èßäÊÓƵ

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 July 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

èßäÊÓƵ Group, Inc.

(Exact name of registrant as specified in its charter)

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.

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

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ASPEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(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)

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)

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 THREE MONTHS ENDED July 31, 2016

(Unaudited)

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)

(Continued)

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

5

ASPEN GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

6

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

Note 1. Nature of Operations and Liquidity

Overview

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

èßäÊÓƵ’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. èßäÊÓƵ is dedicated to providing the highest quality education experiences taught by top-tier professors - 61% 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 March 2014, èßäÊÓƵ 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 $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 per month for 72 months ($27,000), interest free, thereby giving students the ability to earn a degree debt free.

On November 10, 2014, èßäÊÓƵ 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 èßäÊÓƵ 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 months ended July 31, 2016 and 2015, our cash flows for the three months ended July 31, 2016 and 2015, and our financial position as of July 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.

7

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

B. Liquidity

On August 31, 2016, the Company announced that it recently 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 11)

At July 31, 2016, the Company had a cash balance of $480,317. The Company had cash provided from operating activities of $34,476.

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. In November of 2015, our letter of credit with Department of Education was released freeing up approximately $1.1 million of cash. 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 èßäÊÓƵ Group, Inc. 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 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 July 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 July 31, 2016. As of July 31, 2016 and April 30, 2016, there were deposits totaling $292,764 and $1,224,863 respectively, held in two separate institutions greater than the federally insured limits.

8

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 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.

9

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

Net Loss Per Share

Net loss per common share is based on the weighted average number of common shares outstanding during each period. Options to purchase 22,421,102 and 15,897,313 common shares, warrants to purchase 10,464,657 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 July 31, 2016 and 2015, respectively, but were not included in the computation of diluted loss per share because the effects would have been anti-dilutive. The options, warrants and convertible debt are considered to be common stock equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive.

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, èßäÊÓƵ 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 July 31, 2016 and April 30, 2016, the balance of the account receivable, net of allowance, was $45,329.

HEMG has failed to pay to èßäÊÓƵ University any portion of the $772,793 amount due as of September 30, 2014, despite due demand for same. Consequently, on November 18, 2014 èßäÊÓƵ 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 èßäÊÓƵ University obtained a default judgment. In addition, èßäÊÓƵ 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)

Note 4. Property and Equipment

Property and equipment consisted of the following at July 31, 2016 and April 30, 2016:

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

10

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

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

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

Note 5. Courseware

Courseware costs capitalized were $4,450 and $41,104 for the three months ended July 31, 2016 and 2015 respectively. During September 2015, $1,970,670 of fully amortized courseware was written off against the accumulated amortization. There was no expense impact to this write-off.

Courseware consisted of the following at July 31, 2016 and April 30, 2016:

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

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

11

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

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.

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

The Company maintains a line of credit with a bank, up to a maximum credit line of $250,000. The line of credit bears interest equal to the prime rate plus 0.50% (overall interest rate of 4.00% at July 31, 2016). The line of credit requires minimum monthly payments consisting of interest only. The line of credit is secured by all business assets, inventory, equipment, accounts, general intangibles, chattel paper, documents, instruments and letter of credit rights of the Company. The line of credit is for an unspecified time until the bank notifies the Company of the Final Availability Date, at which time monthly payments on the line of credit become the sum of: (a) accrued interest and (b) 1/60th of the unpaid principal balance immediately following the Final Availability Date, which equates to a five-year payment period. The balance due on the line of credit as of July 31, 2016 was $248,783. Since the earliest the line of credit is due and payable is over a five year period and the Company believes that it could obtain a comparable replacement line of credit elsewhere, the entire line of credit is included in long-term liabilities. The unused amount under the line of credit available to the Company at July 31, 2016 was $1,217. In September 2016, the line of credit with the bank was paid and terminated. (See Note 11)

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 July 31, 2016, no performance bonuses have been earned.

12

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

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 is seeking 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 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 three months ended July 31, 2016.

Regulatory Matters

The Company’s subsidiary, èßäÊÓƵ 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 èßäÊÓƵ 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. èßäÊÓƵ 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 èßäÊÓƵ 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. èßäÊÓƵ 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, èßäÊÓƵ 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 èßäÊÓƵ 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. èßäÊÓƵ 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, èßäÊÓƵ 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. èßäÊÓƵ 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 èßäÊÓƵ 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 (See Note 2 “Restricted Cash”).

The HEA requires accrediting agencies to review many aspects of an institution's operations in order to ensure that the education offered is of sufficiently high quality to achieve satisfactory outcomes and that the institution is complying with accrediting standards. Failure to demonstrate compliance with accrediting standards may result in the imposition of probation, the requirements to provide periodic reports, the loss of accreditation or other penalties if deficiencies are not remediated.

