10-Q 1 nauh_10q.htm QUARTERLY REPORT Blueprint
 

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 February 28, 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
 
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 March 29, 2018, 24,330,914 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 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheet as of February 28, 2018 and May 31, 2017
 
Unaudited Condensed Consolidated Statements of Operations and Conprehensive Income for the three months ended February 28, 2018 and 2017
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended February 28, 2018 and 2017
 
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2018 and 2017
 
Notes to Unaudited Condensed Consolidated Financial Statements 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
26
ITEM 4.
CONTROLS AND PROCEDURES
26
 
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
26
ITEM 1A.
RISK FACTORS
27
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
29
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
29
ITEM 4.
MINE SAFETY DISCLOSURES
29
ITEM 5.
OTHER INFORMATION
29
ITEM 6.
EXHIBITS
30
 
 
 
2
 
 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
AS OF FEBRUARY 28, 2018 AND MAY 31, 2017
 
 
 
 
 
 
(In thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
February 28,
 
 
May 31,
 
 
 
2018
 
 
2017
 
ASSETS
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
  Cash and cash equivalents
 $4,638 
 $11,974 
  Available for sale investments
 $- 
 $4,183 
  Student receivables — net of allowance of $686 and $1,195 at February 28, 2018
    
    
    and May 31, 2017, respectively
 $3,586 
 $2,895 
  Other receivables
 $724 
 $458 
  Income taxes receivable
 $2,397 
 $2,301 
  Prepaid and other current assets
 $1,638 
 $1,649 
           Total current assets
 $12,983 
 $23,460 
Total property and equipment - net
 $27,194 
 $31,318 
OTHER ASSETS:
    
    
  Restricted certificate of deposit
 $1,250 
 $- 
  Condominium inventory
 $190 
 $621 
  Land held for future development
 $229 
 $229 
  Course development — net of accumulated amortization of $3,465 and $3,322 at
    
    
    February 28, 2018 and May 31, 2017, respectively
 $812 
 $1,111 
  Other
 $597 
 $853 
           Total other assets
 $3,078 
 $2,814 
TOTAL
 $43,255 
 $57,592 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
CURRENT LIABILITIES:
    
    
  Current portion of capital lease payable
 $367 
 $331 
  Accounts payable
 $2,643 
 $3,076 
  Dividends payable
 $- 
 $1,094 
  Income taxes payable
 $105 
 $113 
  Deferred income
 $3,312 
 $1,691 
  Accrued and other liabilities
 $5,240 
 $5,906 
           Total current liabilities
 $11,667 
 $12,211 
DEFERRED INCOME TAXES
 $- 
 $194 
OTHER LONG-TERM LIABILITIES
 $2,870 
 $4,010 
CAPITAL LEASE PAYABLE, NET OF CURRENT PORTION
 $10,957 
 $11,237 
COMMITMENTS AND CONTINGENCIES (Note 9)
    
    
STOCKHOLDERS' EQUITY:
    
    
  Common stock, $0.0001 par value (50,000,000 authorized; 28,670,095 issued and
    
    
    24,330,914 outstanding as of February 28, 2018; 28,557,968 issued and 24,224,924
    
    
    outstanding as of May 31, 2017)
 $3 
 $3 
  Additional paid-in capital
 $59,258 
 $59,060 
  Accumulated deficit
 $(19,024)
 $(6,622)
  Treasury stock, at cost (4,339,181 shares at February 28, 2018 and 4,333,044
    
    
    shares at May 31, 2017)
 $(22,494)
 $(22,481)
  Accumulated other comprehensive loss, net of taxes - unrealized loss
    
    
   on available for sale securities
 $- 
 $(4)
Total National American University Holdings, Inc. stockholders' equity
 $17,743 
 $29,956 
Non-controlling interest
 $18 
 $(16)
Total stockholders' equity
 $17,761 
 $29,940 
TOTAL
 $43,255 
 $57,592 
 
    
    
 
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 INCOME
FOR THE NINE MONTHS AND THREE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
(In thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
Three Months Ended
 
 
 
  February 28,      
 
 
  February 28,      
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
REVENUE:
 
 
 
 
 
 
 
 
 
 
 
 
  Academic revenue
 $53,607 
 $59,872 
 $16,923 
 $20,158 
  Auxiliary revenue
  2,930 
  3,699 
  955 
  891 
  Rental income — apartments
  1,049 
  873 
  349 
  282 
  Condominium sales
  455 
  - 
  - 
  - 
 
    
    
    
    
           Total revenue
  58,041 
  64,444 
  18,227 
  21,331 
 
    
    
    
    
OPERATING EXPENSES:
    
    
    
    
  Cost of educational services
  19,545 
  20,594 
  6,234 
  7,629 
  Selling, general and administrative
  44,633 
  47,228 
  13,817 
  15,321 
  Auxiliary expense
  2,079 
  2,694 
  686 
  591 
  Cost of condominium sales
  427 
  - 
  - 
  - 
  Loss on lease termination
  362 
  - 
  - 
  - 
  Loss on impairment and disposition of property
  2,071 
  8 
  1,076 
  2 
 
    
    
    
    
           Total operating expenses
  69,117 
  70,524 
  21,813 
  23,543 
 
    
    
    
    
OPERATING LOSS
  (11,076)
  (6,080)
  (3,586)
  (2,212)
 
    
    
    
    
OTHER INCOME (EXPENSE):
    
    
    
    
  Interest income
  63 
  77 
  14 
  28 
  Interest expense
  (628)
  (639)
  (211)
  (211)
  Other income — net
  95 
  83 
  8 
  14 
 
    
    
    
    
           Total other expense
  (470)
  (479)
  (189)
  (169)
 
    
    
    
    
LOSS BEFORE INCOME TAXES
  (11,546)
  (6,559)
  (3,775)
  (2,381)
 
    
    
    
    
INCOME TAX BENEFIT (EXPENSE)
  268 
  1,254 
  83 
  (143)
 
    
    
    
    
NET LOSS
  (11,278)
  (5,305)
  (3,692)
  (2,524)
 
    
    
    
    
NET INCOME ATTRIBUTABLE TO NON-CONTROLLING
  (34)
  (39)
  (15)
  (12)
           INTEREST
    
    
    
    
 
    
    
    
    
NET LOSS ATTRIBUTABLE TO NATIONAL AMERICAN
    
    
    
    
         UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
  (11,312)
  (5,344)
  (3,707)
  (2,536)
 
    
    
    
    
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX
    
    
    
    
  Unrealized gains (losses) on investments, net of tax benefit (expense)
  4 
  (2)
  11 
  3 
COMPREHENSIVE LOSS ATTRIBUTABLE TO
    
    
    
    
         NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
 $(11,308)
 $(5,346)
 $(3,696)
 $(2,533)
 
    
    
    
    
 
    
    
    
    
Basic net loss attributable to National American University
 $(0.47)
 $(0.22)
 $(0.15)
 $(0.10)
     Holdings, Inc.
    
    
    
    
Diluted net loss attributable to National American University
 $(0.47)
 $(0.22)
 $(0.15)
 $(0.10)
    Holdings, Inc.
    
    
    
    
Basic weighted average shares outstanding
  24,222,864 
  24,146,643 
  24,269,158 
  24,177,979 
Diluted weighted average shares outstanding
  24,222,864 
  24,146,643 
  24,269,158 
  24,177,979 
 
    
    
    
    
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
(In thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 1,887 shares common
    
    
    
    
    
    
    
   stock for the treasury
  - 
  - 
  - 
  (4)
  - 
  - 
  (4)
Share based compensation expense
  - 
  143 
  - 
  - 
  - 
  - 
  143 
Dividends declared
  - 
  - 
  (3,270)
  - 
  - 
  - 
  (3,270)
Net (loss) income
  - 
  - 
  (5,344)
  - 
  - 
  39 
  (5,305)
Other comprehensive loss, net of tax
  - 
  - 
  - 
  - 
  (2)
  - 
  (2)
Balance - February 28, 2017
 $3 
 $59,036 
 $(4,602)
 $(22,481)
 $(4)
 $(25)
 $31,927 
 
    
    
    
    
    
    
    
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
  - 
  198 
  - 
  - 
  - 
  - 
  198 
Dividends declared
  - 
  - 
  (1,090)
  - 
  - 
  - 
  (1,090)
Net (loss) income
  - 
  - 
  (11,312)
  - 
  - 
  34 
  (11,278)
Other comprehensive income, net of tax
  - 
  - 
  - 
  - 
  4 
  - 
  4 
Balance - February 28, 2018
 $3 
 $59,258 
 $(19,024)
 $(22,494)
 $- 
 $18 
 $17,761 
 
    
    
    
    
    
    
    
  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 NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
(In thousands)
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(11,278)
 $(5,305)
Adjustments to reconcile net loss to net cash flows used in operating activities:
    
    
Depreciation and amortization
  3,577 
  3,857 
Loss on lease termination
  362 
  - 
Loss on impairment and disposition of property
  2,071 
  8 
Realized loss on sale of available-for-sale investments
  16 
  - 
Provision for uncollectable tuition
  1,775 
  2,822 
Noncash compensation expense
  198 
  143 
Deferred income taxes
  (194)
  1,374 
Changes in assets and liabilities:
    
    
Student and other receivables
  (2,732)
  (3,573)
Prepaid and other current assets
  11 
  (523)
Condominium inventory
  431 
  - 
Other assets
  96 
  211 
Income taxes receivable/payable
  (104)
  78 
Accounts payable
  17 
  (553)
Deferred income
  1,621 
  (59)
Accrued and other liabilities
  (737)
  (193)
Other long-term liabilities
  (1,431)
  (605)
 
    
    
Net cash flows used in operating activities
  (6,301)
  (2,318)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Purchases of available for sale investments
  (1,747)
  (5,985)
Proceeds from sale of available for sale investments
  4,668 
  3,916 
Purchases of property and equipment
  (1,695)
  (3,834)
Proceeds from sale of property and equipment
  210 
  - 
Course development
  (186)
  (472)
Payments received on contract for deed
  133 
  5 
Other
  23 
  46 
 
    
    
Net cash flows provided by (used in) investing activities
  1,406 
  (6,324)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Repayments of capital lease payable
  (244)
  (209)
Purchase of treasury stock
  (13)
  (4)
Dividends paid
  (2,184)
  (3,267)
 
    
    
Net cash flows used in financing activities
  (2,441)
  (3,480)
 
    
    
 
    
    
 
    
 
(Continued)
 
 
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 NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
(In thousands)
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
 $(7,336)
 $(12,122)
 
    
    
CASH AND CASH EQUIVALENTS — Beginning of year
  11,974 
  21,713 
 
    
    
CASH AND CASH EQUIVALENTS — End of period
 $4,638 
 $9,591 
 
    
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
    
    
   Cash paid (received) for income taxes
 $30 
 $(2,706)
   Cash paid for interest
 $630 
 $641 
   Property and equipment purchases included in accounts payable
 $- 
 $283 
   Dividends declared and unpaid at February 28, 2018 and 2017
 $- 
 $1,093 
 
    
    
 
    
 
(Concluded)
 
 
    
    
  The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
7
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED FEBRUARY 28, 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. The accompanying financial statements 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 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 nine month periods ended February 28, 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.
 
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.
 
Financial Condition and Liquidity
 
At February 28, 2018 and May 31, 2017, cash, cash equivalents, and marketable investments were $4,638 and $16,157., respectively. For the nine months ended February 28, 2018 and 2017, cash used in operating activities was $6,301 and $2,318, respectively. During the same period, the Company generated revenues of $58,041 and $64,444, and incurred operating expenses of $69,117 and $70,524, respectively. Included within the operating expenses for the nine months ended February 28, 2018 and 2017, are non-cash expenses, related to depreciation and amortization expenses of $3,577 and $3,857, and losses on impairment and disposition of property of $2,071 and $8, respectively. Our working capital remains positive at $1,316 at February 28, 2018.
 
We have taken steps to strengthen our cash flow position with focus on improving our enrollment trend and reducing our operating expenses. To improve our enrollment trend, we focused on creating and developing new programs as well as assisting students impacted by schools that have closed or have announced that they are discontinuing enrollments. During the quarter ended February 28, 2018, we signed a transfer contract with Zenith, and the estimated revenue for this contract related to the fiscal quarter ended February 28, 2018 was approximately $2,100. To reduce our operating expenses, we executed cost-cutting initiatives to better align our costs with the decreasing enrollments, and we started to see the reduction in operating costs in the quarter ended February 28, 2018. Total operating expenses were $21,813 for the quarter ended February 28, 2018, compared to $23,543 for the quarter ended February 28, 2017. Without taking into considerations the non-cash impairment charge of $1,076, we reduced our operating expenses quarter over quarter by $2,804. We ceased declaring dividends during the first quarter of fiscal year 2018, and we did not carry out any major capital projects during 2018. We also plan on seeking additional financing to help with our cash reserve.
 
We believe that the actions we have taken to reduce enrollment declines and operating expenses, together with existing cash resources, will be sufficient to meet the Company's cash requirements for at least one year after issuance of these financial statements.
 
There is no assurance, however, that the Company will achieve its enrollment and revenue plans, which would negatively impact its near-term liquidity needs. Further, there is no assurance that the Company will become profitable and generate positive operating cash flow, or that it will be able to obtain additional financing when needed or on terms acceptable to the Company.
 
 
8
 
 
2. 
NATURE OF OPERATIONS
 
The Company, through Dlorah, owns and operates National American University. NAU is a regionally accredited, proprietary, multi-location 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; 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 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 will be effective for the Company’s fiscal year 2019 in the first quarter ending August 31, 2018. During the quarter ended February 28, 2018, the Company made progress in its evaluation of the impact on accounting policies and internal processes and controls the new standard may have for each of its primary revenue streams. Tuition revenue and affiliate revenue is recorded ratably over the length of respective courses, which the Company believes, based upon initial assessment, is reasonably consistent with the revenue recognition method required by the new standard. Under the guidance of Accounting Standards Codification Topic 605, Revenue Recognition, the Company recognizes revenue upon the receipt of cash in situations where collectability is not reasonably assured. This accounting treatment is not allowed under Topic 606 and will require modification. Further, the Company will be required to expand its current disclosures to be in compliance with Topic 606. As the Company completes its evaluation, additional impacts may be identified.
 
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 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 when they are expected to vest; (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; (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 in the first quarter ending August 31, 2017. The Company elected to account for forfeitures when they occur, instead of when they are expected to vest. The Company has determined that the impact of implementation on the Company’s consolidated financial statements is immaterial.
 
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 evaluating and has not yet determined the impact implementation will have on the Company’s consolidated financial statements.
 
 
9
 
 
4. 
STUDENT RECEIVABLES, NET
Student receivables, net consist of the following as of the respective period ends:
 
 
 
February 28,
 
 
May 31,
 
 
 
2018
 
 
2017
 
Student accounts receivable
 $4,272 
 $4,090 
Less allowance for doubtful accounts
  (686)
  (1,195)
Student receivables, net
 $3,586 
 $2,895 
 
Student accounts receivable is composed primarily of amounts due related to tuition and educational services. The following summarizes the activity in allowance for doubtful accounts for the respective periods:
 
 
 
Three Months Ended February 28,
 
 
Nine Months Ended February 28,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Beginning allowance for doubtful accounts
 $843 
 $1,041 
 $1,195 
 $723 
Provisions for uncollectible accounts receivable
  496 
  934 
  1,775 
  2,822 
Write-offs, net of recoveries
  (653)
  (791)
  (2,284)
  (2,361)
Ending allowance for doubtful accounts
 $686 
 $1,184 
 $686 
 $1,184 
 
5. 
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 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 November 30, 2017, upon review of assets for impairment, management determined the estimated future undiscounted cash flows associated with the assets of the Houston, Minnetonka, Bloomington, Brooklyn Center and Burnsville locations are 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 during the three months ended November 30, 2017. The impairment charges are included in loss on impairment and disposition of property, within the NAU segment, in the condensed consolidated financial statements.
 
During the quarter ended February 28, 2018, ten locations (including the four Minnesota locations above) were consolidated into other locations. In addition, the Wichita West location was closed down as the result of a fire. An additional impairment charge of $790 was recorded during the three months ended February 28, 2018 as a result of these events. The impairment charges are included in loss on impairment and disposition of property, within the NAU segment, in the condensed consolidated financial statements. During the nine months ended February 28, 2017, there were no impairment charges.
 
6. 
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, 24,330,914 and 24,224,924 shares of common stock were outstanding as of February 28, 2018 and May 31, 2017, respectively. No shares of preferred stock or Class A common stock were outstanding at February 28, 2018 and May 31, 2017.
 
Stock-Based Compensation
 
At February 28, 2018, the Company had 723,557 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. These issuances reduce the shares available for future grants. In addition, the Company settles a portion of the compensation in stock which totaled $25 and $103 for the three and nine months ended February 28, 2018.
 
Restricted stock
 
During the three and nine months ended February 28, 2018, the Company awarded zero and 47,615 restricted stock awards, respectively, with time based vesting at a grant date fair value of $2.10 per share to members of the board of directors. Shares vest one year from the grant date and require board service for the entire year. In addition, during the three and nine months ended February 28, 2018, zero and 5,000 restricted stock awards, respectively, that vested immediately with a fair value of $2.10 per share were awarded to members of the board of directors.
 
Compensation expense in the condensed consolidated statements of operations and comprehensive income associated with restricted stock awards totaled $25 and $87 for the three and nine–month periods ended February 28, 2018, respectively. At February 28, 2018, the unamortized compensation cost of these restricted stock awards totaled $59. The unamortized cost is expected to be recognized over a weighted-average period of 0.6 years as of February 28, 2018.
 
 
10
 
 
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. As of February 28, 2018, 253,250 of the RSUs issued remain outstanding. Up to 100% of the remaining RSUs outstanding will vest on May 31, 2018, based on the annual operating income attained during the 2018 fiscal year. No expense was recorded during the three and nine months ended February 28, 2018 as management believes the targeted annual operating income will not be attained.
 
Stock options
 
During the three months ended February 28, 2018, the Company granted stock options to purchase 8,000 shares of stock at an exercise price of $1.17 per share. 50% of the shares vest on June 1, 2018 and the remaining 50% vests on June 1, 2019.
 
During the three months ended November 30, 2017, the Company granted stock options to purchase 12,500 shares of stock at an exercise price of $1.72 per share. 50% of the stock options vested on the issuance date and the remaining 50% vests at the end of the current fiscal year.
 
There were no stock options exercised during the three and nine months ended February 28, 2018.
 
The following assumptions were used to determine fair value of the stock options awarded:
 
Assumptions used:
 
For the three and nine months ended February 28, 2018
 
Expected term (in years)
 5.75 - 5.75
Expected volatility
 49.14% - 49.17% 
Weighted average risk free interest rate
 2.11% - 2.11% 
Weighted average expected dividend
 0.00% - 0.00% 
Weighted average fair value
  $.72 - $.82
 
The Company recorded compensation expense for the stock options of $2 and $8 for the three and nine months ended February 28, 2018, respectively, in the condensed consolidated statements of operations and comprehensive income. As of February 28, 2018, there was $6 of unrecognized compensation cost related to unvested stock option based compensation arrangements under the Plan to be amortized over 0.9 years.
 
Dividends
 
The following table presents details of the Company’s fiscal 2018 and 2017 dividend payments:
 
Date declared
Record date
Payment date
Per share
April 4, 2016
June 30, 2016
July 8, 2016
$0.0,450
August 8, 2016
September 30, 2016
October 7, 2016
$0.0,450
October 3, 2016
December 31, 2016
January 13, 2017
$0.0,450
January 28, 2017
March 31, 2017
April 7, 2017
$0.0,450
April 13, 2017
June 30, 2017
July 7, 2017
$0.0,450
August 4, 2017
September 30, 2017
October 6, 2017
$0.0,450
 
 
 
11
 
 
 
7. 
INCOME TAXES
 
The total net loss for the nine months ended February 28, 2018 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, a valuation allowance totaling $3,503 was recorded at February 28, 2018. Similarly, a valuation allowance totaling $1,222 was recorded at May 31, 2017, and was included in net 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 2.3% for the nine months ended February 28, 2018 as compared to 19.1% for the corresponding period in 2017. 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.
 
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 Company has recorded an income tax expense of $1,125 due to a re-measurement of deferred tax assets and liabilities; however, this has been offset by the valuation allowance noted above.
 
8. 
EARNINGS PER SHARE
 
Basic earnings per share (“EPS”) is computed by dividing net income attributable to the Company by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share reflect the potential dilution that could occur assuming vesting, conversion or exercise of all dilutive unexercised options and restricted stock.
 
The following is a reconciliation of the numerator and denominator for the basic and diluted EPS computations:
 
 
 
Six Months Ended
 
 
Three Months Ended
 
 
 
November 30,
 
 
November 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to National American University Holdings, Inc.
 $(11,312)
 $(5,344)
 $(3,707)
 $(2,536)
Denominator:
    
    
    
    
 
Weighted average shares outstanding used to compute basic net income per
 
    
    
    
common share
  24,222,864 
  24,146,643 
  24,269,158 
  24,177,979 
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
  24,222,864 
  24,146,643 
  24,269,158 
  24,177,979 
Basic net loss per common share
 $(0.47)
 $(0.22)
 $(0.15)
 $(0.10)
Diluted net loss per common share
 $(0.47)
 $(0.22)
 $(0.15)
 $(0.10)
 
A total of 206,975 and 190,850 shares of common stock subject to issuance upon exercise of stock options for the three and nine months ended February 28, 2018 and February 28, 2017, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.
 
A total of 47,615 and 328,195 shares of common stock subject to issuance upon vesting of restricted shares for the three and nine months ended February 28, 2018 and February 29, 2017, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.
 
9. 
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.
 
On July 21, 2017, the Company 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 $1,626. The transaction closed on March 21, 2018.
 
During the fiscal quarter ended February 28, 2018, the Company entered into an irrevocable letter of credit with Great Western Bank for $1,000. The agreement expires December 19, 2018, bears interest at 0.5% over the prime rate, and is secured by a restricted certificate of deposit totaling $1,250 at February 28, 2018. The letter of credit was required by the state of New Mexico in an amount set by the New Mexico Department of Higher Education.
 
 
12
 
 
10. 
FAIR VALUE MEASUREMENTS
 
The following table summarizes certain information for assets and liabilities measured at fair value on a recurring basis:
 
 
 
Quoted prices in active markets (level 1)
 
 
Other observable inputs (level 2)
 
 
Unobservable inputs (level 3)
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 28, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
Restricted certificates of deposit
 $0 
 $1,250 
 $0 
 $1,250 
Total assets at fair value
 $0 
 $1,250 
 $0 
 $1,250 
 
    
    
    
    
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 condensed balance sheets at fair value on a recurring basis:
 
Certificates of deposit (“CD’s”) and money market accounts: Investments which have closing prices readily available from an active market are used as being representative of fair value. The Company classifies these investments as level 1. Market prices for certain CD’s are obtained from quoted prices for similar assets. The Company classifies these investments as level 2.
 
Fair value of financial instruments: The Company’s financial instruments include cash and cash equivalents, CD’s and money market accounts, receivables 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 and money market accounts are recorded at fair values as indicated in the preceding disclosures.
 
11. 
SEGMENT REPORTING
 
Operating segments are defined as business areas or lines of an enterprise about which financial information is available and evaluated on a regular basis by the chief operating decision maker, or decision-making groups, in deciding how to allocate capital and other resources to such lines of business.
 
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:
 
 
13
 
 
 
 
Nine months ended February 28, 2018
 
 
Nine months ended February 28, 2017
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Consolidated
 
 
 
NAU
 
 
Other
 
 
Total
 
 
NAU
 
 
Other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Academic revenue
 $53,607 
 $- 
 $53,607 
 $59,872 
 $- 
 $59,872 
  Auxiliary revenue
  2,930 
  - 
  2,930 
  3,699 
  - 
  3,699 
  Rental income -- apartments
  - 
  1,049 
  1,049 
  - 
  873 
  873 
  Condominium sales
  - 
  455 
  455 
  - 
  - 
  - 
Total revenue
  56,537 
  1,504 
  58,041 
  63,571 
  873 
  64,444 
Operating expenses:
    
    
    
    
    
    
  Cost of educational services
  19,545 
  - 
  19,545 
  20,594 
  - 
  20,594 
  Selling, general &administrative
  43,166 
  1,467 
  44,633 
  46,155 
  1,073 
  47,228 
  Auxiliary expense
  2,079 
  - 
  2,079 
  2,694 
  - 
  2,694 
  Cost of condominium sales
  - 
  427 
  427 
  - 
  - 
  - 
  (Gain) loss on disposition of
    
    
  - 
  - 
  - 
  - 
    property
  2,112 
  (41)
  2,071 
    
    
    
  Loss on lease termination
  362 
  - 
  362 
  8 
  - 
  8 
Total operating expenses
  67,264 
  1,853 
  69,117 
  69,451 
  1,073 
  70,524 
Loss from operations
  (10,727)
  (349)
  (11,076)
  (5,880)
  (200)
  (6,080)
Other income (expense):
    
    
    
    
    
    
  Interest income
  58 
  5 
  63 
  56 
  21 
  77 
  Interest expense
  (628)
  - 
  (628)
  (639)
  - 
  (639)
  Other (expense) income - net
  (49)
  144 
  95 
  (60)
  143 
  83 
Total other (expense) income
  (619)
  149 
  (470)
  (643)
  164 
  (479)
Loss before income taxes
 $(11,346)
 $(200)
 $(11,546)
 $(6,523)
 $(36)
 $(6,559)
 
    
    
    
    
    
    
 
 
As of February 28, 2018  
 
 
As of February 28, 2017  
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Consolidated
 
 
 
NAU
 
 
Other
 
 
Total
 
 
NAU
 
 
Other
 
 
Total
 
Total assets
 $31,851 
 $11,404 
 $43,255 
 $46,978 
 $12,644 
 $59,622 
 
 
14
 
 
 
 
Three months ended February 28, 2018
 
 
Three months ended February 28, 2017
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
Consolidated
 
 
 
NAU
 
 
Other
 
 
Total
 
 
NAU
 
 
Other
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Academic revenue
 $16,923 
 $- 
 $16,923 
 $20,158 
 $- 
 $20,158 
  Auxiliary revenue
  955 
  - 
  955 
  891 
  - 
  891 
  Rental income — apartments
  - 
  349 
  349 
  - 
  282 
  282 
  Condominium sales
  - 
  - 
  - 
  - 
  - 
  - 
           Total revenue
  17,878 
  349 
  18,227 
  21,049 
  282 
  21,331 
Operating expenses:
    
    
    
    
    
    
  Cost of educational services
  6,234 
  - 
  6,234 
  7,629 
  - 
  7,629 
  Selling, general &administrative
  13,386 
  431 
  13,817 
  14,980 
  341 
  15,321 
  Auxiliary expense
  686 
  - 
  686 
  591 
  - 
  591 
  Loss on disposition of
    
    
    
    
    
    
    property
  1,076 
  - 
  1,076 
  2 
  - 
  2 
Total operating expenses
  21,382 
  431 
  21,813 
  23,202 
  341 
  23,543 
Loss from operations
  (3,504)
  (82)
  (3,586)
  (2,153)
  (59)
  (2,212)
Other income (expense):
    
    
    
    
    
    
  Interest income
  14 
  - 
  14 
  20 
  8 
  28 
  Interest expense
  (211)
  - 
  (211)
  (211)
  - 
  (211)
  Other (expense) income - net
  (40)
  48 
  8 
  (35)
  49 
  14 
Total other (expense) income
  (237)
  48 
  (189)
  (226)
  57 
  (169)
Loss before income taxes
 $(3,741)
 $(34)
 $(3,775)
 $(2,379)
 $(2)
 $(2,381)
 
 
12. 
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.
 
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, which may include 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 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, including 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 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 and 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.
 
 
15
 
 
Our audited financial statements for the fiscal years ended May 31, 2017 and May 31, 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. During the nine months ended February 28, 2018 the Company experienced revenue declines and was in a loss position. If the decline in the Company’s financial position continues, our composite score for the fiscal year ending May 31, 2018 could fall below 1.5.
 
13. 
SUBSEQUENT EVENTS
 
We evaluated subsequent events after the balance sheet date through the date the consolidated financial statements were issued.
 
On March 21, 2018, the Company acquired 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 $1,626. Due to the timing of the transaction closure, the Company has not completed the purchase price allocation. On March 23, 2018, the company received $2,252 of its $2,397 income taxes receivable.
 
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 locations and hybrid learning centers, 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 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-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; and in higher education. As of February 28, 2018, our operations had 31 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.
 
 
16
 
 
As of February 28, 2018, NAU had 617 students enrolled at its physical locations, 4,617 students for its online programs, and 747 students that attended physical hybrid learning locations and also took classes online. NAU supports the instruction of approximately 2,700 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.
 
During the fiscal quarter ended February 28, 2018, the Company consolidated its operations of the Albuquerque West, Bloomington, Brooklyn Center, Burnsville, Colorado Springs South, Houston, Lewisville, Minnetonka and Watertown locations. In addition, the Wichita West location was closed down as the result of a fire and its ground students transferred to the Wichita location. During the term prior to the consolidation, nearly 100% of the students at the consolidated locations participated in classes exclusively through online delivery. Therefore, the Company expects a reduction of expenses with little impact on revenues as a result of the consolidation.
 
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 1% of our revenues for the quarter ended February 28, 2018.
 
Key Financial Results Metrics
 
Revenue. Revenue is derived mostly from NAU’s operations. For the nine months ended February 28, 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 and scholarships and is recognized on a daily basis over the length of the term. 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
 
 
the amount of scholarships for which students qualify.
 
 
17
 
 
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. Bad debt expenses as a percentage of revenues for the nine months ended February 28, 2018 and February 28, 2017 were 3.1% and 4.4%, 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 February 28, 2018 and February 28, 2017, by degree type and by instructional delivery method.
 
 
 
February 28, 2018
(Winter 2017-18 Term)
 
 
February 28, 2017
(Winter 2016-17 Term)
 
 

 
 
 
Number of Students
 
 
% of Total
 
 
Number of Students
 
 
% of Total
 
 
 YOY Percent Change
 
Continuing Ed
  - 
  0.0%
  202 
  2.8%
  -100.0%
Doctoral
  111 
  1.9%
  98 
  1.3%
  13.3%
Graduate
  393 
  6.6%
  386 
  5.3%
  1.8%
Undergraduate & Diploma
  5,477 
  91.5%
  6,628 
  90.6%
  -17.4%
Total
  5,981 
  100.0%
  7,314 
  100.0%
  -18.2%
 
    
    
    
    
    
All Ground
  617 
  10.3%
  1,553 
  21.2%
  -60.3%
All Online
  4,617 
  77.2%
  4,834 
  66.1%
  -4.5%
Hybrid
  747 
  12.5%
  927 
  12.7%
  -19.4%
Total
  5,981 
  100.0%
  7,314 
  100.0%
  -18.2%
 
The combined enrollment in the doctoral and graduate programs increased 4.1% in the winter term 2018 as compared to the winter term 2017. However, the continuing education programs for students who enroll in one-off courses were eliminated pursuant to our plans to phase out those programs. The undergraduate and diploma programs decreased 17.4% due to lower market demand among our targeted student demographic. The overall 18.2% decline in enrollment was across all course delivery methods. We believe our investment to expand academic programming and our growth strategies will be critical in growing enrollemnt in all segments.
 
 
18
 
 
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. During the fiscal quarter ended November 30, 2017, we entered into a transfer agreement with another institution that allows its former students to begin enrolling with NAU in December 2017. The estimated revenue for this agreement related to the quarter ended February 28, 2018 was approximately $2.1 million. 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 also plan to continue expanding and developing our academic programming by focusing on our existing locations and potentially making acquisitions. 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 number of programs that are developed, 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, cost of condominium sales, loss on disposition of property, and loss on lease termination. Cost of educational services 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 include the salaries of the student service positions, 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, as well as depreciation and amortization, bad debt expenses and other related costs associated with student support functions. Auxiliary expenses include primarily costs associated with book sales. 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 represents the income received and the cost incurred in the disposal of assets that are no longer used by us. The loss on lease termination represents excess of amounts paid per lease termination agreements over accrued lease amounts.
 
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. We cannot predict at this time the effect on our seasonality due to the monthly start program that began in the quarter ended November 30, 2017.
 
 
19
 
 
Results of Operations — Nine Months Ended February 28, 2018 Compared to Nine Months Ended February 28, 2017
 
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:
 
 
 
Nine Months Ended February 28, 2018 in percentages
 
 
Nine Months Ended February 28, 2017 in percentages
 
 
 
 
 
 
 
 
Total revenue
  100.0%
  100.0%
Operating expenses:
    
    
Cost of educational services
  33.7 
  32.0 
Selling, general and administrative
  76.9 
  73.3 
Auxiliary expense
  3.6 
  4.2 
Cost of condominium sales
  0.7 
  0.0 
Loss on lease termination
  0.6 
  0.0 
Loss on disposition of property
  3.6 
  0.0 
Total operating expenses
  119.1 
  109.4 
Operating loss
  (19.1)
  (9.4)
Interest income
  0.1 
  0.1