Aspen Group Bear Case

May 01, 2020 2:58 PM ETAspen Group, Inc. (ASPU)119 Comments

31 Followers

Summary

Questionable Financial Statements/Quality of Earnings.
Flawed Business Model.
Lack of regional accreditation.
Negative regulatory environment for for-profits.
Excessive Valuation.

This article was amended on 5/4/2020 to reflect a clarification related to the company's graduation rate.

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Questionable Financial Statements/Quality of EarningsQuality of ASPU's financial statements and earnings are highly suspect. Specifically, the company's accounts receivable is growing at a much faster rate than revenue increasing tenfold from $2 million in 2016 to $20.2 million in January 2020. DSO's have grown from 86.9 days to 163.1 days during this same period (See Table 1). DSO's are an indication of the quality of revenue and receivables.

Compounding this problem is Allowance for Doubtful Accounts which is only 8.2% of gross accounts receivable - much lower than other for-profits. The peer group has reserves consistently around 35% versus ASPU's 8.2% (See Table 2). Also, the peer group books around 5% of revenue for bad debt. ASPU's Bad Debt rate is only 1.9% YTD. And the peer group A/R is majority sourced from the government (i.e. Title IV, TA, VA) which have no default risk. ASPU's A/R are from students that defaults at a much higher rate, especially those student that drop or are inactive. So how can ASPU's bad debt rate be lower than the peer group?

APSU's accounts receivable has grown to an astounding 45% of annual revenue and $6.1 million is now long term which further increases default risk. This ballooning accounts receivable balance is a result of management's liberal payment program allowing students a low monthly cash payment plan that covers only half of earned revenue - similar to a negative amortization loan. As such, by all industry metrics a significant amount of APSU's accounts receivable will become uncollectable. But compounding this alarming growth of accounts receivable is management's extremely aggressive projection of future collections and reserves. Allowance for doubtful accounts and bad debt expense appear to be materially understated evidenced by a comparison to other publicly traded for-profits (See Table 2).

And assuming that financial statements are accurate since they were audited would be a big mistake. ASPU's auditor is a small local three man shop in Florida and not a Big 4 or regional accounting firm that you would expect from a public company.

http://www.secauditor.com/management.php

Accounts receivable is a potential ticking time bomb sitting on ASPU's balance sheet and if corrected will come crashing through the income statement in the form of a huge bad debt adjustment. And if accounts receivable is properly accounted for it could expose the true lack of profitability of ASPU's business model.

Table 1
$ = Millions	2016	2017	2018	2019	2020 TTM
Revenue	$ 8.4	$ 14.2	$ 22.0	$ 34.0	$ 45.2
EBIT	$ (2.2)	$ (1.1)	$ (7.1)	$ (9.3)	$ (6.5)

Bad Debt	$ 1.7	$ 0.0	$ 0.5	$ 0.9	$ 0.7
Bad Debt / AR	85.5%	0.9%	6.6%	6.2%	3.2%
Bad Debt %	20.4%	0.3%	2.4%	2.5%	1.4%

A/R Current	$ 2.0	$ 4.4	$ 6.8	$ 10.7	$ 14.1
A/R Long Term	$ -	$ 0.7	$ 1.3	$ 3.1	$ 6.1
A/R Total	$ 2.0	$ 5.1	$ 8.1	$ 13.7	$ 20.2

A/R Revenue %	24%	36%	37%	40%	45%
A/R Revenue % ST	24%	31%	31%	31%	31%
A/R Revenue % LT	0%	5%	6%	9%	13%

DSO's	$ 86.9	$ 130.9	$ 134.7	$ 147.5	$ 163.1

Table 2
$ = Millions	ASPU	STRA	APEI	PRDO
Gross Accounts Receivable	$ 22.0	$ 84.2	$ 17.5	$ 84.9
Allowance for Doubtful Accounts	$ 1.8	$ 28.5	$ 6.2	$ 29.9
Net Accounts Receivable	$ 20.2	$ 55.7	$ 11.3	$ 55.0
Allowance % of Gross A/R	8.2%	33.8%	35.4%	35.2%

Flawed Business Model

ASPU has grown enrollments at a robust rate not because of anything proprietary. It is as simple as offering a tuition rate far below the competition and liberal payment plans. But the "fatal flaw" is that if you were to fully burden new student starts with the true costs of those enrollments it would result in a negative margin/loss. How can ASPU grow revenue 50%+ per year, double digit enrollments growth but still not be profitable or cash flow positive and be forced to multiple rounds of diluted capital raises? It seems pretty obvious.

ASPU's CEO likes to tout their marketing as a competitive advantage which is driving double digit enrollments growth. This is laughable if you knew the space. The large publicly traded peers have spent billion on developing very sophisticated marketing and student management systems and lead generation. He talks about Marketing Efficiency Ratio (MER) which is the multiple of revenue to the cost per start. Spoken like a true salesman and not a CEO. The correct method of valuing a new student start is a multiple of PROFIT not revenue. Giving away your service at a loss does not make you disruptive! If it were, the better capitalized competitors would lower their tuition rates and copy ASPU. But they won't because APSU's pricing and collection program is not profitable or sustainable. Nursing programs are very costly to operate given low student-to-teacher ratio requirements imposed by the nursing boards and costly nursing instructors and staff. This is the reason a low tuition rate will typically not cover this high cost program.

The CEO accumulated a large stock position from very generous stock grants and options. This has created huge incentive for bad behavior to pump up enrollments and the stock price. The CEO provides extensive commentary about enrollments and enrollments growth. However, there is very little discussion about student persistance and success. One of the primary factors in the demise of a number of the large for-profit postsecondaries was excessive growth in enrollments and poor student outcomes. I found two published graduation rates for Aspen University. The U.S. Department of Education (USDOE) published graduation rate for AU is 27% School | College Scorecard . The USDOE uses an eight year time-to-completion methodology. The graduation rates by program published on the company's website is the accreditor - DEAC - graduation rate using a 150% time-to-completion methodology. https://images.aspen.edu/wp/uploads/2019/12/DEAC-STUDENT-ACHIEVEMENT-DISCLOSURE-FOR-THE-PUBLIC_12.15.19.pdf Using these rates the weighted average graduation rate is 65%. Unlike the other for-profits APSU does not publish persistance rates which would be the best measure of projecting student success and graduation rates.

Lack of regional accreditation

Aspen University (AU) is accredited by DEAC and not by one of the regional accrediting bodies which is the gold standard of accreditation. The traditional non-profit colleges and universities all have regional accreditation. The problem with DEAC accreditation is that it is extremely difficult to transfer credits to a regionally accredited college or university. This is especially problematic for AU's students that complete prerequisites at AU but are not accepted into the core program. They will have a difficult time transferring these credits to another institution and will feel they wasted their time and money at AU. This is a common cause of action for the numerous class action lawsuits against for-profits.

Another issue of not having regional accreditation is that many employers do not consider the institution as being accredited. This penalizes student during the hiring process and tuition reimbursement programs.

It should also be noted that AU does not have full approval for the pre-licensure nursing program and is only provisionally approved. They need a successful site visit before being granted full approval. There is always a risk the visiting team could identify areas of concern during their visit and not grant full approval which would restrict their ability to grow enrollments.

AU has very liberal nursing admissions requirements. The minimum GPA for an applicant is 2.0 versus 2.75+ for the other for-profit colleges who also require an assessment test which AU does not. This "lower quality" student will negatively impact AU's NCLEX scores. When AU's nursing students graduate and take their NCLEX exams they will need an average minimum score no less than 10% of the national average. If they do not meet this minimum standard the nursing board will impose enrollment restrictions or possible suspension of new enrollments. This is a big exposure!

Negative regulatory environment for for-profits

The regulatory environment for the for-profit postsecondary education space is negative and has the potential to get much worse after the election. The current administration has been more favorable to the for-profits than the Obama administration and blocked some of the anti-for-profit education regulations. However, if the administration and and/or Senate turns blue then it could be lights out for the for-profits. It Biden picks Kamala Harris or Elizabeth Warren as his running mate it would be extremely negative. Harris was the California AG that was instrumental in shutting down Corinthian and Harris would like to shut down all for-profit institutions.

Excessive Valuation

Even discounting the previously presented issues, how does APSU justify a $200 million enterprise value?!? The company has never delivered a profit, accumulated tens of millions in accumulated losses and continues to burn through cash. And much of their growth and valuation is based on pre-licensure nursing which has yet to graduate one student that has successfully passed the NCLEX exam.

There have been recent transactions in the private market for for-profit education companies with very reputable nursing programs, growing enrollments and very profitable that have sold at much lower valuations than ASPU's current valuation. I would encourage you to refer to Kippington Capital's well written article (4/19/19) with a base case sum-of-the-parts valuation of $104 million or $5 per share. And this does not consider any of the above concerns raised in this article.

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