Annual report pursuant to Section 13 and 15(d)

Note 3 - Business Combinations

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Note 3 - Business Combinations
12 Months Ended
Jan. 31, 2024
Notes to Financial Statements  
Business Combination Disclosure [Text Block]

(3) Business Combinations

 

(a) Software Luxembourg Holding S.A. (Predecessor or Skillsoft Legacy)

 

On June 11, 2021, Software Luxembourg Holding S.A. merged with and into Churchill Capital Corp II (Churchill) which subsequently changed its name to Skillsoft Corp.

 

The Skillsoft Merger was considered a business combination under ASC 805, Business Combinations and was accounted for using the acquisition method of accounting, whereby Churchill was determined to be the accounting acquirer based on their rights to nominate six members of the initial Board of Directors, the size of their voting interest and their rights to appoint the Chief Executive Officer of Skillsoft Corp. and other members of management of the combined company prior to closing.

 

Under the acquisition method, the acquisition date fair value of the consideration paid by the Company was allocated to the assets acquired and the liabilities assumed based on their estimated fair values.

 

The following summarizes the purchase consideration (in thousands):

 

Description

 

Amount

 

Class A common stock issued

  $ 258,000  

Class B common stock issued *

    48,375  

Cash payments

    505,000  

Second Out Term Loan

    20,000  

Cash settlement of seller transaction costs

    1,308  

Total purchase price

  $ 832,683  

 


*

Shares of Class B common stock were converted into Successor Class A common stock at the time of the Merger.

 

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

 

                       
   

Preliminary Purchase

           

Final Purchase

 

Description

 

Price Allocation

   

Adjustments (1)(2)

   

Price Allocation

 

Cash, cash equivalents and restricted cash

  $ 120,273     $     $ 120,273  

Current assets

    118,847       706       119,553  

Property and equipment

    10,825       1,632       12,457  

Intangible assets

    769,799       (4,701 )     765,098  

Long term assets

    18,629             18,629  

Total assets acquired

    1,038,373       (2,363 )     1,036,010  

Current liabilities

    (49,056 )     (350 )     (49,406 )

Debt, including accounts receivable facility

    (552,977 )           (552,977 )

Deferred revenue

    (123,300 )     (114,047 )     (237,347 )

Deferred and other tax liabilities

    (99,699 )     15,920       (83,779 )

Long term liabilities

    (18,325 )     1       (18,324 )

Total liabilities assumed

    (843,357 )     (98,476 )     (941,833 )

Net assets acquired

    195,016       (100,839 )     94,177  

Goodwill

    637,667       100,839       738,506  

Total purchase price

  $ 832,683     $     $ 832,683  

 


(1)

The increase in deferred revenue (and the corresponding increase to Goodwill by the same amount) is the result of the adoption of ASU 202108 in the quarter ended October 31, 2021.

(2)

All other changes represent measurement period adjustments attributable to the Companys review of inputs and assumptions utilized in valuation models and additional information being obtained on preacquisition liabilities. The measurement period adjustments did not have a significant impact on the Companys results of operations in prior periods.

 

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

 

Description

 

Amount

   

Life (in years)

 

Trademark/tradename – Skillsoft

  $ 84,700    

indefinite

 

Trademark/tradename – SumTotal

    5,800       9.6  

Courseware

    186,600       5  

Proprietary delivery and development software

    114,598       2.5 - 7.6  

Publishing Rights

    41,100       5  

Customer relationships

    271,400       12.6  

Backlog

    60,900       4.6  

Total

  $ 765,098          

 

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

 

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

 

The acquired intangible assets and goodwill are subject to review for impairment if indicators of impairment develop and, in the case of goodwill and indefinite-lived intangible assets, at least annually.

 

The Company incurred $9.8 million in acquisition-related costs, which primarily consisted of transaction fees and legal, accounting and other professional services. Approximately $4.3 million was reported in the period from February 1, 2021 through June 11, 2021 (Predecessor) and $5.5 million was reported in the period from June 12, 2021 through January 31, 2022 (Successor). These costs are included in the "acquisition and integration related costs" in the accompanying consolidated statements of operations.

 

(b) Albert DE Holdings, Inc. (GK)

 

On June 11, 2021, GK and its subsidiaries were acquired by Skillsoft, in conjunction with, and just subsequent to, its merger with Churchill Capital Corp II (then becoming the merged Company).

 

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

 

The following summarized the purchase consideration (in thousands):

 

Description

 

Amount

 

Cash consideration

  $ 170,199  

Warrants issued

    14,000  

Additional Term Loans issued

    70,000  

Cash settlement of seller transaction costs

    4,251  

Total purchase price

  $ 258,450  

 

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

 

                       
   

Preliminary Purchase

           

Final Purchase

 

Description

 

Price Allocation

   

Adjustments (1)(2)

   

Price Allocation

 

Cash, cash equivalents

  $ 17,524     $ (100 )   $ 17,424  

Current assets

    47,849       (2,442 )     45,407  

Property and equipment

    5,531       1,625       7,156  

Intangible assets

    185,800             185,800  

Long term assets

    12,401       (3,325 )     9,076  

Total assets acquired

    269,105       (4,242 )     264,863  

Current liabilities

    (74,463 )     10,910       (63,553 )

Deferred revenue

    (23,018 )     (8,191 )     (31,209 )

Deferred and other tax liabilities

    (16,934 )     (6,162 )     (23,096 )

Long term liabilities

    (4,248 )     2,168       (2,080 )

Total liabilities assumed

    (118,663 )     (1,275 )     (119,938 )

Net assets acquired

    150,442       (5,517 )     144,925  

Goodwill

    108,008       5,517       113,525  

Total purchase price

  $ 258,450     $     $ 258,450  

 


(1)

The increase in deferred revenue (and the corresponding increase to Goodwill by the same amount) is the result of the adoption of ASU 202108 in the quarter ended October 31, 2021.

(2)

All other changes represent measurement period adjustments attributable to the Companys review of inputs and assumptions utilized in valuation models and additional information being obtained on preacquisition liabilities. The measurement period adjustments did not have a significant impact on the Companys results of operations in prior periods.

 

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

 

Description

 

Amount

   

Life (in years)

 

Trademark/tradename

  $ 25,400       17.6  

Courseware

    1,500       3  

Proprietary delivery and development software

    2,500       0.6  

Vendor relationships

    43,900       2.6  

Customer relationships

    112,700       10.6  

Total

  $ 186,000          

 

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

 

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

 

The acquired intangible assets and goodwill are subject to review for impairment if indicators of impairment develop and otherwise at least annually.

 

For the year ended January 31, 2022, the Company incurred $1.0 million in acquisition-related costs, which primarily consisted of transaction fees and legal, accounting and other professional services, substantially all of which were reported in the period from June 12, 2021 through January 31, 2022 (Successor). During the fiscal year ended January 31, 2023 (Successor) the Company incurred an additional $3.0 million in acquisition-related costs in relation to the integration of GK. These costs are included in the "acquisition and integration related costs" in the accompanying consolidated statements of operations.

 

(c) Ryzac, Inc. (Codecademy)

 

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

 

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

 

The following summarizes the purchase consideration (in thousands):

 

Description

 

Amount

 

Cash payments

  $ 202,119  

Class A common stock issued

    182,550  

Cash settlement of seller transaction costs and other

    1,315  

Total purchase price

  $ 385,984  

 

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

 

   

Final Purchase

 

Description

 

Price Allocation

 

Cash, cash equivalents and restricted cash

  $ 4,053  

Current assets

    3,671  

Property and equipment

    385  

Intangible assets

    119,000  

Total assets acquired

    127,109  

Current liabilities

    (6,166 )

Deferred revenue

    (18,396 )

Deferred tax liabilities

    (21,621 )

Total liabilities assumed

    (46,183 )

Net assets acquired

    80,926  

Goodwill

    305,058  

Total purchase price

  $ 385,984  

 

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

 

Description

 

Amount

   

Life (in years)

 

Trade name

  $ 44,000       13.8  

Developed technology

    43,000       5.0  

Content

    17,000       5.0  

Customer relationships

    15,000       5.8  

Total

  $ 119,000          

 

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

 

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

 

The acquired intangible assets and goodwill are subject to review for impairment if indicators of impairment develop and otherwise at least annually.

 

In the fiscal year ended January 31, 2023 (Successor), the Company incurred $10.7 million in acquisition-related costs, which primarily consisted of transaction fees and legal, accounting, and other professional services. These costs are included in the "acquisition and integration related costs" in the accompanying consolidated statements of operations.

 

Other Acquisitions

 

On June 30, 2021, the Company acquired Pluma, Inc., the products and services of which subsequent to the acquisition are referred to as "Skillsoft Coaching". The acquisition enhanced the Company’s leadership development offerings, added a new modality to its blended learning model, and allowed the Company to offer a premium individualized coaching experience. Cash paid for Pluma in the Successor period was lower than the agreed upon purchase price of Pluma for $22 million due to a contractual holdback and working capital adjustment. The fair value of the net assets acquired included $17.8 million of goodwill and $8.7 million of identified intangible assets, which had a weighted average life of 7.4 years. The goodwill is not deductible for tax purposes. Pro forma information and acquisition expenses have not been presented below because such information is not material to the financial statements.

 

Unaudited Pro Forma Financial Information

 

The unaudited pro forma financial information below is presented in accordance with Regulation S-X, Article 11 to enhance comparability for all periods by including operating results for Skillsoft, Global Knowledge and Codecademy as if the transactions had closed on February 1, 2021 (in thousands):

 

    Unaudited Pro Forma  
    Statements of Operations  
    Twelve Months Ended January 31,  
   

2023

   

2022

 

Revenue

  $ 563,182     $ 587,999  

Net loss from continuing operations

    (153,640 )     (129,774 )

 

The unaudited pro forma financial information does not assume any impacts from revenue, cost, or other operating synergies that could be generated as a result of the combinations. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisitions been consummated on February 1, 2021. The pro forma financial information includes adjustments to reflect intangible asset amortization based on the economic values derived from definite-lived intangible assets and interest expense on the new debt financing. Other pro forma adjustments include the following:

 

 

The adoption of ASU 2021‑08 is reflected for all Successor and Predecessor periods presented for comparability.

 

Impairment of goodwill of $641 million has been excluded from the twelve months ended January 31, 2023.
 

The pro forma results of operations exclude acquisition-related costs other than the transaction costs specific to the business combinations occurring in June 2021 and April 2022. These transaction costs are presented as if they occurred in February 2021.