ASPEN GROUP, INC. 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 for the year endedApril 30, 2019 and the Quarterly Report on Form 10-Q for the three months endedJuly 31, 2019 each as filed with theSecurities and Exchange Commission (the "SEC"). Company OverviewAspen Group, Inc. (together with its subsidiaries, the "Company" or "AGI") is an education technology holding company. AGI has three subsidiaries,Aspen University Inc. organized in 1987,United States University, Inc. organized inMay 2017 for the purposes of acquiringUnited States University inDecember 2017 , andAspen Nursing, Inc. ("ANI") organized in 2018. ANI is a subsidiary ofAspen University Inc. AGI leverages its education technology infrastructure and expertise to allow its two universities,Aspen University andUnited States University ("USU"), to deliver on the vision of making college affordable again. Because we believe higher education should be a catalyst to our students' long-term economic success, we exert financial prudence by offering affordable tuition that is one of the greatest values in higher education. AGI's primary focus relative to future growth is to target the high growth nursing profession. As ofOctober 31, 2019 , 8,904 of 10,718 or 83% of all students across both universities are degree-seeking nursing students. InMarch 2014 ,Aspen University unveiled a monthly payment plan available to all students across every online degree program offered by the university. The monthly payment plan is designed so that students will make one payment per month, and that monthly payment is applied towards the total cost of attendance (tuition and fees, excluding textbooks).Aspen University's monthly payment plan offers online associate and bachelor students the opportunity to pay their tuition and fees at$250 /month, online master's students$325 /month, and online doctoral students$375 /month, interest free, thereby giving students a monthly payment option versus taking out a federal financial aid loan. USU began offering the monthly payment plan in the summer of 2017. Today, monthly payment plan is available for the online RN to BSN program ($250 /month), online MBA/M.A.Ed /MSN programs ($325 /month), and the online hybrid Masters of Nursing-Family Nurse Practitioner ("FNP") program ($375 /month). EffectiveAugust 2019 , new student enrollments for USU's FNP monthly payment plan are offered a two-year payment plan ($375 /month for 24 months) designed to pay for the first year's pre-clinical courses only (approximate cost of$9,000 ). The second academic year in which students complete their clinical courses (approximate cost of$18,000 ) is required to be funded through conventional payment methods (either cash, private loans, corporate tuition reimbursement or federal financial aid). Since 1993,Aspen University has been nationally accredited by the DEAC, a national accrediting agency recognized by theDOE . InFebruary 2019 , the DEAC informedAspen University that it had renewed its accreditation for five years toJanuary 2024 . Since 2009, USU has been regionally accredited by WSCUC. Both universities are qualified to participate under the Higher Education Act and the Federal student financial assistance programs (Title IV, HEA programs). Monthly Payment Programs Overview AGI offers two monthly payment programs: •a monthly payment plan in which students make payments every month over a fixed period depending on the degree program; and •a monthly installment plan in which students pay three monthly installments (day 1, day 31 and day 61 after the start of each course). 26 -------------------------------------------------------------------------------- Table of ContentsAspen University students paying tuition and fees through a monthly payment method grew by 17% year-over-year, from 5,074 to 5,927. Those 5,927 students paying through a monthly payment method represent 66% ofAspen University's total active student body.Aspen University's monthly payment plan students currently deliver monthly recurring tuition cash payments exceeding$1,300,000 . USU students paying tuition and fees through a monthly payment method grew from 1,053 to 1,101 students sequentially. Those 1,101 students paying through a monthly payment method represent 65% of USU's total active student body. USU's monthly payment plan students currently deliver monthly recurring tuition cash payments exceeding$300,000 . Note that during fiscal Q2,Aspen University tested changing its monthly payment amounts for bachelorette- and master-level programs from$250 to$300 and$325 to$350 , respectively. The cost per lead rose materially during the two week test period, so the Company reverted back to advertising the original payment amounts per month immediately thereafter and lead costs returned to their original levels. No changes to Aspen's original payment amounts per month (first introduced in 2014) are planned in the future. AGI Student Population Overview AGI's overall active student body (including bothAspen University and USU) grew 35% year-over-year from 7,950 to 10,718 students. Active student body is comprised of active degree-seeking students, enrolled in a course during the quarter covered by this Form 10-Q or are registered for an upcoming course.Aspen University's total active degree-seeking student body grew 27% year-over-year from 7,107 to 9,016 students. Aspen University'sSchool of Nursing grew 34% year-over-year, from 5,466 to 7,299 active students, which includes 1,051 active students in the BSN Pre-Licensure program inPhoenix, Arizona . Specifically, Aspen's BSN Pre-Licensure program active student body grew sequentially by 57%, from 670 to 1,051 students, as a result of now having two campuses open inPhoenix, AZ. USU's total active student body grew year-over-year from 843 to 1,702, or 102%, and sequentially from 1,491 to 1,702, or a sequential increase of 14%. USU's MSN-FNP active student body grew sequentially from 1,294 to 1,463, or a sequential increase of 13%. USU's MSN-FNP program now represents 86% of USU's active student body. AGI's overall active student body (including bothAspen University and USU) grew 35% year-over-year from 7,950 to 10,718 students as ofOctober 31, 2019 , and students seeking nursing degrees were 8,904 or 83% of total students at both universities. [[Image Removed: aspu-20191031_g1.jpg]]
AGI New Student Enrollments
AGI delivered a company record 2,217 new student enrollments for the fiscal
quarter ended
Enrollment growth at
In
27
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addition, our Aspen Nursing + Other Unit experienced an increase in the number
of enrollments per EA and cost per enrollment declined. As a result of this
increased efficiency, Aspen's Nursing + Other unit grew enrollments by 8%
year-over-year.
USU accounted for 394 new student enrollments (primarily FNP enrollments), a 45%
enrollment increase year-over-year.
Below is a table reflecting unconditional acceptance new student enrollments for
the past five quarters:
Enrolls/
New Student Enrollments EAs* Month/EA
Q2'19 Q3'19 Q4'19 Q1'20 Q2'20
Aspen (Nursing + Other) 1,104 895 944 941 1,196 47 8.5
Aspen (Doctoral) 133 120 113 198 190 8 7.9
USU (FNP + Other) 271 251 317 514 394 18 7.3
Aspen (Pre-Licensure BSN,
AZ Campuses) 57 97 186 276 437 8 18.2
Total 1,565 1,363 1,560 1,929 2,217 81
*The EAs reflect the number at quarter end Q2'20.
Marketing Efficiency Ratio (MER) Analysis
AGI has developed a marketing efficiency ratio to continually monitor the
performance of its business model.
Marketing Efficiency Ratio (MER) Revenue per Enrollment (RPE)
= Cost per Enrollment (CPE)
Cost per Enrollment (CPE)
The Cost per Enrollment measures the advertising investment spent in a given six
month period, divided by the number of new student enrollments achieved in that
given six month period, in order to obtain an average CPE for the period
measured.
Revenue per Enrollment (RPE)
The Revenue per Enrollment takes each quarterly cohort of new degree-seeking
student enrollments, and measures the amount of earned revenue including tuition
and fees to determine the average RPE for the cohort measured. For the later
periods of a cohort, we have used reasonable projections based off of historical
results to determine the amount of revenue we will earn in later periods of the
cohort.
The current Marketing Efficiency Ratio (MER = revenue-per-enrollment or
LTV/cost-per-enrollment or CAC) for our four degree units is reflected in the
below table:
Cost-of-
Enrollments Enrollment1 LTV MER
Aspen (Nursing + Other) 1,196 $ 1,061 $ 7,350 6.9X
Aspen (Doctoral) 190 $ 943 $ 12,600 13.4X
USU (FNP + Other) 394 $ 862 $ 17,820 1 20.7X
Aspen (Pre-Licensure BSN, AZ) 437 $ 336 $ 30,000 2 89.3X
_____________________
1Based on 6-month rolling average
2LTV for USU's MSN-FNP Program
The improved MER results were driven by declining cost of enrollment. Compared
to the previous quarter the weighted average cost of enrollment declined 25%, as
the cost of enrollment declined for each program.
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Q2'20 Q2'20 Cost of Q1'20 Q1'20 Cost of Percent
Enrollments Enrollment 1 Enrollments Enrollment 1 Change
Aspen (Nursing + Other) 1,196 $ 1,061 941 $ 1,231 -14 %
Aspen (Doctoral) 190 $ 943 198 $ 1,987 -53 %
USU (FNP + Other) 394 $ 862 514 $ 1,078 -20 %
Aspen (Pre-Licensure BSN, AZ) 437 $ 336 276 $ 478 -30 %
Total / Weighted Average 2,217 $ 873 1,929 $ 1,160 -25 %
_____________________
1Based on 6-month rolling average
Bookings Analysis
On a year-over-year basis, fiscal Q2'20 bookings increased 92%, from $16.3
million to $31.3 million , delivering an average revenue per enrollment (APRU)
increase of 35%, from $10,434 to $14,125 .
