Quarterly report pursuant to Section 13 or 15(d)

Intangible Assets

v3.21.2
Intangible Assets
6 Months Ended
Jul. 31, 2021
Intangible Assets  
Intangible Assets

(4) Intangible Assets

Intangible assets consisted of the following (in thousands):

July31, 2021 (Successor)

January 31, 2021 (Predecessor (SLH))

    

Gross

    

    

Net

    

Gross

    

    

Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

Amount

Amortization

Amount

Amount

Amortization

Amount

Developed software/ courseware

$

310,754

$

9,622

$

301,132

$

265,758

$

24,669

$

241,089

Customer contracts/ relationships

 

381,100

 

2,279

 

378,821

 

279,500

 

3,627

 

275,873

Vendor relationships

 

43,900

 

4,540

 

39,360

Trademarks and trade names

 

7,800

 

186

 

7,614

 

6,300

 

455

 

5,845

Publishing rights

 

41,100

 

1,119

 

39,981

 

35,200

 

2,933

 

32,267

Backlog

 

72,000

 

2,277

 

69,723

 

90,200

 

8,141

 

82,059

Skillsoft trademark

 

84,700

 

84,700

 

91,500

 

91,500

Global Knowledge trademark

 

25,400

 

25,400

Total

$

966,754

$

20,023

$

946,731

$

768,458

$

39,825

$

728,633

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

Fiscal Year

    

Amortization Expense

2022 (Remaining 6 months)

$

73,976

2023

 

168,581

2024

147,458

2025

122,639

2026

 

116,716

Thereafter

 

207,261

Total

$

836,631

Amortization expense related to intangible assets in the aggregate was $20.0 million for the period from June 12, 2021 through July 31 (Successor), 2021, $16.0 million for the period from May 1, 2021 through June 11, 2021 (Predecessor SLH), $50.9 million for the period from February 1, 2021 through June 11, 2021 (Predecessor (SLH)) and $12.8 million and $30.1 million for the three and six months ended July 31, 2020 (Predecessor (PL)), respectively.

Fresh-start Reporting for Intangible Assets (Predecessor (SLH))

In accordance with ASC 852, with the application of fresh-start reporting, the Company allocated its reorganization value to its individual assets based on their estimated fair values in conformity with ASC 805, including those of intangible assets.

Intangible assets were measured based upon estimates of the future performance and cash from the Successor Company at emergence. Values and useful lives assigned to intangible assets were based on estimated value and use of these assets by a market participant. The customer contracts/relationships and backlog were valued using the income approach. The trademarks and trade names were valued using the relief from royalty method. 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 developed software/courseware and publishing rights were valued using the replacement cost approach. 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.

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 or more frequently if there are indicators of impairment. No such indicators were present during the period ended July 31, 2021.

Goodwill for the Predecessor (SLH) represents the excess of the reorganization value over the fair value of tangible and intangible assets in fresh start accounting. Goodwill in the Successor and Predecessor (PL) periods represented the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired.

The Company tests goodwill for impairment on the first day of the last month of the fourth quarter (January 1) in accordance with ASC 350, Intangibles—Goodwill.

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.

Impairment of Goodwill and Intangible Assets for the Predecessor (PL) Period ended April 30, 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 learnings 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 pursing 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, with the impact being more significant to the SumTotal business on a relative basis due to its smaller scale and forecasted cash flow generation.

As part of the Company’s evaluation of impairment indicators based on the circumstances described above as of April 30, 2020, the Company determined its SumTotal long-lived asset group failed the undiscounted cash flow recoverability test. Accordingly, the Company estimated the fair value of its individual long-lived assets to determine if any impairment charges were present. The Company’s 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, the Company concluded the fair values of certain SumTotal intangible assets were lower than their current carrying values, accordingly impairment charges of $62.3 million were recognized in the 3 months ended April 30, 2020 (Predecessor (PL)).

In light of the circumstances above, management also 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 3 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 and SumTotal 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 the SumTotal reporting unit.

In total, as described in detail above, the Company recorded $332.4 million of goodwill and intangible asset impairment charges for the 3 months ended April 30, 2020 (Predecessor (PL)), consisting of (i) $62.3 million of impairments of SumTotal 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 the SumTotal 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:

Description

    

Skillsoft

    

SumTotal

    

GK

    

Consolidated

Goodwill, net January 31, 2021 (Predecessor)

$

491,654

$

3,350

$

$

495,004

Foreign currency translation adjustment

 

(135)

 

(135)

Goodwill, net June 11,2021 (Predecessor)

 

491,519

 

3,350

 

$

494,869

Acquisition of Skillsoft and GK

584,922

52,745

108,008

745,675

Foreign currency translation adjustment

 

(13)

 

(47)

3

 

(57)

Acquisition of Pluma

 

15,559

 

15,559

Goodwill, net July 31, 2021(Successor)

$

600,468

$

52,698

$

108,011

$

761,177

Goodwill at July 31, 2021 (Successor) and January 31, 2021 (Predecessor (SLH)), for the Skillsoft segment was $600.5 million and $491.7 million, respectively. There were no accumulated impairment losses for the Skillsoft segment at July 31, 2021 (Successor) and January 31, 2021 (Predecessor (SLH)).

Goodwill at July 31, 2021 (Successor) and January 31, 2021 (Predecessor (SLH)), for the SumTotal segment was $52.7 million and $3.4 million, respectively. There were no accumulated impairment losses for the SumTotal segment at July 31, 2021 (Successor) and January 31, 2021 (Predecessor (SLH)).

Goodwill at July 31, 2021 (Successor), for the Global Knowledge segment was $108.0 million. There were no accumulated impairment losses for the Global Knowledge segment at July 31, 2021.