CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created by those laws. All statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate may occur in the future, including such things as our outlook, our product development and planning, our pipeline, future capital expenditures, share repurchases, financial results, the impact of regulatory changes, existing and evolving business strategies and acquisitions and dispositions, demand for our services, competitive strengths, the benefits of new initiatives, growth of our business and operations, our ability to successfully implement our plans, strategies, objectives, expectations and intentions are forward-looking statements. Also, when we use words such as “may,” “will,” “would,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “forecast,” “seek,” “outlook,” “target,” goal,” “probably,” or similar expressions, we are making forward-looking statements. Such statements are based upon the current beliefs and expectations of Skillsoft’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. All forward-looking disclosure is speculative by its nature, and we caution you against unduly relying on these forward-looking statements.

 

Factors that could cause or contribute to such differences include those described under “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10‑K for the fiscal year ended January 31, 2023. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in the Annual Report and in our other periodic filings with the Securities and Exchange Commission. The forward-looking statements contained in this Form 10-Q represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements, or otherwise, except as required by law.

 

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included in this document, our inclusion of this information is not a representation or guarantee by us that our objectives and plans will be achieved. Annualized, pro forma, projected and estimated numbers are used for illustrative purposes only, are not forecasts and may not reflect actual results. Additionally, statements as to market share, industry data and our market position are based on the most current data available to us and our estimates regarding market position or other industry data included in this document or otherwise discussed by us involve risks and uncertainties and are subject to change based on various factors, including as set forth above.

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED FINANCIAL STATEMENTS.

 

SKILLSOFT CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except number of shares)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

SKILLSOFT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

SKILLSOFT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

SKILLSOFT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except number of shares)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

SKILLSOFT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - continued

(in thousands, except number of shares)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

SKILLSOFT CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

SKILLSOFT CORP.

UNAUDITED SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION

(in thousands)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)    Description of Business and Basis of Presentation

 

Description of Business

 

The combined company operates as Skillsoft Corp. (“Skillsoft”, “we”, “us”, “our” and the “Company”) and has been listed on the New York Stock Exchange under the ticker symbol “SKIL” since June 14, 2021. Through a portfolio of high-quality content, a platform that is personalized and connected to customer needs, and a broad ecosystem of partners, Skillsoft drives continuous growth and performance for employees and their organizations by overcoming critical skills gaps, unlocking human potential, and transforming the workforce. With more than 150,000 expert-led skills-building courses in modalities ranging from video and audio to instructor-led training and practice labs, Skillsoft offers transformative learning experiences for leaders to frontline workers, readers to hands-on learners.

 

References in the accompanying footnotes to the Company’s fiscal year refer to the fiscal year ended January 31 of that year (e.g., fiscal 2023 is the fiscal year ended January 31, 2023).

 

Basis of Financial Statement Preparation

 

The accompanying condensed consolidated financial statements include the accounts of Skillsoft and its wholly owned subsidiaries. These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, include all information and footnotes necessary for a complete presentation of operations, comprehensive income (loss), financial position, changes in shareholders’ equity (deficit) and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The financial statements contained in these interim financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2023.

 

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS” Act”), and has and may in the future take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. 

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from our estimates.

 

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(2)    Summary of Significant Accounting Policies

 

The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies to the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2023 and should be read in connection with the reading of these interim unaudited financial statements.

 

(3)    Business Combination

 

Ryzac, Inc. (“Codecademy”)

 

On April 4, 2022, the Company acquired Ryzac, Inc. (“Codecademy”). Codecademy is a learning platform providing high-demand technical skills to approximately 40 million registered learners in nearly every country worldwide. The platform offers interactive, self-paced courses and hands-on learning in 14 programming languages across multiple domains such as application development, data science, cloud and cybersecurity.

 

The acquisition was accounted for as a business combination under ASC 805, Business Combinations, utilizing the acquisition method. Under the acquisition method, the acquisition date fair value of the consideration paid by the Company was allocated to the assets acquired and the liabilities assumed based on their estimated fair values.

 

The following summarizes the purchase consideration (in thousands):

 

Description		Amount
Cash payments		$	202,119
Class A common stock issued			182,550
Cash settlement of seller transaction costs and other			1,315
Total purchase price		$	385,984

 

The Company recorded the fair value of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed as follows (in thousands):

 

		Final Purchase
Description		Price Allocation
Cash, cash equivalents and restricted cash		$	4,053
Current assets			3,671
Property and equipment			385
Intangible assets			119,000
Total assets acquired			127,109
Current liabilities			(6,166	)
Deferred revenue			(18,396	)
Deferred tax liabilities			(21,621	)
Total liabilities assumed			(46,183	)
Net assets acquired			80,926
Goodwill			305,058
Total purchase price		$	385,984

 

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The values allocated to identifiable intangible assets and their estimated useful lives are as follows (in thousands):

 

Description		Amount				Life (in years)
Trade name		$	44,000				13.8
Developed technology			43,000				5.0
Content			17,000				5.0
Customer relationships			15,000				5.8
Total		$	119,000

 

Values and useful lives assigned to intangible assets were based on estimated value and use of these assets by a market participant. The customer relationships were valued using the income approach. The trade name was valued using the relief from royalty method. The courseware and proprietary delivery software were valued using the replacement cost approach.

 

Goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The Company determined that the acquisition of Codecademy resulted in the recognition of goodwill primarily because the acquisition is expected to help the Company to meet its long-term operating profitability objectives through achievement of synergies. The majority of goodwill is not deductible for tax purposes.

 

In the three and six months ended July 31, 2022, the Company incurred $2.5 million and $7.7 million, respectively, in acquisition-related costs, which primarily consisted of transaction fees and legal, accounting, and other professional services. These costs are included in the "acquisition-related costs" in the accompanying condensed consolidated statements of operations.

 

Unaudited Pro Forma Financial Information

 

The unaudited pro forma financial information below is presented in accordance with Regulation S-X, Article 11 to enhance comparability for all periods by including operating results for Codecademy as if the merger had closed on February 1, 2022 (in thousands):

 

		Unaudited Pro Forma				Unaudited Pro Forma
		Statement of Operations				Statement of Operations
		Three Months Ended July 31,				Six Months Ended July 31,
		2022				2022
Revenue		$	140,574			$	283,471
Net loss from continuing operations			(116,984	)			(161,375	)

 

The unaudited pro forma financial information does not assume any impacts from revenue, cost, or other operating synergies that could be generated as a result of the acquisition. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated on February 1, 2022. The unaudited pro forma financial information includes adjustments to reflect intangible asset amortization based on the economic values derived from definite-lived intangible assets and interest expense on the new debt financing. The pro forma results of operations also exclude acquisition-related costs other than the transaction costs specific to the business combination occurring in April 2022. These transaction costs are presented as if they occurred in February 2022.

 

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(4)    Discontinued Operations

 

On June 12, 2022, Skillsoft entered into a Stock Purchase Agreement (the “Purchase Agreement”), by and among Skillsoft, Skillsoft (US) Corporation (“Seller”), Amber Holding Inc. (“SumTotal”), and Cornerstone OnDemand, Inc. (“Buyer”), pursuant to which, subject to the certain terms and conditions contained therein, Seller agreed to sell, and Buyer agreed to purchase, all of Seller’s right, title and interest in and to one hundred percent (100%) of the outstanding shares of capital stock of SumTotal. The sale was completed on August 15, 2022. Net proceeds from the sale were $174.9 million, after final working capital adjustments in April 2023.

 

In connection with the sale, the parties to the Purchase Agreement entered into certain other agreements, including a transition services agreement pursuant to which each of Seller and Buyer agreed to provide the other party with certain transition services for a limited period following the closing.

 

The Company determined that the sale of the SumTotal business met the criteria to be classified as discontinued operations, and its assets and liabilities held for sale, as of June 12, 2022. Accordingly, the Company classified the assets and liabilities of the discontinued operations as held for sale in its consolidated balance sheets at the lower of carrying amount or fair value less cost to sell. Classification for the assets and liabilities in comparative periods retained their previous classification as current or long-term. No losses were recognized upon classification of the discontinued operations' assets and liabilities as held for sale. Depreciation and amortization ceased on assets classified as held for sale. The operating results of SumTotal are reported as discontinued operations, for all periods presented, as the disposition reflects a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.

 

The financial results of SumTotal are presented as Income from discontinued operations, net of tax in our condensed consolidated statements of operations. The following presents financial results of SumTotal for the three and six months ended July 31, 2022 in our condensed consolidated statements of operations (in thousands):

 

		Three Months				Six Months
		Ended				Ended
		July 31, 2022				July 31, 2022
Revenues:
Total revenues		$	27,453			$	56,528
Operating expenses:
Costs of revenues			8,152				17,776
Content and software development			4,849				11,289
Selling and marketing			5,385				10,707
General and administrative			289				663
Amortization of intangible assets			2,049				6,345
Acquisition-related costs			422				553
Restructuring			172				201
Total operating expenses			21,318				47,534
Operating income from discontinued operations			6,135				8,994
Other income (expense), net			507				458
Interest income			6				12
Interest expense			(576	)			(1,320	)
Income (loss) from discontinued operations before income taxes			6,072				8,144
Provision for (benefit from) income taxes			255				852
Net income (loss) from discontinued operations		$	5,817			$	7,292

 

In addition, the amounts described in other footnotes within these condensed consolidated financial statements have been updated to reflect the amounts applicable to continuing operations, unless otherwise noted.

 

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(5)    Intangible Assets

 

Intangible assets consisted of the following (in thousands):

 

		July 31, 2023												January 31, 2023
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Developed software/ courseware		$	379,281			$	164,242			$	215,039			$	374,057			$	123,219			$	250,838
Customer contracts/ relationships			338,313				64,945				273,368				336,182				42,026				294,156
Vendor relationships			40,439				37,864				2,575				39,887				36,666				3,221
Trademarks and trade names			44,000				3,202				40,798				44,000				1,454				42,546
Publishing rights			41,100				17,559				23,541				41,100				13,449				27,651
Backlog			49,700				39,360				10,340				49,700				32,780				16,920
Skillsoft trademark			84,700				—				84,700				84,700				—				84,700
Global Knowledge trademark			23,403				5,889				17,514				23,080				5,046				18,034
Total intangible assets		$	1,000,936			$	333,061			$	667,875			$	992,706			$	254,640			$	738,066

 

Amortization expense related to the existing finite-lived intangible assets is expected to be as follows (in thousands):

 

For fiscal years ended January 31:		Amortization Expense
2024 (six months remaining)		$	75,353
2025			132,178
2026			128,356
2027			81,756
2028			41,957
Thereafter			123,575
Total future amortization		$	583,175

 

Amortization expense related to intangible assets in the aggregate was $39.2 million, $77.5 million, $45.2 million and $84.8 million for the three and six months ended July 31, 2023 and the three and six months ended July 31, 2022, respectively.

 

Impairment Review Requirements

 

The Company reviews intangible assets subject to amortization if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in remaining useful life. The Company reviews indefinite lived intangible assets, including goodwill, on the annual impairment test date ( January 1) or more frequently if there are indicators of impairment.

 

In connection with the impairment evaluation, the Company may first consider qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. Performing a quantitative goodwill impairment test is not necessary if an entity determines based on this assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company fails or elects to bypass the qualitative assessment, the goodwill impairment test must be performed. This test requires a comparison of the carrying value of the reporting unit to its estimated fair value. If the carrying value of a reporting unit’s goodwill exceeds its fair value, an impairment loss equal to the difference is recorded, not to exceed the amount of goodwill allocated to the reporting unit. In determining reporting units, the Company first identifies its operating segments, and then assesses whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component.

 

The Company completed the qualitative assessment discussed above for the six months ended July 31, 2023 and concluded that there were not indicators of impairment for our reporting units.

 

A roll forward of goodwill is as follows:

 

Description		Content & Platform				Instructor-Led Training				Consolidated
Goodwill, net January 31, 2023		$	417,340			$	40,404			$	457,744
Foreign currency translation adjustment			(635	)			858				223
Goodwill, net July 31, 2023		$	416,705			$	41,262			$	457,967

 

As of July 31, 2023, there was $569.3 million and $72.1 million of accumulated impairment losses for the Content & Platform (formerly referred to as Skillsoft Content) and Instructor-Led Training (formerly referred to as Global Knowledge) segments, respectively.

 

If current discount rates rise or if relevant market-based inputs for our impairment assessment worsen during the remainder of fiscal 2024, and if our stock price and market capitalization remain at current levels for a prolonged period of time, we will need to reassess intangible impairment at the end of each quarter. Subsequent reviews of goodwill and intangibles could result in impairment during fiscal 2024. Factors that could result in an impairment include, but are not limited to, the following:

 

●

Prolonged period of our estimated fair value of our reporting units exceeding our market capitalization;

●

Lower expectations for future profitability of bookings or EBITDA, which in part, could be impacted by legislative, regulatory or tax changes that affect the cost of, or demand for, products and services as well as the loss of key personnel;

●

Deterioration in key assumptions used in our income approach estimates of fair value, such as higher discount rates from higher stock market volatility; and

●

Valuations of significant mergers or acquisitions of companies that provide relevant market-based inputs for our impairment assessment that could support less favorable conclusions regarding the estimated fair value of our reporting units.

 

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(6)    Taxes

 

For the three and six months ended July 31, 2023, the Company recorded a tax benefit on continuing operations of $1.9 million and $6.3 million, respectively, on a pretax loss of $33.9 million and $82.5 million, respectively. The tax benefit reflects the impact of non-deductible items, current period changes in the Company’s valuation allowance on its deferred tax assets and the impact of foreign rate differential.

 

For the three and six months ended July 31, 2022, the Company recorded a tax benefit on continuing operations of $3.1 million and $25.4 million, respectively, on a pretax loss of $130.4 million and $175.8 million, respectively. The tax benefit reflects the impact of non-deductible items, current period changes in the Company’s valuation allowance on its deferred tax assets and the impact of foreign rate differential.

(7)    Restructuring

 

In connection with strategic initiatives implemented during the three and six months ended July 31, 2023 and July 31, 2022, the Company’s management approved and initiated plans to reduce its cost structure and better align operating expenses with existing economic conditions and the Company’s operating model. The Company recorded restructuring charges of $2.5 million and $7.7 million during the three and six months ended July 31, 2023, respectively, and $4.3 million and $8.3 million for the three and six months ended July 31, 2022, respectively. These restructuring charges are presented separately in the accompanying condensed consolidated statements of operations and include primarily the severance costs of terminated employees and lease termination and lease impairment charges.

(8)    Leases, Commitments and Contingencies

 

The Company’s lease portfolio includes office space, training centers, and vehicles to support its research and development activities, sales operations and other corporate and administrative functions in North America, Europe and Asia. The Company’s leases have remaining terms of one year to ten years. Some of the Company’s leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.

 

Operating lease right-of-use ("ROU") assets and liabilities are recognized based on the present value of the future minimum lease payments over the expected lease term. As the Company’s operating leases generally do not provide an implicit rate, the Company uses an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at the acquisition date to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment. The weighted average incremental borrowing rate for its operating leases as of July 31, 2023 and January 31, 2023 was 5.8% and 5.5%, respectively.

 

The operating leases are included in the captions “Right of use assets”, “Lease liabilities”, and “Long-term lease liabilities” on the Company’s condensed consolidated balance sheets as of July 31, 2023 and January 31, 2023. The weighted-average remaining lease term of the Company’s operating leases is 6.1 years as of July 31, 2023. Lease costs for minimum lease payments are recognized on a straight-line basis over the lease term. The lease costs were $2.9 million and related cash payments were $1.4 million for the six months ended July 31, 2023. The lease costs were $3.7 million and related cash payments were $4.2 million for the six months ended July 31, 2022. Lease costs are included within the content and software development, selling and marketing, and general and administrative lines on the condensed consolidated statements of operations, and the operating leases related cash payments were included in the operating cash flows and the finance leases related cash payments were included in the financing cash flows on the condensed consolidated statements of cash flows. Short-term lease costs and variable lease costs are not material.

 

See Note 7 for discussion related to restructuring charges associated with lease termination and lease impairment charges.

 

The below reconciles the undiscounted future minimum lease payments under non-cancellable leases to the total lease liabilities recognized on the condensed consolidated balance sheets as of July 31, 2023:

 

Fiscal Year Ended January 31 (in thousands):		Operating Leases
2024 (six months remaining)		$	2,492
2025			3,705
2026			2,469
2027			2,337
2028			1,548
Thereafter			4,198
Total future minimum lease payments			16,749
Effects of discounting			(2,509	)
Total lease liabilities		$	14,240
Current lease liabilities		$	3,883
Long-term lease liabilities			10,357
Total lease liabilities		$	14,240

 

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Litigation

 

The Company is, from time to time, party to general legal proceedings and claims, which arise in the ordinary course of business including those relating to commercial and contractual disputes, employment matters, intellectual property, and other business matters. When appropriate, management consults with legal counsel and other appropriate experts to assess claims. If, in management’s opinion, we have incurred a probable loss as determined in accordance with GAAP, an estimate is made of the loss and the appropriate accrual is reflected in our condensed consolidated financial statements. Currently, there are no material amounts accrued. While it is not possible to quantify the financial impact or predict the outcome of all pending claims and litigation, management does not anticipate that the outcome of any current proceedings or known claims, either individually or in aggregate, will materially affect the Company’s financial position, results of operations or cash flows.

 

Guarantees

 

The Company’s software license arrangements and hosting services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and substantially in accordance with the Company’s product documentation under normal use and circumstances. The Company’s arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property right. The Company has entered into service level agreements with some of its hosted application customers warranting certain levels of uptime reliability and such agreements permit those customers to receive credits against monthly hosting fees or terminate their agreements in the event that the Company fails to meet those levels for an agreed upon period of time.

 

To date, the Company has not incurred any material costs as a result of such indemnifications or commitments and has not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

 

(9)    Long-Term Debt

 

Debt consisted of the following (in thousands):

 

		July 31, 2023				January 31, 2023
Term Loan - current portion		$	6,404			$	6,404
Current maturities of long-term debt			6,404				6,404
Term Loan - long-term portion			591,399				594,601
Original issue discount - long-term portion			(7,622	)			(8,286	)
Deferred financing costs - long-term portion			(4,138	)			(4,498	)
Long-term debt		$	579,639			$	581,817

 

On July 16, 2021, Skillsoft Finance II, Inc. (“Skillsoft Finance II”), a subsidiary of Skillsoft Corp., entered into a Credit Agreement (the “Credit Agreement”), by and among Skillsoft Finance II, as borrower, Skillsoft Finance I, Inc., as holdings (“Holdings”), the lenders party thereto and Citibank, N.A., as administrative agent and collateral agent, pursuant to which the lenders provided a $480 million term loan facility (the “Term Loan Facility”) to Skillsoft Finance II, the proceeds of which, together with cash on hand, were used to refinance existing debt. The Term Loan Facility is scheduled to mature on July 16, 2028 (the “Maturity Date”).

 

In connection with the closing of the Codecademy acquisition, Skillsoft Finance II entered into Amendment No. 1 to the Credit Agreement, dated as of April 4, 2022 (the “First Amendment”), among Skillsoft Finance II, Holdings, certain subsidiaries of Skillsoft Finance II, as guarantors, Citibank N.A., as administrative agent, and the financial institutions party thereto as Term B-1 Lenders, which amended the Credit Agreement (as amended by the First Amendment, the “Amended Credit Agreement”).

 

The First Amendment provides for the incurrence of up to $160 million of Term B-1 Loans (the “Term B-1 Loans”) under the Amended Credit Agreement. In addition, the First Amendment, among other things, (a) provides for early opt-in to Secured Overnight Financing Rate ("SOFR") for the existing term loans under the Credit Agreement (such existing term loans together with the Term B-1 Loans, the “Initial Term Loans”) and (b) provides for the applicable margin for the Initial Term Loans at 4.25% with respect to base rate borrowings and 5.25% with respect to SOFR borrowings.

 

The Company received $153.2 million of net proceeds (net of $4.0 million of financing costs and $2.8 million of original issuance discounts) from the Term Loan Facility on April 4, 2022. The Company used the net proceeds and cash on hand for the closing of the Codecademy acquisition on April 4, 2022. 

 

The refinancing was accounted for as a modification for certain lenders and an extinguishment for other lenders and debt issuance costs and lender fees were accounted for in proportion to whether the related principal balance was considered modified or extinguished. Accordingly, both newly incurred and deferred financing costs and original issuance discounts of $0.1 million and $2.8 million, respectively, will be amortized as additional interest expense over the term of the Initial Term Loans.

 

Prior to the maturity thereof, the Initial Term Loans will be subject to quarterly amortization payments of 0.25% of the principal amount.

 

On August 15, 2022, pursuant to the Purchase Agreement entered on June 12, 2022 by and among Skillsoft, Skillsoft (US) Corporation (“Seller”), Amber Holding Inc. (“SumTotal”), and Cornerstone OnDemand, Inc. (“Buyer”), Seller completed the sale of one hundred percent (100%) of the outstanding shares of capital stock of SumTotal to Buyer. As a result of the asset sale, the Company made a mandatory prepayment of $31.4 million to the lenders in August 2022. The remaining net cash proceeds attributable to the sale of SumTotal were subject to reinvestment provisions and could not be used for general corporate purposes. As defined in the Amended Credit Agreement, no additional repayment was required.

 

All obligations under the Amended Credit Agreement, and the guarantees of those obligations (as well as certain cash management obligations and interest rate hedging or other swap agreements), are secured by substantially all of Skillsoft Finance II’s personal property as well as the assets of each subsidiary guarantor.

 

Amounts outstanding under the Term Loan Facility bear interest, at the option of Skillsoft Finance II, at a rate equal to (a) SOFR (subject to a floor of 0.75%) plus a credit premium based on the tenor of the interest period plus 5.25% for SOFR Loans or (b) the highest of (i) the Federal Funds Effective Rate plus 10.50%, (ii) the “prime rate” quoted by the administrative agent, (iii) Adjusted Term SOFR plus 1.00% and (iv) 1.75%, plus 3.75% for alternative base rate loans. As of July 31, 2023, the balance of $597.8 million of Initial Term Loans bears interest at a rate equal to SOFR plus a credit premium of 0.11% plus a spread of 5.25%, per annum, with a SOFR floor of 0.75%, and quarterly principal repayments of $1.6 million until maturity.

 

---

 

Voluntary prepayment is permitted under the Term Loan Facility. Loan parties are subject to various affirmative and negative covenants and reporting obligations under the Amended Credit Agreement. These include, among other things, limitations on indebtedness, liens, sale and leaseback transactions, investments, fundamental changes, assets sales, restricted payments, affiliate transactions, and restricted debt payments. Events of default under the Term Loan Facility include non-payment of amounts due to the lenders, violation of covenants, materially incorrect representations, defaults under other material indebtedness, judgments and specified insolvency-related events, certain ERISA events, and invalidity of loan or collateral documents, subject to, in certain instances, specified thresholds, cure periods and exceptions. As of  July 31, 2023, the Company is in compliance with all covenants.

 

The Company’s debt outstanding as of July 31, 2023 matures as shown below (in thousands):

 

For fiscal years ended January 31:
2024 (six months remaining)		$	3,202
2025			6,404
2026			6,404
2027			6,404
2028			6,404
Thereafter			568,985
Total payments			597,803
Current portion			(6,404	)
Unamortized original issue discount and issuance costs			(11,760	)
Long-term portion		$	579,639

 

Accounts Receivable Facility

 

On December 20, 2018, the Company entered into a $75.0 million receivables credit agreement, with a termination date of the earliest of 5 years from closing or 45 days before the revolving credit facility maturity or 180 days before the maturity of any term indebtedness greater than $75 million. There are four classes of available receivables with advance rates between 50.0% and 85.0%. The lenders require the Company to deposit receipts from pledged receivables to a restricted concentration account. Cash collected against receivables pledged as collateral for borrowings must be transferred to the restricted concentration account within two business days of receipt by the Company. The Company accounts for these transactions as borrowings, as the assets pledged contain the rights to future revenues. Under these agreements, the Company receives the net present value of the accounts receivable balances used to calculate the borrowing base. The interest rate on borrowings outstanding under these agreements was 8.43% at July 31, 2023. Borrowings and repayments under these agreements are presented as cash flows from financing activities in the accompanying unaudited condensed consolidated statements of cash flows.

 

On September 19, 2019, the Company amended the receivables credit agreement to include Class “B” lending. This increased the facility borrowing capacity up to $90.0 million. In conjunction with this, it increased the advance rate to 95% across the four classes of available receivables. All other terms and conditions remained materially the same.

 

On August 27, 2020, the Company amended its accounts receivable facility. In connection with the amendment, additional capacity under the previous accounts receivable facility which had been extended by the private equity sponsor of the Company’s prior owner was eliminated, reducing the maximum capacity of the facility from $90 million to $75 million. The advance rate was also reduced from 90% to between 50.0% and 85.0% based on the class categorization of the receivable. The maturity date for the remaining $75 million facility was extended to the earlier of (i) December 27, 2024 or (ii) 90 days prior to the maturity of any corporate debt. The Company submits a monthly reconciliation on each month’s settlement date detailing what was collected from the prior month's borrowing base and what additional receivables are being pledged during the new borrowing base period to replenish them. If additional receivables are pledged to replenish receipts, the funds from the concentration account will be returned to the Company by the administrative agent. The reserve balances were $3.9 million at  July 31, 2023 and are classified as restricted cash on the balance sheet. As of July 31, 2023, $40.1 million was drawn from our accounts receivable facility. 

(10)    Shareholders’ Equity

 

Common Stock

 

As of July 31, 2023, the Company’s authorized share capital consisted of 375,000,000 shares of Class A common stock and 10,000,000 shares of preferred stock, with a par value $0.0001 each, and 160,467,809 shares of Class A common stock were issued and outstanding. As of July 31, 2023, the Company had no shares of Class C common stock outstanding. The number of authorized shares of Class A common stock or preferred stock authorized for issuance may be increased by the affirmative vote of the holders of a majority in voting power of the Company’s capital stock entitled to vote thereon. Except as required by law, holders of shares of Class C common stock are not entitled to vote any such shares.

 

Subject to applicable law, the Company may declare dividends to be paid ratably to holders of Class A common stock out of the Company’s assets that are legally available to be distributed as dividends in the discretion of the Company’s board of directors. Holders of Class C common stock are generally not entitled to dividends.

 

Warrants

 

Refer to Note 11, for information related to the equity classified warrants.

 

Share Repurchases and Repurchase Authorization

 

On September 7, 2022, the Board of Directors authorized Skillsoft to repurchase up to $30.0 million of its Class A common stock, which expired September 7, 2023. Under the program, the Company was authorized to purchase shares in the open market, in private negotiated transactions, or by other means from time to time. The share repurchase program did not obligate the Company to purchase any minimum number of shares. Under the program, the Company repurchased 4,365,255 of its shares for $8.0 million during the six months ended July 31, 2023. From inception through the quarter ended July 31, 2023, we repurchased 5,995,530 of our shares for $10.9 million.

 

---

 

Accumulated Other Comprehensive Income (Loss)

 

Accumulated Other Comprehensive Income (Loss) associated with foreign currency translation adjustments (in thousands) consisted of the following:

 

		Three Months Ended July 31,
		2023												2022
		Before Tax				Income Tax				Net				Before Tax				Income Tax				Net
Balance as of beginning-of-period		$	(13,919	)		$	—			$	(13,919	)		$	(1,278	)		$	—			$	(1,278	)
Translation adjustment			496				—				496				(1,477	)			—				(1,477	)
Balance as of end-of-period		$	(13,423	)		$	—			$	(13,423	)		$	(2,755	)		$	—			$	(2,755	)

 

		Six Months Ended July 31,
		2023												2022
		Before Tax				Income Tax				Net				Before Tax				Income Tax				Net
Balance as of beginning-of-period		$	(14,794	)		$	—			$	(14,794	)		$	970			$	—			$	970
Translation adjustment			1,371				—				1,371				(3,725	)			—				(3,725	)
Balance as of end-of-period		$	(13,423	)		$	—			$	(13,423	)		$	(2,755	)		$	—			$	(2,755	)

(11)    Warrants

 

In connection with the formation of the Company and subsequent acquisitions of Software Luxembourg Holdings S.A. and Albert DE Holdings Inc., warrants to purchase common stock were issued to investors, sellers of Albert DE Holdings Inc. and an executive of the Company. Warrants that are not subject to ASC 718, Stock Compensation and (i) contained features that could cause the warrant to be puttable to the Company for cash or (ii) had terms that prevented the conversion of the warrant from being fixed in all circumstances, are classified as a liability on the Company’s balance sheet and measured at fair value, with changes in fair value being recorded in the income statement, whereas all other warrants meet the equity scope exception and are classified as equity and not remeasured.

 

A summary of liability classified warrants is as follows (in thousands, except per share amounts):

 

Underlying

Fair Value

Common

Strike

Redemption

Expiration

at July 31,

Type

Shares

Price

Price

Date

2023

Private Placement Warrants – Sponsor

15,846

$

11.50

None

6/11/2026

$

1,109

 

Simultaneously with the closing of the initial public offering, Churchill Capital (the “Sponsor”) purchased an aggregate of 15,800,000 Private Placement Warrants. An additional 1,500,000 warrants were issued at the closing of the business combination with Software Luxembourg Holding S.A. on June 11, 2021 in connection with the repayment of a promissory note due to the Sponsor. One million of the Private Placement Warrants were transferred to the incoming CEO as described below. These warrants held by the Sponsor include provisions that provide for potential changes to the settlement amounts on redemptions and were dependent upon the characteristics of the holder of the warrant. As of  July 31, 2023, 453,596 Private Placement Warrants had been transferred to public holders (included in "Public Warrants" in the table below). Because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares, the warrants are precluded from being indexed to the entity’s stock and are classified as a liability measured at fair value, with changes in fair value each period reported in earnings.

 

A summary of equity classified warrants is as follows (in thousands, except per share amounts):

 

Underlying

Common

Strike

Redemption

Expiration

Type

Shares

Price

Price

Date

Public Warrants

23,454

$

11.50

$

18.00

6/11/2026

Private Placement Warrants (PIPE)

16,667

11.50

18.00

6/11/2026

Private Placement Warrants (Global Knowledge)

5,000

11.50

None

10/12/2025

Private Placement Warrants (CEO)

1,000

11.50

None

6/11/2026

Total

46,121

 

---

 

A description of each category of warrants issued and outstanding is as follows:

 

●

Public Warrants – Pursuant to the initial public offering, the Company sold units that consisted of one share of Class A common stock and one-third of one redeemable warrant (“Public Warrants”), resulting in the issuance of 23,000,000 warrants. Prior to the business combination with Software Luxembourg Holding S.A. on June 11, 2021 (the “Skillsoft Merger"), Churchill Capital Corp II had classified these warrants as liabilities due to tender offer provisions which state that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants. Accordingly, there were potential scenarios outside the control of the Company (which had more than one class of outstanding common stock prior to the Skillsoft Merger), where all warrant holders would be entitled to cash, while only certain holders of the underlying shares of common stock would be entitled to cash, requiring the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings. Upon the completion of the Skillsoft Merger on June 11, 2021, when only one class of voting shares remained outstanding, the warrants met equity classification criteria as net cash settlement can only be triggered in circumstances in which the holders of the shares underlying the contract also would receive cash in the event of a fundamental change in the ownership of the Company, such as a change in control. Accordingly, the fair value of the warrants was transferred to equity and cumulative losses recognized from changes in fair value remain in the Company’s accumulated deficit balance. During the three and six months ended July 31, 2023, there was no activity related to the Private Placement Warrants or Public Warrants.

●

Private Placement Warrants (PIPE) – In connection with the second step investment made by the anchor PIPE investor, 16,666,667 warrants were issued to a PIPE investor to purchase Class A common stock. The PIPE Private Placement Warrants are issued in the same form as the Public Warrants.

●

Private Placement Warrants (Global Knowledge) – Upon completion of the acquisition of Albert DE Holdings Inc. (the "Global Knowledge Merger"), 5,000,000 warrants were issued to the former owner of Global Knowledge. These warrants are similar to the Private Placement Warrants except the warrants are not subject to the redemption provisions described below if transferred.

●

Private Placement Warrants (CEO) - Effective at the closing of the Skillsoft Merger and Global Knowledge Merger, the Sponsor committed to transfer 1,000,000 fully vested Private Placement Warrants to the CEO pursuant to his employment agreement with the Company. The warrants are subject to ASC 718, Stock Compensation.

Public Warrants and PIPE Private Placement Warrants (hereinafter referred to as “Redeemable Warrants”) are currently exercisable and may only be exercised for a whole number of shares. The Company may redeem these warrants:

 

●

in whole and not in part;

●

at a price of $0.01 per warrant;

●

upon not less than 30 days’ prior written notice of redemption;

●

if, and only if, the reported last sale price of the Company’s common stock equals or exceeds $18.00 per share for any 20 trading days within a 30‑trading day period ending on the third business day prior to the notice of redemption to the warrant holders; and

●

if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying the warrants.

 

If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

 

If the Company calls the Redeemable Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of Class A common stock at a price below their exercise price. Additionally, in no event will the Company be required to net cash settle the warrants.

 

The Sponsor and CEO Private Placement Warrants have the same terms as the Public Warrants, except they will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Sponsor Private Placement Warrants are transferred to someone other than the initial purchasers or their permitted transferees, they will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. The Global Knowledge Private Placement Warrants are not redeemable, even upon a transfer in ownership.

(12)    Stock-based compensation

 

Equity Incentive Plans

 

In June 2021, Skillsoft Corp adopted the 2020 Omnibus Incentive Plan (“2020 Plan”). The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other equity-based awards, and cash-based incentive awards to employees, directors, and consultants of the Company. Under the 2020 Plan, 13,105,902 shares were initially made available for issuance. The 2020 Plan includes an annual increase on January 1 each year beginning on January 1, 2022, in an amount equal to 5.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year. The Compensation Committee may act prior to January 1 of a given year to provide that there will be no January 1 increase for such year or that the increase for such year will be a lesser number of shares of common stock than provided for in the 2020 Plan. As of July 31, 2023, a total of 2,922,303 shares of common stock were available for issuance under the 2020 Plan.

 

Stock Options

 

Under the 2020 Plan all employees are eligible to receive incentive share options and all employees, directors and consultants are eligible to receive non-statutory share options. The options generally vest over four years and have a term of ten years. Vested options under the plan generally expire not later than 90 days following termination of employment or service or twelve months following an optionee's death or disability. The fair value of stock options is determined on the grant date and amortized over the vesting period on a straight-line basis.

 

---

 

 

The following summarizes the stock option activity for the six months ended July 31, 2023:

 

										Weighted -
						Weighted -				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic Value
		Shares				Price				Term (Years)				(in thousands)
Outstanding, January 31, 2023			2,321,976			$	10.74				8.4			$	—
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited			(463,976	)			10.69				—				—
Expired			—				—				—				—
Outstanding, July 31, 2023			1,858,000				10.75				7.9				—
Vested and exercisable, July 31, 2023			727,125				10.75				7.9				—

 

The total unrecognized equity-based compensation costs related to the stock options was $3.0 million based on the $2.29 weighted average grant date fair value of the options, which is expected to be recognized over a weighted-average period of 1.9 years.

 

Time-Based Restricted Stock Units

 

Restricted stock units (“RSUs”) represent a right to receive one share of the Company’s common stock that is both non-transferable and forfeitable unless and until certain conditions are satisfied. Other than restricted stock units granted to our non-employee directors, which vest upon the earlier of the anniversary of the grant date and the Company’s next annual meeting of stockholders, restricted stock units generally vest ratably over a three or four-year period, subject to continued employment through each anniversary. The fair value of restricted stock units is determined on the grant date and is amortized over the vesting period on a straight-line basis.

 

The following summarizes the time-based RSU activity for the six months ended July 31, 2023:

 

						Weighted -				Aggregate
						Average Grant				Intrinsic Value
		Shares				Date Fair Value				(in thousands)
Unvested balance, January 31, 2023			12,166,123			$	6.01			$	23,359
Granted (1)			8,785,999				1.52				—
Vested			(1,804,645	)			6.98				—
Forfeited			(2,214,225	)			6.08				—
Unvested balance, July 31, 2023			16,933,252				3.57				22,352

 

(1) In May 2023, 291,000 shares were granted to replace 388,000 shares of market-based RSUs. This modification resulted in stock-based compensation expense increasing by less than $0.1 million per quarter over a two-year period.

 

The total unrecognized stock-based compensation costs related to time-based RSUs was $51.8 million, which is expected to be recognized over a weighted-average period of 2.5 years.

 

Market-based Restricted Stock Units

 

Market-based restricted stock units (“MBRSUs”) vest over a three-year or four-year performance period, subject to continued employment through each anniversary and achievement of market conditions, specifically the Company's stock price and an objective relative total shareholder return. The fair value of MBRSUs that include vesting based on market conditions are estimated using the Monte Carlo valuation method. Compensation cost for these awards is recognized based on the grant date fair value which is recognized over the vesting period using the accelerated attribution method.

 

The following summarizes the MBRSUs activity for the six months ended July 31, 2023:

 

						Weighted -				Aggregate
						Average Grant				Intrinsic Value
		Shares				Date Fair Value				(in thousands)
Unvested balance, January 31, 2023			2,258,458			$	6.75			$	4,336
Granted			2,307,500				2.26				—
Vested			—				—				—
Forfeited			(476,055	)			7.89				—
Canceled (1)			(388,000	)			8.60				—
Unvested balance, July 31, 2023			3,701,903				3.72				4,887

 

(1) In May 2023, 388,000 shares of market-based RSUs were canceled and replaced with 291,000 shares of time-based RSUs. This modification resulted in stock-based compensation expense increasing by less than $0.1 million per quarter over a two-year period.

 

The total unrecognized stock-based compensation costs related to MBRSUs was $7.0 million, which is expected to be recognized over a weighted-average period of 1.1 years.

 

---

 

Stock-based Compensation Expense

 

The following summarizes the classification of stock-based compensation expense in the condensed consolidated statements of operations (in thousands):

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2023				2022				2023				2022
Cost of revenues		$	238			$	37			$	335			$	51
Content and software development			1,744				2,849				3,756				4,424
Selling and marketing (1)			(667	)			1,541				1,015				3,018
General and administrative			4,512				5,590				9,849				11,017
Total		$	5,827			$	10,017			$	14,955			$	18,510

 

(1) Stock-based compensation expense during the three months ended July 31, 2023 was reduced by $2.1 million due to forfeitures of share-based payment awards.

(13)    Revenue

 

Revenue Components and Performance Obligations

 

Subscription services

 

The Company offers subscriptions that provide customers access to a broad-based spectrum of learning options including access to cloud-based learning content and individualized coaching. The Company’s cloud-based subscription solutions normally do not provide customers with the right to take possession of the software supporting the platform or to download course content without continuing to incur fees for hosting services and, as a result, are accounted for as service arrangements. Access to the platform and course content represents a series of distinct services as the Company continually provides access to, and fulfills its obligation to, the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed consideration related to subscription revenue is usually recognized on a straight-line basis over the contract term, beginning on the date that the service is made available to the customer. The Company’s subscription contracts typically vary from one year to three years. The Company’s cloud-based solutions arrangements are mostly non-cancellable, non-refundable, and are invoiced in advance of the subscription services being provided.

 

Virtual, on-demand and classroom

 

The Company’s virtual, on-demand and classroom training provides customers with technical training. Revenue is recognized in the period in which the services are performed. Billing is in advance of the services being provided or immediately after the services have been provided.

 

Professional services

 

The Company also sells professional services related to its cloud solutions which are typically considered distinct performance obligations and are recognized over time as services are performed. For fixed-price contracts, revenue is recognized based on the actual service provided to the end of the reporting period as a proportion of the total services to be provided (proportional performance method). These services usually consist of implementation, integration, and general consulting. Mostly, the Company’s professional service engagements are short in duration. Billing is commonly in advance of the services being provided.

 

Disaggregated Revenue and Geography Information

 

The following is a summary of revenues by type for the three and six months ended July 31, 2023 and July 31, 2022 (in thousands):

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2023				2022				2023				2022
SaaS and subscription services		$	98,032			$	94,247			$	191,851			$	179,316
Virtual, on-demand and classroom			37,999				41,821				74,980				86,874
Professional services			5,156				4,506				9,910				9,223
Total net revenues		$	141,187			$	140,574			$	276,741			$	275,413

  

		Three Months Ended July 31,								Six Months Ended July 31,
		2023				2022				2023				2022
Revenue:
United States		$	92,936			$	92,603			$	182,023			$	176,039
Europe, Middle East and Africa			35,741				35,775				70,276				74,416
Other Americas			7,331				7,419				14,327				15,976
Asia-Pacific			5,179				4,777				10,115				8,982
Total net revenues		$	141,187			$	140,574			$	276,741			$	275,413

 

Other than the United States, no single country accounted for more than 10% of revenue for all periods presented.

 

Deferred Revenue

 

Deferred revenue activity for the six months ended July 31, 2023 was as follows (in thousands):

 

Deferred revenue at January 31, 2023		$	282,454
Billings deferred			220,870
Recognition of prior deferred revenue			(276,741	)
Deferred revenue at July 31, 2023		$	226,583

 

Deferred revenue performance obligations relate predominantly to time-based SaaS and subscription services that are billed in advance of services being rendered.

 

---

 

Deferred Contract Acquisition Costs

 

Deferred contract acquisition cost activity for the six months ended July 31, 2023 was as follows (in thousands):

 

Deferred contract acquisition costs at January 31, 2023		$	24,594
Contract acquisition costs			14,166
Recognition of contract acquisition costs			(9,451	)
Deferred contract acquisition costs at July 31, 2023		$	29,309

(14)    Fair Value Measurements

 

FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fair value hierarchy that prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

The three levels of the fair value hierarchy established by ASC 820 in order of priority are as follows:

 

●

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

●

Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

●

Level 3: Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

 

The following summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis as of July 31, 2023 and are categorized using the fair value hierarchy (in thousands):

 

		Level 2				Level 3
Description		Measurements				Measurements				Total
Interest rate swaps - asset (liability)		$	5,651			$	—			$	5,651
Liability classified warrants			—				(1,109	)			(1,109	)
Total assets and (liabilities) recorded at fair value		$	5,651			$	(1,109	)		$	4,542

 

Interest Rate Swap

 

On June 17, 2022, the Company entered into two fixed-rate interest rate swap agreements to change the SOFR-based component of the interest rate on a portion of the Company’s variable rate debt to a fixed rate (the “Interest Rate Swaps”). The Interest Rate Swaps have a combined notional amount of $300.0 million and a maturity date of June 5, 2027. The objective of the Interest Rate Swaps is to eliminate the variability of cash flows in interest payments on the first $300.0 million of variable rate debt attributable to changes in benchmark one-month SOFR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark SOFR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to offset changes in cash flows of the variable rate debt. The Interest Rate Swaps are not designated as a cash flow hedge and changes in the fair value of the interest rate swaps are recorded in earnings each period. For the three and six months ended July 31, 2023, the Company recognized a non-cash gain of $6.9 million and $7.2 million, respectively, attributable to the Interest Rate Swaps. For the three and six months ended July 31, 2022, the Company recognized a loss of $15.1 million attributable to the Interest Rate Swaps.

 

The inputs for determining fair value of the Interest Rate Swaps are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. The counterparties to these derivative contracts are highly rated financial institutions which we believe carry only a minimal risk of nonperformance.
 

---

 

Warrants

 

A summary of liability-classified warrants is as follows (in thousands, except per share amounts):

 

Underlying

Common

Strike

Redemption

Expiration

Fair Value at

Type

Shares

Price

Price

Date

July 31, 2023

Private Placement Warrants – Sponsor

15,846

$

11.50

None

6/11/2026

$

1,109

 

The Company classifies Sponsor Private Placement Warrants as liabilities in accordance with ASC Topic 815. Refer to Note 11 "Warrants" for more detail. The inputs for determining fair value of these warrants are classified as Level 3 inputs. The Company estimates the fair value of the Sponsor Private Placement Warrants using a Black-Scholes option pricing model and the following assumptions:

 

		July 31, 2023
Risk-free interest rates			4.5	%
Expected dividend yield			0.0	%
Volatility factor			70.0	%
Expected lives (years)			2.9
Value per unit		$	0.07

 

Changes in the fair value of liability-classified warrants classified as Level 3 due to significant unobservable inputs used to determine fair value were as follows:

 

		Three Months Ended				Six Months Ended
		July 31, 2023				July 31, 2023
Balance as of beginning-of-period		$	1,902			$	4,754
Unrealized gains			(793	)			(3,645	)
Balance as of July 31, 2023		$	1,109			$	1,109

 

Other Fair Value Instruments

 

The Company currently invests excess cash balances primarily in money market funds invested in United States Treasury securities and United States Treasury securities repurchase agreements, as well as cash deposits held at major banks. The carrying amounts of cash and cash equivalents, trade receivables, trade payables and accrued liabilities, as reported on the condensed consolidated balance sheet as of  July 31, 2023, approximate their fair value because of the short maturity of those instruments. 

 

Our long-term debt is a financial instrument, and the fair value of the Company’s outstanding principal as of July 31, 2023 was $540.3 million. This fair value is determined based on inputs that are classified as Level 2 within the fair value hierarchy.

(15)    Segment Information

 

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), in determining how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer. The Company’s CODM evaluates results using the operating segment structure as the primary basis for which the allocation of resources and financial results are assessed.

 

The Company has organized its business into two segments: Content & Platform (formerly referred to as Skillsoft content) and Instructor-Led Training (formerly referred to as Global Knowledge). All of the Company’s segments market and sell their offerings globally to businesses of many sizes, government agencies, educational institutions and resellers with a worldwide sales force positioned to offer the combinations that best meet customer needs. The CODM primarily uses revenues and operating income as measures to evaluate financial results and allocation of resources. The Company allocates certain operating expenses to the reportable segments, including general and administrative costs based on the usage and relative contribution provided to the segments. There are no intercompany revenue transactions reported between the Company’s reportable segments.

 

The Content & Platform business engages in the sale, marketing and delivery of its content learning solutions, in areas such as Leadership and Business, Technology and Developer and Compliance. This includes individualized coaching as well as technical skill areas assumed in the Codecademy acquisition. In addition, Content & Platform offers Percipio, an intelligent artificial intelligence ("AI")-driven online learning platform that delivers an immersive learning experience through software as a service ("SaaS") solutions. It leverages its highly engaging content, curated into nearly 700 learning paths (channels) that are continuously updated to ensure customers always have access to the latest information.

 

The Instructor-Led Training business offers training solutions covering information technology and business skills for corporations and their employees. Instructor-Led Training guides its customers throughout their lifelong technology learning journey by offering relevant and up-to-date skills training through instructor-led (in-person “classroom” or online “virtual”) and self-paced (“on-demand”), vendor certified, and other proprietary offerings. Instructor-Led Training offers a wide breadth of training topics and delivery modalities both on a transactional and subscription basis.

 

---

 

The following presents summary results for each of the businesses for the three and six months ended July 31, 2023 and July 31, 2022:

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2023				2022				2023				2022
Content & Platform
Revenues		$	103,188			$	98,753			$	201,761			$	188,539
Operating expenses			122,077				136,602				251,601				265,024
Operating income (loss)			(18,889	)			(37,849	)			(49,840	)			(76,485	)
Instructor-Led Training
Revenues			37,999				41,821				74,980				86,874
Operating expenses			44,408				114,754				85,820				166,407
Operating income (loss)			(6,409	)			(72,933	)			(10,840	)			(79,533	)
Consolidated
Revenues			141,187				140,574				276,741				275,413
Operating expenses			166,485				251,356				337,421				431,431
Operating income (loss)			(25,298	)			(110,782	)			(60,680	)			(156,018	)
Total non-operating income (loss)			(63	)			80				207				1,132
Interest expense, net			(16,255	)			(11,460	)			(32,191	)			(22,837	)
Fair value adjustment of warrants			793				6,846				3,645				16,952
Fair value adjustment of hedge			6,935				(15,065	)			7,205				(15,065	)
(Provision for) benefit from income taxes			1,889				3,065				6,273				25,402
Net income (loss) from continuing operations			(31,999	)			(127,316	)			(75,541	)			(150,434	)
Gain (loss) on sale of business			—				—				(682	)			—
Income (loss) from discontinued operations, net of tax			—				5,817				—				7,292
Net income (loss)		$	(31,999	)		$	(121,499	)		$	(76,223	)		$	(143,142	)

 

Content & Platform segment depreciation for the three and six months ended July 31, 2023 was $0.6 million and $1.4 million, respectively. Content & Platform segment depreciation for the three and six months ended July 31, 2022 was $0.9 million and $1.8 million, respectively.

 

Instructor-Led Training segment depreciation for the three and six months ended July 31, 2023 was $0.5 million and $0.9 million, respectively. Instructor-Led Training segment depreciation for the three and six months ended July 31, 2022 was $0.3 million and $0.9 million, respectively.

 

The Company’s segment assets primarily consist of cash and cash equivalents, accounts receivable, prepaid expenses, deferred taxes, property and equipment, goodwill and intangible assets. The following sets forth the Company’s segment assets as of  July 31, 2023 and January 31, 2023 (in thousands):

 

		July 31, 2023				January 31, 2023
Content & Platform		$	1,282,884			$	1,434,920
Instructor-Led Training			195,190				207,767
Total assets		$	1,478,074			$	1,642,687

 

The following sets forth the Company’s long-lived tangible assets by geographic region as of  July 31, 2023 and January 31, 2023 (in thousands):

 

		July 31, 2023				January 31, 2023
United States		$	3,703			$	7,117
Rest of world			3,541				3,033
Total long-lived tangible assets		$	7,244			$	10,150

 

---

 

(16)    Net Loss Per Share

 

Basic earnings per share is computed by dividing net income for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income for the period by the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding restricted stock-based awards, stock options, and shares issuable under the employee stock purchase plan using the treasury stock method.

 

The following sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2023				2022				2023				2022
Net income (loss) from continuing operations		$	(31,999	)		$	(127,316	)		$	(75,541	)		$	(150,434	)
Net income (loss) from discontinued operations			—				5,817				(682	)			7,292
Net income (loss)		$	(31,999	)		$	(121,499	)		$	(76,223	)		$	(143,142	)
Weighted average common shares outstanding:
Ordinary – Basic and diluted			160,098				164,089				160,836				153,442
Net income (loss) per share:
Ordinary – Basic and diluted - continuing operations		$	(0.20	)		$	(0.78	)		$	(0.47	)		$	(0.98	)
Ordinary – Basic and diluted - discontinued operations			—				0.04				—				0.05
Ordinary – Basic and diluted		$	(0.20	)		$	(0.74	)		$	(0.47	)		$	(0.93	)

 

During the three and six months ended July 31, 2023 and July 31, 2022, the Company incurred net losses and, therefore, the effect of the Company’s potentially dilutive securities was not included in the calculation of diluted loss per share as the effect would be anti-dilutive. The following contains share/unit totals with a potentially dilutive impact (in thousands):

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2023				2022				2023				2022
Warrants to purchase common shares			61,967				61,967				61,967				61,967
Stock options			2,028				2,826				2,090				2,826
RSUs			21,872				14,408				17,530				14,408
Total			85,867				79,201				81,587				79,201

(17)    Related Party Transactions

 

Agreement with Largest Shareholder

 

In December 2021, Skillsoft entered into a commercial agreement to provide off-the-shelf Skillsoft products to the Company’s largest shareholder, MIH Learning B.V., and its affiliates for $0.7 million over three years.

 

Codecademy Transaction

 

An affiliate of our largest shareholder, MIH Learning B.V. also owned approximately 23.8% of the outstanding equity of Codecademy which we acquired on April 4, 2022.

 

Consulting Services

 

In December 2021, Skillsoft engaged The Klein Group, LLC (the “Klein Group”) to act as a consultant to advise the Company of a potential transaction with Codecademy, to assist management in its evaluation of the business opportunity and structuring and negotiation of a potential transaction. Pursuant to this engagement, Skillsoft paid the Klein Group a transaction fee equal to $2.0 million in connection with the Codecademy acquisition. Michael Klein, a member of our Board, is the Chief Executive Officer of the Klein Group and the Klein Group is closely affiliated with our second largest shareholder.

(18)    Subsequent Events

 

The Company has completed an evaluation of all subsequent events after the balance sheet date of July 31, 2023 through the date this Quarterly Report on Form 10-Q was filed with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of July 31, 2023, and events which occurred subsequently but were not recognized in the financial statements. The Company has concluded that no subsequent events have occurred that require disclosure, except as disclosed within these financial statements.

 

---

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of July 31, 2023, compared with January 31, 2023, and the results of operations for the three and six months ended July 31, 2023, compared with the corresponding period in fiscal 2023 of Skillsoft Corp. and its consolidated subsidiaries. Unless otherwise stated or the context otherwise requires, “Skillsoft,” “Company,” “we,” “our” or “us” refers to Skillsoft Corp. and its consolidated subsidiaries.

 

The MD&A is provided as a supplement to, and should be read in conjunction with, the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements (“Notes”) presented in “Part I – Item 1. Financial Statements”; our Form 10-K for the year ended January 31, 2023 (“2023 Form 10-K”); and other reports filed with the Securities and Exchange Commission (“SEC”). For more detailed information on the risks and uncertainties associated with the Company’s business activities, see the risks described in “Part I – Item 1A. Risk Factors” in our 2023 Form 10-K.

 

Unless otherwise noted, amounts referenced in this discussion, other than in reference to share numbers, are in thousands.

 

General

 

At Skillsoft, we propel organizations and people to grow together through transformative learning experiences.

 

Through a portfolio of high-quality content, a platform that is personalized and connected to customer needs, and a broad ecosystem of partners, Skillsoft drives continuous growth and performance for employees and their organizations by overcoming critical skills gaps, unlocking human potential, and transforming the workforce. With more than 150,000 expert-led skills-building courses in modalities ranging from video and audio to instructor-led training and practice labs, Skillsoft offers transformative learning experiences for leaders to frontline workers, readers to hands-on learners.

 

Skillsoft supports approximately 70% of the Fortune 1000 with today's sought-after competencies: leadership and business skills, technology and developer skills, and essential safety and risk management compliance. We leverage various learning modalities adaptable to different preferences, schedules, and learning styles — from books to videos, full courses to micro-learning, audiobooks to live bootcamps and coaching. Content is continuously updated with the latest insights, information, and training methods.

 

Today's learners want the right learning experience, delivered when, where, and how they want it. That's why our approach is mobile-first, and our expert-curated, cloud-based content is served on an open platform that reaches learners wherever they are.

 

Our community of approximately 90 million learners in more than 150 countries around the globe learn in more than 30 languages. As often as they need or want, typical learners turn to Skillsoft to acquire critical job skills in the flow of work, and grow as leaders, employees, and people. We have helped fuel performance and career growth for more than 20 years.

 

For more details, refer to “Part I – Item 1. Business” in our 2023 Form 10-K.

 

Significant Transactions

 

The two transactions discussed below both occurred during fiscal 2023.

 

Completion of the Codecademy Acquisition

 

On April 4, 2022, the Company acquired Codecademy, a leading online learning platform for technical skills. Codecademy is an innovative and popular learning platform providing high-demand technical skills to approximately 40 million registered learners in nearly every country worldwide. The platform offers interactive, self-paced courses and hands-on learning in 14 programming languages across multiple domains such as application development, data science, cloud and cybersecurity. Total consideration for the acquisition was approximately $386.0 million, consisting of the issuance of 30,374,427 common shares and a net cash payment of $203.4 million. 

 

Discontinued Operations

 

On June 12, 2022, we entered into the Purchase Agreement to sell our SumTotal business to a third party for $200 million in cash, subject to adjustments as set forth in the Purchase Agreement. The sale was completed on August 15, 2022. Net proceeds from the sale were $174.9 million, after final working capital adjustments in April 2023. The disposal of SumTotal assets met the criteria to be reported as held for sale and discontinued operations. As a result, SumTotal’s results of operations are presented, net of tax, separate from the results of continuing operations for all periods presented.

 

 

Results of Operations

 

Our results of operations as reported in our condensed consolidated financial statements for these periods are prepared in accordance with GAAP.

 

The following sets forth certain items from our condensed consolidated statements of operations as a percentage of total revenues for the periods indicated:

 

		Three Months Ended July 31,								Six Months Ended July 31,
		2023				2022				2023				2022
Revenues:
Total revenues			100.0	%			100.0	%			100.0	%			100.0	%
Operating expenses:
Costs of revenues			28.7	%			24.9	%			28.3	%			26.5	%
Content and software development			12.7	%			14.0	%			12.6	%			13.1	%
Selling and marketing			28.6	%			29.8	%			31.2	%			29.6	%
General and administrative			17.8	%			18.8	%			18.2	%			20.2	%
Amortization of intangible assets			27.8	%			32.2	%			28.0	%			30.8	%
Impairment of intangible assets			0.0	%			50.1	%			0.0	%			25.6	%
Acquisition-related costs			0.7	%			6.0	%			0.8	%			7.9	%
Restructuring			1.8	%			3.1	%			2.8	%			3.0	%
Total operating expenses			118.1	%			178.8	%			121.9	%			156.6	%
Operating loss			(18.1	)%			(78.8	)%			(21.9	)%			(56.6	)%
Other income (expense), net			(0.7	)%			0.1	%			(0.5	)%			0.4	%
Fair value adjustment of warrants			0.6	%			4.9	%			1.3	%			6.2	%
Fair value of hedge instruments			4.9	%			(10.7	)%			2.6	%			(5.5	)%
Interest income			0.6	%			0.0	%			0.5	%			0.1	%
Interest expense			(11.5	)%			(8.2	)%			(11.6	)%			(8.4	)%
Income (loss) before provision for (benefit from) income taxes			(24.2	)%			(92.7	)%			(29.6	)%			(63.8	)%
Provision for (benefit from) income taxes			(1.3	)%			(2.2	)%			(2.3	)%			(9.2	)%
Income (loss) from continuing operations			(22.9	)%			(90.5	)%			(27.3	)%			(54.6	)%
Gain (loss) on sale of business			0.0	%			0.0	%			(0.2	)%			0.0	%
Income (loss) from discontinued operations, net of tax			0.0	%			4.1	%			0.0	%			2.6	%
Net income (loss)			(22.9	)%			(86.4	)%			(27.5	)%			(52.0	)%

 

Revenues

 

We provide, through our Content & Platform and Instructor-Led Training segments, enterprise learning solutions designed to prepare organizations for the future of work, overcome critical skills gaps, drive demonstrable behavior-change, and unlock the potential in their people.

 

Content & Platform generates revenues from its comprehensive suite of premium, original, and authorized partner content, featuring one of the deepest libraries of leadership and business, technology and development, and compliance curricula. With access to a broad spectrum of learning options (including video, audio, books, bootcamps, live events, and practice labs), organizations can meaningfully increase learner engagement and retention. Content & Platform offerings are predominantly delivered through Percipio, our award-winning, artificial intelligence ("AI")-driven, immersive learning platform purpose built to make learning easier, more accessible, and more effective. In addition, we also have proprietary platforms used for our Codecademy and Skillsoft Coaching offerings. Our learning solutions are typically sold on a subscription basis for a fixed term.

 

Our Instructor-Led Training segment generates revenues from virtual, in-classroom, and on-demand training solutions in information technology geared at foundational, practitioner and expert information technology professionals. Instructor-Led Training’s digital and in-classroom learning solutions provide enterprises, government agencies, and educational institutions a broad selection of customizable courses to meet their technology and development needs.

 

 

Subscription and Non-Subscription Revenue

 

Software as a service ("SaaS") Subscription Revenue. Represents revenue generated from contracts specifying a minimum fixed fee for services delivered over the life of the contract. The initial term of enterprise contracts is generally one to three years and is usually non-cancellable for the term of the subscription. The fixed fee is commonly paid upfront on an annual basis. These contracts typically consist of subscriptions to our various offerings which provide access to our SaaS platforms, associated content and services, over the contract term.

 

Non-Subscription Revenue. Primarily comprised of instructor-led training offerings, which consist of both in-person and virtual environments. Instructor-led training, including virtual offerings, are first scheduled, then delivered later, with revenue realized on the delivery date. Non-subscription revenues also include professional services related to implementation of our offerings and subsequent, ongoing consulting engagements. Our non-subscription services complement our subscription business in creating strong and comprehensive customer relationships.

 

The following is a summary of our revenues by product and service type for the periods indicated:

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
SaaS and subscription revenues:
Content & Platform		$	97,875			$	94,247			$	3,628				3.8	%		$	191,501			$	179,316			$	12,185				6.8	%
Total subscription revenues			97,875				94,247				3,628				3.8	%			191,501				179,316				12,185				6.8	%
Non-subscription revenues:
Instructor-Led Training			37,999				41,821				(3,822	)			(9.1	)%			74,980				86,874				(11,894	)			(13.7	)%
Content & Platform			5,313				4,506				807				17.9	%			10,260				9,223				1,037				11.2	%
Total non-subscription revenues			43,312				46,327				(3,015	)			(6.5	)%			85,240				96,097				(10,857	)			(11.3	)%
Total revenues		$	141,187			$	140,574			$	613				0.4	%		$	276,741			$	275,413			$	1,328				0.5	%

 

The increase in total revenues, when comparing the three months ended July 31, 2023 and 2022, was primarily the result of organic growth in our Content & Platform segment due to higher bookings in the prior year, as revenue from our subscription offerings is typically recognized over the twelve months that follow a booking. This increase was partially offset by a decline in bookings and revenues in our Instructor-Led Training segment primarily due to changes in training programs at two large technology partners during fiscal 2023. The increase in total revenues, when comparing the six months ended July 31, 2023 and 2022, was also impacted by the aforementioned items as well as the result of the inclusion of Codecademy’s revenues earned subsequent to its acquisition on April 4, 2022.

 

Operating expenses

 

Summary of operating expenses

 

The following provides select operating expenses, which are discussed in the associated captions that immediately follow:

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
Cost of revenues		$	40,467			$	34,998			$	5,469				15.6	%		$	78,291			$	73,008			$	5,283				7.2	%
Content and software development expenses			17,863				19,693				(1,830	)			(9.3	)%			34,898				36,026				(1,128	)			(3.1	)%
Selling and marketing expenses			40,411				41,848				(1,437	)			(3.4	)%			86,338				81,410				4,928				6.1	%
General and administrative expenses			25,085				26,367				(1,282	)			(4.9	)%			50,381				55,711				(5,330	)			(9.6	)%
Amortization of intangible assets			39,221				45,200				(5,979	)			(13.2	)%			77,466				84,758				(7,292	)			(8.6	)%
Impairment of goodwill and intangible assets			—				70,475				(70,475	)			(100.0	)%			—				70,475				(70,475	)			(100.0	)%
Acquisition-related costs			937				8,452				(7,515	)			(88.9	)%			2,328				21,764				(19,436	)			(89.3	)%
Restructuring			2,501				4,323				(1,822	)			(42.1	)%			7,719				8,279				(560	)			(6.8	)%
Total operating expenses		$	166,485			$	251,356			$	(84,871	)			(33.8	)%		$	337,421			$	431,431			$	(94,010	)			(21.8	)%

 

 

Cost of revenues

 

Cost of revenues consists primarily of employee salaries and benefits for hosting operations, professional service and customer support personnel; royalties; hosting and software maintenance services; facilities and utilities costs; consulting services; and instructor fees, course materials, logistics costs and overhead costs associated with virtual, in-classroom, and on-demand training solutions. The following provides details regarding the changes in components of cost of revenues:

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
Courseware, instructor fees and outside services		$	22,643			$	17,395			$	5,248				30.2	%		$	43,128			$	36,336			$	6,792				18.7	%
Compensation and benefits			14,123				12,927				1,196				9.3	%			27,539				27,057				482				1.8	%
Hosting and software maintenance			2,926				2,377				549				23.1	%			5,785				4,535				1,250				27.6	%
Facilities, utilities and other			775				2,299				(1,524	)			(66.3	)%			1,839				5,080				(3,241	)			(63.8	)%
Total cost of revenues		$	40,467			$	34,998			$	5,469				15.6	%		$	78,291			$	73,008			$	5,283				7.2	%

 

The increases in courseware, instructor fees and outside services, when comparing the three and six months ended July 31, 2023, to the same periods in 2022, were primarily attributable to rising third-party costs and product mix in our Instructor-Led Training segment. When comparing these same periods, both the compensation and benefits, and hosting and software maintenance categories increased primarily due to the organic growth in our Content & Platform segment and investments in our employees. Refer to Subscription and Non-Subscription Revenue above for additional information related to the organic growth in our Content & Platform segment and declines in our Instructor-Led Training segment. The decrease in facilities and utilities expenses, when comparing the three and six months ended July 31, 2023, to the same periods in 2022, were primarily attributable to cost savings from consolidation of our facilities. In addition, the inclusion of Codecademy’s expenses subsequent to its acquisition on April 4, 2022 increased cost of revenues when comparing the six months ended July 31, 2023, to the same period in 2022.

 

Content and software development

 

Content and software development expenses include costs associated with the development of new products and the enhancement of existing products, consisting primarily of employee salaries and benefits; development-related professional services; facilities costs; depreciation; and software maintenance costs. The following provides details regarding the changes in components of content and software development expenses:

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
Compensation and benefits		$	13,128			$	14,244			$	(1,116	)			(7.8	)%		$	26,004			$	25,523			$	481				1.9	%
Consulting and outside services			2,962				4,139				(1,177	)			(28.4	)%			5,277				8,108				(2,831	)			(34.9	)%
Facilities, utilities and other			817				693				124				17.9	%			2,090				1,393				697				50.0	%
Software maintenance			956				617				339				54.9	%			1,527				1,002				525				52.4	%
Total content and software development expenses		$	17,863			$	19,693			$	(1,830	)			(9.3	)%		$	34,898			$	36,026			$	(1,128	)			(3.1	)%

 

The decreases in compensation and benefits and consulting and outside services, when comparing the three months ended July 31, 2023 and 2022, were primarily attributable to expense reductions and savings from the Company’s integration and restructuring activities. The inclusion of Codecademy’s compensation and benefits, facilities, utilities and other expenses subsequent to its acquisition on April 4, 2022 increased content and software development expenses, when comparing the six months ended July 31, 2023, to the same period in 2022. Refer to Subscription and Non-Subscription Revenue above for additional information related to the organic growth in our Content & Platform segment.

 

Selling and marketing

 

Selling and marketing, or S&M, expenses consist primarily of employee salaries and benefits for selling, marketing and pre-sales support personnel; commissions; travel expenses; advertising and promotional expenses; consulting and outside services; facilities costs; depreciation; and software maintenance costs. The following provides details regarding the changes in components of S&M expenses:

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
Compensation and benefits		$	27,036			$	25,678			$	1,358				5.3	%		$	60,870			$	52,226			$	8,644				16.6	%
Advertising and promotions			7,670				7,759				(89	)			(1.1	)%			14,305				15,519				(1,214	)			(7.8	)%
Software maintenance			3,230				1,469				1,761				119.9	%			6,219				2,592				3,627				139.9	%
Consulting and outside services			1,148				1,908				(760	)			(39.8	)%			2,442				3,822				(1,380	)			(36.1	)%
Facilities, utilities and other			1,327				5,034				(3,707	)			(73.6	)%			2,502				7,251				(4,749	)			(65.5	)%
Total S&M expenses		$	40,411			$	41,848			$	(1,437	)			(3.4	)%		$	86,338			$	81,410			$	4,928				6.1	%

 

The decrease in facilities and utilities expenses, when comparing the three and six months ended July 31, 2023, to the same periods in 2022, were primarily attributable to cost savings from consolidation of our facilities. When comparing these same periods, the increase in compensation and benefits and software maintenance was primarily a result of investments in our go-to-market transformation activities and enablement programs. In addition, the increase in compensation and benefits for these same periods was affected by lower incentive compensation in the prior year periods. Also contributing to the increases in compensation and benefits and software maintenance, when comparing the six months ended July 31, 2023, to the same period in 2022, were the inclusion of Codecademy’s expenses subsequent to its acquisition on April 4, 2022.

 

 

General and administrative

 

General and administrative, or G&A, expenses consist primarily of employee salaries and benefits for executive, finance, administrative, and legal personnel; audit, legal and consulting fees; insurance; franchise, sales and property taxes; facilities costs; and depreciation.

 

The following provides details regarding the changes in components of G&A expenses:

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
Compensation and benefits		$	16,754			$	14,858			$	1,896				12.8	%		$	31,535			$	32,845			$	(1,310	)			(4.0	)%
Consulting and outside services			5,135				7,268				(2,133	)			(29.3	)%			11,718				13,700				(1,982	)			(14.5	)%
Insurance			944				1,473				(529	)			(35.9	)%			2,247				3,407				(1,160	)			(34.0	)%
Facilities, utilities and other			916				1,941				(1,025	)			(52.8	)%			2,177				3,807				(1,630	)			(42.8	)%
Software maintenance			1,087				400				687				171.8	%			1,980				824				1,156				140.3	%
Franchise, sales, and property tax			249				427				(178	)			(41.7	)%			724				1,128				(404	)			(35.8	)%
Total G&A expenses		$	25,085			$	26,367			$	(1,282	)			(4.9	)%		$	50,381			$	55,711			$	(5,330	)			(9.6	)%

 

The decrease in total G&A expenses, when comparing the three and six months ended July 31, 2023, to the same periods in 2022, was primarily attributable to expense reductions and savings from the Company's integration and restructuring activities, including cost savings from consolidation of our facilities and lower insurance, partially offset by lower incentive compensation in the prior year periods. These decreases for the six months ended July 31, 2023, when comparing to the same period in 2022, were partially offset by Codecademy’s expenses subsequent to its acquisition on April 4, 2022.

 

Amortization of intangible assets

 

Intangible assets arising from business combinations are developed technology, customer-related intangibles, trade names and other identifiable intangible assets with finite lives. These intangible assets are amortized over the estimated useful lives of such assets. We also capitalize certain internal use software development costs related to our SaaS platform incurred during the application development stage. The internal use software is amortized on a straight-line basis over its estimated useful life.

 

The decrease in amortization of intangible assets, when comparing the six months ended July 31, 2023, to the same period in 2022, was primarily due to certain intangible assets becoming fully amortized, partially offset by the intangible assets that arose from the acquisition of Codecademy completed on April 4, 2022.

 

Acquisition-related costs

 

Acquisition-related costs consist of professional fees for legal, investment banking and other advisor costs incurred in connection with the business combinations completed in April 2022 and June 2021 and the subsequent integration-related activities. The changes in acquisition-related costs were primarily due to the timing of these aforementioned activities.

 

Restructuring

 

In connection with the acquisition integration process and our workplace flexibility policy, we continued our initiatives and commitment to reduce our costs and better align operating expenses with existing economic conditions and our operating model. In January 2021, we committed to a restructuring plan that encompassed a series of measures intended to improve our operating efficiency, competitiveness and business profitability. These included workforce reductions and consolidation of facilities as we adopted new work arrangements for certain locations. Our restructuring charges recognized during the three and six months ended July 31, 2023 and 2022, have been primarily associated with lease termination and lease impairment charges and employee severance cost. The restructuring charges for the three months ended July 31, 2023 totaling $2.5 million are substantially all related to severance costs of terminated employees. The restructuring charges for the six months ended July 31, 2023 totaling $7.7 million also included severance costs as well as $4.4 million for lease termination and lease impairment charges. The restructuring charges for the three and six months ended July 31, 2022 totaling $4.3 million and $8.3 million, respectively, were substantially all related to severance costs of terminated employees and lease termination and lease impairment charges.

 

 

Interest and other

 

Interest and other, net, consists of gain or loss on derivative instruments, interest income, interest expense, and other expense and income.

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
Other income (expense), net		$	(934	)		$	80			$	(1,014	)			(1267.5	)%		$	(1,309	)		$	1,132			$	(2,441	)			(215.6	)%
Interest income			871				10				861				8610.0	%			1,516				170				1,346				791.8	%
Interest expense			(16,255	)			(11,470	)			(4,785	)			41.7	%			(32,191	)			(23,007	)			(9,184	)			39.9	%

 

The other income (expense) was primarily the foreign exchange gains and losses (specifically, resulting from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities), which fluctuates as the U.S. dollar appreciates or depreciates against other currencies. Interest income for both the three months and six months ended July 31, 2023, compared to the corresponding prior year periods, increased primarily due to the use of money market investments to realize increased returns on cash balances. The increase in interest expense, when comparing the three months ended July 31, 2023, to the corresponding period in 2022, was primarily due to higher interest rates. The increase in interest expense, when comparing the six months ended July 31, 2023, to the corresponding period in 2022, was primarily due to the additional $160 million of term loans in connection with the closing of the Codecademy acquisition on April 4, 2022, and higher interest rates. As a result of the interest rate swaps we executed on June 17, 2022, we have a fixed cash interest rate of 9.05% on $300 million of our outstanding term loans. 

 

Fair value adjustment of warrants

 

The gains attributable to warrants are primarily a result of the Company's underlying common stock performance during the three and six months ended July 31, 2023 and 2022, which decreased the fair value of our liability-classified warrants that are marked to market at each balance sheet date, with gains and losses being recorded in current period earnings.

 

Fair value adjustment of hedge instruments

 

We entered into two fixed-rate interest rate swap agreements on June 17, 2022 for a combined notional amount of $300 million and a maturity date of June 5, 2027. The objective of the interest rate swaps is to eliminate the variability of cash flows in interest payments on $300 million of variable rate debt attributable to changes in benchmark one-month Secured Overnight Financing Rate ("SOFR") interest rates. The interest rate swaps are not designated for hedge accounting and are carried on the statement of financial position at their fair value. Unrealized gains and losses from changes in fair value of the interest rate swaps, which arise from fluctuations in the forward-looking yield curve, are included in the income statement as they occur.

 

Gain on sale of business

 

On June 12, 2022, we entered into the Purchase Agreement to sell our SumTotal business to a third party for $200 million in cash, subject to adjustments set forth in the Purchase Agreement. The sale was completed on August 15, 2022. Net proceeds from the sale were $174.9 million, after final working capital adjustments in April 2023. In accordance with ASC 810, we recorded a gain on sale upon completion of the transaction. The $55.9 million gain, including a loss of $0.7 million recognized in the first quarter of fiscal 2024, was calculated by measuring the difference between the fair value of consideration received less the carrying amount of assets and liabilities sold.

 

Provision for (benefit from) income taxes

 

										Dollar																Dollar
		Three Months Ended July 31,								Increase/				Percent				Six Months Ended July 31,								Increase/				Percent
(In thousands, except percentages)		2023				2022				(Decrease)				Change				2023				2022				(Decrease)				Change
Provision for (benefit from) income taxes		$	(1,889	)		$	(3,065	)		$	1,176				(38.4	)%		$	(6,273	)		$	(25,402	)		$	19,129				(75.3	)%
Effective income tax rate			5.6	%			2.4	%											7.7	%			14.4	%

 

The effective income tax rate for the three and six months ended July 31, 2023 and 2022 differed from the United States federal statutory rate of 21.0% due primarily to the impact of non-deductible items, foreign rate differential and changes in the valuation allowance on the Company’s deferred tax assets.

 

Due to the acquisition of Codecademy on April 4, 2022 the Company analyzed the realizability of its existing deferred tax assets with the addition of the Codecademy assets and liabilities. Based on this analysis the Company determined that a valuation allowance release of $20.7 million was required and recorded in full as a discrete income tax benefit for the six months ended July 31, 2022.

  

 

Liquidity and Capital Resources

 

Liquidity and Sources of Cash

 

As of July 31, 2023, we had $147.9 million of cash and cash equivalents on hand. Our investment policy is approved by the Board of Directors and reviewed annually by the Audit Committee. Our current investment policy’s primary objectives when investing excess cash are, in order of importance: 1) preservation of capital and protection of principal; 2) maintenance of liquidity that is sufficient to meet cash flow needs; and 3) maximize rate of return. Pursuant to this policy, as of July 31, 2023, most of our cash and cash equivalents were held at large financial institutions with high rating agency designations and our exposure to regional banks was not significant. We have funded operations primarily through the use of cash collected from our customers and the proceeds received from the Term Loan Facility (described below), supplemented with borrowings under our accounts receivable facility. Our cash requirements vary depending on factors such as the growth of the business, changes in working capital and capital expenditures. We expect to operate the business and execute our strategic initiatives principally with funds generated from operations and supplemented by borrowings up to a maximum of $75.0 million under our accounts receivable facility. We anticipate that we will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next twelve months, as well as for the foreseeable future with capital sources currently available.

 

Term Loan

 

On July 16, 2021, Skillsoft Finance II, Inc. (“Skillsoft Finance II”), a subsidiary of Skillsoft Corp., entered into a Credit Agreement (the “Credit Agreement”), by and among Skillsoft Finance II, as borrower, Skillsoft Finance I, Inc. (“Holdings”), the lenders party thereto and Citibank, N.A., as administrative agent and collateral agent, pursuant to which the lenders provided a $480 million term loan facility (the “Term Loan Facility”) to Skillsoft Finance II, the proceeds of which, together with cash on hand, were used to refinance existing debt. The Term Loan Facility is scheduled to mature on July 16, 2028.

 

In connection with the closing of the Codecademy acquisition, Skillsoft Finance II entered into Amendment No. 1 to the Credit Agreement, dated as of April 4, 2022 (the “First Amendment”), among Skillsoft Finance II, Holdings, certain subsidiaries of Skillsoft Finance II, as guarantors, Citibank N.A., as administrative agent, and the financial institutions party thereto as Term B-1 Lenders, which amended the Credit Agreement (as amended by the First Amendment, the “Amended Credit Agreement”).

 

The First Amendment provides for the incurrence of up to $160 million of Term B-1 Loans (the “Term B-1 Loans”) under the Amended Credit Agreement. In addition, the First Amendment, among other things, (a) provides for early opt-in to the Secured Overnight Financing Rate ("SOFR") subject to a 0.75% floor, for the existing term loans under the Credit Agreement (such existing term loans together with the Term B-1 Loans, the “Initial Term Loans”) and (b) provides for the applicable margin for the Initial Term Loans at 4.25% with respect to base rate borrowings and 5.25% with respect to SOFR borrowings.

 

Prior to the maturity thereof, the Initial Term Loans are subject to quarterly amortization payments of $1.6 million through maturity. The proceeds of the Term B-1 Loans were used by the Company to finance, in part, the Codecademy acquisition, and to pay costs, fees, and expenses related thereto.

 

SumTotal Proceeds

 

On August 15, 2022, we completed the sale of our SumTotal business to a third party. Net proceeds from the sale were $174.9 million, after final working capital adjustments in April 2023. Under the terms of our Amended Credit Agreement, the net proceeds attributable to the sale of SumTotal required a mandatory prepayment of $31.4 million which was made in August 2022. The remaining net cash proceeds attributable to the sale of SumTotal were subject to reinvestment provisions and could not be used for general corporate purposes. As defined in the Amended Credit Agreement, no additional repayment was required.

 

Accounts Receivable Facility

 

We also have access to up to $75.0 million of borrowings under our accounts receivables facility, where borrowing can be made against eligible accounts receivable, with advance rates between 50.0% and 85.0%. Borrowings under the facility bear interest at 3.11% per annum plus the applicable Term SOFR rate. The maturity date of the accounts receivable facility is the earlier of (i) December 2024 or (ii) 90 days prior to the maturity of any corporate debt. The accounts receivable facility requires a minimum outstanding balance of $10 million at all times. Based on seasonality of billings and the characteristics of accounts receivable, some of which are not eligible for advances, we are not always able to access the full $75.0 million available capacity. As of July 31, 2023, $40.1 million was drawn from our accounts receivable facility. 

 

 

On September 7, 2022, our Board of Directors authorized the Company to repurchase up to $30.0 million of our common stock, which authorization expired September 7, 2023. Although our Board of Directors authorized the share repurchase program, we were not obligated to repurchase any specific dollar amount or acquire any specific number of shares under the program. From inception through April 19, 2023, we repurchased 5,995,530 of our shares for $10.9 million.

 

 

Cash Flows

 

The following summarizes our cash flows for the periods presented:

 

			Six Months Ended July 31,
(In thousands)		2023				2022
Net cash provided by (used in) operating activities		$	1,985			$	(13,003	)
Net cash used in investing activities			(14,494	)			(207,882	)
Net cash provided by (used in) financing activities			(11,730	)			113,014
Effect of foreign currency exchange rates on cash and cash equivalents			(472	)			(4,646	)
Net increase (decrease) in cash and cash equivalents and restricted cash		$	(24,711	)		$	(112,517	)

 

Cash Flows from Operating Activities

 

The year-over-year increase in cash flows from operating activities in the six months ended July 31, 2023, compared to the same period in fiscal 2022, was primarily the result of favorability in working capital, net of effects from acquisitions.

 

Cash flows from operating activities directly attributable to SumTotal, which was sold on August 15, 2022, were not significant for the periods presented herein.

 

Cash Flows from Investing Activities

 

Cash flows from investing activities in the six months ended July 31, 2023 include $6.0 million of cash payments for internally developed software.

 

Cash flows from investing activities for the six months ended July 31, 2022 include cash paid of $198.7 million related to the acquisition of Codecademy. See Note 3 “Business Combination” for more details.

 

Our purchases of property and equipment largely consist of computer hardware and software, as well as capitalized software development costs, to support content and software development activities.

 

Cash flows from investing activities directly attributable to SumTotal, which was sold on August 15, 2022, were not significant for the periods presented herein.

 

Cash Flows from Financing Activities

 

Cash flows from financing activities consist primarily of borrowings and repayments under our debt facilities and our accounts receivable facility, and payments for share repurchases.

 

The Company received $157.1 million of net proceeds from the Term Loan Facility on April 4, 2022. The Company used the net proceeds and cash on hand for the closing of the Codecademy acquisition. See Note 3 “Business Combination” for more details.

 

Contractual and Commercial Obligations

 

The scheduled maturities of our debt and future minimum rental commitments under non-cancelable lease agreements as of July 31, 2023 were as set forth below.

 

		Payments due by Fiscal Year
(In thousands)		Total				Remainder of 2024				2025-2026				2027-2028				Thereafter
Term Loan Facility		$	597,803			$	3,202			$	12,808			$	12,808			$	568,985
Operating leases			16,749				2,492				6,174				3,885				4,198
Total		$	614,552			$	5,694			$	18,982			$	16,693			$	573,183

 

 

Contingencies

 

From time to time, we are party to or may be threatened with litigation in the ordinary course of our business. We regularly analyze then current information including, as applicable, our defense and insurance coverage and, as necessary, provide accruals for probable and estimable liabilities for the eventual disposition of these matters. For information regarding legal proceedings see Note 8.

 

Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements and the related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of assets, liabilities, revenues and expenses during the reporting period. We regularly reevaluate our estimates and judgments, including those related to the following: business combinations, revenue recognition, impairment of goodwill and intangible assets, accounting for warrants, income tax assets and liabilities; and restructuring charges and accruals. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. To the extent there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, or results of operations could be impacted.

 

We believe the following critical accounting estimates most significantly affect the portrayal of our financial condition and involve our most difficult and subjective estimates and judgments.

 

Revenue Recognition

 

The Company enters into contracts that provide customers access to a broad spectrum of learning options including cloud-based learning content, talent management solutions, virtual, on-demand and classroom training, and individualized coaching. The Company recognizes revenue that reflects the consideration that we expect to be entitled to receive in exchange for these services. We apply judgment in determining our customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience, credit, or financial information. The Company is not required to exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price.

 

The Company’s cloud-based solutions generally do not provide customers with the right to take possession of the software supporting the platform or to download course content without continuing to incur fees for hosting services and, as a result, are accounted for as service arrangements. Access to the platform and course content represents a series of distinct services as the Company continually provides access to, and fulfill its obligation to, the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed consideration related to subscription revenue is generally recognized on a straight-line basis over the contract term, beginning on the date the service is made available to the customer. The Company’s subscription contracts typically vary from one year to three years. The Company’s cloud-based solutions arrangements are generally non-cancellable and non-refundable.

 

Revenue from virtual, on-demand and classroom training, and individualized coaching is recognized in the period in which the services are rendered. The Company also sells professional services related to its cloud solutions which are typically considered distinct performance obligations and are recognized over time as services are performed. For fixed-price contracts, revenue is recognized over time based on a measure of progress that reasonably reflects our advancement toward satisfying the performance obligation.

 

While the majority of the Company’s revenue relates to SaaS subscription services where the entire arrangement fee is recognized on a ratable basis over the contractual term, the Company sometimes enters into contractual arrangements that have multiple distinct performance obligations, one or more of which have different periods over which the services or products are delivered. These arrangements may include a combination of subscriptions and non-subscription products such as professional services. The Company allocates the transaction price of the arrangement based on the relative estimated standalone selling price, or SSP, of each distinct performance obligation.

 

Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. The Company presents revenues net of any taxes collected from customers and remitted to government authorities.

 

As the Company’s contractual agreements predominately call for advanced billing, contract assets are rarely generated.

 

Income Taxes

 

We provide for deferred income taxes resulting from temporary differences between the basis of assets and liabilities for financial reporting purposes as compared to tax purposes, using rates expected to be in effect when such differences reverse. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized.

 

We follow the authoritative guidance on accounting for and disclosure of uncertainty in tax positions which requires us to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced to the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority. Interest and penalties related to uncertain tax positions are included in the provision for income taxes in the condensed consolidated statements of operations.

 

 

Intangible Assets, including Goodwill

 

Intangible assets arising from fresh-start accounting and business combinations are generally recorded based upon estimates of the future performance and cash flows from the acquired business. We use an income approach to determine the estimated fair value of certain identifiable intangible assets including customer relationships and trade names and use a cost approach for other identifiable intangible assets, including developed software/courseware. The income approach determines fair value by estimating the after-tax cash flows attributable to an identified asset over its useful life (Level 3 inputs) and then discounting these after-tax cash flows back to a present value. The cost approach determines fair value by estimating the cost to replace or reproduce an asset at current prices and is reduced for functional and economic obsolescence. Developed technology represents patented and unpatented technology and know-how. Customer contracts and relationships represents established relationships with customers, which provide a ready channel for the sale of additional content and services. Trademarks and trade names represent acquired product names and marks that we intend to continue to utilize.

 

We review intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator.

 

We review indefinite-lived intangible assets, including goodwill and certain trademarks, during the fourth quarter of each year for impairment, or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist and reassess their classification as indefinite-lived assets.

 

Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and specifically identified intangible assets acquired. Goodwill in fresh-start accounting results when the reorganization value of the emerging entity exceeds what can be attributed to specific tangible or identified intangible assets. We test goodwill for impairment during the fourth quarter every year in accordance with ASC 350, Intangibles — Goodwill (“ASC 350”). In connection with the impairment evaluation, the Company may first consider qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. Performing a quantitative goodwill impairment test is not necessary if an entity determines based on this assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company fails or elects to bypass the qualitative assessment, the goodwill impairment test must be performed. This test requires a comparison of the carrying value of the reporting unit to its estimated fair value. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded, not to exceed the amount of goodwill allocated to the reporting unit. In determining reporting units, the Company first identifies its operating segments, and then assesses whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component.

 

If current discount rates rise or if relevant market-based inputs for our impairment assessment worsen during the remainder of fiscal 2024, and if our share price remains below our reporting unit fair value per share, we will need to reassess intangible impairment at the end of each quarter. Subsequent reviews of intangibles could result in impairment during fiscal 2024. Factors that could result in an impairment include, but are not limited to, the following:

 

●

Prolonged period of our estimated fair value of our reporting units exceeding our market capitalization;

●

Lower expectations for future profitability of bookings or EBITDA, which in part, could be impacted by legislative, regulatory or tax changes that affect the cost of, or demand for, products and services as well as the loss of key personnel;

●

Deterioration in key assumptions used in our income approach estimates of fair value, such as higher discount rates from higher stock market volatility; and

●

Valuations of significant mergers or acquisitions of companies that provide relevant market-based inputs for our impairment assessment that could support less favorable conclusions regarding the estimated fair value of our reporting units.

 

Derivative Instruments

 

We account for debt and equity issuances as either equity-classified or liability-classified instruments based on an assessment of the instrument's specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the instruments are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the instruments meet all of the requirements for equity classification under ASC 815, including whether the instruments are indexed to our own common stock and whether the holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of issuance of the instruments and as of each subsequent quarterly period end date while the instruments are outstanding.

 

For issued or modified instruments that meet all of the criteria for equity classification, the instruments are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified instruments that do not meet all the criteria for equity classification, the instruments are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the instruments are recognized as a non-cash gain or loss on the statements of operations.

 

Recent Accounting Pronouncements

 

Our recently adopted and to be adopted accounting pronouncements are set forth in Note 2.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have exposures to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.

 

Interest Rate Risk

 

Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities due to movements in interest rates. We are exposed to interest rate risk arising from our interest sensitive long-term debt and accounts receivable facility and to a lesser extent our cash and cash equivalents.

 

Based on the balance of our long-term debt and accounts receivable facility and taking into account the two interest rate swap agreements discussed below, a hypothetical 100 basis point increase or decrease in interest rates would result in approximately $3.5 million additional or lower pre-tax interest expense on an annualized basis, respectively. To manage our exposure to interest rate risk on our long-term debt, we entered into two fixed-rate interest rate swap agreements to change the SOFR-based component of the interest rate on $300.0 million of variable rate debt to a fixed rate. For further information regarding our long-term debt and interest rate swap agreements, see Note 9 and Note 14, respectively, to our condensed consolidated financial statements.

 

Based on the balance of our cash and cash equivalents, a hypothetical 100 basis point increase or decrease in interest rates would result in an approximately $0.7 million increase or decrease, respectively, on our interest income on an annualized basis.

 

Our interest rate swaps are not designated for hedge accounting and are carried on the statement of financial position at their fair value. Unrealized gains and losses from changes in fair value of the interest rate swaps are included in the statement of operations as they occur. A hypothetical 100 basis point increase or decrease in interest rates would result in an approximately $9.6 million increase or decrease, respectively, on our fair value adjustment of hedge instruments at a point in time.

 

Foreign Currency Risk

 

Our reporting currency and the functional currency of our wholly owned foreign subsidiaries is the U.S. dollar. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in other income/(expenses) in our consolidated statement of operations. The Company is exposed to foreign currency fluctuations, including the Euro, pound sterling, Canadian dollar, Australian dollar, Indian rupee, Singapore dollar and related currencies. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. A hypothetical 10% increase or decrease in current exchange rates would have resulted in an impact of approximately $1.6 million on our pre-tax income (loss) on an annualized basis.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2023, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Previously Identified Material Weakness

 

We have taken the actions described in our Annual Report on Form 10-K for the year ended January 31, 2023 regarding the previously identified material weakness. We will continue to evaluate the operating effectiveness of our internal controls in subsequent periods.

 

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 Rules 13a-15(d) and 15d‑15(d) of the Exchange Act that occurred during the three months ended July 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

Because of the inherent limitations in a cost-effective control system, any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will prevent or detect all misstatements, due to error or fraud, from occurring in the condensed consolidated financial statements. Additionally, management is required to use judgment in evaluating controls and procedures.

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

Incorporated by reference herein is information regarding legal proceedings as set forth under “Litigation” contained in Note 8 – “Leases, Commitments and Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q.

 

ITEM 1A. RISK FACTORS.

 

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended January 31, 2023. Such risks and uncertainties are not the only ones facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition or operating results in the future.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

On September 7, 2022, our Board of Directors authorized the Company to repurchase up to $30.0 million of our common stock, which authorization expired September 7, 2023. From inception through April 19, 2023, we repurchased 5,995,530 of our shares for $10.9 million. The Company did not repurchase any common stock during the quarter ended July 31, 2023.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

ITEM 5. OTHER INFORMATION.

 

10b5-1 Trading Plans

 

During the three months ended July 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

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ITEM 6. EXHIBITS.

 

The following list includes exhibits submitted with this Quarterly Report on Form 10-Q as filed with the SEC and those incorporated by reference to other filings.

 

Exhibit No.	Description	Form	File No.	Exhibit	Filing Date
3.1	Second Amended and Restated Certificate of Incorporation of Skillsoft Corp., as amended.
10.7*#	Amended and Restated Employment Agreement, dated as of September 8, 2023, by and between Jeffrey R. Tarr and Skillsoft Corp.
31.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2*	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1‡	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2‡	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	Inline XBRL Instance Document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted in Inline XBRL and included as Exhibit 101)

 

* Filed herewith.

 

‡ Furnished herewith.

 

# Represents management compensation plan, contract or arrangement. 

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

	SKILLSOFT CORP. (Registrant)
Dated: September 11, 2023	By:	/s/ Richard George Walker
	Richard George Walker Chief Financial Officer (Principal Financial Officer)