Lifetime Value
(LTV) Q2'2019 Q2'2019 Q2'2020 Q2'2020
Per Enrollment Enrollments Bookings* Enrollments Bookings*
AU Online (Nursing + Other) Unit $ 7,350 1,104 $ 8,114,400 1,196 $ 8,790,600
AU (Doctoral) Unit$ 12,600 133$ 1,675,800 190 $
2,394,000
AU (Pre-Licensure BSN) Unit$ 30,000 57$ 1,710,000 437 $
13,110,000
USU (FNP + Other) Unit$ 17,820 271$ 4,829,220 394$ 7,021,080 Total 1,565$ 16,329,420 2,217$ 31,315,680 ARPU$ 10,434 $ 14,125
_____________________
*Note: "Bookings" are defined by multiplying Lifetime Value (LTV) per enrollment by new student enrollments for each operating unit. ASPEN UNIVERSITY'S PRE-LICENSURE BSN HYBRID (ONLINE/ON-CAMPUS) DEGREE PROGRAM InJuly 2018 ,Aspen University through ANI began offering its Pre-Licensure Bachelor of Science in Nursing (BSN) degree program at its initial campus inPhoenix, Arizona . As a result of overwhelming demand in thePhoenix metro area, inJanuary 2019 Aspen University began offering both day (July, November, March semesters) and evening/weekend (January, May, September semesters) programs, equaling six semester starts per year. Moreover, inSeptember 2018 , AGI entered into a memorandum of understanding to open a second campus in thePhoenix metro area in partnership with HonorHealth. The initial semester at HonorHealth began inSeptember 2019 .Aspen University's innovative hybrid (online/on-campus) program allows most of the credits to be completed online (83 of 120 credits or 69%), with pricing offered at current low tuition rates of$150 /credit hour for online general education courses and$325 /credit hour for online core nursing courses. For students with no prior college credits, the total cost of attendance is less than$50,000 .Aspen University's Pre-Licensure BSN program is offered as a full-time, three-year (nine semester) program that is specifically designed for students who do not currently hold a state nursing license and have no prior nursing experience. Aspen is admitting students into one of two program components: (1) a pre-professional nursing component for students that have less than the required 41 general education credits completed (Year 1), and (2) the nursing core component for students that are ready to participate in the competitive evaluation process for entry (Years 2-3). New student enrollments forAspen University's Pre-Licensure BSN program increased from 276 to 437, or 58% sequentially.Aspen University ended the fiscal second quarter with 1,051 active students in its Pre-Licensure BSN program.Pre-Licensure BSN Program Campus Expansion Plan Aspen University plans to launch a stand-alone campus inTampa, Florida in the summer of calendar year 2020. A clinical affiliation agreement has been executed withBayfront Health , a regional network of seven hospitals and over 1,900 medical professionals on staff serving the residents ofFlorida's Gulf Coast . 29 -------------------------------------------------------------------------------- Table of Contents Additionally,Aspen University plans to launch a stand-alone campus inAustin, Texas in the winter of calendar year 2020. A clinical affiliation agreement has been executed withBaylor Scott & White Health - Central division. As the largest not-for-profit healthcare system inTexas and one of the largest inthe United States ,Baylor Scott & White Health was born from the 2013 combination ofBaylor Health Care System andScott & White Healthcare . Today,Baylor Scott & White includes 48 hospitals, more than 800 patient care sites, more than 7,800 active physicians, over 47,000 employees and theScott & White Health Plan . The Company has strategically targeted existing campus locations inAustin andTampa that are substantially built-out including FF&E (furniture, fixtures, and equipment) in order to reduce the capital expenditures (CapEx) required to launch these campuses. The Company expects this will allow the CapEx for each new campus to be in the same range as the cost ofAspen University's embedded campus at HonorHealth located inNorth Phoenix . ACCOUNTS RECEIVABLE AND MONTHLY PAYMENT PLAN Since the inception of the monthly payment plan in the spring of 2014, the accounts receivable balance, both short-term and long-term, has grown from a net number of$649,890 atApril 30, 2014 to a net number of$18,304,250 atOctober 31, 2019 . This growth could be portrayed as the engine of the monthly payment plan. The attractive aspect of being able to pay for a degree over a fixed period of time has fueled the growth of this plan and, as a result, the increase of the accounts receivable balance. Each student's receivable account is different depending on how many classes a student takes each period. If a student takes two classes each eight-week period while paying$250 ,$325 or$375 a month as an example, that student's account receivable balance will rise accordingly. The converse is true also. A student who takes courses at a slower pace, even taking time off between eight-week terms, could have a balance due to them. It is much more likely however that a student participating in the monthly payment plan will have an accounts receivable balance, as the majority of students complete their degree program of study prior to the completion of the fixed monthly payment plan. The common thread is the actual monthly payment, which functions as a retail installment contract with no interest that each student commits to pay over a fixed number of months. If a student stops paying, that person can no longer register for a class. If a student decides to withdraw from the university, their account will be settled, either through collection of their balance or disbursement of the amount owed them.Aspen University students paying tuition and fees through a monthly payment method grew by 17% year-over-year, from 5,074 to 5,927. Those 5,927 students paying through a monthly