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Item 7. Management’s Discussion and Analysis

2020-12-03 compared with 2019-12-06 · 278 added, 316 removed, 234 unchanged (72% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the "Selected Financial Data" and the consolidated financial statements and the related notes included elsewhere in this Report on Form 10-K.

You should read the following discussion together with the "Selected Financial Data" and the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations.

Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere in this Report on Form 10-K.

General Overview

We are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as well as welders and CNC machining technicians as measured by total average full-time enrollment and graduates.

We offer certificate, diploma or degree programs at 13 campuses across the United States.

We are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average full-time enrollment and graduates.

We also provide programs for welders and CNC machining technicians.

We offer certificate, diploma or degree programs at 12 campuses across the United States, excluding the Norwood, Massachusetts campus which was closed on July 31, 2020.

Additionally, we offer MSAT programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers.

We have provided technical education for 54 years.

Founded in 1965, we have provided technical education for more than 55 years and have graduated more than 220,000 technicians.

Our revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for discounts and scholarships that we sponsor and for refunds for students who wi t hdraw from our programs prior to specified dates.

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Approximately 99%, 99% and 98% of our revenues for each of the years ended September 30, 2020, 2019 and 2018, respectively, consisted of gross tuition.

We supplement our tuition revenues with additional revenues from sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs.

We supplement our tuition and fee revenues with additional revenues from sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs.

Through our proprietary loan program, we, in substance, provide the students who participate in this program with extended payment terms for a portion of their tuition.

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Average full-time enrollments vary depending on, among other factors, the number of continuing students at the beginning of a period, new student enrollments during the period, students who have previously withdrawn but decide to re-enroll during the period, graduations and withdrawals during the period.

Our average full-time enrollments are influenced by:

the attractiveness of our program offerings to high school graduates and potential adult students;

the effectiveness of our marketing efforts;

the depth of our industry relationships;

the strength of employment markets and long term career prospects;

the quality of our instructors and student services professionals;

the persistence of our students;

Our average full-time enrollments are influenced by the:

• Attractiveness of our program offerings to high school graduates and potential adult students;

• Effectiveness of our marketing efforts;

• Depth of our industry relationships;

• Strength of employment markets and long-term career prospects;

• Quality of our instructors and student services professionals;

• Persistence of our students;

the length of our education programs;

the availability of federal and alternative funding for our programs;

the number of graduates of our programs who elect to attend the advanced training programs we offer and general economic conditions.

• Availability of federal and alternative funding for our programs;

• Number of graduates of our programs who elect to attend the advanced training programs we offer and general economic conditions.

Our introduction of additional program offerings at existing campuses and opening additional campuses is expected to influence our average full-time enrollment.

We currently offer start dates at our campuses that range from every three to six weeks throughout the year in our core programs.

The number of start dates of advanced training programs varies by the duration of those programs and the needs of the manufacturers which sponsor them.

The number of start dates of advanced training programs varies by the

duration of those programs and the needs of the manufacturers which sponsor them.

Our tuition charges vary by type and length of our programs and the program level, such as core or advanced training.

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Most students at our campuses rely on funds received under various government-sponsored student financial aid programs, predominantly Title IV Programs and various veterans' benefits programs, to pay a substantial portion of their tuition and other education-related expenses.

Approximately 67% of our revenues, on a cash basis, were collected from funds distributed under Title IV Programs for the year ended September 30, 2019 .

This percentage differs from our Title IV percentage as calculated under the 90/10 rule due to the prescribed treatment of certain Title IV stipends under the rule.

Approximately 66% of our revenues, on a cash basis, were collected from funds distributed under Title IV Programs for the year ended September 30, 2020 as calculated under the 90/10 rule.

Additionally, approximately 17% of our revenues, on a cash basis, were collected from funds distributed under various veterans' benefits programs for the year ended September 30, 2020.

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2020 Overview

Higher student population levels as we began 2019 resulted in a 2.5% increase in our average full-time enrollment to 10,674 students for the year ended September 30, 2019 .

We started 11,652 students during the year ended September 30, 2019 , which represents an increase of 8.8% as compared to an increase of 1.2% for the year ended September 30, 2018 .

The increase in starts was primarily the result of the transformation plan initiatives and continued execution on the metro campus strategy.

Our revenues for the year ended September 30, 2019 were $331.5 million , an increase of $14.5 million , or 4.6% , from the prior year.

We had an operating loss of $7.8 million compared to an operating loss of $35.3 million for the same period in the prior year.

The increase in revenue was due to higher student count and tuition rate increases.

Additionally, there was an additional earning day, which resulted in an increase of approximately $1.3 million in revenue.

The improvement in operating results were also impacted by an overall decrease across various expense categories with the primary drivers being decreased advertising and contract and professional services expense.

Our results of operations were impacted by the opening of our new campus in Bloomfield, New Jersey in August 2018.

For the year ended September 30, 2019, this campus had revenues of $10.9 million and direct costs of $8.7 million.

We incurred a net loss of $7.9 million compared to a net loss of $32.7 million in the prior year.

The net loss for the year ended September 30, 2018, included an income tax benefit of $3.0 million due primarily to the release of certain valuation allowance, as impacted by the provisions of the Tax Cuts and Jobs Act.

During 2018, we announced and began implementation of a multi-year transformation plan.

This plan included opportunities for growth with select investments in marketing, admissions and student services.

During 2019, we realized measurable benefits from the transformation plan and we continued to refine and execute on these opportunities.

In addition to the transformation plan, we continue to focus on existing key strategies, including:

Impact of COVID-19

On March 19, 2020, we suspended all in-person classes at all of our campuses for the safety and protection of our students and staff, to help slow the spread of COVID-19 and to comply with state and local orders and restrictions.

Upon the suspension of all in-person classes, we provided all students with the opportunity to take a leave of absence or to continue their education via an online curriculum.

On March 25, 2020, we began offering the classroom portion of our training online so that the more than 8,000 students who elected to remain active in the program could continue their education remotely.

our training is a combination of classroom lectures and hands-on labs, there is a portion of most classes that cannot be delivered online and needs to be completed in-person at the campus labs.

We transitioned our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs.

On-campus labs have been redesigned to meet the health, safety and social distancing guidelines imposed by the CDC and state and local jurisdictions, while still meeting our accreditation and curriculum requirements.

Both the ED and the ACCSC granted institutions temporary approval to offer distance learning through December 31, 2020.

To afford us additional flexibility beyond the current temporary approval period(s), we have initiated the approval process with the ACCSC and the appropriate state agencies to be able to offer distance education and a blended learning format for all of our programs on a more permanent basis.

In May 2020, we resumed in-person labs at eight of our campus locations.

Four of our campuses resumed in-person labs in June 2020, and our final campus in Bloomfield, New Jersey resumed in-person labs on July 1, 2020.

As previously planned, we completed the teach-out of our Norwood, Massachusetts campus and it closed on July 31, 2020.

Once a student returns to campus for in-person labs, under the new guidelines it takes on average approximately six to nine weeks for that student to catch-up on the lab work that he was unable to complete during the campus closure and prior to his return.

Additionally, as of September 30, 2020, approximately 5% of students had not returned to campus to complete the in-person labs and remain only in the online portion of the curriculum, essentially only completing half of each course, while approximately 28% of students were completing catch up labs, but over an extended period of time.

We continue to recognize revenue ratably over the term of the course or program offered, taking into consideration those only completing the online curriculum, and the catch up period for active students and the impact it has on expected graduation dates.

As a result, as of September 30, 2020, we had deferred revenue of $6.1 million.

While we have reopened all of our campus locations, some students have delayed returning to campus for in-person labs even with the new social distancing protocols in place and remain on leave of absence or continue only with the online instruction portion of the curriculum.

If students continue to remain on a leave of absence, withdraw, or do not make up the required in person labs on a timely basis, our revenues could continue to be impacted in fiscal 2021.

Student Metrics

End of period undergraduate full-time student enrollment as of September 30, 2020 and 2019 was 12,524 and 12,363, respectively, representing growth of 1.3% despite the impacts of the COVID-19 pandemic.

We experienced a 2.0% decline in our average full-time enrollment to 10,462 students for the year ended September 30, 2020 as compared to the prior year period.

Excluding the Norwood, Massachusetts campus, we started 11,283 students during the year ended September 30, 2020, which represents a decrease of 2.4% from the same period during fiscal 2019.

The decrease in full-time enrollment and starts was primarily the result of the COVID-19 pandemic.

