UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-38175
ASPEN GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
State or Other Jurisdiction of Incorporation or Organization
27-1933597
I.R.S. Employer Identification No.
276 Fifth Avenue, Suite 306, New York, New York
Address of Principal Executive Offices
10001
Zip Code
(212) 477-1210
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001
Name of each exchange on which registered: Nasdaq Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes þ 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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
the Form 10-K or any amendment to the Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, ” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Emerging growth company ¨
Accelerated filer þ
Smaller reporting company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter. Approximately $93 million based on a closing price of $7.95 on October 31, 2017.
The number of shares outstanding of the registrant’s classes of common stock, as of July 11, 2018 was 18,316,854 shares.
Portions of the registrant's Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this
Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120
days of the registrant's fiscal year ended April 30, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
INDEX
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Item 15.
Item 16.
Exhibits, Financial Statement Schedules.
Form 10-K Summary.
PART IV
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ITEM 1. BUSINESS.
PART I
Aspen Group, Inc. (together with its subsidiaries, the “Company” or “AGI”) is a holding company. AGI has two subsidiaries, Aspen
University Inc. (“Aspen University” or “Aspen”) organized in 1987 and United States University Inc. (“USU”). On March 13, 2012, the
Company was recapitalized in a reverse merger.
All references to the “Company”, “AGI”, “Aspen Group”, “we”, “our” and “us” refer to Aspen Group, Inc., unless the context otherwise
indicates.
Description of Business
AGI’s vision is to make college affordable again in America. 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 higher
education.
In March 2014, Aspen University unveiled a monthly payment plan available to all students across every online degree program offered by
Aspen University. The monthly payment plan is designed so that students will make one payment per month, and that monthly payment is
applied towards the total cost of attendance (tuition and fees, excluding textbooks). The monthly payment plan offers online associate and
bachelor students the opportunity to pay their tuition and fees at $250/month, online master students $325/month, and online doctoral
students $375/month, interest free, thereby giving students a monthly payment option versus taking out a federal financial aid loan.
USU began offering monthly payment plans in the summer of 2017. Today, monthly payment plans are available for the online RN to BSN
program ($250/month), online MBA/M.A.Ed/MSN programs ($325/month), and the online hybrid MSN-family nurse practitioner (“FNP”)
program ($375/month).
Additionally, Aspen University has just begun its first semester (July 10, 2018) for its previously announced pre-licensure Bachelor of
Science in Nursing (BSN) degree program at its initial campus in Phoenix, AZ. Aspen’s innovative hybrid (online/on-campus) program
allows most of the credits to be completed online (83 of 120 credits or 69%), with pricing offered at Aspen’s current low tuition rates of
$150/credit hour for online general education courses and $325/credit hour for online core nursing courses. For high school students with
no prior college credits, the total cost of attendance is less than $50,000.
Since 1993, Aspen University has been nationally accredited by the Distance Education and Accrediting Council (“DEAC”), a national
accrediting agency recognized by the U.S. Department of Education (the “DOE”). On February 25, 2015, the DEAC informed Aspen
University that it had renewed its accreditation for five years to January 2019.
Since 2009, USU has been regionally accredited by WASC Senior College and University Commission. (“WSCUC”).
Both universities are qualified to participate under the Higher Education Act of 1965, as amended (HEA or the Higher Education Act) and
the Federal student financial assistance programs (Title IV, HEA programs).
Competitive Strengths - We believe that we have the following competitive strengths:
Exclusively Online Education - Except for our new Aspen University pre-licensure BSN hybrid (online/on-campus) nursing program and
USU’s hybrid (online/on-campus) FNP and International MBA programs, we have designed our courses and programs specifically for
online delivery, and we recruit and train faculty for online instruction. We provide students the flexibility to study and interact at times that
suits 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 take out federal financial aid loans to fund their tuition and fees requirements.
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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. 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 online education model, our relatively low student acquisition costs,
and our variable faculty cost model will enable us to expand our operating margins. As we increase student enrollments we are 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 30 at any given time.
We also think our hybrid campus BSN nursing program has significant potential since there are large waiting lists of applicants at most
schools that offer pre-licensure BSN programs in major U.S. metropolitan areas. Specifically, there were 56,397 qualified applicants not
admitted to pre-licensure BSN programs in the 2016-2017 academic year, as reported by the AACN (2018). Our early experience in the
Phoenix area has confirmed the existence of the backlog. With limited marketing, our first semester that began on July 10, 2018 had 93
students enrolled, of which 29 entered with all pre-requisites completed, thereby entering the final two-year core nursing program. The
remaining 64 students are enrolled in general education pre-requisite courses which must be completed before being admitted into the final
two-year core nursing program. Because of the overwhelming demand for its nursing program in Phoenix, the Company is now assessing
alternative approaches that would allow Aspen University to open a second campus in Phoenix before the end of this 2019 fiscal year.
“One Student at a Time” personal care - We are committed to providing our students with highly responsive 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.
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.
Industry Overview
The U.S. market for postsecondary education is a large, but flattening market. From 2012 to 2016, total enrollments declined 4% from
20,928,443 to 20,082,977, according to Babson Survey Research Group. The survey reported that private, for-profit enrollments declined
significantly over the four year period, from 1,856,538 to 1,218,646 or -34.4%. Additionally, the survey reported that students enrolled
exclusively in distance education courses increased by 13.2% over the four year period, from 2,633,515 to 2,980,854. Again, enrollments in
this cohort in the private, for-profit segment declined by 24.3%, from 927,899 to 702,139. The market share increases among exclusively
distance education students was split between public universities and private, non-profits as both segments increased enrollments by more
than 250,000 students each. Students enrolled in “some but not all” distance education courses rose 20.1% over the four year period, from
2,791,891 to 3,353,659. The private, for-profit segment declined at a lower rate in this cohort, from 134,319 to 125,181 students or -6.8%.
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Competition
There are more than 4,600 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 universities that primarily enroll
online students. Our primarily online university competitors that are publicly traded include: American Public Education, Inc. (Nasdaq:
APEI), Adtalem Global Education (NYSE: ATGE), Grand Canyon Education, Inc. (Nasdaq: LOPE), Capella Education Company
(Nasdaq: CPLA), Strayer Education (Nasdaq: STRA) and Bridgepoint Education, Inc. (NYSE: BPI). We also compete with the privately
owned Apollo Education Group, which includes University of Phoenix and is considered the market leader based on total enrollments.
These competitors have degreed enrollments ranging from approximately 38,000 to 90,000 students. As of April 30, 2018, the Company
had 7,057 active degree-seeking students enrolled.
The primary mission of most traditional accredited four-year universities is to serve full-time students and conduct research. Most online
universities serve working adults. Aspen Group 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:
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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.
*Digest of Education Statistics, 2015, nces.ed.gov
Academics
Aspen University
School of Nursing
School of Education
School of Business and Technology
School of Professional Studies
United States University
College of Nursing
College of Business and Management
College of Education
College of Health Sciences
Extended Studies
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Sales and Marketing
Following Mr. Michael Mathews becoming Aspen’s Chief Executive Officer in May 2011, Mr. Mathews and his team made significant
changes to Aspen’s sales and marketing program, specifically spending a significant amount of time, money and resources on our
proprietary Internet marketing program. What is unique about our Internet marketing program is that we have not used and 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 Group 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 Group university-specific branded, proprietary leads.
Additionally, given the launch of the pre-licensure BSN hybrid (online/on-campus) program in Phoenix, AZ, the Company has begun to
augment its Internet advertising marketing with local radio spots in the Phoenix metro area.
Employees
As of July 9, 2018, we had 305 full-time employees, and 196 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. In February 2012, Aspen Group reincorporated in Delaware under the
name Aspen Group, Inc.
Aspen University was incorporated on September 30, 2004 in Delaware. Its predecessor was a Delaware limited liability company
organized in Delaware in 1999. On March 13, 2012, Aspen Group which was then inactive acquired Aspen in a transaction we refer to as
the Reverse Merger. On December 1, 2017, Aspen Group acquired USU.
Regulation
Students attending our schools finance their education through a combination of individual resources, corporate reimbursement programs
and federal student financial assistance funds available through our participation in the Title IV 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. Further, regulatory compliance is also expensive. Beyond the internal costs, compliance with the extensive regulatory
requirements also involves engagement of outside regulatory professionals.
To participate in Title IV Programs, a school must, among other things, be:
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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, Arizona and California);
Accredited by an accrediting agency recognized by the Secretary of DOE; and
Certified as an eligible institution by DOE.
State Authorization
Based on DOE’s regulation, originally scheduled to go into effect on July 1, 2018, Title IV Program institutions, like ours, that offer
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 postsecondary education to
students in that state and provide specific consumer disclosures regarding educational programs. The institution must be able to document
state approval for distance education if requested by DOE.
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However, on May 25, 2018, the DOE published an announcement in the Federal Register that proposes a two-year delay, until July 1,
2020, of the effective date of the final state authorization of distance education. On July 3, 2018, the DOE delayed the rules going into
effect. According to the Notice, the regulatory delay was prompted by the receipt of letters from the American Council on Education, the
Western Interstate Commission for Higher Education, the Cooperative for Educational Technologies, the National Council for State
Authorization Reciprocity, and the Distance Education Accrediting Commission. The organizations stated that they needed information as
to how to comply with the regulations, including how the term “residence” as described in the preamble of the 2016 regulations may
conflict with state laws and how to disclose to students the appropriate state complaint process when a number of states, including
California, do not currently have complaint processes. The organizations also pointed out that there is widespread confusion with respect to
the public and individualized disclosures of State licensure eligibility for every discipline that requires a license to enter a profession. The
Department of Education said that because of the “complexity of these issues, we are not confident that we could develop a workable
solution through guidance and without the input of negotiators who have been engaged in meeting these requirements.” The Notice said
that since guidance is nonbinding, negotiated rulemaking is the most appropriate vehicle to provide substantive clarification necessary to
stakeholders.
Because we are subject to extensive regulations by the states in which we become authorized or licensed to operate, we must abide by state
laws that 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 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,
(“Colorado Department”) or Arizona State Board for Private Postsecondary Education (“Arizona Board”), and USU losing its authorization
from the California Bureau for Private Postsecondary Education (“California Bureau”). In such event, the school would lose its eligibility
to participate in Title IV Programs, or its ability to offer certain programs, any of which may force us to cease the school’s operations.
Additionally, Aspen and USU are Delaware corporations. 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. On April 25, 2016, the Delaware
DOE informed Aspen University it was granted full approval to operate with degree-granting authority in the State of Delaware until July
1, 2020. The Delaware DOE has accepted USU’s application and we’re awaiting formal confirmation that USU has been granted
provisional status following receipt of payment. The hybrid Phoenix campus is operated by a wholly-owned Delaware corporation which
intends to apply to the Delaware DOE.
Accreditation
Aspen is accredited by the DEAC, a national accrediting agency recognized by DOE, and USU is accredited by WSCUC, a regional
accrediting agency recognized by DOE. Accreditation is a non-governmental system for evaluating educational institutions and their
programs in areas including 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 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 is important to our schools for several reasons. Other institutions 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 DOE is necessary for eligibility to participate in the Title IV
Programs. From time to time, accrediting agencies adopt or make changes to its policies, procedures and standards. If our schools fail to
comply with any of these requirements, the non-complying school’s accreditation status could be at risk.
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In addition to institutional accreditation, there are numerous specialized accrediting commissions that accredit specific programs or schools
within their jurisdiction, many of which are in healthcare and professional fields. Some of our schools baccalaureate and master’s degree
programs in nursing hold specialized accreditation from the CCNE. CCNE is officially recognized by DOE and provides specialized
accreditation for nursing programs. Accreditation of specific nursing programs by CCNE signifies that those programs have met the
additional standards of that agency. If we fail to satisfy the standards of any of these specialized accrediting commissions, we could lose the
specialized accreditation for the affected programs, which could result in materially reduced student enrollments in those programs and
prevent our students from seeking and obtaining appropriate licensure in their fields.
State Education Licensure and Regulation
As an institution of higher education that grants degrees and certificates, we are required to be authorized by applicable state education
authorities which exercise regulatory oversight of our institutions. In addition, in order to participate in the Title IV Programs, we must be
authorized by the applicable state education agencies.
Aspen University is an approved institutional participant in SARA. SARA is intended to make it easier for students to take online courses
offered by postsecondary institutions based in another state. SARA is overseen by a National Council (“NCSARA”) and administered by
four regional education compacts. There is a yearly renewal for participating in NC-SARA and CO-SARA and institutions must agree to
meet certain requirements to participate.
The only state that does not participate in SARA is California, so they may in the future impose regulatory requirements on out-of-state
educational institutions operating within their boundaries, such as those having a physical facility or conducting certain academic activities
within the state. Aspen University currently enrolls students in all 50 states. While we do not believe that any of the states in which our
schools are currently licensed or authorized, other than Colorado, Arizona and California, are individually material to our operations, the
loss of licensure or authorization in any state could prohibit us from recruiting prospective students or offering services to current students
in that state, which could significantly reduce our enrollments.
Because USU is based in California, which does not participate in SARA, USU must obtain authorization in every state in which it intends
to market and enroll online students, which was the standard method prior to the formation of SARA. USU currently is approved in 34
states and is in the application process with 6 additional states.
Individual state laws establish standards in areas such as instruction, qualifications of faculty, administrative procedures, marketing,
recruiting, financial operations, and other operational matters, some of which are different than the standards prescribed by the Colorado
Department, the Arizona Board and the California Bureau. Laws in some states limit schools’ ability to offer educational programs and
award degrees to residents of those states. Some states also prescribe financial regulations that are different from those of DOE, and many
require the posting of surety bonds. Laws, regulations, or interpretations related to online education could increase our cost of doing
business and affect our ability to recruit students in particular states, which could, in turn, negatively affect enrollments and revenues and
have a material adverse effect on our business.
Nature of Federal, State and Private Financial Support for Postsecondary Education
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 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 mission is to offer students the opportunity to fund their education without relying on student loans. In March 2014, Aspen University
launched a $250 monthly payment plan for bachelor students and a $325 monthly payment plan for master students, and subsequently a
$375 monthly payment plan for doctoral students. Since initiation of this mission, 66% of our courses are paid through monthly payment
methods (based on courses started over the last 90 days). In 2017, USU implemented this monthly payment plan and as of April 30, 2018
had 293 students paying through a monthly payment method which represents 53% of USU’s total active student body.
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When our students borrow from the federal government, they 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. For the fiscal year ended
April 30, 2018, approximately 21% of Aspen University’s cash-basis revenues for eligible tuition and fees were derived from Title IV
Programs. Therefore, the majority of Aspen University students self-finance all or a portion of their education. For the calendar year ended
December 31, 2017, approximately 58% of United States University’s cash-basis revenues for eligible tuition and fees were derived from
Title IV Programs. The Company expects USU’s Title IV revenue percentage to decline in future periods given their adoption of the
monthly payment plan in 2017.
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, 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.
For Pell grants, DOE makes grants to undergraduate students who demonstrate financial need. To date, few of our students have received
Pell Grants. Accordingly, the Pell Grant program currently is not material to the Company’s cash revenues.
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 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 institutions are subject to
extensive oversight and review. Because 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 six 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 institutions.
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 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:
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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 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;
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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.
DOE regulations also 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 Program 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, DOE may:
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·
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Require the repayment of Title IV Program funds;
Transfer the institution from the “advance” system of payment of Title IV Program 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 DOE’s “administrative capability” requirements, we could lose, or be limited in our access to, Title IV
Program funding. USU currently has posted a letter of credit (LOC) in the amount of $71,634 in response to a compliance audit that
reported the university had a repeat finding related to late R2T4 (return to Title IV) returns.
Distance Education. We offer all of our existing degree and certificate programs via Internet-based telecommunications from our
headquarters in Colorado, Arizona and California. 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.
On December 16, 2016, DOE issued a final rule that requires institutions to meet all state requirements for legally offering distance
education in any state in which the institution is offering distance education courses. The rule was scheduled to go into effect on July 1,
2018 which has been delayed until July 1, 2020. See “Risk Factors” in Item 1A of this Report.
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 the 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 DOE for liabilities incurred in programs administered by DOE.
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. DOE may also apply such measures of
financial responsibility to the operating company and ownership entities of an eligible institution.
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Although we believe our schools met the minimum composite score necessary to meet the financial ratio standard for fiscal year 2018,
DOE may determine that our calculations are incorrect, and/or it may determine that either or both of our schools continue to not meet
other financial responsibility standards. If DOE were to determine that we do not meet its financial responsibility standards, we may be able
to continue to establish financial responsibility on an alternative basis. Alternative bases include, for example:
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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 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 DOE’s standard advance payment arrangement such as the “reimbursement” system of payment or cash monitoring.
Failure to meet DOE’s “financial responsibility” requirements, either because we do not meet 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.
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 Program 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 Program provision. An institution must report to 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.
Return of Title IV Program Funds. Under DOE’s return of funds regulations, when a student withdraws, an institution must return unearned
funds to 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 fiscal 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 or a DOE program review constitutes material non-compliance with the Title IV Program
requirements.
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.” 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 DOE. For the year ended April 30, 2018, approximately 21% of
Aspen’s revenues were derived from Title IV Programs. For the year ended December 31, 2017, 58% of USU’s revenues were derived
from Title IV Programs.
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 two federal fiscal years. For such institutions, 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.
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If DOE notifies an institution that its cohort default rates for each of the three most recent federal fiscal years are 30% 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 to 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 DOE and may be subject to summary adverse action if it violates Title IV Program requirements. If an
institution’s default rate exceeds 40% for one federal fiscal year, the institution may lose eligibility to participate in some or all Title IV
Programs. Aspen’s official cohort default rates in 2012, 2013 and 2014 were 12.5%, 6.4% and 6.2%, respectively. USU’s official cohort
default rates in 2012, 2013 and 2014 were 3.9%, 3.5% and 9.6%, respectively.
Incentive Compensation Rules. As a part of an institution’s program participation agreement with 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 U.S. Government Accountability Office (the “GAO”) released a report finding that DOE has inadequately enforced the current ban on
incentive payments. In response, 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 DOE incentive payment rule.
Code of Conduct Related to Student Loans. As part of an institution’s program participation agreement with 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.
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Misrepresentation. The Higher Education Act and current regulations authorize 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. DOE regulations define “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 DOE may take if it determines that an institution has engaged in substantial
misrepresentation. 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 Program aid an institution may disburse during a payment period.
Recently, both Congress and DOE have increased their focus on institutions’ policies for awarding credit hours. DOE regulations define the
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 DOE determines that an institution is out of compliance with the credit hour definition, DOE could require the institution to repay the
incorrectly awarded amounts of Title IV Program aid. In addition, if DOE determines that an institution has significantly overstated the
amount of credit hours assigned to a program, 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 DOE, its Office of Inspector General, state licensing agencies, and accrediting agencies. As part of 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 DOE. These auditing standards differ from those followed in the audit of our consolidated financial statements
contained herein. In addition, to enable DOE to make a determination of financial responsibility, institutions must annually submit audited
financial statements prepared in accordance with DOE regulations. Furthermore, DOE regularly conducts program reviews of education
institutions that are participating in the Title IV Programs, and the Office of Inspector General of 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,
DOE planned to strengthen its oversight of Title IV Programs through, among other approaches, increasing the number of program
reviews.
Potential Effect of Regulatory Violations. If we fail to comply with the regulatory standards governing Title IV Programs, DOE could
impose one or more sanctions, including transferring the non-complying school 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 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. In addition, the failure to
comply with the Title IV Program requirements by one institution could increase DOE scrutiny of the other institution and could impact
the other institution’s 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 educational programs. Many states require approval before institutions can add new programs under specified
conditions. The Colorado Commission on Higher Education, the Arizona Board, the California Bureau for Private Postsecondary
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.
