National American University Holdings, Inc. - Quarter Report: 2017 August (Form 10-Q)

☑           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

              For the transition period from                                                                                               to

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)

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.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X As of September 22, 2017, 24,232,895 shares of common stock, $0.0001 par value were outstanding.

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

 

INDEX

Page

ITEM 1.	FINANCIAL STATEMENTS
	Unaudited Condensed Consolidated Balance Sheet as of August 31, 2017 and Condensed Consolidated Balance Sheet as of May 31, 2017	3
	Unaudited Condensed Consolidated Statements of Operations and Conprehensive Income for the three months ended August 31, 2017 August 31, 2016	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended August 31, 2017 August 31, 2016	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2017 August 31, 2016	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4.	CONTROLS AND PROCEDURES	23

ITEM 1.	LEGAL PROCEEDINGS	23
ITEM 1A.	RISK FACTORS	24
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	25
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	25
ITEM 4.	MINE SAFETY DISCLOSURES	25
ITEM 5.	OTHER INFORMATION	25
ITEM 6.	EXHIBITS	25

 

 

 

PART I – FINANCIAL INFORMATION

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

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 2017 AND CONDENSED
CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2017
(In thousands, except share and per share amounts)
	August 31,	May 31,
	2017	2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$7,017	$11,974
Available for sale investments	4,185	4,183
Student receivables — net of allowance of $1,068 and $1,195 at August 31, 2017 and
May 31, 2017, respectively	3,336	2,895
Other receivables	217	458
Income taxes receivable	2,300	2,301
Prepaid and other current assets	1,167	1,649
Total current assets	18,222	23,460
Total property and equipment - net	30,586	31,318
OTHER ASSETS:
Condominium inventory	385	621
Land held for future development	229	229
Course development — net of accumulated amortization of $3,388 and $3,322 at
August 31, 2017 and May 31, 2017, respectively	1,114	1,111
Deferred income taxes	47	-
Other	802	853
Total other assets	2,577	2,814
TOTAL	$51,385	$57,592
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease payable	$342	$331
Accounts payable	3,098	3,076
Dividends payable	1,097	1,094
Income taxes payable	120	113
Deferred income	1,884	1,691
Accrued and other liabilities	5,323	5,906
Total current liabilities	11,864	12,211
DEFERRED INCOME TAXES	-	194
OTHER LONG-TERM LIABILITIES	3,293	4,010
CAPITAL LEASE PAYABLE, NET OF CURRENT PORTION	11,148	11,237
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $0.0001 par value (50,000,000 authorized; 28,568,855 issued and
24,232,895 outstanding as of August 31, 2017; 28,557,968 issued and
24,224,924 outstanding as of May 31, 2017)	3	3
Additional paid-in capital	59,117	59,060
Accumulated deficit	(11,540)	(6,622)
Treasury stock, at cost (4,335,960 shares at August 31, 2017 and 4,333,044
shares at May 31, 2017)	(22,488)	(22,481)
Accumulated other comprehensive loss, net of taxes - unrealized loss on available
for sale securities	(10)	(4)
Total National American University Holdings, Inc. stockholders' equity	25,082	29,956
Non-controlling interest	(2)	(16)
Total stockholders' equity	25,080	29,940
TOTAL	$51,385	$57,592

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, 2017 AND 2016
(In thousands, except share and per share amounts)

	Three Months Ended
	August 31,
	2017	2016
REVENUE:
Academic revenue	$18,190	$19,438
Auxiliary revenue	1,044	1,394
Rental income — apartments	342	298
Condominium sales	220	-
Total revenue	19,796	21,130
OPERATING EXPENSES:
Cost of educational services	6,900	6,468
Selling, general and administrative	15,508	16,482
Auxiliary expense	741	1,049
Cost of condominium sales	236	-
Loss on lease termination	362	-
(Gain) loss on disposition of property	(41)	6
Total operating expenses	23,706	24,005
OPERATING LOSS	(3,910)	(2,875)
OTHER INCOME (EXPENSE):
Interest income	20	22
Interest expense	(209)	(214)
Other income — net	44	37
Total other expense	(145)	(155)
LOSS BEFORE INCOME TAXES	(4,055)	(3,030)
INCOME TAX BENEFIT	241	991
NET LOSS	(3,814)	(2,039)
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST	(14)	(17)
NET LOSS ATTRIBUTABLE TO NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND
SUBSIDIARIES	(3,828)	(2,056)
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX
Unrealized (losses) gains on investments, net of tax benefit (expense)	(6)	4
COMPREHENSIVE LOSS ATTRIBUTABLE TO NATIONAL AMERICAN UNIVERSITY
HOLDINGS, INC.	(3,834)	(2,052)
Basic net loss per share attributable to National American University Holdings, Inc.	$(0.16)	$(0.09)
Diluted net loss per share attributable to National American University Holdings, Inc.	$(0.16)	$(0.09)
Basic weighted average shares outstanding	24,181,440	24,114,294
Diluted weighted average shares outstanding	24,181,440	24,114,294

 

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED AUGUST 31, 2017 AND 2016
(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, 2016	$3	$58,893	$4,012	$(22,477)	$(2)	$(64)	$40,365
Purchase of 991 shares common stock for the treasury	-	-	-	(2)	-	-	(2)
Share based compensation expense	-	116	-	-	-	-	116
Dividends declared ($0.045 per share)	-	-	(1,087)	-	-	-	(1,087)
Net (loss) income	-	-	(2,056)	-	-	17	(2,039)
Other comprehensive income, net of tax	-	-	-	-	4	-	4
Balance - August 31, 2016	$3	$59,009	$869	$(22,479)	$2	$(47)	$37,357
Balance - May 31, 2017	$3	$59,060	$(6,622)	$(22,481)	$(4)	$(16)	$29,940
Purchase of 2,916 shares common stock for the treasury	-	-	-	(7)	-	-	(7)
Share based compensation expense	-	57	-	-	-	-	57
Dividends declared ($0.045 per share)	-	-	(1,090)	-	-	-	(1,090)
Net (loss) income	-	-	(3,828)	-	-	14	(3,814)
Other comprehensive loss, net of tax	-	-	-	-	(6)	-	(6)
Balance - August 31, 2017	$3	$59,117	$(11,540)	$(22,488)	$(10)	$(2)	$25,080
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, 2017 AND 2016
(In thousands)

	Three Months Ended
	August 31,	August 31,
	2017	2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$(3,814)	$(2,039)
Adjustments to reconcile net loss to net cash flows used in
operating activities:
Depreciation and amortization	1,206	1,306
Loss on lease termination	362
(Gain) loss on disposition of property and equipment	(41)	6
Provision for uncollectable tuition	610	1,028
Noncash compensation expense	57	116
Deferred income taxes	(241)	9
Changes in assets and liabilities:
Student and other receivables	(810)	(1,614)
Prepaid and other current assets	482	476
Condominium inventory	236
Other assets	49	95
Income taxes receivable/payable	8	(958)
Accounts payable	461	(524)
Deferred income	193	(221)
Accrued and other liabilities	(654)	(526)
Other long-term liabilities	(1,008)	(201)
Net cash flows used in operating activities	(2,904)	(3,047)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale investments	(496)	(2,244)
Proceeds from sale of available for sale investments	488	248
Purchases of property and equipment	(1,017)	(634)
Proceeds from sale of property and equipment	210
Course development	(68)	(203)
Payments received on contract for deed	2	1
Other		(1)
Net cash flows used in investing activities	(881)	(2,833)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease payable	(78)	(66)
Purchase of treasury stock	(7)	(2)
Dividends paid	(1,087)	(1,085)
Net cash flows used in financing activities	(1,172)	(1,153)
		(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, 2017 AND 2016
(In thousands)

	Three Months Ended
	August 31,	August 31,
	2017	2016
NET DECREASE IN CASH AND CASH EQUIVALENTS	$(4,957)	$(7,033)
CASH AND CASH EQUIVALENTS — Beginning of year	11,974	21,713
CASH AND CASH EQUIVALENTS — End of period	$7,017	$14,680
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND
NON-CASH INFORMATION:
Cash received for income taxes	$(7)	$(42)
Cash paid for interest	$209	$215
Property and equipment purchases included in accounts payable	$11	$447
Dividends declared and unpaid at August 31, 2017 and 2016	$1,097	$1,092
		(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, 2017 AND AUGUST 31, 2016

(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”), Fairway Hills, the Fairway Hills Park and Recreational Association, the Park West Owners’ Association, the Vista Park Owners’ Association, and the Company’s interest in Fairway Hills Section III Partnership (the “Partnership”). 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, 2017 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, 2017, filed on August 4, 2017. Furthermore, the results of operations and cash flows for the three month periods ended August 31, 2017 and 2016 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 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 owns and operates National American University. NAU is a regionally accredited, proprietary, multi-campus 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; and in higher education.

 

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 Residential Development area of Rapid City, South Dakota.

 

 

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 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 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; (4) allows awards settled in cash to qualify for equity classification if withholding is up to the maximum statutory tax rates in the applicable jurisdictions; and (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 became effective this quarter. The Company elected to account for forfeitures when they occur, instead of maximum statutory tax rates in the applicable jurisdictions. The Company has determined that the impact of implementation on the Company’s consolidated financial statements is minimal.

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. 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.

 

 

Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used impairment exists when the estimated undiscounted cash flows associated with the asset or group of assets is less than their 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 value 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.

During the quarter ended August 31, 2017, we concluded that there was one location that had a triggering event that would require additional analysis. Due to the length of time necessary to complete the impairment analysis, our impairment analysis is not complete for the quarter ended August 31, 2017. We expect to complete our analysis prior to reporting our financial results for the second quarter of fiscal year 2018 and will record an impairment charge at that time, if deemed necessary. The maximum value of the impairment would be $0.5 million. During the period ended August 31, 2016, there were no impairment charges.

 

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, 24,232,895 and 24,224,924 shares of common stock were outstanding as of August 31, 2017 and May 31, 2017, respectively. No shares of preferred stock or Class A common stock were outstanding at August 31, 2017 and May 31, 2017.

 

Stock-Based Compensation

At August 31, 2017, the Company had 806,672 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 $31 for the quarter ended August 31, 2017. These issuances reduce the shares available for future grants.

 

Restricted stock

The Company has 46,945 non-vested restricted stock shares with a weighted average grant date fair value of $1.96 per share outstanding at August 31, 2017. Unrecognized compensation expense associated with these shares totals $10 with a remaining amortization of 0.1 year. There were no restricted stock awards granted nor any restricted stock shares vested during the quarter ended August 31, 2017. Stock compensation expense totaling $26 was recorded in the condensed consolidated statements of operations and comprehensive income during the quarter ended August 31, 2017.

 

Performance-based restricted stock units

During the quarter ended August 31, 2017, the Company issued 281,250 performance based restricted stock units (“RSUs”) with a weighted average grant date fair value of $2.38 per share. All RSUs issued remain outstanding at August 31, 2017. Up to 100% of the RSUs issued will vest on October 20, 2018, based on the annual operating income attained during the 2018 fiscal year. Unrecognized compensation expense associated with these shares totals $669 with a remaining amortization life of 1.1 years. Stock compensation expense was not recorded in the condensed consolidated statements of operations and comprehensive income during the quarter ended August 31, 2017. Based on the Company’s financial performance for the quarter ended August 31, 2017, management did not believe the performance metrics would be met.

 

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 and comprehensive income as operating expense based on their fair value over the requisite service period.

There were no stock options issued or exercised during the quarter ended August 31, 2017. Stock options for 1,750 shares of common stock with a weighted average exercise price of $9.35 were forfeited during the quarter ended August 31, 2017. At August 31, 2017, stock options for 189,100 shares were outstanding and exercisable with a weighted average exercise price of $3.79 and a weighted average remaining useful life of 7.4 years. The intrinsic value associated with the stock options at August 31, 2017 totaled $2.50. There was no unamortized compensation associated with stock options at August 31, 2017.

 

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 4, 2016	June 30, 2016	July 8, 2016	$ 0.0450
August 8, 2016	September 30, 2016	October 7, 2016	$ 0.0450
October 3, 2016	December 31, 2016	January 13, 2017	$ 0.0450
January 28, 2017	March 31, 2017	April 7, 2017	$ 0.0450
April 13, 2017	June 30, 2017	July 7, 2017	$ 0.0450
August 4, 2017	September 30, 2017	(est) Oct 6, 2017	$ 0.0450

 

The total net loss in the quarter ended August 31, 2017 created a deferred tax asset; however, the Company has determined that it is more likely than not that it will not realize this asset.  As such, an additional valuation allowance totaling $1,189 was recorded at August 31, 2017 and is netted against the deferred tax asset in the accompanying condensed consolidated balance sheet. Similarly, a valuation allowance totaling $1,222 was recorded at May 31, 2017 and was included in deferred income taxes liability in the accompanying condensed consolidated balance sheets. A primary factor in the assessment of this non-cash charge is that the Company continued to be in a cumulative loss position over the prior three-year period.

 

The Company’s effective tax rate was 5.9% for the three months ended August 31, 2017 as compared to 32.7% for the corresponding period in 2016. The effective rate varies from the statutory rate primarily due to the deferred tax asset valuation allowance. In addition, there is a fluctuation in state income taxes as a result of the Company’s net loss position, as well as nondeductible meals.

 

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:

 

	Three months ended August 31,
	2017	2016
Numerator:
Net loss attributable to National American University Holdings, Inc.	$(3,828)	$(2,056)
Denominator:
Weighted average shares outstanding used to compute basic net income
per common share	24,181,440	24,114,294
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	$24,181,440	$24,114,294
Basic loss income per common share	$(0.16)	$(0.09)
Diluted net loss per common share	$(0.16)	$(0.09)

 

A total of 189,100 and 179,350 shares of common stock subject to issuance upon exercise of stock options for the three months ended August 31, 2017 and 2016, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

 

A total of 46,945 and 181,110 shares of common stock subject to vesting and issuance upon exercise of restricted stock for the three months ended August 31, 2017 and 2016, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

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.

 

On July 21, 2017, we entered into an agreement to acquire substantially all of the assets of Henley-Putnam University, a for-profit post-secondary educational institution that offers 100% online programs focused in the field of strategic security, for a cash payment of $1.5 million plus or minus a contingent obligation calculated principally based on Henley-Putnam’s working capital at the time of closing. The transaction is subject to various closing conditions, the satisfaction of which is uncertain at this time. If the closing conditions are satisfied, the transaction is expected to close during the third quarter of fiscal year 2018.

 

On June 1, 2017, the Company entered into a lease termination agreement for the Allen, TX service center location.  Cash in the amount of $190 was paid as satisfaction for future lease payments totaling $285, which were accelerated and reported on the condensed consolidated balance sheet for the period ended May 31, 2017 within accrued and other liabilities and other long-term liabilities. The difference between the amount of cash paid and amounts accrued of $95 was recorded as a contra expense within loss on termination of lease during the quarter ended August 31, 2017.

 

On August 1, 2017, the Company entered into an additional agreement to terminate the existing lease in Tigard, Oregon. Cash in the amount of $795 was paid as satisfaction of future lease payments totaling $1,206.  Expense of $457 was reported in loss on termination of lease during the quarter ended August 31, 2017.

 

During the quarter ended August 31, 2017, we received notice that the state of New Mexico will require a surety bond or alternative surety in an amount set by the New Mexico Department of Higher Education payable to the New Mexico Department of Higher Education. This regulation will require us to restrict $1.0 million of our cash balance to the state of New Mexico. We anticipate this restriction will be in place during the second quarter of fiscal year 2018.

 

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, 2017
Investments:
Certificates of deposit	$0	$4,185	$0	$4,185
Money market accounts included in cash equivalents	9	-	-	9
Total assets at fair value	$9	$4,185	$0	$4,194
May 31, 2017
Investments:
Certificates of deposit	$0	$4,183	$0	$4,183
Money market accounts included in cash equivalents	9	-	-	9
Total assets at fair value	$9	$4,183	$0	$4,192

 

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

 

