Item 2.01.
|
Completion of Acquisition or Disposition of Assets.
|
As described above, on June 10, 2021, Churchill
held the Churchill Special Meeting, at which the Churchill stockholders considered and adopted, among other matters, a proposal to adopt
and approve the Skillsoft Merger Agreement and the transactions contemplated thereby, including the Merger. On June 11, 2021, the parties
consummated the Merger.
Holders of 34,690,979 shares of Churchill’s
Class A common stock sold in its initial public offering (the “Churchill IPO”) (such shares, “public shares”)
properly exercised their right to have such shares redeemed for a full pro rata portion of the trust account holding the proceeds from
the Churchill IPO, calculated as of two business days prior to the consummation of the business combination, or approximately $10.10
per share and approximately $350.4 million in the aggregate.
At the effective time of the Merger, (i) each
outstanding Skillsoft Class A share (other than shares owned by Churchill, which were automatically canceled and retired and ceased to
exist, and no consideration was delivered in exchange therefor) was automatically cancelled and Churchill issued as consideration therefor
(A) 6.25 shares of Churchill Class A common stock and (B) one share of Churchill Class C common stock and (ii) each outstanding Skillsoft
Class B share was automatically cancelled and Churchill issued as consideration therefor 28.125 shares of Churchill Class A common stock,
in each case except for any fractional shares of Churchill Class A common stock which would result from conversion (which instead were
paid out in cash in accordance with the Skillsoft Merger Agreement). Immediately following the effective time of the Merger, each outstanding
share of Churchill Class C common stock issued to the former holders of Skillsoft Class A shares in connection with the Merger was redeemed
for a redemption price of (i) $131.51 per share in cash and (ii) $5.208 per share in incremental indebtedness under the SO Credit Agreement
(as defined below).
At the effective time of the Global Knowledge
Merger, as consideration for the Global Knowledge Merger, 100% of the issued and outstanding equity interests of Global Knowledge converted,
in the aggregate, into the right to receive warrants, each of which entitles the holders thereof to purchase one share of Churchill Class
A common stock at an exercise price of $11.50 per share. The aggregate number of warrants received by the equity holders of Global Knowledge
as consideration in the Global Knowledge Merger was 5,000,000. The warrants issued to the equity holders of Global Knowledge are non-redeemable
and otherwise substantially similar to the private placement warrants issued to Churchill Sponsor II LLC, a Delaware limited liability
company (the “Sponsor”), in connection with the Churchill IPO.
On October 12, 2020, in connection with the execution
of the Skillsoft Merger Agreement, MIH Edtech Investments B.V. (formerly known as MIH Ventures B.V.) (“MIH Edtech Investments”),
entered into a subscription agreement (the “Prosus Subscription Agreement”) with Churchill and the Sponsor, and on
February 16, 2021 MIH Edtech Investments assigned all of its rights, title and interest in and to, and obligations under, the Prosus
Subscription Agreement to MIH Learning B.V. (“Prosus”) and Prosus accepted such assignments. Pursuant to the Prosus
Subscription Agreement, Prosus subscribed for 10,000,000 newly issued shares of Churchill Class A common stock, at a purchase price of
$10.00 per share, to be issued at the Closing (the “First Step Prosus Investment”), and Churchill granted Prosus a
30-day option (the “Option”) to subscribe for up to the lesser of (i) an additional 40,000,000 newly-issued shares
of Churchill Class A common stock, at a purchase price of $10.00 per share or (ii) such additional number of shares that would result
in Prosus beneficially owning shares of Class A common stock representing 35% of the issued and outstanding shares of Churchill Class
A common stock on a fully-diluted and as-converted basis (excluding any warrants issued to Prosus pursuant to the Prosus Subscription
Agreement) immediately following the consummation of the Merger (the “Prosus Maximum Ownership Amount”) (the “Second
Step Prosus Investment” and together with the First Step Prosus Investment, the “Prosus PIPE Investment”).
On November 10, 2020, Prosus exercised the Option to subscribe for an additional 40,000,000 shares of Churchill Class A common stock
in the Second Step Prosus Investment (or such number of shares as may be reduced pursuant to the Prosus Subscription Agreement). Churchill
and Prosus also agreed that following the consummation of the Merger, to the extent that following the Prosus Second Step Investment,
Prosus beneficially owned less than the Prosus Maximum Ownership Amount, Prosus would have the concurrent right to purchase a number
of additional shares of Churchill Class A common stock, at $10.00 per share, that would result in Prosus maintaining beneficial ownership
of at least, but no more than, the Prosus Maximum Ownership Amount.
On October 14, 2020, in connection with the execution
of the Skillsoft Merger Agreement, Churchill entered into a subscription agreement with SuRo Capital Corp. (“SuRo”)
pursuant to which SuRo subscribed for 1,000,000 newly-issued shares of Churchill Class A common stock, at a purchase price of $10.00
per share (the “SuRo PIPE Investment”), to be issued at the Closing of the Merger (the “SuRo Subscription
Agreement”). Mark Klein, a Churchill director and brother of Michael Klein, manages and has an ownership interest in SuRo.
The issuance of the shares of Churchill Class A common stock pursuant to the SuRo Subscription Agreement was subject to approval by Churchill’s
stockholders because the number of shares of Class A common stock issuable pursuant to the SuRo Subscription Agreement, together with
the shares of Class A common stock issuable pursuant to the Prosus Subscription Agreement, represents greater than 20% of the number
of shares of common stock outstanding before such issuance and may result in a change of control of Churchill. The obligations to consummate
the transactions contemplated by the SuRo Subscription Agreement were conditioned upon, among other things, customary closing conditions
and the consummation of the Merger.
On October 13, 2020, in connection with the execution
of the Global Knowledge Merger Agreement, Churchill entered into a subscription agreement with Lodbrok Capital LLP (“Lodbrok”)
pursuant to which Lodbrok subscribed for 2,000,000 newly-issued shares of Churchill Class A common stock, at a purchase price of $10.00
per share (the “Lodbrok PIPE Investment” and, together with the Prosus PIPE Investment and the SuRo PIPE Investment,
the “PIPE Investments”), to be issued at the closing of the Global Knowledge Merger (the “Lodbrok Subscription
Agreement”). The issuance of the shares of Churchill Class A common stock pursuant to the Lodbrok Subscription Agreement was
not subject to approval by Churchill’s stockholders. The obligations to consummate the transactions contemplated by the Lodbrok
Subscription Agreement were conditioned upon, among other things, customary closing conditions and the consummation of the Global Knowledge
Merger.
Prior to the Closing, the Company consummated
the PIPE Investments and issued 53,000,000 shares of its Class A common stock and warrants to purchase 17,666,667 shares of its Class
A common Stock for aggregate gross proceeds of $530,000,000.
After giving effect to the business combination
and the redemption of public shares as described above, there are currently 133,059,021 shares of the Company’s Class A common
stock issued and outstanding. The Company’s Class A common stock and warrants commenced trading on the New York Stock Exchange
(“NYSE”) under the symbols “SKIL” and “SKIL WS” on June 14, 2021, subject to ongoing review
of the Company’s satisfaction of all listing criteria following the business combination.
As noted above, an aggregate of approximately
$350.4 million was paid from the Company’s trust account to holders that properly exercised their right to have public shares redeemed,
and the remaining balance immediately prior to the Closing of approximately $346.6 million remained in the trust account. The remaining
amount in the trust account was used to fund the business combination.
FORM 10 INFORMATION
Item 2.01(f) of Form 8-K states that
if the registrant was a shell company, as Churchill was immediately before the Merger, then the registrant must disclose the information
that would be required if the registrant were filing a general form for registration of securities on Form 10. Accordingly,
the Company is providing below the information that would be included in a Form 10 if it were to file a Form 10. Please note
that the information provided below relates to the combined company after the consummation of the Merger, unless otherwise specifically
indicated or the context otherwise requires.
Cautionary Note Regarding Forward-Looking
Statements
This Report includes statements that express
the Company’s opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future
results and therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally
be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “seeks,” “projects,” “forecasts,” “intends,” “plans,”
“outlook,” “target,” “goal,” “may,” “will,” “scheduled” or “should”
or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters
that are not historical facts. They appear in a number of places throughout this Report (including in information that is incorporated
by reference into this Report) and include statements regarding our intentions, beliefs or current expectations concerning, among other
things, the Merger, the Global Knowledge Merger, the benefits of the Merger and the Global Knowledge Merger, including results of operations,
financial condition, liquidity, prospects, growth, strategies and the markets in which the Company operates. Such forward-looking statements
are based on available current market material and management’s expectations, beliefs and forecasts concerning future events impacting
the Company. Factors that may impact such forward-looking statements include:
|
·
|
our ability to realize the benefits expected from the Merger and the
Global Knowledge Merger;
|
|
·
|
our ability to attract, train and retain an effective sales force and
other key personnel;
|
|
·
|
our ability to upgrade and maintain information technology systems;
|
|
·
|
our ability to acquire and protect intellectual property;
|
|
·
|
our ability to meet future liquidity requirements and comply with restrictive
covenants related to long-term indebtedness;
|
|
·
|
our ability to enhance future operating and financial
results;
|
|
·
|
our ability to comply with laws and regulations applicable
to its business;
|
|
·
|
our ability to successfully defend litigation; and
|
|
·
|
our ability to successfully deploy the proceeds from
the Merger.
|
Forward-looking statements are not guarantees of performance. You
should not put undue reliance on these statements which speak only as of the date hereof. You should understand that the following important
factors, in addition to those discussed or incorporated by reference under the heading “Risk Factors” below, could
affect the Company and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking
statements in this Report:
|
·
|
the impact of changes in consumer spending patterns,
consumer preferences, local, regional and national economic conditions, crime, weather, demographic trends and employee availability;
|
|
·
|
the impact of the ongoing COVID-19 pandemic on our
business, operating results and financial condition;
|
|
·
|
fluctuations in our future operating results;
|
|
·
|
our ability to successfully identify and consummate
acquisition opportunities;
|
|
·
|
the demand for, and acceptance of, our products and
for cloud-based technology learning solutions in general;
|
|
·
|
our ability to compete successfully in competitive
markets and changes in the competitive environment in our industry and the markets in which we operate;
|
|
·
|
our ability to develop new products;
|
|
·
|
a failure of our information technology infrastructure
or any significant breach of security;
|
|
·
|
future regulatory, judicial and legislative changes
in our industry;
|
|
·
|
the impact of natural disasters, public health crises,
political crises, or other catastrophic events;
|
|
·
|
our ability to attract and retain key employees and
qualified technical and sales personnel;
|
|
·
|
fluctuations in foreign currency exchange rates;
|
|
·
|
our ability to protect or obtain intellectual property
rights;
|
|
·
|
our ability to raise additional capital;
|
|
·
|
the impact of our indebtedness on our financial position
and operating flexibility; and
|
|
·
|
our ability to successfully defend ourselves in legal
proceedings.
|
These and other factors that could cause actual
results to differ from those implied by the forward-looking statements in this Report are more fully described or incorporated by reference
under the heading “Risk Factors” below. The risks described or incorporated by reference under the heading “Risk
Factors” below are not exhaustive. New risk factors emerge from time to time and it is not possible to predict all such risk
factors, nor can the Company assess the impact of all such risk factors on the business, or the extent to which any factor or combination
of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking
statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary
statements. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
In addition, statements of belief and similar
statements reflect the beliefs and opinions of the Company on the relevant subject. These statements are based upon information available
to the Company as of the date of this Report, and while such party believes such information forms a reasonable basis for such statements,
such information may be limited or incomplete, and statements should not be read to indicate that the Company has conducted an exhaustive
inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned
not to unduly rely upon these statements.
Business
The business of the Company is described in the
Registration Statement in the Sections entitled “Information About Skillsoft” and “Information About
Global Knowledge” beginning on pages 143 and 198 thereof, respectively, and that information is incorporated herein by reference.
Risk Factors
The risks associated with the Company’s
business are described in the Registration Statement in the Section entitled “Risk Factors” beginning on page
37 thereof and are incorporated herein by reference.
Financial Information
The financial information of the Company is described
in the Registration Statement in the Sections entitled “Selected Historical Consolidated Financial Information of Skillsoft”
and “Skillsoft Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning
on pages 162 and 165 thereof, respectively, and are incorporated herein by reference.
The financial information of Churchill is described
in the Registration Statement in the Sections entitled “Selected Historical Financial Information of Churchill” and
“Churchill’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
beginning on pages 133 and 134 thereof, respectively, and are incorporated herein by reference.
The financial information of Global Knowledge
is described in the Registration Statement in the Sections entitled “Selected Historical Financial Information of Global Knowledge”
and “Global Knowledge’s Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and beginning on pages 206 and 208 thereof, respectively, and are incorporated herein by reference.
Reference is made to the disclosure set forth
in Item 9.01 of this Report relating to the financial information of the Company, Churchill and Global Knowledge.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in
conjunction with Skillsoft’s consolidated financial statements, including the notes thereto, included in the Registration Statement
and as Exhibit 99.1 hereto and incorporated herein by reference. Certain statements in this “Skillsoft’s Management’s
Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and
uncertainties, such as statements regarding Skillsoft’s plans, objectives, expectations and intentions. Skillsoft’s future
results and financial condition may differ materially from those currently anticipated as a result of the factors described under sections
titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”
Non-GAAP Financial Measures
We track several non-GAAP metrics that we believe
are key financial measures of our success. Non-GAAP measures are frequently used by securities analysts, investors, and other interested
parties in their evaluation of companies comparable to us, many of which present non-GAAP measures when reporting their results. These
measures can be useful in evaluating our performance against our peer companies because we believe the measures provide users with valuable
insight into key components of U.S. GAAP financial disclosures. For example, a company with higher U.S. GAAP net income may not be as
appealing to investors if its net income is more heavily comprised of gains on asset sales. Likewise, excluding the effects of interest
income and expense moderates the impact of a company’s capital structure on its performance. However, non-GAAP measures have limitations
as an analytical tool. Because not all companies use identical calculations, our presentation of non-GAAP financial measures may not
be comparable to other similarly titled measures of other companies. They are not presentations made in accordance with U.S. GAAP, are
not measures of financial condition or liquidity, and should not be considered as an alternative to profit or loss for the period determined
in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. As a result, these performance measures
should not be considered in isolation from, or as a substitute analysis for, results of operations as determined in accordance with U.S.
GAAP.
Adjusted Revenue
Adjusted Revenue. We define Adjusted
Revenue as GAAP revenue excluding impact of fresh-start and purchase accounting. We use Adjusted Revenue to assess our operating performance
excluding GAAP valuation adjustments from fresh-start and purchase accounting.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are used by management,
investors, and other interested parties to assess our operating performance. For example, a measure similar to Adjusted EBITDA is required
by the lenders under our credit agreements. We define these non-GAAP measures as follows:
EBITDA. Represents net income plus
or minus net interest, plus provision for income taxes, depreciation, and amortization as well as impairment of goodwill and intangible
assets.
Adjusted EBITDA. Represents EBITDA
plus primarily non-cash items and non-recurring items that we consider useful to exclude in assessing our operating performance (e.g.,
stock-based compensation expense, restructuring charges, retention costs, recapitalization and transaction-related costs, net foreign
currency impact and other net gains and losses, and impact of fresh-start and purchase accounting).
Free Cash Flow
Free Cash Flow. We define free
cash flow as net cash provided by (used in) operating activities less capital expenditures. We consider free cash flow to be important
because it measures the amount of cash we spend or generate and reflects changes in our working capital.
|
|
Three Months Ended April 30,
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
Non-GAAP
Financial Measures – Adjusted Revenue
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
82,639
|
|
|
$
|
106,349
|
|
Non-subscription revenue
|
|
|
9,062
|
|
|
|
11,980
|
|
Total revenue
|
|
|
91,701
|
|
|
|
118,329
|
|
Plus:
Impact of fresh-start and purchase accounting
|
|
|
19,874
|
|
|
|
—
|
|
Total adjusted revenue
|
|
|
111,575
|
|
|
|
118,329
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Adjusted subscription
revenue
|
|
|
100,583
|
|
|
|
106,349
|
|
Adjusted
non-subscription revenue
|
|
|
10,992
|
|
|
|
11,980
|
|
Total Consolidated
adjusted revenue
|
|
|
111,575
|
|
|
|
118,329
|
|
|
|
|
|
|
|
|
|
|
Content
Business
|
|
|
|
|
|
|
|
|
Adjusted subscription
revenue
|
|
|
77,621
|
|
|
|
80,418
|
|
Adjusted
non-subscription revenue
|
|
|
4,163
|
|
|
|
3,900
|
|
Total Content Business
adjusted revenue
|
|
|
81,784
|
|
|
|
84,318
|
|
|
|
|
|
|
|
|
|
|
SumTotal
Business
|
|
|
|
|
|
|
|
|
Adjusted subscription
revenue
|
|
|
22,962
|
|
|
|
25,931
|
|
Adjusted
non-subscription revenue
|
|
|
6,829
|
|
|
|
8,080
|
|
Total SumTotal Business
adjusted revenu
|
|
|
29,791
|
|
|
|
34,011
|
|
The decrease in revenue for the three months ended
April 30, 2021 compared to the prior year period is the result of lower order intake in the prior year, as revenue recognition typically
occurs in the twelve months that follow order intake. As discussed further below, we have seen improvements in order intake and ARR for
our Content business in the current year and expect stabilization of our SumTotal business for the remainder of the year.
Adjusted revenues decreased $6.7 million, or 5.7%,
for the three months ended April 30, 2021, compared to the same period in 2020. The decrease in adjusted revenue is due primarily to a
$4.2 million decline in our SumTotal business, where we have been experiencing run-off of legacy, non-marketed products. As of April 30,
2021, approximately 68% of our ARR is attributable to our talent development products and the remaining 32% consists of non-marketed products.
We also experienced a decrease in our adjusted
Content revenue of approximately of $2.5 million, which was driven primarily by lower prior year customer retention on, and new sales
related to, our legacy Skillport platform. This decline related partly to the customer experience on Skillport, as well as to competitive
offerings. Offsetting this decline was higher retention associated with Content customers migrating to the Percipio platform, as well
as new sales of Percipio.
We are continuing to execute our Percipio migration
strategy and expect 90% of content revenues will be on Percipio or dual deployment by the end of the current fiscal year. As such, we
expect increased retention of existing customers, as well as sales to new customers, to increase over the next year, leading ultimately
to stabilization and then increases in adjusted revenue. Because retention and new sales of Content and SumTotal were impacted by the
COVID-19 pandemic, along with the continuing adverse impact of Skillport on the Content business, we experienced lower order intake during
the year ended January 31, 2021. The lower order intake in the prior year will result in adjusted revenues for the fiscal year ending
January 31, 2022 being lower than the fiscal year ended January 31, 2021 as revenue is typically recognized over the twelve months following
order intake. In addition to increased usage from an increasing base of Percipio customers, who consume content at a rate of 4x compared
to Skillport, the COVID-19 pandemic also resulted in higher usage of our products by existing customers. We believe this increased usage
bodes well for future retention of such customers, as well as for wider acceptance of digital learning by businesses generally.
|
|
Three Months Ended April 30,
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
Non-GAAP Financial Measures -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(37,405
|
)
|
|
$
|
(433,903
|
)
|
Interest expense, net
|
|
|
11,439
|
|
|
|
105,959
|
|
Provision for income taxes
|
|
|
(2,089
|
)
|
|
|
(8,891
|
)
|
Depreciation and amortization
|
|
|
37,362
|
|
|
|
20,001
|
|
Impairment of goodwill and intangible assets
|
|
|
-
|
|
|
|
332,376
|
|
EBITDA
|
|
|
9,307
|
|
|
|
15,542
|
|
Plus: Non-recurring retention and consulting costs
|
|
|
707
|
|
|
|
4,917
|
|
Plus: Recapitalization and transaction-related costs
|
|
|
1,932
|
|
|
|
16,376
|
|
Plus: Restructuring and contract terminations
|
|
|
537
|
|
|
|
370
|
|
Plus: Integration and migration related
|
|
|
779
|
|
|
|
558
|
|
Plus: Foreign currency and other non-cash expense
|
|
|
171
|
|
|
|
(854
|
)
|
Plus: Impact of fresh-start and purchase accounting
|
|
|
18,021
|
|
|
|
—
|
|
Plus: Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
Plus: Other add backs
|
|
|
422
|
|
|
|
19
|
|
Adjusted EBITDA
|
|
$
|
31,876
|
|
|
$
|
36,928
|
|
Adjusted EBITDA was primarily impacted by the reduction in Adjusted
Revenue, with a $6.8 million decline in Adjusted Revenue resulting in a $5.1 million reduction in Adjusted EBITDA.
(In thousands)
|
|
|
|
|
|
|
Non-GAAP Financial Measures -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
39,676
|
|
|
|
24,764
|
|
Less: Capital expenditures
|
|
|
(1,880
|
)
|
|
|
(3,744
|
)
|
Free cash flow
|
|
$
|
37,796
|
|
|
$
|
21,020
|
|
The significant improvement in free cash flow
for the three months ended April 30, 2021 compared to the corresponding period in the prior year was the result of lower one-time recapitalization
and transaction related costs, which decreased from $16.4 million for the three months ended April 30, 2020 to $1.9 million in the current
period. The $16.4 million of costs in the prior year was attributable to our preparation for a voluntary prepackaged Chapter 11 filing
whereas the $1.9 million related to the acquisition of Skillsoft by Churchill. Free cash flow was also impacted by our change in capital
structure, with no interest being paid for the three months ended April 30, 2020 due to a forbearance agreement with our prior lenders
while we paid approximately $11.1 million of interest for the three months ended April 30, 2021 under our new exit credit facility. The
impact of higher interest payments for the three months ended April 30, 2021 was partially offset by the timing of vendor payments which
were approximately $8.7 million lower for the three months ended April 30, 2021.
Due to the seasonality of our business, a substantial
portion of our orders are received and billed in the fourth quarter of each year. On a prospective basis with our new capital structure,
we expect to generate positive free cash flow in the fourth quarter and first quarter of each year whereas free cash flow in the second
and third quarters of each fiscal year is expected to be breakeven or negative.
Key Performance Metrics
We use
key performance metrics to help us evaluate our performance and make strategic decisions. Additionally, we believe these metrics are
useful as a supplement to investors in evaluating the Company’s ongoing operational performance and trends. These key performance
metrics are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled metrics
presented by other companies.
Order Intake
Order
Intake. Order Intake in any particular period represents orders received during that period and reflects (i) subscription renewals,
upgrades, churn, and downgrades to existing customers, (ii) non- subscription services, and (iii) sales to new customers. Order Intake
generally represents a customer’s annual obligation (versus the life of the contract), and, for the subscription business, revenue
is recognized for such Order Intake over the following 12 months. We use Order Intake to measure and monitor current period business
activity with respect to our ability to sell subscriptions and services to our platforms.
Annualized Recurring Revenue
Annualized
Recurring Revenue (“ARR”). Represents the annualized recurring value of all active subscription contracts at the
end of a reporting period. We believe ARR is useful for assessing the performance of our recurring subscription revenue base and identifying
trends affecting our business.
Dollar Retention Rate
Dollar
Retention Rate (“DRR”) — For existing customers at the beginning of a given period, DRR represents subscription
renewals, upgrades, churn, and downgrades in such period divided by the beginning total renewable base for such customers for such period.
Renewals reflect customers who renew their subscription, inclusive of auto-renewals for multi-year contracts, while churn reflects customers
who choose to not renew their subscription. Upgrades include orders from customers that purchase additional licenses or content (e.g.,
a new Leadership and Business module), while downgrades reflect customers electing to decrease the number of licenses or reduce the size
of their content package. Upgrades and downgrades also reflect changes in pricing. We use our DRR to measure the long-term value of customer
contracts as well as our ability to retain and expand the revenue generated from our existing customers.
Order Intake
The following table sets forth Order Intake for the three
months ended April 30, 2021 and 2020.
|
|
Three Months Ended
April 30
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
Content Business Order
Intake
|
|
|
|
|
|
|
|
|
Percipio Order Intake
|
|
$
|
17,111
|
|
|
$
|
10,117
|
|
Dual Deployment Order Intake
|
|
|
9,869
|
|
|
|
12,675
|
|
Skillport Order Intake
|
|
|
9,318
|
|
|
|
13,912
|
|
Total Subscription Order Intake
|
|
|
36,298
|
|
|
|
36,704
|
|
Services & One-Time
Order Intake
|
|
|
2,572
|
|
|
|
1,805
|
|
Total Content Business Order Intake
|
|
|
38,869
|
|
|
|
38,510
|
|
|
|
|
|
|
|
|
|
|
SumTotal Business Order
Intake
|
|
|
|
|
|
|
|
|
Subscription Order Intake
|
|
$
|
20,773
|
|
|
$
|
26,851
|
|
Services & One-Time Order Intake
|
|
|
4,651
|
|
|
|
5,301
|
|
Total SumTotal Business Order Intake
|
|
|
25,424
|
|
|
|
32,152
|
|
Annualized Recurring Revenue
The following table sets forth ARR as of April 30, 2021 and January
31, 2021:
|
|
April 30,
2021
|
|
|
January 31,
2021
|
|
Key Performance Metrics
Annualized Recurring Revenue (“ARR”)
Percipio ARR
|
|
$
|
81,018
|
|
|
$
|
75,802
|
|
Dual Deployment ARR
|
|
|
166,096
|
|
|
|
161,327
|
|
Skillport ARR
|
|
|
72,209
|
|
|
|
80,245
|
|
Total Content Business ARR.
|
|
|
319,323
|
|
|
|
317,274
|
|
SumTotal Business ARR
|
|
|
97,153
|
|
|
|
99,148
|
|
Dollar Retention Rate
The following table sets forth our Dollar Retention
Rates for the last twelve-month (“LTM”) period ended April 30, 2021 and for the three month periods ended April 30,
2021 and 2020.
|
|
April 30
|
|
|
|
LTM
|
|
|
2021
|
|
|
2020
|
|
Dollar Retention Rate (“DRR”)
|
|
|
|
|
|
|
|
|
|
|
|
|
Percipio DRR
|
|
|
100
|
%
|
|
|
94
|
%
|
|
|
100
|
%
|
Dual Deployment DRR
|
|
|
104
|
%
|
|
|
104
|
%
|
|
|
97
|
%
|
Skillport DRR
|
|
|
70
|
%
|
|
|
76
|
%
|
|
|
77
|
%
|
Total Content Business DRR
|
|
|
93
|
%
|
|
|
91
|
%
|
|
|
88
|
%
|
SumTotal Business DRR
|
|
|
91
|
%
|
|
|
95
|
%
|
|
|
96
|
%
|
Content Business
On a seasonal basis, the first quarter represents the lowest level
of quarterly Order Intake in the content business due to lower customer renewals. Order Intake in the content business for the three months
ended April 30, 2021 was $38.9 million, an increase of $0.4 million compared to the prior year period. New business was $4.7 million compared
to $4.4 million in the year ago period. DRR for the Content business also improved period to period to 91% from 88% due to continued migration
to Percipio. We expect DRR will continue to improve for our Content business as more of our customers use Percipio, which has significantly
higher renewal rates due to its superior user experience compared to our legacy Skillport platform. In the current period, the Dual Deployment
DRR was 104% and Percipio DRR was 94%. The Percipio DRR was impacted in part by approximately $0.6 million of contracts not renewing on
their anniversary dates but expected to renew in future periods, which if renewed in the current period would have brought the Percipio
renewal rate to 97%. Renewal timing shifts did not impact revenue, as customers continued to receive and pay for subscriptions during
the delay period. The net impact of new business and renewal activity resulted in an increase in ARR for the content business of $2.0
million for the three months ended April 30, 2021 compared to January 31, 2021.
