UNIVERSAL TECHNICAL INSTITUTE INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer 56 concluded that our disclosure controls and procedures as of September 30, 2020 were effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) or 15d-15(d) that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As we continue the process to adopt ASU 2016-02, Leases (Topic 842), we expect that there will be additional changes in internal controls over financial reporting. Report of Management on Internal Control Over Financial Reporting and Attestation Report of Independent Registered Public Accounting Firm Management’s Report on Internal Control Over Financial Reporting and the attestation report of our Independent Registered Public Accounting Firm with respect to the effectiveness of our internal control over financial reporting are included on pages F-2 and F-3, respectively, of this Annual Report on Form 10-K. Limitations on Effectiveness of Controls and Procedures Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors and instances of fraud, if any, within our company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks that internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures. Management’s Certifications The Company has filed as exhibits to its Annual Report on Form 10-K for the year ended September 30, 2020, filed with the SEC, the certifications of the Chief Executive Officer and the Chief Financial Officer of the Company required by Section 302 of the Sarbanes-Oxley Act of 2002. The Company has submitted to the NYSE the most recent Annual Chief Executive Officer Certification as required by Section 303A.12(a) of the NYSE Listed Company Manual. ITEM 9B. OTHER INFORMATION None. 57 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Below is a list of our Executive Officers and Board of Directors as of the year ended September 30, 2020: Executive Officer Position Jerome A. Grant Chief Executive Officer Troy R. Anderson Executive Vice President and Chief Financial Officer Sherrell E. Smith Executive Vice President, Campus Operations & Services Bart H. Fesperman Senior Vice President, Chief Commercial Officer Todd A. Hitchcock Senior Vice President, Chief Strategy and Transformation Officer Christopher E. Kevane Senior Vice President, Chief Legal Officer Sonia C. Mason Senior Vice President, Chief Human Resources Officer Eric A. Severson Senior Vice President, Admissions Lori B. Smith Senior Vice President, Chief Information Officer Director Position Robert T. DeVincenzi Chairman of the Board, Universal Technical Institute, Inc.; Principal Partner, Lupine Venture Group David A. Blaszkiewicz President and Chief Executive Officer, Invest Detroit George W. Brochick Executive Vice President - Strategic Development, Penske Automotive Group, Inc. Jerome A. Grant Chief Executive Officer, Universal Technical Institute, Inc. LTG (R) William J. Lennox Former Superindendent of the United States Military Academy at West Point; Chief Executive Officer, Lennox Strategies, LLC Kimberly J. McWaters Former President and Chief Executive Officer, Universal Technical Institute, Inc. Dr. Roderick R. Paige (1) Former United States Secretary of Education Christopher S. Shackelton Managing Partner, Coliseum Capital Management, LLC Linda J. Srere Former President, Young and Rubicam Advertising Kenneth R. Trammell Former Executive Vice President and Chief Financial Officer, Tenneco Inc. John C. White (1) Former Chairman of the Board, Universal Technical Institute, Inc. (1) Effective as of November 30, 2020, Dr. Paige and Mr. White each voluntarily retired from our board of directors. The information required by this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of fiscal year ended September 30, 2020. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of fiscal year ended September 30, 2020. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of fiscal year ended September 30, 2020. 58 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of fiscal year ended September 30, 2020. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2021 Annual Meeting of Stockholders within 120 days after the end of fiscal year ended September 30, 2020. 59 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this Annual Report on Form 10-K: (1) The financial statements required to be included in this Annual Report on Form 10-K are included in Item 8 of this Report. (2) All other schedules have been omitted because they are not required, are not applicable, or the required information is shown on the financial statements or the notes thereto. (3) Exhibits: Exhibit Number Description 3.1 Restated Certificate of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated December 23, 2004.) 3.2 Amended and Restated Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Form 8-K filed by the Registrant on June 30, 2016.) 3.3 Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock. (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant on June 24, 2016.) 3.4 Certificate of Designation, Preferences and Rights of Series E Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant on June 30, 2016.) 4.1 Specimen Certificate evidencing shares of common stock. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) 4.2 Registration Rights Agreement, dated December 16, 2003, between the Registrant and certain stockholders signatory thereto. (Incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) 4.3 Registration Rights Agreement dated June 24, 2016 by and between the Registrant and Coliseum Holdings I, LLC. (Incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Registrant on June 24, 2016.) 4.4 Rights Agreement, dated as of June 29, 2016, by and between the Registrant and Computershare Inc., as Rights Agent. (Incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Registrant on June 30, 2016.) 4.5 Amendment to Rights Agreement, dated as of February 21, 2017, by and between the Registrant and Computershare Inc., as Rights Agent. (Incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Registrant on February 21, 2017.) 4.6+ Description of Securities. 10.1* Universal Technical Institute Executive Benefit Plan, effective March 1, 1997. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) 10.2* Management 2002 Option Program. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) 10.3* Universal Technical Institute, Inc. 2003 Incentive Compensation Plan (as amended March 1, 2017). (Formerly known as the 2003 Stock Incentive Plan). (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on March 3, 2017.) 10.4.1* Form of Restricted Stock Unit Agreement. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on September 11, 2013.) 10.4.2* Form of Restricted Stock Unit Agreement. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on September 10, 2014.) 60 Exhibit Number Description 10.4.3* Form of Performance Unit Award Agreement. (Incorporated by reference to Exhibit 10.4.3 to the Annual Report on Form 10-K filed by the Registrant on December 1, 2017.) 10.4.4* Form of Performance Unit Award Agreement. (Incorporated by reference to Exhibit 10.4.4 to the Annual Report on Form 10-K filed by the Registrant on December 1, 2017.) 10.4.5* Form of Performance Cash Award Agreement. (Incorporated by reference to Exhibit 10.4.5 to the Annual Report on Form 10-K filed by the Registrant on December 1, 2017.) 10.4.6* Form of Performance Cash Award Agreement. (Incorporated by reference to Exhibit 10.4.6 to the Annual Report on Form 10-K filed by the Registrant on December 1, 2017.) 10.5 Lease Agreement, dated July 2, 2001, as amended February 27, 2015, between Delegates LLC, as landlord, and The Clinton Harley Corporation, as tenant. (Incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430), and Exhibit 10.1 to the Form 10-Q filed by the Registrant on May 1, 2015.) 10.6 Form of Indemnification Agreement by and between the Registrant and its directors and officers. (Incorporated by reference to Exhibit 10.7 to the Form 8-K filed by the Registrant on August 6, 2014.) 10.7* Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on April 6, 2010.) 10.8* Employment Agreement, dated April 8, 2014, between the Registrant and Kimberly J. McWaters. (Incorporated by reference to Exhibit 10.1 to a Form 8-K filed by the Registrant on April 11, 2014.) 10.11.1* Offer Letter, dated as of August 2, 2012, between the Registrant and Sherrell E. Smith. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on August 21, 2012.) 10.11.2* Addendum Letter, dated as of August 7, 2012, between the Registrant and Sherrell E. Smith. (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Registrant on August 21, 2012.) 10.13* Form of Retention/Recognition Bonus Agreement. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on June 13, 2011.) 10.14* Universal Technical Institute, Inc. Severance Plan, as amended October 1, 2019, (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on September 24, 2019.) 10.15 Securities Purchase Agreement dated June 24, 2016, between the Registrant and Coliseum Holdings I, LLC. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on June 24, 2016.) 10.16* Retirement Agreement and Release of Claims, dated as of October 31, 2019, by and between the Registrant and Kimberly J. McWaters, as amended. (Incorporated by reference to Exhibit 10.16 to the Form 10-K filed by the Registrant on December 6, 2019.) 10.17* Employment Agreement, dated November 1, 2019, by and between the Registrant and Jerome A. Grant. (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Registrant on October 21, 2019.) 21.1+ Subsidiaries of the Registrant. 23.1+ Consent of Deloitte & Touche LLP. 24.1 Power of Attorney. (Included on signature page.) 31.1+ Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2+ Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1+ Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2+ Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. 61 Exhibit Number Description 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. * Indicates a contract with management or compensatory plan or arrangement. + Filed herewith. 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 3, 2020 UNIVERSAL TECHNICAL INSTITUTE, INC. By: /s/ Jerome A. Grant Jerome A. Grant, Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerome A. Grant and Troy R. Anderson, or either of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any documents related to this report and filed pursuant to the Securities Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Jerome A. Grant Chief Executive Officer (Principal Executive Officer) December 3, 2020 Jerome A. Grant /s/ Troy R. Anderson Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) December 3, 2020 Troy R. Anderson /s/ Robert T. DeVincenzi Chairman of the Board December 3, 2020 Robert T. DeVincenzi /s/ David A. Blaszkiewicz Director December 3, 2020 David A. Blaszkiewicz /s/ George W. Brochick Director December 3, 2020 George W. Brochick /s/ William J. Lennox, Jr. Director December 3, 2020 William J. Lennox, Jr. /s/ Kimberly J. McWaters Director December 3, 2020 Kimberly J. McWaters 63 /s/ Christopher S. Shackelton Director December 3, 2020 Christopher S. Shackelton /s/ Linda J. Srere Director December 3, 2020 Linda J. Srere /s/ Kenneth R. Trammell Director December 3, 2020 Kenneth R. Trammell 64 UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number Management’s Report on Internal Control Over Financial Reporting F- 2 Reports of Independent Registered Public Accounting Firm F- 3 Consolidated Balance Sheets as of September 30, 2020 and 2019 F- 5 Consolidated Statements of Operations for the years ended September 30, 2020, 2019 and 2018 F- 6 Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2020, 2019 and 2018 F- 7 Consolidated Statements of Cash Flows for the years ended September 30, 2020, 2019 and 2018 F- 8 Notes to Consolidated Financial Statements F- 10 F- 1 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company and for assessing the effectiveness of internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes policies and procedures that pertain to maintaining records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of the company’s assets; providing reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management and director authorization; and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2020. The effectiveness of the Company’s internal control over financial reporting as of September 30, 2020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein. F- 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Universal Technical Institute, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Universal Technical Institute, Inc. and subsidiaries (the “Company”) as of September 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 30, 2020, of the Company and our report dated December 3, 2020 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change in method of accounting for leases as a result of the adoption of Accounting Standards Codification Topic 842, Leases, effective October 1, 2019. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Phoenix, Arizona December 3, 2020 F- 3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Universal Technical Institute, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Universal Technical Institute, Inc. and subsidiaries (the "Company") as of September 30, 2020 and 2019, the related consolidated statements of operations, of shareholders’ equity, and of cash flows for each of the three years in the period ended September 30, 2020, and the related notes (“collectively referred to financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 3, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 3 to the consolidated financial statements, effective October 1, 2019, the Company adopted FASB ASC 842, Leases , using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ DELOITTE & TOUCHE LLP Phoenix, Arizona December 3, 2020 We have served as the Company's auditor since 2015. F- 4 UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except par value and per share amounts) September 30, 2020 September 30, 2019 Assets Cash and cash equivalents $ 76,803 $ 65,442 Restricted cash 12,116 15,113 Held-to-maturity investments 38,055 — Receivables, net 35,411 17,937 Notes receivable, current portion 5,184 5,227 Prepaid expenses 6,121 7,054 Other current assets 6,489 7,331 Total current assets 180,179 118,104 Property and equipment, net 72,743 104,126 Goodwill 8,222 8,222 Notes receivable, less current portion 27,609 29,852 Right-of-use assets for operating leases 144,663 — Other assets 8,565 10,222 Total assets $ 441,981 $ 270,526 Liabilities and Shareholders’ Equity Accounts payable and accrued expenses $ 51,891 $ 45,878 Deferred revenue 40,694 42,886 Accrued tool sets 3,148 2,586 Operating lease liability, current portion 23,666 — Financing obligation, current — 1,554 Other current liabilities 2,241 3,940 Total current liabilities 121,640 96,844 Deferred tax liabilities, net 674 329 Deferred rent liability — 10,326 Financing obligation — 39,161 Operating lease liability 134,089 — Other liabilities 9,056 9,578 Total liabilities 265,459 156,238 Commitments and contingencies (Note 14) Shareholders’ equity: Common stock, $ 0.0001 par value, 100,000 shares authorized, 32,730 and 32,499 shares issued, and 32,647 and 25,634 shares outstanding as of September 30, 2020 and 2019, respectively 3 3 Preferred stock, $ 0.0001 par value, 10,000 shares authorized; 700 shares of Series A Convertible Preferred Stock issued and outstanding as of September 30, 2020 and 2019, liquidation preference of $ 100 per share — — Paid-in capital - common 141,002 187,493 Paid-in capital - preferred 68,853 68,853 Treasury stock, at cost, 82 and 6,865 shares as of September 30, 2020 and 2019, respectively ( 365 ) ( 97,388 ) Retained deficit ( 32,971 ) ( 44,673 ) Total shareholders’ equity 176,522 114,288 Total liabilities and shareholders’ equity $ 441,981 $ 270,526 The accompanying notes are an integral part of these consolidated financial statements. F- 5 UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended September 30, 2020 2019 2018 Revenues $ 300,761 $ 331,504 $ 316,965 Operating expenses: Educational services and facilities 155,932 178,317 182,589 Selling, general and administrative 148,700 160,989 169,651 Total operating expenses 304,632 339,306 352,240 Loss from operations ( 3,871 ) ( 7,802 ) ( 35,275 ) Other income (expense): Interest income 1,152 1,491 1,425 Interest expense ( 10 ) ( 3,220 ) ( 3,310 ) Equity in earnings of unconsolidated affiliate — 399 385 Other income 135 1,467 1,078 Total other income (expense), net 1,277 137 ( 422 ) Loss before income taxes ( 2,594 ) ( 7,665 ) ( 35,697 ) Income tax benefit (expense) 10,602 ( 203 ) 3,015 Net income (loss) $ 8,008 $ ( 7,868 ) $ ( 32,682 ) Preferred stock dividends 5,264 5,250 5,250 Income (loss) available for distribution $ 2,744 $ ( 13,118 ) $ ( 37,932 ) Earnings per share (See Note 17): Net income (loss) per share - basic $ 0.05 $ ( 0.52 ) $ ( 1.51 ) Net income (loss) per share - diluted $ 0.05 $ ( 0.52 ) $ ( 1.51 ) Weighted average number of shares outstanding: Basic 29,812 25,438 25,115 Diluted 30,113 25,438 25,115 The accompanying notes are an integral part of these consolidated financial statements. F- 6 UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Preferred Stock Paid-in Capital - Common Paid-in Capital - Preferred Treasury Stock Retained Earnings (Deficit) Total Shareholders’ Equity Shares Amount Shares Amount Shares Amount Balance as of September 30, 2017 31,872 $ 3 700 $ — $ 185,140 $ 68,853 ( 6,865 ) $ ( 97,388 ) $ ( 30,832 ) $ 125,776 Adjustment for the adoption of ASC 606 — — — — — — — — 37,209 37,209 Net loss — — — — — — — — ( 32,682 ) ( 32,682 ) Issuance of common stock under employee plans 379 — — — — — — — — — Shares withheld for payroll taxes ( 82 ) — — — ( 223 ) — — — — ( 223 ) Stock-based compensation — — — — 1,815 — — — — 1,815 Preferred stock cash dividends declared — — — — — — — — ( 5,250 ) ( 5,250 ) Balance as of September 30, 2018 32,169 $ 3 700 $ — $ 186,732 $ 68,853 ( 6,865 ) $ ( 97,388 ) $ ( 31,555 ) $ 126,645 Net loss — — — — — — — — ( 7,868 ) ( 7,868 ) Issuance of common stock under employee plans 465 — — — — — — — — — Shares withheld for payroll taxes ( 135 ) — — — ( 629 ) — — — — ( 629 ) Stock-based compensation — — — — 1,390 — — — — 1,390 Preferred stock cash dividends declared — — — — — — — — ( 5,250 ) ( 5,250 ) Balance as of September 30, 2019 32,499 $ 3 700 $ — $ 187,493 $ 68,853 ( 6,865 ) $ ( 97,388 ) $ ( 44,673 ) $ 114,288 Adjustment for the adoption of ASC 842 — — — — — — — — 8,958 8,958 Net income — — — — — — — — 8,008 8,008 Issuance of common stock under employee plans 328 — — — — — — — — — Shares withheld for payroll taxes ( 97 ) — — — ( 698 ) — — — — ( 698 ) Stock-based compensation — — — — 2,077 — — — — 2,077 Shares issued for equity offering — — — — ( 47,870 ) — 6,783 97,023 — 49,153 Preferred stock cash dividends declared — — — — — — — — ( 5,264 ) ( 5,264 ) Balance as of September 30, 2020 32,730 $ 3 700 $ — $ 141,002 $ 68,853 ( 82 ) $ ( 365 ) $ ( 32,971 ) $ 176,522 The accompanying notes are an integral part of these consolidated financial statements. F- 7 UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended September 30, 2020 2019 2018 Cash flows from operating activities: Net income (loss) $ 8,008 $ ( 7,868 ) $ ( 32,682 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,804 13,222 13,006 Amortization of assets subject to financing obligation — 2,682 2,682 Amortization of right-of-use assets for operating leases 24,273 — — Goodwill and intangible asset impairment expense — — 1,164 Bad debt expense 1,767 1,166 1,511 Stock-based compensation 2,077 1,390 1,815 Deferred income taxes 345 — ( 2,812 ) Equity in earnings of unconsolidated affiliate — ( 399 ) ( 385 ) Training equipment credits earned, net 541 302 33 Other (gains) losses, net ( 52 ) 561 122 Changes in assets and liabilities: Receivables ( 13,749 ) ( 1,483 ) ( 2,695 ) Notes receivable 2,286 1,298 3,393 Prepaid expenses and other current assets ( 1,016 ) 3,157 ( 1,584 ) Other assets ( 76 ) 1,016 ( 116 ) Accounts payable and accrued expenses 7,020 2,942 3,858 Deferred revenue ( 2,192 ) 4,650 ( 5,663 ) Income tax (receivable) payable ( 6,989 ) 166 ( 812 ) Accrued tool sets and other current liabilities 1,863 300 1,014 Deferred rent liability — ( 1,677 ) 5,116 Operating lease liability ( 25,617 ) — — Other liabilities 739 321 ( 318 ) Net cash provided by (used in) operating activities 11,032 21,746 ( 13,353 ) Cash flows from investing activities: Purchase of property and equipment ( 9,262 ) ( 6,453 ) ( 20,606 ) Proceeds from disposal of property and equipment 64 34 25 Purchase of held-to-maturity investments ( 69,678 ) — — Proceeds received upon maturity of investments 31,289 — 7,739 Proceeds from life insurance policy 1,566 — — Purchase of trading securities — — ( 894 ) Proceeds from sales of trading securities — — 40,902 Capitalized costs for intangible assets — — ( 325 ) Return of capital contribution from unconsolidated affiliate 261 267 291 Net cash (used in) provided by investing activities ( 45,760 ) ( 6,152 ) 27,132 Cash flows from financing activities: Proceeds from equity offering 49,153 — — Payment of preferred stock cash dividend ( 5,264 ) ( 5,250 ) ( 5,250 ) Payment of financing obligation and finance leases ( 99 ) ( 1,319 ) ( 1,107 ) Payment of payroll taxes on stock-based compensation through shares withheld ( 698 ) ( 629 ) ( 223 ) Net cash provided by (used in) financing activities 43,092 ( 7,198 ) ( 6,580 ) Change in cash, cash equivalents and restricted cash 8,364 8,396 7,199 Cash and cash equivalents, beginning of period 65,442 58,104 50,138 Restricted cash, beginning of period 15,113 14,055 14,822 Cash, cash equivalents and restricted cash, beginning of period 80,555 72,159 64,960 Cash and cash equivalents, end of period 76,803 65,442 58,104 Restricted cash, end of period 12,116 15,113 14,055 Cash, cash equivalents and restricted cash, end of period $ 88,919 $ 80,555 $ 72,159 F- 8 UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) Year Ended September 30, 2020 2019 2018 Supplemental disclosure of cash flow information: Taxes (refunded) paid $ ( 113 ) $ 37 $ 610 Interest paid 7 3,220 3,310 Training equipment obtained in exchange for services 985 772 3,240 Depreciation of training equipment obtained in exchange for services 1,345 1,387 1,386 Change in accrued capital expenditures during the period ( 490 ) 316 ( 1,042 ) CARES Act funds received for student emergency grants (See Note 21) 16,565 — — CARES Act funds disbursed for student emergency grants (See Note 21) ( 17,184 ) — — CARES Act funds received for institutional costs (See Note 21) 13,889 — — CARES Act funds for institutional costs included in Receivables, net (See Note 21) 1,797 — — The accompanying notes are an integral part of these consolidated financial statements. F- 9 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 1 - Business Description Universal Technical Institute, Inc. (“we,” “us” or “our”) is 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 computer numeric control (“CNC”) machining technicians. We offer certificate, diploma or degree programs at 12 campuses across the United States under the banner of several well-known brands, including Universal Technical Institute, Motorcycle Mechanics Institute, Marine Mechanics Institute and NASCAR Technical Institute. This excludes the Norwood, Massachusetts campus that was closed on July 31, 2020. We also offer manufacturer specific advanced training (“MSAT”) programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers. Founded in 1965, we have provided technical education for more than 55 years and have graduated more than 220,000 technicians. We work closely with over 35 original equipment manufacturers and industry brand partners to understand their needs for qualified service professionals. Revenues generated from our schools consist primarily of tuition and fees paid by students. To pay for a substantial portion of their tuition, the majority of students rely on funds received from federal financial aid programs under Title IV Programs of the Higher Education Act of 1965, as amended (“HEA”), as well as from various veterans benefits programs. For further discussion, see Note 2 on “Summary of Significant Accounting Policies - Concentration of Risk” and Note 20 on “Government Regulation and Financial Aid.” Note 2 - Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of UTI and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, our proprietary loan program, allowance for uncollectible accounts, investments, property and equipment, goodwill recoverability, self-insurance claim liabilities, income taxes, contingencies and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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. Revenue Recognition Postsecondary education 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 %, 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. We supplement our revenues with sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs. 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. F- 10 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 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. 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. Other We provide dealer technician training or instructor staffing services to manufacturers. Revenues are recognized as transfer of the services occurs. Proprietary Loan Program In order to provide funding for students who are not able to fully finance the cost of their education under traditional governmental financial aid programs, commercial loan programs or other alternative sources, we established a private loan program with a bank. Under the terms of the proprietary loan program, the bank originates loans for our students who meet our specific credit criteria with the related proceeds used exclusively to fund a portion of their tuition. We then purchase all such loans from the bank at least monthly and assume all of the related credit risk. The loans bear interest at market rates ranging from approximately 7 % to 10 %; however, principal and interest payments are not required until six months after the student completes or withdraws from his or her program. After the deferral period, monthly principal and interest payments are required over the related term of the loan. The repayment term is up to 10 years. The bank provides these services in exchange for a fee at a percentage of the principal balance of each loan and related fees. Under the terms of the related agreement, we transfer funds for loan purchases to a deposit account with the bank in advance of the bank funding the loan, which secures our related loan purchase obligation. Such funds are classified as restricted cash in our consolidated balance sheet. All related expenses incurred with the bank or other service providers are expensed as incurred within educational services and facilities expense and were approximately $ 0.9 million, $ 1.1 million and $ 1.3 million for the years ended September 30, 2020, 2019, and 2018, respectively. The portion of tuition revenue related to the proprietary loan program is considered a form of variable consideration. We estimate the amount we ultimately expect to collect from the portion of tuition that is funded by the proprietary loan program, resulting in a note receivable. Estimating the collection rate requires significant management judgment. The estimated amount is determined at the inception of the contract, and we recognize the related revenue as the student progresses through school. Each reporting period, we update our assessment of the variable collection rate associated with the proprietary loan program. Prior to adopting ASC 606 on October 1, 2017, we recognized revenue related to the proprietary loan program as cash was received. Restricted Cash Restricted cash includes funds held as collateral for certain of the surety bonds that our insurers issue on behalf of our campuses and admissions representatives with multiple states, which are required to maintain authorization to conduct our business, funds transferred in advance of loan purchases under our proprietary loan program and funds held for students from Title IV financial aid program funds that result in credit balances on a student’s account. Allowance for Uncollectible Accounts We maintain an allowance for uncollectible accounts for estimated losses resulting from the inability, failure or refusal of our students to make required payments. We offer a variety of payment plans to help students pay that portion of their education F- 11 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) expenses not covered by financial aid programs or alternate fund sources, which are unsecured and not guaranteed. Management analyzes accounts receivable, historical percentages of uncollectible accounts, customer credit worthiness and changes in payment history when evaluating the adequacy of the allowance for uncollectible accounts. We use an internal group of collectors, augmented by third party collectors as deemed appropriate, in our collection efforts. Although we believe that our allowance is adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, or 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. Property and Equipment Property, equipment and leasehold improvements are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization expense are calculated using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the remaining useful life of the asset or term of lease, whichever is shorter. Costs relating to software developed for internal use and curriculum development are capitalized and amortized using the straight-line method over the related estimated useful lives. Such costs include direct costs of materials and services as well as payroll and related costs for employees who are directly associated with the projects. Maintenance and repairs are expensed as incurred. We review the carrying value of our property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We evaluate our long-lived assets for impairment by examining estimated future cash flows. These cash flows are evaluated by using probability weighting techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will write-down the carrying value of the asset to its estimated fair value and charge the impairment as an operating expense in the period in which the determination is made. There were no significant impairment charges required for the years ended September 30, 2020, 2019 and 2018. Goodwill Our goodwill balance of $ 8.2 million resulted from the acquisition of our motorcycle and marine education business in 1998 and is allocated to our MMI Orlando, Florida campus that provides the related educational programs. Goodwill represents the excess of the cost of an acquired business over the estimated fair values of the assets acquired and liabilities assumed. Goodwill is reviewed at least annually for impairment, which may result from the deterioration in the operating performance of the acquired business, adverse market conditions, adverse changes in the applicable laws or regulations and a variety of other circumstances. Any resulting impairment charge would be recognized as an expense in the period in which impairment is identified. On March 19, 2020, we suspended all in person classes at all of our campuses, including our Orlando, Florida campus, 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. On March 25, 2020, we began offering the classroom portion of our training online so that students who elected to remain enrolled in the program could continue their education from home. During May of 2020, our Orlando, Florida campus reopened for students to complete hands-on labs, which have been re-designed to meet CDC, state and local guidelines for health, safety and social distancing. While some student graduation dates have been delayed due to the closure, the average students enrolled at our Orlando, Florida campus only decreased by 3.8 % as compared to the prior year. Even with the impacts of COVID-19, our new student enrollments at the Orlando, Florida campus increased by 3.4 % during 2020 over the prior year. After performing a qualitative analysis, there were no indicators of goodwill impairment as of September 30, 2020. Self-Insurance Plans We are self-insured for claims related to employee health and dental care and claims related to workers’ compensation. Liabilities associated with these plans are estimated by management with consideration of our historical loss experience, severity factors and independent actuarial analysis. Our claim liabilities are based on estimates, and while we believe the amounts accrued are adequate, the ultimate losses may differ from the amounts provided. Our recorded net liability related to self-insurance plans was $ 3.4 million as of September 30, 2020. F- 12 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Leases We lease the majority of our administrative and educational facilities under operating lease agreements. Upon adoption of Accounting Standards Codification Topic 842, Leases (“ASC 842”) as of October 1, 2019, we derecognized our previously recorded deferred rent balance. ASC 842 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 under a modified retrospective method without the recasting of comparative periods’ financial information. See Note 3 “Recent Accounting Pronouncements” for further detail regarding the adoption of ASC 842 and the impact on our financial statements and Note 10 “Leases” for our fiscal 2020 disclosures. Advertising Costs Costs related to advertising are expensed as incurred and totaled approximately $ 39.7 million, $ 41.2 million and $ 44.8 million for the years ended September 30, 2020, 2019, and 2018, respectively. Stock-Based Compensation Historically, we have issued restricted stock awards, restricted stock units and stock options. Restricted stock awards and restricted stock units are subject to vesting with service