Our ability to start new students continues to be influenced by various factors including:

unemployment rates;

adverse media coverage, legislative hearings, regulatory actions and investigations by attorneys general and various agencies related to allegations of wrongdoing on the part of other companies within the education and training services industry, which have cast the industry in a negative light;

and the state of the general macro-economic environment and its impact on price sensitivity and the ability and willingness of students and their families to incur debt.

For more information, see Item 1A.

“Risk Factors.”

Our revenues for the year ended September 30, 2020 were $300.8 million, a decrease of $30.7 million, or 9.3%, from the prior year.

The decrease in revenue was primarily due to the COVID-19 pandemic as more students were on leave of absence during the year and our campuses suspended operations for a period of time.

While we have transitioned to a blended learning model, the COVID-19 pandemic has impacted the pace in which students are progressing through their programs.

As a result, our total graduates in fiscal 2020 decreased by 19% as compared to the prior year.

Additionally, our revenue was impacted by our exit of the Norwood, Massachusetts campus in July 2020.

We had $1.4 million of revenue from Norwood in fiscal 2020, compared to $8.5 million in the prior year.

Revenues were favorably impacted in fiscal 2020 from the opening of our Bloomfield, New Jersey campus in fiscal 2018.

We had $14.6 million in revenue from Bloomfield in fiscal 2020, as compared to $10.9 million in fiscal 2019 when the campus was still ramping up.

In fiscal 2020, we had an operating loss of $3.9 million, as compared to an operating loss of $7.8 million for the same period in the prior year.

Our operating expenses for fiscal 2020 decreased 10.2% as compared to the prior year primarily due to cost management initiatives, as well as decreases in compensation and benefit costs, depreciation expense, and contract and professional services expenses.

Productivity improvements and proactive cost actions have been a key part of our operating model for the past several years, and we continue to identify and execute on efficiency opportunities throughout our cost structure, while improving and investing in the overall student experience.

Net income for the year ended September 30, 2020 was $8.0 million, compared to a net loss of $7.9 million in the prior year, and includes a $10.7 million tax benefit resulting from the application of revised net operating loss carryback regulations from the CARES Act.

During fiscal 2020, we were granted approximately $33.0 million in HEERF funds under the CARES Act, with $16.5 million exclusively for emergency financial aid grants to students impacted by COVID-19 and $16.5 million to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus.

As of September 30, 2020, we have awarded all $16.5 million designated for student grants.

During the year ended September 30, 2020, we drew down $13.9 million of the institutional funds into our operating cash account as partial reimbursement for the $15.7 million of eligible costs incurred during fiscal 2020.

We continue to focus on the following key strategies as we identify opportunities for growth:

• Expanding into new geographic markets either organically or through strategic acquisitions;

Offering new programs, such as expanding our welding program to our Dallas/Ft.

Worth, Texas campus, and offering associate level degree programs at additional campus locations;

Maintaining and expanding relationships OEM partners and other employers to provide career opportunities and tuition reimbursement for our graduates;

• Offering new programs, such as expanding our welding program to additional campus locations, and offering associate level degree programs at additional campus locations;

• Maintaining and expanding our manufacturer brand partners and other employers to provide career opportunities and tuition reimbursement for our graduates;

• Identifying and executing on a variety of affordability initiatives for our students, including employer financial support and institutional scholarships and grants;

• Shifting perceptions and building advocacy with key policy makers and influencers.

Several factors continue to challenge our ability to start new students, including the following:

Unemployment;

during periods when the unemployment rate declines or remains stable as it has in recent years, prospective students have more employment options;

Adverse media coverage, legislative hearings, regulatory actions and investigations by attorneys general and various agencies related to allegations of wrongdoing on the part of other companies within the education and training services industry, which have cast the industry in a negative light;

Competition for prospective students continues to increase from within our sector and from market employers, as well as with traditional postsecondary educational institutions;

The state of the general macro-economic environment and its impact on price sensitivity and the ability and willingness of students and their families to incur debt.

Results of Operations

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Year Ended September 30,

2020 2019 2018

Revenues 100.0 % 100.0 % 100.0 %

Operating expenses:

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Loss from operations (1.3) % (2.4) % (11.1) %

Interest expense, net

Interest income (expense), net 0.4 % (0.5) % (0.6) %

Other income — % 0.6 % 0.4 %

Total other income (expense), net 0.4 % 0.1 % (0.2) %

Loss before income taxes (0.9) % (2.3) % (11.3) %

Income tax expense (benefit)

Income tax benefit (expense) 3.5 % (0.1) % 1.0 %

Net income (loss) 2.6 % (2.4) % (10.3) %

Preferred stock dividends 1.8 % 1.6 % 1.7 %

Loss available for distribution

Income (loss) available for distribution 0.8 % (4.0) % (12.0) %

Year Ended September 30, 2020 Compared to Year Ended September 30, 2019

Our revenues for the year ended September 30, 2019 were $331.5 million , an increase of $14.5 million , or 4.6% , as compared to revenues of $317.0 million for the year ended September 30, 2018 .

The 2.5% increase in our average full-time enrollment resulted in an increase in revenues of approximately $7.5 million.

Our revenues were impacted by tuition rate increases of up to 3.0%, depending on the program.

Additionally, there was an additional earning day, which resulted in an increase of approximately $1.3 million in revenue.

Our Bloomfield, New Jersey campus contributed revenues of $10.9 million compared to $0.6 million for the year ended September 30, 2018.

Our revenues for the year ended September 30, 2020 were $300.8 million, a decrease of $30.7 million, or 9.3%, as compared to revenues of $331.5 million for the year ended September 30, 2019.

Our average full-time student enrollment decreased by 2.0% primarily due to a higher number of students who went on a leave of absence during the three months ended June 30, 2020 due to the COVID-19 pandemic.

Additionally, timing of revenue recognition for active students has been impacted by additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed and by students retaking courses that were previously completed.

As a result of the catch up labs not yet completed, as of September 30, 2020, we have deferred revenue of $6.1 million.

We recognized $5.1 million on an accrual basis related to revenues and interest under our proprietary loan program for the year ended September 30, 2020, as compared to $6.8 million recognized for the year ended September 30, 2019.

The increase in revenue was partially offset by a $1.3 million decrease in industry training revenue, $0.7 million decrease in rephase revenue and $0.7 million increase in tuition discounts.

The decrease in overall fiscal year 2020 revenues was also partially attributable to a $1.5 million decrease in revenues from student-paid MSATs for the year ended September 30, 2020 as compared to the prior year period.

Educational services and facilities expenses

Our educational services and facilities expenses for the year ended September 30, 2020 were $155.9 million, representing a decrease of $22.4 million, or 12.6%, as compared to $178.3 million for the year ended September 30, 2019.

Our educational services and facilities expenses included direct costs for our Bloomfield, New Jersey campus of $8.1 million for the year ended September 20, 2019 as compared to $4.2 million for the year ended September 30, 2018.

The following table sets forth the significant components of our educational services and facilities expenses:

The following table sets forth the significant components of our educational services and facilities expenses (in thousands):

Year Ended September 30,

(In thousands)

Salaries expense $ 71,516 $ 78,195

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Bonus expense 1,023 550

Stock-based compensation 64 —

Compensation and related costs 84,514 94,717

Contract services expense

Depreciation and amortization expense 12,187 15,811

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Other educational services and facilities expenses (2,099) 11,560

Student training aids

Supplies and maintenance expense 15,282 10,840

Contract services expense 2,801 3,501

Taxes and licensing expense 2,319 3,479

Student expense $ 3,186 $ 2,626

Total educational services and facilities expense 155,932 178,317

Compensation and related costs decreased $10.2 million for the year ended September 30, 2020, as compared to the prior year:

Salaries expense decreased $0.7 million due to 7.3% lower headcount as compared to the prior year.

The decrease was partially offset by additional headcount needed for the addition of the Bloomfield, New Jersey campus and the new Welding program offered at the Dallas/Ft.

Worth, Texas campus.

Additionally, severance expense increased by $1.1 million for the Norwood, Massachusetts campus teach-out and additional campus right-sizing to support strategic initiatives.

Employee benefits and tax decreased $0.6 million due to lower headcount and lower cost per employee.

Contract services expense decreased $0.8 million during the year ended September 30, 2019 due to the overall business initiative to monitor expenses.

Depreciation and amortization expense increased $0.6 million during the year ended September 30, 2019 due to training aids and equipment at our Bloomfield, New Jersey campus that were placed into service.

Partially offsetting the increase was a higher percentage of our fixed assets becoming fully depreciated.

