Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Unless the context otherwise requires, the terms “Verint”, “we”, “us”, and “our” in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.
Verint helps brands provide Boundless Customer Engagement™. For more than two decades, the world’s most iconic brands – including more than 85 of the Fortune 100 companies – have trusted Verint to provide the technology and domain expertise they require to effectively build enduring customer relationships. Through the Verint Cloud Platform, we offer our customers and partners solutions that are based on artificial intelligence (“AI”) and analytics to automate workflows across enterprise silos to optimize workforce expense and drive an elevated consumer experience. These solutions are used by approximately 10,000 organizations in 175 countries across a diverse set of verticals, including financial services, healthcare, utilities, technology, and government. Our customers include large enterprises with thousands of employees, as well as small to medium sized business (“SMB”) organizations.
Verint is headquartered in Melville, New York, and has more than 40 offices worldwide. We have approximately 4,400 professionals around the globe exclusively focused on helping brands provide Boundless Customer Engagement.
Recent Developments
Spin-Off of Cognyte Software Ltd.
On February 1, 2021, we completed the previously announced spin-off (the “Spin-Off”) of Cognyte Software Ltd. (“Cognyte”), a company limited by shares incorporated under the laws of the State of Israel whose business and operations consist of our former Cyber Intelligence Solutions business (the “Cognyte Business”). The Spin-Off of Cognyte was completed by way of a pro rata distribution in which holders of Verint’s common stock, par value $0.001 per share, received one ordinary share of Cognyte, no par value, for every share of common stock of Verint held of record as of the close of business on January 25, 2021. After the distribution, we do not beneficially own any ordinary shares of Cognyte and no longer consolidate Cognyte into our financial results for periods ending after January 31, 2021. The Spin-Off was intended to be generally tax-free to our stockholders for U.S. federal income tax purposes.
The financial results of Cognyte for the three and nine months ended October 31, 2020 are presented as income from discontinued operations, net of taxes on the condensed consolidated statements of operations and its assets and liabilities as of January 31, 2021 are presented as assets and liabilities of discontinued operations on the condensed consolidated balance sheets. The historical condensed consolidated statement of cash flows has also been revised to reflect the effect of the Spin-Off. The historical statements of comprehensive income and the balances related to stockholders' equity have not been revised to reflect the effect of the Spin-Off. For further information on discontinued operations, see Note 2, “Discontinued Operations”. Unless noted otherwise, discussion in the notes to the condensed consolidated financial statements pertain to continuing operations.
Apax Convertible Preferred Stock Investment
On December 4, 2019, we announced that an affiliate (the “Apax Investor”) of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400.0 million. Under the terms of the Investment Agreement, dated as of December 4, 2019 (the “Investment Agreement”), the Apax Investor purchased $200.0 million of our Series A convertible preferred stock (“Series A Preferred Stock”) in an issuance that closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B convertible preferred stock (the “Series B Preferred Stock” and together with the Series A Preferred Stock, the “Preferred Stock”) in an issuance that closed on April 6, 2021. As of October 31, 2021, Apax’s ownership in us on an as-converted basis was approximately 12.8%. Please refer to Note 10, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
Impact of COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. This pandemic has caused significant economic disruption and uncertainty, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Our customers, partners, and vendors, have also implemented actions in response to the pandemic, including among others, office closings, site restrictions, and employee travel restrictions. In response to these challenges, we established remote working arrangements for our employees, limited non-essential business travel, and canceled or shifted our customer, employee, and industry events to a virtual-only format. As the pandemic has evolved, we have adapted our pandemic response on a localized basis based on the prevailing conditions in each country in which we and our customers, partners, or vendors operate.
Preparation of Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2021 filed with the U.S. Securities and Exchange Commission (“SEC”), except for the recently adopted accounting pronouncements described below. The condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the periods ended October 31, 2021 and 2020, and the condensed consolidated balance sheet as of October 31, 2021, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 2021 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2021. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 2021 filed with the SEC. The results for interim periods are not necessarily indicative of a full year’s results.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., and our wholly owned or otherwise controlled subsidiaries. Noncontrolling interests in less than wholly owned subsidiaries are reflected within stockholders’ equity on our condensed consolidated balance sheet, but separately from our stockholders’ equity. We hold an option to acquire the noncontrolling interests in two majority owned subsidiaries and we account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within accrued expenses and other current liabilities and do not recognize noncontrolling interests in these subsidiaries.
Equity investments in companies in which we have less than a 20% ownership interest and cannot exercise significant influence, and which do not have readily determinable fair values, are accounted for at cost, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, less any impairment.
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
In light of the currently unknown extent and duration of the COVID-19 pandemic, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply to certain of our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of October 31, 2021 and through the date of this report. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Reclassifications
Following the Spin-Off, we began to operate as a pure-play customer engagement company and determined that presenting our revenue and cost of revenue as recurring and nonrecurring would be a more meaningful representation of the nature of our offerings, provide greater transparency and clarity to users of the financial statements, and is more consistent with industry practice and internal reporting. Accordingly, prior period amounts have been reclassified to conform to the current period presentation in our condensed consolidated financial statements and the accompanying notes. For a description of the types of revenue included in each category, see Note 3, “Revenue Recognition”.
Business Segment Information
Prior to the Spin-Off, we had two reportable segments—Customer Engagement and Cyber Intelligence. Upon completion of the Spin-Off, we are a pure-play customer engagement company that operates as a single reporting segment as our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Significant Accounting Policies
There have been no material changes in our significant accounting policies during the nine months ended October 31, 2021, as compared to the significant accounting policies described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2021, other than the recently adopted accounting pronouncements described below.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which affects general principles within Topic 740, Income Taxes. The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the tax basis of goodwill after a business combination, and the recognition of deferred tax liabilities for outside basis differences. The new guidance also changes the calculation of the income tax impact of hybrid taxes and the methodology for calculating income taxes in an interim period. We adopted this standard as of February 1, 2021 on either a prospective basis, or through a modified retrospective approach, as required by the standard. There was no cumulative effect adjustment recorded to accumulated deficit as the amount was not material. The effects of this standard on our financial position, results of operations and cash flows were not material.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU No. 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. ASU No. 2020-06 also eliminates the treasury stock method to calculate diluted earnings per share and requires the if-converted method for convertible instruments. We early adopted ASU No. 2020-06 as of February 1, 2021 using the modified retrospective transition method. Prior period financial statements have not been restated upon adoption.
Upon adoption of ASU No. 2020-06, we no longer presented the conversion feature of our 2014 convertible senior notes, which matured on June 1, 2021, in equity. Instead, we combined the previously separated equity component with the liability component, which prior to maturity of the 2014 convertible senior notes, was classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense until the notes matured. Accordingly, we recorded a decrease to accumulated deficit of approximately $44.9 million, a decrease to additional paid-in capital of $43.4 million, a decrease to temporary equity of $4.8 million, an increase to current maturities of long-term debt of $4.4 million, a decrease to deferred tax liabilities of $0.9 million, and an increase in debt issuance costs of $0.1 million. There was no impact to earnings per share as a result of the adoption.
New Accounting Pronouncements Not Yet Effective
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which will require companies to apply the definition of a performance obligation under ASC Topic 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities relating to contracts with customers that are acquired in a business combination. Under current GAAP, an
acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
2. DISCONTINUED OPERATIONS
On February 1, 2021 (the “Spin-Off Date”), we completed the previously announced Spin-Off of Cognyte by way of a pro rata and generally tax-free distribution of all of the then-issued and outstanding ordinary shares of Cognyte to holders of record of our common stock as of the close of business on January 25, 2021.
To effect the Spin-Off and provide a framework for our relationship with Cognyte post Spin-Off we entered into several agreements with Cognyte, including the following:
•a Separation and Distribution Agreement;
•a Tax Matters Agreement;
•an Employee Matters Agreement;
•a Transition Services Agreement;
•an Intellectual Property Cross License Agreement; and
•a Trademark Cross License Agreement.
These agreements provide for the allocation of assets, employees, liabilities, and obligations (including property, employee benefits, litigation, and tax-related assets and liabilities) between us and Cognyte attributable to periods prior to, at and after the Spin-Off.
Under the Transition Services Agreement (“TSA”) with Cognyte, we and Cognyte will provide and/or make available various administrative services and assets to each other for a given period based on each individual service, with an option to extend certain services after the first year. In no case will services be provided for more than 24 months after the Spin-Off Date. In consideration for such services, we and Cognyte will each pay fees to the other for the services provided, and those fees will generally be in amounts intended to allow the party providing services to recover all of its direct and indirect costs incurred in providing those services, plus a standard markup, and subject to a mutually agreed-upon increase following an extension of the initial service term. The fees charged for the first year of services are fixed. Fees for services provided by third-party suppliers will be on a straight pass-through basis. During the three and nine months ended October 31, 2021, we invoiced Cognyte $1.5 million and $4.4 million, respectively, and Cognyte invoiced us $0.3 million and $0.8 million, respectively, for transition services provided under the TSA.
Under the Tax Matters Agreement with Cognyte, we and Cognyte each agreed to share the obligation to pay any taxes as shown on tax returns filed by Cognyte (or any member of its group), on one hand, and us (or any member of our group), on the other hand, such that we will be primarily responsible for any taxes related to, or arising in connection with our business and Cognyte will be responsible for any taxes related to, or arising in connection with, the Cognyte Business, regardless of which party prepares and files any such tax return and whether such taxes arise prior to or after the Spin-Off. We and Cognyte also agreed to share responsibility for preparing relevant tax returns, which responsibility will depend on the type of a tax return and the period for which such tax return is being filed. We and Cognyte agreed to indemnify each other under the Tax Matters Agreement for certain actions or inactions.
The Spin-Off met the criteria for classification as “discontinued operations” in accordance with the accounting guidance upon completion of the separation, and as such, the results of our former Cognyte Business have been classified as discontinued operations in our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of cash flows for all periods presented. As of October 31, 2021, there were no assets or liabilities from discontinued operations associated with Cognyte. There was no revenue earned or costs and expenses incurred by discontinued operations during the three and nine months ended October 31, 2021.
The following table summarizes the major classes of line items included within discontinued operations in our condensed consolidated statements of operations for the three and nine months ended October 31, 2020:
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|
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|
|
|
|
|
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|
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|
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|
|
(in thousands)
|
|
Three Months Ended
October 31, 2020
|
|
Nine Months Ended
October 31, 2020
|
Revenue
|
|
$
|
112,979
|
|
|
$
|
319,438
|
|
Cost of revenue
|
|
29,331
|
|
|
91,952
|
|
Operating expenses
|
|
65,964
|
|
|
180,843
|
|
Other income, net
|
|
3,317
|
|
|
4,399
|
|
Income from discontinued operations before benefit from income taxes
|
|
21,001
|
|
|
51,042
|
|
Provision for income taxes
|
|
7,073
|
|
|
6,714
|
|
Net income from discontinued operations
|
|
13,928
|
|
|
44,328
|
|
Net income from discontinued operations attributable to noncontrolling interests
|
|
1,343
|
|
|
4,908
|
|
Net income from discontinued operations attributable to Verint Systems Inc. common shares
|
|
$
|
12,585
|
|
|
$
|
39,420
|
|
The following table summarizes the assets and liabilities that were transferred to Cognyte on February 1, 2021 and presented as discontinued operations in our condensed consolidated balance sheet as of January 31, 2021:
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|
|
|
|
|
|
|
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(in thousands)
|
|
January 31, 2021
|
Assets
|
|
|
Current Assets:
|
|
|
Cash and cash equivalents
|
|
$
|
78,570
|
|
Restricted cash and cash equivalents, and restricted bank time deposits
|
|
27,042
|
|
Short-term investments
|
|
4,713
|
|
Accounts receivable, net
|
|
175,001
|
|
Contract assets, net
|
|
20,317
|
|
Inventories
|
|
14,542
|
|
Prepaid expenses and other current assets
|
|
34,741
|
|
Total current assets of discontinued operations
|
|
354,926
|
|
Property and equipment, net
|
|
37,152
|
|
Operating lease right-of-use assets
|
|
31,040
|
|
Goodwill
|
|
158,183
|
|
Intangible assets, net
|
|
5,299
|
|
Other assets
|
|
49,278
|
|
Total long-term assets of discontinued operations
|
|
280,952
|
|
Total assets of discontinued operations
|
|
$
|
635,878
|
|
|
|
|
Liabilities
|
|
|
Current Liabilities:
|
|
|
Accounts payable
|
|
$
|
41,512
|
|
Accrued expenses and other current liabilities
|
|
100,189
|
|
Contract liabilities
|
|
127,012
|
|
Total current liabilities of discontinued operations
|
|
268,713
|
|
Long-term contract liabilities
|
|
22,037
|
|
Operating lease liabilities
|
|
23,174
|
|
Other liabilities
|
|
12,907
|
|
Total long-term liabilities of discontinued operations
|
|
58,118
|
|
Total liabilities of discontinued operations
|
|
$
|
326,831
|
|
In connection with the Spin-Off, $17.1 million of accumulated other comprehensive income, net of income taxes, related to foreign currency translation adjustments and foreign exchange contracts designated as cash flow hedges were transferred to Cognyte on the Spin-Off Date. Additionally, Verint transferred its interests in Cognyte Technologies Israel Ltd. (formerly Verint Systems Limited) (“CTIL”) on the Spin-Off Date. Prior to the transfer, CTIL was a wholly owned subsidiary of Verint and the CTIL board of directors declared a cash dividend in the aggregate amount of $35.0 million payable to Verint, as its sole
holder of record of ordinary shares, on January 29, 2021. In April 2021, we received the dividend from Cognyte less applicable withholding taxes. The $78.6 million of cash and cash equivalents shown in the table above does not reflect the payment of the dividend, which occurred after the completion of the Spin-Off.
3. REVENUE RECOGNITION
We derive our revenue primarily from providing customers the right to access our cloud-based solutions, the right to use our software for an indefinite or specified period of time, and related services and support based on when access or control of the software passes to our customers or the services are provided, in an amount that reflects the consideration we expect to be entitled to in exchange for such goods or services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transactions, including mandatory government charges that are passed through to our customers.
We determine revenue recognition through the following five steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, performance obligations are satisfied.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Disaggregation of Revenue
The following table provides a disaggregation of our recurring and nonrecurring revenue. Recurring revenue is the portion of our revenue that we believe is likely to be renewed in the future. The recurrence of these revenue streams in future periods depends on a number of factors including contractual periods and customers' renewal decisions.
•Recurring revenue primarily consists of cloud revenue and initial and renewal support revenue.
◦Cloud revenue primarily consists of software as a service (“SaaS”) revenue and some optional managed services revenue.
◦SaaS revenue primarily consists of bundled SaaS (software with standard managed services) and unbundled SaaS (software licensing rights accounted for as term-based licenses whereby customers use our software with related support for a specified period of time). Unbundled SaaS can be deployed in the cloud either by us or a cloud partner.
◦Bundled SaaS revenue is recognized over time and unbundled SaaS revenue is recognized at a point in time, except for the related support which is recognized over time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a one- and three-year time frame.
•Nonrecurring revenue primarily consists of our perpetual licenses, hardware, installation services, and business advisory consulting and training services.
In order to conform with the presentation described above, unbundled SaaS revenue for the three and nine months ended October 31, 2020 has been revised to reflect $2.9 million and $7.2 million, respectively, of unbundled SaaS support revenue which had previously been presented within support revenue.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Recurring revenue:
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|
|
|
|
|
|
|
|
Bundled SaaS revenue
|
|
$
|
48,390
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|
|
$
|
37,406
|
|
|
$
|
130,639
|
|
|
$
|
106,617
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|
Unbundled SaaS revenue
|
|
33,713
|
|
|
21,577
|
|
|
91,440
|
|
|
41,483
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|
Optional managed services revenue
|
|
16,358
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|
|
14,884
|
|
|
49,688
|
|
|
43,344
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|
Total cloud revenue
|
|
98,461
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|
|
73,867
|
|
|
271,767
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|
|
191,444
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Support revenue
|
|
60,350
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|
|
76,366
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|
|
187,675
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|
|
227,126
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|
Total recurring revenue
|
|
158,811
|
|
|
150,233
|
|
|
459,442
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|
|
418,570
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Nonrecurring revenue:
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|
|
|
|
|
|
|
|
Perpetual revenue
|
|
40,436
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|
|
35,461
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|
|
102,108
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|
|
99,815
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Professional services revenue
|
|
25,573
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|
|
29,528
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|
|
78,791
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|
|
86,782
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|
Total nonrecurring revenue
|
|
66,009
|
|
|
64,989
|
|
|
180,899
|
|
|
186,597
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|
Total revenue
|
|
$
|
224,820
|
|
|
$
|
215,222
|
|
|
$
|
640,341
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|
|
$
|
605,167
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|
Contract Balances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
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(in thousands)
|
|
October 31, 2021
|
|
January 31, 2021
|
Accounts receivable, net
|
|
$
|
161,020
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|
|
$
|
206,157
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|
Contract assets, net
|
|
$
|
35,276
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|
|
$
|
36,716
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|
Long-term contract assets, net (included in other assets)
|
|
$
|
26,914
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|
|
$
|
17,210
|
|
Contract liabilities
|
|
$
|
221,073
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|
|
$
|
261,033
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|
Long-term contract liabilities
|
|
$
|
17,162
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|
|
$
|
16,502
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|
We receive payments from customers based upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of our contract assets represent unbilled amounts related to multi-year unbundled SaaS contracts and arrangements where our right to consideration is subject to the contractually agreed upon billing schedule. We expect billing and collection of a majority of our contract assets to occur within the next twelve months and asset impairment charges related to contract assets were immaterial in the three and nine months ended October 31, 2021 and 2020. There was one customer, an authorized global reseller of our solutions, that accounted for approximately 19% and 14% of our aggregated accounts receivable and contract assets at October 31, 2021 and January 31, 2021, respectively. Credit losses relating to this reseller have historically been immaterial.
Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract. Revenue recognized during the nine months ended October 31, 2021 and 2020 from amounts included in contract liabilities at the beginning of each period was $223.4 million and $213.8 million, respectively.
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes contract liabilities and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The majority of our arrangements are for periods of up to three years, with a significant portion being one year or less.
We elected to exclude amounts of variable consideration attributable to sales- or usage-based royalties in exchange for a license of our IP from the remaining performance obligations. The timing and amount of revenue recognition for our remaining performance obligations is influenced by several factors, including seasonality, the timing of support renewals, the timing of delivery of software licenses, the average length of the contract terms, and foreign currency exchange rates.