payment method represent 66% ofAspen University's total active student body. USU students paying tuition and fees through a monthly payment method grew from 1,053 to 1,101 students sequentially. Those 1,101 students paying through a monthly payment method represent 65% of USU's total active student body. Relationship Between Accounts Receivable and Revenue The gross accounts receivable balance for any period is the net effect of the following three factors: 1.Revenue; 2.Cash receipts; and 3.The net change in deferred revenue. All three factors equally determine the gross accounts receivable. If one quarter experiences particularly high cash receipts, the gross accounts receivable will go down. The same effect if cash receipts are lower or if there are significant changes in either of the other factors. Simply looking at the change in revenue does not translate into an equally similar change in gross accounts receivable. The relative change in cash and the deferral must also be considered. For net accounts receivable, the changes in the reserve must also be considered. Any additional reserve or write-offs will influence the balance. As it is a straight mathematical formula for both gross accounts receivable and net accounts receivable, and most of the information is public, one can reasonably calculate the two non-public pieces of information, namely the cash receipts in gross accounts receivable and the write-offs in net accounts receivable. For revenue, the quarterly change is primarily billings and the net impact of deferred revenue. The deferral from the prior quarter or year is added to the billings and the deferral at the end of the period is subtracted from the amount billed. The total 30 -------------------------------------------------------------------------------- Table of Contents deferred revenue at the end of every period is reflected in the liability section of the balance sheet. Deferred revenue can vary for many reasons, but seasonality and the timing of the class starts in relation to the end of the quarter will cause changes in the balance. As mentioned in the accounts receivable section, the change in revenue cannot be compared to the change in accounts receivable. Revenue does not have the impact of cash received whereas accounts receivable does. Depending on the month and the amount of cash received, it is likely that revenue or accounts receivable will increase at a rate different from the other. The impact of cash is easy to substantiate as it agrees to deposits in our bank accounts. AGI records an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of its students to make required payments, which includes the recovery of financial aid funds advanced to a student for amounts in excess of the student's cost of tuition and related fees. AtOctober 31, 2019 , the allowance for doubtful accounts was$1,892,318 which represents 9% of the gross accounts receivable balance of$20,196,568 , the sum of both short-term and long-term receivables. The Introduction of Long-Term Accounts Receivable When a student signs up for the monthly payment plan, there is a contractual amount that the Company can expect to earn over the life of the student's program. This contractual amount cannot be recorded as an account receivable as the student does have the option to stop attending. As a student takes a class, revenue is earned over that eight-week class. Some students accelerate their program, taking two classes every eight-week period, and as we discussed, that increases the student's accounts receivable balance. If any portion of that balance will be paid in a period greater than 12 months, that portion is reflected as long-term accounts receivable. As a result of the growing acceptance of our monthly payment plans, our long-term accounts receivable balance has grown from$3,085,243 atApril 30, 2019 to$5,490,733 atOctober 31, 2019 . The primary component consist of students who make monthly payments over 36 and 39 months. The average student completes their academic program in 24 months, therefore most of the Company's accounts receivable are short-term. Included below is a graphic of both short-term and long-term receivables, as well as contractual value: A B C Classes Taken Payments for classes Expected classes less monthly taken that are greater to be taken over payments received than 12 months balance of program. Short-Term Long-term Not recorded in Accounts Receivable Accounts Receivable financial statements The Sum of A, B and C will equal the total cost of the program. Results of Operations For the Quarter EndedOctober 31, 2019 (Fiscal 2020 Q2) Compared with the Quarter EndedOctober 31, 2018 (Fiscal 2019 Q2) Revenues Revenue from operations for the Fiscal 2020 Q2 increased to$12,085,965 from$8,095,344 for the Fiscal 2019 Q2, an increase of$3,990,621 or 49%. The increase was primarily due to enrollment growth in the degree programs with the highest lifetime value (LTV). By focusing our marketing spend on delivering enrollment growth in the degree programs with the highest lifetime value (LTV), we increased our average revenue per enrollment (or ARPU) by 35%. The Company expects revenue growth to continue in future periods as we continue prioritizing our highest LTV degree programs to achieve our long-term growth plans.Aspen University's revenues in the Fiscal 2020 Q2 increased 35% year-over-year.Aspen University's traditional post-licensure online nursing + other business unit contributed 61% of total Company revenue in the Fiscal 2020 Q2, whileAspen University's Pre-Licensure BSN program delivered approximately 12% of the Company's revenues in the Fiscal 2020 Q2. Finally, USU contributed approximately 27% of the total revenues for the Fiscal 2020 Q2. 