SKILLSOFT CORP. The following discussion of the financial condition and results of operations of Skillsoft (as defined below) is a supplement to and should be read in conjunction with Skillsoft's condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and with Skillsoft's Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onApril 18, 2022 . This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Skillsoft's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in Part II, Item 1A of this report. Unless otherwise noted, amounts referenced in this discussion, other than in reference to share numbers, are in thousands.
Completion of the Business Combinations
OnJune 11, 2021 ,Churchill Capital Corp II andSoftware Luxembourg Holding S.A. , a global leader in digital learning and talent management solutions, completed a business combination and subsequent acquisition ofAlbert DE Holdings Inc. ("Global Knowledge" and such acquisition, the "Global Knowledge Merger"), a worldwide leader in IT and professional skills development. The combined company operates asSkillsoft Corp. ("Skillsoft", "we", "us", "our" and the "Company") and is listed on theNew York Stock Exchange under the ticker symbol "SKIL" beginning onJune 14, 2021 . OnDecember 22, 2021 , the Company announced a definitive agreement to acquireCodecademy , 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. TheCodecademy acquisition closed onApril 4, 2022 for total consideration of approximately$386.0 million , consisting of the issuance of 30,374,427 common shares and a net cash payment of$198.6 million .
Company's Business following the Business Combinations
Skillsoft is a global leader in corporate digital learning, serving more than 70% of the Fortune 1000, customers in nearly 200 countries, and a community of learners of more than 80 million globally. Skillsoft's primary learning solutions include: (i) Percipio, an intelligent and immersive digital learning platform; (ii)Global Knowledge , a global provider of authorized information technology & development training and professional skills; (iii)Codecademy , an online learning platform for technical skills that uses an innovative, scalable approach to online coding education; and (iv) Pluma, a digital platform that provides individualized executive-quality coaching that is personal yet scalable. The Company provides enterprise learning solutions designed to prepare organizations for the future of work, enable them to overcome critical skill gaps, drive demonstrable behavior-change, and unlock the potential in one of their most important assets: their people. The Company's award-winning, AI-driven, immersive learning platform, Percipio, is purpose built to make learning easier, more accessible, and more effective. Percipio is an open, modern and extensible platform designed to meet the needs of the enterprise customer. Skillsoft offers a comprehensive suite of premium, original, and authorized partner content, including one of the broadest and deepest libraries of leadership & business, technology & developer, and compliance curricula. With access to a broad spectrum of learning options (including video, audio, books, bootcamps, live events, practice labs and individualized coaching), organizations can meaningfully increase learner engagement and retention. In addition, we believe our recent acquisition ofCodecademy will further strengthen our content library, enhance the Percipio platform, broaden our customer reach and create significant cross selling opportunities, positioning us for faster growth. The corporate digital learning industry is rapidly growing, driven by significant tailwinds as organizations focus on upskilling, reskilling, and future-proofing their workforces and the accelerated shift from in-person training to digital training due, in part, to the significant and likely permanent shift to largely remote and distributed workforces triggered by the COVID-19 pandemic and increased emphasis on talent driven by the "great resignation." The war for talent, labor shortages, wage inflation, hybrid work, early retirements, and burnout among those who stay behind all contribute to this growing demand. According to aJanuary 2021 report by McKinsey, 87% of companies worldwide either currently have skills gaps or believe they will within the next few years, and core skills are changing at an unprecedented pace. In a recent survey conducted by Deloitte, the vast majority of CEO's cited labor and skills shortages as the number one threat to their business in the coming year - ahead of the pandemic, supply chain disruption, inflation and
market instability,
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cybersecurity, and political instability. According to theOrganization for Economic Co-operation and Development , technology will radically transform 1.1 billion jobs by 2030. CEOs, Chief People Officers, and the companies they and their teams lead need to transform their current workforce into one adapted for tomorrow's demands. We believe these factors present a significant market opportunity for our solutions.
Discontinued Operations
OnJune 12, 2022 , we entered into the Purchase Agreement to sell ourSumTotal business to a third party for$200 million in cash, subject to adjustments as set forth in the Purchase Agreement. The sale was completed onAugust 15, 2022 . Skillsoft received net proceeds of$176.7 million onAugust 15, 2022 , pending final closing adjustments. The disposal ofSumTotal assets met the criteria to be reported as held for sale and discontinued operations as ofJuly 31, 2022 . As a result,SumTotal's assets and liabilities are reported as held for sale and the results of operations are presented, net of tax, separate from the results of continuing operations for all periods presented.
The sale of
Results of Operations Our financial results for the three and six months endedJuly 31, 2022 , and the period ofJune 12, 2021 toJuly 31, 2021 are referred to as those of the "Successor" periods. Our financial results for the periods ofMay 1, 2021 toJune 11, 2021 andFebruary 1, 2021 toJune 11, 2021 are referred to as those of the "Predecessor (SLH)" periods. Our results of operations as reported in our Condensed Consolidated Financial Statements for these periods are prepared in accordance with GAAP. Although we are required by GAAP to report on our results for the Successor and Predecessor (SLH) periods separately, we do not believe that reviewing the results of the periods in isolation would be useful in identifying trends in or reaching conclusions regarding our overall operating performance. The table below presents the results for the three months endedJuly 31, 2021 , which are the sum of the reported amounts for the Predecessor (SLH) period fromMay 1, 2021 throughJune 11, 2021 and the Successor period fromJune 12, 2021 throughJuly 31, 2021 , and the results for the six months endedJuly 31, 2021 , which are the sum of the reported amounts for the Predecessor (SLH) period fromFebruary 1, 2021 throughJune 11, 2021 and the Successor period fromJune 12, 2021 throughJuly 31, 2021 . These combined results are not considered to be prepared in accordance with GAAP and have not been prepared as pro forma results per applicable regulations. The combined operating results do not reflect the actual results we would have achieved absent the business combination and may not be indicative of future results. 43 Table of Contents Non-GAAP Non-GAAP Successor Predecessor (SLH) Predecessor (SLH) Combined Combined From From From Three Months Six Months June 12, 2021 to May 1, 2021 to February 1, 2021 to Ended Ended (In thousands) July 31, 2021 June 11, 2021 June 11, 2021 July 31, 2021 July 31, 2021 Revenues: Total revenues $ 75,466 $ 34,814 $ 102,494$ 110,280 $ 177,960 Operating expenses: Costs of revenues 22,290 6,949 22,043 29,239 44,333
Content and software development 6,208
4,510 15,012 10,718 21,220 Selling and marketing 19,650 10,905 34,401 30,555 54,051 General and administrative 16,824 4,652 16,471 21,476 33,295
Amortization of intangible assets 18,493
14,575 46,492 33,068 64,985 Recapitalization and acquisition-related costs 9,900 4,927 6,641 14,827 16,541 Restructuring 287 (910) (576) (623) (289) Total operating expenses 93,652 45,608 140,484 139,260 234,136 Operating loss (18,186) (10,794) (37,990) (28,980) (56,176) Interest and other expense, net (10,248) (4,997) (16,870) (15,245) (27,118) Fair value adjustment to warrants 17,115 800 900 17,915 18,015 Loss before provision for (benefit from) income taxes (11,319) (14,991) (53,960) (26,310) (65,279) Provision for (benefit from) income taxes (1,996) (464) (3,521) (2,460) (5,517) Loss from continuing operations (9,323) (14,527) (50,439) (23,850) (59,762) Income from discontinued operations, net of tax (2,531) 2,668 1,175 137 (1,356) Net loss $ (11,854) $ (11,859) $ (49,264)$ (23,713) $ (61,118) The table below presents the comparison of our historical results of operations for the periods presented: Non-GAAP Non-GAAP Combined Combined Three Months Three Months Six Months Six Months Ended Ended Ended Ended (In thousands) July 31, 2022 July 31, 2021 July 31, 2022 July 31, 2021 Revenues: Total revenues$ 140,574 $ 110,280 $ 275,413 $ 177,960 Operating expenses: Costs of revenues 34,998 29,239 73,008 44,333
Content and software development 19,693
10,718 36,026 21,220 Selling and marketing 41,848 30,555 81,410 54,051 General and administrative 26,367 21,476 55,711 33,295
Amortization of intangible assets 45,200 33,068 84,758 64,985 Impairment of goodwill and intangible assets 70,475 - 70,475 - Recapitalization and acquisition-related costs 8,452
14,827 21,764 16,541 Restructuring 4,323 (623) 8,279 (289) Total operating expenses 251,356 139,260 431,431 234,136 Operating loss (110,782) (28,980) (156,018) (56,176) Interest and other expense, net (11,380) (15,245) (21,705) (27,118) Fair value adjustment to warrants 6,846 17,915 16,952 18,015 Fair value adjustments on hedge instruments (15,065) - (15,065) - Loss before (benefit from) provision for income taxes (130,381) (26,310) (175,836) (65,279) (Benefit from) provision for income taxes (3,065) (2,460) (25,402) (5,517) Loss from continuing operations (127,316) (23,850) (150,434) (59,762) Income from discontinued operations, net of tax 5,817 137 7,292 (1,356) Net loss$ (121,499) $ (23,713) $ (143,142) $ (61,118) 44 Table of Contents The following table sets forth certain items from our condensed consolidated statements of operations as a percentage of total revenues for the periods indicated: Non-GAAP Non-GAAP Combined Combined Three Months Three Months Six Months Six Months Ended Ended Ended Ended July 31, 2022 July 31, 2021 July 31, 2022 July 31, 2021 Revenues: Total revenues 100.0% 100.0% 100.0% 100.0% Operating expenses: Costs of revenues 24.9% 26.5% 26.5% 24.9%
Content and software development 14.0% 9.7%
13.1% 11.9% Selling and marketing 29.8% 27.7% 29.6% 30.4% General and administrative 18.8% 19.5% 20.2% 18.7%
Amortization of intangible assets 32.2% 30.0%
30.8% 36.5% Impairment of goodwill and intangible assets 50.1% 0.0% 25.6% 0.0% Recapitalization and acquisition-related costs 6.0% 13.4% 7.9% 9.3% Restructuring 3.1% (0.6)% 3.0% (0.2)% Total operating expenses 178.8% 126.3% 156.6% 131.6% Operating loss (78.8)% (26.3)% (56.6)% (31.6)%
Interest and other expense, net (8.1)% (13.8)% (7.9)% (15.2)% Fair value adjustment to warrants 4.9% 16.2% 6.2% 10.1% Fair value adjustments on hedge instruments (10.7)% 0.0% (5.5)% 0.0% Loss before provision for (benefit from) income taxes (92.7)% (23.9)% (63.8)% (36.7)% (Benefit from) provision for income taxes (2.2)% (2.2)% (9.2)% (3.1)%
Loss from continuing operations (90.6)% (21.6)%
(54.6)% (33.6)% Income from discontinued operations, net of tax 4.1% 0.1% 2.6% (0.8)% Net loss (86.4)% (21.5)% (52.0)% (34.3)% Revenues
We provide, through our Skillsoft,Global Knowledge , and Codecademy brands, enterprise learning solutions designed to prepare organizations for the future of work, overcome critical skill gaps, drive demonstrable behavior-change, and unlock the potential in their people. Skillsoft generates revenues from its comprehensive suite of premium, original, and authorized partner content, featuring one of the deepest libraries of leadership & business, technology & 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. Skillsoft's content offerings are predominately delivered through Percipio, our award-winning, 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 ourCodecademy and Pluma offerings. Our learning solutions are typically sold on a subscription basis for a fixed term.Global Knowledge generates revenues from virtual, in-classroom, and on-demand training solutions in information technology geared at foundational, practitioner and expert information technology professionals.Global Knowledge's digital and in-classroom learning solutions provide enterprises, government agencies, educational institutions, and individual customers a broad selection of customizable courses to meet their technology and development needs. 45
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The following table sets forth the percentage of our revenues from continuing operations attributable to geographic regions for the periods indicated:
Non-GAAP Non-GAAP
Combined Combined
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
July 31, 2022 July 31, 2021 July 31, 2022 July 31, 2021
Revenues:
United States 65.9% 66.8% 63.9% 70.2%
Other Americas 5.3% 6.7% 5.8% 6.0%
Europe, Middle East and Africa 25.4% 22.5% 27.0% 19.3%
Asia-Pacific 3.4% 4.0% 3.3% 4.5%
Total revenues 100.0% 100.0% 100.0% 100.0%
Subscription and Non-Subscription Revenue
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 five years and is generally non-cancellable for the term of the subscription. The fixed fee is generally paid upfront. These contracts typically consist of subscriptions to our various offerings which provide continuous access to our SaaS platforms and associated content over the contract term. Subscription revenue is usually recognized ratably over the contract term. Non-Subscription Revenue. Primarily represents the sale ofGlobal Knowledge 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 revenue also includes 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 table sets forth (i) SaaS subscription and (ii) non-subscription revenue for our business units for the periods indicated:
Non-GAAP Non-GAAP
Combined Combined
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
(In thousands) July 31, 2022 July 31, 2021 July 31, 2022 July 31, 2021
SaaS subscription revenues:
Content $ 94,247 $ 77,285 $ 179,316 $ 141,646
Total subscription revenues 94,247 77,285 179,316 141,646
Non-subscription revenues:
Content 4,506 3,754 9,223 7,073
Global Knowledge 41,821 29,241 86,874 29,241Total non-subscription revenues 46,327 32,995
96,097 36,314 Total revenues$ 140,574 $ 110,280 $ 275,413 $ 177,960 46 Table of Contents
Revenue by Product and Service Type
The following is a summary of our revenues by product and service type for the
periods indicated:
Non-GAAP
Combined
Three Months Three Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2022 July 31, 2021
(Decrease) Change Revenues: SaaS subscription services$ 94,247 $ 77,285 $ 16,962 21.9% Professional services 4,281 3,754 527 14.0% Software licenses and other 225 - 225 100.0% Instructor led training 41,821 29,241 12,580 43.0% Total revenues$ 140,574 $ 110,280 $ 30,294 27.5% Non-GAAP Combined Six Months Six Months Dollar Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2022 July 31, 2021
(Decrease) Change Revenues: SaaS subscription services$ 179,316 $ 141,646 $ 37,670 26.6% Professional services 8,812 7,073 1,739 24.6% Software licenses and other 411 - 411 100.0% Instructor led training 86,874 29,241 57,633 197.1% Total revenues$ 275,413 $ 177,960 $ 97,453 54.8%
Revenues increased$30.3 million , or 27.5%, for the three months endedJuly 31, 2022 , and increased$97.5 million , or 54.8%, for the six months endedJuly 31, 2022 , compared to the same periods in 2021. The primary reason for the increase in GAAP revenue is due to the inclusion ofGlobal Knowledge revenue for the period subsequent to its acquisition onJune 11, 2021 , which resulted in an increase of$17.2 million and$62.2 million for the three and six months endedJuly 31, 2022 , respectively. Revenues for the three and six months endedJuly 31, 2021 were also lower due to the application of fresh-start reporting inAugust 2020 , which required deferred revenue as ofAugust 28, 2020 to be reduced to its estimated fair value, which is derived from the estimated costs to fulfill contractual obligations at the time of a change in control rather than the value of contractual billings to customers. The application of fresh-start reporting resulted in a decrease in GAAP revenue of approximately$5.9 million and$25.8 million in the three and six month combined periods endedJuly 31, 2021 , respectively. We adopted ASU 2021-08 - Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"), effective at the beginning of the Successor period onJune 11, 2021 . ASU 2021-08 requires an acquirer in a business combination to recognize and measure deferred revenue from acquired contracts using the revenue recognition guidance in Topic 606, rather than the prior requirement to record deferred revenue at a lower fair value. As a result of the adoption of ASU 2021-08, we did not experience a decline in revenue subsequent toJune 11, 2021 attributable to a fair value adjustment as we did with the application of fresh-start reporting in the prior year. After normalizing for the impact of the acquisition ofGlobal Knowledge and fresh-start reporting, revenues were higher due to (i) the inclusion of Pluma revenue and four months ofCodecademy revenue due to their acquisitions onJune 30, 2021 andApril 3, 2022 , respectively, and (ii) organic growth due to higher bookings in the prior year, as revenue from our subscription offerings is typically recognized over the twelve months that follow a booking. 47 Table of Contents Operating expenses Non-GAAP Combined Three Months Three Months Dollar Ended Ended Increase/ Percent (In thousands, except percentages) July 31, 2022 July 31, 2021 (Decrease) Change Cost of revenues$ 34,998 $ 29,239 $ 5,759 19.7% Content and software development 19,693
10,718 8,975 83.7% Selling and marketing 41,848 30,555 11,293 37.0% General and administrative 26,367 21,476 4,891 22.8%
Amortization of intangible assets 45,200 33,068 12,132 36.7% Impairment of goodwill and intangible assets 70,475 - 70,475 100.0% Recapitalization and acquisition-related costs 8,452
14,827 (6,375) (43.0)% Restructuring 4,323 (623) 4,946 (793.9)% Total operating expenses$ 251,356 $ 139,260 $ 112,096 80.5% Non-GAAP Combined Six Months Six Months Dollar Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2022 July 31, 2021 (Decrease) Change Cost of revenues$ 73,008 $ 44,333 $ 28,675 64.7% Content and software development 36,026 21,220
14,806 69.8%
Selling and marketing 81,410 54,051 27,359 50.6%
General and administrative 55,711 33,295 22,416 67.3%Amortization of intangible assets 84,758 64,985
19,773 30.4%
Impairment of goodwill and
intangible assets 70,475 - 70,475 100.0%
Recapitalization and
acquisition-related costs 21,764 16,541 5,223 31.6%
Restructuring 8,279 (289) 8,568 (2964.7)%
Total operating expenses $ 431,431 $ 234,136 $ 197,295 84.3%
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 table below provides details regarding the changes in
components of cost of revenues.
Non-GAAP
Combined
Three Months Three Months Dollar
Ended Ended Increase/ Percent
(In thousands, except
percentages) July 31, 2022 July 31, 2021 (Decrease) Change
Compensation and benefits $ 12,927 $ 10,483 $ 2,444 23.3%
Courseware, reseller fees and
outside services 17,395 15,094 2,301 15.2%
Hosting and software
maintenance 2,377 1,655 722 43.6%
Facilities and utilities 2,062 1,917 145 7.6%
Other 237 90 147 163.3%
Total cost of revenues $ 34,998 $ 29,239 $ 5,759 19.7%
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Non-GAAP
Combined
Six Months Six Months Dollar
Ended Ended Increase/ Percent
(In thousands, except
percentages) July 31, 2022 July 31, 2021 (Decrease) Change
Compensation and benefits $ 27,057 $ 17,555 $ 9,502 54.1%
Courseware, reseller fees and
outside services 36,336 20,293 16,043 79.1%
Hosting and software
maintenance 4,535 3,386 1,149 33.9%
Facilities and utilities 4,896 2,989 1,907 63.8%
Other 184 110 74 67.3%
Total cost of revenues $ 73,008 $ 44,333 $ 28,675 64.7%
The increases in compensation and benefits, courseware, reseller fees and
outside services, and facilities and utilities for the three and six months
ended July 31, 2022 , compared to the same periods in 2021, were primarily the
result of the inclusion of Global Knowledge's expenses incurred subsequent to
its acquisition on June 11, 2021 . The increases in hosting and software for the
three and six months ended July 31, 2022 , compared to the same periods in 2021,
were the result of the inclusion of Codecademy's hosting expenses incurred
subsequent to its acquisition on April 4, 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
table below provides details regarding the changes in components of content and
software development expenses.
Non-GAAP
Combined
Three Months Three Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2022 July 31, 2021 (Decrease) Change Compensation and benefits$ 14,244 $ 7,010$ 7,234 103.2% Consulting and outside services 4,139 2,740
1,399 51.1%
Facilities and utilities 693 708 (15) (2.1)%
Software Maintenance 562 206 356 172.8%
Other 55 54 1 1.9%
Total content and software
development expenses $ 19,693 $ 10,718 $ 8,975 83.7%
Non-GAAP
Combined
Six Months Six Months Dollar
Ended Ended Increase/ Percent
(In thousands, except
percentages) July 31, 2022 July 31, 2021 (Decrease) Change
Compensation and benefits $ 25,523 $ 12,918 $ 12,605 97.6%Consulting and outside services 8,108 6,213
1,895 30.5%
Facilities and utilities 1,393 1,495 (102) (6.8)%
Software Maintenance 972 531 441 83.1%
Other 30 63 (33) (52.4)%
Total content and software
development expenses $ 36,026 $ 21,220 $ 14,806 69.8%
The increases in compensation and benefits for the three and six months ended
July 31, 2022 , compared to the same periods in 2021, were primarily due to
increased headcount within our content development team in 2022, and the
inclusion of Codecademy's compensation expenses incurred subsequent to its
acquisition on April 4, 2022 . Also contributing to the increase in compensation
and benefits expenses for the three and six months ended July 31, 2022 was the
stock-based compensation related to the stock options and restricted stock units
granted to key employees. The increases in consulting and outside services
expenses for the three and six months
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ended
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 table below provides details regarding the changes in components
of
S&M expenses.
Non-GAAP
Combined
Three Months Three Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2022 July 31, 2021
(Decrease) Change Compensation and benefits$ 25,678 $ 22,735 $ 2,943 12.9% Advertising and promotions 7,759 4,348 3,411 78.4% Facilities and utilities 1,143 1,402 (259) (18.5)%
Consulting and outside services 1,908 1,084
824 76.0%
Travel 3,756 74 3,682 4975.7%
Software Maintenance 1,469 907 562 62.0%
Other 135 5 130 2600.0%
Total S&M expenses $ 41,848 $ 30,555 $ 11,293 37.0%
Non-GAAP
Combined
Six Months Six Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2022 July 31, 2021
(Decrease) Change Compensation and benefits$ 52,226 $ 39,534 $ 12,692 32.1% Advertising and promotions 15,519 7,801 7,718 98.9% Facilities and utilities 2,401 2,773 (372) (13.4)%
Consulting and outside services 3,822 2,102
1,720 81.8%
Travel 4,733 90 4,643 5158.9%
Software Maintenance 2,592 1,766 826 46.8%
Other 117 (15) 132 (880.0)%
Total S&M expenses $ 81,410 $ 54,051 $ 27,359 50.6%
The increases in compensation and benefits and consulting and outside services
expenses for the three and six months ended July 31, 2022 , compared to the same
periods in 2021, were primarily the result of the inclusion of Global
Knowledge's S&M expenses incurred subsequent to its acquisition on June 11,
2021 . The increases in advertising and promotion and software maintenance
expenses for the three and six months ended July 31, 2022 , compared to the same
periods in 2021, were primarily due to the inclusion of Codecademy's marketing
expenses and software tools related expenses incurred subsequent to its
acquisition on April 4, 2022 . The increases in travel expenses for the three and
six months ended July 31, 2022 , compared to the same periods in 2021, resulted
from the timing of an annual event which was held earlier in the year as
compared to the prior year.
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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 table below provides
details regarding the changes in components of G&A expenses.
Non-GAAP
Combined
Three Months Three Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2022 July 31, 2021 (Decrease) Change Compensation and benefits$ 14,858 $ 14,499 $ 359 2.5% Consulting and outside services 7,268 3,548 3,720 104.8% Facilities and utilities 1,544 1,326 218 16.4% Franchise, sales, and property tax 427 33
394 1193.9%
Insurance 1,473 1,556 (83) (5.3)%
Software Maintenance 400 190 210 110.5%
Other 397 324 73 22.5%
Total G&A expenses $ 26,367 $ 21,476 $ 4,891 22.8%
Non-GAAP
Combined
Six Months Six Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2022 July 31, 2021 (Decrease) Change Compensation and benefits$ 32,845 $ 22,166 $ 10,679 48.2% Consulting and outside services 13,700 6,064 7,636 125.9% Facilities and utilities 3,427 2,023 1,404 69.4% Franchise, sales, and property tax 1,128 482
646 134.0%
Insurance 3,407 1,921 1,486 77.4%
Software Maintenance 824 263 561 213.3%
Other 380 376 4 1.1%
Total G&A expenses $ 55,711 $ 33,295 $ 22,416 67.3%
The increases in compensation and benefits, facilities and utilities, and
software maintenance expenses for the three and six months ended July 31, 2022 ,
compared to the same periods in 2021, were primarily the result of the inclusion
of Global Knowledge's G&A expenses incurred subsequent to its acquisition on
June 11, 2021 . Also contributing to the increase in compensation and benefits
expenses for the three and six months ended July 31, 2022 was the stock-based
compensation related to the stock options and restricted stock units granted to
key employees. The increase in compensation and benefits expenses for the three
months ended July 31, 2022 was partially offset by lower incentive-based
compensation compared to the prior year. The increases in consulting and outside
services expenses for the three and six months ended July 31, 2022 , compared to
the same periods in 2021, were primarily due to increased professional services
as well as integration-related costs after the combination of Skillsoft, Global
Knowledge and Codecademy . The increase in insurance expenses for the six months
ended July 31, 2022 , compared to the same period in 2021, was due to the higher
directors and officers insurance policies attributable to the Company following
the June 2021 business combinations.
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.
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The increases in amortization of intangible assets of$12.1 million and$19.8 million for the three and six months endedJuly 31, 2022 , respectively, compared to the same periods in 2021, were primarily due to the intangible assets that arose from the business combinations completed inJune 2021 andApril 2022 .
Impairment of goodwill and intangible assets
During the three months endedJuly 31, 2022 , ourGlobal Knowledge instructor led training ("ILT") business experienced a significant decline in bookings and GAAP revenue compared to the corresponding period in the prior year. In light of the circumstances and indicators of impairment, we first considered whether any impairment was present for theGlobal Knowledge long-lived assets group, concluding that no such impairments were present after conducting an undiscounted cash flow recoverability test. In accordance with ASC 350, we next considered whether there were any indicators of impairment forGlobal Knowledge goodwill, concluding that triggering events had occurred, necessitating an interim goodwill impairment test as ofJuly 31, 2022 . In comparing the estimated fair value of theGlobal Knowledge reporting unit to its carrying value, we considered the results of both a discounted cash flow analysis and a market multiples approach. The results of the impairment test performed indicated that the carrying value of theGlobal Knowledge reporting unit exceeded its estimated fair value. Based on the results of the goodwill impairment testing procedures, we recorded a$70.5 million goodwill impairment for the three and six months endedJuly 31, 2022 .
Recapitalization and acquisition-related costs
Recapitalization and acquisition-related costs consist of professional fees for legal, investment banking and other advisor costs incurred in connection with our business combination completed inJune 2021 , and subsequent acquisition related activities driven by theCodecademy acquisition and related debt issuance. The recapitalization and acquisition-related costs decreased$6.4 million and increased$5.2 million for the three and six months endedJuly 31, 2022 , respectively, compared to the same periods in 2021. The changes were primarily due to the timing of the acquisitions related 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. During the three and six months endedJuly 31, 2022 , we recorded restructuring charges of$4.3 million and$8.3 million , respectively, for the severance costs and the abandonment of right-of-use assets. InJanuary 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 are adopting new work arrangements for certain locations. During the three and six months endedJuly 31, 2021 , we recorded restructuring recoveries of$0.6 million and$0.3 million , respectively, as a result of severance cost estimate changes.
Interest and other expense
Interest and other expense, net, consists of gain and loss on derivative
instruments, interest income, interest expense, and other expense and income.
Non-GAAP
Combined
Three Months Three Months Dollar
Ended Ended (Increase)/ Percent
(In thousands, except
percentages) July 31, 2022 July 31, 2021 Decrease Change
Other income (expense), net $ 80 $ (688) $ (768) (111.6)%
Interest income 10 62 52 83.9%
Interest expense, net (11,470) (14,619) 3,149 21.5%
Interest and other expense,
net $ (11,380) $ (15,245) $ 3,865 25.4%
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Non-GAAP
Combined
Six Months Six Months Dollar
Ended Ended (Increase)/ Percent
(In thousands, except
percentages) July 31, 2022 July 31, 2021 Decrease Change
Other income (expense), net $ 1,132 $ (1,159) $ (2,291) (197.7)%
Interest income 170 69 (101) (146.4)%
Interest expense, net (23,007) (26,028) 3,021 11.6%
Interest and other expense,
net $ (21,705) $ (27,118) $ 5,413 20.0%
The net 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) recognized during the three and six months endedJuly 31, 2022 and 2021, which fluctuate as theU.S. dollar appreciates or depreciates against other currencies. The decreases in interest expense for the three and six months endedJuly 31, 2022 , compared to the same periods in 2021, were due to the higher term loan interest rate and average outstanding principal under the exit credit facility of the Predecessor prior to the refinancing in July of 2021. As a result of the interest rate swaps we executed onJune 17, 2022 , we have fixed the cash interest rate on$300 million of our outstanding term loans at 8.94% going forward.
Fair value adjustments to warrants
The gains attributable to warrants for the three and six months endedJuly 31, 2022 are due to a decline in the value of our common stock during the periods, 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 adjustments of hedge instruments
We entered into two fixed-rate interest rate swap agreements onJune 17, 2022 for a notional amount of$300 million and a maturity date ofJune 5, 2027 . The objective of the interest rate swaps is to eliminate the variability of cash flows in interest payments on the first$300 million of variable rate debt attributable to changes in benchmark one-month Secured Overnight Financing Rate (SOFR) interest rates. The interest rate swaps are not designated for hedge accounting and are carried on the statement of financial position at their fair value. Unrealized gains and losses from changes in fair value of the interest rate swaps are included in the income statement as they occur. Benefit from income taxes Non-GAAP Combined Three Months Three Months Dollar Ended Ended Increase/ Percent (In thousands, except percentages) July 31, 2022 July 31, 2021 (Decrease) Change Benefit from income taxes$ (3,065) $ (2,460) $ 605 24.6% Effective income tax rate 2.4% 9.4% Non-GAAP Combined Six Months Six Months Dollar Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2022 July 31, 2021
(Decrease) Change Benefit from income taxes$ (25,402) $ (5,517) $ 19,885 360.4% Effective income tax rate 14.4% 8.5% The effective income tax rate for the three and six months endedJuly 31, 2022 , differed fromthe 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 ofCodecademy onApril 4, 2022 the Company analyzed the realizability of its existing deferred tax assets with the addition of theCodecademy assets and liabilities. Based on this analysis the Company determined 53 Table of Contents
that a valuation allowance release of
The effective income tax rate for the three and six months endedJuly 31, 2021 , differed fromthe United States federal statutory rate of 21.0% due primarily to 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.
Liquidity and Capital Resources
Liquidity and Sources of Cash
As ofJuly 31, 2022 , we had$48.6 million of cash and cash equivalents on hand. 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 from time to time with borrowings under our accounts receivable facility (described below). 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 from 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 12 months as well as for the foreseeable future with capital sources currently available.
Term Loan
OnJuly 16, 2021 ,Skillsoft Finance II, Inc. ("Skillsoft Finance II"), a subsidiary ofSkillsoft 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 andCitibank, 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 onJuly 16, 2028 . In connection with the closing of theCodecademy acquisition, Skillsoft Finance II entered into Amendment No. 1 to the Credit Agreement, dated as ofApril 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 parties 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) 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 will be subject to quarterly amortization payments of 0.25% of the principal amount. The Amended Credit Agreement requires that any prepayment of the Initial Term Loans in connection with a repricing transaction shall be subject to (i) a 2.00% premium on the amount of Initial Term Loans prepaid if such prepayment occurs prior toJuly 16, 2022 and (ii) a 1.00% premium on the amount of Initial Term Loans prepaid in connection with a Repricing Transaction (as defined in the Amended Credit Agreement), if such prepayment occurs on or afterJuly 16, 2022 but on or prior toJanuary 16, 2023 . The proceeds of the Term B-1 Loans were used by the Company to finance, in part, theCodecademy acquisition, and to pay costs,
fees, and expenses related thereto. SumTotal Proceeds OnAugust 15, 2022 , we completed the previously announced sale of ourSumTotal business to a third party. The sale ofSumTotal generated gross proceeds of$200 million and net proceeds of$176.7 million , after reflecting the impact of transaction-related expenses, working capital adjustments and the settlement of other obligations necessitated by the transaction. Under the terms of our Amended Credit Agreement, the net proceeds attributable to the sale ofSumTotal required a mandatory prepayment of$31.4 million . The 54
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remaining net cash proceeds of$145.3 million are subject to reinvestment provisions and may not be used for general corporate purposes. In the event any of the remaining net cash proceeds have not been designated for eligible investments (such as permitted acquisitions, capital expenditures and other such eligible uses as defined in the Amended Credit Agreement) on or beforeAugust 15, 2023 , such remaining net cash proceeds will be used to prepay outstanding indebtedness under our Amended Credit Agreement. We expect to have sufficient qualifying expenditures under the Amended Credit Agreement such that no additional mandatory prepayment with remainingSumTotal proceeds will be necessary.
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 3.00% per annum plus the greater of (i) the prime rate or (ii) the sum of 0.5% per annum plus the federal funds 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 million of capacity.
Share Repurchase Program
OnSeptember 7, 2022 , our Board of Directors authorized the Company to repurchase up to$30 million of our common stock, which authorization will expireSeptember 7, 2023 unless extended. Although our Board of Directors has authorized the share repurchase program, we are not obligated to repurchase any specific dollar amount or to acquire any specific number of shares under the program. In addition, the share repurchase program may be suspended, modified, or terminated at any time without prior notice. The amount, timing, and execution of our share repurchase program may fluctuate based on our priorities for the use of cash for other purposes and because of changes in cash flows, tax laws, and the market price of our common stock.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Non-GAAP
Successor Combined
Six Months Six Months
Ended Ended
(In thousands) July 31, 2022 July 31, 2021
Net cash (used in) provided by operating
activities $ (13,003) $ 34,549
Net cash used in investing activities (207,882)
(565,554)
Net cash provided by financing activities 113,014
394,013
Effect of foreign currency exchange rates on cash and cash equivalents (4,646)
(47)
Net decrease in cash and cash equivalents$ (112,517) $
(137,039)
Cash Flows from Operating Activities
The decrease in cash provided by operating activities for the six months endedJuly 31, 2022 compared to the corresponding period in the prior year was primarily due to (i) higher recapitalization and acquisition-related costs, driven by theCodecademy acquisition and related debt issuance, (ii) higher one-time restructuring and integration-related costs related to the combination of Skillsoft andGlobal Knowledge , (iii) higher annual incentive compensation payments, and (iv) the timing of corporate events and vendors payments compared to the prior year.
Cash Flows from Investing Activities
Cash flows from investing activities include cash paid of$198.6 million related to the acquisition ofCodecademy . See Note 3 "Business Combinations" of the Notes to Unaudited Condensed Consolidated Financial Statements for more details. Our purchases of property 55 Table of Contents
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 Financing Activities
Cash flows from financing activities consist of borrowings and repayments under our Predecessor and Successor debt facilities and our accounts receivable facility. We received$157.1 million of net proceeds from the Amended Credit Agreement and used most of the proceeds for the acquisition ofCodecademy onApril 4, 2022 .
Contractual and Commercial Obligations
The scheduled maturities of our debt and future minimum rental commitments under non-cancelable lease agreements as ofJuly 31, 2022 were as set forth in the table below. Payments due by Fiscal Year (In thousands) Total 2023 (1) 2024-2025 2026-2027 Thereafter Term Loan Facility$ 635,598 $ 34,593 $ 12,808 $ 12,808 $ 575,389 Operating leases 20,574 3,165 8,225 4,260 4,924 Total$ 656,172 $ 37,758 $ 21,033 $ 17,068 $ 580,313
(1)Excluding payments made during the six months ended
From time to time, we are a 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. We are presently not a party to any material legal proceedings.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes have been prepared in accordance with accounting principles generally accepted inthe 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, stock-based compensation, 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 that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, 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.
Impairment of
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and 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 56
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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. Intangible assets arising from 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 tradenames 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 reassesses their classification as indefinite-lived assets. During the three months endedJuly 31, 2022 , ourGlobal Knowledge instructor led training ("ILT") business experienced a significant decline in bookings and GAAP revenue compared to the corresponding period in the prior year. Management believes the poor performance is due to a variety of factors, including (i) reduced corporate spending as customers brace for the potential of a recessionary environment, (ii) difficulty maintaining adequate sales capacity in a challenging labor market for employers and (iii) evolving customer preferences with respect to training and ILT in a post COVID environment.
In light of the circumstances and indicators of impairment described above,
management first considered whether any impairment was present for the
In accordance with ASC 350, management next considered whether there were any indicators of impairment forGlobal Knowledge goodwill, concluding that triggering events had occurred, necessitating an interim goodwill impairment test as ofJuly 31, 2022 . In comparing the estimated fair value of theGlobal Knowledge reporting unit to its carrying value, we considered the results of both a discounted cash flow ("DCF") analysis and a market multiples approach. The results of the impairment test performed indicated that the carrying value of theGlobal Knowledge reporting unit exceeded its estimated fair value. Based on the results of the goodwill impairment testing procedures, we recorded a$70.5 million goodwill impairment for the three and six months endedJuly 31, 2022 . We believe that our procedures for estimating gross future cash flows for each intangible asset are reasonable and consistent with current market conditions for each of the dates when impairment testing was performed. The determination of fair value that is used as a basis for calculating the amount of impairment is a significant estimate. A 10% change in our estimate of fair value of theGlobal Knowledge reporting unit, which could occur due to different judgments around (i) estimates of future cash flows, (ii) discount rates, (iii) estimated control premiums, (iv) use of different multiples, (v) the weighting of valuation approaches or (vi) other assumptions, or a combination of these judgments, would result in an increase or decrease in our goodwill impairment by approximately$13.9 million .
Stock-based Compensation
We recognize compensation expense for stock options and time-based restricted
stock units granted to employees on a straight-line basis over the service
period that awards are expected to vest, based on the estimated fair value of
the awards on the date of the grant. For restricted stock units that have market
conditions, we recognize compensation expense using an accelerated attribution
method. We recognize forfeitures as they occur. We estimate the fair value of
options utilizing the Black-Scholes model, which is dependent on
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several subjective variables, such as the expected option term and expected volatility over the expected option term. We determine the expected term using the simplified method. The simplified method sets the term to the average of the time to vesting and the contractual life of the options. Since we do not have a trading history of our common stock, the expected volatility is estimated by considering (i) the average historical stock volatilities of a peer group of public companies within our industry over a period equivalent to the expected term of the stock option grants and (ii) the implied volatility of warrants to purchase our common stock that are actively traded in public markets. The fair value of restricted stock units that vest based on market conditions are estimated using theMonte Carlo valuation method. These fair value estimates of stock related awards and assumptions inherent therein are estimates and, as a result, may not be reflective of future results or amounts ultimately realized by recipients of the grants.
Recent Accounting Pronouncements
Our recently adopted and to be adopted accounting pronouncements are set forth in Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for the quarterly period endedJuly 31, 2022 .
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