The following table provides information about when we expect to recognize our remaining performance obligations:
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|
|
|
|
|
|
|
|
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(in thousands)
|
|
October 31, 2021
|
|
January 31, 2021
|
RPO:
|
|
|
|
|
Expected to be recognized within 1 year
|
|
$
|
396,121
|
|
|
$
|
405,714
|
|
Expected to be recognized in more than 1 year
|
|
249,302
|
|
|
229,951
|
|
Total RPO
|
|
$
|
645,423
|
|
|
$
|
635,665
|
|
4. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net income per common share attributable to Verint Systems Inc. for the three and nine months ended October 31, 2021 and 2020:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands, except per share amounts)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income (loss) from continuing operations
|
|
$
|
13,501
|
|
|
$
|
(2,101)
|
|
|
$
|
19,911
|
|
|
$
|
(25,889)
|
|
Net income from discontinued operations, net of tax
|
|
—
|
|
|
13,928
|
|
|
—
|
|
|
44,328
|
|
Net income
|
|
13,501
|
|
|
11,827
|
|
|
19,911
|
|
|
18,439
|
|
Net income attributable to noncontrolling interests from continuing operations
|
|
264
|
|
|
309
|
|
|
875
|
|
|
876
|
|
Net income attributable to noncontrolling interests from discontinued operations
|
|
—
|
|
|
1,343
|
|
|
—
|
|
|
4,908
|
|
Net income attributable to Verint Systems Inc.
|
|
13,237
|
|
|
10,175
|
|
|
19,036
|
|
|
12,655
|
|
Dividends on preferred stock
|
|
(5,200)
|
|
|
(2,658)
|
|
|
(13,722)
|
|
|
(5,142)
|
|
Net income attributable to Verint Systems Inc. for basic net income per common share
|
|
8,037
|
|
|
7,517
|
|
|
5,314
|
|
|
7,513
|
|
Dilutive effect of dividends on preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income attributable to Verint Systems Inc. for diluted net income per common share
|
|
$
|
8,037
|
|
|
$
|
7,517
|
|
|
$
|
5,314
|
|
|
$
|
7,513
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Verint Systems Inc. common shares
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to Verint Systems Inc. common shares
|
|
8,037
|
|
|
(5,068)
|
|
|
5,314
|
|
|
(31,907)
|
|
Net income from discontinued operations attributable to Verint Systems Inc. common shares
|
|
—
|
|
|
12,585
|
|
|
—
|
|
|
39,420
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
65,570
|
|
|
65,571
|
|
|
65,474
|
|
|
64,973
|
|
Dilutive effect of employee equity award plans
|
|
758
|
|
|
663
|
|
|
1,043
|
|
|
1,027
|
|
Dilutive effect of 2021 Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive effect of 2014 Notes
|
|
—
|
|
|
—
|
|
|
641
|
|
|
—
|
|
Dilutive effect of warrants
|
|
—
|
|
|
—
|
|
|
110
|
|
|
—
|
|
Dilutive effect of assumed conversion of preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted
|
|
66,328
|
|
|
66,234
|
|
|
67,268
|
|
|
66,000
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share attributable to Verint Systems Inc.:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.12
|
|
|
$
|
(0.08)
|
|
|
$
|
0.08
|
|
|
$
|
(0.49)
|
|
Discontinued operations
|
|
—
|
|
|
0.19
|
|
|
—
|
|
|
0.61
|
|
Total basic net income per common share attributable to Verint Systems Inc.
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share attributable to Verint Systems Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands, except per share amounts)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Continuing operations
|
|
$
|
0.12
|
|
|
$
|
(0.08)
|
|
|
$
|
0.08
|
|
|
$
|
(0.48)
|
|
Discontinued operations
|
|
—
|
|
|
0.19
|
|
|
—
|
|
|
0.59
|
|
Total diluted net income per common share attributable to Verint Systems Inc.
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
We excluded the following weighted-average potential common shares from our diluted per share calculations during the applicable periods because their inclusion would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Common shares excluded from calculation:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock-based awards
|
|
292
|
|
|
867
|
|
|
663
|
|
|
240
|
|
2014 Notes
|
|
—
|
|
|
6,002
|
|
|
—
|
|
|
6,114
|
|
Warrants
|
|
8,333
|
|
|
6,205
|
|
|
—
|
|
|
6,205
|
|
Series A Preferred Stock
|
|
5,497
|
|
|
3,738
|
|
|
5,497
|
|
|
2,411
|
|
Series B Preferred Stock
|
|
3,980
|
|
|
—
|
|
|
3,047
|
|
|
—
|
|
Upon our adoption of ASU No. 2020-06 on February 1, 2021, use of the if-converted method is required for calculating any potential dilutive effect of convertible instruments. For the three months ended October 31, 2021, the average price of our common stock did not exceed the $62.08 per share conversion price of our 2021 Notes (as defined in Note 8, “Long-Term Debt”), and other requirements for the 2021 Notes to be convertible were not met. The 2021 Notes will have a dilutive impact on net income per common share at any time when the average market price of our common stock for a quarterly reporting period exceeds the conversion price.
The Capped Calls (as defined in Note 8, “Long-Term Debt”) do not impact our diluted earnings per common share calculations as their effect would be anti-dilutive. The Capped Calls are intended generally to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the $62.08 conversion price, with such reduction and/or offset subject to a cap of $100.00.
There is no impact on our calculation of the dilutive effect of our 2014 Notes (as defined in Note 8, “Long-Term Debt”) upon adoption of ASU No. 2020-06 as we were obligated to settle the principal amount of our 2014 Notes in cash and settled the conversion spread with shares of our common stock in connection with the maturity of the 2014 Notes. Following the completion of the Spin-Off on February 1, 2021, the strike prices of the conversion features of our 2014 Notes and Warrants (as defined in Note 8, “Long-Term Debt”) were reduced to $40.55 per share and $47.18 per share, respectively, which increased the equivalent number of underlying common shares to 9,541,000 and 9,865,000, respectively.
Our Note Hedges (as defined in Note 8, “Long-Term Debt”) did not impact our diluted earnings per common share calculations because their effect would be anti-dilutive. However, in connection with the maturity of the 2014 Notes, the common shares delivered to us under the Note Hedges neutralized the dilutive effect of the common shares that we issued under the 2014 Notes to settle the conversion premium. As a result, the settlement of the outstanding 2014 Notes did not increase our outstanding common stock.
Our Warrants (as defined in Note 8, “Long-Term Debt”) would have a dilutive impact on net income per common share to the extent that we report net income for the applicable period and the average market value of our common stock exceeds the strike price of the Warrants. The Warrants began to expire incrementally on August 30, 2021 and will continue to expire incrementally on a series of expiration dates through January 21, 2022. We expect that at each expiration date the Warrants will be exercised if the market price per share of our common stock exceeds the strike price of the Warrants, and we will be obligated to issue shares of our common stock having a value equal to such excess. As of October 31, 2021, up to 5,525,000 common shares could be issued upon exercise of the Warrants.
Further details regarding the 2021 Notes, Capped Calls, 2014 Notes, Note Hedges, and the Warrants appear in Note 8, “Long-Term Debt”.
On December 4, 2019, we announced that the Apax Investor would invest up to $400.0 million in us, in the form of convertible preferred stock. On May 7, 2020, the purchase of $200.0 million of our Series A Preferred Stock closed. On April 6, 2021, in connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock. The weighted-average common shares underlying the assumed conversion of the Preferred Stock, on an as-converted basis, were excluded from the calculation of diluted net income per common share for the three and nine months ended October 31, 2021 and 2020, as their effect would have been anti-dilutive. Further details regarding the Preferred Stock investment appear in Note 10, “Convertible Preferred Stock”.
5. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of October 31, 2021 and January 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
(in thousands)
|
|
Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and bank time deposits
|
|
$
|
160,818
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
160,818
|
|
Money market funds
|
|
147,029
|
|
|
—
|
|
|
—
|
|
|
147,029
|
|
Total cash and cash equivalents
|
|
$
|
307,847
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
307,847
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Bank time deposits
|
|
$
|
661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
661
|
|
Total short-term investments
|
|
$
|
661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
(in thousands)
|
|
Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and bank time deposits
|
|
$
|
243,183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
243,183
|
|
Money market funds
|
|
342,090
|
|
|
—
|
|
|
—
|
|
|
342,090
|
|
Total cash and cash equivalents
|
|
$
|
585,273
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
585,273
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Bank time deposits
|
|
$
|
46,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,300
|
|
Total short-term investments
|
|
$
|
46,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,300
|
|
Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.
During the nine months ended October 31, 2021 and 2020, proceeds from maturities and sales of short-term investments were $45.6 million and $18.8 million, respectively.
6. BUSINESS COMBINATIONS
Nine Months Ended October 31, 2021
Conversocial Limited
On August 23, 2021, we completed the acquisition of all of the outstanding shares of Conversocial Limited (together with its subsidiaries, “Conversocial”), a leading messaging platform that enables brands to deliver superior customer experiences. Conversocial has offices in London, United Kingdom and New York, New York.
The purchase price consisted of (i) $53.4 million of cash paid at closing, funded from cash on hand, partially offset by $3.2 million of Conversocial’s cash received in the acquisition, resulting in net cash consideration at closing of $50.2 million; and (ii) $0.2 million of other purchase price adjustments. The purchase price for Conversocial was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts the expected future cash flows to present value using estimates and assumptions determined by management.
Among the factors contributing to the recognition of goodwill as a component of the Conversocial purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. The acquisition resulted in the recognition of $31.8 million of goodwill, of which $0.5 million is deductible for income tax purposes and $31.3 million is not deductible.
In connection with the purchase price allocation for Conversocial, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculated fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $3.4 million of current and long-term contract liabilities, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not been received, we recorded a $1.2 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $0.7 million of which is included within prepaid expenses and other current assets and $0.5 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.
Transaction and related costs directly related to the acquisition of Conversocial, consisting primarily of professional fees and integration expenses, were $1.3 million and $2.4 million for the three and nine months ended October 31, 2021, respectively, and were expensed as incurred and are included in selling, general and administrative expenses.
Revenue and net income (loss) attributable to Conversocial included in our consolidated statement of operations for the three months ended October 31, 2021 was not material.
The purchase price allocation for Conversocial has been prepared on a preliminary basis and changes to the allocation may occur as additional information becomes available during the measurement period (up to one year from the acquisition date). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes, and reserves for uncertain income tax positions.