We expect DRR for Percipio will trend in line with the LTM DRR of 100%
and also expect new sales will continue to accelerate given the Percipio offering and our increased investment in sales and marketing
to drive new business. Based on our expectations for improved DRR and new sales, we expect (i) current fiscal year Order Intake will be
consistent with the prior year and (ii) will begin growing in the next fiscal year and thereafter.
SumTotal Business
Order intake for the SumTotal business for the
three months ended April 30, 2021 was $25.4 million, a decrease of $6.7 million compared to the prior year period. Approximately $3.4
million of the decline is attributable to timing of renewals that moved into subsequent quarters. The remaining decrease is primarily
due to run-off of legacy, non-marketed products. As of April 30, 2021, approximately 70% of our ARR is attributable to our talent development
products and the remaining 30% consists of non-marketed products. We expect Order Intake for our SumTotal business to stabilize over the
course of the fiscal year, with growth in our core talent development product offset by continued runoff of legacy, non-marketed products.
ARR for the SumTotal business decreased by $1.9 million compared to January 31, 2021 due to run-off of legacy, non-marketed products.
Results of Operations
Our financial results for Pointwell Limited for
the three months ended April 30, 2020 is referred to as the “Predecessor” period. Our financial results for Software
Luxembourg Holding S.A. for the three months ended April 30, 2021 is referred to as the “Successor” period. Our results
of operations as reported in our Consolidated Financial Statements for these periods are prepared in accordance with GAAP.
The following table sets forth certain items
from our consolidated statements of operations as a percentage of total revenues for the periods indicated:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Three
Months Ended
April 30, 2021
|
|
|
Three
Months Ended
April 30, 2020
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
26.7
|
%
|
|
|
20.5
|
%
|
Content and software development
|
|
|
18.1
|
%
|
|
|
14.3
|
%
|
Selling and marketing
|
|
|
31.1
|
%
|
|
|
27.7
|
%
|
General and administrative
|
|
|
13.5
|
%
|
|
|
13.3
|
%
|
Recapitalization and transaction-related costs
|
|
|
2.1
|
%
|
|
|
13.8
|
%
|
Amortization of intangible assets
|
|
|
38.1
|
%
|
|
|
14.7
|
%
|
Impairment of goodwill and intangible assets
|
|
|
0.0
|
%
|
|
|
280.9
|
%
|
Restructuring
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
Total operating expenses
|
|
|
130.2
|
%
|
|
|
385.4
|
%
|
Operating loss
|
|
|
-30.2
|
%
|
|
|
-285.4
|
%
|
Interest and other expense, net
|
|
|
-12.9
|
%
|
|
|
-88.8
|
%
|
Loss before benefit from income taxes
|
|
|
-43.1
|
%
|
|
|
-374.2
|
%
|
Benefit from income taxes
|
|
|
-2.3
|
%
|
|
|
-7.5
|
%
|
Net loss
|
|
|
-40.8
|
%
|
|
|
-366.7
|
%
|
Revenues
We generate revenues from our cloud-based learning
solutions for enterprise, government, education and small business customers worldwide. We provide content learning solutions, principally
in Leadership and Business, Technology and Developer, and Compliance, through two platforms: Percipio, our intelligent online learning
platform that delivers an immersive learning experience, and Skillport, our legacy platform. Since its introduction in 2017, we have
continued to invest in Percipio to deliver best-in-class learning experience and enhance the platform with key features and functionality.
These learning solutions are typically sold on a subscription basis for a fixed term. We also provide a unified, comprehensive and configurable
talent management solution that allows organizations to attract, develop and retain the best talent. We sell professional services related
to the talent management solution, and occasionally provide perpetual and term-based licenses for on-premise versions of the solution.
The following table sets forth the percentage
of our revenues attributable to geographic regions for the periods indicated:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Three
Months Ended
April 30, 2021
|
|
|
Three
Months Ended
April 30, 2020
|
|
Revenues:
|
|
|
|
|
|
|
|
|
United States
|
|
|
76.5
|
%
|
|
|
79.0
|
%
|
Other Americas
|
|
|
4.9
|
%
|
|
|
4.2
|
%
|
Europe, Middle East and Africa
|
|
|
13.2
|
%
|
|
|
11.7
|
%
|
Asia-Pacific
|
|
|
5.4
|
%
|
|
|
5.1
|
%
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100
|
%
|
Subscription and Non-Subscription Revenue
We measure and report
revenue by transaction type. Understanding revenue by transaction type helps us identify and address broad changes in the types of services
customers purchase from us. We summarize our transaction type revenue into the following categories:
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 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 platforms and associated content over the contract term. Subscription revenues are inclusive of maintenance revenue for
SumTotal. Subscription revenue is usually recognized ratably over the contract term.
Non-Subscription
Revenue. Primarily represents 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 subscription and
non-subscription revenue for our Content and SumTotal business units for the periods indicated:
|
|
Successor
|
|
|
Predecessor
|
|
(In thousands)
|
|
Three
Months Ended
April 30, 2021
|
|
|
Three
Months Ended
April 30, 2020
|
|
Subscription revenues:
|
|
|
|
|
|
|
|
|
Content
|
|
$
|
63,644
|
|
|
|
80,418
|
|
SumTotal
|
|
|
18,995
|
|
|
|
25,931
|
|
Total subscription revenues
|
|
|
82,639
|
|
|
|
106,349
|
|
Non-subscription revenues:
|
|
|
|
|
|
|
|
|
Content
|
|
|
3,413
|
|
|
|
3,900
|
|
SumTotal
|
|
|
5,649
|
|
|
|
8,080
|
|
Total non-subscription revenues
|
|
|
9,062
|
|
|
|
11,980
|
|
Total revenues
|
|
$
|
91,701
|
|
|
$
|
118,329
|
|
Revenue by Type
The following is a summary of our revenues by type for the three months
ended April 30, 2021 and 2020:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SaaS and subscription services
|
|
$
|
78,574
|
|
|
$
|
101,089
|
|
|
$
|
(22,515
|
)
|
|
|
(22.3
|
)%
|
Software maintenance
|
|
|
4,064
|
|
|
|
5,260
|
|
|
|
(1,196
|
)
|
|
|
(22.7
|
)%
|
Professional services
|
|
|
8,191
|
|
|
|
10,946
|
|
|
|
(2,755
|
)
|
|
|
(25.2
|
)%
|
Perpetual and term-based software licenses
|
|
|
872
|
|
|
|
1,031
|
|
|
|
(159
|
)
|
|
|
(15.4
|
)%
|
Hardware and other
|
|
|
-
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
(100.0
|
)%
|
Total revenues
|
|
$
|
91,701
|
|
|
$
|
118,329
|
|
|
$
|
(26,628
|
)
|
|
|
(22.5
|
)%
|
Revenues decreased $26.6 million, or 22.5%, for
the three months ended April 30, 2021, compared to the same period in 2020. The primary reason for the decrease in GAAP revenue is due
to the application of fresh-start reporting that requires beginning deferred revenue in the Successor period to be reduced to its estimated
fair value, which is derived from the estimated costs to fulfill contractual obligations rather than the value of contractual billings
to customers. The application of fresh-start reporting resulted in a decrease in GAAP revenue of approximately $19.9 million compared
to the three months ended April 30, 2020. The impact of fresh-start reporting will also decrease GAAP revenue for the three months ended
July 31, 2021. After excluding the impact of fresh-start reporting, the decrease in revenues is due primarily to a $4.2 million decline
in our SumTotal business, where we have been experiencing run-off of legacy, non-marketed products. As of April 30, 2021, approximately
70% of our ARR is attributable to our talent development products and the remaining 30% consists of non-marketed products. We also experienced
a decrease in our adjusted content revenue of approximately of $2.5 million, which was driven by lower customer retention on, and new
sales related to, our legacy Skillport platform. This decline related partly to the customer experience on Skillport, as well as to competitive
offerings. Offsetting this decline was higher retention associated with Content customers migrating to the Percipio platform, as well
as new sales of Percipio.
Burdened by excessive debt prior to our recapitalization
in August 2020, we have had limited financial flexibility in recent years to increase investments in accelerating migrations to the Percipio
platform. With a right-sized capital structure and significant additional liquidity, we plan to increase investments and other activities
to accelerate migrations and improve overall competitiveness, leading to expected growth of revenues from customers on the Percipio platform.
As such, we expect increased retention of existing customers, as well as sales to new customers, to increase over the next year, leading
ultimately to stabilization and then increases in organic GAAP revenue. Because retention and new sales of Content and SumTotal were
impacted by the COVID-19 pandemic, along with the continuing adverse impact of Skillport on the Content business, we experienced lower
order intake during the year ended January 31, 2021. The lower order intake in the prior year will result in adjusted revenues for the
fiscal year ending January 31, 2022 being lower than the fiscal year ended January 31, 2021 as revenue is typically recognized over the
twelve months following order intake. In addition to increased usage from an increasing base of Percipio customers, who consume content
at a rate of 4x compared to Skillport, the COVID-19 pandemic also resulted in higher usage of our products by existing customers. We
believe this increased usage bodes well for future retention of such customers, as well as for wider acceptance of digital learning by
businesses generally.
Operating expenses
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Cost of revenues
|
|
$
|
24,521
|
|
|
$
|
24,214
|
|
|
$
|
307
|
|
|
|
1.3
|
%
|
Content and software development
|
|
|
16,607
|
|
|
|
16,943
|
|
|
|
(336
|
)
|
|
|
(2.0
|
)%
|
Selling and marketing
|
|
|
28,502
|
|
|
|
32,737
|
|
|
|
(4,235
|
)
|
|
|
(12.9
|
)%
|
General and administrative
|
|
|
12,362
|
|
|
|
15,688
|
|
|
|
(3,326
|
)
|
|
|
(21.2
|
)%
|
Recapitalization and transaction-related costs
|
|
|
1,932
|
|
|
|
16,376
|
|
|
|
(14,444
|
)
|
|
|
(88.2
|
)%
|
Amortization of intangible assets
|
|
|
34,943
|
|
|
|
17,370
|
|
|
|
17,573
|
|
|
|
101.2
|
%
|
Impairment of goodwill and intangible assets
|
|
|
-
|
|
|
|
332,376
|
|
|
|
(332,376
|
)
|
|
|
(100.0
|
)%
|
Restructuring
|
|
|
537
|
|
|
|
370
|
|
|
|
167
|
|
|
|
45.1
|
%
|
Total operating expenses
|
|
$
|
119,404
|
|
|
$
|
456,074
|
|
|
$
|
(336,670
|
)
|
|
|
(73.8
|
)%
|
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; and consulting services. The table below provides details regarding the changes in components
of cost of revenues.
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Compensation and benefits
|
|
$
|
13,188
|
|
|
$
|
13,542
|
|
|
$
|
(354
|
)
|
|
|
(2.6
|
)%
|
Royalties
|
|
|
4,850
|
|
|
|
4,267
|
|
|
|
583
|
|
|
|
13.7
|
%
|
Hosting and software maintenance
|
|
|
3,029
|
|
|
|
2,862
|
|
|
|
168
|
|
|
|
5.9
|
%
|
Facilities and utilities
|
|
|
2,347
|
|
|
|
1,941
|
|
|
|
406
|
|
|
|
20.9
|
%
|
Consulting and outside services
|
|
|
1,024
|
|
|
|
1,479
|
|
|
|
(406
|
)
|
|
|
(30.8
|
)%
|
Other
|
|
|
83
|
|
|
|
123
|
|
|
|
(40
|
)
|
|
|
(32.5
|
)%
|
Total cost of revenues
|
|
$
|
24,521
|
|
|
$
|
24,214
|
|
|
$
|
307
|
|
|
|
1.3
|
%
|
The increase in royalties was due to additional
fees for increased usage during the three months ended April 30, 2021. The increase in facilities and utilities was primarily a result
of more overhead costs allocated to cost of revenues as the headcount of offshore customer support personnel increased during the three
months ended April 30, 2021, compared to the same period in 2020. The decrease in consulting and outside services expenses for the three
months ended April 30, 2021, compared to the same period in 2020, was primarily due to lower implementation volume in our SumTotal business
resulting in less outsourced professional services in 2021.
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.
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Compensation and benefits
|
|
$
|
10,808
|
|
|
$
|
11,243
|
|
|
$
|
(435
|
)
|
|
|
(3.9
|
)%
|
Consulting and outside services
|
|
|
3,673
|
|
|
|
3,651
|
|
|
|
22
|
|
|
|
0.6
|
%
|
Facilities and utilities
|
|
|
1,308
|
|
|
|
1,501
|
|
|
|
(193
|
)
|
|
|
(12.9
|
)%
|
Software Maintenance
|
|
|
722
|
|
|
|
479
|
|
|
|
243
|
|
|
|
50.7
|
%
|
Other
|
|
|
96
|
|
|
|
68
|
|
|
|
28
|
|
|
|
40.7
|
%
|
Total content
and software development expenses
|
|
$
|
16,607
|
|
|
$
|
16,943
|
|
|
$
|
(336
|
)
|
|
|
(2.0
|
)%
|
The decrease in compensation and benefits for the three months ended
April 30, 2021, compared to the same period in 2020, was a result of workforce reductions to align with current sales levels.
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.
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Compensation and benefits
|
|
$
|
21,212
|
|
|
$
|
23,333
|
|
|
$
|
(2,121
|
)
|
|
|
(9.1
|
)%
|
Advertising and promotions
|
|
|
3,485
|
|
|
|
3,401
|
|
|
|
84
|
|
|
|
2.5
|
%
|
Facilities and utilities
|
|
|
1,704
|
|
|
|
2,534
|
|
|
|
(830
|
)
|
|
|
(32.8
|
)%
|
Consulting and outside services
|
|
|
1,139
|
|
|
|
1,673
|
|
|
|
(534
|
)
|
|
|
(31.9
|
)%
|
Software Maintenance
|
|
|
893
|
|
|
|
775
|
|
|
|
117
|
|
|
|
15.1
|
%
|
Travel expenses
|
|
|
19
|
|
|
|
981
|
|
|
|
(962
|
)
|
|
|
(98.1
|
)%
|
Other
|
|
|
51
|
|
|
|
41
|
|
|
|
10
|
|
|
|
24.8
|
%
|
Total S&M expenses
|
|
$
|
28,502
|
|
|
$
|
32,737
|
|
|
$
|
(4,235
|
)
|
|
|
(12.9
|
)%
|
The decrease in compensation and benefits for
the three months ended April 30, 2021, compared to the same period in 2020, was primarily due to lower commission expenses as a result
of the application of fresh-start reporting, which required us to eliminate the balance of deferred commissions which otherwise would
have been recognized as commission expense in the Successor period. Also contributing to the decrease in compensation and benefits was
a reduction of SumTotal sales personnel in 2021. The sales workforce reduction resulted in less facilities and utilities costs allocated
to S&M for the three months ended April 30, 2021, compared to the same period in 2020. The decrease in consulting and outside services
for the three months ended April 30, 2021, compared to the same period in 2020, was primarily due to Skillsoft’s trade show event,
Perspectives 2020, and related expenses incurred in the three months ended April 30, 2020 in anticipation of the event held in May 2020.
Skillsoft’s Perspectives 2021 will be held in September 2021 and we expect that the event related expenses will incur in the three
months ended October 31, 2021. The decrease in travel expenses for the three months ended April 30, 2021, compared to the same period
in 2020, was due to COVID-19 pandemic. We expect that travel expenses will increase in the following quarters.
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.
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Compensation and benefits
|
|
$
|
7,690
|
|
|
$
|
12,013
|
|
|
$
|
(4,323
|
)
|
|
|
(36.0
|
)%
|
Consulting and outside services
|
|
|
2,861
|
|
|
|
1,726
|
|
|
|
1,851
|
|
|
|
107.3
|
%
|
Facilities and utilities
|
|
|
748
|
|
|
|
812
|
|
|
|
(64
|
)
|
|
|
(7.8
|
)%
|
Franchise, sales, and property tax
|
|
|
520
|
|
|
|
375
|
|
|
|
145
|
|
|
|
38.7
|
%
|
Insurance
|
|
|
371
|
|
|
|
319
|
|
|
|
52
|
|
|
|
16.2
|
%
|
Other
|
|
|
172
|
|
|
|
443
|
|
|
|
(271
|
)
|
|
|
(61.2
|
)%
|
Total G&A expenses
|
|
$
|
12,362
|
|
|
$
|
15,688
|
|
|
$
|
(2,610
|
)
|
|
|
(16.6
|
)%
|
The decrease in compensation and benefits for
the three months ended April 30, 2021, compared to the same period in 2020, was primarily due to one-time retention bonuses paid to key
employees in connection with the Company’s Chapter 11 filing and recapitalization efforts in 2020. The increase in consulting and
outside services expenses for the three months ended April 30, 2021, compared to the same period in 2020, was primarily due to increased
audit and tax services, and business process improvement projects related consulting services.
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 activities related to the planned merger
with Churchill.
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 increase in amortization of intangible assets
for the three months ended April 30, 2021, compared to the same period 2020, was primarily due to the intangible assets that arose from
our reorganization and related application of fresh-start reporting on August 27, 2020.
Impairment of goodwill and intangible assets
We review intangible assets subject to amortization
for impairment 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 impairment indicators were present during the three months ended April 30,
2021.
During the Predecessor period for the three months
ended April 20, 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. In April 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 ended August 27, 2020.
As part of our evaluation of impairment indicators
based on the circumstances described above as of April 30, 2020, we determined the SumTotal 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 certain SumTotal intangible assets were lower than their current carrying values and, accordingly,
impairment charges of $62.3 million were recognized for the Predecessor period from February 1, 2020 to August 27, 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 of April
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 from February 1, 2020 to August 27, 2020.
In accordance with ASC 350, for goodwill we 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. 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 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, we recorded
$332.4 million of impairment charges for the three months ended April 30, 2020, 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.
Restructuring
In January 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 our SumTotal business, and consolidation of facilities as we are adopting new work
arrangements for certain locations. During the three months ended April 30, 2021, we recorded restructuring charges of $0.5 million for
employee severance cost adjustments.
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 months ended April 30, 2020, we recorded restructuring charges of $0.4
million 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.
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Other (expense) income, net
|
|
$
|
(352
|
)
|
|
$
|
910
|
|
|
$
|
(1,262
|
)
|
|
|
(138.7
|
)%
|
Interest income
|
|
|
10
|
|
|
|
19
|
|
|
|
(9
|
)
|
|
|
(47.4
|
)%
|
Interest expense, net
|
|
|
(11,449
|
)
|
|
|
(105,978
|
)
|
|
|
94,529
|
|
|
|
(89.2
|
)%
|
Interest and other expense, net
|
|
$
|
(11,791
|
)
|
|
$
|
(105,978
|
)
|
|
$
|
93,258
|
|
|
|
(88.8
|
)%
|
The decrease in other (expense) income was primarily
due to $0.9 million of net foreign exchange gains (specifically, resulting from foreign currency denominated transactions and the revaluation
of foreign currency denominated assets and liabilities) during the three months ended April 30, 2020, and $0.3 million of net foreign
exchange losses during the three months ended April 30, 2021. The decrease in interest expense for the three months ended April 30, 2021,
compared to the same period in 2020, was the result of our reorganization through the Chapter 11 Cases (as defined below) completed in
August 2020, which resulted in substantially less outstanding debt.
Benefit from income taxes
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 30, 2020
|
|
|
Dollar
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Benefit from income taxes
|
|
$
|
(2,089
|
)
|
|
$
|
(8,891
|
)
|
|
$
|
6,802
|
|
|
|
(76.5
|
%)
|
Effective income tax rate
|
|
|
5.3
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
The decrease in Benefit from income taxes for
the three months ended April 30, 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 three months ended April 30, 2021, as well as the impact
of the impairment of intangible assets in the three months ended April 30, 2020.
The effective income tax rate for the three months
ended April 30, 2021, differs from the Luxembourg statutory rate of 24.9% 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, partially offset by a decrease in
reserves for uncertain tax positions.
The effective income tax rate for the three months
ended April 30, 2020, differed from the Ireland statutory rate of 12.5% due primarily to the impairment of non-deductible goodwill and
an increase in our valuation allowance on our deferred tax assets in Ireland and the United States.
Liquidity and Capital Resources
On June 14, 2020, Pointwell and certain of its
subsidiaries, including Skillsoft Corporation (collectively, the “Debtors”), commenced voluntary “prepackaged”
petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the U.S. Bankruptcy Court for the District of Delaware
(the “Bankruptcy Court”) pursuant to a prepetition restructuring support agreement entered into with the substantial
majority of its first and second lien lenders with the objective of reducing long-term debt while maintaining normal operations and paying
all trade creditors in full. On June 15, 2020 the Debtors filed a plan of reorganization (as amended, the “Plan of Reorganization”)
and a related disclosure statement with the Bankruptcy Court which was subsequently amended by revised filings. In addition to supporting
the Plan of Reorganization, certain of the Debtors’ consenting first lien lenders agreed to support the Debtors’ restructuring
process by providing the Debtors with $60 million in post-petition financing (the “DIP Facility” and the lenders under
such facility, the “DIP Facility Lenders”).
On August 27, 2020, the Debtors consummated the
Plan of Reorganization and emerged from Chapter 11. Upon emergence, all claims related to the DIP Facility were discharged and the DIP
Facility Lenders received, in full and final satisfaction of such claims, on a dollar for dollar basis, the First Out Term Loan (as defined
below). All claims related to the Predecessor Company’s outstanding obligations under the variable rate loans and first lien senior
notes (collectively, the “Predecessor first lien obligations”) were discharged, and the holders of claims with respect
to the Predecessor first lien obligations received, in full and final satisfaction of such claims, its pro rata share of the Second Out
Term Loan (as defined below) and 3,840,000 Class A ordinary shares of the Successor. All claims related to the Predecessor’s outstanding
obligations under the second lien senior notes (the “Predecessor second lien obligations”) were discharged, and the
holders of claims with respect to the Predecessor second lien obligations received, in full and final satisfaction of such claims 160,000
Class B ordinary shares of the Successor and warrants to purchase common shares of the new parent company of Pointwell, Software Luxembourg
Holding S.A.
Upon emergence, the Exit Credit Facility of $520
million consists of (i) a $110 million super senior term loan facility (the “First Out Term Loan”), and (ii) a $410
million first lien, second-out term loan facility (the “Second Out Term Loan”). The Exit Credit Facility bears interest
at a rate equal to LIBOR plus 7.50% per annum, with a LIBOR floor of 1.00%. The First Out Term Loan is due in December 2024 and the Second
Out Term Loan is due April 2025. The Exit Credit Facility contains customary provisions and reporting requirements, including prepayment
penalties and a maximum leverage covenant that will be first measured January 31, 2022 and each quarter thereafter. Quarterly principal
repayments of $1.3 million begin for the quarter ended April 30, 2021 and increase to $2.6 million for the quarter ended April 30, 2022
until maturity.
The Reorganization resulted in a new capital
structure with significantly lower levels of debt and a corresponding decrease in interest payments. As a result of the Reorganization,
our consolidated debt decreased from $3.4 billion to $0.6 billion. After emergence, we have funded operations primarily through the use
of cash collected from our customers and the proceeds received from the Exit Credit Facility, supplemented from the borrowings under
our accounts receivable facility. Our principal sources of liquidity include cash and cash equivalents totaling $105.0 million as of
April 30, 2021.
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.
Cash Flows
The following table summarizes our cash flows
for the period presented:
|
|
Successor
|
|
|
Predecessor
|
|
(In thousands)
|
|
Three Months
Ended
April 30, 2021
|
|
|
Three Months
Ended
April 20, 2020
|
|
Net cash provided by operating activities
|
|
$
|
39,676
|
|
|
$
|
24,764
|
|
Net cash used in investing activities
|
|
|
(1,880
|
)
|
|
|
(3,744
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(4,439
|
)
|
|
|
6,275
|
|
Effect of foreign currency exchange rates on cash and cash equivalents
|
|
|
(140
|
)
|
|
|
(1,602
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
33,217
|
|
|
$
|
25,693
|
|
Cash Flows from Operating Activities
The significant improvement in cash provided
by operating activities for the three months ended April 30, 2021 compared to the corresponding period in the prior year was the result
of lower one-time recapitalization and transaction related costs, which decreased from $16.4 million for the three months ended April
30, 2020 to $1.9 million in the current period. The $16.4 million of costs in the prior year was attributable to our preparation for
a voluntary prepackaged Chapter 11 filing whereas the $1.9 million related to the acquisition of Skillsoft by Churchill. Cash flow provided
by operating activities was also impacted by our change in capital structure, with no interest being paid for the three months ended
April 30, 2020 due to a forbearance agreement with our prior lenders while we paid approximately $11.1 million of interest for the three
months ended April 30, 2021 under our new exit credit facility. The impact of higher interest payments for the three months ended April
30, 2021 was partially offset by the timing of vendor payments which were approximately $8.7 million lower for the three months ended
April 30, 2021.
On a prospective basis with our new capital structure,
due to the seasonality of our business, where a substantial portion of our orders are received and billed in the fourth quarter of each
year, we typically generate positive cash flow in the fourth quarter and first quarter of each year whereas cash flow from operating
activities in the second and third quarters of each fiscal year is typically breakeven or negative.
Cash Flows from Investing Activities
Cash flows from investing activities consist
predominantly of purchases of computer hardware and other property, as well as capitalized software development costs.
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.
Contractual and Commercial Obligations
The scheduled maturities of our debt and future
minimum rental commitments under non-cancelable lease agreements as of April 30, 2021 were as set forth in the table below.
|
|
Payments due by Fiscal
Year
|
|
(In thousands)
|
|
Total
|
|
|
2022(1)
|
|
|
2022-2024
|
|
|
2024-2026
|
|
|
Thereafter
|
|
First Out Term Loan
|
|
$
|
109,725
|
|
|
$
|
825
|
|
|
$
|
4,400
|
|
|
$
|
104,500
|
|
|
$
|
-
|
|
Second Out Term Loan
|
|
|
408,975
|
|
|
|
3,075
|
|
|
|
16,400
|
|
|
|
389,500
|
|
|
|
-
|
|
Operating leases
|
|
|
21,636
|
|
|
|
3,898
|
|
|
|
7,564
|
|
|
|
3,929
|
|
|
|
6,245
|
|
Finance lease
|
|
|
1,209
|
|
|
|
1,209
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
541,545
|
|
|
$
|
9,007
|
|
|
$
|
28,364
|
|
|
$
|
497,929
|
|
|
$
|
6,245
|
|
|
(1)
|
Excluding payments made during
the three months ended April 30, 2021.
|
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 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 consolidated financial statements and the
related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of these 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: fresh-start accounting, revenue recognition, impairment of goodwill and intangible
assets; 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.
We believe the following critical accounting
policies most significantly affect the portrayal of our financial condition and involve our most difficult and subjective estimates and
judgments.
Revenue Recognition
On February 1, 2019, we adopted ASC Topic 606,
Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method. We applied ASC 606 to
contracts that were not completed on February 1, 2019. Results for reporting periods beginning after February 1, 2019 are presented under
ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC
605. See Note 2(t) to our consolidated financial statements for the year ended January 31, 2020 included in the Registration Statement
for discussion related to the impact of adoption.
Under the guidance of ASC 606, revenue is recognized
when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects
to receive in exchange for those goods or services. In order to achieve this core principle, we applied the following five steps:
|
•
|
Identify the contract(s) with the customer.
|
|
•
|
Identify the performance obligations in
the contract.
|
|
•
|
Determine the transaction price.
|
|
•
|
Allocate the transaction price to the
performance obligations in the contract.
|
|
•
|
Recognize revenue as the entity satisfies
the performance obligation.
|
We enter into contracts with customers that provide
cloud-based learning solutions and talent management solutions for customers worldwide. These solutions are typically sold on a subscription
basis for a fixed term. We account for a contract when (i) it has approval and commitment from both parties, (ii) the rights of the parties
have been identified, (iii) payment terms have been identified, (iv) the contract has commercial substance and (v) collectability of
substantially all of the consideration to which we will be entitled in exchange for the transfer of goods or services is probable. Approximately
one third of our revenue recognized each year is related to contracts that have an original duration of one year or less.
Our Software as a Service (“SaaS”)
subscription arrangements for learning and talent management solutions generally do not provide customers with the right to take possession
of the software supporting the platform or, in the case of learning solutions, to download course content without continuing to incur
fees for hosting services and, as a result, are accounted for as service arrangements. Access to the platform and course content represents
a series of distinct services as we continually provide access to, and fulfill our obligation to, the end customer over the subscription
term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed
consideration related to subscription revenue is generally recognized on a straight-line basis over the contract term, beginning on the
date that the service is made available to the customer. Our subscription contracts typically vary from one year to three years. Our
arrangements are generally non-cancellable and non-refundable.
We also provide professional services related
to our talent management solutions which are typically considered distinct performance obligations and are recognized over time as services
are performed. We also occasionally sell talent management solutions by providing perpetual and term-based licenses for on-premise versions
of the software. Such arrangements are treated as transfers of intellectual property and the amount of consideration attributable to
the delivered licenses are recognized at the point of delivery and the remaining amounts allocated for post contract support are recognized
over time.
While the vast majority of our revenue relates
to SaaS subscription services where the entire arrangement fee is recognized on a ratable basis over the contractual term, we sometimes
enter into contractual arrangements that have multiple distinct performance obligations, one or more of which have different periods
over which the services or products are delivered. These arrangements may include a combination of subscriptions, products, support and
professional services. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price
(“SSP”) of each distinct performance obligation.
Our process for determining SSP for each performance
obligation, where necessary, involves significant management judgment. In determining SSP, we maximize observable inputs and consider
a number of data points, including:
|
·
|
the
pricing of standalone sales;
|
|
·
|
the
pricing established by management when setting prices for deliverables that are intended
to be sold on a standalone basis;
|
|
·
|
contractually
stated prices for deliverables that are intended to be sold on a standalone basis; and
|
|
·
|
other
pricing factors, such as the geographical region in which the products are sold and expected
discounts based on the customer size and type.
|
Determining SSP for performance obligations which
we rarely or never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would
have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be
willing to pay.
We also sell cloud-based learning solutions through
resellers, where payments are typically based on the solutions sold through to end users. Reseller arrangements of this nature sometimes
require us to estimate end user activity for a brief period of the contract term, however, amounts estimated and actual amounts subsequently
billed have not been material to date.
We only include estimated amounts in the transaction
price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable
consideration under ASC 606, which we estimate based on historical return experience and other relevant factors and record a corresponding
refund liability as a component of accrued expenses and other current liabilities. Based on the nature of our business and product offerings,
contingent revenue and other variable consideration are infrequent.
While not a common practice for us, in the event
we grant the customer the option to acquire additional products or services in an arrangement, we consider if the option provides a material
right to the customer that it would not receive without entering into the contract (e.g., an incremental discount compared to the range
of discounts typically given for similar products or services). If a material right is deemed to exist, we account for the option as
a distinct performance obligation and recognize revenue when those future products or services are transferred or when the option expires.
Reimbursements received from customers for out-of-pocket
expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from
customers and remitted to government authorities.
We apply the practical expedient for contracts
with significant financing components that are under one year, whereby we do not evaluate contracts under one year to determine if they
have a significant financing component.
We apply the practical expedient for the deferral
of sales commissions and other contract acquisition costs, which are expensed as incurred, because the amortization period would be one
year or less. For deferred contract costs with an expected amortization period of over one year, we recognize such payments over (i)
the expected customer relationship period in the case of new customers, which is typically 3 to 5 years for initial commissions, and
(ii) the contractual term for existing customers for commissions paid on renewals.
As our contractual agreements predominately call
for advanced billing, contract assets are rarely generated.
For transaction prices allocated to remaining
performance obligations, we apply practical expedients and do not disclose quantitative or qualitative information for remaining performance
obligations (i) that have original expected durations of one year or less and (ii) where we recognize revenue equal to what we have the
right to invoice and that amount corresponds directly with the value to the customer of its performance to date. All remaining performance
obligations as of January 31, 2020 qualified for the practical expedient.
Deferred Revenue
We record as deferred revenue amounts that have
been billed in advance for products or services to be provided. Deferred revenue includes the unrecognized portion of revenue associated
with license fees for which we have received payment or for which amounts have been billed and are due for payment. Under ASC 605, deferred
revenue was not recognized on the balance sheet for outstanding receivables where collection was not probable, fees were not fixed or
determinable, or when the customer had termination for convenience rights.
Contract Acquisition Costs
In connection with the adoption of ASC 606, we
implemented new procedures for capitalizing the incremental costs of obtaining customer contracts for the year ended January 31, 2020.
We capitalize sales commissions, and associated
fringe costs, such as payroll taxes, paid to direct sales personnel and other incremental costs of obtaining contracts with customers,
provided we expect to recover those costs. We determine whether costs should be deferred based on sales compensation plans, if the commissions
are in fact incremental and would not have occurred absent the customer contract.
The Company applies the practical expedient for
the deferral of sales commissions and other contract acquisition costs, which are expensed as incurred, because the amortization period
would be one year or less.
Sales commissions for renewal of a subscription
contract are not considered commensurate with the commissions paid for the acquisition of the initial subscription contract given the
substantive difference in commission rates between new and renewal contracts. Commissions paid upon the initial acquisition of a contract
are amortized over an estimated period of benefit of 3 to 5 years while commissions paid related to renewal contracts are amortized over
an estimated average contract term of approximately 12 months. Amortization is recognized on a straight-line basis upon commencement
of the transfer of control of the services, commensurate with the pattern of revenue recognition.
The period of benefit for commissions paid for
the acquisition of initial subscription contracts is determined by taking into consideration the initial estimated customer life and
the technological life of our platform and related significant features. We determine the period of benefit for renewal subscription
contracts by considering the average contractual term for renewal contracts. Amortization of deferred contract acquisition costs is included
within sales and marketing expense in the consolidated statements of operations.
Concentrations of Credit Risk and Off-Balance-Sheet
Risk
For the fiscal years ended January 31, 2020,
2019 and 2018, no customer individually comprised greater than 10% of revenue or accounts receivable.
We perform continuing credit evaluations of its
customers’ financial condition and generally does not require collateral. We maintain a reserve for doubtful accounts and sales
credits that is our best estimate of potentially uncollectible trade receivables. Provisions are made based upon a specific review of
all significant outstanding invoices that are considered potentially uncollectible in whole or in part. For those invoices not specifically
reviewed or considered uncollectible, provisions are provided at different rates, based upon the age of the receivable, historical experience,
and other currently available evidence. The reserve estimates are adjusted as additional information becomes known or payments are made.
We have no significant off-balance-sheet arrangements
nor concentration of credit risks such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
Capitalized Software Development Costs
We capitalize certain internal-use software development
costs related to our SaaS platform incurred during the application development stage. Costs related to preliminary project activities
and to post- implementation activities are expensed as incurred. We also capitalize costs related to specific upgrades and enhancements
when it is probable that the expenditures will result in additional functionality. Internal-use software is amortized on a straight-line
basis over its estimated useful life, which is generally five years. Management evaluates the useful lives of these assets on an annual
basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of the assets.
Capitalized costs are recorded as intangible assets in the accompanying balance sheets.
Income Taxes
We provide for deferred income taxes resulting
from temporary differences between the basis of assets and liabilities for financial reporting purposes as compared to tax purposes,
using rates expected to be in effect when such differences reverse. We record valuation allowances to reduce deferred tax assets to the
amount that is more likely than not to be realized.
We follow the authoritative guidance on accounting
for and disclosure of uncertainty in tax positions which requires us to determine whether a tax position of the Company is more likely
than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical
merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements
is reduced to the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with
the relevant taxing authority.
Interest and penalties related to uncertain tax
positions is included in the provision for income taxes in the consolidated statement of operations.
Intangible Assets and Goodwill
Intangible assets arising from fresh-start accounting
and business combinations are generally recorded based upon estimates of the future performance and cash flows from the acquired business.
We use an income approach to determine the estimated fair value of certain identifiable intangible assets including customer relationships
and trade names and use a cost approach for other identifiable intangible assets, including developed software/courseware. 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 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.
Developed technology represents patented and
unpatented technology and know-how. Customer contracts and relationships represents established relationships with customers, which provide
a ready channel for the sale of additional content and services. Trademarks and tradenames represent acquired product names and marks
that we intend to continue to utilize.
We review intangible assets subject to amortization
at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment
or a change in remaining useful life. Conditions that would indicate impairment and trigger a more frequent impairment assessment include,
but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or
an adverse action or assessment by a regulator.
We review indefinite-lived intangible assets,
including goodwill and certain trademarks, during the fourth quarter of each year for impairment, or more frequently if certain indicators
are present or changes in circumstances suggest that impairment may exist and reassesses their classification as indefinite-lived assets.
Goodwill represents the excess of the purchase
price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill in fresh-start accounting
results when the reorganization value of the emerging entity exceeds what can be attributed to specific tangible or identified intangible
assets. We test goodwill for impairment during the fourth quarter every year in accordance with ASC 350, Intangibles — Goodwill
(“ASC 350”). 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 implied 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.
Goodwill and Indefinite-Lived Asset Impairment
for the Successor three months ended April 30, 2021
We review intangible assets subject to amortization
for impairment 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 impairment indicators were present during the three months ended April 30,
2021.
Goodwill and Indefinite-Lived Asset Impairment
for the Predecessor three months ended April 30, 2020
During the Predecessor period ending August 27,
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 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.
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. In April 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 three months ended April 30, 2020.
As part of our evaluation of impairment indicators
based on the circumstances described above as of April 30, 2020, we determined our SumTotal 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 certain SumTotal intangible assets were lower than their current carrying values and, accordingly,
impairment charges of $62.3 million were recognized for the Predecessor period ended April 30, 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 of April
30, 2020. Accordingly, we estimated the fair value of the Skillsoft trade name using a 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 $107.9 million for the three months ended April 30, 2020.
In accordance with ASC 350, we determined triggering
events had occurred and performed a goodwill impairment test as of April 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 materially consistent with an EBITDA
multiple approach. The results of the impairment tests performed indicated that the carrying values 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, we recorded
$332.4 million of impairment charges for the three months ended April 30, 2020, 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 determination of fair value that is used
as a basis for calculating the amount of impairment of each reporting unit is a significant estimate. A 10% change in our estimate of
fair value of reporting units, which could occur due to different judgments around (i) estimates of future cash flows, (ii) discount
rates, (iii) estimated control premiums, (iv) use of different EBITDA multiples (v) the weighting of valuation approaches or (vi)
other assumptions, or a combination of these judgments, would result in an increase or decrease in our goodwill impairment by approximately
$115 million. Because goodwill impairment is measured after reducing the carrying value of reporting units for impairment of definite-lived
and indefinite-lived assets, any increase or decrease in the estimate of fair value used to calculated impairments of definite-lived
and indefinite-lived assets would result in an offsetting adjustment to the goodwill impairment by a similar amount.
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 three months ended January 31, 2021 and
2020 included in an exhibit to this filing.
Recent Developments
With the Merger and the Global Knowledge
Merger now complete, we expect to change our fiscal year end to January 31st. If Global Knowledge had reported its results for
the three months ended April 30, 2021 instead of April 2, 2021, Global Knowledge’s financial results would have improved as
compared to the financial information included in our proxy statement/prospectus as a result of a trend of improving performance
with many markets now rolling back COVID-19 restrictions and employers starting to bring teams back into traditional office
settings. For example, Global Knowledge reported a net loss of $11,051 for the fiscal quarter ended on April 2,
2021. While not reviewed or audited by our registered independent public accountant, and only for illustrative purposes, we
note that had Global Knowledge’s fiscal quarter ended on April 30, 2021, we expect that Global Knowledge would have reported
a net loss of $12,493 for the fiscal quarter ended on April 30, 2021. Adjusted EBITDA for Global Knowledge for the fiscal quarter
ended on April 2, 2021 was $3,802 whereas we expect Global Knowledge would have reported Adjusted EBITDA of $6,028 for the fiscal
quarter if it had ended on April 30, 2021. The following is a reconciliation of net loss as if it had been reported for each of the
three-month period ended on April 2, 2021 and the fiscal quarter ended on April 30, 2021 to Adjusted EBITDA. Please note that what
seems like GAAP amounts below for the fiscal quarter ended on April 30, 2021 are not GAAP in that they are illustrative only given
that our quarter ended on April 2, 2021 and not on April 30, 2021.
(In thousands)
|
|
For the Three Months Ended
April 2, 2021
|
|
|
For the Three Months Ended
April 30, 2021
|
|
Net Loss
|
|
$
|
(11,051
|
)
|
|
$
|
(12,493
|
)
|
|
|
|
|
|
|
|
|
|
EBITDA Computation
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
8,670
|
|
|
|
10,070
|
|
Provision for income taxes
|
|
|
425
|
|
|
|
840
|
|
Depreciation and amortization
|
|
|
2,740
|
|
|
|
5,022
|
|
EBITDA
|
|
|
784
|
|
|
|
3,439
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Computation
|
|
|
|
|
|
|
|
|
Plus: Non-recurring retention and consulting costs
|
|
|
31
|
|
|
|
1,515
|
|
Plus: Recapitalization and transaction-related costs
|
|
|
1,901
|
|
|
|
1,393
|
|
Plus: Restructuring and contract terminations
|
|
|
809
|
|
|
|
1,103
|
|
Plus: Integration and migration related
|
|
|
343
|
|
|
|
-
|
|
Plus: Foreign currency and other non-cash expense
|
|
|
(66
|
)
|
|
|
(255
|
)
|
Plus: Other add backs
|
|
|
-
|
|
|
|
(1,168
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
3,802
|
|
|
$
|
6,028
|
|
Security Ownership of Certain Beneficial Owners and Management
The following
table sets forth information known to us regarding the beneficial ownership of our common stock immediately following consummation of
the Merger by:
|
•
|
each person who is the beneficial owner of more than 5% of the outstanding
shares of our common stock;
|
|
•
|
each of our named executive officers and directors; and
|
|
•
|
all of our executive officers and directors as a group.
|
Beneficial
ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security
if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently
exercisable or exercisable within 60 days. Except as described in the footnotes below and subject to applicable community property laws
and similar laws, we believe that each person listed above has sole voting and investment power with respect to such shares.
The beneficial
ownership of our common stock is based on 133,059,021 shares of common stock issued and outstanding immediately following consummation
of the Merger. The amount of shares of common stock issued and outstanding immediately following consummation of the Merger excludes
the 34,690,979 shares that were validly redeemed in connection with the business combination.
Beneficial Ownership Table
Name and Address of Beneficial Owner(1)
|
|
Number of
Shares
|
|
|
Percent
Owned
|
|
Five Percent Holders:
|
|
|
|
|
|
|
|
|
MIH Learning B.V (2)
|
|
|
50,000,000
|
|
|
|
37.6
|
%
|
Churchill Sponsor II LLC (3)
|
|
|
17,250,000
|
|
|
|
13.0
|
%
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
Jeffrey R. Tarr
|
|
|
—
|
|
|
|
—
|
|
Apratim Purakayastha
|
|
|
—
|
|
|
|
—
|
|
Helena B. Foulkes
|
|
|
—
|
|
|
|
—
|
|
Ronald W. Hovsepian
|
|
|
—
|
|
|
|
—
|
|
Lawrence C. Illg
|
|
|
55,000
|
|
|
|
*
|
|
Michael Klein
|
|
|
17,250,000
|
|
|
|
13.0
|
%
|
Patrick Kolek
|
|
|
20,000
|
|
|
|
*
|
|
Karen G. Mills
|
|
|
—
|
|
|
|
—
|
|
Peter Schmitt
|
|
|
—
|
|
|
|
—
|
|
Lawrence H. Summers
|
|
|
—
|
|
|
|
—
|
|
All executive officers and directors as a group (16 individuals)
|
|
|
17,325,000
|
|
|
|
13.0
|
%
|
*
|
Less than 1%.
|
|
|
(1)
|
Unless otherwise noted, the address of each of the following entities
or individuals is c/o Skillsoft Corp., 300 Innovative Way, Suite 201, Nashua, New Hampshire 03062.
|
|
|
(2)
|
MIH Learning B.V. (“MIH Learning”), as assignee
of the rights and obligations of MIH Edtech Investments B.V. under the Prosus Subscription Agreement, will own the shares of Churchill
Class A common stock set forth opposite its name. MIH Learning is an indirect wholly owned subsidiary of Prosus N.V. Prosus N.V.
is a direct subsidiary of Naspers Limited (“Naspers”). Naspers holds ordinary shares of Prosus N.V. that represent
73.2% of the voting rights in respect of Prosus N.V.’s shares. As a result, shares of Churchill Class A common stock owned
by MIH Learning may be deemed to be beneficially owned by Prosus N.V. and by Naspers. Prosus N.V. is a publicly traded limited liability
company incorporated under the laws of the Netherlands. Naspers is a publicly traded limited liability company incorporated under
the laws of the Republic of South Africa.
|
|
|
(3)
|
The shares beneficially owned by Churchill Sponsor II LLC, the Sponsor,
may also be deemed to be beneficially owned by Mr. Klein who controls the managing member of the Sponsor. Churchill’s directors
also hold non-managing interests in the Sponsor.
|
Directors and Executive Officers
The directors and executive officers of the Company
following the business combination and the remaining information required to be provided herein are described below and in the Registration
Statement in the Section entitled “Management of the Post-Combination Company After the Merger” beginning on page 193, which
is incorporated herein by reference.
In addition, effective as of the Closing, the
Company named the following additional officers:
Apratim Purakayastha is the Company’s
Chief Technology Officer. Mr. Purakayastha served as Chief Operating Officer of SumTotal Systems, LLC from 2016 to 2019. Mr. Purakayastha
previously served as General Manager and Senior Vice President of SaaS at SevOne where he was responsible for its on-demand/SaaS business
segment, after holding the position of Senior Vice President Engineering. Prior to SevOne, Mr. Purakayastha held senior technology positions
including Group President in ACI Worldwide and Director of Software at IBM. Mr. Purakayastha holds a Doctor of Philosophy degree in Computer
Science from Duke University, a Master of Science degree in Computer Science from Washington State University and a Bachelor of Science
degree in Computer Science from Jadavpur University, India.
Eric Stine is the Company’s Chief
Revenue Officer. A global technology executive with extensive strategy and growth experience, Mr. Stine previously served as Chief of
Staff for the President of Global Sales, Services and Customer Engagement at SAP, where he supported global go-to-market strategy and
operations. Prior to that, he was Chief Revenue Officer at Qualtrics and Chief Innovation Officer for SAP America. Earlier in his career,
Mr. Stine held positions of increasing seniority at SAP, Ciber, Virtustream and Blackboard. Mr. Stine is a member of the Dean’s
Advisory Board at Boston University School of Law and founder of the Eric & Neil Stine-Markman Scholarship, the first permanent endowment
to dedicate scholarship funds to the LGBTQ+ community. Mr. Stine also plays active board and fundraising roles for Broadway Cares/Equity
Fights AIDS, Yale Pediatrics and Northwestern University. Mr. Stine holds a Juris Doctorate from the Boston University School of Law
and Bachelors of Arts in Political Science and History from Northwestern University.
Richard Walker is the Company’s
Chief Strategy and Corporate Development Officer and President, SumTotal. Mr. Walker brings extensive strategic, financial, operational
and merger and acquisition experience. Mr. Walker is an advisor to Churchill Capital and a member of the Board of Directors at ServiceSource,
where he previously served as Chief Financial Officer. Mr. Walker also founded The Bison Group, a private partnership that collaborates
with private equity firms investing in the information services industry. Prior to that, Mr. Walker held executive leadership positions
of increasing responsibility at IHS (now IHS Markit), including Executive Vice President, Chief Financial Officer and Chief Strategy
Officer, among others. In those roles, Mr. Walker built the corporate strategy and development function and led the completion of more
than 60 strategic acquisitions. Mr. Walker holds an MBA from the University of Denver and a Bachelor of Science in Business from the
University of Colorado, magna cum laude.
Sarah Hilty is the Company’s Chief
Legal Officer. Ms. Hilty joined the Company in 2021, bringing more than 25 years of experience practicing corporate law. Ms. Hilty most
recently served as Executive Vice President, General Counsel and Secretary for National CineMedia. Ms. Hilty previously served as Deputy
General Counsel for CH2M Hill Companies, Ltd. While at CH2M, Ms. Hilty led a team that was responsible for global legal corporate enterprise
matters including mergers, acquisitions, and divestitures, securities compliance, treasury and finance activities, real estate, and board
and subsidiary governance. Ms. Hilty began her career at Hogan & Hartson, LLP in the Business and Finance Group and became a partner
in 2004. During her time at the firm, Ms. Hilty focused on mergers and acquisitions, strategic joint ventures and corporate finance,
among other corporate matters, for a broad array of clients. Ms. Hilty holds a Juris Doctorate from Stanford Law School and a Bachelor
of Science in Business Administration from the University of Colorado Boulder.
Michelle Boockoff-Bajdek is the Company’s
Chief Marketing Officer. Ms. Boockoff-Bajdek has been Skillsoft’s Chief Marketing Officer since September 2019. Prior to Skillsoft,
Ms. Boockoff-Bajdek served as the Chief Marketing Officer of IBM Watson from 2018 to 2019, the Global Head of Business Marketing for
IBM Watson Media and Weather from 2016 to 2018, and Vice President, B2B Marketing for The Weather Company, an IBM Business. Previously,
Ms. Boockoff-Bajdek served as Executive Vice President, Marketing from 2014 to 2015 for Quaero, and Vice President, Client Acquisition
& Marketing from 2008 to 2013, also for Quaero. Prior to Quaero, she held leadership roles at various technology companies, including
Harte-Hanks, Kronos, and GN Netcom. Ms. Boockoff-Bajdek holds a Bachelor of Science degree in Political Science from Southern Connecticut
State University, and a Master of Science degree in Communications Management from Simmons University.
Mark Onisk is the Company’s
Chief Content Officer. Mr. Onisk has been Skillsoft’s Chief Content Officer since January 2018, and has held various titles
with Skillsoft since 2011, including Senior Vice President, Skillsoft Books from May 2016 to December 2017, Vice President,
Strategic Business Development from December 2015 to April 2016, and Vice President, Content Production from November 2011 to
November 2015. Mr. Onisk held various titles with Element K (Skillsoft’s predecessor) from 2000 to 2011. Mr. Onisk holds a
Bachelor of Science degree in Finance and Economics from SUNY Brockport and a Master of Business Administration degree from the
Rochester Institute of Technology.
Ryan Murray is the Company’s Interim
Chief Financial Officer and Chief Accounting Officer. Mr. Murray is a Certified Public Accountant with more than 20 years of professional
experience, including more than 10 years leading global accounting and finance organizations for publicly traded companies, where he
led efforts to improve processes, streamline operations and install organizational discipline. Mr. Murray previously served as Skillsoft’s
Senior Vice President of Finance, where he led global accounting, tax and treasury functions. Prior to that, Mr. Murray was VP of Finance,
Chief Accounting Officer and Treasurer of Avid Technology, Inc. Mr. Murray began his career at PricewaterhouseCoopers LLP. Mr. Murray
holds a Bachelor of Science from the University of Massachusetts Isenberg School of Management.
Immediately after the completion of the business
combination, the Board was expanded by two members and the following directors were appointed to those vacancies:
Lawrence C. Illg currently serves as Chief Executive Officer,
Food and Edtech, for Prosus after serving as Chief Executive Officer of Prosus Ventures since 2015, where he led investments in food
delivery, education, healthcare and more. He has more than 20 years of professional experience, more than a decade of experience leading
global internet companies and currently serves on the board of several Prosus portfolio companies. Before joining Prosus and Naspers
in 2013 as the Chief Operating Officer of eCommerce, Mr. Illg was Vice President and General Manager of New Ventures at Trulia, a leading
U.S. online real estate marketplace. Previously, he spent eight years as a senior executive at eBay, responsible for strategy and general
management of many of its global marketplaces and classifieds assets. Prior to eBay, he spent several years as strategy advisor for leading
global consumer goods companies. Mr. Illg started his career at the U.S. Federal Reserve Board and holds a B.A. in Economics and an MBA
from the University of California, Berkeley. Mr. Illg was selected to serve on our board of directors due to his broad business expertise,
including significant experience in the education sector and with high growth companies.
Patrick Kolek joined Naspers in 2014 as
Chief Financial Officer, ecommerce and was appointed Chief Operating Officer of Naspers in July 2016. As Group Chief Operating Officers
at Naspers and Prosus, Mr. Kolek is focused on aligning group strategy with company objectives, leading core business activities and
strategic initiatives such as large acquisitions & divestitures. Mr. Kolek has more than 20 years’ experience in executing
business growth and development strategies for hyper growth organizations. Prior to Naspers, Mr. Kolek spent 10 years at eBay, most recently
as Vice President and Chief Financial Officer of eBay International and previously as the Chief Operating Officer of the eBay Classifieds
Group. Prior to eBay, he worked for Novellus Systems from 1999 to 2004 as corporate controller, and he started his career within the
corporate finance and audit divisions at Ernst & Young, where he worked from 1993 to 1999. Mr. Kolek holds a B.S. in Commerce from
Santa Clara University and is a certified public accountant. Mr. Kolek was selected to serve on our board of directors and as chairperson
of the board of directors due to his extensive experience setting and executing growth and development strategies.
Executive Compensation
The executive compensation of the Company’s
executive officers and directors is set forth in the Registration Statement in the Section entitled “Management of the Post-Combination
Company After the Merger—Compensation of Directors and Officers” beginning on page 197, which section is incorporated herein
by reference.
Item 5.02 of this Report discusses compensatory
arrangements of certain executive officers of the Company and is incorporated herein by reference.
Compensation Committee Interlocks and Insider
Participation
Reference is made to the disclosure set forth
under Item 5.02 of this Report relating to the executive officers of the Company. None of our officers currently serves, and in the past
year none have served, as a member of the board of directors or compensation committee of any entity that has one or more officers serving
on our board of directors.
Director Compensation
The Company expects to provide compensation to
its non-employee directors for their services. This compensation will be reported in the Company’s reports pursuant to the Exchange
Act as required by the Exchange Act and regulations promulgated thereunder.
Certain Relationships and Related Transactions, and Director
Independence
Certain Relationships and Related Person Transactions
Certain relationships and related person transactions
are described in the Registration Statement in the Section entitled “Certain Relationships and Related Person Transactions”
beginning on page 316 thereof and are incorporated herein by reference.
Director Independence
The rules of the NYSE require that a majority
of the Board be independent within one year of Churchill’s initial public offering. An “independent director” is defined
generally as a person that, in the opinion of the Board, has no material relationship with the listed company (either directly or as
a partner, shareholder or officer of an organization that has a relationship with the company). The Board has determined that each of
Helena B. Foulkes, Ronald W. Hovsepian, Lawrence C. Illg, Patrick Kolek, Karen G. Mills and Lawrence H. Summers is an independent director
under applicable SEC and NYSE rules.
Chairperson of the Board & Lead Director
The Company’s Corporate Governance Guidelines
(the “Corporate Governance Guidelines”) provide that the Chairperson of the Board shall be elected by the Board. Currently,
the Chairperson is not the Chief Executive Officer (“CEO”) of the Company. However, the Board believes that the Company
and its stockholders are best served by maintaining flexibility to have any director serve as Chairperson and therefore believes that
a permanent policy on whether the Chairperson and CEO positions should be separated or combined is not appropriate.
In order to maintain the independent integrity
of the Board, however, if the Chairperson is not an independent director, the Board shall appoint a Lead Director who must be independent.
The Lead Director’s responsibilities shall include: (a) presiding at all meetings of the Board at which the Chairperson is not
present, including executive sessions of the independent directors; (b) serving as liaison between the Chairperson and the independent
directors; (c) reviewing and approving materials to be sent to the Board; (d) approving the meeting agendas for the Board; (e) approving
meeting schedules to assure that there is sufficient time for discussion of all agenda items; (f) having the authority to call meetings
of the independent directors; and (g) if requested by major shareholders, ensuring that he or she is available for consultation and direct
communication. If the Chairperson is an independent director, than the foregoing responsibilities will be handled by the Chairperson.
Risk is inherent with every business, and how
well a business manages risk can ultimately determine its success. We face a number of risks, including the risks described or incorporated
by reference above under the heading “Risk Factors.” Management is responsible for the day-to-day management of risks
we face, while our Board, as a whole and through its committees, has responsibility for the oversight of risk management of the Company.
In its risk oversight role, our Board has the responsibility to satisfy itself that the risk management processes designed and implemented
by management are adequate and functioning as designed.
The role of the Board in overseeing the management
of our risks is conducted primarily through committees of the Board, as disclosed in the descriptions of each of the committees below
and in the charters of each of the committees. The full Board (or the appropriate Board committee in the case of risks that are under
the purview of a particular committee) discusses with management our major risk exposures, their potential impact on us, and the steps
we take to manage them. When a Board committee is responsible for evaluating and overseeing the management of a particular risk or risks,
the chairperson of the relevant committee is generally expected to report on the discussion to the full Board during the committee reports
portion of the next Board meeting. This enables the Board and its committees to coordinate the risk oversight role, particularly with
respect to risk interrelationships.
A copy of the Corporate Governance Guidelines
is available on the Company’s investor relations website (https://investor.skillsoft.com/corporate-governance/board-of-directors)
under the link “Governance.” The contents of the Company’s website are not incorporated by reference in this Report
or made a part hereof for any purpose.
Committees of the Board of Directors
The Board has three standing committees: an audit
committee, a compensation committee and a nominating and corporate governance committee. Subject to phase-in rules, the rules of NYSE
and Rule 10A-3 of the Exchange Act require that the audit committee of a listed company be comprised solely of independent directors,
and the rules of NYSE require that the compensation committee and the nominating and corporate governance committee of a listed company
be comprised solely of independent directors. Each of our audit committee, compensation committee and nominating and corporate governance
committee are composed solely of independent directors.
Each committee operates under a charter that
was approved by the Board. The charter of each committee is available on our investor relations website.
Audit Committee
The members of our audit committee are Helena
B. Foulkes, Ronald W. Hovsepian and Karen G. Mills, and Karen G. Mills serves as chair of the audit committee. Each member of the audit
committee is financially literate and the Board has determined that Helena B. Foulkes, Ronald W. Hovsepian and Karen G. Mills each qualify
as an “audit committee financial expert” as defined in applicable SEC rules and has accounting or related financial management
expertise.
Compensation Committee
The members of our compensation committee are
Lawrence C. Illg, Karen G. Mills and Ronald W. Hovsepian, and Ronald W. Hovsepian serves as chair of the compensation committee.
Nominating and Corporate
Governance Committee
The members of our nominating and corporate governance
committee are Helena B. Foulkes, Patrick Kolek and Lawrence H. Summers, and Helena B. Foulkes serves as chair of the nominating and corporate
governance committee.
Legal Proceedings
The Company and/or its subsidiaries are defendants
in various lawsuits and other pending and threatened litigation and other adversarial matters which have arisen in the ordinary course
of business. While the ultimate outcome with respect to such proceedings cannot be predicted with certainty, we believe they will not
have a material adverse effect on the Company’s financial condition or results of operations.
In connection with the Merger, certain Churchill
shareholders have filed lawsuits and other Churchill shareholders have threatened to file lawsuits alleging breaches of fiduciary duty
and violations of the disclosure requirements of the Exchange Act. The Company intends to defend the matters vigorously. These cases
are in the early stages and the Company is unable to reasonably determine the outcome or estimate any potential losses, and, as such,
has not recorded a loss contingency.
Market Price and Dividends on the Registrant’s Common
Equity and Related Stockholder Matters
Market Price and Dividend Information
The market price of and dividends on Churchill’s
common equity, warrants and units and related stockholder matters is described in the Registration Statement in the Section entitled
“Market and Dividend Information” beginning on page 34 thereof and that information is incorporated herein by
reference. In addition, the following table sets forth the high and low sales prices per unit, per share of Class A common stock and
per public warrant as reported on NYSE for the periods from May 20, 2021 through June 10, 2021.
Common Stock
|
|
|
Warrants
|
|
|
Units
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
$
|
11.75
|
|
|
$
|
10.01
|
|
|
$
|
2.79
|
|
|
$
|
1.46
|
|
|
$
|
12.60
|
|
|
$
|
10.12
|
|
The Company’s Class A common stock and
warrants commenced trading on NYSE under the symbols “SKIL” and “SKIL.WS,” respectively, on June 14, 2021, subject
to ongoing review of the Company’s satisfaction of all listing criteria following the business combination, in lieu of the Class
A common stock and warrants of Churchill. Churchill’s units ceased trading separately on NYSE on June 11, 2021.
Holders of Record
As of the Closing Date and following the completion
of the Merger and the redemption of public shares as described above, the Company had 133,059,021 shares of the Class A common stock outstanding
held of record by 236 holders and no shares of preferred stock outstanding. Such amounts do not include DTC participants or beneficial
owners holding shares through nominee names.
Securities Authorized for Issuance Under Equity Compensation Plans
Reference is made to the disclosure
described in the Registration Statement in the Section entitled “Proposal No. 9—The Incentive Plan
Proposal” beginning on page 114 thereof, which is incorporated herein by reference. As described below, the Churchill
Capital Corp II 2020 Omnibus Incentive Plan (the “Incentive Plan”) and the material terms thereunder, including
the authorization of the initial share reserve thereunder, were approved by Churchill’s stockholders at the Churchill Special
Meeting.
Recent Sales of Unregistered Securities
Reference is made to the disclosure set forth
under Item 3.02 of this Report relating to the issuance of the Company’s Class A common stock and warrants in connection with
the Global Knowledge Merger and the PIPE Investments, which is incorporated herein by reference.
Description of Registrant’s Securities to be Registered
The Company’s securities are described
in the Registration Statement in the Section entitled “Description of Capital Stock of Post-Combination Company” beginning
on page 312 thereof and that information is incorporated herein by reference. As described below, the Company’s second amended
and restated certificate of incorporation was approved by Churchill’s stockholders at the Churchill Special Meeting and became
effective on the Closing Date.
The following description of certain provisions
of our second amended and restated certificate of incorporation and amended and restated bylaws is qualified in its entirety by the copies
thereof which are filed as Exhibits 3.1 and 3.2 to this Report and incorporated herein by reference. For a complete description of the
rights and preferences of our securities, we urge you to read our second amended and restated certificate of incorporation, amended and
restated bylaws and the applicable provisions of Delaware law.
Annual Stockholder Meetings
Our second amended and restated certificate of incorporation
and amended and restated bylaws provide that annual stockholder meetings will be held at a date, time and place, if any, as exclusively
selected by the Board. To the extent permitted under applicable law, we may conduct meetings by remote communications, including by webcast.
Effects of Our Second Amended
and Restated Certificate of Incorporation and Amended and Restated Bylaws and Certain Provisions of Delaware Law
Our second amended and restated certificate of incorporation,
amended and restated bylaws and the DGCL contain provisions, which are summarized in the following paragraphs, that are intended to enhance
the likelihood of continuity and stability in the composition of the Board. These provisions are intended to avoid costly takeover battles,
reduce our vulnerability to a hostile change of control and enhance the ability of the Board to maximize stockholder value in connection
with any unsolicited offer to acquire us. However, these provisions may have the effect of delaying, deterring or preventing a merger
or acquisition of the Company by means of a tender offer, a proxy contest or other takeover attempt that a stockholder might consider
in its best interest, including attempts that might result in a premium over the prevailing market price for the shares of our Class
A common stock held by stockholders.
Authorized but Unissued
Capital Stock
Delaware law does not require stockholder approval
for any issuance of authorized shares. However, the listing requirements of the NYSE, which would apply if and so long as our Class A
common stock remains listed on the NYSE, require stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding
voting power or then outstanding number of shares of our Class A common stock. Additional shares that may be used in the future may be
used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.
The Board may generally issue one or more series of
preferred shares on terms calculated to discourage, delay or prevent a change of control of the Company or the removal of our management.
Moreover, our authorized but unissued shares of preferred stock will be available for future issuances in one or more series without
stockholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital,
to facilitate acquisitions and employee benefit plans.
One of the effects of the existence of authorized
and unissued and unreserved common stock or preferred stock may be to enable the Board to issue shares to persons friendly to current
management, which issuance could render more difficult or discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our stockholders
of opportunities to sell their shares of Class A common stock at prices higher than prevailing market prices.
Classified Board of Directors
Our second amended and restated certificate of incorporation
provides that, subject to the right of holders of any series of preferred stock, the Board will be divided into three classes of directors,
with the classes to be as nearly equal in number as possible, and with the directors serving staggered three-year terms, with only one
class of directors being elected at each annual meeting of stockholders. As a result, approximately one-third of the Board will be elected
each year. The classification of directors will have the effect of making it more difficult for stockholders to change the composition
of the Board. Our second amended and restated certificate of incorporation and amended and restated bylaws provide that, except as otherwise
provided for or fixed pursuant to the Stockholders Agreement, the Subscription Agreement or any rights of holders of preferred stock
to elect additional directors under specified circumstances, the number of directors will be determined from time to time exclusively
pursuant to a resolution adopted by the Board; however, any determination by the Board to increase or decrease the total number of directors
shall require the approval of 50% of the directors present at a meeting at which a quorum is present.
Business Combinations
We have opted out of Section 203 of the DGCL; however, our second
amended and restated certificate of incorporation contains similar provisions providing that we may not engage in certain “business
combinations” with any “interested stockholder” for a three-year period following the time that the stockholder became
an interested stockholder, unless:
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·
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prior to such time, the Board approved either the business combination
or the transaction that resulted in the stockholder becoming an interested stockholder;
|
|
·
|
upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the
transaction commenced, excluding certain shares; or
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|
·
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at or subsequent to that time, the business combination is approved
by the Board and by the affirmative vote of holders of at least 66 2/3% of our outstanding voting stock that is not owned by the
interested stockholder.
|
Generally, a “business combination” includes a merger,
asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Subject to certain exceptions,
an “interested stockholder” is a person who, together with that person’s affiliates and associates, owns, or within
the previous three years owned, 15% or more of our outstanding voting stock. “Voting stock” is stock of any class or series
entitled to vote generally in the election of directors.
Under certain circumstances, this provision will make it more difficult
for a person who would be an “interested stockholder” to effect various business combinations with the Company for a three-year
period. This provision may encourage companies interested in acquiring the Company to negotiate in advance with the Board because the
stockholder approval requirement would be avoided if the Board approves either the business combination or the transaction which results
in the stockholder becoming an interested stockholder. These provisions also may have the effect of preventing changes in the Board and
may make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
Removal of Directors; Vacancies
Under the DGCL, unless otherwise provided in our second amended and
restated certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. Our
second amended and restated certificate of incorporation provides that, without limiting the rights of any party to the Stockholders
Agreement or the Prosus Subscription Agreement and other than directors elected by holders of our preferred stock, if any, directors
may be removed with or without cause upon the affirmative vote of a majority in voting power of all outstanding shares of stock entitled
to vote thereon, voting together as a single class. In addition, our second amended and restated certificate of incorporation provides
that, without limiting the rights of any party to the Stockholders Agreement or the rights of any party to the Prosus Subscription Agreement,
any newly created directorship on the Board that results from an increase in the number of directors and any vacancies on the Board will
be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum, or by a sole remaining director.
Our second amended and restated certificate of incorporation provides that the Board may increase or decrease the number of directors
by the affirmative vote of 50% of the directors present at the meeting at which a quorum is present.
No Cumulative Voting
Under Delaware law, the right to vote
cumulatively does not exist unless the certificate of incorporation specifically authorizes cumulative voting. Our second amended
and restated certificate of incorporation does not authorize cumulative voting. Therefore, stockholders holding a majority in voting
power of the shares of our stock entitled to vote generally in the election of directors will be able to elect all of our
directors.
Special Stockholder Meetings
Our second amended and restated certificate of incorporation provides
that special meetings of our stockholders may be called at any time only by or at the direction of the Board or the chairperson of the
Board, either on his or her own initiative or at the request of stockholders that beneficially own at least twenty-five percent (25%)
in voting power of all of our then-outstanding shares of stock. Our amended and restated bylaws provide that, unless otherwise indicated
in the notice thereof, any and all business may be transacted at a special meeting.
Requirements for Advance Notification of Director Nominations
and Stockholder Proposals
Our amended and restated bylaws establish advance
notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations
made by or at the direction of the Board or a committee of the Board. In order for any matter to be properly brought before a meeting
of our stockholders, a stockholder will have to comply with advance notice requirements and provide us with certain information. Generally,
to be timely, a stockholder’s notice must be received by our secretary not less than 90 calendar days nor more than 120 calendar
days prior to the first anniversary date of the immediately preceding annual meeting of stockholders. Our amended and restated bylaws
also specify requirements as to the form and content of a stockholder’s notice. Our amended and restated bylaws allow the chairperson
of the meeting at a meeting of the stockholders to adopt rules and regulations for the conduct of meetings, which may have the effect
of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions may also deter,
delay or discourage a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors
or otherwise attempting to influence or obtain control of the Company.
Stockholder Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to be taken
at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote if a consent
or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a meeting at which all shares of our stock entitled to vote
thereon were present and voted, unless our second amended and restated certificate of incorporation provides otherwise.
Amendment of Certificate of Incorporation or Bylaws
Our second amended and restated certificate of incorporation and amended
and restated bylaws provide that the Board is expressly authorized to make, alter, amend, change, add to, rescind or repeal, in whole
or in part, our bylaws without a stockholder vote in any matter not inconsistent with Delaware law, our second amended and restated certificate
of incorporation, the Stockholders Agreement or the Prosus Subscription Agreement.
The DGCL provides generally that the affirmative vote of a majority
of the outstanding shares entitled to vote thereon, voting together as a single class, is required to amend a corporation’s certificate
of incorporation, unless the certificate of incorporation requires a greater percentage.
Dissenters’ Rights of Appraisal and Payment
Under the DGCL, with certain exceptions, our stockholders will have
appraisal rights in connection with a merger or consolidation of us. Pursuant to the DGCL, stockholders who properly request and perfect
appraisal rights in connection with such merger or consolidation will have the right to receive payment of the fair value of their shares
as determined by the Delaware Court of Chancery.
Stockholders’ Derivative Actions
Under the DGCL, any of our stockholders may bring an action in our
name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder
of our shares at the time of the incident to which the action relates or such stockholder’s stock thereafter devolved by operation
of law.
Exclusive Forum
Our second amended and restated certificate of incorporation provides
that unless the Company consents in writing to the selection of an alternative forum, a state court located within the State of Delaware
(or if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware)
shall be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of the Company, (ii) action asserting
a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Company’s
stockholders, (iii) action asserting a claim against the Company or any director, officer or other employee of the Company arising pursuant
to any provision of the DGCL or our second amended and restated certificate of incorporation or our amended and restated bylaws (as either
may be amended, restated, modified, supplemented or waived from time to time), (iv) action asserting a claim against the Company or any
director, officer or other employee of the Company governed by the internal affairs doctrine, or (v) action asserting an “internal
corporate claim” as that term is defined in Section 115 of the DGCL. These provisions shall not apply to suits brought to enforce
a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Unless the
Company consents in writing to the selections of an alternative forum, the federal district courts of the United States of America shall
be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or
entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company shall be deemed to have notice of and
consented to the forum provisions in our second amended and restated certificate of incorporation. However, it is possible that a court
could find our forum selection provisions to be inapplicable or unenforceable.
Conflicts of Interest
Delaware law permits corporations to adopt provisions renouncing any
interest or expectancy in certain opportunities that are presented to the corporation or its officers, directors or stockholders. Our
second amended and restated certificate of incorporation renounces, to the maximum extent permitted from time to time by Delaware law,
any interest or expectancy that we have in, or right to be offered an opportunity to participate in, any business opportunities that
are from time to time presented to our officers, directors or stockholders or their respective affiliates, other than those officers,
directors, stockholders or affiliates who are our or our subsidiaries’ employees. Our second amended and restated certificate of
incorporation provides that, to the fullest extent permitted by law, none of the Sponsor, Michael Klein, Prosus or any director who is
not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities)
or any of its or his or her affiliates will have any duty to refrain from (i) engaging in and possessing interests in other business
ventures of every type and description, including corporate opportunities in the same or similar business activities or lines of business
in which we or our subsidiaries now engage or propose to engage or (ii) competing with us or any of our subsidiaries, on their own account,
or in partnership with, or as an employee, officer, director or shareholder of any other person. In addition, to the fullest extent permitted
by law, in the event that the Sponsor, Michael Klein, Prosus or any non-employee director or any of its or his or her affiliates acquires
knowledge of a potential transaction or other matter which may be a corporate or other business opportunity for itself or himself, or
herself, or its or his, or her, affiliates or for us or our affiliates, such person will have no duty (fiduciary, contractual or otherwise)
to communicate or present such transaction or matter to us or any of our subsidiaries, as the case may be, and they may take any such
opportunity for themselves or direct it to another person or entity. Our second amended and restated certificate of incorporation does
not renounce our interest in any business opportunity that is expressly offered to a non-employee director solely and exclusively in
his or her capacity as a director or officer of the Company and such opportunity is one the Company is legally and contractually permitted
to undertake. To the fullest extent permitted by law, no business opportunity will be deemed to be a potential corporate opportunity
for us unless we would be permitted to undertake the opportunity under our amended and restated certificate of incorporation, we have
sufficient financial resources to undertake the opportunity and the opportunity would be in line with our business.
Indemnification of Directors and Officers
Section 102(b)(7) of the Delaware General Corporation
Law (the “DGCL”) allows a corporation to provide in its certificate of incorporation that a director of the corporation
will not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director,
except where the director breached the duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated
a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit. The Company’s second amended and restated certificate of incorporation provides for this limitation of liability.
Section 145 of the DGCL, provides, among
other things, that a Delaware corporation may indemnify any person who was, is or is threatened to be made, party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by
or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of
such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best
interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was
unlawful. A Delaware corporation may indemnify any persons who were or are a party to any threatened, pending or completed action or
suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee or agent
of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests, provided
further that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be
liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the expenses (including attorneys’ fees) which such
officer or director has actually and reasonably incurred.
Section 145 further authorizes a corporation
to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against
any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such,
whether or not the corporation would otherwise have the power to indemnify such person under Section 145.
The Company’s amended and restated bylaws
provide that we must indemnify and advance expenses to our directors and officers to the full extent authorized by the DGCL.
We have entered into indemnification agreements
with each of our directors and executive officers. Such agreements may require us, among other things, to advance expenses and otherwise
indemnify our executive officers and directors against certain liabilities that may arise by reason of their status or service as executive
officers or directors, to the fullest extent permitted by law. We intend to enter into indemnification agreements with any new directors
and executive officers in the future.
The indemnification rights set forth above shall
not be exclusive of any other right which an indemnified person may have or hereafter acquire under any statute, any provision of the
Company’s second amended and restated certificate of incorporation, the Company’s second amended and restated bylaws, agreement,
vote of stockholders or disinterested directors or otherwise. Notwithstanding the foregoing, the Company shall not be obligated to indemnify
a director or officer in respect of a proceeding (or part thereof) instituted by such director or officer, unless such proceeding (or
part thereof) has been authorized by the Board pursuant to the applicable procedure outlined in the Company’s second amended and
restated bylaws.
Section 174 of the DGCL provides, among other
things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption,
may be held jointly and severally liable for such actions. A director who was either absent when the unlawful actions were approved or
dissented at the time may avoid liability by causing his or her dissent to such actions to be entered in the books containing the minutes
of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice
of the unlawful acts.
The Company maintains and expect to maintain
standard policies of insurance that provide coverage (1) to its directors and officers against loss rising from claims made by reason
of breach of duty or other wrongful act and (2) to the Company with respect to indemnification payments that the Company may make to
such directors and officers.
These provisions may discourage stockholders
from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing
the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit
the Company and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs
of settlement and damage awards against officers and directors pursuant to these indemnification provisions.
The Company believes that these provisions, the
insurance and the indemnity agreements are necessary to attract and retain talented and experienced officers and directors.
Financial Statements and Supplementary Data
Reference is made to the disclosure set forth
under Item 9.01 of this Report relating to the financial statements and supplementary data of the Company and Churchill, which are
incorporated herein by reference.
Further reference is made to the Section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” as set forth above in Item 2.01, which is incorporated herein by reference.