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Income Taxes
 12 Months Ended
Aug. 31, 2023
Income Taxes [Abstract]  
Income Taxes


‎

15. INCOME TAXES

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

YEAR ENDED

AUGUST 31,

2023

2022

2021

Current:

Federal

$

-

$

-

$

-

State

(791)

(1,221)

(286)

Foreign

(2,389)

(2,202)

(1,773)

(3,180)

(3,423)

(2,059)

Deferred:

Federal

1,545

(9,339)

2,869

State

225

(889)

13

Foreign

216

24 

24

Operating loss carryforward

(7,201)

7,150

(3,058)

Valuation allowance

372

2,845

10,546

Foreign tax credit carryforward

reduction

(65)

(2)

(787)

(4,908)

(211)

9,607

$

(8,088)

$

(3,634)

$

7,548

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

YEAR ENDED

AUGUST 31,

2023

2022

2021

Net income

$

(8,088)

$

(3,634)

$

7,548

Other comprehensive income

(80)

176

11

$

(8,168)

$

(3,458)

$

7,559

Income before income taxes was generated as follows (in thousands):

YEAR ENDED

AUGUST 31,

2023

2022

2021

United States

$

23,574

$

21,152

$

6,834

Foreign

2,295

912

(759)

$

25,869

$

22,064

$

6,075


‎

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

YEAR ENDED

AUGUST 31,

2023

2022

2021

Federal statutory income tax rate

(21.0)

%

(21.0)

%

(21.0)

%

State income taxes, net of federal effect

(4.7)

(3.9)

(1.6)

Valuation allowance

1.4 

12.9 

173.6 

Foreign tax credit carryforward

reduction

(0.3)

-

(13.0)

Executive stock options

-

-

7.7 

Foreign jurisdictions tax differential

(0.2)

(1.1)

(4.0)

Tax differential on income subject

to both U.S. and foreign taxes

(1.4)

(0.2)

(0.7)

Uncertain tax positions

(0.9)

(0.8)

(3.0)

Non-deductible executive compensation

(3.6)

(5.5)

(5.8)

Non-deductible meals and entertainment

(0.7)

(0.1)

(0.2)

Other stock-based compensation

(0.4)

2.5 

-

Other

0.5 

0.7 

(7.8)

(31.3)

%

(16.5)

%

124.2 

%

Our effective income tax expense rate for fiscal 2023 of 31.3 percent was higher than the statutory tax rate primarily due to tax expense of $0.9 million for non-deductible executive compensation and $0.4 million in tax differential on income subject to both U.S. and foreign taxes, which were partially offset by a $0.4 million decrease in the valuation allowance against our deferred income tax assets.

The effective income tax expense rate for fiscal 2022 of 16.5 percent was lower than the statutory tax rate primarily due to a $2.8 million decrease in the valuation allowance against our deferred income tax assets and a $0.6 million benefit for share-based compensation deductions in excess of the corresponding book expense. These tax benefits were partially offset by tax expense of $1.2 million for non-deductible executive compensation.

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.

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. In fiscal 2022, we reduced the valuation allowance against our deferred tax assets by $2.8 million, due primarily to foreign tax credits claimed on our fiscal 2021 U.S. federal income tax return which we

previously concluded would expire unused. In fiscal 2023, we reduced the valuation allowance against our deferred tax assets by $0.4 million, due primarily to reversals of certain foreign subsidiaries’ valuation allowances.

We are subject to the anti-deferral provisions on Global Intangible Low-Taxed Income (GILTI) under the Tax Cut and Jobs Act of 2017. 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). We recorded income tax expense of $0.2 million in fiscal 2023, an insignificant amount of income tax expense in fiscal 2022 and no income tax expense in fiscal 2021 under the GILTI provisions. During fiscal 2019, we recorded income tax expense of $0.3 million under GILTI. 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.

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

AUGUST 31,

2023

2022

Deferred income tax assets:

Net operating loss carryforward

$

6,505 

$

11,334 

Foreign income tax credit

carryforward

4,253 

4,096 

Stock-based compensation

4,222 

2,503 

Sale and financing of corporate

headquarters

1,899 

2,638 

Deferred revenue

1,677 

1,596 

Bonus and other accruals

1,517 

2,094 

Capitalized development costs

1,236 

-

Inventory and bad debt reserves

1,094 

1,533 

Other

458 

605 

Total deferred income tax assets

22,861 

26,399 

Less: valuation allowance

(1,313)

(1,685)

Net deferred income tax assets

21,548 

24,714 

Deferred income tax liabilities:

Intangibles step-ups – indefinite lived

(5,522)

(5,478)

Intangibles step-ups – finite lived

(2,541)

(3,186)

Self-constructed tangible assets

(5,476)

(3,811)

Intangible asset amortization

(4,189)

(3,851)

Deferred commissions

(3,598)

(3,187)

Unremitted earnings of foreign

subsidiaries

(521)

(388)

Property and equipment depreciation

(80)

(326)

Total deferred income tax liabilities

(21,927)

(20,227)

Net deferred income taxes

$

(379)

$

4,487 

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

AUGUST 31,

2023

2022

Long-term assets

$

1,661

$

4,686

Long-term liabilities

(2,040)

(199)

Net deferred income tax asset

$

(379)

$

4,487


‎

Our U.S. federal net operating loss carryforwards were comprised of the following at August 31, 2023 (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 

$

(1,428)

$

(63)

$

-

December 31, 2016

2035

3,052 

-

(908)

2,144

July 15, 2017

2036

1,117 

-

-

1,117 

5,660 

(1,428)

(971)

3,261

Acquired NOL - Strive

December 31, 2018

No Expiration

947 

(295)

(652)

-

December 31, 2019

No Expiration

869 

-

(869)

-

December 31, 2020

No Expiration

1,133 

-

(160)

973

April 25, 2021

No Expiration

553 

-

-

553 

3,502 

(295)

(1,681)

1,526

August 31, 2022

No Expiration

40,996

-

(27,790)

13,206

$

50,158

$

(1,723)

$

(30,442)

$

17,993

Certain operating loss carryforwards in the table above were obtained through the fiscal 2017 acquisition of Jhana Education (Jhana) and the fiscal 2021 acquisition of Strive (Note 3).

We have U.S. state net operating loss carryforwards generated in fiscal 2009 and before in various jurisdictions that expire primarily between September 1, 2023 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 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. The state net operating loss carryforwards generated in fiscal 2022 primarily expire on August 31, 2042.

Our U.S. foreign income tax credit carryforwards were comprised of the following at August 31, 2023 (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

2018

2028

$

1,727 

$

(965)

$

(21)

$

-

$

741 

2019

2029

1,578 

(234)

-

-

1,344 

2020

2030

1,010 

(147)

(18)

-

845 

2022

2032

1,216 

-

(25)

-

1,191 

2023

2033

1,061 

-

-

(929)

132 

$

6,592 

$

(1,346)

$

(64)

$

(929)

$

4,253 

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 fiscal 2020. The remaining valuation allowance at August 31, 2021 related primarily to the foreign tax credit carryforward from fiscal 2011, which we expected to expire in fiscal 2022, and losses of certain foreign subsidiaries. During fiscal 2022 we were able to utilize the foreign tax credit carryforward from 2011. The remaining valuation allowance at August 31, 2022 related primarily to the losses of certain foreign subsidiaries. During fiscal 2023 we reversed the valuation allowance for certain foreign subsidiaries and increased the valuation allowance for certain other foreign subsidiaries, resulting in a net decrease in our total valuation allowance. The remaining valuation allowance at August 31, 2023 relates primarily to the losses of certain foreign subsidiaries which we currently expect will expire unused.

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

YEAR ENDED

AUGUST 31,

2023

2022

2021

Beginning balance

$

1,685

$

4,530

$

15,076

Charged to costs and expenses

212

683

394

Deductions

(584)

(3,528)

(10,940)

Ending balance

$

1,313

$

1,685

$

4,530

Except for the deferred tax assets subject to valuation allowances, we have determined that projected future taxable income will be 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, 2023.

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

YEAR ENDED

AUGUST 31,

2023

2022

2021

Beginning balance

$

1,597

$

1,594

$

1,640

Additions based on tax positions

related to the current year

188

77

349

Additions for tax positions in

prior years

290

207

79

Reductions for tax positions of prior

years resulting from the lapse of

applicable statute of limitations

(186)

-

(188)

Other reductions for tax positions of

prior years

(271)

(281)

(286)

Ending balance

$

1,618

$

1,597

$

1,594

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $1.3 million at each of August 31, 2023 and 2022. Included in the ending balance of gross unrecognized tax benefits at August 31, 2023 is $1.2 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 our income tax expense by $0.1 million in each of fiscal 2023 and 2022 and had an insignificant effect on our income taxes in fiscal 2021. The balance of interest and penalties included in other long-term liabilities on our consolidated balance sheets was $0.4 million on August 31, 2023 and $0.3 million on August 31, 2022. During the next 12 months, we expect an immaterial change in our 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.

 

 

2016-2023

Australia, Canada, and Japan

2016-2023

China

2018-2023

Germany, Switzerland, and Austria

2019-2023

United Kingdom, Singapore

2019-2023

United States – state and local income tax

2020-2023

United States – federal income tax