Skillsoft Corp. — Q2 FY2022 Form 10-Q
Business context and reporting period
The quarter ended July 31, 2021. Skillsoft provides corporate learning and talent-management solutions through Skillsoft, SumTotal and Global Knowledge. The company completed its merger with Churchill and acquired Global Knowledge on June 11, 2021, then acquired Pluma on June 30. Its fiscal year-end changed to January 31.
Comparability caution: The merger created “Successor” and “Predecessor” accounting periods, so reported statements do not present a directly comparable full quarter. Management also presents combined 2021 results by adding predecessor and successor periods; these are non-GAAP and not pro forma results.
Key financial metrics
- Revenue: Management’s combined results show $105.8 million for the three months ended July 31, down 9.4% from $116.8 million, and $197.5 million for the six months, down 16.0% from $235.2 million. The filing attributes much of the reported decline to deferred-revenue reductions under fresh-start and acquisition accounting; acquired Global Knowledge revenue was included only after closing.
- Profit and margins: Combined net loss was $49.4 million for the quarter and $86.8 million for six months, compared with $71.0 million and $504.9 million, respectively, in 2020. Combined operating loss was $58.5 million for the quarter and $86.2 million for six months. Operating margin was approximately negative 55% and negative 44%, respectively. The prior-year six-month loss included $332.4 million of goodwill and intangible-asset impairments.
- Cash flow: Management’s combined six-month cash-flow presentation reports $34.5 million provided by operations, $565.6 million used in investing and $394.0 million provided by financing, for a $137.0 million decrease in cash and cash equivalents. Investing outflows included acquisitions.
- Cash and liquidity: At July 31, cash and cash equivalents were $90.8 million, with $14.7 million of restricted cash. Current assets of $275.1 million were below current liabilities of $342.1 million. The company also had $24.8 million outstanding under its accounts-receivable facility.
- Debt: The company refinanced its prior first- and second-out loans with a $480 million secured term loan due July 2028. The July 31 carrying amount was $467.4 million, including current maturities and net of financing costs and discount. The loan bears interest at LIBOR plus 4.75% (LIBOR floor 0.75%) or an alternative base rate, and is subject to covenants and collateral provisions.
Material changes and unusual items
- The Skillsoft and Global Knowledge acquisitions added substantial goodwill and intangible assets; preliminary purchase accounting remains subject to adjustment. Pluma added a leadership-coaching offering.
- Acquisition and fresh-start accounting reduced recognized revenue by approximately $28.3 million in the combined quarter and $48.2 million in the combined six-month period, according to management. The filing says acquisition accounting effects are expected to reduce GAAP revenue for the next three fiscal quarters.
- A noncash warrant fair-value gain of $17.9 million in the combined quarter benefited results. The six-month combined gain was $18.0 million.
- The company raised $530 million gross through a PIPE investment and used proceeds and cash on hand in connection with the merger and refinancing. The term-loan refinancing included repayment of approximately $608.7 million of prior borrowings and $5.0 million of interest.
Outlook, commentary and risks
Management cited corporate upskilling and the shift toward digital training as industry growth drivers. It expects to fund operations and strategic initiatives primarily from operating cash flow, supplemented by the receivables facility, and believes available liquidity is sufficient for at least the next 12 months. The filing provides no specific revenue, earnings or cash-flow guidance.
Key risks include integrating the acquisitions and realizing expected synergies, demand and competition, COVID-19 impacts, substantial secured indebtedness and covenant compliance, access to capital, foreign-exchange movements, cybersecurity and information-technology disruption, and the accuracy of acquisition valuations and estimates. Management reported disclosure controls were effective as of July 31, 2021. The company reported no material legal proceedings; two merger-related shareholder lawsuits had been dismissed.
Important facts for investors to verify
- How much of reported revenue weakness reflects accounting adjustments versus underlying bookings, renewals and customer demand.
- Post-acquisition revenue, margins and cash generation by business, especially Global Knowledge and Pluma, once comparable periods are available.
- Term-loan interest-rate exposure, covenant headroom, receivables-facility availability and cash needs relative to the negative working-capital position.
- Final purchase-price allocations, acquired deferred-revenue amortization and the ongoing amortization burden from acquired intangibles.
- Potential dilution from outstanding warrants and equity awards, and the effect of recurring transaction, integration and restructuring costs.