NOTES TO UNAUDITED CONSDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED NOVEMBER 30, 2018 AND
2017
(In thousands, except share and per share amounts)
1.
STATEMENT
PRESENTATION AND BASIS OF CONSOLIDATION
The
accompanying unaudited condensed financial statements are presented
on a consolidated basis and include the accounts of National
American University Holdings, Inc., its subsidiary, Dlorah, Inc.
(“Dlorah”), and its divisions, National American
University (“NAU” or the “University”),
Fairway Hills, the Fairway Hills Park and Recreational Association,
the Park West Owners’ Association, the Vista Park
Owners’ Association (“Fairway Hills”), and the
Company’s interest in Fairway Hills Section III Partnership
(the “Partnership”), collectively the
“Company.”
The
accompanying unaudited consolidated financial statements have been
prepared on a basis substantially consistent with the
Company’s audited financial statements and in accordance with
the requirements of the Securities and Exchange Commission
(“SEC”) for interim financial reporting. As permitted
under these rules, certain footnotes and other financial
information that are normally required by accounting principles
generally accepted in the United States of America (“U.S.
GAAP”) can be condensed or omitted. The information in the
condensed consolidated balance sheet as of May 31, 2018 was derived
from the audited consolidated financial statements of the Company
for the year then ended. Accordingly, these financial statements
should be read in conjunction with the Company’s annual
financial statements, which were included in the Company’s
Annual Report on Form 10-K for the year ended May 31, 2018, filed
on September 14, 2018. Furthermore, the results of operations and
cash flows for the six month periods ended November 30, 2018 and
2017 are not necessarily indicative of the results that may be
expected for the full year. These financial statements include
consideration of subsequent events through issuance.
In the
opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments necessary for a fair
presentation as prescribed by U.S. GAAP.
Throughout the
notes to the condensed consolidated financial statements, amounts
in tables are in thousands of dollars, except for per share data or
otherwise designated. The Company’s fiscal year end is May
31. All intercompany transactions and balances have been eliminated
in consolidation.
Unless
the context otherwise requires, the terms “we”,
“us”, “our” and the “Company”
used throughout this document refer to National American University
Holdings, Inc. and its wholly owned subsidiary, Dlorah, Inc., which
owns and operates National American University and Fairway
Hills.
Estimates
— The preparation
of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
amounts and disclosures reported in the financial statements. On an
ongoing basis, the Company evaluates the estimates and assumptions,
including those related to bad debts, income taxes and certain
accruals. Actual results could differ from those
estimates.
Financial Condition and Liquidity
— The Company has experienced a decrease in revenue since
2013 due to enrollment declines at National American University.
This long-term decline in revenue has resulted in increasing net
losses and decreases in liquidity and capital
resources.
For the
six months ended November 30, 2018, cash used in operating
activities was $3.9 million and unrestricted cash and cash
equivalents decreased by $4.8 million from May 31, 2018. As a
result, as of November 30, 2018, the Company had $0.5 million of
unrestricted cash and cash equivalents and a working capital
deficiency of $8.7 million. These factors, among others, raise
substantial doubt regarding the Company’s ability to continue
as a going concern.
During
the quarter ended November 30, 2018, the Company implemented or
began implementing actions to address its liquidity needs as
follows:
●
During the quarter
ended November 30, 2018, the Company implemented an operational
plan that focuses on online academic programs and expanding its
programming and services related to strategic security,
counter-terrorism, and intelligence for the public and private
sectors. In alignment with this new operational change, NAU
suspended new student enrollment in 34 of its 128 programs and is
in the process of closing its ground-based locations. This
operational change may put additional pressure on the
Company’s revenue in the immediate future. However, the
Company expects a significant decrease in expenses with a lesser
impact on revenue in the long run. See note 7 for further details
on the Company’s operational change.
●
On December 19,
2018, the restriction on the Company’s $1.1 million
certificate of deposit with Great Western Bank expired, and the
cash balance has now become available for operating
purposes.
●
On December 17,
2018, the Company entered into an agreement to sell one out of two
available-for-sale aircrafts for proceeds of $0.6 million, which
management expects to close by February 2019. The estimated
proceeds from the other aircraft, as well as the savings from the
related maintenance and operating costs, are approximately $0.9
million. The Company has been actively marketing and advertising to
sell the second aircraft, which management expects will be
completed within the next few quarters.
●
The Company
continued its internal restructuring, which will result in the
elimination of numerous positions throughout the organization in
the third quarter of fiscal 2019. The Company estimates an
additional $1.5 million in annual payroll reduction. This payroll
reduction is part of our continued cost-cutting initiatives to
better align expenses with the decreasing enrollment.
Should
the Company be unsuccessful with one or more of these actions,
should enrollment continue to decline significantly, or in the
event of significant unforeseen expenditures, management believes
that it would need to raise additional funding, including but not
limited to selling the Company’s real estate assets, to
continue as a going concern.
While
the Company believes that the above actions will be successful,
management is unable to conclude that it is probable that these
actions will provide sufficient liquidity to enable the Company to
meet its needs and, as such, there is substantial doubt about its
ability to continue as a going concern for at least twelve months
following the issuance of these financial statements.
The
Company, through Dlorah, owns and operates National American
University. NAU is a regionally accredited, proprietary,
multi-campus institution of higher learning, offering associate,
bachelors, master’s and doctoral degree programs in
business-related disciplines, such as accounting, management,
business administration, and information technology; in
healthcare-related disciplines, such as occupational therapy,
medical assisting, nursing, surgical technology, and healthcare
information and management; in legal-related disciplines, such as
paralegal, criminal justice, and professional legal studies; in
higher education; and in strategic security. Courses are offered
through on-ground educational sites as well as online.
In
addition to the university operations, the Company owns and
operates a real estate business known as Fairway Hills
Developments, or Fairway Hills. The real estate business rents
apartment units and develops and sells condominium units in the
Fairway Hills Planned Development area of Rapid City, South
Dakota.
3.
RECENTLY
ADOPTED AND NEW ACCOUNTING PRONOUNCEMENTS
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) No. 2014-09,
Revenue from Contracts with
Customers (Topic 606)
, which removes inconsistencies and
weaknesses in revenue requirements, provides a more robust
framework for addressing revenue issues, improves comparability of
revenue recognition practices across entities, provides more useful
information to users of the consolidated financial statements
through improved disclosure requirements, and simplifies the
preparation of the consolidated financial statements by reducing
the number of requirements to which an entity must refer. The ASU
outlines five steps to achieve proper revenue recognition: identify
the contract with the customer, identify the performance
obligations in the contract, determine the transaction price,
allocate the transaction price to the performance obligations in
the contract, and recognize revenue when (or as) the entity
satisfies the performance obligation. This standard is effective
for public entities for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting
period. This standard is effective for the Company’s fiscal
year 2019, and was implemented in the first quarter ended August
31, 2018, using the modified retrospective method of adoption. The
adoption of this guidance did not have a material impact on the
Company’s financial statements during the six months ended
November 30, 2018. The primary impact of adopting the new standard
has been modifications to the timing of revenue recognition for
certain revenue streams. A net cumulative increase to accumulated
deficit and a corresponding increase to deferred revenue in the
amount of $0.2 million as of June 1, 2018 was recorded as a result
of the adoption of this guidance. The Company has provided expanded
disclosures pertaining to revenue recognition in
Note 4 – Revenues
.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which supersedes
FASB ASC Topic 840,
Leases
and provides principles for the recognition, measurement,
presentation and disclosure of leases for both lessees and lessors.
The new standard requires lessees to apply a dual approach,
classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively financed
or purchased by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest
method or on a straight-line basis over the term of the lease,
respectively. A lessee is also required to record a right-of-use
asset and a lease liability for all leases with a term of greater
than twelve months regardless of classification. If the available
accounting election is made, leases with a term of twelve months or
less can be accounted for similar to existing guidance for
operating leases. The standard will be effective for the
Company’s fiscal year ending 2020 and will be implemented in
the first quarter ending August 31, 2019. The Company is currently
evaluating and has not yet determined the impact implementation
will have on the Company’s consolidated financial
statements.
In May
2017, the FASB issued ASU 2017-09,
Scope of Modification Accounting
, which
is intended to reduce diversity in practice and the complexity in
applying existing guidance related to changing terms or conditions
of share-based payment awards. The standard clarifies that
modification accounting is required unless the fair value, vesting
conditions, and classification as an equity or liability instrument
of the modified award are the same as that of the original award
immediately prior to the modification. The new standard is
effective for annual periods beginning after December 15, 2017 and
interim periods within those years. The Company adopted this
standard for the fiscal year beginning June 1, 2018, and it did not
have an effect on the consolidated financial statements. ASU
2017-09 will be applied prospectively to any awards modified on or
after the adoption date.
In
August 2018, the FASB issued ASU 2018-13,
Changes to Disclosure Requirements for Fair
Value Measurements
, which will improve the effectiveness of
disclosure requirements for recurring and nonrecurring fair value
measurements. The standard removes, modifies, and adds certain
disclosure requirements, and is effective for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2019. The Company will be evaluating the impact this standard
will have on the Company’s consolidated financial
statements.
Impact
of Adoption of ASC 606 – Revenue from Contracts with
Customers
On June
1, 2018, the Company adopted Accounting Standards Codification
(“ASC”)
Topic 606,
Revenue from Contracts with Customers (“ASC Topic
606”)
, which supersedes the revenue recognition
requirements in
ASC Topic 605,
Revenue Recognition (“ASC Topic 605”)
. The
Company elected to follow the modified retrospective adoption
method. The new guidance was applied to all contracts that were not
completed as of the adoption date. Revenues and operating results
for the reporting period beginning June 1, 2018 have been presented
under the accounting guidance included within ASC Topic 606, while
prior period amounts have not been restated to conform to the new
guidance as permitted by the modified retrospective method of
adoption.
As a
result of the adoption of
ASC
Topic 606
, the Company recorded a net cumulative increase to
accumulated deficit of $0.2 million and a corresponding increase to
deferred income within the Consolidated Balance Sheet as of June 1,
2018. The impact of adoption was primarily related to the estimated
adjustment for students who withdraw from classes for terms that
were not complete at May 31, 2018. Prior to the adoption of ASC
606, these revenue adjustments were recognized when the student
actually withdrew from classes. Compared to the amounts under
ASC Topic 605
, for the six
months ended November 30, 2018, the net impact to revenues under
ASC Topic 606
was a
reduction of revenues of $0.2 million, with a corresponding
increase to deferred income.
The
Company does not have any unsatisfied performance obligations for
contracts with customers that have an expected duration of more
than one year.
Revenue
Recognition
The
following table presents the Company’s revenues from
contracts with customers disaggregated by material revenue
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Academic
revenue
|
$
28,559
|
$
13,879
|
|
Auxilary
revenue
|
1,405
|
678
|
|
Real
estate revenue
|
1,239
|
611
|
|
Consolidated
revenue
|
$
31,203
|
$
15,168
|
Revenues are
recognized when control of the promised goods or services are
transferred to customers in an amount that reflects the
consideration the Company expects to be entitled to receive in
exchange for those goods and services. The Company applies the
five-step revenue model under
ASC
Topic 606
to determine when revenue is earned and
recognized. The Company had no capitalizable costs associated with
obtaining and fulfilling a revenue contract.
Academic Revenue:
Academic revenue
consists of tuition revenue, other fee revenue and the revenue
generated through NAU’s teaching relationships with other
non-related party institutions. The Company’s academic
programs are typically offered on a three-month term basis that,
starting in November 2017, commence on a monthly basis. As a
result, each of the Company’s financial reporting quarters
include the revenue of three months of the first term, two months
of the second term, and one month of the third term.
Tuition
revenue represents amounts charged for course instruction. For
tuition revenue, the Company performs an assessment at the
beginning of each student contract and, subsequently thereafter, if
new information indicates there has been a significant change in
facts and circumstances. Each student contract contains a single
performance obligation that is the Company’s promise to the
student to provide knowledge and skills through course instruction,
which may include any combination of classroom instruction,
on-demand tutoring or on-line instruction.
Tuition
revenue is reported net of adjustments for discounts, refunds and
scholarships. Tuition rates per student vary by educational site,
the number of credit hours the student is enrolled in for the term,
the program, and the degree level of the program. The portion of
tuition and registration fees received but not earned, less
estimated student withdrawals, is recorded as deferred income and
reflected as a current liability in the Company’s
consolidated balance sheets, as such amount represents revenue the
Company expects to earn from terms that are not complete as of the
date of the financial statements.
Tuition
revenue is deferred and recognized as revenue ratably over the term
of instruction (typically three months). Tuition revenue is
recognized over time as the students obtain control of the
educational services provided by the Company subsequent to
enrollment and on a ratable basis over the term of the course
beginning on the course start date through the last day of
classes.
If a
student withdraws prior to the completion of the academic term, the
respective portion of tuition and registration fees the Company
already received and is not entitled to retain are refunded back to
the students and the Department of Education. Students are no
longer entitled to a refund once 60% of the term has been
completed.
’
For students
that have withdrawn from all classes during an academic term, the
Company estimates the expected receivable balance due from such
students and records a provision to reduce academic revenue for
that amount, less estimated collections calculated based on
historical collection trends and adjusted for known current
factors.
Auxiliary Revenue:
Auxiliary revenue
primarily consists of revenues from the Company’s bookstore
operations for the sale of books and other class materials. Revenue
is recognized when control of the books or class materials are
transferred to the student. Auxiliary revenue is recorded net of
any applicable sales tax. There are no identified changes to
revenue recognition from
ASC Topic
605
to
ASC Topic
606
.
Real Estate Revenue:
Real estate
revenue includes monthly rental income, fees paid by members of
owners’ associations managed by the Company and condominium
sales. Rental income and owners’ association fees are
received from tenants or members. Significant amounts paid in
advance are included in deferred income on the Company’s
consolidated balance sheets. Revenue related to the sales of the
condominiums is recognized at the closing of the transaction at the
negotiated contract price. There are no identified changes to
revenue recognition from
ASC Topic
605
to
ASC Topic
606
.
The
following presents the Company’s net revenue disaggregated
based on the timing of revenue recognition:
|
|
|
|
|
|
|
|
|
Services transferred over time:
|
|
|
|
Tuition
revenue, net of adjustments
|
$
28,559
|
$
13,879
|
|
(transferred
over the term of instruction)
|
|
|
|
Rental
income (transferred over the rental period)
|
697
|
346
|
|
Total
|
29,256
|
14,225
|
|
|
|
|
|
Goods or services transferred at a point in time:
|
|
|
|
Auxiliary
revenue
|
1,405
|
678
|
|
Other
real estate income
|
103
|
51
|
|
Condominium
sales
|
439
|
214
|
|
Total
|
1,947
|
943
|
|
|
|
|
|
Total revenue
|
$
31,203
|
$
15,168
|
5.
STUDENT
RECEIVABLES, NET
Student
receivables, net consist of the following as of the respective
period ends:
|
|
|
|
|
|
|
|
|
Student
accounts receivable
|
$
2,256
|
$
3,480
|
|
Less
allowance for doubtful accounts
|
(487
)
|
(587
)
|
|
Student
receivables, net
|
$
1,769
|
$
2,893
|
Student
accounts receivable is composed primarily of amounts due related to
tuition and educational services. The following summarizes the
activity in the allowance for doubtful accounts for the respective
periods:
|
|
|
|
|
|
|
|
|
|
|
Beginning
allowance for doubtful accounts
|
$
587
|
$
1,195
|
|
Provisions
for uncollectible accounts receivable
|
1,046
|
1,279
|
|
Write
offs
|
(1,449
)
|
(1,949
)
|
|
Recoveries
|
303
|
318
|
|
Ending
allowance for doubtful accounts
|
$
487
|
$
843
|
6.
IMPAIRMENT
OF LONG-LIVED ASSETS
Long-lived assets
are reviewed for impairment when circumstances indicate the
carrying value of an asset may not be recoverable. For assets that
are held and used, impairment exists when the estimated
undiscounted cash flows associated with the asset or group of
assets is less than carrying value. If impairment exists, an
adjustment is made to write the asset down to its fair value, and a
loss is recorded as the difference between the carrying and fair
value. Fair values are determined based on quoted market values,
discounted cash flows, or internal and external appraisals, as
applicable. Assets to be held for sale are carried at the lower of
carrying value or fair value, less cost to sell. All impairment
charges are included in loss on impairment and disposition of
property, within the NAU segment, in the consolidated financial
statements.
During
the quarter ended November 30, 2017, upon our review of our assets
for impairment, we determined the estimated future undiscounted
cash flows associated with the assets of the Houston, Minnetonka,
Bloomington, Brooklyn Center and Burnsville campuses were not
sufficient to recover their carrying value. Accordingly, the
carrying values of the assets, primarily leasehold improvements,
were reduced to their fair value, which the Company believes to be
minimal. An impairment charge of $1,009 related to these five
locations was recorded. The impairment charge is included in loss
on impairment and disposition of property, within the NAU segment,
in the condensed consolidated financial statements.
During
the quarter ended August 31, 2018, the Company signed an early
lease termination agreement without penalty for the Albuquerque
East and Colorado Springs North locations. The Company consolidated
the students from these two locations to other local campuses
during the second quarter. The leases at the closed locations were
terminated prior to the end of their terms. As a result of the
early termination of the leases at these two locations, the
carrying values of their assets, primarily classroom and office
equipment and leasehold improvements, were reduced to their fair
value, which the Company estimates to be minimal. An impairment
charge of $555 related to the assets at these locations was
recorded during the three months ended August 31,
2018.
During the quarter
ended November 30, 2018, the Company incurred additional asset
impairment as the result of the Board-Approved Operational Change
to Online Operations. See Note 7 below.
7.
BOARD-APPROVED
OPERATIONAL CHANGE TO ONLINE OPERATIONS
On
October 29, 2018, the Company’s Board of Directors approved a
strategic plan that focuses NAU’s growth strategies on online
academic programs and expanding its programming and services
related to strategic security, counter-terrorism, and intelligence
for the public and private sectors. The Company remains committed
to offering many of its current programs and maintaining its
longstanding mission to assist students in achieving their
educational goals and preparing them for employment in a rapidly
evolving and increasingly competitive employment
market.
In
alignment with its new strategic plan, NAU suspended new student
enrollment in 34 of its 128 programs effective November 1, 2018.
NAU will continue to serve active students currently enrolled in
these programs. To accelerate its operational change to online
academic programs and to gain greater efficiencies through the
centralization of its student-facing services, the Company is
implementing appropriate staff reductions and other personnel
actions.
As a
result, the Company determined that the carrying value of all
assets for the ground locations that were not previously impaired,
should be impaired as of November 30, 2018. The Company incurred a
charge of $5.9 million to account for these fixed asset
impairments. In addition, future lease obligations at the ground
locations that were closed as of November 30, 2018, were
accelerated, and a non-cash charge of $3.1 million was incurred to
recognize the acceleration of these lease obligations. This
non-cash lease acceleration was calculated using the present value
of future payments and offset with estimated sublease
income.
The
authorized capital stock for the Company is 51,100,000 shares,
consisting of (i) 50,000,000 shares of common stock, par value
$0.0001 and (ii) 1,000,000 shares of preferred stock, par value
$0.0001, and (iii) 100,000 shares of class A common stock, par
value $0.0001. Of the authorized shares, 24,522,653 and 24,344,122
shares of common stock were outstanding as of November 30, 2018 and
May 31, 2018, respectively. No shares of preferred stock or Class A
common stock were outstanding at November 30, 2018 and May 31,
2018.
Stock-Based Compensation
Under
the 2009 Stock Option and Compensation Plan (the “2009
Plan”), the Company may grant restricted stock awards,
restricted stock units and stock options to aid in recruiting and
retaining employees, officers, directors and other consultants. The
Company has settled an advisor services contract and management
compensation in stock that totaled 72,033 shares valued at $38 for
the quarter ended November 30, 2018, and 78,609 shares valued at
$44 for the year to date period ended November 30, 2018. These
issuances of stock reduce the shares available for future grants.
At November 30, 2018, the Company had 2,112 shares available for
future grants under its 2009 Plan.
In
2013, the Company adopted the 2013 Restricted Stock Unit Plan (the
“2013 Plan”) authorizing the issuance of up to 750,000
shares of the Company’s stock to participants in the 2013
Plan. Termination of the 2013 Plan was approved by the stockholders
of the National American University Holdings, Inc. at the 2018
Annual Meeting of Stockholders held October 9, 2018.
At the
2018 Annual Meeting of National American University Holdings, Inc.,
held October 9, 2018, the stockholders also approved the 2018 Stock
Option and Compensation Plan (the “2018 Plan”). The
Plan authorizes 1,800,000 shares to aid the Company in recruiting
and retaining employees and to align the interests of employees,
officers and directors with those of the Company’s
stockholders. The Company may grant restricted stock awards,
restricted stock units, stock options, stock appreciation rights,
stock awards and other stock-based awards. The Plan expires ten
years from its inception date. At November 30, 2018, all 1,800,000
shares are available for future grants.
Restricted stock
During
the quarter ended November 30, 2018, 47,615 restricted stock shares
with a weighted average grant date fair value of $2.10 per share
vested. The Company has 113,635 non-vested restricted stock shares
with a weighted average grant date fair value of $0.88 per share
that were granted during the quarter and remain outstanding at
November 30, 2018. These shares vest one year from the issuance
date. Unrecognized compensation expense associated with these
shares total $86 with a remaining amortization period of 0.9 year.
Stock compensation expense totaling $23 and $48, respectively, was
recorded in the condensed consolidated statements of operations and
comprehensive loss during the quarter and year to date periods
ended November 30, 2018.
Stock options
The
Company accounts for stock option-based compensation by estimating
the fair value of options granted using a Black-Scholes option
valuation model. The Company recognizes the expense for grants of
stock options on a straight-line basis in the consolidated
statements of operations and comprehensive income as operating
expense based on their fair value over the requisite service
period.
During
the quarter ended November 30, 2018, the Company granted stock
options to purchase 50,000 shares of stock at a weighted average
exercise price of $0.44 per share. The stock options granted vest
over a one to two-year period. The following assumptions were used
to determine the fair value of the stock options
awarded:
|
Assumptions used:
|
|
For the three and six months ended November 30, 2018
|
|
Expected
term (in years)
|
|
5.75
|
|
Weighted
average expected volatility
|
|
66.6%
|
|
Range
of expected volatility
|
|
57.1%
to 69.0%
|
|
Weighted
average risk-free interest rate
|
|
3.11%
|
|
Range
of risk-free interest rates
|
|
2.93%
to 3.84%
|
|
Weighted
average expected dividend
|
|
0.00%
|
|
Weighted
average fair value per share
|
|
$0.27
|
Stock
options for 27,021 shares of common stock with a weighted average
exercise price of $3.12 were forfeited during the year to date
period ended November 30, 2018. At November 30, 2018, stock options
for 216,329 shares were outstanding with a weighted exercise price
of $2.88 and a weighted average remaining useful life of 7.2 years.
Of the outstanding shares, 167,327 are exercisable with a weighted
average exercise price of $3.57 and a weighted average remaining
useful life of 6.4 years. No intrinsic value was associated with
the stock options at November 30, 2018. The Company recorded
compensation expense for stock options of $2 and $3, respectively,
for the three and six months ended November 30, 2018 in the
consolidated statements of operations and comprehensive loss.
Unamortized compensation associated with stock options at November
30, 2018 is $13 with a remaining amortization term of 1.7
years.
Dividends
To
reduce cash requirements, no dividends have been declared or paid
since October 6, 2017. The following table summarizes the
Company’s fiscal 2018 dividend payments:
|
Date declared
|
|
Record date
|
|
Payment date
|
|
Per share
|
|
April 13, 2017
|
|
June 30, 2017
|
|
July 7, 2017
|
|
$0.0450
|
|
August 4, 2017
|
|
September 30, 2017
|
|
October 6, 2017
|
|
$0.0450
|
As of
November 30, 2018, the Company had net operating loss
(“NOL”) carryforwards of approximately $29,000,
adjusted for certain other non-deductible items available to reduce
future taxable income, if any. The NOL carryforward has no
expiration. In assessing the recovery of the deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
generation of future taxable income in the periods in which those
temporary differences become deductible. Management considers the
scheduled reversals of future deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Because management is unable to determine that it is
more likely than not that the Company will realize the tax benefit
related to the NOL carryforward, by having taxable income, a full
valuation allowance has been established to reduce the net tax
benefit asset value to zero.
The
loss before income taxes for the six months ended November 30,
2018, created a net tax benefit of approximately $3,892. As
realization of this net tax benefit is not assured, a full
valuation allowance was recorded for this amount. As such, a full
valuation allowance totaling $8,410 is recorded at November 30,
2018, and is included in net deferred income taxes liability in the
accompanying condensed consolidated balance sheet.
The
Company’s effective tax rate was expense of 0.1% for the six
months ended November 30, 2018, as compared to expense of 2.6% for
the corresponding period in 2017. The effective tax rate varies
from the statutory rate of 21% primarily due to the deferred tax
asset valuation allowance, fluctuations in state income taxes as a
result of the Company’s net loss position, and nondeductible
meals expense.
The Tax
Cuts and Jobs Act of 2017 was signed into law on December 22, 2017.
The law includes significant changes to the U.S. corporate income
tax system, including a Federal corporate rate reduction from 35%
to 21%. The accounting for these changes was completed as of May
31, 2018.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net
loss attributable to National American University Holdings,
Inc.
|
$
(16,261
)
|
$
(7,605
)
|
$
(11,307
)
|
$
(3,777
)
|
|
Denominator:
|
|
|
|
|
|
Weighted
average shares outstanding used to compute basic
|
|
|
|
|
|
net
income per common share
|
24,344,052
|
24,200,096
|
24,389,841
|
24,219,884
|
|
Incremental
shares issuable upon the assumed exercise of stock
options
|
-
|
-
|
-
|
-
|
|
Incremental
shares issuable upon the assumed vesting of restricted
shares
|
-
|
-
|
-
|
-
|
|
Common
shares used to compute diluted net income per share
|
$
24,344,052
|
$
24,200,096
|
$
24,389,841
|
$
24,219,884
|
|
Basic
net loss per common share
|
$
(0.67
)
|
$
(0.31
)
|
$
(0.46
)
|
$
(0.16
)
|
|
|
|
|
|
|
|
Diluted
net loss per common share
|
$
(0.67
)
|
$
(0.31
)
|
$
(0.46
)
|
$
(0.16
)
|
A total
of 216,329 and 200,600 shares of common stock subject to issuance
upon exercise of stock options for the three and six months ended
November 30, 2018 and 2017, respectively, have been excluded from
the calculation of diluted EPS as the effect would have been
anti-dilutive.
A total
of 113,635 and 47,615 shares of common stock subject to issuance
upon vesting of restricted shares for the three and six months
ended November 30, 2018 and 2017, respectively, have been excluded
from the calculation of diluted EPS as the effect would have been
anti-dilutive.
11.
COMMITMENTS
AND CONTINGENCIES
From
time to time, the Company is a party to various claims, lawsuits or
other proceedings
relating to the conduct
of its business. Although the outcome of litigation cannot be
predicted with certainty and some claims, lawsuits or other
proceedings may be disposed of unfavorably, management believes,
based on facts presently known, that the outcome of such legal
proceedings and claims, lawsuits or other proceedings will not have
a material effect on the Company’s consolidated financial
position, cash flows or future results of operations.
In
April 2017, a former NAU employee filed a
qui tam
suit against NAU, NAUH, and
Dlorah, Inc., alleging certain violations of the Higher Education
Act and Title IV program requirements, including (1) alleged
misrepresentations to a programmatic accrediting agency, (2)
alleged miscalculation of percentage of revenues derived from Title
IV program funds under the 90/10 Rule, and (3) alleged
noncompliance with the incentive compensation prohibition. The U.S.
government decided to not intervene in the lawsuit at that time,
and the complaint was then unsealed by the court in January 2018,
with an amended complaint being filed on April 24, 2018. The U.S.
government reserved the right to intervene at a later time. The
case is styled
U.S. ex rel. Brian
Gravely v. National American University, et al., No.
5:17-cv-05032-JLV
, and remains pending in the U.S. District
Court for the District of South Dakota. NAU, NAUH, and Dlorah,
Inc., have filed an answer to the amended complaint, denying any
legal wrongdoing or liability. We cannot predict the outcome of
this litigation, nor its ability to harm our reputation, impose
litigation costs, or materially adversely affect our business,
financial condition, and results of operations. The amount or range
of reasonably possible losses cannot be determined and,
accordingly, no liability has been accrued for this
matter.
In
December 2018, NAU was served with a lawsuit (Summons and Petition)
commenced by
two former students
of NAU, Shayanne Bowman and Jackquelynn Mortenson (Plaintiffs), in
Missouri state court, alleging claims of fraud and
misrepresentations as to the quality and
value of the
educational degrees that were being pursued by the two Plaintiffs,
and also a
claim under the
Missouri Merchandising Practices Act. The Petition (complaint) does
not
specify the damages
being sought by Plaintiffs in the lawsuit. The case is styled
Shayanne
Bowman and
Jackquelynn Mortenson v. Dlorah, Inc., d/b/a National American
University, et al., Case No. 1816-cv30104, and is pending in
Jackson County Circuit Court (MO). Three
individual
defendants were also included in the lawsuit, all former employees
of NAU. The
Company served and
filed, on January 2, 2019, a formal response to the Petition in the
form of a motion to dismiss the Petition. The Company
simultaneously filed papers seeking to remove the lawsuit to
federal court. The Company’s response to the lawsuit denied
any legal wrongdoing or liability. The Company intends to
vigorously defend the lawsuit. We cannot predict the outcome of
this litigation, nor its ability to harm our reputation, impose
litigation costs, or materially adversely affect our business,
financial condition, and results of operations. The amount or range
of reasonably possible losses cannot be determined at this time
and, accordingly, no liability has been accrued for this
matter.
12.
FAIR
VALUE MEASUREMENTS
The
following table summarizes certain information for assets and
liabilities measured at fair value on a recurring
basis:
|
|
Quoted prices in
active markets (level 1)
|
Other observable
inputs (level 2)
|
Unobservable
inputs (level 3)
|
|
|
November
30, 2018
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
Restricted
certificates of deposit
|
$
-
|
$
9,250
|
$
-
|
$
9,250
|
|
Total assets at
fair value
|
$
-
|
$
9,250
|
$
-
|
$
9,250
|
|
|
|
|
|
|
|
May
31, 2018
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
Restricted
certificates of deposit
|
$
-
|
$
9,250
|
$
-
|
$
9,250
|
|
Total assets at
fair value
|
$
-
|
$
9,250
|
$
-
|
$
9,250
|
Following is a
summary of the valuation techniques for assets and liabilities
recorded in the consolidated balance sheets at fair value on a
recurring basis:
Certificates of deposit
(“CD’s”):
Market prices for certain
CD’s are obtained from quoted prices for similar assets. The
Company classifies these investments as level 2. The certificates
at November 30, 2018 and May 31, 2018 are restricted by an $8
million promissory note and by a $1 million letter of credit. See
Note 14 to these Notes to Consolidated Financial Statements for
additional information regarding these certificates of
deposit.
Fair value of financial instruments:
The Company’s financial instruments include cash and cash
equivalents, CD’s, receivables and payables. The carrying
values approximated fair values for cash and cash equivalents,
receivables, and payables because of the short term nature of these
instruments. CD’s are recorded at fair values as indicated in
the preceding disclosures.
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:
|
|
Six months ended November 30,
|
Six months ended November 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Academic
|
$
28,559
|
$
-
|
$
28,559
|
$
36,684
|
$
-
|
$
36,684
|
|
Auxiliary
|
1,405
|
-
|
1,405
|
1,975
|
-
|
1,975
|
|
Rental
income apartments
|
-
|
697
|
697
|
-
|
700
|
700
|
|
Condominium
sales
|
-
|
439
|
439
|
-
|
455
|
455
|
|
Other
real estate income
|
-
|
103
|
103
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Total revenue
|
29,964
|
1,239
|
31,203
|
38,659
|
1,155
|
39,814
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost
of educational services
|
11,767
|
-
|
11,767
|
13,311
|
-
|
13,311
|
|
Selling,
general & administrative
|
23,158
|
1,047
|
24,205
|
29,780
|
1,036
|
30,816
|
|
Auxiliary
|
972
|
-
|
972
|
1,393
|
-
|
1,393
|
|
Cost
of condominium sales
|
-
|
354
|
354
|
-
|
427
|
427
|
|
Loss
on lease termination
|
3,099
|
-
|
3,099
|
362
|
-
|
362
|
|
Loss
(gain) on disp/impairment of property
|
6,438
|
-
|
6,438
|
1,036
|
(41
)
|
995
|
|
Total operating expenses
|
45,434
|
1,401
|
46,835
|
45,882
|
1,422
|
47,304
|
|
Loss
from operations
|
(15,470
)
|
(162
)
|
(15,632
)
|
(7,223
)
|
(267
)
|
(7,490
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest
income
|
12
|
51
|
63
|
44
|
5
|
49
|
|
Interest
expense
|
(404
)
|
(161
)
|
(565
)
|
(417
)
|
-
|
(417
)
|
|
Other
income (loss) - net
|
(82
)
|
-
|
(82
)
|
(9
)
|
96
|
87
|
|
Total other (expense)income
|
(474
)
|
(110
)
|
(584
)
|
(382
)
|
101
|
(281
)
|
|
Loss
before taxes
|
$
(15,944
)
|
$
(272
)
|
$
(16,216
)
|
$
(7,605
)
|
$
(166
)
|
$
(7,771
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
21,793
|
$
13,107
|
$
34,900
|
$
36,567
|
$
10,083
|
$
46,650
|
|
|
Three months ended November 30,
|
Three months ended November 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Academic
|
$
13,879
|
$
-
|
$
13,879
|
$
18,494
|
$
-
|
$
18,494
|
|
Auxiliary
|
678
|
-
|
678
|
931
|
-
|
931
|
|
Rental
income apartments
|
-
|
346
|
346
|
-
|
358
|
358
|
|
Condominium
sales
|
-
|
214
|
214
|
-
|
235
|
235
|
|
Other
real estate income
|
-
|
51
|
51
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Total revenue
|
14,557
|
611
|
15,168
|
19,425
|
593
|
20,018
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost
of educational services
|
5,413
|
-
|
5,413
|
6,411
|
-
|
6,411
|
|
Selling,
general & administrative
|
10,597
|
536
|
11,133
|
14,781
|
527
|
15,308
|
|
Auxiliary
|
471
|
-
|
471
|
652
|
-
|
652
|
|
Cost
of condominium sales
|
-
|
165
|
165
|
-
|
191
|
191
|
|
Loss
on lease termination
|
3,056
|
-
|
3,056
|
-
|
-
|
-
|
|
Loss
(gain) on disp/impairment of property
|
5,884
|
-
|
5,884
|
1,036
|
-
|
1,036
|
|
Total operating expenses
|
25,421
|
701
|
26,122
|
22,880
|
718
|
23,598
|
|
Loss
from operations
|
(10,864
)
|
(90
)
|
(10,954
)
|
(3,455
)
|
(125
)
|
(3,580
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest
income
|
6
|
26
|
32
|
27
|
2
|
29
|
|
Interest
expense
|
(201
)
|
(81
)
|
(282
)
|
(208
)
|
-
|
(208
)
|
|
Other
income (loss) - net
|
(83
)
|
-
|
(83
)
|
(4
)
|
47
|
43
|
|
Total other (expense)income
|
(278
)
|
(55
)
|
(333
)
|
(185
)
|
49
|
(136
)
|
|
Loss
before taxes
|
$
(11,142
)
|
$
(145
)
|
$
(11,287
)
|
$
(3,640
)
|
$
(76
)
|
$
(3,716
)
|
|
|
|
|
|
|
|
|
14.
LETTER
OF CREDIT AND LONG-TERM DEBT
During
the year ended May 31, 2018, the Company entered into an
irrevocable letter of credit with Great Western Bank for $1,000.
The letter of credit was required by the state of New Mexico in an
amount set by the New Mexico Department of Higher Education. The
agreement expired December 19, 2018. This $1,000 letter of credit
and the Company’s purchasing card account were secured by a
restricted certificate of deposit totaling $1,250. The certificate
of deposit matured on December 19, 2018. Great Western Bank had
restricted the $1,250 certificate of deposit as collateral for the
$1,000 letter of credit and the Company’s purchasing card
account that carried a credit limit of $250.
The
Company replaced the $1,000 letter of credit required by the State
of New Mexico by submitting an acceptable bond in place of the
letter of credit. The bond has no collateral requirements and, as a
result, the Company restored $1,100 of this restricted cash to
unrestricted operating cash effective December 19, 2018. A $150
newly-created restricted certificate of deposit secures the
Company’s purchasing card account that currently carries a
reduced credit limit of $150.
On May
17, 2018, Dlorah and the Company jointly and severally issued to
Black Hills Community Bank, N.A. (“Bank”) a promissory
note in the principal amount of $8,000 (the “Note”),
which is secured by a mortgage granted by Dlorah to the Bank on
certain real property located in Pennington County, South Dakota,
pursuant to a collateral real estate mortgage (the
“Mortgage,” and together with the Note, the “Loan
Agreements”) entered into between Dlorah and the Bank on the
same date as the Note, and certain related rents, as well as a
security interest in certain deposit accounts, to include
restricted certificates of deposit totaling $8,000. These
certificates of deposit are also restricted by the Bank and are not
available for spending.
The
Loan Agreements provide for an $8,000 five-year term loan (the
“Loan”). The Loan carries a fixed interest rate of 4%
(the “Interest Rate”) and is payable as follows:
beginning June 17, 2018, 59 monthly consecutive interest-only
payments based on the unpaid principal balance of the Loan at the
Interest Rate; beginning May 17, 2019, four consecutive annual
principal payments of $800 each, during which interest will
continue to accrue on the unpaid principal balance of the Loan at
the Interest Rate; and on May 17, 2023, one payment of the
remaining principal balance and one month of accrued interest of
the Loan in the amount of $4,816. The Company and Dlorah may prepay
the Loan at any time without penalty unless the Note is refinanced
with proceeds derived from another lender, in which case the Bank
will be entitled to a prepayment penalty of 1%. The Loan Agreements
also contain various affirmative and negative covenants, including
financial covenants and events of default. As of November 30, 2018,
the Company has been in compliance with the covenants included in
the Loan Agreements.
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. These requirements may include (1) being
transferred from the “advance” method of payment of
Title IV program funds to the heightened cash monitoring payment
method under which the institution is required to make Title IV
disbursements to eligible students and parents before it requests
or receives funds from the Department for the amount of those
disbursements, or (2) being transferred to the more onerous
reimbursement payment method under which an institution must submit
to the Department documentation demonstrating the eligibility for
each Title IV disbursement and wait for the Department’s
approval before drawing down Title IV funds.
If
an institution does not achieve a composite score of at least 1.0,
it is subject to additional requirements in order to continue its
participation in the Title IV programs. This includes (1)
submitting to the Department a letter of credit in an amount equal
to at least ten percent, and at the Department’s discretion
up to 50%, of the Title IV funds received by the institution during
its most recently completed fiscal year, and (2) being placed on
provisional certification status, under which the institution must
receive Department approval before implementing new locations or
educational programs and comply with other restrictions, including
reduced due process rights in subsequent proceedings before the
Department.
In
addition, under regulations that took effect on July 1, 2016,
institutions placed on either the heightened cash monitoring
payment method or the reimbursement payment method must pay Title
IV credit balances to students or parents before requesting Title
IV funds from the Department and may not hold Title IV credit
balances on behalf of students or parents, even if such balances
are expected to be applied to future tuition payments.
Our audited finan
cial statements for the
fiscal years ended May 31, 2017 and 2016 indicated our composite
scores for such fiscal years were 1.8 and 1.8, respectively, which
are sufficient to be deemed financially responsible under the
Department of Education’s requirements. Our audited financial
statements for the fiscal year ended May 31, 2018 indicate our
composite score is 1.3. This score is subject to a final
determination by the Department of Education once it receives and
reviews our consolidated audited financial statements for the 2018
fiscal year, but we believe it is likely that the Department of
Education will determine that we meet the standards of the
“zone” alternative and that we will be required to
operate under the “zone” alternative requirements as
well as any other requirements that the Department of Education
might impose in its discretion. While the Company’s
operations are typically consistent with “zone”
alternative requirements, new requirements imposed as a result of
the “zone” alternative status could have a negative
impact on the Company’s liquidity.
As
previously disclosed on Form 8-K filed with the SEC on December 31,
2018, on December 26, 2018, the Company received a written notice
from Nasdaq that, based upon the Company’s market value of
publicly held shares for the last 30 consecutive business days, the
Company no longer meets the requirement to maintain a minimum
Market Value of Publicly Held Shares (“MVPHS”) of
$5,000,000.00, as set forth in Nasdaq Listing Rule
5450(b)(1)(C). On December 28, 2018, the Board of Directors
of the Company approved the voluntary delisting by the Company of
its common stock from the Nasdaq Global Market (“NGM”)
of Nasdaq, and the transfer of the listing of its common stock to
the Over the Counter Quotation Bureau (OTCQB) . The Company’s
Board of Directors approved the voluntary withdrawal of the
Company’s common stock from listing on NGM as a result of
numerous factors, including its assessment of the probability of
the Company’s regaining compliance with Nasdaq Listing Rule
5450(b)(1)(C), the common stock’s current trading volume and
price, and the costs of maintaining eligibility to list the
Company’s common stock on NGM. On December 31, 2018, the
Company notified Nasdaq of its intention to voluntarily delist its
common stock from NGM and concurrently with such notification,
issued a press release regarding its intent to transfer the listing
of its common stock from NGM to the OTCQB. The Company filed Form
25 with the SEC on January 10, 2019 to effect the voluntary
delisting of its common stock from NGM. The Company intends to
remain a reporting company under the Securities and Exchange Act of
1934, as amended, immediately following the voluntary withdrawal
from NGM.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Certain of the statements included in this
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” as well as elsewhere in
this quarterly report on Form 10-Q are forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of
1995 (“Reform Act”). These statements are based on the
Company’s current expectations and are subject to a number of
assumptions, risks and uncertainties. In accordance with the Safe
Harbor provisions of the Reform Act, the Company has identified
important factors that could cause its actual results to differ
materially from those expressed in or implied by such statements.
The assumptions, uncertainties and risks include the pace of growth
of student enrollment, our continued compliance with Title IV of
the Higher Education Act, and the regulations thereunder, as well
as regional accreditation standards and state regulatory
requirements, competitive factors, risks associated with the
offering of new educational programs and adapting to other changes,
risks associated with accepting students from closed educational
institutions, risks relating to the timing of regulatory approvals,
our ability to continue to implement our growth strategy, risks
associated with the ability of our students to finance their
education in a timely manner, and general economic and market
conditions. Further information about these and other relevant
risks and uncertainties may be found in the Company’s Annual
Report on Form 10-K filed on September 14, 2018 and its other
filings with the SEC. The Company undertakes no obligation to
update or revise any forward looking statement, except as may be
required by law.
Background
The
Company owns and operates National American University. NAU is a
regionally accredited, proprietary, multi-location institution of
higher learning, offering associate, baccalaureate, master’s
and doctoral degree programs in business-related disciplines, such
as accounting, management, business administration, and information
technology; in healthcare-related disciplines, such as occupational
therapy, medical assisting, nursing, surgical technology, and
healthcare information and management; in legal-related
disciplines, such as paralegal, criminal justice, and professional
legal studies; strategic security; and in higher education. As of
November 30, 2018, we had 26 operating locations across the states
of Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New
Mexico, Oklahoma, South Dakota and Texas. Distance learning
operations and central administration offices operate from Rapid
City, South Dakota.
As of
November 30, 2018, NAU had 497 students enrolled at its physical
locations, 3,777 students for its online programs and 523 students
that attended physical hybrid learning locations and also took
classes online. NAU supports the instruction of approximately 2,750
additional students at affiliated institutions for which NAU
provides online course hosting and technical assistance. NAU
provides courseware development, technical support and online class
hosting services to various colleges, technical schools and
training institutions in the United States and Canada that do not
have the capacity to develop and operate their own in-house online
curriculum for their students. NAU does not share revenues with
these institutions, but rather charges a fee for its services,
enabling it to generate additional revenue by leveraging its
current online program infrastructure.
The
real estate operations, Fairway Hills, consist of apartment
facilities, condominiums and other real estate holdings in Rapid
City, South Dakota. The real estate operations generated
approximately 4% of our revenues for the quarter ended November 30,
2018.
On
October 29, 2018, the Company’s Board of Directors approved a
strategic plan that focuses National American University’s
growth strategies on online academic programs and expanding its
programming and services related to strategic security,
counter-terrorism, and intelligence for the public and private
sectors. National American University remains committed to offering
many of its current programs and maintaining its longstanding
mission to assist students in achieving their educational goals and
preparing them for employment in a rapidly evolving and
increasingly competitive employment market.
In
alignment with its new strategic plan, National American University
suspended new student enrollment in 34 of its 128 programs
effective November 1, 2018. National American University will
continue to serve active students currently enrolled in these
programs. To accelerate its strategic shift to online academic
programs and to gain greater efficiencies through the
centralization of its student-facing services, the Company is
implementing appropriate staff reductions and other personnel
actions.
In
connection with these changes, the Company incurred asset
impairment charges of $5.9 million in the second quarter of fiscal
year 2019 to reduce the carrying value of long-lived assets to
their respective fair value. In addition, ground locations that
have closed as of November 30, 2018, incurred a charge representing
the net present value of the remaining lease obligations, reduced
by an estimated amount for sublease income, of $3.1
million.
The
locations that are closed effective November 30, 2018, and are no
longer servicing students include: Albuquerque East, NM; Colorado
Springs North, CO;Killeen TX; Lees Summit, MO; Lewisville, TX;
Mesquite, TX; Minnetonka, MN; Rochester, MN; San Antonio, TX;
Watertown, SD; Weldon Springs, MO; Wichita West KS; and Zona Rosa,
MO.
The
locations that will continue to serve students to teach out their
program of study include: Albuquerque West, NM; Austin, TX;
Bellevue, NE; Centennial, CO; Colorado Springs South, CO;
Georgetown, TX; Indianapolis, IN; Overland Park, KS; Rapid City,
SD; Richardson, TX; Roseville, MN; Sioux Falls, SD; Tulsa, OK; and
Wichita East, KS.
In
alignment with the board-approved strategic plan, the following
ground-based programs will no longer accept new students and will
be taught out: Diploma in Medical Assisting, AAS in Invasive
Cardiovascular Technology, Medical Assisting, Medical Laboratory
Technician, Paralegal Studies, Occupational Therapy Assistant, and
Surgical Technology; BS in Nursing and Paralegal
Studies.
Online
programs that will be suspended, taught out, or will serve students
via other programs are: Diploma in Accounting and Bookkeeping,
Computer Support Specialist, and Computer and Network Server
Administrator; AAS in Computer Support Specialist, Construction
Management, Electronic Health Record Support Specialist, Emergency
Medical Services, Professional Legal Studies, and Retail
Management; BS in Professional Legal Studies, Emergency Medical
Services Management, Energy and Manufacturing Management, Energy
Management, and Organizational Leadership; BS IT emphasis areas in
Applications Development, Database Administration, Game Software
Development, Internet Systems Development, Management Information
Systems, Network Management, and Web Development; RN-BSN; Executive
MBA; MS in Global Supply Chain Management, Human Resource
Management, and Nursing; and the EdD in Community College
Leadership.
Key
Financial Results Metrics
Revenue
.
Revenue is derived mostly from
NAU’s operations. For the three months ended November 30,
2018, approximately 92% of our revenue was generated from
NAU’s academic revenue, which consists of tuition and fees
assessed at the start of each term. The remainder of our revenue
comes from NAU’s auxiliary revenue from sources such as
NAU’s book sales and the real estate operations’ rental
income. Tuition revenue is reported net of adjustments for refunds,
scholarships and estimated dropped students and is recognized on a
daily basis over the length of the term (typically three months).
During the quarter ended November 30, 2017, we began allowing
students to take classes on the 2
nd
or 3
rd
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.
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.
We
define enrollments for a particular reporting period as the number
of students registered in a course on the last day of the reporting
period. Enrollments are a function of the number of continuing
students registered and the number of new enrollments registered
during the specified period. Enrollment numbers are offset by
inactive students, graduations and withdrawals occurring during the
period. Inactive students for a particular period are students who
are not registered in a class, and therefore, are not generating
net revenue for that period.
We
believe the principal factors affecting NAU’s enrollments and
net revenue are the number and breadth of the programs being
offered; the effectiveness of our marketing, recruiting and
retention efforts; the quality of our academic programs and student
services; the convenience and flexibility of our online delivery
platform; the availability and amount of federal and other funding
sources for student financial assistance; and general economic
conditions.
The
following chart is a summary of our student enrollment on November
30, 2018 and 2017, by degree type and by instructional delivery
method.
|
|
November 30, 2018
(Fall 2018 Term)
|
November 30, 2017
(Fall 2017 Term)
|
|
|
|
|
|
|
|
|
|
Continuing
Ed
|
-
|
0.0
%
|
15
|
0.2
%
|
-100.0
%
|
|
Doctoral
|
192
|
4.0
%
|
101
|
1.6
%
|
90.1
%
|
|
Graduate
|
436
|
9.1
%
|
423
|
6.8
%
|
3.1
%
|
|
Undergraduate
& Diploma
|
4,169
|
86.9
%
|
5,702
|
91.4
%
|
-26.9
%
|
|
Total
|
4,797
|
100.0
%
|
6,241
|
100.0
%
|
-23.1
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Campus
|
497
|
10.4
%
|
988
|
15.8
%
|
-49.7
%
|
|
All
Online
|
3,777
|
78.7
%
|
4,433
|
71.0
%
|
-14.8
%
|
|
Mixed
|
523
|
10.9
%
|
820
|
13.1
%
|
-36.2
%
|
|
Total
|
4,797
|
100.0
%
|
6,241
|
100.0
%
|
-23.1
%
|
The
combined enrollment in the doctoral and graduate programs increased
20% in the fall term 2018 as compared to the fall 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 26.9% due to lower market demand among our targeted
student demographic. The overall 23.1% 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 all segments.
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. NAU
signed a transfer agreement with Harrison College on September 11,
2018, to provide Harrison College students with the opportunity to
transfer and complete their degree at National American University.
Approximately 300 Harrison College students have enrolled at NAU.
In addition, we are accepting enrollments from students at Canadian
institutions as we continue to build the infrastructure that will
allow us to scale our efforts while maintaining the compliance
requirements of various Canadian regulatory
authorities.
Expenses.
Expenses
consist of cost of educational services; selling, general and
administrative; auxiliary expense; cost of condominium sales; loss
on impairment and disposition of property; and loss on lease
termination and acceleration. 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 impairment represents the charges associated the
determination that the carrying value of fixed assets at the ground
locations should be removed from the balance sheet. The loss on
lease termination represents acceleration of future lease
obligations at ground locations that have closed and present no
future economic benefit.
Factors affecting comparability
Set
forth below are selected factors we believe have had, or which we
expect to have, a significant effect on the comparability of our
recent or future results of operations:
Introduction of new
programs and specializations.
We plan to develop additional
degree and diploma programs and specializations over the next
several years. When introducing new programs and specializations,
we invest in curriculum development, support infrastructure and
marketing research. Revenues associated with these new programs are
dependent upon enrollments, which are lower during the periods of
introduction. During this period of introduction and development,
the rate of growth in revenues and operating income has been, and
may be, adversely affected, in part, due to these factors.
Historically, as the new programs and specializations mature,
increases in enrollment are realized, cost-effective delivery of
instructional and support services are achieved, economies of scale
are recognized and more efficient marketing and promotional
processes are gained.
Seasonality
.
Our operations are generally subject to seasonal trends. While we
enroll students throughout the year, summer and winter quarter new
enrollments and revenue are generally lower than enrollments and
revenue in other quarters due to the traditional custom of summer
breaks and the holiday break in December and January. In addition,
we generally experience an increase in enrollments in the fall of
each year when most students seek to begin their post-secondary
education.
Results of Operations — Six Months Ended November 30, 2018
Compared to the Six Months Ended November 30, 2017
National American University Holdings, Inc.
The
following table sets forth the consolidated statements of
operations data as a percentage of total revenue for each of the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUE
|
100.0
%
|
100.0
%
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
Cost
of educational services
|
37.7
%
|
33.4
%
|
|
Selling,
general and administrative
|
77.6
%
|
77.4
%
|
|
Auxiliary
expense
|
3.1
%
|
3.5
%
|
|
Cost
of condominium sales
|
1.1
%
|
1.1
%
|
|
Loss
on lease termination and acceleration
|
9.9
%
|
0.9
%
|
|
Loss
(gain) on impairment and disposition of property and
equipment
|
20.6
%
|
2.5
%
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
150.0
%
|
118.8
%
|
|
|
|
|
|
OPERATING
LOSS
|
-50.0
%
|
-18.8
%
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
Interest
income
|
0.2
%
|
0.1
%
|
|
Interest
expense
|
-1.8
%
|
-1.0
%
|
|
Other
income — net
|
-0.3
%
|
0.2
%
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
-51.9
%
|
-19.5
%
|
For the
six months ended November 30, 2018, our total revenue was $31.2
million, a decrease of $8.6 million or 21.6%, as compared to total
revenue of $39.8 million for the same period in fiscal 2017. The
change was primarily due to a decrease in enrollment. The decrease
in enrollments is due to lower market demand among our targeted
student demographic. Our revenue for the six months ended November
30, 2018 consisted of $30 million from our NAU operations and $1.2
million from our other operations.
Total
operating expenses were $46.8 million for the six months ended
November 30, 2018, which is a decrease of $0.5 million compared to
$47.3 million in the same period in 2017. This overall decrease in
expense is the result of cost savings associated with the closure
and teach out of ground locations. In the second quarter of the
current fiscal year, the Company incurred fixed asset impairments
and lease acceleration charges of $9.5 million resulting from the
closure and teach out of ground locations. Cost of educational
services is down $1.5 million, or 11.6%, compared to the same
period last year. Selling, general, and administrative expenses are
down $6.6 million, or 21.5%, compared to the same period last year.
These expenses are lower due to the closure and teach out of ground
locations and lower enrollment. The number of administrators and
teachers at the ground locations is lower for the six months ended
November 30, 2018, compared to the six month period ended November
30, 2017.
The
operating loss was $15.6 million for the six months ended November
30, 2018, compared to $7.5 million for the same period in 2017. Net
loss attributable to the Company was $16.3 million for the six
months ended November 30, 2018 as compared to a net loss
attributable to the Company of $7.6 million for the six months
ended November 30, 2017. The primary reason for the increase in net
loss is the fixed asset impairments and lease acceleration charges
of $9.5 million resulting from the closure and teach out of ground
locations in the second quarter.
NAU
The
following table sets forth statements of operations data as a
percentage of total revenue for NAU only for each of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUE
|
100.0
%
|
100.0
%
|
|
OPERATING
EXPENSES:
|
|
|
|
Cost
of educational services
|
39.3
%
|
34.4
%
|
|
Selling,
general and administrative
|
77.3
%
|
77.0
%
|
|
Auxiliary
services
|
3.2
%
|
3.6
%
|
|
Cost
of condominium sales
|
0.0
%
|
0.0
%
|
|
Loss
on lease termination and acceleration
|
10.3
%
|
1.0
%
|
|
Loss
(gain) on impairment and disposition of property and
equipment
|
21.5
%
|
2.7
%
|
|
TOTAL
OPERATING EXPENSES
|
151.6
%
|
118.7
%
|
|
OPERATING
LOSS
|
-51.6
%
|
-18.7
%
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
Interest
Income
|
0.0
%
|
0.1
%
|
|
Interest
Expense
|
-1.3
%
|
-1.1
%
|
|
Other
Income - net
|
-0.3
%
|
0.0
%
|
|
LOSS
BEFORE INCOME TAXES
|
-53.2
%
|
-19.7
%
|
Total revenue
. The total revenue for NAU for the six months
ended November 30, 2018 was $30 million, a decrease of $8.7 million
or 22.5% as compared to total revenue of $38.7 million for the same
period in 2017. The decrease was primarily due to an enrollment
decrease. The enrollment decrease is due to lower market demand
among our targeted student demographic due in part to the current
improving economic climate, in which many working adults have
chosen not to attend school.
The
academic revenue for the six months ended November 30, 2018 was
$28.6 million, a decrease of $8.1 million or 22.1%, as compared to
academic revenue of $36.7 million for the same period in 2017. The
decrease was primarily due to lower enrollments over the prior
year. The auxiliary revenue for the six months ended November 30,
2018 was $1.4 million, a decrease of $0.6 million or 28.9%, as
compared to auxiliary revenue of $2.0 million for the same period
in 2017. This decrease in auxiliary revenue was primarily driven by
decreased enrollments and lower book sales.
Cost of educational services.
The
educational services expense for the six months ended November 30,
2018 decreased $1.5 million, to $11.8 million, as compared to $13.3
million for the same period in 2017. This decrease was due to
reduced instruction and instructional support staff due to lower
enrollments in certain locations and programs. The cost of
educational services as a percentage of total revenue for the six
months ended November 30, 2018, was 39.3%, as compared to 34.4% for
the same period in 2017 primarily due to fixed costs, such as
facility expenses, together with a decreasing revenue
base.
Selling, general and administrative
expenses.
The selling, general and administrative expenses
as a percentage of net revenue for the six months ended November
30, 2018 was 77.3%, as compared to 77.0% for the same period in
2017. The selling, general and administrative expenses for the six
months ended November 30, 2018 were $23.2 million, a decrease of
$6.6 million or 22.2%, as compared to selling, general and
administrative expenses of $29.8 million for the same period in
2017. The decreases were primarily due to lower bad debt expense as
a result of reduced revenue, improved account collections and a
reduction in labor costs as we continue to close and teach out
ground locations.
Loss on impairment of property and equipment
and acceleration of lease expense.
The loss on impairment of
property and equipment was $6.4 million during the six months ended
November 30, 2018. During November 2018, management determined that
the estimated future undiscounted cash flows associated with the
assets of all ground locations were not sufficient to recover their
carrying value. Accordingly, the carrying values of the assets,
primarily classroom and office equipment and leasehold
improvements, were reduced to zero. The charge for acceleration of
leases at the closed ground locations totaled $3.1 million in the
six months ended November 30, 2018.
Results
of Operations — Three Months Ended November 30, 2018 Compared
to the Three Months Ended November 30, 2017
National American University Holdings, Inc.
The
following table sets forth the consolidated statements of
operations data as a percentage of total revenue for each of the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUE
|
100.0
%
|
100.0
%
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
Cost
of educational services
|
35.7
%
|
32.0
%
|
|
Selling,
general and administrative
|
73.4
%
|
76.4
%
|
|
Auxiliary
expense
|
3.1
%
|
3.3
%
|
|
Cost
of condominium sales
|
1.1
%
|
1.0
%
|
|
Loss
on lease termination and acceleration
|
20.1
%
|
0.0
%
|
|
Loss
(gain) on impairment and disposition of property and
equipment
|
38.8
%
|
5.2
%
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
172.2
%
|
117.9
%
|
|
|
|
|
|
OPERATING
LOSS
|
-72.2
%
|
-17.9
%
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
Interest
income
|
0.2
%
|
0.1
%
|
|
Interest
expense
|
-1.9
%
|
-1.0
%
|
|
Other
income — net
|
-0.5
%
|
0.2
%
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
-74.4
%
|
-18.6
%
|
For the
three months ended November 30, 2018, our total revenue was $15.2
million, a decrease of $4.9 million or 24.2%, as compared to total
revenue of $20 million for the same period in fiscal 2017. The
change was primarily due to a decrease in average enrollments of
23.1% for the three months ended November 30, 2018 over the prior
year. The decrease in average enrollments is due to lower market
demand among our targeted student demographic. Our revenue for the
three months ended November 30, 2018 consisted of $14.6 million
from our NAU operations and $0.6 million from our other
operations.
Total
operating expenses were $26.1 million for the three months ended
November 30, 2018, which is an increase of $2.5 million compared to
$23.6 million in the same period in 2017. This overall increase in
expense is the result of the fixed asset impairments and lease
acceleration charges of $8.9 million resulting from the closure and
teach out of ground locations. Cost of educational services is down
$1 million, or 15.6%, compared to the same quarter last year.
Selling, general, and administrative expenses are down $4.2
million, or 27.3%, compared to the same quarter last year. These
expenses are lower due to a reduction in labor costs as we continue
to close and teach out ground locations.
The
operating loss was $11 million for the three months ended November
30, 2018, compared to $3.6 million for the same period in 2017. The
primary reason for the increase in net loss is the fixed asset
impairments and lease acceleration charges of $8.9 million
resulting from the closure and teach out of ground
locations
Net
loss for the three months ended November 30, 2018 increased by $7.5
million as compared to the same period in 2017 due to $4.8 million
lower revenue, an increase in fixed asset impairment and lease
acceleration charges of $7.9 million year-over-year, and a
reduction in cost of educational services and selling, general and
administrative expenses of $5.2 million.
NAU
The
following table sets forth statements of operations data as a
percentage of total revenue for NAU only for each of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUE
|
100.0
%
|
100.0
%
|
|
OPERATING
EXPENSES:
|
|
|
|
Cost
of educational services
|
37.2
%
|
33.0
%
|
|
Selling,
general and administrative
|
72.8
%
|
76.1
%
|
|
Auxiliary
services
|
3.2
%
|
3.4
%
|
|
Cost
of condominium sales
|
0.0
%
|
0.0
%
|
|
Loss
on lease termination and acceleration
|
21.0
%
|
0.0
%
|
|
Loss
(gain) on impairment and disposition of property and
equipment
|
40.4
%
|
5.3
%
|
|
TOTAL
OPERATING EXPENSES
|
174.6
%
|
117.8
%
|
|
OPERATING
LOSS
|
-74.6
%
|
-17.8
%
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
Interest
Income
|
0.0
%
|
0.1
%
|
|
Interest
Expense
|
-1.4
%
|
-1.1
%
|
|
Other
Income - net
|
-0.6
%
|
0.0
%
|
|
LOSS
BEFORE INCOME TAXES
|
-76.6
%
|
-18.8
%
|
Total revenue
. The total revenue for NAU for the three
months ended November 30, 2018 was $14.6 million, a decrease of
$4.9 million or 25.1% as compared to total revenue of $19.4 million
for the same period in 2017. The decrease was primarily due to an
average enrollment decrease of 23.1% for the three months ended
November 30, 2018 over the same period in 2017. The enrollment
decrease is due to lower market demand among our targeted student
demographic due in part to the current improving economic climate,
in which many working adults have chosen not to attend
school.
The
academic revenue for the three months ended November 30, 2018 was
$13.9 million, a decrease of $4.6 million or 25%, as compared to
academic revenue of $18.5 million for the same period in 2017. The
decrease was primarily due to lower enrollments over the prior
year. The auxiliary revenue for the three months ended November 30,
2018 was $0.7 million, a decrease of $0.3 million or 27.2%, as
compared to auxiliary revenue of $0.9 million for the same period
in 2017. This decrease in auxiliary revenue was primarily driven by
decreased enrollments and lower book sales.
Cost of educational
services.
The educational
services expense for the three months ended November 30, 2018
decreased $1 million, to $5.4 million, as compared to $6.4 million
for the same period in 2017. This decrease was due to reduced
instruction and instructional support staff due to lower
enrollments in certain locations and programs. The cost of
educational services as a percentage of total revenue for the three
months ended November 30, 2018, was 37.2%, as compared to 33% for
the same period in 2017 primarily due to fixed costs, such as
facility expenses, together with a decreasing revenue
base.
Selling, general and administrative expenses.
The selling,
general and administrative expenses as a percentage of net revenue
for the three months ended November 30, 2018 was 72.8%, as compared
to 76.1% for the same period in 2017. The selling, general and
administrative expenses for the three months ended November 30,
2018 were $10.6 million, a decrease of $4.2 million or 28.3%, as
compared to selling, general and administrative expenses of $14.8
million for the same period in 2017. The decreases were primarily
due to lower bad debt expense as a result of reduced revenue and
improved collections and a reduction in labor costs as we continue
to close and teach out ground locations.
Loss on impairment of property and equipment and acceleration of
lease expense.
The loss on impairment of property and
equipment was $5.9 million during the three months ended November
30, 2018. During November 2018, management determined that the
estimated future undiscounted cash flows associated with the assets
of all ground locations were not sufficient to recover their
carrying value. Accordingly, the carrying values of the assets,
primarily classroom and office equipment and leasehold
improvements, were reduced to zero. The charge for acceleration of
leases at the closed ground locations totaled $3.1 million in the
three months ended November 30, 2018.
Liquidity and Capital Resources
The
Company has experienced a decrease in revenue since 2013 due to
enrollment declines at National American University. This long-term
decline in revenue has resulted in increasing net losses and
decreases in liquidity and capital resources.
For the
six months ended November 30, 2018, cash used in operating
activities was $3.9 million and unrestricted cash and cash
equivalents decreased by $4.8 million from May 31, 2018. As a
result, as of November 30, 2018, the Company had $0.5 million of
unrestricted cash and cash equivalents and a working capital
deficiency of $8.7 million. These factors, among others, raise
substantial doubt regarding the Company’s ability to continue
as a going concern.
During
the quarter ended November 30, 2018, the Company implemented or
began implementing actions to address its liquidity needs as
follows:
●
During the quarter
ended November 30, 2018, the Company implemented an operational
plan that focuses on online academic programs and expanding its
programming and services related to strategic security,
counter-terrorism, and intelligence for the public and private
sectors. In alignment with this new operational change, NAU
suspended new student enrollment in 34 of its 128 programs and is
in the process of closing its ground-based locations. This
operational change may put additional pressure on the
Company’s revenue in the immediate future. However, the
Company expects a significant decrease in expenses with a lesser
impact on revenue in the long run. See note 7 for further details
on the Company’s operational change.
●
On December 19,
2018, the restriction on the Company’s $1.1 million
certificate of deposit with Great Western Bank expired, and the
cash balance has now become available for operating
purposes.
●
On December 17,
2018, the Company entered into an agreement to sell one out of two
available-for-sale aircrafts for proceeds of $0.6 million, which
management expects to close by February 2019. The estimated proceeds from the
other aircraft, as well as the savings from the related maintenance
and operating costs, are approximately $0.9 million. The Company
has been actively marketing and advertising to sell the second
aircraft, which management expects will be completed within the
next few quarters.
●
The Company
continued its internal restructuring, which will result in the
elimination of numerous positions throughout the organization in
the third quarter of fiscal 2019. The Company estimates an
additional $1.5 million in annual payroll reduction. This payroll
reduction is part of our continued cost-cutting initiatives to
better align expenses with the decreasing enrollment.
Should
the Company be unsuccessful with one or more of these actions,
should enrollment continue to decline significantly, or in the
event of significant unforeseen expenditures, management believes
that it would need to raise additional funding, including but not
limited to selling the Company’s real estate assets, to
continue as a going concern.
While
the Company believes that the above actions will be successful,
management is unable to conclude that it is probable that these
actions will provide sufficient liquidity to enable the Company to
meet its needs and, as such, there is substantial doubt about its
ability to continue as a going concern for at least twelve months
following the issuance of these financial
statements.
Operating Activities.
Net cash used in
operating activities for the six months ended November 30, 2018 was
$3.9 million, as compared to $3.7 million for the six months ended
November 30, 2017. This decrease in cash used in operating
activities is primarily due to an $8.6 million increase in net loss
offset by a net change in working capital items of $7.8
million.
Investing Activities.
Net cash used by
investing activities was $0.7 million for the six months ended
November 30, 2018, as compared to $0.8 million of net cash used in
investing activities for the six months ended November 30, 2017.
The decrease in the cash used by investing activities was primarily
due to reduction of purchases of property and equipment of $0.9
million and the reduction of purchases of available for sale
investments of $0.5 million, partially offset by the decrease of
proceeds from sale of available for sale investments of $1.1
million and the proceeds from sale of property and equipment of
$0.2K.
Financing Activities.
Net cash used in financing activities
was $0.2 million and $2.4 million for the six months ended November
30, 2018 and 2017, respectively. The reduction in cash used in
financing activities was due to a $2.2 million reduction in
dividends paid.
Contractual Obligations.
A summary of
future obligations under our various contractual obligations and
commitments as of May 31, 2018 was disclosed in our fiscal year
2018 Annual Report on Form 10-K. During the three months ended
November 30, 2018, there were no material changes to this
previously disclosed information with the exception of two lease
terminations which reduced the total future payments by
approximately $0.4 million.
LBITDA
LBITDA
consists of loss attributable to the Company plus income from
non-controlling interest, minus interest income, plus interest
expense, plus income taxes, plus depreciation and amortization. We
use LBITDA as a measure of operating performance. However, LBITDA
is not a recognized measurement under U.S. GAAP, and when analyzing
our operating performance, investors should use LBITDA in addition
to, and not as an alternative for, the results of operations as
determined in accordance with U.S. GAAP. Because not all companies
use identical calculations, our presentation of LBITDA may not be
comparable to similarly titled measures of other companies and is
therefore limited as a comparative measure. Furthermore, as an
analytical tool, LBITDA has additional limitations, including that
(a) it is not intended to be a measure of free cash flow, as it
does not consider certain cash requirements such as tax payments;
(b) it does not reflect changes in, or cash requirements for, our
working capital needs; and (c) although depreciation and
amortization are non-cash charges, the assets being depreciated and
amortized often will have to be replaced in the future, and LBITDA
does not reflect any cash requirements for such replacements, or
future requirements for capital expenditures or contractual
commitments. To compensate for these limitations, we evaluate our
results of operations by considering the economic effect of the
excluded expense items independently as well as in connection with
our analysis of cash flows from operations and through the use of
other financial measures.
We
believe LBITDA is useful to an investor in evaluating our operating
performance because it is widely used to measure a company’s
operating performance without regard to certain non-cash expenses
(such as depreciation and amortization) and expenses that are not
reflective of our core operating results over time. We believe
LBITDA presents a meaningful measure of corporate performance
exclusive of our capital structure, the method by which assets were
acquired and non-cash charges, and provides us with additional
useful information to measure our performance on a consistent
basis, particularly with respect to changes in performance from
period to period.
The
following table provides a reconciliation of net loss attributable
to the Company to LBITDA (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Attributable to the Company
|
(16,261
)
|
(7,605
)
|
(11,307
)
|
(3,777
)
|
|
Income
Attributable to Non-Controlling Interest
|
27
|
19
|
10
|
5
|
|
Interest
Income
|
(63
)
|
(49
)
|
(32
)
|
(29
)
|
|
Interest
Expense
|
565
|
417
|
282
|
208
|
|
Income
Taxes
|
18
|
(185
)
|
10
|
56
|
|
Depreciation
and Amortization
|
2,041
|
2,440
|
987
|
1,234
|
|
LBITDA
|
(13,673
)
|
(4,963
)
|
(10,050
)
|
(2,303
)
|
Off-Balance
Sheet Arrangements
Other
than operating leases, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a material
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Impact
of Inflation
We
increase tuition (usually once a year) to assist in offsetting
inflationary impacts without creating a hardship for students.
Consistent with our operating plan, a yearly salary increase in
December (supported by evaluations and recommendations from
supervisors) is considered to help alleviate the inflationary
effects on staff. There can be no assurance that future inflation
will not have an impact on operating results and financial
condition.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Market risk.
We have
no derivative financial instruments or derivative commodity
instruments. Cash in excess of current operating requirements is
invested in short-term certificates of deposit and money market
instruments.
Interest rate risk
.
Interest rate risk is managed by investing excess funds in cash
equivalents and marketable securities bearing variable interest
rates tied to various market indices. As such, future investment
income may fall short of expectations due to changes in interest
rates or losses in principal may occur if securities are forced to
be sold which have declined in market value due to changes in
interest rates. At November 30, 2018, a 10% increase or decrease in
interest rates would not have a material impact on future earnings,
fair values or cash flows.
Item
4. Controls and Procedures.
(a)
Evaluation of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures,” as this
term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act, that are designed to provide reasonable assurance that
information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Under
the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, our management has evaluated
the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this quarterly report on Form
10-Q. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures were not effective as of that date, due to a material
weakness in our internal control environment over financial
reporting as we did not have personnel with sufficient accounting
experience to ensure that more complex accounting analyses are
properly prepared and reviewed. Specifically, our controls were not
properly designed to provide reasonable assurance that we (1)
adequately prepare and review the forecast assumptions incorporated
into our acquired asset valuation model used for purchase
accounting purposes, (2) properly assess and conclude on long-lived
asset impairments at the end of each reporting period, and (3)
adequately prepare and review forecast assumptions used in our
preparation of forecasted financial information used to assess our
ability to continue as a going concern. The material weakness is
principally the result of insufficient accounting resources,
including a controller, and insufficient technical competence of
its financial personnel to appropriately perform and to monitor the
performance of control activities. These material weaknesses were
disclosed in Item 9A of the Company’s May 31, 2018 Form
10-K.
Based
on its evaluation of the effectiveness of the design and operation
of our internal control over financial reporting as of November 30,
2018, management has identified no new material weaknesses other
than those described in the Form 10-K. Although progress has been
made to address such material weaknesses, management has concluded
that the material weakness due to insufficient accounting resources
and insufficient technical competence of its financial personnel
continues to exist as of November 30, 2018, and therefore, has also
concluded that our disclosure controls and procedures were not
effective as of November 30, 2018 for the same reasons disclosed in
the Form 10-K.
(b)
Changes in Internal Control Over Financial Reporting
In
light of the material weaknesses in internal control over financial
reporting that continued to exist as of November 30, 2018,
management performed additional analysis and procedures to ensure
the unaudited consolidated financial statements were prepared in
accordance with U.S. GAAP. Accordingly, management believes that
the unaudited consolidated financial statements and schedules
included in this Form 10-Q fairly present in all material respects
our financial position, results of operations and cash flows for
the periods presented.
Management, with
oversight from the Audit Committee, is working to fully remediate
the material weaknesses in internal control over financial
reporting disclosed in the Form 10-K. No additional changes in our
internal control over financial reporting were identified during
the quarter ended November 30, 2018 that materially affected, or
are reasonably likely to materially affect, such internal control
over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings.
From
time to time, we may be a party to various claims, lawsuits or
other proceedings that arise in the ordinary course of our
business. We are not at this time, a party, as plaintiff or
defendant, to any legal proceedings, which, individually or in the
aggregate, would be expected to have a material effect on our
business, financial condition or results of operation.
Item
1A. Risk Factors.
New rulemaking by the Department of Education could result in
regulatory changes that could reduce our enrollment and revenue,
increase costs of operations, and adversely affect our
business.
Negotiated
rulemaking is a process whereby the Department of Education
consults with members of the postsecondary education community to
identify issues of concern and attempts to agree on proposed
regulatory revisions to address those issues before the Department
of Education formally proposes any regulations. If the
Department of
Education and negotiators cannot reach consensus on the entire
package of draft regulations, the
Department of
Education is authorized to propose regulations without being bound
by any agreements made in the negotiation process. In recent years,
the Department of Education has held negotiated rulemaking sessions
and published regulations on various topics, as described further
in “Item 1 – Business – Regulatory Matters
– Changes in Department of Education Regulations.” in
our most recent Form 10-K.
On
October 15, 2018, the Department of Education announced that it
would establish a new negotiated rulemaking committee to develop
proposed regulations relating to, among other things,
accreditation, distance learning and educational innovation, TEACH
grants, and participation in the Title IV programs by faith-based
educational entities. The negotiated rulemaking committee and three
related subcommittees are scheduled to meet in January, February,
and March of 2019. We are unable to predict when the Department of
Education may ultimately issue regulations on these topics, the
result of any other current or future rulemakings, or the impact of
such rulemakings on our business.
We
cannot predict with certainty when or whether the Department of
Education will propose or finalize regulations on topics that may
impact us, or the impact of any regulations resulting from the
Department of Education’s current or future rulemaking
activities. In addition, Congress may promulgate legislation, and
the executive branch may issue executive orders which would impact
us. Any such actions could reduce our enrollments, increase our
cost of doing business, and have a material effect on our business.
In addition, any regulations that reduce or eliminate our
students’ access to Title IV program funds, that require us
to change or eliminate programs or that increase our costs of
compliance could have an adverse effect on our
business.
The Department of Education may adopt regulations governing federal
student loan debt forgiveness that could result in liability for
amounts based on borrower defenses or affect the Department of
Education’s assessment of our institutional
capability.
On
November 1, 2016, the Department of Education published final
regulations that among other provisions, establish new standards
and processes for determining whether a Direct Loan Program
borrower has a defense to repayment on a loan due to acts or
omissions by the institution at which the loan was used by the
borrower for educational expenses. These final regulations (the
“2016 Borrower Defense Final Rule”) were published with
an effective date of July 1, 2017. Among other topics, the 2016
Borrower Defense Final Rule establishes permissible borrower
defense claims for discharge, procedural rules under which claims
will be adjudicated, time limits for borrowers’ claims, and
guidelines for recoupment by the Department of Education of
discharged loan amounts from institutions of higher education. The
2016 Borrower Defense Final Rule also prohibits schools from using
any pre-dispute arbitration agreements, prohibits schools from
prohibiting relief in the form of class actions by student
borrowers, and invalidates clauses imposing requirements that
students pursue an internal dispute resolution process before
contacting authorities regarding concerns about an institution. For
proprietary institutions, the 2016 Borrower Defense Final Rule
describes the threshold for loan repayment rates that will require
specific disclosures to current and prospective students and the
applicable loan repayment rate methodology. The 2016 Borrower
Defense Final Rule also establishes important new financial
responsibility and administrative capacity requirements for both
not-for-profit and for-profit institutions participating in the
Title IV programs. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit,
including for publicly traded institutions, if the SEC warns the
school that it may suspend trading on the school’s stock, the
school failed to timely file a required annual or quarterly report
with the SEC, or the exchange on which the stock is traded notifies
the school that it is not in compliance with exchange requirements
or the stock is delisted.
Other
events would will require a recalculation of an institution’s
composite score of financial responsibility, including, for a
proprietary institution whose score is less than 1.5, any
withdrawal of an owner's equity by any means, including by
declaring a dividend, unless the equity is transferred within the
affiliated entity group on whose basis the composite score was
calculated. The 2016 Borrower Defense Final Rule also sets forth
events that are discretionary triggers for letters of credit,
meaning that if any of them occur, the Department of Education may
choose to require a letter of credit, increase an existing letter
of credit requirement or demand some other form of surety from the
institution. The 2016 Borrower Defense Final Rule provides that if
an institution fails to meet the composite score requirement for
longer than three years under provisional certification, the
Department of Education may mandate additional financial protection
from the institution or any party with “substantial
control” over the institution. Such parties with
“substantial control” must agree to jointly and
severally guarantee the Title IV program liabilities of the
institution at the end of the three-year provisional certification
period. Under current regulations, a party may be deemed to have
"substantial control" over an institution if, among other factors,
the party directly or indirectly holds an ownership interest of 25%
or more of an institution, or is a member of the board of
directors, a general partner, the chief executive officer or other
executive officer of the institution.
On June
15, 2017, the Department of Education announced an indefinite delay
to its implementation of the 2016 Borrower Defense Final Rule, and
on June 16, 2017 published a notice of intent to establish a
negotiated rulemaking committee to develop proposed revisions to
the rule. On August 30, 2017, the Department of Education published
a Federal Register notice requesting nominations for individuals to
serve on this negotiated rulemaking committee, and on October 24,
2017, the Department of Education promulgated an interim final rule
under which the effective date of most substantive provisions of
the 2016 Borrower Defense Final Rule were delayed until July 1,
2019. The negotiated rulemaking committee sessions occurred in
November 2017, January 2018, and February 2018, during which the
Department of Education and negotiators failed to reach consensus
on a revised regulation. Additionally, on July 6, 2017, the
attorneys general of 18 states and the District of Columbia filed
suit against the Department of Education claiming that its delay of
the 2016 Borrower Defense Final Rule violated applicable law,
including the Administrative Procedure Act. On September 12, 2018,
the U.S. District Court for the District of Columbia issued a
decision concluding that the above-described delay of the 2016
Borrower Defense Final Rule was improper. In a series of opinions
and orders on September 17 and October 12, 2018, the Court
reinstated the 2016 Borrower Defense Final Rule and it is now in
effect. As described above, under the 2016 Borrower Defense Final
Rule, certain events would automatically trigger the need for a
school to obtain a letter of credit, including for publicly traded
institutions, if the SEC warns the school that it may suspend
trading on the school’s stock, the school failed to timely
file a required annual or quarterly report with the SEC, or the
exchange on which the stock is traded notifies the school that it
is not in compliance with exchange requirements or the stock is
delisted. On September 28, 2018, the Company received written
notice from The Nasdaq Stock Market (“Nasdaq”) that the
closing bid price for its common stock was not in compliance with
the minimum bid price requirement for continued inclusion on
Nasdaq. On December 26, 2018, the Company also received a written
deficiency notice from Nasdaq indicating that the Company no longer
meets the requirement to maintain a minimum market value of
publicly held shares. On December 31, 2018, the Company notified
Nasdaq of its intention to voluntarily delist from Nasdaq and to
transfer the listing of its common stock to the OTCQB Market (the
“OTCQB”), a centralized electronic quotation service
for over-the-counter securities. These events therefore may cause
the Department of Education to require that we provide a letter of
credit, cash, or other form of surety in order to remain eligible
to participate in the Title IV programs.