Occupancy costs decreased $0.8 million during the year ended September 30, 2019 due to changes in lease terms at our Houston, Texas;

Norwood, Massachusetts;

Exton, Pennsylvania and Rancho Cucamonga, California campuses to support the right-sizing campus initiative and generate meaningful operational efficiencies.

The decrease was partially offset by an increase in occupancy costs for our Bloomfield, New Jersey campus, which was still in the build-out phase during a major portion of the prior year.

Student training aids expense decreased $1.5 million during the year ended September 30, 2019.

The prior year included additional expenses for the Bloomfield, New Jersey campus build-out.

• Salaries expense decreased $6.7 million primarily due to an approximate 6% decrease in full-time employee headcount.

The decrease in headcount was primarily due to attrition and productivity improvements.

Furloughs enacted to offset revenue decreases from the COVID-19 pandemic also reduced salaries expense.

• Employee benefits and tax decreased $4.1 million also primarily due to lower headcount and lower cost per employee from implementing new benefit plans at the beginning of fiscal 2020.

Depreciation and amortization expense decreased $3.6 million during the year ended September 30, 2020 primarily due to the adoption of ASC 842 as of October 1, 2019, whereby the assets that were previously financed by finance obligations were converted to operating leases.

Subsequent to the adoption of ASC 842, the assets relating to the operating leases were

classified as “Right-of-use assets for operating leases” on the consolidated balance sheet and the related operating lease expense was rolled into “Occupancy costs” in the table above.

Occupancy costs increased $2.0 million during the year ended September 30, 2020.

The increase was primarily attributed to the adoption of ASC 842 as of October 1, 2019 as described above partially offset by cost reductions from closing our Norwood, Massachusetts campus, relocating and downsizing our headquarters facility, and downsizing our Exton, Pennsylvania campus.

Other educational services and facilities expense decreased by $13.7 million, which includes a $13.3 million credit for the year ended September 30, 2020 from the institutional HEERF funds for the reimbursement of allowable costs related to the changes in the delivery of instruction due to the coronavirus.

The allowable costs were included in the relevant line items above.

See Note 21 in the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further information on the HEERF funds.

Supplies and maintenance expense increased by $4.4 million primarily due to $5.7 million in laptops purchased for our students to support their transition to the new blended on-line learning model.

The laptops were one of the allowable costs qualifying for reimbursement from the institutional HEERF funds received.

Contract services expense decreased $0.7 million during the year ended September 30, 2020 primarily due to phasing out contracts with third parties and absorbing these responsibilities internally.

Taxes and licensing expenses decreased by $1.2 million, primarily due to a $0.7 million decrease in taxes and licensing fees for properties in use and a $0.4 million decrease in sales and use taxes.

Selling, general and administrative expenses

Our selling, general and administrative expenses for the year ended September 30, 2020 were $148.7 million, representing a decrease of $12.3 million, or 7.6%, as compared to $161.0 million for the year ended September 30, 2019.

Our selling, general and administrative expenses included direct costs for our Bloomfield, New Jersey campus of $0.7 million for the year ended September 20, 2019 as compared to $0.6 million for the year ended September 30, 2018.

The following table sets forth the significant components of our selling, general and administrative expenses:

The following table sets forth the significant components of our selling, general and administrative expenses (in thousands):

Year Ended September 30,

(In thousands)

Salaries expense $ 57,266 $ 57,827

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Advertising expense 39,707 41,163

Contract and professional services expense

Depreciation and amortization expense

Goodwill and intangible asset impairment expense

Other selling, general and administrative expenses 17,961 21,140

Compensation and related costs decreased $0.3 million for the year ended September 30, 2019 , as compared to the prior year:

Salaries expense decreased $2.0 million, primarily due to the decrease in salaries expense for our admissions representatives because the transition period for our admissions compensation structure ended.

The graduate-based incentive compensation is fully implemented and rewards admissions representatives for students who successfully complete our programs.

The decrease was partially offset by an increase due to the addition of selective key personnel to support transformation effort and severance related to the Norwood, Massachusetts campus teach-out.

Bonus expense increased $2.5 million, primarily as a result of our graduate-based admissions compensation, which is based on an increase in projected graduates.

Advertising expense decreased $3.6 million for the year ended September 30, 2019 , as compared to the prior year.

The decrease was attributable to targeted cost-efficient marketing efforts.

Local marketing efforts and continued strategies from the transformation plan were the focus for the year ended September 30, 2019.

Advertising expense as a percentage of revenues for the year ended September 30, 2019 was approximately 12.4%.

Contract and professional services expense decreased $2.0 million for the year ended September 30, 2019.

The decrease was attributed to no longer incurring fees for the engagement of a consulting firm related to the strategic transformation plan.

The engagement was terminated on October 17, 2018.

The decrease was partially offset by an increase for contract and professional services expense incurred for strategic initiatives and efforts to adopt new accounting pronouncements.

Goodwill and intangible asset impairment expense decreased $1.2 million for the year ended September 30, 2019.

At June 30, 2018, we recorded a goodwill impairment charge of $0.8 million and an intangible asset impairment charge of $0.4 million to write off the full carrying value of goodwill and intangible assets for BrokenMyth Studios, LLC (BMS), which we acquired in February 2016.

These expenses did not recur in 2019.

Other income (expense).

Our other income for the year ended September 30, 2019 was $0.1 million , an increase of $0.5 million as compared to other expense of $0.4 million for the year ended September 30, 2018 .

The improvement is attributable to increased sublease income.

Income taxes .

Our income tax expense for the year ended September 30, 2019 was $0.2 million, or 2.6% of pre-tax loss, compared to income tax benefit of $3.0 million, or 8.4% of pre-tax loss, for the year ended September 30, 2018.

The income tax expense for the year September 30, 2019 was related to certain state taxes, while the income tax benefit for the year September 30, 2018 was due primarily to the release of certain valuation allowance, as impacted by the provisions of the Tax Cuts and Jobs Act.

We will maintain a valuation allowance on our deferred tax assets until sufficient positive evidence exists to support its reversal.

The effective income tax rate in each period also differed from the federal statutory tax rate as a result of state income taxes, net of related federal income tax benefits.

See Note 12 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.

As discussed in Note 12, certain deductions and losses are subject to an annual Section 382 limitation.

The limitation will affect the timing of when these deductions and losses can be used and may cause us to make income tax payments even if a pre-tax loss is recorded in future periods.

The limitation may also cause the deductions and losses to expire unused.

As a result of the foregoing, we reported a net loss for the year ended September 30, 2019 of $7.9 million , as compared to $32.7 million for the year ended September 30, 2018 .

Preferred stock dividends.

On June 24, 2016, we sold 700,000 shares of Series A Preferred Stock for $70.0 million in cash, less $1.2 million in issuance costs.

Pursuant to this sale, we paid preferred stock cash dividends totaling $5.3 million during the years ended September 30, 2019 and September 30, 2018, respectively.

See Note 14 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion of the preferred stock transaction.

Loss available for distribution.

Loss available for distribution refers to net loss reduced by dividends on our Series A Preferred Stock.

As a result of the foregoing, we reported a loss available for distribution for the year ended September 30, 2019 of $13.1 million , as compared to $37.9 million for the year ended September 30, 2018 .

Year Ended September 30, 2018 Compared to Year Ended September 30, 2017

Our revenues for the year ended September 30, 2018 were $317.0 million, a decrease of $7.3 million, or 2.3%, as compared to revenues of $324.3 million for the year ended September 30, 2017.

The 4.3% decrease in our average full-time enrollment resulted in a decrease in revenues of approximately $13.7 million.

Our revenues were impacted by an increase in tuition discounts of $2.7 million, primarily attributable to our institutional grant program.

We recognized $5.7 million on an accrual basis related to revenues and interest under our proprietary loan program for the year ended September 30, 2018, as compared to $8.0 million recognized on a cash basis for the year ended September 30, 2017.

The decrease in revenue was partially offset by an increase of $0.7 million in industry training revenue and tuition rate increases of up to 2.5%, depending on the program.

Educational services and facilities expenses.

Our educational services and facilities expenses for the year ended September 30, 2018 were $182.6 million, representing an increase of $1.6 million, or 0.9%, as compared to $181.0 million for the year ended September 30, 2017.

The following table sets forth the significant components of our educational services and facilities expenses:

Year Ended September 30,

(In thousands)

Salaries expense

Employee benefits and tax

Bonus expense

Stock-based compensation

Compensation and related costs

Depreciation and amortization expense

Occupancy costs

Other educational services and facilities expense

Student expenses

Supplies and maintenance

Compensation and related costs decreased $3.1 million for the year ended September 30, 2018, as compared to the prior year:

Salaries expense decreased $1.7 million, largely attributable to a decrease in the number of employees needed to support our lower average student population.

