains a prepayment penalty had the entire unpaid Principal and accrued interest thereon been paid before
April 30, 2017.
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 May 31, 2017, the fair
value of the Moriah Warrant was approximately $50,949.
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 $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 May 31, 2017,
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 October
14, 2016 and May 31, 2017, 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 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 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 10-Q 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. As of May 31, 2017, the Company is not in compliance with the Adjusted
Gross Revenues covenant.
As a result
of the noncompliance, the note may become payable immediately at the discretion of the lender, and is subject to a default interest
rate.
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. As of May 31, 2017, the
Company is not in compliance with the EBITDA covenant.
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 Financial
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, 2016, 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 Moriah 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 Moriah is paid or (b) December 31, 2017, with
an interest rate of 12% per annum.
On
September 30, 2016, Colgan converted $12,932 in notes payable into 1,901,960 shares of Common Stock at $0.0068 per share.
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 $95,000. 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 May 31, 2017:
|
Periods Ending May 31,
|
|
|
Note Principal
|
|
|
Note Discount
|
|
|
Total
|
|
|
2018
|
|
|
$
|
6,733,284
|
|
|
$
|
(1,214,362
|
)
|
|
$
|
5,518,922
|
|
|
2019
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2020
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2021
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
$
|
6,733,284
|
|
|
$
|
(1,214,362
|
)
|
|
$
|
5,518,922
|
|
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 nine months ended May 31, 2017, the Company issued 1,950,000 shares of its common stock in exchange for services valued at
$21,450.
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
Transactions in FY 2017
|
|
Quantity
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
Weighted
Average
Remaining Contractual
Life
|
|
Outstanding, August 31, 2016
|
|
|
4,985,000
|
|
|
$
|
0.23
|
|
|
|
8.53
|
|
Granted
|
|
|
500,000
|
|
|
$
|
0.03
|
|
|
|
9.85
|
|
Exercised
|
|
|
0
|
|
|
$
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
(492,534
|
)
|
|
$
|
0.09
|
|
|
|
8.77
|
|
Outstanding, May 31, 2017
|
|
|
4,992,466
|
|
|
$
|
0.23
|
|
|
|
8.33
|
|
Exercisable, May 31, 2017
|
|
|
3,353,711
|
|
|
$
|
0.30
|
|
|
|
7.96
|
|
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 1.87%, and expected life of
5.5 years.
The
weighted average remaining contractual life of options outstanding issued under the Plan was 8.13 years at May 31, 2017. The exercise
prices for the options outstanding at May 31, 2017 ranged from $0.01 to $0.75, and the information relating to these options is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
7.59
|
|
|
|
700,000
|
|
|
$
|
0.01
|
|
|
|
7.59
|
|
|
600,000
|
|
|
$
|
0.50
|
|
|
|
7.25
|
|
|
|
600,000
|
|
|
$
|
0.50
|
|
|
|
7.25
|
|
|
450,000
|
|
|
$
|
0.75
|
|
|
|
7.33
|
|
|
|
450,000
|
|
|
$
|
0.75
|
|
|
|
7.33
|
|
|
910,000
|
|
|
$
|
0.35
|
|
|
|
8.43
|
|
|
|
910,000
|
|
|
$
|
0.35
|
|
|
|
8.43
|
|
|
1,425,000
|
|
|
$
|
0.08
|
|
|
|
8.73
|
|
|
|
558,025
|
|
|
$
|
0.08
|
|
|
|
8.73
|
|
|
407,466
|
|
|
$
|
0.11
|
|
|
|
8.83
|
|
|
|
135,686
|
|
|
$
|
0.11
|
|
|
|
8.83
|
|
|
500,000
|
|
|
$
|
0.03
|
|
|
|
9.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,992,466
|
|
|
$
|
0.23
|
|
|
|
8.33
|
|
|
|
3,353,711
|
|
|
$
|
0.30
|
|
|
|
7.96
|
|
Warrants
Outstanding
The
following is a summary of warrants outstanding at May 31, 2017:
|
|
|
|
|
|
NUMBER OF WARRANTS
|
|
Exercise
Price
|
|
|
Expiration
|
|
|
5/31/2017
|
|
|
|
|
|
|
|
|
|
$
|
1.000
|
|
|
12/11/2024
|
|
|
|
1,264,023
|
|
$
|
0.010
|
|
|
7/20/2016
|
|
|
|
100,000
|
|
$
|
0.010
|
|
|
2/28/2018
|
|
|
|
150,000
|
|
$
|
0.500
|
|
|
8/14/2020
|
|
|
|
1,176,473
|
|
$
|
1.000
|
|
|
8/1/2021
|
|
|
|
1,200,000
|
|
$
|
1.000
|
|
|
8/1/2021
|
|
|
|
20,000
|
|
$
|
1.000
|
|
|
8/1/2021
|
|
|
|
10,000
|
|
$
|
0.100
|
|
|
6/23/2018
|
|
|
|
800,000
|
|
$
|
0.125
|
|
|
6/23/2018
|
|
|
|
800,000
|
|
$
|
0.032
|
|
|
6/23/2018
|
|
|
|
3,184,126
|
|
$
|
0.040
|
|
|
6/23/2018
|
|
|
|
3,184,126
|
|
$
|
0.050
|
|
|
6/30/2021
|
|
|
|
100,000
|
|
$
|
0.050
|
|
|
9/22/2021
|
|
|
|
100,000
|
|
$
|
0.100
|
|
|
9/30/2026
|
|
|
|
3,571,429
|
|
$
|
0.100
|
|
|
10/1/2026
|
|
|
|
1,428,571
|
|
$
|
0.100
|
|
|
12/14/2020
|
|
|
|
523,587
|
|
$
|
0.100
|
|
|
10/13/2020
|
|
|
|
2,000,000
|
|
$
|
0.120
|
|
|
10/13/2021
|
|
|
|
3,500,000
|
|
$
|
0.140
|
|
|
10/13/2021
|
|
|
|
8,125,000
|
|
$
|
0.100
|
|
|
10/13/2021
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
36,237,335
|
|
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 nine months ended May 31, 2017, the Company granted warrants to purchase up to 24,248,587 shares of Common
Stock, with exercise prices ranging from $0.05 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 nine months ended May 31, 2017, five (5) customers represented 60% of net revenues and for the nine months ended May 31, 2016,
five (5) customers represented a total of 60% of revenues. A decision by 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. On February 27,
2017, the Company ceased providing services to one of its major customers, Concordia University, representing 26% of the nine
months net revenue, in exchange for an aggregate payment of $840,000 during March 2017.
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 May 31, 2017 and August 31, 2016.
As
of May 31, 2017, 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 expire at various dates through 2037. 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 nine months ended May 31, 2017 and the nine months ended May 31, 2016, amounted to $441,420 and $553,983, respectively. The
Company is responsible for certain operating expenses in connection with these leases. The following is a schedule, by year, of
future minimum lease payments required under non-cancelable operating leases as of May 31, 2017:
Years
Ending
August 31,
|
|
|
|
|
|
Property
Total
|
|
|
2017
|
|
|
|
(remainder
of)
|
|
|
|
141,477
|
|
|
2018
|
|
|
|
|
|
|
|
566,156
|
|
|
2019
|
|
|
|
|
|
|
|
581,867
|
|
|
2020
|
|
|
|
|
|
|
|
581,696
|
|
|
2021
|
|
|
|
|
|
|
|
477,606
|
|
|
Thereafter
|
|
|
|
|
|
|
|
1,281,167
|
|
|
Total
|
|
|
|
|
|
|
|
3,629,969
|
|
Employment
Agreements
At
May 31, 2017, the Company maintains employment agreements with two officers, 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 $236,251. 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, asserting that the arbitration provision in the Consulting
Agreement was void under applicable law and therefore the Arbitrator had no jurisdiction over the dispute. Pursuant to a Settlement
Agreement and Mutual Release (the “Settlement Agreement”) by and between the Company and Greenwood, dated January
9, 2017, 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 were that the Court vacate the award and retain jurisdiction until all payments have been made, which Order
was entered by the Court on February 15, 2017.
On
March 11, 2016, StoryCorp Consulting, Inc. and David R. Wells filed suit against the Company and 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. While the Company believed
it had strong defenses as it relates to this claim, in the interest of avoiding the cost of litigation, in exchange for full dismissal
of the lawsuit against the Company and Hall, in his individual capacity, on July 10, 2017, the Company agreed to issue David R.
Wells 625,000 shares of common stock and pay StoryCorp. a sum of $ 70,000 (“Cash Payment”). The Cash Payment will
be made in installments with the first payment of $ 10,000 due to StoryCorp. by August 15, 2017
and
ten (10) equ
al payments of $ 6,000 to be paid every thirty (30) days thereafter.
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 nine month periods ended May 31, 2017 and
May 31, 2016.
9.
SUBSEQUENT EVENTS
On
July 10, 2017, the Company entered into a Settlement Agreement with StoryCorp. Consulting, Inc. and David R. Wells. While the
Company believed it had strong defenses as it relates to this claim, in the interest of avoiding the cost of litigation, in exchange
for full dismissal of the lawsuit against the Company and Hall, in his individual capacity, the Company agreed to issue David
R. Wells 625,000 shares of common stock and pay StoryCorp. a sum of $ 70,000 (“Cash Payment”). The Cash Payment will
be made in installments with the first payment of $ 10,000 due to StoryCorp. by August 15, 2017 and ten (10) equal payments of
$ 6,000 to be paid every thirty (30) days thereafter.