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On August 22, 2017, DOE recertified Aspen University to participate in Title IV Programs, and set a subsequent program participation
agreement reapplication date of March 31, 2021. USU currently has temporary provisional certification to participate in the Title IV
Programs due to the change of ownership which occurred in December 2017. The provisional certification allows the school to continue to
receive Title IV funding as it did prior to the change of ownership. As a result of the change of ownership, the DOE informed USU that it
must post a letter of credit in the amount of $255,708 and distribute funds under the Heightened Cash Monitoring 1 (HCM1) payment
method by September 3, 2018. USU intends to meet the deadline as requested.
In the future, DOE may impose terms and conditions in any program participation agreement that it may issue, including growth
restrictions or limitation on the number of students who may receive Title IV Program aid.
DOE regulations regarding Gainful Employment (“GE”) programs also require all institutions to notify DOE when establishing new
programs by updating the program list on the institution’s Eligibility and Certification Approval Report. The institution must also provide
certifications to DOE signed by a senior administrative official attesting that the new program meets certain accreditation and state
licensure requirements.
DEAC and WSCUC 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, only proprietary school programs that lead to gainful employment in a recognized
occupation are eligible to participate in Title IV Program funding. DOE’s GE regulations define the requirements that programs at
proprietary institutions must meet in order to be considered a GE program that is eligible for Title IV Program funding. The final GE
regulations were published on October 31, 2014 and went into effect on July 1, 2015. Under the regulations, all GE programs must meet
certain metrics regarding their graduates’ debt-to-earnings (“D/E”) ratios to maintain Title IV Program eligibility. Specifically, the 2015
regulations include two debt-to-earnings metrics.
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Debt-to-annual earnings (“aDTE”) metric which compares the annual loan payment required on the median student loan
debt incurred by students receiving Title IV program funds who completed that particular program to the higher of the
mean or median of those graduates’ annual earnings approximately two to four years after they graduate; and
Debt-to-discretionary income (“dDTI”) metric which compares the annual loan payment required on the median student
loan debt incurred by students receiving Title IV Program funds who completed a particular program to the higher of the
mean or median of those graduates’ discretionary income approximately two to four years after they graduate.
A program must achieve an aDTE rate at or below 8%, or a dDTI rate at or below 20%, to pass the D/E metrics. A program that does not
have a passing rate under either the aDTE or dDTI rates, but has an aDTE rate greater than 8% but less than or equal to 12%, or a dDTI rate
greater than 20% but less than or equal to 30%, is considered “in the zone.” A program with an aDTE rate greater than 12% and a dDTI
rate greater than 30%, is failing the D/E metrics. A program loses Title IV eligibility for three years, if its aDTE rate and dDTI rate are
failing in two out of any three consecutive award years or both of those rates are either failing or in the zone for four consecutive award
years for which the DOE calculates D/E Rates. When a program loses Title IV eligibility, institutions are also restricted from establishing
“substantially similar” programs for three years. Programs are “substantially similar” based on having a classification of instructional
program (“CIP”) code that has the same first four credits.
If DOE notifies an institution that a program could become ineligible based on its final D/E rates for the next award year:
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The institution must provide a warning with respect to the program to students and prospective students indicating that
students may not be able to use Title IV funds to attend or continue in the program; and
The institution must not enroll, register or enter into a financial commitment with a prospective student until a specified
time after providing the warning to the prospective student.
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However, an institution that timely filed a Notice of Intent to submit an alternate earnings appeal is not required to issue the student
warnings until after DOE has reviewed the appeal and issued a final rates determination. The earnings appeal element of the rule was
intended to become effective immediately following the issuance of rates in January 2017, but was delayed once in March, and again in
June 2017. On June 30, 2017, DOE issued a Notice indicating that it would delay the July 1 deadline for submitting an alternate earnings
appeal until new processes are established for those appeals. The DOE stated that it would provide additional guidance within 30 days. In
the meantime, programs that filed an intent to appeal are not required to issue the student warnings and were granted additional time to
complete the appeals process.
The GE Regulations also include certain disclosure requirements, which were scheduled to become effective on January 1, 2017. The
GE rule’s disclosure provisions require institution to provide disclosures to students on their websites about each of their GE
programs using a template developed by DOE for this purpose. Each GE program’s disclosure must include information such as the
occupations that the program prepares students to enter, total program cost, on-time completion rate, job placement rate (if the
institution is required to calculate the rate by their state or accreditation agency), and median loan debt of students who complete the
program, among other items. The new disclosure template was published in January 2017, but the deadline for publishing the
templates was extended until July 1, 2018. However, in conjunction with the delay issued on June 30, 2017, the requirement to issue
the disclosure template was also delayed, in part. The disclosure requirement consists of three forms of disclosure: 1) inclusion of the
template, or a prominent link to the template, on any web page containing academic, cost, financial aid, or admissions information
about a GE program maintained by or on behalf of an institution; 2) inclusion of the template, or a prominent link to it, in all GE
program promotional materials; and 3) personalized delivery (whether in person or by email) to any prospective student prior to
signing an enrollment agreement with an institution. While the June 30 notice delayed the latter two requirements until July 1, 2018,
the requirement to post the template or link on the institution’s webpage became effective on July 1, 2018. We have published the
disclosure templates on the required webpages, prior to the July 1 deadline.
Further, institutions are required to annually report student and program level data to DOE for each Title IV student enrolled in a GE
program. The deadlines to report GE data thus far were in July and October 2015, 2016 and 2017. Annual reporting is scheduled for
October 1, and as of now, DOE has not indicated any planned delay to the 2018 reporting deadline. We have reported all required
student data by these submission deadlines.
Institutions were required to certify that eligible GE programs are programmatically accredited if required by a federal governmental
entity or a state governmental entity of a state in which it is located or is otherwise required to obtain state approval, and that each
eligible program satisfies the applicable educational prerequisites for professional licensure or certification requirements in each state
in which it is located or is otherwise required to obtain state approval, so that a student who completes the program and seeks
employment in that state qualifies to take any licensure or certification exam that is needed for the student to practice or find
employment in an occupation that the program prepares students to enter. We submitted these certifications in a timely manner. As
discussed previously, DOE requires institutions to update these certifications regarding any new programs they wish to add as well.
The new GE 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.
Although the rules regarding GE 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 because the D/E rates are impacted by numerous factors
outside of our control. 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, etc. are all factors that could
impact our D/E rates. In addition, even though we may be able to improve our D/E rates before losing Title IV eligibility for a GE program,
the warning 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 certain types of programs for which there is market demand, thus affecting our ability to maintain or grow our business.
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At this time, the long term impact of the GE rule is still unclear, as DOE issued a Notice of Proposed Rulemaking on June 16, announcing
their intent to empanel a new negotiating committee to examine and rewrite the GE (and Borrower Defense to Repayment) rules. It is likely
that this rulemaking will change the GE rule, but the impact of those changes would not be apparent until after July 2019, at the earliest. In
the meantime, DOE has not indicated its intent to further delay any other elements of the Rule while the rulemaking is underway. If DOE
continues on its current path, programs that failed the first set of D/E rates could lose eligibility in the coming year.
There is significant continued activity around the specifics of the GE rule requirements. DOE issued the first set of GE rates in January
2017. DOE has now announced that it plans to release the draft “completer’s lists” later this spring in preparation for the second round of
GE rates. Under the existing rule, this second round of rates could result in the loss of eligibility for any program that failed in the first and
second years. Preparing the completers lists is the first step in the process for DOE to issue the next set of D/E rates for GE programs. This
step is followed by a challenge period, DOE’s release of draft debt data, another corresponding challenge period and finally, the second
round of GE rates, followed by their own appeal period. The recently concluded negotiated rulemaking should lead DOE to publish a new
rule no later than November 1, 2018. Without consensus, DOE is free to write its own GE rule. If the proposals discussed at the final
rulemaking session are indications of DOE’s intent, we will likely see a rule that could significantly change both the scope and impact of
the GE rule.
The GE rule implementation may also be impacted by a lawsuit brought by 18 state attorneys general alleging that DOE has violated both
the Higher Education Act and the Administrative Procedures Act by delaying implementation of various requirements of the GE rule,
which the AG’s argue is a “de facto rescission.” In response, the Department of Justice argues that DOE’s electronic announcements and
other notices postponing the effective date of certain aspects of the GE rule are not “final agency action,” so it is premature for the states to
seek relief in federal court.
Eligibility and Certification Procedures. Each institution must periodically apply to 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 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.
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. 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.
As a result of the change of ownership, the DOE informed USU that it must post a letter of credit in the amount of $255,708 and distribute
funds under the Heightened Cash Monitoring 1 (HCM1) payment method by September 3, 2018 in order to continue with its provisional
certification status. USU intends to meet the deadline as requested.
In addition, during the period of provisional certification, the institution must comply with any additional conditions included in its program
participation agreement. If 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 remain eligible to receive
Title IV Program funds.
Borrower Defense to Repayment (“BDTR”). DOE’s current regulations provide borrowers of loans under the William D. Ford Federal
Direct Loan (“FDL”) program a defense against an attempt to collect such loans based on any act or omission of the institution that would
give rise to a cause of action under the applicable state law. In the event the borrower’s defense against repayment is successful, DOE has
the authority to discharge all or part of the student’s obligation to repay the loan, and may require the institution to repay the amount of the
loan to which the defense applies.
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In addition to the current regulation, the new BDTR was published November 1, 2016, with an anticipated July 1, 2017 effective date. In
mid-June of 2017, DOE announced an “indefinite delay” in the implementation of the rule due to a lawsuit brought by the California
Association for Private Postsecondary Schools (“CAPPS”) challenging elements of the rule. In a second notice on the same day, DOE
announced that, in addition to the legal challenge, DOE’s own internal analysis indicated that the rule needed “further work,” and a new
negotiated rulemaking panel would be convened to draft a new version.
In October 2017, DOE issued two new notices, the first rescinding DOE’s earlier indefinite delay of the effective date for BDTR, replacing
it with a new effective date of July 1, 2018 and the second extending the delay to July 1, 2019. The reason articulated by DOE for the first
delay was to align the new effective date with DOE’s master calendar; the justification for the second delay is to allow the BDTR
negotiated rulemaking process to be completed before requiring schools to comply. The now-postponed rule is also the subject of multiple
lawsuits – including the CAPPS suit noted above and another from a coalition of state attorneys general who argue that DOE does not have
the authority to delay the effective date of an existing regulation. It also argues that by not implementing the rule, DOE is amending the
regulation without required rulemaking, notice and comment periods in violation of the Administrative Procedures Act.
DOE has indicated in the notices that it will continue to process borrower claims under the current regulation until replaced by a new rule.
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. DOE, most state education agencies, and DEAC 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 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 accreditations,
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.
When a change of ownership resulting in a change of control occurs at a for-profit institution, 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 also demonstrate positive tangible
net worth. If the institution does not satisfy these requirements, 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 DOE to act on a change in ownership and control application may vary
substantially. As a result of the change of ownership, the DOE informed USU that it must post a letter of credit in the amount of $255,708
by September 3, 2018 and distribute funds under the Heightened Cash Monitoring 1 (HCM1) payment method in order to continue with its
provisional certification status. USU intends to meet the deadline as requested. See “Risk Factors” contained in Item 1A of this Report.
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. Similarly to the Company’s acquisition of USU, we may expand through acquisition of related or synergistic
businesses. Our internal growth is subject to monitoring and ultimately approval by the DEAC and WSCUC. If the DEAC or WSCUC
finds that the growth may adversely affect our academic quality, the DEAC or WSCUC can request us to slow the growth and potentially
withdraw accreditation and require us to re-apply for accreditation. DOE may also impose growth restrictions on an institution, including in
connection with a change in ownership and control.
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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 Group. 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
If we are unable to successfully integrate USU with Aspen Group, we may not realize all of the anticipated benefits of the USU
Acquisition.
The success of the USU acquisition (the “Acquisition”) will depend, in large part, on the ability of the Aspen Group to realize the
anticipated benefits from the Acquisition. To realize the anticipated benefits of the Acquisition, Aspen Group must successfully integrate
the marketing and technology functions it has developed for Aspen University with USU. Further, it must integrate USU’s executive team
into the Aspen Group culture. This integration may be complex and time-consuming.
Potential difficulties Aspen Group may encounter include, among others:
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Failure to replicate Aspen’s marketing success on behalf of USU;
Unanticipated issues in integrating logistics, information, communications and other systems;
Integrating personnel from the two companies while maintaining focus on providing a consistent, high quality level of education;
Aspen Group’s success in integrating the Aspen University technology with USU in a seamless manner that minimizes any
adverse impact on students, employees and vendors;
Performance shortfalls at USU or Aspen University as a result of the diversion of Aspen Group ’s management's attention from
day-to-day operations caused by activities surrounding the completion of the Acquisition and integration of the companies’
marketing and management functions;
Potential unknown liabilities, liabilities that are significantly larger than anticipated, or unforeseen expenses or delays associated
with the Acquisition and the integration process;
Unanticipated changes in applicable laws and regulations; and
Complexities associated with managing the larger business.
Some of these factors are outside the control of Aspen Group or USU.
The failure of Aspen Group to successfully integrate USU or otherwise to realize any of the anticipated benefits of the Acquisition could
adversely affect its results of operations. The integration process maybe more difficult, costly or time-consuming than anticipated, which
could cause Aspen Group’s stock price to decline.
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 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. We have experienced growth at Aspen University over the last several years and USU is growing since we acquired
it. Further, we lack experience in managing hybrid online/campus programs and anticipate substantial growth from our Phoenix program in
particular and USU’s FNP program. Assuming we continue to grow as planned, it may impact our ability to manage our business. 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 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. 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. Major
brick and mortar universities continue to develop and advertise their online course offerings. Purdue University’s 2017 acquisition of
Kaplan University is a prime example of this change.
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. These competitive factors
could cause our enrollments, revenues and profitability to materially decrease.
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 DOE for Title IV purposes if the institution is provisionally certified. 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:
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Grow our nursing programs including Aspen University’s core Bachelor’s and Master’s Degree programs, USU’s FNP and
Aspen University’s pre-licensure BSN hybrid online/campus program which began its initial classes on July 10, 2018;
Grow Aspen University’s doctoral programs;
Replicating the success we have had with nursing in other programs;
Achieve the same degree of success with USU;
Create greater awareness of our schools 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).
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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.
Because we are an almost exclusively online provider of education, we are substantially dependent on continued growth and
acceptance of 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 necessary 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.
Although our management has successfully implemented a monthly payment business model, it may not be successful long-term.
Mr. Michael Mathews, our Chief Executive Officer, has developed a monthly payment business model designed to substantially increase
our student enrollment and reduce student debt among Aspen University’s and USU’s student bodies. While results to date have been as
anticipated, there are no assurances that this marketing campaign will continue to be successful. Among the risks are the following:
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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 incentive compensation rule;
Performance problems with our online systems;
Our 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;
Potential USU students may not react favorably to our marketing and advertising campaigns, including our monthly payment
plan; and
The failure to collect our growing accounts receivable.
If our monthly payment plan business model does not continue to be favorably received, our revenues may not increase.
If the demand for the nursing workforce decreases or the educational requirements for nurses were relaxed, our business will be
adversely affected.
Aspen University’s recent focus has been the continued growth of enrollment in its School of Nursing. As of April 30, 2018, approximately
74% of our active degree-seeking were enrolled in Aspen University’s School of Nursing. If the demand for nurses does not continue to
grow (or declines) or there are changes within the healthcare industry that make the nursing occupation less attractive to learners or reduce
the benefits of a bachelors or an advanced degree, our enrollment and results of operations will be adversely affected.
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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.
Since early 2011, Aspen University has made significant investments to update its computer network primarily to permit accelerated
student enrollment and enhance its students’ learning experience. USU is using the same information technology improvements. 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, hacking or cyber security issues and
telecommunications failures.
If we are unable to develop awareness among, and attract and retain, high quality learners to our schools, our ability to generate
significant revenue or achieve profitability will be significantly impaired.
Building awareness of Aspen University and USU and the programs we offer among working adult professionals is critical to our ability to
attract prospective learners. If we are unable to successfully market and advertise our educational programs, Aspen University’s ability to
attract and enroll prospective learners in such programs could be adversely affected, and consequently, our ability to increase revenue or
achieve profitability could be impaired. It is also critical to our success that we convert these prospective learners to enrolled learners in a
cost-effective manner and that these enrolled learners remain active in our programs. Some of the factors that could prevent us from
successfully enrolling and retaining learners in our programs include:
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The emergence of more successful competitors;
Factors related to our marketing, including the costs of Internet advertising and broad-based branding campaigns;
Performance problems with our online systems;
Failure to maintain accreditation;
Learner dissatisfaction with our services and programs, including with our customer service and responsiveness;
Adverse publicity regarding us, our competitors, or online or for-profit education in general;
Price reductions by competitors that we are unwilling or unable to match;
A decline in the acceptance of online education or our degree offerings by learners or current and prospective employers;
Increased regulation of online education, including in states in which we do not have a physical presence;
A decrease in the perceived or actual economic benefits that learners derive from our programs;
Litigation or regulatory investigations that may damage our reputation; and
Difficulties in executing on our strategy as a preferred provider to employers for the vertical markets we serve.
If we are unable to continue to develop awareness of Aspen University and USU and the programs we offer, and to enroll and retain
learners, our enrollments would suffer and our ability to increase revenues and achieve profitability would be significantly impaired.
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 any breaches.
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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 learning management system 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 classrooms at Aspen University and USU employ the Desire2Learn (renamed to D2L in 2017) learning management system
named Brightspace. 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. We rely on third parties to host and help with the administration of it. We further
rely on third parties, the D2L agreement and our internal staff for ongoing support and customization and integration of the system with the
rest of our technology infrastructure. If D2L 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 University
and USU use 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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If our data or our users’ content is hacked, including through privacy and data security breaches, our business could be damaged,
and we could be subject to liability.
Our business is and we expect it will continue to be almost exclusively reliant upon the Internet. Cyber security events have caused
significant damage to large well-known companies. If our systems are hacked and our students’ confidential information is misappropriated
we could be subject to liability.
We may fail to detect the existence of a breach of user content and be unable to prevent unauthorized access to user and company content.
The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often not
recognized until launched against a target. They may originate from less regulated third world countries where lax local enforcement and
poverty create opportunities for hacking. If our security measures are breached, or our students’ content is otherwise accessed through
unauthorized means, or if any such actions are believed to occur, Aspen University and USU may lose existing students and or fail to enroll
new students or otherwise be materially harmed.
Because the CAN-SPAM Act imposes certain obligations on the senders of commercial emails, it could adversely impact our ability
to market Aspen University’s and USU’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 the 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:
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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.
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Because we use email marketing, our requirement to comply with the CAN-SPAM Act could adversely affect our marketing activities and
increase its costs.
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, Mr. Gerard Wendolowski, our Chief Operating Officer, and Dr. Cheri St. Arnauld, our
Chief Academic Officer, 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. We have a $3 million key man life insurance policy on Mr. Mathews. The loss of the services of Mr.
Mathews 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. Further, we are moving to a new hybrid model focused on using full-time faculty members in
addition to adjunct or part-time faculty. These efforts may not be successful resulting in the loss of faculty and difficulties in recruiting.
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.
Our business could be harmed by any significant disruption of service on our websites.
Because of the importance of the Internet to our business, in addition to cybersecurity we face the risk that our systems will fail to function
in a robust manner. Our reputation, and ability to attract, retain, and serve our students are dependent upon the reliable performance of our
websites, including our underlying technical infrastructure. Our technical infrastructure may not be adequately designed with sufficient
reliability and redundancy to avoid performance delays or outages that could be harmful to our business. If our websites are unavailable
when students and professors attempt to access them, or if they experience frequent slowdowns or disruptions, we may lose students and
professors.
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. Very recently in 2018 the United
States Supreme Court ruled that states can tax the sale of goods sold to residents of their respective state. We cannot predict the effect of
current or future 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.
If our goodwill on our balance sheet arising from the USU Acquisition becomes impaired, it would require us to record a material
charge to earnings in accordance with generally accepted accounting principles.
As a result of our acquisition of USU, we recorded approximately $5 million of goodwill as an asset on our on our balance sheet at April
30, 2018. Generally Accepted Accounting Principles (“GAAP”) require us to test our goodwill for impairment on an annual basis, or more
frequently if indicators for potential impairment exist. The testing required by GAAP involves estimates and judgments by management.
Although we believe our assumptions and estimates are reasonable and appropriate, any changes in key assumptions, including a failure to
meet business plans or other unanticipated events and circumstances, may affect the accuracy or validity of such estimates. If in the future
we determine an impairment exists, we may be required to record a material charge to earnings in our consolidated financial statements
during the period in which any impairment of our goodwill is determined.
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If our assumptions with respect to our long-term accounts receivable prove to be inaccurate, we may be required to take a charge
to our accounts receivable and incur a material non cash charge to earnings.
As a result of the growing acceptance of our monthly payment plans, our long-term accounts receivable balance has grown from $657,542
at April 30, 2017 to $1,315,050 at April 30, 2018. The primary component consists of students who make monthly payments over 36 and
39 months. The average student completes their academic program in 24 months, therefore most of the Company’s accounts receivable are
short-term. Our ability to collect the sums owed directly by students in contrast to the federal government or other third parties is directly
tied to the future ability of students to pay us and their other obligations stemming from a variety of factors including the impact of an
economic decline in the United States, the students’ individual and family financial conditions, including unemployment and under-
employment, health issues which affect students, and/or family members and whether students continue with their courses or cease taking
courses. While our management, based on its experience, makes assumptions which affect the reserves we take to our long-term accounts
receivable, these assumptions may be incorrect and the above or other factors may cause to increase our reserves and reduce the long-term
accounts receivable on our balance sheet. The amount of any future reductions we take may be a non-cash material charge to future
earnings.
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 Program funds.
We are subject to extensive regulation by (1) the federal government through DOE under the Higher Education Act, (2) state regulatory
bodies and (3) accrediting agencies recognized by DOE, including DEAC, a “national accrediting agency” recognized by DOE, and
WSCUC, a “regional accrediting agency” recognized by DOE. In addition, 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 laws, 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.
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, 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. Accreditation is also required in order to participate in various federal programs, including
tuition assistance programs of the United States Armed Forces and the federal programs of student financial assistance administered
pursuant to Title IV of the Higher Education Act. The Higher Education Act and its implementing regulations require accrediting agencies
recognized by 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
DOE, include loans made directly to students by DOE and 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 DOE. Our growth strategy is partly dependent on being able to offer financial
assistance through Title IV Programs as it may increase the number of potential students who may choose to enroll in our programs.
The laws, regulations, standards, and policies of 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 laws,
regulations, standards and policies also could result in our being required to pay monetary damages, or subjected to fines, penalties,
injunctions, limitations on our operations, termination of our ability to grant degrees, revocation of our accreditation, restrictions on or loss
of our access to Title IV Program funds or other censure that could have a material adverse effect on our business.
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If we do not maintain authorization in Colorado, Arizona and California, our operations would be curtailed, and we may not grant
degrees.
Aspen University is headquartered in Colorado and is authorized by the Colorado Commission on Higher Education to grant degrees,
diplomas or certificates. Aspen’s pre-licensure hybrid BSN program is authorized by the Arizona Board, and USU is headquartered in
California and is authorized by the California Bureau to grant degrees, diplomas or certificates. If Aspen were to lose its authorization from
the Colorado Commission on Higher Education, Aspen would be unable to provide educational services in Colorado and would lose its
eligibility to participate in the Title IV Programs. If Aspen were to lose its authorization from the Arizona Board, it would be unable to
provide educational services in Arizona. If USU were to lose its authorization from the California Bureau, it would be unable to provide
educational services in California and would lose its 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, state 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 educational programs and award degrees. Some states may also prescribe financial regulations that are different from those of 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 other penalties
or fines. 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.
In addition, DOE’s new distance education rule was scheduled to go into effect on July 1, 2018. However, on May 25, 2018, the DOE
published an announcement in the Federal Register that proposes a two-year delay, until July 1, 2020, of the effective date of the final state
authorization of distance education regulations. The new rule requires us to (i) obtain authorization to offer our programs from each state
where authorization is required or through participation in a reciprocity agreement, and (ii) provide specific consumer disclosures regarding
our educational programs. If we fail to obtain required state authorization to provide postsecondary distance education in a specific state
before the effective date for the new distance education rule, we could lose our ability to award Title IV aid to students within that state or
be required to refund Title IV funds related to jurisdictions in which we failed to have state authorization. We must be able to document
state approval for distance education if requested by DOE. In addition, the consumer disclosures required pursuant to the distance education
rule are detailed and include disclosures regarding licensure and certification requirements, state authorization, student complaints, adverse
actions by state and accreditation agencies, and refund policies. These disclosure requirements will require a considerable amount of data
gathering needed to support such disclosures and will require our institutions to closely track where students enrolled in online programs
reside during the course of their studies. These various disclosure requirements could subject us to financial penalties from DOE and
heighten the risk of potential federal and private misrepresentation claims. On July 3, 2018, the DOE published a final rule in the Federal
Register that implemented a two-year delay, until July 1, 2020, of the effective date of the final state authorization of distance education
regulations.
Moreover, 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, 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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If DOE determines that borrowers of federal student loans who attended our institutions have a defense to repayment of their
federal student loans based on a state law claim against our institution, our institution’s repayment liability to DOE could have a
material adverse effect on our enrollments, revenues and results of operations.
DOE’s current regulations provide borrowers of loans under the FDL program a defense against an attempt to collect such loans based on
any act or omission of the institution that would give rise to a cause of action under applicable state law. In the event the borrower’s
defense against repayment is successful, DOE has the authority to discharge all or part of the student’s obligation to repay the loan, and
may require the institution to repay the amount of the loan to which the defense applies.
In addition to the current regulation, the new BDTR Rule was published November 1, 2016, with an anticipated July 1, 2017 effective date.
In mid-June of 2017, DOE announced an “indefinite delay” in the implementation of the rule due to a lawsuit brought by the CAPPS
challenging elements of the rule. In a second notice on the same day, DOE announced that, in addition to the legal challenge, DOE’s own
internal analysis indicated that the rule needed “further work,” and a new negotiated rulemaking panel would be convened to draft a new
version.
In October 2017, DOE issued two new notices, the first rescinding DOE’s earlier indefinite delay of the effective date for BDTR, replacing
it with a new effective date of July 1, 2018 and the second extending the delay to July 1, 2019.
DOE has indicated in the notices that it will continue to process borrower claims under the current regulation until replaced by a new rule.
The postponed regulations, which could form the basis for any new proposed regulations, open new avenues for student borrowers to assert
a defense to repaying their loans, allow DOE to seek reimbursement for such claims from the affected institutions, and expand DOE’s
financial responsibility rules to require many more schools to post letters of credit with DOE. The postponed regulations include, among
other things:
·
·
·
Bases for borrowers to file claims: The postponed regulations set out three grounds for a borrower defense to repayment claim,
including a favorable decision for the student in a state or federal court case involving the loan; a breach of contract by the
institution; or a substantial misrepresentation by the institution about the nature of its educational program, the nature of its
financial charges, or the employability of its graduates. Claims based on a court judgment or claims to assert a defense against
loan payments that are still due can be made any time (with no statute of limitations), while other claims (such as to recoup loan
funds already repaid to DOE) must be made within six years.
Claim resolution process: The postponed regulations call for DOE to set up a fact-finding process to resolve claims. The
contemplated structure includes providing the institution with notice and an opportunity to submit evidence; however, the exact
procedures, including the opportunity to contest particular factual assertions or present in-person testimony, are not defined. In
addition, DOE has also given itself authority to process claims on a group basis, and to take the initiative to create groups and
include borrowers who have not filed a claim. Borrowers who file successful claims may have their loans forgiven in whole or in
part, with DOE reserving the right to calculate the amount of forgiveness in various ways.
Recovering funds: For debts relieved for individual borrowers, the postponed regulations give DOE the authority to initiate a
proceeding to seek repayment from the institution for any loan amounts forgiven. The details concerning how such a proceeding
would be conducted are not defined in the postponed regulations. For group relief, there is no separate proceeding. If DOE
determines a group discharge is warranted, it will automatically assign liability to the institution.
26
·
·
·
“Early warning” letter of credit triggers: DOE proposed in the postponed regulations to amend its existing financial responsibility
regulations to describe at least 10 new “early warning” triggers that would allow DOE to require an institution to post a letter of
credit with DOE to demonstrate its financial stability and assure DOE of the institution’s ability to pay borrower claims if
needed. Each trigger would authorize DOE to require an LOC in the amount of at least 10% of the Title IV funding utilized by
the institution for the most recently completed fiscal year. The triggers are intended to be cumulative, and therefore could require
an institution to post a very significant letter of credit, up to or even exceeding its Title IV funding level. The postponed
regulations would also put an institution on provisional certification immediately upon a trigger being met. In addition, if the
institution does not provide the required letter of credit within 30 days of DOE’s request, DOE may offset the institution's future
Title IV funds for up to nine months until DOE is able to capture the amount of the letter of credit. The proposed triggering
events include, among others:
a.
b.
c.
d.
e.
Lawsuits and other Actions – If the institution is subject to a liability based on a lawsuit or an audit, investigation or similar
action by a state or federal oversight agency, including any debt or liability incurred or asserted at any time during the three
most recently completed award years, with a claim or liability exceeding the lesser of 10% of the institution’s current assets
or $750,000.
Successful Borrower Defense to Repayment Claims – If the institution is required to pay more than 10% of its current
assets, or $750,000, whichever is less, to satisfy successful borrower defense claims.
Accrediting Agency Actions – If the institution is required to submit a teach-out plan or is placed on probation or issued a
show-cause in the three prior award years, regardless of the cause.
90/10 Rule – Failure to meet the 90/10 Rule revenue ratio for a single year.
Gainful Employment Rates – If more than 50% of the institution’s Title IV-recipient students in GE programs are enrolled
in GE programs with failing or zone rates (but prior to any loss of eligibility under the multi-year triggers in the GE rule).
f.
Cohort Default Rates – Two consecutive years with CDRs of 30% or higher.
Required warnings to students of new repayment rate: One section of the postponed regulations applies only to for-profit
institutions, requiring such institutions to disclose a new form of loan repayment rate in a variety of public materials, to serve as a
warning to current and potential students, when the rate is too low. This repayment rate would be calculated based on the
payment performance of an institution’s students approximately five years after its students graduate or withdraw from the
school.
Forbidding mandatory arbitration clauses and class action waivers: The postponed regulations would prohibit an institution from
incorporating a class action waiver provision, or a mandatory arbitration clause, in any agreement with students. If an institution’s
contracts currently contain a pre-dispute arbitration provision or a class waiver, the institution will be required to amend the
agreement or provide a specific notice to students, using language provided by DOE that explains that those provisions have been
changed.
If DOE determines that borrowers of FDL program loans who attended Aspen or USU have a defense to repayment of their FDL program
loans based on our acts or omissions, the repayment liability to DOE could have a material adverse effect on our financial condition, results
of operations and cash flows. Cumulative letters of credit, at 10% of the amount of Title IV Program funds received by the institution
during the most recently completed award year, could have a material adverse effect on our financial condition, results of operations and
cash flows. Additionally, if DOE determines that our loan repayment rates are too low, having to issue warnings to current and prospective
students describing the low repayment rate could have a material adverse effect on our enrollments, revenues, financial condition, results of
operations and cash flows.
27
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 University is accredited by the DEAC, which is a national accrediting agency and USU is accredited by WSCUC, which is a
regional accrediting agency. Both DEAC and WSCUC are recognized by the U.S. 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. DEAC or
WSCUC 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. In addition, although the loss of accreditation by one school would not necessarily
result in the loss of accreditation by the other school, the accreditor may consider the loss of accreditation by one school as a factor in
considering the on-going qualification for accreditation of the other school.
Because we 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.
Aspen and USU participate in Title IV Programs. 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, DOE could, among other things, impose monetary
penalties, place limitations on our operations, and/or condition or terminate the eligibility of one or both of our schools to receive Title IV
Program funds, which would limit our potential for growth and materiality and adversely affect our enrollment, revenues and results of
operations. In addition, the failure to comply with the Title IV Program requirements by one institution could increase DOE scrutiny of the
other institution and could impact the other institution’s participation in the Title IV Programs.
Because USU is only temporarily provisionally certified by 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 DOE at least every six years and possibly more frequently depending on various
factors. In certain circumstances, 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 August 22, 2017, DOE recertified Aspen
University to participate in the Title IV Programs, and set a subsequent program participation agreement reapplication date of March 31,
2021.
USU currently is operating under a temporary provisional certification to participate in the Title IV Programs due to the change of
ownership which occurred in December of 2017. The temporary provisional certification allows the school to continue to receive Title IV
funding on a month-to-month basis as it did prior to the change of ownership while DOA reviews the change of ownership. Even if DOE
certifies USU following the change of ownership, such certification will be provisional as is the case for all Title IV institutions
undergoing a change of ownership. Under provisional certification, an institution must obtain prior DOE approval to add an educational
program or make other significant changes and may be subject to closer scrutiny by DOE. In addition, if DOE determines that a
provisionally certified institution is unable to meet its responsibilities to comply with the Title IV requirements, DOE may revoke the
institution’s certification to participate in the Title IV Programs without advance notice or opportunity to challenge the action.
As a result of the change of ownership, the DOE informed USU that it must post a letter of credit in the amount of $255,708 and distribute
funds under the Heightened Cash Monitoring 1 (HCM1) payment method by September 3, 2018 in order to continue with its provisional
certification status. USU intends to meet the deadline as requested.
28
Subsequent to a compliance audit covering the period from January 1, 2015 through December 31, 2015, USU recognized that it had not
fully complied with all requirements for calculating and making timely returns of Title IV funds (R2T4). USU was required to post an
irrevocable letter of credit in the amount of 25% of the 2015 Title IV returns. An irrevocable letter of credit was established in favor of the
Secretary of Education in the amount of $71,634 as a result of this finding. In the 2016 compliance audit, USU had a material finding
related to the same issue and was required to maintain the irrevocable letter of credit in the same amount. USU will be required to maintain
the letter of credit until it has experienced two consecutive audit periods without a repeat finding. As a result of the change of ownership,
the previous letter of credit established by USU has been replaced by one provided by AGI. The amount remains unchanged.
If DOE does not ultimately approve USU’s certification to participate in Title IV Programs, USU 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 or substantive change of existing programs or imposition of a letter of
credit could impair our ability to attract and retain students and could negatively affect our financial results.
Because DOE may conduct compliance reviews of us, we may be subject to adverse actions 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 any compliance 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 the percentage of our revenues derived from Title IV Programs is too high, we could lose our ability to participate in Title IV
Programs.
Under the Higher Education Act, an institution is subject to loss of eligibility to participate in the Title IV Programs if, on a cash
accounting basis, it derives more than 90% of its fiscal year revenue from Title IV Program funds, for two consecutive fiscal years. This
rule is known as the 90/10 rule. An institution whose rate exceeds 90% for any single fiscal year is placed on provisional certification for at
least two fiscal years and may be subject to other conditions specified by the U.S. Secretary of Education. We must monitor compliance
with the 90/10 rule by both Aspen and USU. Failure to comply with the 90/10 rule for one fiscal year may result in restrictions on the
amounts of Title IV funds that may be distributed to students; restrictions on expansion; requirements related to letters of credit or any
other restrictions imposed by DOE. Additionally, if we fail to comply with the 90/10 rule for two consecutive years, we will be ineligible to
participate in Title IV Programs and any disbursements of Title IV Program funds made while ineligible must be repaid to DOE.
Further, due to scrutiny of the sector, legislative proposals have been introduced in Congress that would revise the requirements of the
90/10 rule to be stricter, including proposals that would reduce the 90% maximum under the rule to 85% and/or prohibit tuition derived
from military benefit programs to be considered when determining whether the institution has adequate non-Title IV revenue to meet the
requirements of the rule.
29
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 University and USU. 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. For example, large competitors such as ITT Tech and Corinthian Colleges, sold or shut down its schools due to
substantial regulatory investigations and DOE actions. Adverse media coverage regarding other companies in the for-profit school sector or
regarding Aspen or USU 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 DOE, Congress,
accrediting bodies, state legislatures or other governmental authorities with respect to all for-profit institutions, including Aspen and USU.
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
institutions. Any action by Congress that significantly reduces funding for Title IV Programs or the ability of our schools 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.
Further, there has been growing regulatory action and investigations of for-profit companies that offer online education. We are not in a
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 institutions and adversely affect our
revenues and results of operations.
If our efforts to comply with DOE regulations are inconsistent with how 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 DOE could impose monetary penalties, place limitations on our operations, and/or condition or terminate the eligibility
of our schools to receive Title IV Program funds. We cannot predict with certainty the effect the new and impending regulatory provisions
will have on our business.
30
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.
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 or a program review 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 DOE or otherwise be sanctioned by 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.
If we fail to demonstrate “financial responsibility,” Aspen and USU may lose their 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 DOE, or
post a letter of credit in favor of DOE and possibly accept other conditions, such as additional reporting requirements or regulatory
oversight, on its participation in Title IV Programs. 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 alternative standards for continued participation in the Title IV Programs. 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 institutions, 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, 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
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.
Because we rely on a third-party to administer our participation in Title IV Programs, its failure to comply with applicable
regulations could cause our schools to lose our eligibility to participate in Title IV Programs.
We rely on third-party assistance to comply with the complex administration of participation in Title IV Programs for each of our schools.
A third-party 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 the third-party servicer
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.
31
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. The
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 GAO, has issued a report critical of DOE’s enforcement of the incentive payment rule, and DOE has undertaken to increase
its enforcement efforts. If DOE determines that an institution violated the incentive payment rule, it may require the institution to modify
its payment arrangements to DOE’s satisfaction. DOE may also fine the institution or initiate action to limit, suspend, or terminate the
institution’s participation in the Title IV Programs. 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 DOE alleging violation of
the incentive payment provision. Such suits may prompt DOE investigations. Particularly in light of the uncertainty surrounding the
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 their student loan default rates are too high, our schools 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
limited historical default rate information. 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 University or USU 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.
If either institutional accrediting agency loses recognition by the U.S. Secretary of Education or we fail to maintain institutional
accreditation for Aspen and USU, 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 University
and USU are each accredited by a DOE-recognized accrediting body, if DOE were to limit, suspend, or terminate either accreditor’s
recognition that institution could lose its ability to participate in the Title IV Programs. If we were unable to rely on 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 DOE’s recognition process may result in increased scrutiny of
institutions by accrediting agencies.
Furthermore, based on continued scrutiny of the for-profit education sector, it is possible that accrediting bodies will respond by adopting
additional criteria, standards and policies that are intended to monitor, regulate or limit the growth of for-profit institutions like Aspen and
USU. 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 applicable accreditor.
32
If Aspen University or USU fail to meet standards regarding “gainful employment,” it may result in the loss of eligibility to
participate in Title IV Programs.
Under the GE rule, programs with high debt-to-earnings ratios would lose Title IV Program eligibility for three years based on a variety of
specific scenarios outlined by DOE. We anticipate that under the GE rule, the continuing eligibility of our educational programs for Title
IV Program funding may be 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. In addition, there is significant continued activity around the specifics of the GE rule
requirements. DOE issued the first set of GE rates in January 2017. DOE subsequently released the draft “completer’s lists” in preparation
for the second round of GE rates. Under the existing rule, this second round of rates could result in the loss of eligibility for any program
that failed in the first and second years. Preparing the completers lists is the first step in the process for DOE to issue the next set of D/E
rates for GE programs. This step is followed by a challenge period, DOE’s release of draft debt data, another corresponding challenge
period and finally, the second round of GE rates, followed by their own appeal period. The recently concluded negotiated rulemaking
should lead DOE to publish a new rule no later than November 1, 2018. Without consensus, DOE is free to write its own GE rule. If the
proposals discussed at the final rulemaking session are indications of DOE’s intent, we will likely see a rule that could significantly change
both the scope and impact of the GE rule.