On July
31, 2018, the Department of Education published in the Federal
Register a proposed rule (the “2018 Borrower Defense Proposed
Rule”) which would replace most substantive provisions of the
2016 Borrower Defense Final Rule. The 2018 Borrower Defense
Proposed Rule would establish a federal standard for individual
borrowers to raise as a defense to repaying loans disbursed on or
after July 1, 2019. This proposed regulation would permit borrowers
to challenge repayment of loans based on misrepresentation, defined
to include acts or omissions by an institution which are false,
misleading or deceptive, and which are made with knowledge of their
falsity, deception, or misleading nature, or with reckless
disregard for the truth. The 2018 Borrower Defense Proposed Rule
seeks comment as to whether such a defense may be raised
affirmatively or may only arise defensively, out of a collection
action. The proposed regulation also would establish a five-year
window following a final decision on borrower defense for the
Department of Education to seek recoupment from an institution. The
2018 Borrower Defense Proposed Rule would permit schools to use
class-action waivers and pre-dispute arbitration agreements, but
would require schools to provide additional disclosures and
borrower counseling when including such provisions in enrollment
agreements. The 2018 Borrower Defense Proposed rule also sets forth
automatic and discretionary triggers under which the Department of
Education may require the school to provide a letter of credit,
cash, or other form of surety, or may agree to provide surety
through an offset of future Title IV funds for a six-to-twelve
month period. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit or other
surety, including for publicly traded institutions, if the SEC
warns the school that it may suspend trading on the school’s
stock, the school failed to timely file a required annual or
quarterly report with the SEC, or the exchange on which the stock
is traded notifies the school that it is not in compliance with
exchange requirements or the stock is delisted. Other events would
require a recalculation of an institution’s composite score
of financial responsibility including, for a proprietary
institution whose score is less than 1.5, any withdrawal of an
owner’s equity by any means, including by declaring a
dividend, unless the equity is transferred within the affiliated
group on whose basis the composite score was calculated; or for any
institution, the incursion of a borrower defense liability which
reduces the institution’s composite score to under 1.0. The
2018 Borrower Defense Proposed Rule also sets forth events that are
discretionary triggers for letters of credit or other forms of
surety, meaning that if any of them occur, the Department of
Education may choose to require a letter of credit, increase an
existing letter of credit requirement or demand some other form of
surety from the institution. The 2018 Borrower Defense Proposed
Rule also includes provisions regarding the treatment of operating
leases in the financial responsibility composite score methodology,
would more specifically define and require disclosures concerning
the composite score’s inclusion of debt obtained for
long-term purposes, and would revise limited aspects of the
composite score formula to account for changes in accounting
terminology. We cannot predict when the Department of Education
will publish a final rule, the extent to which that final rule may
differ from the 2018 Borrower Defense Proposed Rule, its
differences from the previously promulgated 2016 Borrower Defense
Final Rule, or the impact that any such revised rule might have on
our business. Any regulation that increases potential borrower
defense liabilities or affects the Department of Education’s
assessment of our institutional capability could have a material
effect on our business, financial condition and results of
operations.
If we do not meet specific financial responsibility standards
established by the Department of Education, we may be required to
post a letter of credit or accept other limitations to continue
participating in Title IV programs, or we could lose our
eligibility to participate in Title IV programs.
To
participate in Title IV programs, an eligible institution must
satisfy specific measures of financial responsibility prescribed by
the Department of Education, or post a letter of credit in favor of
the Department of Education and possibly accept other conditions on
its participation in Title IV programs. These financial
responsibility tests are applied to each institution on an annual
basis based on the institution’s audited financial
statements, and may be applied at other times, such as if the
institution undergoes a change in control. The Department of
Education may also apply such measures of financial responsibility
to the operating company and ownership entities of an eligible
institution and, if such measures are not satisfied by the
operating company or ownership entities, require the institution to
post a letter of credit in favor of the Department of Education and
possibly accept other conditions on its participation in Title IV
programs. The operating restrictions that may be placed on an
institution that does not meet the quantitative standards of
financial responsibility include being transferred from the
“advance payment” method of receiving Title IV program
funds to either the “reimbursement” or the
“heightened cash monitoring” system, which could result
in a significant delay in the institution’s receipt of those
funds. Limitations on, or termination of, our participation in
Title IV programs as a result of our failure to demonstrate
financial responsibility would limit our students’ access to
Title IV program funds, which could significantly reduce
enrollments and have a material effect on our business, financial
condition and results of operations.
As
described in more detail under “Item 1 – Business -
Regulatory Matters — Regulation of Federal Student Aid
Programs — Financial Responsibility,” in our most
recent Form 10-K, the Department of Education annually assesses our
financial responsibility through a composite score determination.
Our audited financial statements for the fiscal year ended May 31,
2017 indicated our composite score was 1.8, respectively, which is
sufficient to be deemed financially responsible under the
Department of Education’s requirements. Our audited financial
statements for the fiscal year ended May 31, 2018 indicate our
composite score is 1.3. This score is subject to a final
determination by the Department of Education once it receives and
reviews our consolidated audited financial statements for the 2018
fiscal year, but we believe it is likely that the Department of
Education will determine that we are “in the zone” and
that we will be required to operate under the “zone
alternative” requirements as well as any other requirements
that the Department of Education might impose in its discretion. If
we are unable to meet the minimum composite score or to comply with
the other standards of financial responsibility, and could not post
a required letter of credit or comply with the alternative bases
for establishing financial responsibility, then our students could
lose their access to Title IV program funding.
On
November 1, 2016, as part of the 2016 Borrower Defense Final Rule,
the Department of Education adopted final regulations that revise
its general standards of financial responsibility to include
various actions and events that would require institutions to
provide the Department of Education with irrevocable letters of
credit. On June 15, 2017, the Department of Education announced an
indefinite delay to its implementation of the 2016 Borrower Defense
Final Rule, and on June 16, 2017 published a notice of intent to
establish a negotiated rulemaking committee to develop proposed
revisions to the rule. Additionally, on July 6, 2017, the attorneys
general of 18 states and the District of Columbia filed suit
against the Department of Education claiming that its delay of the
2016 Borrower Defense Final Rule violated applicable law, including
the Administrative Procedure Act. On September 12, 2018, the U.S.
District Court for the District of Columbia issued a decision
concluding that the above-described delay of the 2016 Borrower
Defense Final Rule was improper. In a series of opinions and orders
on September 17 and October 12, 2018, the Court reinstated the 2016
Borrower Defense Final Rule and it is now in effect. Under the 2016
Borrower Defense Final Rule, certain events would automatically
trigger the need for a school to obtain a letter of credit,
including for publicly traded institutions, if the SEC warns the
school that it may suspend trading on the school’s stock, the
school failed to timely file a required annual or quarterly report
with the SEC, or the exchange on which the stock is traded notifies
the school that it is not in compliance with exchange requirements
or the stock is delisted. On September 28, 2018, the Company
received written notice from The Nasdaq Stock Market
(“Nasdaq”) that the closing bid price for its common
stock was not in compliance with the minimum bid price requirement
for continued inclusion on Nasdaq. On December 26, 2018, the
Company also received a written deficiency notice from Nasdaq
indicating that the Company no longer meets the requirement to
maintain a minimum market value of publicly held shares. On
December 31, 2018, the Company notified Nasdaq of its intention to
voluntarily delist from Nasdaq and to transfer the listing of its
common stock to the OTCQB Market (the “OTCQB”), a
centralized electronic quotation service for over-the-counter
securities. These events therefore may cause the Department of
Education to require that we provide a letter of credit, cash, or
other form of surety in order to remain eligible to participate in
the Title IV programs. We cannot predict with any certainty the
impact of these events on our business or operations.
In
addition, on August 30, 2017, the Department of Education published
a Federal Register notice requesting nominations for individuals to
serve on this negotiated rulemaking committee, and on October 24,
2017, the Department of Education promulgated an interim final rule
under which the effective date of most substantive provisions of
the 2016 Borrower Defense Final Rule were delayed until July 1,
2019. The rulemaking committee sessions occurred in November 2017,
January 2018, and February 2018, during which the Department of
Education and negotiators failed to reach consensus on a revised
regulation. On July 31, 2018, the Department of Education published
in the Federal Register the 2018 Borrower Defense Proposed Rule,
which would replace most substantive provisions of the 2016
Borrower Defense Final Rule. For additional information regarding
the 2016 Borrower Defense Final Rule and the 2018 Borrower Defense
Proposed Rule, see “— The Department of Education may
adopt regulations governing federal student loan debt forgiveness
that could result in liability for amounts based on borrower
defenses or affect the Department of Education’s assessment
of our institutional capability” in our most recent Form
10-K. We cannot predict with certainty the timing or substance of
any future regulations concerning financial responsibility
standards for Title IV program participation, nor the impact that
such regulations might have on our business. Any Department of
Education regulations that require NAU to post letters of credit or
accept other limitations to continue participating in Title IV
programs could materially affect our business, financial condition
and results of operations.
We may lose our eligibility to participate in Title IV programs if
our student loan default rates are too high.
An
educational institution may lose its eligibility to participate in
Title IV programs if, for three consecutive years, 30% or more of
its students who were required to begin repayment on their student
loans in the relevant fiscal year default on their payment by the
end of the next federal fiscal year or the subsequent fiscal year.
In addition, an institution may lose its eligibility to participate
in Title IV programs if the default rate of its students exceeds
40% for any single year.
On
September 24, 2018, we received notice from the Department of
Education that our official cohort default rate for federal fiscal
year 2015 was 23.7%. Our official cohort default rates for federal
fiscal years 2014 and 2013 were 24.1% and 23.4%,
respectively.
Any
increase in interest rates or reliance on “self-pay”
students, as well as declines in income or increases in job losses
for our students, could contribute to higher default rates on
student loans. Exceeding the student loan default rate thresholds
and losing eligibility to participate in Title IV programs would
have a material effect on our business, financial condition and
results of operations. Any future changes in the formula for
calculating student loan default rates, economic conditions or
other factors that cause our default rates to increase, could place
us in danger of losing our eligibility to participate in Title IV
programs, which would have a material effect on our business,
financial condition and results of operations.
If we close campus locations and affected students do not complete
their educational programs at another location or online, or
through transfer or teach-out with other postsecondary
institutions, we may be subject to repayment liabilities to the
U.S. Department of Education for discharged federal student
loans.
Department of
Education regulations provide that upon the closure of an
institution participating in the Title IV programs, including any
location thereof, certain students who had attended such an
institution or location may be eligible to obtain a “closed
school discharge” of their federal student loans related to
attendance at that institution or location, if they do not complete
their educational programs at another location or online, or
through transfer or teach-out with other postsecondary
institutions. In order to obtain a closed school discharge, a
student generally must have been enrolled or on an approved leave
of absence when the institution or location closed. Department of
Education regulations historically also provide that students who
withdraw from an institution or location within 120 days prior to
the closure may receive a closed school discharge; this time period
was expanded to 180 days under the 2016 Borrower Defense Final
Rule. Additionally, under the 2016 Borrower Defense Final Rule, the
Department of Education may grant automatic closed school
discharges to students who do not re-enroll in another Title
IV-participating institution within three years after becoming
unable to complete their educational program due to a closure of
their institution or institutional location. In the event that the
Department of Education grants closed school discharges to any
students affected by closures of our campus locations, it may
require NAU to repay those discharged amounts to it. We therefore
cannot predict the effect of such closures on our business,
financial condition, or results of operations.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
.
None
Item 3. Defaults Upon Senior
Securities
.
None.
Item
4. Mine Safety Disclosures.
Not
applicable.
Item
5. Other Information.
None.
Item
6. Exhibits.
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Exhibit
No.
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Description
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Certification of
Chief Executive Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Certification of
Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Certification of
Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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Certification of
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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101
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Interactive Data
Files
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