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EX-32.1 - CERTIFICATION - National American University Holdings, Inc.nuah_ex321.htm
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EX-31.2 - CERTIFICATION - National American University Holdings, Inc.nuah_ex312.htm
EX-31.2 - CERTIFICATION - National American University Holdings, Inc.nuah_ex322.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
Form 10-Q

(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended November 30, 2015
   
 
Or
   
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                                                                         to 

Commission File No. 001-34751
National American University Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware
83-0479936
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
   
5301 S. Highway 16
57701
Rapid City, SD
(Zip Code)
(Address of principal executive offices)
 

(605) 721-5200
(Registrant’s telephone number, including area code)

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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R  No £
 
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer £
                        Accelerated filer £
 
Non-accelerated filer £    (Do not check  if a smaller reporting company)
       Smaller reporting company R
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £  No R

As of December 31, 2015, 24,121,879 shares of common stock, $0.0001 par value were outstanding.


 
 
 
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

INDEX
 
   
Page of
Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
3
 
Unaudited Condensed Consolidated Balance Sheet as of November 30, 2015 and Condensed Consolidated Balance Sheet as of May 31, 2015
4
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended November 30, 2015 and November 30, 2014
5
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended November 30, 2015 and November 30, 2014
6
 
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended November 30, 2015 and November 30, 2014
7
 
Notes to Unaudited Condensed Consolidated Financial Statements
9
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
33
ITEM 4.
CONTROLS AND PROCEDURES
34
     
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
34
ITEM 1A.
RISK FACTORS
34
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
35
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
36
ITEM 4.
MINE SAFETY DISCLOSURES
36
ITEM 5.
OTHER INFORMATION
36
ITEM 6.
EXHIBITS
37
 
 
-2-

 
 
PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.
 
 
 
 
 

 
 
-3-

 

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
           
             
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
           
AS OF NOVEMBER 30, 2015 AND CONDENSED
           
CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2015
           
(In thousands, except share and per share amounts)
           
   
November 30,
   
May 31,
 
   
2015
   
2015
 
ASSETS
           
CURRENT ASSETS:
           
  Cash and cash equivalents
  $ 21,961     $ 23,300  
  Available for sale investments
    4,115       4,102  
  Student receivables — net of allowance of $1,345 and $1,583 at November 30, 2015 and
               
    May 31, 2015, respectively
    5,032       14,358  
  Other receivables
    1,617       1,195  
  Income taxes receivable
    2,772       0  
  Deferred income taxes
    2,300       2,335  
  Prepaid and other current assets
    2,451       2,151  
           Total current assets
    40,248       47,441  
Total property and equipment - net
    34,195       36,390  
OTHER ASSETS:
               
  Condominium inventory
    621       385  
  Land held for future development
    312       312  
  Course development — net of accumulated amortization of $2,907 and $2,760 at
               
    November 30, 2015 and May 31, 2015, respectively
    756       804  
  Other
    1,063       1,212  
           Total other assets
    2,752       2,713  
TOTAL
  $ 77,195     $ 86,544  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
  Current portion of capital lease payable
  $ 265     $ 244  
  Accounts payable
    3,205       3,246  
  Dividends payable
    1,100       1,139  
  Income taxes payable
    201       1  
  Deferred income
    788       1,459  
  Accrued and other liabilities
    5,235       6,746  
           Total current liabilities
    10,794       12,835  
DEFERRED INCOME TAXES
    3,283       3,283  
OTHER LONG-TERM LIABILITIES
    5,728       6,047  
CAPITAL LEASE PAYABLE, NET OF CURRENT PORTION
    11,717       11,853  
COMMITMENTS AND CONTINGENCIES (Note 9)
               
STOCKHOLDERS' EQUITY:
               
  Common stock, $0.0001 par value (50,000,000 authorized; 28,417,499 issued and
               
    24,324,391 outstanding as of November 30, 2015; 28,262,241 issued and 25,191,414
               
    outstanding as of May 31, 2015)
    3       3  
  Additional paid-in capital
    58,692       58,336  
  Retained earnings
    9,036       13,751  
  Treasury stock, at cost (4,093,108 shares at November 30, 2015 and 3,070,827
               
    shares at May 31, 2015)
    (21,965 )     (19,455 )
  Accumulated other comprehensive loss, net of taxes - unrealized loss on available
               
   for sale securities
    (4 )     (1 )
Total National American University Holdings, Inc. stockholders' equity
    45,762       52,634  
Non-controlling interest
    (89 )     (108 )
Total stockholders' equity
    45,673       52,526  
TOTAL
  $ 77,195     $ 86,544  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
               

 
-4-

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
             
                         
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
FOR THE SIX MONTHS AND THREE MONTHS ENDED NOVEMBER 30, 2015 AND 2014
       
(In thousands, except share and per share amounts)
                   
   
Six Months Ended
   
Three Months Ended
 
   
November 30,
   
November 30,
 
   
2015
   
2014
   
2015
   
2014
 
REVENUE:
                       
  Academic revenue
  $ 46,251     $ 54,809     $ 23,593     $ 28,133  
  Auxiliary revenue
    3,581       4,093       1,865       2,212  
  Rental income — apartments
    556       593       281       293  
  Condominium sales
    0       447       0       0  
                                 
           Total revenue
    50,388       59,942       25,739       30,638  
                                 
OPERATING EXPENSES:
                               
  Cost of educational services
    13,128       14,210       6,832       7,077  
  Selling, general and administrative
    37,808       35,943       18,805       17,301  
  Auxiliary expense
    2,663       2,865       1,397       1,562  
  Cost of condominium sales
    0       368       0       0  
  Loss (gain) on disposition of property
    63       (1,678 )     63       0  
                                 
           Total operating expenses
    53,662       51,708       27,097       25,940  
                                 
OPERATING (LOSS) INCOME
    (3,274 )     8,234       (1,358 )     4,698  
                                 
OTHER INCOME (EXPENSE):
                               
  Interest income
    44       111       25       12  
  Interest expense
    (437 )     (451 )     (218 )     (222 )
  Other income — net
    88       100       46       42  
                                 
           Total other expense
    (305 )     (240 )     (147 )     (168 )
                                 
(LOSS) INCOME BEFORE INCOME TAXES
    (3,579 )     7,994       (1,505 )     4,530  
                                 
INCOME TAX BENEFIT (EXPENSE)
    1,111       (2,986 )     335       (1,690 )
                                 
NET (LOSS) INCOME
    (2,468 )     5,008       (1,170 )     2,840  
                                 
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING
                               
           INTEREST
    (19 )     (12 )     (8 )     (14 )
                                 
NET (LOSS) INCOME ATTRIBUTABLE TO NATIONAL AMERICAN
                               
          UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
    (2,487 )     4,996       (1,178 )     2,826  
                                 
OTHER COMPREHENSIVE (LOSS) INCOME  — Unrealized (losses)
                               
         gains on investments, net of tax
    (3 )     1       (2 )     6  
                                 
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO
                               
         NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
  $ (2,490 )   $ 4,997     $ (1,180 )   $ 2,832  
                                 
                                 
Basic net (loss) earnings per share attributable to
                               
          National American University Holdings, Inc.
  $ (0.10 )   $ 0.20     $ (0.05 )   $ 0.11  
Diluted net (loss) earnings per share attributable to
                               
          National American University Holdings, Inc.
  $ (0.10 )   $ 0.20     $ (0.05 )   $ 0.11  
Basic weighted average shares outstanding
    25,177,155       25,136,778       25,164,128       25,151,291  
Diluted weighted average shares outstanding
    25,177,155       25,157,424       25,164,128       25,166,940  
                                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-5-

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
         
                                           
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2015 AND 2014
                         
(In thousands, except share and per share amounts)
                               
                                           
   
Equity attributable to National American University Holdings, Inc. and Subsidiaries
 
                           
Accumulated
             
         
Additional
               
other
         
Total
 
   
Common
   
paid-in
   
Retained
   
Treasury
   
comprehensive
   
Non-controlling
   
stockholders'
 
   
stock
   
capital
   
earnings
   
stock
   
loss
   
interest
   
equity
 
                                           
Balance - May 31, 2014
  $ 3     $ 59,191     $ 11,573     $ (19,423 )   $ (3 )   $ (146 )   $ 51,195  
Purchase of 6,224 shares common stock for the treasury
    0       0       0       (19 )     0       0       (19 )
Share based compensation expense
    0       (978 )     0       0       0       0       (978 )
Dividends declared ($0.045 per share)
    0       0       (2,267 )     0       0       0       (2,267 )
Net income
    0       0       4,996       0       0       12       5,008  
Other comprehensive income, net of tax
    0       0       0       0       1       0       1  
Balance - November 30, 2014
  $ 3     $ 58,213     $ 14,302     $ (19,442 )   $ (2 )   $ (134 )   $ 52,940  
                                                         
Balance - May 31, 2015
  $ 3     $ 58,336     $ 13,751     $ (19,455 )   $ (1 )   $ (108 )   $ 52,526  
Purchase of 1,022,281 shares common stock for the treasury
    0       0       0       (2,510 )     0       0       (2,510 )
Share based compensation expense
    0       356       0       0       0       0       356  
Dividends declared ($0.045 per share)
    0       0       (2,228 )     0       0       0       (2,228 )
Net (loss) income
    0       0       (2,487 )     0       0       19       (2,468 )
Other comprehensive income, net of tax
    0       0       0       0       (3 )     0       (3 )
Balance - November 30, 2015
  $ 3     $ 58,692     $ 9,036     $ (21,965 )   $ (4 )   $ (89 )   $ 45,673  
                                                         
The accompanying notes are an integral part of these condensed consolidated financial statements.
                 
 
 
-6-

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
           
             
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
       
FOR THE SIX MONTHS ENDED NOVEMBER 30,  2015 AND 2014
           
(In thousands)
           
             
   
Six Months Ended
 
   
November 30,
   
November 30,
 
   
2015
   
2014
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) income
  $ (2,468 )   $ 5,008  
Adjustments to reconcile net income to net cash flows provided by operating activities:
         
Depreciation and amortization
    2,843       3,115  
Loss (gain) on disposition of property and equipment
    63       (1,678 )
Provision for uncollectable tuition
    3,160       2,063  
Noncash compensation expense
    356       (978 )
Deferred income taxes
    35       352  
Changes in assets and liabilities:
               
Student and other receivables
    5,744       10,513  
Prepaid and other current assets
    (300 )     (200 )
Condominium inventory
    (236 )     367  
Other assets
    135       (21 )
Income tax receivable/payable
    (2,572 )     594  
Accounts payable
    (192 )     295  
Deferred income
    (671 )     (71 )
Accrued and other liabilities
    (1,514 )     302  
Other long-term liabilities
    (319 )     (240 )
                 
Net cash flows provided by operating activities
    4,064       19,421  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of available for sale investments
    (3,648 )     (22,141 )
Proceeds from sale of available for sale investments
    3,632       25,232  
Purchases of property and equipment
    (417 )     (1,040 )
Proceeds from sale of property and equipment
    4       3,464  
Course development
    (99 )     (60 )
Payments received on contract for deed
    3       157  
Payments received on note receivable
    0       1,390  
Other
    14       9  
                 
Net cash flows (used in) provided by investing activities
    (511 )     7,011  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayments of capital lease payable
    (115 )     (97 )
Purchase of treasury stock
    (2,510 )     (19 )
Dividends paid
    (2,267 )     (2,266 )
                 
Net cash flows used in financing activities
    (4,892 )     (2,382 )
                 
           
(Continued)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
-7-

 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
       
             
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
       
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2015 AND 2014
           
(In thousands except share data)
           
             
   
Six Months Ended
 
   
November 30,
   
November 30,
 
   
2015
   
2014
 
             
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
  $ (1,339 )   $ 24,050  
                 
CASH AND CASH EQUIVALENTS — Beginning of year
    23,300       4,154  
                 
CASH AND CASH EQUIVALENTS — End of period
  $ 21,961     $ 28,204  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
         
   Cash paid for income taxes
  $ 1,426     $ 2,041  
   Cash paid for interest
  $ 437     $ 444  
   Property and equipment purchases included in accounts payable
  $ 175     $ -  
   Dividends declared and unpaid at November 30, 2015 and 2014
  $ 1,100     $ 1,135  
                 
           
(Concluded)
 
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
         

 
-8-

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED NOVEMBER 30, 2015 AND NOVEMBER 30, 2014
(In thousands, except share and per share amounts)

1.  
STATEMENT PRESENTATION AND BASIS OF CONSOLIDATION

The accompanying unaudited condensed financial statements are presented on a consolidated basis. The accompanying financial statements include the accounts of National American University Holdings, Inc. (the “Company”), its subsidiary, Dlorah, Inc. (“Dlorah”), and its divisions, National American University (“NAU” or the “University”), and Fairway Hills.  The accompanying unaudited condensed consolidated financial statements have been prepared on a basis substantially consistent with the Company’s audited financial statements and in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under these rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States (“U.S. GAAP”) can be condensed or omitted. The information in the condensed consolidated balance sheet as of May 31, 2015, was derived from the audited consolidated financial statements for the Company for the year then ended. Accordingly, these financial statements should be read in conjunction with the Company’s annual financial statements which were included in the Company’s Annual Report Form 10-K for the year ended May 31, 2015, filed on August 7, 2015.  Furthermore, the results of operations and cash flows for the six month periods ended November 30, 2015 and 2014 are not necessarily indicative of the results that may be expected for the full year. These financial statements include consideration of subsequent events through issuance.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by U.S. GAAP.

Unless the context otherwise requires, the terms “we”, “us”, “our” and the “Company” used throughout this document refer to National American University Holdings, Inc. and its wholly owned subsidiary, Dlorah, Inc., which owns and operates National American University, sometimes referred to as “NAU” or the “University”.

Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. On an ongoing basis, the Company evaluates the estimates and assumptions, including those related to bad debts, income taxes and certain accruals. Actual results could differ from those estimates.

2.
NATURE OF OPERATIONS

The Company, through Dlorah, owns and operates National American University. NAU is a regionally accredited, proprietary, multi-campus institution of higher learning, offering associate, bachelors, masters and doctoral degree programs in allied health, legal studies, education, business, accounting and information technology. The Company, through Dlorah’s Fairway Hills real estate division, also manages apartment units and develops and sells multi-family residential real estate in the Rapid City, South Dakota area.
 
 
-9-

 

3.  
RECENTLY ADOPTED AND NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, provides more useful information to users of the consolidated financial statements through improved disclosure requirements, and simplifies the preparation of the consolidated financial statements by reducing the number of requirements to which an entity must refer.   The ASU outlines five steps to achieve proper revenue recognition: identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies the performance obligation.  This standard is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  This standard will be effective for the Company’s fiscal year 2019 in the first quarter ending August 31, 2018.  The Company is currently evaluating and has not yet determined the impact implementation will have on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, that will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances.  This standard will be effective for the Company’s fiscal year ending May 31, 2017.  The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which requires reevaluation of all legal entities under a revised consolidation model.  The standard will specifically affect limited partnerships and similar legal entities, the evaluation of fees paid to a decision maker or a service provider as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination, and certain investment funds.  This standard will be effective for the Company’s fiscal year 2017 in the first quarter ending August 31, 2016.  The Company is currently evaluating and has not yet determined the impact implementation will have on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which no longer requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position.  Instead, deferred tax liabilities and assets will be classified as noncurrent.  For public business entities, this update will be effective for financial statements issued for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The Company has elected early adoption and will implement the accounting update effective for the Company’s fiscal year 2017 in the first quarter ending August 31, 2016.  This accounting update will require reclassification of all current deferred tax liabilities and assets to noncurrent in the consolidated balance sheets, which will have an immaterial impact on the Company’s consolidated financial statements.
 
 
-10-

 
 
4.  
CONTRACT FOR DEED

The Company signed a contract for deed on its former Rapid City campus on March 28, 2013 for $4,000 (see Note 5 for capital lease on new campus).  The sale did not meet the accounting requirements to be consummated and was not recorded at this time.  On July 11, 2014, the contract for deed was settled.  The Company collected the outstanding proceeds, which included $3,230 principal and $85 of interest that was offset by $59 of lease-back payments and maintenance expenses related to the long-term operating lease.  All remaining liens on the property were released and deemed sold, resulting in a gain of $1,743.

5.  
CAPITAL LEASE OBLIGATION

As part of ongoing operations, the Company entered into a capital lease arrangement for additional space that houses the corporate headquarters, distance learning operations, and the new Rapid City campus operations (see Note 4).  During the year ended May 31, 2014, the Company increased its capital lease obligation by $2,000 to account for tenant improvements.  The Company initially paid for the improvements and reached an agreement with the lessor to be reimbursed for the amount under the terms of a $2,000 note receivable.  The note receivable required monthly payments of $14 at 6% that directly offset the monthly payments to the lessor under the capital lease obligation.  In June 2014, the landlord of the property paid the $1,390 remaining balance of the note receivable.

6.  
STOCKHOLDERS’ EQUITY

The authorized capital stock for the Company is 51,100,000, consisting of (i) 50,000,000 shares of common stock, par value $0.0001 and (ii) 1,000,000 shares of preferred stock, par value $0.0001, and (iii) 100,000 shares of class A common stock, par value $0.0001.  Of the authorized shares, 24,324,391 and 25,191,414 shares of common stock were outstanding as of November 30, 2015 and May 31, 2015, respectively.  No shares of preferred stock or Class A common stock were outstanding at November 30, 2015.

Stock Repurchase Plan

On August 6, 2015, the Company’s Board of Directors authorized the repurchase of up to 350,000 shares of the Company’s outstanding common stock in both open market and privately negotiated transactions, for aggregate consideration not to exceed $1.25 million. The plan is authorized for a period of one year from August 10, 2015.  The timing and actual number of shares purchased depends on a variety of factors such as price, corporate and regulatory requirements, and other prevailing market conditions. 
 
 
-11-

 

During the three and six months ended November 30, 2015, the Company repurchased 121,062 shares for $332 and 151,069 shares for $416, respectively, under this authorization.  In addition, during the three months ended November 30, 2015, the Company repurchased 853,073 shares of its outstanding common stock for $2,039 from a single unrelated shareholder.  This repurchase was approved by the Company’s Board of Directors and was separate from the August 6, 2015 repurchase authorization.

During the six months ended November 30, 2015 and 2014, $55 and $19, respectively, of additions to treasury stock resulted from the settlement of stock-based compensation.  During the three months ended November 30, 2015 and 2014, $52 and $12, respectively, of additions to treasury stock resulted from the settlement of stock-based compensation.
 
Stock-Based Compensation

In December 2009, the Company adopted the 2009 Stock Option and Compensation Plan (the “Plan”) pursuant to which the Company may grant restricted stock awards, restricted stock units and stock options to aid in recruiting and retaining employees, officers, directors and other consultants.  A total of 1,300,000 shares were authorized by the Plan.  At November 30, 2015, 465,027 shares of common stock remain available for issuance under the Plan.
 
In October 2013, the Company’s Board of Directors adopted the 2013 Restricted Stock Unit Plan (the “2013 Plan”) authorizing the issuance of up to 750,000 shares of the Company’s stock to participants in the 2013 Plan.  At November 30, 2015, 596,500 shares of common stock remain available for issuance under the 2013 Plan.

Restricted stock

During the three months ended November 30, 2015, the Company awarded 40,485 restricted stock awards with time based vesting at a grant date fair value of $2.47 per share to members of the board of directors.  Shares vest one year from the grant date and require board service for the entire year.

Compensation expense in the consolidated statements of operations associated with restricted stock awards totaled $33 and $66, respectively, for the three and six month periods ended November 30, 2015.  At November 30, 2015, the unamortized compensation cost of these restricted stock awards totaled $86.  The unamortized cost is expected to be recognized over a weighted-average period of 0.9 years as of November 30, 2015.

A summary of restricted share awards activity as of November 30, 2015 and the changes during the six months then ended is presented below:
 
Restricted Shares
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Non-vested shares at May 31, 2015
   
42,155
   
$
3.11
 
Granted
   
40,485
     
2.47
 
Vested
   
(42,155)
     
3.11
 
Forfeited
   
-
     
-
 
Non-vested shares at November 30, 2015
   
40,485
   
$
2.47
 
 
 
-12-

 
 
In addition to the restricted stock awards with time vesting above, during the three months ended November 30, 2015, the Company, under the 2013 Plan, issued 187,500 restricted stock units (“RSUs”) with performance based vesting.  The number of shares to be earned is determined by the Company’s profitability during the fiscal year ending May 31, 2016.  The grant date fair value of the restricted stock units is $3.06 per share with a total fair value of $574.  Management at this time believes the performance objectives will not be attained and, as a result, no compensation cost has been recorded in the consolidated statements of operations.

Unrestricted stock

Unrestricted stock is issued to certain employees in settlement of a portion of their salaries and bonuses.  Compensation expense in the consolidated statements of operations associated with these unrestricted stock issuances totaled $190 and $217, respectively, for the three and six month periods ended November 30, 2015.

Stock options

During the three months ended November 30, 2015, the Company granted stock options to purchase 148,475 shares of stock; 50% of the stock options vested on the issuance date and the remaining 50% vests at the end of the current fiscal year.  The following assumptions were used to determine fair value of the stock options awarded:
 
Assumptions used:
 
For the three and six months ended November 30, 2015
 
Expected term (in years)
   
5.75
 
Expected volatility
   
50.40
%
Weighted average risk free interest rate
   
1.54
%
Weighted average risk free interest rate range
   
1.54
%
Weighted average expected dividend
   
5.92
%
Weighted average expected dividend range
   
5.92
%
Weighted average fair value
 
$
0.84
 
 
A summary of option activity under the Plan as of November 30, 2015 and changes during the six months then ended is presented below:
 
Stock Options
 
Shares
   
Weighted average exercise price
   
Weighted average remaining contractual life (in years)
   
Aggregate intrinsic value
 
Outstanding at May 31, 2015
   
78,750
   
$
6.34
     
7.1 
   
 $
 
Granted
   
148,475
     
3.06
                 
Exercised
   
0
     
0
                 
Forfeited or canceled
   
(13,875
)
   
3.95
                 
Outstanding at November 30, 2015
   
213,350
   
$
4.21
     
8.8
   
$
0
 
Exercisable at November 30, 2015
   
144,113
   
$
4.77
     
8.2
   
$
0
 
 
 
-13-

 
 
The Company recorded compensation expense for stock options of $73 for the three and six month periods ended November 30, 2015, in the consolidated statements of operations.  As of November 30, 2015, there was $52 of unrecognized compensation cost related to unvested stock option based compensation arrangements granted under the Plan to be amortized over 0.5 years.

The Company plans to issue new shares as settlement of options exercised.

Dividends

The following table presents details of the Company’s fiscal 2016 and 2015 dividend payments:
 
Date declared
Record date
Payment date
Per share
April 7, 2014
June 30, 2014
July 11, 2014
 $         0.0450
August 11, 2014
September 30, 2014
October 10, 2014
 $         0.0450
October 6, 2014
December 31, 2014
 January 16, 2015
 $         0.0450
January 24, 2015
March 31, 2015
April 17, 2015
 $         0.0450
April 13, 2015
June 30, 2015
July 10, 2015
 $         0.0450
August 10, 2015
September 30, 2015
October 9, 2015
 $         0.0450
October 5, 2015
December 31, 2015
(est) January 15, 2016
 $         0.0450
 
7.  
EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income attributable to the Company by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share reflect the potential dilution that could occur assuming vesting, conversion or exercise of all dilutive unexercised options and restricted stock.
 
The following is a reconciliation of the numerator and denominator for the basic and diluted EPS computations:
 
 
-14-

 
 
   
Six months ended
   
Three months ended
 
   
November 30,
   
November 30,
 
   
2015
   
2014
   
2015
   
2014
 
Numerator:
                       
Net (loss) income attributable to National American
                       
    University Holdings, Inc.
  $ (2,487 )   $ 4,996     $ (1,178 )   $ 2,826  
Denominator:
                               
Weighted average shares outstanding used to
                               
     compute basic net income per common share
    25,177,155       25,136,778       25,164,128       25,151,291  
Incremental shares issuable upon the assumed
                               
     exercise of stock options
    0       0       0       0  
Incremental shares issuable upon the assumed
                               
     exercise of restricted shares
    0       20,646       0       15,649  
Common shares used to compute diluted net income
                               
     per share
    25,177,155       25,157,424       25,164,128       25,166,940  
Basic net income per common share
  $ (0.10 )   $ 0.20     $ (0.05 )   $ 0.11  
                                 
Diluted net income per common share
  $ (0.10 )   $ 0.20     $ (0.05 )   $ 0.11  

A total of 213,350 shares of common stock for the three and six months ended November 30, 2015 and 85,250 shares of common stock for the three and six months ended November 30, 2014 subject to issuance upon exercise of stock options have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

A total of 82,640 shares of common stock subject to vesting of restricted stock for the three and six months ended November 30, 2015 (19,522 and 23,686 of these shares had potential dilutive impact for the three and six months ended November 30, 2015, respectively) have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.  A total of 42,155 shares of common stock subject to vesting of restricted stock for the three and six months ended November 30, 2014 have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

8.  
INCOME TAXES

The Company’s effective tax rate was 31.0% for the six months ended November 30, 2015, as compared to 37.4% for the corresponding period in 2014.  The effective tax rate varies from the statutory rate primarily due to the fluctuation in state income taxes as a result of the Company’s net loss position, nondeductible meals, and stock compensation.

9.  
COMMITMENTS AND CONTINGENCIES

From time to time, NAU is a party to various claims, lawsuits or other proceedings relating to the conduct of its business. Although the outcome of litigation cannot be predicted with certainty and some claims, lawsuits or other proceedings may be disposed of unfavorably, management believes, based on facts presently known, that the outcome of such legal proceedings and claims, lawsuits or other proceedings will not have a material effect on the Company’s consolidated financial position, cash flows or future results of operations.
 
 
-15-

 

10.
FAIR VALUE MEASUREMENTS

The following table summarizes certain information for assets and liabilities measured at fair value on a recurring basis:
 
   
Quoted prices in active markets (level 1)
   
Other observable inputs (level 2)
   
Unobservable inputs (level 3)
   
Fair value
 
November 30, 2015
                       
Investments:
                               
 Certificates of deposit   $ 0     $ 4,115     $ 0     $ 4,115  
 Money market accounts included in cash equivalents     265       0       0       265  
Total assets at fair value
  $ 265     $ 4,115     $ 0     $ 4,380  
                                 
May 31, 2015
                               
Investments:                                
 Certificates of deposit
  $ 244     $ 3,858     $ 0     $ 4,102  
 Money market accounts included in cash equivalents     269       0       0       269  
Total assets at fair value
  $ 513     $ 3,858     $ 0     $ 4,371  
 
Following is a summary of the valuation techniques for assets and liabilities recorded in the consolidated condensed balance sheets at fair value on a recurring basis:

Certificates of Deposit (“CD’s”) and money market accounts:  Investments which have closing prices readily available from an active market are used as being representative of fair value.  The Company classifies these investments as level 1.  Market prices for certain CD’s are obtained from quoted prices for similar assets.  The Company classifies these investments as level 2.

Fair value of financial instruments:  The Company’s financial instruments include cash and cash equivalents, CD’s and money market accounts, receivables, payables, and capital lease payables.  The carrying values approximated fair values for cash and cash equivalents, receivables, and payables because of the short term nature of these instruments.  CD’s and money market accounts are recorded at fair values as indicated in the preceding disclosures.  The estimated fair value of capital lease obligations is $11,982 and $12,097 at November 30, 2015 and May 31, 2015, respectively, which approximates book value.
 
 
-16-

 

11.  
SEGMENT REPORTING

Operating segments are defined as business areas or lines of an enterprise about which financial information is available and evaluated on a regular basis by the chief operating decision makers, or decision-making groups, in deciding how to allocate capital and other resources to such lines of business.

The Company operates two operating and reportable segments: NAU and other. The NAU segment contains the revenues and expenses associated with the University operations and the allocated portion of corporate overhead.  The other segment contains primarily real estate.  These operating segments are divisions of the Company for which separate financial information is available and evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. General administrative costs of the Company are allocated to specific divisions of the Company. The following table presents the reportable segment financial information, in thousands:

 
-17-

 
 
   
Six months ended November 30, 2015
   
Six months ended November 30, 2014
 
               
Consolidated
               
Consolidated
 
   
NAU
   
Other
   
Total
   
NAU
   
Other
   
Total
 
                                     
Revenue:
                                   
  Academic revenue
  $ 46,251     $ 0     $ 46,251     $ 54,809     $ 0     $ 54,809  
  Auxiliary revenue
    3,581       0       3,581       4,093       0       4,093  
  Rental income — apartments
    0       556       556       0       593       593  
  Condominium sales
    0       0       0       0       447       447  
                                                 
           Total revenue
    49,832       556       50,388       58,902       1,040       59,942  
                                                 
Operating expenses:
                                               
  Cost of educational services
    13,128       0       13,128       14,210       0       14,210  
  Selling, general &administrative
    37,035       773       37,808       35,060       883       35,943  
  Auxiliary expense
    2,663       0       2,663       2,865       0       2,865  
  Cost of condominium sales
    0       0       0       0       368       368  
  Loss (gain) on disposition of
                                               
    property
    67       (4 )     63       113       (1,791 )     (1,678 )
                                                 
    Total operating expenses (income)
    52,893       769       53,662       52,248       (540 )     51,708  
                                                 
(Loss) income from operations
    (3,061 )     (213 )     (3,274 )     6,654       1,580       8,234  
                                                 
Other income (expense):
                                               
  Interest income
    39       5       44       18       93       111  
  Interest expense
    (437 )     0       (437 )     (443 )     (8 )     (451 )
  Other income  - net
    0       88       88       0       100       100  
                                                 
    Total other (expense) income
    (398 )     93       (305 )     (425 )     185       (240 )
                                                 
(Loss) income before income taxes
  $ (3,459 )   $ (120 )   $ (3,579 )   $ 6,229     $ 1,765     $ 7,994  
                                                 
   
As of November 30, 2015
   
As of November 30, 2014
 
                   
Consolidated
                   
Consolidated
 
   
NAU
   
Other
   
Total
   
NAU
   
Other
   
Total
 
Total assets
  $ 68,435     $ 8,760     $ 77,195     $ 79,672     $ 10,625     $ 90,297  
 
 
-18-

 

   
Three months ended November 30, 2015
   
Three months ended November 30, 2014
 
               
Consolidated
               
Consolidated
 
   
NAU
   
Other
   
Total
   
NAU
   
Other
   
Total
 
                                     
Revenue:
                                   
  Academic revenue
  $ 23,593     $ 0     $ 23,593     $ 28,133     $ 0     $ 28,133  
  Auxiliary revenue
    1,865       0       1,865       2,212       0       2,212  
  Rental income — apartments
    0       281       281       0       293       293  
  Condominium sales
    0       0       0       0       0       0  
                                                 
           Total revenue
    25,458       281       25,739       30,345       293       30,638  
                                                 
Operating expenses:
                                               
  Cost of educational services
    6,832       0       6,832       7,077       0       7,077  
  Selling, general &administrative
    18,410       395       18,805       16,927       374       17,301  
  Auxiliary expense
    1,397       0       1,397       1,562       0       1,562  
  Cost of condominium sales
    0       0       0       0       0       0  
  Loss (gain) on disposition of
                                               
    property
    67       (4 )     63       0       0       0  
                                                 
    Total operating expenses
    26,706       391       27,097       25,566       374       25,940  
                                                 
(Loss) income from operations
    (1,248 )     (110 )     (1,358 )     4,779       (81 )     4,698  
                                                 
Other income (expense):
                                               
  Interest income
    21       4       25       8       4       12  
  Interest expense
    (218 )     0       (218 )     (222 )     0       (222 )
  Other income  - net
    0       46       46       0       42       42  
                                                 
    Total other (expense) income
    (197 )     50       (147 )     (214 )     46       (168 )
                                                 
(Loss) income before income taxes
  $ (1,445 )   $ (60 )   $ (1,505 )   $ 4,565     $ (35 )   $ 4,530  
 
12.  
SUBSEQUENT EVENTS
 
In December 2015, the Company completed the share repurchase plan that was authorized by the Board of Directors in August 2015.  The authorized 350,000 shares were purchased at an average of $2.45 per share.  151,069 of those shares were repurchased through November 30, 2015 and the remaining 198,931 shares were repurchased in December 2015.
 
In January 2016, the Company announced the planned closure of two physical locations effective March 1, 2016: Weldon Spring, Missouri and Tigard, Oregon.  100% of the students at these two locations took their classes online.  These closures could have a material impact on the financial statements and we are currently evaluating the impact.

 
-19-

 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain of the statements included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 (“Reform Act”). These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause its actual results to differ materially from those expressed in or implied by such statements. The assumptions, uncertainties and risks include the pace of growth of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regional accreditation standards and state regulatory requirements, competitive factors, risks associated with the opening of new campuses and hybrid learning centers, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approvals, our ability to continue to implement our growth strategy, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in the Company’s Annual Report on Form 10-K filed on August 7, 2015 and its other filings with the SEC. The Company undertakes no obligation to update or revise any forward looking statement, except as may be required by law.

Background
 
National American University, or NAU, is a regionally accredited, proprietary, multi-campus institution of higher learning, offering associate, bachelor’s, master’s and doctoral degree programs in allied health, nursing, legal studies, education, business, accounting  and information technology. Operations at November 30, 2015 included 37 locations, including educational sites located in Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota and Texas, a distance learning service center in Texas, and distance learning operations and central administration offices in Rapid City, South Dakota.
 
In November 2015, the Company ceased offering courses in its educational facility in Denver, Colorado.  Our facility in Centennial, Colorado is in the same vicinity, so students have the option to transfer to it.
 
In January 2016, the Company announced the planned closure of two physical locations effective March 1, 2016: Weldon Spring, Missouri and Tigard, Oregon.  The ongoing impact on our future financial results is expected to be positive as online students will remain enrolled, and fixed costs for these locations will be eliminated.
 
We continue to make progress on the development of our new online recruitment center in Albuquerque, New Mexico, where we expect to pilot a program in January 2016 to ensure that registration and other administrative functions run smoothly.  In addition, we have made progress in executing our plans to enroll students from certain Canadian institutions in NAU courses and programs.  We continue to build the infrastructure that will allow us to scale our efforts while maintaining the compliance requirements of the Ontario Ministry of Training, Colleges and Universities.
 
 
-20-

 

As of November 30, 2015, NAU had 1,433 students enrolled at its physical locations, 5,572 students for its online programs, and 1,244 students that attended physical campus hybrid learning locations and also took classes online.  NAU supports the instruction of approximately 1,600 additional students at affiliated institutions for which NAU provides online course hosting and technical assistance. NAU provides courseware development, technical support and online class hosting services to various colleges, technical schools and training institutions in the United States and Canada who do not have the capacity to develop and operate their own in-house online curriculum for their students. NAU does not share revenues with these institutions, but rather charges a fee for its services, enabling it to generate additional revenue by leveraging its current online program infrastructure.

The real estate operations consist of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated approximately 1% of our revenues for the quarter ended November 30, 2015.
 
Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU’s operations. For the six months ended November 30, 2015, approximately 91.8% of our revenue was generated from NAU’s academic revenue, which consists of tuition and fees assessed at the start of each term. The remainder of our revenue comes from NAU’s auxiliary revenue from sources such as NAU’s book sales, and the real estate operations’ rental income and condominium sales. Tuition revenue is reported net of adjustments for refunds and scholarships and is recognized on a daily basis over the length of the term. Upon withdrawal, students generally are refunded tuition based on the uncompleted portion of the term. Auxiliary revenue is recognized as items are sold and is recorded net of any applicable sales tax.
 
  Factors affecting net revenue include:

 
the number of students who are enrolled and who remain enrolled in courses throughout the term;

 
the number of credit hours per student;

 
the student’s degree and program mix;

 
changes in tuition rates;

 
the affiliates with which NAU is working as well as the number of students at the affiliates; and

 
the amount of scholarships for which students qualify.
 
We record unearned tuition for academic services to be provided in future periods. Similarly, we record a tuition receivable for the portion of the tuition that has not been paid. Tuition receivable at the end of any calendar quarter largely represents student tuition due for the prior academic quarter. Based upon past experience and judgment, we establish an allowance for doubtful accounts to recognize those receivables we anticipate will not be paid. Any uncollected account more than six months past due on students who have left NAU is charged against the allowance. Bad debt expenses as a percentage of revenues for the six months ended November 30, 2015 and 2014 were 6.3% and 3.4%, respectively.
 
 
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We define enrollments for a particular reporting period as the number of students registered in a course on the last day of the reporting period. Enrollments are a function of the number of continuing students registered and the number of new enrollments registered during the specified period. Enrollment numbers are offset by inactive students, graduations and withdrawals occurring during the period. Inactive students for a particular period are students who are not registered in a class and, therefore, are not generating net revenue for that period.
 
We believe the principal factors affecting NAU’s enrollments and net revenue are the number and breadth of the programs being offered; the effectiveness of our marketing, recruiting and retention efforts; the quality of our academic programs and student services; the convenience and flexibility of our online delivery platform; the availability and amount of federal and other funding sources for student financial assistance; and general economic conditions.
 
The following chart is a summary of our student enrollment on November 30, 2015 and 2014, by degree type and by instructional delivery method.
 
   
November 30, 2015
   
November 30, 2014
   
% Growth for same quarter over prior year
 
   
(Fall ‘16 Qtr)
   
(Fall ‘15 Qtr)
     
   
Number of Students
   
Number of Students
     
Continuing Ed
    278       460       -39.6 %
Doctoral
    77       52       48.1 %
Graduate
    280       306       -8.5 %
Undergraduate and Diploma
    7,614       9,772       -22.1 %
                         
Total
    8,249       10,590       -22.1 %
                         
                         
On-Campus
    1,433       2,558       -44.0 %
Online
    5,572       6,418       -13.2 %
Hybrid
    1,244       1,614       -22.9 %
                         
Total
    8,249       10,590       -22.1 %
 
We experienced a 22.1% decrease in enrollment in the fall term 2015 over the fall term 2014 due to lower market demand among our targeted student demographic. This decline was across all degree programs and course delivery methods with the exception of the doctoral program. We believe our investment to expand academic programming and our strategic plan will be critical in returning to the growth and results of operations that we have seen over the recent years.
 
 
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We plan to continue expanding and developing our academic programming focusing on growth at our approximately three dozen existing locations and potentially making acquisitions. This growth will be subject to applicable regulatory requirements and market conditions. With these efforts, we anticipate positive enrollment trends. Our ability to maintain or increase enrollment will depend on how economic factors are perceived by our target student market in relation to the advantages of pursuing higher education. If current market conditions continue, we believe that the extent to which we are able to increase enrollment will be correlated with the opening of additional physical locations, the number of programs that are developed, the number of programs that are expanded to other locations, and, potentially, the number of locations and programs added through acquisitions. If market conditions decline or if we are unable to open new physical locations, develop or expand academic programming or make acquisitions, whether as a result of regulatory limitations or other factors, our enrollment rate will likely decline.
 
Expenses. Expenses consist of cost of educational services, selling, general and administrative, auxiliary expense, the cost of condominium sales, and the gain/loss on disposition of property and equipment. Cost of educational services expenses contains expenditures attributable to the educational activity of NAU. This expense category includes salaries and benefits of faculty and academic administrators, costs of educational supplies, faculty reference and support material and related academic costs, and facility costs. Selling, general and administrative expenses include the salaries of the learner services positions (and other expenses related to support of students), salaries and benefits of admissions staff, marketing expenditures, salaries of other support and leadership services (including finance, human resources, compliance and other corporate functions), legal expenses, expenses related to expansion and development of academic programs and physical locations, as well as depreciation and amortization, bad debt expenses and other related costs associated with student support functions. Auxiliary expenses include expenses for the cost of goods sold, including costs associated with books. The cost of condominium sales is the expense related to condominiums that are sold during the reporting period. The gain or loss on disposition of property and equipment expense records the cost incurred or income received in the disposal of assets that are no longer used by us.
 
Factors affecting comparability
 
Set forth below are selected factors we believe have had, or which we expect to have, a significant effect on the comparability of our recent or future results of operations:
 
Introduction of new programs and specializations. We plan to develop additional degree and diploma programs and specializations over the next several years. When introducing new programs and specializations, we invest in curriculum development, support infrastructure and marketing research. Revenues associated with these new programs are dependent upon enrollments, which are lower during the periods of introduction. During this period of introduction and development, the rate of growth in revenues and operating income has been, and may be, adve