31 -------------------------------------------------------------------------------- Table of Contents The Company now expects annual revenue growth to meet or exceed 41% for the full fiscal year 2020. 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 Fiscal 2020 Q2 increased to$2,181,067 or 18% of revenues from$1,586,904 or 20% of revenues for the Fiscal 2019 Q2, an increase of$594,163 or 37%. The increase was primarily due to the increase in the number of class starts year-over-year.Aspen University instructional costs and services represented 16% ofAspen University revenues for the Fiscal 2020 Q2, while USU instructional costs and services equaled 23% of USU revenues during the Fiscal 2020 Q2. Marketing and Promotional Marketing and promotional costs for the Fiscal 2020 Q2 were$2,006,989 or 17% of revenues compared to$2,248,611 or 28% of revenues for the Fiscal 2019 Q2, a decrease of$241,622 or (11%).Aspen University marketing and promotional costs represented 16% ofAspen University revenues for the Fiscal 2020 Q2, while USU marketing and promotional costs equaled 11% of USU revenues for the Fiscal 2020 Q2. AGI corporate marketing expenses equaled$247,904 for the Fiscal 2020 Q2 compared to$205,969 for the Fiscal 2019 Q2, an increase of$41,936 or 20%. Gross profit rose to 63% of revenues or$7,638,195 for the Fiscal 2020 Q2 from 50% of revenues, or$4,083,951 for the Fiscal 2019 Q2, an increase of 87% year over year.Aspen University gross profit represented 65% ofAspen University revenues for the Fiscal 2020 Q2, while USU gross profit equaled 67% of USU revenues during the Fiscal 2020 Q2. Costs and Expenses General and Administrative General and administrative costs for the Fiscal 2020 Q2 were$7,601,459 or 63% of revenues compared to$6,210,411 or 77% of revenues during the Fiscal 2019 Q2, an increase of$1,391,048 , or 22%. The increase in expense is consistent with our long term expectations that general and administrative costs will grow at approximately half the rate of revenues. There is a portion of these costs that are variable which increased as our revenues increased; but there also is a fixed cost component that tends to grow at a slower rate.Aspen University general and administrative costs which are included in the above amount represented 44% ofAspen University revenues for the Fiscal 2020 Q2, while USU general and administrative costs equaled 56% of USU revenues for the Fiscal 2020 Q2. AGI's general and administrative costs for the Fiscal 2020 Q2 and Fiscal 2019 Q2 are included in the above amounts equaled$1,909,085 and$1,534,166 , respectively, include corporate employees in the NY corporate office, IT, rent, non-cash AGI stock based compensation, and professional fees (legal, accounting, and IR). Depreciation and Amortization Depreciation and amortization costs for the Fiscal 2020 Q2 increased to$628,225 from$524,067 for the Fiscal 2019 Q2, an increase of$104,158 , or 20%. The increase in depreciation expense is mainly due to additional investment in company developed software. Moreover, AGI has made capital investments in thePhoenix campuses and will invest in other campus locations that will cause depreciation expense to continue to increase in the near future. Other Income (Expense) 32 -------------------------------------------------------------------------------- Table of Contents Other income/(expense), net for the Fiscal 2020 Q2 decreased to$(296,393) from$(429) in the Fiscal 2019 Q2, a decrease of$(295,964) , or (2,598)%. The decrease is primarily due to amortization of original issue discount and interest on our debt. Income Taxes Income taxes expense for the Fiscal 2020 Q2 was$10,000 compared to$0 in the Fiscal 2019 Q2.Aspen Group experienced operating losses in both periods. As management made a full valuation allowance against the deferred tax assets stemming from these losses, there was no tax benefit recorded in the statement of operations in either quarter. Operating Income and Loss The Company reported an operating loss of$(331,775) during the Fiscal 2020 Q2 as compared to$(2,474,649) for the Fiscal 2019 Q2, a decrease in the loss of$2,142,874 , or 87% improvement.Aspen University generated approximately$1.8 million of operating income for the Fiscal 2020 Q2. Note that Aspen's Pre-Licensure BSN program accounted for$0.5 million of the$1.8 million operating income generated atAspen University , becoming the highest margin unit of the Company. USU generated$34,420 of operating income during the Fiscal 2020 Q2, while AGI corporate incurred approximately$(2.2) million of operating expenses for the Fiscal 2020 Q2. Net Loss Net loss applicable to stockholders was$(638,168) , or net loss per share of$(0.03) for the Fiscal 2020 Q2 as compared to$(2,475,078) for the Fiscal 2019 Q2, a decrease in the loss of$1,836,910 , or 74% improvement. For the Six Months EndedOctober 31, 2019 (Fiscal Year 2020 Q2) Compared with the Six Months EndedOctober 31, 2018 (Fiscal Year 2019 Q2) Revenues Revenues from operations for the six months endedOctober 31, 2019 increased to$22,443,947 from$15,316,649 for the six months endedOctober 31, 2018 , an increase of$7,127,298 or 47%.Aspen University's revenues contributed 74% to total revenue and increased$4,030,066 to$16,547,521 from$12,517,455 . USU revenues increased$3,097,232 or 111% from$2,799,194 to$5,896,426 . 