The following table sets forth the components and the allocation of the purchase price for our acquisition of Conversocial:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Components of Purchase Price:
|
|
|
Cash
|
|
$
|
53,409
|
|
Other purchase price adjustments
|
|
(190)
|
|
Total purchase price
|
|
$
|
53,219
|
|
|
|
|
Allocation of Purchase Price:
|
|
|
Net tangible assets (liabilities):
|
|
|
Accounts receivable
|
|
$
|
1,694
|
|
Other current assets, including cash acquired
|
|
5,302
|
|
Other assets
|
|
511
|
|
Current and other liabilities
|
|
(1,945)
|
|
Contract liabilities - current and long-term
|
|
(3,410)
|
|
Deferred income taxes
|
|
(615)
|
|
Net tangible assets
|
|
1,537
|
|
Identifiable intangible assets:
|
|
|
Customer relationships
|
|
9,800
|
|
Developed technology
|
|
9,900
|
|
Trademarks and trade names
|
|
200
|
|
Total identifiable intangible assets
|
|
19,900
|
|
Goodwill
|
|
31,782
|
|
Total purchase price allocation
|
|
$
|
53,219
|
|
The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of seven years, five years, and one year, respectively, the weighted average of which is approximately 5.9 years. The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
Other Business Combinations
During the three months ended July 31, 2021, we completed the acquisition of certain assets from a leader in contact center hiring automation that qualified as a business combination. This transaction resulted in increases to goodwill, customer relationships, and acquired technology intangible assets, but was not material to our condensed consolidated financial statements, and as a result, additional business combination disclosures for this acquisition have been omitted. There were no other business combinations during the nine months ended October 31, 2021.
Year Ended January 31, 2021
We did not complete any business combinations during the year ended January 31, 2021.
Other Business Combination Information
The pro forma impact of the business combinations completed during the nine months ended October 31, 2021 was not material
to our historical consolidated operating results and is therefore not presented.
The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general, and administrative expenses in our condensed consolidated statements of operations. Changes in the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
For the three months ended October 31, 2021, changes in the fair values of contingent consideration obligations associated with business combinations were immaterial, and for the three months ended October 31, 2020, we recorded a benefit of $0.4 million. For the nine months ended October 31, 2021 and 2020, we recorded a charge of $0.7 million and a benefit of $2.8
million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair values of the remaining contingent consideration obligations associated with business combinations was $7.6 million at October 31, 2021, which was recorded within accrued expenses and other current liabilities.
Payments of contingent consideration earned under these agreements were $9.6 million and $14.0 million for the nine months ended October 31, 2021 and 2020, respectively. There were no payments of contingent consideration earned under these agreements during the three months ended October 31, 2021 and 2020.
7. INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets consisted of the following as of October 31, 2021 and January 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
(in thousands)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
475,038
|
|
|
$
|
(376,118)
|
|
|
$
|
98,920
|
|
Acquired technology
|
|
231,088
|
|
|
(200,965)
|
|
|
30,123
|
|
Trade names
|
|
5,686
|
|
|
(4,201)
|
|
|
1,485
|
|
Distribution network
|
|
2,440
|
|
|
(2,440)
|
|
|
—
|
|
Total intangible assets
|
|
$
|
714,252
|
|
|
$
|
(583,724)
|
|
|
$
|
130,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
(in thousands)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
464,586
|
|
|
$
|
(356,064)
|
|
|
$
|
108,522
|
|
Acquired technology
|
|
222,040
|
|
|
(189,687)
|
|
|
32,353
|
|
Trade names
|
|
9,424
|
|
|
(6,555)
|
|
|
2,869
|
|
Distribution network
|
|
2,440
|
|
|
(2,440)
|
|
|
—
|
|
Total intangible assets
|
|
$
|
698,490
|
|
|
$
|
(554,746)
|
|
|
$
|
143,744
|
|
We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic to assess whether a triggering event had occurred that would result in a potential impairment of our indefinite-lived intangible assets. Based on this assessment, we concluded that a triggering event has not occurred which would require further impairment testing to be performed.
Total amortization expense recorded for acquisition-related intangible assets was $12.0 million and $11.9 million for the three months ended October 31, 2021 and 2020, respectively, and $35.5 million and $35.9 million for the nine months ended October 31, 2021 and 2020, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Years Ending January 31,
|
|
Amount
|
2022 (remainder of year)
|
|
$
|
11,333
|
|
2023
|
|
40,805
|
|
2024
|
|
31,617
|
|
2025
|
|
15,090
|
|
2026
|
|
13,774
|
|
2027 and thereafter
|
|
17,909
|
|
Total
|
|
$
|
130,528
|
|
During the three and nine months ended October 31, 2021, we recorded $0.4 million of impairments for certain acquired trade names, which is included within selling, general and administrative expenses. Impairments of acquired intangible assets were insignificant during the three and nine months ended October 31, 2020.
Goodwill activity for the nine months ended October 31, 2021 was as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
Nine Months Ended October 31, 2021:
|
|
|
Goodwill, gross, at January 31, 2021
|
|
$
|
1,383,450
|
|
Accumulated impairment losses through January 31, 2021
|
|
(56,043)
|
|
Goodwill, net, at January 31, 2021
|
|
1,327,407
|
|
Business combinations
|
|
36,214
|
|
Foreign currency translation and other
|
|
(2,201)
|
|
Goodwill, net, at October 31, 2021
|
|
$
|
1,361,420
|
|
|
|
|
Balance at October 31, 2021
|
|
|
Goodwill, gross, at October 31, 2021
|
|
$
|
1,417,463
|
|
Accumulated impairment losses through October 31, 2021
|
|
(56,043)
|
|
Goodwill, net, at October 31, 2021
|
|
$
|
1,361,420
|
|
We evaluated whether there has been a change in circumstances as of October 31, 2021 and as of the date of this filing in response to the economic impacts seen globally from COVID-19. The valuation methodology to determine the fair value of our reporting unit is sensitive to management's forecasts of future revenue, profitability and market conditions. At this time, the impact of COVID-19 on our forecasts is uncertain and increases the subjectivity that is involved in evaluating goodwill for potential impairment. Our reporting unit fair value may decline as a result of delayed or reduced demand for our products and services, driving lower revenue and operating income across our business. However, given the significant difference between the reporting unit fair value and its carrying value in the most recent quantitative analyses completed as of November 1, 2020, as well as expected long-term recovery, management does not believe that these events were severe enough to result in an impairment trigger. We will perform our annual goodwill impairment analysis as of November 1, 2021 during the three months ending January 31, 2022.
8. LONG-TERM DEBT
The following table summarizes our long-term debt at October 31, 2021 and January 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
January 31,
|
(in thousands)
|
|
2021
|
|
2021
|
2021 Notes
|
|
$
|
315,000
|
|
|
$
|
—
|
|
2014 Notes
|
|
—
|
|
|
386,887
|
|
2017 Term Loan
|
|
100,000
|
|
|
410,125
|
|
Less: unamortized debt discounts and issuance costs
|
|
(8,589)
|
|
|
(7,518)
|
|
Total debt
|
|
406,411
|
|
|
789,494
|
|
Less: current maturities
|
|
—
|
|
|
386,713
|
|
Long-term debt
|
|
$
|
406,411
|
|
|
$
|
402,781
|
|
2021 Notes
On April 9, 2021, we issued $315.0 million in aggregate principal amount of 0.25% convertible senior notes due April 15, 2026 (the “2021 Notes”), unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25% per annum.
We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding
indebtedness under our 2017 Credit Agreement described below, to terminate an interest rate swap agreement, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.
The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. As of October 31, 2021, the 2021 Notes were not convertible.
We incurred approximately $8.9 million of issuance costs in connection with the 2021 Notes, which have been deferred and are presented as a reduction of long-term debt, and which are being amortized as interest expense over the term of the 2021 Notes. Including the impact of the deferred debt issuance costs, the effective interest rate on the 2021 Notes was approximately 0.83% at October 31, 2021.
Based on the closing market price of our common stock on October 31, 2021, the if-converted value of the 2021 Notes was less than their aggregate principal amount.
2014 Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes, with a maturity date of June 1, 2021 (the “2014 Notes”). Net proceeds from the 2014 Notes after underwriting discounts were $391.9 million. The 2014 Notes were unsecured and paid interest in cash semiannually in arrears at a rate of 1.50% per annum.
Effective December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the June 1, 2021 maturity date, holders could have surrendered their 2014 Notes for conversion regardless of whether any of the other specified conditions for conversion had been satisfied. On February 26, 2021, we deposited approximately $390.0 million of cash, representing the full principal amount of the 2014 Notes then outstanding as well as the final interest payment on the 2014 Notes due at maturity, into an escrow account to cash collateralize the 2014 Notes.
In connection with the maturity of the 2014 Notes on June 1, 2021, we paid an aggregate of $389.8 million in cash for the settlement of the 2014 Notes, which included $386.9 million in satisfaction of the outstanding principal of the 2014 Notes and $2.9 million related to the final interest payment on the 2014 Notes. We funded the repayment of the outstanding principal amount of the 2014 Notes and accrued interest thereon using the cash we had placed in escrow. Additionally, the 2014 Notes had an incremental conversion value of $57.7 million, as the market value per share of our common stock, as measured under the terms of the 2014 Notes, was greater than the conversion price of the 2014 Notes. We issued approximately 1,250,000 shares of common stock to the holders of the 2014 Notes as payment of the conversion premium, which we issued from treasury stock.
As of January 31, 2021, the 2014 Notes had a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of approximately $64.46 per share of common stock and would have resulted in the issuance of approximately 6,002,000 shares if all of the 2014 Notes had been converted. As a result of the Spin-Off, the conversion rate was adjusted to 24.6622 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of $40.55 per share of common stock and would have resulted in the issuance of approximately 9,541,000 shares if all of the 2014 Notes had been converted prior to maturity.
At issuance, in accordance with then-applicable accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the 2014 Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the 2014 Notes to be $319.9 million and $80.1 million, respectively, at the issuance date, assuming a 5.00% non-convertible borrowing rate. The equity component was recorded as an increase to additional paid-in capital. Through January 31, 2021, the excess of the principal amount of the debt component over its carrying amount (the “debt discount”) was being amortized as interest expense over the term of the 2014 Notes using the effective interest method. The equity component was not remeasured as long as it continued to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the 2014 Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component of the 2014
Notes were presented as a reduction of long-term debt and were amortized as interest expense over the term of the 2014 Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.
During the three months ended July 31, 2020, we repurchased $13.1 million principal amount of the 2014 Notes (the “Repurchased 2014 Notes”) in open market transactions for an aggregate of $13.0 million in cash, resulting in a debt extinguishment loss of $0.1 million, and a $0.2 million charge to additional paid-in-capital.
At January 31, 2021, because the 2014 notes were convertible, $4.8 million of the 2014 Notes’ equity component was classified as temporary equity on our consolidated balance sheet, representing the difference between the principal amount and the net carrying amount of the 2014 Notes that could be requested for conversion.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU No. 2020-06 eliminates the liability and equity separation model for convertible instruments with a cash conversion feature, such as the 2014 Notes.
As permitted, on February 1, 2021, we early adopted ASU No. 2020-06, which otherwise would have been effective for us on February 1, 2022. As a result, effective February 1, 2021, we no longer presented separate liability and equity components for the 2014 Notes on our condensed consolidated balance sheet. We implemented the provisions of ASU No. 2020-06 using the modified retrospective approach, such that comparative information has not been restated and continues to be reported under accounting standards in effect for those periods.
The adoption of ASU No. 2020-06 resulted in the $78.0 million carrying value of the 2014 Notes’ equity component at January 31, 2021, which included applicable issuance costs and the portion classified within temporary equity, being reclassified and combined with the liability component of the 2014 Notes. This resulted in a $43.4 million decrease to additional paid-in capital, a $4.8 million decrease to temporary equity, a $4.4 million increase to current maturities of long-term debt, a $0.9 million decrease to deferred tax liabilities, a $0.1 million increase in unamortized debt issuance costs (a component of long-term debt), and a $44.9 million decrease to our accumulated deficit.
As the 2014 Notes were due June 1, 2021, they are classified within current maturities of long-term debt on our condensed consolidated balance sheets as of January 31, 2021.
Capped Calls, Note Hedges and Warrants
Capped Calls
In connection with the issuance of the 2021 Notes, on April 6, 2021 and April 8, 2021, we entered into capped call transactions (the “Capped Calls”) with certain counterparties. The Capped Calls are generally intended to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the conversion price, with such reduction and/or offset subject to a cap.
The Capped Calls exercise price is equal to the $62.08 initial conversion price of each of the 2021 Notes, and the cap price is $100.00, each subject to certain adjustments under the terms of the Capped Calls. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of October 31, 2021, no Capped Calls have been exercised.
Pursuant to their terms, the Capped Calls qualify for classification within stockholders’ equity, and their fair value is not remeasured and adjusted as long as they continue to qualify for stockholders’ equity classification. We paid approximately $41.1 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.
Note Hedges and Warrants
Concurrently with the issuance of the 2014 Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants served to increase the effective initial conversion price for the 2014 Notes to $75.00 per share. Subsequent to the Spin-Off, as a result of conversion rate adjustments, the Note Hedges and the Warrants served to increase the effective conversion price for the 2014 Notes to $47.18 per share. The Note Hedges were, and Warrants are, each separate instruments from the 2014 Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we had the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equaled the initial conversion price of the 2014 Notes. As a result of the Spin-Off, on February 1, 2021, the call options on our stock were adjusted to allow us to purchase up to 9,865,000 shares of our common stock at a price of $40.55, which was equal to the adjusted conversion price of the 2014 Notes. We were permitted to settle the Note Hedges in cash, shares of our common stock, or a combination thereof, at our option, and the Note Hedges were intended to reduce our exposure to potential dilution upon conversion of the 2014 Notes. We paid $60.8 million for the Note Hedges, which was recorded as a charge to additional paid-in capital. Our exercise rights under the Note Hedges were automatically triggered upon conversion of any 2014 Notes and the Note Hedges otherwise terminated upon maturity of the 2014 Notes on June 1, 2021. In connection with the maturity of the 2014 Notes on June 1, 2021, we received approximately 1,250,000 shares of our common stock from the counterparties under the Note Hedges, which offset the dilution resulting from the stock settlement of the conversion premium on the 2014 Notes as the market value per share of our common stock, as measured under the terms of the Note Hedges, was greater than the strike price of the Note Hedges.
The Repurchased 2014 Notes acquired during the three months ended July 31, 2020 as described above did not change the number of common shares subject to the Note Hedges as the counterparties agreed that the options under the Note Hedges remained outstanding notwithstanding such repurchase. Upon maturity of the 2014 Notes, we received approximately 42,000 shares of our common stock from the counterparties to the Note Hedges as reimbursement for the in-the-money portion of the Repurchased 2014 Notes.
Warrants
We sold the Warrants to several counterparties. The Warrants initially provided the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. As a result of the Spin-Off, the terms of the Warrants were adjusted to provide the counterparties rights to acquire from us up to approximately 9,865,000 shares of our common stock at a price of $47.18 per share. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. The Warrants began to expire incrementally on August 30, 2021 and will continue to expire incrementally on a series of expiration dates through January 21, 2022. We expect that at each expiration date the Warrants will be exercised if the market price per share of our common stock exceeds the strike price of the Warrants, and we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants have a dilutive effect on net income per share to the extent that the average market value of our common stock, as measured under the terms of the Warrants, exceeds the strike price of the Warrants. As of October 31, 2021, no Warrants had been exercised, 4,340,000 Warrants had expired, and 5,525,000 Warrants remained outstanding. From November 1, 2021 through December 3, 2021, we issued 20,852 shares of common stock as part of the cashless exercise of approximately 1,776,000 Warrants.
The Note Hedges and Warrants both qualified for classification within stockholders’ equity, and their respective fair values were not remeasured and adjusted as long as these instruments continued to qualify for stockholders’ equity classification.
Credit Agreements
2017 Credit Agreement
On June 29, 2017, we entered into a credit agreement with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, and 2021, as further described below (as amended, the “2017 Credit Agreement”).
The 2017 Credit Agreement currently provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the “2017 Term Loan”), of which $100.0 million and $410.1 million was outstanding at October 31, 2021 and January 31, 2021, respectively, and a $300.0 million revolving credit facility maturing on April 9, 2026 (the “2021 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million, which is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.
During the three months ended April 30, 2021, in addition to our regular quarterly $1.1 million principal payment, we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100.0 million. As a result, $1.8 million of deferred debt issuance costs and $0.2 million of unamortized discount associated with the 2017 Term Loan were written off, and are included within losses on early retirements of debt on our condensed consolidated statement of operations for the nine months ended October 31, 2021. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
On April 9, 2021, we amended the 2017 Credit Agreement (the “2021 Amendment”), pursuant to which we refinanced our $300.0 million 2017 Revolving Credit Facility, which would otherwise have matured on June 29, 2022, with the $300.0 million 2021 Revolving Credit Facility. The 2021 Amendment also provides that for purposes of the acceleration of the maturity of the 2017 Term Loan and 2021 Revolving Credit Facility, neither the 2014 Notes nor the 2021 Notes will be deemed to be outstanding if such notes are cash collateralized prior to their respective maturity dates in accordance with the 2017 Credit Agreement. As noted above, we cash collateralized the 2014 Notes prior to settlement on June 1, 2021, and we currently intend to cash collateralize, or otherwise refinance or repurchase, the 2021 Notes prior to their maturity in 2026.
The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility would have been accelerated to March 1, 2021 if on such date any 2014 Notes remained outstanding, unless such outstanding 2014 Notes were cash collateralized pursuant to a second amendment to the 2017 Credit Agreement (the “2020 Amendment”), entered into on June 8, 2020. Pursuant to the 2020 Amendment, we were permitted to effect the Spin-Off of our Cyber Intelligence business within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes would not be deemed to be outstanding if such 2014 Notes were cash collateralized in accordance with the 2017 Credit Agreement for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility discussed above. On February 26, 2021, as noted above, we cash collateralized the 2014 Notes in satisfaction of the cash collateralization provisions of the 2020 Amendment. Accordingly, the maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility were not accelerated to March 1, 2021.
As of October 31, 2021, the interest rate on the 2017 Term Loan was 2.08%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 2.28% at October 31, 2021. As of January 31, 2021, the interest rate on the 2017 Term Loan was 2.14%.
For borrowings under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the "Leverage Ratio"). In addition, under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, we are required to pay a commitment fee with respect to unused availability at rates per annum determined by reference to our Leverage Ratio.
Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2021 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.
The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the 2017 Credit Agreement may be terminated.
2017 Credit Agreement Issuance and Amendment Costs
We incurred debt issuance costs of approximately $6.8 million in connection with the 2017 Credit Agreement, of which $4.1 million were associated with the 2017 Term Loan, and $2.7 million were associated with the 2017 Revolving Credit Facility, which were deferred and are being amortized as interest expense over the terms of the facilities. During the year ended January 31, 2018, we wrote off $0.2 million of deferred debt issuance costs associated with the 2017 Term Loan as a result of the 2018 Amendment. We incurred $2.1 million of debt modification costs related to the 2020 Amendment, $1.2 million of which were expensed, and $0.9 million of which were deferred (comprised of $0.5 million associated with the 2017 Term Loan, and $0.4
million associated with the 2017 Revolving Credit Facility), and which are being amortized along with the previously deferred debt issuance costs.
At the time of the 2021 Amendment, there were $1.3 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility, of which $0.8 million were associated with commitments under the 2017 Revolving Credit Facility provided by lenders that are continuing to provide commitments under the 2021 Revolving Credit Facility and therefore continued to be deferred, and which are now being amortized over the term of the 2021 Revolving Credit Facility. The remaining $0.5 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility were written off and are included within losses on early retirements of debt on our condensed consolidated statement of operations for the nine months ended October 31, 2021. We incurred $1.5 million of debt modification costs related to the 2021 Amendment, all of which are associated with the 2021 Revolving Credit Facility, which have been deferred and are being amortized along with the previously deferred debt issuance costs over the term of the 2021 Revolving Credit Facility.
Deferred debt issuance costs associated with the 2017 Term Loan are being amortized using the effective interest rate method, and deferred debt issuance costs associated with the 2021 Revolving Credit Facility are being amortized on a straight-line basis.
Future Principal Payments on the Term Loan
As a result of the significant 2017 Term Loan principal payments made during the three months ended April 30, 2021, no further principal payments are required prior to the maturity of the 2017 Term Loan on June 29, 2024.
Interest Expense
The following table presents the components of interest expense incurred on the 2021 Notes, the 2014 Notes, and on borrowings under our 2017 Credit Agreement, for the three and nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
2021 Notes:
|
|
|
|
|
|
|
|
|
Interest expense at 0.25% coupon rate
|
|
$
|
197
|
|
|
$
|
—
|
|
|
$
|
442
|
|
|
$
|
—
|
|
Amortization of deferred debt issuance costs
|
|
436
|
|
|
—
|
|
|
978
|
|
|
—
|
|
Total Interest Expense - 2021 Notes
|
|
$
|
633
|
|
|
$
|
—
|
|
|
$
|
1,420
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
2014 Notes:
|
|
|
|
|
|
|
|
|
Interest expense at 1.50% coupon rate
|
|
$
|
—
|
|
|
$
|
1,450
|
|
|
$
|
1,933
|
|
|
$
|
4,436
|
|
Amortization of debt discount
|
|
—
|
|
|
3,220
|
|
|
—
|
|
|
9,620
|
|
Amortization of deferred debt issuance costs
|
|
—
|
|
|
303
|
|
|
522
|
|
|
907
|
|
Total Interest Expense - 2014 Notes
|
|
$
|
—
|
|
|
$
|
4,973
|
|
|
$
|
2,455
|
|
|
$
|
14,963
|
|
|
|
|
|
|
|
|
|
|
Borrowings under 2017 Credit Agreement:
|
|
|
|
|
|
|
|
|
Interest expense at contractual rates
|
|
$
|
533
|
|
|
$
|
2,790
|
|
|
$
|
2,830
|
|
|
$
|
10,766
|
|
Impact of interest rate swap reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
1,356
|
|
|
1,014
|
|
|
3,068
|
|
Amortization of debt discounts
|
|
5
|
|
|
18
|
|
|
13
|
|
|
55
|
|
Amortization of deferred debt issuance costs
|
|
218
|
|
|
497
|
|
|
713
|
|
|
1,327
|
|
Total Interest Expense - Borrowings under 2017 Credit Agreement
|
|
$
|
756
|
|
|
$
|
4,661
|
|
|
$
|
4,570
|
|
|
$
|
15,216
|
|
On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the 2018 Swap (as defined in Note 14, “Derivative Financial Instruments”) prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense) on our condensed consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from
accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021.
Please refer to Note 14, “Derivative Financial Instruments” for further information regarding our interest rate swap agreement.
9. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of October 31, 2021 and January 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
January 31,
|
(in thousands)
|
|
2021
|
|
2021
|
Raw materials
|
|
$
|
2,265
|
|
|
$
|
2,768
|
|
Work-in-process
|
|
286
|
|
|
26
|
|
Finished goods
|
|
3,209
|
|
|
2,747
|
|
Total inventories
|
|
$
|
5,760
|
|
|
$
|
5,541
|
|
Condensed Consolidated Statements of Operations
Other (expense) income, net consisted of the following for the three and nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Foreign currency losses, net
|
|
$
|
(687)
|
|
|
$
|
(1,456)
|
|
|
$
|
(1,691)
|
|
|
$
|
(1,303)
|
|
Losses on derivative financial instruments, net
|
|
—
|
|
|
(949)
|
|
|
(14,374)
|
|
|
(812)
|
|
Change in fair value of future tranche right
|
|
—
|
|
|
(9,224)
|
|
|
15,810
|
|
|
(22,834)
|
|
Other, net
|
|
270
|
|
|
(41)
|
|
|
4,044
|
|
|
(1,297)
|
|
Other (expense) income, net
|
|
$
|
(417)
|
|
|
$
|
(11,670)
|
|
|
$
|
3,789
|
|
|
$
|
(26,246)
|
|
Please refer to Note 10, “Convertible Preferred Stock” and Note 13, “Fair Value Measurements” for additional information regarding the future tranche right.
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Cash paid for interest
|
|
$
|
9,150
|
|
|
$
|
18,116
|
|
Cash payments of income taxes, net
|
|
$
|
37,371
|
|
|
$
|
18,133
|
|
Cash payments for operating leases
|
|
$
|
14,854
|
|
|
$
|
15,478
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
Finance leases of property and equipment
|
|
$
|
4,276
|
|
|
$
|
841
|
|
Liabilities for contingent consideration in business combinations
|
|
$
|
900
|
|
|
$
|
—
|
|
Accrued but unpaid purchases of property and equipment
|
|
$
|
479
|
|
|
$
|
1,055
|
|
Settlement of Future Tranche Right upon issuance of Series B Preferred Stock
|
|
$
|
36,962
|
|
|
$
|
—
|
|
Retirement of treasury stock
|
|
$
|
234,997
|
|
|
$
|
—
|
|
Settlement of convertible note premium with common stock
|
|
$
|
59,131
|
|
|
$
|
—
|
|
Receipt of common stock from the counterparties under the Note Hedges
|
|
$
|
59,651
|
|
|
$
|
—
|
|
10. CONVERTIBLE PREFERRED STOCK
On December 4, 2019, we entered into an Investment Agreement with the Apax Investor, whereby, subject to certain closing conditions, the Apax Investor agreed to make an investment in us in an amount up to $400.0 million as follows:
•On May 7, 2020 (the “Series A Closing Date”), we issued a total of 200,000 shares of our Series A Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $2.7 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series A Preferred Stock.
•In connection with the completion of the Spin-Off, on April 6, 2021, (the “Series B Closing Date” and together with the Series A Closing Date, as applicable, the “Applicable Closing Date”) we issued a total of 200,000 shares of our Series B Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share, to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $1.3 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series B Preferred Stock.
Each of the rights, preferences and privileges of the Series A Preferred Stock and Series B Preferred Stock are set forth in separate certificates of designation filed with the Secretary of State of the State of Delaware on the Applicable Closing Date.
Voting Rights
Holders of the Preferred Stock have the right to vote on matters submitted to a vote of the holders of our common stock, on an as-converted basis; however, in no event will the holders of Preferred Stock have the right to vote shares of the Preferred Stock on an as-converted basis in excess of 19.9% of the voting power of the common stock outstanding immediately prior to December 4, 2019.
Dividends and Liquidation Rights
The Preferred Stock ranks senior to the shares of our common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of our affairs. Shares of Preferred Stock have a liquidation preference of the greater of $1,000 per share or the amount that would be received if the shares are converted at the then applicable conversion price at the time of such liquidation.
Holders of the Preferred Stock are entitled to a cumulative dividend at a rate of 5.2% per annum until the 48-month anniversary of the Series A Closing Date and thereafter at a rate of 4.0% per annum. Dividends on the Preferred Stock are cumulative and payable semi-annually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of Preferred Stock. The dividend rate is subject to increase (i) to 6.0% per annum in the event the number of shares of common stock into which the Preferred Stock could be converted exceeds 19.9% of the voting power of outstanding common stock on the Series A Closing Date (unless we obtain shareholder approval of the issuance of common stock upon conversion of the Preferred Stock) and (ii) by 1.0% each year, up to a maximum dividend rate of 10.0% per annum, in the event we fail to satisfy our obligations to redeem the Preferred Stock in specified circumstances.
For the nine months ended October 31, 2021, we paid $12.9 million of preferred stock dividends, of which $5.2 million was accrued as of January 31, 2021, and there were $6.9 million of cumulative undeclared and unpaid preferred stock dividends at October 31, 2021. There were no dividends paid during the three months ended October 31, 2021, and we had no accrued dividends as of October 31, 2021. We reflected $5.2 million and $13.7 million of preferred stock dividends in our condensed consolidated results of operations, for purposes of computing net income attributable to Verint Systems Inc. common shares, for the three and nine months ended October 31, 2021, respectively. There were $2.7 million and $5.2 million of preferred stock dividends recorded in our condensed consolidated results of operations for the three and nine months ended October 31, 2020.
Conversion
The Series A Preferred Stock was convertible into common stock at the election of the holder, subject to certain conditions, at an initial conversion price of $53.50 per share. The initial conversion price represented a conversion premium of 17.1% over the volume-weighted average price per share of our common stock over the 45 consecutive trading days immediately prior to the date of the Investment Agreement. In accordance with the Investment Agreement, the Series A Preferred Stock did not participate in the Spin-Off distribution of the Cognyte shares, which occurred on February 1, 2021, and the Series A conversion price was instead adjusted to $36.38 per share based on the ratio of the relative trading prices of Verint and Cognyte following
the Spin-Off. The Series B Preferred Stock is convertible at a conversion price of $50.25, based in part on our trading price over the 20 day trading period following the Spin-Off. As of October 31, 2021, the maximum number of shares of common stock that could be required to be issued upon conversion of the outstanding shares of Preferred Stock was approximately 9.6 million shares and Apax’s ownership in us on an as-converted basis was approximately 12.8%.
At any time after 36 months following the Applicable Closing Date, we will have the option to require that all (but not less than all) of the then-outstanding shares of Preferred Stock of the series convert into common stock if the volume-weighted average price per share of the common stock for at least 30 trading days in any 45 consecutive trading day period exceeds 175% of the then-applicable conversion price of such series (a “Mandatory Conversion”).
We may redeem any or all of the Preferred Stock of a series for cash at any time after the 72-month anniversary of the Applicable Closing Date at a redemption price equal to 100% of the liquidation preference of the shares of the Preferred Stock, plus any accrued and unpaid dividends to, but excluding, the redemption date, plus a make-whole amount designed to allow the Apax Investor to earn a total 8.0% internal rate of return on such shares.
The Apax Investor has agreed to restrictions on its ability to dispose of shares of the Series A Preferred Stock until the earlier of (1) the 36-month anniversary of the Series A Closing Date or (2) the 24-month anniversary of the consummation of the Spin-Off (the “Preferred Stock Restricted Period”). Following the Preferred Stock Restricted Period, the Preferred Stock may not be sold or transferred without the prior written consent of the Company. The Apax Investor has also agreed to restrictions on its ability to dispose of the common stock issued upon conversion of the Preferred Stock. The common stock may not be disposed of until the earlier of (1) the 12-month anniversary of consummation of the Spin-Off or (2) the 24-month anniversary of the Series A Closing Date. These restrictions do not apply to certain transfers to one or more permitted co-investors or transfers or pledges of the Preferred Stock or common stock pursuant to the terms of specified margin loans to be entered into by the Apax Investor as well as transfers effected pursuant to a merger, consolidation, or similar transaction consummated by us and transfers that are approved by our board of directors.
At any time after the 102-month anniversary of the Applicable Closing Date or upon the occurrence of a change of control triggering event (as defined in the Certificates of Designation), the holders of the applicable series of Preferred Stock will have the right to cause us to redeem all of the outstanding shares of Preferred Stock for cash at a redemption price equal to 100% of the liquidation preference of the shares of such series, plus any accrued and unpaid dividends to, but excluding, the redemption date. Therefore, the Preferred Stock has been classified as temporary equity on our condensed consolidated balance sheet as of October 31, 2021, separate from permanent equity, as the potential required repurchase of the Preferred Stock, however remote in likelihood, is not solely under our control.
As of October 31, 2021, the Preferred Stock was not redeemable, and we have concluded that it is currently not probable of becoming redeemable, including from the occurrence of a change in control triggering event. The holders’ redemption rights which occur at the 102-month anniversary of the Applicable Closing Date are not considered probable because there is a more than remote likelihood that the Mandatory Conversion may occur prior to such redemption rights. We therefore did not adjust the carrying amount of the Preferred Stock to its current redemption amount, which was its liquidation preference, at October 31, 2021 plus accrued and unpaid dividends. As of October 31, 2021, the stated value of the liquidation preference for each series of Preferred Stock was $200.0 million and cumulative, unpaid dividends on the Series A Preferred Stock and the Series B Preferred Stock were $3.5 million and $3.5 million, respectively.
Future Tranche Right
We determined that our obligation to issue and the Apax Investor’s obligation to purchase 200,000 shares of the Series B Preferred Stock in connection with the completion of the Spin-Off and the satisfaction of other customary closing conditions (the “Future Tranche Right”) met the definition of a freestanding financial instrument as the Future Tranche Right is legally detachable and separately exercisable from the Series A Preferred Stock. At issuance, we allocated a portion of the proceeds from the issuance of the Series A Preferred Stock to the Future Tranche Right based upon its fair value at such time, with the remaining proceeds being allocated to the Series A Preferred Stock. The Future Tranche Right was remeasured at fair value each reporting period until the settlement of the right (at the time of the issuance of the Series B Preferred Stock), and changes in its fair value have been recognized as a non-cash charge or benefit within other income (expense), net on the condensed consolidated statement of operations.
At the Series A Closing Date, the Future Tranche Right was recorded as an asset of $3.4 million, as the purchase price of the Series B Preferred Stock was greater than its estimated fair value at the expected settlement date. This resulted in a $203.4 million carrying value, before direct and incremental issuance costs, for the Series A Preferred Stock.
Immediately prior to the issuance of the Series B Preferred Stock the Future Tranche Right was remeasured to fair value and as a result we recorded a non-cash benefit of $15.8 million related to the change in fair value of the Future Tranche Right for the three months ended April 30, 2021, within other income (expense), net. Upon the issuance of the Series B Preferred Stock in April 2021, the Future Tranche Right was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. This resulted in a $237.0 million carrying value, before direct and incremental issuance costs, for the Series B Preferred Stock. As a result of the issuance of the Series B Preferred Stock, we no longer recognize changes in the fair value of the Future Tranche Right in our condensed consolidated statements of operations. For the three and nine months ended October 31, 2020, we recognized non-cash charges of $9.2 million and $22.8 million, respectively, within other (expense) income, net in the condensed consolidated statement of operations for the change in the fair value of the Future Tranche Right. Please refer to Note 13, “Fair Value Measurements” for additional information regarding valuations of the Future Tranche Right.
11. STOCKHOLDERS’ EQUITY
Common Stock Dividends
We did not declare or pay any cash dividends on our common stock during the nine months ended October 31, 2021 and 2020. Under the terms of our 2017 Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.
In connection with the Spin-Off, each holder of Verint’s common stock received one ordinary share of Cognyte for every share of common stock of Verint held of record as of the close of business on January 25, 2021.
Stock Repurchase Programs
On December 4, 2019, we announced that our board of directors had authorized a stock repurchase program whereby we were authorized to repurchase up to $300.0 million of common stock over the period ending on February 1, 2021. We made $34.0 million and $116.1 million in repurchases under the program during the years ended January 31, 2021 and January 31, 2020, respectively. This program expired on February 1, 2021.
On March 31, 2021, we announced that our board of directors had authorized a stock repurchase program whereby we were authorized to repurchase up to a number of shares of common stock approximately equal to the number of shares to be issued as equity compensation during the fiscal year ending January 31, 2022. During the three months ended April 30, 2021, we repurchased 1,600,000 shares of our common stock at a cost of $75.4 million under this program. There have been no repurchases under this program subsequent to April 30, 2021, and no further repurchases are expected under this program for the year ending January 31, 2022.
On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Repurchases are expected to be financed with available cash in the United States or through borrowing from the 2021 Revolving Credit Facility, subject to compliance with applicable laws, rules and regulations. Please refer to Note 17, “Subsequent Event”, for more information regarding this stock repurchase program.
Treasury Stock
Repurchased shares of common stock are typically recorded as treasury stock, at cost, but may from time to time be retired. We periodically purchase common stock from directors, officers, and other employees to facilitate income tax withholding by us or the payment of required income taxes by such holders in connection with the vesting of equity awards. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired.
During the three months ended July 31, 2021, in connection with the maturity of our 2014 Notes, we issued approximately 1,250,000 treasury shares with an average cost of $47.30 per share to the holders of the 2014 Notes in satisfaction of the conversion premium, which was recorded as a $59.1 million reduction of treasury stock and additional paid-in capital. Additionally, we received approximately 1,250,000 shares of our common stock having a value of $57.7 million from the counterparties under the Note Hedges, as well as approximately 42,000 shares of our common stock having a value of $2.0 million from the counterparties related to the reimbursement for the in-the-money portion of the Repurchased 2014 Notes under the Note Hedge agreements, which was recorded as an increase to treasury stock and additional paid-in capital.
During the nine months ended October 31, 2021, we repurchased approximately 1,613,000 shares of our common stock for a cost of $75.9 million, which includes $75.4 million of share repurchases under the 2021 share repurchase program described above, and other repurchases to facilitate income tax withholding upon vesting of equity awards. On March 30, 2021, our board of directors approved the retirement of such repurchased shares of common stock and any other shares held as treasury stock, at management’s discretion. During the nine months ended October 31, 2021, we retired 1,058,300 shares of our common stock with a cost of $49.6 million that had been repurchased under the 2021 share repurchase program described above, as well as all of our common stock held as treasury stock, which totaled 5,000,738 shares, and restored them to the status of authorized and unissued shares. The aggregate cost of the treasury stock retired was $235.0 million, which was recorded as a reduction of common stock and additional paid-in capital.
During the nine months ended October 31, 2020, we repurchased approximately 613,000 shares of our common stock for a cost of $34.0 million under the 2019 share repurchase program described above.
At January 31, 2021, we held approximately 4,404,000 shares of treasury stock with a cost of $208.1 million.
Issuance of Convertible Preferred Stock
On December 4, 2019, in conjunction with the planned separation of our businesses into two independent publicly traded companies, we announced that an affiliate of Apax Partners would invest up to $400.0 million in us, in the form of convertible preferred stock. Under the terms of the Investment Agreement, the Apax Investor purchased $200.0 million of our Series A Preferred Stock, which closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock, which closed on April 6, 2021. As of October 31, 2021, Apax’s ownership in us on an as-converted basis was approximately 12.8%. Please refer to Note 10, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our condensed consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income as presented in our condensed consolidated statements of operations.
