Note 7 - Intangible Assets
|12 Months Ended|
Jan. 31, 2023
|Notes to Financial Statements|
|Goodwill and Intangible Assets Disclosure [Text Block]||
(7) Intangible Assets
Intangible assets consisted of the following (in thousands):
Amortization expense related to the existing finite-lived intangible assets is expected to be as follows (in thousands):
Amortization expense related to intangible assets in the aggregate was $170.3 million for the fiscal year ended January 31, 2023 (Successor), $89.0 million for the period from June 12, 2021 through January 31, 2022 (Successor), $46.5 million for the period from February 1, 2021 through June 11, 2021 (Predecessor (SLH)), $36.2 million for the period from period from August 28, 2020 through January 31, 2021 (Predecessor (SLH)), and $23.7 million for the period from February 1, 2020 through August 27, 2020 (Predecessor (PL)).
Impairment Review Requirements
The Company reviews intangible assets subject to amortization if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in remaining useful life. The Company reviews indefinite lived intangible assets, including goodwill, on the annual impairment test date ( January 1) or more frequently if there are indicators of impairment.
In connection with the impairment evaluation, the Company may first consider qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. Performing a quantitative goodwill impairment test is not necessary if an entity determines based on this assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company fails or elects to bypass the qualitative assessment, the goodwill impairment test must be performed. This test requires a comparison of the carrying value of the reporting unit to its estimated fair value. If the carrying value of a reporting unit’s goodwill exceeds its fair value, an impairment loss equal to the difference is recorded, not to exceed the amount of goodwill allocated to the reporting unit. In determining reporting units, the Company first identifies its operating segments, and then assesses whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component.
See further discussion below of impairment charges recorded for the fiscal year ended January 31, 2023 (Successor) and the period from February 1, 2020 through August 27, 2020 (Predecessor (PL)).
Impairment of Goodwill for the Successor Fiscal Year Ended January 31, 2023
During the three months ended July 31, 2022, the Company’s Global 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 believed the poor performance was 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 Global 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, management next considered whether there were any indicators of impairment for Global Knowledge goodwill, concluding that triggering events had occurred, necessitating an interim goodwill impairment test as of July 31, 2022. In comparing the estimated fair value of the Global Knowledge reporting unit to its carrying value, the Company utilized a weighted average valuation model of the income approach and market approach. The valuation results indicated that the carrying value of the Global Knowledge reporting unit exceeded its estimated fair value. Based on the results of the goodwill impairment testing procedures, the Company recorded a $70.5 million goodwill impairment for the three months ended July 31, 2022.
During the three months ended October 31, 2022, the Company experienced a substantial decline in its stock price resulting in the total market value of its shares of stock outstanding (“market capitalization”) being less than the carrying value of its reporting units. Management considered the impact of current macroeconomic conditions on the Company’s projected operating results and assumptions used in the income approach and market approach that impact the fair value of the Company’s reporting units. The macroeconomic conditions considered include deterioration in the equity markets evidenced by sustained declines in the Company’s stock price, those of its peers, and major market indices, which reduced the market multiples, along with an increase in the weighted-average cost of capital primarily driven by an increase in interest rates. In addition, the Company lowered its projected operating results primarily due to the foreign exchange impact, underperformance of Global Knowledge business, and macroeconomic uncertainty. After considering all available evidence in the evaluation of goodwill impairment indicators, management determined it appropriate to perform an interim quantitative assessment of the Skillsoft content and Global Knowledge reporting units as of October 31, 2022
Similar to the prior quarter, prior to the quantitative goodwill impairment test, management first considered whether any impairment was present for the Skillsoft content and Global Knowledge long-lived assets group, concluding that no such impairments were present after conducting an undiscounted cash flow recoverability test. Management next estimated the estimated fair value of the Skillsoft content and Global Knowledge reporting units using the same weighted average valuation model. The valuation results indicated that for each of the Skillsoft content and Global Knowledge reporting units, the fair value fell below their respective carrying value. Based on the results of the goodwill impairment testing procedures, the Company recorded a $569.3 million goodwill impairment for Skillsoft content segment and additional $1.6 million goodwill impairment for Global Knowledge segment during the three months ended October 31, 2022.
During the fourth fiscal quarter, considering the slow recovery of the Company's stock price, along with the triggering events presented during the second and third quarters, the management proceeded to the quantitative goodwill impairment test as part of the annual goodwill impairment assessment. Similar to the prior quarters, management first determined that there were no impairments of long-lived assets using an undiscounted cash flow recoverability test, then estimated the fair value of each reporting unit using the weighted average valuation model of income approach and market approach. For each of our reporting units, the income valuation approach indicated an intrinsic value above the carrying amount, while the market valuation approach suggested a value below the carrying amount, with the weighted value exceeding the carrying amount by 7% and 1% for Skillsoft Content and Global Knowledge, respectively. Considering the relatively small excess, we performed a sensitivity test on the weighted average cost of capital (“WACC”) as it is one of the most sensitive inputs used in the income approach (discounted cash flow analysis, or DCF analysis) and it requires significant judgment. The sensitivity test showed that if the WACC employed in the DCF analysis increased by more than 110 basis points and 140 basis points for Skillsoft Content and GK, respectively, the weighted value of each reporting unit would fall below its respective carrying value.
The cumulative goodwill impairment for the fiscal year ended January 31, 2023 (Successor) amounted to $569.3 million for Skillsoft content segment and $72.1 million for Global Knowledge, for a combined total of $641.4 million.
Impairment of Goodwill and Intangible Assets for the Predecessor (PL) Period Ended August 27, 2020
During the three months ended April 30, 2020, the emergence of COVID‑19 as a global pandemic had an adverse impact on our business. While the online learning tools the Company offers have many advantages over traditional in person learning in the current environment, some of the Company’s customers in heavily impacted industries 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 pursuing opportunities for new customers became much more challenging in this environment. In addition to the uncertainty introduced by COVID‑19, the Company’s over leveraged capital structure continued to create headwinds. In April 2020, the Company received temporary forbearance from its 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 the Company’s capital structure and future ownership, continued to hurt its business, as new and existing customers displayed apprehension about the ultimate resolution of the Company’s capital structure and its impact on operations, causing delays and sometimes losses in business. The uncertainty surrounding the Company’s capital structure combined with the potential impact that COVID‑19 would have on the Company and the global economy, resulted in a significant decline in the fair value of its reporting units during the first quarter ended April 30, 2020.
In light of the circumstances above, management concluded that a triggering event had occurred with respect to the Company’s indefinite-lived Skillsoft trade name as of April 30, 2020. Accordingly, the Company estimated the fair value of the Skillsoft trade name using a discounted cash flow analysis which reflected estimates of future revenue, royalty rates, cash flows, and discount rates. Based on this analysis, the Company concluded the carrying value of the Skillsoft trade name exceeded its fair value, resulting in an impairment charge of $92.2 million in the three months ended April 30, 2020 (Predecessor (PL)).
In accordance with ASC 350, for goodwill the Company determined triggering events had occurred and performed an impairment test as of April 30, 2020 that compared the estimated fair value of each reporting unit to their respective carrying values. The prospective financial information used for fiscal years 2021, 2022 and 2023 for these impairment tests was consistent with financial projections included in the Plan of Reorganization and future growth rates tracked to terminal growth rate assumptions. The Company considered the results of both a discounted cash flow (“DCF”) analysis and an EBITDA multiple approach. The Company also considered observable debt trading prices for the debt jointly borrowed by its parent entity and the Company’s subsidiary, Skillsoft Corporation, however, by the end of March 2020, most holders were restricted from trading in anticipation of a restructuring and market prices after that period were therefore less reliable. The results of the impairment tests performed indicated that the carrying value of the Skillsoft reporting unit exceeded the 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.
In total, as described in detail above, the Company recorded $200.1 million of goodwill and intangible asset impairment charges for the three months ended April 30, 2020 (Predecessor (PL)), consisting of (i) $92.2 million impairment of the Skillsoft trade name, and (ii) a $107.9 million goodwill impairment for the Skillsoft reporting unit. The Company believes that its 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.
A roll forward of goodwill is as follows:
The accumulated goodwill impairment losses for the Skillsoft segment were $569.3 million and $0.0 million at January 31, 2023 and 2022, respectively.
The accumulated goodwill impairment losses for the Global Knowledge segment were $72.1 million and $0.0 million at January 31, 2023 and 2022, respectively.
The entire disclosure for goodwill and intangible assets.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef