˿Ƶ

 



 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended October 31, 2016

  

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number: 000-55107

 

˿Ƶ.

(Exact name of registrant as specified in its charter)

 

Delaware

27-1933597

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1660 S Albion Street, Suite 525

Denver, CO

 

80222

(Address of principal executive offices)

(Zip Code)

 

Registrants telephone number: (303) 333-4224

 

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 o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o

 

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

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer 

o (Do not check if a smaller reporting company)

Smaller reporting company

þ

 

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

 

Class

 

Outstanding as of December 12, 2016

Common Stock, $0.001 par value per share

 

137,958,145 shares

 

 




 


INDEX


 

PART I – FINANCIAL INFORMATION

 

                      

 

 

Item 1.

Financial Statements.

1

 

 

 

 

Consolidated Balance Sheets

1

 

 

 

 

Consolidated Statements of Operations (Unaudited)

3

 

 

 

 

Consolidated Statement of Changes in Stockholders Equity (Unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

5

 

 

 

 

Condensed Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

26

 

 

 

Item 4.

Controls and Procedures.

26

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings.

27

 

 

 

Item 1A.

Risk Factors.

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

27

 

 

 

Item 3.

Defaults Upon Senior Securities.

27

 

 

 

Item 4.

Mine Safety Disclosures.

27

 

 

 

Item 5.

Other Information.

27

 

 

 

Item 6.

Exhibits.

27


SIGNATURES

28






 


PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


ASPEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


 

 

October 31,

 

 

April 30,

 

 

 

2016

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

707,379

 

 

$

783,796

 

Accounts receivable, net of allowance of $449,946 and $449,946, respectively

 

 

3,484,606

 

 

 

2,179,852

 

Prepaid expenses

 

 

142,939

 

 

 

123,055

 

Total current assets

 

 

4,334,924

 

 

 

3,086,703

 

 

 

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

 

 

Call center equipment

 

 

39,567

 

 

 

79,199

 

Computer and office equipment

 

 

80,171

 

 

 

67,773

 

Furniture and fixtures

 

 

216,652

 

 

 

114,964

 

Software

 

 

2,451,208

 

 

 

2,567,383

 

 

 

 

2,787,598

 

 

 

2,829,319

 

Less accumulated depreciation and amortization

 

 

(1,515,529

)

 

 

(1,680,687

)

Total property and equipment, net

 

 

1,272,069

 

 

 

1,148,632

 

Courseware, net

 

 

170,481

 

 

 

194,932

 

Accounts receivable, secured - related party, net of allowance of $625,963, and $625,963, respectively

 

 

45,329

 

 

 

45,329

 

Other assets

 

 

54,415

 

 

 

31,175

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,877,218

 

 

$

4,506,771

 


(Continued)



The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.




1



 


ASPEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)


 

 

October 31,

 

 

April 30,

 

 

 

2016

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

618,763

 

 

$

9,201

 

Accrued expenses

 

 

232,949

 

 

 

176,974

 

Deferred revenue

 

 

1,188,507

 

 

 

1,013,434

 

Refunds Due Students

 

 

278,227

 

 

 

110,883

 

Deferred rent, current portion

 

 

13,998

 

 

 

2,345

 

Convertible notes payable, current portion

 

 

50,000

 

 

 

50,000

 

Total current liabilities

 

 

2,382,444

 

 

 

1,362,837

 

 

 

 

 

 

 

 

 

 

Bank Line of credit

 

 

 

 

 

1,783

 

Loan payable officer - related party

 

 

1,000,000

 

 

 

1,000,000

 

Convertible notes payable - related party

 

 

300,000

 

 

 

300,000

 

Third party Line of Credit, net of discounts of $106,250 and $0

 

 

643,750

 

 

 

 

Warrant derivative liability

 

 

52,500

 

 

 

 

Deferred rent

 

 

38,029

 

 

 

29,169

 

Total liabilities

 

 

4,416,723

 

 

 

2,693,789

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies - See Note 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 250,000,000 shares authorized,

 

 

 

 

 

 

 

 

135,158,145 issued and 134,958,145 outstanding at April 30, 2016

 

 

 

 

 

 

 

 

138,158,145 issued and 137,958,145 outstanding at October 31, 2016

 

 

137,959

 

 

 

134,958

 

Additional paid-in capital

 

 

26,386,870

 

 

 

26,353,451

 

Treasury stock (200,000 shares)

 

 

(70,000

)

 

 

(70,000

)

Accumulated deficit

 

 

(24,994,334

)

 

 

(24,605,427

)

Total stockholders’ equity

 

 

1,460,495

 

 

 

1,812,982

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

5,877,218

 

 

$

4,506,771

 


The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.



2



 


ASPEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

For the

 

 

For the

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,465,026

 

 

$

1,913,161

 

 

$

6,221,841

 

 

$

3,619,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation and amortization shown separately below)

 

 

1,234,856

 

 

 

867,801

 

 

 

2,130,915

 

 

 

1,641,910

 

General and administrative

 

 

1,919,653

 

 

 

1,610,202

 

 

 

4,101,731

 

 

 

3,087,819

 

Depreciation and amortization

 

 

139,005

 

 

 

148,258

 

 

 

290,055

 

 

 

291,717

 

Total operating expenses

 

 

3,293,514

 

 

 

2,626,261

 

 

 

6,522,701

 

 

 

5,021,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

171,512

 

 

 

(713,100

)

 

 

(300,860

)

 

 

(1,402,424

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

1,307

 

 

 

2,930

 

 

 

1,364

 

 

 

6,663

 

Interest expense

 

 

(56,278

)

 

 

(34,250

)

 

 

(89,411

)

 

 

(67,365

)

Total other expense, net

 

 

(54,971

)

 

 

(31,320

)

 

 

(88,047

)

 

 

(60,702

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

116,541

 

 

 

(744,420

)

 

 

(388,907

)

 

 

(1,463,126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

116,541

 

 

$

(744,420

)

 

$

(388,907

)

 

$

(1,463,126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share allocable to common stockholders - basic

 

$

0.00

 

 

$

(0.01

)

 

$

(0.00

)

 

$

(0.01

)

Net income (loss) per share allocable to common stockholders - diluted

 

$

0.00

 

 

$

(0.01

)

 

$

(0.00

)

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

 

137,758,145

 

 

 

128,303,606

 

 

 

136,833,008

 

 

 

128,239,022

 

Weighted average number of common shares outstanding - diluted

 

 

145,683,166

 

 

 

128,303,606

 

 

 

136,833,008

 

 

 

128,239,022

 



The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.



3



 



ASPEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED OCTOBER 31, 2016

(Unaudited)


 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Treasury

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Equity

 

Balance at April 30, 2016

 

 

134,958,145

 

 

$

134,958

 

 

$

26,353,451

 

 

$

(70,000

)

 

$

(24,605,427

)

 

$

1,812,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attorney fees associated with Registration Statement

 

 

 

 

 

 

 

 

(1,917

)

 

 

 

 

 

 

 

 

(1,917

)

Stock-based compensation

 

 

 

 

 

 

 

 

157,335

 

 

 

 

 

 

 

 

 

157,335

 

Warrant buyback

 

 

2,500,000

 

 

 

2,500

 

 

 

(196,500

)

 

 

 

 

 

 

 

 

(194,000

)

Shares issued for services

 

 

500,000

 

 

 

501

 

 

 

74,501

 

 

 

 

 

 

 

 

 

75,002

 

Net loss, Six Months ended October 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(388,907

)

 

 

(388,907

)

Balance at October 31, 2016

 

 

137,958,145

 

 

 $

137,959

 

 

26,386,870

 

 

(70,000

)

 

(24,994,334

)

 

1,460,495

 



The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.





4



 


ASPEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

For the

 

 

 

Six Months Ended

 

 

 

October 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

  

                       

  

  

                       

  

Net income (loss)

 

$

(388,907

)

 

$

(1,463,126

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Bad debt expense

 

 

 

 

 

99,188

 

Depreciation and amortization

 

 

290,055

 

 

 

291,717

 

Stock-based compensation

 

 

157,335

 

 

 

128,987

 

Warrant modification expense

 

 

 

 

 

6,000

 

Amortization of debt discounts

 

 

6,250

 

 

 

 

Amortization of prepaid shares for services

 

 

35,000

 

 

 

47,600

 

Warrant buyback expense

 

 

206,000

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,304,754

)

 

 

(594,794

)

Prepaid expenses

 

 

20,118

 

 

 

1,809

 

Other assets

 

 

(23,240

)

 

 

(7,267

)

Accounts payable

 

 

609,562

 

 

 

312,004

 

Accrued expenses

 

 

55,974

 

 

 

58,931

 

Deferred rent

 

 

20,513

 

 

 

(6,300

)

Refunds due students

 

 

167,344

 

 

 

179,638

 

Deferred revenue

 

 

175,073

 

 

 

67,105

 

Net cash provided by (used in) operating activities

 

 

26,323

 

 

 

(878,508

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(382,490

)

 

 

(214,019

)

Purchases of courseware

 

 

(6,550

)

 

 

(63,634

)

Net cash used in investing activities

 

 

(389,040

)

 

 

(277,653

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Warrant buyback

 

 

(400,000

)

 

 

 

Borrowing of bank line of credit

 

 

247,000

 

 

 

5,794

 

Repayment of bank line of credit

 

 

(248,783

)

 

 

 

Third party line of credit

 

 

750,000

 

 

 

 

Third party line of credit financing costs

 

 

(60,000

)

 

 

 

Disbursements for equity offering costs

 

 

(1,917

)

 

 

(679

)

Net cash provided by financing activities

 

 

286,300

 

 

 

5,115

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(76,417

)

 

 

(1,151,046

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

783,796

 

 

 

2,159,463

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

707,379

 

 

$

1,008,417

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

67,656

 

 

$

58,017

 

Cash paid for income taxes

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Common stock issued for services

 

$

75,002

 

 

$

47,600

 

Warrant derivative liability

 

$

52,500

 

 

$

 


The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.



5



 


ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)


Note 1. Nature of Operations and Liquidity


Overview


˿Ƶ. (together with its subsidiary, the “Company” or “Aspen”) is a holding company. Its subsidiary Aspen University Inc. was founded in Colorado in 1987 as the International School of Information Management. On September 30, 2004, it changed its name to Aspen University Inc. (“Aspen University”). On March 13, 2012, the Company was recapitalized in a reverse merger. All references to the Company or Aspen before March 13, 2012 are to Aspen University.


Aspen’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 - 57% of our adjunct professors hold doctorate degrees.


Because we believe higher education should be a catalyst to our students’ long-term economic success, we exert financial prudence by offering affordable tuition that is one of the greatest values in online higher education. In 2014, Aspen University unveiled a monthly payment plan aimed at reversing the college-debt sentence plaguing working-class Americans. The monthly payment plan offers bachelor students (except RN to BSN) the opportunity to pay their tuition at $250/month for 72 months ($18,000), nursing bachelor students (RN to BSN) $250/month for 39 months ($9,750), master students $325/month for 36 months ($11,700) and doctoral students $375/month for 72 months ($27,000), interest free, thereby giving students a monthly payment tuition payment option versus taking out a federal financial aid loan.


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. Department of Education (the “DOE”). On February 25, 2015, the DEAC informed Aspen University that it had renewed its accreditation for five years to January, 2019.


Basis of Presentation


A. Interim Financial Statements


The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly our results of operations for the three and six months ended October 31, 2016 and 2015, our cash flows for the six months ended October 31, 2016 and 2015, and our financial position as of October 31, 2016 have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.


Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Report on Form 10-K for the period ended April 30, 2016 as filed with the SEC on July 27, 2016. The April 30, 2016 balance sheet is derived from those statements.





6



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



B. Liquidity


In August 2016, 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 under the line, of which approximately $248,000 was used to repay a secured line of credit with a bank. (See Note 8)


At October 31, 2016, the Company had a cash balance of approximately $700,000. The Company had cash provided from operating activities of $26,323.

 

On April 22, 2016, the Company issued 4,855,487 shares of common stock to two of its warrant holders in exchange for their early exercise of warrants at a reduced exercise price of $0.155 per share. The Company received gross proceeds of $752,500 from these exercises. As a condition of the warrant holders exercising their warrants, Mr. Michael Mathews, 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 1,591,053 shares of common stock. See Note 7. With the additional cash raised in the financings, the growth in revenues and improving operating margins, the Company believes that it has sufficient cash to allow the Company to implement its long-term business plan.


Note 2. Significant Accounting Policies


Principles of Consolidation


The consolidated financial statements include the accounts of ˿Ƶ. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.


Use of Estimates


The preparation of the unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the unaudited consolidated financial statements. 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, amortization periods and valuation of courseware and software development costs, valuation of beneficial conversion features in convertible debt, valuation of derivative instruments, valuation of loss contingencies, valuation of stock-based compensation and the valuation allowance on deferred tax assets.


Cash and Cash Equivalents


For the purposes of the unaudited consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at October 31, 2016 and April 30, 2016. 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 October 31, 2016. As of October 31, 2016 and April 30, 2016, there were deposits totaling $426,487 and $1,224,863 respectively, held in two separate institutions greater than the federally insured limits.


 



7



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Fair Value Measurements


Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:


Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;

Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.


The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.


Refunds Due Students


The Company receives Title IV funds from the Department of Education to cover tuition and living expenses. After deducting tuition and fees, the Company sends checks for the remaining balances to the students.


Revenue Recognition and Deferred Revenue


Revenues consist primarily of tuition and fees derived from courses taught by the Company online as well as from related educational resources that the Company provides to its students, such as access to our online materials and learning management system. Tuition revenue is recognized pro-rata over the applicable period of instruction. The Company allows a student to make three monthly tuition payments during each class. The Company maintains an institutional tuition refund policy, which provides for all or a portion of tuition to be refunded if a student withdraws during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which override the Company’s policy to the extent in conflict. If a student withdraws at a time when a portion or none of the tuition is refundable, then in accordance with its revenue recognition policy, the Company recognizes as revenue the tuition that was not refunded. Since the Company recognizes revenue pro-rata over the term of the course and because, under its institutional refund policy, the amount subject to refund is never greater than the amount of the revenue that has been deferred, under the Company’s accounting policies revenue is not recognized with respect to amounts that could potentially be refunded. The Company’s educational programs have starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs is not yet earned and is therefore deferred. The Company also charges students annual fees for library, technology and other services, which are recognized over the related service period. Deferred revenue represents the amount of tuition, fees, and other student payments received in excess of the portion recognized as revenue and it is included in current liabilities in the accompanying consolidated balance sheets. Other revenues may be recognized as sales occur or services are performed.


The Company has revenues from students outside the United States representing 3.5% of the revenues for the quarter ended October 31, 2016.


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.



8



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Net Income (Loss) Per Share


Net income (loss) per common share is based on the weighted average number of common shares outstanding during each period. Options to purchase 22,197,979 and 16,857,313 common shares, warrants to purchase 11,214,659 and 28,871,757 common shares, and $350,000 and $650,000 of convertible debt (convertible into 907,143 and 1,207,143 common shares, respectively) were outstanding during three months ending October 31, 2016 and 2015, respectively, but during certain periods were not included in the computation of diluted loss per share because the effects would have been anti-dilutive. The options, warrants and convertible debt are considered to be common stock equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive, as noted in the chart below.


Basic and diluted income per share for the three months ended October 31, 2016, were calculated as follows:


 

 

Basic

 

 

Diluted

 

Numerator

 

 

 

 

 

 

Net income applicable to common stock

 

$

116,541

 

 

$

116,541

 

Convertible debt interest

 

 

 

 

 

8,021

 

 

 

$

116,541

 

 

$

124,562

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

137,758,145

 

 

 

137,758,145

 

Convertible debt

 

 

 

 

 

907,143

 

Warrants and options

 

 

 

 

 

7,017,878

 

 

 

 

137,758,145

 

 

 

145,683,166

 

 

 

 

 

 

 

 

 

 

Net income per share

 

$

0.00

 

 

$

0.00

 


Recent Accounting Pronouncements


There have been no new relevant pronouncements since those disclosed in the April 30, 2016 Consolidated Financial Statements.


Note 3. 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. HEMG’s president is Mr. Patrick Spada, the former Chairman 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 654,850 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 $0.19 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 October 31, 2016 and April 30, 2016, the balance of the account receivable, net of allowance, was $45,329.


HEMG has failed to pay to Aspen University any portion of the $772,793 amount due as of September 30, 2014, despite due demand for same. 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 654,850 shares after March 10, 2015. On April 29, 2015, the Company sold those shares to a private investor for $0.155 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 8 and 10)




9



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Note 4. Property and Equipment


As property and equipment become fully expired, the fully expired asset is written off against the associated accumulated depreciation. There is no expense impact for such write offs. Property and equipment consisted of the following at October 31, 2016 and April 30, 2016:


 

 

October 31,

 

 

April 30,

 

 

 

2016

 

 

2016

 

Call center hardware

 

$

39,567

 

 

$

79,199

 

Computer and office equipment

 

 

80,171

 

 

 

67,773

 

Furniture and fixtures

 

 

216,652

 

 

 

114,964

 

Software

 

 

2,451,208

 

 

 

2,567,383

 

 

 

 

2,787,598

 

 

 

2,829,319

 

Accumulated depreciation and amortization

 

 

(1,515,529

)

 

 

(1,680,687

)

Property and equipment, net

 

$

1,272,069

 

 

$

1,148,632

 


Software consisted of the following at October 31, 2016 and April 30, 2016:


 

 

October 31,

 

 

April 30,

 

 

 

2016

 

 

2016

 

Software

 

$

2,451,208

 

 

$

2,567,383

 

Accumulated amortization

 

 

(1,429,668

)

 

 

(1,560,932

)

Software, net

 

$

1,021,540

 

 

$

1,006,451

 


Depreciation and Amortization expense for all Property and Equipment as well as the portion for just software is presented below for three and six months ended October 31, 2016 and 2015:


 

 

For the

 

 

For the

 

 

 

Three Months Ended

October 31,

 

 

Six Months Ended

October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization Expense

 

$

123,906

 

 

$

130,154

 

 

$

259,054

 

 

$

254,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software Amortization Expense

 

$

112,888

 

 

$

118,237

 

 

$

237,067

 

 

$

232,069

 


The following is a schedule of estimated future amortization expense of software at October 31, 2016:


Year Ending April 30,

 

 

 

2017

 

$

198,363

 

2018

 

 

317,445

 

2019

 

 

234,272

 

2020

 

 

164,430

 

2021

 

 

107,030

 

Total

 

$

1,021,540

 




10



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Note 5. Courseware


Courseware costs capitalized were $6,550 and $63,634 for the six months ended October 31, 2016 and 2015 respectively. During September 2015, $1,970,670 of fully amortized courseware was 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 consisted of the following at October 31, 2016 and April 30, 2016:


 

 

October 31,

 

 

April 30,

 

 

 

2016

 

 

2016

 

Courseware

 

$

318,297

 

 

$

319,267

 

Accumulated amortization

 

 

(147,816

)

 

 

(124,335

)

Courseware, net

 

$

170,481

 

 

$

194,932

 


Amortization expense of courseware for the three and six months ended October 31, 2016 and 2015:


 

 

For the

 

 

For the

 

 

 

Three Months Ended

October 31,

 

 

Six Months Ended

October 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization Expense

 

$

15,099

 

 

$

18,104

 

 

$

31,001

 

 

$

36,792

 


The following is a schedule of estimated future amortization expense of courseware at October 31, 2016:


Year Ending April 30,

 

 

 

2017

 

$

27,246

 

2018

 

 

50,492

 

2019

 

 

49,019

 

2020

 

 

35,177

 

2021

 

 

8,547

 

Total

 

$

170,481

 


Note 6. Loan Payable Officer – Related Party


On June 28, 2013, the Company received $1,000,000 as a loan from the Company’s Chief Executive Officer. This loan was for a term of 6 months with an annual interest rate of 10%, payable monthly. Through various note extensions, the debt was extended to May 5, 2018. There was no accounting effect for these extensions.


