Income Taxes

12 Months Ended

Aug. 31, 2021

‎

14. INCOME TAXES

Our benefit (provision) for income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2021		2020		2019
Current:
Federal	$	-	$	(15)	$	93
State		(286)		(87)		(14)
Foreign		(1,773)		(1,145)		(2,745)
		(2,059)		(1,247)		(2,666)

Deferred:
Federal		2,869		2,306		3,112
State		13		98		102
Foreign		24		(77)		(120)
Operating loss carryforward		(3,058)		(50)		(1,625)
Valuation allowance		10,546		(11,261)		(418)
Foreign tax credit carryforward
reduction		(787)		-		-
		9,607		(8,984)		1,051
	$	7,548	$	(10,231)	$	(1,615)

The allocation of our total income tax benefit (provision) is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2021		2020		2019
Net income (loss)	$	7,548	$	(10,231)	$	(1,615)
Other comprehensive income (loss)		11		16		(5)
	$	7,559	$	(10,215)	$	(1,620)

Income (loss) before income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2021		2020		2019
United States	$	6,834	$	3,062	$	(1,910)
Foreign		(759)		(2,266)		2,502
	$	6,075	$	796	$	592

‎

The differences between income taxes at the statutory federal income tax rate and the consolidated income tax rate reported in our consolidated statements of operations and comprehensive income (loss) were as follows:



YEAR ENDED
AUGUST 31,	2021		2020		2019
Federal statutory income tax rate	(21.0)	%	(21.0)	%	(21.0)	%
State income taxes, net of federal effect	(1.6)		16.9		(5.4)
Valuation allowance	173.6		(1,412.9)		(70.8)
Foreign tax credit carryforward
reduction	(13.0)		-		-
Executive stock options	7.7		199.9		-
Foreign jurisdictions tax differential	(4.0)		1.4		(72.8)
Tax differential on income subject
to both U.S. and foreign taxes	(0.7)		11.9		(64.7)
Uncertain tax positions	(3.0)		13.8		34.0
Non-deductible executive compensation	(5.8)		(18.2)		(8.8)
Non-deductible meals and entertainment	(0.2)		(22.3)		(52.9)
Payout of deferred compensation (NQDC)	-		6.1		0.3
Other	(7.8)		(59.3)		(10.7)
	124.2	%	(1,283.7)	%	(272.8)	%

Our effective income tax benefit rate for fiscal 2021 of 124.2 percent was primarily due to a $10.5 million reduction in our valuation allowance against deferred income tax assets, which was partially offset by the reduction of $0.8 million in foreign tax credit carryforwards resulting from tax withheld by foreign jurisdictions in excess of amounts allowable as credits against our U.S. income taxes. In fiscal 2020, as explained below, we recognized $11.3 million of additional income tax expense resulting from the increase in the valuation allowance against our deferred tax assets. Due to the near break-even amount of pre-tax income during fiscal 2020 and 2019, the effect of non-temporary items on our effective income tax rate was greatly amplified.

In consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the prior three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards. Based on this assessment, we increased the valuation allowance against our deferred tax assets, which generated $11.3 million of additional income tax expense in fiscal 2020.

Our strong financial performance during fiscal 2021 produced cumulative three-year pre-tax income through August 31, 2021. Because of better-than-expected earnings during fiscal 2021, as well as a favorable outlook for future earnings, particularly from sales of our All Access Pass, we reduced the valuation allowance against our deferred tax assets by $10.5 million during fiscal 2021.

The Tax Cut and Jobs Act (the 2017 Tax Act) was signed into law on December 22, 2017. The 2017 Tax Act significantly revised the U.S. corporate income tax code by, among other things, lowering the statutory corporate tax rate from 35 percent to 21 percent; eliminating certain deductions; imposing a mandatory one-time transition tax, or deemed repatriation tax, on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred; introducing new tax regimes; and changing how foreign earnings are subject to U.S. tax. Certain provisions of the 2017 Tax Act became effective for us in fiscal 2019, including limitations on the deductibility of interest and executive compensation as well as anti-deferral provisions on Global Intangible Low-Taxed Income (GILTI). We have elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”).

In fiscal 2020 and fiscal 2019, we recorded $0.2 million and $0.1 million of income tax expense resulting from limitations added by the 2017 Tax Act on the deductibility of executive compensation. Because of losses in foreign jurisdictions, we recorded no income tax expense in fiscal 2021 or fiscal 2020 under the GILTI provisions. During fiscal 2019, we recorded income tax expense of $0.3 million under the GILTI provisions. However, IRS guidance issued after we filed our fiscal 2019 federal income tax return allowed us to amend the return and reverse the GILTI tax previously recorded. Accordingly, we recorded a $0.3 million benefit for this reversal during fiscal 2021.

We previously adopted the provisions of ASU 2016-09, which requires that the benefits of deductions resulting from stock-based compensation in excess of the corresponding book expense be recorded as a component of our income tax provision or benefit for the period, instead of being recorded to additional paid-in capital. In fiscal 2021, as a result of our CEO’s exercise of stock options, we recorded an income tax benefit of $0.5 million for stock-based compensation deductions that were greater than the corresponding book expense. We recorded an income tax benefit of $1.8 million fiscal 2020 a result of our CEO and CFO’s stock options exercised. We recorded income tax expense of $0.1 million in fiscal 2019 for stock-based compensation deductions that were less than the corresponding book expense.

The significant components of our deferred tax assets and liabilities were as follows (in thousands):



AUGUST 31,		2021		2020
Deferred income tax assets:
Foreign income tax credit
carryforward	$	9,466	$	9,150
Net operating loss carryforward		5,986		7,694
Sale and financing of corporate
headquarters		3,307		3,939
Bonus and other accruals		2,483		1,607
Stock-based compensation		2,022		1,431
Inventory and bad debt reserves		1,551		1,328
Deferred revenue		1,075		1,268
Other		653		530
Total deferred income tax assets		26,543		26,947
Less: valuation allowance		(4,530)		(15,076)
Net deferred income tax assets		22,013		11,871

Deferred income tax liabilities:
Intangibles step-ups – indefinite lived		(5,461)		(5,494)
Intangibles step-ups – finite lived		(4,008)		(2,786)
Intangible asset impairment and
amortization		(3,537)		(3,306)
Deferred commissions		(2,784)		(2,231)
Property and equipment depreciation		(1,001)		(1,904)
Unremitted earnings of foreign
subsidiaries		(646)		(354)
Other		-		-
Total deferred income tax liabilities		(17,437)		(16,075)
Net deferred income taxes	$	4,576	$	(4,204)

‎

Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):



AUGUST 31,		2021		2020
Long-term assets	$	4,951	$	1,094
Long-term liabilities		(375)		(5,298)
Net deferred income tax asset (liability)	$	4,576	$	(4,204)

Our U.S. federal net operating loss carryforwards were comprised of the following at August 31, 2021 (in thousands):



	Loss Carryforward				Loss		Loss		Operating
Loss Carryforward	Expires				Deductions		Deductions		Loss Carried
for Year Ended	August 31,		Amount		in Prior Years		in Current Year		Forward
Acquired NOL - Jhana
December 31, 2015	2034	$	1,491	$	(581)	$	(847)	$	63
December 31, 2016	2035		3,052		-		-		3,052
July 15, 2017	2036		1,117		-		-		1,117
			5,660		(581)		(847)		4,232

August 31, 2017	2037		16,361		(5,639)		(10,722)		-
August 31, 2018	2038		10,506		-		(3,301)		7,205

Acquired NOL - Strive
December 31, 2018	No Expiration		947		-		(295)		652
December 31, 2019	No Expiration		869		-		-		869
December 31, 2020	No Expiration		1,148		-		-		1,148
April 25, 2021	No Expiration		136		-		-		136
			3,100		-		(295)		2,805
		$	35,627	$	(6,220)	$	(15,165)	$	14,242

We have U.S. state net operating loss carryforwards generated in fiscal 2009 and before in various jurisdictions that expire primarily between September 1, 2021 and August 31, 2029. The U.S. state net operating loss carryforwards generated in fiscal 2017 and fiscal 2018 primarily expire on August 31, 2037 and 2038, respectively. The state net operating loss carryforwards acquired through the purchase of Jhana Education stock expire between August 31, 2034 and August 31, 2036. The state net operating loss carryforwards acquired through the purchase of Strive stock expire between August 31, 2038 and August 31, 2041.

Our U.S. foreign income tax credit carryforwards were comprised of the following at August 31, 2021 (in thousands):



Credit Generated in					Credits Used		Credits		Credits Used		Credits
Fiscal Year Ended	Credit Expires		Credits		in Prior		Reduced in		in Current		Carried
August 31,	August 31,		Generated		Years		Current Year		Year		Forward
2011	2021	$	3,445	$	(414)	$	-	$	-	$	3,031
2012	2022		2,563		(2,563)		-		-		-
2013	2023		2,815		(2,815)		-		-		-
2014	2024		1,378		(1,378)		-		-		-
2015	2025		1,422		(1,422)		-		-		-
2016	2026		1,569		(1,569)		-		-		-
2017	2027		1,804		-		(299)		-		1,505
2018	2028		1,727		-		(107)		-		1,620
2019	2029		1,578		-		(234)		-		1,344
2020	2030		1,010		-		(147)		-		863
2021	2031		1,103		-		-		-		1,103
		$	20,414	$	(10,161)	$	(787)	$	-	$	9,466

As previously explained, during fiscal 2020 we significantly increased the valuation allowance on our deferred income tax assets. During fiscal 2021 we reversed nearly all of the valuation allowance amounts that we recorded in 2020. The remaining valuation allowance amounts at August 31, 2021 relate primarily to the foreign tax credit carryforward from fiscal 2011, which we expect to expire in fiscal 2022, and losses of certain foreign subsidiaries. During fiscal 2019, we

determined that it was more likely than not that deferred income tax assets of certain foreign subsidiaries would not be realized and we increased the valuation allowance accordingly.

Activity in our deferred income tax asset valuation allowance was as follows for the periods indicated (in thousands):



YEAR ENDED
AUGUST 31,		2021		2020		2019
Beginning balance	$	15,076	$	3,815	$	3,397
Charged to costs and expenses		394		11,269		663
Deductions		(10,940)		(8)		(245)
Ending balance	$	4,530	$	15,076	$	3,815

Except for the deferred tax assets subject to valuation allowances, we have determined that projected future taxable income is adequate to allow for realization of all deferred tax assets. We considered sources of taxable income, including reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. Based on the factors described above, we concluded that realization of our deferred tax assets, except those subject to the valuation allowances described above, is more likely than not at August 31, 2021.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2021		2020		2019
Beginning balance	$	1,640	$	1,895	$	2,111
Additions based on tax positions
related to the current year		349		172		157
Additions for tax positions in
prior years		79		10		7
Reductions for tax positions of prior
years resulting from the lapse of
applicable statute of limitations		(188)		(289)		(370)
Other reductions for tax positions of
prior years		(286)		(148)		(10)
Ending balance	$	1,594	$	1,640	$	1,895

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.3 million at each of August 31, 2021 and 2020. Included in the ending balance of gross unrecognized tax benefits at August 31, 2021 is $1.6 million related to individual states’ net operating loss carryforwards. Interest and penalties related to uncertain tax positions are recognized as components of income tax expense. The net accruals and reversals of interest and penalties increased or decreased our income tax expense by an insignificant amount in each of fiscal 2021, fiscal 2020, and fiscal 2019. The balance of interest and penalties included in other long-term liabilities on our consolidated balance sheets at each of August 31, 2021 and 2020 was $0.2 million. During the next 12 months, we expect an immaterial change in unrecognized tax benefits.

We file United States federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The tax years that remain subject to examinations for our major tax jurisdictions are shown below.

2014-2021	Canada and Australia
2015-2021	Japan
2016-2021	Germany, Switzerland, and Austria
2016-2021	China
2017-2021	United Kingdom, Singapore
2017-2021	United States – state and local income tax
2018-2021	United States – federal income tax

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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