UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended November 30, 2014

 

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

 

For the transition period from __________ to ____________

 

Commission file number 333-184796 

 

GREENWOOD HALL, INC.
(Exact name of registrant as specified in its charter)

 

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

 

1936 East Deere Avenue, Suite 120, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)

 

949-655-5000
(Registrant’s telephone number, including area code)

 

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

 

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

Yes x No ¨

 

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

 

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

  

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of November 30, 2014, there were 43,382,900 shares of the issuer’s $.001 par value common stock issued and outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION	2
Item 1. Financial Statements.	2
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.	3
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	7
Item 4. Controls and Procedures.	8
PART II - OTHER INFORMATION	8
Item 1. Legal Proceedings	8
Item 1A. Risk Factors	8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	8
Item 3. Defaults Upon Senior Securities	8
Item 4. Mine Safety Disclosures.	9
Item 5. Other Information.	9
Item 6. Exhibits.	9
SIGNATURES	10

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

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

 

It is the opinion of management that the unaudited interim financial statements for the quarter ended November 30, 2014 include all adjustments necessary in order to ensure that the unaudited interim financial statements are not misleading.

 

 

GREENWOOD HALL, INC.

INDEX TO FINANCIAL STATEMENTS

 

Balance Sheets	F-2
Statements of Operations	F-3
Statements of Cash Flows	F-5
Notes to Financial Statements	F-6

 

  

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, 2014 AND AUGUST 31, 2014

 

		(Unaudited)				(Audited)
		NOV 2014				AUG 2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	44,799			$	367,286
Accounts receivable, net			599,261				1,039,065
Prepaid expenses and other current assets			100,878				305,691
Current assets to be disposed of			36,860				36,860
TOTAL CURRENT ASSETS			781,798				1,748,902
PROPERTY AND EQUIPMENT, net			181,744				211,525
OTHER ASSETS
Deposits and other assets			65,812				57,659
TOTAL OTHER ASSETS			65,812				57,659
TOTAL ASSETS		$	1,029,354			$	2,018,086
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable		$	628,646			$	835,423
Accrued expenses			304,541				284,362
Accrued payroll and related expenses			427,933				411,280
Deferred revenue			108,603				1,102,500
Accrued interest			20,923				35,773
Due to shareholders / officer			112,586				155,476
Notes payable, net of discount of $65,235 and $71,758, respectively			1,395,609				2,053,134
Line of credit			1,500,000				1,500,000
Derivative liability			118,363				118,363
Current liabilities to be disposed of			335,857				335,857
TOTAL CURRENT LIABILITIES			4,953,061				6,832,168
Notes payable, non-current			1,757,576				1,297,988
TOTAL LIABILITIES			6,710,637				8,130,156
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value; 75,000,000 shares authorized, 39,536,450 and 38,536,450 shares issued and outstanding, respectively			39,536				38,536
Additional paid-in capital			4,148,711				3,149,711
Accumulated deficit			(9,869,530	)			(9,300,317	)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)			(5,681,283	)			(6,112,070	)
Noncontrolling interest			-				-
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)			(5,681,283	)			(6,112,070	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	1,029,354			$	2,018,086

  

See the unaudited notes to
consolidated financial statements.

 

 

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014 AND 2013

(UNAUDITED)

  

		2014				2013
REVENUES		$	2,664,968			$	2,103,272
OPERATING EXPENSES
Direct cost of services			1,578,471				891,803
Personnel			858,960				1,510,740
Selling, general and administrative			769,449				1,234,588
TOTAL OPERATING EXPENSES			3,206,880				3,637,131
INCOME (LOSS) FROM OPERATIONS			(541,912	)			(1,533,859	)
OTHER INCOME (EXPENSE)
Interest expense			(109,528	)			(89,328	)
Change in value of derivatives			-				-
Miscellaneous income (expense), net			82,227				(2,677	)
TOTAL OTHER INCOME (EXPENSE)			(27,301	)			(92,005	)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES			(569,213	)			(1,625,864	)
Provision for (benefit from) income taxes			-				-
INCOME (LOSS) FROM CONTINUING OPERATIONS			(569,213	)			(1,625,864	)
NET INCOME (LOSS)			(569,213	)			(1,625,864	)
Net income (loss) attributable to noncontrolling interests			-				-
Net income (loss) attributable to PCS Link, Inc. common stockholders		$	(569,213	)		$	(1,625,864	)
Earnings per share - basic and diluted
Income (loss) from continuing operations attributable to Greenwood Hall, Inc.  common stockholders		$	(0.01	)		$	(0.06	)
Net income (loss) attributable to Greenwood Hall, Inc. common stockholders		$	(0.01	)		$	(0.06	)
Weighted average common shares - basic and diluted			39,536,450				25,051,591

  

See the unaudited notes

to consolidated financial statements.