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 six months endedOctober 31, 2019 increased to$4,324,886 or 19% of revenues from$3,151,840 or 21% of revenues for the six months endedOctober 31, 2018 , an increase of$1,173,046 or 37%. The increase was primarily due to the increase in the number of class starts year-over-year.Aspen University instructional costs and services represented 17% ofAspen University revenues for the six months endedOctober 31, 2019 , while USU instructional costs and services equaled 25% of USU revenues over the same period. Marketing and Promotional Marketing and promotional costs for the six months endedOctober 31, 2019 were$4,216,228 or 19% of revenues compared to$4,436,067 or 29% of revenues for the six months endedOctober 31, 2018 , a decrease of$219,839 or (5%).Aspen University marketing and promotional costs represented 18% ofAspen University revenues for the six months endedOctober 31, 2019 , while USU marketing and promotional costs equaled 14% of USU revenues for the same period. AGI corporate marketing expenses equaled$476,136 for the six months endedOctober 31, 2019 compared to$432,054 for the six months endedOctober 31, 2018 , an increase of$44,082 or 10%. 33 -------------------------------------------------------------------------------- Table of Contents Gross profit rose to 60% of revenues or$13,403,524 for the six months endedOctober 31, 2019 from 48% of revenues, or$7,393,719 for the six months endedOctober 31, 2018 , an increase of 81% year over year.Aspen University gross profit represented 62% ofAspen University revenues for the six months endedOctober 31, 2019 , while USU gross profit equaled 61% of USU revenues during the same period. Costs and Expenses General and Administrative General and administrative costs for the six months endedOctober 31, 2019 were$14,638,609 or 65% of revenues compared to$12,034,543 or 79% of revenues during the six months endedOctober 31, 2018 , an increase of$2,604,066 , or 22%. The increase in expense is consistent with our long term expectations that general and administrative costs will grow at approximately half the rate of revenues. There is a portion of these costs that are variable which increased as our revenues increased; but there also is a fixed cost component that tends to grow at a slower rate.Aspen University general and administrative costs which are included in the above amount represented 45% ofAspen University revenues for the six months endedOctober 31, 2019 , while USU general and administrative costs equaled 58% of USU revenues for the same period. AGI's general and administrative costs for the six months endedOctober 31, 2019 andOctober 31, 2018 are included in the above amounts equaled$3,865,972 and$2,863,171 , respectively, include corporate employees in the NY corporate office, IT, rent, non-cash AGI stock based compensation, and professional fees (legal, accounting, and IR). Depreciation and Amortization Depreciation and amortization costs for the six months endedOctober 31, 2019 increased to$1,234,799 from$1,022,172 for the six months endedOctober 31, 2018 , an increase of$212,627 , or 21%. The increase in depreciation expense is mainly due to additional investment in company developed software. Moreover, AGI has made capital investments in thePhoenix campuses and will invest in other campus locations that will cause depreciation expense to continue to increase in the near future. Other Income (Expense) Other income/(expense), net for the six months endedOctober 31, 2019 decreased to$(697,280) from$15,619 for the six months endedOctober 31, 2018 , a decrease of$(712,899) , or (4,564)%. The decrease is primarily due to amortization of original issue discount and interest on our debt. Income Taxes Income taxes expense for the six months endedOctober 31, 2019 were$45,595 compared to$0 in for the six months endedOctober 31, 2018 .Aspen Group experienced operating losses in both periods. As management made a full valuation allowance against the deferred tax assets stemming from these losses, there was no tax benefit recorded in the statement of operations in either period. Operating Income and Loss The Company reported an operating loss of$(1,970,575) during the six months endedOctober 31, 2019 as compared to$(5,327,973) for the six months endedOctober 31, 2018 , a decrease in the loss of$3,357,398 , or 63% improvement.Aspen University generated approximately$2.7 million of operating income for the six months endedOctober 31, 2019 . Note that Aspen's Pre-Licensure BSN program accounted for$0.6 million of the$2.7 million operating income generated atAspen University , becoming the highest margin unit of the Company. USU incurred$(384,869) of operating loss during the six months endedOctober 31, 2019 , while AGI corporate incurred approximately$(4.4) million of operating expenses for the six months endedOctober 31, 2019 . Net Loss 34 -------------------------------------------------------------------------------- Table of Contents Net loss applicable to stockholders was$(2,713,450) , or net loss per share of$(0.14) for the six months endedOctober 31, 2019 as compared to$(5,312,354) for the six months endedOctober 31, 2018 , a decrease in loss of$2,598,904 , or 49% improvement. Non-GAAP - Financial Measures The following discussion and analysis includes both financial measures in accordance with Generally Accepted Accounting Principles, or GAAP, as well as non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative of the historical operating results ofAspen Group nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. Our management uses and relies on EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods. Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.Aspen Group defines Adjusted EBITDA as earnings (or loss) from continuing operations before the items in the table below including non-recurring charges of approximately$0 in the Fiscal 2020 Q2 and approximately$118,872 in the Fiscal 2019 Q2. Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing the impact of items of a non-operational nature that affect comparability. We have included a reconciliation of our non-GAAP financial measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicableSEC rules. The following table presents a reconciliation of Net loss allocable to common shareholders to Adjusted EBITDA: Six Months Ended Three Months Ended October 31, October 31, 2019 2018 2019 2018 Net loss$ (638,168)
