UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2012
or
oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________ to _____________
ASPEN GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
333-165685
(Commission
File Number)
27-1933597
(I.R.S. Employer
Identification No.)
720 South Colorado Boulevard, Suite 1150N, Denver, CO 80246
(Address of Principal Executive Office) (Zip Code)
(303) 333-4224
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
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. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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.) þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. Not Applicable
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large accelerated filer
o
Accelerated filer þ
Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price as of
the last business day of the registrant’s most recently completed second fiscal quarter was approximately $77 million.
The number of shares outstanding of the registrant’s classes of common stock, as of March 14, 2013 was 55,453,719 shares.
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4. Mine Safety Disclosures.
Properties.
Legal Proceedings.
INDEX
PART I
PART II
Selected Financial Data.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Financial Statements and Supplementary Data.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
PART III
Item 15. Exhibits, Financial Statement Schedules.
PART IV
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ITEM 1. BUSINESS.
PART I
On March 13, 2012, Aspen Group, Inc., or Aspen Group, and Aspen University Inc., a privately held Delaware corporation, or Aspen, closed
a Merger Agreement whereby Aspen became a wholly-owned subsidiary of Aspen Group. We refer to the merger as the “Reverse
Merger.” All references to “we,” “our” and “us” refer to Aspen Group, unless the context otherwise indicates. In referring to academic matters,
these words refer solely to Aspen University Inc.
Description of Business
Aspen’s mission is to become an institution of choice for adult learners by offering cost-effective, comprehensive, and relevant online
education. We are dedicated to helping our students exceed their personal and professional objectives in a socially conscious and economically
sensible way. Aspen’s mission in fact is to help students achieve their long-term goals of upward mobility and long-term economic success
through providing superior education, exerting financial prudence, and supporting our students’ career advancement goals. Aspen is dedicated
to providing the highest quality education experiences taught by top-tier professors - 67% of our adjunct professors hold doctorate degrees.
Because we believe higher education should be a catalyst to our students’ long-term economic success, we exert financial prudence by offering
affordable tuition that is one of the greatest values in online education. We have expanded our degree offerings broadly but the vision remains
the same: to provide students with the best value in high quality education and to help them achieve their academic and career goals.
One of the key differences between Aspen and other publicly-traded, exclusively online, for-profit universities is an emphasis on post-graduate
degree programs (master or doctorate). As of December 31, 2012, 1,681 students were enrolled as full-time degree seeking students with 1,467
of those students or 87% in a master or doctoral graduate degree program. In addition, 872 students are engaged in part time programs, such as
continuing education courses and certificate level programs (includes 343 part-time undergraduate Military students). Aspen is committed to
maintaining its focus on being a predominantly graduate school for the foreseeable future.
Today, Aspen offers certificate programs and associate, bachelor, master and doctoral degree programs in a broad range of areas, including
business and organization management, education, nursing, information technology, and general studies. In terms of enrollments, our most
popular schools are our school of business and our school of nursing. Specifically, our Master of Business Administration, or MBA, and
Master of Science in Nursing represent the two largest degree programs among our full-time, degree-seeking student body as of December 31,
2012. Aspen’s School of Nursing is our fastest growing program, having grown from 5% of our full-time, degree seeking student body at
year-end 2011, to 16% of our full-time, degree seeking student body at year-end 2012.
We are accredited by the Distance Education and Training Council, or DETC, a “national accrediting agency” recognized by the Department of
Education, or the DOE. Aspen first received DETC accreditation in 1993 and most recently received re-accreditation in January 2009. Aspen
is scheduled for re-accreditation review in November 2013.
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Aspen is provisionally certified by the DOE through September 30, 2013. Under such certification, Aspen is restricted to a limit of 1,200
student recipients for Title IV funding for the period ending June 30, 2013. As of December 31, 2012, Aspen had 442 students that were
currently participating in the Title IV programs. Since inception of Aspen’s provisional certification status, it has had 543 total Title IV student
participants. In the future when it considers whether to extend the provisional certification or make the certification permanent, the DOE may
impose additional or different terms and conditions, including growth restrictions or limitation on the number of students who may receive Title
IV aid. In terms of future deadlines with the DOE, Aspen is required to re-apply by June 30, 2013 to continue its participation in the Title IV
Higher Education Act, or HEA, programs. At that time, a determination will be made whether we meet the requirements for full certification.
In 2008, Aspen received accreditation of its Master of Science in Nursing Program with the Commission on Collegiate Nursing Education, or
the Nursing Commission. Officially recognized by the DOE, the Nursing Commission is a nongovernmental accrediting agency, which
ensures the quality and integrity of education programs in preparing effective nurses. Aspen’s Master of Science in Nursing program most
recently underwent accreditation review by the Nursing Commission in March 2011. At that time, the program’s accreditation was reaffirmed,
with the accreditation term to expire December 30, 2021. We currently offer a variety of nursing degrees including: Masters of Science in
Nursing, Master of Science in Nursing - Nursing Education, Masters of Science in Nursing – Nursing Administration and Management and
Bachelor of Science in Nursing.
Aspen is a Global Charter Education Provider for the Project Management Institute, or PMI, and a Registered Education Provider (R.E.P.) of
the PMI. The PMI recognizes select Aspen Project Management Courses as Professional Development Units. These courses help prepare
individuals to sit for the Project Management Professional, or PMP, certification examination. PMP certification is the project management
profession’s most recognized and respected certification credential. Project management professionals may take the PMI approved Aspen
courses to fulfill continuing education requirements for maintaining their PMP certification.
In connection with our Bachelor and Master degrees in Psychology of Addiction and Counseling, the National Association of Alcoholism and
Drug Abuse Counselors, or NAADAC, has approved Aspen as an “academic education provider.” NAADAC-approved education providers
offer training and education for those who are seeking to become certified, and those who want to maintain their certification, as alcohol and
drug counselors. In connection with the approval process, NAADAC reviews all educational training programs for content applicability to state
and national certification standards.
Competitive Strengths - We believe that we have the following competitive strengths:
Exclusively Online Education - We have designed our courses and programs specifically for online delivery, and we recruit and train
faculty exclusively for online instruction. We provide students the flexibility to study and interact at times that suit their schedules. We design
our online sessions and materials to be interactive, dynamic and user friendly.
Debt Minimization - We are committed to offering among the lowest tuition rates in the sector, which to date has alleviated the need for
a significant majority of our students to borrow money to fund Aspen’s tuition requirements. In July 2011, we raised our course-by-course
tuition rates to $300/credit hour for all degree-seeking programs. However, we believe based on our competitors' public information that our
tuition rates remain significantly lower than our competitors. For example, University of Phoenix, Capella University and Grand Canyon
University charge $740, $699, and $483, respectively, per credit hour for their MBA program versus Aspen’s $350 per credit hour.
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Commitment to Academic Excellence - We are committed to continuously improving our academic programs and services, as
evidenced by the level of attention and resources we apply to instruction and educational support. We are committed to achieving high course
completion and graduation rates compared to competitive distance learning, for-profit schools. 67% of our adjunct faculty members hold a
doctorate degree. One-on-one contact with our highly experienced faculty brings knowledge and great perspective to the learning
experience. Faculty members are available by telephone and email to answer questions, discuss assignments and provide help and
encouragement to our students.
Highly Scalable and Profitable Business Model - We believe our exclusively online education model, our relatively low student
acquisition costs, and our variable faculty cost model will enable us to expand our operating margins. If we increase student enrollments we
will be able to scale on a variable basis the number of adjunct faculty members after we reach certain enrollment metrics (not before). A single
adjunct faculty member can work with as little as two students or as many as 25 over the course of an enrollment period.
“One Student at a Time” personal care - We are committed to providing our students with fast and personal individualized
support. Every student is assigned an academic advisor who becomes an advocate for the student’s success. Our one-on-one approach assures
contact with faculty members when a student needs it and monitoring to keep them on course. Our administrative staff is readily available to
answer any questions and works with a student from initial interest through the application process and enrollment, and most importantly while
the student is pursuing a degree or studies. Based on Aspen’s 2011 DETC Annual Report of student satisfaction survey results, calculated in
accordance with applicable DETC policy, 95% of students on average expressed satisfaction with their recently completed course.
Admissions
In considering candidates for acceptance into any of our certificate or degree programs, we look for those who are serious about pursuing – or
advancing in – a professional career, and who want to be both prepared and academically challenged in the process. We strive to maintain the
highest standards of academic excellence, while maintaining a friendly learning environment designed for educational, personal and professional
success. A desire to meet those standards is a prerequisite. Because our programs are designed for self-directed learners who know how to
manage their time, successful students have a basic understanding of management principles and practices, as well as good writing and research
skills. Admission to Aspen is based on thorough assessment of each applicant’s potential to complete successfully the program. Additionally,
we require students to complete an essay as part of their admission process – as we are looking for students not only with the potential to
succeed but also with the motivation to succeed.
Industry Overview
The U.S. market for postsecondary education is a large, growing market. According to a 2012 publication by the National Center for
Education Statistics, or NCES, the number of postsecondary learners enrolled as of Fall 2010 in U.S. institutions that participate in Title IV
programs was approximately 21 million (including both undergraduate and graduate students), up from 18.2 million in the Fall of 2007. We
believe the growth in postsecondary enrollment is a result of a number of factors, including the significant and measurable personal income
premium that is attributable to postsecondary education, and an increase in demand by employers for professional and skilled workers,
partially offset in the near term by current economic conditions. According to the NCES, in 2010, the median earnings of young adults with a
bachelor’s degree was $45,000 compared to $37,000 for those with an associate’s degree and $21,000 for those with a high school diploma.
Eduventures, Inc., an education consulting and research firm, estimates that 20% of all postsecondary students will be in fully-online programs
by 2014, with perhaps another 20% taking courses online. The estimated increase in students online increased 18% in 2010. We believe that
the higher growth in demand for fully-online education is largely attributable to the flexibility and convenience of this instructional format, as
well as the growing recognition of its educational efficacy.
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Competition
There are more than 4,200 U.S. colleges and universities serving traditional college age students and adult students. Any reference to
universities herein also includes colleges. Competition is highly fragmented and varies by geography, program offerings, delivery
method, ownership, quality level, and selectivity of admissions. No one institution has a significant share of the total postsecondary
market. While we compete in a sense with traditional “brick and mortar” universities, our primary competitors are with online universities. Our
online university competitors that are publicly traded include: Apollo Group, Inc. (Nasdaq: APOL), American Public Education, Inc. (Nasdaq:
APEI), DeVry Inc. (NYSE: DV), Grand Canyon Education, Inc. (Nasdaq: LOPE), ITT Educational Services, Inc. (NYSE: ESI), Capella
Education Company (Nasdaq: CPLA), Career Education Corporation (Nasdaq: CECO) and Bridgepoint Education, Inc. (NYSE:
BPI). American Public Education, Inc. and Capella Education Company are wholly online while the others are not. Based upon public
information, Apollo Group, which includes University of Phoenix, is the market leader with University of Phoenix having degree enrollments
exceeding 356,900 students (based upon APOL’s Form 10-K filed on October 22, 2012). As of December 31, 2012, Aspen had 2,553
students enrolled. These competitors have substantially more financial and other resources.
The primary mission of most accredited four-year universities is to serve generally full-time students and conduct research. Aspen
acknowledges the differences in the educational needs between working and full-time students at “brick and mortar” schools and provides
programs and services that allow our students to earn their degrees without major disruption to their personal and professional lives.
We also compete with public and private degree-granting regionally and nationally accredited universities. An increasing number of universities
enroll working students in addition to the traditional 18 to 24 year-old students, and we expect that these universities will continue to modify
their existing programs to serve working learners more effectively, including by offering more distance learning programs. We believe that the
primary factors on which we compete are the following:
● active and relevant curriculum development that considers the needs of employers;
● the ability to provide flexible and convenient access to programs and classes;
● high-quality courses and services;
● comprehensive student support services;
● breadth of programs offered;
● the time necessary to earn a degree;
● qualified and experienced faculty;
● reputation of the institution and its programs;
● the variety of geographic locations of campuses;
● regulatory approvals;
● cost of the program;
● name recognition; and
● convenience
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Curricula
Certificates
Certificate in Information Technology with specializations in:
Information Systems Management
Java Development
Object Oriented Application Development
Smart Home Integration
Web Development
Certificate in Project Management
Certificate in Internet Marketing
Executive Certificate in Business Administration
Associates Degrees
Associate of General Studies
Associate of Applied Science Early Childhood Education
Associate of Fine Arts
Bachelors Degrees
Bachelor of General Studies
Bachelor of Arts in Psychology and Addiction Counseling
Bachelor of Science in Alternative Energy
Bachelor of Science in Business Administration
Bachelor of Science in Business Administration, (Completion Program)
Bachelor of Science in Criminal Justice
Bachelor of Science in Criminal Justice, (Completion Program)
Bachelor of Science in Criminal Justice with specializations in
Criminal Justice Administration
Major Crime Investigation Procedure
Major Crime Investigation Procedure, (Completion Program)
Bachelor of Science in Early Childhood Education
Bachelor of Science in Early Childhood Education, (Completion Program)
Bachelor of Science in Early Childhood Education with a specialization in
Infants and Toddlers
Infants and Toddlers, (Completion Program)
Preschool
Preschool, (Completion Program)
Bachelor of Science in Foodservice Operations and Restaurant Management
Bachelor of Science in Medical Managements
Bachelor of Science in Fine Arts with a specialization in
Drawing and Painting
Entertainment 2D
Entertainment 3D
Illustration
Bachelor of Science in Nursing – Completion Program
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Masters
Master of Arts Psychology and Addiction Counseling
Master of Science in Criminal Justice
Master of Science in Criminal Justice with a specialization in
Forensic Sciences
Law Enforcement Management
Terrorism and Homeland Security
Master of Science in Information Management with a specialization in
Management
Project Management
Technologies
Master of Science in Information Systems with a specialization in
Enterprise Application Development
Web Development
Master of Science in Information Technology
Master of Science in Nursing with a specialization in
Administration and Management
Administration and Management, (RN to MSN Bridge Program)
Nursing Education
Nursing Education, (RN to MSN Bridge Program)
Master of Science in Physical Education and Sports Management
Master of Science in Technology and Innovation with a specialization in
Business Intelligence and Data Management
Electronic Security
Project Management
Systems Design
Technical Languages
Vendor and Change Control Management
Master in Business Administration
Master in Business Administration with specializations in
Entrepreneurship
Finance
Information Management
Pharmaceutical Marketing and Management
Project Management
Master in Education
Curriculum Development and Outcomes Assessment
Education Technology
Transformational Leadership
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Doctorates
Doctorate of Science in Computer Science
Doctorate in Education Leadership and Learning
Doctorate in Education Leadership and Learning with specializations
Education Administration
Faculty Leadership
Instructional Design
Leadership and Learning
Independent online classes start on the 1st and the 16th of every month and students may enroll in up to a maximum of three courses at a time.
Online interactive courses are offered five times a year.
Sales and Marketing
Prior to Mr. Michael Mathews becoming Aspen’s Chief Executive Officer in May 2011, Aspen had conducted minimal efforts and spent
immaterial sums on sales and marketing. During the second half of 2011, Mr. Mathews and his team made significant changes to our sales and
marketing program and spent a significant amount of time, money and resources on our marketing program.
What is unique about Aspen’s marketing program is that we have no plans in the near future to utilize third-party online lead generation
companies to attract prospective students. To our knowledge, most if not all for-profit online universities utilize multiple third-party online lead
generation companies to obtain a meaningful percentage of their prospective student leads. Aspen’s executive officers have many years of
expertise in the online lead generation and Internet advertising industry, which for the foreseeable future will allow Aspen to cost-effectively
drive all prospective student leads internally. This is a competitive advantage for Aspen because third-party leads are typically unbranded and
non-exclusive (lead generation firms typically sell prospective student leads to multiple universities), therefore the conversion rate for those
leads tends to be appreciably lower than internally generated, Aspen branded, proprietary leads.
In May 2011, Aspen expanded on its current search engine marketing initiatives related to Google. Aspen expanded the use of Aspen keyword
search terms and keywords related to its MBA program and nursing program. Aspen also refined its testing of keywords, marketing messages
and the establishment of program specific informational pages that have been matched to those keywords. Landing pages and keywords have
been further optimized in order to facilitate streamlined communication of Aspen’s programs, degrees and courses offered in order to ensure
that prospective students are provided with information necessary to make an informed decision regarding Aspen and to begin a dialogue with
an Aspen advisor. The search engine marketing program was expanded in July 2011, to include the Microsoft and Yahoo search engines for
general university terms, MBA and nursing programs, utilizing the same paradigm of directing prospective students to an informational page
about their desired interest within those programs.
In October 2011, Aspen began to advertise directly on publisher websites, reaching prospective students who would benefit from the
programs we offer within nursing and business programs. When working directly with publisher websites, Aspen employs a number of
sophisticated targeting techniques to most efficiently generate branded, proprietary student leads. In fact, the majority of our advertising
spend and leads we generate today is through this direct publisher channel, rather than search.
Aspen’s marketing plan for 2013 is consistent with the changes made in 2012 and 2011. In January 2012, Aspen hired an Executive Vice
President of Marketing, who supervises a new call center in the Phoenix-metro area which opened in August 2012. This executive has prior
experience in marketing with multiple online university competitors and, more recently, an online lead generation company. Since opening, the
call center has expanded to meet the increasing number of inquiries.
This change in marketing coincided with our new tuition plan which we launched effective July 15, 2011. Our new plan features increased
tuition rates on a per course basis; i.e. $350/credit hour for master or doctorate program.
From 2005 through July 2011 Aspen initiated a number of pre-payment/low per course plans. The last plan that ran from June 2010 through
July 2011 charged students tuition of only $3,600 for the entire 12-course Master or Doctorate program (the pre-payment option offered the
student the ability to pre-pay $2,700 for the first four courses or 12 credit hours, followed by $112.50 per course or $37.50/credit hour for the
remaining eight courses). This program was terminated as of July 15, 2011. At December 31, 2012, 43% of our degree-seeking students
were on the old pre-paid tuition program. However, those students only represented approximately 11% of Aspen’s full-time degree-seeking
revenues for the quarter ended December 31, 2012, and 6% of Aspen's gross profit from full-time degree seeking students for the quarter
ended December 31, 2012. The quarter ended December 31, 2012 represented the first quarter in which the old-prepay students were not a
majority of our degree seeking students. We expect that by the end of 2013, the number of old-prepay students will cease to be material.
Anticipating significant growth from our new marketing efforts, we spent approximately $1,000,000 upgrading our information technology in
2011 and approximately $400,000 in 2012.
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Employees
As of March 15, 2013, we had 38 full-time employees, and 91 adjunct professors. None of our employees are parties to any collective
bargaining arrangement. We believe our relationships with our employees are good.
Corporate History
Aspen Group was incorporated on February 23, 2010 in Florida as a home improvement company intending to develop products and sell them
on a wholesale basis to home improvement retailers. Aspen Group was unable to execute its business plan. In June 2011, Aspen Group
changed its name to Elite Nutritional Brands, Inc. and terminated all operations. In February 2012, Aspen Group reincorporated in Delaware
under the name Aspen Group, Inc.
Aspen was incorporated on September 30, 2004 in Delaware. Its predecessor was a Delaware limited liability company organized in Delaware
in 1999. In May 2011, Aspen merged with Education Growth Corporation, or the EGC Merger. Aspen survived the EGC Merger. EGC was a
start-up company controlled by Mr. Michael Mathews. Mr. Mathews became Aspen’s Chief Executive Officer upon closing the EGC
Merger. On March 13, 2012, Aspen Group acquired Aspen in the Reverse Merger.
Regulation
Students attending Aspen finance their education through a combination of individual resources, corporate reimbursement programs
and federal financial aid programs. The discussion which follows outlines the extensive regulations that affect our business. Complying with
these regulations entails significant effort from our executives and other employees. Our President has two unique roles: overseeing our
accreditation and regulatory compliance and seeking to improve our academic performance. Accreditation and regulatory compliance is also
expensive. Beyond the internal costs, we began using education regulatory counsel in the summer of 2011, as our current Chief Executive
Officer focused his attention on compliance. Aspen participates in the federal student financial aid programs authorized under Title IV. For the
year ended December 31, 2012, approximately 18% of our cash-basis revenues for eligible tuition and fees were derived from Title IV
programs. In connection with a student’s receipt of Title IV aid, we are subject to extensive regulation by the DOE, state education agencies
and the DETC. In particular, the Title IV programs, and the regulations issued thereunder by the DOE, subject us to significant regulatory
scrutiny in the form of numerous standards that we must satisfy. To participate in Title IV programs, a school must, among other things, be:
●authorized to offer its programs of instruction by the applicable state education agencies in the states in which it is physically
located (in our case, Colorado);
●accredited by an accrediting agency recognized by the Secretary of the DOE; and
●certified as an eligible institution by the DOE.
The DOE enacted regulations relating to the Title IV programs which became effective July 1, 2011. Under these new regulations, an
institution, like ours, that offers postsecondary education through distance education to students in a state in which the institution is not
physically located or in which it is otherwise subject to state jurisdiction as determined by that state, must meet any state requirements to offer
legally postsecondary education to students in that state. The institution must be able to document state approval for distance education if
requested by the DOE.
This new regulation has been recognized as a significant departure from the state authorization procedures followed by most, if not
all, institutions before its enactment. Although these new rules became effective July 1, 2011, the DOE indicated in an April 20, 2011
guidance letter that it would not initiate any action to establish repayment liabilities or limit student eligibility for distance education activities
undertaken before July 1, 2014, provided the institution was making a good faith effort to identify and obtain necessary state authorization
before that date. However, on July 12, 2011, a federal judge for the U.S. District Court for the District of Columbia vacated the portion of
the DOE’s state authorization regulation that requires online education providers to obtain any required authorization from all states in which
their students reside, finding that the DOE had failed to provide sufficient notice and opportunity to comment on the requirement. An
appellate court affirmed that ruling on June 5, 2012 and therefore this new regulation is currently invalid. However, further guidance is
expected.
Should the requirements be enforced at a later date, and if we fail to obtain required state authorization to provide postsecondary
distance education in a specific state, we could lose our ability to award Title IV aid to students within that state. In addition, a state may
impose penalties on an institution for failure to comply with state requirements related to an institution’s activities in a state, including the
delivery of distance education to persons in that state.
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Therefore, we are taking steps to ensure compliance in time for the earlier-effective July 1, 2014 enforcement date as recommended
for all schools facing this new (but currently invalid) regulation. We enroll students in all 50 states, as well as the District of Columbia and
Puerto Rico. We have sought and received confirmation that our operations do not require state licensure or authorization, or we have been
notified that we are exempt from licensure or authorization requirements, in three states. We, through our legal counsel, are researching the
licensure requirements and exemption possibilities in the remaining 47 states. It is anticipated that Aspen will be in compliance with all state
licensure requirements by June of 2014, in time for the earlier-effective compliance date set by the DOE. Because we enroll students in all
50 states, as well as the District of Columbia and Puerto Rico, we may have to seek licensure or authorization in additional states in the
future.
We are subject to extensive regulations by the states in which we become authorized or licensed to operate. State laws typically
establish standards for instruction, qualifications of faculty, administrative procedures, marketing, recruiting, financial operations and other
operational matters. State laws and regulations may limit our ability to offer educational programs and to award degrees. Some states may also
prescribe financial regulations that are different from those of the DOE. If we fail to comply with state licensing requirements, we may lose
our state licensure or authorizations. Failure to comply with state requirements could result in Aspen losing its authorization from the
Colorado Commission on Higher Education, a department of the Colorado Department of Higher Education, or CDHE, its eligibility to
participate in Title IV programs, or its ability to offer certain programs, any of which may force us to cease operations.
Additionally, Aspen is a Delaware corporation. Delaware law requires an institution to obtain approval from the Delaware
Department of Education, or Delaware DOE, before it may incorporate with the power to confer degrees. In July 2012, Aspen received notice
from the Delaware DOE that it is granted provisional approval status effective until June 30, 2015.
Accreditation
Aspen is accredited by the DETC, an accrediting agency recognized by the DOE. Accreditation is a non-governmental system for
recognizing educational institutions and their programs for student performance, governance, integrity, educational quality, faculty, physical
resources, administrative capability and resources, and financial stability. In the U.S., this recognition comes primarily through private
voluntary associations that accredit institutions and programs. To be recognized by the DOE, accrediting agencies must adopt specific
standards for their review of educational institutions. Accrediting agencies establish criteria for accreditation, conduct peer-review evaluations
of institutions and programs for accreditation, and publicly designate those institutions or programs that meet their criteria. Accredited
institutions are subject to periodic review by accrediting agencies to determine whether such institutions maintain the performance, integrity
and quality required for accreditation.
Accreditation by the DETC is important. Accreditation is a reliable indicator of an institution’s quality and is an expression of peer
institution confidence. Universities depend, in part, on accreditation in evaluating transfers of credit and applications to graduate schools.
Accreditation also provides external recognition and status. Employers rely on the accredited status of institutions when evaluating an
employment candidate’s credentials. Corporate and government sponsors under tuition reimbursement programs look to accreditation for
assurance that an institution maintains quality educational standards. Moreover, institutional accreditation awarded from an accrediting agency
recognized by the DOE is necessary for eligibility to participate in Title IV programs. From time to time, DETC adopts or makes changes to
its policies, procedures and standards. If we fail to comply with any of DETC’s requirements, our accreditation status and, therefore, our
eligibility to participate in Title IV programs could be at risk. The National Advisory Committee on Institutional Quality and Integrity (the
panel charged with advising DOE on whether to recognize accrediting agencies for federal purposes, including Title IV program purposes)
was scheduled to review DETC for recognition purposes in the Spring of 2012, at which point the committee voted to recommend that DETC
recognition be continued pending its efforts to reach compliance with certain requirements. Aspen is next scheduled for accreditation review
by DETC in November 2013.
Nature of Federal, State and Private Financial Support for Postsecondary Education
An institution that applies to participate in Title IV programs for the first time, if approved, will be provisionally certified for no more
than one complete award year. Furthermore, an institution that undergoes a change in ownership resulting in a change of control must apply to
the DOE in order to reestablish its eligibility to participate in Title IV programs. If the DOE determines to approve the application, it issues a
provisional certification, which extends for a period expiring not later than the end of the third complete award year following the date of the
provisional certification. Aspen is provisionally certified through September 30, 2013. A provisionally certified institution must apply for and
receive DOE approval of substantial changes and must comply with any additional conditions included in its program participation agreement.
If the DOE determines that a provisionally certified institution is unable to meet its responsibilities under its program participation agreement,
the DOE may seek to revoke the institution's certification to participate in Title IV programs with fewer due process protections for the
institution than if it were fully certified.
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The federal government provides a substantial part of its support for postsecondary education through the Title IV programs, in the
form of grants and loans to students. Students can use those funds at any institution that has been certified by the DOE to participate in the
Title IV programs. Aid under Title IV programs is primarily awarded on the basis of financial need, generally defined as the difference
between the cost of attending the institution and the amount a student can reasonably contribute to that cost. All recipients of Title IV program
funds must maintain satisfactory academic progress and must progress in a timely manner toward completion of their program of study. In
addition, each school must ensure that Title IV program funds are properly accounted for and disbursed in the correct amounts to eligible
students.
Our students receive loans and grants to fund their education under the following Title IV programs: (1) the Federal Direct Loan
program, or Direct Loan and (2) the Federal Pell Grant program, or Pell.
Currently, the majority of Aspen students self-finance all or a portion of their education. Additionally, students may receive full or
partial tuition reimbursement from their employers. Eligible students can also access private loans through a number of different lenders for
funding at current market interest rates.
Under the Direct Loan program, the DOE makes loans directly to students. The Direct Loan Program includes the Direct
Subsidized Loan, the Direct Unsubsidized Loan, the Direct PLUS Loan (including loans to graduate and professional students), and the
Direct Consolidation Loan. The Budget Control Act of 2011 signed into law in August 2011, eliminated Direct Subsidized Loans for
graduate and professional students, as of July 1, 2012. The terms and conditions of subsidized loans originated prior to July 1, 2012 are
unaffected by the law. In 2012, Direct Subsidized Loans were 6% of Aspen’s cash revenues as calculated in accordance with the DOE’s
90/10 rule. Cash revenues are not revenues reported on our consolidated financial statements contained herein.
For Pell grants, the DOE makes grants to undergraduate students who demonstrate financial need. To date, few Aspen students have
received Pell Grants. Accordingly, the Pell Grant program currently is not material to Aspen given the fact that Pell Grant’s represented less
than 1% of Aspen’s cash revenues as calculated in accordance with the DOE’s 90/10 rule.
Regulation of Federal Student Financial Aid Programs
The substantial amount of federal funds disbursed through Title IV programs, the large number of students and institutions
participating in these programs, and allegations of fraud and abuse by certain for-profit institutions have prompted the DOE to exercise
considerable regulatory oversight over for-profit institutions of higher learning. Accrediting agencies and state education agencies also have
responsibilities for overseeing compliance of institutions in connection with Title IV program requirements. As a result, our institution is
subject to extensive oversight and review. Because the DOE periodically revises its regulations and changes its interpretations of existing laws
and regulations, we cannot predict with certainty how the Title IV program requirements will be applied in all circumstances. See the “Risk
Factors” contained herein which disclose comprehensive regulatory risks.
In addition to the state authorization requirements and other regulatory requirements described herein, other significant factors relating
to Title IV programs that could adversely affect us include the following legislative action and regulatory changes:
Congress reauthorizes the Higher Education Act approximately every five to eight years. Congress most recently reauthorized the
Higher Education Act in August 2008. We cannot predict with certainty whether or when Congress might act to amend further the Higher
Education Act. The elimination of additional Title IV programs, material changes in the requirements for participation in such programs, or the
substitution of materially different programs could increase our costs of compliance and could reduce the ability of certain students to finance
their education at our institution.
On December 23, 2011, President Obama signed into law the Consolidated Appropriations Act of 2012, or the Act. The law includes
a number of provisions that significantly affect the Title IV programs. For example, it reduces the income threshold at which students are
assigned “an automatic zero expected family contribution” for purposes of awarding financial aid for the 2012-2013 award year. Under the
Act, students who do not have a high school diploma or a recognized equivalent (e.g., GED) or do not meet an applicable home school
requirement and who first enroll in a program of study on or after July 1, 2012 will not be eligible to receive Title IV aid. The Act also makes
certain changes to the Pell Grant Program and temporarily eliminates the interest subsidy that is provided for Direct Subsidized Loans during
the six-month grace period immediately following termination of enrollment.
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Over the last several years, Congressional committees have held hearings related to for-profit postsecondary education institutions.
Additionally, the chairmen of the House and Senate education committees, along with other members of Congress, asked the Government
Accountability office, or GAO, to review various aspects of the for-profit education sector, including recruitment practices, educational
quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in Title IV programs, and the degree to which
for-profit schools’ revenue is comprised of Title IV and other federal funding sources. In 2010, the GAO released a report based on a three-
month undercover investigation of recruiting practices at for-profit schools. The report concluded that employees at a non-random sample of
15 for-profit schools (which did not include Aspen) made deceptive statements to students about accreditation, graduation rates, job placement,
program costs, or financial aid. On October 31, 2011, the GAO released a second report following an additional undercover investigation
related to enrollment, cost, financial aid, course structure, substandard student performance, withdrawal, and exit counseling. The report
concluded that while some of the 15 unidentified for-profit schools investigated appeared to follow existing policies, others did not. Although
the report identified a number of deficiencies in specific instances, it made no recommendations. On December 7, 2011, the GAO released a
report that attempted to compare the quality of education provided by for-profit, nonprofit, and public institutions based upon multiple outcome
measures including graduation rates, pass rates on licensing exams, employment outcomes, and student loan default rates. The report found
that students at for-profit institutions had higher graduation rates for certificate programs, similar graduation rates for associate’s degree
programs, and lower graduation rates for bachelor’s degree programs than students at nonprofit and public institutions. It also found that a
higher proportion of bachelor’s degree recipients from for-profit institutions took out loans than did degree recipients from other institutions
and that some evidence exists that students at for-profits institutions default on their student loans at higher rates. On nine of the ten licensing
exams reviewed, graduates of for-profit institutions had lower pass rates than students from nonprofit and public institutions.
As described above, certain DOE regulations have been challenged and the lawsuit is currently before a federal appeals court. The
same plaintiff in that lawsuit also filed a lawsuit in the U.S. District Court for the District of Columbia challenging the DOE’s final regulations
on gainful employment, which are discussed below. The lawsuit is currently pending.
The DOE currently is in the process of developing proposed regulations to amend regulations pertinent to the Title IV loan programs
and teacher education. We are unable to predict the timing or the proposed or final form of any regulations that the DOE ultimately may adopt
and the impact of such regulations on our business.
Administrative Capability. DOE regulations specify extensive criteria by which an institution must establish that it has the requisite
“administrative capability” to participate in Title IV programs. Failure to satisfy any of the standards may lead the DOE to find the institution
ineligible to participate in Title IV programs or to place the institution on provisional certification as a condition of its participation. To meet the
administrative capability standards, an institution must, among other things:
● comply with all applicable Title IV program regulations;
● have capable and sufficient personnel to administer the federal student financial aid programs;
● have acceptable methods of defining and measuring the satisfactory academic progress of its students;
● have cohort default rates above specified levels;
● have various procedures in place for safeguarding federal funds;
● not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause
for debarment or suspension;
● provide financial aid counseling to its students;
● refer to the DOE’s Office of Inspector General any credible information indicating that any applicant, student, employee, or agent of the
institution, has been engaged in any fraud or other illegal conduct involving Title IV programs;
● report annually to the Secretary of Education on any reasonable reimbursements paid or provided by a private education lender or group
of lenders to any employee who is employed in the institution’s financial aid office or who otherwise has responsibilities with respect to
education loans;
● develop and apply an adequate system to identify and resolve conflicting information with respect to a student’s application for Title IV
aid;
● submit in a timely manner all reports and financial statements required by the regulations; and
● not otherwise appear to lack administrative capability.
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Among other things, DOE regulations require that an institution must evaluate satisfactory academic progress (1) at the end of each
payment period if the length of the educational program is one academic year or less or (2) for all other educational programs, at the end of
each payment period or at least annually to correspond to the end of a payment period. Second, the DOE regulations add an administrative
capability standard related to the existing requirement that students must have a high school diploma or its recognized equivalent in order to be
eligible for Title IV aid. Under the administrative capability standard, institutions must develop and follow procedures for evaluating the
validity of a student’s high school diploma if the institution or the Secretary of Education has reason to believe that the student’s diploma is not
valid.
● If an institution fails to satisfy any of these criteria or any other DOE regulation, the DOE may:
● require the repayment of Title IV funds;
● transfer the institution from the “advance” system of payment of Title IV funds to cash monitoring status or to the “reimbursement”
system of payment;
● place the institution on provisional certification status; or
● commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.
If we are found not to have satisfied the DOE’s “administrative capability” requirements, we could lose, or be limited in our access
to, Title IV program funding.
Distance Education. We offer all of our existing degree and certificate programs via Internet-based telecommunications from our
headquarters in Colorado. Under the Higher Education Opportunity Act, or HEOA, an accreditor that evaluates institutions offering distance
education must require such institutions to have processes through which the institution establishes that a student who registers for a distance
education program is the same student who participates in and receives credit for the program. Under DOE regulations, if an institution offers
postsecondary education through distance education to students in a state in which the institution is not physically located or in which it is
otherwise subject to state jurisdiction as determined by the state, the institution must meet any state requirements for it to offer legally
postsecondary distance education in that state. The institution must be able to document state approval for distance education if requested by
the DOE. In addition, states must have a process to review and take appropriate action on complaints concerning postsecondary institutions.
As previously discussed herein, these regulations have been vacated by a federal court.
Financial Responsibility. The Higher Education Act and DOE regulations establish extensive standards of financial responsibility that
institutions such as Aspen must satisfy to participate in Title IV programs. These standards generally require that an institution provide the
resources necessary to comply with Title IV program requirements and meet all of its financial obligations, including required refunds and any
repayments to the DOE for liabilities incurred in programs administered by the DOE.
The DOE evaluates institutions on an annual basis for compliance with specified financial responsibility standards that include a
complex formula that uses line items from the institution’s audited financial statements. In addition, the financial responsibility standards
require an institution to receive an unqualified opinion from its accountants on its audited financial statements, maintain sufficient cash reserves
to satisfy refund requirements, meet all of its financial obligations, and remain current on its debt payments. The formula focuses on three
financial ratios: (1) equity ratio (which measures the institution’s capital resources, financial viability, and ability to borrow); (2) primary
reserve ratio (which measures the institution’s viability and liquidity); and (3) net income ratio (which measures the institution’s profitability or
ability to operate within its means). An institution’s financial ratios must yield a composite score of at least 1.5 for the institution to be deemed
financially responsible without the need for further federal oversight. The DOE may also apply such measures of financial responsibility to the
operating company and ownership entities of an eligible institution.
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Under DOE regulations, even if an institution meets all of the other financial responsibility requirements, it is not considered to be
financially responsible if the relevant financial statement audits contain a going concern opinion. If the DOE were to determine that we do not
meet its financial responsibility standards, we may be able to establish financial responsibility on an alternative basis. Alternative bases
include, for example:
●posting a letter of credit in an amount equal to at least 50% of the total Title IV program funds received by us during our most
recently completed fiscal year;
●posting a letter of credit in an amount equal to at least 10% of such prior year’s Title IV program funds received by us, accepting
provisional certification, complying with additional DOE monitoring requirements and agreeing to receive Title IV program funds
under an arrangement other than the DOE’s standard advance payment arrangement such as the “reimbursement” system of
payment or cash monitoring; or
●complying with additional DOE monitoring requirements and agreeing to receive Title IV program funds under an arrangement
other than the DOE’s standard advance payment arrangement such as the “reimbursement” system of payment or cash monitoring.
Failure to meet the DOE’s “financial responsibility” requirements, either because we do not meet the DOE’s financial responsibility
standards or are unable to establish financial responsibility on an alternative basis, would cause us to lose access to Title IV program funding.
Consistent with the Higher Education Act, Aspen’s certification to participate in Title IV programs terminated after closing of the
Reverse Merger. The DOE received Aspen's application and extended the provisional certification through September 30, 2013. In the future,
the DOE may impose additional or different terms and conditions in any final or provisional program participation agreement that it may issue.
In terms of future deadlines with the DOE, Aspen is required to re-apply by June 30, 2013 to continue its participation in the Title IV HEA
programs. At that time, a determination will be made whether we meet the requirements for full certification.
Third-Party Servicers. DOE regulations permit an institution to enter into a written contract with a third-party servicer for the
administration of any aspect of the institution’s participation in Title IV programs. The third-party servicer must, among other obligations,
comply with Title IV requirements and be jointly and severally liable with the institution to the Secretary of Education for any violation by the
servicer of any Title IV provision. An institution must report to the DOE new contracts with or any significant modifications to contracts with
third-party servicers as well as other matters related to third-party servicers. We contract with a third-party servicer which performs certain
activities related to our participation in Title IV programs. If our third-party servicer does not comply with applicable statutes and regulations
including the Higher Education Act, we may be liable for its actions, and we could lose our eligibility to participate in Title IV programs.
Title IV Return of Funds. Under the DOE’s return of funds regulations, when a student withdraws, an institution must return
unearned funds to the DOE in a timely manner. An institution must first determine the amount of Title IV program funds that a student
“earned.” If the student withdraws during the first 60% of any period of enrollment or payment period, the amount of Title IV program funds
that the student earned is equal to a pro rata portion of the funds for which the student would otherwise be eligible. If the student withdraws
after the 60% threshold, then the student has earned 100% of the Title IV program funds. The institution must return to the appropriate Title
IV programs, in a specified order, the lesser of (i) the unearned Title IV program funds and (ii) the institutional charges incurred by the student
for the period multiplied by the percentage of unearned Title IV program funds. An institution must return the funds no later than 45 days after
the date of the institution’s determination that a student withdrew. If such payments are not timely made, an institution may be subject to
adverse action, including being required to submit a letter of credit equal to 25% of the refunds the institution should have made in its most
recently completed year. Under DOE regulations, late returns of Title IV program funds for 5% or more of students sampled in the
institution’s annual compliance audit constitutes material non-compliance. Aspen’s academic calendar structure is a non-standard term with
rolling start dates with defined length of term (16 week term).
The “90/10 Rule.” A requirement of the Higher Education Act commonly referred to as the “90/10 Rule,” applies only to “proprietary
institutions of higher education,” which includes Aspen. An institution is subject to loss of eligibility to participate in the Title IV programs if
it derives more than 90% of its revenues (calculated on a cash basis and in accordance with a DOE formula) from Title IV programs for two
consecutive fiscal years. An institution whose rate exceeds 90% for any single fiscal year will be placed on provisional certification for at least
two fiscal years and may be subject to other conditions specified by the Secretary of the DOE. For the year ended December 31, 2012, we
derived approximately 18% of our revenues (calculated on a cash basis and in accordance with a DOE formula) from Title IV program funds.
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Student Loan Defaults. Under the Higher Education Act, an education institution may lose its eligibility to participate in some or all of
the Title IV programs if defaults on the repayment of Direct Loan Program loans by its students exceed certain levels. For each federal fiscal
year, a rate of student defaults (known as a “cohort default rate”) is calculated for each institution with 30 or more borrowers entering
repayment in a given federal fiscal year by determining the rate at which borrowers who become subject to their repayment obligation in that
federal fiscal year default by the end of the following federal fiscal year. For such institutions, the DOE calculates a single cohort default rate
for each federal fiscal year that includes in the cohort all current or former student borrowers at the institution who entered repayment on any
Direct Loan Program loans during that year.
If the DOE notifies an institution that its cohort default rates for each of the three most recent federal fiscal years are 25% or greater,
the institution’s participation in the Direct Loan Program and the Federal Pell Grant Program ends 30 days after the notification, unless the
institution appeals in a timely manner that determination on specified grounds and according to specified procedures. In addition, an
institution’s participation in Title IV ends 30 days after notification that its most recent fiscal year cohort default rate is greater than 40%,
unless the institution timely appeals that determination on specified grounds and according to specified procedures. An institution whose
participation ends under these provisions may not participate in the relevant programs for the remainder of the fiscal year in which the
institution receives the notification, as well as for the next two fiscal years.
If an institution’s cohort default rate equals or exceeds 25% in any single year, the institution may be placed on provisional
certification status. Provisional certification does not limit an institution’s access to Title IV program funds; however, an institution with
provisional status is subject to closer review by the DOE and may be subject to summary adverse action if it violates Title IV program
requirements. If an institution’s default rate exceeds 40%, the institution may lose eligibility to participate in some or all Title IV programs.
Since Aspen has only recently begun to participate in Title IV programs and our certification limits the number of Aspen students who may
receive Title IV aid, we do not yet have reporting data on our cohort default rates for the three most recent federal fiscal years for which cohort
default rates have been officially calculated, namely 2007, 2008 and 2009. The primary reason is that we have not yet had students who have
begun to repay their Title IV loans.
HEOA extended by one year the period for measuring the cohort default rate, effective with cohort default rates for federal fiscal year
2009. Currently, institutions that have two-year cohort default rates of 25% or more for each of their three most recent years, or of 40% in any
one year, will lose eligibility for Title IV student aid programs; beginning in 2014, institutions that have three-year cohort default rates of 30%
or higher for three consecutive years, or of more than 40% in any given year, will lose eligibility for those programs.
Incentive Compensation Rules. As a part of an institution’s program participation agreement with the DOE and in accordance with
the Higher Education Act, an institution may not provide any commission, bonus or other incentive payment to any person or entity engaged
in any student recruitment, admissions or financial aid awarding activity based directly or indirectly on success in securing enrollments or
financial aid. Failure to comply with the incentive payment rule could result in termination of participation in Title IV programs, limitation on
participation in Title IV programs, or financial penalties. Aspen believes it is in compliance with the incentive payment rule.
In recent years, other postsecondary educational institutions have been named as defendants to whistleblower lawsuits, known as
“qui tam” cases, brought by current or former employees pursuant to the Federal False Claims Act, alleging that their institution’s
compensation practices did not comply with the incentive compensation rule. A qui tam case is a civil lawsuit brought by one or more
individuals, referred to as a relator, on behalf of the federal government for an alleged submission to the government of a false claim for
payment. The relator, often a current or former employee, is entitled to a share of the government’s recovery in the case, including the
possibility of treble damages. A qui tam action is always filed under seal and remains under seal until the government decides whether to
intervene in the case. If the government intervenes, it takes over primary control of the litigation. If the government declines to intervene in the
case, the relator may nonetheless elect to continue to pursue the litigation at his or her own expense on behalf of the government. Any such
litigation could be costly and could divert management’s time and attention away from the business, regardless of whether a claim has merit.
The GAO released a report finding that the DOE has inadequately enforced the current ban on incentive payments. In response, the
DOE has undertaken to increase its enforcement efforts by, among other approaches, strengthening procedures provided to auditors reviewing
institutions for compliance with the incentive payments ban and updating its internal compliance guidance in light of the GAO findings and
the recently amended DOE incentive payment rule.
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Code of Conduct Related to Student Loans. As part of an institution’s program participation agreement with the DOE, HEOA
requires that institutions that participate in Title IV programs adopt a code of conduct pertinent to student loans. For financial aid office or
other employees who have responsibility related to education loans, the code must forbid, with limited exceptions, gifts, consulting
arrangements with lenders, and advisory board compensation other than reasonable expense reimbursement. The code also must ban revenue-
sharing arrangements, “opportunity pools” that lenders offer in exchange for certain promises, and staffing assistance from lenders. The
institution must post the code prominently on its website and ensure that its officers, employees, and agents who have financial aid
responsibilities are informed annually of the code’s provisions. Aspen has adopted a code of conduct under the HEOA which is posted on its
website. In addition to the code of conduct requirements that apply to institutions, HEOA contains provisions that apply to private lenders,
prohibiting such lenders from engaging in certain activities as they interact with institutions. Failure to comply with the code of conduct
provision could result in termination of our participation in Title IV programs, limitations on participation in Title IV programs, or financial
penalties.
Misrepresentation. The Higher Education Act and current regulations authorize the DOE to take action against an institution that
participates in Title IV programs for any “substantial misrepresentation” made by that institution regarding the nature of its educational
program, its financial charges, or the employability of its graduates. Effective July 1, 2011, DOE regulations expanded the definition of
“substantial misrepresentation” to cover additional representatives of the institution and additional substantive areas and expands the parties to
whom a substantial misrepresentation cannot be made. The regulations also augment the actions the DOE may take if it determines that an
institution has engaged in substantial misrepresentation. Under the final regulations, the DOE may revoke an institution’s program
participation agreement, impose limitations on an institution’s participation in Title IV programs, or initiate proceedings to impose a fine or to
limit, suspend, or terminate the institution’s participation in Title IV programs.
Credit Hours. The Higher Education Act and current regulations use the term “credit hour” to define an eligible program and an
academic year and to determine enrollment status and the amount of Title IV aid an institution may disburse during a payment period.
Recently, both Congress and the DOE have increased their focus on institutions’ policies for awarding credit hours. Recent DOE regulations
define the previously undefined term “credit hour” in terms of a certain amount of time in class and outside class, or an equivalent amount of
work. The regulations also require accrediting agencies to review the reliability and accuracy of an institution’s credit hour assignments. If an
accreditor identifies systematic or significant noncompliance in one or more of an institution’s programs, the accreditor must notify the
Secretary of Education. If the DOE determines that an institution is out of compliance with the credit hour definition, the DOE could require
the institution to repay the incorrectly awarded amounts of Title IV aid. In addition, if the DOE determines that an institution has significantly
overstated the amount of credit hours assigned to a program, the DOE may fine the institution, or limit, suspend, or terminate its participation
in the Title IV programs.
Compliance Reviews. We are subject to announced and unannounced compliance reviews and audits by various external agencies,
including the DOE, its Office of Inspector General, state licensing agencies, and accrediting agencies. As part of the DOE’s ongoing
monitoring of institutions’ administration of Title IV programs, the Higher Education Act and DOE regulations require institutions to submit
annually a compliance audit conducted by an independent certified public accountant in accordance with Government Auditing Standards and
applicable audit standards of the DOE. These auditing standards differ from those followed in the audit of our financial statements contained
herein. In addition, to enable the DOE to make a determination of financial responsibility, institutions must annually submit audited financial
statements prepared in accordance with DOE regulations. Furthermore, the DOE regularly conducts program reviews of education institutions
that are participating in the Title IV programs, and the Office of Inspector General of the DOE regularly conducts audits and investigations of
such institutions. In August 2010, the Secretary of Education announced in a letter to several members of Congress that, in part in response to
recent allegations against proprietary institutions of deceptive trade practices and noncompliance with DOE regulations, the DOE planned to
strengthen its oversight of Title IV programs through, among other approaches, increasing the number of program reviews by 50%, from 200
conducted in 2010 to up to 300 reviews in 2011. The DOE has apparently not yet reported on the number of reviews conducted in
2012. Pending legislation including the “Students First Act” introduced in the United States Senate on February 28, 2013, would – if passed
– increased the number of program reviews for various institutions deemed at-risk of violating DOE requirements.
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Potential Effect of Regulatory Violations. If we fail to comply with the regulatory standards governing Title IV programs, the DOE
could impose one or more sanctions, including transferring Aspen to the reimbursement or cash monitoring system of payment, seeking to
require repayment of certain Title IV program funds, requiring Aspen to post a letter of credit in favor of the DOE as a condition for continued
Title IV certification, taking emergency action against us, referring the matter for criminal prosecution or initiating proceedings to impose a fine
or to limit, condition, suspend or terminate our participation in Title IV programs.
We also may be subject, from time to time, to complaints and lawsuits relating to regulatory compliance brought not only by our
regulatory agencies, but also by other government agencies and third parties, such as present or former students or employees and other
members of the public.
Restrictions on Adding Educational Programs. State requirements and accrediting agency standards may, in certain instances, limit
our ability to establish additional programs. Many states require approval before institutions can add new programs under specified
conditions. The Colorado Commission on Higher Education, and other state educational regulatory agencies that license or authorize us and
our programs, may require institutions to notify them in advance of implementing new programs, and upon notification may undertake a
review of the institution’s licensure or authorization.
In addition, we were advised by the DOE that because we were provisionally certified due to being a new Title IV program
participant, we could not add new degree or non-degree programs for Title IV program purposes, except under limited circumstances and only
if the DOE approved such new program, until the DOE reviewed a compliance audit that covered one complete fiscal year of Title IV program
participation. That fiscal year ended on December 31, 2010, and we timely submitted our compliance audit and financial statements to the
DOE. In addition, in June 2011, Aspen timely applied for recertification to participate in Title IV programs. The DOE extended Aspen's
provisional certification until September 30, 2013. Aspen is required to re-apply by June 30, 2013 to continue its participation in the Title IV
Higher Education Act programs. At that time, a determination will be made whether we meet the requirements for full certification.
Recent DOE regulations establish a new process under which an institution must apply for approval to offer a program that, under
the Higher Education Act, must prepare students for “gainful employment in a recognized occupation” in order to be eligible for Title IV
funds. An institution must notify the DOE at least 90 days before the first day of classes when it intends to add a program that prepares
students for gainful employment. The DOE may, as a condition of certification to participate in Title IV programs, require prior approval of
programs or otherwise restrict the number of programs an institution may add.
DETC requires pre-approval of new courses, programs, and degrees that are characterized as a “substantive change.” An institution
must obtain written notice approving such change before it may be included in the institution’s grant of accreditation. An institution is further
prohibited from advertising or posting on its website information about the course or program before it has received approval. The process for
obtaining approval generally requires submission of a report and course materials and may require a follow-up on-site visit by an examining
committee.
Gainful Employment. Under the Higher Education Act, proprietary schools are eligible to participate in Title IV programs only in
respect of education programs that lead to gainful employment in a recognized occupation. Under the DOE rules, with respect to each gainful
employment program, a proprietary institution of higher education must disclose to prospective students with the identities of the occupations
that the program prepares students to enter, total program cost, on-time completion rate, job placement rate (if applicable), and median loan
debt of students who complete the program. Under the new program requirements, institutions are required to notify the DOE at least 90
days before the commencement of new gainful employment programs which must include information on the demand for the program, a wage
analysis, an institutional program review and approval process, and a demonstration of accreditation. While the DOE had issued various
additional reporting regulations, requiring institutions to annually submit information to the DOE regarding each enrolled student, including
the amount of debt incurred, those reporting regulations were vacated in the June 2011 court decision discussed earlier herein, which was
affirmed on appeal; new reporting regulations are expected to issue at some point. Institutions need not disclose or report gainful employment
information on programs that are not eligible to participate in Title IV programs.
Expected gainful employment reporting requirements will likely substantially increase our administrative burdens, particularly during
the implementation phase. These reporting and the other procedural changes in the new rules could affect student enrollment, persistence and
retention in ways that we cannot now predict. For example, if our reported program information compares unfavorably with other reporting
education institutions, it could adversely affect demand for our programs.
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Although the rules regarding gainful employment metrics provide opportunities to address program deficiencies before the loss of
Title IV eligibility, the continuing eligibility of our educational programs for Title IV funding is at risk under pending gainful employment
rules due to factors beyond our control, such as changes in the actual or deemed income level of our graduates, changes in student borrowing
levels, increases in interest rates, changes in the federal poverty income level relevant for calculating discretionary income, changes in the
percentage of our former students who are current in repayment of their student loans, and other factors. In addition, even though deficiencies
in the metrics may be correctible on a timely basis, the disclosure requirements to students following a failure to meet the standards may
adversely impact enrollment in that program and may adversely impact the reputation of our education institution. The exposure to these
external factors may reduce our ability to offer or continue confidently certain types of programs for which there is market demand, thus
affecting our ability to maintain or grow our business.
Eligibility and Certification Procedures. Each institution must periodically apply to the DOE for continued certification to participate
in Title IV programs. Such recertification is required every six years, but may be required earlier, including when an institution undergoes a
change of control. An institution may come under the DOE’s review when it expands its activities in certain ways, such as opening an
additional location, adding a new program, or, in certain cases, when it modifies academic credentials that it offers.
The DOE may place an institution on provisional certification status if it finds that the institution does not fully satisfy all of the
eligibility and certification standards and in certain other circumstances, such as when it undergoes a change in ownership and control. The
DOE may more closely review an institution that is provisionally certified if it applies for approval to open a new location, add an educational
program, acquire another school or make any other significant change.
In addition, during the period of provisional certification, the institution must comply with any additional conditions included in its
program participation agreement. If the DOE determines that a provisionally certified institution is unable to meet its responsibilities under its
program participation agreement, it may seek to revoke the institution’s certification to participate in Title IV programs with fewer due process
protections for the institution than if it were fully certified. Students attending provisionally certified institutions, like Aspen, remain eligible to
receive Title IV program funds.
Change in Ownership Resulting in a Change of Control. In addition to school acquisitions, other types of transactions can also cause
a change of control. The DOE, most state education agencies, and DETC all have standards pertaining to the change of control of schools, but
those standards are not uniform. DOE regulations describe some transactions that constitute a change of control, including the transfer of a
controlling interest in the voting stock of an institution or the institution’s parent corporation. DOE regulations provide that a change of control
of a publicly-traded corporation occurs in one of two ways: (i) if there is an event that would obligate the corporation to file a Current Report
on Form 8-K with the Securities and Exchange Commission, or the SEC, disclosing a change of control or (ii) if the corporation has a
shareholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest shareholder of the corporation,
and that shareholder ceases to own at least 25% of such stock or ceases to be the largest shareholder. A significant purchase or disposition of
our voting stock could be determined by the DOE to be a change of control under this standard. Many states include the sale of a controlling
interest of common stock in the definition of a change of control requiring approval. A change of control under the definition of one of these
agencies would require us to seek approval of the change in ownership and control to maintain our accreditation, state authorization or
licensure. The requirements to obtain such approval from the states and DETC vary widely. In some cases, approval of the change of
ownership and control cannot be obtained until after the transaction has occurred. In December 2011, we provided details regarding the
Reverse Merger to the CDHE. The CDHE indicated that under current regulations, as long as we maintain accreditation by DETC following
the Reverse Merger, Aspen will remain in good standing with the CDHE. As described below, DETC approved the change of ownership,
with several customary conditions.
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DETC recently revised its policy pertinent to changes in legal status, control, ownership, or management. The policy revisions add
definitions of the situations under which DETC considers a change in legal status, control, ownership, or management to occur, describe the
procedures that an institution must follow to obtain approval, and clarify the options available to DETC. Among other revisions, DETC
defines a change of ownership and control as a change in the ability to direct or cause the direction of the actions of an institution, including,
for example, the sale of a controlling interest in an institution’s corporate parent. Failure to obtain prior approval of a change of ownership
and control will result in withdrawal of accreditation under the new ownership. The policy also requires institutions to undergo a post-change
examination within six months of a change of ownership. The revisions clarify that after such examination, DETC will make a final decision
whether to continue the institution’s accreditation. In addition, if an institution is acquired by an entity that owns or operates other distance
education institutions, the amendments clarify that any such institutions must obtain DETC approval within two years of the change of
ownership or accreditation may be withdrawn. The policy revisions define a change of management as the replacement of the senior level
executive of the institution, for example the President or Chief Executive Officer. In addition, the revisions clarify that before undertaking
such a change, an institution must seek DETC’s prior approval by explaining when the change will occur, the rationale for the change, the
executive’s job description, the new executive’s qualifications, and how the change will affect the institution’s ability to comply with all
DETC accreditation standards. DETC may take any action it deems appropriate in response to a change of management request. The
Reverse Merger was considered a change of control event under DETC’s policy. In February 2012, DETC informed Aspen that it had
approved the change of ownership, with several conditions that are consistent with DETC’s change of ownership procedures and
requirements. These conditions included: (1) that Aspen agree to undergo an examination visit by a committee; (2) that an updated Self-
Evaluation Report be submitted four to six weeks prior to the on-site visit; (3) that Aspen submit a new Teach-Out Resolution form as soon
as the Reverse Merger had closed; and (4) that Aspen provide written confirmation to DETC by February 20, 2012 that it agreed to and
would comply with the stated conditions. We provided the requested information to DETC. The examination visit occurred in August 2012.
Aspen is scheduled for re-accreditation review in November 2013. On September 28, 2012, the DOE approved Aspen's change of control
and extended its provisional certification until September 30, 2013.
When a change of ownership resulting in a change of control occurs at a for-profit institution, the DOE applies a different set of
financial tests to determine the financial responsibility of the institution in conjunction with its review and approval of the change of
ownership. The institution generally is required to submit a same-day audited balance sheet reflecting the financial condition of the institution
immediately following the change in ownership. The institution’s same-day balance sheet must demonstrate an acid test ratio of at least 1:1,
which is calculated by adding cash and cash equivalents to current accounts receivable and dividing the sum by total current liabilities (and
excluding all unsecured or uncollateralized related party receivables). The same-day balance sheet must demonstrate positive tangible net
worth. If the institution does not satisfy these requirements, the DOE may condition its approval of the change of ownership on the
institution’s agreeing to post a letter of credit, provisional certification, and/or additional monitoring requirements, as described in the above
section on Financial Responsibility. The time required for the DOE to act on a post-change in ownership and control application may vary
substantially. As a result of the change of ownership, Aspen delivered a $264,665 letter of credit to the DOE in accordance with the standards
identified above.
A change of control also could occur as a result of future transactions in which Aspen is involved. Some corporate reorganizations
and some changes in the Board are examples of such transactions. Moreover, the potential adverse effects of a change of control could
influence future decisions by us and our shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock. In addition,
the regulatory burdens and risks associated with a change of control also could discourage bids for your shares of common stock and could
have an adverse effect on the market price of your shares.
Possible Acquisitions. In addition to the planned expansion through Aspen’s new marketing program, we may expand through
acquisition of related or synergistic businesses. Our internal growth is subject to monitoring and ultimately approval by the DETC. If the
DETC finds that the growth may adversely affect our academic quality, the DETC can request us to slow the growth and potentially withdraw
accreditation and require us to re-apply for accreditation. The DOE may also impose growth restrictions on an institution, including in
connection with a change in ownership and control. While acquisitions of online universities would be subject to approval by the DETC,
approval of businesses which supply services to online universities or which provide educational services and/or products may not be subject
to regulatory approval or extensive regulation.
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ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding
whether to invest in Aspen. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also
impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business,
consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and
marketability of the common stock could decline.
Risks Relating to Our Business
Our ability to continue as a going concern is in doubt absent obtaining adequate new debt or equity financing.
We incurred a net loss of approximately $6 million in 2012 and $2.1 million in 2011. We anticipate losses will continue until we are able to
increase our enrollment under our new tuition plan and these new students paying higher rates have taken at least two courses. Additionally,
our audited financial statements contain a going concern opinion. Since August 2012, we closed equity financings totaling net proceeds of
$3,590,236, which has provided working capital necessary because of these losses. We cannot assure you that we will meet our future
working capital needs. In such event, we may not be able to remain in business. Furthermore, this going concern opinion may affect our ability
to obtain DOE permanent certification for Title IV purposes.
Because our management team has been in place for less than two years, it may be difficult to evaluate our future prospects and the
risk of success or failure of our business.
Our management team began the process of taking control of Aspen from its then Chairman in May 2011 and embarked upon changes in
Aspen’s business model including adopting a new tuition plan effective upon receiving regulatory approval, revamping Aspen’s marketing
approach, substantially increasing marketing expenditures, and upgrading Aspen’s technology infrastructure. While the results to date are very
encouraging, the limited time period makes it difficult to project whether we will be successful.
Our business may be adversely affected by a further economic slowdown in the U.S. or abroad or by an economic recovery in the
U.S.
The U.S. and much of the world economy are experiencing difficult economic circumstances. We believe the recent economic downturn in the
U.S., particularly the continuing high unemployment rate, has contributed to a portion of our recent enrollment growth as an increased number
of working students seek to advance their education to improve job security or reemployment prospects. This effect cannot be quantified.
However, to the extent that the economic downturn and the associated unemployment have increased demand for our programs, an improving
economy and increased employment may eliminate this effect and reduce such demand as fewer potential students seek to advance their
education. We do not know whether the gradually reduced unemployment rate will reduce future demand for our services, which would have a
material adverse effect on our business, financial condition, results of operations and cash flows. Conversely, a worsening of economic and
employment conditions could adversely affect the ability or willingness of prospective students to pay our tuition and our former students to
repay student loans, which could increase our bad debt expense, impair our ability to offer students loans under Title IV, and require increased
time, attention and resources to manage defaults.
If we cannot manage our growth, our results of operations may suffer and could adversely affect our ability to comply with federal
regulations.
The growth that we have experienced after our new management began in May 2011, as well as any future growth that we experience, may
place a significant strain on our resources and increase demands on our management information and reporting systems and financial
management controls. If growth negatively impacts our ability to manage our business, the learning experience for our students could be
adversely affected, resulting in a higher rate of student attrition and fewer student referrals. Future growth will also require continued
improvement of our internal controls and systems, particularly those related to complying with federal regulations under the Higher Education
Act, as administered by the DOE, including as a result of our participation in federal student financial aid programs under Title IV. If we are
unable to manage our growth, we may also experience operating inefficiencies that could increase our costs and adversely affect our profitability
and results of operations.
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Because there is strong competition in the postsecondary education market, especially in the online education market, our cost of
acquiring students may increase and our results of operations may be harmed.
Postsecondary education is highly fragmented and competitive. We compete with traditional public and private two-year and four-year brick and
mortar colleges as well as other for-profit schools, particularly those that offer online learning programs. Public and private colleges and
universities, as well as other for-profit schools, offer programs similar to those we offer. Public institutions receive substantial government
subsidies, and public and private institutions have access to government and foundation grants, tax-deductible contributions that create large
endowments and other financial resources generally not available to for-profit schools. Accordingly, public and private institutions may have
instructional and support resources that are superior to those in the for-profit sector. In addition, some of our competitors, including both
traditional colleges and universities and online for-profit schools, have substantially greater name recognition and financial and other resources
than we have, which may enable them to compete more effectively for potential students. We also expect to face increased competition as a
result of new entrants to the online education market, including established colleges and universities that have not previously offered online
education programs.
We may not be able to compete successfully against current or future competitors and may face competitive pressures including price pressures
that could adversely affect our business or results of operations and reduce our operating margins. We may also face increased competition if
our competitors pursue relationships with the military and government educational programs with which we already have relationships. These
competitive factors could cause our enrollments, revenues and profitability to decrease significantly.
In the event that we are unable to update and expand the content of existing programs and develop new programs and
specializations on a timely basis and in a cost-effective manner, our results of operations may be harmed.
The updates and expansions of our existing programs and the development of new programs and specializations may not be accepted by
existing or prospective students or employers. If we cannot respond to changes in market requirements, our business may be adversely affected.
Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as students require or
as quickly as our competitors introduce competing programs. To offer a new academic program, we may be required to obtain appropriate
federal, state and accrediting agency approvals, which may be conditioned or delayed in a manner that could significantly affect our growth
plans. In addition, a new academic program that must prepare students for gainful employment must be approved by the DOE for Title IV
purposes if the institution is provisionally certified, which we are through September 30, 2013. If we are unable to respond adequately to
changes in market requirements due to financial constraints, regulatory limitations or other factors, our ability to attract and retain students could
be impaired and our financial results could suffer.
Establishing new academic programs or modifying existing programs may require us to make investments in management and faculty, incur
marketing expenses and reallocate other resources. If we are unable to increase the number of students, or offer new programs in a cost-
effective manner, or are otherwise unable to manage effectively the operations of newly established academic programs, our results of
operations and financial condition could be adversely affected.
Because our future growth and profitability will depend in large part upon the effectiveness of our marketing and advertising efforts,
if those efforts are unsuccessful we may not be profitable in the future.
Our future growth and profitability will depend in large part upon our media performance, including our ability to:
● Create greater awareness of our school and our programs;
● Identify the most effective and efficient level of spending in each market and specific media vehicle;
● Determine the appropriate creative message and media mix for advertising, marketing and promotional expenditures; and
● Effectively manage marketing costs (including creative and media).
Our marketing expenditures may not result in increased revenue or generate sufficient levels of brand name and program awareness. If our
media performance is not effective, our future results of operations and financial condition will be adversely affected.
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Although our management is spearheading a new marketing and advertising program, it may not be successful.
Mr. Michael Mathews, our Chief Executive Officer has developed a new marketing campaign designed to substantially increase our student
enrollment. While initial results have been as anticipated, there are no assurances that this marketing campaign will continue to be
successful. Among the risks are the following:
● Our ability to compete with existing online colleges which have substantially greater financial resources, deeper management and
academic resources, and enhanced public reputations;
● the emergence of more successful competitors;
● factors related to our marketing, including the costs of Internet advertising and broad-based branding campaigns;
● limits on our ability to attract and retain effective employees because of the new incentive payment rule;
● performance problems with our online systems;
● failure to maintain accreditation;
● student dissatisfaction with our services and programs;
● adverse publicity regarding us, our competitors or online or for-profit education generally;
● a decline in the acceptance of online education;
● a decrease in the perceived or actual economic benefits that students derive from our programs;
● potential students may not be able to afford the monthly payments; and
● potential students may not react favorably to our marketing and advertising campaigns.
If our new marketing campaign is not favorably received, our revenues may not increase.
If student enrollment decreases as a result of our increased tuition plan, our results of operations may be adversely affected.
In July 2011, we launched a new tuition plan which provided for a material increase in our tuition prices. The prior business model and pricing
structure implemented by our prior management was flawed and could not be sustained. Although changes in our marketing strategy and
upgraded technology infrastructure have increased our enrollment, we cannot assure that our student enrollment will not suffer in the future as a
result of the increased tuition. If we are unable to enroll students in a cost-effective manner, our results of operations will suffer and you may
lose your investment.
If we incur system disruptions to our online computer networks, it could impact our ability to generate revenue and damage our
reputation, limiting our ability to attract and retain students.
In 2011 and 2012, we spent approximately $1.4 million to update our computer network primarily to permit accelerated student enrollment and
enhance our students’ learning experience. We expect to spend $250,000 in capital expenditures over the next 12 months. The performance and
reliability of our technology infrastructure is critical to our reputation and ability to attract and retain students. Any system error or failure, or a
sudden and significant increase in bandwidth usage, could result in the unavailability of our online classroom, damaging our reputation and
could cause a loss in enrollment. Our technology infrastructure could be vulnerable to interruption or malfunction due to events beyond our
control, including natural disasters, terrorist activities and telecommunications failures.
Although one of our directors has pledged shares of common stock to secure payment of a receivable, it is possible that the future
market price of our common stock will decline in which case we will incur an adverse impact to its future operating results and
financial condition.
In March 2012, one of our directors pledged a total of 117,943 shares of personally owned Aspen common stock (now shares of Aspen
Group). The shares were pledged (in addition to shares pledged by Aspen's former Chairman and his company) to secure payment of a
$772,793 accounts receivable. The Stock Pledge Agreement provides that the shares will be cancelled at the rate of $1.00 per share in the event
that we are unable to collect this receivable which is due in 2014. Because of sales of common stock below $1.00 per share, the receivable in
total was reduced to $270,478 as of December 31, 2012. If we are unable to collect on this receivable, we will suffer a number of
consequences, including a failure to collect a material amount of cash and if our stock price is below $0.35, we will sustain a non cash loss.
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If we experience any interruption to our technology infrastructure, it could prevent students from accessing their courses, could have
a material adverse effect on our ability to attract and retain students and could require us to incur additional expenses to correct or
mitigate the interruption.
Our computer networks may also be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems. A
user who circumvents security measures could misappropriate proprietary information, personal information about our students or cause
interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these
security breaches or to alleviate problems caused by these breaches.
Because we rely on third parties to provide services in running our operations, if any of these parties fail to provide the agreed
services at an acceptable level, it could limit our ability to provide services and/or cause student dissatisfaction, either of which could
adversely affect our business.
We rely on third parties to provide us with services in order for us to efficiently and securely operate our business including our computer
network and the courses we offer to students. Any interruption in our ability to obtain the services of these or other third parties or deterioration
in their performance could impair the quality of our educational product and overall business. Generally, there are multiple sources for the
services we purchase. Our business could be disrupted if we were required to replace any of these third parties, especially if the replacement
became necessary on short notice, which could adversely affect our business and results of operations.
If we or our service providers are unable to update the technology that we rely upon to offer online education, our future growth
may be impaired.
We believe that continued growth will require our service providers to increase the capacity and capabilities of their technology infrastructure.
Increasing the capacity and capabilities of the technology infrastructure will require these third parties to invest capital, time and resources, and
there is no assurance that even with sufficient investment their systems will be scalable to accommodate future growth. Our service providers
may also need to invest capital, time and resources to update their technology in response to competitive pressures in the marketplace. If they are
unwilling or unable to increase the capacity of their resources or update their resources appropriately and we cannot change over to other service
providers efficiently, our ability to handle growth, our ability to attract or retain students, and our financial condition and results of operations
could be adversely affected.
Because we rely on third party administration and hosting of open source software for our online classroom, if that third party were
to cease to do business or alter its business practices and services, it could have an adverse impact on our ability to operate.
Our online classroom employs the Moodle learning management system which is an open source learning platform and is supported by the
open source community. The system is a web-based portal that stores and delivers course content, provides interactive communication between
students and faculty, and supplies online evaluation tools. While Moodle is an open source learning platform, we rely on third parties to host
and help with the administration of it. We further rely on third parties, the Moodlerooms, Inc. agreement and the open source community as
well as our internal staff for ongoing support and customization and integration of the system with the rest of our technology infrastructure. If
Moodlerooms or the open source community that supports it were unable or unwilling to continue to provide us with service, we may have
difficulty maintaining the software required for our online classroom or updating it for future technological changes. Any failure to maintain our
online classroom would have an adverse impact on our operations, damage our reputation and limit our ability to attract and retain students.
Because the personal information that we or our vendors collect may be vulnerable to breach, theft or loss, any of these factors could
adversely affect our reputation and operations.
Possession and use of personal information in our operations subjects us to risks and costs that could harm our business. Aspen uses a third
party to collect and retain large amounts of personal information regarding our students and their families, including social security numbers, tax
return information, personal and family financial data and credit card numbers. We also collect and maintain personal information of our
employees in the ordinary course of our business. Some of this personal information is held and managed by certain of our vendors. Errors in
the storage, use or transmission of personal information could result in a breach of student or employee privacy. Possession and use of personal
information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches, restrict our
use of personal information, and cause us to lose our certification to participate in the Title IV programs. We cannot guarantee that there will not
be a breach, loss or theft of personal information that we store or our third parties store. A breach, theft or loss of personal information
regarding our students and their families or our employees that is held by us or our vendors could have a material adverse effect on our
reputation and results of operations and result in liability under state and federal privacy statutes and legal or administrative actions by state
attorneys general, private litigants, and federal regulators any of which could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
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Because the CAN-SPAM Act imposes certain obligations on the senders of commercial emails, it could adversely impact our ability to
market Aspen’s educational services, and otherwise increase the costs of our business.
The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes requirements for
commercial email and specifies penalties for commercial email that violates the CAN-SPAM Act. In addition, the CAN-SPAM Act gives
consumers the right to require third parties to stop sending them commercial email.
The CAN-SPAM Act covers email sent for the primary purpose of advertising or promoting a commercial product, service, or Internet
website. The Federal Trade Commission, a federal consumer protection agency, is primarily responsible for enforcing the CAN-SPAM Act,
and the Department of Justice, other federal agencies, State Attorneys General, and Internet service providers also have authority to enforce
certain of its provisions.
The CAN-SPAM Act’s main provisions include:
● Prohibiting false or misleading email header information;
● Prohibiting the use of deceptive subject lines;
●
●
Ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the
sender;
Requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively permitted the message;
and
● Requiring that the sender include a valid postal address in the email message.
The CAN-SPAM Act also prohibits unlawful acquisition of email addresses, such as through directory harvesting and transmission of
commercial emails by unauthorized means, such as through relaying messages with the intent to deceive recipients as to the origin of such
messages.
Violations of the CAN-SPAM Act’s provisions can result in criminal and civil penalties, including statutory penalties that can be based in part
upon the number of emails sent, with enhanced penalties for commercial email companies who harvest email addresses, use dictionary attack
patterns to generate email addresses, and/or relay emails through a network without permission.
The CAN-SPAM Act acknowledges that the Internet offers unique opportunities for the development and growth of frictionless commerce, and
the CAN-SPAM Act was passed, in part, to enhance the likelihood that wanted commercial email messages would be received.