Fair value of financial instruments: The Company’s financial instruments include cash and cash equivalents, CD’s and money market accounts, receivables, payables, and capital lease payables. The carrying values approximated fair values for cash and cash equivalents, receivables, and payables because of the short term nature of these instruments. CD’s and money market accounts are recorded at fair values as indicated in the preceding disclosures. The estimated fair value of capital lease obligations is $11,490 and $11,568 at August 31, 2017 and May 31, 2017 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,			Three months ended August 31,
	2017			2016
			Consolidated			Consolidated
	NAU	Other	Total	NAU	Other	Total
Revenue:
Academic	$18,190	$-	$18,190	$19,438	$-	$19,438
Auxiliary	1,044	-	1,044	1,394	-	1,394
Rental income - apartments	-	342	342	-	298	298
Condominium sales	-	220	220	-	-	-
Total revenue	19,234	562	19,796	20,832	298	21,130
Operating expenses:
Cost of educational services	6,900	-	6,900	6,468	-	6,468
Selling, general & administrative	14,999	509	15,508	16,118	364	16,482
Auxiliary	741	-	741	1,049	-	1,049
Cost of condominium sales	-	236	236	-	-	-
Loss on lease termination	362	-	362	-	-	-
(Gain) loss on disposition of property	-	(41)	(41)	6	-	6
Total operating expenses	23,002	704	23,706	23,641	364	24,005
Loss from operations	(3,768)	(142)	(3,910)	(2,809)	(66)	(2,875)
Other income (expense):
Interest income	17	3	20	21	1	22
Interest expense	(209)	-	(209)	(214)	-	(214)
Other (loss) income - net	(5)	49	44	(10)	47	37
Total other (expense) income	(197)	52	(145)	(203)	48	(155)
Loss before taxes	$(3,965)	$(90)	$(4,055)	$(3,012)	$(18)	$(3,030)

	As of August 31, 2017			As of August 31, 2016
			Consolidated			Consolidated
	NAU	Other	Total	NAU	Other	Total
Total assets	$40,406	$10,979	$51,385	$55,694	$8,688	$64,382

 

We evaluated subsequent events after the balance sheet date through the date the condensed 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 4, 2017 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-campus 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; and in higher education. As of August 31, 2017, our operations had 32 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.

 

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.  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.

As of August 31, 2017, NAU had 1,092 students enrolled at its physical locations, 4,004 students for its online programs, and 821 students that attended physical campus hybrid learning locations and also took classes online. NAU supports the instruction of approximately 2,649 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, Fairway Hills, consists of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated approximately 3% of our revenues for the quarter ended August 31, 2017.

 

 

Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU’s operations. For the three months ended August 31, 2017, 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, 2017 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 academic revenues for the three months ended August 31, 2017 and 2016 were 3.4% and 5.3%, 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, 2017 and 2016, by degree type and by instructional delivery method:

	August 31, 2017 (Summer '18 Qtr)		August 31, 2016 (Summer '17 Qtr)		% Change for same quarter over prior year
	Number of Students	% of Total	Number of Students	% of Total
Continuing Ed	103	1.7%	254	3.7%	-59.4%
Doctoral	94	1.6%	80	1.2%	17.5%
Graduate	384	6.5%	312	4.6%	23.1%
Undergraduate and Diploma	5,336	90.2%	6,186	90.5%	-13.7%
Total	5,917	100.0%	6,832	100.0%	-13.4%
On-Campus	1,092	18.4%	1,260	18.4%	-13.3%
Online	4,004	67.7%	4,580	67.0%	-12.6%
Hybrid	821	13.9%	992	14.5%	-17.2%
Total	5,917	100.0%	6,832	100.0%	-13.4%

 

 

	Three Months Ended August 31, 2017 in percentages	Three Months Ended August 31, 2016 in percentages
Total revenue	100.0%	100.0%
Operating expenses:
Cost of educational services	34.9	30.6
Selling, general and administrative	78.3	78.0
Auxiliary expense	3.7	5.0
Cost of condominium sales	1.2	0.0
Loss on lease termination	1.8	0.0
(Gain) loss on disposition of property	(0.2)	0.0
Total operating expenses	119.7	113.6
Operating loss	(19.7)	(13.6)
Interest income	0.1	0.1
Interest expense	(1.1)	(1.0)
Other income - net	0.2	0.2
Loss before income taxes	(20.5)	(14.3)
Income tax benefit	1.2	4.7
Net income attributable to non-controlling interest	(0.1)	(0.1)
Net loss attributable to the Company	-19.4%	-9.7%