and performance conditions. We measure all share-based payments to employees at estimated fair value. We recognize the compensation expense for restricted stock awards and restricted stock units with only service conditions on a straight-line basis over the requisite service period. We granted restricted stock awards with both service and performance conditions during the year ended September 30, 2020. We did not grant any stock options during the year ended September 30, 2020. Shares issued under our equity compensation plans are new shares. Compensation expense associated with restricted stock awards, restricted stock units and performance units is measured based on the grant date fair value of our common stock, discounted for non-participation in anticipated dividends during the vesting period. The requisite service period for restricted stock awards, restricted stock units and performance units is generally the vesting period. We estimate the fair value of performance units using a Monte Carlo simulation which requires assumptions for expected volatility, risk-free rates of return, and dividend yields. Expected volatilities are derived using a method that calculates historical volatility over a period equal to the length of the measurement period for UTI. We use a risk-free rate of return that is equal to the yield of a zero-coupon U.S. Treasury bill that is commensurate with each measurement period, and we assume that any dividends paid were reinvested. Stock-based compensation expense of $ 2.1 million, $ 1.4 million and $ 1.9 million was recorded for the years ended September 30, 2020, 2019 and 2018, respectively. The tax benefit related to stock-based compensation recognized was $ 0.5 million, $ 0.4 million, and $ 0.5 million for the years ended September 30, 2020, 2019 and 2018, respectively. See Note 14 for further discussion. Income Taxes We recognize deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We also recognize deferred tax assets for net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. Deferred tax assets are reduced through a valuation allowance if it is more likely than not that the deferred tax assets will not be realized. F- 13 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Concentration of Risk Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, short-term investments and receivables. As of September 30, 2020, we held cash and cash equivalents of $ 76.8 million, restricted cash of $ 12.1 million and short-term held-to-maturity investments of $ 38.1 million. We place our cash and cash equivalents and restricted cash with high quality financial institutions and limit the amount of credit exposure with any one financial institution. We mitigate the concentration risk of our investments by limiting the amount invested in any one issuer. We mitigate the risk associated with our investment in corporate bonds by requiring a minimum credit rating of A. We have the ability and intention to hold these investments until maturity and therefore have classified these investments as held-to-maturity and recorded them at amortized cost. We extend credit for tuition and fees, for a limited period of time, to a majority of our students. A substantial portion is repaid through the student’s participation in federally funded financial aid programs. Transfers of funds from the financial aid programs to us are made in accordance with the ED requirements. 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. The financial aid and veterans benefits programs are subject to political and budgetary considerations. There is no assurance that such funding will be maintained at current levels. Extensive and complex regulations govern the financial assistance programs in which our students participate. Our administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation of potential adverse actions, including a suspension, limitation, placement on reimbursement status or termination proceeding, which could have a material adverse effect on our business. ED and other regulators have increased the frequency and severity of their enforcement actions against postsecondary schools which have resulted in the imposition of material liabilities, sanctions, letter of credit requirements and other restrictions and, in some cases, resulted in the loss of schools’ eligibility to receive Title IV funds or in closure of the schools. If any of our institutions were to lose its eligibility to participate in federal student financial aid programs, the students at that institution would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. Students obtain access to federal student financial aid through an ED prescribed application and eligibility certification process. Student financial aid funds are generally made available to students at prescribed intervals throughout their predetermined expected length of study. Students typically apply the funds received from the federal financial aid programs to pay their tuition and fees. The transfer of funds is from the financial aid program to the student, who then uses those funds to pay for a portion of the cost of their education. The receipt of financial aid funds reduces the student’s amounts due to us and has no impact on revenue recognition, as the transfer relates to the source of funding for the costs of education, which may occur either through Title IV or other funds and resources available to the student. Fair Value of Financial Instruments The carrying value of cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and deferred tuition approximates their respective fair value as of September 30, 2020 and 2019 due to the short-term nature of these instruments. Start-up Costs Costs related to the start-up of new campuses and programs are expensed as incurred. F- 14 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 3 - Recent Accounting Pronouncements Accounting Pronouncements Effective in Fiscal 2020 Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amended the FASB Accounting Standards Codification (“ASC”) by creating ASC 842 to replace ASC 840. ASU 2016-02 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. It also allows lessors to elect not to separate lease and non-lease components when certain conditions are met. In March 2019, the FASB issued ASU 2019-01, Lease (Topic 842): Codification Improvements (“ASU 2019-01”). ASU 2019-01 clarifies certain items regarding lessor accounting. It also clarifies the interim disclosure requirements during transition. The new guidance in ASC 842 also provides a package of transition practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing lease. We adopted ASC 842 effective October 1, 2019, and elected the package of transition practical expedients. We also elected additional transitional practical expedients that allow an entity to not reassess land easements not previously addressed under ASC 840 and to not recognize on the balance sheet leases with terms of less than 12 months. We are using the modified retrospective method without the recasting of comparative periods’ financial information. We did not elect the practical expedient to use hindsight in determining a lease term of the ROU assets at the adoption date. As a result of adopting the new standard, we recognized an operating lease liability of $ 163.0 million and an operating lease ROU asset of $ 148.6 million on October 1, 2019. The change resulted in the de-recognition of approximately $ 0.9 million of other assets and $ 15.3 million of other liabilities. The standard did not materially impact our condensed consolidated statements of operations and cash flows. In addition, we have two build-to-suit leases that were accounted for as financing obligations and related assets because we had continued involvement in the related facility after the construction period was completed. The financing obligations are now classified as operating leases in accordance with the new standard as of the transition date, including recognition of operating lease ROU assets and lease liabilities. The change resulted in the de-recognition of approximately $ 40.7 million existing deferred financing obligations and $ 31.6 million in related assets. The net impact of the de-recognition and the adoption of ASC 842 as of October 1, 2019 was an increase in stockholders’ equity of approximately $ 9.1 million, with a subsequent adjustment during the three months ended March 31, 2020, which reduced the impact to stockholders’ equity by $ 0.1 million. The transition also resulted in the recognition of rent expense, which was previously reported as interest expense under the former guidance. See Note 10 “Leases” for our fiscal 2020 disclosures. Fair Value Measurement In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 amends the disclosure requirements of ASC 820, changing the fair value measurement disclosure requirements of ASC 820 by adding new disclosure requirements, modifying existing disclosure requirements and eliminating other disclosure requirements. We adopted ASU 2018-13 as of October 1, 2019. There was no impact to our consolidated financial statements or disclosures. Cloud Computing Arrangements In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and other Internal-use Software (Subtopic 350-40) (“ASU 2018-15”). ASU 2018-15 aligns the accounting for costs incurred to implement a cloud computing arrangement (“CCA”) that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs F- 15 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) should be capitalized in a CCA that is considered a service contract. The effect of this new standard on our consolidated financial statements is dependent on our entry into any future cloud computing arrangements. Accounting Pronouncements Effective in Fiscal 2021 In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326) . This update significantly changes the way that entities will be required to measure credit losses. This standard requires that entities estimate credit losses based upon an “expected credit loss” approach rather than the “incurred loss” approach, which is currently used. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable forecasts of collectability. The change in approach is anticipated to impact the timing of recognition of credit losses. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. These changes became effective for the Company's fiscal year beginning October 1, 2020. Upon adoption on October 1, 2020, we recorded an increase in our receivables balance related to our proprietary loan program of $ 1.6 million, with the corresponding amount recorded as an increase to retained earnings. No other adjustments were deemed necessary in applying this new guidance, and we do not expect the adoption of ASU 2016-13 to have a material impact on our results of operations. Accounting Pronouncements Effective in Fiscal 2022 In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We are currently evaluating the impact that the update will have on our results of operations, financial condition and financial statement disclosures. Note 4 - Revenue from Contracts with Customers Nature of Goods and Services See Note 2 “Summary of Significant Accounting Policies” for a description of the nature of revenues. Postsecondary Education 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 ASC 606, Revenue from Contracts from Customers . Tuition and fee revenue is recognized ratably over the term of the course or program offered. The majority of our programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration. We supplement our revenues with sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs. 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 condensed consolidated balance sheets because it is expected to be earned within the next 12 months. Additionally, certain students participate in a proprietary loan program that extends repayment terms for their tuition. We purchase said loans from the lender and, based on historical collection rates, believe a portion of these loans are collectible. 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 the amount we expect to collect, and we recognize these revenues ratably over the term of the course or program offered. Other We provide dealer technician training or instructor staffing services to manufacturers. Revenues are recognized as transfer of the services occurs. F- 16 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) We provide postsecondary education and other services in the same geographical market, the United States. The impact of economic factors on the nature, amount, timing and uncertainty of revenue and cash flows is consistent among our various postsecondary education programs. See Note 19 “Segment Information” for disaggregated segment revenue information. Contract Balances Contract assets primarily relate to our rights to consideration for a student’s progress through our training program in relation to our services performed but not billed at the reporting date. The contract assets are transferred to the receivables when the rights become unconditional. Currently, we do not have any contract assets that have not transferred to a receivable. Our deferred revenue is considered a contract liability and primarily relates to our enrollment agreements where we received payments for tuition but we have not yet delivered the related training programs to satisfy the related performance obligations. The advance consideration received from students or Title IV funding is deferred revenue until the training program has been delivered to the students. The following table provides information about receivables and contract liabilities from contracts with customers: September 30, 2020 September 30, 2019 Receivables, which includes Tuition and Notes Receivable $ 53,144 $ 44,629 Deferred revenue $ 40,694 $ 42,886 During the year ended September 30, 2020, the contract liabilities balance included decreases for revenues recognized during the period and increases related to new students who started school during the period. Transaction Price Allocated to the Remaining Performance Obligations Tuition and fee revenue is recognized ratably over the term of the course or program offered. The majority of our programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration. Impacts 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. We do not recognize revenue while a student is on a leave of absence. 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. As 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 lab. During the year ended September 30, 2020, as campuses were able to reopen, 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. 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 resumed in-person labs in Bloomfield, New Jersey on July 1, 2020. On-campus labs have been re-designed to meet the health, safety and social distancing guidelines imposed by the Centers for Disease Control (“CDC”) and state and local jurisdictions, while still meeting our accreditation and curriculum requirements. Upon the initial resumption of in-person labs, once a student returned 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. 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. F- 17 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 5 - Post-employment Benefits On February 18, 2019, we announced that our campus in Norwood, Massachusetts is no longer accepting new student applications, and its last group of students started on March 18, 2019 and completed the curriculum in July 2020, with the campus closing on July 31, 2020. The post-employment benefits incurred due to the campus closure were approximately $ 1.1 million. Additionally, we periodically enter into agreements that provide post-employment benefits to personnel whose employment is terminated. On October 21, 2019, we announced the retirement of our former President and Chief Executive Officer, Kimberly J. McWaters, effective October 31, 2019. During the twelve months ended September 30, 2020, we incurred post-employment benefit charges of $ 1.5 million and paid cash of $ 1.2 million, in accordance with Ms. McWaters’ Retirement Agreement and Release of Claims, dated October 31, 2019. The post-employment benefit liability, which is included in “Accounts payable and accrued expenses” on the accompanying consolidated balance sheets, is generally paid out ratably over the terms of the agreements, which range from 1 month to 24 months, with the final agreement expiring in 2021. The post-employment benefit accrual activity for the years ended September 30, 2020 and 2019 was as follows: Severance Other Total Balance accrued as of September 30, 2018 $ 372 $ 9 $ 381 Post-employment benefit charges 1,637 90 1,727 Cash paid ( 1,159 ) ( 28 ) ( 1,187 ) Other non-cash adjustments (1) ( 129 ) ( 39 ) ( 168 ) Balance accrued as of September 30, 2019 $ 721 $ 32 $ 753 Post-employment benefit charges 2,223 57 2,280 Cash paid ( 2,210 ) ( 51 ) ( 2,261 ) Other non-cash adjustments (1) 131 ( 29 ) 102 Balance accrued as of September 30, 2020 $ 865 $ 9 $ 874 (1) Primarily relates to the reclassification of benefits between severance and other benefits. Note 6 - Receivables, net Receivables, net consist of the following: September 30, 2020 2019 Tuition receivables $ 23,565 $ 11,800 Tax receivables (1) 7,145 156 Other receivables 6,494 7,078 Receivables 37,204 19,034 Less: allowance for uncollectible accounts ( 1,793 ) ( 1,097 ) Receivables, net $ 35,411 $ 17,937 (1) Primarily related to an income tax receivable recorded as a result of the net operation loss provisions in the CARES Act. See Note 13 “Income Taxes” for further discussion. The allowance for uncollectible accounts is estimated using our historical write-off experience applied to the receivable balances for students who are no longer attending school due to graduation or withdrawal or who are in school and have F- 18 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) receivable balances in excess of financial aid available to them. We write off receivable balances against the allowance for uncollectible accounts at the time we transfer the balance to a third party collection agency. The following table summarizes the activity for our allowance for uncollectible accounts for the years ended September 30, 2020, 2019 and 2018: Year Ended September 30, 2020 2019 2018 Balance at beginning of period $ 1,097 $ 999 $ 579 Additions to bad debt expense 1,767 1,166 1,511 Write-offs of uncollectible accounts ( 1,071 ) ( 1,068 ) ( 1,091 ) Balance at end of period $ 1,793 $ 1,097 $ 999 Note 7 - Investments In February 2020, we raised approximately $ 49.5 million in net proceeds from an underwritten public offering of shares of our common stock. See Note 15 “Shareholders’ Equity” for further details on the equity offering. We invested a portion of the proceeds from the equity 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 have the ability and intention to hold these investments until maturity and therefore have classified these investments as held-to-maturity and recorded them at amortized cost. The amortized cost, gross unrealized gains or losses, and fair value of investments classified as held-to-maturity at September 30, 2020 were as follows: Gross Unrealized Estimated Fair Due in less than 1 year: Amortized Cost Gains Losses Market Value Corporate and municipal bonds $ 38,055 $ 10 $ ( 33 ) $ 38,032 Total as of September 30, 2020 $ 38,055 $ 10 $ ( 33 ) $ 38,032 Investments are exposed to various risks, including interest rate, market and credit risk. As a result, it is possible that changes in the values of these investments may occur and that such changes could affect the amounts reported in the condensed consolidated financial statements. Note 8 - Fair Value Measurements The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers: Level 1: Defined as quoted market prices in active markets for identical assets or liabilities. Level 2: Defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Defined as unobservable inputs that are not corroborated by market data. Any transfers of investments between levels occurs at the end of the reporting period. Assets measured or disclosed at fair value on a recurring basis consisted of the following: F- 19 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Fair Value Measurements Using September 30, 2020 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market funds (1) $ 43,322 $ 43,322 $ — $ — Notes receivable (2) 32,793 — — 32,793 Corporate bonds (3) 33,119 33,119 — — Municipal bonds, and other (3) 4,913 4,913 — — Total assets at fair value on a recurring basis $ 114,147 $ 81,354 $ — $ 32,793 Fair Value Measurements Using September 30, 2019 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market funds (1) $ 37,794 $ 37,794 $ — $ — Notes receivable (2) 35,079 — — 35,079 Total assets at fair value on a recurring basis $ 72,873 $ 37,794 $ — $ 35,079 (1) Money market funds and other highly liquid investments with maturity dates less than 90 days are reflected as “Cash and cash equivalents” in our consolidated balance sheet as of September 30, 2020 and 2019. (2) Notes receivable relate to our proprietary loan program. (3) Corporate bonds, municipal bonds, and other are reflected as “Held-to-maturity investments” in our consolidated balance sheet as of September 30, 2020. Note 9 - Property and Equipment, net Property and equipment, net consisted of the following: Depreciable Lives (in years) September 30, 2020 September 30, 2019 Land — $ 3,189 $ 3,189 Building and building improvements 3 - 35 28,046 82,653 Leasehold improvements 1 - 28 62,899 53,020 Training equipment 3 - 10 91,731 96,737 Office and computer equipment 3 - 10 33,524 35,927 Curriculum development 5 19,692 19,692 Software developed for internal use 1 - 5 11,951 11,354 Vehicles 5 1,502 1,454 Right-of-use assets for finance leases 2 - 3 359 — Construction in progress — 2,213 1,631 255,106 305,657 Less: accumulated depreciation and amortization ( 182,363 ) ( 201,531 ) Property and equipment, net $ 72,743 $ 104,126 As previously discussed in Note 3 “Summary of Significant Accounting Policies,” 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 F- 20 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) “Buildings and building improvements.” In addition, certain items related to the build-to-suit leases in “Buildings and building improvements” were reclassified to “Leasehold improvements” as part of the adoption of ASC 842. The following amounts, which are included in the above table, represented assets financed by financing obligations as of September 30, 2019: September 30, 2019 Assets financed by financing obligations, gross $ 45,816 Less: accumulated depreciation and amortization ( 14,208 ) Assets financed by financing obligations, net $ 31,608 Note 10 - Leases We lease 10 of our 12 campuses and our corporate headquarters under non-cancelable operating leases, some of which contain escalation clauses and requirements to pay other fees associated with the leases. Our lease for the Norwood, Massachusetts campus ended on July 31, 2020 when the campus closed. During the year ended September 30, 2020, we relocated our corporate headquarters facility in conjunction with the expiration of the existing lease agreement, and entered into a new long-term lease agreement at a new facility. We also modified our existing lease for our Sacramento campus by extending the term, and reducing the leased square footage effective as of January 1, 2022. Our facility leases have original lease terms ranging from 8 to 20 years and expire at various dates through 2033. In addition, the leases commonly include lease incentives in the form of rent abatements and tenant improvement allowances. We sublease certain portions of unused building space to third parties, which currently result in minimal income. All of the leases, other than those that may qualify for the short-term scope exception of 12 months or less, are recorded on our consolidated balance sheets. Some of the facility leases are subject to annual changes in the Consumer Price Index (“CPI”). While lease liabilities are not remeasured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. There are no early termination with penalties, residual value guarantees, restrictions or covenants imposed by our facility leases. Significant Assumptions and Judgments 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.” F- 21 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The components of lease expense during the year ended September 30, 2020 were as follows: Lease Expense Year ended September 30, 2020 Operating lease expense (1) $ 29,348 Finance lease expense: Amortization of leased assets 102 Interest on lease liabilities 7 Variable lease expense 4,120 Sublease income ( 744 ) Total net lease expense $ 32,833 (1) Excludes the expense for short-term leases not accounted for under ASC 842, which was not significant for the year ended September 30, 2020. Supplemental balance sheet, cash flow and other information related to our leases was as follows: Leases Classification As of September 30, 2020 Assets: Operating lease assets Right-of-use assets for operating leases $ 144,663 Finance lease assets Property and equipment, net (1) 257 Total leased assets $ 144,920 Liabilities: Current Operating lease liabilities Operating lease liability, current portion $ 23,666 Finance lease liabilities Other current liabilities 129 Noncurrent Operating lease liabilities Operating lease liability 134,089 Finance lease liabilities Other liabilities 131 Total lease liabilities $ 158,015 (1) Finance lease assets are recorded net of accumulated amortization of $ 0.1 million as of September 30, 2020. F- 22 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Supplemental Disclosure of Cash Flow Information and Other Information Year ended September 30, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 25,617 Operating cash flows from finance leases 7 Financing cash flows from finance leases 99 Non-cash activity related to lease liabilities: Lease assets obtained in exchange for new operating lease liabilities $ 20,321 Leases assets obtained in exchange for new finance lease liabilities 215 Lease Term and Discount Rate As of September 30, 2020 Weighted-average remaining lease term (in years): Operating leases 9.34 Finance leases 2.05 Weighted average discount rate: Operating leases 4.37 % Finance leases 3.08 % Maturities of lease liabilities were as follows: As of September 30, 2020 Years ending September 30, Operating Leases Finance Leases 2021 $ 28,212 $ 135 2022 27,447 110 2023 18,565 23 2024 17,435 — 2025 15,022 — 2026 and thereafter 86,134 — Total lease payments 192,815 268 Less: interest ( 35,060 ) ( 8 ) Present value of lease liabilities 157,755 260 Less: current lease liabilities ( 23,666 ) ( 129 ) Long-term lease liabilities $ 134,089 $ 131 The maturities of lease liabilities as of September 30, 2020 includes the future minimum lease payments for the build-to-suit leases. Disclosures Related to Periods Prior to the Adoption of ASC 842 As of September 30, 2019, minimum lease payments under non-cancelable operating leases by period were expected to be as follows (in thousands): F- 23 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Years ending September 30, Gross Sublease income Net 2020 $ 26,379 $ ( 362 ) $ 26,017 2021 23,531 ( 77 ) 23,454 2022 21,621 ( 78 ) 21,543 2023 10,461 ( 20 ) 10,441 2024 9,180 — 9,180 Thereafter 41,822 — 41,822 Total lease payments $ 132,994 $ ( 537 ) $ 132,457 Related Party Transactions for Leases Rent expense includes rent paid to related parties, which was approximately $ 2.0 million for the years ended September 30, 2020, 2019, and 2018. Since 1991, two of our properties comprising our Orlando, Florida location have been leased from entities controlled by John C. White, a director on our Board of Directors. The leases extend through August 19, 2022 and August 31, 2022 with annual base lease payments for the first year under this lease totaling approximately $ 0.3 million and $ 0.7 million, with annual adjustments based on the higher of (i) an amount equal to 4 % of the total annual rent for the immediately preceding year or (ii) the percentage of increase in the CPI. These transactions were not considered significant as of September 30, 2020. Note 11 - Investment in Unconsolidated Affiliate In 2012, we invested $ 4.0 million to acquire an equity interest of approximately 28 % in a joint venture (JV) related to the lease of our Lisle, Illinois campus facility. In connection with this investment, we do not possess a controlling financial interest as we do not hold a majority of the equity interest, nor do we have the power to make major decisions without approval from the other equity member. Therefore, we do not qualify as the primary beneficiary. Accordingly, this investment is accounted for under the equity method of accounting and is included in other assets in our consolidated balance sheet. We recognize our proportionate share of the JV’s net income or loss during each accounting period as a change in our investment. Historically, the JV used an interest rate cap to manage interest rate risk associated with its floating rate debt. This derivative instrument was designated as a cash flow hedge based on the nature of the risk being hedged. As such, the effective portion of the gain or loss on the derivative was initially reported as a component of the JV’s accumulated other comprehensive income or loss, net of tax, and was subsequently reclassified into earnings when the hedged transaction affects earnings. Any ineffective portion of the gain or loss was recognized in the JV’s current earnings. Due to our equity method investment in the JV, when the JV reports a current year component of other comprehensive income (OCI), we, as an investor, likewise adjust our investment account for the change in investee equity. In addition, we adjust our OCI for our share of the JV’s currently reported OCI item. During the three months ended December 31, 2017, the JV refinanced the facility loan and discontinued its use of an interest rate cap. Our equity in earnings of unconsolidated affiliates was $ 0.4 million for the years ended September 30, 2020, 2019 and 2018. Investment in our unconsolidated affiliate consists of the following: September 30, 2020 September 30, 2019 Carrying Value Ownership Percentage Carrying Value Ownership Percentage Investment in JV $ 4,494 28.0 % $ 4,338 28.0 % F- 24 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Investment in our unconsolidated affiliate included the following activity during the period: Year ended September 30, 2020 2019 Balance at beginning of period $ 4,338 $ 4,206 Equity in earnings of unconsolidated affiliate 417 399 Return of capital contribution from unconsolidated affiliate ( 261 ) ( 267 ) Balance at end of period $ 4,494 $ 4,338 Through September 30, 2019, the activity from equity in earnings of the unconsolidated affiliate was included in “Other (expense) income, net” on the condensed consolidated statements of operations. In conjunction with the adoption of ASC 842, as previously described in Note 3 “Summary of Significant Accounting Policies,” beginning October 1, 2019, the activity is included in “Educational services and facilities” on the consolidated statements of operations. Note 12 - Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following: September 30, 2020 2019 Accounts payable $ 12,471 $ 10,033 Accrued compensation and benefits 28,053 22,230 Other accrued expenses 11,367 13,615 Accounts payable and accrued expenses $ 51,891 $ 45,878 Note 13 - Income Taxes The components of income tax benefit (expense) for the years ended September 30, 2020, 2019 and 2018 are as follows: Year Ended September 30, 2020 2019 2018 Current benefit (expense): United States federal $ 11,250 $ 2 $ 125 State ( 303 ) ( 205 ) 78 Total current benefit (expense) 10,947 ( 203 ) 203 Deferred benefit (expense): United States federal ( 345 ) — 2,878 State — — ( 66 ) Total deferred benefit (expense) ( 345 ) — 2,812 Total income tax benefit (expense) $ 10,602 $ ( 203 ) $ 3,015 F- 25 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The income tax provision differs from the tax that would result from application of the statutory federal tax rate of 21.0 % to pre-tax income for the years ended September 30, 2020 and September 30, 2019, and 24.5 % to pre-tax income for the year ended September 30, 2018. The reasons for the differences are as follows: Year Ended September 30, 2020 2019 2018 Income tax benefit at statutory rate $ 545 $ 1,610 $ 8,746 State income taxes, net of federal tax benefit ( 246 ) ( 165 ) 12 Change in federal statutory rate — — ( 12,645 ) Decrease (increase) in valuation allowance 6,135 ( 1,514 ) 7,066 Net operating losses carryback to higher federal statutory rate years 4,270 — — Other, net ( 102 ) ( 134 ) ( 164 ) Total income tax benefit (expense) $ 10,602 $ ( 203 ) $ 3,015 The components of the deferred tax assets (liabilities) recorded in the accompanying consolidated balance sheets were as follows: September 30, 2020 2019 Gross deferred tax assets: Right-of-use assets for operating leases $ 40,515 $ — Deferred compensation $ 802 $ 1,449 Accrued compensation 3,940 2,432 Accrued tool sets 831 694 Other reserves and accruals 2,665 1,884 Deferred revenue 4,406 4,324 Deferred rent liability — 3,024 Financing obligation — 10,178 Net operating losses 6,729 12,639 Tax credit carryforwards 293 205 Charitable contribution carryovers 1,527 1,234 Deductions limited by Section 382 764 670 Valuation allowance ( 17,449 ) ( 25,673 ) Total gross deferred tax assets 45,023 13,060 Gross deferred tax liabilities: Operating lease liability ( 37,083 ) — Amortization of goodwill and intangibles ( 2,056 ) ( 2,056 ) Depreciation and amortization of property and equipment ( 5,547 ) ( 10,470 ) Prepaid and other expenses deductible for tax ( 1,011 ) ( 863 ) Total gross deferred tax liabilities ( 45,697 ) ( 13,389 ) Net deferred tax liabilities $ ( 674 ) $ ( 329 ) F- 26 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The following table summarizes the activity for the valuation allowance for the years ended September 30 2020, 2019 and 2018: Year Ended September 30, 2020 2019 2018 Balance at beginning of period $ 25,673 $ 23,112 $ 38,407 Additions (reductions) to income tax ( 5,947 ) 2,561 ( 5,555 ) Write-offs (1) ( 2,277 ) — ( 9,740 ) Balance at end of period $ 17,449 $ 25,673 $ 23,112 (1) Of this total, approximately $ 9.6 million and $ 2.3 million related to our adoption of ASC 606 as of October 1, 2017 and our adoption of ASC 842 as of October 1, 2019, respectively. We have valuation allowances of $ 17.4 million and $ 25.7 million against the deferred tax assets as of September 30, 2020 and September 30, 2019, respectively, based on our assessment of the ability to utilize the deferred tax assets. The valuation allowances established relate to all federal and state deferred tax assets, for which we determined that it was more likely than not that a benefit will not be realized. In assessing whether a valuation allowance was required for the deferred tax assets, we considered all available positive and negative evidence. A significant piece of negative evidence was the cumulative losses incurred in recent years. The CARES Act, which was enacted on March 27, 2020, made tax law changes to provide financial relief to companies as a result of the business impacts of COVID-19. Key income tax provisions of the CARES Act include changes in net operating loss (“NOL”) carryback and carryforwards rules, acceleration of alternative minimum tax credit recovery, increase of the net interest expense deduction limit and charitable contribution limit, and immediate write-off of qualified improvement property. The CARES Act allows us to carryback $ 20.3 million and $ 13.0 million of NOLs arising in the years ended September 30, 2019 and September 30, 2018, respectively, generating a tax refund of approximately $ 11.3 million. During the three months ended March 31, 2020, we recorded a receivable for the expected refund. Approximately $ 4.2 million was received during the year ended September 30, 2020, leaving approximately $ 7.1 million in the receivable balance as of September 30, 2020. As of September 30, 2020, we had approximately $ 18.9 million and $ 48.4 million in net operating losses for federal and state tax purposes, respectively. Approximately $ 2.3 million of the federal net operating losses expire in the year 2039 if not utilized, while the rest can be carryforward indefinitely. The state net operating losses expire in the years 2027 through 2040 if not utilized. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We believe that all of our tax positions meet the more-likely-than not test and therefore no uncertain tax positions were recorded as of September 30, 2020. We file income tax returns for federal purposes and in many states. Our tax filings remain subject to examination by applicable tax authorities for certain length of time, generally three to four years, following the tax year to which these filings relate. In fiscal 2018, 2019 and 2020, we filed returns to carry back federal and certain state net operating losses to prior years. The statute of limitations for adjustment of the net operating losses utilized on these tax returns remains open an additional three to four years, depending on jurisdiction, from the date these returns were filed. F- 27 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 14 - Commitments and Contingencies Licensing Agreements In fiscal 1999, we entered into a licensing agreement that gives us the right to use certain materials and trademarks in the development of our courses. The agreement was amended in November 2009. Under the terms of the amended agreement, we are required to pay a flat fee per student for each program a student completes. There are no minimum license fees required to be paid. The agreement terminates upon the written notice of either party providing not less than ninety days notification of intent to terminate. License fees related to this agreement were $ 0.5 million, $ 0.6 million and $ 0.7 million for the years ended September 30, 2020, 2019 and 2018, respectively, and were recorded in educational services and facilities expenses. In May 2007, we entered into a licensing agreement that gives us the right to use certain trademarks, trade names, trade dress and other intellectual property in connection with the operation of our campuses and courses. The agreement was amended January 2019 and expires December 31, 2026. We are committed to pay royalties based upon minimum amounts specified in the agreement, throughout the term. The agreement required a minimum royalty payment of $ 1.0 million in calendar year 2020. The expense related to these agreements was $ 1.2 million, $ 1.4 million and $ 1.6 million for the years ended September 30, 2020, 2019 and 2018, respectively, and was recorded in educational services and facilities expenses. Annual payments range between $ 1.0 million and $ 1.5 million throughout the licensing period. In July 2013, we entered into a training and materials agreement that gives us the right to use certain materials and trademarks in development of our courses. Under the terms of the agreement, we are required to pay a flat fee per student for each related program a student completes. There is an immaterial minimum annual fee required to be paid upon commencement of the program and annually thereafter. The agreement terminates upon the written notice of either party providing not less than 90 days notification of intent to terminate. The expense related to this agreement was $ 0.1 million for the years ended September 30, 2020, 2019 and 2018, respectively, and was recorded in educational services and facilities expenses. In April 2015, we entered into a licensing agreement that gives us the right to use certain trademarks in connection with the operation of our campuses and courses. The agreement has an initial term of four years , with options for three annual renewals totaling a seven year term. The maximum license fee over seven years is $ 2.3 million. The expense related to this agreement was $ 0.3 million, $ 0.2 million and $ 0.4 million for the years ended September 30, 2020, 2019 and 2018, respectively, and was recorded in educational services and facilities expenses. Vendor Relationships We have an agreement with a vendor that allows us to purchase promotional tool kits for our students at a discount from the vendor’s list price. In addition, we earn credits that are redeemable for equipment from the vendor that we use in our business. Credits are earned on our purchases as well as purchases made by students enrolled in our programs. We have agreed to grant the vendor exclusive access to our campuses, to display advertising and to use their tools to train our students. The credits under this agreement may be redeemed in multiple ways, which historically has been for additional equipment at the full retail list price, which is more than we would be required to pay using cash. The renewal was executed in October 2017 and expires October 31, 2022. The renewal allows us to redeem our credits for a portion of the tool sets we purchase for our students. Any product credits remaining at termination will expire 60 days after the date of termination. A net prepaid expense with the vendor resulted from an excess of credits earned over credits used of $ 5.5 million and $ 6.4 million as of September 30, 2020 and 2019, respectively, included in other current assets in our consolidated balance sheets. Students are provided a Career Starter Tool Set Voucher which can be redeemed for a tool set near graduation. The cost of the tool sets, net of the credit, is accrued during the time period in which the students begin attending school until they have progressed to the point that the promotional tool set vouchers are provided. Our consolidated balance sheets include an accrued tool set liability of $ 3.1 million and $ 2.6 million as of September 30, 2020 and 2019, respectively. Additionally, our liability to the vendor for vouchers redeemed by students was $ 1.9 million and $ 2.1 million as of September 30, 2020 and 2019, respectively, and is included in accounts payable and accrued expenses in our consolidated balance sheets. F- 28 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Deferred Compensation Plans We have established a deferred compensation plan (“the Plan”) effective April 1, 2010, into which certain members of management are eligible to defer a maximum of 75 % of their regular compensation and a maximum of 100 % of their incentive compensation. Non-employee members of our Board of Directors are eligible to defer up to 100 % of their cash compensation. The amounts deferred by the participant under this Plan are credited with earnings or losses based upon changes in values of participant elected notional investments. Each participant is fully vested in the amounts deferred. We may make contributions at the discretion of our Board of Directors that will generally vest according to a five year vesting schedule. Distribution elections under the Plan may be for separation from service distribution or in-service distribution. We are not obligated to fund the Plan; however, we have purchased life insurance policies on the participants in order to fund the related benefits and such policies have been placed into a rabbi trust. Our obligations under the Plan totaled $ 3.0 million and $ 4.3 million as of September 30, 2020 and 2019, respectively, and are included in other liabilities while the cash surrender value of the life insurance policies totaled $ 3.3 million and $ 4.8 million as of September 30, 2020 and 2019, respectively, and are included in other assets in our consolidated balance sheets. Surety Bonds Each of our campuses must be authorized by the applicable state education agency in which the campus is located to operate and to grant certificates, diplomas or degrees to its students. Our campuses are subject to extensive, ongoing regulation by each of these states. Additionally, our campuses are required to be authorized by the applicable state education agencies of certain other states in which our campuses recruit students. Our insurers issue surety bonds for us on behalf of our campuses and admissions representatives with multiple states to maintain authorization to conduct our business. We are obligated to reimburse our insurers for any surety bonds that are paid by the insurers. As of September 30, 2020, the total face amount of these surety bonds was approximately $ 16.8 million. Legal In the ordinary conduct of our business, we are periodically subject to lawsuits, demands in arbitration, investigations, regulatory proceedings or other claims, including, but not limited to, claims involving current or former students, routine employment matters, business disputes and regulatory demands. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we would accrue a liability for the loss. When a loss is not both probable and estimable, we do not accrue a liability. Where a loss is not probable but is reasonably possible, including if a loss in excess of an accrued liability is reasonably possible, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim. Because we cannot predict with certainty the ultimate resolution of the legal proceedings (including lawsuits, investigations, regulatory proceedings or claims) asserted against us, it is not currently possible to provide such an estimate. The ultimate outcome of pending legal proceedings to which we are a party may have a material adverse effect on our business, cash flows, results of operations or financial condition. Note 15 - Shareholders’ Equity Common Stock Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right to one vote per share on all matters requiring shareholder approval. On June 9, 2016, our Board of Directors voted to eliminate the quarterly cash dividend on our common stock. Preferred Stock Preferred Stock consists of 10,000,000 authorized preferred shares of $ 0.0001 par value each. As of September 30, 2020 and 2019, 700,000 shares of Series A Preferred Stock were issued and outstanding. F- 29 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) On June 24, 2016, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with Coliseum Holdings I, LLC (“Purchaser”) to sell to the Purchaser 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. The Series A Preferred Stock is perpetual, and therefore does not have a maturity date. In conjunction with this purchase, we incurred $ 1.2 million in stock issuance costs, which were recorded as a reduction of the additional paid-in capital associated with the Series A Preferred Stock. The description below provides a summary of certain material terms of the Series A Preferred Stock as set forth in the Certificate of Designations (“Certificate of Designations”) of the Series A Preferred Stock: Rank The Series A Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank senior to our common stock and each other junior class or series of shares that we may issue in the future. The Series A Preferred Stock will also rank junior to any future indebtedness. Dividends We may pay a cash dividend on each share of the Series A Preferred Stock at a rate of 7.5 % per year on the liquidation preference then in effect (“Cash Dividend”). The Cash Dividend is payable before any dividends would be declared or paid to common stockholders or other junior stockholders. If we do not pay a Cash Dividend, the liquidation preference shall be increased to an amount equal to the current liquidation preference in effect plus an amount reflecting that liquidation preference multiplied by the Cash Dividend rate then in effect plus 2.0 % per year (“Accrued Dividend”). Cash Dividends are payable semi-annually in arrears on September 30 and March 31 of each year, and will begin to accrue on the first day of the applicable dividend period. We paid Cash Dividends of $ 5.3 million during the years ended September 30, 2020 and September 30, 2019. The Series A Preferred Stock includes participation rights such that, in the event that we pay a dividend or make a distribution on the outstanding common stock, we shall also pay to each holder of the Series A Preferred Stock a dividend on an as converted basis. If we are required to or elect to obtain stockholder and regulatory approval and if such approval is not obtained within the time periods set forth in the Certificate, the dividend rates with respect to the Cash Dividend and Accrued Dividend will be increased by 5.0 % per year, not to exceed a maximum of 14.5 % per year, subject to downward adjustment on obtaining the foregoing approvals. Liquidation Preference In the event of voluntary or involuntary liquidation, dissolution or winding up of our company, holders of the Series A Preferred Stock are entitled to receive, before any distribution or payment to the holders of any common or junior stock, an amount per share of Series A Preferred Stock equal to the liquidation preference then in effect, which would include any Accrued Dividends. Alternatively, the holder may choose to receive the amount that would be payable per share of common stock issued upon conversion of the Series A Preferred Stock immediately prior to such liquidation event. Mergers (regardless of whether we remain the surviving entity), sale of substantially all of our assets or any other recapitalization, reclassification or other transaction in which substantially all of our common stock is exchanged or converted into cash or other property are considered “Deemed Liquidation Events.” The Certificate of Designations provides that, in the case of a Deemed Liquidation Event, each holder of Series A Preferred Stock shall be entitled to receive the liquidation amount they would receive under a normal liquidation event; however, the liquidation amount must be in the same form of consideration as is payable to the holders of our common stock. The liquidation preference associated with the Series A Preferred Stock was $ 100 per share at September 30, 2020 and 2019. F- 30 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Voting Holders of Series A Preferred Stock are entitled to vote with the holders of shares of common stock on an as converted basis, subject to the Continuing Caps as discussed below. A majority of the voting power of the Series A Preferred Stock must approve certain significant actions, including, without limitation, the issuance of certain equity securities; the repurchase, redemption or acquisition of our common stock; the incurrence of debt; the consummation of certain acquisitions, mergers or other such transactions; and the sale of material assets. The Certificate of Designations includes a Conversion Cap and an Investor Voting Cap (each as defined in the Certificate of Designations), which generally prohibit: (i) the conversion of Series A Preferred Stock into common stock; and (ii) the voting of common stock issuable upon conversion of the Series A Preferred Stock, to the extent that such conversion results in the issuance of a number of shares of common stock exceeding 4.99 % of our outstanding shares of common stock as of June 24, 2016 or that has voting power that exceeds 4.99 % of the voting power of our outstanding shares of common stock as of June 24, 2016. The Certificate of Designations provides that the Conversion Cap and the Investor Voting Cap may only be removed upon our receipt of: (i) certain stockholder approvals required by Section 312.03 of the New York Stock Exchange Listed Company Manual (“NYSE Rule 312”); and (ii) either (A) Education Regulatory Approval (as defined in the Certificate of Designations), or (B) a good faith determination by our board of directors that Education Regulatory Approval is not required. Our stockholders approved a proposal at the annual meeting of stockholders on February 27, 2020 , in accordance with the listing standards of the NYSE, that satisfied NYSE Rule 312. In August 2020, the Purchaser notified us that it intended to distribute all 700,000 Series A Preferred Stock to its members, and that certain of its members would subsequently distribute their Series A Preferred Stock to (i) limited partners affiliated with the Purchaser and certain other entities for whom Coliseum Capital Management, LLC (an affiliate of the Purchaser) holds voting and dispositive power with respect to the Series A Preferred Stock (the “Affiliated Holders”), which six Affiliated Holders, following such distribution, will own Series A Preferred Stock that would represent, on an as converted basis, approximately 24.9 % of our outstanding shares of common stock and voting power, and (ii) limited partners unaffiliated with the Purchaser (the “Unaffiliated Holders”), which 12 Unaffiliated Holders, following such distribution, each will own Series A Preferred Stock that would represent, on an as converted basis, 9.9 % or less of our outstanding shares of common stock and voting power (collectively, the “Distributions”). In connection with the Distributions, our board of directors, based on advice of legal counsel, determined that: (i) no Education Regulatory Approval would be required for the Unaffiliated Holders to remove the Conversion Cap and the Investor Voting Cap with respect to the Series A Preferred Stock acquired in the Distributions; and (ii) as to the Series A Preferred Stock held by the Affiliated Holders, no Education Regulatory Approval is required prior to the Affiliated Holders (A) converting a number of Series A Preferred Stock into common stock provided that the number of shares of common stock issued pursuant to such conversion, in the aggregate, is less than or equal to 9.9 % of the number of shares of common stock outstanding on an as converted basis as of the date of the Distributions, and (B) voting a number of Series A Preferred Stock provided that the voting power of such Series A Preferred Stock and any shares of common stock issued upon conversion of such Series A Preferred Stock is less than or equal to 9.9 % of the voting power of the common stock outstanding as of the date of the Distributions (the foregoing limitations, the “Continuing Caps”). The removal of the Conversion Cap and Voting Cap became effective as of the date of the Distributions, subject to the Continuing Caps remaining in place with respect to the Series A Preferred Stock distributed to the Affiliated Holders. Education Regulatory Approval continue to be required for, and the Continuing Caps will remain in place with respect to, the Series A Preferred Stock acquired by the Affiliated Holders in the Distributions to the extent such shares, on an as converted basis, represent in excess of 9.9 % of our common stock and voting power as of the date of the Distributions. The Affiliated Holders may, at any time, request that we seek Education Regulatory Approval or make a good faith determination that such approval is not required. F- 31 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Optional Conversion by Purchaser The Series A Preferred Stock are convertible to common stock at any time at the option of the holder. Following the Distributions, the Conversion Cap currently applies to the Affiliated Holders. Additionally, the recipients of the Series A Preferred Stock in the Distributions entered into standard lock-up agreements with the Company restricting the transfer or sale of the Series A Preferred Stock, or any common stock convertible therefrom, for a period of 180 days from the September 14, 2020 distribution date. Optional Conversion by Our Company If at any time following the third anniversary of the issuance of the Series A Preferred Stock, the volume weighted average price of our common stock equals or exceeds 2.5 times the conversion price of the Series A Preferred Stock, or $ 8.33 as of September 30, 2020, for a period of 20 consecutive trading days (“Conversion Trigger”), we may, at our option and subject to obtaining any required stockholder and regulatory approvals, require that any or all of the then outstanding Series A Preferred Stock be automatically converted into our common stock at the conversion rate. We may not elect such conversion during the closed trading window periods in which any director or executive officer of our company is prohibited by us to, directly or indirectly, purchase, sell or otherwise acquire or transfer any equity security of our company. If we are unable to obtain the necessary regulatory approvals to remove the Conversion Cap within 120 days of giving our notice of intent to convert, we will have the option to redeem all of the Series A Preferred Stock at a premium. Conversion Rate and Conversion Price The conversion rate for the Series A Preferred Stock will be calculated by dividing the current liquidation preference by the conversion price then in effect. The initial and current conversion price for the Series A Preferred Stock is $ 3.33 per share. The conversion price is subject to adjustment upon the occurrence of certain common stock events, as defined in the Purchase Agreement, including stock splits, reverse stock splits or the issuance of common stock dividends. Optional Special Dividend and Conversion on Certain Change of Control Upon a change of control, at the written election by holders of a majority of the then outstanding shares of Series A Preferred Stock, we shall declare and pay a special cash dividend in the amount equal to either 1.5 or 2.0 times the Cash Dividend rate, depending on the type of change in control, multiplied by the liquidation preference per share then in effect. Redemption at the Option of Our Company We have the ability to redeem the Series A Preferred Stock at any time after the third anniversary of the issue date, provided that the Conversion Trigger has not been met on the date of the redemption notice. Holders of the Series A Preferred Stock will be able to convert their shares into common stock if neither the Investor Voting Cap nor Conversion Cap is in effect. If they do not provide notice of conversion within 10 days of receipt of the redemption notice, the redemption will proceed at a price per share equal to the product of the current conversion rate and 2.5 times the conversion price. If either the Investor Voting Cap or Conversion Cap is in effect at the date of the notice of redemption, the holder may request that we obtain the necessary regulatory approval for its removal. After the tenth anniversary of the issue date, we have the ability to redeem the Series A Preferred Stock in whole or in part at any time. Holders of the Series A Preferred Stock will then be able to convert their shares into common stock if neither the Investor Voting Cap nor Conversion Cap is in effect. If they do not provide notice of conversion within 10 days of receipt of the redemption notice, the redemption will proceed at a price per share equal to the current liquidation preference. If either the Investor Voting Cap or Conversion Cap is in effect at the date of the notice of redemption, the holder may request that we obtain the necessary regulatory approval for its removal. F- 32 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Anti-dilution The conversion price of the Series A Preferred Stock is subject to certain customary anti-dilution protections should we effect certain common stock events, such as stock splits, stock dividends or subdivisions, reclassifications or combinations of our common stock. In such events, the conversion price will be adjusted in a proportionate manner to the change in outstanding share of common stock immediately preceding and immediately after the event. Reservation of Shares Issuable upon Conversion We are required, at all times, to reserve and keep available out of our authorized and unissued shares of common stock the number of shares that would be issuable upon conversion of all Series A Preferred Stock, assuming that the Conversion Cap does not apply. If this reserve is not sufficient at any point to allow for full conversion, we shall be required to take action to increase our pool of authorized but unissued shares. Under the Securities Act, we were not required to register the offer or sale of the Series A Preferred Stock to the Purchaser. In conjunction with the Purchase Agreement, the parties entered into a Registration Rights Agreement in order to grant the Purchaser certain demand and piggyback registration rights covering the purchased shares. In the event that the Purchaser requests such registration of the Series A Preferred Stock, the Registration Rights agreement provides that we shall bear all expenses associated with the registration, with the exception of underwriting discounts and commissions and brokerage fees. On October 18, 2019, we filed a Form S-3 with the Securities and Exchange Commission to register shares of common stock currently held by selling stockholders as well as shares of common stock issuable upon the optional conversion of Series A Convertible Preferred Stock held by the selling stockholders. That registration statement became effective on October 30, 2019. Equity Offering On February 20, 2020, we entered into an Underwriting Agreement with B. Riley FBR, Inc., as representative of the several underwriters named therein (the “Underwriters”), to issue and sell an aggregate of 6,782,610 shares (the “Firm Shares”) of our common stock, par value $ 0.0001 per share (the “Common Stock”), 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) (the “Registration Statement”) and the accompanying prospectus , and related prospectus supplement, filed with the SEC (the “Offering”). In addition, we granted the Underwriters an option (“Option”) to purchase up to an additional 1,017,390 shares of the Common Stock for a period of 30 days from February 20, 2020. The Offering of the Firm Shares closed on February 25, 2020. The net proceeds from the Offering were approximately $ 49.2 million, after deducting underwriting discounts. Direct costs of $ 0.4 million related to the offering were recorded to equity during the three months ended March 31, 2020. The Underwriters did not exercise the Option in full for the additional 1,017,390 shares. The 6,782,610 shares purchased were issued from Treasury Stock on February 25, 2020, leaving 82,287 shares in Treasury stock. 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. Share Repurchase Program On December 20, 2011, our Board of Directors authorized the repurchase of up to $ 25.0 million of our common stock in the open market or through privately negotiated transactions. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements and prevailing market conditions. We may terminate or limit the share repurchase program at any time without prior notice. During the year ended September 30, 2020, we did not repurchase 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 Certificate of Designations, stock purchases under this program require the approval of a majority of the voting power of the Series A Preferred Stock. F- 33 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Note 16 - Stock-Based Compensation Incentive Compensation Plans We have two stock-based compensation plans: the Management 2002 Stock Option Program (“2002 Plan”) and the 2003 Incentive Compensation Plan, as amended (“2003 Plan”). The 2002 Plan was approved by our Board of Directors on April 1, 2002 and provided for the issuance of options to purchase 0.7 million shares of our common stock. On February 25, 2003, our Board of Directors authorized an additional 0.1 million options to purchase our common stock under the 2002 Plan. We do not intend to grant any additional options under the 2002 Plan. The 2003 Plan was approved by our Board of Directors and adopted effective December 22, 2003 upon consummation of our initial public offering and amended on February 28, 2007 and February 22, 2012 by our stockholders. The 2003 Plan, as amended, authorizes the issuance of various common stock awards, including stock options, restricted stock awards and restricted stock units, for approximately 6.3 million shares of our common stock. As of September 30, 2020, 2.2 million shares of common stock were reserved for issuance under the 2003 Plan, of which 1.3 million shares are available for future grant. When recording our stock-based compensation expense, we account for forfeitures as they occur. The following table summarizes the operating expense line and the impact on net income (loss) in the consolidated statements of operations in which stock-based compensation expense has been recorded for the years ended September 30, 2020, 2019, and 2018: Year Ended September 30, 2020 2019 2018 Educational services and facilities $ 64 $ — $ — Selling, general and administrative 2,013 1,440 1,864 Total stock-based compensation expense $ 2,077 $ 1,440 $ 1,864 Income tax benefit $ 519 $ 360 $ 466 Stock Options We issue stock options with exercise prices equal to the closing price of our stock on the grant date and which vest upon issuance. The expiration date of stock options granted under the 2003 Plan is the earlier of the seven or ten-year anniversary of the grant date, based on the terms of the individual grant; the one-year anniversary of the termination of the participant’s employment by reason of death or disability; 90 days after the date of the participant’s termination of employment if caused by reasons other than death, disability, cause, material breach or unsatisfactory performance; or on the termination date if termination occurs for reasons of cause, material breach or unsatisfactory performance. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model. The estimated fair value is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables, including, but not limited to, our expected stock price volatility, the expected term of the awards and actual and projected employee stock exercise behaviors. We evaluate our assumptions on the date of each grant. In determining our expected term, we have reviewed our historical share option exercise experience and determined it does not provide a reasonable basis upon which to estimate an expected term due to our limited historical award and exercise experience. Therefore, we have historically assumed the life of the options to be the term of the grant. F- 34 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) We determine the risk-free interest rate of our awards using the implied yield currently available for zero-coupon U.S. Government issues with a remaining term equal to the expected life of the options. The expected volatility considers the volatility of the Company’s common stock that has been traded for a period commensurate with the expected life. The expected term of options granted represents the period of time that options granted are expected to be outstanding based on historical experience. We have used an expected dividend yield of zero in the Black-Scholes option pricing model. We did not grant stock options during the years ended September 30, 2020 and 2018. We granted 210,000 stock options during the year ended September 30, 2019. The following assumptions were used to value options granted during the year ended September 30, 2019: Year Ended September 30, 2019 Expected years until exercised 7 Risk-free interest rate 2.84 % Expected volatility 52.4 % Expected dividends — % The following table summarizes stock option activity under the 2003 Plan for the years ended September 30, 2020, 2019 and 2018: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (In thousands) (per Share) (Years) Outstanding as of September 30, 2017 — $ — — $ — Outstanding as of September 30, 2018 — $ — — $ — Granted 210 $ 3.14 Exercised — $ — Forfeited — $ — Outstanding as of September 30, 2019 210 $ 3.14 6.19 $ 483 Granted — $ — Exercised — $ — Forfeited — $ — Outstanding as of September 30, 2020 210 $ 3.14 5.18 $ 407 Stock options exercisable as of September 30, 2020 210 $ 3.14 5.18 $ 407 As of September 30, 2020, there was no unrecognized stock-based compensation expense related to stock options. F- 35 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Restricted Stock Units and Performance Units The following table summarizes the activity for restricted stock units and performance units granted under the 2003 Plan for the years ended September 30, 2020, 2019 and 2018: RSU PSU Number of Shares (In thousands) Weighted Average Grant Date Fair Value per Share Number of Shares (In thousands) Weighted Average Grant Date Fair Value per Share Outstanding as of September 30, 2017 523 $ 3.71 132 $ 3.11 Granted 350 $ 2.90 182 $ 2.40 Vested ( 206 ) $ 4.51 — $ — Forfeited ( 95 ) $ 3.55 ( 36 ) $ 2.74 Outstanding as of September 30, 2018 572 $ 2.95 278 $ 2.69 Granted — $ — — $ — Adjustment to September 2017 grant based on achieved attainment level — $ — 23 Vested ( 228 ) $ 3.17 ( 108 ) $ 3.11 Forfeited ( 108 ) $ 2.96 ( 60 ) $ 2.75 Outstanding as of September 30, 2019 236 $ 2.74 133 $ 2.40 Granted 306 $ 7.46 314 $ 7.72 Adjustment to September 2017 grant based on achieved attainment level — $ — 33 Vested ( 141 ) $ 2.62 ( 100 ) $ 2.32 Forfeited ( 63 ) $ 2.96 ( 39 ) $ 2.48 Outstanding as of September 30, 2020 338 $ 7.01 341 $ 7.30 Restricted Stock Units Our restricted stock units are issued at fair market value, which is based on the closing prices of our stock on the grant date, discounted for non-participation in anticipated dividends during the vesting period. The restrictions on these units generally lapse ratably over a three or four year period based on the terms of the individual grant. The restrictions associated with our restricted stock units awarded under the 2003 Plan will lapse upon the death, disability, or if, within one year following a change of control, employment is terminated without cause or for good reason. If employment is terminated for any other reason, all shares of restricted stock shall be forfeited upon termination. As of September 30, 2020, unrecognized stock compensation expense related to restricted stock units was $ 1.8 million which is expected to be recognized over a weighted average period of 2.4 years. Performance Units The performance condition for performance units is compounded annual total shareholder return (“TSR”) for the measurement periods included in the grant. On the settlement date for each measurement period, participants will receive shares of our common stock equal to 0 % to 150 % of the performance units originally granted depending on the total stockholder return for that measurement period. The performance units vest subject to a market condition and on the settlement date which is expected to be no later than two and a half months after the end of each measurement period. We estimate the fair value of performance units using a Monte Carlo simulation which requires assumptions for expected volatility, risk-free rates of return, and dividend yields. Expected volatilities are derived using a method that calculates F- 36 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) historical volatility over a period equal to the length of the measurement period for UTI. We use a risk-free rate of return that is equal to the yield of a zero-coupon U.S. Treasury bill that is commensurate with each measurement period, and we assume that any dividends paid were reinvested. To receive the performance units awarded for a measurement period, participants are required to be employed by us on the settlement date unless one of the following conditions is met. Upon death or disability of a participant, the participant will receive a pro-rated number of performance units reflecting actual performance through the vesting date and the number of months of the performance period during which the participant was employed. If an employee is terminated without cause or leaves for good reason within one year following certain changes in control, a determination of whether, and to what extent the performance condition has been achieved will be based on actual performance against the stated criteria through the separation date. If an employee is terminated without cause or leaves for good reason after the one-year anniversary of certain changes in control, the participant will receive a pro-rated number of performance units reflecting actual performance through the separation date and the number of complete twelve-month periods of the performance period during which the participant was employed. If employment is terminated for any other reason, all unvested performance units shall be forfeited upon termination. As of September 30, 2020, unrecognized stock compensation expense related to performance units was $ 1.6 million, which is expected to be recognized over a weighted average period of 1.4 years. Note 17 - Earnings per Share We calculate basic earnings per share pursuant to the two-class method as a result of the issuance of the Series A Preferred Stock on June 24, 2016. Our Series A Preferred Stock is considered a participating security because, in the event that we pay a dividend or make a distribution on the outstanding common stock, we shall also pay each holder of the Series A Preferred Stock a dividend on an as-converted basis. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividend and participation rights in undistributed earnings. Under this method, all earnings, distributed and undistributed, are allocated to common shares and participating securities based on their respective rights to receive dividends. The Series A Preferred Stock is not included in the computation of basic earnings per common share in periods in which we have a net loss as the Series A Preferred Stock is not contractually obligated to share in our net losses. Diluted earnings per common share is calculated using the more dilutive of the two-class method or as-converted method. The two-class method uses net income available to common shareholders and assumes conversion of all potential shares other than the participating securities. The as-converted method uses net income and assumes conversion of all potential shares including the participating securities. Dilutive potential common shares include outstanding stock options, unvested restricted share awards and units and convertible preferred stock. The basic and diluted weighted average shares outstanding are the same for years ended September 30, 2019 and 2018 as a result of the net loss available to common shareholders and anti-dilutive impact of the potentially dilutive securities. The following table summarizes the computation of basic and diluted earnings per common share under the two-class or as-converted method, as well as the anti-dilutive shares excluded: Year Ended September 30, 2020 2019 2018 Basic earnings per common share: Net income (loss) $ 8,008 $ ( 7,868 ) $ ( 32,682 ) Less: Preferred stock dividend declared ( 5,264 ) ( 5,250 ) ( 5,250 ) Income (loss) available for distribution 2,744 ( 13,118 ) ( 37,932 ) Income allocated to participating securities ( 1,135 ) — — Net income (loss) available to common shareholders $ 1,609 $ ( 13,118 ) $ ( 37,932 ) F- 37 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Year Ended September 30, 2020 2019 2018 Weighted average basic shares outstanding 29,812 25,438 25,115 Basic income (loss) per common share $ 0.05 $ ( 0.52 ) $ ( 1.51 ) Diluted earnings per common share: Method used: Two-class Two-class Two-class Net income (loss) available to common shareholders $ 1,609 $ ( 13,118 ) $ ( 37,932 ) Weighted average basic shares outstanding 29,812 25,438 25,115 Dilutive effect related to employee stock plans 301 — — Weighted average diluted shares outstanding 30,113 25,438 25,115 Diluted income (loss) per common share $ 0.05 $ ( 0.52 ) $ ( 1.51 ) Anti-dilutive shares excluded: Outstanding stock-based grants 14 733 334 Convertible preferred stock 21,021 21,021 21,021 Total anti-dilutive shares excluded 21,035 21,754 21,355 Dilutive shares under the as-converted method (1) 51,134 46,971 46,382 (1) The dilutive shares under the as-converted method assume conversion of the preferred stock and are presented here merely for reference. In a net income position, diluted earnings per share is determined by the more dilutive of the two-class method or the as-converted method. Note 18 - Defined Contribution Employee Benefit Plan We sponsor a defined contribution 401(k) plan, under which our employees elect to withhold specified amounts from their wages to contribute to the plan and we have a fiduciary responsibility with respect to the plan. The plan provides for matching a portion of employees’ contributions at management’s discretion. All contributions and matches by us are invested at the direction of the employee in one or more mutual funds or cash. We made matching contributions of approximately $ 1.0 million for the years ended September 30, 2020, 2019 and 2018. Note 19 - Segment Information Our principal business is providing postsecondary education. We also provide manufacturer-specific training and these operations are managed separately from our campus operations. These operations do not currently meet the quantitative criteria for segments and therefore are reflected in the Other category. Our equity method investments and other non-Postsecondary Education operations are also included within the Other category. Corporate expenses are allocated to Postsecondary Education and the Other category based on compensation expense. Depreciation and amortization includes amortization of assets subject to finance leases or financing obligations. F- 38 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) Summary information by reportable segment is as follows: Postsecondary Education Other Consolidated Year Ended September 30, 2020 Revenues $ 287,195 $ 13,566 $ 300,761 Loss from operations ( 3,493 ) ( 378 ) ( 3,871 ) Depreciation and amortization (1) 11,698 106 11,804 Net income (loss) 8,386 ( 378 ) 8,008 Year Ended September 30, 2019 Revenues 316,589 14,915 331,504 Loss from operations ( 6,685 ) ( 1,117 ) ( 7,802 ) Depreciation and amortization (1) 15,747 157 15,904 Net loss ( 7,149 ) ( 719 ) ( 7,868 ) Year Ended September 30, 2018 Revenues 300,753 16,212 316,965 Loss from operations ( 31,707 ) ( 3,568 ) ( 35,275 ) Depreciation and amortization (1) 14,978 710 15,688 Net loss ( 29,713 ) ( 2,969 ) ( 32,682 ) As of September 30, 2020 Total assets 435,144 6,837 441,981 As of September 30, 2019 Total assets 263,974 6,552 270,526 (1) Excludes 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. Note 20 - Government Regulation and Financial Aid Our institutions are subject to extensive regulatory requirements imposed by a wide range of federal and state agencies, as well as by institutional and programmatic accreditors. These requirements, which are frequently being revisited, revised, and expanded, cover virtually every aspect of our schools’ operations, and our institutions are subject to periodic audits and program compliance reviews by various external agencies for compliance with these requirements. Each of our institutions’ administration of the federal programs of student financial assistance under Title IV of the HEA (“Title IV Programs”) also must be audited annually by independent accountants and the resulting audit report submitted to ED for review. The approvals granted by these regulatory entities permit our schools to operate and to participate in a variety of government-sponsored financial aid programs, including Title IV Programs. If our institutions fail to comply with any of these regulatory requirements, our regulators could take an array of adverse actions, up to and including revocation of the approval granted by the agency. Such adverse actions could have a material adverse effect on our academic or operational initiatives, cash flows, results of operations, or financial condition. Below, we discuss certain, specific elements of this regulatory environment. F- 39 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) State Authorization To operate and offer postsecondary programs, and to be certified to participate in Title IV Programs, each of our institutions must obtain and maintain authorization from the state in which it is physically located (“Home State”). To engage in recruiting activities outside of its Home State, each institution also may be required to obtain and maintain authorization from the states in which it is recruiting students. The level of regulatory oversight varies substantially from state to state and is extensive in some states. State laws may establish standards for instruction, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing, recruiting, student outcomes reporting, disclosure obligations to students, limitations on mandatory arbitration clauses in enrollment agreements, financial operations, and other operational matters. Some states prescribe standards of financial responsibility and mandate that institutions post surety bonds. Many states have requirements for institutions to disclose institutional data to current and prospective students, as well as to the public. And some states require that our schools meet prescribed performance standards as a condition of continued approval. Accreditation Accreditation is a non-governmental process through which an institution voluntarily submits to ongoing qualitative reviews by an organization of peer institutions. Institutional accreditation by an ED-recognized accreditor is required for an institution to be certified to participate in Title IV Programs. All of our institutions are accredited by the Accrediting Commission of Career Schools and Colleges (“ACCSC”), which is an accrediting agency recognized by ED. ACCSC reviews the academic quality of each institution’s instructional programs, as well as the administrative and financial operations of the institution to ensure that it has the resources necessary to perform its educational mission, implement continuous improvement processes, and support student success. Our institutions must submit annual reports, and at times, supplemental reports, to demonstrate ongoing compliance and improvement. ACCSC requires institutions to disclose certain institutional information to current and prospective students, as well as to the public, and requires that our schools and programs meet various performance standards as a condition of continued accreditation. Institutions must periodically renew their accreditation by completing a comprehensive renewal of accreditation process. Title IV Programs The federal government provides a substantial part of its support for postsecondary education through Title IV Programs in the form of grants and loans to students who can use those funds at any institution that has been certified as eligible to participate by ED. All of our institutions are certified to participate in Title IV Programs. In fiscal 2020, we derived approximately 66 % of our revenues, on a cash basis as defined by ED, from Title IV Programs. Significant factors relating to Title IV Programs that could adversely affect us include: • The 90/10 Rule . As a condition of participation in Title IV Programs, proprietary institutions must agree when they sign their PPA to derive at least 10% of their revenues for each fiscal year from sources other than Title IV Program funds. A proprietary institution is subject to sanctions if it exceeds the 90% level for a single year, and loses its eligibility to participate in Title IV Programs if it derives more than 90% of its revenue from Title IV Programs for two consecutive fiscal years. As of September 30, 2020, our institutions’ annual Title IV percentages as calculated under the 90/10 rule ranged from approximately 65 % to 68 %. • Administrative Capability . To continue its participation in Title IV Programs, an institution must demonstrate that it remains administratively capable of providing the education it promises and of properly managing the Title IV Programs. ED assesses the administrative capability of each institution that participates in Title IV Programs under a series of standards listed in the regulations, which cover a wide range of operational and administrative topics, including the designation of capable and qualified individuals, the quality and scope of written procedures, the adequacy of institutional communication and processes, the timely resolution of issues, the sufficiency of recordkeeping, and the frequency of findings of noncompliance, to name a few. ED’s administrative capability standards also include thresholds and expectations for federal student loan cohort default rates (discussed below), satisfactory academic progress, and loan counseling. Failure to satisfy any of the standards may lead ED to find the institution ineligible to participate in Title IV Programs, require the institution to repay Title IV Program funds, change the method of payment of Title IV Program F- 40 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) funds, or place the institution on provisional certification as a condition of its continued participation or take other actions against the institution. • Three-Year Student Loan Default Rates. To remain eligible to participate in Title IV Programs, institutions also must maintain federal student loan cohort default rates below specified levels. An institution whose three-year cohort default rate is 15% or greater for any one of the three preceding years is subject to a 30-day delay in receiving the first disbursement on federal student loans for first-time borrowers. As of September 30, 2020, only Universal Technical Institute of Texas was subject to a 30-day delay in receiving the first disbursement on federal student loans for first-time borrowers due to a three-year cohort default rate that was 15% or greater for one of the three most recent years. The 30-day delay was lifted as of September 30, 2020 for Universal Technical Institute of Phoenix due to the three-year cohort default rate falling below 15%. • Financial Responsibility. All institutions participating in Title IV Programs also must satisfy specific ED standards of financial responsibility. Among other things, an institution must meet all of its financial obligations, including required refunds to students and any Title IV Program liabilities and debts, be current in its debt payments, comply with certain past performance requirements, not receive an adverse, qualified, or disclaimed opinion by its accountants in its audited financial statements. Each year, ED also evaluates institutions’ financial responsibility by calculating a “composite score,” which utilizes information provided in the institutions’ annual audited financial statements. The composite score is based on three ratios: (1) the equity ratio which measures the institution’s capital resources, ability to borrow and financial viability; (2) the primary reserve ratio which measures the institution’s ability to support current operations from expendable resources; and (3) the net income ratio which measures the institution’s ability to operate at a profit. Between composite score calculations, ED also will reevaluate the financial responsibility of an institution following the occurrence of certain “triggering events,” which must be timely reported to the agency. • Title IV Program Rulemaking. ED is almost continuously engaged in one or more negotiated rulemakings, which is the process pursuant to which it revisits, revises, and expands the complex and voluminous Title IV Program regulations. Recent and significant negotiated rulemakings include the Gainful Employment Rulemaking, the Borrower Defense to Repayment Rulemaking, and the Accreditation and Innovation Rulemaking. New regulations associated with these rulemakings took effect on July 1, 2020. We devote significant effort to understanding the effects of these regulations on our business and to developing compliant solutions that also are congruent with our business, culture, and mission to serve our students and industry relationships. However, we cannot predict with certainty how these new and developing regulatory requirements will be applied or whether each of our schools will be able to comply with all of the requirements in the future. Other Federal and State Student Aid Programs Some of our students also receive financial aid from federal sources other than Title IV Programs, such as the programs administered by the VA, the Department of Defense (“DOD”) and under the Workforce Investment Act. Additionally, some states provide financial aid to our students in the form of grants, loans or scholarships. Our Long Beach, Rancho Cucamonga and Sacramento, California campuses, for example, are currently eligible to participate in the Cal Grant program. All of our institutions must comply with the eligibility and participation requirements applicable to each of these funding programs, which vary by funding agency and program. In 2020, we derived approximately 17 % of our revenues, on a cash basis, from veterans’ benefits programs, which include the Post-9/11 GI Bill, the Montgomery GI Bill, the Reserve Education Assistance Program (“REAP”) and VA Vocational Rehabilitation. To continue participation in veterans’ benefits programs, an institution must comply with certain requirements established by the VA. COVID-19 and the CARES Act On March 13, 2020, the United States declared a national emergency concerning the COVID-19 pandemic, effective March 1, 2020. ED, consistent with its authority under then-existing statutes and regulations, issued guidance on March 5, 2020, outlining a range of accommodations intended to address interruptions of study related to COVID-19. On March 27, 2020, President Trump signed the CARES Act, which provides additional flexibilities and accommodations, beyond those offered F- 41 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) by the ED in its March 5, 2020 guidance, particularly with regard to the campus-based assistance programs, the measurement of satisfactory academic progress and the return of unearned Title IV Program funds to ED. Shortly thereafter, on April 3, 2020, ED issued further guidance, providing additional regulatory flexibilities, and in some cases, implementing the accommodations provided for in the CARES Act. ED periodically updated and supplemented this guidance over the following months. Guidance also has been published regarding immigration, discrimination, safety, and privacy issues, as well as the Higher Education Emergency Relief Fund (“HEERF”) established under the CARES Act. We have reviewed and implemented many of the flexibilities created by the CARES Act and ED’s guidance, including the opportunity to temporarily offer distance education, discussed below. We continue to review new guidance from ED and to implement available legislative and regulatory relief as applicable. Distance Education In response to the COVID-19 pandemic, ED provided broad approval for institutions to use distance learning modalities without going through the standard ED approval process for payment periods that begin on or before December 31, 2020. ED also permitted accreditors to waive their distance review requirements. ACCSC has granted institutions temporary approval to offer distance education through December 31, 2020 for the end of the emergency. State agencies have also provided distance education flexibility, but the processes and expiration dates for temporary distance education approval vary by state, and states have been granting extensions to these temporary approvals as they approach expiration. We have availed ourselves of this temporary flexibility in all our programs and we are in full compliance with all state and ACCSC requirements. To afford us additional flexibility beyond the current temporary approval period(s), we have initiated the approval process with ACCSC, state agencies, or both to be able of offer distance education and a blended learning format for all of our programs on a more permanent basis. Additionally, as a result of previously implementing our Tech II curriculum, we are currently approved to offer distance education at our Avondale, Arizona, Rancho Cucamonga, California, Sacramento, California, Orlando, Florida, Dallas-Ft. Worth, Texas, Long Beach, California and Bloomfield, New Jersey campuses for our Automotive/Diesel Tech II programs by ACCSC, state agencies, or both. Note 21 - Higher Education Emergency Relief Fund under the CARES Act The CARES Act established the HEERF. The HEERF includes approximately $ 14.0 billion in relief funds to be distributed directly to institutions of higher education. The most significant portion of that funding allocation provides that $ 12.56 billion will be distributed to institutions using a formula based on student enrollment. Of the amount allocated to each institution under this formula, at least 50% must be reserved to provide students with emergency financial aid grants to help cover expenses related to the disruption of campus operations due to coronavirus. The remaining funds must be used “to cover any costs associated with significant changes to the delivery of instruction due to the coronavirus.” In order to access the HEERF funds, institutions must complete two Funding and Certification Agreements (the “HEERF Agreements”), one for the emergency financial grants to students portion and the other for the institutional portion, which obligate the recipient to administer the funds in a manner that is consistent with the CARES Act and federal laws and regulations cited in the HEERF Agreements. The HEERF Agreements also subject the recipient to a range of audit requirements, as well as quarterly and annual reporting requirements. ED has emphasized that institutions should be prepared to report the use of the funds and to describe any internal controls the institution has in place to ensure that funds were used for allowable purposes and in accordance with cash management principles. The agency also has encouraged institutions to keep detailed records of how they are expending all funds received under the HEERF. A failure to administer the HEERF funds in accordance with applicable laws at regular intervals could result in a future repayment liability. The allocations to the higher education institutions were set by a formula prescribed in the CARES Act, which is weighted significantly by the number of full-time students who are Pell-eligible, but also takes into consideration the total population of the school and the number of students who were not enrolled full-time online before the COVID-19 outbreak. ED utilized the most recent data available from the Integrated Postsecondary Education Data System and Federal Student Aid for this F- 42 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) calculation. In May 2020, we were granted approximately $ 33.0 million in HEERF funds for emergency grants to students and to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus. HEERF Funds for Student Grants Per the HEERF Agreements, at least 50% of HEERF funds received were to be used exclusively for emergency financial aid grants to students impacted by COVID-19, supporting their efforts to stay in school and continue their training toward graduation and future careers. In May 2020, we received approximately $ 16.5 million designated for student grants and deposited these funds into a separate restricted cash account. As of September 30, 2020, we have awarded all $ 16.5 million designated for student grants to approximately 9,000 students. HEERF Funds for Significant Changes to the Delivery of Instruction Due to Coronavirus In addition, in May of 2020 we were awarded approximately $ 16.5 million for the institutional portion of the HEERF funds. Such funds may be used to provide additional emergency financial aid grants to students, to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus, or not used at all and returned to the government. Per the CARES Act, the HEERF Agreements, and ED guidance, the following requirements are generally applicable to all allowable institutional costs: • Funds may only be used to cover institutional costs associated with significant changes to the delivery of instruction due to the coronavirus. • Costs must have been incurred on or after March 13, 2020. • Funds must generally be spent one calendar year (365 days) from the date of award. • The use of funds must be documented and reported. As explained in the HEERF Agreements for the Institutional Portions, we have “discretion in determining how to allocate and use the funds provided under the CARES Act, provided the funds will be spent only on those costs for which Recipient has a reasoned basis for concluding such costs have a clear nexus to significant changes to the delivery of instruction due to the coronavirus.” Institutional costs that the ED has specifically designated as allowable include: additional emergency grants to students; reimbursements for refunds made to students for services the institution could no longer provide such as housing, food, room and board, and tuition; technology costs including laptops, hotspots, and other information technology equipment and software to enable students to participate in distance learning; qualified scholarships and payment for future academic terms; payments to a third-party service provider or online program manager for each additional student using the distance learning platform; purchases to ensure the physical safety of the students on campus; and purchases of equipment or software, paying for online licensing fees, or paying for internet service to enable students to transition to distance learning as such costs are associated with a significant change in the delivery of instruction due to the coronavirus. The ED has specifically prohibited costs related to pre-enrollment recruiting activities, endowments, capital outlays associated with facilities to athletics, sectarian instruction, or religious worship, executive compensation, investor benefits, and to pay student balances or student debt. Prior to the COVID-19 crisis, the majority of our training programs were delivered exclusively through in-person instruction at our campus locations. In order to allow our students to continue their education during the COVID-19 crisis, beginning on March 25, 2020, we shifted our predominantly on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs. We incurred significant costs for the initial development and implementation of our online training program for students including software purchases, audio/video equipment purchases and labor hours to record the instructional videos and for training of faculty, and enhancements to the online student experience. 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 to resume in-person labs in Bloomfield, New Jersey opened on July 1, 2020. On-campus labs have been re-designed or modified to meet the guidelines set by the CDC, as well as state and local jurisdictions for health, safety and social distancing. In order to comply with these new guidelines, we incurred costs for sanitization supplies, partitions, labor hours and other related expenses to ensure safety and social distancing. Additionally, we purchased laptops to provide to our students to assist their transition to the online blended F- 43 Table of Contents UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) training model. We also incurred costs as we continued to improve and enhance the delivery of our online instruction for students. In total, we incurred approximately $ 15.1 million between March 15, 2020 and September 30, 2020 related to the changes in the delivery of instruction due to the coronavirus. We have consulted with our outside regulatory counsel and believe that all of these costs are allowable expenses for the institutional HEERF funds under the CARES Act. However, we cannot guarantee that ED will agree with our foregoing conclusion. We have offset our total operating expenses by $ 15.1 million for the year ended September 30, 2020. Of the $ 15.1 million, $ 13.3 million was recorded in “Educational services and facilities” and $ 1.8 million was recorded in “Selling, general and administrative” on the consolidated statement of operations for the year ended September 30, 2020. Additionally, during the year ended September 30, 2020, we used $ 0.6 million of the institutional funds for additional emergency grants to our students. Including the additional student grants, the total institutional funds spent during fiscal 2020 was $ 15.7 million. As of September 30, 2020, we had drawn 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 the year ended September 30, 2020. 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. As of September 30, 2020, there was approximately $ 0.8 million of institutional funds remaining to be used for allowable costs incurred after September 30, 2020, which are expected to be used during the first quarter of our fiscal 2021. Note 22 - Quarterly Financial Summary (Unaudited) Summarized quarterly financial information for fiscal 2020 and 2019 is as follows: Year ended September 30, 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Revenues $ 87,234 $ 82,717 $ 54,483 $ 76,327 $ 300,761 Income (loss) from operations 4,254 ( 499 ) ( 13,779 ) 6,153 ( 3,871 ) Net income (loss) 4,684 10,142 ( 13,268 ) 6,450 8,008 Earnings (loss) per share: Basic $ 0.07 $ 0.18 $ ( 0.45 ) $ 0.10 $ 0.05 Diluted $ 0.07 $ 0.18 $ ( 0.45 ) $ 0.09 $ 0.05 Year ended September 30, 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Revenues $ 83,050 $ 81,746 $ 79,042 $ 87,666 $ 331,504 (Loss) income from operations ( 7,205 ) ( 5,580 ) ( 455 ) 5,438 ( 7,802 ) Net (loss) income ( 7,717 ) ( 5,263 ) ( 365 ) 5,477 ( 7,868 ) Earnings (loss) per share: Basic $ ( 0.36 ) $ ( 0.26 ) $ ( 0.07 ) $ 0.09 $ ( 0.52 ) Diluted $ ( 0.36 ) $ ( 0.26 ) $ ( 0.07 ) $ 0.09 $ ( 0.52 ) The sum of quarterly per share information does not equal amounts for the full year as quarterly calculations are performed on a discrete basis. Additionally, securities may have had an anti-dilutive effect during individual quarters but not for the full year. F- 44