National American University Holdings, Inc. - Quarter Report: 2016 August (Form 10-Q)

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 August 31, 2016

 

Or

 

              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 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 ☑ 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 ☑

                 

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 September 23, 2016, 24,162,368 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
		4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended August 31, 2016 and August 31, 2015	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2016 and August 31, 2015	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21
ITEM 4.	CONTROLS AND PROCEDURES	21

 

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	21
ITEM 1A.	RISK FACTORS	21
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	22
ITEM 4.	MINE SAFETY DISCLOSURES	22
ITEM 5.	OTHER INFORMATION	22
ITEM 6.	EXHIBITS	22

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements.     NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

 

 

 

AS OF AUGUST 31, 2016 AND CONDENSED
CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2016
(In thousands, except share and per share amounts)
	August 31,	May 31,
	2016	2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$14,680	$21,713
Available for sale investments	6,117	4,117
Student receivables — net of allowance of $857 and $723 at August 31, 2016 and
May 31, 2016, respectively	3,886	3,011
Other receivables	86	375
Income taxes receivable	3,754	2,780
Prepaid and other current assets	1,602	2,078
Total current assets	30,125	34,074
Total property and equipment - net	31,124	31,273
OTHER ASSETS:
Condominium inventory	621	621
Land held for future development	229	312
Course development — net of accumulated amortization of $3,113 and $3,051 at
August 31, 2016 and May 31, 2016, respectively	958	817
Deferred income taxes	422	431
Other	903	998
Total other assets	3,133	3,179
TOTAL	$64,382	$68,526
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease payable	$296	$285
Accounts payable	2,773	2,913
Dividends payable	1,092	1,090
Income taxes payable	126	110
Deferred income	1,428	1,649
Accrued and other liabilities	5,335	5,861
Total current liabilities	11,050	11,908
OTHER LONG-TERM LIABILITIES	4,485	4,686
CAPITAL LEASE PAYABLE, NET OF CURRENT PORTION	11,490	11,567
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $0.0001 par value (50,000,000 authorized; 28,494,516 issued and
24,162,368 outstanding as of August 31, 2016; 28,472,129 issued and 24,140,972
outstanding as of May 31, 2016)	3	3
Additional paid-in capital	59,009	58,893
Retained earnings	869	4,012
Treasury stock, at cost (4,332,148 shares at August 31, 2016 and 4,331,157
shares at May 31, 2016)	(22,479)	(22,477)
Accumulated other comprehensive income (loss), net of taxes - unrealized gain (loss)
on available for sale securities	2	(2)
Total National American University Holdings, Inc. stockholders' equity	37,404	40,429
Non-controlling interest	(47)	(64)
Total stockholders' equity	37,357	40,365
TOTAL	$64,382	$68,526
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 2016 AND 2015
(In thousands, except share and per share amounts)
	Three Months Ended
	August 31,
	2016	2015
REVENUE:
Academic revenue	$19,438	$22,658
Auxiliary revenue	1,394	1,716
Rental income — apartments	298	275
Total revenue	21,130	24,649
OPERATING EXPENSES:
Cost of educational services	6,468	6,296
Selling, general and administrative	16,482	19,003
Auxiliary expense	1,049	1,266
Loss on disposition of property	6	0
Total operating expenses	24,005	26,565
OPERATING LOSS	(2,875)	(1,916)
OTHER INCOME (EXPENSE):
Interest income	22	19
Interest expense	(214)	(219)
Other income — net	37	42
Total other expense	(155)	(158)
LOSS BEFORE INCOME TAXES	(3,030)	(2,074)
INCOME TAX BENEFIT	991	776
NET LOSS	(2,039)	(1,298)
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST	(17)	(11)
NET LOSS ATTRIBUTABLE TO NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES	(2,056)	(1,309)
OTHER COMPREHENSIVE INCOME (LOSS) — Unrealized gains (losses) on investments, net of tax	4	(1)
Income tax benefit related to items of other comprehensive loss
COMPREHENSIVE LOSS ATTRIBUTABLE TO NATIONAL AMERICAN UNIVERSITY
HOLDINGS, INC.	$(2,052)	$(1,310)
Basic net loss attributable to National American University Holdings, Inc.	$(0.09)	$(0.05)
Diluted net loss attributable to National American University Holdings, Inc.	$(0.09)	$(0.05)
Basic weighted average shares outstanding	24,114,294	25,190,039
Diluted weighted average shares outstanding	24,114,294	25,190,039
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED AUGUST 31, 2016 AND 2015
(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) income	interest	equity
Balance - May 31, 2015	$3	$58,336	$13,751	$(19,455)	$(1)	$(108)	$52,526
Purchase of 30,841 shares common
stock for the treasury	0	0	0	(87)	0	0	(87)
Share based compensation expense	0	60	0	0	0	0	60
Dividends declared ($0.045 per share)	0	0	(1,135)	0	0	0	(1,135)
Net (loss) income	0	0	(1,309)	0	0	11	(1,298)
Other comprehensive loss, net of tax	0	0	0	0	(1)	0	(1)
Balance - August 31, 2015	$3	$58,396	$11,307	$(19,542)	$(2)	$(97)	$50,065
Balance - May 31, 2016	$3	$58,893	$4,012	$(22,477)	$(2)	$(64)	$40,365
Purchase of 991 shares common
stock for the treasury	0	0	0	(2)	0	0	(2)
Share based compensation expense	0	116	0	0	0	0	116
Dividends declared ($0.045 per share)	0	0	(1,087)	0	0	0	(1,087)
Net (loss) income	0	0	(2,056)	0	0	17	(2,039)
Other comprehensive income, net of tax	0	0	0	0	4	0	4
Balance - August 31, 2016	$3	$59,009	$869	$(22,479)	$2	$(47)	$37,357
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 2016 AND 2015
(In thousands)
	Three Months Ended
	August 31,	August 31,
	2016	2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$(2,039)	$(1,298)
Adjustments to reconcile net loss to net cash flows (used in) provided by operating activities:
Depreciation and amortization	1,306	1,423
Loss on disposition of property and equipment	6	0
Provision for uncollectable tuition	1,028	1,870
Noncash compensation expense	116	60
Deferred income taxes	9	6
Changes in assets and liabilities:
Student and other receivables	(1,614)	8,739
Prepaid and other current assets	476	453
Other assets	95	88
Income taxes receivable/payable	(958)	(933)
Accounts payable	(524)	(21)
Deferred income	(221)	(594)
Accrued and other liabilities	(526)	(1,310)
Other long-term liabilities	(201)	(159)
Net cash flows (used in) provided by operating activities	(3,047)	8,324
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale investments	(2,244)	(1,416)
Proceeds from sale of available for sale investments	248	1,889
Purchases of property and equipment	(634)	(128)
Course development	(203)	(41)
Payments received on contract for deed	1	1
Other	(1)	2
Net cash flows (used in) provided by investing activities	(2,833)	307
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease payable	(66)	(57)
Purchase of treasury stock	(2)	(87)
Dividends paid	(1,085)	(1,134)
Net cash flows used in financing activities	(1,153)	(1,278)
		(Continued)
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 2016 AND 2015
(In thousands)
	Three Months Ended
	August 31,	August 31,
	2016	2015
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	$(7,033)	$7,353
CASH AND CASH EQUIVALENTS — Beginning of year	21,713	23,300
CASH AND CASH EQUIVALENTS — End of period	$14,680	$30,653
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
Cash received for income taxes	$(42)	$(152)
Cash paid for interest	$215	$219
Property and equipment purchases included in accounts payable	$447	$1
Dividends declared and unpaid at August 31, 2016 and 2015	$1,092	$1,040
		(Concluded)
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE MONTHS ENDED AUGUST 31, 2016 AND AUGUST 31, 2015

(In thousands, except share and per share amounts)

 

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, 2016, 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, 2016, filed on August 5, 2016. Furthermore, the results of operations and cash flows for the three month periods ended August 31, 2016 and 2015 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”, 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.

 

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.

 

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 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 explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. This standard was implemented for the Company’s fiscal year ending May 31, 2017, and did not have a significant impact on the Company’s condensed 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 specifically affects 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 is effective for the Company’s fiscal year 2017 in the first quarter ended August 31, 2016. The Company reassessed its relationship with Fairway Hills Section III Partnership and made no change to the resulting variable interest entity determination.

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. Under this amendment, deferred tax liabilities and assets would be offset and presented as a single amount. For public business entities, this update is effective for financial statements issued for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. Early adoption of the amendments is permitted and may either be applied prospectively or retrospectively. The Company has elected early adoption and implemented the accounting update for the Company’s fiscal year 2017 in the first quarter ended August 31, 2016. The retrospective change resulted in reclassifying $2,621 of current deferred tax assets and $(2,190) of long-term deferred tax liabilities to a net $431 deferred tax asset for the year ended May 31, 2016.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses written aspects of recognition, measurement, presentation and disclosure of financial instruments. This standard will be effective for the Company’s fiscal year ending 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 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 a financed purchase 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 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 March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify various aspects of share-based accounting. Specifically, the standard (1) requires all excess tax benefits and deficiencies to be recognized as income tax expense/benefit in the income statement as discrete items in the reporting period in which they occur, with no charges to additional paid-in capital; (2) requires excess tax benefits to be classified as operating cash flows; (3) allows an accounting election to account for forfeitures when they occur, instead of maximum statutory tax rates in the applicable jurisdictions; (5) clarifies that the cash paid by an employer to taxing authorities when directly withholding shares for tax-withholding purposes should be classified as a financing activity in the cash flow statement. This standard will be effective for the Company’s fiscal year ending 2018, in the first quarter ending August 31, 2017. The Company is currently evaluating and has not yet determined the impact implementation will have on the consolidated financial statements.

 

 

In June and July 2016, Dlorah, Inc. entered into construction contracts totaling approximately $4.7 million on a 24-unit apartment building and a new administrative building. Construction will be funded through operations and is expected to be complete in June 2017. Total construction in progress included in property and equipment on the condensed consolidated balance sheet at August 31, 2016 is approximately $1.2 million.

 

 

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, 24,162,368 and 24,140,972 shares of common stock were outstanding as of August 31, 2016 and May 31, 2016, respectively. No shares of preferred stock or class A common stock were outstanding at August 31, 2016 and May 31, 2016.

 

Stock-Based Compensation

At August 31, 2016, the Company had 890,760 shares available for future grants under its stock-based compensation plans. 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. In addition, the Company settles a portion of the compensation of the Chief Executive Officer in stock, which totaled $27 for the quarter ended August 31, 2016. Other executive compensation for the same quarter totaled $28. These issuances reduce the shares available for future grants under the plans.

 

Restricted stock

The Company has 40,485 non-vested restricted stock shares with a weighted average grant date fair value of $2.47 per share outstanding at August 31, 2016. Unrecognized compensation expense associated with these shares totals $10 with a remaining amortization life of 0.4 years. There were no restricted stock awards granted nor any restricted stock shares vested during the quarter ended August 31, 2016. Stock compensation expense totaling $25 was recorded in the condensed consolidated statements of operations and comprehensive income during the quarter ended August 31, 2016.

 

 

Performance-based restricted stock units

During the quarter ended August 31, 2016, the Company issued 281,250 performance based restricted stock units (“RSUs”) with a weighted average grant date fair value of $1.93 per share. All RSUs issued remain outstanding at August 31, 2016. Up to 100% of the RSUs issued will vest on May 31, 2017, based on the annual operating income attained during the 2017 fiscal year. Unrecognized compensation expense associated with these shares totals $507 with a remaining amortization life of 0.7 years. Stock compensation expense totaling $36 was recorded in the condensed consolidated statements of operations and comprehensive income during the quarter ended August 31, 2016.

 

Stock options

The Company accounts for stock option-based compensation by estimating the fair value of options granted using a Black-Scholes option pricing model. The Company recognizes the expense for grants of stock options on a straight-line basis in the consolidated statements of operations as operating expense based on their fair value over the requisite service period.

There were no stock options issued or exercised in the quarter ended August 31, 2016. Stock options for 13,000 shares of common stock with a weighted average exercise price of $5.67 were forfeited during the quarter ended August 31, 2016. At August 31, 2016, stock options for 179,350 shares were outstanding and exercisable with a weighted average exercise price of $4.00 and a weighted average remaining life of 8.2 years. There was no intrinsic value associated with the stock options at August 31, 2016.

 

Dividends

The following table presents details of the Company’s fiscal 2017 and 2016 dividend payments:

 

Date declared	Record date	Payment date	Per share
April 13, 2015	June 30, 2015	July 10, 2015	$0.0,450
August 10, 2015	September 30, 2015	October 9, 2015	$0.0,450
October 5, 2015	December 31, 2015	January 15, 2016	$0.0,450
January 23, 2016	March 31, 2016	April 8, 2016	$0.0,450
April 4, 2016	June 30, 2016	July 8, 2016	$0.0,450
August 8, 2016	September 30, 2016	(est) October 7, 2016	$0.0,450

 

The Company’s effective tax rate was 32.7% for the three months ended August 31, 2016 as compared to 37.4% for the corresponding period in 2015. The effective 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 and nondeductible meals.

 

Basic earnings per share (“EPS”) is computed by dividing net income attributable to National American University Holdings, Inc. 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:

	Three months ended
	August 31,
	2016	2015
Numerator:
Net loss attributable to National American University Holdings, Inc.	$(2,056)	$(1,309)
Denominator:
Weighted average shares outstanding used to compute basic net income per
common share	24,114,294	25,190,039
Incremental shares issuable upon the assumed exercise of stock options	-	-
Incremental shares issuable upon the assumed exercise of restricted shares	-	-
Common shares used to compute diluted net income per share	24,114,294	25,190,039
Basic net loss per common share	$(0.09)	$(0.05)
Diluted net loss per common share	$(0.09)	$(0.05)

 

A total of 179,350 and 69,875 shares of common stock subject to issuance upon exercise of stock options for the three months ended August 31, 2016 and 2015, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

 

A total of 181,110 and 42,155 shares of common stock subject to vesting of restricted stock for the three months ended August 31, 2016 and 2015, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

 

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.

 

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
August 31, 2016
Investments:
Certificates of deposit	$-	$4,121	$-	$4,121
US treasury bills and notes	1,996	-	-	1,996
Money market accounts included in cash equivalents	46	-	-	46
Total assets at fair value	$2,042	$4,121	$-	$6,163
May 31, 2016
Investments:
Certificates of deposit	$-	$4,117	$-	$4,117
Money market accounts included in cash equivalents	38	-	-	38
Total assets at fair value	$38	$4,117	$-	$4,155

 

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.

 

U.S. treasury bills and notes: U.S. treasury bills and notes are traded with sufficient frequency and volume to enable us to obtain pricing information on a consistent basis. As such, the Company classifies these investments as level 1.

 

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 the capital lease obligations is $11,786 and $11,852 at August 31, 2016 and May 31, 2016, respectively, which approximates book value.

 

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. The Company considers each campus location to be an operating segment, and they are aggregated into the NAU segment for financial reporting purposes. 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:

 

 

 

 

	Three months ended August 31, 2016			Three months ended August 31, 2015
			Consolidated			Consolidated
	NAU	Other	Total	NAU	Other	Total
Revenue:
Academic revenue	$19,438	$0	$19,438	$22,658	$0	$22,658
Auxiliary revenue	1,394	0	1,394	1,716	0	1,716
Rental income — apartments	0	298	298	0	275	275
Total revenue	20,832	298	21,130	24,374	275	24,649
Operating expenses:
Cost of educational services	6,468	0	6,468	6,296	0	6,296
Selling, general &administrative	16,118	364	16,482	18,625	378	19,003
Auxiliary expense	1,049	0	1,049	1,266	0	1,266
Loss on disposition of
property	6	0	6	0	0
Total operating expenses	23,641	364	24,005	26,187	378	26,565
Loss from operations	(2,809)	(66)	(2,875)	(1,813)	(103)	(1,916)
Other income (expense):
Interest income	21	1	22	18	1	19
Interest expense	(214)	0	(214)	(219)	0	(219)
Other income - net	(10)	47	37	0	42	42
Total other (expense) income	(203)	48	(155)	(201)	43	(158)
Loss before taxes	$(3,012)	$(18)	$(3,030)	$(2,014)	$(60)	$(2,074)

	As of August 31, 2016			As of August 31, 2015
			Consolidated			Consolidated
	NAU	Other	Total	NAU	Other	Total
Total assets	$55,694	$8,688	$64,382	$73,517	$8,540	$82,057

 

 

We evaluated subsequent events after the balance sheet date through the date the consolidated financial statements were available to be issued. We did not identify any additional material events or transactions occurring during this subsequent event reporting period that required further recognition or disclosure in these condensed consolidated financial statements.

 

 

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 5, 2016 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, for-profit, multi-campus institution of higher learning, offering associate, bachelor’s, master’s and doctoral degree programs in business-related disciplines, such as accounting, applied management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management. Courses are offered through educational sites as well as online via the Internet. As of August 31, 2016, our operations had 37 locations, including educational sites located in Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota and Texas, a distance learning service center in Texas and distance learning operations and central administration offices in Rapid City, South Dakota.

 

We continue to assist students impacted by schools that have closed or have announced that they are discontinuing enrollments.  Over the past year, NAU has enrolled students from other institutions where students have been unable to complete their education.  We have worked closely with these institutions and new enrollees to highlight our academic programs and the commitment we have to our students' success.  This quarter, we entered into a Memorandum of Understanding (MOU) with Brown Mackie, and we are currently enrolling ITT students who wish to complete their degree with NAU. In addition, we are accepting enrollments from students at Canadian institutions as we continue to build the infrastructure that will allow us to scale our efforts while maintaining the compliance requirements of various Canadian regulatory authorities. We are also making progress on the development of the infrastructure for NAU’s new online recruitment center in Albuquerque, New Mexico.

 

As of August 31, 2016, NAU had 1,260 students enrolled at its physical locations, 4,580 students for its online programs, and 992 students that attended physical campus hybrid learning locations and also took classes online. NAU supports the instruction of approximately 2,100 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 August 31, 2016. The company is currently constructing a 24-unit luxury apartment complex, expected to be completed in June 2017.

 

Key Financial Results Metrics

 

Revenue. Revenue is derived mostly from NAU’s operations. For the three months ended August 31, 2016, 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 for the three months ended August 31, 2016 came 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 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 services are performed.

 

 

Factors affecting net revenue include:

 

 

 

 

 

 

 

We record deferred income for prepaid 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 three months ended August 31, 2016 and 2015 were 4.9% and 7.6%, respectively.

 

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 August 31, 2016 and 2015, by degree type and by instructional delivery method:

 

	August 31, 2016 (Summer '17 Qtr)		August 31, 2015 (Summer '16 Qtr)
	Number of Students	% of Total	Number of Students	% of Total	% Change for same quarter over prior year
Continuing Ed	254	3.7%	116	1.4%	119.0%
Doctoral	80	1.2%	77	0.9%	3.9%
Graduate	312	4.6%	242	3.0%	28.9%
Undergraduate and Diploma	6,186	90.5%	7,704	94.7%	-19.7%
Total	6,832	100.0%	8,139	100.0%	-16.1%
On-Campus	1,260	18.4%	1,326	16.3%	-5.0%
Online	4,580	67.0%	5,608	68.9%	-18.3%
Hybrid	992	14.5%	1,205	14.8%	-17.7%
Total	6,832	100.0%	8,139	100.0%	-16.1%

 

 

The combined enrollment in the continuing education, doctoral and graduate programs increased 48.5% in the summer term 2016 as compared to the summer term 2015. However, the undergraduate and diploma programs decreased 19.7% due to lower market demand among our targeted student demographic. The overall 16.1% decline in enrollment was across all course delivery methods. 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.

 

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.

 

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, adversely affected, in part, due to these factors. Historically, as the new programs and specializations mature, increases in enrollment are realized, cost-effective delivery of instructional and support services are achieved, economies of scale are recognized and more efficient marketing and promotional processes are gained.

 

Seasonality. Our operations are generally subject to seasonal trends. While we enroll students throughout the year, summer and winter quarter new enrollments and revenue are generally lower than enrollments and revenue in other quarters due to the traditional custom of summer breaks and the holiday break in December and January. In addition, we generally experience an increase in enrollments in the fall of each year when most students seek to begin their post-secondary education.

 

Results of Operations — Three Months Ended August 31, 2016 Compared to Three Months Ended August 31, 2015 National American University Holdings, Inc.

 

The following table sets forth statements of operations data as a percentage of total revenue for each of the periods indicated:

 

	Three Months Ended August 31, 2016 in percentages	Three Months Ended August 31, 2015 in percentages
Total revenue	100.0%	100.0%
Operating expenses:
Cost of educational services	30.6	25.6
Selling, general and administrative	78.0	77.1
Auxiliary expense	5.0	5.1
Loss on disposition of property	0.0	0.0
Total operating expenses	113.6	107.8
Operating (loss)	(13.6)	(7.8)
Interest income	0.1	0.1
Interest expense	(1.0)	(0.9)
Other income - net	0.2	0.2
(Loss) before income taxes	(14.3)	(8.4)
Income tax benefit	4.7	3.1
Net income attributable to non-controlling interest	(0.1)	0.0
Net (loss) attributable to the Company	(9.7)	(5.3)