The GE rule implementation may also be impacted by a lawsuit brought by 18 state attorneys general alleging that DOE has violated both
the Higher Education Act and the Administrative Procedures Act by delaying implementation of various requirements of the GE rule,
which the AG’s argue is a “de facto rescission.” In response, the Department of Justice argues that DOE’s electronic announcements and
other notices postponing the effective date of certain aspects of the GE rule are not “final agency action,” so it is premature for the states to
seek relief in federal court.
If we fail to obtain required DOE approval for new programs that prepare students for gainful employment in a recognized
occupation, it could materially and adversely affect our business.
Under the GE rule, an institution may establish a new program’s Title IV eligibility by updating the list of the institution’s programs
maintained by DOE. Significantly, an institution is prohibited from updating its list of eligible programs to include a GE program, or a GE
program that is substantially similar to a failing or zone program that the institution voluntarily discontinued or became ineligible, that was
subject to the three-year loss of eligibility until that three-year period expires. Depending on our program offerings, compliance with the
GE rule could cause delay or an inability to offer certain 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.
If we fail to comply with DOE’s substantial misrepresentation rules, it could result in sanctions against our schools.
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. DOE has expanded the activities that constitute a
substantial misrepresentation. Under 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 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 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 DOE determines
that an institution has engaged in substantial misrepresentation, 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.
33
If we fail to comply with DOE’s credit hour requirements, it could result in sanctions against our schools.
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
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 DOE if it finds systemic noncompliance or
significant noncompliance in one or more programs. 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 continues to examine the for-profit postsecondary education sector which 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.
Additionally, DOE recently created a special unit for the purpose of monitoring publicly traded for-profit educational institutions.
Moreover, political consideration could result in a reduction of Title IV funding. 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
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 or achieve positive adjusted Earnings Before Interest, Taxes, Depreciation and Amortization;
A decline in our growth rate including new student enrollments and class starts;
Our public disclosure of the terms of any financing which we consummate in the future;
Disclosure of the results of our monthly payment plan;
Actual or anticipated variations in our quarterly results of operations;
A decline in the economy in the United States which is severe enough to impact our ability to collect our accounts receivable;
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;
The sale of large numbers of shares of common stock;
Short selling activities; or
Changes in market valuations of similar companies.
34
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.
Because we may issue preferred stock without the approval of our shareholders and have other anti-takeover defenses, it may be
more difficult for a third-party to acquire us and could depress our stock price.
Our Board of Directors (the “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.
As a result of the limited number of shares in the public float, we believe that major financial institutions including mutual funds
and large hedge funds may be reluctant to purchase shares of our common stock.
We have a relatively low number of shares in the public float, and our common stock does not normally trade actively. Our Chief Executive
Officer believes, partly based upon conversations with potential investors that mutual funds and large hedge funds are unable to purchase
our common stock due to the lack of public float and since their minimum size purchase would likely cause an artificial rise in our common
stock price. Unless our public float increases, we believe our stock price will be adversely affected.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our corporate headquarters and executive offices are located in New York, New York, consisting of approximately 3,200 square feet of
office space under a lease that expires in November 2023. Aspen University leases a facility in Denver, Colorado, consisting of
approximately 6,500 square feet of office space under a lease that expires in December 2018. This facility accommodates our academic
operations. Aspen University operates an enrollment center in Phoenix, Arizona where it leases approximately 4,600 square feet under a
five-year term that expires in May 2021. Aspen University leases approximately 38,000 square feet in a building complex for both the pre-
licensure program and the enrollment center in Phoenix. This lease expires in July 2025. USU leases approximately 26,000 square feet
under a lease in the San Diego, California area which expires on June 30, 2022. We lease office space for our developers in Dieppe, NB,
Canada consisting of approximately 1,700 under a three year agreement that commenced March 1, 2017. 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.
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
the date of this report, except as discussed below, we are not aware of any other 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.
35
On February 11, 2013, Higher Education Management Group, Inc. (“HEMG”) and Mr. Patrick Spada sued the Company, certain senior
management members and our directors in state court in New York seeking damages arising principally from (i) allegedly false and
misleading statements in the filings with the SEC and DOE where the Company disclosed that HEMG and Mr. Spada borrowed $2.2
million without Board authority, (ii) the alleged breach of an April 2012 agreement whereby the Company had agreed, subject to numerous
conditions and time limitations, to purchase certain shares of the Company from HEMG, and (iii) alleged diminution to the value of
HEMG’s shares of the Company due to Mr. Spada’s disagreement with certain business transactions the Company engaged in, all with
Board approval. On November 8, 2013, the state court in New York granted the Company’s motion to dismiss nearly all of the claims. On
December 10, 2013, the Company answered an amended complaint filed by HEMG and Mr. Spada in April 2013.
On December 10, 2013, the Company also filed a series of counterclaims against HEMG and Mr. Spada in the same state court of New
York. By order dated August 4, 2014, the New York court denied HEMG and Spada’s motion to dismiss the fraud counterclaim the
Company asserted against them.
The litigation has been stayed since HEMG’s 2015 bankruptcy filing.
While the Company has been advised by its counsel that HEMG’s and Spada’s claims in the New York lawsuit is baseless, the Company
cannot provide any assurance as to the ultimate outcome of the case. Defending the lawsuit maybe expensive and will require the
expenditure of time which could otherwise be spent on the Company’s business. While unlikely, if Mr. Spada’s and HEMG’s claims in the
New York litigation were to be successful, the damages the Company could pay could potentially be material.
In November 2014, the Company and Aspen University sued HEMG seeking to recover sums due under two 2008 Agreements where
Aspen University sold course materials to HEMG in exchange for long-term future payments. On September 29, 2015, the Company and
Aspen University obtained a default judgment in the amount of $772,793. This default judgment precipitated the bankruptcy petition
discussed in the next paragraph.
On October 15, 2015, HEMG filed bankruptcy pursuant to Chapter 7. As a result, the remaining claims and Aspen’s counterclaims in the
New York lawsuit are currently stayed. The bankrupt estate’s sole asset consists of 208,000 shares of AGI common stock. The principal
creditors are AGI which holds the judgment and has several other claims including the $2.2 million misappropriation claim. The other
primary claimant is a secured creditor which alleges it is owed a principal amount of $1,200,000. AGI alleges that because HEMG, a
Nevada corporation, had failed to pay annual fees to Nevada it lacked the legal authority to create a security interest.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
36
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our stock trades on Nasdaq Capital Market under the symbol “ASPU”. Prior to August 2, 2017, our stock traded on the OTCQB.
PART II
The last reported sale price of our common stock as reported by Nasdaq on July 11, 2018 was $7.34. As of that date, we had 160 record
holders. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of
record by banks, brokers, and other financial institutions.
The following table sets forth the quarterly high and low sales price information for the periods indicated. The prices shown represent
quotations between dealers, without adjustment for retail markups, markdowns or commissions, and may not represent actual transactions.
Year
Fiscal 2018
Fiscal 2017
Dividend Policy
Period Ended
April 30
January 31
October 31
July 31
April 30
January 31
October 31
July 31
Prices
High
($)
Low
($)
9.01
9.61
8.92
7.75
5.00
4.44
3.36
2.10
5.85
7.44
5.35
4.62
3.05
2.76
1.56
1.524
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
None
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement
for the 2018 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended April 30, 2018.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
37
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
You should read the following discussion in conjunction with our consolidated financial statements, which are included elsewhere in this
Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements
that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to these differences include those discussed in the Risk Factors contained herein.
Company Overview
AGI is a holding company. AGI has two subsidiaries, Aspen University organized in 1987 and USU organized in 1997. On March 13,
2012, the Company was recapitalized in a reverse merger and acquired Aspen University. On December 1, 2017, the Company acquired
USU.
Aspen Group’s vision is to make college affordable again in America. 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 higher
education.
In March 2014, Aspen University unveiled a monthly payment plan available to all students across every online degree program offered by
the university. The monthly payment plan is designed so that students will make one payment per month, and that monthly payment is
applied towards the total cost of attendance (tuition and fees, excluding textbooks). The monthly payment plan offers online associate and
bachelor students the opportunity to pay their tuition and fees at $250/month, online master students $325/month, and online doctoral
students $375/month, interest free, thereby giving students a monthly payment option versus taking out a federal financial aid loan.
USU began offering monthly payment plans in the summer of 2017. Today, monthly payment plans are available for the online RN to BSN
program ($250/month), online MBA/M.A.Ed/MSN programs ($325/month), and the online hybrid MSN-FNP program ($375/month).
Additionally, Aspen University has just begun its first semester (July 10, 2018) for its previously announced pre-licensure Bachelor of
Science in Nursing (BSN) degree program at its initial campus in Phoenix, Arizona. Aspen’s innovative hybrid (online/on-campus)
program allows most of the credits to be completed online (83 of 120 credits or 69%), with pricing offered at Aspen’s current low tuition
rates of $150/credit hour for online general education courses and $325/credit hour for online core nursing courses. For high school
students with no prior college credits, the total cost of attendance is less than $50,000.
Since 1993, Aspen University has been nationally accredited by the DEAC, a national accrediting agency recognized by the DOE. On
February 25, 2015, the DEAC informed Aspen University that it had renewed its accreditation for five years to January, 2019.
Since 2009, USU has been regionally accredited by WSCUC.
Both universities are qualified to participate under the Higher Education Act and the Federal student financial assistance programs (Title
IV, HEA programs).
AGI Student Population Overview*
Aspen University’s total active student body grew 39% year-over-year from 4,681 to 6,500. Aspen’s School of Nursing grew 43% year-
over-year, from 3,363 to 4,807 active students, which now represents 74% of Aspen’s total active student body. Aspen’s RN to BSN
program accounted for the majority of the growth, from 2,104 to 3,158 active students, an increase of 1,054 active students, or 50% year-
over-year.
38
USU’s active degree-seeking student body grew sequentially from 446 to 557 students or a sequential increase of 25%.
* Note: “Active Degree-Seeking Students” are defined as degree-seeking students who were enrolled in a course during the quarter reported, or
are registered for an upcoming course.
AGI New Student Enrollments
AGI delivered a company record of 1,273 total new student enrollments for the fiscal 2018 fourth quarter. Aspen University accounted for
1,096 new student enrollments (includes 116 Doctoral enrollments), while USU accounted for 177 new student enrollments (primarily
FNP enrollments).
Note that starting in March 2018, Aspen University no longer admits students without official transcripts (formerly called conditional
acceptances). This change was made for operational efficiency reasons, as the starts and revenues earned from conditional acceptance
enrollments did not warrant the conditional acceptance policy to be continued. Below is a table reflecting historical enrollments (includes
unconditional and conditional acceptance enrollments) against the new methodology of unconditional acceptance enrollments only.
HISTORICAL ENROLLMENTS:
(Unconditional + Conditional Accepts)
NEW ENROLLMENT METHODOLOGY:
(Unconditional Accepts only)
986 1,025 1,255 1,164 N/A
Q4’17 Q1’18 Q2’18 Q3’18 Q4’18 Q4’17 Q1’18 Q2’18 Q3’18 Q4’18*
980
116
177
972 1,273
862 1,044
862 1,044
834
834
972
Aspen (Nursing + Other)
Aspen (Doctoral)
USU (FNP + Other)
Total
———————
*
From a year-over-year perspective, Aspen University had 834 enrollments (removing conditionals from fiscal Q4’17), therefore the
1,096 enrollments in fiscal Q4’18 represents a year-over-year increase of 31%.
Monthly Payment Programs Overview
Aspen offers two monthly payment programs, a monthly payment plan in which students make payments every month over a fixed period
depending on the degree program, and a monthly installment plan in which students pay three monthly installments (day 1, day 31 and day
61 after the start of each course).
Aspen University students paying tuition and fees through a monthly payment method grew by 48% year-over-year, from 3,060 to 4,532.
Those 4,532 students paying through a monthly payment method represent 70% of Aspen University’s total active student body.
39
As of April 30, 2018, of the 4,532 active students paying tuition and fees through a monthly payment method, 4,211 active students are
paying through a monthly payment plan and 321 students are paying through a monthly installment plan. Additionally, Aspen University is
currently projecting to add approximately 120 active students/month net to its monthly payment programs through fiscal year 2019. The
total contractual value of Aspen University’s monthly payment plan students now exceeds $35 million which currently delivers monthly
recurring tuition cash payments exceeding $1,200,000.
USU students paying tuition and fees through a monthly payment method grew from 204 to 293 students sequentially. Those 293 students
paying through a monthly payment method represent 53% of USU’s total active student body of 557.
Marketing Efficiency Ratio (MER) Analysis
AGI has developed a marketing efficiency ratio to continually monitor the performance of its business model.
Marketing Efficiency Ratio (MER) =
Revenue per Enrollment (RPE)
—————————————
Cost per Enrollment (CPE)
Cost per Enrollment (CPE)
The Cost per Enrollment measures the advertising investment spent in a given six month period, divided by the number of new student
enrollments achieved in that given six month period, in order to obtain an average CPE for the period measured.
Revenue per Enrollment (RPE)
The Revenue per Enrollment takes each quarterly cohort of new degree-seeking student enrollments, and measures the amount of earned
revenue including tuition and fees to determine the average RPE for the cohort measured. For the later periods of a cohort, we have used
reasonable projections based off of historical results to determine the amount of revenue we will earn in later periods of the cohort.
The current CPE/RPE Marketing Efficiency Ratio for our three current degree units is reflected in the below table.
Enrollments***
980
116
177
$
$
$
Cost-of-
Enrollment
LTV
MER
1,124* $
2,159** $
1,955** $
7,350
12,600
17,820
6.5X
5.8X
9.1X
Aspen (Nursing + Other)
Aspen (Doctoral)
USU (FNP + Other)****
———————
*
**
***
****
Based on a six-month rolling average.
Based on only one full quarter of marketing spend, therefore six-month rolling average will be available next quarter.
Note that starting in March, 2018, Aspen University no longer admits students without official transcripts (formerly called
conditional acceptances). Enrollments reported in the above table includes unconditional acceptance enrollments only.
Note that USU to date has limited the number of FNP enrollments to 75 every other month based on guidance from the California
Board of Registered Nursing (CA BRN), therefore the cost-of-enrollment is artificially high relative to the potential enrollment
demand. USU’s FNP program is undergoing its one-year program review with the CA BRN in July, 2018 and should that cap be
increased, the cost-of-enrollment is expected to decline thereafter.
Please be advised that the two new reporting programs, Aspen (Doctoral) and USU (FNP), began marketing on the Internet in recent
months, consequently the new reporting programs will have received an immaterial amount of organic/referral enrollments, so the cost-of-
enrollment today is essentially a reflection of the average cost of delivering a ‘paid’ enrollment. Aspen’s traditional business today delivers
over 20% of its enrollments from organic/referral sources, which is what drives down the average cost-of-enrollment in this traditional
business. Organic/referral enrollments of course will increase over time in these two new reporting programs.
ASPEN UNIVERSITY’S PRE-LICENSURE BSN HYBRID (ONLINE/ON-CAMPUS) DEGREE PROGRAM
Aspen University has just begun its first semester (July 10, 2018) for its previously announced pre-licensure Bachelor of Science in Nursing
(BSN) degree program at its initial campus in Phoenix, Arizona. Aspen’s innovative hybrid (online/on-campus) program allows most of the
credits to be completed online (83 of 120 credits or 69%), with pricing offered at Aspen’s current low tuition rates of $150/credit hour for
online general education courses and $325/credit hour for online core Nursing courses. For high school students with no prior college
credits, the total cost of attendance is less than $50,000.
40
Aspen’s pre-licensure BSN program is offered as a full-time, three-year (nine semester) program that is specifically designed for students
who do not currently hold a state nursing license and have no prior nursing experience. Aspen is admitting students into three tracks: (1)
high school graduates with no prior college credits, (2) students that have less than 48 general education prerequisites completed, and (3)
students that have completed all 48 general education prerequisite credits and are ready to enter the core nursing courses and clinical
experiences. Aspen is currently limited to a maximum of 30 students entering the two-year core nursing program each semester based on
guidance provided by the Arizona State Board of nursing. This 30 student limitation per semester will remain in place until the first cohort
of 30 students complete the NCLEX exam in mid-2020.
The semester that started on July 10, 2018 had 93 students enrolled, of which 29 entered with all pre-requisites completed, thereby entering
the final two-year core nursing program. The remaining 64 students are enrolled in general education pre-requisite courses which must be
completed before being admitted into the two-year core nursing program.
Additionally, 28 of the 64 general education students that started in July are anticipated to be ready to enter the two-year core nursing
program for our upcoming semester starting on November 18, therefore we anticipate having a waitlist for our final two-year core nursing
program for the remainder of the academic year (November and March semesters). Because of the overwhelming demand for our nursing
program in Phoenix, the Company is now assessing alternative approaches that would allow Aspen University to open a second campus in
Phoenix in calendar year 2019.
ACCOUNTS RECEIVABLES AND MONTHLY PAYMENT PLAN
Since the inception of the monthly payment plan in the spring of 2014, the accounts receivable balance, both short-term and long-term, has
grown from a net number of $649,890 at April 30, 2014 to a net number of $8,117,773 at April 30, 2018. This growth could be portrayed as
the engine of the monthly payment plan. The attractive aspect of being able to pay for a degree over a fixed period of time has fueled the
growth of this plan and, as a result, the increase of the accounts receivable balance.
Each student’s receivable account is different depending on how many classes a student takes each period. If a student takes two classes
each eight week period while paying $250, $325 or $375 a month, that student’s account receivable balance will rise accordingly. The
converse is true also. A student who takes courses at a slower pace, even taking time off between eight-week terms, could have a balance
due to them. It is much more likely however that a student participating in the monthly payment plan will have an accounts receivable
balance, as the majority of students complete their degree program of study prior to the completion of the fixed monthly payment plan.
The common thread is the actual monthly payment, which functions as a retail installment contract with no interest that each student
commits to pay over a fixed number of months. If a student stops paying, that person can no longer register for a class. If a student decides
to withdraw from the university, their account will be settled, either through collection of their balance or disbursement of the amount owed
them.
Aspen University students paying tuition and fees through a monthly payment method grew by 48% year-over-year, from 3,060 to 4,532.
Those 4,532 students paying through a monthly payment method represent 70% of Aspen University’s total active student body.
USU students paying tuition and fees through a monthly payment method grew from 204 to 293 students sequentially. Those 293 students
paying through a monthly payment method represent 53% of USU’s total active student body.
Relationship Between Accounts Receivable and Revenue
The gross accounts receivable balance for any period is the net effect of the following three factors:
1. Revenue;
2. Cash receipts, and;
3. The net change in deferred revenue.
All three factors equally determine the gross accounts receivable. If one quarter experiences particularly high cash receipts, the gross
accounts receivable will go down. The same effect if cash receipts are lower or if there are significant changes in either of the other factors.
41
Simply looking at the change in revenue does not translate into an equally similar change in gross accounts receivable. The relative change
in cash and the deferral must also be considered. For net accounts receivable, the changes in the reserve must also be considered. Any
additional reserve or write-offs will influence the balance.
As it is a straight mathematical formula for both gross accounts receivable and net accounts receivable, and most of the information is
public, one can reasonably calculate the two non-public pieces of information, namely the cash receipts in gross accounts receivable and the
write-offs in net accounts receivable.
For revenue, the quarterly change is primarily billings and the net impact of deferred revenue. The deferral from the prior quarter or year is
added to the billings and the deferral at the end of the period is subtracted from the amount billed. The total deferred revenue at the end of
every period is reflected in the liability section of the balance sheet. Deferred revenue can vary for many reasons, but seasonality and the
timing of the class starts in relation to the end of the quarter will cause changes in the balance.
As mentioned in the accounts receivable section, the change in revenue cannot be compared to the change in accounts receivable. Revenue
does not have the impact of cash received whereas accounts receivable does. Depending on the month and the amount of cash received, it
is likely that revenue or accounts receivable will increase at a rate different from the other. The impact of cash is easy to substantiate as it
agrees to deposits in our bank accounts.
At April 30, 2018, the allowance for doubtful accounts was $468,174 which represents 5.5% of the gross accounts receivable balance of
$8,585,947, the sum of both short-term and long-term receivables. Many aged students’ accounts were written off against the reserve in
2018, after which management then increased the reserve to its current level at April 30, 2018.
The Introduction of Long-Term Accounts Receivables
When a student signs up for the monthly payment plan, there is a contractual amount that the Company can expect to earn over the life of
the student’s program. This contractual amount cannot be recorded as an account receivable as the student does have the option to stop
attending. As a student takes a class, revenue is earned over that eight week class. Some students accelerate their program, taking two
classes every eight week period, and as we discussed, that increases the student’s accounts receivable balance. If any portion of that balance
will be paid in a period greater than 12 months, that portion is reflected as long-term accounts receivable. At April 30, 2018 and 2017, those
balances are $1,315,050 and $657,542, respectively.
As a result of the growing acceptance of our monthly payment plans, our long-term accounts receivable balance has grown from $657,542
at April 30, 2017 to $1,315,050 at April 30, 2018. The primary component consist of students who make monthly payments over 36 and 39
months. The average student completes their academic program in 24 months, therefore most of the Company’s accounts receivable are
short-term.
Here is a graphic of both short-term and long-term receivables, as well as contractual value:
A
B
C
Classes Taken
less monthly
payments received
Payments for classes
taken that are greater
than 12 months
Expected classes
to be taken over
balance of program.
Short-Term
Accounts Receivable
Long-term
Accounts Receivable
Not recorded in
financial statements
The Sum of A, B and C will equal the total cost of the program.
Seasonality Briefing and Revenue Guidance
As Aspen University continues to scale its student body, seasonality has become more pronounced. In fiscal 2017, the Company explained
that its first fiscal quarter (May – July) is the seasonal low point because it falls during the summer months and therefore our primarily
working professional students tend to take less courses during that quarter relative to the other three fiscal quarters.
42
By way of example, in Q4 fiscal 2017 (quarter ending April 30, 2017), revenues were $4,289,230. In the following quarter (Q1 fiscal
2018), revenues sequentially declined 1% or 46,344 to $4,242,886. The following quarter (Q2 fiscal 2018), revenues rose sequentially by
14% or $608,753 to $4,851,639.
The Company expects the same seasonality effect to occur in the first quarter in the upcoming 2019 fiscal year. Aspen University revenues
are expected to decline in Q1 relative to Q4, similar to the prior fiscal year, however overall Company revenues are expected to be flat in
Q1 relative to Q4 given the revenue contribution from USU. Although revenues are expected to be flat sequentially, on a year-over-year
basis the Company growth rate in Q1 is forecasted to accelerate to 70%.
Results of Operations
For the Year Ended April 30, 2018 Compared with the Year Ended April 30, 2017
Revenue
Revenue from operations for the year ended April 30, 2018 (“2018 Period”) increased to $22,021,512 from $14,246,696 for the year ended
April 30, 2017 (“2017 Period”), an increase of $7,774,816 or 55%.
Aspen University’s increase in revenues was a result of new class starts rising by 42% year-over-year, and the average new class start
tuition rate rising 1% from $815 to $821.
USU contributed five months of revenues which accounted for less than 10% of the total revenues for the full fiscal year.
Cost of Revenues (exclusive of amortization)
The Company’s cost of revenues consists of instructional costs and services and marketing and promotional costs.
Instructional Costs and Services
Instructional costs and services for the 2018 Period rose to $4,424,991 from $2,436,147 for the 2017 Period, an increase of $1,988,844 or
82%.
Aspen University instructional costs and services represented 18% of Aspen University revenues for the full 2018 period, while USU
instructional costs and services equaled 38% of USU revenues during the five month post-acquisition period.
Marketing and Promotional
Marketing and promotional costs for the 2018 Period were $5,428,828 compared to $2,625,075 for the 2017 Period, an increase of
$2,803,753 or 107%.
Aspen University Marketing and promotional expenses represented 22% of Aspen University revenues for the full 2018 period, while USU
Marketing and promotional expenses equaled 34% of USU revenues during the five month post-acquisition period.
Gross profit fell to 53% of revenues or $11,636,809 for the 2018 period from 61% of revenues or $8,679,248 for the 2017 Period.
Aspen University gross profit represented 57% of Aspen University revenues for the full 2018 period, while USU gross profit equaled 27%
of USU revenues during the five month post-acquisition period.
Costs and Expenses
General and Administrative
General and administrative costs for the 2018 period were $16,328,580 compared to $9,087,740 during the 2017 Period, an increase of
$7,240,840 or 80%.
Aspen University general and administrative costs represented 51% of Aspen University revenues for the full 2018 period, while USU
general and administrative costs equaled 99% of USU revenues during the five month post-acquisition period.
43
Aspen Group, Inc. general and administrative costs which are included in the above amount for the full 2018 period equaled approximately
$3.78 million, including corporate employees in the NY corporate office, IT, rent, non-cash AGI stock based compensation, and
professional fees (legal, accounting, and IR).
Depreciation and Amortization
Depreciation and amortization costs for the 2018 Period increased to $1,092,283 from $556,730 for the 2017 Period, an increase of
$535,553 or 96%. The increase in depreciation expense is mainly due to the depreciation of intangible assets acquired with USU. Aspen has
begun making capital investments in the ground campus and that will cause depreciation expense to continue to increase in the near future.
Other Income (Expense)
Other income for the 2018 Period increased to $149,761 from $14,336 in the 2017 Period, an increase of $135,425 or 945%. This increase is
mainly attributable to collection of interest on a $900,000 promissory note from USU and sub-lease income received by USU and the
release of the warrant derivative liability of $52,500. Interest expense increased from $337,510 to $2,010,152, an increase of $1,672,642 or
496%. This increase is primarily due to the interest paid on our former credit facility and costs associated with its extinguishment. In July
2017, we entered into a credit facility which we paid off in April 2018.
Income Taxes
Income taxes expense (benefit) for the comparable years was $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 for 2018 Period was ($7,061,061) as compared to ($1,105,260) for the 2017 Period, an increase in the loss of $5,955,801 or
approximately 539%.
Aspen University generated $1.02 million of net income for the full 2018 period, while USU experienced a net loss of $2.06 million during
the five month post-acquisition period.
AGI corporate contributed $6.02 million of operating expenses for the full 2018 period, including $2 million interest expense.
For the Quarter Ended April 30, 2018 Compared with the Quarter Ended April 30, 2017
Revenue
Revenue from operations for the quarter ended April 30, 2018 (“2018 Quarter”) increased to $7,225,029 from $4,289,230 for the quarter
ended April 30, 2017 (“2017 Quarter”), an increase of $2,935,799 or 68%.
Aspen University’s increase in revenues was primarily a result of new class starts rising by 42% year-over-year.
USU revenues contributed nearly 15% of the quarterly revenues for the Company, rising at a faster pace than the previously projected
~10% for the quarter.
Cost of Revenues (exclusive of amortization)
The Company’s cost of revenues consists of instructional costs and services and marketing and promotional costs.
Instructional Costs and Services
Instructional costs and services for the 2018 Quarter rose to $1,531,173 or 21% of revenues from $734,202 or 17% of revenues for the
2017 Quarter, an increase of $769,971 or 109%.
Aspen University instructional costs and services represented 18% of Aspen University revenues for the 2018 quarter, while USU
instructional costs and services equaled 38% of USU revenues during the 2018 quarter.
44
Marketing and Promotional
Marketing and promotional costs for the 2018 Quarter were $2,039,832 or 28% of revenues compared to $836,974 or 20% of revenues for
the 2017 Quarter, an increase of $1,202,858 or 144%.
Aspen University marketing and promotional costs represented 23% of Aspen University revenues for the 2018 quarter, while USU
marketing and promotional costs equaled 35% of USU revenues during the 2018 quarter.
Gross profit fell to 49% of revenues or $3,506,254 for the 2018 Quarter from 60% of revenues or $2,575,815 for the 2017 Quarter.
Aspen University gross profit represented 57% of Aspen University revenues for the 2018 quarter, while USU gross profit equaled 27% of
USU revenues during the 2018 quarter.
Costs and Expenses
General and Administrative
General and administrative costs for the 2018 Quarter were $5,353,495 compared to $2,859,186 during the 2017 Quarter, an increase of
$2,494,309 or 87%.
Aspen University general and administrative costs which are included in the above amount represented 27% of Aspen University revenues
for the 2018 quarter, while USU general and administrative costs equaled 103% of USU revenues during the 2018 quarter.
Aspen Group, Inc. general and administrative costs for the 2018 quarter which is included in the above amount equaled approximately
$2.35 million, including corporate employees in the NY corporate office, IT, rent, non-cash AGI stock based compensation, and
professional fees (legal, accounting, and IR).
Depreciation and Amortization
Depreciation and amortization costs for the 2018 Quarter increased to $460,314 from $133,948 for the 2017 Quarter, an increase of
$326,366 or 244%. The increase in depreciation expense is mainly due to the depreciation of intangible assets acquired with USU. Aspen
has begun making capital investments in the Phoenix campus and that will cause depreciation expense to continue to increase in the near
future.
Other Income (Expense)
Other income for the 2018 Quarter increased to $61,694 from $11,289 in the 2017 Quarter, an increase of $50,405 or 446%. Interest
expense increased to ($1,566,394) from ($161,848), an increase of ($1,404,546) or 868%. This increase is primarily due to the interest paid
on the credit facility and costs associated with its extinguishment.
Income Taxes
Income taxes expense (benefit) for the comparable years was $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 applicable to shareholders was ($3,664,486) or net loss per share of $(0.26) for the 2018 Quarter as compared to ($723,729) for the
2017 Quarter, an increase in the loss of $2,940,757.
Aspen University generated $0.9 million of operating income for the fourth quarter, USU experienced an operating loss of $1.29 million
during the fourth quarter, while AGI corporate contributed $3.28 million of operating expenses for the fourth quarter which included the
one-time $1.5 million interest expense related to the early extinguishment of the $10 million credit facility. Excluding the one-time $1.5
million interest expense, the adjusted net loss per share, a non-GAAP financial measure, was $(0.15).
45
Non-GAAP – Financial Measures
The following discussion and analysis includes both financial measures in accordance with Generally Accepted Accounting Principles, or
GAAP, as well as non-GAAP financial measures. 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 are they
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 EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe that both
management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing
future periods. Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and
as a means to evaluate period-to-period comparison. Our management recognizes that the non-GAAP financial measures have inherent
limitations because of the described excluded items.
Aspen Group defines Adjusted EBITDA as earnings (or loss) from continuing operations before the items in the table below including non-
recurring charges of $764,253 in 2018 and $732,971 in 2017. 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.
We have included a reconciliation of our non-GAAP financial measures to the most comparable financial measure calculated in accordance
with GAAP. We believe that providing the non-GAAP financial measures, 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 measures 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 loss allocable to common shareholders, a GAAP financial
measure:
Net loss
Interest expense
Depreciation & amortization
EBITDA (loss)
Program review settlement
Bad debt expense
Acquisition expenses
Warrant buy back expense
Non-recurring charges
Stock-based compensation
Adjusted EBITDA (Loss)
Net loss
Interest expense
Depreciation & amortization
EBITDA (Loss)
Program review settlement
Bad debt expense
Acquisition expenses
Non-recurring charges
Stock-based compensation
Adjusted EBITDA (Loss)
For the Years Ended
April 30,
2018
(7,061,061) $
1,860,391
1,092,283
(4,108,387)
—
535,366
828,566
—
764,253
642,566
(1,337,636) $
2017
(1,105,260)
337,510
556,730
(211,020)
323,090
44,320
211,122
206,000
732,971
338,294
1,644,777
For the Quarters Ended
April 30,
2018
(3,664,486) $
1,504,701
460,314
(1,699,471)
—
317,222
—
186,147
176,098
(1,020,004) $
2017
(723,730)
161,848
133,948
(427,934)
298,090
70,000
211,122
230,537
84,461
466,276
$
$
$
$
46
Aspen University generated $1.37 million of Adjusted EBITDA for the 2018 quarter, while USU experienced an Adjusted EBITDA loss of
$(0.98) million during the 2018 quarter.
Aspen Group corporate contributed $1.41 million of operating expenses to the $(1,020,004) Adjusted EBITDA loss for the 2018 quarter.
Liquidity and Capital Resources
A summary of our cash flows is as follows:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash
Net Cash Used in Operating Activities
For the Years Ended
April 30,
2018
2017
$ (5,609,935) $ (1,488,160)
(1,713,358)
(3,711,831)
21,178,108
5,173,939
$ 11,856,342 $ 1,972,421
Net cash used in operating activities during the 2018 Period totaled ($5,609,935) and resulted primarily from a net loss of ($7,061,061) and
a net change in operating assets and liabilities of ($1,704,389), both offset by non-cash items of $3,212,898. The most significant change in
operating assets and liabilities was an increase of $3,360,277 in accounts receivable reflecting the expansion of the monthly payment plan.
The most significant non-cash item was $1,092,283 in Depreciation and Amortization.
Net cash used in operating activities during the 2017 Period totaled ($1,488,160) and resulted primarily from a net loss of operations of
($1,105,260) and a net change in operating assets and liabilities of ($1,685,244), both offset by non-cash items of $1,302,344. The most
significant change in operating assets and liabilities was an increase of $2,974,073 in accounts receivable, reflecting the expansion of the
monthly payment plan. The most significant non-cash item was $556,730 in Depreciation and Amortization.
Net Cash Used in Investing Activities
Net cash used in investing activities during the 2018 Period totaled ($3,711,831), reflecting primarily fixed asset purchases of $1,836,618
and the cash paid for the acquisition totaling $2,589,719.
Net cash used in investing activities during the 2017 Period totaled ($1,713,358), reflecting primarily fixed asset purchases of $804,558 and
the issuance of a note receivable for $900,000.
Net Cash Provided By Financing Activities
Net cash provided by financing activities during the 2018 Period totaled $21,178,108, reflecting primarily net proceeds of equity offerings,
totaling approximately $20.8 million.
Net cash provided by financing activities during the 2017 Period totaled $5,173,939, reflecting primarily proceeds of $7,500,000 from an
equity financing, the proceeds of which were used to terminate a third-party line of credit of $2,150,000 and the loan payable and
convertible debt payable to the CEO of $1,300,000. The third-party line of credit was opened and terminated in the fiscal year ended April
30, 2017.
Liquidity
With the closing of our $23 million public offering, we retained $12 million in net proceeds after underwriting discounts and expenses and
repayment of $8 million to our lender.
As of July 12, 2018, the Company had a cash balance of approximately $11.5 million. The Company believes that it has sufficient cash to
allow the Company to meet its operational expenditures as our business is currently operating for at least the next 12 months.
47
Our cash balances are kept liquid to support our growing infrastructure needs. The majority of our cash is concentrated in large financial
institutions.
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 our financial
condition. There were no material changes to our principal accounting estimates during the period covered by this report.
Revenue Recognition and Deferred Revenue
Revenue consisting 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 revenue may be
recognized as sales occur or services are performed.
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.
48
Business Combinations
We include the results of operations of businesses we acquire from the date of the respective acquisition. We allocate the purchase price of
acquisitions to the assets acquired and liabilities assumed at fair value. The excess of the purchase price of an acquired business over the
amount assigned to the assets acquired and liabilities assumed is recorded as goodwill. We expense transaction costs associated with
business combinations as incurred.
Goodwill and Intangibles
Goodwill represents the excess of purchase price over the fair market value of assets acquired and liabilities assumed from Educacion
Significativa, LLC. Goodwill has an indefinite life and is not amortized. Goodwill is tested annually for impairment.
Intangible assets represent both indefinite lived and definite lived assets. Accreditation and regulatory approvals and Trade name and
trademarks are deemed to have indefinite useful lives and accordingly are not amortized but are tested annually for impairment. Student
relationships and curriculums are deemed to have definite lives and are amortized accordingly.
Related Party Transactions
See Note 15 to the consolidated financial statements included herein for additional description of related party transactions that had a
material effect on our consolidated financial statements.
Off Balance Sheet Arrangements
We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.
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 contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including
statements regarding our future operating margins and expected growth rate, growth in student body, including future organic/referral
enrollments, the demand for our nursing program, the future Title IV revenue percentage, the number of students participating in our
payment programs, projections with respect to our marketing efficiency ratio and expected default rate, the integration of USU and
liquidity. All statements other than statements of historical facts contained in this report, including statements regarding our future
financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking
statements. 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 in Item 1A.
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.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
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, required by Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934 (the
“Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or 15d-15(e) under the
Exchange Act. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure
controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive
Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our evaluation excluded
USU which was acquired in December 2017. In accordance with guidance issued by the SEC, companies are allowed to exclude
acquisitions from their assessment of internal controls over financial reporting during the first year subsequent to the acquisition while
integrating the acquired operations.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, under the
supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our
internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used
the criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework as issued in 2013. Based on that evaluation, our management concluded that our internal control over financial reporting was
effective based on that criteria. Our evaluation excluded USU which was acquired in December 2017. In accordance with guidance issued
by the SEC, companies are allowed to exclude acquisitions from their assessment of internal controls over financial reporting during the
first year subsequent to the acquisition while integrating the acquired operations. The assets of United States University, Inc., excluding
intangible assets and goodwill, represent approximately 7.9% of total consolidated assets of the Company and the revenues of United
States University, Inc. represent approximately 7.3% of consolidated revenues of the Company.
Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal
Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may deteriorate.
The Company’s independent registered public accounting firm, Salberg & Company, PA, audited the effectiveness of our internal control
over financial reporting. Salberg & Company, PA has issued an audit report with respect to our internal control over financial reporting,
which appears in Part IV, Item 15 of this Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as
defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
50
ITEM 9B. OTHER INFORMATION.
The Company’s press release issued on July 12, 2018 (the “Earnings Release”), and the Current Report on Form 8-K of July 12, 2018 (the
“Form 8-K”) furnishing the Earnings Release contained a scrivener’s error in the disclosure of the Company’s EBITDA, a non-GAAP
financial measure. The Company’s EBITDA was $(4,108,387) for the year ended April 30, 2018 (instead of $(4,008,387) disclosed in the
Earnings Release and the Form 8-K) and $(1,699,471) for the fourth quarter ended April 30, 2018 (instead of $(1,599,471) disclosed in the
Earnings Release and the Form 8-K). The scrivener’s error did not affect Adjusted EBITDA disclosed in the Earnings Release and the
Form 8-K.
For the reconciliation of Adjusted EBITDA to Net loss, see Part II Item 7 of this Report on Form 10-K.
51
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders to
be filed with the SEC within 120 days of the fiscal year ended April 30, 2018.
Our Board of Directors has adopted a Code of Ethics applicable to all officers, directors and employees, which is available on our website
(http://ir.aspen.edu/governance-docs) under "Corporate Governance." We intend to satisfy the disclosure requirement under Item 5.05 of
Form 8-K regarding amendment to, or waiver from, a provision of our Code of Ethics and by posting such information on our website at
the address and location specified above.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders to
be filed with the SEC within 120 days of the fiscal year ended April 30, 2018.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders to
be filed with the SEC within 120 days of the fiscal year ended April 30, 2018.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders to
be filed with the SEC within 120 days of the fiscal year ended April 30, 2018.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders to
be filed with the SEC within 120 days of the fiscal year ended April 30, 2018.
52
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.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
53
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.
SIGNATURES
Date: July 13, 2018
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.