Note 7. Convertible Notes, Convertible Notes – Related Party


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 common shares of the Company at the rate of $1.00 per share. The Company evaluated the convertible note and determined that, for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common shares on the note issue date. This loan (now a convertible promissory note) was originally due in February 2014.  The amount due under this note has been reserved for payment upon the note being tendered to the Company by the note holder.




11



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



On March 13, 2012, the Company’s CEO loaned the Company $300,000 and received a convertible promissory note due March 31, 2013, bearing interest at 0.19% per annum. The note is convertible into common shares of the Company at the rate of $1.00 per share upon five days written notice to the Company. The Company evaluated the convertible note and determined that, for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the common shares on the note issue date. 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 $0.19 per share and the Company issued 1,591,053 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 evaluated the convertible notes 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 dates.


On August 14, 2012, the Company’s CEO loaned the Company $300,000 and received a convertible promissory note, payable on demand, bearing interest at 5% per annum. The note is convertible into shares of common stock of the Company at a rate of $0.35 per share (based on proceeds received on September 28, 2012 under a private placement at $0.35 per unit). The Company evaluated the convertible notes and determined that, for the embedded conversion option, there was no beneficial conversion value to record as the conversion price is considered to be the fair market value of the 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.


Note 8. Commitments and Contingencies


Line of Credit


In August 2016, 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 under the line, of which approximately $248,000 was used to repay a secured line of credit with a bank as noted below. Additionally, the Company paid a 2% origination fee of $60,000 and issued 750,000 common-stock warrants at an exercise price of $0.20 per share, which are redeemable by the Company if the closing price of its common stock averages at least $0.25 per share for 10 consecutive trading days.  The origination fee and $52,500 value of the 750,000 warrants (see note 11) were recorded as debt discounts to be amortized over the term of the line.  Amortization expense was $6,250 as of October 31, 2016.


The Company maintained a line of credit with a bank, up to a maximum credit line of $250,000.  In September 2016, the line of credit with the bank was paid and terminated.


Employment Agreements


From time to time, the Company enters into employment agreements with certain of its employees. These agreements typically include bonuses, some of which are performance-based in nature. As of October 31, 2016, no performance bonuses have been earned.


Legal Matters


On August 13, 2015, a former employee filed a complaint against the Company in the United States District Court, District of Arizona, for breach of contract claiming that Plaintiff was terminated for “Cause” when no cause existed. Plaintiff sought the remaining amounts under her employment agreement, severance pay, bonuses, value of lost benefits, and the loss of the value of her stock options. The Company filed an answer to the complaint by the September 8, 2015 deadline. That matter has been fully and finally settled for $69,000 as of June 2016 and has been dismissed. The Company accrued $87,500 in accordance with ASC 450-20-55-11 and is included in accrued expenses at April 30, 2016.  The amount owed was paid in the six months ended October 31, 2016.




12



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Regulatory Matters


The Company’s subsidiary, Aspen University, is subject to extensive regulation by Federal and State governmental agencies and accrediting bodies. In particular, the Higher Education Act (the “HEA”) and the regulations promulgated thereunder by the DOE subject Aspen University to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy to participate in the various types of federal student financial assistance programs authorized under Title IV of the HEA. Aspen University has had provisional certification to participate in the Title IV Programs. That provisional certification imposes certain regulatory restrictions including, but not limited to, a limit of 1,200 student recipients for 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 which 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 requirements to the DOE on an ongoing basis. Aspen University performs periodic reviews of its compliance with the various applicable regulatory requirements. As Title IV funds received in 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.


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 operates in a highly regulated industry, it may be subject from time to time to audits, investigations, claims of noncompliance or lawsuits by governmental agencies or third parties, which allege statutory violations, regulatory infractions or common law causes of action.


On February 25, 2015, the DEAC informed Aspen University that it had renewed its accreditation for five years to January, 2019.


Return of Title IV Funds


An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completion and must return those unearned funds in a timely manner, no later than 45 days of the date the school determines that the student has withdrawn. Under Department regulations, failure to make timely returns of Title IV Program funds for 5% or more of students sampled on the institution's annual compliance audit in either of its two most recently completed fiscal years can result in the institution having to post a letter of credit in an amount equal to 25% of its required Title IV returns during its most recently completed fiscal year. If unearned funds are not properly calculated and returned in a timely manner, an institution is also subject to monetary liabilities or an action to impose a fine or to limit, suspend or terminate its participation in Title IV Programs.




13



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Subsequent to a program review by the Department of Education, the Company recognized that it had not fully complied with all requirements for calculating and making timely returns of Title IV funds (R2T4). In November 2013, the Company returned a total of $102,810 of Title IV funds to the Department of Education.


Delaware Approval to Confer Degrees


Aspen University is a Delaware corporation. Delaware law requires an institution to obtain approval from the Delaware Department of Education (“Delaware DOE”) before it may incorporate with the power to confer degrees. In July 2012, Aspen received notice from the Delaware DOE that it was granted provisional approval status effective until June 30, 2015. On April 25, 2016 the Delaware DOE informed Aspen University it was granted full approval to operate with degree-granting authority in the State of Delaware until July 1, 2020. Aspen University is authorized by the Colorado Commission on Education to operate in Colorado as a degree granting institution.


Note 9. Stockholders’ Equity


Common Stock


On June 21, 2016, the Company issued 2,500,000 shares valued at $400,000 and made a cash payment of $400,000 to a warrant holder in exchange for the buyback of 13,451,611 warrants.  The Company re-valued the fair value of the warrants on the buyback date which equaled $594,000 and accordingly, the Company recorded an expense associated with the buyback of $206,000.


On July 31, 2016, the Company issued 500,000 shares to two IR firms for services.  200,000 shares were issued for services under a six month contract with a value of $30,000. 300,000 shares were issued for services under a one year contract with a value of $45,000.  The Company recorded a prepaid for the value of the services and is amortizing over the respective service periods.


Warrants


A summary of the Company’s warrant activity during the six months ended October 31, 2016 is presented below:


 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

Warrants

 

Shares

 

 

Price

 

 

Term

 

 

Value

 

Balance Outstanding, April 30, 2016

 

 

23,916,270

 

 

$

0.19

 

 

 

 

 

 

616,335

 

Granted

 

 

750,000

 

 

 

0.20

 

 

 

 

 

 

37,500

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(13,451,611

)

 

 

0.16

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

Balance Outstanding, October 31, 2016

 

 

11,214,659

 

 

$

0.24

 

 

 

2.0

 

 

$

653,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable, October 31, 2016

 

 

11,214,659

 

 

$

0.24

 

 

 

2.0

 

 

$

653,835

 


On June 24, 2016, the Company issued 2,500,000 shares and a cash payment of $400,000 to a warrant holder in exchange for 13,451,611 warrants as discussed above.


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 750,000 common-stock warrants at an exercise price of $0.20 per share, which are redeemable by the Company if the closing price of its common stock averages at least $0.25 per share for 10 consecutive trading days.




14



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Stock Incentive Plan and Stock Option Grants to Employees and Directors


Immediately following the closing of the Reverse Merger, on March 13, 2012, the Company adopted the 2012 Equity Incentive Plan (the “Plan”) that provides for the grant of 9,300,000 shares, 14,300,000 effective July 2014, 16,300,000 effective September 2014, 20,300,000 effective November 2015 and 25,300,000 effective June 2016, in the form of incentive stock options, non-qualified stock options, restricted shares, stock appreciation rights and restricted stock units to employees, consultants, officers and directors. As of October 31, 2016, there were 3,102,021 shares remaining under the Plan for future issuance. The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of the Company’s stock price over the expected term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC Topic 718 requirements. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award. The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted to employees during the six months ended October 31, 2016 and 2015.


 

 

 

 

 

October 31,

 

 

 

 

 

 

2016

 

Expected life (years)

 

 

 

 

 

 

4-6.5

 

Expected volatility

 

 

 

 

 

 

40-43

%

Weighted-average volatility

 

 

 

 

 

 

0.38

%

Risk-free interest rate

 

 

 

 

 

 

0.00

%

Dividend yield

 

 

 

 

 

 

n/a

 

Expected forfeiture rate

 

 

 

 

 

 

 

 


The Company utilized the simplified method to estimate the expected life for stock options granted to employees. The simplified method was used as the Company does not have sufficient historical data regarding stock option exercises. The expected volatility is based on the average of the expected volatilities from the most recent audited financial statements available for comparative public companies that are deemed to be similar in nature to the Company. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.


A summary of the Company’s stock option activity for employees and directors during the six months ended October 31, 2016, is presented below:


 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

Options

 

Shares

 

 

Price

 

 

Term

 

 

Value

 

Balance Outstanding, April 30, 2016

 

 

17,931,102

 

 

$

0.21

 

 

 

3.3

 

 

 

 

Granted

 

 

4,300,000

 

 

$

0.16

 

 

 

4.9

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(228,123

)

 

$

0.01

 

 

 

1.4

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

Balance Outstanding, October 31, 2016

 

 

22,002,979

 

 

$

0.18

 

 

 

3.16

 

 

$

1,557,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable, October 31, 2016

 

 

9,839,872

 

 

$

0.21

 

 

 

1.57

 

 

$

557,660

 


On May 19, 2016, the Company granted to each of its eight non-employee directors 150,000 five-year stock options. The Company granted an additional 50,000 five-year stock options to the chairman of the Compensation Committee and to the chairman of the Audit Committee.  These options are exercisable at $0.16 and vest in three years.  For the directors receiving 150,000, the fair value was approximately $7,500 per grant and for the two directors receiving 200,000 options, the fair value on the date of grant was approximately $10,000.



15



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



On June 23, 2016, the Company granted 2,000,000 stock options to the Chief Operating Officer, 700,000 stock options to the Chief Academic Officer and 300,000 to the Chief Financial Officer. The five-year options are exercisable at a price of $0.166 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.


As of October 31, 2016, there was approximately $583,000 of unrecognized compensation costs related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.7 years.


The Company recorded compensation expense of $157,335 for the six months ended October 31, 2016 in connection with employee stock options. The Company recorded compensation expense of $128,987 for the six months ended October 31, 2015 in connection with employee stock options.


On September 12, 2016, the Company extended approximately 5 million 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.  


Stock Option Grants to Non-Employees


There were no stock options granted to non-employees during six months ended October 31, 2016 and 2015. The Company recorded no compensation expense for the six months ended October 31, 2016 in connection with non-employee stock options. There was no unrecognized compensation cost at October 31, 2016.


A summary of the Company's stock option activity for non-employees during the six months ended October 31, 2016, is presented below:


 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

Options

 

Shares

 

 

Price

 

 

Term

 

 

Value

 

Balance Outstanding, April 30, 2016

 

 

195,000

 

 

$

0.28

 

 

 

0.9

 

 

$

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

Balance Outstanding, October 31, 2016

 

 

195,000

 

 

$

0.29

 

 

 

0.43

 

 

4,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable, October 31, 2016

 

 

195,000

 

 

$

0.29

 

 

 

0.43

 

 

4,500

 


Note 10. Related Party Transactions


See Note 3 for discussion of secured note and account receivable to related parties and see Notes 6 and 7 for discussion of loans payable and convertible notes payable to related parties.


Note 11. Fair Value Measurements – Warrant Derivative liability


 The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting standard established a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 input are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.



16



ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2016

(Unaudited)



Assets and liabilities measured at fair value on a recurring and non-recurring basis consisted of the following at October 31, 2016 which related to 750,000 warrants which contained price protection:


 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

Value at

 

 

 

 

 

 

 

 

 

 

 

 

October 31,

 

 

Fair value Measurements at October 31, 2016

 

 

 

2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant Derivative Liability

 

$

52,500

 

 

$

 

 

$

 

 

$

52,500

 


The following is a summary of activity of Level 3 liabilities for the six-month period ended October 31, 2016:


Balance April 30, 2016

 

$

 

Initial valuation of warrant derivative liability

 

 

52,500

 

Change in valuation of warrant derivative liability

 

 

 

Balance October 31, 2016

 

$

52,500

 


Changes in fair value of the warrant derivative liability are included in other income (expense) in the accompanying unaudited condensed consolidated statements of operations.


The Company intends to provide notice to the warrant holder that they would redeem any unexercised warrants within 30 days in accordance with the warrant terms as the Company’s common stock trading average was at least twenty-five cents over ten consecutive trading days. Accordingly, the fixed monetary redemption value of $0.07 indicates the fair value as of October 31, 2016.


There were no changes in the valuation techniques during the three and six month periods ended October 31, 2016.


Note 12. Subsequent Event


On November 18, 2016, under the 2012 Equity incentive Plan the Company granted 500,000 five-year options to each of the two new directors elected at the annual meeting held that month. These options are exercisable at $0.27 per share. The options were valued at $40,000 each and vest over a three year term, subject to continued service.


 


 






17



 


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


You should read the following discussion in conjunction with our consolidated financial statements, which are included elsewhere in this Form 10-Q. 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 in the Annual Report on Form 10-K filed on July 27, 2016 with the Securities and Exchange Commission, or the SEC.


All references to “we,” “our” and “us” refer to ˿Ƶ. and its subsidiaries (including Aspen), unless the context otherwise indicates. In referring to academic matters, these words refer solely to Aspen University.


Company Overview


Founded in 1987, Aspen’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 - 57% of our adjunct professors hold doctorate degrees.


Because we believe higher education should be a catalyst to our students’ long-term economic success, we exert financial prudence by offering affordable tuition that is one of the greatest values in online higher education. In 2014, Aspen University unveiled a monthly payment plan aimed at reversing the college-debt sentence plaguing working-class Americans. The monthly payment plan offers bachelor students (except RN to BSN) the opportunity to pay their tuition at $250/month for 72 months ($18,000), nursing bachelor students (RN to BSN) $250/month for 39 months ($9,750), master students $325/month for 36 months ($11,700) and doctoral students $375/month for 72 months ($27,000), interest free, thereby giving students a monthly payment tuition payment option versus taking out a federal financial aid loan.