426,694 41,922 846,761 82,275
Taxes 44,168 9,276 134,445 9,276
Depreciation & amortization 628,225 524,067 1,234,799 1,022,172
EBITDA (loss) 460,919 (1,899,813) (497,445) (4,198,631)
Bad debt expense 407,759 171,084 648,658 292,889
Non-recurring charges - 118,872 132,949 307,537
Stock-based compensation 492,130 305,315 990,547 515,291
Adjusted EBITDA (Loss) $ 1,360,808 For the Quarter EndedOctober 31, 2019 (Fiscal 2020 Q2) Compared with the Quarter EndedOctober 31, 2018 (Fiscal 2019 Q2) The Company reported Adjusted EBITDA of$1,360,808 for the Fiscal 2020 Q2 as compared to an Adjusted EBITDA loss of$(1,304,542) for the Fiscal 2019 Q2, an improvement of >100%.Aspen University generated$1.8 million of net income and$2.6 million of Adjusted EBITDA for the Fiscal 2020 Q2 as compared to approximately net income of$0.4 million and$0.9 million of Adjusted EBITDA for the Fiscal 2019 Q2. 35 -------------------------------------------------------------------------------- Table of Contents USU generated net income of$151,359 and$0.5 million of Adjusted EBITDA for the Fiscal 2020 Q2 as compared to a net loss of$(1.1) million and an Adjusted EBITDA loss of approximately$(0.8) million during the Fiscal 2019 Q2.Aspen Group corporate incurred an Adjusted EBITDA loss of($1.7) million which contributed to the consolidated Aspen Group Adjusted EBITDA result of$1.4 million for the Fiscal 2020 Q2.Aspen Group corporate incurred an Adjusted EBITDA loss of$(1.4) million that contributed to the consolidatedAspen Group Adjusted EBITDA loss of$(1.3) million for the Fiscal 2019 Q2. For the Six Months EndedOctober 31, 2019 (Fiscal Year 2020 Q2) Compared with the Six Months EndedOctober 31, 2018 (Fiscal Year 2019 Q2) The Company reported Adjusted EBITDA of$1,274,709 for the six months endedOctober 31, 2019 as compared to an Adjusted EBITDA loss of$(3,082,914) for the six months endedOctober 31, 2018 , an improvement of >100%.Aspen University generated$2.7 million of net income and$4.1 million of Adjusted EBITDA for the six months endedOctober 31, 2019 as compared to approximately net income of$0.4 million and$1.2 million of Adjusted EBITDA for the six months endedOctober 31, 2018 . USU incurred a net loss of$(267,667) and$0.5 million of Adjusted EBITDA for the six months endedOctober 31, 2019 as compared to a net loss of$(2.3) million and an Adjusted EBITDA loss of approximately$(1.6) million for the six months endedOctober 31, 2018 .Aspen Group corporate incurred an Adjusted EBITDA loss of($3.5) million which impacted the consolidated Aspen Group Adjusted EBITDA result of$1.2 million for the six months endedOctober 31, 2019 .Aspen Group corporate incurred an Adjusted EBITDA loss of($2.7) million which impacted the consolidated Aspen Group Adjusted EBITDA result of$(3,082,914) for the six months endedOctober 31, 2018 . Liquidity and Capital Resources A summary of our cash flows is as follows: Six Months Ended October 31, 2019 2018 Net cash used in operating activities$ (2,025,107) $ (5,487,423) Net cash used in investing activities (1,253,653) (1,431,598) Net cash provided by financing activities 237,713 30,270 Net decrease in cash$ (3,041,047) $
(6,888,751)
Net Cash Used in Operating Activities Net cash used in operating activities for the six months endedOctober 31, 2019 totaled$(2,025,107) and resulted primarily from the net loss of$(2,713,450) and a net change in operating assets and liabilities of$(2,365,984) , partially offset by$3,054,327 in non-cash items. The net loss included$852,649 for interest expense. The most significant change in operating assets and liabilities was an increase in gross accounts receivable (both short and long term accounts receivable, before allowance for doubtful accounts) of approximately$5.2 million 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 approximately$1.2 million and stock-based compensation expense of approximately$0.9 million . Cash used in operations is also affected by changes in working capital. The Company expects a favorable trend in working capital over time, but there may be volatility from quarter to quarter. So, in aggregate the Company expects a general trend toward lower cash used in operations in future quarters; however, some quarters could have higher cash used in operations as a result of more cash used to support changes in working capital. Program start timings and the related federal financial aid drawdowns also impact cash timing. For example, this quarter the timing of the drawdown for our USU MSN-FNP program resulted in over$500,000 of cash just before quarter end. In the future, the opposite effect may occur depending on program start timing during the year. Net cash used in operating activities for the six months endedOctober 31, 2018 totaled$(5,487,423) and resulted primarily from the net loss of$(5,312,354) , partially offset by$1,838,637 in non-cash items and$2,013,706 decrease in operating assets 36 -------------------------------------------------------------------------------- Table of Contents and liabilities. The most significant item change in operating assets and liabilities was an increase in accounts receivable of$4,028,143 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$1,022,172 and stock-based compensation expense of$515,291 .Net Cash Used in Investing Activities Net cash used in investing activities for the six months endedOctober 31, 2019 totaled$(1,253,653) mostly attributed to investments in Company developed software. Net cash used in investing activities for the six months endedOctober 31, 2018 totaled$(1,431,598) mostly attributed to investments in courseware and the purchase of property and equipment as we were building up our campus. Net Cash Provided By Financing Activities Net cash provided by financing activities for the six months endedOctober 31, 2019 