The CAN-SPAM Act preempts, or blocks, most state restrictions specific to email, except for rules against falsity or deception in commercial
email, fraud and computer crime. The scope of these exceptions, however, is not settled, and some states have adopted email regulations that, if
upheld, could impose liabilities and compliance burdens in addition to those imposed by the CAN-SPAM Act.
Moreover, some foreign countries, including the countries of the European Union, have regulated the distribution of commercial email and the
online collection and disclosure of personal information. Foreign governments may attempt to apply their laws extraterritorially or through
treaties or other arrangements with U.S. governmental entities.
Because we use email marketing, our requirement to comply with the CAN-SPAM Act could adversely affect Aspen's marketing activities and
increase its costs.
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If we lose the services of key personnel, it could adversely affect our business.
Our future success depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued services of Mr.
Michael Mathews, our Chief Executive Officer, and Dr. Gerald Williams, our President, who are critical to the management of our business and
operations and the development of our strategic direction and would also be difficult to replace. The loss of the services of Mr. Mathews and/or
Dr. Williams and other key individuals and the process to replace these individuals would involve significant time and expense and may
significantly delay or prevent the achievement of our business objectives.
If we are unable to attract and retain our faculty, administrators, management and skilled personnel, we may not be able to support
our growth strategy.
To execute our growth strategy, we must attract and retain highly qualified faculty, administrators, management and skilled personnel.
Competition for hiring these individuals is intense, especially with regard to faculty in specialized areas. If we fail to attract new skilled
personnel or faculty or fail to retain and motivate our existing faculty, administrators, management and skilled personnel, our business and
growth prospects could be severely harmed. The DOE’s revised incentive payment rule, which took effect July 1, 2011, may affect the manner
in which we attract, retain, and motivate new and existing employees.
If we are unable to protect our intellectual property, our business could be harmed.
In the ordinary course of our business, we develop intellectual property of many kinds that is or will be the subject of copyright, trademark,
service mark, trade secret or other protections. This intellectual property includes but is not limited to courseware materials, business know-how
and internal processes and procedures developed to respond to the requirements of operating and various education regulatory agencies. We rely
on a combination of copyrights, trademarks, service marks, trade secrets, domain names, agreements and registrations to protect our intellectual
property. We rely on service mark and trademark protection in the U.S. to protect our rights to the mark "ASPEN UNIVERSITY" as well as
distinctive logos and other marks associated with our services. We rely on agreements under which we obtain rights to use course content
developed by faculty members and other third party content experts. We cannot assure you that the measures that we take will be adequate or
that we have secured, or will be able to secure, appropriate protections for all of our proprietary rights in the U.S. or select foreign jurisdictions,
or that third parties will not infringe upon or violate our proprietary rights. Despite our efforts to protect these rights, unauthorized third parties
may attempt to duplicate or copy the proprietary aspects of our curricula, online resource material and other content, and offer competing
programs to ours.
In particular, third parties may attempt to develop competing programs or duplicate or copy aspects of our curriculum, online resource material,
quality management and other proprietary content. Any such attempt, if successful, could adversely affect our business. Protecting these types
of intellectual property rights can be difficult, particularly as it relates to the development by our competitors of competing courses and
programs.
We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in these
disputes. Third parties may raise a claim against us alleging an infringement or violation of the intellectual property of that third party.
If we are subject to intellectual property infringement claims, it could cause us to incur significant expenses and pay substantial
damages.
Third parties may claim that we are infringing or violating their intellectual property rights. Any such claims could cause us to incur significant
expenses and, if successfully asserted against us, could require that we pay substantial damages and prevent us from using our intellectual
property that may be fundamental to our business. Even if we were to prevail, any litigation regarding the intellectual property could be costly
and time-consuming and divert the attention of our management and key personnel from our business operations.
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If we incur liability for the unauthorized duplication or distribution of class materials posted online during our class discussions, it
may affect our future operating results and financial condition.
In some instances, our faculty members or our students may post various articles or other third party content on class discussion boards. We
may incur liability for the unauthorized duplication or distribution of this material posted online for class discussions. Third parties may raise
claims against us for the unauthorized duplication of this material. Any such claims could subject us to costly litigation and impose a significant
strain on our financial resources and management personnel regardless of whether the claims have merit. As a result we may be required to
alter the content of our courses or pay monetary damages.
Because we are an exclusively online provider of education, we are entirely dependent on continued growth and acceptance of
exclusively online education and, if the recognition by students and employers of the value of online education does not continue to
grow, our ability to grow our business could be adversely impacted.
We believe that continued growth in online education will be largely dependent on additional students and employers recognizing the value of
degrees and courses from online institutions. If students and employers are not convinced that online schools are an acceptable alternative to
traditional schools or that an online education provides value, or if growth in the market penetration of exclusively online education slows,
growth in the industry and our business could be adversely affected. Because our business model is based on online education, if the acceptance
of online education does not grow, our ability to continue to grow our business and our financial condition and results of operations could be
materially adversely affected.
As Internet commerce develops, federal and state governments may draft and propose new laws to regulate Internet commerce,
which may negatively affect our business.
The increasing popularity and use of the Internet and other online services have led and may lead to the adoption of new laws and regulatory
practices in the U.S. and to new interpretations of existing laws and regulations. These new laws and interpretations may relate to issues such as
online privacy, copyrights, trademarks and service marks, sales taxes, fair business practices and the requirement that online education
institutions qualify to do business as foreign corporations or be licensed in one or more jurisdictions where they have no physical location or
other presence. New laws, regulations or interpretations related to doing business over the Internet could increase our costs and materially and
adversely affect our enrollments, revenues and results of operations.
If there is new tax treatment of companies engaged in Internet commerce, this may adversely affect the commercial use of our
marketing services and our financial results.
Due to the growing budgetary problems facing state and local governments, it is possible that governments might attempt to tax our activities.
New or revised tax regulations may subject us to additional sales, income and other taxes. We cannot predict the effect of current attempts to
impose taxes on commerce over the Internet. New or revised taxes and, in particular, sales or use taxes, would likely increase the cost of doing
business online which could have an adverse effect on our business and results of operations.
Risks Related to the Regulation of Our Industry
If we fail to comply with the extensive regulatory requirements for our business, we could face penalties and significant restrictions
on our operations, including loss of access to Title IV loans.
We are subject to extensive regulation by (1) the federal government through the DOE and under the Higher Education Act, (2) state regulatory
bodies and (3) accrediting agencies recognized by the DOE, including the Distance Education and Training Council, or DETC, a “national
accrediting agency” recognized by the DOE. The U.S. Department of Defense and the U.S. Department of Veterans Affairs regulate our
participation in the military’s tuition assistance program and the VA’s veterans’ education benefits program, respectively. The regulations,
standards and policies of these agencies cover the vast majority of our operations, including our educational programs, facilities, instructional
and administrative staff, administrative procedures, marketing, recruiting, financial operations and financial condition. These regulatory
requirements can also affect our ability to add new or expand existing educational programs and to change our corporate structure and
ownership.
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Institutions of higher education that grant degrees, diplomas, or certificates must be authorized by an appropriate state education agency or
agencies. In addition, in certain states as a condition of continued authorization to grant degrees and in order to participate in various federal
programs, including tuition assistance programs of the United States Armed Forces, a school must be accredited by an accrediting agency
recognized by the U.S. Secretary of Education. Accreditation is a non-governmental process through which an institution submits to qualitative
review by an organization of peer institutions, based on the standards of the accrediting agency and the stated aims and purposes of the
institution. The Higher Education Act requires accrediting agencies recognized by the DOE to review and monitor many aspects of an
institution's operations and to take appropriate action when the institution fails to comply with the accrediting agency's standards.
Our operations are also subject to regulation due to our participation in Title IV programs. Title IV programs, which are administered by the
DOE, include loans made directly to students by the DOE. Title IV programs also include several grant programs for students with economic
need as determined in accordance with the Higher Education Act and DOE regulations. To participate in Title IV programs, a school must
receive and maintain authorization by the appropriate state education agencies, be accredited by an accrediting agency recognized by the U.S.
Secretary of Education, and be certified as an eligible institution by the DOE. Our growth strategy is partly dependent on enrolling more
students who are attracted to us because of our continued participation in the Title IV programs.
The regulations, standards, and policies of the DOE, state education agencies, and our accrediting agencies change frequently. Recent and
impending changes in, or new interpretations of, applicable laws, regulations, standards, or policies, or our noncompliance with any applicable
laws, regulations, standards, or policies, could have a material adverse effect on our accreditation, authorization to operate in various states,
activities, receipt of funds under tuition assistance programs of the United States Armed Forces, our ability to participate in Title IV programs,
receipt of veterans education benefits funds, or costs of doing business. Findings of noncompliance with these regulations, standards and
policies also could result in our being required to pay monetary damages, or being subjected to fines, penalties, injunctions, limitations on our
operations, termination of our ability to grant degrees, revocation of our accreditation, restrictions on our access to Title IV program funds or
other censure that could have a material adverse effect on our business.
If we do not maintain authorization in Colorado, our operations would be curtailed, and we may not grant degrees.
Aspen is headquartered in Colorado and is authorized by the Colorado Commission on Higher Education to grant degrees, diplomas or
certificates. If we were to lose our authorization from the Colorado Commission on Higher Education, we would be unable to provide
educational services in Colorado and we would lose our eligibility to participate in the Title IV programs.
Our failure to comply with regulations of various states could have a material adverse effect on our enrollments, revenues, and
results of operations.
Various states impose regulatory requirements on education institutions operating within their boundaries. Several states assert jurisdiction over
online education institutions that have no physical location or other presence in the state but offer education services to students who reside in
the state or advertise to or recruit prospective students in the state. State regulatory requirements for online education are inconsistent among
states and not well developed in many jurisdictions. As such, these requirements change frequently and, in some instances, are not clear or are
left to the discretion of state regulators.
State laws typically establish standards for instruction, qualifications of faculty, administrative procedures, marketing, recruiting, financial
operations, and other operational matters. To the extent that we have obtained, or obtain in the future, additional authorizations or licensure,
changes in state laws and regulations and the interpretation of those laws and regulations by the applicable regulators may limit our ability to
offer education programs and award degrees. Some states may also prescribe financial regulations that are different from those of the DOE. If
we fail to comply with state licensing or authorization requirements, we may be subject to the loss of state licensure or authorization. If we fail
to comply with state requirements to obtain licensure or authorization, we may be the subject of injunctive actions or penalties. Loss of licensure
or authorization or the failure to obtain required licensures or authorizations could prohibit us from recruiting or enrolling students in particular
states, reduce significantly our enrollments and revenues and have a material adverse effect on our results of operations. We enroll students in
all 50 states, as well as the District of Columbia and Puerto Rico. We have sought and received confirmation that our operations do not require
state licensure or authorization, or we have been notified that we are exempt from licensure or authorization requirements, in three states. We,
through our legal counsel, are researching the licensure requirements and exemption possibilities in the remaining 47 states. It is anticipated that
Aspen will be in compliance with all state licensure requirements by June of 2014. Because we enroll students in all 50 states, as well as the
District of Columbia and Puerto Rico, we may have to seek licensure or authorization in additional states in the future.
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Under DOE regulations, if an institution offers postsecondary education through distance education to students in a state in which the institution
is not physically located or in which it is otherwise subject to state jurisdiction as determined by that state, the institution must have met any state
requirements for it to be legally offering postsecondary distance education in that state. A federal court has vacated such requirement, and an
appellate court affirmed that ruling on June 5, 2012, though further guidance is expected. See page 10 of this report. Should the requirement be
upheld or otherwise enforced, however, and if we fail to obtain required state authorization to provide postsecondary distance education in a
specific state, we could lose our ability to award Title IV aid to students within that state.
The DOE’s requirement could lead some states to adopt new laws and regulatory practices affecting the delivery of distance education to
students located in those states. In the event we are found not to be in compliance with a state’s new or existing requirements for offering
distance education within that state, the state could seek to restrict one or more of our business activities within its boundaries, we may not be
able to recruit students from that state, and we may have to cease providing service to students in that state. In addition, under the DOE’s
regulation regarding state authorization and distance education, if and when the regulation is enforced or re-promulgated, we could lose
eligibility to offer Title IV aid to students located in that state.
If we fail to maintain our institutional accreditation, we would lose our ability to participate in the tuition assistance programs of the
U.S. Armed Forces and also to participate in Title IV programs.
Aspen is accredited by the DETC, which is a national accrediting agency recognized by the Secretary of Education for Title IV purposes.
Accreditation by an accrediting agency that is recognized by the Secretary of Education is required for an institution to become and remain
eligible to participate in Title IV programs as well as in the tuition assistance programs of the United States Armed Forces. DETC may impose
restrictions on our accreditation or may terminate our accreditation. To remain accredited we must continuously meet certain criteria and
standards relating to, among other things, performance, governance, institutional integrity, educational quality, faculty, administrative capability,
resources and financial stability. Failure to meet any of these criteria or standards could result in the loss of accreditation at the discretion of the
accrediting agency. The loss of accreditation would, among other things, render our students and us ineligible to participate in the tuition
assistance programs of the U.S. Armed Forces or Title IV programs and have a material adverse effect on our enrollments, revenues and results
of operations.
Because we have only recently begun to participate in Title IV programs, our failure to comply with the complex regulations
associated with Title IV programs would have a significant adverse effect on our operations and prospects for growth.
We have only recently begun to participate in Title IV programs. In 2012 and 2011, approximately 18% and approximately 7%, respectively, of
our total cash-basis revenues are from students utilizing Title IV programs. However, compliance with the requirements of the Higher
Education Act and Title IV programs is highly complex and imposes significant additional regulatory requirements on our operations, which
require additional staff, contractual arrangements, systems and regulatory costs. We have a limited demonstrated history of compliance with
these additional regulatory requirements. If we fail to comply with any of these additional regulatory requirements, the DOE could, among other
things, impose monetary penalties, place limitations on our operations, and/or condition or terminate our eligibility to receive Title IV program
funds, which would limit our potential for growth and adversely affect our enrollment, revenues and results of operations.
Because we are only provisionally certified by the DOE, we must reestablish our eligibility and certification to participate in the Title
IV programs, and there are no assurances that DOE will recertify us to participate in the Title IV programs.
An institution generally must seek recertification from the DOE at least every six years and possibly more frequently depending on various
factors. In certain circumstances, the DOE provisionally certifies an institution to participate in Title IV programs, such as when it is an initial
participant in Title IV programs or has undergone a change in ownership and control. On September 28, 2012, the DOE notified us that
following our application for change of control, it extended our provisional certification until September 30, 2013. Pending this approval, we
delivered a $264,665 letter of credit to the DOE. Furthermore, DOE may impose additional or different terms and conditions in any final
program participation agreement that it may issue, including growth restrictions or limitation on the number of students who may receive Title
IV aid. The DOE could also decline to finally certify Aspen, otherwise limit its participation in the Title IV programs, or continue provisional
certification.
If the DOE does not ultimately approve our permanent certification to participate in Title IV programs, our students would no longer be able to
receive Title IV program funds, which would have a material adverse effect on our enrollments, revenues and results of operations. In addition,
regulatory restraints related to the addition of new programs could impair our ability to attract and retain students and could negatively affect our
financial results.
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Because the DOE may conduct compliance reviews of us, we may be subject to adverse review and future litigation which could
affect our ability to offer Title IV student loans.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of non-compliance and lawsuits by
government agencies, regulatory agencies, and third parties, including claims brought by third parties on behalf of the federal government. If the
results of compliance reviews or other proceedings are unfavorable to us, or if we are unable to defend successfully against lawsuits or claims,
we may be required to pay monetary damages or be subject to fines, limitations, loss of Title IV funding, injunctions or other penalties,
including the requirement to make refunds. Even if we adequately address issues raised by an agency review or successfully defend a lawsuit or
claim, we may have to divert significant financial and management resources from our ongoing business operations to address issues raised by
those reviews or to defend against those lawsuits or claims. Claims and lawsuits brought against us may damage our reputation, even if such
claims and lawsuits are without merit.
If our competitors are subject to further regulatory claims and adverse publicity, it may affect our industry and reduce our future
enrollment.
We are one of a number of for-profit institutions serving the postsecondary education market. In recent years, regulatory investigations and civil
litigation have been commenced against several companies that own for-profit educational institutions. These investigations and lawsuits have
alleged, among other things, deceptive trade practices and non-compliance with DOE regulations. These allegations have attracted adverse media
coverage and have been the subject of federal and state legislative hearings. Although the media, regulatory and legislative focus has been
primarily on the allegations made against specific companies, broader allegations against the overall for-profit school sector may negatively
affect public perceptions of other for-profit educational institutions, including Aspen. In addition, in recent years, reports on student lending
practices of various lending institutions and schools, including for-profit schools, and investigations by a number of state attorneys general,
Congress and governmental agencies have led to adverse media coverage of postsecondary education. Adverse media coverage regarding other
companies in the for-profit school sector or regarding us directly could damage our reputation, could result in lower enrollments, revenues and
operating profit, and could have a negative impact on our stock price. Such allegations could also result in increased scrutiny and regulation by
the DOE, Congress, accrediting bodies, state legislatures or other governmental authorities with respect to all for-profit institutions, including
us.
Due to new regulations or congressional action or reduction in funding for Title IV programs, our future enrollment may be reduced
and costs of compliance increased.
The Higher Education Act comes up for reauthorization by Congress approximately every five to six years. When Congress does not act on
complete reauthorization, there are typically amendments and extensions of authorization. Additionally, Congress reviews and determines
appropriations for Title IV programs on an annual basis through the budget and appropriations process. There is no assurance that Congress
will not in the future enact changes that decrease Title IV program funds available to students, including students who attend our institution.
Any action by Congress that significantly reduces funding for Title IV programs or the ability of our school or students to participate in these
programs would require us to arrange for other sources of financial aid and would materially decrease our enrollment. Such a decrease in
enrollment would have a material adverse effect on our revenues and results of operations. Congressional action may also require us to modify
our practices in ways that could result in increased administrative and regulatory costs and decreased profit margin.
We are not in position to predict with certainty whether any legislation will be passed by Congress or signed into law in the future. The
reallocation of funding among Title IV programs, material changes in the requirements for participation in such programs, or the substitution of
materially different Title IV programs could reduce the ability of students to finance their education at our institution and adversely affect our
revenues and results of operations.
If our efforts to comply with DOE regulations are inconsistent with how the DOE interprets those provisions, either due to insufficient time to
implement the necessary changes, uncertainty about the meaning of the rules, or otherwise, we may be found to be in noncompliance with such
provisions and the DOE could impose monetary penalties, place limitations on our operations, and/or condition or terminate our eligibility to
receive Title IV program funds. We cannot predict with certainty the effect the new and impending regulatory provisions will have on our
business.
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Investigations by state attorneys general, Congress and governmental agencies regarding relationships between loan providers and
educational institutions and their financial aid officers may result in increased regulatory burdens and costs.
In the past few years, the student lending practices of postsecondary educational institutions, financial aid officers and student loan providers
were subject to several investigations being conducted by state attorneys general, Congress and governmental agencies. These investigations
concern, among other things, possible deceptive practices in the marketing of private student loans and loans provided by lenders pursuant to
Title IV programs. Higher Education Opportunity Act, or HEOA, contains new requirements pertinent to relationships between lenders and
institutions. In particular, HEOA requires institutions to have a code of conduct, with certain specified provisions, pertinent to interactions with
lenders of student loans, prohibits certain activities by lenders and guaranty agencies with respect to institutions, and establishes substantive and
disclosure requirements for lists of recommended or suggested lenders of private student loans. In addition, HEOA imposes substantive and
disclosure obligations on institutions that make available a list of recommended lenders for potential borrowers. State legislators have also
passed or may be considering legislation related to relationships between lenders and institutions. Because of the evolving nature of these
legislative efforts and various inquiries and developments, we can neither know nor predict with certainty their outcome, or the potential
remedial actions that might result from these or other potential inquiries. Governmental action may impose increased administrative and
regulatory costs and decreased profit margins.
Because we are subject to sanctions if we fail to calculate correctly and return timely Title IV program funds for students who stop
participating before completing their educational program, our future operating results may be adversely affected.
A school participating in Title IV programs must correctly calculate the amount of unearned Title IV program funds that have been disbursed to
students who withdraw from their educational programs before completion and must return those unearned funds in a timely manner, generally
within 45 days after the date the school determines that the student has withdrawn. Under recently effective DOE regulations, institutions that
use the last day of attendance at an academically-related activity must determine the relevant date based on accurate institutional records (not a
student’s certificate of attendance). For online classes, “academic attendance” means engaging in an academically-related activity, such as
participating in class through an online discussion or initiating contact with a faculty member to ask a question; simply logging into an online
class does not constitute “academic attendance” for purposes of the return of funds requirements. Because we only recently began to participate
in Title IV programs, we have limited experience complying with these Title IV regulations. Under DOE regulations, late return of Title IV
program funds for 5% or more of students sampled in connection with the institution's annual compliance audit constitutes material non-
compliance. If unearned funds are not properly calculated and timely returned, we may have to repay Title IV funds, post a letter of credit in
favor of the DOE or otherwise be sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our
results of operations. This may have an impact on our systems, our future operations and cash flows.
Because our consolidated financial statements are not unqualified, Aspen may lose its eligibility to participate in Title IV programs or
be required to post a letter of credit in order to maintain eligibility to participate in Title IV programs.
To participate in Title IV programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the DOE, or
post a letter of credit in favor of the DOE and possibly accept other conditions, such as additional reporting requirements or regulatory
oversight, on its participation in Title IV programs. Our financial statements are qualified on our ability to continue as a going concern, which
means the DOE may determine that we are not financially responsible under DOE regulations. The DOE may also apply its measures of
financial responsibility to the operating company and ownership entities of an eligible institution and, if such measures are not satisfied by the
operating company or ownership entities, require the institution to meet the alternative standards described under “Regulation” on page 10 of
this report. Any of these alternative standards would increase our costs of regulatory compliance. If we were unable to meet these alternative
standards, we would lose our eligibility to participate in Title IV programs. If we fail to demonstrate financial responsibility and thus lose our
eligibility to participate in Title IV programs, our students would lose access to Title IV program funds for use in our institution, which would
limit our potential for growth and adversely affect our enrollment, revenues and results of operations.
If we fail to demonstrate “administrative capability,” we may lose eligibility to participate in Title IV programs.
DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate
in Title IV programs. If an institution fails to satisfy any of these criteria or comply with any other DOE regulations, the DOE may require the
repayment of Title IV funds, transfer the institution from the "advance" system of payment of Title IV funds to cash monitoring status or to the
"reimbursement" system of payment, place the institution on provisional certification status, or commence a proceeding to impose a fine or to
limit, suspend or terminate the participation of the institution in Title IV programs. If we are found not to have satisfied the DOE's
"administrative capability" requirements we could be limited in our access to, or lose, Title IV program funding, which would limit our potential
for growth and adversely affect our enrollment, revenues and results of operations.
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Because we rely on a third party to administer our participation in Title IV programs, its failure to comply with applicable
regulations could cause us to lose our eligibility to participate in Title IV programs.
We have been eligible to participate in Title IV programs for a relatively short time, and we have not developed the internal capacity to handle
without third-party assistance the complex administration of participation in Title IV programs. Boston Educational Network assists us with
administration of our participation in Title IV programs, and if it does not comply with applicable regulations, we may be liable for its actions
and we could lose our eligibility to participate in Title IV programs. In addition, if it is no longer able to provide the services to us, we may not
be able to replace it in a timely or cost-efficient manner, or at all, and we could lose our ability to comply with the requirements of Title IV
programs, which would limit our potential for growth and adversely affect our enrollment, revenues and results of operation.
If we pay impermissible commissions, bonuses or other incentive payments to individuals involved in recruiting, admissions or
financial aid activities, we will be subject to sanctions.
A school participating in Title IV programs may not provide any commission, bonus or other incentive payment based, directly or indirectly, on
success in enrolling students or securing financial aid to any person involved in student recruiting or admission activities or in making decisions
regarding the awarding of Title IV program funds. If we pay a bonus, commission, or other incentive payment in violation of applicable DOE
rules, we could be subject to sanctions, which could have a material adverse effect on our business. Effective July 1, 2011, the DOE abolished
12 safe harbors that described permissible arrangements under the incentive payment regulation. Abolition of the safe harbors and other aspects
of the new regulation may create uncertainty about what constitutes impermissible incentive payments. The modified incentive payment rule and
related uncertainty as to how it will be interpreted also may influence our approach, or limit our alternatives, with respect to employment policies
and practices and consequently may affect negatively our ability to recruit and retain employees, and as a result our business could be materially
and adversely affected.
In addition, the General Accounting Office, or the GAO, has issued a report critical of the DOE’s enforcement of the incentive payment rule,
and the DOE has undertaken to increase its enforcement efforts. If the DOE determines that an institution violated the incentive payment rule, it
may require the institution to modify its payment arrangements to the DOE’s satisfaction. The DOE may also fine the institution or initiate
action to limit, suspend, or terminate the institution’s participation in the Title IV programs. The DOE may also seek to recover Title IV funds
disbursed in connection with the prohibited incentive payments. In addition, third parties may file “qui tam” or “whistleblower” suits on behalf
of the DOE alleging violation of the incentive payment provision. Such suits may prompt DOE investigations. Particularly in light of the
uncertainty surrounding the new incentive payment rule, the existence of, the costs of responding to, and the outcome of, qui tam or
whistleblower suits or DOE investigations could have a material adverse effect on our reputation causing our enrollments to decline and could
cause us to incur costs that are material to our business, among other things. As a result, our business could be materially and adversely
affected.
If our student loan default rates are too high, we may lose eligibility to participate in Title IV programs.
DOE regulations provide that an institution’s participation in Title IV programs ends when historical default rates reach a certain level in a single
year or for a number of years. Because of our limited experience enrolling students who are participating in these programs, we have no
historical default rates. Relatively few students are expected to enter the repayment phase in the near term, which could result in defaults by a
few students having a relatively large impact on our default rate. If Aspen loses its eligibility to participate in Title IV programs because of high
student loan default rates, our students would no longer be eligible to use Title IV program funds in our institution, which would significantly
reduce our enrollments and revenues and have a material adverse effect on our results of operations.
Increased scrutiny of accrediting agencies by the Secretary of Education and the U.S. Congress may result in increased scrutiny of
institutions, we may lose our ability to participate in Title IV programs.
Increased regulatory scrutiny of accrediting agencies and their accreditation of universities is likely to continue. While Aspen is accredited by the
DETC, a DOE-recognized accrediting body, if the DOE were to limit, suspend, or terminate the DETC’s recognition, we could lose our ability
to participate in the Title IV programs. While the DOE has provisionally certified Aspen through September 30, 2013, there are no assurances
that we will remain certified following that date. If we were unable to rely on DETC accreditation in such circumstances, among other things,
our students and our institution would be ineligible to participate in the Title IV programs, and such consequence would have a material adverse
effect on enrollments, revenues and results of operations. In addition, increased scrutiny of accrediting agencies by the Secretary of Education in
connection with the DOE’s recognition process may result in increased scrutiny of institutions by accrediting agencies.
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Furthermore, because the for-profit education sector is growing at such a rapid pace, it is possible that accrediting bodies will respond to that
growth by adopting additional criteria, standards and policies that are intended to monitor, regulate or limit the growth of for-profit institutions
like us. Actions by, or relating to, an accredited institution, including any change in the legal status, form of control, or ownership/management
of the institution, any significant changes in the institution’s financial position, or any significant growth or decline in enrollment and/or
programs, could open up an accredited institution to additional reviews by the DETC.
If Aspen fails to meet standards regarding “gainful employment,” it may result in the loss of eligibility to participate in Title IV
programs.
The DOE’s regulations on gainful employment programs became effective July 1, 2012. Should a program fail the gainful employment metrics
three times within a four year period, the DOE would terminate the program’s eligibility for federal student aid (i.e., students in the program
would immediately lose eligibility to participate in Title IV programs), and the institution would not be able to reestablish the program’s
eligibility for at least three years, though the program could continue to operate without Title IV funding. The earliest a program could lose
eligibility under the gainful employment rule will be 2015, based on its 2012, 2013, and 2014 performance under the metrics. Because the
DOE’s gainful employment rules will be implemented over several years and are based at least in part on data that is unavailable to us, it is not
possible at this time to determine with any degree of certainty whether these new regulations will cause any of our programs to become
ineligible to participate in the Title IV programs. However, under this new regulation, the continuing eligibility of our educational programs for
Title IV funding is at risk due to factors beyond our control, such as changes in the actual or deemed income level of our graduates, changes in
student borrowing levels, increases in interest rates, changes in the federal poverty income level relevant for calculating discretionary income,
changes in the percentage of our former students who are current in repayment of their student loans, and other factors. In addition, even though
deficiencies in the metrics may be correctible on a timely basis, the disclosure requirements to students following a failure to meet the standards
may adversely impact enrollment in that program and may adversely impact the reputation of our educational institutions.
Our failure to obtain DOE approval, where required, for new programs that prepare students for gainful employment in a
recognized occupation could materially and adversely affect our business.
Under the DOE regulations, an institution must notify the DOE at least 90 days before the first day of class when it intends to add a program
that prepares students for gainful employment in a recognized occupation. The institution may proceed to offer the program, unless the DOE
advises the institution that the DOE must approve the program for Title IV purposes. In addition, if the institution does not provide timely notice
to the DOE regarding the additional program, the institution must obtain approval of the program for Title IV purposes. If the DOE denies
approval, the institution may not award Title IV funds in connection with the program. Were the DOE to deny approval to one or more of our
new programs, our business could be materially and adversely affected. Furthermore, compliance with these new procedures could cause delay
in our ability to offer new programs and put our business at a competitive disadvantage. Compliance could also adversely affect our ability to
timely offer programs of interest to our students and potential students and adversely affect our ability to increase our revenues. As a result, our
business could be materially and adversely affected.
Our failure to comply with the DOE’s substantial misrepresentation rules could result in sanctions.
The DOE may take action against an institution in the event of substantial misrepresentation by the institution concerning the nature of its
educational programs, its financial charges or the employability of its graduates. Under new regulations, the DOE has expanded the activities
that constitute a substantial misrepresentation. Under the DOE regulations, an institution engages in substantial misrepresentation when the
institution itself, one of its representatives, or an organization or person with which the institution has an agreement to provide educational
programs, marketing, advertising, or admissions services, makes a substantial misrepresentation directly or indirectly to a student, prospective
student or any member of the public, or to an accrediting agency, a state agency, or to the Secretary of Education. The final regulations define
misrepresentation as any false, erroneous or misleading statement, and they define a misleading statement as any statement that has the
likelihood or tendency to deceive or confuse. The final regulations define substantial misrepresentation as any misrepresentation on which the
person to whom it was made could reasonably be expected to rely, or has reasonably relied, to the person’s detriment. If the DOE determines
that an institution has engaged in substantial misrepresentation, the DOE may revoke an institution’s program participation agreement, impose
limitations on an institution’s participation in the Title IV programs, deny participation applications made on behalf of the institution, or initiate a
proceeding against the institution to fine the institution or to limit, suspend or termination the institution’s participation in the Title IV
programs. We expect that there could be an increase in our industry of administrative actions and litigation claiming substantial
misrepresentation, which at a minimum would increase legal costs associated with defending such actions, and as a result our business could be
materially and adversely affected.
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Failure to comply with the DOE’s credit hour requirements could result in sanctions.
The DOE has defined “credit” hour for Title IV purposes. The credit hour is used for Title IV purposes to define an eligible program and an
academic year and to determine enrollment status and the amount of Title IV aid that an institution may disburse in a payment period. The final
regulations define credit hour as an institutionally established equivalency that reasonably approximates certain specified time in class and out of
class and an equivalent amount of work for other academic activities. The final regulations also require institutional accreditors to review an
institution’s policies, procedures, and administration of policies and procedures for assignment of credit hours. An accreditor must take
appropriate actions to address an institution’s credit hour deficiencies and to notify the DOE if it finds systemic noncompliance or significant
noncompliance in one or more programs. The DOE has indicated that if it finds an institution to be out of compliance with the credit hour
definition for Title IV purposes, it may require the institution to repay the amount of Title IV awarded under the incorrect assignment of credit
hours and, if it finds significant overstatement of credit hours, it may fine the institution or limit, suspend, or terminate its participation in Title
IV programs, as a result of which our business could be materially and adversely affected.
The U.S. Congress recently conducted an examination of the for-profit postsecondary education sector that could result in legislation
or additional DOE rulemaking that may limit or condition Title IV program participation of proprietary schools in a manner that
may materially and adversely affect our business.
In recent years, the U.S. Congress has increased its focus on for-profit education institutions, including with respect to their participation in the
Title IV programs, and has held hearings regarding such matters. In addition, the GAO released a series of reports following undercover
investigations critical of for-profit institutions. We cannot predict the extent to which, or whether, these hearings and reports will result in
legislation, further rulemaking affecting our participation in Title IV programs, or more vigorous enforcement of Title IV requirements. To the
extent that any laws or regulations are adopted that limit or condition Title IV program participation of proprietary schools or the amount of
federal student financial aid for which proprietary school students are eligible, our business could be materially and adversely affected.
Other Risks
Because our common stock is temporarily subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our
common stock which adversely affects its liquidity and market price.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per
share, subject to specific exemptions. We expect that the market price of our common stock on the Over-The-Counter Bulletin Board, or the
Bulletin Board, will be substantially less than $5.00 per share and therefore we will be considered a “penny stock” according to SEC
rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a
written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the
ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.
Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of
broker-dealers decline to permit investors to purchase and sell or otherwise make it difficult to sell shares of penny stocks like Aspen. This may
have a depressive effect upon our common stock price.
Our management will be able to exert control over us to the detriment of minority shareholders.
Our executive officers and directors own approximately 16% of our outstanding common stock. These shareholders, if they act together, may
be able to control our management and affairs and all matters requiring shareholder approval, including significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing our change in control and might affect the market price of our
common stock. For more information, see Item 12 below.
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If our common stock becomes subject to a “chill” imposed by the Depository Trust Company, or DTC, your ability to sell your
shares may be limited.
The DTC acts as a depository or nominee for street name shares that investors deposit with their brokers. Until the fourth quarter of 2012, our
stock was not eligible to be electronically transferred among DTC participants (broker-dealers) and required delivery of paper certificates as a
result of a “chill” imposed by DTC. As a result of becoming “DTC-Eligible”, our common stock is no longer subject to a chill. However, DTC
in the last several years has increasingly imposed a chill or freeze on the deposit, withdrawal and transfer of common stock of issuers whose
common stock trades on the Bulletin Board. Depending on the type of restriction, a chill or freeze can prevent shareholders from buying or
selling shares and prevent companies from raising money. A chill or freeze may remain imposed on a security for a few days or an extended
period of time (in at least one instance a number of years). While we have no reason to believe a chill or freeze will be imposed against our
common stock again in the future, if it were your ability to sell your shares would be limited. In such event, your investment will be adversely
affected.
Due to factors beyond our control, our stock price may be volatile.
Any of the following factors could affect the market price of our common stock:
● Our failure to generate increasing material revenues;
● Our failure to become profitable;
● Our failure to raise working capital;
● Our public disclosure of the terms of any financing which we consummate in the future;
● Actual or anticipated variations in our quarterly results of operations;
● Announcements by us or our competitors of significant contracts, new services, acquisitions, commercial relationships, joint ventures or
capital commitments;
● The loss of Title IV funding or other regulatory actions;
● Our failure to meet financial analysts’ performance expectations;
● Changes in earnings estimates and recommendations by financial analysts;
● Short selling activities; or
● Changes in market valuations of similar companies.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been
instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would
otherwise be used to benefit our business.
We may issue preferred stock without the approval of our shareholders and have other anti-takeover defenses, which could make it
more difficult for a third party to acquire us and could depress our stock price.
Our Board may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per
share. This could permit our Board to issue preferred stock to investors who support us and our management and give effective control of our
business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and
a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause
the market price of our common stock shares to drop significantly, even if our business is performing well.
An investment in Aspen Group may be diluted in the future as a result of the issuance of additional securities.
If we need to raise additional capital to meet our working capital needs, we expect to issue additional shares of common stock or securities
convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to investors. Investors
should anticipate being substantially diluted based upon the current condition of the capital and credit markets and their impact on small
companies.
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Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our
common stock.
It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot
recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage
limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at
times when we acquire additional capital.
Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any
dividends for the foreseeable future.
We have not and do not intend to pay any dividends in the foreseeable future, as we intend to retain any earnings for development and
expansion of our business operations. As a result, you will not receive any dividends on your investment for an indefinite period of time.
If we do not successfully defend the pending litigation brought by our former chairman and large shareholder, we may incur
material damages.
In February 2013, our former Chairman and a company he controls sued us, certain senior management members and our directors and in state
court in New York seeking damages arising from losses and other matters incurred in the operation of Aspen’s business since May 2011, our
filings with the SEC and the DOE where we stated that he and his company borrowed $2.2 million without board authority and our failure to
use our best efforts to purchase certain shares of common stock from him following the April Agreement (described in Item 13 below). While
we have been advised by our counsel that the lawsuit is baseless, we cannot assure you that we will be successful. Defending the litigation will
be expensive and divert our management from Aspen’s business. If we are unsuccessful, the damages we pay may be material.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our corporate headquarters are located in a facility in Denver, Colorado, consisting of approximately 3,900 square feet of office space under a
lease that expires in September 2015. This facility accommodates our academic operations. Our executive offices are in New York City where
we lease 2,000 square feet under a month-to-month sublease. We operate a call center in Scottsdale, Arizona where we lease 2,629 square
feet under a three-year term. We believe that our existing facilities are suitable and adequate and that we have sufficient capacity to meet our
current anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
On February 11, 2013, the former chairman of Aspen, Mr. Patrick Spada and a corporation he controls, filed suit against Aspen Group,
Aspen, our Board of Directors, our Chief Executive and Financial Officers and an unrelated party in the New York Supreme Court located in
Manhattan.
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The gravamen of Mr. Spada’s claims are that the officers and directors breached their fiduciary duty and defamed Mr. Spada by (a) including
false and defamatory statements to the effect that Mr. Spada owes approximately $2 million to Aspen Group in various of Aspen Group’s
SEC and DOE filings, (b) imprudently managed Aspen Group’s assets by spending too much money on certain marketing and promotional
efforts and by using Aspen Group’s funds for expenses which were not intended to benefit Aspen Group. Mr. Spada also claims that Aspen
Group breached two separate agreements with Mr. Spada and his company, one of which involved Aspen Group agreeing to purchase certain
shares of Aspen stock under certain conditions, and one consulting agreement. As discussed below, Aspen Group believes that none of these
claims have any merit in either fact or law.
Aspen Group and the other defendants firmly believe that the suit is baseless and was filed primarily because Aspen Group refused to
purchase additional shares of the Plaintiffs’ common stock of Aspen Group on unacceptable terms.
The Plaintiffs’ allegations that false or defamatory statements were including in Aspen Group’s filings are based on the following disclosures
in multiple SEC and DOE filings: “…Aspen discovered in November 2011 that HEMG had borrowed $2,195,084 from it from 2005 to 2012
without Board of Directors authority. Aspen has been unable to reach any agreement with Mr. Spada concerning repayment and is considering
its options.” In the same filings, Aspen Group disclosed that “There is no agreement with the former chairman that this sum is due and in fact
he has denied liability and even claimed that Aspen owes him money.” Aside from these disclosures being factually accurate, Aspen Group
believes they cannot, as a matter of law, form the basis of a breach of fiduciary duty or defamation claim.
The Plaintiffs’ allegations concerning imprudent management of its funds are categorically false. Aspen Group has also been advised that
claims of this type can only be brought in what is called a shareholders’ derivative action where, assuming liability, the ultimate beneficiary is
Aspen Group and not the Plaintiffs. Counsel has further advised the management of Aspen Group’s affairs and how its funds are expended
are protected from a disgruntled stockholder’s opinion of how funds should have been spent by the business judgment rule and the provision
in Aspen Group’s charter eliminating liability for such claims. The remaining breach of fiduciary duty claim falsely alleges that travel
expenses and work was performed by Aspen Group on behalf of another corporation for which Aspen Group’s Chief Executive Officer then
served as Chairman of the Board. Such claims are categorically false, but even if true, like the remaining breach of fiduciary claims, the
ultimate beneficiary is Aspen Group and not the Plaintiffs.
The breach of contract claims consist of two distinct claims: first, Aspen entered into a two-year Consulting Agreement in September 2011
with Mr. Spada. Aspen Group terminated the Consulting Agreement after it learned of the former Chairman’s $2.2 million unauthorized
borrowing without board approval alleging that the Consulting Agreement was induced by fraud.
The second claim arises from the April Agreement (described in Item 13 below). Under the April Agreement, an individual defendant who has
never been an officer or director of Aspen Group agreed to purchase from Spada’s corporation 400,000 shares of Aspen Group’s common
stock at $0.50 per share. The complaint acknowledges that this purchase occurred. Under the April Agreement, Aspen Group also agreed (i)
that it would purchase an additional 600,000 shares from Mr. Spada’s company at $0.50 per share within 90 days from the date of the April
Agreement, and (ii) that Aspen Group would use its best efforts to locate a purchaser to buy another 1,400,000 shares at $0.50 per share from
Mr. Spada’s company, and once that purchaser was located, to buy the shares and resell them to the new investor. Aspen Group in fact did
purchase the additional 600,000 shares and Mr. Spada’s company was paid the proceeds. Aspen Group did use its best efforts to locate a new
investor for the final 1,400,000 shares, however given the fact that Aspen Group during that same timeframe was selling its own common
stock at $0.35 per share, it was not able to find any buyers who would pay $0.50 per share. Also, Aspen Group’s obligation to locate a new
purchaser expired under the terms of the April Agreement after 180 days, which have long passed. Under the terms of the April Agreement,
the Plaintiffs agreed not to file suit against Aspen Group, Aspen and their officers and directors, unless sued by Aspen Group or Aspen.
Aspen Group and Aspen University have never sued the Plaintiffs. Accordingly, Aspen Group believes that both breach of contract claims are
entirely baseless.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our stock trades on the Bulletin Board, under the symbol “ASPU.” Since March 31, 2011, Aspen Group’s common stock has been
quoted on the Bulletin Board. The last reported sale price of Aspen’s common stock as reported by the Bulletin Board on March 14, 2013
was $0.42. As of March 14, 2013, we had 238 record holders. The following table provides the high and low bid price information for our
common stock for the periods our stock was quoted on the Bulletin Board. For the period our stock was quoted on the Bulletin Board, the
prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and does not necessarily represent actual transactions.
Our common stock does not trade on a regular basis.
Year
2012
2011
Quarter Ended
High
Low
Prices (1)(2)
December 31 $
September 30 $
June 30
$
March 31 $
2.85 $
3.75 $
3.75 $
6.50 $
December 31 $
September 30 $
$
June 30
$
March 31
6.50 $
$
6.50
$
6.50
$
0.0208
0.70
2.91
3.75
3.28
6.50
6.50
6.25
0.0208
__________
(1) All prices give effect to a 12-for-1 forward stock split effected in June 2011.
(2) All prices give effect to a 1-for-2.5 reverse stock split effected in February 2012.
Dividend Policy
We have not paid cash dividends on our common stock and do not plan to pay such dividends in the foreseeable future. Our Board will
determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business
conditions.
Recent Sales of Unregistered Securities
In addition to those unregistered securities previously disclosed in filings with the SEC, we have sold securities which are not registered under
the Securities Act of 1933, or the Securities Act. On December 31, 2012, we sold $45,000 of units containing a total of 128,571 shares of
common stock and 64,287 five-year warrants exercisable at $0.50 per share in a private placement offering to three accredited investors. The
investors acquired the securities for investment, there was no general solicitation and all investor were accredited. Each investor had a pre-
existing relationship with Aspen Group. The securities were exempt from registration under Section 4(a)(2) of the Securities Act and Rule
506 thereunder.
Equity Compensation Plan Information.
See page 55 for a discussion of Aspen Group’s equity compensation plan.
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ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion should be read in conjunction with the other sections contained herein, including the risk factors and the consolidated
financial statements and the related exhibits contained herein. The various sections of this discussion contain a number of forward-looking
statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout
this report as well as other matters over which we have no control. Our actual results may differ materially. See “Cautionary Note
Regarding Forward-Looking Statements.”
Company Overview
Founded in 1987, Aspen’s mission is to become an institution of choice for adult learners by offering cost-effective, comprehensive, and
relevant online education. One of the key differences between Aspen and other publicly-traded, exclusively online, for-profit universities is
that 87% of our full-time degree-seeking students (as of December 31, 2012) are enrolled in a graduate degree program (master or doctorate
degree program). According to publicly available information, Aspen enrolls a larger percentage of its full-time degree-seeking students in
graduate degree programs than its publicly-traded competitors. As of December 31, 2012, 1,681 students were enrolled as full-time degree
seeking students with 1,467 of those students or 87% in a master or doctoral graduate degree program. In addition, a further 872 students are
engaged in part time programs, such as continuing education courses and certificate level programs. Therefore, Aspen’s student body totaled
2,553 as of December 31, 2012.
Among online, for-profit universities, Aspen ranks among the leaders relative to the closely analyzed industry metrics such as high student
graduation rates, high student course completion rates and low revenue exposure to DOE federal student financial aid Title IV
programs. During 2012, Aspen had a student graduation rate of 58%, and a student course completion rate of 90% (calculated in accordance
with DETC guidelines which is the average completion rate of students in our top 10 most popular courses), a federal student financial aid
Title IV program participation rate of only 18% of revenues (this rate was calculated in accordance with the DOE regulations with revenues
calculated on a cash basis). While most publicly-traded for-profit universities are near the 90/10 Title IV ratio limit, Aspen’s ratio is only 18%.
Enrollments
Degree-seeking student enrollments increased by 37% during 2012, from 1,477 to 2,024 students. Among Aspen’s degree seeking programs,
the Master of Nursing program grew 273% in 2012, from 71 students to 265 students. Part-time students enrolled as of March 31, 2012 were
529 students, an increase of 7% from 496 part-time students at year-end 2011.
Results of Operations
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Revenue
Revenue for the year ended December 31, 2012 increased to $5,017,213 from $4,477,931 for the year ended December 31, 2011, an
increase of 12%. The increase is primarily attributable to the growth in Aspen student enrollments as revenues from full-time degree-seeking
students increased to $2,684,930 from $2,395,440, an increase of 12%. Of particular note, revenues from Aspen’s Nursing degree program,
which is included in the revenue amount discussed in the preceding sentence, increased to $409,938 from $124,113, an increase of 230%.
Meanwhile, the revenue Aspen derives from its third-party sourced corporate-sponsored employee certificate programs and part-time degree
programs rose to $2,332,283 from $2,082,491, an increase of 12%.
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Our 2012 and 2011 revenues were impacted by the 2010 (and previous years) pre-payment tuition plan, or the Legacy Tuition Plan, which
was discontinued on July 15, 2011. The Legacy Tuition Plan had students paying full-rate tuition for a degree program’s first 4 courses
($675/course) and a steeply discounted tuition rate for the program’s eight course balance ($112.50/course). Specifically, the Plan produced
immediate cash flow, but unsustainably low gross profit margins over the length of the degree program. As of December 31, 2012, 44% of
our full-time degree-seeking students are still enrolled under the Legacy Tuition Plan. However, as the table below demonstrates, the
contribution from Legacy Tuition Plan students to overall Aspen revenue and profits diminished steadily over the course of 2012 as the
population of full-time degree-seeking students paying regular tuition rates increased by 188% and the population of Legacy Tuition Plan
students fell by 36%. Accordingly, much as 2012 was affected negatively by the lingering impact of the Legacy Tuition Plan, 2013 revenue
should demonstrate a dramatically diminished effect from the Legacy Tuition Plan and a much greater contribution from the growing number
of regular rate students. In fact, Aspen Group expects Legacy Tuition Plan students’ contribution to financial results to be immaterial for the
full year 2013, and on a quarterly basis to be immaterial no later than the second quarter of 2013.
The following table represents certain metrics regarding Aspen’s full-time degree seeking students. The revenue numbers are for tuition only
and do not include fees.
Full-Time Degree Seeking Student Metrics (unaudited)
1Q12
2Q12
3Q12
4Q12
Regular Rate Students
437
551
724
949
Legacy Tuition Plan Students:
- Legacy Tuition Plan Students
- % Legacy Tuition Plan Class Starts
- % Legacy Tuition Plan Tuition Revenue
- % Legacy Tuition Plan Tuition Gross Profit
1,051
67%
41%
35%
951
56%
28%
23%
861
45%
17%
12%
732
36%
10%
6%
Average Tuition Per Course
$
463
$
512
$
537
$
653
Total Full time Degree Students
1,488
1,502
1,585
1,681
Separately, Aspen’s largest corporate customer was Verizon, predominantly in the tri-state region (NY, NJ, CT), representing 29% of our
revenues in 2012 and 45% in 2011. Because of the payments we make to our third-party business development partner in connection with the
referrals of corporate customers, our gross margins from corporate customer revenues are substantially less. Deducting these payments,
Verizon accounted for only 6% and 11% of our net revenues for 2012 and 2011, respectively.
In 2012, Aspen’s Verizon revenues were significantly affected in the second half of the year by the impact of Hurricane Sandy as Verizon
employees were wholly focused on reconstruction efforts to return damaged infrastructure to operation. Verizon’s net revenue contribution in
the second half of 2012 fell to 3% as revenues contracted at a 70% year/year rate versus a year/year growth rate of 9% during the first half of
2012 when the net revenue contribution was 11%. Management expects Verizon’s net revenue contribution to be immaterial in 2013. This is a
planned, long-term strategic shift in which Aspen has decided to de-emphasize third-party-sourced corporate employee certificate programs in
favor of launching its own internal marketing efforts for such programs in 2013. The first certificate program planned to be launched in early-
April through Aspen’s internal marketing department is the Certificate in Internet Marketing.
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Costs and Expenses
Instructional Costs and Services
Instructional costs and services for the year ended December 31, 2012 rose to $2,926,837 from $2,200,034 for the year ended December 31,
2011, an increase of 33%. The increase is primarily attributable to higher charges associated with non-capitalizable courseware costs and
payments to faculty due to the increase in class completions. As student enrollment levels increase, instructional costs and services should rise
commensurately. However, as Aspen increases its full-time degree-seeking student enrollments, the higher gross margins associated with such
students should lead to the growth rate in instructional costs and services to lag that of overall revenues.
Revenues less instructional costs and services, a measure of the gross profit of Aspen operations, for the year ended December 31, 2012
declined to $2,090,376 from $2,277,897 for the year ended December 31, 2011, a decrease of 8%. Gross profit from Aspen’s full-time
degree-seeking students declined to $1,785,030 for the year ended December 31, 2011 from $1,946,899 for the year ended December 31,
2011, a decrease of 8%. The timing impact of the Legacy Tuition Plan was experienced in the second half of 2012 as Aspen’s gross profit
from full-time degree-seeking students fell at a year/year rate of 14% versus a 1% decline during the first half of 2012. This is because the
second half of 2011 was affected by a large number of Legacy Tuition Plan students completing their initial four courses which contributed
gross profits in contrast to later periods with a lower number of initial four courses taken by Legacy Tuition Plan students. After the initial
four courses, gross profit from the Legacy Tuition Plan is immaterial. Gross profit growth is expected in 2013 as new full-time degree-seeking
student enrollments increase and Legacy Tuition Plan students represent a shrinking portion of the total full-time degree-seeking student
population. Gross profit from Aspen’s third-party corporate employee certificate programs and part-time degree programs declined to
$305,346 for the year ended December 31, 2012 from $330,998 for the year ended December 31, 2011, a decrease of 8%. The timing impact
of Hurricane Sandy was experienced in the second half of 2012 as Aspen’s gross profit from third-party corporate employee certificate
programs and part-time degree programs fell at a year/year rate of 44% versus a year/year growth rate of 35% during the first half of 2012.
Gross profit growth in 2013 should benefit from the growing number of regular rate students, the de-emphasis of low-margin third-party-
sourced corporate employee certificate programs and the ramp-up of Aspen’s own certificate programs.
Marketing and Promotional
Marketing and promotional costs for the year ended December 31, 2012 increased to $1,442,128 from $515,362 for the year ended December
31, 2011, an increase of 180%. The increase is primarily attributable to expenses related to the launch and operation of Aspen's new marketing
and student enrollment program. With Aspen’s strategy of proprietary lead generation driving higher marketing and promotional spending
levels, it is highly likely that these expenditures will increase in 2013 over 2012 levels. Factors serving to mitigate the expected increase
include possible economies realized in cost per lead as well as the yield realized in terms of higher enrollments per unit of marketing and
promotional spending. While such economies were realized in 2012, we cannot assure you that we will realize further economies of scale in
2013.
General and Administrative
General and administrative costs for the year ended December 31, 2012 increased to $5,404,325 from $3,593,956 for the year ended
December 31, 2011, an increase of 50%. The most significant factor is the higher employment level as Aspen increased staffing to support its
growth objectives. To that end, payroll costs for the period rose to $2,716,302 from the prior year period’s $1,596,711, an increase of 70%.
Separately, professional fees for the period rose to $920,086 from $583,416, an increase of 58%. Within professional fees, accounting fees for
the period rose to $509,711 from $58,707, a 768% increase, while legal fees for the period declined to $395,375 from $523,233, a 24%
decrease. Activities supported by the increased level of professional fees were reverse merger regulatory filings with the DOE and the DETC,
post-reverse merger regulatory filings with the DOE, the filing of the Super 8-K and Form 10-Qs with the SEC, along with our capital raising
and other transactional activities. Relative to the professional fees incurred a total of $702,093 is non-recurring (accounting, $340,778; legal,
$361,315). We expect professional fees to decline in 2013, particularly as Aspen Group’s auditors have agreed to a flat-fee arrangement.
Apart from payroll costs and professional fees, bad debt expense for the period rose to $302,952 from $21,200, an increase of 1,329%, as the
payment performance of Aspen’s third-party corporate employee certificate programs and part-time degree programs has suffered and
management took steps to ensure the conservative presentation of our consolidated financial statements. Separately, general and administrative
costs in 2012 reflected non-cash stock-based compensation expense of $347,657 as Aspen Group's board of directors approved an option
program on March 13, 2012. Based on grants made to date, non-cash stock-based compensation expense should be $374,091 in 2013. We
expect to recognize an additional $606,807 of non-cash stock-based compensation through December 31, 2016. Excluding payroll,
professional fees, bad debt expense and non-cash stock-based compensation expense, general and administrative costs for the year ended
December 31, 2012 declined to $1,117,328 from $1,392,631, a decrease of 20%.
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Overall general and administrative costs are expected to experience moderate growth in 2013 from 2012 as the cost associated with state
regulatory compliance and DOE reporting requirements on topics such as gainful employment standards will increase in 2013. It is not
feasible to quantify these future costs.
Receivable Collateral Valuation Reserve
Due to a change in the estimated value of the collateral supporting the Account Receivable, secured – related party from $1.00/share to
$0.35/share based on the financing by Aspen that closed September 28, 2012, a non-cash valuation reserve expense of $502,315 was recorded
for the year ended December 31, 2012.
Depreciation and Amortization
Depreciation and amortization costs for the year ended December 31, 2012 rose to $397,923 from $264,082 for the year ended December 31,
2011, an increase of 51%. The increase is primarily attributable to higher levels of capitalized technology costs as Aspen continues the
infrastructure build-out initiated in 2011.
Other Income (Expense)
Other income (expense) for the year ended December 31, 2012 declined to an expense of ($354,418) from an expense of ($40,070), a
decrease of $314,348. The decrease is primarily attributable to interest expense related to the issuance of $2,006,000 in convertible notes
payable during the period along with the amortization of debt issue costs. On the closing of the financing on September 28, 2012, the
convertible notes were converted into common shares at a per share price of $0.3325.
Income Taxes
Income taxes expense (benefit) for the year ended December 31, 2012 and the year ended December 31, 2011 were $0 as Aspen
Group experienced operating losses in both periods. As management made a full valuation allowance against the deferred tax assets stemming
from these losses, there was no tax benefit recorded in the statement of operations in both periods.
Net Loss
Net loss allocable to common stockholders for the year ended December 31, 2012 widened to ($6,048,113) from ($2,222,899) for the year
ended December 31, 2011, an increase of 172%. The increase is primarily attributable to depressed returns as Aspen transitions through the
impact of the Legacy Tuition Plan, incurs the budgeted employee, infrastructure and marketing costs associated with Aspen's new programs
to sustain future growth and experienced the non-recurring impact of Aspen Group's costs related to becoming a public-traded entity.
Non-GAAP – Financial Measure
The following discussion and analysis includes both financial measures in accordance with GAAP, as well as a non-GAAP financial
measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that
either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and
presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as
alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not
be indicative of the historical operating results of Aspen Group nor is it intended to be predictive of potential future results. Investors should
not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.
Our management uses and relies on Adjusted EBITDA, a non-GAAP financial measure. We believe that both management and shareholders
benefit from referring to the following non-GAAP financial measure in planning, forecasting and analyzing future periods. Our management
uses this non-GAAP financial measure in evaluating its financial and operational decision making and as a means to evaluate period-to-period
comparison.
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Aspen Group defines Adjusted EBITDA as earnings (or loss) from continuing operations before preferred dividends, interest expense,
income taxes, collateral valuation adjustment, bad debt expense, depreciation & amortization, and amortization of stock-based
compensation. Aspen Group excludes stock based compensation because our management believes Adjusted EBITDA is an important
measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results
from period to period after removing the impact of items of a non-operational nature that affect comparability. Our management recognizes
that Adjusted EBITDA has inherent limitations because of the excluded items.
We have included a reconciliation of our non-GAAP financial measure to the most comparable financial measure calculated in accordance with
GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make
comparisons between Aspen Group and other companies. In making any comparisons to other companies, investors need to be aware that
companies use different non-GAAP measure to evaluate their financial performance. Investors should pay close attention to the specific
definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under
applicable SEC rules.
The following table presents a reconciliation of Adjusted EBITDA to Net Income (loss) allocable to common stockholders, a GAAP financial
measure:
1Q12
2Q12
3Q12
4Q12
2012
Net income/(loss) allocable to common stockholders
Accretion of preferred dividends
Interest Expense, net
Collateral Valuation Adjustment
Bad Debt Expense
Depreciation & Amortization
Stock-based compensation expense
Adjusted EBITDA (Loss)
$ (1,827,046) $ (1,664,733) $ (1,721,976) $
0
229,084
193,198
113,476
103,738
63,547
$ (1,598,570) $ (1,033,186) $ (1,018,933) $
0
127,702
309,116
51,521
96,188
47,020
37,379
2,289
0
32,955
89,749
66,104
(834,358) $ (6,048,113)
37,379
0
360,297
1,222
502,315
0
302,952
105,000
397,923
108,248
347,657
170,986
(448,902) $ (4,099,590)
Over the course of 2012, Aspen Group narrowed the Adjusted EBITDA loss as a result of the 188% increase in the number of full-rate tuition
students and the 36% decrease in the number of Legacy Tuition Plan students, a shift that lifted average realized per-course tuition from $463
in the first quarter of 2012 to $653 in the fourth quarter of 2012 - a 41% increase.
The impact of the Collateral Valuation Adjustment will be confined to 2012 if the market price of Aspen Group shares remains at or above the
current $0.35/share valuation level. As of the filing date of this report, Aspen Group had reduced its line of credit balance from $250,000 to
$100. In 2013, the amount of interest expense is not expected to increase over 2012 levels. As Aspen Group de-emphasizes third-party
sourced certificate programs, the level of Bad Debt Expense is likely to be reduced.
The above factors along with higher numbers of full-rate tuition degree-seeking students are expected to deliver a positive Adjusted EBITDA
performance in the third quarter of 2013.
Capital Resources and Liquidity
Net cash used in operating activities during the year ended December 31, 2012 totaled ($4,403,361) and resulted primarily from a net loss of
($6,010,734) offset by non-cash items of $1,965,955 and a net change in operating assets and liabilities of ($358,582). Net cash from
operating activities include non-recurring expenses of $702,093 which comprised of professional fees.
Net cash used in investing activities during the year ended December 31, 2012 totaled ($619,801) and resulted primarily from capitalized
technology expenditures of ($505,146) and a net increase of restricted cash of ($264,992), offset by officer loan repayments received of
$150,000.
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Net cash provided by financing activities during the year ended December 31, 2012 totaled $4,901,548 which resulted primarily from
proceeds from the net issuance of debt and equity securities and warrants of $5,370,021 offset by issuance costs of ($266,473) and the
repurchase of treasury shares of ($202,000).
In May 2011, Aspen had approximately $200,000 in cash when its new management team joined it in connection with the EGC merger. From
June 2010 through the time of the EGC merger, Aspen had received $1,390,500 from the Legacy Tuition Plan which was designed to increase
immediate cash flow at the expense of future cash flow. To sustain its operations, Aspen raised $328,000 from the sale of convertible notes
and $3,469,985 from the sale of convertible preferred stock at prices ranging from approximately $0.95 to $1.00 per share. Funds were used
to repurchase $740,000 of common stock pursuant to a prior obligation, to repay $165,000 to investors who purchased Aspen common stock
in prior years resulting from violation of state securities laws registration provisions, to repurchase $21,200 of common stock to investors
requesting a return of their investments, and $2,871,785 for general corporate purposes including working capital.
We do not anticipate generating positive cash flow from operations until approximately the third quarter of 2013. As of the filing date of this
report, we had $806,441 in available cash. As discussed above, we anticipate our marketing and regulatory costs will increase.
To ensure we have enough cash to support our working capital needs, we plan to raise additional working capital. As of the filing date of this
report, we have raised $565,000 in 2013. In March 2013, we entered into an engagement agreement with Laidlaw & Company (UK) Ltd.,
which agreed to use its best efforts to raise up to $770,000 of units of shares of common stock and warrants.
We expect to spend $250,000 in capital expenditures over the next 12 months. These capital expenditures will be allocated across growth
initiatives including expansion of Aspen’s call center activities, academic courseware development and further improvements in Aspen’s
technology infrastructure. Depending on management’s efforts to realize efficiencies in technology development and the amount of capital
raised, our capital expenditures may be less than anticipated.
Critical Accounting Policies and Estimates
In response to financial reporting release FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from the SEC,
we have selected our more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the
estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the our financial condition. The
accounting estimates are discussed below and involve certain assumptions that, if incorrect, could have a material adverse impact on our results
of operations and financial condition.
Revenue Recognition and Deferred Revenue
Revenues consist primarily of tuition and fees derived from courses taught by Aspen online as well as from related educational resources
that Aspen provides to its students, such as access to our online materials and learning management system. Tuition revenue is
recognized pro-rata over the applicable period of instruction. Aspen maintains an institutional tuition refund policy, which provides for all
or a portion of tuition to be refunded if a student withdraws during stated refund periods. Certain states in which students reside impose
separate, mandatory refund policies, which override Aspen’s policy to the extent in conflict. If a student withdraws at a time when a
portion or none of the tuition is refundable, then in accordance with its revenue recognition policy, Aspen recognizes as revenue the
tuition that was not refunded. Since Aspen recognizes revenue pro-rata over the term of the course and because, under its institutional
refund policy, the amount subject to refund is never greater than the amount of the revenue that has been deferred, under Aspen’s
accounting policies revenue is not recognized with respect to amounts that could potentially be refunded. Aspen’s educational programs
have starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from
these programs is not yet earned and is therefore deferred. Aspen also charges students annual fees for library, technology and other
services, which are recognized over the related service period. Deferred revenue represents the amount of tuition, fees, and other student
payments received in excess of the portion recognized as revenue and it is included in current liabilities in the accompanying consolidated
balance sheets. Other revenues may be recognized as sales occur or services are performed.
Aspen enters into certain revenue sharing arrangements with consultants whereby the consultants will develop course content primarily
for technology related courses, recommend, but not select, faculty, lease equipment on behalf of Aspen for instructional purposes for the
on-site laboratory portion of distance learning courses and make introductions to corporate and government sponsoring organizations who
provide students for the courses. Aspen has evaluated ASC 605-45 "Principal Agent Considerations" and determined that there are more
indicators than not that Aspen is the primary obligor in the arrangements since Aspen establishes the tuition, interfaces with the student or
sponsoring organization, selects the faculty, is responsible for delivering the course, is responsible for issuing any degrees or certificates,
and is responsible for collecting the tuition and fees. The gross tuition and fees are included in revenues while the revenue sharing
payments are included in instructional costs and services, an operating expense.
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Accounts Receivable and Allowance for Doubtful Accounts Receivable
All students are required to select both a primary and secondary payment option with respect to amounts due to Aspen for tuition, fees and
other expenses. The most common payment option for Aspen’s students is personal funds or payment made on their behalf by an
employer. In instances where a student selects financial aid as the primary payment option, he or she often selects personal cash as the
secondary option. If a student who has selected financial aid as his or her primary payment option withdraws prior to the end of a course
but after the date that Aspen’s institutional refund period has expired, the student will have incurred the obligation to pay the full cost of the
course. If the withdrawal occurs before the date at which the student has earned 100% of his or her financial aid, Aspen will have to return
all or a portion of the Title IV funds to the DOE and the student will owe Aspen all amounts incurred that are in excess of the amount of
financial aid that the student earned and that Aspen is entitled to retain. In this case, Aspen must collect the receivable using the student’s
second payment option.
For accounts receivable from students, Aspen records an allowance for doubtful accounts for estimated losses resulting from the inability,
failure or refusal of its students to make required payments, which includes the recovery of financial aid funds advanced to a student for
amounts in excess of the student’s cost of tuition and related fees. Aspen determines the adequacy of its allowance for doubtful accounts
using a general reserve method based on an analysis of its historical bad debt experience, current economic trends, and the aging of the
accounts receivable and student status. Aspen applies reserves to its receivables based upon an estimate of the risk presented by the age of
the receivables and student status. Aspen writes off accounts receivable balances at the time the balances are deemed uncollectible. Aspen
continues to reflect accounts receivable with an offsetting allowance as long as management believes there is a reasonable possibility of
collection.
For accounts receivable from primary payors other than students, Aspen estimates its allowance for doubtful accounts by evaluating
specific accounts where information indicates the customers may have an inability to meet financial obligations, such as bankruptcy
proceedings and receivable amounts outstanding for an extended period beyond contractual terms. In these cases, Aspen uses assumptions
and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due
to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional
information is received. The amounts calculated are analyzed to determine the total amount of the allowance. Aspen may also record a
general allowance as necessary.
Direct write-offs are taken in the period when Aspen has exhausted its efforts to collect overdue and unpaid receivables or otherwise
evaluate other circumstances that indicate that Aspen should abandon such efforts.
Related Party Transactions
At December 31, 2012, we included as a long term asset an account receivable of $270,478 net of an allowance of $502,315 from our former
Chairman. Although it is secured by stock pledges, there is a risk that we may not collect all or any of this sum.
In March 2012, we issued a $300,000 convertible note to Mr. Michael Mathews, our Chief Executive Officer, in consideration for a $300,000
loan. The note was originally due March 31, 2013, but was amended to extend the due date to August 31, 2013. The note bears interest at
0.19% per annum and is convertible at $1.00 per share. In August 2012, we issued a $300,000 convertible note to Mr. Mathews in
consideration for an additional $300,000 loan. The note was originally a demand note, but was amended to extend the due date to August 31,
2014. The note bears interest at 5% per annum and is convertible at $0.35 per share.
See Note 15 to our consolidated financial statements included herein for additional description of related party transactions that had a material
effect on our consolidated financial statements.
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New Accounting Pronouncements
See Note 2 to our consolidated financial statements included herein for discussion of recent accounting pronouncements.
Cautionary Note Regarding Forward Looking Statements
This report includes forward-looking statements including statements regarding liquidity, Adjusted EBITDA, cash flows from operations,
capital expenditures, expected number of students under the Legacy Tuition Plan, 2013 revenue and gross profit growth.
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,”
“expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-
looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy and financial needs.
The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may
cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors contained herein. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or
otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors and our other
filings with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The requirements of this Item can be found beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
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ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the
effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on
their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
Management’s Internal Control over Financial Reporting
Based upon SEC interpretations and discussions with the Staff of the SEC, we concluded that we were not required to include management’s
assessment or an attestation report of our independent registered public accounting firm. Thus, this annual report does not include a report of
management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public
accounting firm.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially
affected, or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following executive officers and directors were appointed to their current positions with Aspen Group listed in the table in
connection with the Reverse Merger. Except for Sanford Rich, who was appointed a director effective with the closing of the Reverse Merger,
each person listed in the table had identical positions with Aspen.
Name
Age
Position
Michael Mathews
Gerald Williams
David Garrity
Angela Siegel
Michael D’Anton
C. James Jensen
David Pasi
Sanford Rich
John Scheibelhoffer
Paul Schneier
51
59
52
33
55
72
52
55
51
62
Chief Executive Officer and Chairman of the Board
President
Chief Financial Officer
Executive Vice President of Marketing
Director
Director
Director
Director
Director
Director
Michael Mathews has served as Aspen’s Chief Executive Officer and a director since May 2011. He served as Chief Executive Officer of
interclick, inc. (Nasdaq: ICLK) from August 28, 2007 until January 31, 2011. From June 2007 until it was acquired by Yahoo, Inc.
(NASDAQ: YHOO) in December 2011, Mr. Mathews also served as a director of interclick. From May 15, 2008 until June 30, 2008, Mr.
Mathews served as the interim Chief Financial Officer of interclick. From 2004 to 2007, Mr. Mathews served as the senior vice-president of
marketing and publisher services for World Avenue U.S.A., LLC, an Internet promotional marketing company. From March 2011 until
October 2012, Mr. Mathews served as the Chairman and a consultant (and from December 1, 2011 through March 19, 2012 as Executive
Chairman) for Wizard World, Inc. (Other OTC: WIZD). Mr. Mathews was selected to serve as a director due to his track record of success in
managing early stage and growing businesses, his extensive knowledge of the Internet marketing industry and his knowledge of running and
serving on the boards of public companies.
Gerald Williams has served as Aspen’s President since March 2011. Dr. Williams functions as Aspen’s chief academic officer and has
responsibility for all educational matters. Since January 15, 2012, Dr. Williams has also served as the Dean of our School of Technology.
Prior to January 1, 2012, Dr. Williams was a consultant beginning in March 2011 under a Consulting Agreement. From 2005 until 2010, Mr.
Williams was an adjunct professor at the University of Missouri – Kansas City.
David Garrity has served as Aspen’s Chief Financial Officer since June 2011. He served as Chief Financial Officer of interclick from June
30, 2008 until August 14, 2009 and as a member of interclick’s board of directors from June 9, 2008 until June 5, 2009. Through GVA
Research LLC, a company he controls, Mr. Garrity provides consulting services to organizations such as the World Bank Group and offers
expert commentary on technology sector developments to CNBC, Bloomberg TV and other media networks. Mr. Garrity holds Series 7, 24,
63, 79, 86 & 87 securities licenses and is affiliated with Whitemarsh Capital Advisors, LLC, a Financial Industry Regulatory Authority, Inc.,
or FINRA, member firm. From 2006 to 2008, Mr. Garrity served as Managing Director and Director of Research for Dinosaur Securities,
LLC. In 2006, Mr. Garrity was fined $10,000 and suspended for 45 days from associating with a FINRA member firm for certain inadvertent
violations of FINRA's rules unrelated to fraud or any customer complaints. Mr. Garrity consented to the sanctions without admitting or
denying FINRA's findings.
Angela Siegel has served as Aspen’s Executive Vice President of Marketing since January 1, 2012. Ms. Siegel has responsibility for the
online lead generation and the Office of Enrollment. From July 2010 until December 2011, Ms. Siegel was the Director of Compliance and
Enrollment Analytics at Ward Media, Inc., or Ward, a lead generation marketing agency. From January 2010 until July 2010, Ms. Siegel was
the Chief Marketing Officer at the Jack Welch Management Institute at Chancellor University. From October 2008 until January 2010, Ms.
Siegel was the Director of Enrollment Marketing at Ward. From July 2004 until October 2008, Ms. Siegel was the Online Marketing Manager
at Grand Canyon Education, Inc. (NASDAQ: LOPE), a regionally accredited provider of post-secondary education including online as well as
traditional ground programs.
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Michael D’Anton has served as a director of Aspen for approximately six years. Since 1988, Dr. D’Anton has been an ENT physician and
surgeon at ENT Allergy Associates. Dr. D’Anton was selected as a director for his experience in growing and running a successful surgery
center and his knowledge of Aspen from serving as a director prior to the Reverse Merger.
C. James Jensen has served as a director of Aspen since May 2011. Since 1983, Mr. Jensen has been the managing partner of Mara
Gateway Associates, L.P., a privately owned real estate investment company he co-founded. Since 2006, Mr. Jensen has been the co-
managing partner of Stronghurst, LLC, which provides advisory and financial services to emerging growth companies. Since April 2011, Mr.
Jensen has served as a director of Sugarmade, Inc. (OTC BB: SGMD). From April 2006 until March 2008, Mr. Jensen served as a director
of Health Benefits Direct Corp. (OTC BB: HBDT). Mr. Jensen was selected a director as a designee of Mr. Mathews in connection with the
EGC Merger due to his previous service on a public company board and his experience with entrepreneurial companies.
David Pasi has served as a director of Aspen since May 2011. Since December 2010, Mr. Pasi has been a registered investment advisor
under Delta Financial Group. From August 2008 until August 2010, Mr. Pasi was a risk manager at Credit Suisse. From January 2004 until
June 2008, Mr. Pasi was the risk manager at Citigroup, Inc. Mr. Pasi was selected as a designee of Mr. Spada in connection with the EGC
Merger. Because of his finance background, Mr. Pasi was selected as a director.
Sanford Rich has served as a director since March 13, 2012. In November 2012, Mr. Rich began serving as the Chief of Negotiations and
Restructuring for the Pension Benefit Guaranty Corporation. From October 2011 to September 2012, Mr. Rich served as Chief Executive
Officer of In The Car LLC. Mr. Rich served as a director of interclick from August 28, 2007 until June 5, 2009. Since January 2008, Mr.
Rich has served as Managing Director of Whitemarsh Capital Advisors, a broker-dealer. From May 2008 to February 2009, Mr. Rich was a
Managing Director with Matrix USA LLC, a broker-dealer. From 1995 until January 2008, Mr. Rich was the Senior Vice President of
Investments, a Portfolio Manager and a Specialist Manager of High Yield and Convertible Securities Portfolios for institutions at GEM
Capital Management, Inc. Since April 2006, Mr. Rich has served as a director and Audit Committee Chairman for InsPro Technologies (OTC
BB: ITCC). Mr. Rich was selected as a director for his 32 years of experience in the financial sector and because he is independent and has
experience serving on the audit committees of public companies.
John Scheibelhoffer has served as a director of Aspen for approximately six years. Since 1996, Dr. Scheibelhoffer has been a physician and
surgeon employed by ENT Allergy Associates. Dr. Scheibelhoffer was selected to serve as a director for his experience in running a
successful surgery center and his knowledge of Aspen from serving as a director member prior to the EGC Merger.
Paul Schneier has served as a director of Aspen for approximately five years. Since April 2007, Mr. Schneier has been a Division President
at PulteGroup, Inc. (NYSE: PHM), a homebuilding company. Prior to that, Mr. Schneier was a Division President at Beazer Homes USA,
Inc. (NYSE: BZEH), a homebuilding company. Mr. Schneier was selected to serve as a director because of his management background.
Brad Powers served as our Chief Marketing Officer until March 1, 2013.
Except for Dr. D’Anton and Mr. Pasi, who are brother-in-laws, there are no family relationships among our directors and/or executive
officers.
Board Committees and Charters
The Board and its committees meet throughout the year and act by written consent from time to time as appropriate. The Board delegates
various responsibilities and authority to its Board committees. Committees regularly report on their activities and actions to the Board. The
Board currently has, and appoints the members of the Audit Committee and the Compensation Committee. The following table identifies the
independent and non-independent current Board and committee members:
Name
Michael Mathews
Michael D’Anton
C. James Jensen
David Pasi
Sanford Rich
John Scheibelhoffer
Paul Schneier
Independent
Audit
Compensation
ü
ü
ü
ü
ü
ü
Chairman
ü
ü
Chairman
ü
ü
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Director Independence
We currently have seven directors serving on our Board. We are not a listed issuer and, as such, are not subject to any director
independence standards. Using the definition of independence set forth in the rules of the NYSE MKT, all of our directors except Mr.
Mathews are independent.
Board Committees and Charters
The members of the Audit Committee are Sanford Rich, Chairman, David Pasi and C. James Jensen. Our Board has determined that
each of the members are independent in accordance with the independence standards for audit committees under the NYSE MKT listing rules.
The Board has also determined that Mr. Rich is an “Audit Committee Financial Expert.” The Audit Committee has a written charter approved
by the Board.
The members of the Compensation Committee are Mr. Jensen, Chairman, Paul Schneier and John Scheibelhoffer, MD.
Our Board is expected to appoint a Nominating Committee, and to adopt charters relative to the Compensation Committee and the
Nominating Committee, in the future. We intend to appoint such persons to the Nominating Committee of the Board as are expected to be
required to meet the corporate governance requirements imposed by a national securities exchange, although we are not required to comply
with such requirements until we elect to seek listing on a national securities exchange, and we are under no obligation to do so.
Code of Ethics
Our Board has adopted a Code of Ethics that applies to all of our employees, including our Chief Executive Officer and Chief
Financial Officer. Although not required, the Code of Ethics also applies to our directors. The Code of Ethics provides written standards that
we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure and
compliance with laws, rules and regulations, including insider trading, corporate opportunities and whistle-blowing or the prompt reporting of
illegal or unethical behavior. We will provide a copy, without charge, to anyone that requests one in writing to Aspen Group, Inc. 224 West
30th Street, Suite 604, New York, New York 10001, Attention: Corporate Secretary.
Shareholder Communications
Although we do not have a formal policy regarding communications with the Board, shareholders may communicate with the Board
by writing to us at Aspen Group, Inc., 224 West 30th Street, Suite 604, New York, New York 10001, Attention: Corporate
Secretary. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be
forwarded, as appropriate.
Board Assessment of Risk
Our risk management function is overseen by our Board. Our management keeps its Board apprised of material risks and provides
its directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, and how
management addresses those risks. Mr. Michael Mathews, as our Chief Executive Officer and Chairman of the Board, works closely together
with the Board once material risks are identified on how to best address such risks. If the identified risk poses an actual or potential conflict
with management, our independent directors may conduct the assessment. Presently, the primary risks affecting us are our ability to grow our
business with our current cash balance and manage our expected growth consistent with regulatory oversight.
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Risk Assessment Regarding Compensation Policies and Practices as they Relate to Risk Management
Our compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks
that are reasonably likely to have a material adverse effect on us. Our compensation has the following risk-limiting characteristics:
● Our base pay programs consist of competitive salary rates that represent a reasonable portion of total compensation and provide a
reliable level of income on a regular basis, which decreases incentive on the part of our executives to take unnecessary or
imprudent risks;
● A portion of executive incentive compensation opportunity is tied to long-term incentive compensation that emphasizes sustained
performance over time. This reduces any incentive to take risks that might increase short-term compensation at the expense of
longer term company results.
● Awards are not tied to formulas that could focus executives on specific short-term outcomes;
● Equity awards may be recovered by us should a restatement of earnings occur upon which incentive compensation awards were
based, or in the event of other wrongdoing by the recipient; and
● Equity awards, generally, have multi-year vesting which aligns the long-term interests of our executives with those of our
shareholders and, again, discourages the taking of short-term risk at the expense of long-term performance.
Section 16(a) Beneficial Ownership Reporting Compliance.
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION.
The following information is related to the compensation paid, distributed or accrued by us to our Chief Executive Officer (principal
executive officer) and the two other most highly compensated executive officers serving at the end of the last fiscal year whose total
compensation exceeded $100,000. We refer to these persons as the “Named Executive Officers.”
2012 Summary Compensation Table
Name and
Principal Position
(a)
Michael Mathews (2)
Chief Executive Officer
David Garrity (3)
Chief Financial Officer
Brad Powers (4)
Former Chief Marketing Officer
Salary
($)(c)
Option
Awards
($)(f) (1)
Total
($)(j)
265,702
125,000
264,269
1,286,880
0
1,552,582
125,000
70,000
334,269
264,520
70,000
334,520
Year
(b)
2012
2011
2012
2012
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(1) These amounts do not reflect the actual economic value realized by the Named Executive Officers. In accordance with SEC rules, this
column represents the grant date fair value of awards, in accordance with applicable accounting guidance related to stock-based compensation.
Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions.
(2) Salary for 2011 includes $62,500 of deferred base salary which as of December 31, 2012 remained unpaid. Includes 455,577 options
accepted in lieu of $159,452 of cash salary.
(3) Salary includes 302,674 options accepted in lieu of $105,936 of cash salary.
(4) Salary includes 422,439 options accepted in lieu of $147,854 of cash salary.
Executive Employment Agreements
Each of the Employment Agreements described below was entered into by Aspen prior to the Reverse Merger. Aspen Group assumed each
agreement effective with the closing of the Reverse Merger, and all option grants and common stock issued as performance bonuses will be of
Aspen Group. Each person’s title with Aspen is identical with Aspen Group. See the discussion at page 53 of this report concerning
amendments to all Employment Agreements except Ms. Siegel.
Michael Mathews. Effective on July 5, 2011, Aspen entered into a four-year Employment Agreement with Michael Mathews to serve as its
Chief Executive Officer. The Employment Agreement provides that Mr. Mathews will receive a base salary of $250,000 per year, which will
be increased by at least 10% annually. In addition to a base salary, Mr. Mathews is eligible to receive an annual performance bonus based
upon the achievement of pre-established performance milestones of which at least half would be paid in cash and the remaining in common
stock. If performance milestones are met, Mr. Mathews’ bonus will be 100% of his base salary for the year the milestone was met. If Mr.
Mathews and a majority of the Board are unable to mutually agree on performance milestones, Mr. Mathews will receive a guaranteed bonus
for that fiscal year of no less than 15% of his base salary. In 2012, no performance milestones were set and Mr. Mathews waived his right to a
guaranteed annual performance bonus. Additionally, in March 2012, Mr. Mathews was granted 300,000 five-year options to purchase shares
of Aspen Group common stock exercisable at $1.00 per share vesting over a three-year period. In December 2012, the options were re-priced
to $0.35 per share.
David Garrity. Effective on June 9, 2011, Aspen entered into a four-year Employment Agreement with David Garrity to serve as its Chief
Financial Officer. In accordance with the Employment Agreement, from June 9, 2011 through July 4, 2011, Mr. Garrity was paid a fee in lieu
of salary at a rate of $10,000 per month pursuant to a separate Consulting Agreement with Mr. Garrity. From July 4 until September 30, 2011,
Aspen paid Mr. Garrity $10,000 per month (a rate of $125,000 per annum). Under his Employment Agreement, from October 1, 2011, Mr.
Garrity was to be paid at the rate of $250,000 per year, which will be increased by at least 10% annually. In addition to a base salary, Mr.
Garrity is eligible to receive an annual performance bonus based upon the achievement of pre-established performance milestones of which at
least half would be paid in cash and the remaining in Aspen common stock. If performance milestones are met, Mr. Garrity’s bonus will be
100% of his base salary for the year the milestone was met. If Mr. Garrity and a majority of the Board are unable to mutually agree on
performance milestones, Mr. Garrity will receive a guaranteed bonus for that fiscal year of no less than 15% of his base salary. In 2012, no
performance milestones were set and Mr. Garrity waived his right to a guaranteed annual performance bonus. Additionally, in March 2012,
Mr. Garrity was granted 200,000 five-year options to purchase shares of Aspen Group common stock exercisable at $1.00 per share vesting
over a three-year period. In December 2012, the options were re-priced to $0.35 per share.
Brad Powers. Effective on July 5, 2011, Aspen entered into a four-year Employment Agreement with Brad Powers to serve as its Chief
Marketing Officer. In accordance with the Employment Agreement, Mr. Powers was to be paid a base salary of $250,000 per year. In March
2012, Mr. Powers was granted 200,000 five-year options to purchase shares of Aspen Group common stock exercisable at $1.00 per share
vesting over a three-year period. In December 2012, the options were re-priced to $0.35 per share.
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Effective March 1, 2013, Brad Powers resigned as Chief Marketing Officer and as an employee of Aspen Group in order to pursue other
business ventures. Mr. Powers has agreed to provide consulting services to Aspen Group for a two-year period. Under a Consulting
Agreement, Mr. Powers will receive a fee of $100,000 per year and his outstanding stock options will continue to vest as originally in
accordance with their terms provided that Mr. Powers is providing consulting services. Mr. Powers’ Employment Agreement described
above has been terminated.
Gerald Williams. Effective January 1, 2012, Aspen entered into a five-year Employment Agreement with Dr. Gerald Williams to serve as its
President. In accordance with the Employment Agreement, Dr. Williams was to be paid a base salary of $150,000 per year. In addition to
base salary, Dr. Williams is eligible to receive an annual performance bonus in an amount equal to 50% of his then-current base salary, based
upon the achievement of pre-established performance milestones mutually agreed upon by him and the Chief Executive Officer. One-half of
the annual bonus is to be paid in cash and the remaining is to be paid in common stock. In 2012, no performance milestones were set and Dr.
Williams waived his right to an annual performance bonus. Additionally, in March 2012, Dr. Williams was granted 200,000 five-year options
to purchase shares of Aspen Group common stock at $1.00 per share vesting over a three-year period. In December 2012, the options were
re-priced to $0.35 per share.
Angela Siegel. Effective January 1, 2012, Aspen entered into a five-year Employment Agreement with Angela Siegel to serve as its
Executive Vice President, Marketing. In accordance with the Employment Agreement, Ms. Siegel is paid a base salary of $150,000 per
year. In addition to base salary, Ms. Siegel is eligible to receive an annual performance bonus in an amount equal to 50% of her then-current
base salary, based upon the achievement of pre-established performance milestones mutually agreed upon by her and the Chief Executive
Officer. In 2012, no performance milestones were set and Ms. Siegel waived her right to an annual performance bonus. Additionally, in
March 2012, Ms. Siegel was granted 150,000 five-year options to purchase shares of Aspen Group common stock exercisable at $1.00 per
share and vesting over a three-year period. In December 2012, the options were re-priced to $0.35 per share.
Amendments to Employment Agreements
On December 31, 2011, Messrs. Michael Mathews and Brad Powers, our Chief Executive Officer and then Chief Marketing Officer,
respectively, entered into amendments to their Employment Agreements waiving 50% of their salaries that would have otherwise accrued
($62,500 each). Additionally, effective January 1, 2012, they agreed to defer 50% of their base salaries until such time as Mr. Mathews or our
Board determine that we have sufficient cash flow to pay the previously agreed upon amount. As of August 31, 2012, these executives and
our Board agreed to continue deferring their salaries until December 31, 2012. Separately, Mr. David Garrity, our Chief Financial Officer,
effective April 1, 2012 deferred 40% of his base salary. At the same date, Mr. Michael Mathews deferred 60% of his base salary. In
consideration for deferring their salaries, Messrs. Mathews, Powers and Garrity were granted 288,911, 255,773 and 136,008 fully-vested
five-year stock options, respectively, exercisable at $0.35 per share to settle deferred salaries.
As of August 31, 2012, Messrs. Michael Mathews, Brad Powers, David Garrity, and Gerald Williams, our Academic President, agreed to
reduce their base salaries to $100,000 per year for the remainder of 2012. In consideration for reducing their salaries, Messrs. Mathews,
Powers and Garrity were each granted 166,666 stock options and Dr. Williams was granted 47,620 stock options. These stock options are
exercisable at $0.35 per share and vested in four equal installments at the end of each month of 2012, beginning on September 30, 2012.
Our Board approved the option grants in the two above paragraphs on October 23, 2012. The Board also granted Dr. Williams a $45,000
bonus on October 23, 2012. On September 4, 2012, our Board granted Mr. Mathews up to 2,900,000 five-year options exercisable at $0.35
per share and vesting in equal annual increments over four years with the first vesting date being September 4, 2013.
Termination Provisions
The table below describes the severance payments that our executive officers are entitled to in connection with a termination of their
employment upon death, disability, dismissal without cause, for Good Reason, a change of control and the non-renewal of their employment at
the discretion of Aspen Group. All of the termination provisions are intended to comply with Section 409A of the Internal Revenue Code of
1986 and the Regulations thereunder.
Michael Mathews
Gerald Williams
David Garrity
Angela Siegel
Death or Total Disability
Six months base
salary
Three months base
salary
Six months base
Six months base salary
salary
Dismissal Without Cause or Resignation for
Good Reason (1)
12 months base
salary (2)
Change of Control (3)
None
The greater of three
months base salary
or the remainder of
the base salary due
under the
employment
agreement
The greater of 12
months base salary
or the remainder of
the base salary due
under the
employment
agreement (2)
The greater of six
months base salary or
the remainder of the
base salary due under
the employment
agreement
The greater of three
months base salary
or the remainder of
the base salary due
under the
employment
agreement (3)
The greater of 12
months base salary
or the remainder of
the base salary due
under the
employment
agreement (2)
The greater of six
months base salary or
the remainder of the
base salary due under
the employment
agreement.
agreement
agreement
Expiration of Initial Term and Aspen Group does
not renew
_________
(1) Generally, Good Reason in the above Agreements include the material diminution of the executives’ duties, any material reduction in base
salary without consent, the relocation of the geographical location where the executive performs services or any other action that constitutes a
material breach by Aspen Group under the Employment Agreements.
Three months base
salary
Six months base
salary
12 months base
salary (2)
12 months base
salary (2)
(2) Any restricted stock or stock options held by the executive immediately vest upon occurrence of this event.
(3) Our standard form option agreement provides that all options shall vest in the event of a Change of Control event. Change of Control
generally means a shareholder acquires over 50% of Aspen Group’s total voting power, the sale of substantially all of Aspen Group’s assets,
or a merger which results in Aspen Group’s current shareholders owning less than 50% of the surviving entity.
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Outstanding Equity Awards At 2012 Year-End
Listed below is information with respect to unexercised options for each Named Executive Officer as of December 31, 2012.
Outstanding Equity Awards At 2012 Year-End
Name (a)
Michael Mathews
Number of Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
Number of Securities
Underlying
Unexercised Options
(#)
Unexercisable
(c)
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
0
0
0
288,911
166,666
300,000(1)
0
2,876,800(2)
500,000(3)
0
0
Option
Exercise Price
($)
(e)
Option
Expiration Date
(f)
0.35 March 15, 2017
September 4,
2017
0.35
0.35 March 22, 2017
0.35
0.35
October 23,
2017
October 23,
2017
0.35 March 15, 2017
0.35
0.35
October 23,
2017
October 23,
2017
0.35 March 15, 2017
0.35
0.35
October 23,
2017
October 23,
2017
23,200(2)
0
0
0
0
0
0
0
0
0
David Garrity
0
200,000(1)
136,008
166,666
0
0
Brad Powers
0
200,000(1)
255,773
166,666
0
0
(1) The options vest in three equal increments on March 14, 2013, 2014 and 2015.
(2) The options were subject to Aspen Group raising $3.5 million in its private placement offerings. As of December 31, 2012, Aspen
Group raised a total of $3,472,000 and therefore 2,876,800 options were earned by Mr. Mathews as of that date. From December 31, 2012
to the filing date of this report, Aspen Group raised an additional $565,000. As of the filing date of this report, all 2,900,000 options had
been earned. The options vest in equal increments on September 4, 2013, 2014, 2015 and 2016.
(3) The options vest in three equal increments on March 20, 2013, 2014 and 2015.
Equity Compensation Plan Information
Immediately following the closing of the Reverse Merger, our Board adopted the 2012 Equity Incentive Plan, or the Plan, which
provided for 2,500,000 shares to be granted under the Plan. As of September 28, 2012, our Board increased the Plan to 5,600,000 shares
and on January 16, 2013, the Board further increased the Plan to 8,000,000 shares.
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The exercise price of options or stock appreciation rights granted under the Plan shall not be less than the fair market value of the
underlying common stock at the time of grant. In the case of incentive stock options, the exercise price may not be less than 110% of the fair
market value in the case of 10% shareholders. Options and stock appreciation rights granted under the Plan shall expire no later than 10 years
after the date of grant. The total number of shares with respect to which options or stock awards may be granted under the Plan the purchase
price per share, if applicable, shall be adjusted for any increase or decrease in the number of issued shares resulting from a recapitalization,
reorganization, merger, consolidation, exchange of shares, stock dividend, stock split, reverse stock split, or other subdivision or consolidation
of shares.
Our Board may from time to time may alter, amend, suspend, or discontinue the Plan with respect to any shares as to which awards
of stock rights have not been granted. However no rights granted with respect to any awards under the Plan before the amendment or
alteration shall be impaired by any such amendment, except with the written consent of the grantee.
Under the terms of the Plan, our Board may also grant awards which will be subject to vesting under certain conditions. The vesting
may be time-based or based upon meeting performance standards, or both. Recipients of restricted stock awards will realize ordinary income at
the time of vesting equal to the fair market value of the shares. We will realize a corresponding compensation deduction. Upon the exercise of
stock options or stock appreciation rights, the holder will have a basis in the shares acquired equal to any amount paid on exercise plus the
amount of any ordinary income recognized by the holder. Upon sale of the shares, the holder will have a capital gain or loss equal to the sale
proceeds minus his or her basis in the shares.
The Plan and our standard Stock Option Agreement provide for “clawback” provisions, which enable our Board to cancel options
and recover past profits if the person is dismissed for cause or commits certain acts which harm us.
Equity Compensation Plan Information
The following chart reflects the number of securities granted and the weighted average exercise price for our compensation plans as
of December 31, 2012.
Number of
securities to be
issued
upon exercise
of
outstanding
options,
warrants and
rights
(a) (1)
Weighted-
average exercise
price of
outstanding
options,
warrants
and rights
(b)
Number of
securities
remaining
available for
future issuance
under
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
5,600,000 $
1,291,167 $
0.35
0.35
0
N/A
6,891,167
Name Of Plan
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
2012 Equity Incentive Plan (1)
Non-Plan Options (2)
Total
———————
(1) Represents options issued under the Plan. Includes 5,176,800 options granted to directors and executive officers.
(2) Represents options issued outside of the Plan. All of these options were granted to directors and executive officers. In January 2013,
the non-plan options were converted into Plan options.
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Director Compensation
We do not pay cash compensation to our directors for service on our Board and our employees do not receive compensation for
serving as members of our Board. Directors are reimbursed for reasonable expenses incurred in attending meetings and carrying out duties as
board and committee members. Under the Plan, our non-employee directors receive grants of stock options as compensation for their services
on our Board, as described above. Because we do not pay compensation to employee directors, Mr. Michael Mathews was not compensated
for his service as a director and is omitted from the following table.
Director Compensation for 2012
Name
Michael D’Anton (2)
James Jensen (2)
David Pasi (2)
Sanford Rich (3)
John Scheibelhoffer (2)
Paul Schneier (2)
Option
Awards
($) (1)
Total
($)
35,000
35,000
35,000
35,000
35,000
35,000
35,000
35,000
35,000
35,000
35,000
35,000
(1) The amounts in this column represent the fair value of the award as of the grant date as computed in accordance with FASB
ASC Topic 718 and the recently revised SEC disclosure rules. These amounts represent awards that are paid in options to purchase shares of
our common stock and do not reflect the actual amounts that may be realized by the directors. All of the options in this table are exercisable at
$0.35 per share.
(2) Of these options, one-third vested immediately and the remaining vest in equal increments on May 20, 2013 and 2014,
subject to continued service as a director on each applicable vesting date.
(3) These options vest in equal increments on March 15, 2013, 2014 and 2015, subject to continued service as a director on
each applicable vesting date.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth the number of shares of Aspen Group’s common stock beneficially owned as of March 12, 2013 by
(i) those persons known by Aspen Group to be owners of more than 5% of its common stock, (ii) each director (iii) the Named Executive
Officers (as disclosed in the Summary Compensation Table), and (iv) Aspen Group’s executive officers and directors as a group. Unless
otherwise specified in the notes to this table, the address for each person is: c/o Aspen Group, Inc. 224 West 30th Street, Suite 604 New
York, New York 10001.
Title of Class
Named Executive Officers:
Common Stock
Common Stock
Common Stock
Directors:
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
5% Shareholders:
Common Stock
________
* Less than 1%.
Beneficial
Owner
Amount of
Beneficial
Ownership (1)
Percent
Beneficially
Owned (1)
Michael Mathews (2)
David Garrity (3)
Brad Powers (4)
Michael D’Anton (5)
James Jensen (6)
David Pasi (7)
Sanford Rich (7)
John Scheibelhoffer (8)
Paul Schneier (9)
All directors and executive officers as a group (10 persons)
(10)
4,497,837
550,609
989,106
2,213,565
705,309
350,527
59,583
2,165,471
918,333
7.8%
1.0%
1.8 %
4.0%
1.3%
*
*
3.9%
1.7%
11,705,370
20.0%
Higher Education Management Group, Inc. (11)(12)
5,177,315
9.3%
(1) Applicable percentages are based on 55,453,719 shares outstanding as of March 14, 2013 adjusted as required by rules of the
SEC. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to
securities. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days whether upon the
exercise of options, warrants or conversion of notes. Unless otherwise indicated in the footnotes to this table, Aspen Group believes that each
of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as
beneficially owned by them. This table does not include any unvested stock options except for those vesting within 60 days.
(2) Mr. Mathews is our Chairman and Chief Executive Officer. Includes: (i) 300,000 shares issuable upon conversion of a $300,000
Note, (ii) 857,143 shares issuable upon the conversion of a second $300,000 Note, (iii) 117,943 shares pledged as collateral for a receivable
and (iv) 722,244 vested stock options.
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(3) Mr. Garrity is our Chief Financial Officer. Includes: (i) 369,341 vested stock options and (ii) 25,000 shares underlying warrants.
(4) Mr. Powers is our former Chief Marketing Officer. Includes 489,106 vested stock options.
(5) Dr. D’Anton is a director. Includes 113,358 shares of common stock and 51,429 shares underlying warrants held as custodian for
the benefit of Dr. D’Anton’s children. Also includes 96,190 vested stock options.
(6) Mr. Jenson is a director. Includes (i) 150,000 shares underlying warrants and (ii) 33,333 vested stock options.
(7) A director. Includes 33,333 vested stock options.
(8) Dr. Scheibelhoffer is a director. Includes 128,121 shares of common stock and 51,429 shares underlying warrants held as
custodian for the benefit of Dr. Scheibelhoffer’s children. Also includes 33,333 vested stock options.
(9) Mr. Schneier is a director. Includes (i) 50,000 shares underlying warrants and (ii) 33,333 vested stock options.
(10) In accordance with SEC rules, includes securities held by executive officers who are not Named Executive Officers.
(11) Higher Education Management Group, Inc., or HEMG, is an entity controlled by Aspen’s former Chairman, Patrick Spada. A total
of 772,793 shares of Aspen Group common stock are pledged to Aspen to secure payment of $772,793 originally due in December 2013, and
now due in 2014. The shares not pledged to Aspen are subject to a lien which is further described under Item 13 below.
(12) At inception, Aspen issued all of its 10 million shares of authorized common stock to HEMG. In order to raise money over a five-
year period, Aspen sold shares and HEMG relinquished and returned to Aspen’s treasury the number of shares Aspen sold. Due to some
clerical errors, 120,500 shares owned by HEMG were not cancelled by Mr. Spada’s personal assistant. Due to this pattern, Aspen does not
believe that it sold shares improperly. In support of this, HEMG agreed not to sell 120,500 shares pending resolutions in connection with the
April Agreement (described on page 61). Therefore, Aspen Group does not believe that it has any exposure to liability in these
manners. Aspen Group is relying on its transfer records for information concerning HEMG’s beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
During 2010-2011, Aspen entered into numerous transactions with its then Chairman, Mr. Patrick Spada, and HEMG, a
corporation he controlled. These transactions also occurred prior to 2010. In connection with the audit of Aspen’s financial statements for
2010-2011, Aspen discovered in November 2011 that HEMG had borrowed $2,195,084 from it from 2005 to 2010 without Board
authority. In connection with this loan, three of Aspen’s directors pledged 2,209,960 shares of common stock to secure payment of this
loan receivable. The directors are Mr. Michael Mathews, our Chairman and Chief Executive Officer, and Drs. Michael D’Anton and John
Scheibelhoffer. Aspen believes his claim is baseless and utterly without merit. On August 16, 2012, following a series of discussions with
the Staff of the SEC, Aspen Group determined that they should have expensed these amounts rather than report them as a secured
receivable. In connection with this consolidated financial statement restatement, the disinterested directors concluded that it would be
fundamentally unfair to retain the pledged shares due because the directors in pledging shares understood that the only risk they were taking
involved either an unsuccessful suit to collect the receivable or the inability to collect any judgment. Accordingly, the Board concluded that
the Pledge Agreement was null and void and directed that the shares be returned to each of the three directors. The three interested directors
abstained on the matter.
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Previously on September 16, 2011, Aspen, HEMG, and Mr. Spada entered into a series of agreements. In essence, Mr. Spada gave
up substantial control he retained including the power to determine when, if ever, Aspen would go public; in exchange he received substantial
benefits from Aspen which are described below.
In 2008, HEMG purchased video courses and program rights from Aspen for $1,055,000. The balance due Aspen on September
16, 2011 was $772,793. Under one agreement, HEMG pledged 772,793 shares of Series C Preferred Stock, or Series C, which converted to
654,850 shares of Aspen Group’ common stock upon the closing of the Reverse Merger to secure payment of this $772,793. Due to the
approximate 0.847 conversion ratio of the Series C into common stock, the shares of Series C pledged by HEMG were not enough to fully
secure the $772,793. In order to avoid a portion of this loan from being partially written-off, on March 8, 2012, Mr. Mathews pledged an
additional 117,943 shares as collateral for the repayment of the this obligation. Aspen’s Board never authorized entry into the 2008
agreements. As a result, Aspen’s Board accelerated the due date and declared it immediately due and payable. In connection with the April
Agreement (described on page 61), Aspen agreed to extend the due date to September 30, 2014 and waived any default which had previously
arisen.
On September 16, 2011, Aspen exchanged general releases with Mr. Spada/HEMG, and Mr. Spada entered into a modified non-
compete agreement where he was permitted to compete with Aspen except with respect to three corporate customers for whom Aspen has an
existing commercial relationship with. He also agreed to a two-year confidentiality provision and agreed not to solicit employees for nine
months after expiration of the Consulting Agreement. Finally, Aspen entered into an Indemnification Agreement with HEMG on September
16, 2011 agreeing to indemnify it from liability for its actions to the fullest extent permitted by law. The Indemnification Agreement is similar
to the form we provide to our directors and executive officers which is a standard form of corporate indemnification agreement. The
Indemnification Agreement is attached as Exhibit 10.13. Aspen’s Second Amended and Restated Certificate of Incorporation contains a
provision which precludes indemnification of expenses from any litigation between Aspen and any officer or director.
Upon discovering the unauthorized borrowings described above, Aspen gave notice of termination of the Consulting Agreement. The
undisclosed loan from Dr. Michael D’Anton described above would have also served as cause to terminate the Consulting Agreement.
Additionally, in connection with the HEMG Agreement, Aspen repaid a loan owed to Mr. Steve Karl, a former employee of Aspen,
by Mr. Spada of approximately $16,000. Aspen also agreed to pay Mr. Karl severance of $75,000 (six months base pay). Additionally,
Aspen agreed to pay Mr. Karl’s wife and previously the bookkeeper of Aspen $32,500 (six months base pay) and paid a former bookkeeping
consultant $6,000. When Aspen gave notice of termination of the Consulting Agreement to Mr. Spada, it also gave notice to the Karls that it
was terminating its severance obligations (approximately $71,000), given the fact that these employees were responsible for keeping Aspen’s
books and records during the timeframes of the unauthorized Spada borrowings. The Karls responded that they do not agree with Aspen
terminating their severance payments. They have not filed suit against Aspen.
The 4,425,522 shares of Aspen Group’s common stock which HEMG holds that are not pledged to Aspen are subject to a Lock-
Up/Leak-Out Agreement which provides that (until March 13, 2014, HEMG and Spada, collectively, are, in any given week, allowed to sell,
transfer or otherwise dispose of up to 5% of the total trading volume for Aspen Group’s common stock for the prior 10 trading days not
including any days in the week of sale. The current directors of Aspen Group also signed Lock-Up/Leak-Out Agreements at the same terms
as the HEMG Lock-Up/Leak-Out Agreement. Recently Aspen Group was given notice by a creditor that the creditor has a lien for over $1
million owed by HEMG and Spada, which requires that any proceeds of future sales must be used to first satisfy the lien.
Although Mr. Spada is believed to have devoted his full-time services to Aspen, there is no evidence he ever received any salary. For
2010 and 2011, Aspen paid $655,191 of personal expenses on behalf of Mr. Spada. Aspen issued to Mr. Spada and HEMG two 1099s in
relation to 2011 for $119,800 and $320,935, respectively. No 1099s were issued to HEMG or Mr. Spada prior to 2011, and the difference
was added to the loan receivable. In 2012, Aspen Group issued Mr. Spada an amended 1099 for 2011 which included the full amount of the
borrowed funds.
On September 16, 2011, Mr. Spada sold 3,769,150 shares of Series C (equivalent to 3,193,906 shares of common stock of Aspen
Group) for $1,000,000 or approximately $0.265 per share (or the equivalent of $0.313 per share of Aspen Group’s common stock). Mr.
Mathews was one of the purchasers; other purchasers included Mr. David Garrity, Aspen’s Chief Financial Officer, and Michael D’Anton,
MD, Mr. C. James Jensen and John Scheibelhoffer MD who are directors. On September 21, 2011, Aspen lent $238,210 to Mr. Mathews to
allow him to acquire Series C from HEMG. The loan was for a nine month period with 3% per annum interest and was guaranteed by Mr.
Mathews’ wife and secured by a pledge of 40,000 shares of interclick, inc. common stock owned by Mr. Mathews. Mr. Mathews repaid the
loan in December 2011. In December 2011, Aspen lent Mr. Brad Powers, our former Chief Marketing Officer, $150,000 in exchange for a
promissory note bearing 3% per annum interest due September 14, 2012. As collateral, the note was secured by 500,000 shares of Aspen’s
common stock. The loan was repaid in February 2012.
On August 14, 2012, Mr. Mathews loaned Aspen Group $300,000 in exchange for a convertible demand note bearing interest at 5%
per annum. The note is convertible at $0.35 per share, and the due date was extended until August 31, 2014. In March 2012, Mr. Mathews
loaned Aspen $300,000 in exchange for a convertible note bearing interest at 0.19% per annum. The note is convertible at $1.00 per share,
and the due date has been extended to August 31, 2014.
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During 2009, Aspen received a loan of $50,000 from the brother of Mr. Spada, the former Chairman. During 2011 and 2010, the
loans were non-interest bearing demand loans. In February 2012, the lender agreed to convert the loan into a two-year convertible note
payable convertible at $1.00 per share.
In May 2011, the following investments in Aspen’s Series A or Series A Preferred Stock offering were made directly or indirectly by
our officers and/or directors:
● David Pasi invested $30,000 for 31,500 shares of Series A.
● Sanford Rich, who was not affiliated with Aspen at the time, invested $25,000 for 26,250 shares of Series A.
● C. James Jensen invested $50,000 for 52,500 shares of Series A.
● Michael Mathews invested $150,000 for 157,500 shares of Series A.
● David Garrity, who was not affiliated with Aspen at the time, invested $25,000 for 26,250 shares of Series A.
● In May 2011, the following investments in Aspen’s Series B Preferred Stock, or Series B, offering were made directly or indirectly by
officers and/or directors:
● Michael Mathews invested $50,000 for 52,631 shares of Series B.
● John Scheibelhoffer invested $31,500 for 33,157 shares of Series B.
● Michael D’Anton invested $7,500 for 7,894 shares of Series B.
● In September 2011, the following investments in Series C were made directly or indirectly by officers and/or directors:
● John Scheibelhoffer invested $50,000 for 188,457 shares of Series C.
● Michael D’Anton invested $50,000 for 188,457 shares of Series C.
● C. James Jensen invested $53,062 for 200,000 shares of Series C.
● David E. Pasi invested $50,000 for 188,457 shares of Series C.
● David Garrity invested $25,053 for 94,430 shares of Series C.
● Michael Mathews invested $238,209.94 for 897,848 shares of Series C.
● Gerald Williams invested $25,000 for 94,229 shares of Series C.
● The Series C shares were sold by HEMG, not Aspen.
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On April 10, 2012, HEMG, Spada, Aspen Group and one other person entered into an Agreement, which we refer to as the April
Agreement, under which HEMG sold 400,000 shares of common stock of Aspen Group for $200,000 to individuals who were not executive
officers or directors of Aspen Group. In connection with the April Agreement, Aspen Group guaranteed that it would purchase 600,000
shares at $0.50 per share within 90 days of the April Agreement and agreed to use its best efforts to purchase an additional 1,400,000 shares
of common stock at $0.50 per shares within 180 days from the date of the April Agreement. A group of predominately existing shareholders
purchased 336,000 shares of common stock at $0.50 per share and Aspen Group purchased 264,000 shares at $0.50 per share. Aspen Group
purchased the shares after the 90 day period had expired; Spada cashed the check without reserving his rights or protesting at the late payment.
We have been advised by counsel that this means that the agreement of HEMG and Spada not to sue us is binding. See Item 3. “Legal
Proceedings.”
No additional shares were purchased at that time because Aspen Group could not sell its own common stock at a price that high. In
December 2012, Aspen Group purchased 200,000 of HEMG's shares for $0.35 per share. Provided that HEMG and Mr. Spada meet their
obligations under the April Agreement, Aspen Group agreed to allow HEMG and Mr. Spada to privately sell up to 500,000 shares privately
which are subject to the lock-up agreement described above provided that the purchaser agreed to be bound by the terms of the lock-
up. Additionally, under the April Agreement, HEMG and Mr. Spada agreed not to commence any lawsuit, or cooperate in any lawsuit against
us, except in an action, claim or lawsuit which is brought against HEMG or Mr. Spada by us in which case HEMG and Mr. Spada may assert
any counterclaim or cross-claim against Aspen. See Item 3. “Legal Proceedings” above for a description of a lawsuit brought by Mr. Spada
and HEMG against Aspen Group. Additionally, Aspen agreed to extend the due date on the $772,793 receivable to September 30, 2014.
A number of years ago Dr. Michael D’Anton lent Aspen $25,000 of which $22,000 was owed at September 30, 2012. The loan
was not disclosed on Aspen’s balance sheet. In November 2012, Dr. D’Anton cancelled Aspen’s obligation in exchange for 62,857 five-year
vested options exercisable at $0.35 per share.
Additionally, directors and an executive officer have purchased securities in Aspen Group’s private placement offerings on the same
terms as other investors.
See page 50 for a discussion of director independence.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Our Audit Committee reviews and approves audit and permissible non-audit services performed by our independent registered public
accounting firm, as well as the fees charged for such services. In its review of non-audit service and its appointment of Salberg & Company,
P.A., or Salberg, as our independent registered public accounting firm, the Audit Committee considered whether the provision of such
services is compatible with maintaining independence. Our Audit Committee determined that the rendering of non-audit services by Salberg,
if any, is compatible with maintaining the independence of Salberg. All of the services provided and fees charged by Salberg in fiscal 2012
and 2011 were approved by the Audit Committee.
The following table shows the fees paid to Salberg for the fiscal years ended December 31, 2012 and 2011.
2012
2011
Audit Fees (1)
Audit Related Fees (2)
Tax Fees
All Other Fees
Total
———————
(1) Audit fees – these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements.
86,000 $
135,000 $
0 $
0 $
221,000 $
113,000
0
0
0
113,000
$
$
$
$
$
(2) Audit related fees – these fees relate primarily to the auditors’ review of our registration statements, audits required for DOE purposes,
other audits including audits of companies we may acquire and audit related consulting.
61
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed as part of the report.
PART IV
(1) Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial
statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.
(2) Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information
is contained in the consolidated financial statements or notes included in this report.
(3) Exhibits. See the Exhibit Index below.
62
Back to Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 18, 2013
Aspen Group, Inc.
By: /s/ Michael Mathews
Michael Mathews
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Michael Mathews
Michael Mathews
/s/ David Garrity
David Garrity
/s/ Dr. Michael D’Anton
Dr. Michael D’Anton
/s/ C. James Jensen
C. James Jensen
/s/ David E. Pasi
David E. Pasi
/s/ Sanford Rich
Sanford Rich
/s/ Dr. John Scheibelhoffer
Dr. John Scheibelhoffer
/s/ Paul Schneier
Paul Schneier
Principal Executive Officer and Director
March 18, 2013
Chief Financial Officer
(Principal Financial Officer)
Director
Director
Director
Director
Director
Director
63
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
Aspen Group, Inc. and Subsidiaries Index to Consolidated Financial Statements
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the years ended December 31, 2012
and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of:
Aspen Group, Inc.
We have audited the accompanying consolidated balance sheets of Aspen Group, Inc. and Subsidiaries as of December 31, 2012 and 2011, and
the related consolidated statements of operations, changes in stockholders’ equity (deficiency) and cash flows for each of the two years in the
period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Aspen Group, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each
of the two years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has a net loss allocable to common stockholders and net cash used in
operating activities in 2012 of $6,048,113 and $4,403,361, respectively, and has an accumulated deficit of $11,337,104 as of December 31, 2012.
These matters raise substantial doubt about the Company's ability to continue as a going concern. Management’s Plan in regards to these matters
is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Salberg & Company, P.A.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
March 18, 2013
2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328
Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com • info@salbergco.com
Member National Association of Certified Valuation Analysts • Registered with the PCAOB
Member CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality
F-2
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $204,580 and $47,595, respectively
Accounts receivable, secured - related party
Note receivable from officer, secured - related party
Prepaid expenses
Other current assets
Total current assets
Property and equipment:
Call center equipment
Computer and office equipment
Furniture and fixtures
Library (online)
Software
Vehicle
Less accumulated depreciation and amortization
Total property and equipment, net
Courseware, net
Accounts receivable, secured - related party, net of allowance of $502,315 and $0, respectively
Other assets
December 31,
2012
December 31,
2011
$
$
644,988
264,992
561,697
-
-
192,533
72,438
1,736,648
121,313
45,718
11,336
100,000
1,388,824
-
1,667,191
(455,871)
1,211,320
253,571
270,478
25,181
766,602
-
847,234
772,793
150,000
103,268
210
2,640,107
121,313
38,577
-
100,000
927,455
39,736
1,227,081
(229,972)
997,109
369,831
-
6,559
Total assets
$
3,497,198
$
4,013,606
Liabilities and Stockholders’ Equity (Deficiency)
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Notes payable, current portion
Loan payable to stockholder
Deferred rent, current portion
Other current liabilities
Total current liabilities
Line of credit
Loans payable (includes $50,000 to related parties)
Convertible notes payable (includes $650,000 to related parties)
Notes payable
Deferred rent
Total liabilities
Commitments and contingencies - See Note 10
Temporary equity:
Series A preferred stock, $0.001 par value; 850,500 shares designated,
none and 850,395 shares issued and outstanding, respectively
Series D preferred stock, $0.001 par value; 3,700,000 shares designated,
none and 1,176,750 shares issued and outstanding, respectively
(liquidation value of $1,176,750)
Series E preferred stock, $0.001 par value; 2,000,000 shares designated,
none and 1,700,000 shares issued and outstanding, respectively
(liquidation value of $1,700,000)
Total temporary equity
Stockholders’ equity (deficiency):
Preferred stock, $0.001 par value; 20,000,000 shares authorized
Series C preferred stock, $0.001 par value; 11,411,400 shares designated,
none and 11,307,450 shares issued and outstanding, respectively
(liquidation value of $11,307)
$
$
216,974
261,307
1,076,397
-
491
6,257
69,000
1,630,426
250,000
-
800,000
-
15,017
2,695,443
1,094,029
167,528
835,694
6,383
-
4,291
-
2,107,925
233,215
200,000
-
8,768
21,274
2,571,182
-
-
-
-
-
809,900
1,109,268
1,550,817
3,469,985
11,307
(liquidation value of $11,307)
Series B preferred stock, $0.001 par value; 368,421 shares designated,
none and 368,411 shares issued and outstanding, respectively
Common stock, $0.001 par value; 60,000,000 shares authorized,
55,243,719 issued and 55,043,719 outstanding at December 31, 2012 and
11,837,930 issued and outstanding at December 31, 2011
Additional paid-in capital
Treasury stock (200,000 shares)
Accumulated deficit
Total stockholders’ equity (deficiency)
-
-
11,307
368
55,244
12,153,615
(70,000)
(11,337,104)
801,755
11,838
3,275,296
-
(5,326,370)
(2,027,561)
Total liabilities and stockholders’ equity (deficiency)
$
3,497,198
$
4,013,606
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues
Costs and expenses:
Instructional costs and services
Marketing and promotional
General and administrative
Receivable collateral valuation reserve
Depreciation and amortization
Total costs and expenses
Operating loss
Other income (expense):
Interest income
Interest expense
Gain on disposal of property and equipment
Loss due to unauthorized borrowing
Total other expense
Loss before income taxes
Income tax expense (benefit)
Net loss
Cumulative preferred stock dividends
Net loss allocable to common stockholders
Net loss per share allocable to common stockholders:
Basic and diluted
Weighted average number of common shares outstanding:
Basic and diluted
For the
For the
Year Ended Year Ended
December 31,
2012
December 31,
2011
$
5,017,213
$
4,477,931
2,926,837
1,442,128
5,404,326
502,315
397,923
10,673,529
2,200,034
515,362
3,593,956
-
264,082
6,573,434
(5,656,316)
(2,095,503)
4,592
(364,889)
5,879
-
(354,418)
2,656
(27,850)
-
(14,876)
(40,070)
(6,010,734)
(2,135,573)
-
-
(6,010,734)
(2,135,573)
(37,379)
(87,326)
$ (6,048,113) $ (2,222,899)
$
(0.17) $
(0.14)
35,316,681
15,377,413
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
Preferred Stock
Additional
Series B
Shares
Amount
Series C
Shares
Amount
Common Stock
Shares
Amount
Paid-In
Capital
Treasury Accumulated
Stock
Deficit
Total
Stockholders'
Equity
(Deficiency)
- $
-
-
-
-
-
368,411
Balance at
December 31,
2010
Rescission of
common shares
Common
shares issued as
part of merger
Treasury shares
acquired for
cash
Conversion of
convertible
notes into
Series B
preferred shares 368,411
Conversion of
common shares
into Series C
preferred shares
Net loss, 2011
Balance at
December 31,
2011
Conversion of
all preferred
shares into
common shares (368,411)
Recapitalization
-
Conversion of
convertible
notes into
common shares
Issuance of
common shares
and warrants
for cash, net of
offering costs
of $446,764
Issuance of
common shares
and warrants
due to price
protection
Issuance of
common shares
and warrants to
settle accrued
interest
Treasury shares
acquired for
cash
Issuance of
common shares
for services
Issuance of
common shares
and warrants
for services
Issuance of
stock options to
-
-
-
-
-
-
-
-
-
-
-
- $
-
- 21,000,000 $ 21,000 $ 3,850,809 $
- $ (3,190,797) $
681,012
-
(170,100)
(170)
(164,830)
-
-
(165,000)
-
- 3,200,000
3,200
-
-
-
3,200
-
-
(884,520)
(885)
(760,315)
-
-
(761,200)
368
-
-
-
-
349,632
-
-
350,000
- 11,307,450 11,307 (11,307,450) (11,307)
-
-
-
-
-
-
-
-
-
-
-
(2,135,573) (2,135,573)
368 11,307,450 11,307 11,837,930 11,838 3,275,296
-
(5,326,370) (2,027,561)
(368) (11,307,450) (11,307) 13,677,274 13,677 3,467,983
(30,629)
- 9,760,000
9,760
-
-
-
-
- 3,469,985
(20,869)
-
-
-
- 5,293,152
5,293 1,770,532
-
- 1,775,825
-
-
- 9,920,000
9,920 3,015,316
-
- 3,025,236
-
-
- 4,516,917
4,517
(4,517)
-
-
-
-
-
-
-
-
202,446
203
70,451
-
-
70,654
-
-
(264,000)
(264)
(131,736) (70,000)
-
(202,000)
-
-
200,000
200
69,800
-
-
70,000
-
-
-
100,000
100
42,900
-
-
43,000
stock options to
officers to settle
accrued payroll
Issuance of
stock options to
officers to settle
note payable
Stock-based
compensation
Net loss, 2012
Balance at
December 31,
2012
-
-
-
-
-
-
238,562
-
-
238,562
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
22,000
-
-
22,000
347,657
-
-
-
-
347,657
(6,010,734) (6,010,734)
- $
-
- $
- 55,243,719 $ 55,244 $12,153,615 $(70,000) $(11,337,104) $
801,755
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense
Receivable collateral valuation reserve
Amortization of debt issuance costs
Gain on disposal of property and equipment
Depreciation and amortization
Loss on settlement of accrued interest
Issuance of convertible notes in exchange for services rendered
Stock-based compensation
Common shares and warrants issued for services rendered
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable
Accounts receivable, secured - related party
Prepaid expenses
Other current assets
Other assets
Accounts payable
Accrued expenses
Deferred rent
Deferred revenue
Other current liabilities
Net cash used in operating activities
Cash flows from investing activities:
Cash acquired as part of merger
Purchases of property and equipment
Purchases of courseware
Increase in restricted cash
Advances to officer for note receivable
Proceeds received from officer loan repayments
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from (repayments on) line of credit, net
Proceeds from issuance of common shares and warrants, net
Principal payments on notes payable
Proceeds received from issuance of convertible notes and warrants
Proceeds from related party for convertible notes
Disbursements for debt issuance costs
Proceeds from issuance of Series A, D and E preferred stock
Payments for stockholder rescissions
Proceeds from note payable
Disbursements to purchase treasury shares
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
For the
For the
Year Ended Year Ended
December 31,
2012
December 31,
2011
$ (6,010,734) $ (2,135,573)
302,952
502,315
266,473
(5,879)
397,923
3,339
38,175
347,657
113,000
21,200
-
-
-
264,082
-
22,000
-
-
(17,415)
-
(89,055)
(72,438)
(18,622)
(865,405)
398,941
(4,291)
240,703
69,000
(4,403,361)
196,229
7,376
(97,474)
(210)
-
780,703
(98,588)
(2,324)
(54,510)
-
(1,097,089)
337
(479,846)
(25,300)
(264,992)
-
150,000
(619,801)
3,200
(1,060,887)
(54,090)
-
(388,210)
238,210
(1,261,777)
16,785
3,025,236
-
1,706,000
600,000
(266,473)
-
-
22,000
(202,000)
4,901,548
(10,284)
-
(30,871)
255,000
73,000
-
3,469,985
(165,000)
-
(761,200)
2,830,630
(121,614)
471,764
766,602
294,838
Cash and cash equivalents at end of year
$
644,988
$
766,602
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of non-cash investing and financing activities:
Conversion of all preferred shares into common shares
Conversion of convertible notes payable into common shares
Issuance of stock options to officers to settle accrued payroll
Conversion of loans payable to convertible notes payable
$
$
$
$
$
$
273,718
-
$
$
34,804
-
3,469,985
1,775,825
238,562
200,000
$
$
$
$
-
-
-
-
Issuance of common shares and warrants to settle accrued interest
Issuance of stock options to officers to settle note payable
Liabilities assumed in recapitalization
Settlement of notes payable by disposal of property and equipment
Issuance of convertible notes payable to pay accounts payable
Conversion of convertible notes payable into Preferred Series B shares
$
$
$
$
$
$
70,654
22,000
21,206
15,151
11,650
-
$
$
$
$
$
$
-
-
-
-
-
350,000
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Note 1. Nature of Operations and Going Concern
Overview
Aspen Group, Inc. (together with its subsidiaries, the “Company” or “Aspen”) was founded in Colorado in 1987 as the International School of
Information Management. On September 30, 2004, it was acquired by Higher Education Management Group, Inc. (“HEMG”) and changed its
name to Aspen University Inc. On May 13, 2011, the Company formed a Colorado subsidiary, Aspen University Marketing, LLC, which was
inactive and was formally dissolved on November 20, 2012. On March 13, 2012, the Company was recapitalized in a reverse merger (See Note
12). All references to the Company or Aspen before March 13, 2012 are to Aspen University, Inc.
Aspen’s mission is to become an institution of choice for adult learners by offering cost-effective, comprehensive, and relevant online
education. One of the key differences between Aspen and other publicly-traded, exclusively online, for-profit universities is that approximately
87% of our degree-seeking students (as of December 31, 2012) were enrolled in graduate degree programs (Master or Doctorate degree
program). Since 1993, we have been nationally accredited by the Distance Education and Training Council (“DETC”), a national accrediting
agency recognized by the U.S. Department of Education (the “DOE”).
Merger with Education Growth Corporation
On May 19, 2011, the Company closed an Agreement and Plan of Merger (the “Merger Agreement”) wherein the Company acquired Education
Growth Corporation, Inc. (“EGC”), a privately-held corporation formed in Delaware on January 21, 2011. EGC merged with and into Aspen
University Inc. and Aspen University Inc. was the surviving corporation.
The consideration with respect to the merger with EGC consisted of 3,200,000 common shares of the Company. EGC was not an operating
company and it did not meet the definition of a business for business combination accounting. EGC did possess intellectual property and,
accordingly, the merger was accounted for as an asset acquisition. Since the stockholders of EGC acquired more than a 10% voting interest in
the Company, the asset acquisition was accounted for in accordance with Staff Accounting Bulletin, Topic 5G, “Transfers of Nonmonetary
Assets by Promoters or Shareholders”. Accordingly, the assets acquired in the merger have been recorded at the transferors’ historical cost basis
determined under GAAP. The net purchase price, including acquisition costs paid, was allocated to assets acquired and liabilities assumed as
follows:
Current assets (including cash of $3,200)
Intangible assets
Liabilities assumed
Net purchase price
$
$
3,200
-
-
3,200
Intangible assets acquired include a proprietary database of education-specific media publishers, a database of key words and performance
metrics specific to the internet search channel of the education market, and a proprietary lead database processing architecture.
Going Concern
The Company had a net loss allocable to common stockholders of $6,048,113 and negative cash flows from operations of $4,403,361 for the
year ended December 31, 2012. While management expects operating trends to improve over the course of 2013, the Company’s ability to
continue as a going concern is contingent on securing additional debt or equity financing from outside investors. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
Management plans to continue to implement its business plan and to fund operations by raising additional capital through the issuance of debt
and equity securities. During 2012, the Company raised $5,778,000 in gross funding including: (i) $1,706,000 from the sale of convertible
notes and warrants under the Laidlaw arrangement (See Note 9), (ii) $600,000 from the sale of convertible notes to the Company’s chief
executive officer (the “CEO”) (See Notes 9 and 15), and (iii) $3,472,000 from Units (consisting of common shares and warrants) (See Note
12). Since the beginning of 2013, the Company has received an additional $565,000 in funding from the sale of Units (consisting of common
stock and warrants). To aid the fund-raising process, the Company on March 14, 2013 engaged Laidlaw & Company to raise up to $770,000
through the sale of additional Units.
F-7
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
The consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Aspen Group, Inc. and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial
statements. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include
the allowance for doubtful accounts and other receivables, the valuation of collateral on certain receivables, amortization periods and valuation of
courseware and software development costs, valuation of stock-based compensation and the valuation allowance on deferred tax assets.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Restricted Cash
Restricted cash represents amounts pledged as security for letters of credit for transactions involving Title IV programs.
Consistent with the Higher Education Act, Aspen’s certification to participate in Title IV programs terminated after closing of the reverse merger,
and Aspen applied to DOE to reestablish its eligibility and certification to participate in the Title IV programs. However, in order to avoid
significant disruption in disbursements of Title IV funds, the DOE may temporarily and provisionally certify an institution, like Aspen, that is
seeking approval of a change in ownership under certain circumstances while the DOE reviews the institution’s application. In response to DOE
requests, the Company pledged a $105,865 letter of credit to the DOE on March 27, 2012 and on August 31, 2012, the Company pledged an
additional $158,800 to the letter of credit and extended the due date to December 31, 2013. The Company considers $264,992 (includes accrued
interest of $327) as restricted cash (shown as a current asset as of December 31, 2012) until such letter of credit expires. As of December 31,
2012, the account bears interest of 0.25%.
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities
recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs
(highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market
assumptions. The fair value measurements are classified under the following hierarchy:
● Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;
● Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for
identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets and liabilities; and
● Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.
F-8
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
Accounts receivable consist primarily of amounts due for tuition, technology fees and other fees for students who are in the course of completing
a degree or certificate program. Students generally fund their education through personal funds, grants and/or loans under various DOE Title IV
programs, or tuition assistance from military and corporate employers. Accounts receivable also includes secured amounts presented as non-
current due from the sale of courseware to a former related party.
All students are required to select both a primary and secondary payment option with respect to amounts due to the Company for tuition, fees and
other expenses. The most common payment option for the Company’s students is personal funds or payment made on their behalf by an
employer. In instances where a student selects financial aid as the primary payment option, he or she often selects personal cash as the secondary
option. If a student who has selected financial aid as his or her primary payment option withdraws prior to the end of a course but after the date
that the Company’s institutional refund period has expired, the student will have incurred the obligation to pay the full cost of the course. If the
withdrawal occurs before the date at which the student has earned 100% of his or her financial aid, the Company will have to return all or a
portion of the Title IV funds to the DOE and the student will owe the Company all amounts incurred that are in excess of the amount of financial
aid that the student earned and that the Company is entitled to retain. In this case, the Company must collect the receivable using the student’s
second payment option.
For accounts receivable from students, the Company records an allowance for doubtful accounts for estimated losses resulting from the inability,
failure or refusal of its students to make required payments, which includes the recovery of financial aid funds advanced to a student for amounts
in excess of the student’s cost of tuition and related fees. The Company determines the adequacy of its allowance for doubtful accounts using a
general reserve method based on an analysis of its historical bad debt experience, current economic trends, and the aging of the accounts
receivable and student status. The Company applies reserves to its receivables based upon an estimate of the risk presented by the age of the
receivables and student status. The Company writes off accounts receivable balances at the time the balances are deemed uncollectible. The
Company continues to reflect accounts receivable with an offsetting allowance as long as management believes there is a reasonable possibility of
collection.
For accounts receivable from primary payors other than students, the Company estimates its allowance for doubtful accounts by evaluating
specific accounts where information indicates the customers may have an inability to meet financial obligations, such as bankruptcy proceedings
and receivable amounts outstanding for an extended period beyond contractual terms. In these cases, the Company uses assumptions and
judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce
the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is
received. The amounts calculated are analyzed to determine the total amount of the allowance. The Company may also record a general
allowance as necessary.
Direct write-offs are taken in the period when the Company has exhausted its efforts to collect overdue and unpaid receivables or otherwise
evaluate other circumstances that indicate that the Company should abandon such efforts.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the related assets per the following table.
F-9
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Category
Call center equipment
Computer and office equipment
Furniture and fixtures
Library (online)
Software
Vehicle
Depreciation Term
5 years
5 years
7 years
3 years
5 years
5 years
Costs incurred to develop internal-use software during the preliminary project stage are expensed as incurred. Internal-use software development
costs are capitalized during the application development stage, which is after: (i) the preliminary project stage is completed; and (ii) management
authorizes and commits to funding the project and it is probable the project will be completed and used to perform the function
intended. Capitalization ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial
testing is completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional
functionality. Amortization is provided for on a straight-line basis over the expected useful life of five years of the internal-use software
development costs and related upgrades and enhancements. When existing software is replaced with new software, the unamortized costs of the
old software are expensed when the new software is ready for its intended use.
Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation and amortization are removed and a
gain or loss is recorded in the consolidated statements of operations. Repairs and maintenance costs are expensed in the period incurred.
Courseware
The Company records the costs of courseware in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 350 “Intangibles - Goodwill and Other”.
Generally, costs of courseware are capitalized whereas costs for upgrades and enhancements are expensed as incurred. Courseware is stated at
cost less accumulated amortization. Amortization is provided for on a straight-line basis over the expected useful life of five years.
Long-Lived Assets
The Company assesses potential impairment to its long-lived assets when there is evidence that events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Events and circumstances considered by the Company in determining whether the
carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant
changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or
economic trends, a significant decline in the Company’s stock price for a sustained period of time, and changes in the Company’s business
strategy. An impairment loss is recorded when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The
carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset
exceeds fair value and is recorded as a reduction in the carrying value of the related asset and an expense to operating results.
Leases
The Company enters into various lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease
agreement to determine whether the lease is an operating or capital lease. Leases may contain initial periods of free rent and/or periodic
escalations. When such items are included in a lease agreement, the Company records rent expense on a straight-line basis over the initial term of
a lease. The difference between the rent payment and the straight-line rent expense is recorded as a deferred rent liability. The Company
expenses any additional payments under its operating leases for taxes, insurance or other operating expenses as incurred.
F-10
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Revenue Recognition and Deferred Revenue
Revenues consist primarily of tuition and fees derived from courses taught by the Company online as well as from related educational resources
that the Company provides to its students, such as access to our online materials and learning management system. Tuition revenue is recognized
pro-rata over the applicable period of instruction. The Company maintains an institutional tuition refund policy, which provides for all or a
portion of tuition to be refunded if a student withdraws during stated refund periods. Certain states in which students reside impose separate,
mandatory refund policies, which override the Company’s policy to the extent in conflict. If a student withdraws at a time when a portion or
none of the tuition is refundable, then in accordance with its revenue recognition policy, the Company recognizes as revenue the tuition that was
not refunded. Since the Company recognizes revenue pro-rata over the term of the course and because, under its institutional refund policy, the
amount subject to refund is never greater than the amount of the revenue that has been deferred, under the Company’s accounting policies
revenue is not recognized with respect to amounts that could potentially be refunded. The Company’s educational programs have starting and
ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs is not yet
earned and is therefore deferred. The Company also charges students annual fees for library, technology and other services, which are
recognized over the related service period. Deferred revenue represents the amount of tuition, fees, and other student payments received in excess
of the portion recognized as revenue and it is included in current liabilities in the accompanying consolidated balance sheets. Other revenues may
be recognized as sales occur or services are performed.
The Company enters into certain revenue sharing arrangements with consultants whereby the consultants will develop course content primarily
for technology related courses, recommend, but not select, faculty, lease equipment on behalf of the Company for instructional purposes for the
on-site laboratory portion of distance learning courses and make introductions to corporate and government sponsoring organizations who
provide students for the courses. The Company has evaluated ASC 605-45 "Principal Agent Considerations" and determined that there are
more indicators than not that the Company is the primary obligor in the arrangements since the Company establishes the tuition, interfaces with
the student or sponsoring organization, selects the faculty, is responsible for delivering the course, is responsible for issuing any degrees or
certificates, and is responsible for collecting the tuition and fees. The gross tuition and fees are included in revenues while the revenue sharing
payments are included in instructional costs and services, an operating expense.
Instructional Costs and Services
Instructional costs and services consist primarily of costs related to the administration and delivery of the Company's educational programs. This
expense category includes compensation for faculty and administrative personnel, costs associated with online faculty, technology license costs
and costs associated with other support groups that provide services directly to the students.
Marketing and Promotional Costs
Marketing and promotional costs include compensation of personnel engaged in marketing and recruitment, as well as costs associated with
purchasing leads, producing marketing materials, and advertising. Such costs are generally affected by the cost of advertising media and leads,
the efficiency of the Company's marketing and recruiting efforts, compensation for the Company's enrollment personnel and expenditures on
advertising initiatives for new and existing academic programs. Advertising costs consists primarily of marketing leads and other branding and
promotional activities. Non-direct response advertising activities are expensed as incurred, or the first time the advertising takes place, depending
on the type of advertising activity.
General and Administrative
General and administrative expenses include compensation of employees engaged in corporate management, finance, human resources,
information technology, compliance and other corporate functions. General and administrative expenses also include professional services fees,
bad debt expense related to accounts receivable, financial aid processing costs, non-capitalizable courseware and software costs, travel and
entertainment expenses and facility costs.
Reclassifications
Certain amounts in the accompanying 2011 consolidated financial statements have been reclassified in order to conform to the December 31,
2012 presentation.
On the consolidated balance sheet, software has been reclassified to property and equipment.
On the consolidated statement of operations, bad debt expense, courseware development costs and financial aid processing costs have been
reclassified from instructional costs and services to general and administrative costs. Consulting expense and training and seminars expense have
been reclassified from marketing and promotional costs to general and administrative costs. The following tables show the reclassifications to the
consolidated statements of operations for the year ended December 31, 2011.
F-11
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
For the Year Ended December 31, 2011
Reclassifications
As Previously
Reported
Bad Debt
Expense
Costs and expenses:
Courseware
Consulting Development Processing
Costs
Expense
Training and
Seminars
Expense
Costs
As
Reclassified
Financial
Aid
$ 2,493,341
Instructional costs and
services
Marketing and
promotional
General and administrative 2,634,453
Depreciation and
amortization
Total costs and expenses
264,082
$ 6,573,434
1,181,558
$
(21,200)
$
(236,953) $
(35,154)
$ 2,200,034
21,200
$
(658,832)
658,832
236,953
35,154
$
(7,364)
7,364
515,362
3,593,956
264,082
$ 6,573,434
Income Taxes
The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial
amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be
realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic
recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of
projected future taxable income.
The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax
return. The Company accounts for uncertainty in income taxes using a two-step approach for evaluating tax positions. Step one, recognition,
occurs when the Company concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon
examination. Step two, measurement, is only addressed if the position is more likely than not to be sustained. Under step two, the tax benefit is
measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate
settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For
employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing
model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility,
employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent
the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. For non-employee
stock-based awards, the Company calculates the fair value of the award on the date of grant in the same manner as employee awards, however,
the awards are revalued at the end of each reporting period and the prorata compensation expense is adjusted accordingly until such time the non-
employee award is fully vested, at which time the total compensation recognized to date shall equal the fair value of the stock-based award as
calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based
awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such
amounts are recorded as a cumulative adjustment in the period estimates are revised.
Net Loss Per Share
Net loss per common share is based on the weighted average number of common shares outstanding during each year. Options to purchase
6,972,967 common shares, warrants to purchase 8,112,696 common shares, and $800,000 of convertible debt (convertible into 1,357,143
common shares) were outstanding during the year ended December 31, 2012, but were not included in the computation of diluted loss per share
because the effects would have been anti-dilutive. Warrants to purchase 456,000 common shares were outstanding during the year ended
December 31, 2011, but were not included in the computation of diluted loss per share because the effects would have been anti-dilutive. The
options, warrants and convertible debt are considered to be common stock equivalents and are only included in the calculation of diluted earnings
per common share when their effect is dilutive.
F-12
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
In addition to the above common stock equivalents, the Company had outstanding preferred shares (Series A through E) that were contingently
convertible into common shares upon it becoming an SEC reporting company. There were an aggregate of 15,403,006 preferred shares
contingently convertible into 13,677,274 common shares for the years ended December 31, 2011 that could have been potentially dilutive in the
future. As a result of its merger with Aspen Group, Inc., on March 13, 2012 (the SEC Reporting Date), the Company became subject to SEC
reporting requirements. Accordingly, all of the preferred shares were automatically converted into common shares on that date (See Notes 11 and
12).
Segment Information
The Company operates in one reportable segment as a single educational delivery operation using a core infrastructure that serves the curriculum
and educational delivery needs of its online students regardless of geography. The Company's chief operating decision makers, its CEO and
President, manage the Company's operations as a whole, and no revenue, expense or operating income information is evaluated by the chief
operating decision makers on any component level.
Recent Accounting Pronouncements
In June 2011, the FASB, issued ASU 2011-05, which amends ASC Topic 220, Comprehensive Income, which requires an entity to present the
total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. It eliminates the option to present components of other
comprehensive income as part of the statement of changes in stockholders' equity. The ASU does not change the items which must be reported
in other comprehensive income, how such items are measured or when they must be reclassified to net income. This ASU is effective for interim
and annual periods beginning after December 15, 2011. The Company adopted ASU 2011-05 effective January 1, 2012, and such adoption did
not have a material effect on the Company's financial statements.
In December 2011, the FASB issued ASU 2011-12, which amends ASC Topic 220, Comprehensive Income, to defer certain aspects of ASU
2011-05. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The
Company adopted this guidance, along with ASU 2011-05, on January 1, 2012, and such adoption did not have a material impact on the
Company’s financial statements.
In July 2012, the FASB issued ASU 2012-02, which amends ASC Topic 350 to allow an entity to first assess qualitative factors to determine
whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. An entity would not be
required to determine the fair value of the indefinite-lived intangible unless the entity determines, based on the qualitative assessment, that it is
more likely than not that its fair value is less than the carrying value. ASU 2012-02 is effective for annual and interim impairment tests performed
for fiscal years beginning after September 15, 2012 and early adoption is permitted. The Company is evaluating the impact of this ASU and does
not expect the adoption will have an impact on its consolidated results of operations or financial condition.
We have implemented all new accounting standards that are in effect and that may impact our consolidated financial statements and do not believe
that there are any other new accounting pronouncements that have been issued that might have a material impact on our consolidated financial
position or results of operations.
Note 3. Accounts Receivable
Accounts receivable consisted of the following at December 31, 2012 and 2011:
Accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net
December
31,
2012
December
31,
2011
$ 766,277 $ 894,829
(47,595)
$ 561,697 $ 847,234
(204,580)
Bad debt expense was $302,952 and $21,200 for the years ended December 31, 2012 and 2011, respectively.
See also Note 14 for concentrations of accounts receivable.
F-13
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Note 4. Secured Accounts and Notes Receivable – Related Parties
On September 21, 2011, the Company loaned $238,210 to its CEO in exchange for a promissory note bearing 3% per annum. As collateral, the
note was secured by 40,000 shares of common stock of interclick, Inc. (a publicly-traded company) owned personally by the CEO. The note
along with accrued interest was due and payable on June 21, 2012. For the year ended December 31, 2011, interest income of $1,867 was
recognized. On December 20, 2011, the note along with accrued interest of $1,867 was paid in full (See Note 15).
On December 14, 2011, the Company loaned $150,000 to an officer of the Company in exchange for a promissory note bearing 3% per
annum. As collateral, the note was secured by 500,000 shares of the Company’s common stock owned personally by the officer. The note along
with accrued interest was due and payable on September 14, 2012. During the year ended December 31, 2011, interest income of $210 was
recognized on the note receivable and is included in other current assets. As of December 31, 2011, the balance due on the note receivable was
$150,000, all of which is short-term. During the year ended December 31, 2012, interest income of $594 was recognized on the note
receivable. On February 16, 2012, the note receivable from an officer was repaid along with accrued interest (See Note 15).
On March 30, 2008 and December 1, 2008, the Company sold courseware pursuant to marketing agreements to HEMG, a related party and
principal stockholder of the Company whose president is Mr. Patrick Spada, the former Chairman of the Company, in the amount of $455,000
and $600,000, respectively; UCC filings were filed accordingly. Under the marketing agreements, the receivables are due net 60 months. On
September 16, 2011, HEMG pledged 772,793 Series C preferred shares (automatically converted to 654,850 common shares on March 13,
2012) of the Company as collateral for this account receivable. On March 8, 2012, due to the impending reduction in the value of the collateral as
the result of the Series C conversion ratio and the Company’s inability to engage Mr. Spada in good faith negotiations to increase HEMG’s
pledge, Michael Mathews, the Company’s CEO, pledged 117,943 common shares of the Company, owned personally by him, valued at $1.00
per share based on recent sales of capital stock as additional collateral to the accounts receivable, secured – related party. On March 13, 2012, the
Company deemed the receivables stemming from the sale of courseware curricula to be in default. On April 4, 2012, the Company entered into
an agreement with: (i) an individual, (ii) HEMG, a related party and principal stockholder of the Company whose president is Mr. Patrick Spada,
the former Chairman of the Company and (iii) Mr. Patrick Spada. Under the agreement, (a) the individual purchased and HEMG sold to the
individual 400,000 common shares of the Company at $0.50 per share; (b) the Company guaranteed it would purchase at least 600,000 common
shares of the Company at $0.50 per share within 90 days of the agreement and the Company would use its best efforts to purchase from HEMG
and resell to investors an additional 1,400,000 common shares of the Company at $0.50 per share within 180 days of the agreement; (c) provided
HEMG and Mr. Patrick Spada fulfilled their obligations under (a) and (b) above, the Company shall consent to additional private transfers by
HEMG and/or Mr. Patrick Spada of up to 500,000 common shares of the Company on or before March 13, 2013; (d) HEMG agreed to not sell,
pledge or otherwise transfer 142,500 common shares of the Company pending resolution of a dispute regarding the Company’s claim that
HEMG sold 131,500 common shares of the Company without having enough authorized shares and a stockholder did not receive 11,000
common shares of the Company owed to him as a result of a stock dividend; and (e) the Company waived any default of the accounts receivable,
secured - related party and extend the due date to September 30, 2014. As of September 30, 2012, third party investors purchased 336,000
shares for $168,000 and the Company purchased 264,000 shares for $132,000 per section (b) above. Based on proceeds received on September
28, 2012 under a private placement at $0.35 per unit (consisting of one common share and one-half of a warrant exercisable at $0.50 per share),
the value of the aforementioned collateral decreased. Accordingly, as of December 31, 2012, the Company has recognized an allowance of
$502,315 for this account receivable. As of December 31, 2012 and 2011, the balance of the account receivable, net of allowance, was $270,478
and $772,793 and is shown as accounts receivable, secured – related party, net (See Notes 12 and 15).
F-14
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Note 5. Property and Equipment
Property and equipment consisted of the following at December 31, 2012 and 2011:
Call center
Computer and office equipment
Furniture and fixtures
Library (online)
Software
Vehicle
Accumulated depreciation and amortization
Property and equipment, net
December
31,
2012
December
31,
2011
$ 121,313 $ 121,313
38,577
45,718
-
11,336
100,000
100,000
927,455
1,388,824
39,736
-
1,667,191 1,227,081
(229,972)
$1,211,320 $ 997,109
(455,871)
Depreciation and amortization expense for the years ended December 31, 2012 and 2011 was $256,363 and $85,662,
respectively. Accumulated depreciation amounted to $455,871 and $229,972 as of December 31, 2012 and 2011, respectively.
Amortization expense for software, included in the above amounts, for the years ended December 31, 2012 and 2011 was $226,454 and
$60,290, respectively. Software consisted of the following at December 31, 2012 and 2011:
Software
Accumulated amortization
Software, net
December
31,
2012
December
31,
2011
$1,388,824 $ 927,455
(60,290)
$1,102,080 $ 867,165
(286,744)
The following is a schedule of estimated future amortization expense of software at December 31, 2012:
Year Ending December 31,
2013
2014
2015
2016
2017
Total
$ 277,765
277,765
277,765
217,474
51,311
$1,102,080
Note 6. Courseware
Courseware costs capitalized were $25,300 and $54,090 for the years ended December 31, 2012 and 2011, respectively.
Courseware consisted of the following at December 31, 2012 and 2011:
`
Courseware
Accumulated amortization
Courseware, net
F-15
December 31,
2012
December 31,
2011
$ 2,097,538 $ 2,072,238
(1,843,967) (1,702,407)
369,831
$
253,571 $
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Amortization expense of courseware for the years ended December 31, 2012 and 2011 was $141,560 and $178,420, respectively.
The following is a schedule of estimated future amortization expense of courseware at December 31, 2012:
Year Ending December 31,
2013
2014
2015
2016
2017
Total
$ 120,819
77,757
39,616
12,738
2,641
$ 253,571
Note 7. Accrued Expenses
Accrued expenses consisted of the following at December 31, 2012 and December 31, 2011:
December
31,
2012
December
31,
2011
Accrued compensation
Accrued settlement payable
Other accrued expenses
Accrued expenses
$
50,923 $
-
210,384
33,930
40,000
93,598
$ 261,307 $ 167,528
In October 2009, the Company entered into an agreement with Glen Oaks College (“Glen Oaks”) whereby Glen Oaks would provide technical
training to Aspen students. Under the agreement, the Company received $100,000 from Glen Oaks in order to develop and obtain the necessary
approvals to begin the program. On May 20, 2011, Glen Oaks filed suit against the Company to return the $100,000 when the agreement was
not performed. On June 23, 2011, the Company agreed to settle the matter and paid Glen Oaks $5,000 on that date. On July 22, 2011, the
Company and Glen Oaks entered into a settlement agreement whereby the Company agreed to pay Glen Oaks as follows: (i) $5,000 upon
execution of the settlement agreement and (ii) $10,000 per month for nine consecutive months commencing August 1, 2011. As of December
31, 2011, the remaining settlement payable to Glen Oaks was $40,000. As of December 31, 2012, the settlement had been paid in full and no
further amount was due.
Note 8. Loans Payable
During 2009, the Company received advances aggregating $200,000 from three individuals. Of the total funds received, $50,000 was received
from a related party. From the date the funds were received through the date the loans were converted into convertible promissory notes payable,
the loans were non-interest bearing demand loans and, therefore, no interest expense was recognized or due. As of December 31, 2011, the
entire balance of the loans payable is included in long-term liabilities as the Company, in February 2012, has converted the loans into long-term
convertible notes payable (See Notes 9 and 15).
Note 9. Notes Payable
Notes Payable – Related Party
In June 2009, the Company borrowed an aggregate of $45,000 from an individual, who was an officer of the Company at that time, in exchange
for notes payable bearing interest at 18% per annum. The notes were due in October 2009 and became demand notes at that time. During the
year ended December 31, 2011, interest expense of $2,393 was recognized on the notes. During the year ended December 31, 2011, the
remaining principal balance of $25,000 due on the notes payable was repaid and no further amount is due (See Note 15).
During April 2012, the Company received $22,000 from a director of the Company in exchange for a note payable bearing interest of 10%, due
on demand. On November 21, 2012, the director forgave a $22,000 note receivable from the Company in exchange for 62,857 five-year vested
non-Plan stock options exercisable at $0.35 per share. No gain was recognized as the settlement was between the Company and related
parties. On January 16, 2013, these options were modified to be Plan options (See Notes 12, 15 and 16).
F-16
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Convertible Notes Payable
On March 6, 2011, the Company authorized the issuance of up to $350,000 of convertible notes that were convertible into Series B preferred
shares at $0.95 per share, bearing interest of 6% per annum. The notes were convertible beginning after the closing of the EGC Merger (See
Note 1). As of May 13, 2011, the Company had received an aggregate of $328,000 (of which $73,000 was received from related parties) from
the sale of convertible notes. The Company evaluated the convertible notes and determined that, for the embedded conversion option, there was
no beneficial conversion value to record. In addition, the Company issued an aggregate of $22,000 (of which $16,000 was to related parties) of
convertible notes for services rendered. In May 2011, $350,000 of the convertible notes were converted into 368,411 Series B preferred shares
(See Notes 12 and 15).
As part of the recapitalization that occurred on March 13, 2012, the Company assumed from the public entity an aggregate of $20,000 of
convertible notes bearing interest at 10% per annum. Each note holder had the right to convert all or a portion of the principal amount of the note
into shares of the Company’s common stock at the conversion price of the next equity offering of the Company. The notes meet the criteria of
stock settled debt under ASC 480, “Distinguishing Liabilities from Equity”, and accordingly were presented at their fixed monetary amount of
$20,000. The convertible notes were past due as of the date of assumption and, accordingly, the Company was in default. In April 2012, the
convertible notes payable of $20,000 were converted into 20,000 common shares of the Company and, accordingly, the default was cured (See
Note 12).
On February 25, 2012, February 27, 2012 and February 29, 2012, loans payable to an individual, another individual and a related party (the
brother of Patrick Spada, the former Chairman of the Company), of $100,000, $50,000 and $50,000, respectively, were converted into two-year
convertible promissory notes, bearing interest of 0.19% per annum. Beginning March 31, 2012, the notes are convertible into common shares of
the Company at the rate of $1.00 per share. The Company evaluated the convertible notes and determined that, for the embedded conversion
option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common shares
on the note issue dates. As these loans (now convertible promissory notes) are not due for at least 12 months after the balance sheet, they have
been included in long-term liabilities as of December 31, 2012 (See Notes 8 and 15).
On March 13, 2012, the Company’s CEO loaned the Company $300,000 and received a convertible promissory note due March 31, 2013,
bearing interest at 0.19% per annum. The note is convertible into common shares of the Company at the rate of $1.00 per share upon five days
written notice to the Company. The Company evaluated the convertible note and determined that, for the embedded conversion option, there was
no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common shares on the note issue
date. On September 4, 2012, the maturity date was extended to August 31, 2013. On December 17, 2012, the maturity date was extended to
August 31, 2014. There was no accounting effect for these two modifications (See Note 15).
On February 29, 2012 (the "Effective Date"), the Company retained the investment bank of Laidlaw & Company (UK) Ltd. ("Laidlaw") on an
exclusive basis for the purpose of raising up to $6,000,000 (plus up to an additional $1,200,000 million to cover over-allotments at the option of
Laidlaw) through two successive best-efforts private placements of the Company's securities following the reverse merger. Each Unit in the
Phase One financing consisted of: (i) senior secured convertible notes (the "Convertible Notes"), bearing 10% interest, convertible into the
Company's common shares at the lower of (a) $1.00 or (b) 95% of the per share purchase price of any shares of common stock (or common
stock equivalents) issued on or after the original issue date of the note and (ii) five-year warrant to purchase that number of the Company's
common shares equal to 25% of the number of shares issuable upon conversion of the Convertible Notes. As of June 30, 2012, the Company,
without the assistance of any broker-dealer, raised $150,000 from the sale of 3.0 Units. Laidlaw raised $1,289,527 (net of debt issuance costs of
$266,473) from the sale of 31.12 Units (including Convertible Notes payable and an estimated 389,000 warrants). Mandatory conversion was to
occur on the initial closing of the Phase Two financing, which occurred September 28, 2012. The Convertible Notes (as extended) had a maturity
date of September 30, 2012, carried provisions for price protection and contained registration rights. For the Phase One financing, Laidlaw
received a cash fee of 10% of aggregate funds raised along with a five-year warrant (the "Laidlaw Warrant") equal to 10% of the common stock
reserved for issuance in connection with the Units. Separately, Laidlaw required an activation fee of $25,000. The Phase Two financing
consisted of units offered at $0.35 per unit (consisting of one common share and one-half of a warrant exercisable at $0.50 per share. The
Convertible Notes embedded conversion options did not qualify as derivatives since the conversion shares were not readily convertible to cash
due to an inactive trading market and there was no beneficial conversion value since the conversion price equaled the fair value of the shares. As
a result of proceeds received on September 28, 2012 in the Phase Two financing, all of the $1,706,000 (face value) of Convertible Notes were
automatically converted into 5,130,795 common shares at the contractual rate of $0.3325 per share. Moreover, the warrants issuable upon
conversion of the convertible notes became fixed and determinable and caused to be outstanding 1,282,674 warrants (includes an additional
856,174 warrants due to price protection provisions) to acquire common shares at $0.3325 per share. In addition, 202,334 common shares and
50,591 five-year warrants exercisable at $0.3325 per share were issued to settle $67,276 of accrued interest on the aforementioned Convertible
Notes. Accordingly, a loss of $3,339 was recognized in general and administrative expenses upon settlement (See Note 12).
F-17
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
On May 1, 2012, the Company issued a convertible note payable to a consultant in the amount of $49,825 in exchange for past services rendered,
of which $38,175 pertains to the nine months ended September 30, 2012. The note bore interest at 0.19% per annum, had a maturity date of
September 30, 2012, and was convertible into the Company’s common shares at the lower (a) $1.00 or (b) the per share purchase price of any
shares of common stock (or common stock equivalents) issued on or after the original issue date of the note. The convertible note embedded
conversion options did not qualify as derivatives since the conversion shares were not readily convertible to cash due to an inactive trading
market and there was no beneficial conversion value since the conversion price equaled the fair value of the shares. As a result of the private
placement closing on September 28, 2012, the $49,825 (face value) convertible note was automatically converted into 142,357 common shares at
the contractual rate of $0.35 per share. In addition, 112 common shares were issued to settle $39 of accrued interest on the aforementioned
convertible note. No gain or loss was recognized upon settlement (See Note 12).
On August 14, 2012, the Company’s CEO loaned the Company $300,000 and received a convertible promissory note, payable on demand,
bearing interest at 5% per annum. The note is convertible into common shares of the Company at the rate of $0.35 per share (based on proceeds
received on September 28, 2012 under a private placement at $0.35 per unit). The Company evaluated the convertible notes and determined that,
for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market
value of the common shares on the note issue date. On September 4, 2012, the maturity date was extended to August 31, 2013. On December
17, 2012, the maturity date was extended to August 31, 2014 (See Note 15).
As of December 31, 2012, the convertible notes embedded conversion options were still not accounted for as bifurcated derivatives since the
conversion shares were not readily convertible to cash due to an inactive trading market.
Notes payable consisted of the following at December 31, 2012 and 2011:
December 31,
2012
December 31,
2011
Note payable - related party originating August 14, 2012; no monthly payments required; bearing interest at
5%; [A]
$
300,000
$
Note payable - related party originating March 13, 2012; no monthly payments required; bearing interest at
0.19%; [A]
Note payable - originating February 25, 2012; no monthly payments required; bearing interest at 0.19%;
maturing at February 25, 2014
Note payable - originating February 27, 2012; no monthly payments required; bearing interest at 0.19%;
maturing at February 27, 2014
Note payable - related party originating February 29, 2012; no monthly payments required; bearing interest
at 0.19%; maturing at February 29, 2014
Note payable for vehicle, 72 monthly payments of $618; interest at 8.4% through March 2014
Total
Less: Current maturities (notes payable)
Less: Current maturities (convertible notes payable)
Subtotal
Less: amount due after one year for notes payable
Amount due after one year for convertible notes payable
[A] - effective September 4, 2012, note amended to provide a maturity date of August 31, 2013.
Effective December 17, 2012, notes amended to provide a maturity date of August 31, 2014.
300,000
100,000
50,000
50,000
-
800,000
-
-
800,000
-
800,000
$
F-18
-
-
-
-
-
15,151
15,151
(6,383)
-
8,768
(8,768)
-
$
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Future maturities of notes payable are as follows:
Year Ending December 31,
2013
2014
-
$
800,000
$ 800,000
Note 10. Commitments and Contingencies
Line of Credit
The Company maintains a line of credit with a bank, up to a maximum credit line of $250,000. The line of credit bears interest equal to the prime
rate plus 0.50% (overall interest rate of 3.75% at December 31, 2012). The line of credit requires minimum monthly payments consisting of
interest only. The line of credit is secured by all business assets, inventory, equipment, accounts, general intangibles, chattel paper, documents,
instruments and letter of credit rights of the Company. The line of credit is for an unspecified time until the bank notifies the Company of the
Final Availability Date, at which time payments on the line of credit become the sum of: (a) accrued interest and (b) 1/60th of the unpaid principal
balance immediately following the Final Availability Date, which equates to a five-year payment period. The balance due on the line of credit as
of December 31, 2012 was $250,000. Since the earliest the line of credit is due and payable is over a five year period and the Company believes
that it could obtain a comparable replacement line of credit elsewhere, the entire line of credit is included in long-term liabilities. The unused
amount under the line of credit available to the Company at December 31, 2012 was $0 (See Note 16).
Operating Leases
The Company leases office space for its corporate headquarters in New York, New York on a month-to-month basis with monthly rent payments
of $4,200 per month.
The Company leases office space for its Denver, Colorado location under a seven-year lease agreement commencing September 15, 2008. The
operating lease granted four initial months of free rent and had a base monthly rent of $6,526 commencing January 15, 2009. Thereafter, the
monthly rent escalates 2.5% annually over the base year.
On October 4, 2012, the Company entered into a three-year lease agreement for its call center in Scottsdale, Arizona. The Company occupied
temporary space at this location until moving into the leased space on February 1, 2013, the commencement date of the lease. The lease requires
rent payments of $4,491 per month during months 4 through 12, $4,601 per month during the second year, and $4,710 per month during the
third year.
The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2012:
Year ending December 31,
2013
2014
2015
2016
Total minimum payments required
$ 56,979
141,274
144,550
64,780
$ 407,583
Rent expense was $140,783 and $114,511 for the years ended December 31, 2012 and 2011, respectively.
Employment Agreements
From time to time, the Company enters into employment agreements with certain of its employees. These agreements typically include bonuses,
some of which are performance-based in nature. As of December 31, 2012, the Company had entered into five employment agreements whereby
the Company is obligated to pay an annual performance bonus ranging from 50% to 100% of the employee’s base salary based upon the
achievement of pre-established milestones. Such annual bonuses are to be paid one-half in cash and the remainder in common shares of the
Company. As of December 31, 2012, no performance bonuses have been earned.
F-19
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Consulting Agreement
On September 16, 2011, the Company entered into a two-year consulting agreement with the former Chairman of the Company in which the
Company was obligated to pay $11,667 per month. On September 28, 2011, the Company prepaid 13 months of the consulting agreement, or
$151,667, which was then amortized until December 31, 2011, at which time the consulting agreement was terminated and the remaining
unamortized prepaid expense was recognized immediately as consulting expense. No additional amounts are due under the consulting agreement
(See Note 15).
On October 1, 2012, the Company retained two investor relations firms agreeing to pay one firm $50,000 a year for two years and issuing it
200,000 shares of common stock, having a fair value of $70,000 based on recent sales of Units. The second firm was retained for one year with
a fee of $5,000 per month. The second firm also received 100,000 shares of common stock and 100,000 five-year warrants exercisable at $0.60
per share, having a fair value of $43,000 based on recent sale of Units (See Note 12).
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of
December 31, 2012, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our
operations and there are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an
adverse party or has a material interest adverse to our interest (See Note 16).
Regulatory Matters
The Company’s subsidiary, Aspen University Inc. (“Aspen University”), is subject to extensive regulation by Federal and State governmental
agencies and accrediting bodies. In particular, the Higher Education Act (the “HEA”) and the regulations promulgated thereunder by the DOE
subject Aspen University to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy to participate in the
various types of federal student financial assistance programs authorized under Title IV of the HEA. Aspen University has had provisional
certification to participate in the Title IV programs. That provisional certification imposes certain regulatory restrictions including, but not limited
to, a limit of 1200 student recipients for Title IV funding for the duration of the provisional certification. During 2011, Aspen University’s
provisional certification was scheduled to expire, but Aspen University timely filed its application for recertification with the DOE, which
extended the term of Aspen University’s certification to September 30, 2013. The provisional certification restrictions continue with regard to
Aspen University’s participation in Title IV programs.
To participate in the Title IV programs, an institution must be authorized to offer its programs of instruction by the relevant agencies of the State
in which it is located, and since July 2011, potentially in the States where an institution offers postsecondary education through distance
education. In addition, an institution must be accredited by an accrediting agency recognized by the DOE and certified as eligible by the
DOE. The DOE will certify an institution to participate in the Title IV programs only after the institution has demonstrated compliance with the
HEA and the DOE’s extensive academic, administrative, and financial regulations regarding institutional eligibility and certification. An
institution must also demonstrate its compliance with these requirements to the DOE on an ongoing basis. Aspen University performs periodic
reviews of its compliance with the various applicable regulatory requirements. As Title IV funds received in 2012 represented approximately
18% of the Company's cash revenues, as calculated in accordance with Department of Education guidelines, the loss of Title IV funding would
have a material effect on the Company's future financial performance.
On March 27, 2012 and on August 31, 2012, Aspen University provided the DOE with letters of credit for which the due date was extended to
December 31, 2013. The DOE may impose additional or different terms and conditions in any final provisional program participation agreement
that it may issue (See Note 2 "Restricted Cash").
The HEA requires accrediting agencies to review many aspects of an institution's operations in order to ensure that the education offered is of
sufficiently high quality to achieve satisfactory outcomes and that the institution is complying with accrediting standards. Failure to demonstrate
compliance with accrediting standards may result in the imposition of probation, the requirements to provide periodic reports, the loss of
accreditation or other penalties if deficiencies are not remediated.
F-20
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Because Aspen University operates in a highly regulated industry, it may be subject from time to time to audits, investigations, claims of
noncompliance or lawsuits by governmental agencies or third parties, which allege statutory violations, regulatory infractions or common law
causes of action.
Return of Title IV Funds
An institution participating in Title IV programs must correctly calculate the amount of unearned Title IV program funds that have been disbursed
to students who withdraw from their educational programs before completion and must return those unearned funds in a timely manner, generally
within 45 days of the date the school determines that the student has withdrawn. Under Department regulations, failure to make timely returns of
Title IV program funds for 5% or more of students sampled on the institution's annual compliance audit in either of its two most recently
completed fiscal years can result in the institution having to post a letter of credit in an amount equal to 25% of its required Title IV returns during
its most recently completed fiscal year. If unearned funds are not properly calculated and returned in a timely manner, an institution is also
subject to monetary liabilities or an action to impose a fine or to limit, suspend or terminate its participation in Title IV programs.
Delaware Approval to Confer Degrees
Aspen University is a Delaware corporation. Delaware law requires an institution to obtain approval from the Delaware Department of
Education (“Delaware DOE”) before it may incorporate with the power to confer degrees. On July 3, 2012, Aspen University received notice
from the Delaware DOE that it is granted provisional approval status effective until June 30, 2015. Aspen University is authorized by the
Colorado Commission on Education to operate in Colorado as a degree granting institution.
Unauthorized Borrowings
During 2005 through 2011, the Company advanced funds without board authority to both Patrick Spada (former Chairman of the Company) and
HEMG, of which Patrick Spada is President. The amount of unauthorized borrowings during the year ended December 31, 2011 was $14,876,
which has been expensed as a loss due to unauthorized borrowing, a non-operating item (See Note 15).
Letter of Credit
The Company maintains a letter of credit under a DOE requirement (See Note 2 "Restricted Cash").
Note 11. Temporary Equity
During 2011, the Company sold an aggregate of 850,395 Series A preferred shares in exchange for cash proceeds of $809,900 (of which
$230,000 was received from then related parties). The Series A shares had the following features: (i) equal voting rights as the common shares;
(ii) automatically convert to common shares at the time the Company is required to file Forms 10-Q and 10-K with the SEC (the “SEC Reporting
Date”); (iii) a conversion ratio of 1 share of common for each share of Series A; (iv) until the SEC Reporting Date, transfer restricted to permitted
transfers; (v) until the SEC Reporting Date, price protection should any common stock or equivalents be issued with a lower conversion ratio;
(vi) 5% cumulative accruing dividends whether or not declared (payable only upon redemption per vii); and (vii) shall be redeemed by the
Company if: (a) Michael Mathews is no longer the CEO, or (b) the SEC Reporting Date does not occur on or before January 31, 2012 (on
February 29, 2012, this was extended to March 15, 2012), but (c) only to the extent the Company has EBITDA. During the year ended
December 31, 2011, cumulative dividend on the Series A preferred shares amounted to $34,500 (See Note 15).
During 2011, the Company sold an aggregate of 1,176,750 Series D preferred shares and a warrant to purchase 400,000 Series D shares in
exchange for cash proceeds of $1,109,268, net of offering costs of $67,482. The warrants are exercisable at $1.00 per share for five years
beginning June 28, 2011 and, after the SEC Reporting Date, are exercisable into common shares of the Company. The Series D shares have the
same features as the Series A shares (see above) except for 550,000 of the Series D shares for which the price protection is for a period of 36
months following the SEC Reporting Date. During the year ended December 31, 2011, cumulative dividend on the Series D preferred shares
amounted to $30,632.
During 2011, the Company sold an aggregate of 1,700,000 Series E preferred shares in exchange for cash proceeds of $1,550,817, net of
offering costs of $149,183 and a warrant to purchase 56,000 Series E shares. The warrants are exercisable at $1.00 per share for five years
beginning September 28, 2011 and, after the SEC Reporting Date, are exercisable into common shares of the Company.
The Series E shares had the same features as the Series A shares (see above) except item (v) the price protection is for a period of 36 months
following the SEC Reporting Date. During the year ended December 31, 2011, cumulative dividend on the Series E preferred shares amounted
to $22,194.
F-21
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
On October 28, 2011, the Company filed a First Amendment to the second amended and restated certificate of incorporation whereby a
liquidation preference equal to the original issue price ($1.00) was added to both the Series D and Series E shares. In addition, the liquidation
preferences of the Series D shares became pari passu with the liquidation preferences of the Series E shares and the liquidation preferences of
both the Series D and Series E shares became senior to the liquidation preferences of the Series C shares. On January 23, 2012, the Company
filed a Second Amendment to the second amended and restated certificate of incorporation whereby the Series A, Series D and Series E preferred
shares shall be redeemed if the SEC Reporting Date does not occur on or before February 29, 2012. On February 29, 2012, the Company filed a
Third Amendment to the second amended and restated certificate of incorporation whereby the Series A, Series D and Series E preferred shares
shall be redeemed if the SEC Reporting Date does not occur on or before March 15, 2012. The SEC Reporting Date occurred on March 13,
2012.
Prior to their conversion to common shares on March 13, 2012, the Series A, Series D and Series E preferred shares were classified as
temporary equity. During 2012 through March 13, 2012, the preferred shares accumulated additional dividends of $37,379 and as of March 13,
2012, total cumulative preferred dividends were $124,705. On March 13, 2012, all preferred shares were automatically converted into common
shares and, based on the terms of the preferred shares, none of the cumulative dividends shall ever be paid (See Note 12).
Note 12. Stockholders’ Equity (Deficiency)
Stock Dividends and Reverse Split
On May 17, 2011, the Company declared a stock dividend of 1.1 new shares of common stock of the Company for each share presently held as
of the close of business on May 20, 2011. All references to the Company’s outstanding shares, warrants and per share information have been
retroactively adjusted to give effect to the stock dividend.
On February 23, 2012, the Company approved a stock dividend of one new share of the Company for each share presently held. Following the
stock dividend, the Company approved a one-for-two reverse stock split as of the close of business on February 24, 2012 in which each two
shares of common stock shall be combined into one share of common stock. This was done in order to reduce the conversion ratio of the
convertible preferred stock for all Series to 1 for 1 except for Series C, which then had a conversion ratio of 0.8473809.
Authorized and Designated Shares
On May 17, 2011, the Company amended its certificate of incorporation whereby the total number of authorized shares was increased from
10,000,000 shares to: (i) 60,000,000 shares of common stock having a par value of $0.001 per share, and (ii) 20,000,000 shares of preferred
stock having a par value of $0.001 per share.
On May 17, 2011, the Company designated 850,500 Series A preferred shares, 368,421 Series B preferred shares, 11,411,400 Series C
preferred shares, and 3,700,000 Series D preferred shares.
On September 9, 2011, the Company filed its second amended certificate of incorporation whereby the Company designated 2,000,000 Series E
preferred shares.
Preferred Shares
In May 2011, $350,000 of convertible notes were converted into 368,411 Series B preferred shares (See Notes 9 and 15). The Series B shares
had the following features: (i) equal voting rights as the common shares; (ii) automatically convert to common shares at the time the Company is
required to file Forms 10-Q and 10-K with the SEC (the “SEC Reporting Date”); (iii) a conversion ratio of 1 share of common for each share of
Series B; (iv) until the SEC Reporting Date, transfer restricted to permitted transfers; and (v) until the SEC Reporting Date, price protection
should any common stock or equivalents be issued with a lower conversion ratio.
F-22
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
On May 20, 2011, as part of a post-closing transaction of the merger with EGC, the Company’s largest stockholder exchanged all 11,307,450
common shares owned into 11,307,450 Series C shares. The Series C shares had the following features: (i) equal voting rights as the common
shares; (ii) automatically convert to common shares at the time the Company is required to file Forms 10-Q and 10-K with the SEC (the “SEC
Reporting Date”); (iii) a conversion ratio of 0.8473809 shares of common for each share of Series C; (iv) until the SEC Reporting Date, transfer
restricted to permitted transfers; (v) exclusion from the two-for-one stock split effectuated immediately prior to the SEC Reporting Date (See
Note 15); and (vi) a liquidation preference of $0.001 per share.
On March 13, 2012, all preferred shares were automatically converted into common shares and, based on the terms of the preferred shares (See
below).
Common Shares
On May 11, 2011, pursuant to a rescission offer, the Company repurchased an aggregate of 170,100 common shares and returned to investors an
aggregate of $165,000 as a result of Blue Sky violations. The treasury shares were subsequently retired.
On May 19, 2011, the Company issued 3,200,000 common shares of the Company in order to acquire all of the outstanding shares of EGC as
part of a merger (See Note 1).
On May 20, 2011, as part of a post-closing transaction of the merger with EGC and a settlement with a certain group of investors, the Company
repurchased an aggregate of 850,500 common shares and returned to investors an aggregate of $740,000. The treasury shares were subsequently
retired.
On December 28, 2011, the Company repurchased an aggregate of 34,020 common shares and returned to investors an aggregate of
$21,200. The treasury shares were subsequently retired.
On March 13, 2012, all of the outstanding preferred shares of the Company were automatically converted into 13,677,274 common shares of
Aspen Group, Inc. (See Note 11).
Pursuant to the recapitalization discussed below, the Company is deemed to have issued 9,760,000 common shares to the original stockholders of
the publicly-held entity.
In April 2012, the Company issued 20,000 common shares upon the conversion of $20,000 of convertible notes payable (See Note 9).
On September 28, 2012, the Company raised $2,494,899 (net of offering costs of $262,101) from the sale of 78.77 Units (including 7,877,144
common shares and 3,938,570 five-year warrants exercisable at $0.50 per share) through Laidlaw. Of the amount raised, $212,000 or 605,716
common shares were from directors of the Company. Also, on September 28, 2012, as a result of this financing, all of the $1,706,000 (face
value) of Convertible Notes from the Phase One financing automatically converted into 5,130,795 common shares at the contractual rate of
$0.3325 per share. In addition, 202,334 common shares and 50,591 five-year warrants exercisable at $0.3325 per share were issued to settle
$67,276 of accrued interest on the aforementioned Convertible Notes. Accordingly, a loss of $3,339 was recognized upon settlement (See Note
9).
On September 28, 2012, as a result of the aforementioned financing, a $49,825 (face value) convertible note was automatically converted into
142,357 common shares at the contractual rate of $0.35 per share. In addition, 112 common shares were issued to settle $39 of accrued interest
on the aforementioned convertible note. No gain or loss was recognized upon settlement (See Note 9).
On September 28, 2012, as a result of the initial closing of the Phase Two financing, 4,516,917 common shares and warrants to purchase
915,429 commons shares at $0.3325 per share were issued to the former owners of Series D and Series E shares under the price protection
provision. This resulted in an increase in common stock of $4,517 with a corresponding decrease in additional paid-in capital. 550,000 of the
former Series D shares and all 1,700,000 of the former Series E shares continue to have price protection through March 13, 2015.
On October 1, 2012, the Company purchased 264,000 common shares for $132,000, from the Company's former chairman (see Notes 4 and
15). On November 13, 2012, these shares were retired.
On December 7, 2012, the Company purchased 200,000 common shares for $70,000, from the Company's former chairman. The shares are
being held as treasury shares.
F-23
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
On October 1, 2012, the Company retained two investor relations firms agreeing to pay one firm $50,000 a year for two years and issuing it
200,000 shares of common stock, having a fair value of $70,000 based on recent sales of common stock. The second firm was retained for one
year with a fee of $5,000 per month. The second firm also received 100,000 shares of common stock and 100,000 five-year warrants exercisable
at $0.60 per share, having a fair value of $43,000 based on recent sale of Units.
On October 10, 2012, the Company entered into a non-exclusive agreement with Global Arena Capital Corp. (“GAC”), a broker-dealer, through
which GAC agreed to use its best efforts to raise up to $2,030,000 from the sale of Units of common stock and warrants that are identical to
those Units sold on September 28, 2012. The Company agreed to compensate GAC from sales of Units by paying it compensation equal to 10%
of the gross proceeds sold by it. The Company also agreed to issue GAC five-year warrants to purchase 10% of the same Units it sells to
investors with an exercise price equal to the purchase price paid by investors ($35,000 per Unit). In addition, the Company agreed to pay GAC a
3% non-accountable expense allowance from the proceeds of Units sold by it.
As of December 31, 2012, the Company raised $530,337 (net of offering costs of $184,663 and five-year warrants to purchase: (i) 100,000
common shares at $0.35 per share and (ii) 98,000 common shares at $0.50 per share.) from the sale of 20.43 Units (including 2,042,856
common shares and 1,021,432 warrants) under the offering. The offering shall terminate no later than March 31, 2013.
Recapitalization
On March 13, 2012 (the “recapitalization date”), Aspen University was acquired by Aspen Group, Inc., an inactive publicly-held company, in a
reverse merger transaction accounted for as a recapitalization of Aspen University (the “Recapitalization” or the “Reverse Merger”). The
common and preferred stockholders of the Company received 25,515,204 common shares of Aspen Group, Inc. in exchange for 100% of the
capital stock of Aspen University Inc. For accounting purposes, Aspen University Inc. is the acquirer and Aspen Group, Inc. is the acquired
company because the stockholders of Aspen University Inc. acquired both voting and management control of the combined entity. The Company
is deemed to have issued 9,760,000 common shares to the original stockholders of the publicly-held entity. Accordingly, after completion of the
recapitalization, the historical operations of the Company are those of Aspen University Inc. and the operations since the recapitalization date are
those of Aspen University Inc. and Aspen Group, Inc. The assets and liabilities of both companies are combined at historical cost on the
recapitalization date. As a result of the recapitalization and conversion of all Company preferred shares into common shares of the public entity,
all redemption and dividend rights of preferred shares were terminated. As a result of the recapitalization, the Company now has 120,000,000
shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share authorized. The
assets acquired and liabilities assumed from the publicly-held company were as follows:
Cash and cash equivalents
Liabilities assumed
Net
$
337
(21,206)
$ (20,869)
Stock Warrants
On September 28, 2012, as a result of the initial closing of the Phase Two financing, warrants to purchase 915,429 commons shares at $0.3325
per share were issued to the former owners of Series D and Series E shares under a price protection provision. In addition, warrants to purchase
856,174 common shares at $0.3325 per share were issued to the former holders of convertible notes (sold during March through June of 2012
with the assistance of Laidlaw) under price protection provisions. As the aforementioned issuances of warrants stemmed from price protection
provisions in the original contracts, no expense was recognized.
On October 1, 2012, the Company retained an investor relations firm. As part of its compensation, the investor relations firm received 100,000
five-year warrants exercisable at $0.60 per share, having a fair value of $8,000. As the warrants vested immediately, the entire $8,000 was
recognized as a prepaid expense and is being amortized over the term of the agreement.
On October 23, 2012, the Company issued 150,000 five-year warrants exercisable at $0.50 per share, having a fair value of $15,000. As the
warrants vested immediately and were for prior services, the entire $15,000 was expensed immediately. On December 17, 2012, the warrants
were repriced to have an exercise price of $0.35 per share, resulting in additional expense of $4,500, which was expensed immediately.
F-24
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
All other outstanding warrants issued by the Company to date have been related to capital raises. Accordingly, the Company has not recognized
any additional stock-based compensation for other warrants issued during the years presented.
A summary of the Company’s warrant activity during the year ended December 31, 2012 is presented below:
Warrants
Balance Outstanding, December 31, 2011
Granted
Exercised
Forfeited
Expired
Balance Outstanding, December 31, 2012
Weighted
Average
Exercise
Price
Number of
Shares
Weighted
Average
Remaining Aggregate
Intrinsic
Contractual
Value
Term
456,000 $
7,806,696
-
(150,000)
-
8,112,696
$
0.33
0.45
-
0.50
-
0.44
4.5
$
47,332
Exercisable, December 31, 2012
8,112,696 $
0.44
4.5
$
47,332
Certain of the Company’s warrants contain price protection. The Company evaluated whether the price protection provision of the warrant would
cause derivative treatment. In its assessment, the Company determined that since its shares are not readily convertible to cash due to an inactive
trading market, the warrants are excluded from derivative treatment.
Stock Incentive Plan and Stock Option Grants to Employees and Directors
Immediately following the closing of the Reverse Merger, on March 13, 2012, the Company adopted the 2012 Equity Incentive Plan (the “Plan”)
that provides for the grant of 2,500,000 shares (increased to 5,600,000 shares effective September 28, 2012) in the form of incentive stock
options, non-qualified stock options, restricted shares, stock appreciation rights and restricted stock units to employees, consultants, officers and
directors. As of December 31, 2012, no shares were remaining under the Plan for future issuance (See Note 16).
On October 23, 2012, the Company issued non-Plan stock options to its executive officers as compensation for salary deferrals through August
31, 2012. Messrs. Michael Mathews, Brad Powers and David Garrity received 288,911, 255,773, and 136,008 five-year stock options,
respectively, exercisable at $0.35 per share which options are fully vested. In aggregate, 680,692 stock options were issued to settle $238,562 of
accrued salaries. No gain was recognized as the settlement was between the Company and related parties. On January 16, 2013, these options
were modified to be Plan options (See Note 16).
On October 23, 2012, the Company issued additional non-Plan options to executive officers who reduced their salaries for the period September
1 through December 31, 2012. The Company granted Messrs. Mathews, Powers and Garrity each 166,666 five-year options, respectively, and
Dr. Gerald Williams 47,620 five-year options, all exercisable at $0.35 per share with 25% of these options vesting on the last day of September,
October, November and December 2012, subject to the applicable executive remaining employed on each applicable vesting date. In aggregate,
547,618 stock options were issued as part of the reduced salaries. All stock options or shares granted are valued on the appropriate measurement
date and the related expense shall be recognized over the requisite service period. On January 16, 2013, these options were modified to be Plan
options (See Note 16).
During April 2012, the Company received $22,000 from a director of the Company in exchange for a note payable bearing interest of 10%, due
on demand. On November 21, 2012, the director forgave a $22,000 note receivable from the Company in exchange for 62,857 five-year vested
non-Plan stock options exercisable at $0.35 per share. No gain was recognized as the settlement was between the Company and related
parties. On January 16, 2013, these options were modified to be Plan options (See Notes 9, 15 and 16).
F-25
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
On December 17, 2012, the Company repriced 1,705,000 stock options from having an exercise price of $1.00 per share to $0.35 per
share. Accordingly, the incremental increase in the fair value due to the repricing is being recognized over the remaining service period of the
stock options.
During the year ended December 31, 2012, including the aforementioned stock option issuances in this section, the Company granted to
employees 6,777,967 stock options, net of cancellations (including repriced stock options), all of which were under the Plan, having an exercise
price of $0.35 per share. While most of the options vest pro rata over three to four years on each anniversary date, 910,214 vested immediately;
all options expire five years from the grant date. The total fair value of stock options granted to employees during the year ended December 31,
2012 was $1,747,007. The Company recorded compensation expense of $252,057 for the year ended December 31, 2012, in connection with
employee stock options.
The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon
several variables such as the expected option term, expected volatility of the Company’s stock price over the expected term, expected risk-free
interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture
rates. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and
directors which are subject to ASC Topic 718 requirements. These amounts are estimates and thus may not be reflective of actual future results,
nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite
service period for each award. The following table summarizes the assumptions the Company utilized to record compensation expense for stock
options granted to employees during the years ended December 31, 2012 and 2011:
Assumptions
Expected life (years)
Expected volatility
Weighted-average volatility
Risk-free interest rate
Dividend yield
Expected forfeiture rate
For the
Year Ended
December 31,
2012
For the
Year Ended
December 31,
2011
2.5 - 3.8
44.2% - 50.9%
49.0%
0.31% - 0.60%
0.00%
1.7%
N/A
N/A
N/A
N/A
N/A
N/A
The Company utilized the simplified method to estimate the expected life for stock options granted to employees. The simplified method was
used as the Company does not have sufficient historical data regarding stock option exercises. The expected volatility is based on the average of
the expected volatilities from the most recent audited financial statements available for comparative public companies that are deemed to be similar
in nature to the Company. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related
option at the time of the grant. Dividend yield is based on historical trends. While the Company believes these estimates are reasonable, the
compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected
dividend yield increased.
A summary of the Company’s stock option activity for employees and directors during the year ended December 31, 2012 is presented below:
Options
Balance Outstanding, December 31, 2011
Granted
Exercised
Forfeited
Expired
Balance Outstanding, December 31, 2012
Exercisable, December 31, 2012
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Number of
Shares
-
8,672,967 $
-
(1,895,000) $
-
$
6,777,967
1,457,832 $
0.49
1.00
0.35
0.35
F-26
4.7
$
4.8
$
-
-
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
The weighted-average grant-date fair value of options granted to employees during the year ended December 31, 2012 was $0.13.
As of December 31, 2012, there was $980,898 of total unrecognized compensation costs related to nonvested share-based compensation
arrangements. That cost is expected to be recognized over a weighted-average period of 1.5 years.
Stock Option Grants to Non-Employees
On March 15, 2012, the Company granted 175,000 stock options to non-employees, all of which were under the Plan, having an exercise price
of $1.00 per share. The options vest pro rata over three years on each anniversary date; all options expire five years from the grant date. The
total fair value of the stock options granted was $57,750, all of which was recognized immediately as these stock options were issued for prior
services rendered. On December 17, 2012, the Company repriced the stock options issued from having an exercise price of $1.00 per share to
$0.35 per share. Accordingly, the incremental increase in the fair value of $15,750 was recognized immediately.
On October 23, 2012, under the Plan, the Company issued to a consultant 20,000 five-year stock options exercisable at $0.50 per share vesting in
equal annual increments over a three-year period subject to the consultant continuing to provide services for the Company. The total fair value of
the stock options granted was $2,000, all of which was recognized immediately as these stock options were issued for prior services
rendered. On December 17, 2012, the Company repriced the stock options issued from having an exercise price of $0.50 per share to $0.35 per
share. Accordingly, the incremental increase in the fair value of $600 was recognized immediately.
The total fair value of stock options granted to non-employees during the year ended December 31, 2012 was $95,600, all of which was
recognized immediately as these stock options were issued for prior services rendered. The Company recorded compensation expense of
$95,600 for the year ended December 31, 2012, in connection with non-employee stock options.
The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted to non-
employees during the years ended December 31, 2012 and 2011:
Assumptions
Expected life (years)
Expected volatility
Weighted-average volatility
Risk-free interest rate
Dividend yield
For the
Year Ended
December 31,
2012
For the
Year Ended
December 31,
2011
2.7 - 5.0
44.2% - 50.0%
47.4%
0.37% - 0.60%
0.00%
N/A
N/A
N/A
N/A
N/A
A summary of the Company’s stock option activity for non-employees during the year ended December 31, 2012 is presented below:
Options
Balance Outstanding, December 31, 2011
Granted
Exercised
Forfeited
Expired
Balance Outstanding, December 31, 2012
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Number of
Shares
-
390,000 $
-
(195,000) $
-
$
195,000
0.65
0.95
0.35
4.5
$
-
Exercisable, December 31, 2012
-
N/A
N/A
N/A
F-27
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Note 13. Income Taxes
The components of income tax expense (benefit) are as follows:
Current:
Federal
State
Deferred:
Federal
State
Total Income tax expense (benefit)
For the
For the
Year Ended Year Ended
December 31,
2012
December 31,
2011
$
$
- $
-
-
-
-
-
- $
-
-
-
-
-
-
-
Significant components of the Company's deferred income tax assets and liabilities are as follows:
Deferred tax assets:
Net operating loss
Allowance for doubtful accounts
Intangible assets
Deferred rent
Stock-based compensation
Contributions carryforward
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Property and equipment
Total deferred tax liabilities
Deferred tax assets, net
Valuation allowance:
Beginning of year
(Increase) decrease during year
Ending balance
Net deferred tax asset
December 31,
2012
December 31,
2011
$ 3,649,651 $ 2,064,725
17,637
261,946
-
118,740
9,473
7,883
-
128,827
-
93
4,167,140 2,091,835
-
(630)
(630)
(148,345)
(805)
(149,150)
4,166,510 1,942,685
(1,942,685) (1,152,977)
(2,223,825)
(789,708)
(4,166,510) (1,942,685)
$
- $
-
A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company
recorded a valuation allowance in 2012 and 2011 due to the uncertainty of realization. Management believes that based upon its projection of
future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit
associated with deferred tax assets. The net change in the valuation allowance during the years ended December 31, 2012 and 2011 was an
increase of $2,223,825 and $789,708, respectively.
F-28
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
At December 31, 2012, the Company had $9,849,068 of net operating loss carryforwards which will expire from 2029 to 2032. The Company
believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for
unrecognized tax benefits. As of December 31, 2012, tax years 2004 and 2008 through 2011 remain open for IRS audit. The Company has
received no notice of audit from the Internal Revenue Service for any of the open tax years.
A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:
Statutory U.S. federal income tax rate
State income taxes, net of federal tax benefit
Other
Change in valuation allowance
Effective income tax rate
Note 14. Concentrations
Concentration of Credit Risk
For the
Year Ended
December 31,
2012
For the
Year Ended
December 31,
2011
34.0%
3.1
(0.1)
(37.0)
0.0%
34.0%
3.1
(0.1)
(37.0)
0.0%
On November 9, 2010, the FDIC issued a Final Rule implementing section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act that provides for unlimited insurance coverage of noninterest-bearing transaction accounts. Beginning December 31, 2010, through
December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured
institutions. The unlimited insurance coverage is available to all depositors, including consumers, businesses, and governmental entities. This
unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositor’s other deposit accounts held at
an FDIC-insured institution. A noninterest-bearing transaction account is a deposit account where interest is neither accrued nor paid; depositors
are permitted to make an unlimited number of transfers and withdrawals; and the bank does not reserve the right to require advance notice of an
intended withdrawal.
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not
experienced any losses in such accounts through December 31, 2012. On January 1, 2013, the aforementioned additional federal insurance
provision expired and accordingly, the standard insurance amount of $250,000 per depositor, per bank, became effective. Had this provision
expired by December 31, 2012, cash amounts in excess of FDIC limits would have been approximately $583,000. As of December 31, 2011,
the Company’s bank balances exceeded FDIC insured amounts by approximately $50,000.
Concentration of Revenues, Accounts Receivable and Publisher Expense
For the years ended December 31, 2012 and 2011, the Company had significant customers with individual percentage of total revenues equaling
10% or greater as follows:
Customer 1
Customer 2
Totals
F-29
For the
Year Ended
December 31,
2012
For the
Year Ended
December 31,
2011
28.7%
17.7%
46.4%
44.6%
-
44.6%
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
At December 31, 2012 and 2011, concentration of accounts receivable with significant customers representing 10% or greater of accounts
receivable was as follows:
Customer 1
Customer 2
Totals
December 31,
2012
December 31,
2011
54.4%
-
54.4%
53.4%
17.3%
70.7%
For the years ended December 31, 2012 and 2011, the Company had significant vendors representing 10% or greater of cost and expense as
follows:
Vendor 1
Totals
Note 15. Related Party Transactions
For the
Year Ended
December 31,
2012
For the
Year Ended
December 31,
2011
11.0%
11.0%
24.4%
24.4%
On September 21, 2011, the Company loaned $238,210 to its CEO in exchange for a promissory note bearing 3% per annum. As collateral, the
note was secured by 40,000 shares of common stock of interclick, Inc. (a publicly-traded company) owned personally by the CEO. The note
along with accrued interest was due and payable on June 21, 2012. For the year ended December 31, 2011, interest income of $1,867 was
recognized. On December 20, 2011, the note along with accrued interest of $1,867 was paid in full (See Note 4).
On December 14, 2011, the Company loaned $150,000 to an officer of the Company in exchange for a promissory note bearing 3% per
annum. As collateral, the note was secured by 500,000 shares of the Company’s common stock owned personally by the officer. The note along
with accrued interest was due and payable on September 14, 2012. During the year ended December 31, 2011, interest income of $210 was
recognized on the note receivable and is included in other current assets. As of December 31, 2011, the balance due on the note receivable was
$150,000, all of which is short-term. During the year ended December 31, 2012, interest income of $594 was recognized on the note
receivable. On February 16, 2012, the note receivable from an officer was repaid along with accrued interest (See Note 4).
On March 30, 2008 and December 1, 2008, the Company sold courseware pursuant to marketing agreements to HEMG, a related party and
principal stockholder of the Company whose president is Mr. Patrick Spada, the former Chairman of the Company, in the amount of $455,000
and $600,000, respectively; UCC filings were filed accordingly. Under the marketing agreements, the receivables are due net 60 months. On
September 16, 2011, HEMG pledged 772,793 Series C preferred shares (automatically converted to 654,850 common shares on March 13,
2012) of the Company as collateral for this account receivable. On March 8, 2012, due to the impending reduction in the value of the collateral as
the result of the Series C conversion ratio and the Company’s inability to engage Mr. Spada in good faith negotiations to increase HEMG’s
pledge, Michael Mathews, the Company’s CEO, pledged 117,943 common shares of the Company, owned personally by him, valued at $1.00
per share based on recent sales of capital stock as additional collateral to the accounts receivable, secured – related party. On March 13, 2012, the
Company deemed the receivables stemming from the sale of courseware curricula to be in default. On April 4, 2012, the Company entered into
an agreement with: (i) an individual, (ii) HEMG, a related party and principal stockholder of the Company whose president is Mr. Patrick Spada,
the former Chairman of the Company and (iii) Mr. Patrick Spada. Under the agreement, (a) the individual purchased and HEMG sold to the
individual 400,000 common shares of the Company at $0.50 per share; (b) the Company guaranteed it would purchase at least 600,000 common
shares of the Company at $0.50 per share within 90 days of the agreement and the Company would use its best efforts to purchase from HEMG
and resell to investors an additional 1,400,000 common shares of the Company at $0.50 per share within 180 days of the agreement; (c) provided
HEMG and Mr. Patrick Spada fulfilled their obligations under (a) and (b) above, the Company shall consent to additional private transfers by
HEMG and/or Mr. Patrick Spada of up to 500,000 common shares of the Company on or before March 13, 2013; (d) HEMG agreed to not sell,
pledge or otherwise transfer 142,500 common shares of the Company pending resolution of a dispute regarding the Company’s claim that
HEMG sold 131,500 common shares of the Company without having enough authorized shares and a stockholder did not receive 11,000
common shares of the Company owed to him as a result of a stock dividend; and (e) the Company waived any default of the accounts receivable,
secured - related party and extend the due date to September 30, 2014. As of September 30, 2012, third party investors purchased 336,000
shares for $168,000 and the Company purchased 264,000 shares for $132,000 per section (b) above. Based on proceeds received on September
28, 2012 under a private placement at $0.35 per unit (consisting of one common share and one-half of a warrant exercisable at $0.50 per share),
the value of the aforementioned collateral decreased. Accordingly, as of December 31, 2012, the Company has recognized an allowance of
$502,315 for this account receivable. As of December 31, 2012 and 2011, the balance of the account receivable, net of allowance, was $270,478
and $772,793 and is shown as accounts receivable, secured – related party, net (See Notes 4 and 12).
F-30
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
On February 25, 2012, February 27, 2012 and February 29, 2012, loans payable to an individual, another individual and a related party (the
brother of Patrick Spada, the former Chairman of the Company), of $100,000, $50,000 and $50,000, respectively, were converted into two-year
convertible promissory notes, bearing interest of 0.19% per annum. Beginning March 31, 2012, the notes are convertible into common shares of
the Company at the rate of $1.00 per share. The Company evaluated the convertible notes and determined that, for the embedded conversion
option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common shares
on the note issue dates. As these loans (now convertible promissory notes) are not due for at least 12 months after the balance sheet, they have
been included in long-term liabilities as of December 31, 2012 (See Notes 8 and 9).
In June 2009, the Company borrowed an aggregate of $45,000 from an individual, who was an officer of the Company at that time, in exchange
for notes payable bearing interest at 18% per annum. The notes were due in October 2009 and became demand notes at that time. During the
year ended December 31, 2011, interest expense of $2,393 was recognized on the notes. During the year ended December 31, 2011, the
remaining principal balance of $25,000 due on the notes payable was repaid and no further amount is due (See Note 9).
During April 2012, the Company received $22,000 from a director of the Company in exchange for a note payable bearing interest of 10%, due
on demand. On November 21, 2012, the director forgave a $22,000 note receivable from the Company in exchange for 62,857 five-year vested
non-Plan stock options exercisable at $0.35 per share. No gain was recognized as the settlement was between the Company and related
parties. On January 16, 2013, these options were modified to be Plan options (See Notes 9, 12 and 16).
On March 6, 2011, the Company authorized the issuance of up to $350,000 of convertible notes that were convertible into Series B preferred
shares at $0.95 per share, bearing interest of 6% per annum. The notes were convertible beginning after the closing of the EGC Merger (See
Note 1). As of May 13, 2011, the Company had received an aggregate of $328,000 (of which $73,000 was received from related parties) from
the sale of convertible notes. The Company evaluated the convertible notes and determined that, for the embedded conversion option, there was
no beneficial conversion value to record. In addition, the Company issued an aggregate of $22,000 (of which $16,000 was to related parties) of
convertible notes for services rendered. In May 2011, $350,000 of the convertible notes were converted into 368,411 Series B preferred shares
(See Notes 9 and 12).
On March 13, 2012, the Company’s CEO loaned the Company $300,000 and received a convertible promissory note due March 31, 2013,
bearing interest at 0.19% per annum. The note is convertible into common shares of the Company at the rate of $1.00 per share upon five days
written notice to the Company. The Company evaluated the convertible note and determined that, for the embedded conversion option, there was
no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common shares on the note issue
date. On September 4, 2012, the maturity date was extended to August 31, 2013. On December 17, 2012, the maturity date was extended to
August 31, 2014. There was no accounting effect for these two modifications (See Note 9).
On August 14, 2012, the Company’s CEO loaned the Company $300,000 and received a convertible promissory note, payable on demand,
bearing interest at 5% per annum. The note is convertible into common shares of the Company at the rate of $0.35 per share (based on proceeds
received on September 28, 2012 under a private placement at $0.35 per unit). The Company evaluated the convertible notes and determined that,
for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market
value of the common shares on the note issue date. On September 4, 2012, the maturity date was extended to August 31, 2013. On December
17, 2012, the maturity date was extended to August 31, 2014 (See Note 9).
During 2005 through 2011, the Company advanced funds without board authority to both Patrick Spada (former Chairman of the Company) and
HEMG, of which Patrick Spada is President. The amount of unauthorized borrowings during the year ended December 31, 2011 was $14,876,
which has been expensed as loss due to unauthorized borrowing, a non-operating item (See Note 10).
F-31
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
On September 16, 2011, the Company entered into a two-year consulting agreement with the former Chairman of the Company in which the
Company was obligated to pay $11,667 per month. On September 28, 2011, the Company prepaid 13 months of the consulting agreement, or
$151,667, which was then amortized until December 31, 2011, at which time the consulting agreement was terminated and the remaining
unamortized prepaid expense was recognized immediately as consulting expense. No additional amounts are due under the consulting
agreement (See Note 10).
During 2011, the Company sold an aggregate of 850,395 Series A preferred shares in exchange for cash proceeds of $809,900 (of which
$230,000 was received from then related parties). The Series A shares had the following features: (i) equal voting rights as the common shares;
(ii) automatically convert to common shares at the time the Company is required to file Forms 10-Q and 10-K with the SEC (the “SEC Reporting
Date”); (iii) a conversion ratio of 1 share of common for each share of Series A; (iv) until the SEC Reporting Date, transfer restricted to permitted
transfers; (v) until the SEC Reporting Date, price protection should any common stock or equivalents be issued with a lower conversion ratio;
(vi) 5% cumulative accruing dividends whether or not declared (payable only upon redemption per vii); and (vii) shall be redeemed by the
Company if: (a) Michael Mathews is no longer the CEO, or (b) the SEC Reporting Date does not occur on or before January 31, 2012 (on
February 29, 2012, this was extended to March 15, 2012), but (c) only to the extent the Company has EBITDA. During the year ended
December 31, 2011, cumulative dividend on the Series A preferred shares amounted to $34,500 (See Note 11).
Note 16. Subsequent Events
On January 16, 2013, the Company increased the number of shares in its stock option plan to 8,000,000 shares. Also on January 16, 2013,
1,291,167 options were modified to be Plan options (See Notes 9, 12 and 15).
On February 11, 2013, HEMG and Mr. Spada sued us, certain senior management members and our directors in state court in New York
seeking damages arising from losses and other matters incurred in the operation of the Company’s business since May 2011, our filings with the
SEC and the DOE where we stated that HEMG and Mr. Spada borrowed $2.2 million without board authority and our failure to use our best
efforts to purchase certain shares of common stock from HEMG following an April 2012 agreement. While we have been advised by our
counsel that the lawsuit is baseless, we cannot assure you that we will be successful. Defending the litigation will be expensive and divert our
management from the Company’s business. If we are unsuccessful, the damages we pay may be material.
During February and March 2013, the Company sold $565,000 of Units (consisting of one common share and one-half of a warrant exercisable
at $0.50 per share).
During February 2013, the Company repaid approximately $250,000 of its line of credit. The line of credit remains open.
On March 14, 2013, the Company entered into a letter of intent with Laidlaw & Company (UK) Ltd. under which Laidlaw agreed to use its
best efforts to sell up to $770,000 of Units at the same terms as the Units the Company sold in 2012 and 2013 to date. Laidlaw will receive
cash commissions of 10% based on the number of Units sold and five year warrants equal to 10% of the securities sold exercisable at $0.50
per share.
F-32
Exhibit #
Exhibit Description
Incorporated by Reference
Date
Number
Form
Filed or
Furnished
Herewith
EXHIBIT INDEX
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.3
3.4
3.5
3.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
Certificate of Merger
Agreement and Plan of Merger
Agreement and Plan of Merger – DE Reincorporation
Articles of Merger – DE Reincorporation
Certificate of Merger – DE Reincorporation
Certificate of Incorporation, as amended
Bylaws
Certificate of Incorporation – Acquisition Sub
Articles of Amendment to FL Articles of Incorporation
Articles of Amendment to FL Articles of Incorporation
FL Articles of Incorporation
Employment Agreement – Mathews*
Employment Agreement – Garrity *
Employment Agreement – Powers*
Employment Agreement - Siegel*
Employment Agreement - Williams*
Amendment to Mathews Employment Agreement*
Amendment of Powers Employment Agreement*
September 16, 2011 Spada Agreement
Consulting Agreement – Spada
Lock-Up/Leak-Out Agreement – Spada
Form of Lock-Up/Leak-Out Agreement – Officers and Directors
Spada / HEMG April 2012 Agreement
Spada - Indemnification Agreement
Form of Directors Indemnification Agreement
Stock Pledge Agreement - Mathews dated March 8, 2012
Stock Pledge Agreement - Mathews dated March 16, 2012
Form of Convertible Note – Mathews - $1.00
Form of Convertible Note – Mathews
Form of Convertible Note – Private Placement
Form of Warrant – Private Placement
64
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
S-1/A
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K/A
8-K/A
8-K/A
8-K
8-K
S-1
S-1
10-Q
10-Q
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
6/20/11
5/5/10
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
3/19/12
5/7/12
5/7/12
5/7/12
3/19/12
3/19/12
2/11/13
2/11/13
8/20/12
8/20/12
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.3
3.1
10.1
10.2
10.3
10.4
10.5
10.14
10.15
10.6
10.7
10.8
10.9
10.19
10.20
10.21
10.12
10.16
10.17
10.18
10.5
10.6
Back to Table of Contents
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
21.1
31.1
31.2
2012 Equity Incentive Plan, as amended
Form of Stock Option Agreement
Form of Siegel Stock Option Agreement*
Form of Warrant – September Private Placement
Form of Registration Rights Agreement – September Private
Placement
Form of Registration Rights Agreement – Whalehaven
Form of Salary Reduction Agreement
Form of Securities Purchase Agreement – September Private
Placement
Form of Securities Purchase Agreement – December Private
Placement
Form of Registration Rights Agreement – December Private
Placement
Form of Warrant – December Private Placement
D’Anton Agreement –Loan Cancellation
Powers Consulting Agreement
Subsidiaries
Certification of Principal Executive Officer (302)
Certification of Principal Financial Officer (302)
S-1
8-K
8-K
8-K
8-K
S-1
S-1
8-K
2/11/13
3/19/12
3/19/12
10/1/12
10/1/12
10/1/12
10/1/12
10/1/12
10.21
10.14
10.15
10.3
10.2
10.26
10.27
10.1
8-K
12/17/12
10.1
8-K
8-K
S-1
S-1
12/17/12
12/17/12
2/11/13
2/11/13
10.2
10.3
10.32
21.1
Certification of Principal Executive and Principal Financial Officer
(906)
XBRL Instance Document
32.1
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
101.LAB
101.PRE
____________
* Management contract or compensation plan.
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
Filed
Filed
Filed
Furnished**
Furnished***
Furnished***
Furnished***
Furnished***
Furnished***
Furnished***
** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with
Item 601 of Regulation S-K.
*** Attached as Exhibit 101 to this report are the Company’s financial statements for the year ended December 31, 2012 and 2011 formatted
in XBRL (eXtensible Business Reporting Language). The XBRL-related information in Exhibit 101 to this report shall not be deemed “filed”
or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, and is not filed for purposes of
Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of those sections.
Copies of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to Aspen Group, Inc., 224
West 30th Street, Suite 604 New York, New York 10001 Attention: Corporate Secretary.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have
Not Registered Securities Pursuant to Section 12 of the Act
During the year ended December 31, 2012, no annual report or proxy materials were sent to Aspen Group’s security holders.
65
BUSINESS CONSULTING SERVICES AGREEMENT
Exhibit 10.33
This Business Consulting Services Agreement (the “Agreement”) is entered into effective as of March 1, 2013 (the “Effective Date”) by and
between Aspen Group, Inc., a Delaware corporation (the “Company”); Brad Powers and GT Marketing Group, LLC (collectively the
“Consultant”). (Each of the Company and the Consultant are hereinafter a “Party” and collectively the “Parties”).
WHEREAS, the Consultant has been employed by the Company as Chief Marketing Officer under that certain Employment
Agreement dated May 19, 2011, as amended (the “Employment Agreement”); and
WHEREAS, the Consultant and the Company mutually agree and are desirous to terminate the Consultant’s employment with the
Company and the Employment Agreement in order to provide the Consultant with the ability to pursue other business ventures; and
WHEREAS, the Company desires to continue to retain the services of the Consultant and the Consultant is desirous and willing to
accept such service arrangement and render such services, all upon and subject to the terms and conditions contained in this Agreement,
NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth in this Agreement, and intending to be legally
bound, the Company and the Consultant agree as follows:
1. Engagement. The Company hereby engages and retains the Consultant and the Consultant hereby agrees to render services upon the
terms and conditions hereinafter set forth. As of the Effective Date, Brad Powers resigns as Chief Marketing Officer and as an employee of the
Company.
2. Term. This Agreement shall be for an initial two-year term commencing on the Effective Date (the “Initial Term”) unless
sooner terminated in accordance with the provisions of Section 6. This Agreement shall automatically be extended for additional and successive
terms of one (1) year each (each a “Renewal Term”), unless either Party gives written notice of non-renewal to the other Party no later than sixty
(60) days prior to the expiration of the Initial Term (the “Non-Renewal Notice”), or the then current Renewal Term, as the case may be. For the
purposes of this Agreement, the Initial Term and any Renewal Term are hereinafter collectively referred to as the “Term”.
3. Services. During the Term, the Consultant shall act as a special advisor providing general marketing, business and financial advice to
the Company and shall report directly to the Company’s (i) Chief Executive Officer and (ii) the Company’s Board of Directors (the
“Board”). The Consultant shall perform such reasonable duties in connection with its general marketing, business and financial advice as the
Chief Executive Officer and the Board may request (the “Services”). The Consultant shall use his best efforts to perform the Services
pursuant to this Agreement competently, carefully, faithfully and shall devote sufficient time and energies necessary to perform his services
from locations selected by the Consultant. The Consultant’s Services shall be performed on a non-exclusive basis, but may not be performed
during the Term, directly or indirectly for another online university that directly competes with the business of the Company including its
subsidiaries. A direct competitor shall be deemed to be an online university. For the avoidance of doubt, a competitor shall be deemed to be an
online postsecondary education company, as described in "The Our Company" section of The Form S-1 filed by the Company on February 11,
2013.
1
4. Compensation/Expenses.
(a) Compensation. In consideration for the Services to be rendered by the Consultant under this Agreement, the Company during the
Initial Term shall pay the Consultant a fee of $100,000 per year payable monthly. The Consultant shall provide monthly invoices accompanied
by a monthly statement generally detailing the services provided by the Consultant during the prior month. During any Renewal Term, the
Company and the consultant shall mutually agree upon the Consultant’s compensation, which shall not be less than the compensation paid in the
initial Term.
(b) Options. The stock options (the “Options”) held by the Consultant as of the Effective Date shall continue to vest in accordance with
their original terms provided that the Consultant is providing the Services. All agreements evidencing the Options are hereby amended to
modify the vesting, exercisability and clawback provisions substituting consulting references for employment references, except that
Consultant’s estate shall continue to have such rights of transfer on death of the Consultant as is provided if consultant was an employee of the
Company. The Company hereby represents and warrants that all of the Options and option agreements held by Consultant are in full force and
effect; that there are no events of default or forfeiture thereunder and are duly enforceable according to their terms. In the event of a Change of
Control, the Consultant’s Options shall fully vest. Change of Control for the purposes of this Agreement shall mean the occurrence of any
of the following events: (a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 50% or more of the total voting power of the Company’ then outstanding voting securities or 50% or more of the fair
market value of the Company; (b)Within a twelve month period, any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the total voting power of the Company’s then outstanding voting securities; (c)Within a twelve month
period, less than a majority of the directors are Incumbent Directors. "Incumbent Directors" will mean directors who either (A) are directors of
the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of a majority of the
Incumbent Directors at the time of such election or nomination; (d) Michael Matthews shall no longer be the CEO of the Company or (e) The
Company has sold all or substantially all of its assets to another person or entity that is not a majority-owned subsidiary of the
Corporation. The Company represents and warrants that it has granted Consultant three (3) Options as follows:
1. Option Grant #1: 3/15/12: 200,000 shares at strike price $1/share (re-priced on 12/17/12 to $0.35/share);
2. Option Grant #2: 10/23/12: 255,773 at strike price $0.35/share;
3. Option Grant #3: 10/23/12: 166,666 at strike price $0.35/share
Total Options: 622,439 shares @ $0.35/share
(c) Expenses. In addition to any compensation received under this Section 4, the Company shall reimburse the
Consultant for all reasonable travel, lodging, meals, and other prior approved out-of-pocket expenses incurred or paid by the Consultant in
connection with the performance of its Services under this Agreement; provided, however, any such expenses over $250 shall be approved by
the Company in writing in advance. All other expenditures shall be the sole responsibility of the Consultant. The Consultant shall submit to the
Company on or about the fifth day of each month an itemized statement, in a form reasonably satisfactory to the Company, of such expenses
incurred in the previous period for which the Consultant is seeking reimbursement and the Company shall reimburse the Consultant within
thirty (30) days of submission to the Company. Upon execution of this Agreement, the Company shall: (i) reimburse Consultant all expenses
incurred while an employee of the Company, which expenses are set forth and made a part of this Agreement as Exhibit “A”; (ii) The Company
agrees that all re-occurring charges appearing on Consultant’s credit card, as itemized and set forth in Exhibit “B” and made a part of this
Agreement, while Consultant was an employee of the Company, shall be transferred back to the Company.
2
5. Independent Contractor Relationship.
(a) The Consultant acknowledges that it is an independent contractor and no longer an employee of the Company. Consultant
acknowledges it is not the legal representative or agent of, nor does it have the power to obligate the Company for any purpose other than
specifically provided in this Agreement. The Consultant further acknowledges that the scope of its engagement hereunder does not include any
supervisory responsibilities with respect to the Company’s personnel. The Consultant expressly acknowledges that the relationship intended to
be created by this Agreement is a business relationship based entirely on, and circumscribed by, the express provisions of this Agreement and
that no partnership, joint venture, agency, fiduciary or employment relationship is intended or created by reason of this Agreement.
(b) The Company shall carry no worker’s compensation insurance or any health or accident insurance to cover the Consultant or
its employees. The Company shall not pay contributions to social security, unemployment insurance, federal or state withholding taxes, nor
provide any other contributions or benefits, which might be expected in an employer-employee relationship. Neither the Consultant nor its
employees shall be entitled to medical coverage, life insurance or to participation in any current or future Company pension
plan. Notwithstanding the foregoing however, Brad Powers shall continue to be entitled to insurance coverage provided by the Company’s
Directors and Officers insurance policies for the period of time in which Consultant was an employee of the Company. ] The Company further
agrees the Consultant shall be entitled to all protections afforded by the Company to its officers and directors pursuant to the Company’s by-
laws, certificate of incorporation or as otherwise provided to all officers, directors and employees through separate agreement or otherwise then
in place when Consultant was an employee of the Company, including any indemnity and hold harmless covenants. All of Brad Powers’ rights
to indemnification are subject to the certificate of incorporation and bylaws of the Company and the Indemnification Agreement which he
previously entered into with the Company.
(c) The Company shall issue the Consultant a Form 1099 for all payments made hereunder. All taxes, withholding and
the like on any and all amounts paid under this Agreement shall be the Consultant’s responsibility. The Consultant agrees that it shall indemnify
and hold the Company, its affiliates, and agents, harmless from and against any judgments, fines, costs, or fees associated with such payments
hereunder.
6. Termination.
(a) In the event of a material default under this Agreement by either party, the other party may terminate this Agreement if such
default is not cured within 10 days following delivery of written notice specifying and detailing the default complained of and demanding its
cure. Notwithstanding the preceding, in the event of a violation by the Consultant of Section 7, the Company may terminate this Agreement
immediately upon written notice to the Consultant.
(b) Upon termination of this Agreement, the Company shall reimburse the Consultant for any reasonable expenses previously
incurred for which the Consultant had not been reimbursed prior to the effective date of termination, provided that the requirements of Section
4(c) have been satisfied. Any and all other rights granted to the Consultant under this Agreement shall terminate as of the date of such
termination.
(c) In the event of termination of this Agreement, all fees and reimbursable expenses earned and incurred by Consultant up to the
date of termination shall continue to remain due and survive any such termination. If any termination shall occur during a month then and in
such an event, fees shall be ratably apportioned according to the amount of days prior to the termination date.
7. Non-Disclosure of Confidential Information.
(a) Confidential Information. Confidential Information includes, but is not limited to, trade secrets as defined by the common
law and statutes in New York or any future New York statute, processes, policies, procedures, techniques including recruiting techniques,
designs, drawings, know-how, show-how, technical information, specifications, computer software and source code, information and data
relating to the development, research, testing, costs, marketing and uses of the Company’s products and services, the Company’s budgets and
strategic plans, and the identity and special needs of customers, databases, data, all technology relating to the Company’s businesses, systems,
methods of operation, customer lists, customer information, solicitation leads, marketing and advertising materials, methods and manuals and
forms, all of which pertain to the activities or operations of the Company, names, home addresses and all telephone numbers and e-mail
addresses of the Company’s employees, former employees, clients and former clients. In addition, Confidential Information also includes the
identity of customers and the identity of and telephone numbers, e-mail addresses and other addresses of employees or agents of customers who
are the persons with whom the Company’s employees and agents communicate in the ordinary course of business. For purposes of this
Agreement, the following will not constitute Confidential Information (i) information which is or subsequently becomes generally available to
the public through no act or omission of the Consultant, (ii) information set forth in the written records of the Consultant prior to disclosure to
the Consultant by or on behalf of the Company, which information is given to the Company in writing as of or prior to the date of this
Agreement, and (iii) information which is lawfully obtained by the Consultant in writing from a third party (excluding any affiliates of the
Consultant) who was legally entitled to disclose the information.
3
(b) Legitimate Business Interests. The Consultant recognizes that the Company has legitimate business interests to protect and
as a consequence, the Consultant agrees to the restrictions contained in this Agreement because they further the Company’s legitimate business
interests. These legitimate business interests include, but are not limited to (i) trade secrets and valuable confidential business or professional
information that otherwise does not qualify as trade secrets, including all Confidential Information; (ii) substantial relationships with specific
prospective or existing customers or clients; (iii) customer goodwill associated with the Company’s business; and (iv) specialized training
relating to the Company’s business, technology, methods and procedures.
(c) Confidentiality. The Confidential Information shall be held by the Consultant in the strictest confidence and shall not,
without the prior written consent of the Company, be disclosed to any person other than in connection with the Consultant’s Services to the
Company. The Consultant further acknowledges that such Confidential Information as is acquired and used by the Company is a special,
valuable and unique asset. The Consultant shall exercise all due and diligence precautions to protect the integrity of the Company’s Confidential
Information and to keep it confidential whether it is in written form, on electronic media or oral. The Consultant shall not copy any Confidential
Information except to the extent necessary to perform its Services hereunder nor remove any Confidential Information or copies thereof from
the Company’s premises except to the extent necessary to provide its Services and then only with the authorization of an officer of the
Company. All records, files, materials and other Confidential Information obtained by the Consultant in the course of its Services to the
Company are confidential and proprietary and shall remain the exclusive property of the Company or its customers, as the case may be. The
Consultant shall not, except in connection with and as required by its performance of the Services under this Agreement, for any reason use for
his own benefit or the benefit of any person or entity with which he may be associated or disclose any such Confidential Information to any
person, firm, corporation, association or other entity for any reason or purpose whatsoever without the prior written consent of an officer of the
Company.
(d) Non-Disparagement. The Parties will not directly or indirectly disparage or criticize the other nor hold the other up to public
ridicule or scorn. Neither Party shall issue any public statements or press release concerning this Agreement or the Parties relationship without
the other Party’s prior approval.
(e) Affiliates. References to the Company in this Section 7 shall include the Company and its affiliates.
8. Equitable Relief. The Company and the Consultant recognize that the Services to be rendered under this Agreement by the
Consultant are special, unique and of extraordinary character, and that in the event of the breach by the Consultant of the terms and conditions of
this Agreement or if the Consultant shall cease to provide the Services to the Company for any reason and take any action in violation of Section
7, the Company shall be entitled to institute and prosecute proceedings in any court of competent jurisdiction to enjoin the Consultant from
breaching the provisions of Section 7. In such action, the Company shall not be required to plead or prove irreparable harm or lack of an
adequate remedy at law or post a bond or any security.
9. Survival. Sections 7, 8 and 12 through 19 shall survive termination of this Agreement.
10. Assignability. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Company. This Agreement may not be assigned or alienated without the prior written consent of the other party
and any attempt to do so shall be void.
11. Severability. If any provision of this Agreement otherwise is deemed to be invalid or unenforceable or is prohibited by the laws of the
state or jurisdiction where it is to be performed, this Agreement shall be considered divisible as to such provision and such provision shall be
inoperative in such state or jurisdiction and shall not be part of the consideration moving from either of the parties to the other. The remaining
provisions of this Agreement shall be valid and binding and of like effect as though such provisions were not included. If any restriction set
forth in this Agreement is deemed unreasonable in scope, it is the parties’ intent that it shall be construed in such a manner as to impose only
those restrictions that are reasonable in light of the circumstances and as are necessary to assure the Company the benefits of this Agreement.
4
12. Notices and Addresses. All notices, offers, acceptance and any other acts under this Agreement (except payment) shall be in writing,
and shall be sufficiently given if delivered to the addressees in person, by FedEx or similar overnight delivery, as follows:
If to the Company:
With a copy to:
If to the Recipient:
With a copy to:
Aspen Group, Inc.
224 W. 30th Street, Suite 604
New York, NY 10001
Attention: Michael Mathews, CEO
Email: michael.mathews@aspen.edu
Nason, Yeager, Gerson, White & Lioce, P.A.
1645 Palm Beach Lakes Blvd., Suite 1200
West Palm Beach, FL 33401
Attention: Michael D. Harris, Esq.
Email: mharris@nasonyeager.com
GT Marketing Group, LLC
Brad Powers
45 Broadway, Suite 2230,
New York, N.Y. 10006
George Cacoulidis, Esq.
590 Madison Avenue, 21st Floor
New York, N.Y. 10022
Or to such other address a either of them, by notice to the other may designate from time to time. Time shall be counted to, or from, as the case
may be, the delivery in person or by mailing.
13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. The execution of this Agreement may be by actual, facsimile or pdf signature.
5
14. Attorney’s Fees. In the event that there is any controversy or claim arising out of or relating to this Agreement, or to the
interpretation, breach or enforcement thereof, and any action or proceeding is commenced to enforce the provisions of this Agreement, the
prevailing party shall be entitled to a reasonable attorney’s fee, costs and expenses.
15. Governing Law. This Agreement and any dispute, disagreement, or issue of construction or interpretation arising hereunder
whether relating to its execution, its validity, and the obligations provided therein or performance shall be governed or interpreted according to
the internal laws of the State of New York without regard to choice of law considerations.
16. Exclusive Jurisdiction and Venue. Any action brought by either party against the other concerning the transactions
contemplated by or arising under this Agreement shall be brought only in the state or federal courts of New York and venue shall be in New
York County or appropriate federal district and division. The parties to this Agreement hereby irrevocably waive any objection to jurisdiction
and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non
conveniens.
17. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior oral and written
agreements between the parties hereto with respect to the subject matter hereof. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, except by a statement in writing signed by the party or parties against whom enforcement or
the change, waiver discharge or termination is sought.
18. Additional Documents. The parties hereto shall execute such additional instruments as may be reasonably required by their
counsel in order to carry out the purpose and intent of this Agreement and to fulfill the obligations of the parties hereunder.
19. Section and Paragraph Headings. The section and paragraph headings in this Agreement are for reference purposes only and shall
not affect the meaning or interpretation of this Agreement.
[Signature Page to Follow]
6
IN WITNESS WHEREOF, the Company and the Consultant have executed this Agreement as of the date written above.
(Print)
(Print)
(Print)
(Print)
COMPANY:
ASPEN GROUP, INC.
By: /s/ Michael Mathews
Michael Mathews, Chief Executive Officer
CONSULTANT:
By: /s/ Brad Powers
Brad Powers
7
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Michael Mathews, certify that:
1. I have reviewed this annual report on Form 10-K of Aspen Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 18, 2013
/s/ Michael Mathews
Michael Mathews
Chief Executive Officer
(Principal Executive Officer)
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, David Garrity, certify that:
1. I have reviewed this annual report on Form 10-K of Aspen Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 18, 2013
/s/ David Garrity
David Garrity
Chief Financial Officer
(Principal Financial Officer)
(Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Aspen Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012, as
filed with the Securities and Exchange Commission on the date hereof, I, Michael Mathews, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
2.
The annual report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
The information contained in the annual report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Exhibit 32.1
/s/ Michael Mathews
Michael Mathews
Chief Executive Officer
(Principal Executive Officer)
Date: March 18, 2013
In connection with the annual report of Aspen Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012, as
filed with the Securities and Exchange Commission on the date hereof, I, David Garrity, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
2.
The annual report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
The information contained in the annual report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ David Garrity
David Garrity
Chief Financial Officer
(Principal Financial Officer)
Date: March 18, 2013
Date: March 18, 2013