One of the key differences between Aspen and other publicly-traded, exclusively online, for-profit universities is the fact that the majority of our active degree-seeking students (68% as of October 31, 2016) were enrolled in Aspen’s School of Nursing.


Student Population Overview*


Aspen’s active degree-seeking student body increased year-over-year by 54% during the fiscal quarter ended October 31, 2016, from 2,422 to 3,726 students.


Our most popular school is our School of Nursing. Aspen’s School of Nursing has grown from 57% of our active degree-seeking student body at October 31, 2015, to 68% at October 31, 2016. Aspen’s School of Nursing grew from 1,379 to 2,538 student’s year-over-year, which represented 89% of Aspen’s active degree-seeking student body growth. At October 31, 2016, Aspen’s School of Nursing included 1,493 active students in the RN to BSN program and 1,045 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 during the quarter reported, or are registered for an upcoming course. Aspen is using this definition going forward because it’s 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 seven quarters, including the recent quarter ending October 31, 2016.


 

 

New Student Enrollments

 

Active Degree Seeking Student Body*

Fiscal Quarter End April 30, 2015

 

444

 

1,989

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




18



 


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 1,320 Active Nursing students – net of student graduations and withdrawals (or ~110/month). Aspen’s BSN program accounts for 68% of that growth, as that program is on pace to increase on an annualized basis by approximately 900 students – net (or ~75/month).


Aspen University expects its total active degree-seeking student body to continue its rapid growth and reach approximately 4,500 students by the end of the fiscal year, April 30, 2017. Therefore, the university is on pace to increase its active student body by ~1,600 students on an annualized basis in fiscal year 2017 versus the previous pace of ~950 active students a year ago, an improvement of 68% year-over-year.


Nursing Revenue Summary


Below is a summary of the Nursing active degree-seeking student body as a percentage of the total active degree-seeking student body over the past six fiscal quarters, as well as the Nursing degree-seeking revenue as a percentage of total revenues. Because Nursing average more course completions per year and the average tuition price per course is higher (all Nursing courses are $975/course) as compared to non-Nursing students, Nursing students today represent 71% 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 July 31, 2015

 

 

2,153

 

 

 

1,098

 

 

 

51

%

 

 

53

%

 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

%


Monthly Payment Programs Overview


Since the March 2014 monthly payment plan announcement, 59% 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 October 31, 2016, Aspen had 1,970 active students paying through a monthly payment plan, and 238 students paying through a monthly installment plan, for a total of 2,208 active students paying tuition through a monthly payment method. Additionally, Aspen is currently on pace to add approximately 75 active students/month net to its monthly payment programs through fiscal year 2017. Monthly recurring tuition cash payments for monthly payment programs is approximately $550,000 per month, as compared to approximately $150,000 per month a year ago.


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 33% of total cash receipts in fiscal year 2015 to approximately 28% for fiscal year 2016.


Marketing Efficiency Analysis


Aspen has developed a marketing efficiency ratio to continually monitor the performance of its business model.


Revenue per Enrollment (RPE)

Marketing Efficiency Ratio =

—————————————

Cost per Enrollment (CPE)


Cost per Enrollment (CPE)

The Cost per Enrollment measures the marketing investment spent in a given quarter, divided by the number of new student enrollments achieved in that given quarter, in order to obtain an average CPE for the quarter measured.




19



 


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 the reporting to track 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 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**

2.7x

4.3x

6.4x

7.9x

9.7x


*

Projection

**

Based on current $718 CPE (six month rolling CPE average)

 

 

 

 


The Average RPE is approximately $7,000. Of the $7,000, $6,400 of the RPE is earned through tuition, with the remaining $600 on average earned through miscellaneous fees (includes annual technology fee, withdrawal fees, graduation fees, proctored exams, course specific fees, etc.)


Aspen is projecting to average a Marketing Efficiency Ratio of 9.7x, in other words a 9.7x 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.


Results of Operations


For the Quarter Ended October 31, 2016 Compared with the Quarter Ended October 31, 2015

 

Revenue


Revenue from operations for the quarter ended October 31, 2016 (“2016 Quarter”) increased to $3,465,026 from $1,913,161 for the quarter ended October 31, 2015 (“2015 Quarter”), an increase of $1,551,865 or 81%.


New class starts begun in the 2016 quarter rose to 3,730 from 2,238 for the 2015 quarter, an increase of 67%.  The average tuition price of the new class starts rose to $819 for the 2016 quarter from $786 for the 2015 quarter, an increase of 4%.

 



20



 


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 2016 Quarter rose to $547,863 from $384,854 for the 2015 Quarter, an increase of $163,009 or 42%.  


Note that instructional costs and services for the 2016 Quarter dropped to 16% of revenues, as compared to 20% of revenues for the 2015 Quarter.  As student enrollment levels continue to rise, Aspen anticipates the growth rate in instructional costs and services will continue to lag that of overall revenue growth as a result of the Company commencing in early-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. Depending upon how successful Aspen is in converting faculty to full-time status, we estimate annualized savings of over $500,000.


Marketing and Promotional

 

Marketing and promotional costs for the 2016 Quarter were $686,993 compared to $482,947 for the 2015 Quarter, an increase of $204,046 or 42%. The Company expects marketing and promotional costs to rise in future periods, given we expect to increase monthly marketing spend to approximately $360,000 by the end of the 2017 fiscal year.


Gross Profit rose to 61% of revenues or $2,102,183 for the 2016 Quarter from 48% of revenues or $909,019 for the 2015 Quarter.


Costs and Expenses


General and Administrative


General and Administrative costs for the 2016 Quarter were $1,919,653 compared to $1,610,202 during the 2015 Quarter, an increase of $309,451 or 19%. A significant portion of this increase is the approximate $360,000 increase in payroll, primarily due to the headcount of our enrollment center increasing by 82% year-over-year. General and Administrative costs as a percentage of revenue for the 2016 Quarter declined to 55% compared to 84% during the 2015 Quarter.


From a sequential perspective, excluding the extraordinary one-time, non-recurring and other expenses incurred in the July 30, 2016 quarter of $269,000 ($206,000 expense associated with the surrender of warrants and a $69,000 expense resulting from a former employee litigation settlement), General and Administrative costs only rose by $12,575.


Depreciation and Amortization


Depreciation and amortization costs for the 2016 Quarter declined to $139,005 from $148,258 for the 2015 Quarter, a decrease of $9,253 or 6%.


Other Expense, net


Other expense, net for the 2016 Quarter increased to $54,971 from $31,320 in the 2015 Quarter, an increase of $23,651 or 76%.


Income Taxes

 

Income taxes expense (benefit) for the comparable years was $0 as Aspen Group experienced operating losses in both periods. As management made a full valuation allowance against the deferred tax assets stemming from these losses, there was no tax benefit recorded in the statement of operations in both periods.


Net Income

 

Net Income for 2016 Quarter was $116,541 as compared to a loss of ($744,420) for the 2015 Quarter, an improvement of $860,961 or approximately 116%. Contributing to this improvement was the year-over-year increase in revenues of $1,551,865 or 81% in the 2016 Quarter growing at a significantly higher rate than the increase of General and Administrative costs of only 19%.




21



 


For the Six Months Ended October 31, 2016 Compared with the Six Months Ended October 31, 2015

 

Revenue


Revenue from operations for the six months ended October 31, 2016 (“2016 Period”) increased to $6,221,841 from $3,619,022 for the six months ended October 31, 2015 (“2015 Period”), an increase of $2,602,819 or 72%.


Cost of Revenues (exclusive of amortization)


The Company’s cost of revenues consist of instructional costs and services and marketing and promotional costs.


Instructional Costs and Services


Instructional costs and services for the 2016 Period rose to $1,007,062 from $770,921 for the 2015 Period, an increase of $236,141 or 31%.


As student enrollment levels continue to rise, Aspen anticipates the growth rate in instructional costs and services will continue to lag that of overall revenue growth as a result of the Company commencing in early-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. Depending upon how successful Aspen is in converting faculty to full-time status, we estimate annualized savings of over $500,000.


Marketing and Promotional

 

Marketing and promotional costs for the 2016 Period were $1,123,853 compared to $870,989 for the 2015 Period, an increase of $252,864 or 29%. The Company expects marketing and promotional costs to rise in future periods, given we expect to increase monthly marketing spend to approximately $360,000 by the end of the 2017 fiscal year.


Gross Profit rose to 61% of revenues or $3,822,857 for the 2016 Quarter from 47% of revenues or $1,708,251 for the 2015 Quarter.


Costs and Expenses


General and Administrative


General and administrative costs for the 2016 Period were $4,101,731 compared to $3,087,819 during the 2015 Period, an increase of $1,013,912 or 33%. A significant portion of this increase is the increase in payroll, as well as $206,000 for the warrant surrender incurred in the quarter ending July 31, 2016.


Depreciation and Amortization


Depreciation and amortization costs for the 2016 Period decreased to $290,055 from $291,717 for the 2015 Period, a decrease of $1,662 or 1%.


Other Income (Expense)


Other income for the 2016 Period decreased to $1,364 from $6,663 in the 2015 Period, a decrease of $5,299 or 80%. Interest expense increased to $89,411 from $67,365, an increase of $22,046 or 33%, the increase primarily to higher interest paid for the third party line of credit.


Income Taxes

 

Income taxes expense (benefit) for the 2016 Period and 2015 Period was $0 as Aspen Group experienced operating losses in both periods. As management made a full valuation allowance against the deferred tax assets stemming from these losses, there was no tax benefit recorded in the statement of operations in both periods.




22



 


Net Loss

 

Net loss for the 2016 Period was ($388,907) as compared to ($1,463,126) for the 2015 Period, a decrease in the loss of $1,074,219, or approximately 73%. Contributing to this lower loss was the increase in revenues and gross profits in the 2016 Period, as well as lower proportional increase in G&A expenses relative to the increase in revenues.


Non-GAAP – Financial Measures


The following discussion and analysis includes both financial measures in accordance with Generally Accepted Accounting Principles, or GAAP, as well as non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative of the historical operating results of Aspen Group nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.


Our management uses and relies on Adjusted EBITDA and EBITDA, which are non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods. Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.


Aspen Group defines Adjusted EBITDA as earnings (or loss) from continuing operations before the items in the table below including non-recurring and other charges of $97,384. Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing the impact of items of a non-operational nature that affect comparability.


We have included a reconciliation of our non-GAAP financial measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between Aspen Group and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules.


The following table presents a reconciliation of Adjusted EBITDA to Net loss allocable to common shareholders, a GAAP financial measure:


 

 

For the Quarters Ended

 

 

 

October 31,

 

 

 

2016

 

 

2015

 

Net income (loss)

 

$

116,541

 

 

$

(744,420

)

Interest Expense, net of interest income

 

 

54,971

 

 

 

31,320

 

Depreciation & Amortization

 

 

139,005

 

 

 

148,258

 

EBITDA (loss)

 

 

310,517

 

 

 

(564,842

)

Bad Debt Expense

 

 

 

 

 

67,299

 

Non-recurring and Other Charges

 

 

97,384

 

 

 

162,145

 

Stock-based compensation

 

 

61,728

 

 

 

56,046

 

Adjusted EBITDA (Loss)

 

$

469,629

 

 

$

(279,352

)




23



 


Liquidity and Capital Resources


A summary of our cash flows is as follows:


 

 

For the

 

 

 

Six Months Ended

 

 

 

October 31,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

26,323

 

 

$

(878,508

)

Net cash used in investing activities

 

 

(389,040

)

 

 

(277,653

)

Net cash provided by financing activities

 

 

286,300

 

 

 

5,115

 

Net increase (decrease) in cash and cash equivalents

 

$

(76,417

)

 

$

(1,151,046

)


Net Cash Provided by (Used in) Operating Activities


Net cash provided in operating activities during the 2016 Period totaled $26,323 and resulted primarily by non-cash items of $692,905 and a net change in operating assets and liabilities of $277,674, reduced by the net loss of $388,907. The most significant item change operating assets and liabilities was an increase in accounts receivable of $1,304,754 which is primarily attributed to the growth in revenues from students paying through the monthly payment plan.  The most significant non-cash items were depreciation and amortization expense of $290,055 and the warrant buyback expense of $206,000.


Net cash used in operating activities during the 2015 Period totaled ($878,508) and resulted primarily from a net loss from continuing operations of ($1,463,126) offset by non-cash items of $573,491 and a net change in operating assets and liabilities of $11,127 Depreciation and amortization of $291,716 was the most significant non-cash change and an increase of $594,794 in accounts receivable was the most significant change in operating assets and liabilities.


Net Cash Used in Investing Activities


Net cash used in investing activities during the 2016 Period totaled ($389,040) mostly attributed to the increase in software.


Net cash used in investing activities during the 2015 Period totaled ($277,653) and resulted primarily from capitalized technology expenditures included in property and equipment.


Net Cash Provided By Financing Activities


Net cash used by financing activities during the 2016 Period totaled $286,300 which reflects the increase due to the new $3,000,000 line of credit, of which $750,000 has been drawn, offset by the buyback of warrants for $400,000.


Net cash provided by financing activities during the 2015 Period totaled $5,115 which resulted primarily from a net increase in the line of credit at our bank.


Liquidity and Capital Resource Considerations


Historically, our primary source of liquidity is 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.


As of December 12, 2016, the Company had a cash balance of approximately $1.0 million. With the additional cash from the Company’s $3 million line of credit, the growth in the Company revenues and improving operating margins, the Company believes that it has sufficient cash to allow the Company to implement its long-term business plan and meet its operations for at least the next 12 months. During the next 12 months, we expect to double our monthly marketing spend rate from $180,000 to $360,000, and spend $500,000 to enhance our computer systems to support our planned growth.


Our cash balances are kept liquid to support our growing infrastructure needs. The majority of our cash is concentrated in large financial institutions.




24



 


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. The accounting estimates are discussed below and involve certain assumptions that, if incorrect, could have a material adverse impact on our results of operations and financial condition.


Revenue Recognition and Deferred Revenue


Revenue consisting primarily of tuition and fees derived from courses taught by Aspen online as well as from related educational resources that Aspen provides to its students, such as access to our online materials and learning management system. Tuition revenue is recognized pro-rata over the applicable period of instruction. Aspen maintains an institutional tuition refund policy, which provides for all or a portion of tuition to be refunded if a student withdraws during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which override Aspen’s policy to the extent in conflict. If a student withdraws at a time when a portion or none of the tuition is refundable, then in accordance with its revenue recognition policy, Aspen recognizes as revenue the tuition that was not refunded. Since Aspen recognizes revenue pro-rata over the term of the course and because, under its institutional refund policy, the amount subject to refund is never greater than the amount of the revenue that has been deferred, under Aspen’s accounting policies revenue is not recognized with respect to amounts that could potentially be refunded. Aspen’s educational programs have starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs is not yet earned and is therefore deferred. Aspen also charges students annual fees for library, technology and other services, which are recognized over the related service period. Deferred revenue represents the amount of tuition, fees, and other student payments received in excess of the portion recognized as revenue and it is included in current liabilities in the accompanying consolidated balance sheets. Other revenue may be recognized as sales occur or services are performed.


Accounts Receivable and Allowance for Doubtful Accounts Receivable


All students are required to select both a primary and secondary payment option with respect to amounts due to Aspen for tuition, fees and other expenses. The most common payment option for Aspen’s students is personal funds or payment made on their behalf by an employer. In instances where a student selects financial aid as the primary payment option, he or she often selects personal cash as the secondary option. If a student who has selected financial aid as his or her primary payment option withdraws prior to the end of a course but after the date that Aspen’s institutional refund period has expired, the student will have incurred the obligation to pay the full cost of the course. If the withdrawal occurs before the date at which the student has earned 100% of his or her financial aid, Aspen will have to return all or a portion of the Title IV funds to the DOE and the student will owe Aspen all amounts incurred that are in excess of the amount of financial aid that the student earned and that Aspen is entitled to retain. In this case, Aspen must collect the receivable using the student’s second payment option.


For accounts receivable from students, Aspen records an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of its students to make required payments, which includes the recovery of financial aid funds advanced to a student for amounts in excess of the student’s cost of tuition and related fees. Aspen determines the adequacy of its allowance for doubtful accounts using a general reserve method based on an analysis of its historical bad debt experience, current economic trends, and the aging of the accounts receivable and student status. Aspen applies reserves to its receivables based upon an estimate of the risk presented by the age of the receivables and student status. Aspen writes off accounts receivable balances at the time the balances are deemed uncollectible. Aspen continues to reflect accounts receivable with an offsetting allowance as long as management believes there is a reasonable possibility of collection.


For accounts receivable from primary payers other than students, Aspen estimates its allowance for doubtful accounts by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations, such as bankruptcy proceedings and receivable amounts outstanding for an extended period beyond contractual terms. In these cases, Aspen uses assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. Aspen may also record a general allowance as necessary.


Direct write-offs are taken in the period when Aspen has exhausted its efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that Aspen should abandon such efforts.


Related Party Transactions


See Note 10 to the unaudited consolidated financial statements included herein for additional description of related party transactions that had a material effect on our unaudited consolidated financial statements.




25



 


Off Balance Sheet Arrangements

 

We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.


New Accounting Pronouncements


See Note 2 to our unaudited consolidated financial statements included herein for discussion of recent accounting pronouncements.


Cautionary Note Regarding Forward Looking Statements


This report contains forward-looking statements including statements regarding student growth, projected Marketing Efficiency Ratio, overall growth and liquidity. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

 

The results anticipated by any or all of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include the failure to maintain regulatory approvals, regulatory issues, competition, ineffective media and/or marketing, failure to maintain growth in degree seeking students and the failure to generate sufficient revenue. Further information on our risk factors is contained in our filings with the SEC, including the Form 10-K filed on July 27, 2016. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.


ITEM 4. 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.

 

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




26



 


PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. There were no material changes to our legal proceedings as described in the Company’s Form 10-K during the period covered by this report.   


ITEM 1A. RISK FACTORS


Not applicable to smaller reporting companies.


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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.


ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION


Effective September 14, 2016, Mr. Paul Schneier resigned from the Company’s Board of Directors. Additionally, effective August 29, 2016, Mr. David Pasi resigned from the Company’s Board of Directors. By agreement with the Company, all of Mr. Schneier’s and Mr. Pasi’s outstanding equity awards became fully vested upon their resignations.


ITEM 6. EXHIBITS

 

See the Exhibit Index at the end of this report.





27



 


SIGNATURES

 

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


 

˿Ƶ.

 

 

 

 

 

December 12, 2016

By:

/s/ Michael Mathews

 

 

 

Michael Mathews

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 


December 12, 2016

By:

/s/ Janet Gill

 

 

 

Janet Gill

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

 

 

 







28



 


EXHIBIT INDEX



 

 

 

 

 

Incorporated by Reference

 

Filed or Furnished

Exhibit #

 

Exhibit Description

 

 

Form

 

Date

 

 

Number

 

Herewith

3.1

 

Certificate of Amendment to Certificate of Incorporation, as amended

 

 

S-1

 

10/18/14

 

 

3.1

 

 

3.2

 

Bylaws

 

 

8-K

 

3/19/12

 

 

2.7

 

 

3.3

 

Amendment No. 1 to Bylaws

 

 

8-K

 

3/12/14

 

 

3.1

 

 

10.1

 

2012 Equity Incentive Plan, as amended

 

 

10-K

 

7/27/16

 

 

10.5

 

 

10.2

 

Form of Letter Agreement

 

 

8-K

 

9/7/16

 

 

2.1

 

 

10.3

 

Form of Revolving Promissory Note

 

 

8-K

 

9/7/16

 

 

2.2

 

 

10.4

 

Form of Warrant

 

 

8-K

 

9/7/16

 

 

3.1

 

 

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

———————

**

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.

 

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 ˿Ƶ., at the address on the cover page of this report, Attention: Corporate Secretary.







29