SKILLSOFT CORP. The following discussion of the financial condition and results of operations of Skillsoft (as defined below) should be read in conjunction with Skillsoft's condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and the audited consolidated financial statements for the year endedJanuary 31, 2021 and the related notes included in the Company's Current Report on Form 8-K filed with theSecurities and Exchange Commission (the "SEC") onJune 17, 2021 . 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 Combination
OnJune 11, 2021 , the Company 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 new ticker symbol "SKIL" beginning onJune 14, 2021 .
Change in Fiscal Year
OnJune 21, 2021 , our board of directors approved the adoption of aJanuary 31 year-end for the Company's financial reporting, effective immediately, to alignChurchill Capital Corp II andGlobal Knowledge with the pre-business combination Skillsoft's fiscal year end. As a result, this fiscal year ends onJanuary 31, 2022 (fiscal 2022) and the second quarter of fiscal 2022 ended onJuly 31, 2021 .
Company's Business following the Business Combination
Skillsoft is a global leader in corporate digital learning, serving approximately 70% of the Fortune 1000, customers in over 160 countries, and more than 45 million learners globally. 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. 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, and practice labs), organizations can meaningfully increase learner engagement and retention. Skillsoft's offerings are delivered through Percipio, its award-winning, AI-driven, immersive learning platform purpose built to make learning easier, more accessible, and more effective. Learn more at www.skillsoft.com. Skillsoft's primary learning solutions include: (i) Skillsoft Percipio, an intelligent and immersive digital learning platform; (ii) Skillport, a legacy learning content delivery platform; (iii)Global Knowledge , a global provider of authorized information technology & development training and professional skills; and (iv)SumTotal , a SaaS-basedHuman Capital Management ("HCM") solution with a leadingTalent Development platform. Skillsoft provides enterprise learning solutions, and premium, authorized, and original content that help many of the world's leading organizations drive measurable improvement and overcome critical skills gaps. Skillsoft sells broad portfolio of content and solutions to customers through our leading sales force across a global footprint. Skillsoft is deeply embedded within our customers' organizations, and constantly evolving our solutions to address their needs
and
current market trends.
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Table of Contents
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 COVID-19 pandemic.
Organizations invest in learning and talent solutions to build a more motivated,
skilled, and resilient workforce. Skillsoft helps them accomplish these
objectives by delivering a complete learning solution, supported by our proven,
dynamic, and comprehensive content portfolio, which includes offerings across
the Leadership and Business Skills, Technology and Development, and Compliance
customer market segments. Our solutions are powered by engaging learning
platforms, including our wholly owned subsidiary, Global Knowledge , and our
award-winning, state-of-the-art learning experience platform, Percipio, and our
SumTotal Talent Development platform.
Results of Operations
Our financial results for the period ofJune 12, 2021 toJuly 31, 2021 are referred to as those of the "Successor" period. 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 financial results for the three and six months endedJuly 31, 2020 are also referred to as those of the "Predecessor (PL)" periods. Our results of operations as reported in our Consolidated Financial Statements for these periods are prepared in accordance with GAAP. Although GAAP requires us to report on our results for the period fromJune 12, 2021 throughJuly 31, 2021 ,May 1, 2021 throughJune 11, 2021 ,February 1, 2021 throughJune 11, 2021 ,May 1, 2020 throughJuly 31, 2020 , andFebruary 1, 2020 throughJuly 31, 2020 , separately, management views the Company's operating results for the three and six months endedJuly 31, 2021 by combining the results of the applicable Predecessor and Successor periods because such presentation provides the meaningful comparison of our results to prior periods. We cannot adequately benchmark the operating results for the three and six months endedJuly 31, 2021 against any of the previous periods reported in our Consolidated Financial Statements without combining the period fromFebruary 1, 2021 throughJune 11, 2021 and the period fromJune 12, 2021 throughJuly 31, 2021 and do not believe that reviewing the results of this period in isolation would be useful in identifying trends in or reaching conclusions regarding our overall operating performance. Management believes that the key performance metrics such as revenue and operating (loss) income for the Successor period when combined with the Predecessor periods provide more meaningful comparisons to other periods and are useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our Consolidated Financial Statements in accordance with GAAP, the tables and discussion below also present the combined results for the three and six months endedJuly 31, 2021 . The table below presents the results for the three months endedJuly 31, 2021 , which are the sum of the reported amounts for the Predecessor 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 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 37 Table of Contents 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. Predecessor Non-GAAP Predecessor Non-GAAP Successor (SLH) Combined (SLH) Combined Three From From June From May 1, Months February 1, Six Months 12, 2021 to 2021 to June Ended July 2021 to June Ended July (In thousands) July 31, 2021 11, 2021 31, 2021 11, 2021 31, 2021 Revenues: Total revenues$ 57,912 $ 47,935 $ 105,847 $ 139,636 $ 197,548 Operating expenses: Costs of revenues 28,006 11,360 39,366 35,881 63,887
Content and software development 9,878 7,477
17,355 24,084 33,962
Selling and marketing 22,234 13,438 35,672 41,940 64,174
General and administrative 17,073 4,855 21,928 17,217 34,290
Amortization of goodwill and
intangible assets 20,023 15,959 35,982 50,902 70,925
Recapitalization and transaction
related costs 9,995 5,006 15,001 6,938 16,933
Restructuring 316 (1,240) (924) (703) (387)
Total operating expenses 107,525 56,855 164,380 176,259 283,784
Operating loss (49,613) (8,920) (58,533) (36,623) (86,236)Interest and other expense, net (10,541) (5,358) (15,899) (17,249) (27,790) Fair value adjustment to warrants 17,115 800 17,915 900 18,015 Loss before benefit from income taxes (43,039) (13,478)
(56,517) (52,972) (96,011)
Benefit from income taxes (5,504) (1,619) (7,123) (3,708) (9,212)
Net loss $ (37,535) $ (11,859) $ (49,394) $ (49,264) $ (86,799)
The table below presents the comparison of our historical results of operations
for the periods presented:
Non-GAAP Non-GAAP
Combined Predecessor (PL) Combined Predecessor (PL)
Three Months Three Months Six Months Six Months
Ended July 31, Ended July Ended July Ended July
(In thousands) 2021 31, 2020 31, 2021 31, 2020
Revenues:
Total revenues $ 105,847 $ 116,835 $ 197,548 $ 235,164
Operating expenses:
Costs of revenues 39,366 21,618 63,887 45,831
Content and software development 17,355
16,835 33,962 33,778
Selling and marketing 35,672 34,033 64,174 66,769
General and administrative 21,928 15,324 34,290 32,015Amortization of intangible assets 35,982 12,779 70,925 30,148 Impairment of goodwill and intangible assets - - - 332,376 Recapitalization and transaction related costs 15,001
16,659 16,933 32,035
Restructuring (924) 771 (387) 1,141
Total operating expenses 164,380 118,019 283,784 574,093
Operating loss (58,533) (1,184) (86,236) (338,929)Interest and other expense, net (15,899) (60,113) (27,790) (165,161) Fair value adjustment to warrants 17,915 - 18,015 - Reorganization items, net - (10,593) - (10,593) Loss before benefit from income taxes (56,517)
(71,890) (96,011) (514,683) Benefit from income taxes (7,123) (909) (9,212) (9,800) Net loss$ (49,394) $ (70,981)$ (86,799) $ (504,873) 38 Table of Contents
The following table sets forth certain items from our consolidated statements of operations as a percentage of total revenues for the periods indicated:
Non-GAAP Non-GAAP
Combined Predecessor (PL) Combined Predecessor (PL)
Three Months Three Months Six Months Six Months
Ended July 31, Ended July 31, Ended July Ended July
2021 2020 31, 2021 31, 2020
Revenues:
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Costs of revenues 37.2 % 18.5 % 32.4 % 19.5 %Content and software development 16.4 %
14.4 % 17.2 % 14.4 %
Selling and marketing 33.7 % 29.1 % 32.5 % 28.4 %
General and administrative 20.7 % 13.1 % 17.4 % 13.6 %Amortization of intangible assets 34.0 % 10.9 % 35.9 % 12.8 % Impairment of goodwill and intangible assets 0.0 % 0.0 % 0.0 % 141.3 % Recapitalization and transaction related costs 14.2 %
14.3 % 8.6 % 13.6 %
Restructuring (0.9) % 0.7 % (0.2) % 0.5 %
Total operating expenses 155.3 % 101.1 % 143.8 % 244.1 %
Operating loss (55.3) % (1.0) % (43.8) % (144.1) %Interest and other expense, net (15.0) % (51.5) % (14.1) % (70.2) % Fair value adjustment to warrants 16.9 % 0.0 % 9.1 % 0.0 % Reorganization items, net 0.0 % (9.1) % 0.0 % (4.5) % Loss before benefit from income taxes (53.4) %
(61.5) % (48.8) % (218.8) % Benefit from income taxes (6.7) % (0.8) % (4.7) % (4.2) % Net loss (46.7) % (60.7) % (44.1) % (214.6) % Revenues We provide, through our Skillsoft,Global Knowledge and SumTotal 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 offerings are delivered through Percipio, its award-winning, AI-driven, immersive learning platform purpose built to make learning easier, more accessible, and more effective. These 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.SumTotal generates revenues from its unified, comprehensive and configurable SaaS talent management solution that allows organizations to attract, develop and retain the best talent.SumTotal also sells professional services related to the talent management solution, and occasionally provide perpetual and term-based licenses for on-premise versions of the solution. 39 Table of Contents
The following table sets forth the percentage of our revenues attributable to geographic regions for the periods indicated:
Non-GAAP Non-GAAP
Combined Predecessor(PL) Combined Predecessor (PL)
Three Three
Months Months Six Months Six Months
Ended July Ended July Ended July Ended July
31, 2021 31, 2020 31, 2021 31, 2020
Revenues:
United States 67.5 % 77.5 % 70.1 % 77.1 %
Other Americas 7.1 % 4.1 % 6.7 % 4.8 %
Europe, Middle East and Africa 19.9 % 12.3 % 17.2 % 12.2 %
Asia-Pacific 5.4 % 6.1 % 6.0 % 6.0 %
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Subscription and Non-Subscription Revenue
SaaS and 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 these contracts is generally two 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 revenues are inclusive of maintenance revenue forSumTotal . Subscription revenue is usually recognized ratably over the contract term. Non-Subscription Revenue. Primarily represents the sale ofGlobal Knowledge classroom offerings in both in-person and virtual environments. Classroom 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 and subscription and (ii) non-subscription revenue for our business units for the periods indicated:
Non-GAAP Non-GAAP
Combined Predecessor (PL) Combined Predecessor (PL)
Three Months Three Months Six Months Six Months
Ended July Ended July Ended July Ended July
(In thousands) 31, 2021 31, 2020 31, 2021 31, 2020
SaaS and subscription revenues:
Content $ 54,949 $ 80,331 $ 118,594 $ 160,751
SumTotal 18,030 26,014 37,797 52,875
Total subscription revenues 72,979 106,345 156,391 213,626
Non-subscription revenues:
Content 2,807 3,756 6,219 7,654Virtual, on-demand and classroom 24,660 - 24,660 - SumTotal 5,401 6,734 10,278 13,884 Total non-subscription revenues 32,868
10,490 41,157 21,538 Total revenues$ 105,847 $ 116,835$ 197,548 $ 235,164 40 Table of Contents
Revenue by Product and Service Type
The following is a summary of our revenues by product and service type for the
three and six months ended
Non-GAAP
Combined Predecessor (PL)
Three Months Three Months Dollar
Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change
Revenues:
SaaS and subscription services $ 75,111 $ 100,398 $ (25,287) (25.2) %
Software maintenance 3,575 5,119 (1,544) (30.2) %
Professional services 8,444 10,247 (1,803) (17.6) %Software licenses and other 78 1,071 (993) (93.5) % Virtual, on-demand and classroom 18,639
- 18,639 100.0 % Total revenues$ 105,847 $ 116,835$ (10,988) (9.4) % Non-GAAP Combined Predecessor (PL) Six Months Six Months Dollar Ended Ended Increase/ Percent (In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Revenues: SaaS and subscription services$ 153,767 $ 201,492$ (47,725) (23.7) % Software maintenance 7,621 10,378 (2,757) (26.6) % Professional services 16,555 21,189 (4,634) (21.9) %
Software licenses and other 966 2,105 (1,139) (54.1) % Virtual, on-demand and classroom 18,639 - 18,639 100.0 % Total revenues$ 197,548 $ 235,164$ (37,616) (16.0) % Revenues decreased$11.0 million , or 9.4%, for the combined three months endedJuly 31, 2021 , and decreased$37.6 million , or 16.0%, for the combined six months endedJuly 31, 2021 , compared to the same periods in 2020. The primary reason for the decrease in GAAP revenue for these periods is due to the application of fresh-start reporting inAugust 2020 and business combination Accounting inJune 2021 , both of which require beginning deferred revenue in the Successor periods 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 compared to the three and six month combined periods endedJuly 31, 2021 , respectively. The application of business combination accounting resulted in a decrease in GAAP revenue of approximately$22.4 million compared to the three and six month combined periods endedJuly 31, 2021 . The impact of business combination accounting will also decrease GAAP revenue for the next three fiscal quarters. The impact of fresh-start reporting and business combination accounting was partially offset by the acquisition ofGlobal Knowledge , the revenue from which is included for the period fromJune 11, 2021 toJuly 31, 2021 . After normalizing for the impact of fresh-start reporting, business combination accounting and the acquisition ofGlobal Knowledge , revenues for the Content andSumTotal business units were down slightly due to lower bookings in the prior year, as revenue from our subscription offerings is typically recognized over the twelve months that follow a booking. 41 Table of Contents Operating expenses Non-GAAP Combined Predecessor (PL) Three Months Three Months Dollar Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Cost of revenues$ 39,366 $ 21,618$ 17,748 82.1 % Content and software development 17,355
16,835 520 3.1 % Selling and marketing 35,672 34,033 1,639 4.8 % General and administrative 21,928 15,324 6,604 43.1 %
Amortization of intangible assets 35,982 12,779 23,203 181.6 % Recapitalization and transaction related costs 15,001
16,659 (1,658) (10.0) % Restructuring (924) 771 (1,695) (219.8) % Total operating expenses$ 164,380 $ 118,019$ 46,361 39.3 % Non-GAAP Combined Predecessor (PL) Six Months Six Months Dollar Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Cost of revenues$ 63,887 $ 45,831$ 18,056 39.4 % Content and software development 33,962
33,778 184 0.5 %
Selling and marketing 64,174 66,769 (2,595) (3.9) %
General and administrative 34,290 32,015 2,275 7.1 %Amortization of intangible assets 70,925 30,148 40,777 135.3 % Impairment of goodwill and intangible assets - 332,376 (332,376) (100.0) % Recapitalization and transaction related costs 16,933
32,035 (15,102) (47.1) %
Restructuring (387) 1,141 (1,528) (133.9) %
Total operating expenses $ 283,784 $ 574,093 $ (290,309) (50.6) %
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; 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 Predecessor (PL)
Three Months Three Months Dollar
Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change
Compensation and benefits $ 16,753 $ 12,996 $ 3,757 28.9 %
Royalties 8,814 4,033 4,781 118.5 %Hosting and software maintenance 2,959 3,117 (158) (5.1) % Facilities and utilities 3,357 1,788 1,569 87.8 % Consulting and outside services 7,387 731 6,656 910.5 % Other 96 (1,047) 1,143 (109.2) % Total cost of revenues$ 39,366 $ 21,618$ 17,748 82.1 % 42 Table of Contents Non-GAAP Combined Predecessor (PL) Six Months Six Months Dollar Ended Ended Increase/ Percent (In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Compensation and benefits$ 29,941 $ 26,539$ 3,402 12.8 % Royalties 13,664 8,300 5,364 64.6 %
Hosting and software maintenance 5,988 5,978 10 0.2 % Facilities and utilities 5,704 3,729 1,975 53.0 % Consulting and outside services 8,468
2,246 6,222 277.0 % Other 122 (961) 1,083 (112.7) % Total cost of revenues$ 63,887 $ 45,831$ 18,056 39.4 % The increases in compensation and benefits, royalties, facilities and utilities, and consulting and outside services expenses were primarily a result of includingGlobal Knowledge's expenses incurred in the period ofJune 12, 2021 toJuly 31, 2021 in the Non-GAAP combined periods of three and six months endedJuly 31, 2021 . The$1.0 million credit in other expenses was a result of deconsolidation ofSkillsoft Canada Ltd. inJuly 2020 when Skillsoft filed prepackaged Chapter 11 with Canadian court.
Content and software development
Content and software development expenses include costs associated with the
development of new products and the enhancement of existing products, consisting
primarily of employee salaries and benefits; development related professional
services; facilities costs; depreciation; and software maintenance costs. The
table below provides details regarding the changes in components of content and
software development expenses.
Non-GAAP
Combined Predecessor
Three Months Three Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Compensation and benefits$ 12,374 $ 10,755 $ 1,619 15.1 % Consulting and outside services 3,111 3,950 (839) (21.2) % Facilities and utilities 1,261 1,455 (194) (13.3) % Software Maintenance 604 681 (77) (11.3) % Other 5 (6) 11 (183.3) % Total content and software development expenses$ 17,355 $ 16,835 $ 520 3.1 % Non-GAAP Combined Predecessor (PL) Six Months Six Months Dollar Ended Ended Increase/ Percent (In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Compensation and benefits$ 23,182 $ 21,999$ 1,183 5.4 % Consulting and outside services 6,869 7,627 (758) (9.9) % Facilities and utilities 2,569
2,956 (387) (13.1) % Software Maintenance 1,326 1,160 166 14.3 % Other 16 36 (20) (55.6) % Total content and software development expenses$ 33,962 $ 33,778$ 184 0.5 % The increases in compensation and benefits for the three and six months endedJuly 31, 2021 , compared to the same periods in 2020, were primarily due to the increases in incentive-based compensation accruals. The decreases in consulting and outside services expenses for the three and six months endedJuly 31, 2021 , compared to the same periods in 2020, were primarily due to decreased third party software development costs as we shifted the software development work to our offshore employees. 43 Table of Contents 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 Predecessor (PL) Three Months Three Months Dollar Ended Ended Increase/ Percent (In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Compensation and benefits$ 27,019 $ 25,210$ 1,809 7.2 % Advertising and promotions 4,657 4,737 (80) (1.7) % Facilities and utilities 1,751 2,487 (736) (29.6) % Consulting and outside services 1,152 1,056 96 9.1 % Software Maintenance 938 794 144 18.1 % Travel expenses 102 47 55 117.0 % Other 53 (298) 351 (117.8) % Total S&M expenses$ 35,672 $ 34,033$ 1,639 4.8 % Non-GAAP Combined Predecessor Six Months Six Months Dollar Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Compensation and benefits$ 48,230 $ 48,543 $ (313) (0.6) % Advertising and promotions 8,142 8,137 5 0.1 % Facilities and utilities 3,454 5,020 (1,566) (31.2) % Consulting and outside services 2,291 2,384 (93) (3.9) % Software Maintenance 1,831 1,569 262 16.7 % Travel expenses 120 1,028 (908) (88.3) % Other 106 88 18 20.5 % Total S&M expenses$ 64,174 $ 66,769 $ (2,595) (3.9) % The increase in compensation and benefits for the three months endedJuly 31, 2021 , compared to the same period in 2020, was primarily a result of includingGlobal Knowledge's S&M compensation costs incurred in the period ofJune 12, 2021 toJuly 31, 2021 in the Non-GAAP combined periods of three and six months endedJuly 31, 2021 . The increase was partially offset by the decreases in Skillsoft's compensation costs as a result of its sales personnel reduction in 2021 and the decreases in commission expenses as a result of the application of fresh-start reporting inAugust 2020 and Topic 805 business combination guidance inJune 2021 , which required us to eliminate the balance of deferred commissions which otherwise would have been recognized as commission expense in the Successor period. Skillsoft's sales workforce reduction resulted in less facilities and utilities costs allocated to S&M for the three and six months endedJuly 31, 2021 , compared to the same periods in 2020. The decrease in travel expenses for the six months endedJuly 31, 2021 , compared to the same period in 2020, was due to COVID-19 pandemic. 44 Table of Contents 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 Predecessor (PL)
Three Months Three Months Dollar
Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change
Compensation and benefits $ 14,685 $ 11,164 $ 3,521 31.5 %
Consulting and outside services 3,854 2,665 1,189 44.6 %
Facilities and utilities 1,382 792 590 74.5 %
Franchise, sales, and property tax 91 212 (121) (57.1) % Insurance 1,556 299 1,257 420.4 % Other 360 193 167 87.5 %
Total G&A expenses$ 21,928 $
15,324$ 6,603 43.1 % Non-GAAP Combined Predecessor (PL) Six Months Six Months Dollar Ended Ended Increase/ Percent (In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Compensation and benefits$ 22,375 $ 23,177$ (802) (3.5) % Consulting and outside services 6,716 5,620 1,096 19.5 % Facilities and utilities 2,131 1,604 527 32.9 % Franchise, sales, and property tax 610
587 23 3.9 % Insurance 1,927 618 1,309 211.8 % Other 531 409 122 29.8 % Total G&A expenses$ 34,290 $ 32,015$ 2,275 7.1 % The increase in compensation and benefits for the three months endedJuly 31, 2021 , compared to the same period in 2020, was primarily a result of includingGlobal Knowledge's G&A expenses incurred in the period ofJune 12, 2021 toJuly 31, 2021 in the Non-GAAP combined periods of three months endedJuly 31, 2021 . Also contributing to the increases in compensation and benefits expenses was the stock-based compensation related to the stock options and restricted stock units granted to key executive employees inJune 2021 . Those increases were partially offset by one-time retention bonuses paid to key employees in connection with Skillsoft's Chapter 11 filing and recapitalization efforts during the three and six months endedJuly 31, 2020 . The increases in consulting and outside services expenses for the three and six months endedJuly 31, 2021 , compared to the same periods in 2020, were primarily due to increased audit and tax services, and business process improvement projects related consulting services. The increases in insurance expenses for the three and six months endedJuly 31, 2021 , compared to the same periods in 2020, were due to the excess Directors and Officers insurance policies purchased in association with the business combination completed inJune 2021 .
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 increases in amortization of intangible assets for the three and six months endedJuly 31, 2021 , compared to the same periods 2020, was primarily due to the intangible assets that arose from the business combinations completed inJune 2021 . 45 Table of Contents
Impairment of goodwill and intangible assets
During the Predecessor period for the three months endedApril 30, 2020 , the emergence of COVID-19 as a global pandemic had an adverse impact on our business. While the online learnings tools we offer have many advantages over traditional in person learning in the current environment, some of our customers have sought to temporarily reduce spending, resulting in reductions in contract sizes and in some cases cancellations when such contracts have come up for renewal. In addition, identifying and pursing opportunities for new customers became much more challenging in this environment. As a result of the expected impact of the COVID-19 pandemic, management decreased its estimates of future cash flows. In addition to the uncertainty introduced by the COVID-19 pandemic, our over-leveraged capital structure continued to create headwinds. InApril 2020 , we received temporary forbearance from our lenders due to a default on amounts owed under the Senior Credit Facility as a long-term consensual solution was being negotiated with lenders. The uncertainty around our capital structure and future ownership continued to hurt our business, as new and existing customers displayed apprehension about the ultimate resolution of our capital structure and its impact on operations, causing delays and sometimes losses in business. The uncertainty surrounding our capital structure combined with the potential impact that the COVID-19 pandemic would have on our company and the global economy, resulted in a significant decline in the fair value of our reporting units during the predecessor period endedAugust 27, 2020 . As part of our evaluation of impairment indicators based on the circumstances described above as ofApril 30, 2020 , we determined theSumTotal long-lived asset group failed the undiscounted cash flow recoverability test. Accordingly, we estimated the fair value of our individual long-lived assets to determine if any impairment charges were present. Our estimation of the fair value of definite lived intangible assets included the use of discounted cash flow analyses which reflected estimates of future revenue, customer attrition rates, royalty rates, cash flows, and discount rates. Based on these analyses, we concluded the fair values of certainSumTotal intangible assets were lower than their current carrying values and, accordingly, impairment charges of$62.3 million were recognized for the Predecessor period fromFebruary 1, 2020 toJuly 31, 2020 . In light of the circumstances above, we also concluded that a triggering event had occurred with respect to the Company's indefinite-lived Skillsoft trade name as ofApril 30, 2020 . Accordingly, we estimated the fair value of the Skillsoft trade name using a discounted cash flow ("DCF") analysis which reflected estimates of future revenue, royalty rates, cash flows, and discount rates. Based on this analysis, we concluded the carrying value of the Skillsoft trade name exceeded its fair value, resulting in an impairment charge of$92.2 million for the Predecessor period fromFebruary 1, 2020 toJuly 31, 2020 . In accordance with ASC 350, for goodwill we determined triggering events had occurred and performed an impairment test as ofApril 30, 2020 that compared the estimated fair value of each reporting unit to their respective carrying values. We considered the results of a DCF analysis, which were also materially corroborated by an EBITDA multiple approach. The results of the impairment tests performed indicated that the carrying values of the Skillsoft andSumTotal reporting units exceeded their estimated fair values determined by the Company. Based on the results of the goodwill impairment testing procedures, the Company recorded a$107.9 million goodwill impairment for the Skillsoft reporting unit and a$70.0 million goodwill impairment for theSumTotal reporting unit. In total, as described in detail above, we recorded$332.4 million of impairment charges for the six months endedJuly 31, 2020 , consisting of (i)$62.3 million of impairments ofSumTotal definite-lived intangible assets, (ii) an$92.2 million impairment of the Skillsoft trade name, (iii) a$107.9 million goodwill impairment for the Skillsoft reporting unit and (iv) a$70.0 million goodwill impairment for theSumTotal reporting unit.
Recapitalization and transaction-related costs
Recapitalization and transaction-related costs consist of professional fees for legal, investment banking and other advisor costs incurred in connection with our recapitalization efforts, including the evaluation of strategic alternatives, preparation for the Chapter 11 filing and subsequent emergence inAugust 2020 , and activities related to the business combination completed inJune 2021 . Restructuring 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 mainly within ourSumTotal business, and consolidation of facilities as we are adopting new work arrangements for certain locations. During the three and six months ended 46 Table of Contents
In connection with our strategic initiatives implemented during 2020, we approved and initiated plans to reduce our cost structure and better align operating expenses with existing economic conditions and our operating model. During the three and six months endedJuly 31, 2020 , we recorded restructuring charges of$0.7 million and$1.1 million , respectively, for employee severance cost adjustments and lease termination related fees.
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 Predecessor (PL)
Three Months Three Months Dollar
Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change
Other income, net $ (738) $ 898 $ (1,636) (182.2) %
Interest income 66 65 1 1.5 %
Interest expense, net (15,227) (61,076) 45,849 (75.1) %
Interest and other expense, net $ (15,899) $ (60,113) $ 44,214 (73.6) %
Non-GAAP
Combined Predecessor (PL)
Six Months Six Months Dollar
Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change
Other (expense) income, net $ (1,190) $ 1,819 $ (3,009) (165.4) %
Interest income 76 84 (8) (9.5) %
Interest expense, net (26,676) (167,054) 140,378 (84.0) %
Interest and other expense, net $ (27,790) $ (165,151) $ 137,361 (83.2) %
The changes in net other (expense) income for the three and six months ended
July 31, 2021 , and 2020 were primarily due to the foreign exchange gains and
losses (specifically, resulting from foreign currency denominated transactions
and the revaluation of foreign currency denominated assets and liabilities)
during the three and six months ended July 31, 2021 , and 2020. The decrease in
interest expense for the three and six months ended July 31, 2021 , compared to
the same periods in 2020, were the result of our reorganization through
voluntarily filed "pre-packaged" Chapter 11 cases completed in August 2020 ,
which resulted in substantially less outstanding debt.
Benefit from income taxes
Non-GAAP
Combined Predecessor
Three Months Three Months Dollar
Ended Ended Increase/ Percent(In thousands, except percentages) July 31, 2021 July 31,2020
(Decrease) Change Benefit from income taxes$ (7,123) $ (909) $ (6,214) 683.6 % Effective income tax rate 12.6 % 1.3 % 47 Table of Contents Non-GAAP Combined Predecessor Six Months Six Months Dollar Ended Ended Increase/ Percent
(In thousands, except percentages) July 31, 2021 July 31,2020 (Decrease) Change Benefit from income taxes$ (9,212) $ (9,800) $ 588 (6.0) Effective income tax rate 9.6 % 1.9 % The decrease in Benefit from income taxes for the three months endedJuly 31, 2021 , compared to the same period in 2020, was primarily due to changes in the valuation allowance on our deferred tax assets and the impact of foreign rate differential in the three months endedJuly 31, 2021 , as well as the impact of non-deductible expenses and the impairment of intangible assets in the three months endedJuly 31, 2020 . The effective income tax rate for the three months endedJuly 31, 2021 , differs fromthe United States federal statutory rate of 21.0% due primarily to the impact of foreign earnings in lower tax jurisdictions and an increase in the valuation allowance on the Company's deferred tax assets.
The effective income tax rate for the three months ended
The decrease in Benefit from income taxes for the six months endedJuly 31, 2021 , compared to the same period in 2020, was primarily due to increases in the valuation allowance on our deferred tax assets and the impact of foreign rate differential in the six months endedJuly 31, 2021 , as well as the impact of the impairment of intangible assets in the six months endedJuly 31, 2020 . The effective income tax rate for the six months endedJuly 31, 2021 , differs fromthe United States federal statutory rate of 21.0% due primarily to the impact of foreign earnings in lower tax jurisdictions and an increase in the valuation allowance on the Company's deferred tax assets.
The effective income tax rate for the three months ended
Liquidity and Capital Resources
Liquidity and Sources of Cash
As ofJuly 31, 2021 , we had$90.7 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. 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 that certain Credit Agreement (the "Credit Agreement"), by and among Skillsoft Finance II, as borrower,Skillsoft Finance I, Inc. , as holdings ("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 the Senior Secured First Out Term Loan and Senior Secured Second Out Term Loans incurred by certain subsidiaries of Skillsoft Finance II. The Term Loan Facility is scheduled to mature onJuly 16, 2028
(the
"Maturity Date").
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The Term Loan Facility is guaranteed by Holdings and certain material
subsidiaries of Skillsoft Finance II (collectively, the "Loan Parties"). All
obligations under the Credit Agreement, and the guarantees of those obligations,
are secured by substantially all of the material assets of the Loan Parties.
Amounts outstanding under the Term Loan Facility bear interest, at the option of
Skillsoft Finance II, at a rate equal to (a) LIBOR (subject to a floor of 0.75%)
plus 4.75% for Eurocurrency Loans or (b) the highest of (i) the Federal Funds
Effective Rate plus ½ of 1%, (ii) the "prime rate" quoted by the Administrative
Agent, (iii) LIBOR plus 1.00% and (iv) 1.75%, plus 3.75%.
Skillsoft Finance II is required to repay the Term Loan Facility in quarterly
installments in the amount of 1% per annum, payable on the last business day of
each fiscal quarter. The entire remaining outstanding balance of the Term Loan
Facility is payable on the Maturity Date. Voluntary prepayment is permitted
under the Term Loan Facility subject to a premium of 2% for any prepayments
prior to the 12 month anniversary of the Term Loan Facility.
Loan Parties are subject to various affirmative and negative covenants and
reporting obligations under the Credit Facility. These include, among others,
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.
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.
Cash Flows
The following table summarizes our cash flows for the period presented:
Non-GAAP
Combined Predecessor
Six Months Six Months
Ended Ended
(In thousands) July 31, 2021 July 31,2020
Net cash provided by operating activities $ 34,549 $ 11,573
Net cash used in investing activities (565,554) (6,386)
Net cash provided by financing activities 394,013 59,800
Effect of foreign currency exchange rates on cash and cash equivalents
(47) (2,264)
Net (decrease) increase in cash and cash equivalents
Cash Flows from Operating Activities
The improvement in cash provided by operating activities for the six months endedJuly 31, 2021 compared to the corresponding period in the prior year was the result of lower recapitalization and transaction related costs, which decreased from$32.0 million for the six months endedJuly 31, 2020 to$15.8 million in the current period. The$32.0 million of costs in the prior year was attributable to our preparation for a voluntary prepackaged Chapter 11 filing whereas the$15.8 million related to the acquisitions completed inJune 2021 . Cash flow provided by operating activities was also impacted by our change in capital structure, with only$0.4 million of interest being paid for the six months endedJuly 31, 2020 due to a forbearance agreement with our prior lenders while we paid approximately$21.5 million of interest for the six months endedJuly 31, 2021 under the exit credit facility. 49 Table of Contents
Cash Flows from Investing Activities
Cash flows from investing activities include cash paid of$386.0 million related to the acquisition of Skillsoft,$156.9 million related to the acquisition ofGlobal Knowledge , and$18.6 million related to the acquisition of Pluma. See Note 3 "Business Combinations" of our Notes to Condensed Consolidated Financial Statements 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 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$530 million of proceeds from PIPE equity investment and used most of the proceeds for the acquisition of Skillsoft onJune 11, 2021 .
Contractual and Commercial Obligations
The scheduled maturities of our debt and future minimum rental commitments under non-cancelable lease agreements as ofJuly 31, 2021 were as set forth in the table below. Payments due by Fiscal Year (In thousands) Total 2022(1) 2022-2024 2024-2026 Thereafter Term Loan Facility$ 480,000 $ 1,200 $ 9,600 $ 9,600 $ 459,600 Operating leases 29,018 5,033 13,240 4,590 6,155 Finance lease 905 905 - - - Total$ 509,923 $ 7,138 $ 22,840 $ 14,190 $ 465,755
(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 unaudited 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 unaudited 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 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 policies, which have been updated to reflect changes that occurred during the period endedJuly 31, 2021 , in addition to those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our annual audited financial statements included in our Current Report on Form 8-K/A filed onJune 17, 2021 , most significantly affect the portrayal of our financial condition and involve our most difficult and subjective estimates and judgments.
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
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recognize forfeitures as they occur. We estimate the fair value of options utilizing the Black-Scholes model, which is dependent on 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. Derivative Instruments We account for debt and equity issuances as either equity-classified or liability-classified instruments based on an assessment of the instruments specific terms and applicable authoritative guidance inFinancial 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 of Condensed Consolidated Financial Statements for the quarterly
period ended
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