  

  

GREENWOOD HALL, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

 

																		Total
																		Greenwood Hall, Inc.
		Common Stock								Additional Paid-in				Accumulated				Stockholders' Equity				Noncontrolling				Total Stockholders'
		Shares				Amount				Capital				Deficit				(Deficit)				Interest				Equity (Deficit)
Balance, January 1, 2012			25,051,591			$	25,052			$	(20,552	)		$	(3,471,399	)		$	(3,466,899	)		$	-			$	(3,466,899	)
Net income			-				-				-				618,883				618,883				-				618,883
Balance, December 31, 2012			25,051,591				25,052				(20,552	)			(2,852,516	)			(2,848,016	)			-				(2,848,016	)
Net loss			-				-				-				(2,921,250	)			(2,921,250	)			-				(2,921,250	)
Balance, December 31, 2013			25,051,591				25,052				(20,552	)			(5,773,766	)			(5,769,266	)			-				(5,769,266	)
Recapitalization of Greenwood Hall, Inc.			10,250,000				10,250				(44,834	)			-				(34,584	)			-				(34,584	)
Issuance of units (1 share and 1 warrant) for cash, net of fees			1,650,000				1,650				1,643,961				-				1,645,611				-				1,645,611
Conversion of debt into units (1 share and 1 warrant)			1,386,450				1,386				1,385,064				-				1,386,450				-				1,386,450
Issuance of stock with debt			198,409				198				186,072				-				186,270				-				186,270
Issuance of warrants with debt			-				-				78,281				-				78,281				-				78,281
Reclassification of warrants to liabilities			-				-				(78,281	)			-				(78,281	)			-				(78,281	)
Net loss			-				-				-				(3,526,551	)			(3,526,551	)			-				(3,526,551	)
Balance, August 31, 2014			38,536,450				38,536				3,149,711				(9,300,317	)			(6,112,070	)			-				(6,112,070	)
Issuance of units (1 share and 1 warrant) for cash, net of fees			1,000,000				1,000				999,000				-				1,000,000				-				1,000,000
Net loss			-				-				-				(569,213	)			(569,213	)			-				(569,213	)
Balance, November 30, 2014			39,536,450			$	39,536			$	4,148,711			$	(9,869,530	)		$	(5,681,283	)		$	-			$	(5,681,283	)

 

See report of independent registered public accounting firm

and notes to consolidated financial statements.

  

  

GREENWOOD HALL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014 AND 2013

(UNAUDITED)

  

		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(569,213	)		$	(1,625,864	)
Net (income) loss from discontinued operations			-				-
Net income (loss) from continuing operations			(569,213	)			(1,625,864	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of continuing operations:
Depreciation and amortization			15,840				-
Amortization of note discount			6,523
Changes in operating assets and liabilities:
Accounts receivable			439,804				389,555
Prepaid expenses and other current assets			196,660				75,806
Accounts payable			(204,546	)			486,546
Accrued expenses			20,177				49,144
Accrued payroll and related			16,653				-
Deferred revenue			(993,897	)			50,000
Accrued interest			(14,848	)			80,042
Advances from officers, net			(42,890	)			141,301
Net cash provided by (used in) operating activities of continuing operations			(1,129,737	)			(353,470	)
Net cash provided by (used in) operating activities of discontinued operations			-				-
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			(1,129,737	)			(353,470	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable			-				1,216,275
Payments on notes payable			(192,750	)			(1,299,934	)
Bank overdraft			-				81,861
Repurchase of common stock			-				(13,000	)
Proceeds from the sale of units			1,000,000				-
Net cash provided by (used in) financing activities of continuing operations			807,250				(14,798	)
Net cash provided by (used in) financing activities of discontinued operations			-				-
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			807,250				(14,798	)
NET INCREASE (DECREASE) IN CASH FROM CONTINUING OPERATIONS			(322,487	)			(368,268	)
NET INCREASE (DECREASE) IN CASH FROM DISCONTINUED OPERATIONS			-				-
NET INCREASE (DECREASE) IN CASH			(322,487	)			(368,268	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			367,286				368,268
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	44,799			$	-
Supplemental disclosures:
Interest paid in cash		$	117,853			$	39,502
Income taxes paid in cash		$	-			$	-

  

See unaudited notes to consolidated financial statements

 

 

GREENWOOD HALL, INC. AND SUBSIDIARIES

Notes to Financial Statements

NOV 30, 2014

(Unaudited)

  

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 141 employees and has served more than 40 education clients and over 70 degree programs.

 

Basis of Presentation

 

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

 

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

 

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

 

Principles of Consolidation

 

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

 

Going Concern

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplates the continuation of the Company as a going concern. The Company has an accumulated deficit and a working capital deficit as of November 30, 2014 and has incurred a loss from continuing operations during 2014. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

 

The Company has historically funded its activities through cash generated from operations, debt financing, the issuance of equity for cash, and advances from shareholders. During the three months ended November 30, 2014 the Company received a net amount of approximately $807,000 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 2013, 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 three months ended November 30, 2014 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 shareholders / directors.

 

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

 

 

Marketing and Advertising

 

Marketing and advertising costs are expensed as incurred. Marketing and advertising amounted to $29,685 and $375,932 for the three months ended November 30, 2014and the three months ended November 30, 2013 respectively, and are included in selling, general and administrative expenses.

    

Derivative Liabilities

 

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

 

As part of a debt financing during May 2014, the Company issued warrants to acquire 248,011 shares of Common Stock. These warrants contain a mechanism to increase the number of warrants upon the issuance of certain dilutive equity securities. If during the terms of the warrants, the Company issues additional shares of Common Stock or equivalents, the warrant holders are entitled to additional warrants with the same terms as the original warrants. As a result of these features, the warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the warrants on the date of issuance was estimated using an option pricing model and recorded on the Company’s Consolidated Balance Sheet as a derivative liability. The fair value of the Warrants is estimated at the end of each reporting period and the change in the fair value of the Warrants is recorded as a non-operating gain or loss as change in value of derivatives in the Company’s Consolidated Statement of Operations. During the three months ended November 30, 2014 and 2013, the Company recognized a change in value of the derivative liability of $0 and $0, respectively. 

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

The following table summarizes fair value measurements at November 30, 2014 for assets and liabilities measured at fair value on a recurring basis.

 

November 30, 2014

 

		Level 1				Level 2				Level 3
Derivative Liabilities		$	-			$	-			$	118,363

 

 

The assumptions used in valuing warrants issued during the three months ended November 30, 2014 were as follows:

 

Risk free interest rate			2.12	%
Expected life			6.5 Years
Dividend yield			None
Volatility			30	%

 

The following is a reconciliation of the derivative liability related to these warrants for the three months ended November 30, 2014:

 

Value at August 31, 2014		$	118,363
Issuance of instruments			-
Change in value			-
Net settlements			-
Value at November 30, 2014		$	118,363

  

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.

 

2. PROPERTY AND EQUIPMENT

 

Depreciation and amortization of property and equipment amounted to $15,837 for the three months ended November 30, 2014, $0 during the three months ended November 30, 2013, and is included in the accompanying consolidated statements of operations in selling, general and administrative expenses.

 

At November 30, 2014, property and equipment consists of the following:

 

		NOV 2014
Computer equipment		$	553,255
Software and Equipment			39,400
			592,655
Accumulated depreciation			(410,911	)
Net property and equipment		$	181,744

 

 

3. NOTES PAYABLE

 

Bank

 

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

 

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 May 2017.

 

As of November 30, 2014, the balance outstanding on the term loan and line of credit amounted to $1,757,576 and $1,500,000, respectively. At November 30, 2014, amounts owed pursuant to the Credit Agreement bear interest at a rate of 5.75% per annum.

 

In connection with the Credit Agreement, the Company issued 248,011 warrants to purchase common stock at an exercise price of $1.00 per share, which increased to 375,000 warrants due to dilutive issuances of equity by the Company during the eight months ended August 31, 2014. The warrants are exercisable immediately. In the event of future dilutive issuances, the number of warrants issuable shall be increased based on a specified formula. The warrants were valued at $78,281 on the date of issuance, which was recorded as a note discount. During the eight months ended August 31, 2014, the Company recognized $6,523 of amortization related to this discount, leaving a balance of $71,758 at August 31, 2014.

 

Bank

 

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

 

In May 2014, the Company and CUB amended the promissory note of $1,250,000 to extend the maturity date to the earlier of i) October 2014 or ii) the completion of specified debt / equity funding. CUB also agreed to subordinate its security interest to another lender if certain criteria were met. As of November 30, 2014, the balance remaining is $876,250. 

 

 

Credit Agreement

 

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

 

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

 

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

 

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

 

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

 

Loan and Security Agreement

 

During 2013, the Company entered into a Loan and Security Agreement with Colgan Financial Group, Inc. (“ Colgan ”) pursuant to which the Company issued a promissory note of $600,000. The note bears interest at 2.5% per month, is payable in monthly installments of principal and interest through June 2014, is guaranteed by one shareholder of the Company and an advisor to the Company and is secured by substantially all assets of the Company. This note is subordinate to the notes held by California United Bank. In July 2014, a paydown of $144,000 was made in connection with an equity funding. As of November 30, 2014, the balance remaining is $456,000. 

 

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

 

Unsecured Promissory Note

 

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

 

The Company also finances the purchases of small equipment. The amount of such notes is not significant at November 30, 2014. The following is a schedule, by year, of future minimum principal payments required under notes payable as of November 30, 2014:  

 

Years Ending August 31,
2015 (remainder of)		$	1,460,844
2016			1,228,643
2017			528,933
2018			-
2019			-
Total			3,218,420
Note discount			(65,235	)
		$	3,153,185

 

 

4. RELATED PARTY TRANSACTIONS

 

One of the Company’s customers, MarkeTouch Media, Inc. (“MarkeTouch”), held a 7.5% interest in our common stock during 2013. Pursuant to an agreement between the Company and MarkeTouch, the Company is repurchasing the shares held by MarkeTouch. As of November 30, 2014 and 2013, the Company owed $0 and $27,333, respectively, relating to this share repurchase obligation, which is recorded in accrued expenses.

 

5. STOCKHOLDERS’ EQUITY

 

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

 

Pursuant to an agreement between the Company and MarkeTouch, the Company is repurchasing the shares held by MarkeTouch. As of November 30, 2013, the Company owed $27,333 relating to this share repurchase obligation, which is recorded in accrued expenses. The shares of MarkeTouch are still considered issued and outstanding as of November 30, 2013 and were cancelled during the eight months ended August 31, 2014 upon payment in full of the share repurchase obligation.

 

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

 

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

 

The following is a summary of warrants outstanding at November 30, 2014:

 

Exercise Price				Number of Warrants				Expiration Date
$	1.00				375,000			May 2021
$	1.30				3,036,450			July 2016
$	1.30				1,000,000			September 2016

 

6. CONCENTRATIONS

 

Concentration of Credit Risk

 

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

 

Major Customers

 

For the three months ended November 30, 2014 and 2013 1 and 3 customers represented 57% and 48% of net revenues, respectively. For the three months ended November 30, 2014 and 2013 3 and2 customers represented 67% and 52% of accounts receivable, respectively.

 

 

7. INCOME TAXES

 

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

 

A majority of the Company’s deferred tax asset is comprised of net operating loss carryforwards, offset by a 100% valuation allowance at November 30, 2014 and August 31, 2014.

 

As of November 30, 2014, 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 Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $0 for the three months ended November 30, 2014 and 2013. The Company files income tax returns with the Internal Revenue Service (“ IRS ”) and several states. The Company is no longer subject to examination by federal and state taxing authorities for tax years through 2009 and 2008, respectively. The Company’s net operating loss carryforwards are subject to examination until they are fully utilized and such tax years are closed.

 

 

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

 

8. COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

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, 2014 and 2013 $80,068 and $123,445 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, 2014:

 

Years Ending August 31,
2015 (remainder of)		$	239,656
2016			336,356
2017			348,530
2018			358,015
2019			368,700
Thereafter			1,971,200
		$	3,622,457

  

Employment Agreements

 

At November 30, 2014, the Company maintained an employment agreement with an officer, the terms of which may require the payment of severance benefits upon termination.

 

Legal Matters

 

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

 

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

 

 

9. 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 months ended November 30, 2014 and 2013.

 

10. SUBSEQUENT EVENTS

 

In December 2014, the Company entered into a Loan Agreement with Colgan Financial Group, Inc. (“ Colgan ”) pursuant to which the Company issued a promissory note of $500,000. The note bears interest at 12% per year, the interest of which is payable monthly. This is a 3 year note and is secured by substantially all assets of the Company. This note is subordinate to the notes held by Opus Bank and California United Bank.

 

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

All dollar amounts refer to US dollars unless otherwise indicated.

 

Corporate Overview

 

Greenwood Hall is an emerging education management solutions provider that delivers end-to-end services that support the entire student lifecycle including offerings that increase student enrollment, improve student experience, maximize student success and outcomes, and help schools maximize operating efficiencies. Since 2006, we have customized turnkey solutions that combine experienced strategy, personnel, proven processes and robust technology to help schools effectively and efficiently improve student outcomes, expand into new markets such as online learning, increase revenues, and deliver enhanced student experiences. Our Company currently has 166 employees and has served more than 40 education clients and over 70 degree programs.

 

 

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

 

Our Services

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

Subsequent Events

 

The following events occurred after November 30, 2014, through January 12, 2015, the date on which the financial statements for the year ended November 30, 2014 were issued:

 

 

·

On December 22, 2014 PCS Link, Inc. dba Greenwood & Hall entered into a Change in Terms Agreement with California United Bank (“CUB”) in relation to the promissory note with outstanding balance of $876,250. The change in terms included an extention of the maturity date of the facility to April 30, 2015. Other specific terms were described in the 8-K filing of December 30, 2014.

 

·

On December 22, 2014, in consideration for funds in the amount of $500,000 received by Greenwood Hall, Inc. from Colgan Financial Group, Inc. and Robert Logan (“Logan,” and together with CFG, the “Holder”), the Company executed a secured convertible promissory note, the specific terms of which were described in the 8-K filing of December 30, 2014.

 

Restructuring

 

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

 

Going Concern

 

As more fully described in Note 1 to the financial statements related to the uncertainty of our ability to continue as a going concern appearing in this report for the three months ended November 30, 2014. The Company has an accumulated deficit and a working capital deficit as of November 30, 2014 and incurred a loss from continuing operations during the first quarter. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

Lack of Working Capital

 

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

 

Results of Operations

 

The following summary of our results of operations should be read in conjunction with our financial statements for the Three Months ended Nov 30, 2014 and Nov 30, 2013.

 

		Three Months				Three Months
		Ended				Ended
		Nov 30, 2014				Nov 30, 2013
Revenue		$	2,664,968			$	2,103,272
Cost of goods sold			1,578,471				891,803
Gross margin			1,086,497				1,211,469
General & Administrative
Expenses			1,655,710				2,837,333
Loss from operations			(569,213	)			(1,625,864	)
Income tax provision
NET INCOME (LOSS)		$	(569,213	)			(1,625,864	)

 

 

Three Months Ended Nov 30, 2014 Compared to Three Months Ended Nov 30, 2013

 

Comparison of the Three Months Ended November 30, 2014 (Unaudited) to the Three Months Ended November 30, 2013 (Unaudited)

 

Revenues: Revenues increased $561,696, or 26.7%, during the three months ended November 30, 2014, primarily due to new business obtained in 2014.

 

Direct Cost of Services: Direct cost of services increased $686,668, or 77%, during the three months ended November 30, 2014, primarily due to the increased revenues for the same time period, as well as a revised allocation of personnel to direct cost of services as opposed to general and administrative in 2014. Such allocations had not been previously made due to limited tracking and reporting available in relation to payroll and personnel costs.

 

Personnel: Personnel costs decreased $651,780 or 43%, during the three months ended November 30, 2014, primarily due to a reduction in the number of employees as a result of the operational restructuring and better health insurance rates during 2014.

 

Selling, General and Administrative: Selling, general and administrative expenses decreased $465,139, or 38%, during the three months ended November 30, 2014, primarily due to the a reduction in the number of management employees as a result of the operational restructuring and to directly allocating various employees to cost of services.

 

Income (Loss) From Continuing Operations: As a result of the restructuring efforts, cost cutting and the aforementioned items, we experienced a net loss of $569,213 from continuing operations during the three months ended November 30, 2014, compared with a net loss from continuing operations of $1,625,864 during the three months ended November 30, 2013, a decrease of $1,056,651, or 65%. We believe that this improvement is a clear indication that the Company is beginning to see the benefits of the restructuring initiated in 2013.

 

Liquidity and Capital Resources

 

Working Capital

 

		Nov 30, 2014				Nov 30, 2013
Total Current Assets		$	781,798				1,748,902
Total Current Liabilities			4,953,061				6,832,168
Working Capital Deficit			(4,171,263	)			(5,083,266	)

 

The decrease in the working capital deficit of $912,003 or 18% in the three months ended November 30, 2014, as compared to the three months ended November 30, 2013 was due to reduced accounts payable as a result of the restructuring, increased receivables as a result of new business; and fundraising activities resulting in increased cash and decreased debt.

 

Cash Flows

 

		Three Months Ended				Three Months Ended
		Nov 30, 2014				Nov 30, 2013
Net Cash used by Operating Activities		$	(1,129,737	)			(353,470	)
Net Cash provided by Financing Activities			807,250				(14,798	)

 

 

The net decrease in cash in the three months ended November 30, 2014, as compared to the three months ended November 30, 2013, decreased by $45,781 or 12.4%. The increase in net cash used in operating activities was due to a decrease in accounts payables as well as a decrease in deferred revenue during the three months ended November 30, 2014. The increase in cash provided by financing activities in the three months ended November 30, 2014, as compared to the three months ended November 30, 2013 was due to the issuance of common shares during the three months ended November 30, 2014.

 

Debt of PCS Link

 

California United Bank Loan

 

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

 

Colgan Note

 

In December 2013, the Company entered into a Loan and Security Agreement with Colgan Financial Group, Inc. (“Colgan”) pursuant to which the Company issued a promissory note of $600,000. The note bears interest at 2.5% per month, is payable in monthly installments of principal and interest through June 2014, is guaranteed by one shareholder of the Company and is secured by substantially all assets of PCS Link, however, it is subordinated to the Opus Amended Credit Agreement (as defined below). As of November 30, 2014, the balance outstanding was $456,000.

 

Opus Facility

 

In May 2014, PCS Link entered into a Credit Agreement and related term loan and line of credit with Opus Bank (“Opus”). The Credit Agreement was amended on July 18, 2014 (the “Opus Amended Credit Agreement”). Pursuant to the terms of the agreement, PCS Link received $2,000,000 and issued a promissory note in that same amount to Opus. PCS Link used the funds received from Opus repay a loan that was outstanding to its then current lender. Monthly payments of principal and interest are required to be made by PCS Link through the maturity date in May 2017. The amounts outstanding under the Credit Agreement are secured by substantially all assets of PCS Link. PCS Link also received a line of credit for a maximum amount of $3,000,000. Payments of interest only will be due monthly with the unpaid balance due, in full, on the maturity date in May 2017. The first extension of credit under the line of credit was conditioned upon PCS Link successfully selling equity interests with gross cash proceeds of not less than $1.65 Million. On July 24, 2014, $1,500,000 was advanced to the Company under the line of credit. No other amounts have been advanced under the line of credit.

 

Off-Balance Sheet Arrangements

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the fiscal quarter ended November 30, 2014, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

Since the beginning of the fiscal quarter ended November 30, 2014, we 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. These equity securities were not registered under the Securities Act of 1933.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

Exhibit Number		Description of Exhibit
31.1		Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase*
101.DEF		XBRL Taxonomy Extension Definition Linkbase*
101.LAB		XBRL Taxonomy Extension Label Linkbase*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase*

  

*Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

GREENWOOD HALL, INC.

 

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