Because èßäÊÓƵ 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 èßäÊÓƵ University that it had renewed its accreditation for five years to January, 2019.

13

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

Return of Title IV Funds

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

Subsequent to a program review by the Department of Education, 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

èßäÊÓƵ 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, èßäÊÓƵ 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 èßäÊÓƵ University it was granted full approval to operate with degree-granting authority in the State of Delaware until July 1, 2020. èßäÊÓƵ 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 13,451,613 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 three months ended July 31, 2016 is presented below:

14

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

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 13,451,613 warrants as discussed above.

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 July 31, 2016, there were 2,878,898 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 three months ended July 31, 2016 and 2015.

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 three months ended July 31, 2016, is presented below:

15

ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

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.

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 July 31, 2016, there was approximately $547,000 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 $95,607 for the three months ended July 31, 2016 in connection with employee stock options. The Company recorded compensation expense of $72,941 for the three months ended July 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.  (See Note 11)

Stock Option Grants to Non-Employees

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

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

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.

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ASPEN GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 31, 2016

(Unaudited)

Note 11. Subsequent Events

On August 31, 2016, the Company announced that it recently 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. Additionally, the Company paid a 2% origination fee 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.

In September 2016, the Company’s Chief Executive Officer extended $1,300,000 of notes payable to May 5, 2018 from February 2017.

On September 13, 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 three year periods beginning with the respective extension periods.

Effective September 14, 2016, Mr. Paul Schneier resigned as a director. The Company agreed to vest all of his outstanding options.

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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 26, 2016 with the Securities and Exchange Commission, or the SEC.

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

Company Overview

Founded in 1987, èßäÊÓƵ’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. èßäÊÓƵ is dedicated to providing the highest quality education experiences taught by top-tier professors - 61% 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 March 2014, èßäÊÓƵ 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 $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 the ability to earn a degree debt free.

One of the key differences between èßäÊÓƵ and other publicly-traded, exclusively online, for-profit universities is the fact that the majority of our degree-seeking students (56% as of July 31, 2016) were enrolled in èßäÊÓƵ’s School of Nursing.

Student Population Overview

èßäÊÓƵ’s degree-seeking student body increased year-over-year by 48% during the fiscal quarter ended July 31, 2016, from 3,609 to 5,332 students.

Our most popular school is our School of Nursing. èßäÊÓƵ’s School of Nursing has grown from 44% of our degree-seeking student body at July 31, 2015, to 56% of our degree-seeking student body at July 31, 2016. èßäÊÓƵ’s School of Nursing grew from 1,604 to 2,988 student’s year-over-year, which represented 80% of èßäÊÓƵ’s degree-seeking student body growth. At July 31, 2016, èßäÊÓƵ’s School of Nursing included 1,497 students in the RN to BSN program and 1,491 students in the MSN program or the RN to MSN Bridge program.

New Student Enrollment and Degree Seeking Student Body Growth

Since the launch of the BSN marketing campaign in mid-November, 2014, èßäÊÓƵ’s growth rate of new student enrollments has accelerated significantly. Below is a quarterly analysis of the growth of èßäÊÓƵ’s new student enrollments, as well as the growth of the degree seeking student body over the past eight quarters, including the recent quarter ending July 31, 2016.

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èßäÊÓƵ’s School of Nursing is responsible for the vast majority of the new student enrollment and overall student body growth. Specifically, èßäÊÓƵ’s School of Nursing is now on pace to grow on an annualized basis by approximately 1,680 Nursing students – net of student graduations and withdrawals (or ~140/month). èßäÊÓƵ’s BSN program accounts for 70% of that growth, as that program is on pace to increase on an annualized basis by approximately 1,180 students – net (or ~98/month).

èßäÊÓƵ University expects its total degree-seeking student body to continue its rapid growth and reach approximately 6,800 students by the end of the fiscal year, April 30, 2017. Therefore, the university is on pace to increase its student body by ~2,000 students on an annualized basis in fiscal year 2017 versus the previous pace of ~1,500 students a year ago. Note that in the seasonally slowest first quarter of fiscal year 2017, the student body increased by 514 degree-seeking students, meaning that the university is on track to exceed the forecast of ~2,000 students on an annualized basis.

Revenue Growth Recap

Since launching the debtless education solution in March 2014, èßäÊÓƵ University has become one of the fastest growing universities in the United States with record revenue acceleration in fiscal year 2016. Below is a chart reflecting the year-over-year percentage of revenue growth during èßäÊÓƵ’s previous six fiscal quarters:

èßäÊÓƵ University’s Revenue Acceleration  

Nursing Revenue Summary

Below is a summary of the Nursing degree-seeking student body as a percentage of the total degree-seeking student body over the past five fiscal quarters, as well as the Nursing degree-seeking revenue as a percentage of total revenues. Because Nursing students 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 69% of total revenues (well ahead of today’s Nursing student body of 56%).

*Note that in previous quarterly filings, the Nursing revenue amounts and percentage differ from the above corrected disclosure.

Monthly Payment Programs Overview

Since the March 2014 debtless education announcement, 56% of courses are now paid through monthly payment methods (based on courses started over the last 90 days). èßäÊÓƵ 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).

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As of July 31, 2016, èßäÊÓƵ had 1,737 students paying through a monthly payment plan, and 420 students paying through a monthly installment plan, for a total of 2,157 students paying tuition through a monthly payment method. Additionally, èßäÊÓƵ is currently on pace to add approximately 100 students/month net to its monthly payment programs through fiscal year 2017. The 1,737 students (as of July 31, 2016) paying tuition through a monthly payment plan represents total contractual value in excess of $15 million. Monthly recurring tuition cash payments for monthly payment programs is approximately $435,000 per month, as compared to approximately $100,000 per month a year ago.

Finally, as a consequence of monthly payment programs becoming the payment method of choice among the majority of èßäÊÓƵ’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

èßäÊÓƵ 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.

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:

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.)

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èßäÊÓƵ is projecting to average a Marketing Efficiency Ratio of 9.2x, in other words a 9.2x 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 èßäÊÓƵ’s business model is currently performing at more than double the efficiency level of that sector.

Results of Operations

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

Revenue

Revenue from operations for the quarter ended July 31, 2016 (“2016 Quarter”) increased to $2,756,815 from $1,705,861 for the quarter ended July 31, 2015 (“2015 Quarter”), an increase of $1,050,954 or 62%.

New class starts begun in the 2016 quarter rose to 3,335 from 2,072 for the 2015 quarter, an increase of 61%.  The average tuition price of the new class starts rose to $805 for the 2016 quarter from $774 for the 2015 quarter, an increase of 4%.

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 $459,199 from $386,067 for the 2015 Quarter, an increase of $73,132 or 19%.  

Note that instructional costs and services for the 2016 Quarter dropped to 17% of revenues, as compared to 23% of revenues for the 2015 Quarter.  As student enrollment levels continue to rise, èßäÊÓƵ 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 èßäÊÓƵ 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 $436,860 compared to $388,042 for the 2015 Quarter, an increase of $48,818 or 13%. The Company expects marketing and promotional costs to rise in future periods, given the planned spend rate increase to $180,000 per month in August 2016, with the funds available from the new $3 million line of credit.  Over the next 12 months, we expect to increase monthly marketing spend to $360,000.

Gross Profit rose to 62% of revenues or $1,720,674 for the 2016 Quarter from 47% of revenues or $799,232 for the 2015 Quarter.

Costs and Expenses

General and Administrative

General and administrative costs for the 2016 Quarter were $2,182,078 compared to $1,477,617 during the 2015 Quarter, an increase of $704,461 or 48%. A significant portion of this increase is the approximate $450,000 increase in payroll, primarily due to the headcount of our enrollment center increasing by 80% year-over-year.  The Company incurred $464,241 one-time, non-recurring expenses for the 2016 Quarter, including a non cash $206,000 expense associated with the surrender of warrants and a $69,000 expense resulting from a former employee litigation settlement.

Depreciation and Amortization

Depreciation and amortization costs for the 2016 Quarter rose to $151,049 from $143,459 for the 2015 Quarter, an increase of $7,590 or 5%.

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Other Expense, net

Other expense, net for the 2016 Quarter increased to $33,076 from $29,382 in the 2015 Quarter, an increase of $3,694 or 13%.

Income Taxes

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

Net Loss

Net loss for 2016 Quarter was ($505,447) as compared to ($718,706) for the 2015 Quarter, a decrease in the loss of $213,259 or approximately 30%. Contributing to this lower loss was the increase in revenues in the 2016 Quarter growing at a higher rate than the increase of costs, offset by the non-recurring, one-time expenses of $464,241. The Company forecasts to achieve positive Net Income before the end of the 2017 fiscal year.

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 èßäÊÓƵ 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.

èßäÊÓƵ Group defines Adjusted EBITDA as earnings (or loss) from continuing operations before the items in the table below including non-recurring charges of $464,241. 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 èßäÊÓƵ 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:

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Liquidity and Capital Resources

A summary of our cash flows is as follows: