1. STATEMENT PRESENTATION AND BASIS OF CONSOLIDATION

6 Months Ended

Nov. 30, 2018

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.

National American University Holdings, Inc. 10-Q