totaled$237,713 which reflects proceeds from the exercise of stock options and warrants. Net cash provided by financing activities for the six months endedOctober 31, 2018 totaled$30,270 , which reflects stock option exercise proceeds net of payment of offering costs. Liquidity The Company had cash deposits of approximately$7.3 million onDecember 6, 2019 , including$454,288 of restricted cash. In addition to its cash, the Company also had access to the$5 million Revolving Credit Facility, which is unused. The Company expects that its cash resources will be sufficient to meet its working capital needs for at least the next 12 months. Our cash balances are kept liquid to support our growing infrastructure needs. The majority of our cash is concentrated in large financial institutions. Critical Accounting Policies and Estimates In response to financial reporting release FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from theSEC , we have selected our more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on our financial condition. There were no material changes to our principal accounting estimates during the period covered by this report. Revenue Recognition and Deferred Revenue Revenue consisting primarily of tuition and fees derived from courses taught by Aspen online as well as from related educational resources that Aspen provides to its students, such as access to our online materials and learning management system. Tuition revenue is recognized pro-rata over the applicable period of instruction. Aspen maintains an institutional tuition refund policy, which provides for all or a portion of tuition to be refunded if a student withdraws during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which override Aspen's policy to the extent in conflict. If a student withdraws at a time when a portion or none of the tuition is refundable, then in accordance with its revenue recognition policy, Aspen recognizes as revenue the tuition that was not refunded. Since Aspen recognizes revenue pro-rata over the term of the course and because, under its institutional refund policy, the amount subject to refund is never greater than the amount of the revenue that has been deferred, under Aspen's accounting policies revenue is not recognized with respect to amounts that could potentially be refunded. Aspen's educational programs have starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs is not yet earned and is therefore deferred. Aspen also charges students annual fees for library, technology and other services, which are recognized over the related service period. Deferred revenue represents the amount of tuition, fees, and other student payments received in excess of the portion recognized as revenue and it is included in current liabilities in the accompanying consolidated balance sheets. Other revenue may be recognized as sales occur or services are performed. Accounts Receivable and Allowance for Doubtful Accounts Receivable 37 -------------------------------------------------------------------------------- Table of Contents 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 theDOE 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. Business Combinations We include the results of operations of businesses we acquire from the date of the respective acquisition. We allocate the purchase price of acquisitions to the assets acquired and liabilities assumed at fair value. The excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed is recorded as goodwill. We expense transaction costs associated with business combinations as incurred.Goodwill and IntangiblesGoodwill currently represents the excess of purchase price over the fair market value of assets acquired and liabilities assumed fromEducacion Significativa, LLC .Goodwill has an indefinite life and is not amortized.Goodwill is tested annually for impairment. Intangible assets represent both indefinite lived and definite lived assets. Accreditation and regulatory approvals and Trade name and trademarks are deemed to have indefinite useful lives and accordingly are not amortized but are tested annually for impairment. Student relationships and curriculums are deemed to have definite lives and are amortized accordingly. 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 38
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Table of Contents This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future revenue growth, the expectations from highest LTV programs, expected pace of increase in expenses, future bottom line results, reductions in future cash used in operations, the expected future effect of seasonality on our operating results, the Pre-Licensure BSN program campus expansion plans, the expected timing of launching of, and anticipated capital expenditures and other costs related to, new campuses, collection of our accounts receivable and liquidity. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include continued high demand for nurses, the continued effectiveness of our marketing efforts, signing leases and unanticipated issues with, and delays in, launching our third and fourth campuses, futureU.S. economic conditions and the impact on our enrollments and our students ability to make monthly payment plan payments, the failure of our students to meet minimum NCLEX scores required by applicable states, and our failure to continue obtaining enrollments at low acquisition costs and keeping teaching costs down. Further information on the risk factors affecting our business is contained in our filings with theSEC , including our Annual Report on Form 10-K for the year endedApril 30, 2019 , as updated by the Quarterly Report on Form 10-Q for the three months endedJuly 31, 2019 . We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
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