Dive Brief:

• For-profit college operator National American University Holdings (NAUH) said in a quarterly earnings report filed Monday that it came up short of the U.S. Department of Education's financial responsibility standards for receiving student aid through the Title IV program.
• According to NAUH, the department said in a letter received March 8 that it must post a letter of credit for either 50% ($36.7 million) or 15% ($11 million) of its Title IV awards in order to continue participating in the program. In the latter case, the university would receive provisional certification. The department did not immediately respond to Education Dive's request for more information.
• NAUH said it asked the department to reconsider the letter of credit requirement, as well as the timing and amount. NAUH said its financial position as of Feb. 28, as well as the department's letter of credit demand, raises "substantial doubt" about its ability to survive as a business for the next 12 months.

Dive Insight:

Any capital NAUH might need to put up for a letter of credit — which is a financial instrument issued by a bank, typically for a fee — could stress the operator's already tight liquidity. That raises the possibility the college system will file for creditor protection or fail.

In the quarter ending Feb. 28, NAUH had just $425,0000 in unrestricted cash and cash equivalents, as well as a working capital deficiency of $10 million. To make up for the cash shortage, the company sold one of two aircrafts it owns for $600,000 and sought mortgage financing on $5 million worth of property.

As NAUH looks to shed costs and restructure around its online program, its top and bottom lines are suffering. For the latest quarter, academic revenue fell 38% year over year to $10.5 million, and total revenue fell 36% during the period. The company's operating loss widened by $705,000 from a year ago to a total of $4.3 million, and its net loss increased nearly $860,000 to about $4.6 million during that time.

The for-profit first raised the possibility it might fail as a going concern in January, with its previous quarterly report. Since then the university's cash position has tightened and its working capital deficiency has expanded.

In its letter, the Ed Department mentioned the January filing, as well as National American's financial composite score of 1.1 for the year ending May 31, 2018 — below the threshold of 1.5 considered to be financially responsible. Along with asking for a letter of credit, the department put NAUH on heightened cash monitoring — which could further strain its liquidity — and required it to report its bi-weekly cash balance and monthly cash flow statements, according to the company.

At the end of February, NAUH enrolled 258 students at its physical locations — which it is rapidly closing — and 3,140 students online. That more modest scale can explain some of the problems with the company's enrollment, revenue and bottom line.

"At some level, even though they're offering programs online, they're still small," said Trace Urdan, a managing director at investment firm Tyton Partners who analyzes the for-profit sector, in an interview earlier this year. "And so to be heard, the ability to leverage your marketing expense across a large student population is difficult, and you kind of become too small to be efficient."