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EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - National American University Holdings, Inc.nauh_ex311.htm
EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - National American University Holdings, Inc.nauh_ex322.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - National American University Holdings, Inc.nauh_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - National American University Holdings, Inc.nauh_ex312.htm
 
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2018
 
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
 
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 
 
 
 
 
 
 
5301 Mt. Rushmore Road
 
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  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  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
 
 
Emerging growth company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of January 4, 2019, 24,522,653 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, 2018 and May 31, 2018
3
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended November 30, 2018 and 2017
4
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended November 30, 2018 and 2017
5
 
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended November 30, 2018 and 2017
6
 
Notes to Unaudited Condensed Consolidated Financial Statements
8
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 26
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 36
ITEM 4.
CONTROLS AND PROCEDURES
 36
 
 
 
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
 37
ITEM 1A.
RISK FACTORS
 38
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 42
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 42
ITEM 4.
MINE SAFETY DISCLOSURES
 42
ITEM 5.
OTHER INFORMATION
 42
ITEM 6.
EXHIBITS
 43
 
 
 
 
 
 
 
 
-2-
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 2018 AND MAY 31, 2018
(In thousands, except share and per share amounts)
 
 
 
November 30,
 
 
May 31,
 
 
 
2018
 
 
2018
 
ASSETS
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
  Cash and cash equivalents
 $530 
 $5,324 
  Student receivables — net of allowance of $487 and $587 at November 30, 2018
    
    
    and May 31, 2018, respectively
  1,769 
  2,893 
  Other receivables
  382 
  563 
  Income taxes receivable
  7 
  105 
  Prepaid and other current assets
  1,104 
  1,552 
           Total current assets
  3,792 
  10,437 
Total property and equipment - net
  17,810 
  25,228 
OTHER ASSETS:
    
    
  Restricted certificates of deposit
  9,250 
  9,250 
  Condominium inventory
  154 
  512 
  Land held for future development
  414 
  414 
  Course development — net of accumulated amortization of $3,809 and $3,577 at
    
    
    November 30, 2018 and May 31, 2018, respectively
  1,670 
  1,841 
  Goodwill
  363 
  363 
  Other intangibles — net of accumulated amortization of $37 and $22 at November 30,
    
    
    2018 and May 31, 2018, respectively
  192 
  207 
  Other
  1,255 
  555 
           Total other assets
  13,298 
  13,142 
TOTAL 
 $34,900 
 $48,807
 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
CURRENT LIABILITIES:
    
    
  Current portion of capital lease payable
 $406 
 $380 
  Current portion of long-term debt
  800 
  800 
  Current portion of lease acceleration payable
  1,553 
  - 
  Accounts payable
  3,281 
  1,991 
  Income taxes payable
  84 
  70 
  Deferred income
  3,115 
  3,758 
  Accrued and other liabilities
  3,288 
  4,090 
           Total current liabilities
  12,527 
  11,089 
OTHER LONG-TERM LIABILITIES
  1,639 
  2,688 
CAPITAL LEASE PAYABLE, NET OF CURRENT PORTION
  10,650 
  10,857 
LONG-TERM DEBT, NET OF CURRENT PORTION
  7,200 
  7,200 
LONG-TERM LEASE ACCELERATION PAYABLE, NET OF CURRENT PORTION
  2,300 
  - 
COMMITMENTS AND CONTINGENCIES (Note 11)
    
    
STOCKHOLDERS' EQUITY:
    
    
  
  Common stock, $0.0001 par value (50,000,000 authorized; 28,877,439 issued and
 
  
  24,522,653 outstanding as of November 30, 2018; 28,685,195 issued and 24,344,122
 
    outstanding as of May 31, 2018)
  3 
  3 
  Additional paid-in capital
  59,400 
  59,305 
  Accumulated deficit
  (36,377)
  (19,873)
  
  Treasury stock, at cost (4,354,786 shares at November 30, 2018 and 4,341,073
 
    shares at May 31, 2018)
  (22,503)
  (22,496)
Total National American University Holdings, Inc. stockholders' equity
  523 
  16,939 
Non-controlling interest
  61 
  34 
Total stockholders' equity
  584 
  16,973 
TOTAL
 $34,900 
 $48,807 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
-3-
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2018 AND 2017
(In thousands, except share and per share amounts)
 
 
 
Six Months Ended
 
 
Three Months Ended
 
 
 
November 30,    
 
 
November 30,    
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
REVENUE:
 
 
 
 
 
 
 
 
 
 
 
 
  Academic revenue
 $28,559 
 $36,684 
 $13,879 
 $18,494 
  Auxiliary revenue
  1,405 
  1,975 
  678 
  931 
  Rental income — apartments
  697 
  700 
  346 
  358 
  Condominium sales
  439 
  455 
  214 
  235 
  Other real estate income
  103 
  - 
  51 
  - 
 
    
    
    
    
           Total revenue
  31,203 
  39,814 
  15,168 
  20,018 
 
    
    
    
    
OPERATING EXPENSES:
    
    
    
    
  Cost of educational services
  11,767 
  13,311 
  5,413 
  6,411 
  Selling, general and administrative
  24,205 
  30,816 
  11,133 
  15,308 
  Auxiliary expense
  972 
  1,393 
  471 
  652 
  Cost of condominium sales
  354 
  427 
  165 
  191 
  Loss on lease termination and acceleration
  3,099 
  362 
  3,056 
  - 
  Loss on impairment and disposition of property and equipment
  6,438 
  995 
  5,884 
  1,036 
 
    
    
    
    
           Total operating expenses
  46,835 
  47,304 
  26,122 
  23,598 
 
    
    
    
    
OPERATING LOSS
  (15,632)
  (7,490)
  (10,954)
  (3,580)
 
    
    
    
    
OTHER INCOME (EXPENSE):
    
    
    
    
  Interest income
  63 
  49 
  32 
  29 
  Interest expense
  (565)
  (417)
  (282)
  (208)
  Other (expense) income — net
  (82)
  87 
  (83)
  43 
 
    
    
    
    
           Total other expense
  (584)
  (281)
  (333)
  (136)
 
    
    
    
    
LOSS BEFORE INCOME TAXES
  (16,216)
  (7,771)
  (11,287)
  (3,716)
 
    
    
    
    
INCOME TAX (EXPENSE) BENEFIT
  (18)
  185 
  (10)
  (56)
 
    
    
    
    
NET LOSS
  (16,234)
  (7,586)
  (11,297)
  (3,772)
 
    
    
    
    
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST
  (27)
  (19)
  (10)
  (5)
 
    
    
    
    
NET LOSS ATTRIBUTABLE TO NATIONAL AMERICAN
    
    
    
    
         UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
  (16,261)
  (7,605)
  (11,307)
  (3,777)
 
    
    
    
    
OTHER COMPREHENSIVE LOSS, NET OF TAX
    
    
    
    
  Unrealized losses on investments, net of tax benefit
  - 
  (5)
  - 
  1 
 
    
    
    
    
 
    
    
    
    
COMPREHENSIVE LOSS ATTRIBUTABLE TO
    
    
    
    
         NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
 $(16,261)
 $(7,610)
 $(11,307)
 $(3,776)
 
    
    
    
    
 
    
    
    
    
Basic net loss attributable to National American University Holdings, Inc.
 $(0.67)
 $(0.31)
 $(0.46)
 $(0.16)
Diluted net loss attributable to National American University Holdings, Inc.
 $(0.67)
 $(0.31)
 $(0.46)
 $(0.16)
Basic weighted average shares outstanding
  24,344,052 
  24,200,096 
  24,389,841 
  24,219,884 
Diluted weighted average shares outstanding
  24,344,052 
  24,200,096 
  24,389,841 
  24,219,884 
 
    
    
    
    
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
-4-
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2018 AND 2017
(In thousands, except share and per share amounts)
 
 
 
Equity attributable to National American University Holdings, Inc. and Subsidiaries  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Retained
 
 
 
 
 
other
 
 
 
 
 
Total
 
 
 
Common
 
 
paid-in
 
 
earnings
 
 
Treasury
 
 
comprehensive
 
 
Non-controlling
 
 
stockholders'
 
 
 
stock
 
 
capital
 
 
(deficit)
 
 
stock
 
 
loss
 
 
interest
 
 
equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - May 31, 2017
 $3 
 $59,060 
 $(6,622)
 $(22,481)
 $(4)
 $(16)
 $29,940 
 
    
    
    
    
    
    
    
Purchase of 6,137 shares common
    
    
    
    
    
    
    
   stock for the treasury
  - 
  - 
  - 
  (13)
  - 
  - 
  (13)
Share based compensation expense
  - 
  146 
  - 
  - 
  - 
  - 
  146 
Dividends declared ($0.045 per share)
  - 
  - 
  (1,090)
  - 
  - 
  - 
  (1,090)
Net (loss) income
  - 
  - 
  (7,605)
  - 
  - 
  19 
  (7,586)
Other comprehensive loss, net of tax
  - 
  - 
  - 
  - 
  (5)
  - 
  (5)
Balance - November 30, 2017
 $3 
 $59,206 
 $(15,317)
 $(22,494)
 $(9)
 $3 
 $21,392 
 
    
    
    
    
    
    
    
Balance - May 31, 2018
 $3 
 $59,305 
 $(19,873)
 $(22,496)
 $- 
 $34 
 $16,973 
Impact of adoption of new accounting
    
    
    
    
    
    
    
standard
  - 
  - 
  (243)
  - 
  - 
  - 
  (243)
Purchase of 13,713 shares common
    
    
    
    
    
    
    
stock for the treasury
    
  - 
    
  (7)
    
    
  (7)
Share based compensation expense
  - 
  95 
  - 
  - 
  - 
  - 
  95 
Net (loss) income
  - 
  - 
  (16,261)
  - 
  - 
  27 
  (16,234)
Balance - November 30, 2018
 $3 
 $59,400 
 $(36,377)
 $(22,503)
 $- 
 $61 
 $584
 
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 CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2018 AND 2017
(In thousands)
 
 
 
Six Months Ended
 
 
 
November 30,
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(16,234)
 $(7,586)
Adjustments to reconcile net loss to net cash flows used in operating activities:
    
    
Depreciation and amortization
  2,041 
  2,440 
Loss on lease termination
  3,099
 
  362 
Loss on impairment and disposition of property
  6,438 
  995 
Provision for uncollectable tuition
  1,046 
  1,279 
Noncash compensation expense
  95 
  146 
Deferred income taxes
  0 
  (203)
Changes in assets and liabilities:
    
    
Student and other receivables
  259 
  (1,113)
Prepaid and other current assets
  448 
  351 
Condominium inventory
  358 
  431 
Other assets
  (700)
  93 
Income taxes receivable/payable
  112 
  16 
Accounts payable
  1,058 
  679 
Deferred income
  (886)
  284 
Accrued and other liabilities
  (802)
  (622)
Other long-term liabilities
  (252)
  (1,220)
 
    
    
Net cash flows used in operating activities
  (3,920)
  (3,668)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Purchases of available for sale investments
  0 
  (497)
Proceeds from sale of available for sale investments
  0 
  1,109 
Purchases of property and equipment
  (633)
  (1,570)
Proceeds from sale of property and equipment
  10 
  210 
Course development
  (63)
  (107)
Payments received on contract for deed
  0 
  3 
Other
  0 
  23 
 
    
    
Net cash flows used in investing activities
  (686)
  (829)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Repayments of capital lease payable
  (181)
  (157)
Purchase of treasury stock
  (7)
  (13)
Dividends paid
  0 
  (2,184)
 
    
    
Net cash flows used in financing activities
  (188)
  (2,354)
 
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, 2018 AND 2017
(In thousands)
 
 
 
Six Months Ended
 
 
 
November 30,
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
 $(4,794)
 $(6,851)
 
    
    
CASH AND CASH EQUIVALENTS — Beginning of year
  5,324 
  11,974 
 
    
    
CASH AND CASH EQUIVALENTS — End of period
 $530 
 $5,123 
 
    
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND
    
    
   NON-CASH INFORMATION:
    
    
   Cash (received) paid for income taxes
 $(93)
 $2 
   Cash paid for interest
 $566 
 $418 
   Property and equipment purchases included in accounts payable
 $189 
 $0 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
-7-
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED NOVEMBER 30, 2018 AND 2017
(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 and include the accounts of National American University Holdings, Inc., its subsidiary, Dlorah, Inc. (“Dlorah”), and its divisions, National American University (“NAU” or the “University”), Fairway Hills, the Fairway Hills Park and Recreational Association, the Park West Owners’ Association, the Vista Park Owners’ Association (“Fairway Hills”), and the Company’s interest in Fairway Hills Section III Partnership (the “Partnership”), collectively the “Company.”
 
The accompanying unaudited 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 of America (“U.S. GAAP”) can be condensed or omitted. The information in the condensed consolidated balance sheet as of May 31, 2018 was derived from the audited consolidated financial statements of 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 on Form 10-K for the year ended May 31, 2018, filed on September 14, 2018. Furthermore, the results of operations and cash flows for the six month periods ended November 30, 2018 and 2017 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.
 
Throughout the notes to the condensed consolidated financial statements, amounts in tables are in thousands of dollars, except for per share data or otherwise designated. The Company’s fiscal year end is May 31. All intercompany transactions and balances have been eliminated in consolidation.
 
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 and Fairway Hills.
 
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.
 
-8-
 
 
Financial Condition and Liquidity — The Company has experienced a decrease in revenue since 2013 due to enrollment declines at National American University. This long-term decline in revenue has resulted in increasing net losses and decreases in liquidity and capital resources.
 
For the six months ended November 30, 2018, cash used in operating activities was $3.9 million and unrestricted cash and cash equivalents decreased by $4.8 million from May 31, 2018. As a result, as of November 30, 2018, the Company had $0.5 million of unrestricted cash and cash equivalents and a working capital deficiency of $8.7 million. These factors, among others, raise substantial doubt regarding the Company’s ability to continue as a going concern.
 
During the quarter ended November 30, 2018, the Company implemented or began implementing actions to address its liquidity needs as follows:
 
During the quarter ended November 30, 2018, the Company implemented an operational plan that focuses on online academic programs and expanding its programming and services related to strategic security, counter-terrorism, and intelligence for the public and private sectors. In alignment with this new operational change, NAU suspended new student enrollment in 34 of its 128 programs and is in the process of closing its ground-based locations. This operational change may put additional pressure on the Company’s revenue in the immediate future. However, the Company expects a significant decrease in expenses with a lesser impact on revenue in the long run. See note 7 for further details on the Company’s operational change.
On December 19, 2018, the restriction on the Company’s $1.1 million certificate of deposit with Great Western Bank expired, and the cash balance has now become available for operating purposes.
On December 17, 2018, the Company entered into an agreement to sell one out of two available-for-sale aircrafts for proceeds of $0.6 million, which management expects to close by February 2019. The estimated proceeds from the other aircraft, as well as the savings from the related maintenance and operating costs, are approximately $0.9 million. The Company has been actively marketing and advertising to sell the second aircraft, which management expects will be completed within the next few quarters.
The Company continued its internal restructuring, which will result in the elimination of numerous positions throughout the organization in the third quarter of fiscal 2019. The Company estimates an additional $1.5 million in annual payroll reduction. This payroll reduction is part of our continued cost-cutting initiatives to better align expenses with the decreasing enrollment.
 
Should the Company be unsuccessful with one or more of these actions, should enrollment continue to decline significantly, or in the event of significant unforeseen expenditures, management believes that it would need to raise additional funding, including but not limited to selling the Company’s real estate assets, to continue as a going concern.
 
While the Company believes that the above actions will be successful, management is unable to conclude that it is probable that these actions will provide sufficient liquidity to enable the Company to meet its needs and, as such, there is substantial doubt about its ability to continue as a going concern for at least twelve months following the issuance of these financial statements.
 
-9-
 
 
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, master’s and doctoral degree programs in business-related disciplines, such as accounting, management, business administration, and information technology; in healthcare-related disciplines, such as occupational therapy, medical assisting, nursing, surgical technology, and healthcare information and management; in legal-related disciplines, such as paralegal, criminal justice, and professional legal studies; in higher education; and in strategic security. Courses are offered through on-ground educational sites as well as online.
 
In addition to the university operations, the Company owns and operates a real estate business known as Fairway Hills Developments, or Fairway Hills. The real estate business rents apartment units and develops and sells condominium units in the Fairway Hills Planned Development area of Rapid City, South Dakota.
 
3.
RECENTLY ADOPTED AND NEW ACCOUNTING PRONOUNCEMENTS
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard 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 is effective for the Company’s fiscal year 2019, and was implemented in the first quarter ended August 31, 2018, using the modified retrospective method of adoption. The adoption of this guidance did not have a material impact on the Company’s financial statements during the six months ended November 30, 2018. The primary impact of adopting the new standard has been modifications to the timing of revenue recognition for certain revenue streams. A net cumulative increase to accumulated deficit and a corresponding increase to deferred revenue in the amount of $0.2 million as of June 1, 2018 was recorded as a result of the adoption of this guidance. The Company has provided expanded disclosures pertaining to revenue recognition in Note 4 – Revenues.
 
-10-
 
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively financed or purchased by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. If the available accounting election is made, leases with a term of twelve months or less can be accounted for similar to existing guidance for operating leases. The standard will be effective for the Company’s fiscal year ending 2020 and will be implemented in the first quarter ending August 31, 2019. The Company is currently evaluating and has not yet determined the impact implementation will have on the Company’s consolidated financial statements.
 
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which is intended to reduce diversity in practice and the complexity in applying existing guidance related to changing terms or conditions of share-based payment awards. The standard clarifies that modification accounting is required unless the fair value, vesting conditions, and classification as an equity or liability instrument of the modified award are the same as that of the original award immediately prior to the modification. The new standard is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The Company adopted this standard for the fiscal year beginning June 1, 2018, and it did not have an effect on the consolidated financial statements. ASU 2017-09 will be applied prospectively to any awards modified on or after the adoption date.
 
In August 2018, the FASB issued ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s consolidated financial statements.
 
-11-
 
 
4.
REVENUES
 
Impact of Adoption of ASC 606 – Revenue from Contracts with Customers
 
On June 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition (“ASC Topic 605”). The Company elected to follow the modified retrospective adoption method. The new guidance was applied to all contracts that were not completed as of the adoption date. Revenues and operating results for the reporting period beginning June 1, 2018 have been presented under the accounting guidance included within ASC Topic 606, while prior period amounts have not been restated to conform to the new guidance as permitted by the modified retrospective method of adoption.
 
As a result of the adoption of ASC Topic 606, the Company recorded a net cumulative increase to accumulated deficit of $0.2 million and a corresponding increase to deferred income within the Consolidated Balance Sheet as of June 1, 2018. The impact of adoption was primarily related to the estimated adjustment for students who withdraw from classes for terms that were not complete at May 31, 2018. Prior to the adoption of ASC 606, these revenue adjustments were recognized when the student actually withdrew from classes. Compared to the amounts under ASC Topic 605, for the six months ended November 30, 2018, the net impact to revenues under ASC Topic 606 was a reduction of revenues of $0.2 million, with a corresponding increase to deferred income.
 
The Company does not have any unsatisfied performance obligations for contracts with customers that have an expected duration of more than one year.
 
Revenue Recognition
 
The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category:
 
 
 
Six months ended
 
 
Three months ended
 
 
 
November 30,
 
 
November 30,
 
 
 
2018
 
 
2018
 
Academic revenue
 $28,559 
 $13,879 
Auxilary revenue
  1,405 
  678 
Real estate revenue
  1,239 
  611 
Consolidated revenue
 $31,203 
 $15,168 
 
Revenues are recognized when control of the promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods and services. The Company applies the five-step revenue model under ASC Topic 606 to determine when revenue is earned and recognized. The Company had no capitalizable costs associated with obtaining and fulfilling a revenue contract.
 
-12-
 
 
Academic Revenue: Academic revenue consists of tuition revenue, other fee revenue and the revenue generated through NAU’s teaching relationships with other non-related party institutions. The Company’s academic programs are typically offered on a three-month term basis that, starting in November 2017, commence on a monthly basis. As a result, each of the Company’s financial reporting quarters include the revenue of three months of the first term, two months of the second term, and one month of the third term.
 
Tuition revenue represents amounts charged for course instruction. For tuition revenue, the Company performs an assessment at the beginning of each student contract and, subsequently thereafter, if new information indicates there has been a significant change in facts and circumstances. Each student contract contains a single performance obligation that is the Company’s promise to the student to provide knowledge and skills through course instruction, which may include any combination of classroom instruction, on-demand tutoring or on-line instruction.
 
Tuition revenue is reported net of adjustments for discounts, refunds and scholarships. Tuition rates per student vary by educational site, the number of credit hours the student is enrolled in for the term, the program, and the degree level of the program. The portion of tuition and registration fees received but not earned, less estimated student withdrawals, is recorded as deferred income and reflected as a current liability in the Company’s consolidated balance sheets, as such amount represents revenue the Company expects to earn from terms that are not complete as of the date of the financial statements.
 
Tuition revenue is deferred and recognized as revenue ratably over the term of instruction (typically three months). Tuition revenue is recognized over time as the students obtain control of the educational services provided by the Company subsequent to enrollment and on a ratable basis over the term of the course beginning on the course start date through the last day of classes.
 
If a student withdraws prior to the completion of the academic term, the respective portion of tuition and registration fees the Company already received and is not entitled to retain are refunded back to the students and the Department of Education. Students are no longer entitled to a refund once 60% of the term has been completed. For students that have withdrawn from all classes during an academic term, the Company estimates the expected receivable balance due from such students and records a provision to reduce academic revenue for that amount, less estimated collections calculated based on historical collection trends and adjusted for known current factors.
 
Auxiliary Revenue: Auxiliary revenue primarily consists of revenues from the Company’s bookstore operations for the sale of books and other class materials. Revenue is recognized when control of the books or class materials are transferred to the student. Auxiliary revenue is recorded net of any applicable sales tax. There are no identified changes to revenue recognition from ASC Topic 605 to ASC Topic 606.
 
Real Estate Revenue: Real estate revenue includes monthly rental income, fees paid by members of owners’ associations managed by the Company and condominium sales. Rental income and owners’ association fees are received from tenants or members. Significant amounts paid in advance are included in deferred income on the Company’s consolidated balance sheets. Revenue related to the sales of the condominiums is recognized at the closing of the transaction at the negotiated contract price. There are no identified changes to revenue recognition from ASC Topic 605 to ASC Topic 606.
 
-13-
 
 
The following presents the Company’s net revenue disaggregated based on the timing of revenue recognition:
 
 
 
Six months ended
 
 
Three months ended
 
 
 
November 30, 2018
 
 
November 30, 2018
 
Services transferred over time:
 
 
 
 
 
 
Tuition revenue, net of adjustments
 $28,559 
 $13,879 
  (transferred over the term of instruction)
    
    
Rental income (transferred over the rental period)
  697 
  346 
Total
  29,256 
  14,225 
 
    
    
Goods or services transferred at a point in time:
    
    
Auxiliary revenue
  1,405 
  678 
Other real estate income 
  103 
  51 
Condominium sales
  439 
  214 
Total
  1,947 
  943 
 
    
    
Total revenue
 $31,203 
 $15,168 
 
5.
STUDENT RECEIVABLES, NET
 
Student receivables, net consist of the following as of the respective period ends:
 
 
 
November 30,
 
 
May 31,
 
 
 
2018
 
 
2018
 
Student accounts receivable
 $2,256 
 $3,480 
Less allowance for doubtful accounts
  (487)
  (587)
  Student receivables, net
 $1,769 
 $2,893 
 
Student accounts receivable is composed primarily of amounts due related to tuition and educational services. The following summarizes the activity in the allowance for doubtful accounts for the respective periods:
 
 
 
Six Months Ended
 
 
 
November 30,
 
 
 
2018
 
 
2017
 
Beginning allowance for doubtful accounts
 $587 
 $1,195 
Provisions for uncollectible accounts receivable
  1,046 
  1,279 
Write offs
  (1,449)
  (1,949)
Recoveries
  303 
  318 
Ending allowance for doubtful accounts
 $487 
 $843 
 
 
-14-
 
 
6.
IMPAIRMENT OF LONG-LIVED ASSETS
 
Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are held and used, impairment exists when the estimated undiscounted cash flows associated with the asset or group of assets is less than carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying and fair value. Fair values are determined based on quoted market values, discounted cash flows, or internal and external appraisals, as applicable. Assets to be held for sale are carried at the lower of carrying value or fair value, less cost to sell. All impairment charges are included in loss on impairment and disposition of property, within the NAU segment, in the consolidated financial statements.
 
During the quarter ended November 30, 2017, upon our review of our assets for impairment, we determined the estimated future undiscounted cash flows associated with the assets of the Houston, Minnetonka, Bloomington, Brooklyn Center and Burnsville campuses were not sufficient to recover their carrying value. Accordingly, the carrying values of the assets, primarily leasehold improvements, were reduced to their fair value, which the Company believes to be minimal. An impairment charge of $1,009 related to these five locations was recorded. The impairment charge is included in loss on impairment and disposition of property, within the NAU segment, in the condensed consolidated financial statements.
 
During the quarter ended August 31, 2018, the Company signed an early lease termination agreement without penalty for the Albuquerque East and Colorado Springs North locations. The Company consolidated the students from these two locations to other local campuses during the second quarter. The leases at the closed locations were terminated prior to the end of their terms. As a result of the early termination of the leases at these two locations, the carrying values of their assets, primarily classroom and office equipment and leasehold improvements, were reduced to their fair value, which the Company estimates to be minimal. An impairment charge of $555 related to the assets at these locations was recorded during the three months ended August 31, 2018.
 
During the quarter ended November 30, 2018, the Company incurred additional asset impairment as the result of the Board-Approved Operational Change to Online Operations. See Note 7 below.
 
7.
BOARD-APPROVED OPERATIONAL CHANGE TO ONLINE OPERATIONS
 
On October 29, 2018, the Company’s Board of Directors approved a strategic plan that focuses NAU’s growth strategies on online academic programs and expanding its programming and services related to strategic security, counter-terrorism, and intelligence for the public and private sectors. The Company remains committed to offering many of its current programs and maintaining its longstanding mission to assist students in achieving their educational goals and preparing them for employment in a rapidly evolving and increasingly competitive employment market.
 
In alignment with its new strategic plan, NAU suspended new student enrollment in 34 of its 128 programs effective November 1, 2018. NAU will continue to serve active students currently enrolled in these programs. To accelerate its operational change to online academic programs and to gain greater efficiencies through the centralization of its student-facing services, the Company is implementing appropriate staff reductions and other personnel actions.
 
-15-
 
 
As a result, the Company determined that the carrying value of all assets for the ground locations that were not previously impaired, should be impaired as of November 30, 2018. The Company incurred a charge of $5.9 million to account for these fixed asset impairments. In addition, future lease obligations at the ground locations that were closed as of November 30, 2018, were accelerated, and a non-cash charge of $3.1 million was incurred to recognize the acceleration of these lease obligations. This non-cash lease acceleration was calculated using the present value of future payments and offset with estimated sublease income.
 
8.
STOCKHOLDERS’ EQUITY
 
The authorized capital stock for the Company is 51,100,000 shares, 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, 24,522,653 and 24,344,122 shares of common stock were outstanding as of November 30, 2018 and May 31, 2018, respectively. No shares of preferred stock or Class A common stock were outstanding at November 30, 2018 and May 31, 2018.
 
Stock-Based Compensation
Under the 2009 Stock Option and Compensation Plan (the “2009 Plan”), 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. The Company has settled an advisor services contract and management compensation in stock that totaled 72,033 shares valued at $38 for the quarter ended November 30, 2018, and 78,609 shares valued at $44 for the year to date period ended November 30, 2018. These issuances of stock reduce the shares available for future grants. At November 30, 2018, the Company had 2,112 shares available for future grants under its 2009 Plan.
 
In 2013, the Company 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. Termination of the 2013 Plan was approved by the stockholders of the National American University Holdings, Inc. at the 2018 Annual Meeting of Stockholders held October 9, 2018.
 
At the 2018 Annual Meeting of National American University Holdings, Inc., held October 9, 2018, the stockholders also approved the 2018 Stock Option and Compensation Plan (the “2018 Plan”). The Plan authorizes 1,800,000 shares to aid the Company in recruiting and retaining employees and to align the interests of employees, officers and directors with those of the Company’s stockholders. The Company may grant restricted stock awards, restricted stock units, stock options, stock appreciation rights, stock awards and other stock-based awards. The Plan expires ten years from its inception date. At November 30, 2018, all 1,800,000 shares are available for future grants.
 
Restricted stock
During the quarter ended November 30, 2018, 47,615 restricted stock shares with a weighted average grant date fair value of $2.10 per share vested. The Company has 113,635 non-vested restricted stock shares with a weighted average grant date fair value of $0.88 per share that were granted during the quarter and remain outstanding at November 30, 2018. These shares vest one year from the issuance date. Unrecognized compensation expense associated with these shares total $86 with a remaining amortization period of 0.9 year. Stock compensation expense totaling $23 and $48, respectively, was recorded in the condensed consolidated statements of operations and comprehensive loss during the quarter and year to date periods ended November 30, 2018.
 
Stock options
 
The Company accounts for stock option-based compensation by estimating the fair value of options granted using a Black-Scholes option valuation model. The Company recognizes the expense for grants of stock options on a straight-line basis in the consolidated statements of operations and comprehensive income as operating expense based on their fair value over the requisite service period.
 
-16-
 
 
During the quarter ended November 30, 2018, the Company granted stock options to purchase 50,000 shares of stock at a weighted average exercise price of $0.44 per share. The stock options granted vest over a one to two-year period. The following assumptions were used to determine the fair value of the stock options awarded:
 
Assumptions used:
 
For the three and six months ended November 30, 2018
Expected term (in years)
 
5.75
Weighted average expected volatility
 
66.6%
Range of expected volatility
 
57.1% to 69.0%
Weighted average risk-free interest rate
 
3.11%
Range of risk-free interest rates
 
2.93% to 3.84%
Weighted average expected dividend
 
0.00%
Weighted average fair value per share
 
$0.27
 
Stock options for 27,021 shares of common stock with a weighted average exercise price of $3.12 were forfeited during the year to date period ended November 30, 2018. At November 30, 2018, stock options for 216,329 shares were outstanding with a weighted exercise price of $2.88 and a weighted average remaining useful life of 7.2 years. Of the outstanding shares, 167,327 are exercisable with a weighted average exercise price of $3.57 and a weighted average remaining useful life of 6.4 years. No intrinsic value was associated with the stock options at November 30, 2018. The Company recorded compensation expense for stock options of $2 and $3, respectively, for the three and six months ended November 30, 2018 in the consolidated statements of operations and comprehensive loss. Unamortized compensation associated with stock options at November 30, 2018 is $13 with a remaining amortization term of 1.7 years.
 
Dividends
To reduce cash requirements, no dividends have been declared or paid since October 6, 2017. The following table summarizes the Company’s fiscal 2018 dividend payments:
 
Date declared
 
Record date
 
Payment date
 
Per share
April 13, 2017
 
June 30, 2017
 
July 7, 2017
 
 $0.0450
August 4, 2017
 
September 30, 2017
 
October 6, 2017
 
 $0.0450
 
9.
INCOME TAXES
 
As of November 30, 2018, the Company had net operating loss (“NOL”) carryforwards of approximately $29,000, adjusted for certain other non-deductible items available to reduce future taxable income, if any. The NOL carryforward has no expiration. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Because management is unable to determine that it is more likely than not that the Company will realize the tax benefit related to the NOL carryforward, by having taxable income, a full valuation allowance has been established to reduce the net tax benefit asset value to zero.
 
The loss before income taxes for the six months ended November 30, 2018, created a net tax benefit of approximately $3,892. As realization of this net tax benefit is not assured, a full valuation allowance was recorded for this amount. As such, a full valuation allowance totaling $8,410 is recorded at November 30, 2018, and is included in net deferred income taxes liability in the accompanying condensed consolidated balance sheet.
 
-17-
 
 
The Company’s effective tax rate was expense of 0.1% for the six months ended November 30, 2018, as compared to expense of 2.6% for the corresponding period in 2017. The effective tax rate varies from the statutory rate of 21% primarily due to the deferred tax asset valuation allowance, fluctuations in state income taxes as a result of the Company’s net loss position, and nondeductible meals expense.
 
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%. The accounting for these changes was completed as of May 31, 2018.
 
10.
LOSS 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:
 
 
 
Six months ended
 
 
Three months ended
 
 
 
November 30,
 
 
November 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to National American University Holdings, Inc.
 $(16,261)
 $(7,605)
 $(11,307)
 $(3,777)
Denominator:
    
    
    
    
Weighted average shares outstanding used to compute basic
    
    
    
    
     net income per common share
 24,344,052
 24,200,096
 24,389,841
 24,219,884
Incremental shares issuable upon the assumed exercise of stock options
  - 
  - 
  - 
  - 
Incremental shares issuable upon the assumed vesting of restricted shares
  - 
  - 
  - 
  - 
Common shares used to compute diluted net income per share
 $24,344,052
 $24,200,096
 $24,389,841
 $24,219,884
Basic net loss per common share
 $(0.67)
 $(0.31)
 $(0.46)
 $(0.16)
 
    
    
    
    
Diluted net loss per common share
 $(0.67)
 $(0.31)
 $(0.46)
 $(0.16)
 
A total of 216,329 and 200,600 shares of common stock subject to issuance upon exercise of stock options for the three and six months ended November 30, 2018 and 2017, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.
 
-18-
 
 
A total of 113,635 and 47,615 shares of common stock subject to issuance upon vesting of restricted shares for the three and six months ended November 30, 2018 and 2017, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.
 
11.
COMMITMENTS AND CONTINGENCIES
 
From time to time, the Company 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.
 
In April 2017, a former NAU employee filed a qui tam suit against NAU, NAUH, and Dlorah, Inc., alleging certain violations of the Higher Education Act and Title IV program requirements, including (1) alleged misrepresentations to a programmatic accrediting agency, (2) alleged miscalculation of percentage of revenues derived from Title IV program funds under the 90/10 Rule, and (3) alleged noncompliance with the incentive compensation prohibition. The U.S. government decided to not intervene in the lawsuit at that time, and the complaint was then unsealed by the court in January 2018, with an amended complaint being filed on April 24, 2018. The U.S. government reserved the right to intervene at a later time. The case is styled U.S. ex rel. Brian Gravely v. National American University, et al., No. 5:17-cv-05032-JLV, and remains pending in the U.S. District Court for the District of South Dakota. NAU, NAUH, and Dlorah, Inc., have filed an answer to the amended complaint, denying any legal wrongdoing or liability. We cannot predict the outcome of this litigation, nor its ability to harm our reputation, impose litigation costs, or materially adversely affect our business, financial condition, and results of operations. The amount or range of reasonably possible losses cannot be determined and, accordingly, no liability has been accrued for this matter.
 
In December 2018, NAU was served with a lawsuit (Summons and Petition) commenced by two former students of NAU, Shayanne Bowman and Jackquelynn Mortenson (Plaintiffs), in Missouri state court, alleging claims of fraud and misrepresentations as to the quality and value of the educational degrees that were being pursued by the two Plaintiffs, and also a claim under the Missouri Merchandising Practices Act. The Petition (complaint) does not specify the damages being sought by Plaintiffs in the lawsuit. The case is styled Shayanne Bowman and Jackquelynn Mortenson v. Dlorah, Inc., d/b/a National American University, et al., Case No. 1816-cv30104, and is pending in Jackson County Circuit Court (MO). Three individual defendants were also included in the lawsuit, all former employees of NAU. The Company served and filed, on January 2, 2019, a formal response to the Petition in the form of a motion to dismiss the Petition. The Company simultaneously filed papers seeking to remove the lawsuit to federal court. The Company’s response to the lawsuit denied any legal wrongdoing or liability. The Company intends to vigorously defend the lawsuit. We cannot predict the outcome of this litigation, nor its ability to harm our reputation, impose litigation costs, or materially adversely affect our business, financial condition, and results of operations. The amount or range of reasonably possible losses cannot be determined at this time and, accordingly, no liability has been accrued for this matter.
 
-19-
 
 
12.
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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
Restricted certificates of deposit
 $- 
 $9,250 
 $- 
 $9,250 
Total assets at fair value
 $- 
 $9,250 
 $- 
 $9,250 
 
    
    
    
    
May 31, 2018
    
    
    
    
Investments:
    
    
    
    
Restricted certificates of deposit
 $- 
 $9,250 
 $- 
 $9,250 
Total assets at fair value
 $- 
 $9,250 
 $- 
 $9,250 
 
Following is a summary of the valuation techniques for assets and liabilities recorded in the consolidated balance sheets at fair value on a recurring basis:
 
Certificates of deposit (“CD’s”): Market prices for certain CD’s are obtained from quoted prices for similar assets. The Company classifies these investments as level 2. The certificates at November 30, 2018 and May 31, 2018 are restricted by an $8 million promissory note and by a $1 million letter of credit. See Note 14 to these Notes to Consolidated Financial Statements for additional information regarding these certificates of deposit.
 
Fair value of financial instruments: The Company’s financial instruments include cash and cash equivalents, CD’s, receivables and 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 are recorded at fair values as indicated in the preceding disclosures.
 
13.
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 maker, or decision-making groups, in deciding how to allocate capital and other resources to such lines of business.
 
-20-
 
 
The Company has two reportable segments: NAU and Other. The NAU segment contains the revenues and expenses associated with the University operations. The Company considers each location to be an operating segment, and they are aggregated into the NAU segment for financial reporting purposes, as the locations have similar economic and other conditions. The Other segment contains primarily real estate. 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:
 
 
 
Six months ended November 30,
 
 
Six months ended November 30,
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Consolidated
 
 
 
NAU
 
 
Other
 
 
Total
 
 
NAU
 
 
Other
 
 
Total
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Academic
 $28,559 
 $- 
 $28,559 
 $36,684 
 $- 
 $36,684 
  Auxiliary
  1,405 
  - 
  1,405 
  1,975 
  - 
  1,975 
  Rental income apartments
  - 
  697 
  697 
  - 
  700 
  700 
  Condominium sales
  - 
  439 
  439 
  - 
  455 
  455 
  Other real estate income
  - 
  103 
  103 
  - 
  - 
  - 
 
    
    
    
    
    
    
Total revenue
  29,964 
  1,239 
  31,203 
  38,659 
  1,155 
  39,814 
 
    
    
    
    
    
    
Operating expenses:
    
    
    
    
    
    
  Cost of educational services
  11,767 
  - 
  11,767 
  13,311 
  - 
  13,311 
  Selling, general & administrative
  23,158 
  1,047 
  24,205 
  29,780 
  1,036 
  30,816 
  Auxiliary
  972 
  - 
  972 
  1,393 
  - 
  1,393 
  Cost of condominium sales
  - 
  354 
  354 
  - 
  427 
  427 
  Loss on lease termination
  3,099 
  - 
  3,099 
  362 
  - 
  362 
  Loss (gain) on disp/impairment of property
  6,438 
  - 
  6,438 
  1,036 
  (41)
  995 
Total operating expenses
  45,434 
  1,401 
  46,835 
  45,882 
  1,422 
  47,304 
Loss from operations
  (15,470)
  (162)
  (15,632)
  (7,223)
  (267)
  (7,490)
Other income (expense):
    
    
    
    
    
    
  Interest income
  12 
  51 
  63 
  44 
  5 
  49 
  Interest expense
  (404)
  (161)
  (565)
  (417)
  - 
  (417)
  Other income (loss) - net
  (82)
  - 
  (82)
  (9)
  96 
  87 
Total other (expense)income
  (474)
  (110)
  (584)
  (382)
  101 
  (281)
Loss before taxes
 $(15,944)
 $(272)
 $(16,216)
 $(7,605)
 $(166)
 $(7,771)
 
    
    
    
    
    
    
 
 
 
As of November 30, 2018
 
 
As of November 30, 2017
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Consolidated
 
 
 
NAU
 
 
Other
 
 
Total
 
 
NAU
 
 
Other
 
 
Total
 
Total assets
 $21,793 
 $13,107 
 $34,900 
 $36,567 
 $10,083 
 $46,650 
 
-21-
 
 
 
 
Three months ended November 30,
 
 
Three months ended November 30,
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Consolidated
 
 
 
NAU
 
 
Other
 
 
Total
 
 
NAU
 
 
Other
 
 
Total
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Academic
 $13,879 
 $- 
 $13,879 
 $18,494 
 $- 
 $18,494 
  Auxiliary
  678 
  - 
  678 
  931 
  - 
  931 
  Rental income apartments
  - 
  346 
  346 
  - 
  358 
  358 
  Condominium sales
  - 
  214 
  214 
  - 
  235 
  235 
  Other real estate income
  - 
  51 
  51 
  - 
  - 
  - 
 
    
    
    
    
    
    
Total revenue
  14,557 
  611 
  15,168 
  19,425 
  593 
  20,018 
 
    
    
    
    
    
    
Operating expenses:
    
    
    
    
    
    
  Cost of educational services
  5,413 
  - 
  5,413 
  6,411 
  - 
  6,411 
  Selling, general & administrative
  10,597 
  536 
  11,133 
  14,781 
  527 
  15,308 
  Auxiliary
  471 
  - 
  471 
  652 
  - 
  652 
  Cost of condominium sales
  - 
  165 
  165 
  - 
  191 
  191 
  Loss on lease termination
  3,056 
  - 
  3,056 
  - 
  - 
  - 
  Loss (gain) on disp/impairment of property
  5,884 
  - 
  5,884 
  1,036 
  - 
  1,036 
Total operating expenses
  25,421 
  701 
  26,122 
  22,880 
  718 
  23,598 
Loss from operations
  (10,864)
  (90)
  (10,954)
  (3,455)
  (125)
  (3,580)
Other income (expense):
    
    
    
    
    
    
  Interest income
  6 
  26 
  32 
  27 
  2 
  29 
  Interest expense
  (201)
  (81)
  (282)
  (208)
  - 
  (208)
  Other income (loss) - net
  (83)
  - 
  (83)
  (4)
  47 
  43 
Total other (expense)income
  (278)
  (55)
  (333)
  (185)
  49 
  (136)
Loss before taxes
 $(11,142)
 $(145)
 $(11,287)
 $(3,640)
 $(76)
 $(3,716)
 
    
    
    
    
    
    
 
14.
LETTER OF CREDIT AND LONG-TERM DEBT
 
During the year ended May 31, 2018, the Company entered into an irrevocable letter of credit with Great Western Bank for $1,000. The letter of credit was required by the state of New Mexico in an amount set by the New Mexico Department of Higher Education. The agreement expired December 19, 2018. This $1,000 letter of credit and the Company’s purchasing card account were secured by a restricted certificate of deposit totaling $1,250. The certificate of deposit matured on December 19, 2018. Great Western Bank had restricted the $1,250 certificate of deposit as collateral for the $1,000 letter of credit and the Company’s purchasing card account that carried a credit limit of $250.
 
The Company replaced the $1,000 letter of credit required by the State of New Mexico by submitting an acceptable bond in place of the letter of credit. The bond has no collateral requirements and, as a result, the Company restored $1,100 of this restricted cash to unrestricted operating cash effective December 19, 2018. A $150 newly-created restricted certificate of deposit secures the Company’s purchasing card account that currently carries a reduced credit limit of $150.
 
-22-
 
On May 17, 2018, Dlorah and the Company jointly and severally issued to Black Hills Community Bank, N.A. (“Bank”) a promissory note in the principal amount of $8,000 (the “Note”), which is secured by a mortgage granted by Dlorah to the Bank on certain real property located in Pennington County, South Dakota, pursuant to a collateral real estate mortgage (the “Mortgage,” and together with the Note, the “Loan Agreements”) entered into between Dlorah and the Bank on the same date as the Note, and certain related rents, as well as a security interest in certain deposit accounts, to include restricted certificates of deposit totaling $8,000. These certificates of deposit are also restricted by the Bank and are not available for spending.
 
The Loan Agreements provide for an $8,000 five-year term loan (the “Loan”). The Loan carries a fixed interest rate of 4% (the “Interest Rate”) and is payable as follows: beginning June 17, 2018, 59 monthly consecutive interest-only payments based on the unpaid principal balance of the Loan at the Interest Rate; beginning May 17, 2019, four consecutive annual principal payments of $800 each, during which interest will continue to accrue on the unpaid principal balance of the Loan at the Interest Rate; and on May 17, 2023, one payment of the remaining principal balance and one month of accrued interest of the Loan in the amount of $4,816. The Company and Dlorah may prepay the Loan at any time without penalty unless the Note is refinanced with proceeds derived from another lender, in which case the Bank will be entitled to a prepayment penalty of 1%. The Loan Agreements also contain various affirmative and negative covenants, including financial covenants and events of default. As of November 30, 2018, the Company has been in compliance with the covenants included in the Loan Agreements.
 
15.
REGULATORY MATTERS
 
Financial Responsibility Composite Score
 
To participate in Title IV programs, the U.S. Department of Education (the “Department”) regulations specify that an eligible institution of higher education must satisfy specific measures of financial responsibility prescribed by the Department, or post a letter of credit in favor of the Department and accept other conditions on its participation in Title IV programs. Pursuant to the Title IV program regulations, each eligible institution must satisfy a measure of financial responsibility that is based on a weighted average of the following three annual ratios which assess the financial condition of the institution:
 
Primary Reserve Ratio – measure of an institution’s financial viability and liquidity;
Equity Ratio – measure of an institution’s capital resources and its ability to borrow; and
Net Income Ratio – measure of an institution’s profitability.
 
 
-23-
 
 
These ratios provide three individual scores which are converted into a single composite score. The maximum composite score is 3.0. If an institution’s composite score is at least 1.5, it is considered financially responsible. If an institution’s composite score is less than 1.5 but is 1.0 or higher, it is still considered financially responsible, and the institution may continue to participate as a financially responsible institution for up to three years under the Department’s “zone” alternative. Under the zone alternative, the Department may subject the institution to various operating or other requirements. These requirements may include (1) being transferred from the “advance” method of payment of Title IV program funds to the heightened cash monitoring payment method under which the institution is required to make Title IV disbursements to eligible students and parents before it requests or receives funds from the Department for the amount of those disbursements, or (2) being transferred to the more onerous reimbursement payment method under which an institution must submit to the Department documentation demonstrating the eligibility for each Title IV disbursement and wait for the Department’s approval before drawing down Title IV funds.
 
If an institution does not achieve a composite score of at least 1.0, it is subject to additional requirements in order to continue its participation in the Title IV programs. This includes (1) submitting to the Department a letter of credit in an amount equal to at least ten percent, and at the Department’s discretion up to 50%, of the Title IV funds received by the institution during its most recently completed fiscal year, and (2) being placed on provisional certification status, under which the institution must receive Department approval before implementing new locations or educational programs and comply with other restrictions, including reduced due process rights in subsequent proceedings before the Department.
 
In addition, under regulations that took effect on July 1, 2016, institutions placed on either the heightened cash monitoring payment method or the reimbursement payment method must pay Title IV credit balances to students or parents before requesting Title IV funds from the Department and may not hold Title IV credit balances on behalf of students or parents, even if such balances are expected to be applied to future tuition payments.
 
Our audited financial statements for the fiscal years ended May 31, 2017 and 2016 indicated our composite scores for such fiscal years were 1.8 and 1.8, respectively, which are sufficient to be deemed financially responsible under the Department of Education’s requirements. Our audited financial statements for the fiscal year ended May 31, 2018 indicate our composite score is 1.3. This score is subject to a final determination by the Department of Education once it receives and reviews our consolidated audited financial statements for the 2018 fiscal year, but we believe it is likely that the Department of Education will determine that we meet the standards of the “zone” alternative and that we will be required to operate under the “zone” alternative requirements as well as any other requirements that the Department of Education might impose in its discretion. While the Company’s operations are typically consistent with “zone” alternative requirements, new requirements imposed as a result of the “zone” alternative status could have a negative impact on the Company’s liquidity.
 
 
-24-
 
 
16.
SUBSEQUENT EVENTS
 
As previously disclosed on Form 8-K filed with the SEC on December 31, 2018, on December 26, 2018, the Company received a written notice from Nasdaq that, based upon the Company’s market value of publicly held shares for the last 30 consecutive business days, the Company no longer meets the requirement to maintain a minimum Market Value of Publicly Held Shares (“MVPHS”) of $5,000,000.00, as set forth in Nasdaq Listing Rule 5450(b)(1)(C).  On December 28, 2018, the Board of Directors of the Company approved the voluntary delisting by the Company of its common stock from the Nasdaq Global Market (“NGM”) of Nasdaq, and the transfer of the listing of its common stock to the Over the Counter Quotation Bureau (OTCQB) . The Company’s Board of Directors approved the voluntary withdrawal of the Company’s common stock from listing on NGM as a result of numerous factors, including its assessment of the probability of the Company’s regaining compliance with Nasdaq Listing Rule 5450(b)(1)(C), the common stock’s current trading volume and price, and the costs of maintaining eligibility to list the Company’s common stock on NGM. On December 31, 2018, the Company notified Nasdaq of its intention to voluntarily delist its common stock from NGM and concurrently with such notification, issued a press release regarding its intent to transfer the listing of its common stock from NGM to the OTCQB. The Company filed Form 25 with the SEC on January 10, 2019 to effect the voluntary delisting of its common stock from NGM. The Company intends to remain a reporting company under the Securities and Exchange Act of 1934, as amended, immediately following the voluntary withdrawal from NGM.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-25-
 
 
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 offering of new educational programs and adapting to other changes, risks associated with accepting students from closed 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 September 14, 2018 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
 
The Company owns and operates National American University. NAU is a regionally accredited, proprietary, multi-location institution of higher learning, offering associate, baccalaureate, master’s and doctoral degree programs in business-related disciplines, such as accounting, management, business administration, and information technology; in healthcare-related disciplines, such as occupational therapy, medical assisting, nursing, surgical technology, and healthcare information and management; in legal-related disciplines, such as paralegal, criminal justice, and professional legal studies; strategic security; and in higher education. As of November 30, 2018, we had 26 operating locations across the states of Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota and Texas. Distance learning operations and central administration offices operate from Rapid City, South Dakota.
 
As of November 30, 2018, NAU had 497 students enrolled at its physical locations, 3,777 students for its online programs and 523 students that attended physical hybrid learning locations and also took classes online. NAU supports the instruction of approximately 2,750 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 that 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, Fairway Hills, consist of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated approximately 4% of our revenues for the quarter ended November 30, 2018.
 
On October 29, 2018, the Company’s Board of Directors approved a strategic plan that focuses National American University’s growth strategies on online academic programs and expanding its programming and services related to strategic security, counter-terrorism, and intelligence for the public and private sectors. National American University remains committed to offering many of its current programs and maintaining its longstanding mission to assist students in achieving their educational goals and preparing them for employment in a rapidly evolving and increasingly competitive employment market.
 
In alignment with its new strategic plan, National American University suspended new student enrollment in 34 of its 128 programs effective November 1, 2018. National American University will continue to serve active students currently enrolled in these programs. To accelerate its strategic shift to online academic programs and to gain greater efficiencies through the centralization of its student-facing services, the Company is implementing appropriate staff reductions and other personnel actions.
 
-26-
 
 
In connection with these changes, the Company incurred asset impairment charges of $5.9 million in the second quarter of fiscal year 2019 to reduce the carrying value of long-lived assets to their respective fair value. In addition, ground locations that have closed as of November 30, 2018, incurred a charge representing the net present value of the remaining lease obligations, reduced by an estimated amount for sublease income, of $3.1 million.
 
The locations that are closed effective November 30, 2018, and are no longer servicing students include: Albuquerque East, NM; Colorado Springs North, CO;Killeen TX; Lees Summit, MO; Lewisville, TX; Mesquite, TX; Minnetonka, MN; Rochester, MN; San Antonio, TX; Watertown, SD; Weldon Springs, MO; Wichita West KS; and Zona Rosa, MO.
 
The locations that will continue to serve students to teach out their program of study include: Albuquerque West, NM; Austin, TX; Bellevue, NE; Centennial, CO; Colorado Springs South, CO; Georgetown, TX; Indianapolis, IN; Overland Park, KS; Rapid City, SD; Richardson, TX; Roseville, MN; Sioux Falls, SD; Tulsa, OK; and Wichita East, KS.
 
In alignment with the board-approved strategic plan, the following ground-based programs will no longer accept new students and will be taught out: Diploma in Medical Assisting, AAS in Invasive Cardiovascular Technology, Medical Assisting, Medical Laboratory Technician, Paralegal Studies, Occupational Therapy Assistant, and Surgical Technology; BS in Nursing and Paralegal Studies.
 
Online programs that will be suspended, taught out, or will serve students via other programs are: Diploma in Accounting and Bookkeeping, Computer Support Specialist, and Computer and Network Server Administrator; AAS in Computer Support Specialist, Construction Management, Electronic Health Record Support Specialist, Emergency Medical Services, Professional Legal Studies, and Retail Management; BS in Professional Legal Studies, Emergency Medical Services Management, Energy and Manufacturing Management, Energy Management, and Organizational Leadership; BS IT emphasis areas in Applications Development, Database Administration, Game Software Development, Internet Systems Development, Management Information Systems, Network Management, and Web Development; RN-BSN; Executive MBA; MS in Global Supply Chain Management, Human Resource Management, and Nursing; and the EdD in Community College Leadership.
 
Key Financial Results Metrics
 
Revenue. Revenue is derived mostly from NAU’s operations. For the three months ended November 30, 2018, approximately 92% 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. Tuition revenue is reported net of adjustments for refunds, scholarships and estimated dropped students and is recognized on a daily basis over the length of the term (typically three months). During the quarter ended November 30, 2017, we began allowing students to take classes on the 2nd or 3rd month within a term rather than waiting to enroll the following term. Upon withdrawal, students generally are refunded tuition based on the uncompleted portion of the term, unless they have already finished sixty percent or more 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