Additionally, severance expense decreased by $0.7 million due to expense in the prior year period related to the November 2016 reduction in workforce.

The decreases were partially offset by the annual merit increase.

Bonus expense decreased $0.9 million due to an adjustment recorded to reflect anticipated zero attainment on one of our bonus plans.

During the prior year period, we paid holiday bonuses to employees in lieu of annual merit increases.

Student expenses increased $1.9 million during the year ended September 30, 2018 due to increased housing grants offered as part of the transformation plan initiatives.

Supplies and maintenance expense increased $0.9 million during the year ended September 30, 2018 due to the opening of our Bloomfield, New Jersey campus and real estate consolidation efforts at our Houston, Texas campus.

Occupancy costs increased $0.9 million during the year ended September 30, 2018 primarily due to the addition of our Bloomfield, New Jersey campus.

Selling, general and administrative expenses.

Our selling, general and administrative expenses for the year ended September 30, 2018 were $169.7 million, representing an increase of $24.6 million, or 17.0%, as compared to $145.1 million for the year ended September 30, 2017.

The following table sets forth the significant components of our selling, general and administrative expenses:

Year Ended September 30,

(In thousands)

Salaries expense

Employee benefits and tax

Bonus expense

Stock-based compensation

Compensation and related costs

Advertising expense

Bad debt expense

Contract services expense 4,307 8,401

Depreciation and amortization expense

Good will and intangible asset impairment expense

Other selling, general and administrative expenses

Professional services expense 3,828 4,690

Compensation and related costs increased $7.7 million for the year ended September 30, 2018, as compared to the prior year:

Salaries expense increased $2.2 million, primarily due to the addition of selective key personnel to support transformation efforts along with merit increases.

Employee benefits and tax increased $1.4 million, primarily due to an increase in self-insurance medical claims and an increase in employee headcount.

Bonus expense increased $5.1 million, primarily as a result of increased expense related to our graduate-based incentive compensation program for our admissions representatives.

The transition period for our admissions compensation structure continued through calendar year 2018.

During the transition period, we continued to accrue for and started to pay out graduate-based bonuses prior to realizing a decrease in salaries expense for our admissions representatives.

Stock-based compensation decreased $0.9 million, primarily due to a lower level of grants during 2018 as compared to 2017 and a change to market-based awards.

Contract services expense increased $6.4 million for the year ended September 30, 2018.

The increase is primarily attributable to our engagement of a consulting firm to advise on the optimization of our marketing and admissions processes.

We engaged this consulting firm to assist in the implementation of our transformation plan discussed above.

Advertising expense increased $6.2 million for the year ended September 30, 2018, as compared to the prior year.

The increase was attributable to local marketing efforts and new strategies from the transformation plan.

Advertising expense as a percentage of revenues for the year ended September 30, 2018 was approximately 14.1%.

Professional services expense increased $1.3 million for the year ended September 30, 2018, due to our adoption of ASC 606 effective October 1, 2017 as well as other services.

We recorded a goodwill impairment charge of $0.8 million and an intangible asset impairment charge of $0.4 million at June 30, 2018 to write off the full carrying value of goodwill and intangible assets for BMS.

These non-cash charges had no impact on liquidity or cash flows from operations.

Other expense.

Our other expense for the year ended September 30, 2018 was $0.4 million, a decrease of $0.5 million as compared to $0.9 million for the year ended September 30, 2017.

The decrease is primarily attributable to increased sublease income.

Income taxes .

Depreciation and amortization expense 963 1,480

Total selling, general and administrative expenses $ 148,700 $ 160,989

Compensation and related costs decreased by $2.2 million for the year ended September 30, 2020, as compared to the prior year:

• Salaries expense decreased by $0.6 million, primarily due to lower headcount compared to the prior year, partially offset by costs related to the retirement of Kimberly J.

McWaters, our former President and Chief Executive Officer, in October 2019.

• Employee benefits and tax decreased by $2.6 million, primarily due to lower headcount and lower cost per employee from implementing new benefit plans at the beginning of fiscal 2020.

• Stock-based compensation expense increased by $0.6 million, due to new awards granted during fiscal 2020.

There were no stock-based compensation awards granted during fiscal 2019.

Advertising expense decreased by $1.5 million for the year ended September 30, 2020, as compared to the prior year.

The decrease was attributable to targeted cost-efficient marketing efforts, with a shift away from television advertising toward digital media.

Advertising expense as a percentage of revenues remained relatively consistent at approximately 13.2% for the year ended September 30, 2020 as compared to 12.4% in the prior year.

Other selling, general and administrative decreased by $3.2 million.

Other selling, general and administrative expenses includes a $1.8 million credit for year ended September 30, 2020 from the institutional HEERF funds for the reimbursement of allowable costs related to the changes in the delivery of instruction due to the coronavirus.

The allowable costs were included in the relevant line items above.

See Note 21 of the notes to our Condensed Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further information on the HEERF funds.

Also contributing to the favorable cost trend were decreases in travel and entertainment of $1.5 million.

Contract services expense decreased $4.1 million for the year ended September 30, 2020.

The decrease was attributable to a one-time, non-recurring $4.0 million consultant termination fee recognized during the year ended September 30, 2019.

Professional services expense decreased by $0.9 million primarily attributable to a decreases in legal fees of $0.5 million and broad decreases related to external professional services due to cost control measures.

Other income (expense)

Other income for the year ended September 30, 2020 was $1.3 million, an increase of $1.1 million as compared to other expense of $0.1 million for the year ended September 30, 2019.

The $1.3 million of other income in fiscal 2020 was comprised primarily of interest income from our held-to-maturity investments.

The adoption of ASC 842 as of October 1, 2019 resulted in the de-recognition of the assets associated with our financing obligations, which were previously included in property and equipment during the year ended September 30, 2019 and contributed $3.2 million of interest expense during that period.

This was partially offset by tenant rent income in the prior period of $1.5 million which was not present during the year ended September 30, 2020 also due to the impacts of the ASC 842 adoption.

Our income tax benefit for the year ended September 30, 2020 was $10.6 million, or (408.7%) of pre-tax loss, compared to income tax expense of $0.2 million, or 2.6% of pre-tax loss, for the year ended September 30, 2019.

The income tax benefit for the year September 30, 2018 was due primarily to the release of certain valuation allowance, as impacted by the provisions of the Tax Cuts and Jobs Act.

The effective income tax rate in each period differed from the federal statutory tax rate of 21% primarily as a result of changes in the valuation allowance and state taxes.

Our income tax benefit or expense was impacted by a decrease of $6.1 million and an increase of $1.5 million in the valuation allowance during the years ended September 30, 2020 and 2019, respectively.

The significant decrease in the valuation allowance for the year ended September 30, 2020, and the related income tax benefit, was primarily attributable to the carryback of NOLs under the provisions of the CARES Act and the adoption of ASC 842 as of October 1, 2019.

The income tax expense for the year September 30, 2019 was related to certain state taxes.

We will maintain a valuation allowance on our deferred tax assets until sufficient positive evidence exists to support its reversal.

The effective income tax rate in each period also differed from the federal statutory tax rate as a result of state income taxes, net of related federal income tax benefits.

See Note 12 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.

As discussed in Note 12, certain deductions and losses are subject to an annual Section 382 limitation.

The limitation will affect the timing of when these deductions and losses can be used and may cause us to make income tax payments even if a pre-tax loss is recorded in future periods.

The limitation may also cause the deductions and losses to expire unused.

As a result of the foregoing, we reported net loss for the year ended September 30, 2018 of $32.7 million, as compared to $8.1 million for the year ended September 30, 2017.

See Note 13 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Preferred stock dividends

On June 24, 2016, we sold 700,000 shares of Series A Preferred Stock for $70.0 million in cash, less $1.2 million in issuance costs.

Pursuant to this sale, we paid preferred stock cash dividends totaling $5.3 million during the years ended September 30, 2018 and September 30, 2017, respectively.

See Note 14 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion of the preferred stock transaction.

Loss available for distribution.

Loss available for distribution refers to net loss reduced by dividends on our Series A Preferred Stock.

As a result of the foregoing, we reported a loss available for distribution for the year ended September 30, 2018 of $37.9 million, as compared to $13.4 million for the year ended September 30, 2017.

Pursuant to this sale, we paid preferred stock cash dividends totaling $5.3 million during the years ended September 30, 2020 and 2019, respectively.

See Note 15 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the preferred stock transaction.

Income (loss) available for distribution

Income (loss) available for distribution refers to net income (loss) reduced by dividends on our Series A Preferred Stock.

As a result of the foregoing, we reported income available for distribution for the year ended September 30, 2020 of $2.7 million, as compared to a loss available for distribution of $13.1 million for the year ended September 30, 2019.

For a discussion of the financial results of operations for the year ended September 30, 2019 compared to the year ended September 30 2018, refer to Part I, Item 7 of our 201 9 Form 10-K filed with the SEC on December 6, 2019 which discussion is incorporated herein by reference and which is available free of charge on the SEC’s website at www.sec.gov.

Non-GAAP Financial Measures

Our earnings before interest, tax, depreciation and amortization (“EBITDA”) for the years ended September 30, 2020, 2019 and 2018 were $9.4 million, $11.4 million and $(16.7) million, respectively.

We define EBITDA as net income (loss) for the year, before interest (income) expense, income tax (benefit) expense, and depreciation and amortization.

EBITDA is a non-GAAP financial measure which is provided to supplement, but not substitute for, the most directly comparable GAAP measure.

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Management also utilizes EBITDA as an internal performance measure.

To obtain a complete understanding of our performance, these measures should be examined in connection with net income (loss) and net cash provided by (used in) operating activities, determined in accordance with GAAP.

Since the items excluded from these measures are significant components in understanding and assessing financial performance under GAAP, these measures should not be considered to be an alternative to net income (loss) or net cash provided by (used in) operating activities as a measure of our operating performance or profitability.

Exclusion of items in the non-GAAP presentation should

not be construed as an inference that these items are unusual, infrequent or non-recurring.

Other companies, including other companies in the education industry, may calculate non-GAAP financial measures differently than we do, limiting their usefulness as a comparative measure across companies.

To obtain a complete understanding of our performance, this measure should be examined in connection with net income (loss) determined in accordance with GAAP.

Since the items excluded from this measure are significant components in understanding and assessing financial performance under GAAP, this measure should not be considered to be an alternative to net income (loss) or any other measures derived in accordance with GAAP as a measure of our operating performance or profitability.

Exclusion of items in our non-GAAP presentation should not be construed as an inference that these items are unusual, infrequent or non-recurring.

Other companies, including other companies in the education industry, may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure across companies.

Investors are encouraged to use GAAP measures when evaluating our financial performance.

EBITDA reconciles to net loss as follows:

EBITDA reconciles to net income (loss) as follows (in thousands):

Year Ended September 30,

Interest expense, net

Income tax expense (benefit)

2020 2019 2018

Net income (loss) $ 8,008 $ (7,868) $ (32,682)

Interest (income) expense, net (1,142) 1,729 1,885

Income tax (benefit) expense (10,602) 203 (3,015)

Depreciation and amortization (1)

13,150 17,291 17,074

EBITDA $ 9,414 $ 11,355 $ (16,738)

(1) Includes depreciation of training equipment obtained in exchange for services of $1.3 million, $1.4 million and $1.4 million for the years ended September 30, 2020, 2019 and 2018, respectively.

Student retention/completion rate

Our consolidated student retention/completion rate is based on new students that began one of our programs during a fiscal year and completed or are still attending as of September 30 of the following fiscal year.

The following table sets forth our consolidated student retention/completion rate during each of the periods indicated:

Year Ended September 30,

Consolidated student retention/completion

Liquidity and Capital Resources

Based on past performance and current expectations, we believe that our cash flows from operations and cash on hand will satisfy our working capital needs, capital expenditures, liquidity requirements and commitments associated with our existing operations as well as the expansion of programs at existing campuses through the next 12 months.

We believe that the strategic use of our cash resources includes subsidizing funding alternatives for our students.

Additionally, we regularly evaluate the repurchase of our common stock, consideration of strategic acquisitions, expansion of programs at existing campuses, opening additional campus locations and other potential uses of cash.

Based on past performance and current expectations, we believe that our cash flows from operations, cash on hand and short-term investments will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our existing operations, as well as the expansion of programs at existing campuses through the next 12 months.

Our cash position is available to fund strategic long-term growth initiatives, including opening additional metro campuses in new markets and the creation of new programs, such as welding, in existing markets with under-utilized campus facilities.

We had no line of credit or other long-term debt as of September 30, 2020.

Our aggregate cash and cash equivalents were $76.8 million as of September 30, 2020, an increase of $11.4 million from September 30, 2019.

Additionally, we had short-term held-to-maturity investments of $38.1 million as of September 30, 2020.

There were no held-to-maturity investments as of September 30, 2019.

We believe that additional strategic use of our cash resources may include funding new campuses or new programs in our existing campuses, purchase of real estate assets, consideration of strategic acquisitions, the repurchase of common stock, subsidizing funding alternatives for our students, and other potential uses of cash.

To the extent that potential acquisitions are large enough to require financing beyond cash from operations, cash and cash equivalents, and short-term investments, or we need capital to fund operations, new campus openings or expansion of programs at existing campuses, we may enter into a credit facility, issue debt or issue additional equity.

On February 20, 2020, we entered into an Underwriting Agreement with B.

Riley FBR, Inc., as representative of the several underwriters named therein, to issue and sell an aggregate of 6,782,610 shares of our common stock, par value $0.0001 per share, in a public offering, at a price to the public of $7.75 per share, pursuant to a registration statement on Form S-3 (Registration No.

333-236146) and the accompanying prospectus , including the related prospectus supplement , filed with the SEC (the “Offering”).

The Offering closed on February 25, 2020.

The net proceeds from the Offering were approximately $49.2 million, after deducting underwriting discounts and offering expenses.

We invested a portion of the net proceeds from the Offering in held-to-maturity securities, which primarily consist of corporate bonds from large cap industrial and selected financial companies with a minimum credit rating of A.

We intend to use the proceeds for working capital, capital expenditures, and other general corporate purposes, which may include the addition of new campuses, the expansion of existing programs and the development of new programs, and the purchase of real property and campus infrastructure.

We may also use a portion of the net proceeds to fund potential strategic acquisitions of complementary businesses, assets, services or technologies.

See Note 15 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the Offering.

On June 9, 2016, our board of directors voted to eliminate the quarterly cash dividend on our common stock.

On June 24, 2016, we issued 700,000 shares of Series A Preferred Stock for a total purchase price of $70.0 million.

The proceeds from the offering were used to fund strategic initiatives to drive growth including;

the transformation plan, expansion to new markets with metro campuses and the creation of new programs in existing markets with under-utilized campus facilities.

We may also use the proceeds to fund strategic acquisitions that complement our core business.

To the extent that potential acquisitions are large enough to require financing beyond cash from operations, cash and cash equivalents and investments on hand or we need capital to fund operations, new campus openings or expansion of programs at existing campuses, we may enter into a credit

facility, issue debt or issue additional equity.

We paid preferred stock cash dividends of $5.3 million during the years ended September 30, 2019 and September 30, 2018, respectively.

Currently, we do not have a credit facility agreement or bank debt.

To the extent that we enter into leasing transactions that result in financing obligations or capital leases, our interest expense would increase.

Our aggregate cash and cash equivalents were $65.4 million and $58.1 million as of September 30, 2019 and 2018 , respectively.

The proceeds from the offering were used to fund strategic initiatives to drive growth including the transformation plan, expansion to new markets with metro campuses and the creation of new programs in existing markets with under-utilized campus facilities.

We paid preferred stock cash dividends of $5.3 million during the years ended September 30, 2020, 2019, and 2018, respectively.

Our principal source of liquidity is operating cash flows and existing cash and cash equivalents.

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These factors, together with the timing of when our students begin their programs, affect our operating cash flow.

As discussed in more detail in Note 21 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K, during fiscal 2020 we were granted approximately $33.0 million in HEERF funds under the CARES Act, with $16.5 million exclusively for emergency financial aid grants to students impacted by COVID-19 and $16.5 million to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus.

As of September 30, 2020, we have awarded all $16.5 million designated for student grants.

As of September 30, 2020, $2.7 million remained in our G5 account with the ED and is not included in our “Cash and cash equivalents” on our consolidated balance sheet.

We drew down the remaining $1.8 million for the eligible costs incurred during the year ended September 30, 2020 in October 2020.

Operating Activities

Our net cash provided by operating activities was $21.7 million and net cash used in operating activities was $13.4 million for the years ended September 30, 2019 and 2018, respectively.

Our net cash provided by operating activities was $1.1 million for the year ended September 30, 2017 .

The cash provided by operating activities in 2019 was attributable to $18.9 million for non-cash and other items and a cash inflow of $10.7 million related to the change in our operating assets and liabilities, partially offset by a net loss of $7.9 million .

Changes in operating assets and liabilities

For the year ended September 30, 2019 , the changes in our operating assets and liabilities resulted in cash inflows of $10.7 million.

The inflows were primarily attributable to changes in deferred revenue, prepaid and other current assets, accounts payable and accrued expenses, notes receivable and other assets.

The inflow was partially offset by a change in deferred rent and receivables.

The increase in deferred revenue resulted in a cash inflow of $4.7 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at September 30, 2019 compared to September 30, 2018.

The decrease in prepaid expenses and other current assets resulted in a cash inflow of $3.2 million primarily related to the timing of the payment made for rent and general invoices compared to the prior year.

The cash inflow of $2.9 million in accounts payable and accrued expenses was related to the timing of payments for invoices and payroll.

The change in notes receivable resulted in a cash inflow of $1.3 million and was due to payments received on loans exceeding new loan originations.

The decrease in other assets resulted in a cash inflow of $1.0 million due to the timing of payments on certain leases and distribution of cash surrender life insurance related to our non-qualified deferred compensation plan.

Partially offsetting the cash inflows was a decrease in deferred rent and receivables, which contributed to cash outflows of $1.7 million and $1.5 million, respectively.

The decrease in deferred rent was due to the normal amortization of our leases across business units of $1.5 million.

The elimination of the deferred rent balance related to the Norwood, Massachusetts campus exit announced on February 18, 2019 also contributed to the decrease of approximately $0.9 million.

Partially offsetting the decrease was the lease extension for our Exton, Pennsylvania campus in August 2019 of approximately $0.7 million.

While the lease reduced the square footage by 71,000, the extension triggered a lease modification under GAAP.

The decision to exit the Norwood, Massachusetts campus

before the end of fiscal year 2020 and to reduce the square footage at our Exton, Pennsylvania campus is part of our strategy to move from large destination campuses to smaller campuses to generate meaningful operational efficiencies.

The cash outflow of $1.5 million in receivables was primarily attributable to the timing of cash receipts for a tenant improvement allowance from the lease extension at our Exton, Pennsylvania campus and cash receipts on behalf of our students.

For the year ended September 30, 2018, the changes in our operating assets and liabilities resulted in cash inflows of $2.2 million.

The inflows were primarily attributable to changes in deferred rent, accounts payable and accrued expenses and notes receivable.

The inflow was partially offset by changes in deferred revenue, receivables and prepaid expenses and other current assets.

The increase in deferred rent liability resulted in a cash inflow of $5.1 million and was primarily due to the Bloomfield, New Jersey campus partially offset by amortization of the deferred rent balance associated with our home office lease.

The inflow in accounts payable and accrued expenses of $3.9 million was primarily related to changes in our graduate-based incentive compensation program for our admissions representatives.

The change in notes receivable resulted in a cash inflow of $3.4 million and was due to payments received on loans exceeding new loan originations.

Partially offsetting the cash inflows was a decrease in deferred revenue, which resulted in a cash outflow of $5.7 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at September 30, 2018 compared to September 30, 2017.

The increase in receivables resulted in a cash outflow of $2.7 million and was primarily attributable to the timing of cash receipts on behalf of our students.

The increase in prepaid expenses and other current assets resulted in a cash outflow of $1.6 million primarily related to the timing of the payment made for general invoices compared to the prior year.

For the year ended September 30, 2017, the changes in our operating assets and liabilities resulted in cash outflows of $9.7 million.

The outflows were primarily attributable to changes in accounts payable and accrued expenses, deferred revenue, receivables and deferred rent.

The outflow was partially offset by a change in income tax from a receivable position to a payable position.

The decrease in accounts payable and accrued expenses resulted in a cash outflow of $4.8 million due to decreases in accrued bonus due to minimal attainment on our largest bonus plan compared to prior year, accrued severance from the November 2016 reduction in workforce and accrued expenses primarily due to the timing of when we purchase loans from our tuition loan program.

The decrease was partially offset by an increase in accrued advertising costs for marketing initiatives.

The decrease in deferred revenue resulted in a cash outflow of $3.1 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at September 30, 2017 compared to September 30, 2016.

The increase in receivables resulted in a cash outflow of $3.0 million, and was primarily attributable to the timing of cash receipts on behalf of our students, and a decrease in our allowance for doubtful accounts.

The decrease in deferred rent liability resulted in a cash outflow of $2.1 million and was primarily due to amortization of the deferred rent balance associated with our home office lease.

Partially offsetting the cash outflows was a change in income tax from a receivable position to a payable position, which resulted in a cash inflow of $2.7 million and was primarily due to the loss carrybacks that occurred in the prior year and the timing of tax payments and refunds.

Our net cash provided by operating activities was $11.0 million and $21.7 million for the years ended September 30, 2020 and 2019, respectively.

Our net cash used in operating activities was $13.4 million for the year ended September 30, 2018.

Net income, after adjustments for non-cash items, for the year ended September 30, 2020 provided cash of $48.8 million.

The non-cash items included $24.3 million for amortization of right-of-use assets for operating leases, $11.8 million for depreciation and amortization expense, $2.1 million for stock based compensation expense and $1.8 million for bad debt expense.

Changes in operating assets and liabilities for the year ended September 30, 2020 used cash of $37.7 million primarily due to the following:

• Changes in our operating lease liability as a result of rent payments used cash of $25.6 million.

• The increase in receivables used cash of $13.7 million and was primarily due to the timing of Title IV disbursements and other cash receipts on behalf of our students.

Due to the COVID-19 pandemic, more students took a leave of absence in fiscal 2020 and our campuses suspended operations for a period of time during the second quarter.

While we have transitioned to a blended learning model, the COVID-19 pandemic has impacted the pace in which students are progressing through their programs.

• The increase in the income taxes receivable used cash of $7.0 million and was primarily attributable to the CARES Act, which allowed us to carryback NOLs from fiscal 2019 and fiscal 2018.

• The decrease in deferred revenue used cash of $2.2 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relations to completion of their program at September 30, 2020 as compared to September 30, 2019.

We had deferred revenue of $6.1 million during fiscal 2020 due to students retaking courses that were previously completed and the additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed due to the COVID-19 pandemic.

• The increase in accounts payable and accrued expenses provided cash of $7.0 million primarily related to the timing of payments to vendors and bonus accruals.

Net loss, after adjustments for non-cash items, for the year ended September 30, 2019 provided cash of $11.1 million.

The non-cash items included $13.2 million for depreciation and amortization expense, $2.7 million for amortization of assets subject to financing obligations, $1.4 million for stock-based compensation expense, and $1.2 million for bad debt expense.

Changes in operating assets and liabilities for the year ended September 30, 2019 provided cash of $10.7 million primarily due to the following:

• The increase in deferred revenue provided cash of $4.7 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at September 30, 2019 as compared to September 30, 2018.

• The decrease in prepaid expenses and other current assets provided cash of $3.2 million primarily due to a decrease in prepaid rent.

• The increase in accounts payable and accrued expenses provided cash of $2.9 million primarily related to the timing of payments to vendors.

• The increase in receivables used cash of $1.5 million and was primarily attributable to the timing of Title IV disbursements and other cash receipts on behalf of our students.

Net loss, after adjustments for non-cash items, for the year ended September 30, 2018 used cash of $15.5 million.

The non-cash items included $13.0 million for depreciation and amortization expense, $2.7 million for amortization of assets subject to financing obligations, $1.8 million for stock-based compensation expense, $1.5 million for bad debt expense, and $1.2 million for goodwill impairment expense.

Changes in operating assets and liabilities for the year ended September 30, 2018 provided cash of $2.2 million primarily due to the following:

• The increase in deferred rent liability provided cash of $5.1 million and was primarily relating to the Bloomfield, New Jersey campus, partially offset by amortization of the deferred rent balance associated with our home office lease.

• The increase in accounts payable and accrued expenses provided cash of $3.9 million primarily related to changes in our graduate-based incentive compensation program for our admissions representatives.

• The change in notes receivable provided cash of $3.4 million and was due to payments received on loans exceeding new loan originations.

• The decrease in deferred revenue used cash of $5.7 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at September 30, 2018 compared to September 30, 2017.

• The increase in receivables used cash of $2.7 million and was primarily attributable to the timing of Title IV disbursements and other cash receipts on behalf of our students.

• The increase in prepaid expenses and other current assets used cash of $1.6 million primarily related to the timing of the payment made for general invoices compared to the prior year.

Investing Activities

For the year ended September 30, 2019 , cash used in investing activities was $6.2 million .

We had cash outflows of $6.5 million related to the purchase of property and equipment for our Dallas/Ft.

Worth, Texas campus for welding, real estate consolidation efforts and new and replacement training equipment for ongoing operations.

For the year ended September 30, 2020, net cash used in investing activities was $45.8 million.

The cash outflow was primarily related to the net purchase of $38.4 million in held-to-maturity investments with a portion of the proceeds received from the Offering.

Net cash used in investing activities was also impacted by purchases of property and equipment of $9.3 million which includes capital expenditures for the Houston, Texas and Long Beach, California welding program expansions.

For the year ended September 30, 2019, net cash used in investing activities was $6.2 million, primarily related to the purchase of property and equipment, primarily for our Dallas/Ft.

Worth, Texas campus for welding program expansion, and new and replacement training equipment for ongoing operations and consolidation efforts at our Houston, Texas campus.

For the year ended September 30, 2018, cash provided by investing activities was $27.1 million.

We had cash inflows of $40.9 million and $7.7 million from proceeds received from sales of trading securities and proceeds

received upon the maturity of our investments, respectively.

We had cash inflows of $40.9 million from proceeds received from sales of trading securities and $7.7 million from proceeds received upon the maturity of our investments.

We had cash outflows of $20.6 million related to the purchases of new training equipment for our Bloomfield, New Jersey campus and replacement training equipment for our ongoing operations.

For the year ended September 30, 2017, cash used in investing activities was $52.2 million.

We had cash outflows for the purchase of trading securities and held to maturity investments of $42.7 million and $9.7 million, respectively.

We had cash outflows of $8.2 million related to the purchases of new and replacement training equipment for our ongoing operations.

We had cash inflows of $3.6 million and $2.7 million from proceeds received upon the maturity of our investments and proceeds received from sales of trading securities, respectively.

Financing Activities

For the year ended September 30, 2019 , cash used in financing activities was $7.2 million .

We had cash outflows related primarily to the payment of preferred stock dividends of $2.6 million on September 26, 2019 and on March 28, 2019, respectively.

We also had cash outflows of $1.3 million related to the repayment of financing obligations.

For the year ended September 30, 2018, cash used in financing activities was $6.6 million.

We had cash outflows related primarily to the payment of preferred stock dividends of $2.6 million on September 25, 2018 and on March 28, 2018, respectively.

We also had cash outflows of $1.1 million related to the repayment of financing obligations.

For the year ended September 30, 2017, cash used in financing activities was $6.8 million and related primarily to the payment of preferred stock dividends of $2.6 million on September 25, 2017 and on March 28, 2017.

For the year ended September 30, 2020, net cash provided by financing activities was $43.1 million and related primarily to the net proceeds received from the Offering of $49.2 million, partially offset by our semi-annual payments of preferred stock dividends of $5.3 million.

For the year ended September 30, 2019, net cash used in financing activities was $7.2 million and related primarily to the semi-annual payments of preferred stock dividends of $5.3 million and payments of financing obligations of $1.3 million.

For the year ended September 30, 2018, net cash used in financing activities was $6.6 million and related primarily to the semi-annual payments of preferred stock dividends of $5.3 million and payments of financing obligations of $1.1 million.

Share Repurchase Program

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We may terminate or limit the share repurchase program at any time without prior notice.

During the year ended September 30, 2019 , we did not repurchase any shares.

The last stock repurchase under this stock repurchase program was during fiscal 2015.

As of September 30, 2020, we have repurchased 1,677,570 shares at an average price per share of $9.09 and a total cost of approximately $15.3 million under this program.

Under the terms of the Purchase Agreement, stock purchases under this program require the approval of a majority of the voting power of the Series A Preferred Stock.

Under the terms of the Certificate of Designations, stock purchases under this program require the approval of a majority of the voting power of the Series A Preferred Stock.

Contractual Obligations

The following table sets forth, as of September 30, 2019 , the aggregate amounts of our significant contractual obligations and commitments with definitive payment terms that will require cash outlays in the future.

The following table sets forth in thousands, as of September 30, 2020, the aggregate amounts of our significant contractual obligations and commitments with definitive payment terms that will require cash outlays in the future.

Payments Due by Period

(In thousands)

Less than 1-3 3-5 More than

Total 1 year years years 5 years

Operating leases, net of sublease income (1)

$ 192,815 $ 28,212 $ 46,012 $ 32,457 $ 86,134

Finance leases 268 135 133 — —

Purchase obligations (2)

Other long-term obligations (3)

8,582 1,399 2,515 2,813 1,855

Total contractual commitments $ 201,665 $ 29,746 $ 48,660 $ 35,270 $ 87,989

(1) Minimum rental commitments.

These amounts do not include property taxes, insurance or normal recurring repairs and maintenance.

These amounts do not include property taxes, insurance or ordinary course recurring repairs and maintenance.

(2) Includes all agreements to purchase goods or services of either a fixed or minimum quantity that are enforceable and legally binding.

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In the ordinary course of business, we enter into forward purchase commitments for service agreements for general operations and advertising.

Includes lease payments for our Lisle, Illinois and Long Beach, California campuses which are accounted for as financing obligations.

See Note 9 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.

Off-Balance Sheet Arrangements

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As of September 30, 2020, the total face amount of these surety bonds was approximately $16.8 million.

Additionally, our consolidated balance sheets do not reflect our operating lease obligations described above in "Contractual Obligations" or our proprietary loan program described below in "Critical Accounting Estimates".

Related Party Transactions

Information concerning certain related party transactions is included in Note 13 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K.

Information concerning certain related party transactions is included in Note 10 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K.

For a description of additional information regarding related party transactions, see the information included in our proxy statement for the 2021 Annual Meeting of Stockholders under the heading “Certain Relationships and Related Transactions.”

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Furthermore, our revenues for the first quarter ending December 31 are impacted by the closure of our campuses for a week in December for a holiday break and during which we do not earn revenue.

Operating income is negatively impacted during the initial start up of new campus openings.

We incur marketing and admissions costs as well as campus personnel costs in advance of the campus opening.

Typically we begin to incur such costs approximately 12 to 15 months in advance of the campus opening with the majority of the costs being incurred in the nine month period prior to a campus opening.

Year Ended September 30,

(Dollars shown in thousands) Year Ended September 30,

2020 2019 2018

Three Month Period Ending:

($'s in thousands)

Amount Percent Amount Percent Amount Percent

December 31 $ 87,234 29.0 % $ 83,050 25.1 % $ 81,156 25.6 %

March 31 82,717 27.5 % 81,746 24.7 % 80,663 25.5 %

June 30 54,483 18.1 % 79,042 23.8 % 74,890 23.6 %

September 30 76,327 25.4 % 87,666 26.4 % 80,256 25.3 %

Fiscal year $ 300,761 100.0 % $ 331,504 100.0 % $ 316,965 100.0 %

The decline in revenues from December 31, 2019 to June 30, 2020 was primarily due to the impact of the COVID-19 pandemic as a higher number of students went on leave of absence.

Additionally, timing of revenue recognition for active students was impacted by additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed and by students retaking courses that were previously completed.

The increase in revenue for the three months ended September 30, 2020 was primarily due to our successful transition of our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations

with hands-on labs.

During the year ended September 30, 2020, the COVID-19 pandemic impacted our financials throughout each of the three months ended March 31, 2020, June 30, 2020, and September 30, 2020, and therefore are not comparative for seasonality effects.

The increase in revenues for each of the three months ended December 31, 2018, March 31, 2019, June 30, 2019 and September 30, 2019, as compared to the same periods in fiscal 2018, was primarily due to an increase in our student population during fiscal 2019.

Income (Loss) from Operations

Year Ended September 30,

(Dollars shown in thousands) Year Ended September 30,

2020 2019 2018

Three Month Period Ending:

($'s in thousands)

The increase in revenues for the three month period ended December 31, 2018 was due to an additional earnings day with virtually flat average students, as compared to the same period in the prior year.

The increase in revenues for each of the three month periods ended March 31, 2019;

June 30, 2019 and September 30, 2019, as compared to the same periods in the prior year, was primarily due to an increase in our student population in

Management's continued cost control efforts contributed to the improvement in income (loss) from operations for the three month periods ended March 31, 2019;

June 30, 2019 and September 30, 2019, as compared to the same periods in the prior year.

The decline in loss from operations for the three month period ended December 31, 2018 was impacted by the one-time transformation consultant termination cost, as compared to the same period in the prior year.

The decline in revenues for each of the three month periods ended December 31, 2017;

March 31, 2018;

June 30, 2018 and September 30, 2018, as compared to the same periods in the prior year, was primarily due to a decrease in our student population in 2018 and 2017, respectively.

The decrease in our student population also contributed to a decline in income (loss) from operations for the three month periods ended December 31, 2017;

Amount Percent Amount Percent Amount Percent

December 31 $ 4,254 (109.9) % $ (7,205) 92.4 % $ (3,604) 10.2 %

March 31 (499) 12.9 % (5,580) 71.5 % (8,820) 25.0 %

June 30, 2018 and September 30, 2018, as compared to the same periods in the prior year.

June 30 (13,779) 356.0 % (455) 5.8 % (11,800) 33.5 %

September 30 6,153 (159.0) % 5,438 (69.7) % (11,051) 31.3 %

Fiscal year $ (3,871) 100.0 % $ (7,802) 100.0 % $ (35,275) 100.0 %

During the year ended September 30, 2020, the COVID-19 pandemic impacted our financials throughout each of the three months ended March 31, 2020, June 30, 2020 and September 30, 2020, and therefore, are not comparative for seasonality effects.

Management's continued cost control efforts contributed to the improvement in income (loss) from operations for the each of the three months ended March 31, 2019, June 30, 2019 and September 30, 2019, as compared to the same periods in fiscal 2018.

Effect of Inflation

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Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.

Our significant accounting policies are discussed in Note 2 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K.

Our significant accounting policies are discussed in Note 2 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K.

We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties.

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Revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for discounts and scholarships that we sponsor and for refunds for students who withdraw from our programs prior to specified dates.

We apply the five-step model outlined in Accounting Standards Codification Topic 606, Revenue from Contracts from Customers (ASC 606).Tuition and fee revenue is recognized ratably over the term of the course or program offered.

Approximately 99%, 98% and 98% of our revenues for each of the years ended September 30, 2019, 2018 and 2017, respectively, consisted of gross tuition.

We apply the five-step model outlined in Accounting Standards Codification Topic 606, Revenue from Contracts from Customers (“ASC 606”).

Tuition and fee revenue is recognized ratably over the term of the course or program offered.

Approximately 99%, 99% and 98% of our revenues for each of the years ended September 30, 2020, 2019 and 2018,

respectively, consisted of gross tuition.

The majority of our core programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration.

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Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and fees earned and is reflected as a current liability in our consolidated balance sheets because it is expected to be earned within the next 12 months.

During the year ended September 30, 2020, due to the COVID-19 pandemic, we transitioned our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs.

We continue to recognize revenue ratably over the term of the course or program offered.

However, revenue recognition for active students during the year ended September 30, 2020 was impacted by students retaking courses that were previously completed and the additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed due to COVID-19.

As of September 30, 2020 we had deferred revenue of $6.1 million related to students who were only attending courses online or with catch-up labs still outstanding.

We do not recognize revenue while a student is on a leave of absence.

Through our proprietary loan program, we, in substance, provide the students who participate in this program with extended payment terms for a portion of their tuition.

Based on historical collection rates, we can demonstrate that a portion of these loans are collectible, which results in a change in accounting due to our adoption of ASC 606 on October 1, 2017.

Accordingly, we recognize tuition and loan origination fees financed by the loan

and any related interest revenue under the effective interest method required under the loan based on this collection rate.

Accordingly, we recognize tuition and loan origination fees financed by the loan and any related interest revenue under the effective interest method required under the loan based on this collection rate.

We provide dealer technician training or instructor staffing services to manufacturers.

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We also monitor and consider external factors such as changes in the economic and regulatory environment.

We use an internal group of collectors, augmented by third party collectors as deemed appropriate, in our collection efforts.

We use an internal group of

collectors, augmented by third party collectors as deemed appropriate, in our collection efforts.

When a student with Title IV loans withdraws, Title IV rules determine if we are required to return a portion of Title IV funds to the lender.

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Although we believe that our allowance is adequate, if we underestimate the allowances required, additional allowances may be necessary, which would result in increased selling, general and administrative expenses in the period such determination is made.

We lease the majority of our administrative and educational facilities.

ASC 842, Leases , requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.

We adopted ASC 842 as of October 1, 2019 under a modified retrospective method without the recasting of comparative periods’ financial information.

To determine if a contract is or contains a lease, we considered whether (1) explicitly or implicitly identified assets have been deployed in the contract and (2) we obtain substantially all of the economic benefits from the use of that underlying asset and direct how and for what purpose the asset is used during the term of the contract.

If we determine a contract is, or contains, a lease, we assess whether the contract contains multiple lease components.

We consider a lease component to be separate from other lease components in the contract if (a) we can benefit from the right of use either on its own or together with other resources that are readily available to us and (b) the right of use is neither highly dependent on nor highly interrelated with the other right(s) to use underlying assets in the contract.

In contracts involving the use of real estate, we separate the right to use land from other underlying assets unless the effect of separating the land is insignificant to the resulting lease accounting.

We have elected to account for the lease and non-lease components as a single lease component.

For all leases we are a party to, the discount rate implicit in the lease was not readily determinable.

Therefore, we used our incremental borrowing rate for each lease to determine the present value of the lease.

We determined the incremental borrowing rate applicable to each lease through a model that represents the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

The incremental borrowing rate was applied to each lease based on the remaining term of the lease.

The components of lease expense are included in “Educational services and facilities” and “Selling, general and administrative” on the consolidated statement of operations, with the exception of interest on lease liabilities, which is included in “Interest expense.”

Goodwill represents the excess of the cost of an acquired business over the estimated fair values of the assets acquired and liabilities assumed.

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Any resulting impairment charge would be recognized as an expense in the period in which impairment is identified.

Our goodwill resulted primarily from the acquisition of our motorcycle and marine education business in 1998, and we recorded $8.2 million related to the goodwill allocated to our MMI Orlando, Florida campus that provides the related educational programs.

We perform our annual goodwill impairment assessment during the fourth quarter of each fiscal year.

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2020 Impairment Testing

We completed our 2019 annual goodwill impairment tests and determined that there was no impairment related to our MMI Orlando, Florida campus.

We performed a quantitative goodwill impairment test using the fair value method described above.

Our goodwill resulted primarily from the acquisition of our motorcycle and marine education business in 1998.

$8.2 million of goodwill is allocated to our MMI Orlando, Florida campus that provides the related educational programs.

Our analysis included consideration of macro-economic and company-specific factors as well as the synergies we are beginning to realize as we integrate this reporting unit into our business.

Actual experience may differ from the amounts included in our assessment, which could result in additional impairment of our goodwill in the future.

Our total recorded goodwill was $8.2 million as of September 30, 2019.

Our total recorded goodwill was $8.2 million as of September 30, 2020 which resulted primarily from the acquisition of our motorcycle and marine education business in 1998 in Orlando, Florida.

We completed our 2020 annual goodwill impairment tests and determined that it was more likely than not that the fair value of the reporting units exceeded the carrying value and concluded that goodwill was not impaired.

As a result, we did not perform the quantitative goodwill impairment evaluation.

Self-Insurance

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If our insurance claim trends were to differ significantly from our historic claim experience, we would make a corresponding adjustment to our insurance reserves.

Income taxes .

We are subject to the income tax laws of the United States, which are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities.

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The realization of deferred tax assets is dependent, in part, upon future taxable income.

the need for a valuation allowance, we consider all available evidence, including our historical profitability and projections of future taxable income.

In assessing the need for a valuation allowance, we consider all available evidence, including our historical profitability and projections of future taxable income.

If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance.

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Significant judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets.

Changes in the valuation allowance are included in our statement of operations as a charge or credit to income tax expense.

As a result of our assessment, income tax expense within our statements of loss was impacted by an increase of $2.6 million and a decrease of $5.6 million in the valuation allowance during the years ended September 30, 2019 and 2018, respectively.

Changes in the valuation allowance are included in our statement of operations as a charge or credit to income tax benefit (expense).

As a result of our assessment, income tax benefit (expense) within our statements of operations was impacted by a decrease of $6.1 million and an increase of $1.5 million in the valuation allowance during the years ended September 30, 2020 and 2019, respectively.

The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods if estimates of future taxable income during the carryforward period are increased, if objective negative evidence in the form of cumulative losses is no longer present and if additional weight may be given to subjective evidence such as our projections for growth.

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Recent Accounting Pronouncements

Information concerning recently issued accounting pronouncements which are not yet effective is included in Note 3 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K.

As indicated in Note 3, we are still evaluating the impact of the recently issued accounting pronouncements on our financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis