SECURITIES AND EXCHANGE COMMISSION
| | | | | |
þ
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year endedApril 30, 2017 2020 |
| | | | | |
¨
☐ | TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___________ to ___________ |
Commission file number000-55107001-38175 (Exact Name of Registrant as Specified in Its Charter)
| | |
Delaware
| | 27-1933597
| | | | | | |
Delaware | | 27-1933597 |
| State or Other Jurisdiction of Incorporation or Organization | | I.R.S. Employer Identification No. |
| | |
1660 South Albion Road,276 Fifth Avenue, Suite 525, Denver, CO
505, New York, New York | | 80222
10001 |
Address of Principal Executive Offices | | Zip Code |
(303) 333-4224
(646) 448-5144
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None | | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.001 | ASPU | The Nasdaq Stock Market (The Nasdaq Global Market) |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001None
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“emerging growth company”company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company)☑ | Smaller reporting company þ ☑ | |
| Emerging growth company ¨☐ | | |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨
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
$30.4$108 million based on
$3.00. a closing price of $6.25 on October 31, 2019.
The number of shares outstanding of the registrant’s classes of common stock, as of July
24, 20172, 2020 was
13,612,35422,240,993 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's
Proxy Statementproxy statement for the
20172020 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, 2017.
INDEX
TABLE OF CONTENTS
PART I
Aspen Group, Inc. (together with its subsidiaries, the "Company" or "AGI") is an education technology holding company. AGI has five subsidiaries, Aspen University Inc. ("Aspen University" or AUI") organized in 1987, Aspen Nursing of Arizona, Inc. ("ANAI"), Aspen Nursing of Florida, Inc. ("ANFI"), Aspen Nursing of Texas, Inc. ("ANTI"), and United States University Inc. ("United States University" or Aspen Group, owns 100%"USU"). ANAI, ANFI and ANTI are subsidiaries of Aspen University Inc., a Delaware corporation, or Aspen or Aspen University.
All references to the
“Company,” “we,”“Company”, “AGI”, “Aspen Group”, “we”, “our” and “us” refer to Aspen Group,
Inc., unless the context otherwise indicates.
AGI leverages its education technology infrastructure and expertise to allow its two universities, Aspen
Group, Inc. (“Aspen Group”) is a post-secondary education company with an overarchingUniversity and United States University, to deliver on the vision of making
higher educationcollege affordable
again in America. To date, Aspen Group’s sole operating subsidiary has been Aspen University, Inc., doing business as Aspen University. On May 18, 2017, Aspen Group announced it had entered into a definitive agreement to acquire United States University (“USU”), a regionally accredited for-profit university based in San Diego, California for a total purchase price of $9 million. The transaction is subject to customary closing conditions and regulatory approvals by the U.S. Department of Education (“DOE”), WASC Senior College and University Commission, and state regulatory and programmatic accreditation bodies. The earliest that Aspen Group would receive required regulatory approvals would be December 2017.
The remainder of this management discussion will focus on Aspen University.
Founded in 1987, Aspen University’s mission is to offer any motivated college-worthy student the opportunity to receive a high quality, responsibly priced distance-learning education for the purpose of achieving sustainable economic and social benefits for themselves and their families. Aspen is dedicated to providing the highest quality education experiences taught by top-tier professors - 54% of our adjunct professors hold doctorate degrees.
again. 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. AGI’s primary focus relative to future growth is to target the high growth nursing profession. As of April 30, 2020, 9,710 of 11,444 or 85% of all students across both universities are degree-seeking nursing students.
In March 2014, Aspen University unveiled a monthly payment plan
aimed at reversingavailable to all students across every online degree program offered by the
college-debt sentence plaguing working-class Americans.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
bachelor’s degreeonline associate and most bachelor students
(except RN to BSN) the opportunity to pay
their tuition and fees at $250/month,
for 72 months ($18,000), nursing bachelor’s degree students (RN to BSN) $250/month for 39 months ($9,750), master’s degreeonline master students $325/month,
for 36 months ($11,700) and
online doctoral students
$375 per $375/month,
for 72 months ($27,000), interest free, thereby giving students a monthly payment
tuition option versus taking out a federal financial aid loan.
Since the March 2014
USU began offering monthly payment education announcement, 65%plans in the summer of courses are now paid for through2017. Today, monthly payment methods (basedplans are available for the online RN to BSN program ($250/month), online MBA/MAEd/MSN programs ($325/month), online hybrid Bachelor of Arts in Liberal Studies, Teacher Credentialing tracks approved by the California Commission on courses started overTeacher Credentialing ($350/month), and the last 90 days)online hybrid Masters of Nursing-Family Nurse Practitioner (“FNP”) program ($375/month). Aspen offers two monthly payment programs, aEffective August 2019, new student enrollments for USU’s FNP monthly payment plan described aboveare offered a $9,000 two-year payment plan ($375/month x 24 months) designed to pay for the first year’s pre-clinical courses only (approximate cost of $9,000). The second academic year of the two-year FNP program in which students make payments every monthcomplete their clinical courses (approximate cost of $18,000) is required to be funded through conventional payment methods (either cash, private loans, corporate tuition reimbursement or federal financial aid).
The Company focused its growth capital over
a fixed period (36, 39 or 72 months dependingthe past fiscal year almost exclusively 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). As of April 30, 2017, Aspen has 3,060 students paying tuition through either of the monthly payment methods. Of those, 2,801 of those students are paying tuition through a monthly payment plan representing total contractual value of $26.5 million, which today equates to approximately $780,000 of monthly recurring tuition revenue.
Aspen offers certificate programs and associate, bachelor’s, master’s and doctoralits two licensure degree programs in a broad range of areas, including nursing, business, education, technology, and professional studies. In terms of student body growth during fiscal year 2017, Aspen’s active degree-seeking student body grew by 1,749 students or 60%, from 2,932 to 4,681 students.
One of the key differences between Aspen and other publicly-traded, exclusively online, for-profit universitieswhich have higher lifetime values. Set forth below is the fact that the majoritydescription of our degree-seeking students (72% as of April 30, 2017 compared to 54% as of April 30, 2016) were enrolled in Aspen’s School of Nursing. Aspen’s School of Nursing grew during fiscal year 2017 by 1,481 students or 79%, from 1,882 to 3,363 students, which represents 85% of Aspen’s student body growth.
On November 10, 2014, Aspen University announced that the Commission on Collegiate Nursing Education (“CCNE”) had awarded accreditation to itsthese two key licensure degree programs.
Pre-Licensure Bachelor of Science in Nursing (BSN)
Aspen University offers a Pre-Licensure Bachelor of Science in Nursing degree program (RN(the “Pre-Licensure BSN Program”). This innovative hybrid (online/on-campus) program allows most of the credits to BSN) through December 31,be completed online (83 of 120 credits or 69%), with pricing offered at current low tuition rates of $150/credit hour for online general education courses $325/credit hour for online core nursing courses, and $495 for core clinical courses. For students with no prior college credits, the total cost of attendance is less than $50,000.
Phoenix, AZ, Campuses
Aspen University began offering the Pre-Licensure BSN program in July 2018 at its initial campus in Phoenix, Arizona. As a result of overwhelming demand in the Phoenix metropolitan area, in January 2019 Aspen University began offering both day (July, November, March) and evening/weekend (January, May, September) terms, equaling six term starts per year. Aspen University opened a second campus in the Phoenix metropolitan area in partnership with HonorHealth under a memorandum of understanding entered into in July 2018. The initial term at HonorHealth began in September 2019. CCNE
Future Campuses
Aspen University announced in February 2020 the signing of definitive lease agreements for two new Aspen University Pre-Licensure BSN campus locations in Tampa, Florida and Austin, Texas.
Tampa, FL
Aspen University has executed a definitive lease agreement for 10 years to occupy approximately 30,000 square feet (Suites 150 and 450) of the Tampa Oaks I property located at 12802 Tampa Oaks Boulevard. The building is officially recognizedvisible from the intersection of Interstate 75 and East Fletcher Avenue, near the University of South Florida, providing visibility to approximately 126,500 cars per day.
Aspen University has executed a clinical affiliation agreement with Bayfront Health, a regional network of seven hospitals and over 1,900 staff medical professionals serving the residents of Florida’s Gulf Coast to provide required clinical placements for its nursing students. In addition, clinical affiliation agreements have been signed in the Tampa metropolitan area with John Hopkins All Children’s Hospital, Inc., Care Connections at Home, Global Nurse Network, LLC and The American National Red Cross.
Prior to commencing its campus operations, Aspen University is required to obtain approval from the Florida Board of Nursing which has been received. It also requires approval from the Florida Commission for Independent Education which has its next meeting scheduled in late July 2020. Aspen University is targeting to begin its first term at Tampa Oaks I in November, 2020.
Austin, TX
Aspen University has executed a definitive lease agreement for eight years to occupy approximately 22,000 square feet in a portion of the first floor of the Frontera Crossing office building located at 101 W. Louis Henna Boulevard in the Austin suburb of Round Rock. The building is situated at the junction of Interstate 35 and State Highway 45, one of the most heavily trafficked freeway exchanges in the metropolitan area with visibility to approximately 143,362 cars per day.
Aspen University has executed a clinical affiliation agreement with Baylor Scott & White Health – Central division, the largest not-for-profit healthcare system in Texas and one of the largest in the United States. Baylor Scott & White Health includes 48 hospitals, more than 800 patient care sites, more than 7,800 active physicians, over 47,000 employees and the Scott & White Health Plan.
Aspen University has received regulatory approval from the Texas Higher Education Coordinating Board and a regulatory exemption from the Texas Workforce Commission. Required approval from the Texas Board of Nursing is pending its meeting scheduled for later in July 2020.
Effective August 1, 2020, Aspen University has executed a sublease to take over the remaining 20-month lease held by
sublandlord National American University (NAU) to occupy their campus of approximately 7,200 square feet in the
DOEAustin suburb of Georgetown, Texas. This campus is approximately 10 miles north of Aspen’s future Frontera Crossing campus in the Austin suburb of Round Rock. In exchange, Aspen University as subtenant, at no additional cost, has the right to utilize all the existing furniture, fixtures and
equipment owned by sublandlord and will convey all such furniture, fixtures and equipment to Aspen via a bill of sale for $10.00. Aspen University is
a nongovernmental accrediting agency, which provides specialized accreditation fortargeting to commence its first term in September 2020 and will share the campus with NAU until February 2021 when NAU will have completed the teach-out of their remaining 12 nursing
programs by ensuring the quality and integrity of nursing education in preparing effective nurses.
students.
Since 2008, Aspen’s
USU Master of Science in Nursing Program has held CCNE accreditation. The Master of Science in Nursing program most recently underwent accreditation review by CCNE in March 2011. At that time, the program’s accreditation was reaffirmed, withNursing-Family Nurse Practitioner (MSN-FNP)
USU offers a new accreditation term to expire December 30, 2021. We currently offer a varietynumber of nursing degrees including: Masterdegree programs and other degree programs in health sciences, business & technology and education. Its primary enrollment program is its MSN-FNP which is designed for BSN-prepared registered nurses who are seeking a Nurse Practitioner license. The MSN-FNP is an online-hybrid 50-credit degree program with 100% of Sciencethe curriculum online, including the curricular component to complete 540 clinical and 32 lab hours.
While stimulation/immersion lab hours to date have been done at USU’s San Diego facility, the rapid growth of the MSN-FNP program has caused AGI to plan to expand for lab immersions in
Nursing, Mastermultiple locations across the United States. For example, the Company has leased an additional suite on the ground floor of
Scienceits main campus facility in
Nursing - Nursing Education, Master of SciencePhoenix (by the airport) to begin offering weekend immersions for MSN-FNP students in
Nursing – Nursing Administration and Management, Master of SciencePhoenix, in
Nursing – Forensic Nursing, Master of Scienceaddition to San Diego. We expect this additional clinical facility in
Nursing –Public Health, Master of Science in Nursing – Informatics, and Bachelor of Science in Nursing.
Aspen’s School of Nursing is responsiblePhoenix to be open this coming September.
Moreover, AGI's future plans call for the vast majoritybuild-out of, the new student enrollment and overall active student body growth. Specifically, Aspen’s Schoolon average, 10 exam rooms that will occupy approximately 3,000 square feet in each of Nursing is now on paceits pre-licensure metropolitan areas for USU to grow on an annualized basis by approximately 1,500 Active Nursing students – netimplement immersions for its MSN-FNP program. As a result,
following regulatory approvals, by the end of calendar year 2020, lab immersions are planned to be conducted in four metropolitan areas for USU MSN-FNP students: San Diego, Phoenix, Austin and Tampa.
On July 7, 2020, the fiscal year, April 30, 2018. Therefore,Company announced an affiliation partnership with American-Advanced Practice Network (A-APN), a national clinical network for advanced practice nurses that provides comprehensive health care and nursing services at its outpatient centers and clinical facilities throughout the university is on paceU.S.
A-APN offers independent nurse practitioners (NPs) a unique, multi-state network or "group practice without walls" with best-in-class technology and business support. A-APN was created for and by NPs. Rural and remote members of the network have nationwide, trusted peer cross-coverage for patients. A-APN members deliver clinical care using CareSpan's Digital Care Delivery platform, facilitating care delivery in-person, or at a distance. The platform includes diagnostics, EMR, e-prescribing, remote monitoring, and dynamic documentation.
Through this affiliation, A-APN will appoint an Educational Coordinator to
increase its active student body by ~2,300work with USU’s Office of Field Experience to place USU MSN-FNP students
on an annualized basis in fiscal year 2018 versuswith qualified, experienced NP preceptors. We expect that this telehealth partnership will enable MSN-FNP students to complete their required direct care clinical hours with A-APN throughout the
previous pace of ~1,750 active studentsCOVID-19 crisis and thereafter. As a
year ago, an improvement of 30% year-over-year.
In additionbenefit, the Company does not anticipate any delays to the specialized CCNE programmatic accreditation, sincetheir projected graduation dates.
Accreditation
Since 1993, Aspen University has been
nationally accredited by the Distance Education Accrediting Commission
(“DEAC”("DEAC"), a national
institutional accrediting agency recognized by the
U.S. United States Department of Education
(“DOE”("DOE")
.Accreditation by an accrediting commission recognized by and the DOE is requiredCouncil for an institution to become and remain eligible to participate in the federal programs of student financial assistance administered pursuant to Title IV of the Higher Education Act of 1965, as amended (the “Title IV Programs”Accreditation ("CHEA").On February 25,
2015,2019, the DEAC informed Aspen University that it had renewed its accreditation for five years
throughto January
2019. Aspen University’s accreditation is further discussed in the Accreditation Section of this Form 10-K.
Aspen2024.
Since 2009, USU has been regionally accredited by WASC Senior College and University also maintains approvals from professional associations, such as its approval as a Global Charter Education Provider from the Project Management Institute (“PMI”Commission ("WSCUC"), a regional accrediting agency recognized by the United States Department of Education ("DOE") and asthe Council for Higher Education Accreditation ("CHEA"). Its current accreditation period extends through 2022.
As a
Registered Education Provider (R.E.P.)result of
the PMI. The PMI recognizes select Aspen Project Management Courses as Professional Development Units. These courses help prepare individualstheir respective accreditations, both universities are qualified to
sit for the Project Management Professional (“PMP”), certification examination. PMP certification is the project management profession’s most recognized and respected certification credential. Project management professionals may take the PMI approved Aspen courses to fulfill continuing education requirements for maintaining their PMP certification.
Similarly, in connection with our Bachelor and Master degrees in Psychology of Addiction and Counseling, the National Association of Alcoholism and Drug Abuse Counselors, (“NAADAC”), has approved Aspen as an “academic education provider.” NAADAC-approved education providers offer training and education for those who are seeking to become certified, and those who want to maintain their certification, as alcohol and drug counselors. In connection with the approval process, NAADAC reviews all educational training programs for content applicability to state and national certification standards.
Aspen also is a participant in theTitle IV Programs.At the federal level,participate under the Higher Education Act of 1965 as amended (the “HEA”("HEA") and the regulations promulgated under theFederal student financial assistance programs (Title IV, HEA by the DOE set forth numerous, complex standards that institutions must satisfyprograms).
Our operations are organized in
order to participate in the Title IV Programs.
one reporting segment.
Competitive Strengths - We believe that we have the following competitive strengths:
Exclusively
Proprietary Education Technology Platform – Traditionally, a University or Online Program Manager (OPM) offering online education has three core systems that serve as the backbone of their technology stack: (i) a Customer Relationship Management (CRM) system used by the enrollment team to manage prospective students; (ii) a student information system (or SIS) that the university uses to manage its student body, and (iii) a learning management system (or LMS) which serves as the online classroom.
In each of these categories, there are a number of software as a service ("SaaS") companies that offer solutions for higher education. Most universities and OPMs license one or all of these systems. In studying these systems, we concluded that there was no reasonable way to have these three separately licensed systems fluently talk to each other to achieve our end goal of having real-time data on every aspect of a students’ career – whether it be academic in nature or personal, financial or other behavioral issues.
As a result, several years ago we built an in-house Student Information System and connected it to our Learning Management System, D2L. We subsequently built and launched the first phase of an in-house CRM system that was designed for the enrollment departments at Aspen University and USU.
The first-phase CRM included an algorithm that recommends to Enrollment Advisors (EAs), in priority order, what follow-up calls should be made in a given day to complete the enrollment process for prospective students in that given EAs database. The algorithm was created by studying the daily habits and activities of the three most productive EAs in AGI history. This recommendation engine then automatically updates in real-time after each follow-up/action is conducted by an EA. To our knowledge, these advanced features are not offered by any CRM software company in the industry. This recommendation engine has boosted our lead conversion rates to approximately 12% vs. 10% prior to launch. That is phase one of our in-house CRM, but the true breakthrough technology is targeted in phase two.
Phase two is designed to achieve materially higher persistence rates among our student body, and is targeted to be launched late in calendar year 2021. We believe the biggest persistence challenge among the growing population of fully-online students in the U.S. is the lack of timely student support.
Specifically, students struggle in many different ways during their academic career (academic, financial, personal, and time management, to name a few) and institutions and OPMs lack the ability to obtain timely information on how students are performing and the struggles they are experiencing across all of these areas, and then provide timely student support to overcome these issues. Our CRM is intended to turn our student services departments into a proactive student support group vs. traditional student services departments that simply react to student issues in a defensive manner (often times when it is too late). Specifically, our CRM when completed will alert an Academic Advisor when an at-risk event occurs, in real-time, so the advisor can contact the student to discuss ways to mitigate or solve the issue.
Our in-house CRM, when completed, does not exist in the higher education market and we believe it will drive industry-leading persistence rates and therefore higher LTVs over time.More importantly, this holds promise to deliver better student outcomes meaning higher graduation rates and therefore higher returns on students’ education investments.
Emphasis on Online Education - We haveThe curriculum for all courses at AGI's universities are designed our courses and programs specificallyprimarily for online delivery,delivery. Two nursing degree programs at AGI's universities require clinical practice: Aspen University's pre-licensure BSN hybrid (online/on-campus) nursing program and USU’s hybrid (online/on-campus) MSN-FNP program. In addition, USU's Bachelor of Arts in Liberal Studies, Teacher Credentialing tracks require field experience/student teaching. Online, we recruit and train faculty exclusively for online instruction. We provide students the flexibility to study and interact at times that suitssuit their schedules. We design our onlineonline/on-campus sessions and materials to be interactive, dynamic and user friendly.
Debt Minimization - We are committed to offering among the lowest tuition rates in the sector, which to date has alleviated the need for a significant majority of our students to borrow moneytake out federal financial aid loans to fund Aspen’s tuition requirements. Aspen’s course-by-course tuition rates are $150/credit hour for degree-seeking undergraduate programs, $325/credit hour for all master programs and the Bachelor of Science in Nursing (BSN) program and $450/credit hour for all doctoral degree programs. These tuition rates are designed to allow students to pay their tuition through monthly payment plans, thereby having the opportunity to earn their degree debt free.
and fees requirements.
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. Fifty-four percent of our adjunct faculty members hold a doctorate degree. One-on-oneRegular and substantive interaction and one-on-one student contact with our highly experienced faculty brings knowledge and great perspective to the learning experience. Faculty members are available by telephone, video conference 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 variableflexible faculty cost model will enable us to expand our operating margins. As we increase student enrollments, we are able to scale our online business on a variable basis through growing 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 studentsone student or as many as 3050 at any given time.
We also believe our hybrid Pre-Licensure BSN Program has significant potential since there are large waiting lists of applicants at many public universities that offer pre-licensure BSN programs in major U.S. metropolitan areas. According to AACN’s report on 2018-2019 Enrollment and Graduations in Baccalaureate and Graduate Programs in Nursing, U.S. nursing schools turned away 75,029 qualified applicants from baccalaureate and graduate nursing programs in 2018 due to an insufficient number of faculty, clinical sites, classroom space, clinical preceptors, and budget constraints.
(https://www.aacnnursing.org/Portals/42/News/Factsheets/Faculty-Shortage-Factsheet.pdf?ver=2019-04-02-160735-400)
Our experience in the Phoenix metropolitan area has confirmed the existence of a backlog. Throughout our second full fiscal year (FY’20) marketing the program, Aspen University increased its active student body from 396 to 1,521 in its Pre-Licensure BSN Program in the Phoenix metropolitan area.
“One Student at a Time” personal carePersonal 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 workswork with a student from initial interest through the application process and enrollment, and most importantly while the student is pursuing a degree ortheir studies.
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
time management principles and practices, as well as good writing and research skills. Admission to Aspen
University is based on
a thorough assessment of each applicant’s potential to complete
successfully the
program.
program successfully.
Industry Overview
The U.S.
According to Department of Education reports, among college students that study exclusively online, public and private not-for-profits represent the majority of students -- 79% of the total in fall 2017. All of the online growth since fall 2012 came at not-for-profit schools, as online enrollment fell at for-profit schools during this period, decreasing private for-profit institutions’ market share to 21% of total online enrollment from 35% in fall 2012. However, for postsecondary education is a large, growing market. those that do attend for-profit institutions, the bulk of those students attend online. As of fall 2017 (2017-2018 school year), nearly 60% of students attending private for-profit institutions did so online.
Competition
According to the
most recent publication by the National Center for2018 Digest of Education Statistics
(“NCES”)(nces.ed.gov),
the number of postsecondary learners enrolled as of 2012-13 in U.S. institutions that participate in Title IV Programs was approximately 27.8 million (including both undergraduate and graduate students). This number is up from 21 million in the fall of 2010, and from 18.2 million in the fall of 2007. We believe the growth in postsecondary enrollment is a result of a number of factors, including the significant and measurable personal income premium that is attributable to postsecondary education, and an increase in demand by employers for professional and skilled workers.
According to the Integrated Postsecondary Education Data System (“IPEDS”) data managed by the DOE, the number of students that took at least one online course in the most recent studies was about 5.5 million — roughly one-quarter of the total enrollment. Among those 5.5 million students, about 2.6 million were enrolled in fully online programs — the rest took some traditional courses, some online. Additionally, the share of graduate students enrolled in fully online programs was twice as high as the share of undergraduates — 22 to 11 percent.
Competition
Therethere are more than 4,2004,600 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 withuniversities that primarily enroll online universities.students. Our primarily online university competitors that are publicly traded include: American Public Education, Inc. (Nasdaq: APEI), DeVryAdtalem Global Education (NYSE: ATGE), Apollo Education Group, Inc. (NYSE: DV)(Nasdaq: APOL), Grand Canyon Education, Inc. (Nasdaq: LOPE), Capella Education Company (Nasdaq: CPLA), and BridgepointStrategic Education, Inc. (NYSE: BPI)(Nasdaq: STRA). American Public Education, Inc. and Capella Education Company are wholly online while the others are not. Based upon public information, Apollo Group, which includes University of Phoenix, is the market leader with University of Phoenix having
We believe that these competitors have degreed enrollments
of 135,900 in November 2016 (based upon APOL’s Form 10-Q filed on January 9, 2017 for the period ending November 30, 2016).ranging from approximately 38,000 to over 100,000 students. As of April 30,
2017, Aspen2020, AGI had
4,68111,444 active degree-seeking students
enrolled, respectively. These competitors have substantiallyenrolled. Because of the current COVID-19 pandemic, we may face more
financial and other resources.
online competition in the future.
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-old24-year-old students, and we expect that these universities will continue to modify their existing programs to serve working learners more effectively, including by offering more distance learning programs. We believe that the primary factors on which we compete are the following:
·
•Active and relevant curriculum development that considers the needs of employers;·
•The ability to provide flexible and convenient access to programs and classes;·
•Cost of the program;
•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;
·
•Convenience.
Curricula
Certificates
Certificate in Project Management
Certificate in eLearning Pedagogy
Associates Degrees
Associate
Academics
Aspen University
School of Applied Science Early ChildhoodNursing and Health Sciences
School of Education
Bachelor’s Degrees
Bachelor
School of Business and Technology
School of Arts
in Psychology and
Addiction CounselingBachelorSciences
United States University
College of
Science in Business AdministrationBachelor of Science in Business Administration, (Completion Program)
Bachelor of Science in Criminal Justice
Bachelor of Science in Criminal Justice, (Completion Program)
Bachelor of Science in Criminal Justice with specializations in Criminal Justice Administration and
Major Crime Scene Investigation Procedure
Bachelor of Science in Early Childhood Education
Bachelor of Science in Early Childhood Education, (Completion Program)
Bachelor of Science in Medical Management
Bachelor of Science in Nursing (Completion Program)
Master’s Degrees
Master of Arts Psychology and Addiction Counseling
Master of Science in Criminal Justice
Master of Science in Criminal Justice with specializations in Forensic Sciences, Law Enforcement Management, and
Terrorism and Homeland Security
Master of Science in Information Management
Master of Science in Information Systems with specializations in Enterprise Application Development and
Web Development
Master of Science in Information Technology
Master of Science in Information Technology and Innovation
Master of Science in Nursing with a specialization in Administration and Management
Master of Science in Nursing (RN to MSN Bridge Program) with a specialization in Administration and Management
Master of Science in Nursing with a specialization in Nursing Education
Master of Science in Nursing (RN to MSN Bridge Program) with a specialization in Nursing Education
Master of Science in Nursing (RN to MSN Bridge Program) with a specialization in Forensic Nursing
Master of Science in Nursing with a specialization in Forensic Nursing
Master of Science in Nursing with a specialization in Public Health
Master of Science in Nursing (RN to MSN Bridge Program) with a specialization in Public Health
Master of Science in Nursing with a specialization in Informatics
Master of Science in Nursing (RN to MSN Bridge Program) with a specialization in Informatics
Master in Business Administration
Master in Business Administration with specializations in Entrepreneurship, Finance, Information Management, Pharmaceutical Marketing and Management, and Project Management
Master in Education with specializations in Curriculum Development and Outcomes Assessment, Education Technology, Transformational Leadership, and eLearning Pedagogy
Doctorate Degrees
Doctorate of Science in Computer Science
Doctorate in Education Leadership and Learning with specializations in K-12, Higher Education, Organizational Leadership, Organizational Psychology, and Health Care Administration
DoctorSciences
College of
Nursing Practice
Business and Technology
College of Education
Extended Studies
Following Mr. Michael Mathews becoming Aspen’sour 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 Aspen’sour Internet marketing program is that we have not used and have no plans in the near future to utilizeacquire non-branded, non-exclusive leads from 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 that are branded and exclusive in nature, and those leads are both non-branded and non-exclusive in addition to exclusive branded leads. Aspen’sOur executive officers have many years of expertise in the online lead generation and Internet advertising industry, which for the foreseeable future will allow Aspenus to cost-effectively drive all prospective student leads internally. This is a competitive advantage forthat are branded and exclusive in nature.
We have invested in our technology infrastructure and believe our education technology platform enables us to provide lower costs per enrollment. Additionally, in connection with the launch of the BSN Pre-Licensure Program in Phoenix, AZ, Aspen because third-party leadsUniversity has begun to augment its Internet advertising campaigns with local radio spots in the Phoenix metropolitan area.To date, we have found that our enrollment costs per student 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 in this program than internally generated, Aspen branded, proprietary leads.
our other degree programs at AGI.
As of
July 24, 2017,June 15, 2020, we had
138319 full-time employees, and
133511 adjunct professors,
of which 54%who are
doctorally prepared.part-time employees. None of our employees are parties to any collective bargaining arrangement. We believe our relationships with our employees are good.
Aspen Group was incorporated on February 23, 2010 in
Florida as a home improvement company intending to develop products and sell them on a wholesale basis to home improvement retailers. In June 2011, Aspen Group changed its name to Elite Nutritional Brands, Inc. and terminated all operations.Florida. In February 2012, Aspen Group reincorporated in Delaware under the name Aspen Group, Inc.
Aspen University
Inc. 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
University Inc. in a transaction we refer to as the
Reverse Merger.
reverse merger. On December 1, 2017, Aspen Group acquired USU.
Available Information
Our corporate website is www.aspu.com. On our website under "SEC Filings", we make available access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), free of charge.
Regulatory Environment
Students attending
Aspenour schools finance their education through a combination of individual resources, corporate reimbursement programs and federal student financial assistance funds available through
Aspen’sour 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.
For the fiscal year ended April 30, 2017, approximately 21%
To participate in Title IV Programs, a school must, among other things, be:
·
•Authorized to offer its programs of instruction by the applicable state education agencies in the states in which it is physically located (in our case, Colorado);·
Colorado, Arizona and California) or otherwise have a physical presence as defined by the state and meet the state education agency requirements to legally offer postsecondary distance education
in any state in which the school is not physically located; •Accredited by an accrediting agency recognized by the Secretary of the DOE; and·
•Certified as an eligible institution by the DOE.
State Authorization
Based on regulations issued by
Collectively, state education agencies, accrediting agencies, and the DOE comprise the higher education regulatory triad.
We cannot predict the actions that any entity in 2011, Title IV Programthe higher education regulatory triad, Congress, or Administration may take or their effect on our schools.
State Authorization
As institutions
like ours,of higher education that
offer postsecondarygrant degrees and certificates, we are required to be authorized by applicable state education
through distance education to studentsauthorities which exercise regulatory oversight of our schools. In addition, 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. The institution must be able to document state approval for distance education if requested by the DOE. This regulation was considered a significant departure from the state authorization procedures followed by most, if not all, institutions before its enactment. On July 12, 2011, a federal judge for the U.S. District Court for the District of Columbia vacated the portion of the DOE’s state authorization regulation that requires online education providers to obtain any required authorization from all states in which their students reside, finding that the DOE had failed to provide sufficient notice and opportunity to comment on the requirement. An appellate court affirmed that ruling on June 5, 2012 and therefore this regulation is currently invalid.
However, on July 25, 2016, the DOE issued a Notice of Proposed Rulemaking (“NPRM”) concerning new regulations governing the requirements for state authorization for distance education.Similar to the 2011 Rules, the proposed regulations required institutions to meet all state requirements for legally offering distance education in any state in which they are offering distance education courses as a condition of institutional eligibilityorder to participate in the Title IV Programs. If an institution does not hold authorization in a state that requires it to do so, students in that state would notPrograms, we must be eligible to receive Title IV Program funds for enrollment in distance education programs offeredauthorized by the institution in the state. The NPRM also proposed that Title IV Program eligibility and funding be contingent upon an institution being able to demonstrate that it is subject to an adequateapplicable state student complaint procedure. To date, the DOE has not indicated which state complaint procedures, if any, it considers to be inadequate. In addition, the NPRM required institutions to make a significant number of consumer disclosures regarding their distance education programs including disclosures regarding licensure and certification requirements, state authorization, student complaints, adverse actions by state and accreditation agencies, and refund policies. On December 16, 2016, DOE issued the final rule related to this NPRM. Although the final rule is similar to what DOE proposed on July 25, 2016, it surprisingly provides that the State Authorization Reciprocity Agreement (“SARA”) would not satisfy the basic authorization requirements of the rule. SARA is an agreement among member states, districts and territories that establishes comparable national standards for interstate offering of postsecondary distance education courses and programs. When the NPRM was released, there appeared to be broad consensus that the regulations would support the multi-state SARA arrangement as satisfying the requirement that institutions obtain authorization in each state where they are required to be authorized. However, the final rule effectively removes SARA from the definition of a “State authorization reciprocity agreement” for the purpose of complying with the new regulations. This is significant because we are an approved SARA institution.
The rest of the final rule remains largely unchanged from the NPRM. As in the proposed rule, the final rule requires institutions to meet all state requirements for legally offering distance education in any state in which institutions are offering distance education courses, but only to the extent the state has any such requirements. Also, while the language of the rule appears to make state authorization for distance learning a condition of institutional eligibility in the Title IV Programs, the preamble to the final rule clarifies that failure to hold a required authorization in a state will only result in inability to disburse Title IV Program funds to eligible students who are enrolled in distance learning programs while present in that state, rather than institution-wide. 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.
agencies.
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 the DOE. If we fail to comply with state licensing requirements, we may lose our state licensure or authorizations.authorizations, which in turn would result in a loss of accreditation and access to Title IV funds.
On February 22, 2019, members of the California Assembly proposed a legislative package of seven bills that would increase regulatory compliance requirements for institutions that are approved by the -California Bureau. A modified form of the legislative package passed out of the California Assembly but the most onerous provisions of the bills were amended, and in one case, the bill did not make it out of committee. Only three of the original seven bills made it through the California Senate and were signed into law. The final bills impact the calculation of the Student Tuition Recovery Fund, create additional reporting requirements around graduate job placement, and change the process for out-of-state institutions to register their online programs in California. While the other, more onerous, bills did not make it out of the Legislature, we cannot predict whether thesame provisions will resurface in future legislative packages.
Licensure of Physical Locations
The Higher Education Opportunity Act (HEOA) and certain state laws require our institutions to be legally authorized to provide educational programs in states in which our schools have a physical location or otherwise have a physical presence as defined by the state. Aspen University is authorized to provide educational programs in Colorado by the Colorado Department of Higher Education (“Colorado Department”) and Arizona State Board for Private Postsecondary Education (“Arizona Board”). USU is authorized to provide educational programs in California by the California Bureau for Private Postsecondary Education (“California Bureau”). Failure to comply with state requirements could result in Aspen
University losing its authorization from the Colorado
Commission on Higher Education, a department ofDepartment or Arizona Board, and USU losing its authorization from the
Colorado Department of Higher Education, (“CDHE”), itsCalifornia Bureau. In such event, the schools would lose their eligibility to participate in Title IV Programs, or
itstheir ability to offer certain
educational programs, any of which may force us to cease
the school’s operations.
Additionally, Aspen is aUniversity, ANI and USU are Delaware corporation.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 University received notice from the Delaware DOE that it iswas 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; we are currently in the renewal process. On June 6, 2018, the Delaware DOE granted an initial operating license to United States University until June 30, 2023.
Licensure of Online Programs
On December 19, 2016, DOE issued regulations regarding state authorization of distance education (the “2016 regulations”) that were originally scheduled to go into effect on July 1, 2018. Under the 2016 regulations, 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. Under the 2016 regulations, an institution may meet state requirements by seeking authorization from the state or (in all states other than California) through a state authorization reciprocity agreement. The 2016 regulations required an institution to document state approval for distance education if requested by DOE.
On May 25, 2018, the DOE published an announcement in the Federal Register (the “Notice”) that proposed a two-year delay, until July 1,
2020.
Accreditation
2020, of the effective date of the 2016 regulations, and on July 3, 2018, the DOE’s delay of the 2016 regulations took effect. In April 2019, a U.S. District Court judge determined that the delay to July 1, 2020 was improper, and ordered the 2016 regulations had taken effect on May 26, 2019. The DOE appealed this decision, but ultimately announced on July 29, 2019 that the 2016 regulations had taken effect on May 26, 2019.
On July 31, 2018, the DOE announced its intention to convene a negotiated rulemaking committee (the “Committee”) to consider proposed regulations for Title IV Programs, including revisions to the 2016 regulations. The Committee convened for several meetings from January to April 2019. On June 12, 2019, the DOE published a notice of proposed rulemaking, which included proposed regulations that would supplant the 2016 regulations. The DOE released final regulations on accreditation and state authorization of distance education on November 1, 2019, which took effect July 1, 2020 (the “Final Regulations”). Like the 2016 regulations, the Final Regulations require 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, to meet any state requirements to offer postsecondary education to students who are located in that state.
Under the Final Regulations, institutions may meet the authorization requirements by obtaining such authorization directly from any state that requires it or through a state authorization reciprocity agreement, such as the State Authorization Reciprocity Agreement (“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 (“NC-SARA”) and administered by four regional education compacts.
Aspen University is an approved institutional participant in NC-SARA. There is an annual renewal for participating in NC-SARA and the state-level agency, in Aspen University’s case CO-SARA, and institutions must agree to meet certain requirements to participate. The only state that does not participate in SARA is California and it has imposed regulatory requirements on out-of-state educational institutions operating within its boundaries, such as those having a physical facility or conducting certain academic activities within the state. Aspen University is registered as an out-of-state institution with California until February 28, 2021. 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, is 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 NC-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 NC-SARA. USU is currently authorized to offer one or more programs in 42 states and is in the application development process with 8 additional states and the District of Columbia. USU maintains its state authorizations through annual reporting and required renewals.
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.
Accreditation
Aspen University is institutionally accredited by the DEAC, ana national accrediting agency recognized by CHEA and the DOE, and USU is institutionally accredited by WSCUC, a regional accrediting agency recognized by CHEA and the 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 the DOE, accrediting agencies must adopt specific standards for their review of educational institutions. Accrediting agencies establish criteria for accreditation, conduct peer-review evaluations of institutions and programs for accreditation, and publicly designate those institutions or programs that meet their criteria. Accredited institutions are subject to periodic review by accrediting agencies to determine whether such institutions maintain the performance, integrity and quality required for accreditation.
Accreditation by the DEAC is important to the Universityour 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. Other institutions depend, in part, on our accreditation in evaluating transfers of credit and applications to graduate schools.
Moreover, institutional accreditation awarded from an accrediting agency recognized by
the DOE is necessary for eligibility to participate in the Title IV Programs.
As part of the Final Regulations published on November 1, 2019, and which take effect July 1, 2020, the DOE amended regulations relating to the recognition of accrediting agencies. The Final Regulations amend the DOE’s process for recognition and review of accrediting agencies, including the criteria used by the DOE to recognize accrediting agencies, and the DOE’s requirements for accrediting agencies’ policies and standards that are applied to institutions and programs. From time to time,
DEAC adoptsaccrediting agencies adopt or
makesmake changes to
itstheir policies, procedures and standards. If
weour schools fail to comply with any of
DEAC’sthese requirements,
ourthe non-complying school’s accreditation status
and, therefore, our eligibility to participate in the Title IV Programs could be at risk.
On February 25, 2015, the DEAC informed Aspen University that it had renewed its accreditation for five years to January, 2019.
In addition to institutional accreditation, there are numerous specialized accrediting commissionsaccreditors that accredit specific programs or schools within their jurisdiction, many of which are in healthcare and professional fields. In our case, Aspen’s Master of ScienceUSU’s and Aspen University’s baccalaureate and master’s degree programs in nursing are accredited by the Commission on Collegiate Nursing Education (CCNE) and Bachelor of Science in Nursing programs hold specialized accreditation from the CCNE.Aspen University’s doctoral nursing degree is currently CCNE-accredited. CCNE is officially recognized by CHEA and the DOE and provides specialized accreditation for nursing programs. In our case, accreditation of specific nursing programsAccreditation by CCNE signifies that those programs have met the additional standards of that agency. We are also pleased that Aspen University’s School of Business and Technology has been awarded the status of Candidate for Accreditation by the International Accreditation Council for Business Education (IACBE) for its baccalaureate and master’s business programs. Finally, USU’s Bachelor of Arts in Liberal Studies has two Teacher Credentialing tracks: (1) Multiple Subject Credential Preparation track for students in California interested in teaching at the TK-6 level, and (2) General track for students interested in exploring a variety of topics, transfer students, or students outside of California. Both tracks are approved by the California Commission on Teacher Credentialing (CTC).
If we fail to satisfy the standards of
any of these specialized
accrediting commissions,accreditors, 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
EducationProfessional Licensure
and Regulation
As
States have specific requirements that 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 institution. In addition,individual must satisfy in order to
participatebe licensed or certified as a professional in
the Title IV Programs, we must be authorized by the applicable state education agencies.
Wespecific fields. For example, graduates from some USU and Aspen University nursing programs often seek professional licensure in their field because they are an approved institutional participantlegally required to do so in SARA. SARA is intendedorder to make it easier for students to take online courses offered by postsecondary institutions basedwork in another state. SARA is overseen by a National Council (NCSARA)that field or because obtaining licensure enhances employment opportunities. Success in obtaining licensure depends on several factors, including each individual’s personal 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. Some states that do not participate in SARA 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. We currently enroll students in 49 states. Although we are currently licensed, authorized, in-process, or exempt in all non-SARA jurisdictions in which we operate, if we fail to comply with state licensing or authorization requirements for a state, or fail to obtain licenses or authorizations when required, we could lose our state license or authorization by that state or be subject to other sanctions, including restrictions on our activities in, and fines and penalties imposed by, that state,professional qualifications as well as fines, penalties,other factors related to the degree or program completed, including but not necessarily limited to:
•whether the institution and sanctions imposedthe program were approved by DOE. While we do not believe that any of the statesstate in which we are currently licensed or authorized, other than Colorado, are individually material to our operations, the loss ofgraduate seeks licensure, or authorization in anyby a professional association;
•whether the program from which the applicant graduated meets all state could prohibit us from recruitingrequirements; and
•whether the institution and/or the program is accredited by a CHEA and DOE-recognized agency.
Professional licensure and certification requirements can vary by state and may change over time.
In addition, the Final Regulations that take effect July 1, 2020 require institutions to make readily available disclosures to enrolled and prospective students regarding whether programs leading to professional licensure or offering servicescertification meet state educational requirements for that professional license or certification. These disclosures apply to both on-ground and online programs that lead to professional licensure or certification or are advertised as leading to professional licensure or certification. Under the Final Regulations, institutions must determine the state in which current and prospective students are located, and then must: (1) determine whether such program’s curriculum meets the educational requirements for licensure or certification in
that state; (2) determine whether such program’s curriculum does not meet the educational requirements for licensure or certification in that state; or (3) choose not to make a determination as to whether such program’s curriculum meets the educational requirements for licensure or certification in that state. Institutions must also provide direct disclosures in writing to prospective students and current students under certain circumstances. Institutions must provide direct disclosures in writing to prospective students if the institution has determined the program in which the student intends to enroll does not meet the educational requirements for licensure or certification in the state in which the student is located or if the institution has not made any determination. Institutions must provide direct disclosures in writing to current students,
but only if the institution has determined the program in
that state, which
could significantly reduce our enrollments.
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 bystudent is enrolled does not meet the Colorado Department of Higher Education. 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 the DOE, and many require the posting of surety bonds. In non-SARA states, regulatory requirements for online education vary amonglicensure in the states, are not well developedstate in many states, are imprecise or unclear in some states, and can change frequently. 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.
the student is located.
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
the DOE to participate in the Title IV Programs. Aid under Title IV Programs is primarily awarded on the basis of financial need, generally defined as the difference between the cost of attending the institution and the amount a student can reasonably contribute to that cost. All recipients of Title IV Program funds must maintain satisfactory academic progress and must progress in a timely manner toward completion of their program of study. In addition, each school must ensure that Title IV Program funds are properly accounted for and disbursed in the correct amounts to eligible students.
Aspen’s mission is to offer
Our institutional missions manifest themselves through offering students the opportunity to fund their education without relying solely on student loans. In March 2014, Aspen University launched a $250 monthly payment plan for associate and bachelor degree students and a $325 monthly payment plan for mastermaster’s degree students, and subsequently a $375 monthly payment plan for doctoral students. Since initiationThe monthly payment plan is available to all Aspen University and United States University students except those in the Aspen University BSN Pre-licensure program. Note that effective August 2019, new student enrollments for USU’s FNP monthly payment plan are offered a $9,000 two-year payment plan ($375/month x 24 months) designed to pay for the first year’s pre-clinical courses only (approximate cost of this mission,$9,000). The second academic year in which students complete their clinical courses (approximate cost of $18,000) will be required to be funded through conventional payment methods (either cash, private loans, corporate tuition reimbursement or federal financial aid).
Currently, 62% of Aspen University students utilize monthly payment options, including the monthly payment plan or the installment plan. In 2017, USU implemented these monthly payment options and currently has 65% of
our courses are paid through monthly payment methods (based on courses started over the last 90 days).
its students utilizing them.
When ourAspen University students borrowseek funding 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. USU students are eligible for the same, plus Federal Work Study and Federal Supplemental Opportunity Grants. For the fiscal year ended April 30, 2017,2020, approximately 21%28%of ourAspen 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 fiscal year ended April 30, 2020, approximately 20%of United States University’s cash-basis revenues for eligible tuition and fees were derived from Title IV Programs.
Additionally, students may receive full or partial tuition reimbursement from their employers. Eligible students can also access private loans through a number of different lenders for funding at current market interest rates.
Under the Direct Loan program, the DOE makes loans directly to students. The Direct Loan Program includes the Direct Subsidized Loan, the Direct Unsubsidized Loan, the Direct PLUS Loan (including loans to graduate and professional students), and the Direct Consolidation Loan. The Budget Control Act of 2011 signed into law in August 2011, eliminated Direct Subsidized Loans for graduate and professional students, as of July 1, 2012. The terms and conditions of subsidized loans originated prior to July 1, 2012 are unaffected by the law.
For Pell
grants,Grants, the DOE makes grants to undergraduate students who demonstrate financial need. To date, few
Aspenof our students have received Pell Grants. Accordingly, the Pell Grant program currently is not material to
Aspen’sthe 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 the DOE to exercise considerable regulatory oversight over for-profit institutions of higher learning. Accrediting agencies and state
education agencies also have responsibilities for overseeing compliance of institutions in connection with Title IV Program requirements. As a result, our
institution isinstitutions are subject to extensive oversight and review. Because the DOE periodically revises its regulations and changes its interpretations of existing laws and regulations, we cannot predict
with certainty how the Title IV Program requirements will be applied in all circumstances. See the “Risk Factors” contained herein which disclose comprehensive regulatory risks.
In addition to the state authorization requirements and other regulatory requirements described herein, other significant factors relating to Title IV Programs that could adversely affect us include the following legislative action and regulatory changes:
Congressional Action. Congress reauthorizes the Higher Education Act approximately every five to eightsix years. Congress most recently reauthorized the Higher Education Act in August 2008.2008 through the end of 2013 and the law has been extended since that date. Congress has held hearings regarding the reauthorization of the HEA and has continued to consider new legislation regarding passage of the HEA. We cannot predict with certainty whether or when Congress might act to amend further the Higher Education Act.HEA. The elimination of additional Title IV Programs, material changes in the requirements for participation in such programs, or the substitution of materially different programs could increase our costs of compliance and could reduce the ability of certain students to finance their education at our institution.
institutions.
Federal Rulemaking. On July 31, 2018, DOE announced its intention to convene a negotiated rulemaking committee (the “Committee”) to prepare proposed regulations for Title IV Programs. From January 2019 to April 2019, the Committee met to consider proposed regulations on a variety of topics including the following:
•Criteria used by the Secretary of the DOE to recognize accrediting agencies;
•Clarification of the primary functions and responsibilities of accrediting agencies, state education agencies, and DOE;
•Clarification of permissible arrangements between institutions and other organizations to provide a portion of an education program;
•Revisions to rules related to distance education, direct assessment programs, and competency-based education;
•Consideration of the 2016 regulations relating to state authorization of distance education and corresponding disclosures;
•Revisions to various regulatory definitions, including the definition of "distance education" and a “credit hour”; and
•Elimination of regulations related to Title IV Programs that have not been funded in recent years.
In April 2019, the Committee reached consensus on all proposed rules subject to the negotiated rulemaking. On June 12, 2019, the DOE issued a notice of proposed rulemaking (“NPRM”) that proposes rules related to accreditation and state authorization. The DOE issued Final Regulations on November 1, 2019, which take effect July 1, 2020. On December 11, 2019, the DOE issued a NPRM that proposes rules related to TEACH Grants and Faith-Based Entities, which was subject to a public comment period that concluded on January 10, 2020. On April 2, 2020, the DOE issued a NPRM that proposes rules related to distance education and innovation, which was subject to a public comment period that concluded on May 4, 2020.
We cannot predict when the DOE will publish final regulations for those NPRMs, how or whether those regulations may impact Aspen and USU, or if the regulations as proposed in those NPRMs will go into effect as currently drafted or will be revised.
Administrative Capability. DOE regulations specify extensive criteria by which an institution must establish that it has the requisite “administrative capability” to participate in Title IV Programs. Failure to satisfy any of the standards may lead the DOE to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. To meet the administrative capability standards, an institution must, among other things:
·
•Comply with all applicable Title IV Program regulations;·
•Have capable and sufficient personnel to administer the federal student financial aid programs;·
•Have acceptable methods of defining and measuring the satisfactory academic progress of its students;·
•Have cohort default rates above specified levels;·
•Have various procedures in place for safeguarding federal funds;·
•Not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is cause for debarment or suspension;·
•Provide financial aid counseling to its students;·
•Refer to the DOE’s Office of Inspector General any credible information indicating that any applicant, student, employee, or agent of the institution, has been engaged in any fraud or other illegal conduct involving Title IV Programs;·
•Report annually to the Secretary of Education on any reasonable reimbursements paid or provided by a private education lender or group of lenders to any employee who is employed in the institution’s financial aid office or who otherwise has responsibilities with respect to education loans;·
•Develop and apply an adequate system to identify and resolve conflicting information with respect to a student’s application for Title IV aid;·
•Submit in a timely manner all reports and financial statements required by the regulations; and·
•Not otherwise appear to lack administrative capability.
The
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,
the DOE may:
·
•Require the repayment of Title IV Program funds;·
•Transfer the institution from the “advance” system of payment of Title IV Program funds to heightened cash monitoring status or to the “reimbursement” system of payment;·
•Place the institution on provisional certification status; or
·
•Commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV Programs.
If we are found not to have satisfied the DOE’s “administrative capability” requirements, we could lose, or be limited in our access to, Title IV Program funding.
Distance Education. We offer all of our existing degree and certificate programs via Internet-based telecommunications from our headquarters in Colorado.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,
the 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
will be effectivewas scheduled to go into effect on July 1,
2018.
2018, and ultimately took effect on May 26, 2019. On November 1, 2019, DOE issued Final Regulations that among other things, modifies the 2016 regulations regarding state authorization of distance education. 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 and USU 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 the DOE for liabilities incurred in programs administered by the DOE.
The DOE evaluates institutions on an annual basis for compliance with specified financial responsibility standards that include a complex formula that uses line items from the institution’s audited financial statements. In addition, the financial responsibility standards require an institution to receive an unqualified opinion from its accountants on its audited financial statements, maintain sufficient cash reserves to satisfy refund requirements, meet all of its financial obligations, and remain current on its debt payments. The formula focuses on three financial ratios: (1) equity ratio (which measures the institution’s capital resources, financial viability, and ability to borrow); (2) primary reserve ratio (which measures the institution’s viability and liquidity); and (3) net income ratio (which measures the institution’s profitability or ability to operate within its means). An institution’s financial ratios must yield a composite score of at least 1.5
on a scale of -1.0 to 3.0 for the institution to be deemed financially responsible without the need for further federal oversight. The DOE may also apply such measures of financial responsibility to the operating company and ownership entities of an eligible institution.
For fiscal year 2014 (ending April 30, 2014), Aspen did not meet the financial responsibility standards due to a failure to meet the minimum composite score of 1.5. Consequently, in order for Aspen to continue to participate in the Title IV Programs,
Although we
were required to choose one of two alternatives. The first alternative was to qualify as a financially responsible institution by submitting an irrevocable letter of credit in favor of the DOE in the amount of $2,244,971, which represented 50% of the Title IV Program funds received by the institution during the most recently completed fiscal year. The second alternative was to post a letter of credit in the amount of $1,122,485 and be provisionally certified for a period of up to three complete award years. That amount represented 25% of the Title IV Program funds received by the institution during the most recently completed fiscal year. Aspen selected the second alternative and posted the required letter of credit in the amount of $1,122,485 on April 29, 2015. In November of 2015, the DOE informed Aspen that it no longer needed to maintain a letter of credit based on the institution’s fiscal year 2015 results and released the letter of credit. As a part of the April 29, 2015 decision, Aspen is currently subject to Heightened Cash Monitoring 1 (HCM1) status, which requires the institution to first make disbursements of Title IV Program funds to eligible students and parents before it requests or receives funds for the amount of those disbursements from the DOE. In addition, Aspen continues to be provisionally certified. A provisionally certified institution, such as Aspen, must apply for and receive DOE approval of substantial changes and must comply with any additional conditions included in its program participation agreement, which is Aspen’s agreement with the DOE. If the DOE determines that a provisionally certified institution is unable to meet its responsibilities under its program participation agreement, the DOE may seek to revoke the institution's certification to participate in Title IV Programs with fewer due process protections for the institution than if it were fully certified.
Although Aspen believes it will meetbelieve our schools met the minimum composite score necessary to meet the Financial Ratiofinancial ratio standard for fiscal year 2017,2019, the DOE may determine that Aspen’s calculation isour calculations are incorrect, and/or it may determine that Aspen continueseither or both of our schools continue to not meet other financial responsibility standards. If the 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:
·
•Posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by us during our most recently completed fiscal year;·
•Posting a letter of credit in an amount equal to at least 10% of such prior year’s Title IV Program funds received by us, accepting provisional certification, complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE’s standard advance payment arrangement such as the “reimbursement” system of payment or cash monitoring; or·
Complying with additional DOE monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than the DOE’s standard advance payment arrangement such as the “reimbursement” system of payment or cash monitoring.
USU had been requested to post 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, but that LOC, as funded by AGI expired as of March 31, 2019. On May 14, 2019, USU was granted provisional approval to participate in the Title IV Programs and has a program participation agreement reapplication date of December 31, 2020. As part of the provisional approval, the DOE informed USU that it must post a letter of credit in the amount of $255,708 based on a failure to meet the audited same day balance sheet requirements that apply in a change of control. This LOC was funded by AGI. The DOE informed AGI that the LOC was reduced to $21,857; this letter with the reduced amount will remain in effect for at least the duration of the provisional approval. Pursuant to USU’s provisional Program Participation Agreement ("PPA"), the DOE indicated that USU must agree to participate in Title IV under the HCM1 funding process; however, the DOE does retain discretion on whether or not to implement that term of the agreement. Although the DOE has not, to date, notified USU that it has been placed in the HCM1 funding process, nor does DOE’s public disclosure website identify USU as being on HCM1, it is possible that prior to the end of the PPA term, the DOE may notify USU that it must begin funding under the HCM1 procedure. See “Risk Factors” contained in Item 1A of this Report.
Provisional certification alone does not limit an institution’s access to Title IV Program funds; however, an institution with provisional status is subject to closer review by the DOE and may be subject to summary adverse action if it violates Title IV Program requirements.
Failure to meet the DOE’s “financial responsibility” requirements, either because we do not meet the DOE’s financial responsibility standards or are unable to establish financial responsibility on an alternative basis, would cause us to lose access to Title IV Program funding.
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 the DOE new contracts with, or any significant modifications to contracts with third-party servicers as well as other matters related to third-party servicers. We contract with a third-party servicer which performs certain activities related to our participation in Title IV Programs. If our third-party servicer does not comply with applicable statutes and regulations including the Higher Education Act, we may be liable for its actions, and we could lose our eligibility to participate in Title IV Programs.
Return of Title IV Program Funds. Under the DOE’s return of funds regulations, when a student withdraws or reduces their enrollment status or credit load to less than full time, an institution must return unearned funds to the DOE in a timely manner. An institution must first determine the amount of Title IV Program funds that a student “earned.” If the student withdraws during the first 60% of any period of enrollment or payment period, the amount of Title IV Program funds that the student earned is equal to a pro rata portion of the funds for which the student would otherwise be eligible. If the student withdraws after the 60% threshold, then the student has earned 100% of the Title IV Program funds. The institution must return to the appropriate Title IV Programs, in a specified order, the lesser of (i) the unearned Title IV Program funds and (ii) the institutional charges incurred by the student for the period multiplied by the percentage of unearned Title IV Program funds. An institution must return the funds no later than 45 days after the date of the institution’s determination that a student withdrew. If such payments are not timely made, an institution may be subject to adverse action, including being required to submit a letter of credit equal to 25% of the refunds the institution should have made in its most recently completed fiscal year. Under the 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,education.” which includes Aspen. An institution is subject to loss of eligibility to participate in the Title IV Programs if it derives more than 90% of its revenues (calculated on a cash basis and in accordance with a DOE formula) from Title IV Programs for two consecutive fiscal years. An institution whose rate exceeds 90% for any single fiscal year will be placed on provisional certification for at least two fiscal years and may be subject to other conditions specified by the Secretary of the DOE. For Aspen’s most recent fiscalthe year endingended April 30, 2017,2020, approximately 21%28% of our revenue wasAspen’s revenues were derived from Title IV Programs.
For the year ended April 30, 2020, approximately 20% 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,
the DOE calculates a single cohort default rate for each federal fiscal year that includes in the cohort all current or former student borrowers at the institution who entered repayment on any Direct Loan Program loans during that year.
If the DOE notifies an institution that its cohort default rates for each of the three most recent federal fiscal years are 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
the DOE and may be subject to summary adverse action if it violates Title IV Program requirements. If an institution’s default rate exceeds 40% for one federal fiscal year, the institution may lose eligibility to participate in some or all Title IV Programs.
Aspen’sAspen University’s current official
3-year cohort default rates
2011, 2012are as follows: FY2016 (8.8%), FY2015 (5.7%), and
2013FY2014 (6.2%). USU’s current official 3-year cohort default rates are
3%as follows: FY2016 (10.6%),
12.5%FY2015 (11.4%), and
6.4%, respectively.
FY2014 (9.6%).
Incentive Compensation RulesRule. As a part of an institution’s program participation agreement with the DOE and in accordance with the Higher Education Act,HEOA, 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.
Incentive Compensation Rule (the “IC Rule”).
In recent years, other postsecondary educational institutions have been named as defendants
toin 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.IC 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
GAOU.S. Government Accountability Office (the “GAO”) released a report finding that the DOE has inadequately enforced the current ban on incentive payments. In response, the DOE has undertaken to increase its enforcement efforts by, among other approaches, strengthening procedures provided to auditors reviewing institutions for compliance with the incentive payments ban and updating its internal compliance guidance in light of the GAO
findings and the DOE incentive payment rule.
findings.
Code of Conduct Related to Student Loans. As part of an institution’s program participation agreement with the DOE, HEOA requires that institutions that participate in Title IV Programs adopt a code of conduct pertinent to student loans. For financial aid officeofficers or other employees who have responsibility related to education loans, the code must forbid, with limited exceptions, gifts, consulting arrangements with lenders, and advisory board compensation other than reasonable expense reimbursement. The code also must ban revenue-sharing arrangements, “opportunity pools” that lenders offer in exchange for certain promises, and staffing assistance from lenders. The institution must post the code prominently on its website and ensure that its officers, employees, and agents who have financial aid responsibilities are informed annually of the code’s provisions. Aspen has adopted a code of conduct under the HEOA which is posted on its website. In addition to the code of conduct requirements that apply to institutions, HEOA contains provisions that apply to private lenders, prohibiting such lenders from engaging in certain activities as they interact with institutions. Failure to comply with the code of conduct provision could result in termination of our participation in Title IV Programs, limitations on participation in Title IV Programs, or financial penalties.
Misrepresentation. The Higher Education ActHEOA and current regulations authorize the DOE to take action against an institution that participates in Title IV Programs for any “substantial misrepresentation” made by that institution regarding the nature of its educational program, its financial charges, or the employability of its graduates. Effective July 1, 2011, DOE regulations expanded the definition ofdefine “substantial misrepresentation” to cover additional representatives of the institution and additional substantive areas and expands the parties to whom a substantial misrepresentation cannot be made. The regulations also augment the actions the DOE may take if it determines that an institution has engaged in substantial misrepresentation. Under the final regulations, the DOE may revokemisrepresentation, which include revoking an institution’s program participation agreement, imposeimposing limitations on an institution’s participation in Title IV Programs, or initiateinitiating 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.for particular programs. Recently, both Congress and the 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 the DOE determines that an institution is out of compliance with the credit hour definition, the DOE could require the institution to repay the incorrectly awarded amounts of Title IV Program aid. In addition, if the DOE determines that an institution has significantly overstated the amount of credit hours assigned to a program, the DOE may fine the institution, or limit, suspend, or terminate its participation in the Title IV Programs.
On July 31, 2018, the DOE announced its intention to convene a negotiated rulemaking committee (the “Committee”) to consider proposed regulations for Title IV Programs, including revisions to the regulatory definition of “credit hour.” The Committee reached consensus on a revised definition of “credit hour” in April 2019, and published a NPRM on April 2, 2020 that includes revised definitions of “academic engagement”, “credit hour”, “clock hour” and “distance education”. These proposed definitions clarify what the DOE will consider appropriate methods of establishing a student’s participation in distance education programs and issuing academic credit. The DOE has not published a final version of these revised regulations.
Compliance Reviews. We are subject to announced and unannounced compliance reviews and audits by various external agencies, including the DOE, its Office of Inspector General, state licensing agencies, and accrediting agencies. As part of the DOE’s ongoing monitoring of institutions’ administration of Title IV Programs, the Higher Education ActHEOA and the DOE regulations require institutions to submit annually a compliance audit conducted by an independent certified public accountant in accordance with Government Auditing Standards and applicable audit standards of the DOE.DOE, which were updated effective for fiscal years beginning after June 30, 2016. These auditing standards differ from those followed in the audit of our consolidated financial statements contained herein. In addition, to enable the DOE to make a determination of financial responsibility, institutions must annually submit audited financial statements prepared in accordance with DOE regulations. Furthermore, the DOE regularly conducts program reviews of education institutions that are participating in the Title IV Programs, and the Office of Inspector General of the DOE regularly conducts audits and investigations of such institutions. In August 2010, the Secretary of Education announced in a letter to several members of Congress that, in part in response to recent allegations against proprietary institutions of deceptive trade practices and noncompliance with DOE regulations, the DOE planned to strengthen its oversight of Title IV Programs through, among other approaches, increasing the number of program reviews.
Potential Effect of Regulatory Violations. If we fail to comply with the regulatory standards governing Title IV Programs, the DOE could impose one or more sanctions, including transferring Aspenthe non-complying school to the reimbursement or cash monitoring system of payment, seeking to require repayment of certain Title IV Program funds, requiring Aspen or USU to post a letter of credit in favor of the DOE as a condition for continued Title IV certification, taking emergency action against us, referring the matter for criminal prosecution or initiating proceedings to impose a fine or to limit, condition, suspend or terminate our participation in Title IV Programs.
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
state attorneys general, federal and state consumer protection agencies, 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 State Board for Private Postsecondary Education, the California Bureau for Private Postsecondary Education, institutional or programmatic accreditors and other state educational regulatory agencies that license, accredit 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, accreditation or authorization.
In addition, we were advised by
On August 22, 2017, the DOE that because we were provisionally certified due to being a new Title IV Program participant, we could not add new degree or non-degree programs for Title IV Program purposes, except under limited circumstances and only if the DOE approved such new program, until the DOE reviewed a compliance audit that covered one complete fiscal year of Title IV Program participation. That fiscal year ended on December 31, 2010, and we timely submitted our compliance audit and financial statements to the DOE. In addition, in June 2011,recertified Aspen timely applied for recertificationUniversity to participate in Title IV Programs. The DOE extended Aspen'sPrograms, and set a subsequent program participation agreement reapplication date of March 31, 2021. On May 15, 2019, United States University was granted provisional certification until September 30, 2013. Aspen re-applied as of June 30, 2013approval to continue its participationparticipate in the Title IV HEA programs. On February 9, 2015, thePrograms and has a program participation agreement reapplication date of December 31, 2020. While provisionally certified, USU must apply for and receive approval from DOE notified Aspen thatfor expansion or for any substantial change before it had the choice of posting a letter of credit for 25% of allmay award, disburse or distribute Title IV, ProgramHEA funds and remain provisionally certifiedbased on the substantial change. The provisional participation agreement indicates that substantial changes generally include, but are not limited to: (a) establishment of an additional location; (b) increase in the level of academic offering beyond those listed in the Institution's eligibility documents; or post a 50% letter(c) addition of credit and become fully certified. We elected to post a 25% letter of credit and remain provisionally certified – increasing our letter of credit to $1,122,485. In November of 2015, the DOE informed Aspen that it no longer needed to post a letter of credit and released the posted letter of credit. any educational program (including degree, non-degree, or short-term training programs).
In the future, the DOE may impose
additional or different 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 programs also require all institutions to notify the Department of Education when establishing new programs by updating the program list on the institution’s Eligibility and Certification Approval Report. The institution mustmay also be
required to provide certifications to the
Department of EducationDOE signed by a senior administrative official attesting that the new program meets certain accreditation and state licensure requirements.
DEAC
requiresand WSCUC require 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
grantscope 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 educational programs that lead to gainful employment in a recognized occupation are eligible to participate in Title IV Program funding. The DOE’sDOE issued final Gainful Employment (“GE”) regulations defineon October 31, 2014 (“2014 GE Rule”), which went into effect on July 1, 2015. The 2014 GE Rule defines 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. After an earlier version
On July 1, 2019, DOE issued a new final GE Rule. In this publication, the DOE rescinded the entirety of Subparts Q and R of 34 CFR 668, which included all of the
provisions of the 2014 GE
Rules was vacated by a federal court inRule. The effective date of this new rule is July
2012,1, 2020; however, the
DOE initiated aSecretary has provided institutions the opportunity to implement the new
negotiated rulemaking process in 2013. The negotiators failed to reach consensus in establishing new GE Rules, and the DOE published a new proposed GE rule
in March 2014 for public comment. The final GE regulations were published on October 31, 2014 and went into effectbeginning on July 1,
2015. Under2019. Both Aspen University and USU have opted to implement the
regulations, all GE programs must meet certain metrics regardingnew rule early and have internally documented their
graduates’ debt-to-earnings (“D/E”) ratiosdetermination to
maintain Title IV Program eligibility. Specifically, the 2015 regulations include two debt-to-earnings metrics.
·
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 ED 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 the DOE notifies an institution that a program could become ineligible based on its final D/E rates for the next award year:
·
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.
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 the DOE has reviewed the appeal and issued a final rates determination. The earnings appeal element of the rule was intended to become effective immediatelytake early action, following the issuance of rates in January 2017, but was delayed once in March, and again in June, 2017. On June 30th, the DOE issued a Notice in the Federal Register indicating that it would delay the July 1st 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 1st, 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 developeddirection provided by the DOE for this purpose. Each GE program’s disclosure must include information suchin Gainful Employment Electronic Announcement #122. Therefore, as the occupations that the program prepares students to enter, total program cost, on-time completion rate, job placement rate (if the institutionof July 1, 2019, neither Aspen University nor USU 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 1st. However, in conjunctioncomply with the delay issued on June 30th, 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 a2014 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 30th 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 1st. Aspen has 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 the 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 and October 2016. Annual reporting is scheduled for October 1st, and as of now, the DOE has not indicated any planned delay to the 2017 reporting deadline. We have reported all required student data by these submission deadlines.
By December 31, 2015, 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, the 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.
Rule.
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.
At this time, the long term impact of the GE Rule is still unclear, as the Department issued a Notice of Proposed Rulemaking on June 16th, 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, ED has not indicated its intent to further delay any other elements of the Rule while the rulemaking is underway. If ED continues on its current path, programs that failed the first set of debt-to-earnings rates could lose eligibility in the coming year.
Eligibility and Certification Procedures. Each institution must periodically apply to the DOE for continued certification to participate in Title IV Programs. Such recertification is required every six years, but may be required earlier, including when an institution undergoes a change of control. An institution may come under the DOE’s review when it expands its activities in certain ways, such as opening an additional location, adding a new program, or, in certain cases, when it modifies academic credentials that it offers.
The DOE may place an institution on provisional certification status if it finds that the institution does not fully satisfy all of the eligibility and certification standards and in certain other circumstances, such as when it undergoes a change in ownership and control.
The DOE may more closely review an institution that is provisionally certified if it applies for approval to open a new location, add an educational program, acquire another school or make any other significant change.
In addition, during the period of provisional certification, the institution must comply with any additional conditions included in its program participation agreement. If the DOE determines that a provisionally certified institution is unable to meet its responsibilities under its program participation agreement, it may seek to revoke the institution’s certification to participate in Title IV Programs with fewer due process protections for the institution than if it were fully certified. Students attending provisionally certified institutions
like Aspen, remain eligible to receive Title IV Program funds.
Borrower Defense to Repayment (BDTR)(“BDTR”). The DOE’s current regulations provide borrowersPursuant to the Higher Education Act and following negotiated rulemaking, on November 1, 2016, the DOE released a final regulation (“2016 BDTR Rule”) specifying the acts or omissions of loansan institution that a borrower may assert as a defense to repayment of a loan made under the William D. Ford Federal Direct Loan (“FDL”) programProgram and the consequences of such borrower defenses for borrowers, institutions, and the DOE. Under the regulation, for Direct Loans disbursed after July 1, 2017, a student borrower may assert a defense to repayment if: (1) the student borrower obtained a state or federal court judgment against an attempt to collect such loans based on any act or omission ofthe institution; (2) the institution that would give risefailed to perform on a cause of action undercontract with the applicable state law. Instudent; and/or (3) the eventinstitution committed a “substantial misrepresentation” on which the borrower’s defense against repayment is successful,borrower reasonably relied to his or her detriment.
These defenses are asserted through claims submitted to the DOE, and the DOE has the authority to issue a final decision in which it may discharge all or part of a borrower's Direct Loan. In addition, the student’s obligationregulation permits the DOE to repaygrant relief to an individual or group of individuals, including individuals who have not applied to the loan, and may requireDOE seeking relief. If a defense is successfully raised, the institutionDOE has discretion to repayinitiate action to collect from an institution the amount of losses incurred based on the loanborrower defense discharge.
The 2016 regulation also amends the rules concerning discharge of federal student loans when a school or campus closes, requires institutions to report events that might potentially impact an institution’s financial responsibility (“financial triggers”) to allow the DOE to determine if the institution needs to provide additional assurances or surety to continue participating in the Title IV Programs, and prohibits pre-dispute arbitration agreements and class action waivers for borrower defense-type claims.
On January 19, 2017, the DOE issued a final procedural rule, specifically relating to the then-upcoming borrower defense rules, with request for comments. These rules were limited to updating the hearing procedures for actions to establish liability against an institution of higher education and establishing procedures for recovery proceedings under the borrower defense regulations.
Several times between June 2017 and February 2018, the DOE announced delays until July 1, 2019 for implementation of certain portions of the 2016 BDTR Rule. However, in September 2018, a judge denied a request to further delay implementation, and as a result, the regulations went into effect as of October 16, 2018 and remained in effect until July 1, 2020, based on the effective date of an amended BDTR Rule, as noted below. DOE issued additional guidance regarding its planned implementation of the 2016 BDTR rule on March 15, 2019, which included specific processes for reporting financial responsibility trigger events occurring since July 1, 2017.
Prior to the defense applies. In October 2015,court decision noted above, on June 16, 2017, the DOE announced its intent to appointconvene a negotiated rulemaking committee to addressdevelop new and different proposed regulations related to borrower defense to repaymentreplace the 2016 BDTR Rule and to address certain other related issues. Thematters. Following three negotiated rulemaking committeesessions, on July 31, 2018, the DOE published a notice of proposed rulemaking that, among other things, would establish a new federal standard for evaluating, and a process for adjudicating, BDTR claims made on or after July 1, 2019. The DOE accepted public comments on the notice of proposed rulemaking through August 30, 2018; however, the DOE did not reach consensus on proposed regulations, resulting in DOE havingpublish the authority to draft proposed regulations in its sole discretion. The DOE published proposed regulations in the Federal Register on June 16, 2016, and stated that it would accept comments from the public on the proposed regulations through August 1, 2016. In accordance with the rulemaking calendar specified in the HEA, DOE would have to publish any final regulationrule by November 1, 2016, in order for such2018, as required by the Department’s master calendar to allow the final regulation to become effectivetake effect on July 1, 2017,2019.
The DOE eventually published the
earliest date that new regulations could take effect. DOE met the deadline, issuing theamended final BDTR
ruleRule on
November 1stSeptember 23, 2019 (the “2019 BDTR Rule”),
2016 for awith an effective date of July 1,
2017 effective date.
2020. The amended rule made substantial changes to the 2016 Rule. The 2019 BDTR regulations opened new avenuesRule again changes the basis under which a student can make a BDTR claim for student borrowersloans disbursed after July 1, 2020, limiting it from the three bases in the 2016 Rule to assertonly one basis in the 2019 Rule: misrepresentation upon which a defenseborrower reasonably relied, and which resulted in financial harm to repaying their loans, allowthe borrower. The 2019 Rule also removes the group claim option, and instead relies on individual evaluation of borrower’s claims; however, as was the case in the 2016 Rule, DOE can still initiate an action against the institution to recoup its losses for discharged loans.
In addition, the 2019 BDTR Rule changes the “financial triggers” and reporting process, narrowing the DOE’s bases for determining a school lacks financial responsibility, and relying on more definitive liabilities that would impact an institution’s composite score, as opposed to more speculative potential losses. The updated provisions include both “mandatory triggering events,” and “discretionary triggering events” that may impact the institution’s financial responsibility under the DOE rules. Institutions are required to report any of the events included under either category, but mandatory events will require DOE to seek reimbursement for such claimstake action (which includes recalculating the institution’s most recent composite score, if applicable), while the DOE has discretion to determine whether action needs to be taken if the trigger is discretionary. The mandatory triggers include a liability from the affected institutions, and expand DOE’s financial responsibility rules to require many more schools to post letters of credit with the DOE. The proposed regulations include, among other things: (1) Bases for borrowers to file claims including a favorable decision for the studentsettlement or final determination in an action brought by a state or federal court involving the loan,agency; a breachcapital distribution or distribution of contractdividends when an institution’s composite score is below 1.5; or, for publicly traded institutions, an action to revoke registration or delist by the institution, or a substantial misrepresentation byapplicable exchange.
The 2019 Rule removes the
institution about the nature of its educational program, the nature of its financial charges or the employability of its graduates; (2) the establishment by the DOE of a fact-finding process to resolve claims; (3) Provisions giving DOE the authority to initiate a proceeding to seek repayment from the institution for any loan amounts forgiven; (4) Amendments to DOE’s financial responsibility regulations that describe new “early warning” triggers that would allow DOE to put an institutionprohibition on
provisional certification and require it to post a letter of credit with the DOE to demonstrate its financial stability; (5) New repayment rate calculations and warnings to students if the institution does not meet prescribed repayment rate metrics; and (6)pre-dispute arbitration provisions
forbidding mandatory arbitration clauses and class action
waivers.
waivers, and instead requires institutions to disclose, in laymen’s terms, how arbitration and class action waivers impact the student. The 2019 Rule also makes additional changes to the closed school and false certification loan discharge rules, as well as updating the financial reporting requirements relating to how long term debt is calculated and disclosed in annual financial audits, and how institutions must account for operating leases to reflect updated GAAP standards.
In January and March 2020, the House of Representatives and Senate, respectively, voted to overturn the 2019 BDTR
ruleRule under the authority provided in the Congressional Review Act. The bill was
scheduledpresented to
becomethe President on May 19, 2020 for his consideration. On May 29, 2020, the President vetoed the Congressional action and sent the bill back to Congress where it could either remain without further action or be revisited in an effort to override the Presidential veto, which would require a two-thirds vote in each Chamber. The House announced that it would seek further consideration of the proposals and on June 26, 2020, the House attempted to override the veto, but did not reach the required 290 votes needed to move the resolution to the Senate. Having failed to achieve the requisite number of votes, the Presidential veto stands, and the 2019 BDTR Rule became effective on July 1,
2017, but as noted above, on June 16th, the DOE issued a Notice of Proposed Rulemaking expressing its intent to rewrite the BDTR rule. In conjunction with that Notice, DOE also indicated it was postponing implementation of the new BDTR rules until legal challenges to the rule are resolved, and to allow for a “reset” of the regulation through negotiated rulemaking. There was no new effective date proposed, so as of now, the rule has been delayed indefinitely. However, in response to these actions, the DOE is now being sued by a large group of Attorneys General, as well as a number of students.2020. It is
unclear ifstill possible that there could be last minute efforts to delay the
Courts will intercede and force the Department to set a new2019 BDTR Rule implementation
date. In the meantime, aggrieved borrowers are still able to seek a defense to repayment through the
existing rule which has been effective since 1994.
courts; however, we do not know if this is likely or whether such a legal challenge would be successful.
Change in Ownership Resulting in a Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. The DOE, accrediting agencies, and most state education agencies, and DEAC all have standards pertaining to the change of control of schools, but those standards are not uniform. The 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. The DOE regulations provide that a change of control of a publicly-traded corporation occurs in
one of two ways: (i) if there is an event that would obligate the corporation to file a Current Report on Form 8-K with the Securities and Exchange Commission, or the SEC, disclosing a change of control or (ii) if the corporation has a shareholder that owns at least 25% of the total outstanding voting stock of the corporation and is the largest shareholder of the corporation, and that shareholder ceases to own at least 25% of such stock or ceases to be the largest shareholder. A significant purchase or disposition of our voting stock could be determined by the DOE to be a change of control under this standard. Many states include the sale of a controlling interest of common stock in the definition of a change of control requiring approval. A change of control under the definition of one of these agencies would require us to seek approval of the change in ownership and control to maintain our
accreditation,accreditations, state authorization or licensure. The requirements to obtain such approval from the states and
DETCour accrediting agencies vary widely. In some cases, approval of the change of ownership and control cannot be obtained until after the transaction has occurred.
In connection with Aspen Group’s acquisition of Aspen University, it provided notice to the regulators involved and received approval in due course with a number of conditions. Aspen University complied with all conditions although it remains provisionally certified.
When a change of ownership resulting in a change of control occurs at a for-profit institution, the DOE applies a different set of financial tests to determine the financial responsibility of the institution in conjunction with its review and approval of the change of ownership. The institution generally is required to submit a same-day audited balance sheet reflecting the financial condition of the institution
or its parent corporation 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
either of these requirements, the DOE may condition its approval of the change of ownership on the institution’s agreeing to post a letter of credit, provisional certification, and/or additional monitoring requirements, as described in the above section on Financial Responsibility.
The time required for the DOE to act on a change in ownership and control application may vary substantially. As
a resultpart of the change of
ownership, Aspen delivered a $264,665 lettercontrol of
creditUSU, in addition to
being granted provisional approval to participate in the
DOE in accordance with the standards identified above. Thereafter, as described above, this letter of credit was increased to $1,122,485. In November of 2015,Title IV Programs, the DOE informed
AspenUSU that it
no longer needed tomust post a letter of credit
and releasedbased on a failure to meet the
existing letteraudited same day balance sheet requirements that apply in a change of
credit.
control.
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 composition of 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.
The time required for the DOE to act on a change in ownership and control application may vary substantially. In some such recent transactions, institutions have experienced extensive delays in this review process, in some cases exceeding 18-24 months.
Possible Acquisitions. In additionSimilar to the planned expansion through Aspen’s new marketing program,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.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. The DOE may also impose growth restrictions on an institution, including in connection with a change in ownership and control.
Please note that on May 18, 2017,Clery Act and Title IX. Both USU and Aspen Group announced it had entered into a definitive agreementUniversity publish the required Annual Crime and Security Reports to acquirecomply with the requirements of the federal Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (“Clery Act”). USU a regionally accredited for-profit university based inpublishes separate reports for its San Diego, CaliforniaCA and Phoenix, AZ locations; Aspen publishes separate reports for its Denver, CO and Phoenix, AZ locations. Both universities are committed to providing students, faculty, staff, and guests a total purchase price of $9 million. USU offers graduatesafe and undergraduate degrees in health sciences, businesssecure environment. The Reports identify policies and nursing, as well as California Teaching Credentials. The transaction is subject to customary closing conditionsprocedures for security and regulatory approvals bycrime prevention, substance abuse, sexual misconduct/harassment (Title IX), and emergency response and evacuation. On May 6, 2020, the DOE WASC Senior Collegeissued a new final rule regarding Title IX which substantially changes institutions’ responsibilities in responding to sexual harassment and University Commission,sexual assault. The new rule will become effective on August 14, 2020, and state regulatoryUSU and programmatic accreditation bodies. The earliest that Aspen Group would receive required regulatory approvals would be December 2017.
In March 2017, Aspen Group entered into a Marketing Consulting Agreement with USU whereby Aspen Group agreedare currently assessing the new rule and evaluating necessary changes to provide marketing consulting for their online programs. USU is requiredour policies and procedures to pay Aspen for providing the consulting services under the Agreement. The term of the Marketing Agreement continues until December 31, 2017 unless terminated earlier in accordance with the Agreement.
On July 25, 2017, the Company signed a $10 million senior secured term loan with Runway Growth Credit Fund (formerly known as GSV Growth Credit Fund)maintain compliance.
Other Approvals. The Company will draw $5 million underU.S. Department of Defense and the facility at closing,U.S. Department of Veterans Affairs (the “VA”) 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.
Seasonality
Our business has been seasonal with our fiscal fourth quarter (beginning February 1) being our strongest quarter and the remaining $5 million tofiscal second quarter (beginning August 1) being the next strongest. The fiscal first quarter (beginning May 1) is the weakest as it covers the summer months of June and July. Given the growth of USU’s structured two-year MSN-FNP program and Aspen University’s pre-licensure BSN hybrid campus program, future seasonality may be drawn following the closing of the Company’s acquisition of substantially all the assets of the United States University, 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 also issued 224,174 5-year warrants at an exercise price of $6.87 per share.less pronounced.
Investing in our common stock involves a high degree of risk.
YouInvestors 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 the Acquisition of United States University
If we are unable to successfully integrate USU with Aspen Group, we may not realize all of the anticipated benefits of the 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:
·
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.
Aspen Group has not completed an acquisition comparable in size or scope to the Acquisition. 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.
The pendency of the Acquisition could adversely affect Aspen Group’s stock price and could adversely affect Aspen University’s and USU’s respective businesses, financial condition, results of operations or business prospects.
While neither Aspen Group nor USU is aware of any significant adverse effects to date, the pendency of the Acquisition could disrupt either or both of their businesses in a number of ways, including:
·
The attention of Aspen Group’s and/or USU’s management may be directed toward the completion of the Acquisition and related matters and may be diverted from the day-to-day business operations of their respective universities, including from other opportunities that might otherwise be beneficial to them;
·
Certain suppliers, business partners and other persons with whom Aspen Group and/or USU have a business relationship may delay or defer certain business decisions or seek to terminate, change or renegotiate their relationship as a result of the Acquisition, whether pursuant to the terms of their existing agreements or otherwise; and
·
Current and prospective employees of USU may experience uncertainty regarding their future roles with USU following completion of the Acquisition, which might adversely affect its ability to retain, recruit and motivate key personnel.
If any of these events were to take place, the businesses of Aspen Group and USU will be adversely affected.
Failure to complete or delay of the Acquisition could negatively impact Aspen Group’s and USU’s respective businesses, financial condition or results of operations.
The completion of the Acquisition is subject to a number of conditions including regulatory approval and educational consents, and there can be no assurance that the conditions to the completion of the Acquisition will be satisfied. If the conditions are not satisfied, the Acquisition will not be completed or will be delayed. If the Acquisition is not completed or is delayed, Aspen Group will be subject to several risks, including but not limited to:
·
The current market price of our common stock may reflect a market assumption that the Acquisition will occur or that it will occur by late 2017, and a failure to complete the Acquisition or a delay in the Acquisition could result in a negative perception by the market of Aspen Group generally and a resulting decline in the market price of our common stock;
·
Aspen Group may experience negative reactions from its employees, suppliers and other business partners; and
·
There may be substantial disruption to our business and a distraction of our management team and employees from day-to-day operations, because matters related to the Acquisition have required substantial commitments of time and financial and other resources, which could otherwise have been devoted to other opportunities that might have been beneficial.
Aspen Group’s future operating results will be adversely affected if it does not effectively manage its expanded operations following the Acquisition.
Following the Acquisition, the size of our business will be significantly larger and our revenues will also increase substantially. Our future success will depend, in part, upon our ability to manage this expanded business and replicate the marketing success we have had with Aspen University for USU, which will pose substantial challenges for Aspen Group’s, and USU’s management. We cannot assure you that the combined company will be successful or that the combined company will realize the expected marketing success, operating efficiencies, synergies, revenue enhancements and other benefits currently anticipated to result from the Acquisition.
If the Acquisition is not completed, Aspen Group will have incurred substantial expenses without realizing the expected benefits of the Acquisition.
Aspen Group has incurred substantial legal and other expenses in connection with the negotiation and completion of the transactions contemplated by the Acquisition. If the Acquisition is not completed, Aspen Group would have to recognize these expenses without realizing the expected benefits of the Acquisition.
Risks Relating to Our Business
If we are unable to comply with the conditions of the Loan and Security Agreement, we will materially and adversely affected.
The credit facility we entered into contains a number of conditions including financial covenants that we must comply with once we close. While we fully expect that we will comply with the credit facility, if we fail to do so, the lender may impose fees to waive compliance and if the violations are material, it may call the loan. In such event, we would have to refinance the indebtedness which would likely be on less favorable terms and be more expensive and if we were unable to refinance the loan, we would be materially and adversely affected. Since Aspen University is guaranteeing payment of the loan (and following the Acquisition, USU will be a guarantor), such an adverse event will likely result in the loss of regulatory approvals and cessation of our operations.
If we cannot manage our growth, our results of operations may suffer and could adversely affect our ability to comply with federal regulations.
The growth that we have experienced after our new management began in May 2011, as well as any future growth that we experience, may place a significant strain on our resources and increase demands on our management information and reporting systems and financial management controls. We have experienced growth at Aspen University over the last several years. 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 the DOE, including as a result of our participation in federal student financial aid programs under Title IV. If we are unable to manage our growth, we may also experience operating inefficiencies that could increase our costs and adversely affect our profitability and results of operations.
Because there is strong competition in the postsecondary education market, especially in the online education market
and in the wake of COVID-19, our cost of acquiring students may increase and our results of operations may be harmed.
Postsecondary education is highly fragmented and competitive. We compete with traditional public and private two-year and four-year brick and mortar colleges as well as other for-profit schools
particularly those that offerand online
learning programs.not-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
offeredemphasized online education
programs.programs, a trend which will likely be amplified and accelerated as a result of the COVID-19 pandemic. 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.
Another example is Arizona State University which spends considerable sums on advertising its online degree programs in partnership with its Online Program Manager.
To the extent the COVID-19 pandemic and related regulatory and safety protocols require continued social distancing, we expect to see increased competition in the short term as traditionally on-campus universities shift to online classes, and as hybrid universities that offer licensure programs such as ours move to 100% online course offerings, including virtual immersions. For example, in addition to AGI, for-profit competitors such as Adtalem Global Education, Inc. and American Public Education, Inc., as well as public non-profit institutions, shifted their licensure program on-campus classes to 100% online classes in response to the pandemic. Because the long-term effects of COVID-19, including the widespread adoption of online learning methods employed by our competitors, remain uncertain, the resultant increase in competition may subsist beyond the pandemic.
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
decrease significantly.
materially decrease.
The current COVID-19 pandemic and any future public health emergencies may adversely affect our business.
The current COVID-19 pandemic has caused a significant downturn to the U.S. and global economies. Any economic recession or depression that results could reduce the demand for our non-nursing graduates in the labor market, which may in turn reduce our enrollments and class starts in the future. Further, in order to comply with government mandates and to protect the safety of our students and employees, Aspen Group and its subsidiaries have implemented a remote work policy, temporarily closed physical campuses and office locations and moved to online-only classes. The transition to remote work poses operational challenges which may adversely affect our ability to manage our physical campus program, maintain student enrollment, and meet other operational objectives within the time frames or to the same extent anticipated prior to the pandemic.
While our initial experience has revealed that we have not sustained any material adverse effect from the pandemic and the economic downturn, we cannot assure that this will continue. The effect of the COVID-19 pandemic on our business,
operations and financial results remains uncertain and will depend on numerous evolving factors that are impossible to predict, including the duration and scope of the pandemic and economic downturn; increased competition in the online learning sector as universities switch from a campus to an online environment; the impact on economic activity and actions taken in response, including those of lawmakers and government agencies; the impact on our employees and business partners; our ability to effectively and efficiently operate with employees working remotely and/or temporary closures of our campus locations; the ability of our students to continue to attend and pay for their courses; and the ability of our non-nursing graduates to procure employment notwithstanding the economic downturn. We cannot predict whether students will be able to continue paying tuition under our monthly payment plan at the same historical rates or if future enrollment and class starts will be reduced. Any negative effect of the pandemic on our operations, for the foregoing reasons or due to other factors which cannot be predicted, could have a material adverse effect on our financial condition and results of operations.
If we are unable to successfully execute our growth strategy of opening new nursing campuses, our results of operations and future growth could be materially and adversely affected.
In addition to its two existing campuses in the Phoenix metropolitan area, the Company expects to open at least two additional campuses per year in the foreseeable future. In calendar year 2020, we plan to open new campuses in Tampa, Florida and Austin, Texas. This requires us to obtain appropriate state and accrediting agency approvals and to comply with any requirements from those agencies related to a new location. Our application with the Florida Commission for Independent Education has been delayed to the Department’s next scheduled meeting on July 28, 2020. Our meeting with the Texas Board of Nursing is scheduled for July 23, 2020. These state approvals must be received before we can start marketing efforts. Any further delays will delay our planned start dates.Adding new locations will also require significant financial investments, including capital improvements, human resource capabilities, and new clinical placement relationships. If we are unable to obtain the required approvals, attract sufficient additional students to new campus locations, offer programs at new campuses in a cost-effective manner, identify appropriate clinical placements, or otherwise manage effectively the operations of newly established campuses, our results of operations and financial condition could be materially and adversely affected.
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,
delayed or
delayeddeclined in a manner that could significantly affect our growth plans. In addition, a new academic program that must prepare students for gainful employment must be approved by the DOE for Title IV purposes if the institution is provisionally certified. 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 we are primarily an 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 in part 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.
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:
·
•Grow our nursing programs including Aspen University’s Pre-Licensure BSN hybrid online/campus program; USU’s MSN-FNP program; and Aspen University’s legacy Baccalaureate, Master’s and Doctoral online degree programs;·
Replicating
•Select communities which have excess demand for nursing students interested in an on-campus model;
•Replicate the success we have had with nursing in other programs;·
Achieve the same degree of success with USU assuming we complete the Acquisition;
·
•Create greater awareness of our schoolschools 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;
•Comply with applicable laws and·
regulations affecting our marketing activities; and
•Effectively manage marketing costs (including creative and media); and increase our line of credit to support such growth.
.
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.
Although
If our management has successfully implementedassumptions with respect to our long-term accounts receivable prove to be inaccurate, we may be required to take a charge to our Allowance for Doubtful accounts and incur a material non-cash charge to earnings.
As a result of the growing acceptance of our monthly payment
business model, it may not be successful long-term.
Mr. Michael Mathews,plans, our Chief Executive Officer,long-term accounts receivable balance has developed agrown from $3,085,243 at April 30, 2019 to $6,701,136 at April 30, 2020. The primary component consists of students who make monthly payments over 36, 39 and 72 months. The average student completes their academic program in 30 months, therefore most of the Company’s accounts receivable are short-term. However, when students graduate earlier than the 30-month average completion duration, and as students enter academic year two of USU’s MSN-FNP legacy 72-month payment business model designedplan, they all transition to substantially increase our student enrollment and reducing and/or eliminating student debt among Aspen’s student body. While resultslong-term accounts receivable when their liability increases 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:
·
over $4,500. Our ability to compete with existing online colleges which have substantially greater financial resources, deeper managementcollect 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 academic resources, and enhanced public reputations;
·
The emergencetheir other obligations stemming from a variety of more successful competitors;
·
Factors related to our marketing,factors including the costs of Internet advertising and broad-based branding campaigns;
·
Limits on our ability to attract and retain effective employees becauseimpact of the new incentive payment 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;
·
Acurrent economic decline in the acceptanceUnited 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 against our long-term accounts receivable, these assumptions may be incorrect and the above or other factors may cause us to increase our reserves and reduce the long-term accounts receivable on our balance sheet. The amount of online education;
·
A decrease in the perceived or actual economic benefits that students derive from our programs;
·
Potential studentsany future reductions we take may not be ablea non-cash material charge to afford the monthly payments; and
future earnings.
·
Potential USU students may not react favorably to our marketing and advertising campaigns, including our monthly payment plan.
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’s recent
Aspen Group’s primary focus has been the continued growth of enrollment in its
School of Nursing.nursing programs at both universities. As of April 30,
2017,2020, approximately
72%85% of our active degree-seeking
students were enrolled in
Aspen’s School of Nursing.our nursing programs. 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
bachelorsbachelor’s or an advanced degree, our enrollment and results of operations will be adversely affected.
If
Although our management has successfully implemented a monthly payment business model, it may not be successful long-term.
Under the leadership of Mr. Michael Mathews, our Chief Executive Officer, we incur system disruptionshave 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:
•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 including traditional campus based universities which accelerated their online presence as a result of the pandemic;
•Factors related to our online computer networks, it could impact our ability to generate revenuemarketing, including the costs of Internet advertising and damage our reputation, limitingbroad-based branding campaigns;
•Limits on our ability to attract and retain students.
Since early 2011, Aspen University has made significant investmentseffective employees because of the incentive compensation rule;
•Performance problems with our online systems;
•Our failure to update its computer network primarily to permit accelerated student enrollmentmaintain accreditation or regulatory approvals;
•Student dissatisfaction with our services and enhance its students’ learning experience. We expect to spend approximately $852,000 in capital expenditures over the next 12 months. The performance and reliabilityprograms;
•Adverse publicity regarding us, our technology infrastructure is critical to our reputation and ability to attract and retain students. Any system errorcompetitors or failure,online or a sudden and significant increase in bandwidth usage, could resultfor-profit education generally;
•A decline in the unavailabilityacceptance of online education;
•A decrease in the perceived or actual economic benefits that students derive from our online classroom, damagingprograms;
•Potential students may not be able to afford the monthly payments as a result of declines in the economy;
•The failure to collect our reputation and could cause a loss in enrollment. Our technology infrastructure couldgrowing accounts receivable.
If our monthly payment plan business model does not continue to be
vulnerable to interruption or malfunction due to events beyondfavorably received, our
control, including natural disasters, terrorist activities and telecommunications failures.
revenues may not increase.
If we are unable to develop awareness among, and attract and retain, high quality learners to
Aspen University,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 isare critical to our ability to attract prospective learners. If we are unable to successfully market and advertise our educational programs,
Aspen University'sour ability to attract and enroll prospective
learnersstudents 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 learnersapplicants to enrolled
learnersstudents in a cost-effective manner and that these
enrolled learnersstudents remain active in our programs. Some of the factors that could prevent us from successfully enrolling and retaining
learnersstudents in our programs include:
·
•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;·
Learneraccreditation or regulatory approvals;
•Student 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 learnersstudents 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 learnersstudents 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,students, 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 these breaches.
Because we rely on third parties to provide services in running our operations, if any of these parties fail to provide the agreed services at an acceptable level, it could limit our ability to provide services and/or cause student dissatisfaction, either of which could adversely affect our business.
We rely on third parties to provide us with services in order for us to efficiently and securely operate our business including our computer network and the courses we offer to students. Any interruption in our ability to obtain the services of these or other third parties or deterioration in their performance could impair the quality of our educational product and overall business. Generally, there are multiple sources for the services we purchase. Our business could be disrupted if we were required to replace any of these third parties, especially if the replacement became necessary on short notice, which could adversely affect our business and results of operations.
If we or our service providers are unable to update the technology that we rely upon to offer online education, our future growth may be impaired.
We believe that continued growth will require our service providers to increase the capacity and capabilities of their technology infrastructure. Increasing the capacity and capabilities of the technology infrastructure will require these third parties to invest capital, time and resources, and there is no assurance that even with sufficient investment their systems will be scalable to accommodate future growth. Our service providers may also need to invest capital, time and resources to update their technology in response to competitive pressures in the marketplace. If they are unwilling or unable to increase the capacity of their resources or update their resources appropriately and we cannot change over to other service providers efficiently, our ability to handle growth, our ability to attract or retain students, and our financial condition and results of operations could be adversely affected.
Because we rely on third-party administration and hosting of 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.
Beginning in June 2014, our
Our online
classroom began employingclassrooms at Aspen University and USU employ the
Desire2LearnD2L learning management system
namedcalled 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.
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 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 has grown significantly since we acquired it. Further, we have somewhat limited experience in managing our hybrid programs and anticipate substantial growth from this business. Managing multiple campuses in many locations will pose operational challenges which may impact our ability to manage our business with the same level of effectiveness as we achieved in fiscal year 2020. If growth negatively impacts our ability to manage our business, the learning experience for our students could be adversely affected, resulting in a higher rate of student attrition and fewer student referrals. Future growth will also require continued improvement of our internal controls and systems, particularly those related to complying with federal regulations under the Higher Education Act, as administered by the DOE, including as a result of our participation in federal student financial aid programs under Title IV. If we are unable to manage our growth, we may also experience operating inefficiencies that could increase our costs and adversely affect our profitability and results of operations.
If we experience 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.
We continue to make investments to update our computer network and systems primarily to permit accelerated student enrollment and enhance our students’ learning experience. We plan to make significant changes to our student systems and our accounting systems to enhance our ability to support the growth of the business, improve the visibility of program specific activities and related costs and enhance overall business intelligence to support capital allocation decision making. The performance and reliability of our technology infrastructure is critical to our reputation and ability to attract and retain students and manage our business. 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. In addition, changes in systems can be disruptive, divert manage time and typically may involve bugs which causes further disruptions. Our technology infrastructure and systems 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 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; Dr. Cheri St. Arnauld, our Chief Academic Officer; Mr. Frank Cotroneo, our Chief Financial Officer; and Dr. Anne McNamara, our Chief Nursing Officer, all of whom 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 have moved 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 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.
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 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. This problem is heightened with all of our employees working remotely who may have less security with their home Wi-Fi systems. 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.
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:
•Prohibiting false or misleading email header information;
•Prohibiting the use of deceptive subject lines;
•Ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender;
•Requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively permitted the message; and
•Requiring that the sender include a valid postal address in the email message.
The CAN-SPAM Act also prohibits unlawful acquisition of email addresses, such as through directory harvesting and transmission of commercial emails by unauthorized means, such as through relaying messages with the intent to deceive recipients as to the origin of such messages.
Violations of the CAN-SPAM Act’s provisions can result in criminal and civil penalties, including statutory penalties that can be based in part upon the number of emails sent, with enhanced penalties for commercial email companies who harvest email addresses, use dictionary attack patterns to generate email addresses, and/or relay emails through a network without permission.
The CAN-SPAM Act acknowledges that the Internet offers unique opportunities for the development and growth of frictionless commerce, and the CAN-SPAM Act was passed, in part, to enhance the likelihood that wanted commercial email messages would be received.
The CAN-SPAM Act preempts, or blocks, most state restrictions specific to email, except for rules against falsity or deception in commercial email, fraud and computer crime. The scope of these exceptions, however, is not settled, and some states have adopted email regulations that, if upheld, could impose liabilities and compliance burdens in addition to those imposed by the CAN-SPAM Act.
Moreover, some foreign countries, including the countries of the European Union, have regulated the distribution of commercial email and the online collection and disclosure of personal information. Foreign governments may attempt to apply their laws extraterritorially or through treaties or other arrangements with U.S. governmental entities.
Because we use email marketing, our requirement to comply with the CAN-SPAM Act could adversely affect our marketing activities and increase our costs.
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 heavily 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.
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.
If we incur liability for the unauthorized duplication or distribution of class materials posted online during our class discussions, it may affect our future operating results and financial condition.
In some instances, our faculty members or our students may post various articles or other third-party content on class discussion boards. We may incur liability for the unauthorized duplication or distribution of this material posted online for class discussions. Third parties may raise claims against us for the unauthorized duplication of this material. Any such claims could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether the claims have merit. As a result, we may be required to alter the content of our courses or pay monetary damages.
Because 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
usesUniversity 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
ofon 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
and by such other international laws including the European Union’s GDPR and their respective enforcement mechanisms any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Because
If governments enact new laws to regulate Internet commerce, it may negatively affect our business.
The widespread use of the CAN-SPAM Act imposes certain obligations onInternet has led and may in the sendersfuture lead to the adoption of commercial emails,new laws and regulatory practices in the U.S. and to new interpretations of existing laws and regulations. As well as regulations elsewhere including the European Union. These new laws and interpretations may relate to issues such as online privacy, data protection and breach 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 we fail to comply with laws and regulations relating to privacy, data protection, information security, advertising and consumer protection, government access requests, or, new laws in one or more of these areas are enacted, it could result in proceedings, actions, or penalties against us and could adversely impactaffect our abilitybusiness, financial condition, and results of operations.
We rely on a variety of marketing techniques, including email, radio, telemarketing, display advertising, and social media marketing, targeted online advertisements, and postal mailings, and we are or may become subject to
market Aspen’s educational services,various laws and
otherwise increaseregulations that govern such marketing and advertising practices. A variety of federal, state, and international laws and regulations, including those enforced by various federal government agencies such as 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 enforcingFederal Communications Commission, and state and local agencies, govern the collection, use, retention, sharing, and security of personal data, particularly in the context of online advertising, which we utilize to attract new students.
The laws and regulations which may restrict, limit or otherwise affect our advertising efforts include the Telephone Consumer Protection Act of 1991, the Telemarketing Sales Rule, the CAN-SPAM Act and
the Department of Justice, other federal agencies, State Attorneys General,various U.S. state laws regarding telemarketing. These laws generally impose restrictions on advertising practices, may be subject to varying interpretations by courts and
Internet service providers also have authority to enforce certain of its provisions.
The CAN-SPAM Act’s main provisions include:
·
Prohibiting false or misleading email header information;
·
Prohibiting the use of deceptive subject lines;
·
Ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender;
·
Requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively permitted the message;governmental authorities 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, often require subjective interpretation, which could impose liabilities andrender our compliance burdens in addition to those imposed by the CAN-SPAM Act.
Moreover, some foreign countries, including the countries of the European Union, have regulated the distribution of commercial email and the online collection and disclosure of personal information. Foreign governments may attempt to apply their laws extraterritorially or through treaties or other arrangements with U.S. governmental entities.
Because we use email marketing,efforts more challenging. We cannot guarantee our requirementefforts to comply with these laws, rules and regulations will be successful, or, if they are successful, that the CAN-SPAM Act could adversely affect Aspen's marketing activities and increase its costs.
If we lose the servicescost of key personnel, it could adversely affectsuch compliance will not be materially adverse to our business.
Our future success depends, in part, on If any laws, rules or regulations applicable to our ability to attract and retain key personnel. Our future also depends on the continued services of Mr. Michael Mathews,advertising techniques significantly restrict 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 supportimplement adequate alternative communication and marketing strategies at favorable costs or at all. Further, any non-compliance with these laws, rules and regulations may result in financial penalties or litigation, which would adversely affect our growth strategy.
To executefinancial condition and reputation.
The use and storage of data, files, and information on our websites and those of our third-party service providers concerning, among others, student information is essential to their enrollment in our schools. Laws and regulations relating to privacy, data protection, information security, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other regulations or our current practices. As a result, our practices may not have complied or may not comply in the future with all such laws, regulations, requirements, and obligations. We have implemented various features, integrations, and capabilities as well as contractual obligations intended to enable us to comply with applicable privacy and security requirements in our collection, use, and transmittal of data, but these features do not ensure our compliance and may not be effective against all potential privacy concerns. In particular, as a United States company, we may be obliged to disclose data pursuant to government requests under United States law. Compliance with such requests may be inconsistent with local laws in other countries where our students reside. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject, or other legal obligations relating to privacy or consumer protection, whether federal, state, or international, could adversely affect our reputation, brand, and business, and may result in claims, proceedings, or actions against us by governmental entities, students, users of our website, third party service providers, or others, or may require us to change our operations and/or cease using certain types of data. Any such claims, proceedings, or actions could hurt our reputation, brand, and business, force us to incur significant expenses in defense of such proceedings or actions, result in adverse publicity, distract our management, increase our costs of doing business, result in a loss of students and/or third party service providers, and result in the imposition of monetary penalties.
The legislative and regulatory bodies or self-regulatory organizations in various jurisdictions both inside and outside the United States may expand current laws or regulations, enact new laws or regulations, or issue revised rules or guidance regarding privacy, data protection, consumer protection, information security, and online advertising. For example, the GDPR, implemented on May 25, 2018 across the European Union, imposes more stringent data protection obligations on companies that process personal data in the E.U. GDPR has created new compliance obligations, requires investment into ongoing data protection activities and documentation requirements, and creates the potential for significantly increased fines for noncompliance. Noncompliance with the GDPR can trigger fines of up to the greater of €20 million or 4% of global annual revenues. In the first 20 months of the GDPR, E.U. regulators issued hundreds of fines to companies, including Google and Facebook, for over €114 million. California has enacted the California Consumer Privacy Act of 2018 (the “CCPA”), which went into effect on January 1, 2020. The CCPA requires companies that process personal information on California residents to make new disclosures to consumers about such companies’ data collection, use, and sharing practices and inform consumers of their personal information rights such as deletion rights, allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches. The CCPA is the most prescriptive general privacy law in the United States and may lead to similar laws being enacted in other U.S. states or at the federal level. For example, the State of Nevada has also passed a law, which went into effect on October 1, 2019, that amends the state’s online privacy law to allow consumers to submit requests to prevent websites and online service providers (“Operators”) from selling personally identifiable information that Operators collect through a website or online service. Additionally, the Federal Trade Commission and many
state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, require changes to our business model or practices, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct. In addition, any such changes could compromise our ability to develop an adequate marketing strategy and pursue 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 facultyeffectively, which, 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,turn, could adversely affect our business, financial condition, and growth prospects could be severely harmed. Further, we are movingresults of operations.
In addition, federal and state governmental authorities continue 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 resultingevaluate the privacy implications inherent in the
use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. The U.S. government has enacted legislation and regulations, and may enact further legislation or regulations in the future, that could significantly restrict the ability of companies and individuals to utilize online behavioral tracking, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could, if widely adopted, result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss
in our ability to make effective use of
facultyservices that employ such technologies could increase our costs of operations and
difficulties in recruiting.
limit our ability to acquire new students on cost-effective terms and consequently, materially and adversely affect our business, financial condition, and results of operations.
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"ASPEN UNIVERSITY and the mark UNITED STATES 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.
If we incur liability for the unauthorized duplication or distribution of class materials posted online during our class discussions, it may affect our future operating results and financial condition.
In some instances, our faculty members or our students may post various articles or other third-party content on class discussion boards. We may incur liability for the unauthorized duplication or distribution of this material posted online for class discussions. Third parties may raise claims against us for the unauthorized duplication of this material. Any such claims could subject us to costly litigation and impose a significant strain on our financial resources and management personnel regardless of whether the claims have merit. As a result we may be required to alter the content of our courses or pay monetary damages.
Because we are an exclusively online provider of education, we are entirely dependent on continued growth and acceptance of exclusively online education and, if the recognition by students and employers of the value of online education does not continue to grow, our ability to grow our business could be adversely impacted.
We believe that continued growth in online education will be largely dependent on additional students and employers recognizing the value of degrees and courses from online institutions. If students and employers are not convinced that online schools are an acceptable alternative to traditional schools or that an online education provides 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.
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. 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 we are unable to repay our outstanding indebtedness under our senior secured convertible notes, we could lose our business.
Our obligations under our outstanding $10 million convertible notes are secured by a first priority lien in certain deposit accounts of the Company, all current and future accounts receivable of Aspen University and USU, certain of the deposit accounts of Aspen University and USU and a pledge of all of the outstanding capital stock of Aspen University and USU. The notes are due on January 22, 2023. The conversion feature on the convertible notes are as follows: after six months from the issuance date, the lenders have the right to convert the principal into our shares of the Company’s common stock at a conversion price of $7.15 per share and the convertible notes automatically convert into shares of the Company’s common stock if the average closing price of our common stock is at least $10.725 over a 20 consecutive trading day period. If an acceleration event occurs under the notes, our entire indebtedness will immediately become due and payable and, if we do not have sufficient funds to repay the indebtedness, the lenders would have the right to proceed against the collateral in which we granted a security interest to them and we could lose our business.
Our business is subject to the risks of earthquakes, hurricanes, tornadoes, fires, power outages, floods and other catastrophic events, any of which may adversely affect our business and results of operations.
Our business, including our brick and mortar campuses, may experience business interruptions resulting from natural disasters, such as earthquakes, hurricanes, tornadoes, floods, fires or significant power outages. In addition to our largest office facility and two campuses in Phoenix, AZ, we presently have an office in Denver, CO, and a campus in San Diego, CA in addition to our planned campuses in Florida and Texas. These events could cause us to close schools — temporarily or permanently — and could affect student recruiting opportunities in those locations, causing enrollment and revenue to decline, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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 which is currently shown as an asset on our balance sheet at April 30, 2020. 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.
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 the DOE under the
Higher Education Act,HEA/HEOA, (2) state regulatory bodies and (3) accrediting agencies recognized by the DOE, including
the DEAC, a “national accrediting agency” recognized by the
DOE, and WSCUC, a “regional accrediting agency” recognized by the DOE.
TheIn 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’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, and in order to participate in various federal programs, including tuition assistance programs of the United States Armed Forces, a school must be accredited by an accrediting agency recognized by the U.S. Secretary of Education. Accreditation is a non-governmental process through which an institution submits to qualitative review by an organization of peer institutions, based on the standards of the accrediting agency and the stated aims and purposes of the institution. 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
requiresand its implementing regulations require accrediting agencies recognized by the DOE to review and monitor many aspects of an
institution'sinstitution’s operations and to take appropriate action when the institution fails to comply with the accrediting
agency'sagency’s standards.
Our operations are also subject to regulation due to our participation in Title IV
Programs. Title IV Programs which are administered by the DOE
and include loans made directly to students by the
DOE. Title IV Programs also includeDOE and several grant programs for students with economic need as determined in accordance with the
Higher Education ActHEOA and
the DOE regulations. To participate in Title IV Programs, a school must receive and maintain authorization by the appropriate state education agencies, be accredited by an accrediting agency recognized by the U.S. Secretary of Education and be certified as an eligible institution by the DOE. Our growth strategy is partly dependent on 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.
Our two highest long-term value programs, Aspen University’s BSN Pre-Licensure nursing program, and USU’s MSN-FNP program which only offers a monthly payment program for the first year of each program, make these students dependent upon Title IV or other payment options in order to continue their education.
The
laws, regulations, standards, and policies of the DOE, state education agencies, and our accrediting agencies change
frequently. Recent and impendingfrequently particularly when there is a change in the U.S. President. Pending 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
being 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.
If we do not maintain authorization in Colorado,
Arizona and California and future states where we plan to have campuses, our operations would be curtailed, and we
maywould not
be able to 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 BSN pre-licensure hybrid program is authorized by the Arizona Board. USU is headquartered in California and is authorized by the California Bureau to grant degrees, diplomas or certificates. If
weAspen were to lose
ourits authorization from the Colorado Commission on Higher Education,
weAspen would be unable to provide educational services in Colorado and
we would lose
ourits access to accreditation and 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 access to accreditation and 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.
SeveralMany 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,
additionalstate 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
educationeducational programs and award degrees. Some states may also prescribe financial regulations that are different from those of the DOE. If we fail to comply with state licensing or authorization requirements, we may be subject to the loss of state licensure or authorization. If we fail to comply with state requirements to obtain licensure or authorization, we may be the subject of injunctive actions or
penalties.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, the DOE’s 2016 regulations
that have now been vacated, if an institution offers postsecondary education throughfor distance education
ultimately took effect on May 26, 2019. On November 1, 2019, the Department issued the Final Regulations on accreditation and the authorization of distance education, which took effect July 1, 2020. Like the 2016 regulations, the Final Regulations require us to
students(i) obtain authorization to offer our programs from each state where authorization is required or through participation in a
state in whichreciprocity agreement, and (ii) provide specific consumer disclosures regarding our educational programs, including both general and direct disclosures to current and prospective students relating to professional licensure and whether the
institution is not physically locatedcurriculum for on-ground and online professional licensure or
in which it is otherwise subject to state jurisdiction as determined by that state, the institution must have met any statecertification programs meet states’ educational requirements for
it to be legally offering postsecondary distance education in that state. The state authorization NPRM, which was issued on July 25, 2016, similarly conditions eligibility for federal Title IV aid on maintaining all required state authorizations in states where we enroll Title IV students.licensure. If
the final state authorization regulations, which could become effective as early as July 1, 2017, maintains these same requirements, and if we fail to obtain required state authorization to provide postsecondary distance education in a specific state,
before that time, 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 the DOE. In addition, effective with the DOE’s new state authorization regulations in effect as of July 1, 2020, 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 are located during the course of their studies. These various disclosure requirements could subject us to financial penalties from the DOE and heightened the risk of potential federal and private misrepresentation claims.
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,
as stated above if and when the DOE regulation is enforced or re-promulgated, we could lose eligibility to offer Title IV aid to students located in that state. Furthermore, the institution must be able to document state approval for distance education if requested by the DOE.
This prior DOE regulation was recognized as a significant departure from the state authorization procedures followed by most, if not all, institutions before its enactment. On July 12, 2011, a federal judge for the U.S. District Court for the District of Columbia vacated the portion of the DOE’s state authorization regulation that required online education providers to obtain any required authorization from all states in which their students reside, finding that the DOE had failed to provide sufficient notice and opportunity to comment on the requirement. An appellate court affirmed that ruling on June 5, 2012 and therefore this regulation is currently invalid. On April 16, 2013, the DOE announced its intention to revisit the state authorization requirements for postsecondary distance education in a new negotiated rulemaking process which began in the fall of 2013. However, the rulemaking process failed to reach consensus on the rule in May 2014. Subsequently, in June 2014, the DOE announced it would “pause” on issuing a new state authorization for distance education regulation. On July 25, 2016, the DOE released a Notice of Proposed Rulemaking (“NPRM”) on the new state authorization for distance education regulations. Similar to the 2011 Rules, the new regulations require institutions participating in the Title IV Programs, as a condition of Title IV eligibility, to meet all state requirements for legally offering distance education in any state in which they are offering distance education courses. If an institution does not hold authorization in a state that requires it to do so, students in that state would not be eligible to receive Title IV funding to enroll in distance education programs offered by the institution in the state. The NPRM would also make Title IV eligibility and funding contingent upon an institution being able to demonstrate that it is subject to an adequate state student complaint procedure. To date, the DOE has not indicated which state complaint procedures, if any, it considers to be inadequate. In addition, the proposed regulation requires institutions make a significant number of consumer disclosures regarding their distance education programs including disclosures regarding licensure and certification requirements, state authorization, student complaints, adverse actions by state and accreditation agencies, and refund policies.
When the final state authorization rule becomes effective, which could be as early as July 1, 2017, and if the state authorization requirements from the NPRM are maintained, we could lose our ability to award Title IV Program aid to students within a state if we do not have the required state authorization to provide postsecondary distance education in that specific 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. In addition, if Aspen University is found not to be in compliance with SARA’s eligibility criteria, including requirements related to financial responsibility that require institutions to maintain a composite score of 1.0 or higher, Aspen University could become ineligible to participate in SARA. If Aspen University fails to meet SARA’s eligibility criteria and can no longer participate in SARA, Aspen University would need to comply with each state’s requirements for offering distance education in that state, which could lead to disruptions in enrollments and operations while Aspen University obtains any necessary authorizations.
If our pre-licensure BSN nursing programs fail to have a required minimum pass rate on the NCLEX, it could result in sanctions and could adversely affect our business, results of operations and future growth.
Our BSN pre-licensure nursing degree program must comply with state regulations which require approval from the local nursing board and compliance with local laws and regulations. State nursing boards in the states where we currently have or plan to open pre-licensure nursing campuses require that these nursing programs have a certain minimum pass rate on the National Council Licensure Examination (the “NCLEX”). If the NCLEX pass rate falls below the required minimum for multiple years, our program in a state may be put on probation and ultimately terminated, which would materially adversely affect our business, results of operations and future growth. Additionally, the various disclosure requirements ofBSN pre-licensure program is accredited by CCNE which has a required minimum NCLEX pass rate to maintain accreditation. If the proposed state authorization rule could subject us to financial penalties fromNCLEX pass rate falls below the DOE and heightensrequired minimum, our program’s accreditation may be in jeopardy which would materially affect our business.
If the
risk of potential federal and private misrepresentation claims.
If DOE determines that borrowers of federal student loans who attended our institutioninstitutions 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 the DOE could have a material adverse effect on our enrollments, revenues and results of operations.
The DOE’s
current2016 BDTR regulations
as published on November 1, 2016 and put into effect by court order issued on October 16, 2018, as well as the new 2019 BDTR Rule, 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 actionrepayment under
applicable state law.certain circumstances outlined in each rule. 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
to DOE the amount of the loan to which the defense applies.
In June 2015, DOE issued a fact sheet announcing steps it would be taking to support efforts by borrowers to secure discharge of their FDL program loans underUnder the borrower defense regulations. Among those steps, DOE indicated that it would be appointing a Special Master to oversee borrower defense issues and to create a streamlined process for discharge applications, and that it would be revisiting the borrower defense regulations for the purpose of creating a better system for debt relief.
In October 2015, DOE announced its intent to appoint a negotiated rulemaking committee to address borrower defense to repayment and related issues. The DOE-appointed negotiated rulemaking committee met for nine days beginning in January 2016 and ending in March 2016 and discussed a broad scope of topics. The negotiated rulemaking committee did not reach consensus on proposed regulations, resulting in DOE having the authority to draft proposed regulations in its sole discretion. The DOE published proposed regulations in the Federal Register on June 16, 2016, and stated that it would accept comments from the public on the proposed regulations through August 1, 2016. In accordance with the rulemaking calendar specified in the HEA, DOE would have to publish any final regulation by November 1, 2016, in order for such regulation to become effective July 1, 2017, the earliest date that new regulations could take effect.
The 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 the DOE. The proposed regulations include, among other things:
·
Bases for borrowers to file claims: The proposed regulations set outBDTR Rule, there are three grounds for a borrower defense to repayment claim, including a favorable decision for loans disbursed between July 1, 2017 and June 30, 2020: (1) the student inborrower obtained a state or federal court case involving the loan; a breach of contract byjudgment against the institution; or a substantial misrepresentation by(2) the institution aboutfailed to perform on a contract with the nature of its educational program,student; and/or (3) the nature of its financial charges,institution committed a “substantial misrepresentation” on which the borrower reasonably relied to his or the employability of its graduates.her detriment. 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.
·
For loans disbursed after July 1, 2020, the basis for a BDTR claim will be limited to a misrepresentation claim, under the DOE’s new definition, and generally, the claim must be made within three years of the borrower’s last date of enrollment.
Claim resolution
process:process: The
proposed regulations call for
the 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,evidence. In addition, under the
exact procedures, including2016 Rule, 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
the DOE reserving the right to calculate the amount of forgiveness in various ways.
·
Recovering funds: As noted above, the 2019 BDTR Rule removes the group claim option, but DOE will continue to evaluate student claims individually and make determinations about the borrower’s relief.
For debts relieved for individual borrowers,
both the
proposed2016 and 2019 regulations give
the 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 proposed 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. ·
“Early warning” letter of credit triggers: DOE has proposed 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 proposed 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.
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.b.
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.
c.
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.
d.
90/10 Rule – Failure to meet the 90/10 Rule revenue ratio for a single year.
e.
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 proposed 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 proposed 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. This requirement applies to any existing agreements at the time the rule becomes effective, not just for those agreements entered into after July 1, 2017.
If DOE determines that borrowers of FDLDirect Loan program loans who attended Aspen University or USU have a defense to repayment of their FDLDirect Loan program loans based on our acts or omissions, the repayment liability to the DOE could have a material adverse effect on our financial condition, results of operations and cash flows. Cumulative letters
If our institutions experience a “financial trigger” event as defined in either the 2016 or 2019 BDTR Rules, DOE could determine that we are not financially responsible, resulting in a requirement that we post an additional letter of credit, possible negative impacts on the status of our Title IV program participation agreement, additional reporting, growth limitations, and a change to a more stringent funding process, such as Heightened Cash Monitoring II or “reimbursement.”
Both the 2016 and 2019 BDTR Rules amend the financial responsibility regulations to describe numerous operational or financial events that would potentially indicate that the institution will have difficulty meeting its financial or administrative obligations. If one of the enumerated triggering events occur, the institution is required to report to DOE according to the reporting requirements included in the regulation.
For certain of the triggers, the DOE will assess the potential liability or fiscal impact reported and recalculate the institution’s composite score. If the institution’s composite score drops below 1.0, the DOE may require the institution to provide additional surety to continue Title IV participation. The regulations also include “discretionary trigger” events or conditions that institutions must report, and which the DOE will review to determine whether they are reasonably likely to have a materially adverse effect on the institution’s fiscal or operational condition.
If based on these events and the DOE’s assessment, it is determined that the institution is not financially responsible, DOE will require the institution to become provisionally certified and post a letter of credit in an amount specified, generally at least 10% of the Title IV funds received in the most recent fiscal year. The institution and the DOE may also agree to an offset of the institution's future Title IV funds for six to 12 months until the DOE is able to capture the amount of Title IV Program funds received by the surety required.
If Aspen University or USU were to experience an event that the DOE determines is an indication that either institution during the most recently completed award year,is not financially responsible, we could be forced to post letter(s) of credit and be moved to provisional certification, both of which could have a material adverse effecteffects on our financial condition, results of operations and cash flows. Additionally,
The 2016 BDTR Rule had included a prohibition on mandatory pre-dispute arbitration clauses and class action waivers as means to resolve a borrower defense-related claim (meaning related to the making of a Direct Loan or the educational services for which the Direct Loan was issued). Under the 2016 Rule, institutions were required to amend their arbitration and class action waiver agreements to include mandatory DOE language, and to provide notice to students under previous (non-compliant) versions of these agreements that the institution would not compel the borrower to arbitrate their claim or waive the right to join a class action for similar types of claims. For students who borrowed through the Direct Loan program between July 1, 2017 and June 30, 2020, they cannot be compelled to bring an action in arbitration or waive their right to be a member of a class action lawsuit against Aspen University or USU, if the basis of the borrower’s claim is rooted in the making of the Direct Loan or the educational services it paid for. In addition, under the 2016 Rule, institutions were required to report and provide DOE determineswith arbitral and judicial records when a student files a borrower defense-related claim.
Under the 2019 BDTR Rule, which became effective on July 1, 2020, pre-dispute arbitration agreements and class action waivers are no longer prohibited. Institutions that
our loan repayment rates are too low, havingopt to
issue warningsuse these types of agreements will be required to
currentprovide “plain language” disclosures that explain arbitration and
prospective students describingclass action, and make those disclosures publicly available on the
low repayment rate could have a material adverse effect on our enrollments, revenues, financial condition, results of operations and cash flows.
institution’s admission webpage.
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 the 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.
The 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
IVPrograms,IV Programs, our failure to comply with the complex regulations associated with Title IV
Programs would have a significant adverse effect on our operations and prospects for growth.
We
Aspen University 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, the 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
eligibilityschools 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 the DOE's scrutiny of the other institution and could impact the other institution’s participation in the Title IV Programs.
Because we are onlyUSU is provisionally certified by the DOE, we must reestablish our eligibility and certification to participate in the Title IV Programs, and there are no assurances that the DOE will recertify us to participate in the Title IV Programs.
An institution generally must seek recertificationre-certification from the DOE at least every six years and possibly more frequently depending on various factors. In certain circumstances, the DOE provisionally certifies an institution to participate in Title IV Programs, such as when it is an initial participant in Title IV Programs or has undergone a change in ownership and control. Beginning in 2009, and following our change of control in 2012, we have been provisionally certified.
On February 9, 2015, the DOE notified Aspen that it had the choice of posting a letter of credit for 25% of all Title IV funds and remain provisionally certified or post a 50% letter of credit and become permanently certified. We electedMay 14, 2019, United States University was granted provisional approval to post a 25% letter of credit and remain provisionally certified – increasing our letter of credit to $1,122,485. In November of 2015, the DOE informed Aspen that it no longer needed to post a letter of credit. It was subsequently released. In the future, the DOE may impose additional or different terms and conditions in any final program participation agreement that it may issue, including growth restrictions or limitation on the number of students who may receive Title IV aid. The DOE could also decline to fully certify Aspen, otherwise limit its participationparticipate in the Title IV Programs and has a program participation agreement reapplication date of December 31, 2020. As part of the provisional approval, USU posted a letter of credit in the amount of $255,708 which was funded by AGI. In March 2020, USU was notified that amount will be reduced to $21,857; this letter with the reduced amount will remain in effect for the duration of the provisional approval.
Under provisional certification, an institution must obtain prior DOE approval to add an educational program or continuemake other significant changes and may be subject to closer scrutiny by the DOE. In addition, if the DOE determines that a provisionally certified institution is unable to meet its responsibilities to comply with the Title IV requirements, the DOE may revoke the institution’s certification to participate in the Title IV Programs without advance notice or opportunity to challenge the action. USU expects to be on HCM1, once formal notification is received from the DOE.
Pursuant to USU’s provisional
certification.
PPA, the DOE indicated that USU must agree to participate in Title IV under the HCM1 funding process; however, the DOE does retain discretion on whether or not to implement that term of the agreement. Although DOE has not, to date, notified USU that it has been placed in the HCM1 funding process, nor does the DOE’s public disclosure website identify USU as being on HCM1, it is possible that prior to the end of the PPA term, the DOE may notify USU that it must begin funding under the HCM1 procedure.
If the DOE does not ultimately approve
our fullUSU’s certification to participate in Title IV Programs,
ourUSU 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 an additional letter of credit could impair our ability to attract and retain students and could negatively affect our financial results.
Because the DOE may conduct compliance reviews of us, we may be subject to adverse
reviewactions and future litigation which could affect our ability to offer Title IV student loans.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of non-compliance and lawsuits by government agencies, regulatory agencies, and third parties, including claims brought by third parties on behalf of the federal government. If the results of compliance reviews or other proceedings are unfavorable to us, or if we are unable to defend successfully against lawsuits or claims, we may be required to pay monetary damages or be subject to fines, limitations, loss of Title IV funding, injunctions or other penalties, including the requirement to make refunds. Even if we adequately address issues raised by
an agencyany 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, from Title IV Program funds. years. This rule is known as the 90/10 rule. Our online programs are well below this threshold due to our monthly payment plans. However, our BSN Pre-licensure hybrid campus/online nursing program tuition is too high to justify use of our monthly payment plans.
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.
This rule is known asWe must monitor compliance with the 90/10
rule. We have only recently begun to participate in Title IV Programs, but must remain aware of the 90/10 calculation.rule by both Aspen University 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
creditscredit or any other restrictions imposed by the DOE.
Failure to comply with the 90/10 rule for one year is also considered a triggering event under the 2016 and 2019 BDTR Rules. Additionally, if we
are determinedfail to
comply with the 90/10 rule for two consecutive years, we will be ineligible to participate in Title IV Programs
due to the 90/10 rule,and any disbursements of Title IV
Program funds
made while ineligible must be repaid to the DOE.
Further, due to scrutiny of the sector, legislative proposals have been introduced in Congress that would
heightenrevise 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
and veterans benefit programs to be
included inconsidered when determining whether the
85% portion.
institution has adequate non-Title IV revenue to meet the requirements of the rule.
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
the 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.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,
a large
competitor,competitors such as ITT Technical Institute and Corinthian Colleges sold or shut down
itstheir schools due to substantial regulatory investigations and
DOE actions. Other significant school groups have likewise been closed in light of significantthe DOE actions. Adverse media coverage regarding other companies in the for-profit school sector or regarding
usAspen University 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 the DOE, Congress, accrediting bodies, state legislatures or other governmental authorities with respect to all for-profit institutions, including
us.
Aspen University 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
institution.institutions. Any action by Congress that significantly reduces funding for Title IV Programs or the ability of our
schoolschools 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.
There
Further, there has been growing regulatory action and investigations of for-profit companies that offer online education.
A larger competitor has accepted a deal with the DOE to sell or shut down most of its campuses.
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 institutioninstitutions and adversely affect our revenues and results of operations.
If our efforts to comply with
the DOE regulations are inconsistent with how the DOE interprets those provisions, either due to insufficient time to implement the necessary changes, uncertainty about the meaning of the rules, or otherwise, we may be found to be in noncompliance with such provisions and the DOE could impose monetary penalties, place limitations on our operations, and/or condition or terminate
the eligibility of our
eligibilityschools to receive Title IV Program funds. We cannot predict with certainty the effect the new and impending regulatory provisions will have on our business.
Investigations by state attorneys general, Congress and governmental agencies regarding relationships between loan providers and educational institutions and their financial aid officers may result in increased regulatory burdens and costs.
In the past few years, the student lending practices of postsecondary educational institutions, financial aid officers and student loan providers were subject to several investigations being conducted by state attorneys general, Congress and governmental agencies. These investigations concern, among other things, possible deceptive practices in the marketing of private student loans and loans provided by lenders pursuant to Title IV Programs. Higher Education Opportunity Act, or HEOA, contains requirements pertinent to relationships between lenders and institutions. In particular, HEOA requires institutions to have a code of conduct, with certain specified provisions, pertinent to interactions with lenders of student loans, prohibits certain activities by lenders with respect to institutions, and establishes substantive and disclosure requirements for lists of recommended or suggested lenders of private student loans. In addition, HEOA imposes substantive and disclosure obligations on institutions that make available a list of recommended lenders for potential borrowers. State legislators have also passed or may be considering legislation related to relationships between lenders and institutions. Because of the evolving nature of these legislative efforts and various inquiries and developments, we can neither know nor predict with certainty their outcome, or the potential remedial actions that might result from these or other potential inquiries. Governmental action may impose increased administrative and regulatory costs and decrease profit margins.
Because we are subject to sanctions if we fail to calculate correctly and return timely Title IV Program funds for students who stop participating before completing their educational program, our future operating results may be adversely affected.
A school participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw
fromor reduce their enrollment status in 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
atin an
academically-relatedacademically related activity must determine the relevant date based on accurate institutional records (not a student’s certificate of attendance). For online classes, “academic attendance” means engaging in an academically-related activity, such as participating in class through an online discussion or initiating contact with a faculty member to ask a question; simply logging into an online class does not constitute “academic attendance” for purposes of the return of funds requirements.
Because we only recently began to participate in Title IV Programs, we have limited experience complying with these Title IV regulations. Under
the DOE regulations, late return of Title IV Program funds for 5% or more of students sampled in connection with the
institution'sinstitution’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 the DOE or otherwise be sanctioned by the DOE, which could increase our cost of regulatory compliance and adversely affect our results of operations. This may have an impact on our systems, our future operations and cash flows.
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 was replaced by one provided by AGI.
If we fail to ensure that the delivery of our distance education programs supports regular and substantive interaction between students and instructors, our distance education programs could be considered “correspondence courses” which could make those programs ineligible to participate in the Title IV Programs.
The DOE distinguishes between distance education and correspondence courses. Distance education involves the delivery of instruction to students who are separated from the instructor, which supports regular and substantive interaction between the students and the instructor. Correspondence courses do not involve regular and substantive interaction between the students and the instructor. An institution is not eligible to participate in the Title IV Programs if 50% or more of its students were enrolled in correspondence courses during its latest completed award year, making it important for the schools’ distance education to involve regular and substantive interaction. If Aspen and USU distance education programs do not include regular and substantive interaction, they could be considered correspondence courses, and we would need to refund DOE financial aid money for those programs.
On April 2, 2020, the DOE issued a NPRM that proposes rules related to distance education and innovation, including revisions to the definition of “distance education.” The NPRM was subject to a public comment period that concluded on May 4, 2020,
and we cannot predict when the DOE will issue final regulations or will take effect, or whether the revised definition of “distance education” will be different than in the NPRM.
If we fail to demonstrate “financial responsibility,” Aspen
University and USU may lose
itstheir eligibility to participate in Title IV Programs or be required to post a letter of credit in order to maintain eligibility to participate in Title IV Programs.
To participate in Title IV Programs, an eligible institution must satisfy specific measures of financial responsibility prescribed by the DOE, or post a letter of credit in favor of the DOE and possibly accept other conditions, such as additional reporting requirements or regulatory oversight, on its participation in Title IV Programs.
Effective July 1, 2020, the DOE has updated the triggering events and factors it considers when evaluating whether an institution is financially responsible, which may render compliance more difficult or costly in the future. The DOE may also apply its measures of financial responsibility to the operating company and ownership entities of an eligible institution and, if such measures are not satisfied by the operating company or ownership entities, require the institution to meet
the alternative standards
described under “Regulation” beginning on page 6 herein.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
institution,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.
The DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV Programs. If an institution fails to satisfy any of these criteria or comply with any other DOE regulations, the DOE may require the repayment of Title IV funds, transfer the institution from the
"advance"“advance” system of payment of Title IV funds to cash monitoring status or to the
"reimbursement"“reimbursement” system of payment, place the institution on provisional certification status, or commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV Programs. If we are found not to have satisfied the
DOE's "administrative capability"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
usour schools to lose our eligibility to participate in Title IV Programs.
We
have been eligible to participate in Title IV Programs for a relatively short time, and we have not developed the internal capacity to handle withoutrely on third-party assistance
to comply with the complex administration of participation in Title IV
Programs.Programs for each of our schools. A
third-partythird 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
itthe 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.
If we pay impermissible commissions, bonuses or other incentive payments to individuals involved in recruiting, admissions or financial aid activities, we will be subject to sanctions.
A school participating in Title IV Programs may not provide any commission, bonus or other incentive payment based, directly or indirectly, on success in enrolling students or securing financial aid to any person involved in student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. If we pay a bonus, commission, or other incentive payment in violation of applicable DOE rules, we could be subject to sanctions, which could have a material adverse effect on our business.
Effective July 1, 2011, the DOE abolished 12 safe harbors that described permissible arrangements under the incentive payment regulation. Abolition of the safe harbors and other aspects of the current regulation may create uncertainty about what constitutes impermissible incentive payments. The
modified incentive payment rule and related uncertainty as to how it will be interpreted also may influence our approach, or limit our alternatives, with respect to employment policies and practices and consequently may affect negatively our ability to recruit and retain employees, and as a result our business could be materially and adversely affected.
In addition, the General Accounting Office, or the GAO has issued a report critical of the DOE’s enforcement of the incentive payment rule, and the DOE has undertaken to increase its enforcement efforts. If the DOE determines that an institution violated the incentive payment rule, it may require the institution to modify its payment arrangements to the DOE’s satisfaction. The DOE may also fine the institution or initiate action to limit, suspend, or terminate the institution’s participation in the Title IV Programs. The DOE may also seek to recover Title IV funds disbursed in connection with the prohibited incentive payments. In addition, third parties may file “qui tam” or “whistleblower” suits on behalf of the DOE alleging violation of the incentive payment provision. Such suits may prompt the DOE investigations. Particularly in light of the uncertainty surrounding the new incentive payment rule, the
existence of, the costs of responding to, and the outcome of, qui tam or whistleblower suits or
the 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
ourtheir student loan default rates are too high,
weour schools may lose eligibility to participate in Title IV Programs.
The 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 oureither institutional accrediting agency loses recognition by the U.S. Secretary of Education or we fail to maintain our institutional accreditation for Aspen University 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.
For example, in February 2020 a bill titled the “Accreditation Reform Act of 2020” was introduced to Congress, which, if enacted, would implement a regulatory overhaul with respect to accrediting agencies by, among other things, requiring enhanced scrutiny of such agencies by the DOE. While Aspen
isUniversity and USU are each accredited by
the DEAC, a DOE-recognized accrediting body, if the DOE were to limit, suspend, or terminate
the DEAC’seither accreditor’s recognition
wethat institution could lose
ourits ability to participate in the Title IV Programs.
While the DOE has provisionally certified Aspen, there are no assurances that we will remain certified. If we were unable to rely on
DEAC accreditation in such circumstances, among other things, our students and our institution would be ineligible to participate in the Title IV Programs, and such consequence would have a material adverse effect on enrollments, revenues and results of operations. In addition, increased scrutiny of accrediting agencies by the Secretary of Education in connection with the DOE’s recognition process may result in increased scrutiny of institutions by accrediting agencies.
Furthermore,
becausebased on continued scrutiny of the for-profit education sector,
is growing at such a rapid pace, it is possible that accrediting bodies will respond
to that growth by adopting additional criteria, standards and policies that are intended to monitor, regulate or limit the growth of for-profit institutions like
us.Aspen University 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
DEAC.
If Aspen fails to meet standards regarding “gainful employment,” it may result in the loss of eligibility to participate in Title IV Programs.
In 2014, the DOE issued a new gainful employment rule which went into effect on July 1, 2015. Under the gainful employment 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 the DOE. We anticipate that under this new regulation, 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.
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 gainful employment regulation that went into effect on July 1, 2015, an institution may establish a new program’s Title IV eligibility by updating the list of the institution’s programs maintained by the DOE. Significantly, an institution is prohibited from updating its list of eligible programs to include a gainful employment program, or a gainful employment 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 gainful employment 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.
applicable accreditor.
If we fail to comply with the DOE’s substantial misrepresentation rules, it could result in sanctions against us.
our schools.
The DOE may take action against an institution in the event of substantial misrepresentation by the institution concerning the nature of its educational programs, its financial charges or the employability of its graduates.
TheIn 2011, the DOE
has expanded the activities that constitute a substantial misrepresentation. Under the DOE regulations, an institution engages in substantial misrepresentation when the institution itself, one of its representatives, or an organization or person with which the institution has an agreement to provide educational programs, marketing, advertising, or admissions services, makes a substantial misrepresentation directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, a state agency, or to the Secretary of Education. The
final regulations define misrepresentation as any false, erroneous or misleading statement, and they define a misleading statement as any statement that has the likelihood or tendency to deceive or confuse. The
final regulations define substantial misrepresentation as any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to the person’s detriment. If the DOE determines that an institution has engaged in substantial misrepresentation, the DOE may revoke an institution’s program participation agreement, impose limitations on an institution’s participation in the Title IV Programs, deny participation applications made on behalf of the institution, or initiate a proceeding against the institution to fine the institution or to limit, suspend or termination the institution’s participation in the Title IV Programs. We expect that there could be an increase in our industry of administrative actions and litigation claiming substantial misrepresentation, which at a minimum would increase legal costs associated with defending such actions, and as a result our business could be materially and adversely affected.
If we fail to comply with the DOE’s credit hour requirements, it could result in sanctions against
us.
our schools.
The DOE has defined “credit” hour for Title IV purposes. The credit hour is used for Title IV purposes to define an eligible program and an academic year and to determine enrollment status and the amount of Title IV aid that an institution may disburse for students in a payment period.particular program. The final regulations define credit hour as an institutionally established equivalency
that reasonably approximates certain specified time in class and out of class and an equivalent amount of work for other academic activities. The final regulations also require institutional accreditors to review an institution’s policies, procedures, and administration of policies and procedures for assignment of credit hours. An accreditor must take appropriate actions to address an institution’s credit hour deficiencies and to notify the DOE if it finds systemic noncompliance or significant noncompliance in one or more programs. The DOE has indicated that if it finds an institution to be out of compliance with the credit hour definition for Title IV purposes, it may require the institution to repay the amount of Title IV awarded under the incorrect assignment of credit hours and, if it finds significant overstatement of credit hours, it may fine the institution or limit, suspend, or terminate its participation in Title IV Programs,
as athe result of which
could be that our business
could beis materially and adversely affected.
The U.S. Congress continues to examine the for-profit postsecondary education sector which could result in legislation or additional
the 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,Moreover, with the
DOE recently created a special unit for the purpose of monitoring publicly traded for-profit educational institutions. Moreover,HEA pending reauthorization and an election coming up in 2020, political
considerationconsiderations could
result in a reduction ofimpact Title IV
funding.funding as well as the treatment of for-profit education in future legislation. 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.
Unfavorable laws
Failure to comply with the federal campus safety and
regulations may impede our growth.
Existing and future laws and regulations may create increased regulatory risk,security reporting requirements as implemented by the DOE would result in sanctions, which could impedehave a material adverse effect on our growth. Thesebusiness and results of operation.
We must comply with certain campus safety and security reporting requirements as well as other requirements in the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act of 1990 (the “Clery Act”), as amended by the Violence Against Women Reauthorization Act of 2013. The Clery Act requires an institution to report to the DOE and disclose in its annual security report, for the three most recent calendar years, statistics concerning the number of certain crimes that occurred within the institution’s so-called “Clery geography.” As we expand to new campus locations, our efforts to comply with the Clery Act will become more costly and the risk of noncompliance will increase.Failure to comply with the Clery Act requirements or regulations promulgated by the DOE could result in fines or suspension or termination of our eligibility to participate in Title IV programs, could lead to litigation, or could harm our reputation, each of which could, in turn, have a material adverse effect on our business and results of operations. Although not related to educational regulations, we must comply with state and local social distancing and pandemic related regulations and lawsorders. These requirements may cover consumer protection, mobile communications, privacy, data protection, electronic communications, pricing and taxation.
increase our expenses.
Other Risks
Because of their share ownership, our management may be able to exert control over us to the detriment of minority shareholders.
As of July 24, 2017, our executive officers and directors owned approximately 14.2% of our outstanding common stock. These shareholders, if they act together, may be able to control all matters requiring shareholder approval, including significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing our change in control and might affect the market price of our common stock.
If our common stock becomes subject to a “chill” imposed by the Depository Trust Company, or DTC, your ability to sell your shares may be limited.
The DTC acts as a depository or nominee for street name shares that investors deposit with their brokers. Until December of 2012, our stock was not eligible to be electronically transferred among DTC participants (broker-dealers) and required delivery of paper certificates as a result of a “chill” imposed by DTC. As a result of becoming “DTC-Eligible”, our common stock is no longer subject to a chill. However, DTC in the last several years has increasingly imposed a chill or freeze on the deposit, withdrawal and transfer of common stock of issuers whose common stock trades on a market other than an exchange. Depending on the type of restriction, a chill or freeze can prevent shareholders from buying or selling shares and prevent companies from raising money. A chill or freeze may remain imposed on a security for a few days or an extended period of time (in at least one instance a number of years). While we have no reason to believe a chill or freeze will be imposed against our common stock again in the future, if it were your ability to sell your shares would be limited. In such event, your investment will be adversely affected.
Due to factors beyond our control, our stock price may be volatile.
Any of the following factors could affect the market price of our common stock:
·
•Our failure to generate increasing material revenues;·
•Our failure to become profitable or achieve positive adjusted Earnings Before Interest, Taxes, Depreciation and Amortization;·
•Our failure to meet financial analysts’ performance expectations;
•Changes in earnings estimates and recommendations by financial analysts;
•A decline in our growth rate including new student enrollments and class starts;·
Our failure to raise working capital, if required;
·
•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;
·
Aplan and collections;
•The continued decline in the economy in the United States which is severe enough to impactimpacts 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 which we have registered;·
by our officers, directors or other shareholders;
•Short selling activities; or·
•Changes in market valuations of similar companies.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.
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.
An investment in Aspen may be diluted in the future as a result of the issuance of additional securities.
If we need to raise additional capital to meet our working capital needs, we expect to issue additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to investors. Investors should anticipate being substantially diluted based upon the current condition of the capital and credit markets and their impact on small companies.
Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.
It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we acquire additional capital.
Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future.
We have not and do not intend to pay any dividends in the foreseeable future, as we intend to retain any earnings for development and expansion of our business operations. As a result, you will not receive any dividends on your investment for an indefinite period of time.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
Our corporate headquarters are located in a facility in Denver, Colorado, consisting ofPROPERTIES
We lease approximately 6,53588,600 square feet of office and classroom space underin the Phoenix metro area, San Diego, New York, Denver, Austin and Moncton, New Brunswick Canada. Our lease cost for the fiscal year ending April 30, 2020 was $2,516,213.
Additionally, the Company announced in February 2020 the signing of definitive lease agreements for two new Pre-Licensure BSN campus locations in Tampa, Florida and Austin, Texas, and a sublease in Austin, Texas. See “Part I. Item 1. Business – Future Campuses” for more information. Furthermore, as the result of the rapid growth of the Master of Science in Nursing-Family Nurse Practitioner program, the Company plans to build-out on average 10 exam rooms that are expected to occupy approximately 3,000 square feet in each of San Diego, Phoenix, Austin and Tampa, its pre-licensure metropolitan areas for USU to implement lab immersions for its MSN-FNP program. To that end, the Company announced in July 2020 a lease
that expiresagreement for an additional suite in
December 2018. This facility accommodates our academic operations. Our executive offices areits Phoenix campus (by the airport) to begin conducting weekend immersions for its MSN-FNP program starting in
New York City where we lease approximately 2,000 square feet under a lease that expires in December 2017. We operate an enrollment center in Phoenix, Arizona where we lease approximately 4,643 square feet under a three-year term that expires in May 2021. We lease office space for our developers in Dieppe, NB, Canada 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.
September 2020.
ITEM 3. LEGAL PROCEEDINGS.
From
time to time,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.
On February 11, 2013, HEMGHigher Education Management Group, Inc. (“HEMG”) and Mr. Patrick Spada sued the Company,AGI, 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 CompanyAGI disclosed that HEMG and Mr. Spada borrowed $2.2 million without boardBoard authority, (ii) the alleged breach of an April 2012 agreement whereby the CompanyAGI had agreed, subject to numerous conditions and time limitations, to purchase certain shares of the CompanyAGI from HEMG, and (iii) alleged diminution to the value of HEMG’s shares of the CompanyAGI due to Mr. Spada’s disagreement with certain business transactions the CompanyAGI engaged in, all with Board approval. On November 8, 2013, the state court in New York granted the Company’sAGI’s motion to dismiss nearly all of the claims. On December 10, 2013, the CompanyAGI answered an amended complaint filed by HEMG and Mr. Spada in April 2013.
On December 10, 2013, AGI also filed a series of counterclaims against HEMG and Mr. Spada in
the same 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 CompanyAGI asserted against them.
The litigation has been stayed since HEMG’s 2015 bankruptcy filing. In February 2019, the bankruptcy court judge entered an order reducing AGI’s claim to $888,631. While there is about $924,500 available for distribution, the Companytrustee’s fees as of a few
months ago were $346,500. The trustee is awaiting computation of the amount of taxes due which must be paid from the available funds and means that AGI will recover far less than the sum it is entitled to.
While AGI has been advised by its counsel that HEMG’s and Spada’s claims in the New York lawsuit is baseless,
the CompanyAGI cannot provide any assurance as to the ultimate outcome of the case. Defending the lawsuit
will bemaybe 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 CompanyAGI 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.
ITEM 4. MINE SAFETY DISCLOSURES.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock tradesis listed on the OTCQB,The Nasdaq Global Market under the symbol “ASPU.” “ASPU”. Effective after the U.S. stock market opened on June 29, 2020, the Company joined the small cap Russell 2000® Index and the broad-market Russell 3000® Index at the conclusion of the annual reconstitution of the Russell stock indexes.
The last reported sale price of
Aspen Group’sour common stock as reported by
the OTCQBNasdaq on July
21, 20172, 2020 was
$6.79.$8.74. As of that date, we had
1,001135 record holders. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
The following table provides the high and low bid price information for our common stock. The prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and does not necessarily represent actual transactions. Our common stock does not trade on a regular basis.
| | | | | | | | | | | | |
| | | | | | Prices | |
Year | | | Period Ended | | | High | | | Low | |
| | | | | | ($) | | | ($) | |
Fiscal 2017 | | | | | | | | | | | | |
| | | April 30 | | | | 5.00 | | | | 3.05 | |
| | | January 31 | | | | 4.44 | | | | 2.76 | |
| | | October 31 | | | | 3.36 | | | | 1.56 | |
| | | July 31 | | | | 2.1 | | | | 1.524 | |
Fiscal 2016 | | | | | | | | | | | | |
| | | April 30 | | | | 2.244 | | | | 1.236 | |
| | | January 31 | | | | 2.388 | | | | 1.212 | |
| | | October 31 | | | | 2.22 | | | | 1.38 | |
| | | July 31 | | | | 2.94 | | | | 1.116 | |
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
Unregistered Sales of
UnregisteredEquity 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 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended April 30, 2017.
None.
ITEM 6. SELECTED FINANCIAL DATA.
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
Annual Report on 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.
Key Terms
In connection with the management of our businesses, we identify, measure and assess a variety of operating metrics. The principal metrics we use in managing our businesses are set forth below:
Operating Metrics
•Lifetime Value ("LTV") - Lifetime Value as the weighted average total amount of tuition and fees paid by every new student that enrolls in the Company’s universities, after giving effect to attrition.
•Bookings - defined by multiplying LTV by new student enrollments for each operating unit.
•Average Revenue per Enrollment ("ARPU") - defined by dividing total bookings by total enrollments for each operating unit.
•Marketing Efficiency Ratio ("MER") - is defined as revenue per enrollment divided by cost per enrollment.
Operating costs and expenses
•Cost of revenues - consists of instructional costs and services and marketing and promotional costs.
◦Instructional costs - 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 - include costs associated with producing marketing materials and advertising, and outside sales costs. 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.
•General and administrative expense - consists primarily of compensation expense (including stock-based compensation expense) and other employee-related costs for personnel engaged in executive and academic management and operations, finance, legal, tax and human resources, fees for professional services, corporate taxes and facilities costs.
Non-GAAP financial measures:
•Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") - is a non-GAAP financial measure. See "Non-GAAP – Financial Measures" for a reconciliation of Net loss allocable to common shareholders to EBITDA for the fiscal years 2020 and 2019.
•Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA")- is a non-GAAP financial measure. See "Non-GAAP – Financial Measures" for a reconciliation of Net loss allocable to common shareholders to Adjusted EBITDA for the fiscal years 2020 and 2019.
AGI is an educational technology holding company. It operates two universities, Aspen University ("Aspen University" or "AUI" or "Aspen") and United States University ("United States University" or "USU").
All references to the “Company”, “AGI”, “Aspen Group”, “we”, “our” and “us” refer to Aspen Group, Inc. is a post-secondary, unless the context otherwise indicates.
AGI leverages its education
company with an overarchingtechnology infrastructure and expertise to allow its two universities, Aspen University and United States University, to deliver on the vision of making
higher educationcollege affordable
again in America. To date, Aspen Group’s sole operating subsidiary has been Aspen University, Inc., doing business as Aspen University. On May 18, 2017, Aspen Group announced it had entered into a definitive agreement to acquire USU, a regionally accredited for-profit university based in San Diego, California for a total purchase price of $9 million. The transaction is subject to customary closing conditions and regulatory approvals by the DOE, WASC Senior College and University Commission, and state regulatory and programmatic accreditation bodies. The earliest that Aspen Group would receive required regulatory approvals would be December 2017. To finance the cash portion of the Acquisition and provide appropriate working capital, we are about to close the credit facility referred to in Item 1. “Business.”
The remainder of this management discussion will focus on Aspen University.
Founded in 1987, Aspen University’s mission is to offer any motivated college-worthy student the opportunity to receive a high quality, responsibly priced distance-learning education for the purpose of achieving sustainable economic and social benefits for themselves and their families. Aspen is dedicated to providing the highest quality education experiences taught by top-tier professors - 54% of our adjunct professors hold doctorate degrees.
again. 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. AGI’s primary focus relative to future growth is to target the high growth nursing profession. As of April 30, 2020, 9,710 of 11,444 or 85% of all students across both universities are degree-seeking nursing students.
In
March 2014, Aspen University unveiled a monthly payment plan
aimed at reversingavailable to all students across every online degree program offered by the
college-debt sentence plaguing working-class Americans.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 most bachelor students
(except RN to BSN) the opportunity to pay their tuition
and fees at $250/month,
for 72 months ($18,000), nursing bachelor students (RN to BSN) $250/month for 39 months ($9,750),online master students $325/month,
for 36 months ($11,700) and
online 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.
One
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/MAEd/MSN programs ($325/month), online hybrid Bachelor of Arts in Liberal Studies, Teacher Credentialing tracks approved by the California Commission on Teacher Credentialing ($350/month), and the online hybrid Masters of Nursing-Family Nurse Practitioner (“FNP”) program ($375/month). Effective August 2019, new student enrollments for USU’s FNP monthly payment plan will be offered a $9,000 two-year payment plan ($375/month x 24 months) designed to pay for the first year’s pre-clinical courses only (approximate cost of $9,000). The second academic year of the key differences betweentwo-year FNP program in which students complete their clinical courses (approximate cost of $18,000) is required to be funded through conventional payment methods (either cash, private loans, corporate tuition reimbursement or federal financial aid).
Since 1993, Aspen University has been nationally accredited by the DEAC, a national accrediting agency recognized by the DOE and other publicly-traded, exclusively online, for-profitCHEA. On February 25, 2019, the DEAC informed Aspen University that it had renewed its accreditation for five years to January 2024.
Since 2009, USU has been regionally accredited by WSCUC.
Both universities isare qualified to participate under the fact thatHigher Education Act and the majority of ourFederal student financial assistance programs (Title IV, HEA programs).
AGI Student Population Overview*
AGI’s overall active
degree-seeking students (72%student body (includes both Aspen University and USU) grew 28% year-over-year from 8,932 to 11,444 as of April 30,
2017)2020 and students seeking nursing degrees were
enrolled in Aspen University’s School9,710 or 85% of
Nursing.
Student Population Overview*
Aspen’stotal students at both universities. Active student body is comprised of active degree-seeking student body increased year-over-year by 60% during the fiscal quarter ended April 30, 2017, from 2,932 to 4,681 students.
Our most popular school is our School of Nursing. Aspen’s School of Nursing has grown from 64% of our active degree-seeking student body at April 30, 2016, to 72% at April 30, 2017. Aspen’s School of Nursing grew from 1,882 to 3,363 student’s year-over-year, which represented 85% of Aspen’s active degree-seeking student body growth. At April 30, 2017, Aspen’s School of Nursing included 2,104 active students in the RN to BSN program and 1,259 active students in the MSN program or the RN to MSN Bridge program.
* Note: Aspen has revised its degree seeking student body definition to only report “Active Degree-Seeking Students.” “Active Degree-Seeking Students” are defined as students who were enrolled in a course duringat the quarter reported,end of the fiscal year or are registered for an upcoming course.
Aspen
is using this definition going forward because it is more closely aligned with the definitions used by other publicly traded, for-profit institutions.
New Student Enrollment and Active Degree Seeking Student Body Growth
Since the launch of the BSN marketing campaign in November, 2014, Aspen’s growth rate of new student enrollments has accelerated significantly. Below is a quarterly analysis of the growth of Aspen’s new student enrollments, as well as the growth of the active degree seeking student body over the past eight quarters, including the recent quarter ending April 30, 2017.
| | | | |
| | New Student Enrollments | | Active Degree Seeking Student Body* |
Fiscal quarter end July 31, 2015 | | 410 | | 2,153 |
Fiscal quarter end October 31, 2015 | | 557 | | 2,422 |
Fiscal quarter end January 31, 2016 | | 550 | | 2,704 |
Fiscal quarter end April 30, 2016 | | 572 | | 2,932 |
Fiscal quarter end July 31, 2016 | | 621 | | 3,252 |
Fiscal quarter end October 31, 2016 | | 811 | | 3,726 |
Fiscal quarter end January 31, 2017 | | 825 | | 4,064 |
Fiscal quarter end April 30, 2017 | | 986 | | 4,681 |
Aspen’s School of Nursing is responsible for the vast majority of the new student enrollment and overall active student body growth. Specifically, Aspen’s School of Nursing is now on pace to grow on an annualized basis by approximately 1,500 Active Nursing students – net of student graduations and withdrawals (or ~125/month). Aspen’s BSN program accounts for 72% of that growth, as that program is on pace to increase on an annualized basis by approximately 1,080 students – net (or ~90/month).
Aspen University expects itsUniversity’s total active degree-seeking student body grew 22% year-over-year from 7,784 to continue its rapid growth and reach approximately 7,000 students by the end of the fiscal year, April 30, 2018. Therefore, the university is on pace to increase its active student body by ~2,300 students on an annualized basis in fiscal year 2018 versus the previous pace of ~1,750 active students a year ago, an improvement of 50% year-over-year.
Nursing Revenue Summary
Below is a summary of the nursing active degree-seeking student body as a percentage of the9,487. USU’s total active degree-seeking student body overgrew year-over-year from 1,148 to 1,957 or 70%.
AGI New Student Enrollments
For the fourth quarter of fiscal year 2020, Aspen University accounted for 1,344 new student enrollments delivering overall enrollment growth at Aspen University of 8% year-over-year.Enrollment growth at Aspen University was driven primarily by the Pre-Licensure BSN program as a result of a full quarter of enrollments at both Phoenix, AZ campuses, as compared to the prior year with only one campus open.
USU accounted for 432 new student enrollments in the quarter driven primarily by FNP enrollments, a 36% enrollment increase year-over-year.
For fiscal year 2020, Aspen University year-over-year enrollment grew 26% to 5,953 new student enrollments, and USU year-over-year enrollment grew 62% to 1,715 new student enrollments.
Below is a table reflecting new student enrollments for the past
seven fiscal quarters, as well as the Nursing degree-seeking revenue as a percentage of total revenues.
| | | | | | | | | | | | | | | | |
| | Total Degree-Seeking Active Student Body | | | Nursing Degree- Seeking Active Student Body | | | Nursing Degree-Seeking Active Student Body (%) | | | Nursing Degree-Seeking Active Student Body – Revenue %* | |
Quarter ended October 31, 2015 | | | 2,422 | | | | 1,379 | | | | 57 | % | | | 59 | % |
Quarter ended January 31, 2016 | | | 2,704 | | | | 1,663 | | | | 62 | % | | | 62 | % |
Quarter ended April 30, 2016 | | | 2,932 | | | | 1,882 | | | | 64 | % | | | 67 | % |
Quarter ended July 31, 2016 | | | 3,252 | | | | 2,144 | | | | 66 | % | | | 69 | % |
Quarter ended October 31, 2016 | | | 3,726 | | | | 2,538 | | | | 68 | % | | | 71 | % |
Quarter ended January 31, 2017 | | | 4,064 | | | | 2,899 | | | | 71 | % | | | 71 | % |
Quarter ended April 30, 2017 | | | 4,681 | | | | 3,363 | | | | 72 | % | | | 74 | % |
Monthly Payment Programs Overview
Since the March 2014 monthly payment plan announcement, 65% of courses are now paid through monthly payment methods (based on courses started over the last 90 days). Aspen offers two monthly payment programs, a monthly payment plan in which students make payments every month over a fixed period (36, 39 or 72 months 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).
As of April 30, 2017, Aspen had 2,801 active students paying through a monthly payment plan, and 259 students paying through a monthly installment plan, for a total of 3,060 active students paying tuition through a monthly payment method. Additionally, Aspen is currently on pace to add approximately 160 active students/month net to its monthly payment programs through fiscal year 2018. The total contractual value of monthly payment plan students now exceeds $26.5 million which currently delivers monthly recurring tuition cash payments of approximately $780,000.
five quarters: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| New Student Enrollments by Quarter | | | | | | | | |
| Q4’19 | | Q1’20 | | Q2’20 | | Q3’20 | | Q4’20 |
| Aspen University | 1,243 | | 1,415 | | 1,823 | | 1,371 | | 1,344 |
| USU | 317 | | 514 | | 394 | | 375 | | 432 |
| Total | 1,560 | | 1,929 | | 2,217 | | 1,746 | | 1,776 |
Finally, as a consequence of monthly payment programs becoming the payment method of choice among the majority of Aspen’s degree-seeking student body, our HEA, Title IV Program revenue dropped from 25% of total cash receipts in fiscal year 2016 to approximately 21% for fiscal year 2017.
Marketing Efficiency
Ratio (MER) Analysis
Aspen
AGI has developed a marketing efficiency ratio to continually monitor the performance of its business model.
Revenue per Enrollment (RPE)
Marketing Efficiency Ratio =
—————————————
| | | | | |
| Revenue per Enrollment (RPE) |
| Marketing Efficiency Ratio (MER) = | ————————————— |
| Cost per Enrollment (CPE) |
Cost per Enrollment (CPE)
Cost per Enrollment (CPE)
The Cost per Enrollment measures the
marketingadvertising investment spent in a given
quarter,nine month period, divided by the number of new student enrollments achieved in that given
quarter,nine month period, in order to obtain an average CPE
(or CAC outside of the education sector) for the
quarterperiod 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,
in particular students four years or older, 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.
We created
In the
reporting to trackfourth quarter of fiscal year 2020 the
CPE and RPE starting in 2012 and can accurately predict the CPE and RPE for each new student cohort. Our current CPE/RPE Marketing Efficiency Ratio
is reflected(MER) for our universities, representing revenue-per-enrollment (LTV) over cost-per-enrollment (CPE), improved 38% for Aspen University and 14% for USU, as shown in the below
table.
Quarterly New Student Cohort Actuals Data:
| | | | | |
CPE/RPE Analysis * | 6 Months Out | 12 Months Out | 2 Years Out | 3 Years Out | 4+ Years Out |
| | | | | |
Courses completed | 2.24 | 3.52 | 5.28 | 6.48 | 8 |
| | | | | |
Average RPE | $1,974 | $3,078 | $4,630 | $5,684 | $7,000 |
| | | | | |
RPE % earned | 28% | 44% | 66% | 81% | 100% |
| | | | | |
Marketing efficiency ratio** | 2.4x | 3.8x | 5.7x | 7.0x | 8.6x |
* Projection ** Based on current $768 CPE (six month rolling CPE average) | | | | |
table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter Marketing Efficiency Ratio | | | | | | | | | | |
| Enrollments | | CAC1 | | LTV2 | | Q4 '20 MER | | Q4 '19 MER | | MER % Change |
| Aspen University | 1,344 | | $ | 1,284 | | | $14,058 3 | | 10.9X | | 7.9X | | 38 | % |
| USU | 432 | | $ | 1,423 | | | $17,820 4 | | 12.5X | | 11.0X | | 14 | % |
———————
1Based on 6-month rolling weighted average CAC for each university's enrollments
2Lifetime Value (LTV) of a new student enrollment
3Weighted average LTV for all Aspen University enrollments in the quarter
4LTV for USU's MSN-FNP Program
The Average RPEimproved year-over-year MER results were driven by the decline in cost of enrollment.Compared to the previous year, AGI’s weighted average cost of enrollment declined 10%, from $1,462 to $1,315.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter Weighted Average Cost of Enrollment | | | | | | | | |
| Q4 '19 Enrollments | | Q4 '19 CAC1 | | Q4 '20 Enrollments | | Q4 '20 CAC1 | | CAC % Change |
| Aspen University | 1,243 | | $ | 1,420 | | | 1,344 | | $ | 1,284 | | | (10) | % |
| USU | 317 | | $ | 1,619 | | | 432 | | $ | 1,423 | | | (12) | % |
| Weighted Average | | | $ | 1,462 | | | | | $ | 1,315 | | | (10) | % |
———————
1Based on 6-month rolling average
Bookings Analysis
On a year-over-year basis, fiscal fourth quarter 2020 bookings increased 36% to $26.6 million, delivering a company-wide average revenue per enrollment (APRU) increase of 19% to $14,973. For the full year fiscal 2020, bookings increased 68% to $111.3 million, delivering a company-wide average revenue per enrollment (APRU) increase of 27% to $14,514.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter Bookings1 and Average Revenue Per Enrollment (ARPU) | | | | | | | | |
| Q4 '19 Enrollments | | Q4 '19 Bookings | | Q4 '20 Enrollments | | Q4 '20 Bookings | | % Change Total Bookings & ARPU |
| Aspen University | 1,243 | | $ | 13,942,200 | | | 1,344 | | $ | 18,893,550 | | | | |
| USU | 317 | | $ | 5,648,940 | | | 432 | | $ | 7,698,240 | | | | |
| Total | 1,560 | | $ | 19,591,140 | | | 1,776 | | $ | 26,591,790 | | | 36 | % |
| | | | | | | | | |
| ARPU | | | $ | 12,558 | | | | | $ | 14,973 | | | 19 | % |
1“Bookings” are defined by multiplying Lifetime Value (LTV) per enrollment by new student enrollments for each operating unit. “Average Revenue Per User” (ARPU) is defined by dividing total bookings by total enrollment
ASPEN UNIVERSITY’S PRE-LICENSURE BSN HYBRID (ONLINE/ON-CAMPUS) DEGREE PROGRAM
In July 2018, Aspen University through ANI began its Pre-Licensure Bachelor of Science in Nursing degree program at its initial campus in Phoenix, Arizona. As a result of overwhelming demand in the Phoenix metropolitan area, in January 2019 Aspen University began offering both day (July, November, March semesters) and evening/weekend (January, May, September semesters) programs, equaling six semester starts per year. Moreover, in September 2018, AGI entered into a memorandum of understanding to open a second campus in the Phoenix metropolitan area in partnership with HonorHealth. The initial semester at HonorHealth began in September 2019.
Aspen University'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 current low tuition rates of $150/credit hour for online general education courses and $325/credit hour for online core nursing courses. For students with no prior college credits, the total cost of attendance is less than $50,000.
Aspen University'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 one of two program components: (1) a pre-professional nursing component for students that have less than the required 41 general education credits completed (Year 1), and (2) the nursing core component for students that are ready to participate in the competitive evaluation process for entry (Years 2-3).
Pre-Licensure BSN Program - Future Campus Expansion Plans
Aspen University announced in February 2020 the signing of definitive lease agreements for two new Aspen University Pre-Licensure BSN campus locations in Tampa, Florida and Austin, Texas.
Tampa, Florida Campus
Aspen University has executed a definitive lease agreement for ten years to occupy approximately 30,000 square feet (Suites 150 and 450) of the Tampa Oaks I property located at 12802 Tampa Oaks Boulevard. The building is visible from the intersection of Interstate 75 and East Fletcher Avenue, near the University of South Florida, providing visibility to approximately 126,500 cars per day. Aspen is targeting to begin its first semester at Tampa Oaks I in August 2020 in campus space formerly occupied by the University of Phoenix.
Aspen University has executed an agreement with Bayfront Health, a regional network of seven hospitals and over 1,900 medical professionals on staff serving the residents of Florida’s Gulf Coast to provide required clinical placements for Aspen’s nursing students. In addition, clinical affiliation agreements have been signed in the Tampa metropolitan area with John Hopkins All Children’s Hospital, Inc., Care Connections at Home, Global Nurse Network, LLC and The American National Red Cross.
Prior to commencing its campus operations, Aspen is required to obtain approval by the Florida Board of Nursing and the Florida Commission on Independent Education (FLCIE). To date, Aspen has obtained approval from the Florida Board of Nursing and has received confirmation that we are on the agenda for final approval during the month of July 2020 with the FLCIE. Assuming approval is granted in July 2020, we expect to commence our first semester in Tampa in November 2020.
Austin, Texas Campus
Aspen University has executed a definitive lease agreement for eight years to occupy approximately 22,000 square feet in a portion of the first floor of the Frontera Crossing office building located at 101 W. Louis Henna Boulevard in the Austin suburb of Round Rock. The building is situated at the junction of Interstate 35 and State Highway 45, one of the most heavily trafficked freeway exchanges in the metropolitan area with visibility to approximately 143,362 cars per day. Aspen is targeting to begin its first semester at Frontera Crossing in November 2020 in campus space formerly occupied by The Art Institute.
Aspen has executed a clinical affiliation agreement with Baylor Scott & White Health – Central division, the largest not-for-profit healthcare system in Texas and one of the largest in the United States. Baylor Scott & White includes 48 hospitals, more than 800 patient care sites, more than 7,800 active physicians, over 47,000 employees and the Scott & White Health Plan.
Aspen is working with the Texas Board of Nursing, the Texas Higher Education Coordinating Board, and the Texas Workforce Commission to complete their respective regulatory approval processes and is required to obtain approval from all agencies prior to commencing its campus operations. To date, Aspen has obtained approval from the Texas Higher Education Coordinating Board and the Texas Workforce Commission, and has received confirmation that we are on the agenda for final approval during the month of July, 2020 with the Texas Board of Nursing.
In addition to the Round Rock campus, effective August 1, 2020, Aspen University has executed a sublease to take over the remaining 20-month lease held by sublandlord National American University (NAU) to occupy approximately 7,200 square feet of their campus in the suburb of Georgetown, Texas, which is approximately $7,000. Of10 miles north of Aspen’s future Frontera Crossing campus in the $7,000, $6,400suburb of Round Rock. In exchange, Aspen as subtenant, at no additional cost, shall have the right to utilize all the existing furniture, fixtures and equipment owned by sublandlord and will convey all such furniture, fixtures and equipment to subtenant via a bill of sale for $10.00. Subject to regulatory approval, Aspen University is targeting to commence its first semester in September 2020 and will share the campus with NAU until January 2021 when NAU will have completed the teach-out of their remaining 12 nursing students.
AGI’s Plan for United States University (USU) to Implement MSN-FNP Weekend Immersions in Every Campus Metropolitan Area:
While lab hours to date have been done at USU’s San Diego facility, the rapid growth of the RPE is earned through tuition, withMSN-FNP program has caused AGI to plan to expand the remaining $600lab immersions in multiple locations across the United States. For example, the Company has leased an additional suite on the ground floor of our main campus facility in Phoenix (by the airport) to begin offering weekend immersions for MSN-FNP students in both San Diego and Phoenix. We expect this additional clinical facility in Phoenix to be open this coming September.
Moreover, AGI’s future plans call for the build-out of, on average, earned through miscellaneous fees (includes annual10 exam rooms that will occupy approximately 3,000 square feet in each of its pre-licensure metropolitan areas for USU to implement immersions for its MSN-FNP program. As a result, following regulatory approvals, by the end of calendar year 2020, lab immersions are planned to be conducted in four metropolitan areas for USU MSN-FNP students: San Diego, Phoenix, Austin and Tampa.
AGI’s Tele-Health Affiliation Partnership with American-Advanced Practice Network (A-APN)
On July 7, 2020, the Company announced an affiliation partnership with American-Advanced Practice Network (A-APN), a national clinical network for advanced practice nurses that provides comprehensive health care and nursing services at its outpatient centers and clinical facilities throughout the U.S.
A-APN offers independent nurse practitioners (NPs) a unique, multi-state network or "group practice without walls" with best-in-class technology fee, withdrawal fees,and business support. A-APN was created for and by NPs. Rural and remote members of the network have nationwide, trusted peer cross-coverage for patients. A-APN members deliver clinical care using CareSpan's Digital Care Delivery platform, facilitating care delivery in-person, or at a distance. The platform includes diagnostics, EMR, e-prescribing, remote monitoring, and dynamic documentation.
Through this affiliation, A-APN will appoint an Educational Coordinator to work with USU’s Office of Field Experience to place USU MSN-FNP students with qualified, experienced NP preceptors. We expect that this telehealth partnership will enable MSN-FNP students to complete their required direct care clinical hours with A-APN throughout the COVID-19 crisis and thereafter. As a benefit, the Company doesn't anticipate any delays to their projected graduation
fees, proctored exams, course specific fees, etc.)
Aspen is projecting to average a Marketing Efficiency Ratio of 8.6x, in other words a 8.6x return on our marketing investment. Third-party companies in the higher education industry that manage the Enrollment and Marketing functions on behalf of Universities (also referred to as Managed Services companies) reportedly average 3-4x return on their marketing investments, meaning that Aspen’s business model is currently performing at more than double the efficiency level of that sector.
dates.
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
$5,092,404$21,027,927 at April 30,
2017.2020. 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'sstudent’s receivable account is different depending on how many classes a student takes each period. If a student takes two classes each
eight weekeight-week period while paying $250, $325 or $375 a month, that
student'sstudent’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 8-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 isfunctions as a private loan commitmentretail installment contract with no interest that each student commits to pay over a fixed number of months. IfAspen University students paying tuition and fees through a monthly payment method grew by 9% year-over-year, from 5,404 to 5,888. Those 5,888 students paying through a monthly payment method represent 62% of Aspen University’s total active student stopsbody.
USU students paying tuition and fees through a monthly payment method grew from 758 to 1,273 students sequentially. Those 1,273 students paying through a monthly payment method represent 65% of USU’s total active student body.
Change in Business Mix and Relationship to Accounts Receivable
During fiscal year 2020 revenue from students using the Monthly Payment Plan increased by 34% year over year, but declined as a percentage of total revenue for the second year in a row down from 61.5% in 2019 to 57.2% in 2020, while total revenue increased 44% year over year.
Our two highest lifetime value programs are Aspen University’s Pre-Licensure BSN Program and USU’s MSN-Family Nurse Practitioner Program.These programs are our fastest growing programs and now represent 40% of total annual revenue.We expect the revenue from these programs to continue to grow as a percentage of our total revenue as we continue to expand our campus footprint from 2 to 10+ campuses over the next 3-4 years.
This change in our business mix will have a meaningful change in our accounts receivable and our allowance for doubtful accounts.The BSN Pre-licensure program and the second academic year of the MSN-FNP program require payment prior to the start of each term.This means that person can no longer register for a class. If a student decides to withdrawapproximately 90+% of all revenue from the university, their accountthese two programs will be settled, either through collectionpaid in advance; meaningfully reducing our accounts receivable and the allowance for doubtful accounts as a percentage of their balance or disbursementour total revenue.
As revenue from these programs continue to grow as a percentage of overall revenue, we expect that we will see a corresponding increase in our cashflow from operations that in turn will allow AGI to turn cashflow positive and generate positive free cashflow over time.
In addition to this change in our business mix, we have built upon the existing analysis of our accounts receivable and expanded our analysis to include evaluation of all payment types, student status, and aging within programs.Previously our evaluation was focused primarily on students using the Monthly Payment Plan.As we upgrade our financial systems we expect to gain greater ability to track discrete data faster and easier to support more proactive student engagement that we believe will improve the performance of our student receivable portfolio.
As we identify program and student status specific trends, we will strive to create ways to isolate program specific revenue and accounts receivable activity to gather, analyze and report program specific data and trends.Over time we will use this knowledge to enhance our allowance reserving policies going forward.
By improving visibility into trends earlier we expect to see improvement in overall student performance and a reduction of account delinquencies.
Reserving for Allowance for Doubtful Accounts and Charges to the Allowance
During the fourth quarter we built upon the existing analysis of our accounts receivable and evaluated several segments of our older dated student files.During this analysis we made the determination that receivables for approximately 656 students, amounting to $686,000 for Aspen University and $81,000 of receivables for approximately 39 students for USU were deemed
uncollectible based on the payment detail and student status.These amounts were charged against the allowance for doubtful accounts in the fourth quarter of fiscal year 2020.
As part of the amount owed them. At April 30, 2017, there were 2,801 monthlyaccount receivable analysis discussed earlier, we evaluated our long-term MPP student receivables. The analysis evaluated students in two categories: nursing and non-nursing.Based on our analysis of the payment plandetails and student performance, in the fourth quarter, we elected to charge $152,000 of MPP receivables against the reserve for doubtful accounts. The MPP receivables will be evaluated in conjunction with our updated recovery and collection process and we expect results to be positive.
Our accounts receivable remaining for former students which represented 60%are from 2018 or more recent with the exception of Aspen’s activecertain alumni from our nursing programs. We believe our analysis is appropriate and reasonable. We further believe that we are positioned to focus our enhanced recovery and collections efforts on delinquencies and past due amounts from recent graduates and current enrolled students.
Based on our review of accounts receivable, overall revenue growth trends and changes in our mix of business, we evaluated our reserve methodology and increased our reserve by $720,000 for Aspen University and by $60,005 for USU also in the fourth quarter of fiscal year 2020. Note that the AGI's bad debt allowance started the year at $1.25 million and ended the year at $1.75 million.
As part of the process of evaluating our reserving methodology we also evaluated our processes in student body at April 30, 2017.
accounts, our accounts receivable recovery and collections processes.
We have designed an enhanced recovery and collections process that is expected to begin recovery of student late payments earlier and manage these students more proactively during their course of study and post-graduation for MPP students
We will continue to reserve against our receivables based on revenue growth trends, mix of business and specific trends we identify on a program by program basis. We feel we currently have sufficient reserves against our current student portfolio but we intend to stay vigilant to become aware of external changes that could affect our students ability to meet their obligations such as the continuation of the COVID-19 economic slowdown or other exogenous events and circumstances that could give us reason to make a material change to our current methodology and reserve policy.
Overtime we expect the change in our mix of business together with process improvements and collection enhancements to result in a better managed portfolio of student receivables and improving cash flow from operations.
Relationship Between Accounts Receivable and Revenue
The gross accounts receivable balance for any period is the net effect of the following three factors:
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.
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,
2017,2020, the
Allowanceallowance for
Doubtful Accountsdoubtful accounts was
$328,864$1,758,920 which represents
6.4%7.7% of the
Gross Accounts Receivablegross accounts receivable balance
of $22,786,847, the sum of both short-term and
long-term. It should be noted that this percentage matches the latest Aspen University default rate released by the Department of Education. The reserve was first decreased during the quarter ended April 30, 2017, while settling the program review. Many related students’ accounts were written off against the reserve and management then increased the reserve by $70,000 at April 30, 2017.
long-term receivables.
The Introduction of Long-Term Accounts Receivables
Receivable
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 weekeight-week class. Some students accelerate their program, taking two classes every eight weekeight-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
As a result of the growing acceptance of our monthly payment plans, our long-term accounts receivable balance has grown from $3,085,243 at April 30,
20172019 to $6,701,136 at April 30, 2020. The primary component consists of MPP students who make monthly payments over 36, 39 and
2016, those balances72 months. The average student completes their academic program in 30 months, therefore most of the Company’s accounts receivable are
$657,542short-term. However, when students graduate earlier than the 30 month average completion duration, and
$127,099, respectively.
as students enter academic year two of USU’s MSN-FNP legacy 72 month payment plan, they transition to long-term accounts receivable when their liability increases to over $4,500. Those are the two primary factors that have driven an increase in long-term accounts receivable.
Here is a graphic of both short-term and long-term receivables, as well as contractual value:
| | |
A
| B
| C
| | | | | | |
A | B | C |
Classes Taken
less monthly
| Payments for classes
taken that are greater
than 12 months | Expected classes
to be taken over
balance of program. |
Short-Term
| 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
As
2020 Developments
On January 22, 2020, the Company closed on an underwritten public offering of common stock for net proceeds of approximately $16 million. On January 22, 2020, the Company refinanced its then existing $10 million term loan held by two investors issuing the investors each a $5 million Convertible Note. The key terms of the Convertible Notes are as follows:
•After six months from the issuance date, the lenders have the right to convert the principal into our shares of the Company’s common stock at a conversion price of $7.15 per share;
•The Convertible Notes automatically convert into shares of the Company’s common stock if the average closing price of our common stock is at least $10.725 over a 20 consecutive trading day period;
•The Convertible Notes are due January 22, 2023 or approximately three years from the closing;
•The interest rate of the Convertible Notes is 7% per annum (payable monthly in arrears) compared to 12% under the Term Loans; and
•The Convertible Notes are secured in the same manner as the Term Loans.
On March 1, 2020, the statute of limitations expired to enforce payment on a $50,000 convertible note which matured on March 1, 2014. Therefore, the Company is not liable to pay this loan and treated this as a debt extinguishment in the fourth quarter of fiscal year 2020.
In June 24, 2019, the Company's common stock, which had previously been listed on the Nasdaq Capital Market, was listed on the Nasdaq Global Market.
2020 Consolidated Results
Revenues for the fiscal year 2020 increased to $49,061,080 from $34,025,418 for the fiscal year 2019, an increase of $15,035,662 or 44%. The Company’s focus on its two newest business units that generate the Company’s highest LTV’s, United States University’s MSN-Family Nurse Practitioner (MSN-FNP) and Aspen University’s Pre-Licensure BSN (PL-BSN) programs, now represent 40% of total revenue.
New student enrollments for fiscal year 2020 increased 32% to 7,668 students, and total Bookings rose 68% to $111.3 million, delivering a company-wide APRU increase of 27% to $14,514. The enrollment increases in our Aspen University continues to scale itsDoctor of Nursing Practice (DNP) and PL-BSN, and United States University’s (USU) MSN-FNP programs drove total bookings growth and increased ARPU. The improvement in our MER which remained over 10X at both universities was the result of the consistent year-over-year decline in the cost of enrollment.
AGI’s overall active student body seasonality has become more pronounced. Last(includes both Aspen University and USU) grew 28% year-over-year from 8,932 to 11,444. Aspen University’s total active degree-seeking student body grew 22% year-over-year from 7,784 to 9,487. On a year-over-year basis, USU’s total active student body grew from 1,148 to 1,957 or 70%.
COVID-19 Update
The COVID-19 crisis did not have a material impact on the Company’s financial results for the fourth quarter of fiscal year (FY’2016),2020, as evidenced by our record revenues of $14.1 million. Course starts and persistence amongst our active student body remained at pre-COVID-19 levels throughout the fourth quarter of fiscal year 2020 and during May and June, 2020.
Enrollments in our highest LTV programs remained at pre-COVID-19 levels throughout the fourth quarter of fiscal year 2020, however the Company explained that its first fiscal quarter (May – July) isdid experience a moderate slowdown in Aspen University post-licensure online nursing degree enrollments for approximately a six week period between mid-March and end-April 2020. Subsequently, enrollments across all units in the seasonal low point because it falls duringCompany returned to pre-COVID-19 levels throughout May and June, 2020.
COVID-19 has focused a spotlight on the
summer monthsshortage of nurses in the U.S. and,
therefore students tend to take less courses during that quarterin particular, the need for nurses with four-year and advanced degrees such as USU’s MSN-FNP and Aspen University’s DNP programs. We believe we will be operating in a tailwind environment for many years relative to the
other three fiscal quarters. Conversely, the second fiscal quarter (August – October) is the seasonal high point given students’ ingrained ‘startplanned expansion of
the school year’ mentality.
In reviewing revenues for fiscal year 2017, note that in the first quarter revenues rose sequentially less than $100,000, while revenues increased sequentially at least $250,000 each of the remaining three quarters, with the second quarter rising over $700,000. The Company expects this trend to continue as the business scales, and in fact become more pronounced this fiscal year and in future fiscal years. Specifically, the Company expects revenues to be flat or slightly down from Q4’2017 to Q1’2018 this fiscal year and in future fiscal years. The opposite effect is forecasted to occur in Q2’2018 as revenues are projected to rise into the $5 million range.
our Pre-Licensure BSN hybrid campus business.
For the
Three Months Ended April 30, 2020 Compared to the Three Months Ended April 30, 2019 and Fiscal Year Ended April 30,
20172020 Compared
with theto Fiscal Year Ended April 30,
20162019
For the three months ended April 30, 2020 ("4Q 2020") compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Revenue | | $ | 14,079,193 | | | $ | 3,865,051 | | | 38% | | $ | 10,214,142 | |
Revenue from operations for the fiscal year 2020 increased to $14,079,193 from $10,214,142 for the fiscal year 2019, an increase of $3,865,051 or 38%.
Aspen University’s revenues contributed 71% of total revenue and increased $2,157,982 to $9,988,306 from $7,830,324. AU’s Pre-Licensure BSN program accounted for 17% of overall Company revenues. USU revenues increased $1,707,067 or 72% from $2,383,819 to $4,090,886 and accounted for 29% of overall Company revenues.
During the Company's standard year end revenue testing procedures we determined that our earned revenue report at Aspen University inadvertently wasn't reporting credits issued to withdrawn students for certain de minimus technology fees. Note that all invoices and credits issued to students were and are correct and their student ledger were and accounts are accurate, so this earned revenue reporting error has no effect on our student body. For fiscal year 2020, this incorrect earned fee calculation amounted to $480,303. Consequently, revenue for the fourth fiscal quarter is $14,079,193 rather than the pre-announced revenue estimate of $14.5 million. For fiscal year 2019, this incorrect earned fee calculation amounted to $296,471. This amount was deemed immaterial to our fiscal 2019 revenue and the Company will be recording this adjustment to other expense in our Q1 Fiscal 2021 10-Q.
For the years ended April 30, 2017 (“2017 Period”2020 ("FY 2020") compared to April 30, 2019 (Fiscal Year 2019)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Revenue | | $ | 49,061,080 | | | $ | 15,035,662 | | | 44% | | $ | 34,025,418 | |
Revenue from operations for the fiscal year 2020 increased to $14,246,696$49,061,080 from $8,453,669$34,025,418 for the fiscal year ended April 30, 2016 (“2016 Period”),2019, an increase of $5,793,027$15,035,662 or 69%44%. Aspen’s School of Nursing
Aspen University’s revenues contributed 73% to total revenue and increased $8,572,316 to $35,648,490 from $27,076,174. AU’s Pre-Licensure BSN program accounted for
72%13% of
theoverall full year Company revenues. USU revenues
increased $6,463,344 or 93% from $6,949,245 to $13,412,589 and accounted for
2017 Period.
27% of overall Company revenues.
Cost of Revenues (exclusive of amortization)
The Company’s cost of revenues consists of instructional costsdepreciation and services and marketing and promotional costs.
amortization shown separately below)
For the three months ended April 30, 2020 compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Cost of Revenues (exclusive of depreciation and amortization shown separately below) | | $ | 5,431,182 | | | $ | 1,118,851 | | | 26% | | $ | 4,312,331 | |
| As a percentage of revenue | | 39% | | | | | | 42% |
Instructional Costs and Services
Instructional costs and services for the 2017 Period rosethree months ended April 30, 2020 increased to $2,436,147$2,691,185 or 19% of revenues from $1,730,110$1,974,846 or 19% of revenues for the 2016 Period,three months ended April 30,2019, an increase of $706,037$716,339 or 41%36%. As student enrollment levels continueThe increase was primarily due to rise, the increase in the number of class starts year-over-year and the hiring of additional full-time faculty in our nursing licensure programs; AU's BSN Pre-Licensure and USU's MSN-FNP program.
Aspen anticipates the growth rate inUniversity instructional costs and services represented 18% of Aspen University revenues for three months ended April 30, 2020, while USU instructional costs and services equaled 21% of USU revenues over the same period.
Marketing and Promotional
Marketing and promotional costs for the three months ended April 30, 2020 were $2,739,997 or 19% of revenues compared to lag that$2,337,486 or 23% of overall revenue growth as a resultrevenues for the three months ended April 30, 2019, an increase of $402,511 or 17%.
Aspen University marketing and promotional costs represented 18% of Aspen University revenues for the Company commencing in 2016 with a full-time faculty conversion model which saves approximately $50,000 perthree months ended April 30, 2020, while USU marketing and promotional costs equaled 16% of USU revenues for the same period.
AGI corporate marketing expenses equaled $265,375 for the three months ended April 30, 2020 compared to $201,190 for the three months ended April 30, 2019, an increase of $64,185 or 32%.
Gross profit rose to 59% of revenues or $8,351,112 for the three months ended April 30, 2020, from $5,683,536 or 56% for the three months ended April 30, 2019, an increase of 47% year over year.
Aspen University gross profit represented 60% of Aspen University revenues for each adjunct faculty member that is convertedthe three months ended April 30, 2020, and USU gross profit equaled 63% of USU revenues during the same period.
For the years ended April 30, 2020 (Fiscal Year 2020) compared to full-time status. As projected, April 30, 2019 (Fiscal Year 2019)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Cost of Revenues (exclusive of depreciation and amortization shown separately below) | | $ | 19,135,302 | | | $ | 3,158,084 | | | 20% | | $ | 15,977,218 | |
| As a percentage of revenue | | 39 | % | | | | | | 47 | % |
Instructional Costs and Services
Instructional costs and services for the
2017 Period dropped as a percentagefiscal year 2020 increased to $9,639,323 or 20% of
revenuerevenues from $6,880,668 or 20% of revenues for the fiscal year 2019, an increase of $2,758,655 or 40%. The increase was primarily due to
17%, from 20%the increase in the
2016 Period.
number of class starts year-over-year and the hiring of additional full-time faculty in our nursing licensure programs; AU’s BSN Pre-Licensure and USU’s MSN-FNP program..
Aspen University instructional costs and services represented 18% of Aspen University revenues for the fiscal year 2020, while USU instructional costs and services equaled 21% of USU revenues over the same period.
Marketing and Promotional
Marketing and promotional costs for the 2017 Periodfiscal year 2020 were $2,625,075$9,495,980 or 19% of revenues compared to $1,856,918$9,096,551 or 27% of revenues for the 2016 Period,fiscal year 2019, an increase of $768,157$399,429 or 41%4%. The Company expects
Aspen University marketing and promotional costs represented 18% of Aspen University revenues for the fiscal year 2020, while USU marketing and promotional costs equaled 16% of USU revenues for the same period.
AGI corporate marketing expenses equaled $994,113 for the fiscal year 2020 compared to
rise in future periods given$852,904 for the
planned spend ratefiscal year 2019, an increase
to an average of
$300,000 per month beginning in July 2017. To date, the Company has experienced a strong correlation between marketing spend and new enrollments.
$141,209 or 17%.
Gross profit rose to
61%59% of revenues or
$8,679,248$28,848,786 for the
2017 Periodfiscal year 2020, from
51% of revenues or $4,316,408$17,299,195 for the
2016 Period.
fiscal year 2019, an increase of 67% year over year.
Aspen University gross profit represented 61% of Aspen University revenues for the fiscal year 2020, and USU gross profit equaled 62% of USU revenues during the same period.
Given gross profit for the year increased over $11.5 million year-over-year while revenue increased $15 million, 77% of the fiscal year revenue increase therefore dropped to the gross profit line.
General and Administrative
For the three months ended April 30, 2020 compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| General and Administrative | | $ | 7,716,277 | | | $ | 1,420,452 | | | 23% | | $ | 6,295,825 | |
| As a percentage of revenue | | 53% | | | | | | 62% |
General and administrative costs for the 2017 Periodfiscal year 2020 were $9,087,740$7,716,277 or 53% of revenues compared to $6,403,708$6,295,825 or 62% of revenues during the 2016 Period,fiscal year 2019, an increase of $2,684,032$1,420,452, or 42%23%. DuringThe increase in expense is consistent with our long term expectations that general and administrative costs will grow at approximately half the latter partrate of revenues. There is a portion of these costs that are variable which increased as our revenues increased; but there also is a fixed cost component that tends to grow at a slower rate.
Note that AGI recorded $77,000 of one-time G&A expense items in the 2017 Period, there were increased costs associated with the announcement of a definitive agreement to acquire United States University and other corporate initiatives. This accounted for approximately $440,000 of the increase. In addition, this increase also reflects higher salary and rental costsquarter, primarily related to significant expansionrecruiting fees. Excluding those one-time items, G&A would have increased year-over-year by only $1.3 million, meaning that G&A would have grown at 21% year-over-year.
Aspen University general and administrative costs which are included in the above amount represented 33% of our call center staffAspen University revenues for the three months ended April 30, 2020, while USU general and administrative costs equaled 46% of USU revenues for the same period.
AGI’s general and administrative costs for the three months ended April 30, 2020 and 2019 are included in the above amounts equaled $2,492,208 and $1,727,814, respectively, include corporate employees in the New York corporate office, IT, rent, non-cash AGI stock based compensation, and professional fees (legal, accounting, and Investor Relations), as well as
several supporting academic and operational positions.
Program Review
On February 8, 2017,one-time expense items in the DOE issued a Final Program Review Determination (“FPRD”) letterquarter related to recruiting fees.
For the 2013 program review. The FRPD includes a summary of the non-compliance areasyears ended April 30, 2020 (Fiscal Year 2020) compared to April 30, 2019 (Fiscal Year 2019)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| General and Administrative | | $ | 30,329,520 | | | $ | 6,195,700 | | | 26% | | $ | 24,133,820 | |
| As a percentage of revenue | | 62% | | | | | | 71% |
General and calculations of amounts dueadministrative costs for the 126 students that they reviewed. We had 45 daysfiscal year 2020 were $30,329,520 or 62% of revenues compared to review$24,133,820 or 71% of revenues during the calculationsfiscal year 2019, an increase of $6,195,700, or 26%. In fiscal year 2020, general and electedadministrative expenses, excluding non-recurring items, grew 21% over the prior year. Going forward, the Company expects recurring general and administrative expenses to not appealgrow at approximately half the amount. In accordance with ASC 450-20, we recorded a minimum liabilityrate of $80,000 at January 31, 2017 and recorded the final amount of $298,090 at April 30, 2017. However,revenue. There is a portion of these costs that are variable which increased as our revenues increased; but there also is a fixed cost component that tends to grow at a slower rate.
Aspen University general and administrative costs which are included in the above amount removedrepresented 39% of Aspen University revenues for the fiscal year 2020, while USU general and administrative costs equaled 53% of USU revenues for the same period.
AGI’s general and administrative costs for the fiscal years 2020 and 2019 are included in the above amounts equaled $9,157,729 and $6,136,918, respectively, include corporate employees in the New York corporate office, IT, rent, non-cash AGI stock based compensation, and professional fees (legal, accounting, and Investor Relations), as well as one-time expense items as stated above.
Bad Debt Expense
For the three months ended April 30, 2020 compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Bad debt expense | | $ | 780,005 | | | $ | 406,057 | | | 109% | | $ | 373,948 | |
| As a percentage of revenue | | 5% | | | | | | 4% |
Bad debt expense for the three months ended April 30, 2020 increased to $780,005 from $373,948 for the three months ended April 30, 2019, an increase of $406,057, or 109%. Based on revenue growth trends and review of accounts receivable,
balances that were previously reserved.
the Company evaluated its reserve methodology and increased reserves for Aspen and USU accordingly.
For the years ended April 30, 2020 (Fiscal Year 2020) compared to April 30, 2019 (Fiscal Year 2019)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Bad debt expense | | $ | 1,431,210 | | | $ | 577,202 | | | 68% | | $ | 854,008 | |
| As a percentage of revenue | | 3% | | | | | | 3% |
Bad debt expense for the fiscal year 2020 increased to $1,431,210 from $854,008 for the fiscal year 2019, an increase of $577,202, or 68%. Based on revenue growth trends and review of accounts receivable, the Company evaluated its reserve methodology and increased reserves for Aspen and USU accordingly.
Depreciation and Amortization
For the three months ended April 30, 2020 compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Depreciation and amortization | | $ | 493,268 | | | $ | (99,366) | | | (17)% | | $ | 592,634 | |
| As a percentage of revenue | | 4% | | | | | | 6% |
Depreciation and amortization costs for the
2017 Periodthree months ended April 30, 2020 decreased to
$556,730$493,268 from
$598,303$592,634 for the
2016 Period,three months ended April 30, 2019, an decrease of $99,366, or 17%. The decrease in depreciation expense is primarily due to a decrease
of $41,473 or 7%.
Other Income (Expense)
Other incomein amortization expense at USU relating to intangibles from the AGI acquisition in late 2017.
For the years ended April 30, 2020 (Fiscal Year 2020) compared to April 30, 2019 (Fiscal Year 2019)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Depreciation and amortization | | $ | 2,203,461 | | | $ | 33,363 | | | 2% | | $ | 2,170,098 | |
| As a percentage of revenue | | 4% | | | | | | 6% |
Depreciation and amortization costs for the 2017 Periodfiscal year 2020 increased to $14,336$2,203,461 from $9,985 in$2,170,098 for the 2016 Period,fiscal year 2019, an increase of $4,351$33,363, or 44%2%. InterestThe increase in depreciation expense increasedis mainly due to additional investment in company developed software, partially offset by a decrease in amortization expense at USU from $121,320the AGI acquisition in late 2017. Moreover, AGI has made capital investments in the Phoenix campuses and expects to $337,510, aninvest in other campus locations that will cause depreciation expense to continue to increase of $216,190 or 178%. This increase reflectsin the additional interest paidnear future.
Other Expense, net
For the three months ended April 30, 2020 compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Other expense, net | | $ | (333,711) | | | $ | (84,378) | | | 34% | | $ | (249,333) | |
Other expense, net for the third-partythree months ended April 30, 2020 primarily includes interest expense related to the Company's line of credit and secured loan payable of approximately $400,000 offset by a write off of a $50,000 promissory note.
For the $112,500 write-off ofyears ended April 30, 2020 (Fiscal Year 2020) compared to April 30, 2019 (Fiscal Year 2019)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Other expense, net | | $ | (1,568,832) | | | $ | (1,400,341) | | | 831% | | $ | (168,491) | |
Other expense, net for the
originalfiscal year 2020 includes interest
discount associated withexpense related to the
Company's line of
credit.
credit, secured loan payable and former convertible notes of approximately $1.8 million offset by recovery of approximately $120,000 of previously written off USU accounts receivable and the write off of a $50,000 promissory note.
For the three months ended April 30, 2020 compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Income tax expense | | $ | 10,688 | | | $ | 10,688 | | | NM | | | $ | — | |
________________
NM - Not meaningful
Income taxes expense
(benefit) for the
comparable yearsthree months ended April 30, 2020 was
$10,688 compared to $0
asin for the fiscal year 2019. 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.
either period.
Net Loss
Net loss for 2017 Period was ($1,105,260) as compared to ($2,246,705) for the 2016 Period, a decrease in the loss of $1,141,445 or approximately 51%. Contributing to this lower loss was the increase in revenues in the 2017 period growing at a higher rate than the increase of costs.
For the Quarter Ended April 30, 2017 Compared with the Quarter Ended April 30, 2016
Revenue
Revenue from operations for the quarteryears ended April 30, 2017 (“2017 Quarter”) increased2020 (Fiscal Year 2020) compared to $4,289,230 from $2,670,616 for the quarter ended April 30, 2016 (“2016 Quarter”), an increase of $1,618,614 or 61%. Aspen’s School of Nursing accounted for 74% of the revenues for the 2017 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 2017 Quarter rose to $734,202 from $453,985 for the 2016 Quarter, an increase of $280,217 or 62%. As student enrollment levels continue to rise, Aspen anticipates the growth rate in instructional costs and services to lag that of overall revenue growth as a result of the Company commencing in 2016 with a full-time faculty conversion model which saves approximately $50,000 per year for each adjunct faculty member that is converted to full-time status. Instructional costs and services for the 2017 Quarter remained as a percentage of revenue at 17% as compared to the 2016 Quarter.
Marketing and Promotional
Marketing and promotional costs for the 2017 Quarter were $836,974 compared to $495,607 for the 2016 Quarter, an increase of $341,367 or 69%. The Company expects marketing and promotional costs to rise in future periods given the planned spend rate increase to an average of $300,000 per month beginning in July 2017.
Gross profit rose to 61% of revenues or $2,602,674 for the 2017 Quarter from 59% of revenues or $1,578,785 for the 2016 Quarter.
Costs and Expenses
General and Administrative
General and administrative costs for the 2017 Quarter were $2,859,186 compared to $1,656,756 during the 2016 Quarter, an increase of $1,202,430 or 73%. During this quarter, there were increased costs associated with the announcement of a definitive agreement to acquire United States University and other corporate initiatives. This accounted for approximately $440,000 of the increase. In addition, this increase also reflects higher salary and rental costs related to significant expansion of the call center staff as well as several supporting academic and operational positions.
Program Review
On February 8, 2017, the DOE issued a 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 review the calculations and elected to not appeal the amount. In accordance with ASC 450-20, we recorded a minimum liability of $80,000 at January 31, 2017 and recorded the final expense of $298,090 at April 30, 2017.
Depreciation and Amortization
Depreciation and amortization costs for the 2017 Quarter decreased to $133,948 from $154,990 for the 2016 Quarter, a decrease of $21,042 or 14%.
2019 (Fiscal Year 2019) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Income tax expense | | $ | 51,820 | | | $ | 51,820 | | | NM | | | $ | — | |
Other Expense, net
Other income for the 2017 Quarter increased to $11,288 from $1,908 in the 2016 Quarter, an increase of $9,380 or 492%. Interest expense increased to $161,848 from $19,802, an increase of $142,046 or 717%. This increase reflects the additional interest paid for the third-party line of credit and the $90,000 write-off of the original interest discount associated with the termination of that line of credit.
Income Taxes
Income taxes expense
(benefit) for the
comparable yearsfiscal year 2020 was
$51,820 compared to $0
asin for the fiscal year 2019. 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.
either period.
For the three months ended April 30, 2020 compared to the three months ended April 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Net loss | | $ | (664,563) | | | $ | 945,360 | | | 59% | | $ | (1,609,923) | |
Net loss allocable to stockholders was $664,563 or net loss per basic share of $0.03 for the 2017 Quarter was ($723,730)three months ended April 30, 2020 as compared to ($108,616)$1,609,923, or net loss per basic share of $0.09 for the 2016 Quarter,three months ended April 30, 2019, a decrease in the loss of $615,114. Although revenues in$945,360, or 59% improvement.
For the 2017 Quarter grew at a higher rate than the increaseyears ended April 30, 2020 (Fiscal Year 2020) compared to April 30, 2019 (Fiscal Year 2019)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | | | | |
| | 2020 | | $ Change | | % Change | | 2019 |
| Net loss | | $ | (5,659,065) | | | $ | 3,619,152 | | | 39% | | $ | (9,278,217) | |
Net loss allocable to stockholders was $5,659,065 or net loss per basic share of
recurring operating costs, the higher non-recurring costs related to the USU Acquisition, legal costs, the settlement of the program review and the termination of the third-party line of credit resulted in a loss$0.29 for the
Quarter.
fiscal year 2020 as compared to$9,278,217, or net loss per basic share of $0.50 for the fiscal year 2019, a decrease in loss of $3,619,152, or 39% improvement.
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 GroupAGI 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.comparisons. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the
excluded items described
excluded items.
below.
Aspen Group defines Adjusted EBITDA as earnings (or loss) from continuing operations before the items in the table below including non-recurring charges
- stock based compensation of
$732,971.$474,324 and non-recurring charges - other of $745,748 in 2020 and non-recurring charges - other of $497,300 in 2019. 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
measuremeasures 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 GroupAGI 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 lossLoss allocable to common shareholders to Adjusted EBITDA, a GAAP financial measure:
| | | | | | | | | | | | |
| | | | | For the Years Ended April 30, | |
| | | | | 2017 | | | 2016 | |
Net loss | | | | | | $ | (1,105,260 | ) | | $ | (2,246,705 | ) |
Interest expense | | | | | | | 337,510 | | | | 111,335 | |
Depreciation & amortization | | | | | | | 556,730 | | | | 598,303 | |
EBITDA (loss) | | | | | | | (211,020 | ) | | | (1,537,067 | ) |
Program review settlement | | | | | | | 323,090 | | | | — | |
Bad debt expense | | | | | | | 44,320 | | | | 170,677 | |
Acquisition expenses | | | | | | | 211,122 | | | | — | |
Warrant buy back expense | | | | | | | 206,000 | | | | — | |
Warrant modification expense | | | | | | | — | | | | 54,554 | |
Non-recurring charges | | | | | | | 732,971 | | | | 548,151 | |
Stock-based compensation | | | | | | | 338,294 | | | | 308,260 | |
Adjusted EBITDA (Loss) | | | | | | $ | 1,644,777 | | | $ | (455,425 | ) |
| | | | | | | | | | | | |
| | | | | For the Quarters Ended April 30, | |
| | | | | 2017 | | | 2016 | |
Net loss | | | | | | $ | (723,730 | ) | | $ | (108,616 | ) |
Interest expense | | | | | | | 161,848 | | | | 17,894 | |
Depreciation & amortization | | | | | | | 133,948 | | | | 154,990 | |
EBITDA (Loss) | | | | | | | (427,934 | ) | | | 64,268 | |
Program review settlement | | | | | | | 298,090 | | | | — | |
Bad debt expense | | | | | | | 70,000 | | | | — | |
Acquisition expenses | | | | | | | 211,122 | | | | — | |
Warrant modification expense | | | | | | | — | | | | 48,554 | |
Non-recurring charges | | | | | | | 230,537 | | | | 106,648 | |
Stock-based compensation | | | | | | | 84,461 | | | | 84,603 | |
Adjusted EBITDA | | | | | | $ | 466,276 | | | $ | 304,073 | |
requirement:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | | | Years Ended April 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net loss | $ | (664,563) | | | $ | (1,609,923) | | | $ | (5,659,065) | | | $ | (9,278,217) | |
| Interest expense | 393,471 | | | 285,437 | | | 1,818,078 | | | 441,961 | |
| Taxes | (10,688) | | | — | | | 51,820 | | | 9,276 | |
| Depreciation & amortization | 493,268 | | | 592,634 | | | 2,203,461 | | | 2,170,098 | |
| EBITDA | 211,488 | | | (731,852) | | | (1,585,706) | | | (6,656,882) | |
| Bad debt expense | 780,005 | | | 373,942 | | | 1,431,210 | | | 854,008 | |
| Stock-based compensation | 300,740 | | | 324,256 | | | 1,641,984 | | | 1,190,385 | |
| Non recurring charges - Stock-based compensation | — | | | — | | | 474,324 | | | — | |
| Non-recurring charges - other | 77,000 | | | 106,589 | | | 745,748 | | | 497,300 | |
| Adjusted EBITDA | $ | 1,369,233 | | | $ | 72,935 | | | $ | 2,707,560 | | | $ | (4,115,189) | |
Aspen University generated $9.1 million of Adjusted EBITDA for fiscal 2020 and $3.1 million of Adjusted EBITDA for fiscal Q4 2020.
USU generated Adjusted EBITDA of $1.4 million during fiscal 2020 and Adjusted EBITDA of $689 thousand for fiscal Q4 2020.
Aspen Group corporate generated Adjusted EBITDA of $(7.8) million for fiscal 2020 and Adjusted EBITDA of $(2.4) million for Q4 2020.
Liquidity and Capital Resources
A summary of our cash flows is as follows:
| | | | | | | | |
| | For the Years Ended | |
| | April 30, | |
| | 2017 | | | 2016 | |
| | | | | | |
Net cash used in operating activities | | $ | (1,488,160 | ) | | $ | (2,444,421 | ) |
Net cash provided by (used in) investing activities | | | (1,713,358 | ) | | | 564,977 | |
Net cash provided by financing activities | | | 5,173,939 | | | | 503,777 | |
Net increase (decrease) in cash | | $ | 1,972,421 | | | $ | (1,375,667 | ) |
| | | | | | | | | | | |
| For the Years Ended April 30, | | |
| 2020 | | 2019 |
| Net cash used in operating activities | $ | (5,748,633) | | | $ | (10,216,014) | |
| Net cash used in investing activities | (3,290,361) | | | | (2,623,043) | |
| Net cash provided by financing activities | 16,978,007 | | | 8,003,744 | |
| Net increase in cash | $ | 7,939,013 | | | $ | (4,835,313) | |
Net Cash Used in Operating Activities
Net cash used in operating activities during the
20172020 Period totaled
($1,488,160)$(5.7) million and resulted primarily from
athe net loss of
operations of ($1,105,260)$(5.7) million, offset by $8.1 million in non-cash items and a
net change$8.2 million decrease in operating assets and
liabilities of ($1,685,244), both offset by non-cash items of $1,302,344.liabilities. The most significant
item change in operating assets and liabilities was an increase
of $2,974,073 in accounts receivable
reflectingof $(8.7) million which is primarily attributed to the
expansion ofgrowth in revenues from students paying through the monthly payment plan. The most significant non-cash
item was $556,730 in Depreciationitems were depreciation and
Amortization.
amortization expense of $2.2 million and stock-based compensation expense of $2.1 million.
Net cash used in operating activities during the
20162019 Period totaled
($2,444,421)$(10.2) million and resulted primarily from
athe net loss of
continuing operations of ($2,246,705)$(9.3) million, offset by $4.4 million in non-cash items and a
net change$5.3 million decrease in operating assets and
liabilities of ($1,379,911), both offset by non-cash items of $1,182,195.liabilities. The most significant
item change in operating assets and liabilities was
($1,292,190)an increase in accounts
receivable.receivable of $6.5 million which is primarily attributed to the growth in revenues from students paying through the monthly payment plan. The most significant non-cash
item was $598,303 in Depreciationitems were depreciation and
Amortization.
amortization expense of $2.2 million and stock-based compensation expense of $1.2 million.
Net Cash Provided By (Used in)Used in Investing Activities
Net cash used in investing activities during the
20172020 Period totaled
($1,713,358), reflecting primarily fixed asset purchases$(3.3) million mostly attributed to investments in the purchase of
$804,558property and
the issuance of a note receivable for $900,000.
equipment as we build up our campuses.
Net cash
provided byused in investing activities during the
20162019 Period totaled
$564,977, reflecting primarily($2.6) million, mostly attributed to investments in the
$1,122,485 releasepurchase of
property and equipment as we built up our
letter of credit by the DOE, offset by fixed asset purchases of $466,884.
campuses in Arizona.
Net Cash Provided By Financing Activities
Net cash provided by financing activities during the
20172020 Period totaled
$5,173,939, reflecting$17.0 million which primarily
reflects proceeds
of $7,500,000 from
anthe Company's 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 terminatedoffering in the fiscal
year ended April 30, 2017.
third quarter.
Net cash provided by financing activities during the 20162019 Period totaled $503,777, reflecting primarily proceeds from warrant exercises$8.0 million which reflects the early repayment of $752,500the remaining outstanding principal of the Convertible Note, issued in connection with the USU acquisition, offset by the reductionproceeds from the senior secured term loans.
Liquidity
The Company had cash and cash equivalents of
our lineapproximately $15.2 million on July 2, 2020, and approximately $3.7 million of
credit of $242,206.
Liquidity and Capital Resource Considerations
Historically, our primary source of liquidity isrestricted cash. In addition to its cash, receipts from tuition and the issuances of debt and equity securities. The primary uses of cash are payroll related expenses, professional expenses and instructional and marketing expenses. On April 7, 2017, the Company raised $7,500,000 throughalso had access to the issuance of 2,000,000 common shares.$5 million Revolving Credit Facility, which is undrawn at April 30, 2020 and currently remains undrawn. The net proceeds of $6,996,000 were partially used to terminate the third-party line of credit with an outstanding balance of approximately $2,150,000 and the repayment of approximately $1,300,000 under notes held by the Company’s CEO. Accrued interest was paid on all retirements.
As of July 24, 2017, the Company had a cash balance of approximately $2.2 million. With the cash from the Company’s $7.5 million equity raise, the growth in the Company revenues, improving operating margins, and the cash from our new credit facility, the Company believes that it has sufficient cash to allow the Companyresources to meet its operational expenditures as our business is currently operatingworking capital needs for at least the next 12 months.
Included in cash and cash equivalents are proceeds of $1.1 million from the June 5, 2020 exercise of stock purchase warrants and $847,000 from current and former employee option exercises. Employee funds received for payroll taxes to be remitted from these option exercises were approximately $546,000, and are included in restricted cash
At April 30, 2020, the Company has $17.56 million remaining available under its shelf registration statement on Form S-3 (File No. 333-224230), which is set to expire in April 2021.
For each new campus, the Company expects to spend $750,000 to $1.0 million of capital. Approximately $350,000 to $500,000 will be in the form of letters of credit to facilitate the leases. These letters of credit wind down over three to four years in accordance with the lease agreements. Approximately $500,000 will be spent on property build out, furniture and fixtures and other equipment for labs and clinical classrooms.
Our cash balances are kept liquid to support our growing infrastructure needs. The majority of our cash is concentrated in large financial institutions.
The Company has analyzed its liquidity position and believes its current resources are adequate to meet anticipated liquidity
needs for the next 12 months.
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.
The monthly payment plan represents 60% 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.
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 appliesAGI establishes reserves to its receivables based upon an estimate of the risk presented by the
program within the university, student status, payment type and age of
the receivables and student status.receivables. 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.
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 14 to the consolidated financial statements included herein for additional description of
The Company did not have any related party transactions
that had a material effect on our consolidated financial statements.
in fiscal year 2020.
Off Balance Sheet Arrangements
We do
The Company does not
engage inhave any
activities involving variable interest entities or off-balance sheet
arrangements.
arrangements as of April 30, 2020.
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 the expected launch of Aspen University’s Florida and Texas campusesand the expected rate of subsequent campus openings, the expected effect of telehealth partnership with A-APN, our planned USU lab immersion expansions, the impact of bookings, our estimates concerning Lifetime Value, the expected launch of phase two of our in-house CRM and the anticipated effects of such launch on persistence rates and Lifetime Value, future expansion of our operating margins, the anticipated increase in competition, including as the result of the COVID-19 pandemic, our expected ability to cost-effectively drive prospective student leads internally, our future ability to provide lower costs per enrollment, the expected growth in student body, projections with respectour future revenues from the Aspen University’s Pre-Licensure BSN Program and USU’s MSN-FNP Program, the expected changes to our marketing efficiency ratio,accounts receivable and allowance for doubtful accounts, our anticipated increase in cash flow from operations, the completion ofexpected increase in the Acquisitionfuture general and integration of USUadministrative costs,the near-term continued increase in the depreciation expense, the expected capital expenditures related to new campus openings, and future 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 areinclude our ability to obtain the necessary regulatory approvals to launch our future campuses in a timely fashion or at all, unanticipated issues with, and delays in, launching phase two of our in-house CRM and the continued ability of the CRM to perform as expected, continued high demand for nurses, the continued effectiveness of our marketing efforts, the effectiveness of our collection efforts and process improvements, national and local economic factors including the substantial impact of the COVID-19 pandemic on the economy, the competitive impact from the trend of major non-profit universities using online education, unfavorable regulatory changes, and our failure to continue obtaining enrollments at low acquisition costs and keeping teaching costs down.Further information on the risks and uncertainties affecting our business is contained in thePart I. Item 1A. – Risk Factors above.Factors. 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 offinancial statements and the other information required by this Item can be found beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
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.
Management’s Annual 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) inInternal Control-Integrated Framework as issued in 2013. In evaluating our information technology controls, management also used components of the framework contained in the Control Objectives for Information and Related Technology, which was developed by the Information Systems Audit and Control Association’s IT Governance Institute, as a complement to the COSO internal control framework. Based on that evaluation,these evaluations, our management concluded that our internal control over financial reporting was effective based on thatthese criteria. 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.
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 reportingreporting.
ITEM 9B. OTHER INFORMATION.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the
20172020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended April 30,
2017.
2020.
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-documents)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 20172020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended April 30, 2017.2020.
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 20172020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended April 30, 2017.2020.
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 20172020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended April 30, 2017.2020.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference to our Proxy Statement for the
20172020 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended April 30,
2017.
2020.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
| |
(a)
| Documents filed as part of the report.
|
| | |
| (1)
| (a)Documents filed as part of the report. (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.
EXHIBIT INDEX | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | | | | | Filed or Furnished Herewith | | Exhibit # | | Exhibit Description | | Form | | Date | | Number | | | | | Certificate of Incorporation, as amended | | 10-K | | 7/9/2019 | | 3.1 | | | | | Bylaws, as amended | | 10-Q | | 3/15/2018 | | 3.2 | | | | | Description of securities registered under Section 12 of the Exchange Act of 1934 | | 10-K | | 7/9/2019 | | 4.1 | | | | | 2012 Equity Incentive Plan, as amended* | | 10-Q | | 3/15/2018 | | 10.11 | | | | | Amendment No. 10 to the 2012 Equity Incentive Plan | | 8-K | | 3/22/2018 | | 10.1 | | | | | Aspen Group, Inc. 2018 Equity Incentive Plan* | | DEF 14A | | 10/31/2018 | | Annex A | | | | | Amendment No. 1 to the Aspen Group, Inc. 2018 Equity Incentive Plan* | | DEF 14A | | 11/5/2019 | | Annex A | | | | | Employment Agreement dated November 2, 2016 - Michael Mathews* | | 10-Q | | 3/9/2017 | | 10.1 | | | | | Employment Agreement dated November 24, 2014 - Gerard Wendolowski* | | 10-K | | 7/28/2015 | | 10.19 | | | | | Employment Agreement dated June 11, 2017 – St. Arnauld* | | 10-K | | 7/25/2017 | | 10.5 | | | | | Employment Agreement dated November 1, 2019 – Anne McNamara* | | | | | | | | Filed | | | Employment Agreement between the Company and Frank J. Cotroneo dated December 2, 2019* | | 8-K | | 12/5/2019 | | 10.1 | | | | | Employment Agreement between the Company and Robert Alessi dated December 1, 2019* | | 8-K | | 12/5/2019 | | 10.2 | | | | | Form of Restricted Stock Unit Agreement | | | | | | | | Filed | | | Form of Restricted Stock Unit Agreement – price based vesting | | | | | | | | Filed | | | Form of Stock Option Agreement | | | | | | | | Filed | | | Securities Purchase Agreement, dated as of July 19, 2018, by and between Aspen Group, Inc. and ESL | | 8-K | | 7/19/2018 | | 10.1 | | | | | Loan Agreement, dated November 5, 2018 | | 8-K | | 11/5/2018 | | 10.1 | | | | | Revolving Promissory Note, dated November 5, 2018 | | 8-K | | 11/5/2018 | | 10.2 | | | | | Warrant to purchase 92,049 shares of common stock, dated November 5, 2018 | | 8-K | | 11/5/2018 | | 4.1 | | | | | Form of Term Promissory Note and Security Agreement dated March 6, 2019 | | 10-Q | | 3/11/2019 | | 10.1 | | | | | Form of Loan Agreement, dated March 6, 2019 | | 10-Q | | 3/11/2019 | | 10.2 | | | | | Form of Intercreditor Agreement, dated March 6, 2019 | | 10-Q | | 3/11/2019 | | 10.3 | | | | | Form of Warrant for the Purchase of 100,000 shares of common stock, dated March 6, 2019 | | 10-Q | | 3/11/2019 | | 10.4 | | | | | Amended and Restated Revolving Promissory Note and Security Agreement, dated March 6, 2019 | | 10-Q | | 3/11/2019 | | 10.5 | | | | | Form of Amended and Restated Convertible Promissory Note and Security Agreement dated January 22, 2020 | | 8-K | | 1/23/2020 | | 10.1 | | | | | Form of Amended and Restated Revolving Promissory Note and Security Agreement dated January 22, 2020 | | 8-K | | 1/23/2020 | | 10.2 | | | | | Form of Investors/Registration Rights Agreement dated January 22, 2020 | | 8-K | | 1/23/2020 | | 10.3 | | | | | Form of Loan Agreement dated January 15, 2020 | | 10-Q | | 3/10/2020 | | 10.7 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subsidiaries | | | | | | | | Filed | | | Consent of Independent Registered Public Accounting Firm | | | | | | | | Filed | | | Certification of Principal Executive Officer (302) | | | | | | | | Filed | | | Certification of Principal Financial Officer (302) | | | | | | | | Filed | | | Certification of Principal Executive and Principal Financial Officer (906) | | | | | | | | Furnished** | | 101.INS | | Inline XBRL Instance Document (the instance document
does not appear in the accompanying Index to Consolidated Financial StatementsInteractive Data File because
its XBRL tags are filed herewith in response to this Item.embedded within the Inline XBRL
document) |
| | | | | | | | Filed | | 101.SCH | (2)
| Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information isInline XBRL Taxonomy Extension Schema Document
| | | | | | | | Filed | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | Filed | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | Filed | | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | Filed | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | Filed | | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in the consolidated financial statements or notes included in this report.Exhibit 101) | | | | | | | | |
| | | | (3)
| Exhibits. See the Exhibit Index.
|
——————
* 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. + 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.
ITEM 16. FORM 10-K SUMMARY. Not applicable.
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. | | | | | | | | | | | | | | | Aspen Group, Inc. | | | | | | Date: July 25, 2017 7, 2020 | By:
| By: | /s/ Michael Mathews | | | | | Michael Mathews | | | | | Chief Executive Officer | | | | | (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | Signature
| | Title
| | Date
| | | | | | | | | | | | Signature | | Title | | Date | | | | | | | /s/ Michael Mathews | | Principal Executive Officer and Director | | July 25, 2017 7, 2020 | Michael Mathews | | | | | | | | | | /s/ Janet Gill Frank J. Cotroneo | | Chief Financial Officer and Director | | July 25, 2017 7, 2020 | Janet Gill
Frank J. Cotroneo | | (Principal Financial Officer) | | | | | | | | /s/ Dr. Michael D’Anton Robert Alessi | | Director
Chief Accounting Officer | | July 25, 2017 7, 2020 | Dr. Michael D’Anton
Robert Alessi | | (Principal Accounting Officer) | | | | | | | | | /s/ Norman Dicks | | Director | | July 7, 2020 | Norman Dicks | | | | | | | | | | | | Director
| | | /s/ C. James Jensen | | Director | | July 7, 2020 | | C. James Jensen | | | | | | | | | | | /s/ Andrew Kaplan | | Director | | July 25, 2017 7, 2020 | Andrew Kaplan | | | | | | | | | | /s/ Malcolm MacLean IV | | Director | | July 25, 2017 7, 2020 | Malcolm MacLean IV | | | | | | | | | | | /s/ Sanford Rich | | Director | | July 7, 2020 | Sanford Rich | | | | | | | | | | /s/ Dr. John Scheibelhoffer
| | Director
| | July 25, 2017
| Dr. John Scheibelhoffer
| | | | | | | | | | | | Director
| | | Rick Solomon
| | | | |
Aspen Group, Inc. and Subsidiaries Index
Table of Contents to Consolidated Financial Statements | | | | | Page
| | | | Financial Statements
| | Page Number | Consolidated Financial Statements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aspen Group, Inc. and Subsidiaries (the “Company”) as of April 30, 20172020 and 2016,2019, 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, 2017. 2020, and the related notes (collectively referred to as the “consolidated financial statements”). 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended April 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements 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 Public Company Accounting Oversight Board (United States). 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. Anmisstatement, whether due to error or fraud.The Company is not required to have, nor were we engaged to perform, an audit includesof internal control over financial reporting.As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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 supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. 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 opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aspen Group, Inc. and Subsidiaries as of April 30, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the two years in the period ended April 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
opinions.
/ s// Salberg & Company, P.A.
We have served as the Company’s auditor since 2012
2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328 Phone: (561) 995-8270•995-8270 • Toll Free: (866) CPA-8500•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
ASPEN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | Assets | | | | | | | | | | | | | | Current assets: | | | | | | | Cash | | $ | 2,756,217 | | | $ | 783,796 | | Accounts receivable, net of allowance of $328,864 and $449,946, respectively | | | 4,434,862 | | | | 2,051,934 | | Prepaid expenses | | | 133,531 | | | | 123,055 | | Promissory note receivable | | | 900,000 | | | | — | | Other receivables | | | 81,464 | | | | 819 | | Accrued interest receivable | | | 8,000 | | | | — | | Total current assets | | | 8,314,074 | | | | 2,959,604 | | | | | | | | | | | Property and equipment: | | | | | | | | | Call center equipment | | | 53,748 | | | | 79,199 | | Computer and office equipment | | | 103,649 | | | | 67,773 | | Furniture and fixtures | | | 255,984 | | | | 114,964 | | Software | | | 2,131,344 | | | | 2,567,383 | | | | | 2,544,725 | | | | 2,829,319 | | Less accumulated depreciation and amortization | | | (1,090,010 | ) | | | (1,680,687 | ) | Total property and equipment, net | | | 1,454,715 | | | | 1,148,632 | | Courseware, net | | | 145,477 | | | | 194,932 | | Accounts receivable, secured - related party, net of allowance of $625,963, and $625,963, respectively | | | 45,329 | | | | 45,329 | | Long term accounts receivable | | | 657,542 | | | | 127,099 | | Other assets | | | 56,417 | | | | 31,175 | | | | | | | | | | | Total assets | | $ | 10,673,554 | | | $ | 4,506,771 | |
(Continued)
| | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Assets | | | | | | | | | Current assets: | | | | | Cash and cash equivalents | $ | 14,350,554 | | | $ | 8,316,285 | | | Restricted cash | 3,556,211 | | | 1,651,467 | | | Accounts receivable, net of allowance of $1,758,920 and $1,247,031, respectively | 14,326,791 | | | 10,656,470 | | | Prepaid expenses | 941,671 | | | 410,745 | | | Other receivables | 23,097 | | | 2,145 | | | Other current assets | 173,090 | | | — | | | Total current assets | 33,371,414 | | | 21,037,112 | | | | | | | Property and equipment: | | | | | Computer equipment and hardware | 649,927 | | | | 521,395 | | | Furniture and fixtures | 1,007,099 | | | | 915,936 | | | Leasehold improvements | 867,024 | | | | 204,545 | | | Instructional equipment | 301,842 | | | | 260,790 | | | Software | 6,162,770 | | | | 4,314,198 | | | 8,988,662 | | | | 6,216,864 | | | Less: accumulated depreciation and amortization | (2,841,019) | | | | (1,825,524) | | | Total property and equipment, net | 6,147,643 | | | | 4,391,340 | | | Goodwill | 5,011,432 | | | 5,011,432 | | | Intangible assets, net | 7,900,000 | | | 8,541,667 | | | Courseware, net | 111,457 | | | 161,930 | | | Accounts receivable, secured - net of allowance of $625,963, and $625,963, respectively | 45,329 | | | 45,329 | | | Long term contractual accounts receivable | 6,701,136 | | | 3,085,243 | | | Debt issue cost, net | 182,418 | | | 300,824 | | | Operating lease right of use asset, net | 6,412,851 | | | — | | | Deposits and other assets | 355,831 | | | 629,626 | | | | | | | Total assets | $ | 66,239,511 | | | $ | 43,204,503 | |
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 756,701 | | | $ | 9,201 | | Accrued expenses | | | 262,911 | | | | 176,974 | | Deferred revenue | | | 1,354,989 | | | | 1,013,434 | | Refunds due students | | | 310,576 | | | | 110,883 | | Deferred rent, current portion | | | 11,200 | | | | 2,345 | | Convertible notes payable, current portion | | | 50,000 | | | | 50,000 | | Total current liabilities | | | 2,746,377 | | | | 1,362,837 | | | | | | | | | | | Bank line of credit | | | — | | | | 1,783 | | Loan payable officer - related party | | | — | | | | 1,000,000 | | Convertible notes payable - related party | | | — | | | | 300,000 | | Warrant derivative liability | | | 52,500 | | | | — | | Deferred rent | | | 34,437 | | | | 29,169 | | Total liabilities | | | 2,833,314 | | | | 2,693,789 | | | | | | | | | | | Commitments and contingencies - See Note 10 | | | — | | | | — | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | Common stock, $0.001 par value; 250,000,000 shares authorized, 13,520,679 issued and 13,504,012 outstanding at April 30, 2017, 11,263,179 issued and 11,246,512 outstanding at April 30, 2016 | | | 13,504 | | | | 11,247 | | Additional paid-in capital | | | 33,607,423 | | | | 26,477,162 | | Treasury stock (16,667 shares) | | | (70,000 | ) | | | (70,000 | ) | Accumulated deficit | | | (25,710,687 | ) | | | (24,605,427 | ) | Total stockholders’ equity | | | 7,840,240 | | | | 1,812,982 | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 10,673,554 | | | $ | 4,506,771 | |
| | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Liabilities and Stockholders’ Equity | | | | | | | | | Current liabilities: | | | | | Accounts payable | $ | 1,505,859 | | | $ | 1,699,221 | | | Accrued expenses | 537,413 | | | 651,418 | | | Deferred revenue | 3,712,994 | | | 2,456,865 | | | Refunds due students | 2,371,844 | | | 1,174,501 | | | Deferred rent, current portion | — | | | 47,436 | | | Convertible note payable | — | | | 50,000 | | | Operating lease obligations, current portion | 1,683,252 | | | | — | | | Other current liabilities | 545,711 | | | 270,786 | | | Total current liabilities | 10,357,073 | | | 6,350,227 | | | | | | | Convertible notes, net of discount of $1,550,854 | 8,449,146 | | | — | | | Senior secured loan payable, net of discount of $353,328 | — | | | 9,646,672 | | | Operating lease obligations | 5,685,335 | | | | — | | | Deferred rent | — | | | 746,176 | | | Total liabilities | 24,491,554 | | | 16,743,075 | | | | | | | Commitments and contingencies - See Note 10 | | | | | | | | | Stockholders’ equity: | | | | | Preferred stock, $0.001 par value; 1,000,000 shares authorized, 0 issued and outstanding at April 30, 2020 and April 30, 2019 | — | | | — | | | Common stock, $0.001 par value; 40,000,000 shares authorized, 21,770,520 issued and 21,753,853 outstanding at April 30, 2020 18,665,551 issued and 18,648,884 outstanding at April 30,2019 | 21,771 | | | 18,666 | | | Additional paid-in capital | 89,505,216 | | | 68,562,727 | | | Treasury stock (16,667 shares) | (70,000) | | | (70,000) | | | Accumulated deficit | (47,709,030) | | | (42,049,965) | | | Total stockholders’ equity | 41,747,957 | | | 26,461,428 | | | | | | | Total liabilities and stockholders’ equity | $ | 66,239,511 | | | $ | 43,204,503 | |
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | For the Years Ended | | | | | | | April 30, | | | | | | | | | | 2017 | | | 2016 | | | | | | | | | | | | | | | Revenues | | | | | | | | | | $ | 14,246,696 | | | $ | 8,453,669 | | | | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | | | | Cost of revenues (exclusive of depreciation and amortization shown separately below) | | | | | | | | | | | 5,061,222 | | | | 3,587,028 | | General and administrative | | | | | | | | | | | 9,087,740 | | | | 6,403,708 | | Program review settlement expense | | | | | | | | | | | 323,090 | | | | — | | Depreciation and amortization | | | | | | | | | | | 556,730 | | | | 598,303 | | Total operating expenses | | | | | | | | | | | 15,028,782 | | | | 10,589,039 | | | | | | | | | | | | | | | | | | | Operating loss | | | | | | | | | | | (782,086 | ) | | | (2,135,370 | ) | | | | | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | | | | | Other income | | | | | | | | | | | 14,336 | | | | 9,985 | | Interest expense | | | | | | | | | | | (337,510 | ) | | | (121,320 | ) | Total other expense, net | | | | | | | | | | | (323,174 | ) | | | (111,335 | ) | | | | | | | | | | | | | | | | | | Loss before income taxes | | | | | | | | | | | (1,105,260 | ) | | | (2,246,705 | ) | | | | | | | | | | | | | | | | | | Income tax expense (benefit) | | | | | | | | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net loss | | | | | | | | | | $ | (1,105,260 | ) | | $ | (2,246,705 | ) | | | | | | | | | | | | | | | | | | Net loss per share allocable to common stockholders – basic and diluted | | | | | | | | | | $ | (0.10) | | | $ | (0.21) | | | | | | | | | | | | | | | | | | | Weighted average number of common shares outstanding: basic and diluted | | | | | | | | | | | 11,558,112 | | | | 10,703,733 | |
| | | | | | | | | | | | | Years Ended April 30, | | | | 2020 | | 2019 | | Revenues | $ | 49,061,080 | | | $ | 34,025,418 | | | | | | | Operating expenses | | | | | Cost of revenues (exclusive of depreciation and amortization shown separately below) | 19,135,302 | | | 15,977,218 | | | General and administrative | 30,329,520 | | | 24,133,820 | | | Bad debt expense | 1,431,210 | | | | 854,008 | | | Depreciation and amortization | 2,203,461 | | | 2,170,098 | | | Total operating expenses | 53,099,493 | | | 43,135,144 | | | | | | | Operating loss | (4,038,413) | | | (9,109,726) | | | | | | | Other income (expense): | | | | | Other income | 249,246 | | | 276,189 | | | Interest expense | (1,818,078) | | | (444,680) | | | Total other expense, net | (1,568,832) | | | (168,491) | | | | | | | Loss before income taxes | (5,607,245) | | | (9,278,217) | | | | | | | Income tax expense | 51,820 | | | — | | | | | | | Net loss | $ | (5,659,065) | | | $ | (9,278,217) | | | | | | | Net loss per share allocable to common stockholders - basic and diluted | $ | (0.29) | | | $ | (0.50) | | | | | | | Weighted average number of common shares outstanding: basic and diluted | 19,708,708 | | | 18,409,459 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE
YEARS ENDED APRIL 30, 20162020 AND 2017
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | Additional | | | | | | | | | Stockholders' | | | | Common Stock | | | Paid-In | | | Treasury | | | Accumulated | | | Equity | | | | Shares | | | Amount | | | Capital | | | Stock | | | Deficit | | | | | Balance at April 30, 2015 | | | 10,687,800 | | | $ | 10,688 | | | $ | 25,016,213 | | | $ | (70,000 | ) | | $ | (22,358,722 | ) | | $ | 2,598,179 | | | | | | | | | | | | | | | | | | | | | | | | | | | Offering cost for professional services from private placement | | | — | | | | — | | | | (679 | ) | | | — | | | | — | | | | (679 | ) | Stock-based compensation | | | — | | | | — | | | | 308,260 | | | | — | | | | — | | | | 308,260 | | Conversion of convertible debt into shares | | | 132,588 | | | | 133 | | | | 302,178 | | | | — | | | | — | | | | 302,311 | | Repurchase of shares under settlement agreement | | | (3,500 | ) | | | (4 | ) | | | (5,834 | ) | | | — | | | | — | | | | (5,838 | ) | Shares issued for services rendered | | | 25,000 | | | | 25 | | | | 50,375 | | | | — | | | | — | | | | 50,400 | | Warrants exercised for cash | | | 404,624 | | | | 405 | | | | 752,095 | | | | — | | | | — | | | | 752,500 | | Warrant modification | | | — | | | | — | | | | 54,554 | | | | — | | | | — | | | | 54,554 | | Net loss, for the year ended April 30, 2016 | | | — | | | | — | | | | — | | | | — | | | | (2,246,705 | ) | | | (2,246,705 | ) | Balance at April 30, 2016 | | | 11,246,512 | | | | 11,247 | | | | 26,477,162 | | | | (70,000 | ) | | | (24,605,427 | ) | | | 1,812,982 | | | | | | | | | | | | | | | | | | | | | | | | | | | Attorney fees associated with Registration Statement | | | — | | | | — | | | | (4,017 | ) | | | — | | | | — | | | | (4,017 | ) | Shares issued for cash | | | 2,000,000 | | | | 2,000 | | | | 7,498,000 | | | | — | | | | — | | | | 7,500,000 | | Fees associated with equity raise | | | — | | | | — | | | | (560,261) | | | | — | | | | — | | | | (560,261) | | Stock-based compensation | | | — | | | | — | | | | 338,294 | | | | — | | | | — | | | | 338,294 | | Warrant buyback | | | 208,333 | | | | 208 | | | | (194,208 | ) | | | — | | | | — | | | | (194,000 | ) | Shares issued for services rendered | | | 49,167 | | | | 49 | | | | 52,453 | | | | — | | | | — | | | | 52,502 | | Net loss, for the year ended April 30, 2017 | | | — | | | | — | | | | — | | | | — | | | | (1,105,260 | ) | | | (1,105,260 | ) | Balance at April 30, 2017 | | | 13,504,012 | | | $ | 13,504 | | | $ | 33,607,423 | | | $ | (70,000 | ) | | $ | (25,710,687 | ) | | $ | 7,840,240 | |
2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | | | Additional
Paid-In
Capital | | Treasury
Stock | | Accumulated
Deficit | | Total
Stockholders'
Equity | | Shares | | Amount | | | | | | | | | | Balance as of April 30, 2018 | 18,333,521 | | | $ | 18,334 | | | $ | 66,557,005 | | | $ | (70,000) | | | $ | (32,771,748) | | | $ | 33,733,591 | | | Stock-based compensation | — | | | — | | | 1,190,385 | | | — | | | — | | | 1,190,385 | | | Common stock issued for cashless stock options exercised | 111,666 | | | 112 | | | (112) | | | — | | | — | | | — | | | Common stock issued for stock options exercised for cash | 56,910 | | | 56 | | | 128,145 | | | — | | | — | | | 128,201 | | | Common stock issued for cashless warrant exercise | 119,594 | | | 120 | | | (120) | | | — | | | — | | | — | | | Common stock issued for warrants exercised for cash | 43,860 | | | 44 | | | 99,956 | | | — | | | — | | | 100,000 | | | Warrants issued with debt financing | — | | | — | | | 615,587 | | | — | | | — | | | 615,587 | | | Amortization of warrant based cost issued for services | — | | | — | | | 1,713 | | | — | | | — | | | 1,713 | | | Purchase of treasury stock, net of broker fees | — | | | — | | | — | | | (7,370,000) | | | — | | | (7,370,000) | | | Re-sale of treasury stock, net of broker fees | — | | | — | | | — | | | 7,370,000 | | | — | | | 7,370,000 | | | Other offering costs | — | | | — | | | (29,832) | | | — | | | — | | | (29,832) | | | Net loss | — | | | — | | | — | | | — | | | (9,278,217) | | | (9,278,217) | | | Balance as of April 30, 2019 | 18,665,551 | | | $ | 18,666 | | | $ | 68,562,727 | | | $ | (70,000) | | | $ | (42,049,965) | | | $ | 26,461,428 | | | | | | | | | | | | | | | Stock-based compensation | — | | | | — | | | | 2,116,309 | | | | — | | | | — | | | | 2,116,309 | | | Amortization of restricted stock issued for service | — | | | | — | | | | 122,250 | | | | — | | | | — | | | | 122,250 | | | Common stock issued for cashless stock options exercised | 190,559 | | | | 191 | | | | (191) | | | | — | | | | — | | | | — | | | Common stock issued for stock options exercised for cash | 277,678 | | | | 278 | | | | 962,372 | | | | — | | | | — | | | | 962,650 | | | Common stock issued for cashless warrant exercise | 76,929 | | | | 77 | | | | (77) | | | | — | | | | — | | | | — | | | Amortization of warrant based cost issued for services | — | | | | — | | | | 36,719 | | | | — | | | | — | | | | 36,719 | | | Restricted stock issued for services, subject to vesting | 144,803 | | | | 144 | | | | (144) | | | | — | | | | — | | | | — | | | Common stock issued for equity raise, net of underwriter costs of $1,222,371 | 2,415,000 | | | | 2,415 | | | | 16,042,464 | | | | — | | | | — | | | | 16,044,879 | | | Other offering costs | — | | | | — | | | | (51,282) | | | | — | | | | — | | | | (51,282) | | | Beneficial conversion feature on Convertible Debt | — | | | | — | | | | 1,692,309 | | | | — | | | | — | | | | 1,692,309 | | | Common stock short swing reclamation | — | | | | — | | | | 21,760 | | | | — | | | | — | | | | 21,760 | | | Net loss | — | | | | — | | | | — | | | | — | | | | (5,659,065) | | | | (5,659,065) | | | Balance as of April 30, 2020 | 21,770,520 | | | | $ | 21,771 | | | | $ | 89,505,216 | | | | $ | (70,000) | | | | $ | (47,709,030) | | | | $ | 41,747,957 | |
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | For the Years ended | | | | April 30, | | | | 2017 | | | 2016 | | Cash flows from operating activities: | | | | | | | Net loss | | $ | (1,105,260 | ) | | $ | (2,246,705 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | Bad debt expense | | | 44,320 | | | | 170,677 | | Depreciation and amortization | | | 556,730 | | | | 598,303 | | Stock-based compensation | | | 338,294 | | | | 308,260 | | Warrant modification expense | | | — | | | | 54,554 | | Amortization and write-off of origination fees | | | 112,500 | | | | — | | Amortization of prepaid shares for services | | | 52,500 | | | | — | | Warrant buyback expense | | | 206,000 | | | | — | | Common shares and warrants issued for services rendered | | | — | | | | 50,400 | | Changes in operating assets and liabilities: | | | | | | | | | Accounts receivable | | | (2,974,073 | ) | | | (1,292,190 | ) | Other receivables | | | (64,263 | ) | | | — | | Prepaid expenses | | | (10,474 | ) | | | (1,462 | ) | Accrued interest receivable | | | (8,000 | ) | | | — | | Other assets | | | (25,242 | ) | | | (4,496 | ) | Accounts payable | | | 747,500 | | | | (169,908 | ) | Accrued expenses | | | 85,937 | | | | 5,624 | | Deferred rent | | | 14,123 | | | | 23,763 | | Refunds due students | | | 199,693 | | | | (169,856 | ) | Deferred revenue | | | 341,555 | | | | 228,615 | | Net cash used in operating activities | | | (1,488,160 | ) | | | (2,444,421 | ) | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Purchases of property and equipment | | | (804,558 | ) | | | (466,884 | ) | Purchases of courseware | | | (8,800 | ) | | | (90,624 | ) | Issuance of note receivable | | | (900,000 | ) | | | — | | Increase in restricted cash | | | — | | | | 1,122,485 | | Net cash provided by (used in) investing activities | | | (1,713,358 | ) | | | 564,977 | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Retirement of shares | | | — | | | | (5,838 | ) | Proceeds of warrant exercise | | | — | | | | 752,500 | | Repayment of convertible note payable – related party | | | (300,000 | ) | | | — | | Repayment of loan payable – officer – related party | | | (1,000,000 | ) | | | — | | Proceeds from equity raise | | | 7,500,000 | | | | — | | Disbursements related to equity raise | | | (560,261 | ) | | | — | | Warrant buyback | | | (400,000 | ) | | | — | | Borrowing of bank line of credit | | | 247,000 | | | | | | Payments for bank line of credit | | | (248,783 | ) | | | (242,206 | ) | Borrowing of third party line of credit | | | 2,150,000 | | | | — | | Payments to third party line of credit | | | (2,150,000 | ) | | | — | | Third party line of credit financing costs | | | (60,000 | ) | | | — | | Disbursements for registration statement | | | (4,017 | ) | | | (679 | ) | Net cash provided by financing activities | | | 5,173,939 | | | | 503,777 | | | | | | | | | | | Net increase (decrease) in cash | | | 1,972,421 | | | | (1,375,667 | ) | Cash at beginning of year | | | 783,796 | | | | 2,159,463 | | Cash at end of year | | $ | 2,756,217 | | | $ | 783,796 | |
| | | | | | | | | | | | | Years Ended April 30, | | | | 2020 | | 2019 | | Cash flows from operating activities: | | | | | Net loss | $ | (5,659,065) | | | $ | (9,278,217) | | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | Bad debt expense | 1,431,210 | | | 854,008 | | | Depreciation and amortization | 2,203,461 | | | 2,170,098 | | | Stock-based compensation | 2,116,309 | | | 1,190,385 | | | Warrants issued for service | 36,719 | | | 1,713 | | | Loss on asset disposition | 3,918 | | | — | | | Lease expense | 162,127 | | | — | | | Amortization of debt discounts | 261,128 | | | 40,881 | | | Amortization of debt issue costs | 118,406 | | | 54,247 | | | Gain on debt extinguishment | (50,000) | | | | — | | | Non-cash payments to investor relation firm | 122,250 | | | — | | | Cash paid to settle convertible debt | — | | | 60,932 | | | Amortization of prepaid shares for services | — | | | 8,285 | | | Changes in operating assets and liabilities: | | | | | Accounts receivable | (8,717,424) | | | (6,477,948) | | | Prepaid expenses | (530,926) | | | (219,624) | | | Other receivables | (20,952) | | | 182,424 | | | Other current assets | (173,090) | | | — | | | Deposits and other assets | 273,792 | | | (44,660) | | | Accounts payable | (193,362) | | | (527,993) | | | Accrued expenses | 138,467 | | | (7,436) | | | Deferred rent | — | | | 663,376 | | | Refunds due students | 1,197,343 | | | 358,660 | | | Deferred revenue | 1,256,129 | | | 642,729 | | | Other liabilities | 274,927 | | | 112,126 | | | Net cash used in operating activities | (5,748,633) | | | (10,216,014) | | | | | | | Cash flows from investing activities: | | | | | Purchases of courseware and accreditation | (13,851) | | | (91,522) | | | Purchases of property and equipment | (3,276,510) | | | (2,531,521) | | | Net cash used in investing activities | (3,290,361) | | | (2,623,043) | | | | | | | Cash flows from financing activities: | | | | | Proceeds from sale of common stock net of underwriter costs | 16,044,879 | | | — | | | Disbursements for equity offering costs | (51,282) | | | (29,832) | | | Common stock short swing reclamation | 21,760 | | | — | | | Proceeds of stock options exercised and warrants exercised | 962,650 | | | 228,201 | | | Proceeds of senior secured loan | — | | | 10,000,000 | | | Repayment of convertible note payable | — | | | (2,000,000) | | | Offering costs paid on debt financing | — | | | (100,000) | | | Closing costs of senior secured loans | — | | | (33,693) | | | Cash paid to settle convertible debt | — | | | (60,932) | | | Purchase of treasury stock | — | | | (7,370,000) | | | Re-sale of treasury stock | — | | | 7,370,000 | | | Net cash provided by financing activities | 16,978,007 | | | 8,003,744 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| | | | | | | | | | | For the Years ended | | | | April 30, | | | | 2017 | | | 2016 | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Cash paid for interest | | $ | 297,151 | | | $ | 104,326 | | Cash paid for income taxes | | $ | — | | | $ | — | | | | | | | | | | | Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | Common stock issued for services | | $ | 52,502 | | | $ | 50,400 | | Warrant derivative liability | | $ | 52,500 | | | $ | — | | Common stock issued from conversion of notes | | $ | — | | | $ | 302,311 | |
| | | | | | | | | | | | | Years Ended April 30, | | | | 2020 | | 2019 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 7,939,013 | | | $ | (4,835,313) | | | Cash and cash equivalents and restricted cash at beginning of year | 9,967,752 | | | 14,803,065 | | | Cash and cash equivalents and restricted cash at end of year | $ | 17,906,765 | | | $ | 9,967,752 | | | | | | | Supplemental disclosure cash flow information: | | | | | Cash paid for interest | $ | 1,208,285 | | | $ | 118,217 | | | Cash paid for income taxes | $ | 51,820 | | | $ | — | | | | | | | Supplemental disclosure of non-cash investing and financing activities: | | | | | Common stock issued for services | $ | 178,477 | | | $ | 29,809 | | | Beneficial conversion feature on convertible debt | $ | 1,692,309 | | | $ | — | | | Gain on debt extinguishment | $ | 50,000 | | | $ | — | | | Right-of-use lease asset offset against operating lease obligations | $ | 8,988,525 | | | $ | — | | | Warrants issued as part of revolving credit facility | $ | — | | | $ | 255,071 | | | Warrants issued as part of senior secured term loans | $ | — | | | $ | 360,516 | |
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheet that sum to the same such amounts shown in the consolidated statement of cash flows: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Cash and cash equivalents | $ | 14,350,554 | | | $ | 8,316,285 | | | Restricted cash | 3,556,211 | | | 1,651,467 | | | Total cash and cash equivalents and restricted cash | $ | 17,906,765 | | | $ | 9,967,752 | |
The accompanying notes are an integral part of these consolidated financial statements.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 20162019
Note 1. Nature of Operations and Liquidity
Aspen Group, Inc. (together with its subsidiary,subsidiaries, the “Company”"Company" or “Aspen”"AGI") is aan education technology holding company. Its subsidiaryAGI has 5 subsidiaries, Aspen University Inc. (“("Aspen University”University" or AUI") was organized in 1987. On March 13, 2012, the Company was recapitalized in a reverse merger. 1987, Aspen Nursing of Arizona, Inc. ("ANAI"), Aspen Nursing of Florida, Inc. ("ANFI"), Aspen Nursing of Texas, Inc. ("ANTI"), and United States University Inc. ("United States University" or "USU"). ANAI, ANFI and ANTI are subsidiaries of Aspen University Inc. All references to the Company or Aspen before March 13, 2012 are“Company”, “AGI”, “Aspen Group”, “we”, “our” and “us” refer to Aspen University.
Aspen’s mission isGroup, Inc., unless the context otherwise indicates.
AGI leverages its education technology infrastructure and expertise to offer any motivated college-worthy studentallow its two universities, Aspen University and United States University, to deliver on the opportunity to receive a high quality, responsibly priced distance-learning education for the purposevision of achieving sustainable economic and social benefits for themselves and their families. Aspen is dedicated to providing the highest quality education experiences taught by top-tier professors - 54% of our adjunct professors hold doctorate degrees.
making college affordable again. 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 2014,AGI’s primary focus relative to future growth is to target the high growth nursing profession. As of April 30, 2020, 9,710 of 11,444 or 85% of all students across both universities are degree-seeking nursing students. Since 1993, 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.
On November 10, 2014, Aspen University announced the Commission on Collegiate Nursing Education (“CCNE”) has granted accreditation to its Bachelor of Science in Nursing program (RN to BSN) until December 31, 2019.
Since 1993, we have been nationally accredited by the Distance Education and Accrediting Council (“DEAC”), a national accrediting agency recognized by the U.S.United States Department of Education (the “DOE”) and Council for Higher Education Accreditation ("CHEA"). On February 25, 2015,2019, the DEAC informed Aspen University that it had renewed its accreditation for five years through January 2024.
Since 2009, USU has been regionally accredited by WASC Senior College and University Commission (“WSCUC”). Both universities are qualified to January, 2019.
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 resulting from the ownership change of control in connection with the acquisition by AGI on December 1, 2017.
COVID-19 Update
The COVID-19 crisis did not have a material impact on the Company’s financial results for the fourth quarter of fiscal year 2020, as evidenced by our record revenues of $14,079,193. Course starts and persistence amongst our active student body remained at pre-COVID-19 levels throughout the fourth quarter of fiscal year 2020 and during May and June, 2020. Enrollments in our highest LTV programs remained at pre-COVID-19 levels throughout the fourth quarter of fiscal year 2020, however the Company did experience a moderate slowdown in Aspen University post-licensure online nursing degree enrollments for approximately a six week period between mid-March and end-April 2020. Subsequently, enrollments across all units in the Company returned to pre-COVID-19 levels throughout May and June, 2020. COVID-19 has focused a spotlight on the shortage of nurses in the U.S. and, in particular, the need for nurses with four-year and advanced degrees such as USU’s MSN-FNP and Aspen University’s DNP programs. We believe we will be operating in a tailwind environment for many years relative to the planned expansion of our Pre-Licensure BSN hybrid campus business.
At April 30, 2017,2020, the Company had a cash and cash equivalents balance of $2,756,217.
On April 22, 2016,$14,350,554 with an additional $3,556,211 in restricted cash.
In March 2019, the Company entered into 2 loan agreements for a principal amount of $5 million each and received total proceeds of $10 million. In connection with the loan agreements, the Company issued 404,624 shares of common stock18 month senior secured promissory notes, with the right to two of its warrant holders in exchange for their early exercise of warrants at a reduced exercise price of $1.86 per share. The Company received gross proceeds of $752,500 from these exercises. As a conditionextend the term of the warrant holders exercising their warrants, Mr. Michael Mathews,loans for an additional 12 months by paying a 1% one-time extension fee. On January 22, 2020, the Company’s Chairman of the Board and Chief Executive Officer, converted a $300,000 note and in connection with this conversion, Mr. Mathews was issued 132,588 shares of common stock.Term Loans were exchanged for convertible notes maturing January 22, 2023. (See Note 11)
In August 2016,9)
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 On January 22, 2020, the Company closed on a $3 million credit line with its largest shareholder. The credit line, whose terms include a 12% per annum interest rate on drawn funds and a 2% per annum interest rate on undrawn funds, will extend through August 2019. The Company initially drew down $750,000 underan underwritten public offering of common stock for the line, of which approximately $248,000 was used to repay a secured line of credit with a bank and then drew down $500,000 in January 2017. In March 2017 the company drew an additional $900,000. The entire balance of $2,150,000 plus interest was paid off and the letter of credit was terminated on April 7, 2017. (See Note 10)
On April 7, 2017, the Company raised $7,500,000 through the issuance of 2,000,000 common shares. The net proceeds of $6,996,000 were usedapproximately $16 million. The public offering was a condition precedent to retire the third party lineclosing of the refinancing described above.
On November 5, 2018 the Company entered into a three-year $5,000,000 senior revolving credit the loan payable and convertible loan and support working capital needs.facility. There is currently 0 outstanding balance under that facility. (See Note 11)9)
The Company paid $1,160,000 of principal and accrued interest related to a convertible note on December 3, 2018, as explained in Note 9. Also, on February 25, 2019, the Company paid a total of $1,080,000, which included the remaining $1 million of principal, $19,068 of accrued unpaid interest and settlement expense of $60,932 to prepay the debt and eliminate the holder’s conversion option. This was the final payment for the acquisition of USU and was originally due on December 1, 2019. (See Note 9).
F-9
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended April 30, 20172020 the Company provided net cash of $7,939,013, which included using $5,748,633 in operating activities. The Company has analyzed its liquidity position and 2016believes its current resources are adequate to meet anticipated liquidity needs for the next 12 months.
Note 2. Significant Accounting Policies
Principles
Basis of Presentation and Consolidation
The Company prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). The consolidated financial statements include the accounts of Aspen Group, Inc.AGI and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use
Accounting Estimates Management of Estimates
Thethe Company is required to make certain estimates, judgments and assumptions during the preparation of the unauditedits consolidated financial statements in conformityaccordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to makeGAAP. These estimates, judgments and assumptions that affectimpact the reported amounts inof assets, liabilities, revenue and expenses and the unaudited consolidated financial statements.related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Significant estimates in the accompanying unaudited consolidated financial statements include the allowance for doubtful accounts and other receivables, the valuation of collateral on certain receivables, the carrying value of right-of-use ("ROU") assets, estimates of the fair value of assets acquired and liabilities assumed in a business combination, depreciable lives of property and equipment, amortization periods and valuation of courseware, intangibles and software development costs, valuation of beneficial conversion features in convertible debt, valuation of derivative instruments,goodwill, valuation of loss contingencies, valuation of stock-based compensation and the valuation allowance on deferred tax assets.
Cash, and 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 ASU No 2016-18 – In November 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (ASU 2016- 18), requiring restricted cash and cash equivalents atto be included with cash and cash equivalents of the statement of cash flows. The standard is effective for fiscal years, and interim periods with those year, beginning December 15, 2017, with early adoption permitted. The Company adopted this ASU on May 1, 2018. As of April 30, 20172020, restricted cash of $3,556,211 consists of $692,293 which is collateral for letters of credit for the Aspen University and USU facility operating leases and $255,708, which is collateral for a letter of credit issued by the bank and $71,828 which is related to USU’s receipt of Title IV funds and is required by the Department of Education ("DOE") in
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2016. 2020 and 2019 connection with the change of control of USU. Also included are funds held for students for unbilled educational services that were received from Title IV and non-Title IV programs totaling $2,536,382. As an administrator of these Title IV program funds, the Company is required to maintain and restrict these funds pursuant to the terms of the program participation agreement with the U.S. Department of Education. Restricted cash as of April 30, 2019 was $1,651,467 and includes $120,864 which is collateral for the USU facility operating lease and $255,708, which is collateral for a letter of credit issued by the bank and $71,828 which is related to USU’s receipt of Title IV funds and is required by DOE in connection with the change of control of USU. Also included are funds held for students for unbilled educational services that were received from Title IV and non-Title IV programs totaling $1,203,067 which were previously included in Cash and cash equivalents. See Prior Period Reclassifications below for additional information. Concentration of Credit Risk 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, 2017.2020. As of April 30, 20172020 and April 30, 2016,2019, there were deposits totaling $2,687,461$16,742,603 and $1,224,863$9,359,208 respectively, held in two separate institutions greaterthaninstitutions. Goodwill and Intangibles Goodwill currently represents the federally insured limits.
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. We have selected an April 30th annual goodwill impairment test date. 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.
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 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.
F-10
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 2016
2019 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 AspenAGI 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. TheAs of April 30, 2020, the monthly payment plan represents approximately 65%57% of the payments that are made by students.students, making it the most common payment type. 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’sAGI’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 willAGI may have to return all or a portion of the Title IV funds to the DOE and the student will owe AspenAGI all amounts incurred that are in excess of the amount of financial aid that the student earned, and that AspenAGI is entitled to retain. In this case, AspenAGI must collect the receivable using the student’s second payment option.
For accounts receivable from students, AspenAGI 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. AspenAGI determines the adequacy of its allowance for doubtful accounts using a general reservean allowance method based on an analysis of its historical bad debt experience, current economic trends, and the aging of the accounts receivable and studenteach student’s status. Aspen applies reservesAGI estimates the amounts to its receivablesincrease the allowance based upon an estimate of the risk presented by the age of the receivables and student status. AspenAGI writes off accounts receivable balances at the time the balances are deemed uncollectible. AspenAGI 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, AspenAGI 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, AspenAGI 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. AspenAGI may also record a general allowance as necessary.
Direct write-offs are taken in the period when AspenAGI has exhausted its efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that AspenAGI should abandon such efforts.
(See Note 14) 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 accounts receivable because, 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, 20172020 and 2016,2019, those balances are $657,542$6,701,136 and $127,099,$3,085,243, respectively.
The Company has determined that the long term accounts receivable do not constitute a significant financing component as the list price, cash selling price and promised consideration are equal. Further, the interest free financing portion of the monthly payment plans are not considered significant to the contract. Property and equipment are recorded at cost less accumulated depreciation and amortization.depreciation. Depreciation and amortization areis computed using the straight-line method over the estimated useful lives of the related assets per the following table. | | | Category
| | Depreciation Term
| | | | | | | Call center equipment
Category | | 5 years
Useful Life | Computer and office equipment & hardware | | 53 years
| Software | | 5 years | | Instructional equipment | | 5 years | | Furniture and fixtures | | 7 years | Library (online)
Leasehold improvements | | 3The lesser of 8 years
| Software
| | 5 or the number of years
of the lease term |
F-11
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 2016
2019 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. AmortizationDepreciation is provided for on a straight-line basis over the expected useful life of five years of the internal-use software development costs and related upgrades and enhancements. When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software is ready for its intended use.
Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation and amortization are removed and a gain or loss is recorded in the consolidated statements of operations. Repairs and maintenance costs are expensed in the period incurred.
Courseware
and Accreditation The Company records the costs of courseware and accreditation in accordance with Financial Accounting Standards Board (“FASB”)the FASB Accounting Standards Codification (“ASC”) Topic 350 “Intangibles - Goodwill and Other”.
Generally, costs of courseware creation and enhancement are capitalized. Accreditation renewal or extension costs related to intangible assets 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.
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.
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.
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.additional amortization. The Company expenses any additional payments under its operating leases for taxes, insurance or other operating expenses as incurred.
F-12
In February 2016, FASB issued Accounting Standards Update, or ASU, No. 2016-2, Leases (Topic 842). This standard requires entities to recognize most operating leases on their balance sheets as right-of-use assets with a corresponding lease liability, along with disclosing certain key information about leasing arrangements. The Company adopted the standard effective May 1, 2019 using the cumulative effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company adopted the following practical expedients and elected the following accounting policies related to this standard:
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 2016
2019
•Carry forward of historical lease classification; •Short-term lease accounting policy election allowing lessees to not recognize right-of-use assets and lease liabilities for leases with a term of 12 months or less; and •Not separate lease and non-lease components for office space and campus leases.
The adoption of this standard resulted in the recognition of an initial operating lease right-of-use assets (“ROU’s”) and corresponding lease liabilities of approximately $8.8 million, on the Consolidated Balance Sheet as of May 1, 2019. For presentation purposes, the deferred rent liability is presented as a separate line item at April 30, 2019 and is deducted from the operating lease ROU asset at April 30, 2020. There was no impact to the Company’s net income or liquidity as a result of the adoption of this ASU. Additionally, the standard did not materially impact the Company's consolidated statements of cash flows.
Disclosures related to the amount, timing, and uncertainty of cash flows arising from leases are included in Note 11. Treasury Stock Purchases and sales of treasury stock are accounted for using the cost method. Under this method, shares acquired are recorded at the acquisition price directly to the treasury stock account. Upon sale, the treasury stock account is reduced by the original acquisition price of the shares and any difference is recorded in equity. This method does not allow the company to recognize a gain or loss to income from the purchase and sale of treasury stock. Revenue Recognition and Deferred Revenue
On May 1, 2018, the Company adopted Accounting Standards Codification 606 (ASC 606). ASC 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments. Our adoption of this ASC, resulted in no change to our results of operations or our balance sheet. Revenues consist primarily of tuition and course fees derived from courses taught by the Company online as well as from related educational resources and services that the Company provides to its students, such as access to our online materials and learning management system. Tuitionstudents. Under ASC 606, this 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 imposeinstruction and are not considered 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 itsperformance obligations. Non-tuition related 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 has revenues from students outsideprovided or when the United States and its territories representing 3.3% ofgoods are received by the revenues for the year ended April 30, 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 or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. 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.
student. (See Note 14) 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.
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 $2,625,075$9,495,980 and $1,856,918$9,096,550 for the yearsyear ended April 30, 20172020 and 2016, respectively.
2019, respectively and are included in cost of revenues. General and Administrative
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 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.
F-13
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017 and 2016
All legal costcosts for litigation are charged to expense as incurred.
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.
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.
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. The Company has early adopted FASB ASU 2017-11, which simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when the pricing of a future round of financing is lower. This allows the company to treat such instruments or their embedded features as equity instead of considering them as a derivative. If such a feature is triggered in a stand-alone instrument treated as equity, the value is measured pre-trigger and post-trigger. The difference in these two measurements is treated as a dividend, reducing income. The value recognized as a dividend is not subsequently remeasured, but in instances where the feature is triggered multiple times each instance is recognized. 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 calculateshas early adopted ASU 2018-7, which substantially aligns share based compensation for employees and non-employees as noted below.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 ASU 2018-07 - In June 2018, the fair valueFinancial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718). This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the award onstandard is permitted. The standard will be applied in a retrospective approach for each period presented. The company implemented this standard in February 2019. Business Combinations We include the results of operations of businesses we acquire from the date of grant in the same manner as employee awards, however,respective acquisition. We allocate the awards are revaluedpurchase price of acquisitions to the assets acquired and liabilities assumed 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 valuevalue. The excess of the stock-based award as calculated onpurchase price of an acquired business over 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, andamount assigned to the extent actual results or updated estimates differ from original estimates, such amounts areassets acquired and liabilities assumed is recorded as a cumulative adjustment in the period estimates are revised.
goodwill. We expense transaction costs associated with business combinations as incurred. Net loss per common share is based on the weighted average number of common shares outstanding during each period. Options to purchase 2,096,5502,734,899 and 1,510,5093,408,154 common shares, 643,175 and 0 restricted stock units ("RSUs"), warrants to purchase 912,798566,223 and 2,001,356731,152 common shares, unvested restricted stock of 24,672 and 64,116, and $10,000,000 and $50,000 and $350,000 of convertible debt (convertible into 4,1671,398,601 and 75,5964,167 common shares) were outstanding at April 30, 20172020 and 2016,2019, respectively, but were not included in the computation of diluted net loss per share because the effects would have been anti-dilutive. The options, warrants and convertible debt are considered to be common stock equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive.
F-14
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017 and 2016
The Company operates in one1 reportable segment as a single educational delivery operation using a core infrastructure that serves the curriculum and educational delivery needs of its online and campus students regardless of geography. The Company's chief operating decision makers, its CEOChief 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.
Reclassifications
Certain amounts in the FY2016 balance sheet have been reclassified from Accounts Receivable, Net to Long Term Accounts Receivable to conform to the FY2017 presentation. This reclassification increased Long Term Receivable, in non-current assets by $127,099 and decreased Accounts Receivable in current assets by the same amount in FY2016.
whole. Recent Accounting Pronouncements
Financial Accounting Standards Board, Accounting Standard Updates which are not effective until after April 30, 2017,2020, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
ASU 2014 – 09:
In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue
Prior Period Reclassifications Certain amounts in prior periods have been reclassified to conform to the current year presentation. Restricted cash in fiscal 2020, previously included in cash in fiscal 2019, of $1,203,067 has been reclassified to include funds from: (1) unearned educational services that were received from Contracts with Customers”. The update gives entities a single comprehensive modelTitle IV programs that the Company will expect to usebe earned in reporting information about the amountsubsequent period up to approximately 84%; (2) non-Title IV funds held for students who have withdrawn representing refunds due students up to approximately 12%; and timing(3) other items up to approximately 4% for all periods presented. As an administrator of revenue resulting from contractsthese Title IV program funds, the Company is required to provide goods or servicesmaintain and restrict these funds pursuant to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topicsterms of the Codification. Additionally,program participation agreement with the update would supersede some cost guidanceU.S. Department of Education. See Consolidated Balance Sheets and Cash, Cash equivalents and Restricted cash section above for additional information. Property and equipment categories have been updated to align with the current period presentation for all periods presented. There was no impact to the useful lives of property and equipment at April 30, 2019. The computer and office equipment category has been renamed to computer equipment and hardware, and now includes call center equipment. The instructional equipment and leasehold improvements categories are now separate categories; previously included in Subtopic 605-35, Revenue Recognition – Construction-Typefurniture and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to usersfixtures.
Table of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This updated guidance did not have a material impact on our results of operations, cash flows or financial condition.
ASU 2015-03
In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which changes the presentation of debt issuance costs in financial statements. Under this guidance such costs would be presented as a direct deduction from the related debt liability rather than as an asset. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. This ASU did not have a material impact on its consolidated financial statements.
ASU 2015-08
In May 2015, the FASB issued ASU 2015-08, “Business Combinations (Topic 805) Pushdown Accounting,” which conforms the FASB’s guidance on pushdown accounting with the SEC’s guidance. ASU 2015-08 is effective for annual periods beginning after December 15, 2015. This ASU did not have a material impact on the consolidated financial statements.
F-15
Contents ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 2016
ASU 2016-15
In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-15,2019
Additionally, bad debt expense, which was previously included in general and administrative expense in fiscal 2019 of $854,008, is now reported separately as a component of operating expenses for all periods presented. See Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.This guidance addresses eight specific cash flow issues with the objective of reducing diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows. The Company is required to adopt ASU 2016-15operations for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 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 current assets and current liabilities, but have no net material impact on its consolidated financial statements.
ASU 2016-09
In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-09:"Compensation – Stock Compensation (Topic 718)- Improvements to Employee Share-Based Payment Accounting" which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this ASU did not have a material impact on the consolidated financial statements.
additional information.
Note 3. Accounts Receivable
Accounts receivable consisted of the following at April 30, 20172020 and 2016:
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | | | | | | | | Accounts receivable | | $ | 4,763,726 | | | $ | 2,501,880 | | Long term contractual receivable | | | 657,542 | | | | 127,099 | | Less: Allowance for doubtful accounts | | | (328,864 | ) | | | (449,946 | ) | Accounts receivable, net | | $ | 5,092,404 | | | $ | 2,179,033 | |
2019: | | | | | | | | | | | | | | April 30, | | | | | 2020 | | 2019 | | Accounts receivable | $ | 22,786,847 | | | $ | 14,988,744 | | | Long term contractual accounts receivable | (6,701,136) | | | (3,085,243) | | | Less: Allowance for doubtful accounts | (1,758,920) | | | (1,247,031) | | | Accounts receivable, net | $ | 14,326,791 | | | $ | 10,656,470 | |
Bad debt expense for the years ended April 30, 20172020 and 2016,2019, were $44,320$1,431,210 and $170,677$854,008 respectively.
Note 4. Secured Note and Accounts Receivable – Related Parties
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, 2017 and April 30, 2016, 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, 2017 and 2016
HEMG has 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 Notes 10 and 14)
Note 5.4. Property and Equipment
As property and equipment become fully expired,reach the end of their useful lives, the fully expired asset isassets are written off against the associated accumulated depreciation.depreciation and amortization. There is no expense impact for such write offs. Property and equipment consisted of the following at April 30, 20172020 and April 30, 2016:
| | | | | | | | | | | April 30, | | | April 30, | | | | 2017 | | | 2016 | | Call center hardware | | $ | 53,748 | | | $ | 79,199 | | Computer and office equipment | | | 103,649 | | | | 67,773 | | Furniture and fixtures | | | 255,984 | | | | 114,964 | | Software | | | 2,131,344 | | | | 2,567,383 | | | | | 2,544,725 | | | | 2,829,319 | | Accumulated depreciation and amortization | | | (1,090,010 | ) | | | (1,680,687 | ) | Property and equipment, net | | $ | 1,454,715 | | | $ | 1,148,632 | |
2019: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Computer equipment and hardware | $ | 649,927 | | | $ | 521,395 | | | Furniture and fixtures | 1,007,099 | | | 915,936 | | | Leasehold improvements | 867,024 | | | | 204,545 | | | Instructional equipment | 301,842 | | | | 260,790 | | | Software | 6,162,770 | | | 4,314,198 | | | 8,988,662 | | | 6,216,864 | | | Accumulated depreciation and amortization | (2,841,019) | | | (1,825,524) | | | Property and equipment, net | $ | 6,147,643 | | | $ | 4,391,340 | |
Software consisted of the following at April 30, 20172020 and April 30, 2016:
| | | | | | | | | | | April 30, | | | April 30, | | | | 2017 | | | 2016 | | Software | | $ | 2,131,344 | | | $ | 2,567,383 | | Accumulated amortization | | | (994,017 | ) | | | (1,560,932 | ) | Software, net | | $ | 1,137,327 | | | $ | 1,006,451 | |
2019: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Software | $ | 6,162,770 | | | $ | 4,314,198 | | | Accumulated amortization | (2,049,809) | | | (1,351,193) | | | Software, net | $ | 4,112,961 | | | $ | 2,963,005 | |
Depreciation and Amortizationamortization expense for all Property and Equipment as well as the portion for just software is presented below for the years ended April 30, 20172020 and 2016:
| | | | | | | | | | | For the Years Ended | | | | April 30, | | | | 2017 | | | 2016 | | | | | | | | | Depreciation and Amortization Expense | | $ | 498,476 | | | $ | 529,300 | | | | | | | | | | | Software Amortization Expense | | $ | 447,972 | | | $ | 481,230 | |
2019: | | | | | | | | | | | | | Years Ended April 30, | | | | 2020 | | 2019 | | Depreciation and amortization expense | $ | 1,497,470 | | | $ | 1,002,347 | | | | | | | Software amortization expense | $ | 1,013,466 | | | $ | 684,871 | |
The following is a schedule of estimated future amortization expense of software at April 30, 2017:
| | | | | Year Ending April 30, | | | | 2018 | | $ | 382,783 | | 2019 | | | 299,610 | | 2020 | | | 229,768 | | 2021 | | | 157,321 | | 2022 | | | 67,845 | | Total | | $ | 1,137,327 | |
2020:
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 | | | | | | | | | Year Ending April 30, | | | 2021 | $ | 1,203,497 | | | 2022 | 1,109,903 | | | 2023 | 942,271 | | | 2024 | 639,618 | | | Thereafter | 217,672 | | | Total | $ | 4,112,961 | |
Note 5. USU Goodwill and Intangibles On December 1, 2017, USU acquired United States University and 2016
assumed certain liabilities from Educacion Significativa, LLC (“ESL”). USU 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 certain liabilities of ESL 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. 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 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 assigned an indefinite useful life to the accreditation and regulatory approvals and the trade name and trademarks as it believes 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 the Company intends 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 expense for the year ended April 30, 2020 and for the year ended April 30, 2019 was $641,667 and $1,100,000, respectively.
Intangible assets consisted of the following at April 30, 2020 and April 30, 2019: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Intangible assets | $ | 10,100,000 | | | $ | 10,100,000 | | | Accumulated amortization | (2,200,000) | | | (1,558,333) | | | Net intangible assets | $ | 7,900,000 | | | $ | 8,541,667 | |
Note 6. Courseware
and Accreditation
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 Courseware & accreditation costs capitalized were $8,800 and $90,624$13,851 for the yearsyear ended April 30, 20172020 and 2016 respectively. During September 2015, $1,970,670$91,522 for the year ended April 30, 2019. As courseware and accreditation reach the end of fully amortized courseware wasits useful life, it is written off against the accumulated amortization. In subsequent periods, certain other fully expired courseware has been written off in the same way. There is no expense impact for such write-offs.
Courseware and accreditation consisted of the following at April 30, 20172020 and April 30, 2016:
| | | | | | | | | | | April 30, | | | April 30, | | | | 2017 | | | 2016 | | Courseware | | $ | 271,777 | | | $ | 319,267 | | Accumulated amortization | | | (126,300 | ) | | | (124,335 | ) | Courseware, net | | $ | 145,477 | | | $ | 194,932 | |
2019: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Courseware | $ | 287,813 | | | | $ | 325,987 | | | Accreditation | 59,350 | | | | 57,100 | | | Accumulated amortization | (235,706) | | | | (221,157) | | | Courseware and accreditation, net | $ | 111,457 | | | | $ | 161,930 | |
Amortization expense of courseware and accreditation for the years ended April 30, 20172020 and 2016:
| | | | | | | | | | | For the | | | | Years Ended April 30, | | | | 2017 | | | 2016 | | | | | | | | | Amortization Expense | | $ | 58,254 | | | $ | 69,003 | |
2019: | | | | | | | | | | | | | Years Ended April 30, | | | | 2020 | | 2019 | | Amortization expense | $ | 64,324 | | | $ | 67,751 | |
The following is a schedule of estimated future amortization expense of courseware and accreditation at April 30, 2017:
| | | | | Year Ending April 30, | | | | 2018 | | $ | 50,942 | | 2019 | | | 49,469 | | 2020 | | | 35,627 | | 2021 | | | 8,663 | | 2022 | | | 776 | | Total | | $ | 145,477 | |
| | | | | | | | | Year Ending April 30, | | | 2021 | $ | 40,454 | | | 2022 | 31,935 | | | 2023 | 26,116 | | | 2024 | 11,743 | | | Thereafter | 1,209 | | | Total | $ | 111,457 | |
Note 7. 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 $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, 2020, and April 30, 2019, the balance of the account receivable, net of allowance, was $45,329. 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 10.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019
Note 7.8. Accrued Expenses
expenses Accrued expenses consisted of the following at April 30, 20172020 and 2016:
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | | | | | | | | Accrued compensation | | $ | 122,520 | | | $ | 91,070 | | Accrued Interest | | | 13,566 | | | | 71,214 | | Other accrued expenses | | | 126,825 | | | | 14,690 | | Accrued expenses | | $ | 262,911 | | | $ | 176,974 | |
2019: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Accrued compensation | $ | — | | | $ | 226,805 | | | Accrued interest | 49,863 | | | 135,115 | | | Other accrued expenses | 487,550 | | | 289,498 | | | Accrued expenses | $ | 537,413 | | | $ | 651,418 | |
Note 8. Loan Payable Officer – Related Party
9. Debt Convertible Notes Due January 22, 2023 On June 28, 2013,January 22, 2020, the Company received $1,000,000issued $5 million in principal amount convertible notes (“Convertible Notes”) to each of 2 lenders in exchange for the 2 $5 million notes issued under senior secured term loans entered into in 2019 as discussed below (the “Term Loans”). The Company recorded a loanbeneficial conversion feature on these Convertible Notes of $1,692,309. The closing of the refinancing was conditioned upon the Company conducting an equity financing resulting in gross proceeds to the Company of at least $10 million. On January 22, 2020, the Company closed on an underwritten public offering for net proceeds of approximately $16 million (See Note 12) and the condition precedent to the closing of the refinancing was satisfied. The key terms of the Convertible Notes are as follows:
•After six months from the issuance date, the lenders have the right to convert the principal into our shares of the Company’s Chief Executive Officer. This loan was forcommon stock at a termconversion price of 6 months with an annual$7.15 per share; •The Convertible Notes automatically convert into shares of the Company’s common stock if the average closing price of our common stock is at least $10.725 over a 20 consecutive trading day period; •The Convertible Notes are due January 22, 2023 or approximately three years from the closing; •The interest rate of 10%, payable monthly. Through variousthe Convertible Notes is 7% per annum (payable monthly in arrears); and •The Convertible Notes are secured.
The former notes under the Senior Secured Term Loans were due in September 2020 and were subject to a one-year extension and the payment of an extension fee for each note extensions,of $50,000 (total of $100,000). The Company also paid each lender $40,400 at closing of the debt was extendedConvertible Notes offering to May 5, 2018. There was no accounting effect for these extensions. The loan plus accrued interest was paid in full on April 7, 2017cover taxes they would incur as part of the $7,500,000 equity raise. (See Note 11.)
F-18
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017note exchange and 2016
Note 9.paid their legal fees arising from the re-financing. In connection with refinancing of the Term Loans, on January 22, 2020, the Company also entered into an Investors/Registration Rights Agreement with the lenders whereby, upon request of the lenders on or after June 22, 2020, the Company must file and obtain and maintain the effectiveness of a registration statement registering the shares of common stock issued or issuable upon conversion of the Convertible Notes.
The Company’s obligations under the Convertible Notes are secured by a first priority lien in certain deposit accounts of the Company, all current and future accounts receivable of Aspen University and USU, certain of the deposit accounts of Aspen University and USU, and all of the outstanding capital stock of Aspen University and USU (the “Collateral”).
On March 6, 2019, in connection with entering into the Loan Agreements, the Company also entered into an intercreditor agreement (the “Intercreditor Agreement”) among the Company, the Lenders and the Foundation, individually. The Intercreditor Agreement provides among other things that the Company’s obligations under this agreement, and the security interests in the Collateral granted pursuant to, the Loan Agreements and the Amended and Restated Facility Agreement shall rankpari passu to one another. The Security Agreement was amended onJanuary 22, 2020 to give effect to the Convertible Note issuances. Convertible Notes – Related Party and Debenture Payable
On February 29, 2012, a loan payable of $50,000 was converted into a two-year convertible promissory note, bearing interest of 0.19% per annum. Beginning March 31, 2012, the note was convertible into shares of common sharesstock of the Company at the rateconversion
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 price of $12.00 per share.share (taking into account the one-for-12 reverse stock split of the Company’s common stock). The Company evaluated the convertible note and determined that, for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common sharesstock on the note issue date. This loan (now a convertible promissory note) was originally due in February 2014. The amount due under On March 1, 2020, the statute of limitations expired on this note has been reserved for payment upon the note being tendered toand can no longer be enforced. As such, the Company by the note holder.
On March 13, 2012, the Company’s CEO loaned the Company $300,000wrote off this liability and receivedrecognized a convertible promissory note due March 31, 2013, bearing interest at 0.19% per annum. The note is convertible into common shares of the Company at the rate of $12.00 per share upon five days written notice to the Company. The Company evaluated the convertible note and determined that, for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common sharesgain on the note issue date. Through various note extensions, the debt was extended to May 5, 2018. There was no accounting effect for these modifications. On April 22, 2016, the CEO converted the loan and accrued interest into common stock. The loan was converted at $2.28 per share and the Company issued 132,588 shares of common stock. The note modification was treated as a debt extinguishment under ASC 470-50. There was no gain or loss on this debt extinguishment. The Company evaluatedwhich is included in other income of $50,000 during the convertible note and determined that, for the embedded conversion option there was no beneficial conversion value to record as the conversion price exceeded the fair market value of the common shares on the note issue date.
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). The Company evaluated the convertible notes and determined that, for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the shares of common stock on the note issue date. 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 onthree months ended April 7, 2017, as part of the $7,500,000 equity raise (See Note 11.)
30, 2020. Convertible notes payable and loan payable consisted of the following at April 30, 2020 and 2019: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Convertible note payable - originating February 29, 2012; no monthly payments required; bearing interest at 0.19%; maturing at February 29, 2014 | $ | — | | | $ | 50,000 | | | Less: Current maturities | — | | | (50,000) | | | Total | $ | — | | | $ | — | |
Convertible Notes – Related Party On December 1, 2017, the Company completed the acquisition of USU and, 2016:
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | Convertible note payable - related party originating August 14, 2012; no monthly payments required; bearing interest at 5% | | $ | — | | | $ | 300,000 | | | | | | | | | | | Convertible note payable - originating February 29, 2012; no monthly payments required; bearing interest at 0.19%; maturing at February 29, 2014 | | | 50,000 | | | | 50,000 | | | | | | | | | | | Loan Payable - related party originating February 25, 2012; no monthly payments required; bearing interest at 10% | | | — | | | | 1,000,000 | | | | | | | | | | | Total | | | 50,000 | | | | 1,350,000 | | Less: Current maturities (notes payable) | | | (50,000 | ) | | | (50,000 | ) | Subtotal | | | — | | | | 1,300,000 | | Less: amount due after one year for notes payable | | | — | | | | (1,000,000 | ) | Amount due after one year for convertible notes payable | | $ | — | | | $ | 300,000 | |
Future maturitiesas part of notesthe consideration, a $2 million convertible note (the “Note”) was issued, bearing 8% annual interest that matures over a two years period after the closing. (See Note 5) 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 asin 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. On December 1, 2018 the Company paid the first payment of $1 million principal and $60,000 in interest. On February 25, 2019, the Company paid the remaining principal of $1 million and $80,000 of interest and fees
. Revolving Credit Facility On November 5, 2018, the Company entered into a loan agreement (the “Credit Facility Agreement”) with the Leon and Toby Cooperman Family Foundation (the “Foundation”). The Credit Facility Agreement provides for a $5,000,000 revolving credit facility (the “Facility”) evidenced by a revolving promissory note (the “Revolving Note”). Borrowings under the Credit Facility Agreement bear interest at 12% per annum. The Facility matures on November 4, 2021. Pursuant to the terms of the Credit Facility Agreement, the Company agreed to pay to the Foundation a $100,000 one-time upfront Facility fee. The Company also agreed to pay to the Foundation a commitment fee, payable quarterly at the rate of 2% per annum on the undrawn portion of the Facility. As of April 30, 20172020, the Company has not borrowed any sum under the Facility. The Credit Facility Agreement contains customary representations and warranties, events of default and covenants. Pursuant to the Loan Agreement and the Revolving Note, all future or contemporaneous indebtedness incurred by the Company, other than indebtedness expressly permitted by the Credit Facility Agreement and the Revolving Note, will be subordinated to the Facility. Pursuant to the Credit Facility Agreement, on November 5, 2018 the Company issued to the Foundation warrants to purchase 92,049 shares of the Company’s common stock exercisable for five years from the date of issuance at the exercise price of $5.85 per share which were deemed to have a relative fair value of $255,071. The relative fair value of the warrants along with the Facility fee were treated as debt issue costs, as the facility has not been drawn on, assets to be amortized over the term of the loan. Total unamortized costs at April 30, 2020 were $182,418. On March 6, 2019, in connection with entering into the Senior Secured Loans, the Company amended and restated the Credit Facility Agreement (the “Amended and Restated Facility Agreement”) and the Revolving Note. The Amended and Restated Facility Agreement provides among other things that the Company’s obligations thereunder are as follows:
| | | | | Year ending April 30, | | | | 2018 | | $ | 50,000 | | 2019 | | | — | | | | $ | 50,000 | |
F-19
secured by a first priority lien in the Collateral, on a pari passu basis with the Lenders.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 20162019 Senior Secured Term Loans On March 6, 2019, the Company entered into two loan agreements (each a “Loan Agreement” and together, the “Loan Agreements”) with the Foundation, of which Mr. Leon Cooperman, a stockholder of the Company, is the trustee, and another stockholder of the Company (each a “Lender” and together, the “Lenders”). Each Loan Agreement provides for a $5,000,000 term loan (each a “Loan” and together, the “Loans”), evidenced by a term promissory note and security agreement (each a “Term Note” and together, the “Term Notes”), for combined total proceeds of $10,000,000 million. The Company borrowed $5,000,000 from each Lender that day. The Term Notes bear interest at 12% per annum and mature on September 6, 2020, subject to one 12-month extension upon the Company’s option, and upon payment of a 1% one-time extension fee. Pursuant to the Loan Agreements and the Term Notes, all future or contemporaneous indebtedness incurred by the Company, other than indebtedness expressly permitted by the Loan Agreements and the Term Notes, will be subordinated to the Loans. Pursuant to the Loan Agreements, on March 6, 2019 the Company issued to each Lender warrants to purchase 100,000 shares of the Company’s common stock exercisable for five years from the date of issuance at the exercise price of $6.00 per share. The two warrants were deemed to have a combined relative fair value of $360,516. The relative fair value along with closing costs of $33,693 were treated as debt discounts to be amortized over the term of the Loans. On January 22, 2020, the Term Loans were cancelled and exchanged for convertible notes as discussed above. In connection with this transaction, the Company wrote off approximately $182,000 of unamortized debt issuance costs as the transaction qualified as a debt extinguishment.
Note 10. 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 11) 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 16.). The entire balance of $2,150,000 plus interest was paid and the letter of credit was terminated on April 7, 2017 as part of the $7,500,000 equity raise. The unamortized balance of the origination fees were expensed at that time. (See Note 11 and 16.)
Operating Leases
The Company recently signed an 18 month lease for its corporate headquarters in New York, New York, commencing June 7, 2016. The monthly rent is $7,667.
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 $2,049 Canadian which is approximately $1,872 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 $10,483.
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, 2017 and 2016
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, 2017:
| | | | | Year Ending April 30, | | | | 2018 | | $ | 379,691 | | 2019 | | | 242,725 | | 2020 | | | 155,859 | | 2021 | | | 140,060 | | 2022 | | | 11,692 | | 2023 | | | — | | Total minimum payments required | | $ | 930,027 | |
Rent expense for the years ended April 30, 2017 and 2016 were $338,196 and $239,658, respectively.
From time to time, the Company enters into employment agreements with certain of its employees. These agreements typically include bonuses, some of which aremay or may not be performance-based in nature. As of April 30, 2017, no performance bonuses have been earned.
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, 2017,2020, 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, HEMGHigher Education Management Group, Inc., (“HEMG”) and its Chairman, 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 SECSecurities and Exchange Commission (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 the same 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 will bemaybe 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.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 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.
F-21
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017 The bankrupt estate’s sole asset consisted of 208,000 shares of AGI common stock, plus a claim filed by the bankruptcy trustee against Spada’s brother and 2016
a third party to recover approximately 167,000 shares. On August 13, 2015, a former employee filed a complaint againstFebruary 8, 2019, 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 lossbankruptcy court issued an order reducing AGI’s claim to $888,638 which consisted of the valuejudgment and a $200,000 claim for failure to disclose certain liabilities. Subsequently, the trustee sold the AGI common stock and has $924,486 available for distribution. However priorities are an unknown amount of herincome taxes due from the sale of the common 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 20162, 2020 $346,480 in fees due the trustee and has been dismissed. Thehis counsel and $574,145 due arising from settlements with the secured creditor and Spada’s brother and the third party. While we do not know how much the Company accrued $87,500 in accordance with ASC 450-20-55-11 and was included in accrued expenses at April 30, 2016. Thewill receive, it will be substantially less than the amount owed was paid in the fiscal year ended April 30, 2017.
it is due. The Company’s subsidiary,subsidiaries, Aspen University isand 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 Aspen Universitythe 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 hadqualified 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. ThatPrograms due to its acquisition by the Company. The provisional certification imposes certain regulatory restrictions including, but not limitedallows the school to a limit of 1,200 student recipients forcontinue to receive Title IV funding for the duration of the provisional certification. The provisional certification restrictions continue with regard to Aspen University’s participation in Title IV Programs.
To participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction by the relevant agencies of the State in whichas it is located. In addition, an institution must be accredited by an accrediting agency recognized by the DOE and certified as eligible by the DOE. The DOE will certify an institution to participate in the Title IV Programs only after the institution has demonstrated compliance with the HEA and the DOE’s extensive academic, administrative, and financial regulations regarding institutional eligibility and certification. An institution must also demonstrate its compliance with these requirementsdid prior to the DOE on an ongoing basis. Aspen University performs periodic reviewschange of its compliance with the various applicable regulatory requirements. As Title IV funds received in fiscal 2016 represented approximately 28% of the Company's cash basis revenues (including revenues from discontinued operations), as calculated in accordance with Department of Education guidelines, the loss of Title IV funding would have a material effect on the Company's future financial performance.
On March 27, 2012 and on August 31, 2012, Aspen University provided the DOE with letters of credit for which the due date was extended to December 31, 2013. On January 30, 2014, the DOE provided Aspen University with an option to become permanently certified by increasing the letter of credit to 50% of all Title IV funds received in the last program year, equaling $1,696,445, or to remain provisionally certified by increasing the 25% letter of credit to $848,225. Aspen informed the DOE of its desire to remain provisionally certified and posted the $848,225 letter of credit for the DOE on April 14, 2014. On February 26, 2015, Aspen University was informed by the DOE that it again had the option to become permanently certified by increasing the letter of credit to 50% of all Title IV funds received in the last program year, equaling $2,244,971, or to remain provisionally certified by increasing the existing 25% letter of credit to $1,122,485. Aspen informed the DOE on March 3, 2015 of its desire to remain provisionally certified and post the $1,122,485 letter of credit for the DOE by April 30, 2015. In November of 2015, the DOE informed Aspen that they no longer need to post a letter of credit. It was subsequently released. The DOE may impose additional or different terms and conditions in any final provisional program participation agreement that it may issue.
ownership. 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 operatesour subsidiaries operate in a highly regulated industry, iteach 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.
On February 25, 2015, the DEAC informed Aspen University that it had renewed its accreditation for five years to January, 2019.
F-22
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017 and 2016
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 Departmentthe DOE 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 bycompliance audit, in 2015, Educacion Significativa, LLC (“ESL”) the Department of Education (“DOE”) during calendar year 2013, the Companypredecessor to USU recognized that it had not fully complied with all requirements for calculating and making timely returns of Title IV funds (R2T4). In November 2013,2016, ESL, the Company returnedpredecessor to USU, had 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 findingsfinding related to the 2013 program review findings.
On February 8, 2017,same issue and is required to maintain a letter of credit in the DOE issuedamount of $71,634 as a Final Program Review Determination (“FPRD”)result of this finding. The letter relatedof credit was been provided to the 2013 program review. The FRPD includesDepartment of Education by AGI since it assumed this obligation in its purchase of USU. This letter of credit expired in early 2020 and the cash is expected to be returned.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 USU also was asked to post a summaryletter of credit for $255,708, which was funded by AGI in April 2020. This amount has been formally reduced to $21,857; this letter with the reduced amount will remain in effect for at least the duration of the non-compliance areas and calculationsprovisional approval. Pursuant to USU’s provisional PPA, DOE indicated that USU must agree to participate in Title IV under the HCM1 funding process; however, DOE does retain discretion on whether or not to implement that term of amounts due for the 126 studentsagreement. Although DOE has not, to date, notified USU 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 amountit has been placed in the range from $80,000HCM1 funding process, nor does DOE’s public disclosure website identify USU as being on HCM1, it is possible that prior to $360,000. In accordance with ASC 450-20, we recorded a minimum liabilitythe end of $80,000 at January 31, 2017. Ofthe PPPA term, DOE may notify USU that amount, $55,000 was recorded againstit must begin funding under 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.
HCM1 procedure. 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 theThe 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 institutioninstitution. USU is also a Delaware corporation and received initial approval from the Delaware DOE to confer degrees through June 2023. Note 11. Leases Operating lease assets are ROU assets, which represent the right to use an underlying asset for the lease term. Operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating leases are included in the Operating Lease ROU assets, net, and Operating Lease Obligations, Current and Long-term on the Consolidated Balance Sheet at April 30, 2020. These assets and lease liabilities are recognized based on the present value of remaining lease payments over the lease term. When the lease does not provide an implicit interest rate, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The right-of-use asset includes all lease payments made and excludes lease incentives. Lease expense for operating leases is recognized on a straight-line basis over the lease term. There are no variable lease payments. Lease expense for the year ended April 30, 2020 was $2,516,213 respectively. These costs are primarily related to long-term operating leases, but also include amounts for short-term leases with terms greater than 30 days that are not material. The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of April 30, 2020 (a). | | | | | | | | | | | | | Maturity of Lease Obligations | | Lease Payments | | 2021 | | | $ | 2,409,191 | | | 2022 | | | 2,250,755 | | | 2023 | | | 1,686,197 | | | 2024 | | | 1,488,839 | | | 2025 | | | 1,136,640 | | | Thereafter | | 779,286 | | | Total | | 9,750,908 | | | Less Interest | | (2,382,321) | | | Present value of operating lease obligations | | $ | 7,368,587 | |
_____________________ (a) Lease payments exclude $4.3 million of legally binding minimum lease payments for the new Aspen University BSN Pre-Licensure campus location in Austin, Texas lease signed but not yet commenced. Prior to commencing its Austin campus operations, Aspen is required to obtain approvals from the Texas Board of Nursing.
| | | | | | | | | | Balance Sheet Classification | | | | Operating lease obligations, current | | $ | 1,683,252 | | | Operating lease obligations, long-term | | 5,685,335 | | | Total operating lease obligations | | $ | 7,368,587 | |
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 | | | | | | | Other Information | | | Weighted average remaining lease term | 4.6 | | Weighted average discount rate | 12.06 | % |
Note 11.12. Stockholders’ Equity
Common Stock
On June 8, 2015,28, 2019, the Company amended its Certificate of Incorporation, as amended, to reduce in exchange for the terminationnumber of shares of common stock the Company is authorized to issue from 250,000,000 to 40,000,000 shares, and the number of shares of preferred stock the Company is authorized to issue from 10,000,000 to 1,000,000 shares. The stockholders of the Company had previously approved the amendment at a consulting agreementspecial meeting of stockholders held on June 28, 2019.
Preferred Stock
The Company is authorized to issue 1,000,000 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, 2020 and April 30, 2019, we had 0 shares of preferred stock issued and outstanding.
Common Stock
The Company is authorized to issue 40,000,000 shares of common stock.
On January 22, 2020 the Company raised $17,267,250 through the issuance of 2,415,000 shares of common stock at a Director,price of $7.15. The net proceeds were $16,044,879 after deducting underwriting discounts and commissions. The number of shares sold through this public offering includes 315,000 shares of common stock pursuant to an option granted to the underwriters to cover over allotments that was exercised in full.
On November 30, 2019, the Company issued 25,000 restrictedshares of common stock units (withfor services in connection with the CFO transition which immediately vested. The total value of $50,400 based on the market value on the grant date). Two-thirds are fully vested and the remaining balance vests in six equal monthly installments commencing on June 30, 2015. At January 31, 2016, thewas $177,500.The Company has recorded consulting expense of $50,400 and it was fully vested.
On January 19, 2016, the Company paid $29,500 as part of settlement to repurchase 3,500 shares. After adjusting for the shares, the Company recorded an expense of $23,662.
On April 22, 2016, the Companyalso issued 404,62415,000 shares of common stock to twoits new Chief Financial Officer upon the vesting of its warrant holders in exchangeRSUs previously granted to him for their earlyAudit Committee services. The total value of the grant was approximately $103,350.
During the years ended April 30, 2020 and 2019, the Company issued 190,559 and 111,666 shares of common stock upon the cashless exercise of 363,334 and 194,276 stock options, respectively.
During the years ended April 30, 2020 and 2019, the Company issued 76,929 and 119,594 shares of common stock upon the cashless exercise of 164,929 and 218,323 stock warrants, at a reduced pricerespectively.
During the years ended April 30, 2020 and 2019, the Company issued 277,678 and 56,910 shares of $1.86 (originally, $2.28) per share. Thecommon stock upon the exercise of stock options for cash and received proceeds of $962,650 and $128,201, respectively.
During the year ended April 30, 2020, the company did not issue any common stock for warrants exercised for cash. During the years ended April 30, 2019, the Company recorded a warrant modificationissued 43,860 shares of common stock, respectively, upon the exercise of 43,860 warrants for cash and received proceeds of $100,000.
Restricted Stock
As of the years ended April 30, 2020 and 2019, there were 24,672 and 64,116 unvested shares of restricted common stock outstanding, respectively. Total unrecognized compensation expense of $48,555 in accordance with ASC 718-20-35 related to the incremental increase in value. The Company received gross proceeds of $752,500 from these exercises. As a conditionunvested shares as of the warrant holders exercising their warrants, the CEO converted a $300,000 noteyears ended April 30, 2020 and the related interest on the Note2019 amounted to $70,178 and the conversion price was reduced from $12.00 to $2.28 per share. $340,000 respectively.
In connection with these conversions, the CEO wasDecember 2018, Company issued 132,58824,672 shares of restricted common stock. (See Note 9)
F-23
stock to directors, with a fair value of $126,320 to be recognized over 36 months, of which $70,178 is unrecognized as of April 30, 2020 and will be amortized over the remaining vesting periods. Amortization expense for these shares was $42,107 and $14,036 for the years ended April 30, 2020 and 2019.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 2016
2019 On June 21, 2016,18, 2019, in order to correct errors in a third-party software system used to track stock options, the Company issued 208,333granted Andrew Kaplan, a current director, 5,131 shares of restricted common stock and two former directors a total of 25,000 shares of restricted common stock valued at $400,000$122,232 and madeexpensed immediately.
In April 2019, the Company granted 25,000 shares to its investor relations firm, of which 5,000 were vested with the balance vesting quarterly over one year, subject to continued service. The total value was $122,250 which was amortized and recognized over the fiscal 2020 year. The Board approved a cash paymentgrant of $400,00025,000 shares of restricted common stock to the then Chief Financial Officer in September 2018. Thestock price was $7.15 on the date of the grant and was to vest over a warrant holderperiod of 36 months. The value of the compensation was approximately $180,000. Upon leaving the Company on November 30, 2019 the remaining two-thirds of restricted stock was immediately vested as part of the separation agreement resulting in exchangeaccelerated amortization expense of approximately $108,000.
Restricted Stock Units
A summary of the Company’s Restricted Stock Unit activity during the year ended April 30, 2020 is presented below:
| | | | | | | | | | | | | | | | | Number of Shares | | Weighted Average Grant Price | | Restricted Stock Units | | | | | | Balance outstanding at April 30, 2019 | | — | | | $ | — | | | | | | | | | | Granted | | 658,675 | | | 5.67 | | Vested | | (15,000) | | | 6.89 | | Forfeited | | (500) | | | 5.18 | | | | | | | | Balance outstanding at April 30, 2020 | | 643,175 | | | 5.64 |
For the year ended April 30, 2020, the Company recorded compensation expense of $454,999 in connection with RSU grants.
There were 643,175 unvested RSUs as of April 30, 2020. Total unrecognized compensation expense related to the unvested RSUs as of April 30, 2020 is approximately $3,274,970 which will be amortized over the remaining vesting periods.
On February 4, 2020, the Compensation Committee approved the following grants of restricted stock units (the“RSUs”) to the executive officers of the Company under the Company’s 2018 Equity Incentive Plan: 100,000 RSUs to the Chief Executive Officer, 75,000 RSUs to each of the Chief Financial Officer, Chief Operating Officer, and Chief Academic Officer, and 50,000 to the Chief Nursing Officer. Each RSU represents the right to receive 1 share of the Company’s common stock. The RSUs vest four years from the grant date, subject to accelerated vesting as follows: (i)if the closing price of the Company’s common stock is at least $9 for 20 consecutive trading days, 10% of the buybackRSUs will vest immediately; (ii) if the closing price of 1,120,968 warrants.the Company’s common stock is at least $10 for 20 consecutive trading days, 25% of the RSUs will vest immediately; and (iii) if the closing price of the Company’s common stock is at least $12 for 20 consecutive trading days, all of the unvested RSUs will vest immediately. On the grant date, the closing price of the Company’s common stock on The Company re-valuedNasdaq Global Market was $9.49 per share. The grants have a four year vesting period. For fiscal 2020 amortization expense related to these RSUs was $111,211.
In December 2019, the CFO and CAO received grants of 100,000 and 20,000 RSU's, respectively, as part of their employment agreements. These grants will vest annually over three years and had a combined fair value of $826,800.
In December 2019, the warrants oncurrent CFO immediately vested in 15,000 RSUs with a total expense of $103,350, which he was granted as Audit Committee Chairman in November 2019.
In November 2019, the buyback date which equaled $594,000Chief Nursing Officer received a grant of 50,000 RSUs as part of her employment agreement. These grants will vest annually over three years and accordingly, thehave a fair value of $314,500. The Company recorded an expense associatedalso issued 98,675 RSUs to employees vesting over three years subject to continued employment with the buybacka fair value of $206,000.
$708,425.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 Treasury Stock 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 presented19, 2018, AGI 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 disbursements of $57,000. In addition, one firm received 20,000simultaneous transactions repurchased $1,000,000 shares of common stock for their services valued at $3.75$7.40 per share or $75,000.
and re-sold the shares to a large well-known institutional money manager at $7.40 per share. The shares were purchased by the Company from ESL pursuant to a Securities Purchase Agreement dated July 18, 2018. The purchaser paid $30,000 to a broker-dealer in connection with the transaction. A summary of the Company’s warrant activity during the year ended April 30, 20172020 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | | Weighted | | | Average | | | | | | | | | | Average | | | Remaining | | | Aggregate | | | | Number of | | | Exercise | | | Contractual | | | Intrinsic | | Warrants | | Shares | | | Price | | | Term | | | Value | | Balance Outstanding, April 30, 2016 | | | 2,001,356 | | | $ | 2.31 | | | | — | | | | 1,022,078 | | Granted | | | 62,500 | | | | 2.40 | | | | — | | | | 78,125 | | Exercised | | | (8,834 | ) | | | 3.99 | | | | — | | | | — | | Forfeited | | | (1,120,968 | ) | | | 1.86 | | | | — | | | | — | | Expired | | | (21,256 | ) | | | 3.99 | | | | — | | | | — | | Balance Outstanding, April 30, 2017 | | | 912,798 | | | $ | 2.82 | | | | 1.6 | | | $ | 1,100,203 | | | | | | | | | | | | | | | | | | | Exercisable, April 30, 2017 | | | 912,798 | | | $ | 2.82 | | | | 1.6 | | | $ | 1,100,203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Warrants | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | Balance Outstanding, April 30, 2019 | | 731,152 | | | $ | 5.28 | | | 3.29 | | $ | 413,296 | | | Granted | | — | | | — | | | — | | | — | | | Exercised | | (164,929) | | | 2.05 | | | — | | | — | | | Surrendered | | — | | | — | | | — | | | — | | | Expired | | — | | | — | | | — | | | — | | | Balance Outstanding, April 30, 2020 | | 566,223 | | | $ | 6.22 | | | 3.17 | | $ | 950,100 | | | | | | | | | | | | Exercisable, April 30, 2020 | | 566,223 | | | $ | 6.22 | | | 3.17 | | $ | 950,100 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ALL WARRANTS | | | | | | EXERCISABLE WARRANTS | | | | | Exercise Price | | Weighted Average Exercise Price | | Outstanding No. of Warrants | | Weighted Average Exercise Price | | Weighted Average Remaining Life In Years | | Exercisable No. of Warrants | | | | | | | | | | | | | $ | 4.89 | | | $ | 4.89 | | | 50,000 | | | $ | 4.89 | | | 3.85 | | 50,000 | | | | | | | | | | | | | | $ | 5.85 | | | $ | 5.85 | | | 92,049 | | | $ | 5.85 | | | 3.82 | | 92,049 | | | | | | | | | | | | | | $ | 6.00 | | | $ | 6.00 | | | 200,000 | | | $ | 6.00 | | | 3.85 | | 200,000 | | | | | | | | | | | | | | $ | 6.87 | | | $ | 6.87 | | | 224,174 | | | $ | 6.87 | | | 2.24 | | 224,174 | | | | | | | | | | | | | | | | | 566,223 | | | | | | | 566,223 | |
On April 22, 2016,August 17, 2019 an investor elected a cashless exercise of 13,542 warrants, receiving 6,271 shares. On August 20, 2019 2 investors elected cashless exercises of 18,818 and 88,710 warrants, receiving 8,970 and 42,285 shares, respectively.
On June 3, 2019, a former director cashlessly exercised 21,930 warrants, receiving 9,806 shares of common stock. On June 7, 2019, the CEO cashlessly exercised the same amount of warrants receiving 9,597 shares of common stock.
As part of the Credit Facility Agreement executed on November 8, 2018, 92,049 five-year warrants were issued with an exercise price of $5.85 per share.
The Company issued 404,624200,000 warrants on March 5, 2019 related to senior secured loans.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 The Company issued 50,000 warrants on April 30, 2019 to an advisory board member for services. The warrants vest ratably over three years.
During the year ended April 30, 2019, 262,183 warrants were exercised. Of these, 218,323 warrants were cashless exercises resulting in a net of 119,594 shares of common stock to two of its warrant holdersbeing issued and 43,860 were exercised for cash resulting in exchange for their early exercise of warrants at a reduced price of $1.86 (originally, $2.28) per share. The Company received gross proceeds of $752,500 from these exercises.
On June 24, 2016, the Company43,860 shares being issued 208,333 shares and a cash payment of $400,000 to a warrant holdergenerating $100,000 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.
F-24
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017 and 2016
proceeds.
Stock Incentive Plan and Stock Option Grants to Employees and Directors
On March 13, 2012, the Company adopted the Aspen Group, Inc. 2012 Equity Incentive Plan (the “Plan”“2012 Plan”) that provides for the grant of 1,691,667 effective November 2015 and 2,108,3333,500,000 shares effective June 2016, in the form of incentive stock options, non-qualified stock options, restricted shares, stock appreciation rights and restricted stock unitsRSUs to employees, consultants, officers and directors. On December 13, 2018, the stockholders of the Company approved the Aspen Group, Inc. 2018 Equity Incentive Plan (the “2018 Plan”) that provides for the grant of 500,000 shares in the form of incentive stock options, non-qualified stock options, restricted shares, stock appreciation rights and RSUs to employees, consultants, officers and directors. On December 30, 2019, the Company held its Annual Meeting of Shareholders at which the shareholders voted to amend the 2018 Plan to increase the number of shares of common stock available for issuance under the 2018 Plan from 500,000 to 1,100,000 shares. As of April 30, 2017,2020, there were 38,783179,380 and 47,277 shares remaining available for future issuance under the 2012 and 2018 Plan, for future issuance. respectively.
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, 2017.
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | Expected life (years) | | | 4-6.5 | | | | 4 - 6.5 | | Expected volatility | | | 40% - 43 | % | | | 40% - 43 | % | Weighted-average volatility | | | 0.38 | % | | | 40.0 | % | Risk-free interest rate | | | 0.00 | % | | | 0.38 | % | Dividend yield | | | 0.00 | % | | | 0.00 | % | Expected forfeiture rate | | | n/a | | | | n/a | |
period ended. | | | | | | | | | | | | | | April 30, | | | | | 2020 | | 2019 | | Expected life (years) | 3.5 | | 3.5 | | Expected volatility | 57.0 | % | | 50.1 | % | | Risk-free interest rate | 0.24 | % | | 2.63 | % | | Dividend yield | 0.00 | % | | 0.00 | % | | Expected forfeiture rate | n/a | | n/a |
The Company utilized the simplified method to estimate the expected life for stock options granted to employees. The simplified method was used as the Company does not have sufficient historical data regarding stock option exercises. The expected volatility is based on the average of the expected volatilities from the most recent audited financial statements available for comparative public companies that are deemed to be similar in nature to the Company.historical volatility. 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, 2017,2020, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | | Weighted | | | Average | | | | | | | | | | Average | | | Remaining | | | Aggregate | | | | Number of | | | Exercise | | | Contractual | | | Intrinsic | | Options | | Shares | | | Price | | | Term | | | Value | | Balance Outstanding, April 30, 2016 | | | 1,492,593 | | | $ | 2.29 | | | | — | | | | — | | Granted | | | 671,666 | | | $ | 2.74 | | | | 4.5 | | | | — | | Exercised | | | — | | | | — | | | | — | | | | — | | Forfeited | | | (44,654 | ) | | $ | 2.19 | | | | 1.5 | | | | — | | Expired | | | (23,055 | ) | | | 4.13 | | | | — | | | | — | | Balance Outstanding, April 30, 2017 | | | 2,096,550 | | | $ | 2.42 | | | | 3.09 | | | $ | 2,715,101 | | | | | | | | | | | | | | | | | | | Exercisable, April 30, 2017 | | | 1,963,217 | | | $ | 2.83 | | | | 0.19 | | | $ | 1,375,198 | |
On June 8, 2015, the Chief Academic Officer received a grant
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 2016
On August 5, 2015, 41,667 options were granted to the Senior Vice President of Compliance. The exercise price was $2.16 and the fair value was $30,000. The options vest over 3 years.
On September 23, 2015, 38,750 options were granted to a total of 39 employees. The exercise prices were $1.572 and the fair value of the total grant was $48,600. The options vest over 3 years.
On November 20, 2015, three directors were each awarded 20,834 five- year options. The options vest over three years, the exercise prices were $1.98 and the fair value of the total grant of 62,500 options is $37,500.
On December 11, 2015, the Chief Executive Officer was granted 125,000 options that vest over three years. The exercise price is $2.10, the life of the options is ten years and the fair value of the grant is $105,000.
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. 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Options | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | Balance Outstanding, April 30, 2019 | | 3,408,154 | | | $ | 4.44 | | | 2.90 | | $ | 6,880,644 | | | Granted | | 156,900 | | | 5.18 | | | — | | | — | | | Exercised | | (624,346) | | | 3.17 | | | — | | | — | | | Forfeited | | (205,809) | | | 7.37 | | | — | | | — | | | Expired | | — | | | — | | | — | | | — | | | Balance Outstanding, April 30, 2020 | | 2,734,899 | | | $ | 4.62 | | | 1.97 | | $ | 9,146,198 | | | | | | | | | | | | Exercisable, April 30, 2020 | | 1,742,599 | | | $ | 3.71 | | | 1.48 | | $ | 7,366,936 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ALL OPTIONS | | | | | | EXERCISABLE OPTIONS | | | | | Exercise Price | | Weighted Average Exercise Price | | Outstanding No. of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life In Years | | Exercisable No. of Options | | $1.57 to $2.10 | | $2.00 | | | 561,724 | | | $2.00 | | | 0.71 | | 561,724 | | | | | | | | | | | | | | $2.28 to $2.76 | | $2.30 | | | 374,446 | | | $2.30 | | | 0.41 | | 374,446 | | | | | | | | | | | | | | $3.24 to $4.38 | | $3.89 | | | 327,730 | | | $3.87 | | | 1.60 | | 275,063 | | | | | | | | | | | | | | $4.50 to $5.20 | | $4.94 | | | 677,277 | | | $4.94 | | | 2.54 | | 226,125 | | | | | | | | | | | | | | $5.95 to $6.28 | | $6.07 | | | 79,917 | | | $6.07 | | | 2.20 | | 26,639 | | | | | | | | | | | | | | $7.17 to $7.55 | | $7.41 | | | 549,639 | | | $7.32 | | | 3.58 | | 223,880 | | | | | | | | | | | | | | $8.57 to $9.07 | | $8.97 | | | 164,166 | | | $8.97 | | | 2.69 | | 54,722 | | | | | | | | | | | | | | Options only | | | | 2,734,899 | | | | | | | 1,742,599 | |
For the directors receiving 12,500,years ended April 30, 2020 and 2019, 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.
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 in connection with stock options of $338,294 for$1,289,546 and $1,190,385. For the yearyears ended April 30, 2017 in connection with employee stock options. The2020 and 2019, the Company recorded 0 stock based compensation expense of $308,260 forrelated to the year ended April 30, 2016 in connection with employee stock options.
executive officer target bonus plan.
As of April 30, 2017,2020, there was approximately $585,000$724,965 of unrecognized compensation costs related to nonvestednon-vested share-based compensationoption arrangements. That cost is expected to be recognized over a weighted-average period of 2.01.7 years.
F-26
In April 2020, the Company awarded 6,900 options to employees hired during the fiscal third quarter. The fair value of these grants was $11,088 with an average grant price of $4.58.
On December 9, 2019, the Company granted 61,000 options to its directors with an exercise price of $6.92 per share for services performed for the calendar year 2019. The fair value of these options was approximately $116,000 and was fully recognized as of January 31, 2020.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 20172020 and 2016
Stock Option Grants2019
On August 1, 2019, the Company granted 59,000 options with an exercise price of $3.99 per share to Non-Employees
There were no26 employees who had been hired during the first quarter ended July 31, 2019.
The fair value of these options was approximately $83,000 and will be recognized over 36 months. The Company granted a total of 30,000 five years non-qualified stock options grantedon May 13, 2019, which were immediately vested, to non-employeescertain former directors exercisable at $4.12 per share. The fair value of the options was $33,600 and expensed during the yearthree months ended July 31, 2019.
The Company granted 65,750 options to 44 new and continuing employees on April 30, 20172019. The exercise price was $4.56 per share and 2016.the fair value was approximately $117,000. The options vest over 36 months.
On December 24, 2018, the Company recorded no compensation expense forgranted 61,667 options to three directors, 41,667 to one director, and 10,000 each to two others. The exercise price was $5.14 per share and the years ended April 30, 2017,total fair value was approximately $123,000, which will be recognized over 36 months.
On December 13, 2018, the Company granted 89,125 options to 61 employees who had been hired throughout 2018. The fair value of these options was approximately $136,000 and 2016 in connection with non-employee stock options. There was no unrecognized compensation cost at April 30, 2017.
A summarywill be recognized over 36 month. The exercise price is $5.20 per share.
On July 19, 2018, the Board granted 200,000 five year options to the Chief Executive Officer and 180,000 options to each of the Company's stockChief Operating Officer and Chief Academic Officer. The fair value per option activitywas $2.56 or $1,433,600 for non-employeesall 560,000 options granted. The exercise price is $7.55 per share. In April 2019, the CEO rescinded his grant and the expenses associated with the unvested options previously recorded were reversed during the fiscal year ended April 30, 2017 is presented below:
| | | | | | | | | | | | | | | | | | | | | | Weighted | | | Average | | | | | | | | | | Average | | | Remaining | | | Aggregate | | | | Number of | | | Exercise | | | Contractual | | | Intrinsic | | Options | | Shares | | | Price | | | Term | | | Value | | Balance Outstanding, April 30, 2016 | | | 16,250 | | | $ | 3.48 | | | | 0.9 | | | $ | — | | Granted | | | — | | | | — | | | | — | | | | — | | Exercised | | | — | | | | — | | | | — | | | | — | | Forfeited | | | — | | | | — | | | | — | | | | — | | Expired | | | (16,250 | ) | | | — | | | | — | | | | — | | Balance Outstanding, April 30, 2017 | | | — | | | $ | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Exercisable, April 30, 2017 | | | — | | | $ | — | | | | — | | | | — | |
Note 12. Income Taxes
2019.
As of September 6, 2018, the Board approved a grant of 180,000 five-year options to the then Chief Financial Officer and 50,000 five years options to the then Chief Accounting Officer. The components of income tax expense (benefit) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended | | | | | | | | | | April 30, | | | | | | | | | | 2017 | | | 2016 | | Current: | | | | | | | | | | | | | Federal | | | | | | | | | | $ | — | | | $ | — | | State | | | | | | | | | | | — | | | | — | | | | | | | | | | | | | — | | | | — | | Deferred: | | | | | | | | | | | | | | | | | Federal | | | | | | | | | | | — | | | | — | | State | | | | | | | | | | | — | | | | — | | | | | | | | | | | | | — | | | | — | | Total Income tax expense (benefit) | | | | | | | | | | $ | — | | | $ | — | |
F-27
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017 and 2016
Significant componentsfair value of the Company's deferred income tax assetstwo grants on September 6, 2018 was $257,400 for the Chief Financial Officer and liabilities are as follows:
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | Deferred tax assets: | | | | | | | Net operating loss | | $ | 8,626,748 | | | $ | 8,271,894 | | Allowance for doubtful accounts (recovery) | | | (20,029 | ) | | | 26,793 | | Intangible assets | | | 201,942 | | | | 249,099 | | Deferred rent | | | 16,911 | | | | 11,678 | | Stock-based compensation | | | 820,257 | | | | 694,900 | | Contributions carryforward | | | 93 | | | | 93 | | Total deferred tax assets | | | 9,645,922 | | | | 9,254,457 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Property and equipment | | | (174,260 | ) | | | (185,683 | ) | Total deferred tax liabilities | | | (174,260 | ) | | | (185,683 | ) | | | | | | | | | | Deferred tax assets, net | | | 9,471,662 | | | | 9,068,774 | | | | | | | | | | | | | | | | | | | | Valuation allowance: | | | | | | | | | Beginning of year | | | (9,068,774 | ) | | | (8,240,200 | ) | (Increase) during period | | | (402,888 | ) | | | (828,574 | ) | Ending balance | | | (9,471,662 | ) | | | (9,068,774 | ) | | | | | | | | | | Net deferred tax asset | | $ | — | | | $ | — | |
A valuation allowance is established if it is more likely than not that all or a portion$71,500 for the Chief Accounting Officer. As required by the rules of the deferred tax assetNasdaq Stock Market, both option grants were subject to shareholder approval which occurred on December 13, 2018, which is the measurement date for recording the transaction. The compensation will not be realized. The Company recorded a valuation allowance at April 30, 2017 and 2016 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, 2017 was an increase of $402,888.
At April 30, 2017, the Company had $20,204,869 of net operating loss carryforwards which will expire from 2032 to 2037. 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, 2017, tax years 2013 through 2016 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.
A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:
| | | | | | | | | | | April 30, | | | | 2017 | | | 2016 | | Statutory U.S. federal income tax rate | | | 34.0 | % | | | 34.0 | % | State income taxes, net of federal tax benefit | | | 3.0 | | | | 3.0 | | Other | | | (0.5 | ) | | | (0.1 | ) | Change in valuation allowance | | | (36.5 | ) | | | (36.9 | ) | Effective income tax rate | | | 0.0 | % | | | 0.0 | % |
Note 13. Concentrations
Concentration of Credit Risk
As of April 30, 2017, the Company’s bank balances exceed FDIC insurance by $2,687,461.
F-28
ASPEN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2017 and 2016
recognized over 36 months.
Note 14.13. Related Party Transactions
On July 19, 2018, AGI in simultaneous transactions repurchased 1,000,000 shares of common stock (the “Shares”) at $7.40 per share and re-sold the Shares to a large well-known institutional money manager (the “Purchaser”) at $7.40 per share. The Shares were purchased by the Company from ESL pursuant to a Securities Purchase Agreement. The Shares were sold to the Purchaser through Craig-Hallum Capital Group, LLC (“Craig Hallum”). Craig-Hallum acted as a dealer in this transaction and received an ordinary brokerage commission from the Purchaser.
The Purchaser initiated the transaction by contacting the Company seeking to buy a large block of common stock. The Company approached ESL which had acquired the Shares on December 1, 2017 when it sold United States University to the Company. Ms. Oksana Malysheva, the sole manager of ESL, became a director of the Company as part of the purchase of United States University and is no longer a director of the Company.
See Note 4 for discussion of secured note and account receivable to related parties and see Notes 8 and 9 for discussionadditional information on the repayment of loans payablea convertible note issued in conjunction with the USU acquisition. Note 14. Revenue Revenues consist primarily of tuition and convertible notes payablefees 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. 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 fees for library and technology costs, which are recognized over the related parties.
Note 15. Fair Value Measurements – Warrant Derivative liability
service period and are not considered separate performance obligations. Other services, books, and exam fees are recognized as services are provided or when goods are received by the student. The accounting standardCompany’s contract liabilities are reported as deferred revenue and refunds due students. Deferred revenue represents the amount of tuition, fees, and other student invoices in excess of the portion recognized as revenue and it is included in current liabilities in the accompanying consolidated balance sheets.
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 The following table represents our revenues disaggregated by the nature and timing of services: | | | | | | | | | | | | | For the Years Ended April 30, | | | | 2020 | | 2019 | Tuition - recognized over period of instruction | $ | 43,917,321 | | | $ | 31,032,677 | | Course fees - recognized over period of instruction | 4,536,639 | | | 2,488,232 | | Book fees - recognized at a point in time | 80,845 | | | 106,819 | | Exam fee - recognized at a point in time | 219,015 | | | 189,090 | | Service fees - recognized at a point in time | 307,260 | | | 208,600 | | | $ | 49,061,080 | | | $ | 34,025,418 | |
Contract Balances and Performance Obligations The Company recognizes deferred revenue as a student participates in a course which continues past the balance sheet date. Deferred revenue at April 30, 2020 was $3,712,994 which is future revenue that has not yet been earned for fair value measurements providescourses in progress. The Company has $2,371,844 of refunds due students, which mainly represents Title IV funds due to students after deducting their tuition payments. Of the total revenue earned during the year ended April 30, 2020, approximately $2.5 million came from revenues which were deferred at April 30, 2019. The Company begins providing the performance obligation by beginning instruction in a frameworkcourse, a contract receivable is created, resulting in accounts receivable. The Company accounts for measuring fair valuereceivables in accordance with ASC 310, Receivables. The Company uses the portfolio approach, as discussed below. AGI 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 requires expanded disclosures regarding fair value measurements. Fair valuerelated fees. AGI determines the adequacy of its allowance for doubtful accounts using an allowance method based on an analysis of its historical bad debt experience, current economic trends, and the aging of the accounts receivable and student status. AGI applies reserves to its receivables based upon an estimate of the risk presented by the age of the receivables and student status. AGI writes off accounts receivable balances at the time the balances are deemed uncollectible. AGI continues to reflect accounts receivable with an offsetting allowance as long as management believes there is defineda reasonable possibility of collection. Cash Receipts Our students finance costs through a variety of funding sources, including, among others, monthly payment plans, installment plans, federal loan and grant programs (Title IV), employer reimbursement, and various veterans and military funding and grants, and cash payments. Most students elect to use our monthly payment plan. This plan allows them to make continuous monthly payments during the length of their program and through the length of their payment plan. Title IV and military funding typically arrives during the period of instruction. Students who receive reimbursement from employers typically do so after completion of a course. Students who choose to pay cash for a class typically do so before beginning the class. Significant Judgments We analyze revenue recognition on a portfolio approach under ASC 606-10-10-4. Significant judgment is utilized in determining the appropriate portfolios to assess for meeting the criteria to recognize revenue under ASC Topic 606. We have determined that all of our students can be grouped into one portfolio. Students behave similarly, regardless of their payment method or academic program. Enrollment agreements and refund policies are similar for all of our students. We do not expect that revenue earned for the portfolio is significantly different as the pricecompared to revenue that would be receivedearned if we were to assess each student contract separately. The Company maintains institutional tuition refund policies, which provides for an assetall 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 exit priceCompany’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
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019 tuition that would be paid to transfer a liability inwas not refunded. Since the principal or most advantageous market in an orderly transaction between market participants onCompany recognizes revenue pro-rata over 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 oncourse 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 own assumptions usedaccounting policies revenue is not recognized with respect to measure assetsamounts that could potentially be refunded. The Company had revenues from students outside the United States representing approximately 2.5% 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 consisted1.6% of the following at April 30, 2017 which related to 62,500 warrants which contained price protection:
| | | | | | | | | | | | | | | | | | | Carrying | | | | | | | | | | | | | Value at | | | | | | | | | | | | | April 30, | | | Fair value Measurements at April 30, 2017 | | | | 2017 | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | | | | | | | | | | | | | | | | | Warrant derivative liability | | $ | 52,500 | | | $ | — | | | $ | — | | | $ | 52,500 | |
The following is a summary of activity of Level 3 liabilitiesrevenues for the year ended April 30, 2017:
| | | | | Balance April 30, 2016 | | $ | — | | Initial valuation of warrant derivative liability | | | 52,500 | | Change in valuation of warrant derivative liability | | | — | | Balance April 30, 2017 | | $ | 52,500 | |
Changes in fair value2020 and 2019 respectively.
Note 15. Income Taxes The components of income tax expense are as follows: | | | | | | | | | | | | | For the Years Ended April 30, | | | | 2020 | | 2019 | | Current: | | | | | Federal | $ | — | | | $ | — | | | State | 51,820 | | | — | | | 51,820 | | | — | | | Deferred: | | | | | Federal | — | | | — | | | State | — | | | — | | | — | | | — | | | Total Income tax expense | $ | 51,820 | | | $ | — | |
Significant components of the warrant derivative liabilityCompany's deferred income tax assets and liabilities are included in other income (expense) in the accompanying consolidated statementsas follows: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Deferred tax assets: | | | | | Net operating loss carryforward | $ | 11,044,236 | | | $ | 9,033,235 | | | Allowance for doubtful accounts | 629,272 | | | 181,774 | | | Deferred rent | 606,594 | | | 180,154 | | | Stock-based compensation | 439,454 | | | 954,586 | | | Contributions carryforward | 11,275 | | | 60 | | | Intangibles | 86,897 | | | — | | | Total deferred tax assets | 12,817,728 | | | 10,349,809 | | | | | | | Deferred tax liabilities: | | | | | Property and equipment | (417,780) | | | (234,336) | | | Intangibles | — | | | (64,439) | | | Total deferred tax liabilities | (417,780) | | | (298,775) | | | | | | | Deferred tax assets, net | $ | 12,399,948 | | | $ | 10,051,034 | | | | | | | Valuation allowance: | | | | | Beginning of year | (10,051,034) | | | (7,837,755) | | | Increase during period | (2,348,914) | | | (2,213,279) | | | Ending balance | (12,399,948) | | | (10,051,034) | | | | | | | Net deferred tax asset | $ | — | | | $ | — | |
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 2019
As of April 30, 2020, as part of its periodic evaluation of the necessity to maintain a valuation allowance against its deferred tax assets, and after consideration of all factors, including, among others, projections of future taxable income, current year net operating loss carryforward utilization and the extent of the Company's cumulative losses in recent years, the Company determined that, on a more likely than not basis, it would not be able to use remaining deferred tax assets. Accordingly, the Company has determined to maintain a full valuation allowance against its net deferred tax assets. As of April 30, 2020 and 2019, the valuation allowance was approximately $12,400,000 and $10,100,000, respectively. In the future, the utilization of the Company's net operating loss carryforwards may be subject to certain change of control limitations. If the Company determines it will be able to use some or all of its deferred tax assets in a future reporting period, the adjustment to reduce or eliminate the valuation allowance would reduce its tax expense and increase after-tax income. At April 30, 2020, the Company had approximately $41,900,000 of net operating loss carryforwards, $28,200,000 of which will expire from 2031 to 2038, the remainder will carryforward indefinitely. 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, 2020, tax years 2017 through 2019 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years. A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows: The Company's effective income tax expense differs from the statutory federal income tax rate of 21% as follows: | | | | | | | | | | | | | April 30, | | | | 2020 | | 2019 | | Statutory Rate applied to net loss before income taxes | 21.0 | % | | | 21.0 | % | | Increase (decrease) in income taxes resulting from: | | | | | State income taxes, net of federal tax benefit | 5.3 | % | | | 3.6 | % | | Federal and State Minimum Taxes | (0.9) | % | | | — | % | | Permanent Differences | (0.3) | % | | | — | % | | Change in Tax Rates - States | 17.3 | % | | | — | % | | Change in Valuation Allowance | (41.9) | % | | | (23.8) | % | | Other | (1.4) | % | | | (0.8) | % | | Effective Income Tax Rate | (0.9) | % | | 0.0 | % | | | | |
Note 16. Quarterly Results (Unaudited)
ASPEN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 2020 and 20162019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter Ended July 31 | | Quarter Ended October 31 | | Quarter Ended January 31 | | Quarter Ended April 30 | | Year Ended April 30 | | Year Ended April 30, 2020 | | | | | | | | | | | | | | | Revenue | | $ | 10,357,982 | | | $ | 12,085,965 | | | $ | 12,537,940 | | | $ | 14,079,193 | | | $ | 49,061,080 | | | Cost of revenue (exclusive of depreciation and amortization) | | 4,353,058 | | | 4,188,056 | | | 5,163,007 | | | 5,431,181 | | | 19,135,302 | | | Operating loss | | (1,638,800) | | | (331,775) | | | (1,728,048) | | | (339,790) | | | (4,038,413) | | | Loss before income taxes | | (2,039,687) | | | (628,168) | | | (2,265,889) | | | (673,501) | | | (5,607,245) | | | Net loss | | (2,075,282) | | | (638,168) | | | (2,281,052) | | | (664,563) | | | (5,659,065) | | | | | | | | | | | | | | Net loss per share allocable to common stockholders - basic and diluted | | $ | (0.11) | | | $ | (0.03) | | | $ | (0.12) | | | $ | (0.03) | | | $ | (0.29) | | | | | | | | | | | | | | | Quarter Ended July 31 | | Quarter Ended October 31 | | Quarter Ended January 31 | | Quarter Ended April 30 | | Year Ended April 30 | | Year Ended April 30, 2019 | | | | | | | | | | | | | | | Revenue | | $ | 7,221,305 | | | $ | 8,095,344 | | | $ | 8,494,627 | | | $ | 10,214,142 | | | $ | 34,025,418 | | | Cost of revenue (exclusive of depreciation and amortization) | | 3,752,392 | | | 3,835,515 | | | 4,076,980 | | | 4,312,331 | | | 15,977,218 | | | Operating loss | | (2,853,324) | | | (2,474,649) | | | (2,421,686) | | | (1,360,067) | | | (9,109,726) | | | Loss before income taxes | | (2,837,276) | | | (2,475,078) | | | (2,355,940) | | | (1,609,923) | | | (9,278,217) | | | Net loss | | (2,837,276) | | | (2,475,078) | | | (2,355,940) | | | (1,609,923) | | | (9,278,217) | | | | | | | | | | | | | | Net loss per share allocable to common stockholders - basic and diluted | | $ | (0.15) | | | $ | (0.13) | | | $ | (0.13) | | | $ | (0.09) | | | $ | (0.50) | |
Note 17. Subsequent Events
On May 13, 2017,June 5, 2020, the Company granted its executive officers a total of 500,000 five-year options to purchase sharesreduced by 5% the exercise price of the Company’s common stock underpurchase warrants issued to the 2012 Equity Incentive Plan.Foundation, on November 5, 2018 (the "2018 Cooperman Warrants") and on March 5, 2020 (the "2019 Cooperman Warrants"). The options vest annually over three years, subject2018 Cooperman Warrants exercise price was reduced from $5.85 to continued employment at each applicable vesting date, and are exercisable at $4.90$5.56 per share. The Chairman2019 Cooperman Warrants exercise price was reduced from $6.00 to $5.70 per share. On June 8, 2020, the Foundation immediately exercised the 2018 and Chief Executive Officer received 200,000 options with a fair value of $282,000,2019 Cooperman Warrants paying 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 $98,700Company $1,081,792 and the Chief Financial OfficerCompany issued 192,049 shares of common stock to the Foundation. In consideration of the reduction, the Foundation in addition to its immediate exercise executed a lock-up agreement agreeing not to request registration of or sell the underlying shares of common stock for at least six months. The warrant modification and acceleration charge related to this transaction in the first quarter of fiscal 2021 will be approximately $26,000. In May and June 2020, current and former employees exercised 295,091stock options. Total proceeds received 30,000 options with a fair value of $42,300.
On May 18, 2017,by the Company announced it had entered into a definitive agreement to acquire United States University, a regionally accredited for-profit university based in San Diego, California for a total purchase pricewere approximately $847,000 upon the issuance of $9 million. The transaction is subject to customary closing conditions and regulatory approvals by the U.S. Department of Education, WASC Senior College and University Commission, and state regulatory and programmatic accreditation bodies. The earliest that Aspen Group would receive required regulatory approvals would be December 2017.
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.
Effective June 11, 2017, the Company increased the Chief Academic Officer’s salary from $264,000 to $300,000, and granted 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 employment date. The options are exercisable at $6.28 per share and the fair value is $54,000.
On June 20, 2017, the Company increased the Chief Financial Officer’s salary from $231,000 to $250,000.
On July 24, 2017, the Board of Directors approved the increase of shares authorized to be granted under the 2012 Equity Incentive Plan to 3,500,000.
On July 25, 2017, the Company signed a $10 million senior secured term loan with Runway Growth Credit Fund (formerly known as GSV Growth Credit Fund). The Company will draw $5 million under the facility at closing, with the remaining $5 million to be drawn following the closing of the Company’s acquisition of substantially all the assets of the United States University, 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 also issued 224,174 5-year warrants at an exercise price of $6.87 per share.
136,031 shares.
EXHIBIT INDEX
| | | | | | | | | | | | | | | | | | Incorporated by Reference
| | Filed or Furnished
| Exhibit #
| | Exhibit Description
| | | Form
| | Date
| | | Number
| | Herewith
| 3.1
| | Certificate of Incorporation, as amended
| | | 10-Q
| | 3/9/17
| | | 3.1
| | | 3.2
| | Bylaws
| | | 8-K
| | 3/19/12
| | | 3.2
| | | 3.2(a)
| | Amendment No. 1 to Bylaws
| | | 8-K
| | 3/12/14
| | | 3.1
| | | 10.1
| | Promissory Note dated March 8, 2017 – Linden Finance
| | | | | | | | | | Filed
| 10.2
| | Form of Stock Purchase Agreement dated April 7, 2017
| | | 8-K
| | 4/10/17
| | | 10.1
| | | 10.3
| | Employment Agreement dated November 1, 2016 – Mathews*
| | | 10-Q
| | 3/9/17
| | | 10.1
| | | 10.4
| | Employment Agreement dated November 24, 2014 – Gerard Wendolowski*
| | | 10-K
| | 7/28/15
| | | 10.19
| | | 10.5
| | Employment Agreement dated June 11, 2017 – St. Arnauld*
| | | | | | | | | | Filed
| 10.6
| | 2012 Equity Incentive Plan, as amended*
| | | 10-K
| | 7/27/16
| | | 10.5
| | | 10.7
| | Form of Non-Qualified Stock Option Agreement
| | | 8-K
| | 12/17/15
| | | 10.1
| | | 10.8
| | Form of Directors Indemnification Agreement
| | | 8-K/A
| | 5/7/12
| | | 10.21
| | | 10.9
| | Loan Agreement dated August 31, 2016 – Cooperman
| | | 8-K
| | 9/7/16
| | | 2.1
| | | 10.10
| | Revolving Promissory Note dated August 31, 2016 – Cooperman
| | | 8-K
| | 9/7/16
| | | 2.2
| | | 10.11
| | Warrant dated August 31, 2016 – Cooperman
| | | 8-K
| | 9/7/16
| | | 3.1
| | | 10.12
| | Note Conversion Agreement dated April 16, 2016 – Mathews
| | | 10-K
| | 7/27/16
| | | 10.4
| | | 10.13
| | Letter Agreement with Warrant Holders for Reduced Exercise Price and Early Exercise 2016
| | | 10-K
| | 7/27/16
| | | 10.19
| | | 10.14
| | Letter Agreement with Warrant Holders for Reduced Exercise Price and Early Exercise 2015
| | | 10-K
| | 7/28/15
| | | 10.20
| | | 10.15
| | Termination of AEK Consulting Agreement
| | | 10-K
| | 7/28/15
| | | 10.12
| | | 10.16
| | Consulting Agreement – AEK Consulting
| | | 10-K
| | 7/29/14
| | | 10.24
| | | 21.1
| | Subsidiaries
| | | | | | | | | | Filed
| 23.1
| | Consent of Independent Registered Public Accounting Firm
| | | | | | | | | | Filed
| 31.1
| | Certification of Principal Executive Officer (302)
| | | | | | | | | | Filed
| 31.2
| | Certification of Principal Financial Officer (302)
| | | | | | | | | | Filed
| 32.1
| | Certification of Principal Executive and Principal Financial Officer (906)
| | | | | | | | | | Furnished**
| 101.INS
| | XBRL Instance Document
| | | | | | | | | | Filed
| 101.SCH
| | XBRL Taxonomy Extension Schema Document
| | | | | | | | | | Filed
| 101.CAL
| | XBRL Taxonomy Extension Calculation Linkbase Document
| | | | | | | | | | Filed
| 101.DEF
| | XBRL Taxonomy Extension Definition Linkbase Document
| | | | | | | | | | Filed
| 101.LAB
| | XBRL Taxonomy Extension Label Linkbase Document
| | | | | | | | | | Filed
| 101.PRE
| | XBRL Taxonomy Extension Presentation Linkbase Document
| | | | | | | | | | Filed
|
———————
*
Represents compensatory plan of management.
**
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.
|