Date
July 13, 2018
July 13, 2018
July 13, 2018
July 13, 2018
July 13, 2018
July 13, 2018
July 13, 2018
July 13, 2018
Signature
Title
/s/ Michael Mathews
Michael Mathews
/s/ Janet Gill
Janet Gill
/s/ Michael D’Anton
Dr. Michael D’Anton
/s/ Norman Dicks
Norman Dicks
/s/ C. James Jensen
C. James Jensen
/s/ Andrew Kaplan
Andrew Kaplan
Malcolm MacLean IV
Oksana Malysheva
/s/ Sanford Rich
Sanford Rich
/s/ John Scheibelhoffer
John Scheibelhoffer
Rick Solomon
Principal Executive Officer and Director
Chief Financial Officer
(Principal Financial Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
54
Aspen Group, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 30, 2018 and 2017
Consolidated Statements of Operations for the years ended April 30, 2018 and 2017
Consolidated Statements of Changes in Stockholders' Equity for the years ended April 30, 2017 and 2018
Consolidated Statements of Cash Flows for the years ended April 30, 2018 and 2017
Notes to Consolidated Financial Statements
Page
F-2
F-4
F-6
F-7
F-8
F-10
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of:
Aspen Group, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Aspen Group, Inc. and Subsidiaries (the “Company”) as of April 30,
2018 and 2017, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two
years in the period ended April 30, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). We also
have audited the Company’s internal control over financial reporting as of April 30, 2018, based on criteria established in Internal Control
—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As described in the accompanying Management’s Report on Internal Control over Financial Reporting, with the exception of internal
controls over impairment testing of intangible assets and goodwill, Management has excluded United States University, Inc. from its
assessment of internal control over financing reporting as of April 30, 2018, because the business operated by United States University, Inc.
was acquired by the Company in a purchase business combination in the third quarter of fiscal 2018. The assets of United States
University, Inc., excluding intangible assets and goodwill, represent approximately 7.9% of total consolidated assets of the Company and
the revenues of United States University Inc. represent approximate 7.3% of consolidated revenues of the Company. We also excluded
United States University, Inc. from our audit of internal control over financial reporting.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of the Company as of April 30, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the
period ended April 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2018, based on
criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a
public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or
fraud, and whether effective internal control over financial reporting was maintained in all material respects.
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
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Salberg & Company, P.A.
We have served as the Company’s auditor since 2012
SALBERG & COMPANY, P.A.
Boca Raton, Florida
July 13, 2018
F-3
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Cash
Restricted cash
Accounts receivable, net of allowance of $468,174 and $328,864, respectively
Prepaid expenses
Promissory note receivable
Other receivables
Accrued interest receivable
Total current assets
Property and equipment:
Call center equipment
Computer and office equipment
Furniture and fixtures
Software
Less accumulated depreciation and amortization
Total property and equipment, net
Goodwill
Intangible assets, net
Courseware, net
Accounts receivable, secured - net of allowance of $625,963, and $625,963, respectively
Long term contractual accounts receivable
Deposits and other assets
Total assets
April 30,
2018
2017
$ 14,612,559 $ 2,756,217
—
4,434,862
133,531
900,000
81,464
8,000
8,314,074
190,506
6,802,723
199,406
—
184,569
—
21,989,763
140,509
230,810
932,454
2,878,753
4,182,526
(1,320,360)
2,862,166
5,011,432
9,641,667
138,159
45,329
1,315,050
584,966
53,748
103,649
255,984
2,131,344
2,544,725
(1,090,010)
1,454,715
—
—
145,477
45,329
657,542
56,417
$ 41,588,532 $ 10,673,554
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Refunds due students
Deferred rent, current portion
Convertible notes payable, current portion
Other current liabilities
Total current liabilities
Convertible note payable
Warrant Liability
Deferred rent
Total liabilities
Commitments and contingencies - See Note 11
Stockholders’ equity :
Preferred stock, $0.001 par value; 10,000,000 shares authorized,
0 issued and outstanding at April 30, 2018 and 2017
Common stock, $0.001 par value; 250,000,000 shares authorized,
18,333,521 issued and 18,316,854 outstanding at April 30, 2018
13,504,012 issued and 13,487,345 outstanding at April 30, 2017
Additional paid-in capital
Treasury stock (16,667 shares)
Accumulated deficit
Total stockholders’ equity
April 30,
2018
2017
$
2,227,214 $
658,854
1,814,136
815,841
8,160
1,050,000
203,371
6,777,576
756,701
262,911
1,354,989
310,576
11,200
50,000
—
2,746,377
1,000,000
—
77,365
7,854,941
—
52,500
34,437
2,833,314
—
—
—
—
18,334
13,504
66,557,005 33,607,423
(70,000)
(32,771,748) (25,710,687)
7,840,240
33,733,591
(70,000)
Total liabilities and stockholders’ equity
$ 41,588,532 $ 10,673,554
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues
Operating expenses
Cost of revenues (exclusive of depreciation and amortization shown separately below)
General and administrative
Program review settlement expense
Depreciation and amortization
Total operating expenses
Operating loss
Other income (expense):
Other income
Gain on extinguishment of warrant liability
Interest expense
Total other expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss per share allocable to common stockholders – basic and diluted
Weighted average number of common shares outstanding – basic and diluted
For the Years Ended
April 30,
2018
2017
$ 22,021,512
$ 14,246,696
9,853,819
16,328,580
—
1,092,283
27,274,682
5,061,222
9,087,740
323,090
556,730
15,028,782
(5,253,170)
(782,086)
149,761
52,500
(2,010,152)
(1,807,891)
14,336
—
(337,510)
(323,174)
(7,061,061)
(1,105,260)
—
—
$ (7,061,061) $ (1,105,260)
$
(0.50) $
(0.10)
14,215,868
11,558,112
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED APRIL 30, 2017 AND APRIL 30, 2018
Balance at April 30, 2016
11,246,512 $
11,247 $ 26,477,162 $
(70,000) $(24,605,427) $ 1,812,982
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Treasury
Stock
Total
Stockholders'
Equity
Accumulated
Deficit
Attorney fees associated with Registration
Statement
Shares issued for cash
Fees associated with equity raise
Stock-based compensation
Warrant buyback
Shares issued for services rendered
Net loss, for the year ended April 30, 2017
Balance at April 30, 2017
—
2,000,000
—
—
208,333
49,167
—
13,504,012 $
—
2,000
—
—
208
49
—
(4,017)
7,498,000
(560,261)
338,294
(194,208)
52,453
—
13,504 $ 33,607,423 $
—
—
—
—
—
—
—
—
(4,017)
—
7,500,000
—
(560,261)
—
338,294
—
(194,000)
—
52,502
(1,105,260)
(1,105,260)
(70,000) $(25,710,687) $ 7,840,240
Restricted stock issued for services
Stock-based compensation
Common stock issued for acquisition
Common stock issued for cashless warrant
exercise
Common stock issued for warrants
exercised for cash
Common stock issued for stock options
exercised for cash
Common stock issued in equity raise
Warrants issued with senior secured term
loan
Fees associated with equity raise
10,000
—
1,203,209
10
—
88,689
642,566
1,203 10,214,041
171,962
172
(172)
87,775
88
246,292
136,563
3,220,000
137
475,688
3,220 23,019,780
—
—
—
—
478,428
(2,215,730)
—
—
—
—
—
—
—
—
—
88,699
—
—
642,566
— 10,215,244
—
—
—
246,380
—
475,825
— 23,023,000
—
—
478,428
(2,215,730)
Net loss, for the year ended April 30, 2018
Balance at April 30, 2018
—
18,333,521 $
—
—
18,334 $ 66,557,005 $
—
(7,061,061)
(7,061,061)
(70,000) $(32,771,748) $ 33,733,591
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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
Gain on extinguishment of warrant liability
Depreciation and amortization
Stock-based compensation
Loss on asset disposal
Amortization and write-off origination fees
Amortization of prepaid shares for services
Warrant buyback expense
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses
Accrued interest receivable
Other receivables
Deposits and other assets
Accounts payable
Accrued expenses
Deferred rent
Refunds due students
Deferred revenue
Other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Increase in restricted cash
Purchases of courseware
Purchases of property and equipment
Note receivable proceeds (disbursements)
Cash paid in acquisition
Proceeds from promissory note interest receivable
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from Equity offering
Disbursements for equity offering costs
Repayment of convertible note payable - related party
Repayment of loan payable - officer - related party
Warrant Buyback
Borrowing of bank line of credit
Payments for bank line of credit
Borrowing of third party line of credit
Payments of third party line of credit
Third party line of credit financing costs
Disbursements for registration statement
Proceeds of warrant and stock option exercises
Offering costs paid on debt financing
Repayment of senior secured term loan
Proceeds from senior secured loan
Net cash provided by financing activities
For the Years ended
April 30,
2018
2017
$ (7,061,061) $ (1,105,260)
535,366
(52,500)
1,092,283
642,566
27,590
829,794
80,415
—
(3,360,277)
(13,593)
(45,400)
(103,105)
(528,549)
1,319,268
280,697
22,079
505,265
(1,953)
221,180
(5,609,935)
44,320
—
556,730
338,294
—
112,500
52,500
206,000
(2,974,073)
(10,474)
(8,000)
(64,263)
(25,242)
747,500
85,937
14,123
199,693
341,555
—
(1,488,160)
(190,506)
(48,388)
(1,836,618)
900,000
—
(8,800)
(804,558)
(900,000)
(2,589,719)
53,400
(3,711,831)
—
—
(1,713,358)
23,023,000
(2,215,730)
—
—
—
—
—
—
—
—
—
722,205
(351,367)
(7,500,000)
7,500,000
21,178,108
7,500,000
(560,261)
(300,000)
(1,000,000)
(400,000)
247,000
(248,783)
2,150,000
(2,150,000)
(60,000)
(4,017)
—
—
—
—
5,173,939
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
ASPEN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Net increase in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of non-cash investing and financing activities
Warrants issued as part of senior secured loan
Assets acquired net of liabilities assumed for non-cash consideration
Common stock issued for services
Warrant derivative liability
For the Years ended
April 30,
2018
11,856,342
2017
1,972,421
2,756,217
783,796
$ 14,612,559 $ 2,756,217
$
$
540,341 $
— $
297,151
—
$
478,428 $
$ 12,215,244 $
88,699 $
$
— $
$
—
—
52,502
52,500
The accompanying notes are an integral part of these consolidated financial statements.
F-9
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Note 1. Nature of Operations and Liquidity
Overview
Aspen Group, Inc. (together with its subsidiaries, the “Company,” “Aspen,” or “AGI”) is a holding company, which has two subsidiaries.
Aspen University, Inc. (“Aspen University”) was organized in 1987 and United States University, Inc. (“USU”) was formed May 2017 and
certain assets were acquired and liabilities assumed on December 1, 2017. (See Note 17)
Aspen Group’s vision is to make college affordable again in America. 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
higher education. In March 2014, Aspen University unveiled a monthly payment plan aimed at reversing the college-debt sentence
plaguing working-class Americans. The monthly payment plan offers bachelor students (except RN to BSN) the opportunity to pay their
tuition at $250/month for 72 months ($18,000), nursing bachelor students (RN to BSN) $250/month for 39 months ($9,750), master
students $325/month for 36 months ($11,700) and doctoral students $375/month for 72 months ($27,000), interest free, thereby giving
students a monthly payment tuition payment option versus taking out a federal financial aid loan.
USU began offering monthly payment plans in the summer of 2017. Today, monthly payment plans are available for the RN to BSN
program ($250/month), MBA/M.A.Ed/MSN programs ($325/month), and the MSN-FNP program ($375/month).
Since 1993, Aspen University has been nationally accredited by the Distance Education and Accrediting Council (“DEAC”), a national
accrediting agency recognized by the U.S. Department of Education (the “DOE”). On February 25, 2015, the DEAC informed Aspen
University that it had renewed its accreditation for five years to January, 2019.
Since 2009, USU has been regionally accredited by WASC Senior College and University Commission. (“WSCUC”).
Both universities are qualified to participate under the Higher Education Act of 1965, as amended (HEA) and the Federal student financial
assistance programs (Title IV, HEA programs). USU has a provisional certification.
Liquidity
At April 30, 2018, the Company had a cash balance of $14,612,559 with an additional $190,506 in restricted cash.
In April 2018, the Company raised $23,023,000 in equity through the sale of 3,220,000 shares at $7.15 per share. With the proceeds, the
Company repaid the senior secured term loan. (See Notes 10 and 12)
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, estimates of
the fair value of assets acquired and liabilities assumed in a business combination, amortization periods and valuation of courseware,
intangibles and software development costs, valuation of beneficial conversion features in convertible debt, valuation of goodwill,
valuation of loss contingencies, valuation of stock-based compensation and the valuation allowance on deferred tax assets.
F-10
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Cash, Cash Equivalents, and Restricted Cash
For the purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at April 30, 2018 and April 30,
2017. The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits of
$250,000 per financial institution. The Company has not experienced any losses in such accounts from inception through April 30, 2018.
As of April 30, 2018 and April 30, 2017, there were deposits totaling $14,422,499 and $2,687,461 respectively, held in two separate
institutions greater than the federally insured limits.
Restricted cash consists of $118,872 which is collateral for a letter of credit issued by the bank and required under the USU facility
operating lease and $71,634 which is collateral for a letter of credit issued by the bank and related to USU’s receipt of Title IV funds and is
required by DOE in connection with the change of control of USU. (See Note 11)
Goodwill and Intangibles
Goodwill represents the excess of purchase price over the fair market value of assets acquired and liabilities assumed from Educacion
Significativa, LLC. Goodwill has an indefinite life and is not amortized. Goodwill is tested annually for impairment. (See Note 17)
Intangible assets represent both indefinite lived and definite lived assets. Accreditation and regulatory approvals and Trade name and
trademarks are deemed to have indefinite useful lives and accordingly are not amortized but are tested annually for impairment. Student
relationships and curriculums are deemed to have definite lives and are amortized accordingly.
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.
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
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.
The monthly payment plan represents approximately 70% of the payments that are made by students. 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.
F-11
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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.
When a student signs up for the monthly payment plan, there is a contractual amount that the Company can expect to earn over the life of
the student’s program. This contractual amount cannot be recorded as the student does have the option to stop attending. As a student
takes a class, revenue is earned over the class term. Some students accelerate their program, taking two or more classes every eight week
period, which increases the student’s accounts receivable balance. If any portion of that balance will be paid in a period greater than 12
months, that portion is reflected as long-term accounts receivable. At April 30, 2018 and 2017, those balances are $1,315,050 and $657,542,
respectively.
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.
Category
Call center equipment
Computer and office equipment
Furniture and fixtures
Library (online)
Software
Depreciation Term
5 years
5 years
7 years
3 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.
F-12
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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 creation 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.
Refunds Due Students
The Company receives Title IV funds from the Department of Education to cover tuition and living expenses. After deducting tuition and
fees, the Company sends checks for the remaining balances to the students.
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.
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 had revenues from students outside the United States representing 2.3% and 3.3% of the revenues for the years ended April
30, 2018 and 2017 respectively.
F-13
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Accounting for Derivatives
The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging”. The
result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a
liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other
income (expense). Upon conversion, exercise, or other extinguishment (transaction) of a derivative instrument, the instrument is marked to
fair value at the transaction date and then that fair value is recognized as an extinguishment gain or loss. Equity instruments that are
initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liability at the fair value of the
instrument on the reclassification date.
Cost of Revenues
Cost of revenues consists of two categories of cost, instructional costs and services, and marketing and promotional costs.
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 costs associated with online faculty, technology license costs and costs associated with other
support groups that provide services directly to the students and are included in cost of revenues.
Marketing and Promotional Costs
Marketing and promotional costs include costs associated with producing marketing materials and advertising. Such costs are generally
affected by the cost of advertising media, the efficiency of the Company's marketing and recruiting efforts, and expenditures on advertising
initiatives for new and existing academic programs. Non-direct response advertising activities are expensed as incurred, or the first time the
advertising takes place, depending on the type of advertising activity. Total marketing and promotional costs were $5,428,828 and
$2,625,075 for the years ended April 30, 2018 and 2017, respectively and are included in cost of revenues.
General and Administrative
General and administrative expenses include compensation of employees engaged in corporate management, finance, human resources,
information technology, academic operations, 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.
Legal Expenses
All legal costs for litigation are charged to expense as incurred.
Income Tax
The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related
financial statement 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.
F-14
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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 pro rata 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.
Business Combinations
We include the results of operations of businesses we acquire from the date of the respective acquisition. We allocate the purchase price of
acquisitions to the assets acquired and liabilities assumed at fair value. The excess of the purchase price of an acquired business over the
amount assigned to the assets acquired and liabilities assumed is recorded as goodwill. We expense transaction costs associated with
business combinations as incurred.
Net Loss Per Share
Net loss per common share is based on the weighted average number of common shares outstanding during each period. Options to
purchase 2,933,426 and 2,097,384 common shares, warrants to purchase 650,847 and 914,123 common shares, and $50,000 and $50,000 of
convertible debt (convertible into 4,167 and 4,167 common shares) were outstanding at April 30, 2018 and 2017, respectively, 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.
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 Chief Executive Officer and Chief Academic Officer, 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
Financial Accounting Standards Board, Accounting Standard Updates which are not effective until after April 30, 2018, are not expected to
have a significant effect on the Company’s consolidated financial position or results of operations.
ASU 2017-01 - In January 2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-01: "Business
Combinations (Topic 805)- to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for interim
and annual reporting periods beginning after December 15, 2017. The Company implemented this guidance effective February 1, 2018.
F-15
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
ASU 2017-04 - In January 2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-04:
"Intangibles - Goodwill and Other (Topic 350)” - to simplify how an entity is required to test goodwill for impairment by eliminating Step
2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s
goodwill with the carrying amount of that goodwill. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2019. The Company early adopted this standard effective April 30, 2018.
ASU No 2016-18 – In November 2016, FASB issue ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (ASU 2016-
18), requiring restricted cash and cash equivalents to be included with cash and cash equivalents of the statement of cash flows. The new
standard is effective for fiscal years, and interim periods with those year, beginning December 15, 2017, with early adoption permitted. The
Company has elected to adopt this new ASU at May 1, 2018, and does not anticipate the ASU to have a material impact on its consolidated
financial statements.
ASU 2016-02 - In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02: “Leases
(Topic 842)” whereby lessees will need to recognize almost all leases on their balance sheet as a right of use asset and a lease liability. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company expects this ASU will
increase its assets and liabilities, but have no net material impact on its consolidated financial statements.
ASU 2014-09 - In May 2014, the Financial Accounting Standards Board (FASB) issued Update No. 2014-09: “Revenue from Contracts
with Customers (Topic 606)” which requires that an entity recognize revenue to depict the transfer of promised goods and services to
customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
Since the issuance of the original standard, the FASB has issued several updates to the standard which i) clarify the application of the
principal versus agent guidance; ii) clarify the guidance relating to performance obligations and licensing; iii) clarify assessment of the
collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transaction;
and iv) clarify narrow aspects of ASC 606 or corrects unintended application of the guidance. The new revenue recognition standard,
amended by the updates, becomes effective in the first quarter of fiscal 2019 and is to be applied retrospectively using one of two prescribed
methods. Early adoption is permitted. The Company adopted the new standard effective May 1, 2018 and does not believe the adoption of
this standard will have a material impact on the amount or timing of its revenues.
Note 3. Accounts Receivable
Accounts receivable consisted of the following at April 30, 2018 and 2017:
Accounts receivable
Long term contractual accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net
April 30,
2018
2017
$ 8,585,947 $ 5,421,268
(657,542)
(328,864)
$ 6,802,723 $ 4,434,862
(1,315,050)
(468,174)
Bad debt expense for the years ended April 30, 2018 and 2017, were $535,366 and $44,320 respectively.
Note 4. Secured Note and Accounts Receivable
On March 30, 2008 and December 1, 2008, Aspen University sold courseware pursuant to marketing agreements to Higher Education
Management Group, Inc. (“HEMG”,) which was then a related party and principal stockholder of the Company. The sold courseware
amounts were $455,000 and $600,000, respectively; UCC filings were filed accordingly. Under the marketing agreements, the receivables
were due net 60 months. On September 16, 2011, HEMG pledged 772,793 Series C preferred shares (automatically converted to 54,571
common shares on March 13, 2012) of the Company as collateral for this account receivable which at that time had a remaining balance of
$772,793. Based on the reduction in value of the collateral to $2.28 based on the then current price of the Company’s common stock, the
Company recognized an expense of $123,647 during the year ended April 30, 2014 as an additional allowance. As of April 30, 2018 and
April 30, 2017, the balance of the account receivable, net of allowance, was $45,329.
F-16
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
HEMG failed to pay to Aspen University any portion of the $772,793 amount due as of September 30, 2014. Consequently, on November
18, 2014 Aspen University filed a complaint vs. HEMG in the United States District Court for the District of New Jersey, to collect the full
amount due to the Company. HEMG defaulted and Aspen University obtained a default judgment. In addition, Aspen University gave
notice to HEMG that it intended to privately sell the 54,571 shares after March 10, 2015. On April 29, 2015, the Company sold those shares
to a private investor for $1.86 per share or $101,502, which proceeds reduced the receivable balance to $671,291 with a remaining
allowance of $625,963, resulting in a net receivable of $45,329. (See Note 11)
Note 5. Property and Equipment
As property and equipment become fully expired, the fully expired asset is written off against the associated accumulated depreciation.
There is no expense impact for such write offs. Property and equipment consisted of the following at April 30, 2018 and April 30, 2017:
Call center hardware
Computer and office equipment
Furniture and fixtures
Software
Accumulated depreciation and amortization
Property and equipment, net
Software consisted of the following at April 30, 2018 and April 30, 2017:
Software
Accumulated amortization
Software, net
$
April 30,
2017
April 30,
2018
140,509 $
230,810
932,454
2,878,753
4,182,526
(1,320,360)
53,748
103,649
255,984
2,131,344
2,544,725
(1,090,010)
$ 2,862,166 $ 1,454,715
April 30,
2018
April 30,
2017
$ 2,878,753 $ 2,131,344
(994,017)
$ 1,732,745 $ 1,137,327
(1,146,008)
Depreciation and Amortization expense for all Property and Equipment as well as the portion for just software is presented below for the
years ended April 30, 2018 and 2017:
For the
Years Ended
April 30,
2018
2017
$
578,244 $
498,476
$
475,178 $
447,972
Depreciation and amortization Expense
Software amortization Expense
The following is a schedule of estimated future amortization expense of software at April 30, 2018:
Year Ending April 30,
2019
2020
2021
2022
2023
Total
$
513,729
443,886
371,439
281,966
121,725
$ 1,732,745
Note 6. Courseware
Courseware costs capitalized were $48,388 and $8,800 for the years ended April 30, 2018 and 2017. Fully expired courseware is written
off against the accumulated amortization. There is no expense impact for such write-offs.
F-17
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Courseware consisted of the following at April 30, 2018 and April 30, 2017:
Courseware
Accumulated amortization
Courseware, net
Amortization expense of courseware for the years ended April 30, 2018 and 2017:
April 30,
2018
298,064 $
(159,905)
138,159 $
April 30,
2017
271,777
(126,300)
145,477
$
$
For the
Years Ended
April 30,
2018
2017
Amortization expense
$
55,706 $
58,254
The following is a schedule of estimated future amortization expense of courseware at April 30, 2018:
Year Ending April 30,
2019
2020
2021
2022
2023
Total
$
$
59,146
45,306
18,340
10,453
4,914
138,159
Note 7. Accrued Expenses
Accrued expenses consisted of the following at April 30, 2018 and 2017:
Accrued compensation
Accrued Interest
Other accrued expenses
Accrued expenses
Note 8. Loan Payable Officer – Related Party
April 30,
2018
2017
$
$
202,664 $
79,853
376,337
658,854 $
122,520
13,566
126,825
262,911
On June 28, 2013, the Company received $1,000,000 as a loan from the Company’s Chief Executive Officer. This loan was for a term of 6
months with an annual interest rate of 10%, payable monthly. Through various note extensions, the debt was extended to May 5, 2018.
There was no accounting effect for these extensions. The loan plus accrued interest was paid in full on April 7, 2017 using proceeds from
the $7,500,000 equity raise. (See Note 12.)
Note 9. Convertible Notes and Convertible Notes – Related Party
On February 29, 2012, a loan payable of $50,000 was converted into a two-year convertible promissory note, interest of 0.19% per annum.
Beginning March 31, 2012, the note was convertible into common shares of the Company at the rate of $12.00 per share. This loan (now a
convertible promissory note) was originally due in February 2014. The amount due under this note has been reserved for payment upon the
note being tendered to the Company by the note holder.
F-18
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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 was convertible into shares of common stock of the Company at a rate of $4.20 per share
(based on proceeds received on September 28, 2012 under a private placement at $4.20 per unit). Through various note extensions, the debt
was extended to May 5, 2018. There was no accounting effect for these modifications. This note was paid in full with accrued interest on
April 7, 2017, as part of the $7,500,000 equity raise. (See Note 12.)
On December 1, 2017, the Company completed the acquisition of USU and, as part of the consideration, a $2.0 million convertible note
(the “Note”) was issued, bearing 8% annual interest that matures over a two-year period after the closing. (See Note 17) At the option of
the Note holder, on each of the first and second anniversaries of the closing date, $1,000,000 of principal and accrued interest under the
Note will be convertible into shares of the Company’s common stock based on the volume weighted average price per share for the ten
preceding trading days (subject to a floor of $2.00 per share) or become payable in cash. There was no beneficial conversion feature on the
note date and the conversion terms of the note exempt it from derivative accounting. Subsequently the note was assigned to a third party.
Convertible notes payable consisted of the following at April 30, 2018 and 2017:
Convertible note payable - originating December 1, 2017; no monthly payments required; bearing an annual
rate of interest at 8%; $1,000,000 maturing on December 1, 2018 and $1,000,000 maturing on December 1,
2019
$
2,000,000 $
—
April 30,
2018
2017
Convertible note payable - originating February 29, 2012; no monthly payments required; bearing interest at
0.19%; maturing at February 29, 2014
Less: Current maturities
Total
Future maturities of convertible notes payable as of April 30, 2018 are as follows:
50,000
50,000
2,050,000
(1,050,000)
1,000,000 $
$
50,000
(50,000)
—
Year ending April 30,
2019
2020
$ 1,050,000
1,000,000
$ 2,050,000
Note 10. Senior Secured Term Loan
On July 25, 2017, the Company signed a $10 million senior secured term loan with Runway Growth Capital Fund (formerly known as
GSV Growth Capital Fund). The Company drew $5 million under the facility at closing, then subsequently drew $2.5 million in December
2017, following the closing of the Company’s acquisition of substantially all the assets of Educacion Significativa, LLC (ESL), including
receipt of all required regulatory approvals, among other conditions to funding. Terms of the 4-year senior loan include a 10% over 3-
month LIBOR per annum interest rate.
The Company would have been required to begin making principal repayments upon the 24-month anniversary of the initial closing (July
24, 2019), and each month thereafter would have been required to repay 1/24th of the total loan amount outstanding. Should the Company
achieve both annualized revenue growth of at least 30% and operating margin of at least 7.5% for any 12-month trailing period, then at the
quarter-end of that 12-month trailing period, the Company may elect to extend the interest only period for the quarter immediately
following the 12-month trailing period throughout the duration of the loan.
F-19
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Additionally, the Company paid a 0.25% origination fee on the initial $5 million draw and paid another 0.25% origination fee upon the
second $2.5 million draw, and issued 224,174 5-year warrants at an exercise price of $6.87. The relative fair value of the warrants was
$478,428 and was recorded as debt discount along with other direct costs of the term loan and was being amortized to interest expense over
the term of the loan.
On April 23, 2018, the Company repaid the entire $7.5 million outstanding senior secured term loan plus early termination and closing fees
of approximately $600,000. The Company paid this using the funding received in the equity raise on April 18, 2018. (See note 12.)
Note 11. Commitments and Contingencies
Line of Credit
The Company maintained a line of credit with a bank, up to a maximum credit line of $250,000. The line of credit bore interest equal to the
prime rate plus 0.50% (overall interest rate of 4.00% at April 30, 2016). The line of credit required minimum monthly payments consisting
of interest only. The line of credit was 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 was for an unspecified time until the bank notifies the
Company of the Final Availability Date, at which time monthly payments on the line of credit would have been 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 April 30, 2016 was $1,783. Since the earliest the line of credit could have been
due and payable was over a five year period and the Company believed that it could obtain a comparable replacement line of credit
elsewhere, the entire line of credit was included in long-term liabilities. The unused amount under the line of credit available to the
Company at April 30, 2016 was $248,217. In September 2016, the line of credit with the bank was paid and terminated.
In August 2016, the Company closed on a $3 million credit line with its largest shareholder. The credit line, whose terms included a 12%
per annum interest rate on drawn funds and a 2% per annum interest rate on undrawn funds. The Company initially drew down $750,000
under the line, of which approximately $248,000 was used to repay a secured line of credit with a bank as noted above. Additionally, the
Company paid a 2% origination fee of $60,000 and issued 62,500 common-stock warrants at an exercise price of $2.40 per share, which are
redeemable by the Company if the closing price of its common stock averages at least $3.00 per share for 10 consecutive trading days. The
origination fee and $52,500 value of the 62,500 warrants (see Note 12) were recorded as debt discounts to be amortized over the term of the
line. In January of 2017, the company drew an additional $500,000 and drew another $900,000 in March 2017 to use as a down payment for
the USU acquisition (See Note 17.). The entire balance of $2,150,000 plus interest was paid and the letter of credit was terminated on April
7, 2017 using proceeds of the $7,500,000 equity raise. The unamortized balance of the origination fees were expensed at that time. (See
Note 12 and 17.)
Operating Leases
On December 5, 2017 the Company signed a 92 month lease for the campus located in Phoenix, Arizona. The operating lease granted eight
initial months of free rent and had a monthly rent of $66,696 and increases after month twelve. Related to this the company produced a
security deposit of $519,271, which is included in Deposits and other assets on the accompanying consolidated balance sheet.
On September 18, 2017 the Company signed a six year lease for its corporate headquarters in New York, NY. The annum amount is
$186,060, payable at a rate of $15,505 per month and then increases after the first anniversary.
The Company leases office space for its developers in Dieppe, NB, Canada under a three year agreement commencing March 1, 2017. The
monthly rent payment is $4,367 Canadian which is approximately $3,200 US.
The Company leases office space for its Denver, Colorado location under a two year lease commencing January 1, 2017. The monthly rent
payment is $10,756.
On February 1, 2016, the Company entered into a 64-month lease agreement for its call center in Phoenix, Arizona. The operating lease
granted four initial months of free rent and had a base monthly rent of $10,718 and then increases 2% per year after.
F-20
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
On November 11, 2015, the Company signed a five year and four months lease agreement for our Scottsdale Office Center. The lease
commenced on January 15, 2016 and expires May 31, 2021. The annual base rent beginning January 15, 2016 was $128,612 with a four
month Rent Abatement Period. After the sixteenth month each annual base rent increases base on the price per rentable square foot.
United States University’s lease commenced July 1, 2016 and expires on June 30, 2022. The initial monthly base rent was $51,270 for the
first 10 months and has a periodic increase per 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 April 30, 2018:
Year Ending April 30,
2019
2020
2021
2022
2023
2024
2025
2026
Total minimum payments required
$ 1,893,294
2,011,781
2,048,646
1,977,141
1,411,654
1,239,728
1,148,973
292,233
$ 12,023,450
Rent expense for the years ended April 30, 2018 and 2017 were $853,145 and $338,196, 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 may or may not be performance-based in nature.
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
April 30, 2018, except as discussed below, there were no other 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.
On February 11, 2013, HEMG and its Chairman, Mr. Spada, sued the Company, certain senior management members and our directors in
state court in New York seeking damages arising principally from (i) allegedly false and misleading statements in the filings with the SEC
and the DOE where the Company disclosed that HEMG and Mr. Spada borrowed $2.2 million without board authority, (ii) the alleged
breach of an April 2012 agreement whereby the Company had agreed, subject to numerous conditions and time limitations, to purchase
certain shares of the Company from HEMG, and (iii) alleged diminution to the value of HEMG’s shares of the Company due to Mr.
Spada’s disagreement with certain business transactions the Company engaged in, all with Board approval. On November 8, 2013, the state
court in New York granted the Company’s motion to dismiss all of the claims. On December 10, 2013, the Company filed a series of
counterclaims against HEMG and Mr. Spada in state court of New York. By decision and order dated August 4, 2014, the New York court
denied HEMG and Spada’s motion to dismiss the fraud counterclaim the Company asserted against them.
While the Company has been advised by its counsel that HEMG’s and Spada’s claims in the New York lawsuit is baseless, the Company
cannot provide any assurance as to the ultimate outcome of the case. Defending the lawsuit may be expensive and will require the
expenditure of time which could otherwise be spent on the Company’s business. While unlikely, if Mr. Spada’s and HEMG’s claims in the
New York litigation were to be successful, the damages the Company could pay could potentially be material.
F-21
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
On October 15, 2015, HEMG filed bankruptcy pursuant to Chapter 7. As a result, the remaining claims and Aspen’s counterclaims in the
New York lawsuit are currently stayed. The sole asset of the bankruptcy estate is approximately 208,000 shares of the Company’s common
stock owned by HEMG. The Company and a creditor are the primary claimants seeking ownership of the stock. Based on current market
value, the assets are insufficient to satisfy both claimants. The Company has challenged the priority of the other creditor. On December
2013, the Company answered an amended complaint filed by HEMG and Mr. Spada in April 2013.
On December 10, 2013, the Company also filed a series of counterclaims against HEMG and Mr. Spada in the same state court of New
York. By order dated August 4, 2014, the New York court denied HEMG and Spada’s motion to dismiss the fraud counterclaim the
Company asserted against them.
The litigation has been stayed since HEMG’s 2015 bankruptcy filing.
While the Company has been advised by its counsel that HEMG’s and Spada’s claims in the New York lawsuit is baseless, the Company
cannot provide any assurance as to the ultimate outcome of the case. Defending the lawsuit maybe expensive and will require the
expenditure of time which could otherwise be spent on the Company’s business. While unlikely, if Mr. Spada’s and HEMG’s claims in the
New York litigation were to be successful, the damages the Company could pay could potentially be material.
In November 2014, the Company and Aspen University sued HEMG seeking to recover sums due under two 2008 Agreements where
Aspen University sold course materials to HEMG in exchange for long-term future payments. On September 29, 2015, the Company and
Aspen University obtained a default judgment in the amount of $772,793. This default judgment precipitated the bankruptcy petition
discussed in the next paragraph.
On October 15, 2015, HEMG filed bankruptcy pursuant to Chapter 7. As a result, the remaining claims and Aspen’s counterclaims in the
New York lawsuit are currently stayed. The bankrupt estate’s sole asset consists of 208,000 shares of AGI common stock. The principal
creditors are AGI which holds the judgment and has several other claims including the $2.2 million misappropriation claim. The other
primary claimant is a secured creditor which alleges it is owed a principal amount of $1,200,000. AGI alleges that because HEMG, a
Nevada corporation, had failed to pay annual fees to Nevada it lacked the legal authority to create a security interest.
On August 13, 2015, a former employee filed a complaint against the Company in the United States District Court, District of Arizona, for
breach of contract claiming that Plaintiff was terminated for “Cause” when no cause existed. Plaintiff sought the remaining amounts under
her employment agreement, severance pay, bonuses, value of lost benefits, and the loss of the value of her stock options. The Company
filed an answer to the complaint by the September 8, 2015 deadline. That matter has been fully and finally settled for $69,000 as of June
2016 and has been dismissed. The Company accrued $87,500 in accordance with ASC 450-20-55-11 and was included in accrued expenses
at April 30, 2016. The amount owed was paid in the fiscal year ended April 30, 2017.
Regulatory Matters
The Company’s subsidiaries, Aspen University and United States University, are 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 the subsidiaries 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.
On August 22, 2017, the DOE informed Aspen University of its determination that the institution has qualified to participate under the
HEA and the Federal student financial assistance programs (Title IV, HEA programs), and set a subsequent program participation
agreement reapplication date of March 31, 2021.
USU currently has provisional certification to participate in the Title IV Programs due to the business combination. The provisional
certification allows the school to continue to receive Title IV funding as it did prior to the change of ownership.
F-22
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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.
Because Aspen University and USU operate 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, no later than 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.
Subsequent to a program review by the Department of Education (“DOE”) during calendar year 2013, the Company recognized that it had
not fully complied with all requirements for calculating and making timely returns of Title IV funds (R2T4). In November 2013, the
Company returned a total of $102,810 of Title IV funds to the DOE. In the two most recent fiscal years (2015 and 2016), Aspen's
compliance audit reflected no material findings related to the 2013 program review findings.
On February 8, 2017, the DOE issued a Final Program Review Determination (“FPRD”) letter related to the 2013 program review. The
FRPD includes a summary of the non-compliance areas and calculations of amounts due for the 126 students that they reviewed. We had
45 days to appeal the amounts calculated and while we were reviewing their calculations, we recognized that we would owe some amount
in the range from $80,000 to $360,000. In accordance with ASC 450-20, we recorded a minimum liability of $80,000 at January 31, 2017.
Of that amount, $55,000 was recorded against the accounts receivable reserve and $25,000 was expensed. In late March 2017, we agreed to
not contest the calculations and paid the full amount of $378,090. As a result, we recorded an additional expense of $298,090 in the fiscal
quarter ended April 30, 2017.
Subsequent to a compliance audit, in 2015, ESL the predecessor to USU recognized that it had not fully complied with all requirements for
calculating and making timely returns of Title IV funds (R2T4). In 2016, ESL the predecessor to USU, had a material finding related to
the same issue and is required to maintain a letter of credit in the amount of $71,634 as a result of this finding. The letter of credit has been
provided to the Department of Education by AGI.
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. In July 2012, Aspen received notice from the
Delaware DOE that it was granted provisional approval status effective until June 30, 2015. On April 25, 2016 the Delaware DOE
informed Aspen University it was granted full approval to operate with degree-granting authority in the State of Delaware until July 1,
2020. Aspen University is authorized by the Colorado Commission on Education to operate in Colorado as a degree granting institution.
USU is also a Delaware corporation and is in the process of obtaining Delaware approval.
F-23
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Note 12. Stockholders’ Equity
Preferred Stock
We are authorized to issue 10,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be
determined from time to time by our Board of Directors. As of April 30, 2018 and 2017, we had no shares of preferred stock issued and
outstanding.
Common Stock
On June 21, 2016, the Company issued 208,333 shares valued at $400,000 and made a cash payment of $400,000 to a warrant holder in
exchange for the buyback of 1,120,968 warrants. The Company re-valued the fair value of the warrants on the buyback date which equaled
$594,000 and accordingly, the Company recorded an expense associated with the buyback of $206,000.
On July 31, 2016, the Company issued 29,167 shares to two IR firms for services. 16,667 shares were issued for services under a six
month contract with a value of $30,000. 12,500 shares were issued for services under a one year contract with a value of $22,500. The
Company recorded a prepaid for the value of the services and is amortizing over the respective service periods.
Following approval from its shareholders, on January 10, 2017, the Company effected 1-for-12 reverse split of its common stock. All
references to common shares and per-share data for all periods presented in this report have been retroactively adjusted to give effect to this
reverse split.
On April 7, 2017, the Company raised $7,500,000 through the issuance of 2,000,000 common shares at a price of $3.75. The net proceeds
were $6,996,000 and there were additional cash offering costs paid of approximately $57,000. In addition, one firm received 20,000 shares
of common stock for their services valued at $3.75 per share or $75,000.
Effective May 24, 2017, the Company entered into waiver agreements with all of its investors in the April 2017 common stock offering. In
consideration for waiving their registration rights, the Company paid to each of the investors 1.5% of their investment amount in the
offering. The total amount paid was $112,500 and was recorded in general and administrative expenses during the quarter ended July 31,
2017.
In November 2017, the company issued 5,000 restricted shares each to two consultants assisting with establishing the new campus. The
shares were valued at $88,699 based on the trading price of $8.87 on the grant date and recorded as a prepaid asset being amortized over
the six month term of the agreement.
On December 1, 2017 certain assets were acquired and certain liabilities assumed from Educacion Significativa, LLC (dba United States
University) by United States University, Inc. United States University, Inc. is a wholly owned subsidiary of Aspen Group Inc. (“AGI”). As
part of the purchase price the company issued 1,203,209 shares of AGI stock which were valued at $10,215,244 based on the quoted
closing price of $8.49 per share as of November 30, 2017. (See Note 17)
On April 18, 2018 and April 23, 2018, the Company raised a total of $23,023,000 through an equity raise of 3,220,000 shares of common
stock at $7.15 per share. The number of shares sold on April 18, 2018 was 2,800,000 and then another 420,000 shares were sold on April
23, 2018. The cost of raising these funds was approximately $2.2 million and was recorded as a reduction of equity. Proceeds from the
equity raise were first used to repay the senior secured term loan and the remainder to support the operations of USU and the pre-licensure
campus. (See Note 18)
During fiscal 2018, the Company issued 171,962 shares of common stock upon the cashless exercise of warrants.
During fiscal 2018, the Company issued 87,775 shares of common stock upon the exercise of warrants and received proceeds of $246,380.
During fiscal 2018, the Company issued 136,563 shares of common stock upon the exercise of stock options and received proceeds of
$475,825.
F-24
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Warrants
A summary of the Company’s warrant activity during the year ended April 30, 2018 is presented below:
Warrants
Balance outstanding, April 30, 2017
Granted
Exercised
Forfeited
Expired
Balance outstanding, April 30, 2018
Exercisable, April 30, 2018
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Number of
Shares
Aggregate
Intrinsic
Value
914,123 $
224,174
(398,526)
—
(88,924)
650,847 $
2.82
6.87
0.49
—
—
3.80
1.6 $ 1,990,995
201,757
4.2
—
—
—
—
—
—
2,581,450
2.1 $
650,847 $
3.80
2.1 $
2,581,450
On June 24, 2016, the Company issued 208,333 shares and a cash payment of $400,000 to a warrant holder in exchange for 93,414
warrants.
On August 31, 2016, the Company announced that it had closed on a $3 million credit line with its largest shareholder. The Company paid
a 2% origination fee of $60,000 and issued 62,500 common-stock warrants at an exercise price of $2.40 per share, which are redeemable by
the Company if the closing price of its common stock averages at least $3.00 per share for 10 consecutive trading days
In connection with the Senior Secured Term Loan that was finalized on July 25, 2017, the Company issued 224,174 5-year warrants at an
exercise price of $6.87. (See Note 10)
The Company issued 259,737 shares of Common Stock in conjunction with the cash and cashless exercise of 398,526 warrants. The
Company received $246,380 in conjunction with the cash exercises.
Stock Incentive Plan and Stock Option Grants to Employees and Directors
On March 13, 2012, the Company adopted the 2012 Equity Incentive Plan (the “Plan”) that provides for the grant of 1,691,667 shares
effective November 2015, 2,108,333 shares effective June 2016 and 3,500,000 shares effective July 2017, 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 April 30, 2018, there were 1,037,747 shares remaining under the Plan for future issuance. 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 year ended April 30, 2018.
Expected life (years)
Expected volatility
Risk-free interest rate
Dividend yield
F-25
April 30,
April 30,
2018
2017
4-5.0
40-43%
0.00%
n/a
4-6.5
40-43%
0.00%
n/a
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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 April 30, 2018, is presented below:
Options
Balance outstanding, April 30, 2017
Granted
Exercised
Forfeited
Expired
Balance outstanding, April 30, 2018
Exercisable, April 30, 2018
Weighted
Average
Exercise
Price
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
1.86
6.29
—
—
—
3.58
2.7 $ 12,489,871
1,610,110
4.5
—
—
—
—
—
—
3.15 $ 16,558,373
Number of
Shares
2,097,384 $
979,692
(136,563)
(7,087)
—
2,933,426 $
1,545,513 $
2.32
2.66 $ 11,534,060
On May 19, 2016, the Company granted to each of its eight non-employee directors 12,500 five-year stock options. The Company granted
an additional 4,167 five-year stock options to the chairman of the Compensation Committee and to the chairman of the Audit Committee.
These options are exercisable at $1.92 and vest in three years. For the directors receiving 12,500, the fair value was approximately $7,500
per grant and for the two directors receiving 16,667 options, the fair value on the date of grant was approximately $10,000.
On June 20, 2016, the Company granted 2,500 options to an employee. The fair value was approximately $5,000 and vest over 3 years.
On June 23, 2016, the Company granted 166,667 stock options to the Chief Operating Officer, 58,333 stock options to the Chief Academic
Officer and 25,000 to the Chief Financial Officer. The five-year options are exercisable at a price of $1.99 and vest over three years. On the
date of grant, the grant to the Chief Operating Officer had a fair value of approximately $100,000, the grant to the Chief Academic Officer
had a fair value of approximately $35,000 and the grant to the Chief Financial Officer had a fair value of approximately $15,000.
On September 12, 2016, the Company extended approximately 420,000 options that were expiring in 2017. The new expiration dates were
extended three years. The cost associated with these extensions is approximately $150,000, which represents the difference between the
fair value of the options before the modification and the fair value immediately after the modification. These extended options will vest
over the next three years.
On October 1, 2016, the Company granted 20,417 options to a pool of employees. The fair value was approximately $17,000 and the
options vest over 3 years.
On November 18, 2016, under the Plan the Company granted 41,667 five-year options to each of the two new directors elected at the
annual meeting held that month. These options are exercisable at $3.24 per share. The options were valued at $40,000 each and vest over a
three year term, subject to continued service.
On January 6, 2017, the Company granted 69,583 options to a pool of employees. The fair value was approximately $225,000 and the
options vest over three years.
F-26
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
From February 1, 2017 to April 17, 2017 inclusive, the Company granted new employees a total of 20,000 options with an exercise price
ranging from $3.60 to $4.50. All of these options are five year options that vest over 3 years. The fair value of the group of options is
$22,710.
On April 12, 2017, the Board of Directors was issued a total of 113,333 five-year options that vest of 3 years. The strike price was $4.32
and the fair value is $140,533.
The Company recorded compensation expense of $338,294 for the year ended April 30, 2017 in connection with employee stock options.
On May 13, 2017, the Company granted its executive officers a total of 500,000 five-year options to purchase shares of the Company’s
common stock under the Plan. The options vest annually over three years, subject to continued employment at each applicable vesting date,
and are exercisable at $4.90 per share. The Chairman and Chief Executive Officer received 200,000 options with a fair value of $282,000,
the Chief Operating Officer received 200,000 options with a fair value of $282,000, the Chief Academic Officer received 70,000 options
with a fair value of $98,700 and the Chief Financial Officer received 30,000 options with a fair value of $42,300.
In May 2017, the Company issued 5,500 stock options to various employees at exercise prices ranging from $4.95 to $5.10 per share.
Effective June 11, 2017, the Company granted the Chief Academic Officer 30,000 five-year options. The options vest quarterly over a
three-year period in 12 equal quarterly increments with the first vesting date being September 11, 2017, subject to continued employment
on each applicable vesting date. The options are exercisable at $6.28 per share and the fair value is $54,000.
On August 21, 2017, 52,250 options were issued to 24 employees with an exercise price of $5.95 per share and a fair value of $89,348.
On January 4, 2018, 180,000 options were issued to the board of directors with an exercise price of $9.07 per share and a fair value of
$421,200.
On January 17, 2018, 74,000 options were issued to 23 employees with an exercise price of $8.57 per share and a fair value of $149,480.
On February 12, 2018, 31,000 options were granted to 21 employees with an exercise price of $7.31 per share and a fair value of $54,250.
On April 5, 2018, 19,000 options were granted to 24 employees with an exercise price of $7.31 per share and a fair value of $33,250.
During the year ended April 30, 2018, the company issued 136,563 shares of common stock in conjunction with the exercise of 63,838
stock options. The company received $475,825 related to these exercises.
As of April 30, 2018, there was $1,439,283 of unrecognized compensation costs related to non-vested share-based compensation
arrangements. That cost is expected to be recognized over a weighted-average period of 2.0 years
The Company recorded compensation expense of $642,566 and $338,294 for the years ended April 30, 2018 and 2017, respectively, in
connection with stock options.
F-27
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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)
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 (recovery)
Intangible assets
Deferred rent
Stock-based compensation
Contributions carryforward
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Total deferred tax liabilities
Deferred tax assets, net
Valuation allowance:
Beginning of year
Decrease (increase) during period
Ending balance
Net deferred tax asset
For the Years Ended
April 30,
2018
2017
$
$
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
April 30,
2018
2017
$ 7,163,547 $ 8,626,748
(20,029
201,942
16,911
820,257
93
9,645,922
105,122
(6,573)
20,574
687,067
60
7,969,797
(132,042)
(132,042)
(174,260)
(174,260)
7,837,755
9,471,662
(9,471,662)
1,633,907
(7,837,755)
(9,068,774)
(402,888)
(9,471,662)
$
— $
—
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 at April 30, 2018 and 2017 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 year ended April 30,
2018 was a decrease of $1,633,907.
At April 30, 2018, the Company had approximately $29,780,000 of net operating loss carryforwards which will expire from 2033 to 2038.
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 April 30, 2018, tax years 2014 through 2017 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.
F-28
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
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
Effect of change in federal tax rates
Change in valuation allowance
Effective income tax rate
Note 14. Concentrations
Concentration of Credit Risk
April 30,
2018
2017
34.0%
3.0
(0.9)
(13.0)
(23.1)
0.0%
34.0%
3.0
(0.5)
—
(36.5)
0.0%
As of April 30, 2018, the Company’s bank balances exceed FDIC insurance by $14,422,499.
Note 15. Related Party Transactions
See Notes 8 and 9 for discussion of loans payable and convertible notes payable to related parties.
Note 16. Fair Value Measurements – Warrant Derivative liability
The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures
regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid
to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the
measurement date. The accounting standard established a fair value hierarchy which requires an entity to maximize the use of observable
inputs, where available. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 input are quoted prices (unadjusted)
in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or
inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term
of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and
liabilities at fair value. An asset or liability’s classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
Assets and liabilities measured at fair value on a recurring and non-recurring basis consisted of the following at April 30, 2017 which
related to 62,500 warrants which contained price protection:
Carrying
Value at
April 30,
2017
Fair value Measurements at April 30, 2017
(Level 2)
(Level 1)
(Level 3)
Warrant derivative liability
$
52,500 $
— $
— $
52,500
The following is a summary of activity of Level 3 liabilities for the years ended April 30, 2017 and 2018:
Balance April 30, 2016
Initial valuation of warrant derivative liability
Change in valuation of warrant derivative liability
Balance April 30, 2017
Gain on extinguishment of warrant liability
Balance April 30, 2018
$
$
$
—
52,500
—
52,500
(52,500)
—
Changes in fair value of the warrant derivative liability are included in other income (expense) in the accompanying consolidated
statements of operations.
There were no changes in the valuation techniques during years ended April 30, 2018 and 2017.
F-29
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
Note 17 – Acquisition of USU
On December 1, 2017 (“acquisition date”) certain assets were acquired and certain liabilities assumed from Educacion Significativa, LLC
(dba United States University) by United States University, Inc. United States University, Inc. is a wholly owned subsidiary of AGI and
was formed for the purpose of completing the asset purchase transaction. For purposes of purchase accounting, AGI is referred to as the
acquirer. AGI acquired the assets and assumed the liabilities of Educacion Significativa, LLC (dba United States University) for a purchase
price of approximately $14.8 million. The purchase consideration consisted of a cash payment of $2,500,000 less an adjustment for
working capital of approximately $110,000 plus approximately $200,000 of additional costs paid to/on behalf of and for the benefit of the
seller, a convertible note of $2,000,000 and 1,203,209 shares of AGI stock valued at the quoted closing price of $8.49 per share as of
November 30, 2017. The stock consideration represents $10,215,244 of the purchase consideration. Following the acquisition, AGI,
through its subsidiary, operates USU.
The acquisition was accounted for by AGI in accordance with the acquisition method of accounting pursuant to ASC 805 “Business
Combinations” and pushdown accounting was applied to record the fair value of the assets acquired and liabilities assumed on United
States University, Inc. Under this method, the purchase price is allocated to the identifiable assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The excess of the amount paid over the estimated fair values of the identifiable net
assets was $5,011,432 which has been reflected in the consolidated balance sheet as goodwill.
The following is a summary of the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents
Current assets acquired
Other assets acquired
Intangible assets
Accreditation and regulatory approvals
Trade name and trademarks
Student relationships
Curriculum
Goodwill
Less: Current liabilities assumed
Total purchase price
Purchase Price
Allocation
Useful Life
$
—
244,465
176,667
6,200,000
1,700,000
2,000,000
200,000
5,011,432
(727,601)
$ 14,804,963
2 years
1 year
We determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use
while employing the concept of highest and best use of the respective items. We used the following assumptions, the majority of which
include significant unobservable inputs (Level 3), and valuation methodologies to determine fair value:
·
·
Intangibles - We used the multiple period excess earnings method to value the Accreditation and regulatory approvals. The
Trade name and trademarks were valued using the relief-from-royalty method, which represents the benefit of owning these
intangible assets rather than paying royalties for their use. The Student relationships were valued using the excess earnings
method. The curriculum was valued using the replacement cost approach.
Other assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of
acquisition.
The goodwill resulting from the acquisition may become deductible for tax purposes in the future. The goodwill resulting from the
acquisition is principally attributable to the future earnings potential associated with enrollment growth and other intangibles that do not
qualify for separate recognition such as the assembled workforce.
We have selected an April 30th annual goodwill impairment test date.
F-30
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2018 and 2017
We assigned an indefinite useful life to the accreditation and regulatory approvals and the trade name and trademarks as we believe they
have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic or other factors to limit
the intangibles’ useful life and we intend to renew the intangibles, as applicable, and renewal can be accomplished at little cost. We
determined all other acquired intangibles are finite-lived and we are amortizing them on either a straight-line basis or using an accelerated
method to reflect the pattern in which the economic benefits of the assets are expected to be consumed. Amortization from the acquisition
date through April 30, 2018 was $458,333.
The expected benefits from the business acquisition will allow USU, Inc. to achieve its vision of making college affordable again on a
much broader scale along with providing various accreditations.
The Company is in the process of completing its accounting and valuations of USU, Inc. and accordingly, the estimated fair values and
allocation of purchase price noted above is provisional pending the final valuation of the assets acquired and liabilities assumed which will
not exceed one-year in accordance with ASC 805.
The total acquisition costs that AGI incurred was approximately $1,050,000, of which approximately $200,000 was incurred and expensed
in the fiscal year ended April 30, 2017 and $850,000 was incurred and expensed in the fiscal year ended April 30, 2018.
The results of operations of USU are included in the Company’s consolidated statement of operations from the date of acquisition of
December 1, 2017. The following supplemental unaudited pro forma combined information assumes that the acquisitions had occurred as
of the beginning of each period presented:
Revenue
Net Loss
Loss per common share- basic and diluted
For the Year
Ended
April 30,
2017
(unaudited)
For the Nine
Months Ended
October 31,
2017
(unaudited)
$ 18,038,474 $ 10,719,546
$ (5,444,205) $ (3,521,086)
$(0.26)
$
(0.47)
The pro forma financial information is not necessarily indicative of the results that would have occurred if these acquisitions had occurred
on the dates indicated or that result in the future.
Note 18. Subsequent Events
As a result of the change of ownership, the DOE informed USU that it must post a letter of credit in the amount of $255,708 and distribute
funds under the Heightened Cash Monitoring 1 (HCM1) payment method by September 3, 2018 in order to continue with its provisional
certification status. USU intends to meet the deadline as requested.
F-31
EXHIBIT INDEX
Exhibit # Exhibit Description
3.1
3.2
4.1
4.2
10.1
10.1(a)
10.2
10.3
Certificate of Incorporation, as amended
Bylaws, as amended
Form of Convertible Note dated December 1, 2017 - USU
Form of Senior Indenture
2012 Equity Incentive Plan, as amended*
Amendment No. 10 to the 2012 Equity Incentive Plan
Employment Agreement dated November 2, 2016 - Michael Mathews*
Employment Agreement dated November 24, 2014 - Gerard
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
21.1
23.1
31.1
31.2
32.1
Wendolowski*
Employment Agreement dated November 24, 2014 - Janet Gill*
Employment Agreement dated June 11, 2017 – St. Arnauld*
Loan and Security Agreement – Runway - July 25, 2017 +
Registration Rights Agreement – Runway - July 25, 2017
Warrant Agreement – Runway - July 25, 2017+
Form of Registration Rights Waiver dated May 9, 2017
Promissory Note dated March 8, 2017 – Linden Finance
Asset Purchase Agreement dated May 13, 2017 - USU +
Form of Stock Purchase Agreement - April 2017 Offering
Form of Registration Rights Agreement - April 2017 Offering
Form Waiver of Registration Rights Agreement - April 2017 Investors
Loan Agreement dated August 31, 2016 – Cooperman
Revolving Promissory Note dated August 31, 2016 – Cooperman
Warrant dated August 31, 2016 – Cooperman
Letter Agreement with Warrant Holders for Reduced Exercise Price and
Early Exercise 2016
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certification of Principal Executive Officer (302)
Certification of Principal Financial Officer (302)
Certification of Principal Executive and Principal Financial Officer
(906)
Number
Incorporated by Reference
Form
Date
10-Q 3/9/17
10-Q
8-K
S-3
10-Q
8-K
10-Q
10-K
3/15/18
12/1/17
4/11/18
3/15/18
3/22/18
3/9/17
7/28/15
3.1
3.2
4.1
4.5
10.11
10.1
10.1
10.19
10-K
10-K
8-K
8-K
8-K
10-Q
10-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-K
7/28/15
7/25/17
7/28/17
7/28/17
7/28/17
9/14/17
7/25/17
5/18/17
4/10/17
4/10/17
5/30/17
9/7/16
9/7/16
9/7/16
7/27/16
10.18
10.5
10.1
10.2
10.3
10.4
10.1
10.1
10.1
10.2
10.1
2.1
2.2
3.1
10.19
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
———————
*
**
Management contract or compensatory plan or arrangement.
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.
Filed or
Furnished
Herewith
Filed
Filed
Filed
Filed
Furnished**
Filed
Filed
Filed
Filed
Filed
Filed
+
Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K.
A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon
request.
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our
shareholders who make a written request to Aspen Group, Inc., at the address on the cover page of this report, Attention: Corporate
Secretary.
SUBSIDIARIES
Exhibit 21.1
Aspen University Inc., a Delaware corporation
Aspen Nursing, Inc., a Delaware corporation
United States University, Inc., a Delaware corporation
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 previously filed on December 13, 2016
(File No. 333-215075) and on Form S-3 previously filed on April 11, 2018 (File No. 333-224230) of our report dated July 13, 2018 on the
consolidated financial statements of Aspen Group, Inc. as of and for the years ended April 30, 2018 and 2017, and the effectiveness of
internal control over financial reporting of Aspen Group, Inc. as of April 30, 2018, which report is included in this Annual Report on Form
10-K of Aspen Group, Inc. for the year ended April 30, 2018.
/s/ Salberg & Company, P.A.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
July 13, 2018
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:
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;
a)
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;
b)
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
c)
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
d)
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):
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
a)
the registrant’s internal control over financial reporting.
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in
Date: July 13, 2018
/s/ Michael Mathews
Michael Mathews
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Janet Gill, 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:
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;
a)
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;
b)
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
c)
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
d)
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):
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
a)
the registrant’s internal control over financial reporting.
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in
Date: July 13, 2018
/s/ Janet Gill
Janet Gill
Chief 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
Exhibit 32.1
In connection with the annual report of Aspen Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended April 30, 2018, as filed
with the Securities and Exchange Commission on the date hereof, I, Michael Mathews, 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/ Michael Mathews
Michael Mathews
Chief Executive Officer
(Principal Executive Officer)
Dated: July 13, 2018
In connection with the annual report of Aspen Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended April 30,
2018, as filed with the Securities and Exchange Commission on the date hereof, I, Janet Gill, 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/ Janet Gill
Janet Gill
Chief Financial Officer
(Principal Financial Officer)
Dated: July 13, 2018