The following table summarizes changes to our accumulated other comprehensive income (loss) by component for the nine months ended October 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges
|
|
Unrealized Loss on Interest Rate Swap Designated as Hedge
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Accumulated other comprehensive income (loss) at January 31, 2021
|
|
$
|
634
|
|
|
$
|
(13,031)
|
|
|
$
|
(124,481)
|
|
|
$
|
(136,878)
|
|
Distribution of Cognyte Software Ltd.
|
|
(559)
|
|
|
—
|
|
|
17,682
|
|
|
17,123
|
|
Other comprehensive income (loss) before reclassifications
|
|
180
|
|
|
—
|
|
|
(2,843)
|
|
|
(2,663)
|
|
Amounts reclassified out of accumulated other comprehensive income (loss)
|
|
136
|
|
|
(1,014)
|
|
|
—
|
|
|
(878)
|
|
Amounts reclassified upon partial early retirement of the 2017 Term Loan
|
|
—
|
|
|
(12,017)
|
|
|
—
|
|
|
(12,017)
|
|
Net other comprehensive (loss) income
|
|
(515)
|
|
|
13,031
|
|
|
14,839
|
|
|
27,355
|
|
Accumulated other comprehensive income (loss) at
October 31, 2021
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
(109,642)
|
|
|
$
|
(109,523)
|
|
All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.
On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense) on our consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021. Please refer to Note 14, “Derivative Financial Instruments” for further information regarding our interest rate swap agreement.
The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statements of operations, with presentation location, for the three and nine months ended October 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
|
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Location
|
Unrealized gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Cost of recurring revenue
|
|
|
5
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
Cost of nonrecurring revenue
|
|
|
28
|
|
|
28
|
|
|
100
|
|
|
28
|
|
|
Research and development, net
|
|
|
14
|
|
|
—
|
|
|
45
|
|
|
—
|
|
|
Selling, general and administrative
|
|
|
47
|
|
|
28
|
|
|
164
|
|
|
28
|
|
|
Total, before income taxes
|
|
|
(7)
|
|
|
(4)
|
|
|
(28)
|
|
|
(4)
|
|
|
Provision for income taxes
|
|
|
$
|
40
|
|
|
$
|
24
|
|
|
$
|
136
|
|
|
$
|
24
|
|
|
Total, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement
|
|
$
|
—
|
|
|
$
|
(1,356)
|
|
|
$
|
(1,014)
|
|
|
$
|
(3,067)
|
|
|
Interest expense
|
|
|
—
|
|
|
—
|
|
|
(15,655)
|
|
|
—
|
|
|
Other income (expense), net
|
|
|
—
|
|
|
(1,356)
|
|
|
(16,669)
|
|
|
(3,067)
|
|
|
Total, before income taxes
|
|
|
—
|
|
|
294
|
|
|
3,638
|
|
|
666
|
|
|
Benefit from income taxes
|
|
|
$
|
—
|
|
|
$
|
(1,062)
|
|
|
$
|
(13,031)
|
|
|
$
|
(2,401)
|
|
|
Total, net of income taxes
|
12. INCOME TAXES
Our interim (benefit from) provision for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.
For the three months ended October 31, 2021, we recorded an income tax provision of $9.3 million on pretax income of $22.9 million, which represented an effective income tax rate of 40.9%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign income, partially offset by lower statutory rates in certain foreign jurisdictions.
For the three months ended October 31, 2020, we recorded an income tax provision of $1.1 million on a pretax loss of $1.0 million, which represented a negative effective income tax rate of 106.6%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, limitations on certain tax deductions, and a change in the fair value of the Future Tranche Right associated with the Series A Preferred stock, offset by lower statutory rates in several foreign jurisdictions.
For the nine months ended October 31, 2021, we recorded an income tax provision of $13.5 million on pre-tax income of $33.4 million, which represented an effective income tax rate of 40.4%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign income and the impact of a tax rate change in a foreign
jurisdiction, offset by a change in the fair value of the Future Tranche Right associated with the Series A Preferred Stock and by lower statutory rates in certain foreign jurisdictions.
For the nine months ended October 31, 2020, we recorded an income tax provision of $9.8 million on a pre-tax loss of $16.1 million, which represented a negative effective income tax rate of 60.7%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, limitations on certain tax deductions, and a change in the fair value of the Future Tranche Right associated with the Series A Preferred Stock, offset by lower statutory rates in several foreign jurisdictions and the favorable impact of recently issued regulations.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. Accounting guidance for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in certain state and foreign jurisdictions. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.
We had unrecognized income tax benefits of $85.8 million and $84.8 million (excluding interest and penalties) as of October 31, 2021 and January 31, 2021, respectively, that if recognized, would impact our effective income tax rate. The accrued liability for interest and penalties was $3.2 million and $3.0 million at October 31, 2021 and January 31, 2021, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized income tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized income tax benefits at October 31, 2021 could decrease by approximately $1.6 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur, which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made. See Note 2, “Discontinued Operations” for discussion related to the Tax Matters agreement entered into between and us and Cognyte as result of the Spin-Off.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. However, we have deferred the timing of employer payroll taxes and accelerated the refund of AMT credits as permitted by the CARES Act.
13. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of October 31, 2021 and January 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
|
|
Fair Value Hierarchy Category
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
147,029
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
—
|
|
|
143
|
|
|
—
|
|
Contingent consideration receivable
|
|
—
|
|
|
—
|
|
|
329
|
|
Total assets
|
|
$
|
147,029
|
|
|
$
|
143
|
|
|
$
|
329
|
|
Liabilities:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Contingent consideration - business combinations
|
|
—
|
|
|
—
|
|
|
7,615
|
|
Option to acquire noncontrolling interests of consolidated subsidiaries
|
|
—
|
|
|
—
|
|
|
4,000
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
11,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2021
|
|
|
Fair Value Hierarchy Category
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
342,090
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
—
|
|
|
136
|
|
|
—
|
|
Contingent consideration receivable
|
|
—
|
|
|
—
|
|
|
565
|
|
Total assets
|
|
$
|
342,090
|
|
|
$
|
136
|
|
|
$
|
565
|
|
Liabilities:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
—
|
|
|
17,881
|
|
|
—
|
|
Future tranche right
|
|
—
|
|
|
—
|
|
|
52,772
|
|
Contingent consideration - business combinations
|
|
—
|
|
|
—
|
|
|
15,704
|
|
Option to acquire noncontrolling interests of consolidated subsidiaries
|
|
—
|
|
|
—
|
|
|
3,250
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
17,929
|
|
|
$
|
71,726
|
|
We evaluated the Future Tranche Right associated with the Series A Preferred Stock issued on May 7, 2020 and determined that the Future Tranche Right was a freestanding financial instrument. The Future Tranche Right was initially recorded as an asset and was re-measured at each reporting period until the redemption feature was exercised in connection with the sale and issuance of the Series B Preferred Stock on April 6, 2021. Immediately prior to the issuance of the Series B Preferred Stock the Future Tranche Right was remeasured to fair value with the change in fair value recognized as a component of other income (expense). Upon the issuance of the Series B Preferred Stock, the Future Tranche Right liability was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. Please refer to Note 10, “Convertible Preferred Stock” for additional information regarding the Future Tranche Right and preferred stock investment.
The following table presents the changes in the estimated fair value of the Future Tranche Right measured using significant unobservable inputs (Level 3) for the nine months ended October 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Fair value measurement at beginning of period
|
|
$
|
(52,772)
|
|
|
$
|
—
|
|
Fair value of future tranche right upon issuance of the Series A Preferred Stock
|
|
—
|
|
|
3,374
|
|
Change in fair value, recorded in other income (expense), net
|
|
15,810
|
|
|
(22,834)
|
|
Reclassification of future tranche right liability upon settlement
|
|
36,962
|
|
|
—
|
|
Fair value measurement at end of period
|
|
$
|
—
|
|
|
$
|
(19,460)
|
|
In January 2020, we completed the sale of an insignificant subsidiary. In accordance with the terms of the sale agreement, 100% of the aggregate purchase price is contingent in nature based on a percentage of net sales of the former subsidiary’s products during the thirty-six month period following the transaction closing. We include the fair value of the contingent
consideration receivable within prepaid expenses and other current assets and other assets on our condensed consolidated balance sheet. The estimated fair value of this asset as of October 31, 2021, which is measured using Level 3 inputs, was $0.3 million. We received payments of $0.2 million, and the change in the estimated fair value of this contingent receivable was not material, during the nine months ended October 31, 2021. The estimated fair value of this asset as of October 31, 2020 was $0.6 million. We received payments of $0.1 million, and the change in the estimated fair value of this contingent receivable was not material, during the nine months ended October 31, 2020.
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Fair value measurement at beginning of period
|
|
$
|
15,704
|
|
|
$
|
31,367
|
|
Contingent consideration liabilities recorded for business combinations
|
|
900
|
|
|
—
|
|
Changes in fair values, recorded in operating expenses
|
|
669
|
|
|
(2,847)
|
|
Payments of contingent consideration
|
|
(9,560)
|
|
|
(13,980)
|
|
Foreign currency translation and other
|
|
(98)
|
|
|
188
|
|
Fair value measurement at end of period
|
|
$
|
7,615
|
|
|
$
|
14,728
|
|
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.
During the year ended January 31, 2017, we acquired two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interests. We account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We currently expect to exercise the option to acquire the noncontrolling interests prior to its expiration on January 31, 2022. As of October 31, 2021, we included the fair value of the option within accrued expenses and other current liabilities and did not recognize noncontrolling interests in these subsidiaries. As of January 31, 2021, we included the fair value of the option within other liabilities on our condensed consolidated balance sheet. The following table presents the change in the estimated fair value of this liability, which is measured using Level 3 inputs, for the nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Fair value measurement at beginning of period
|
|
$
|
3,250
|
|
|
$
|
2,900
|
|
Change in fair value, recorded in operating expenses
|
|
750
|
|
|
300
|
|
Fair value measurement at end of period
|
|
$
|
4,000
|
|
|
$
|
3,200
|
|
On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense), net on our consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021. Please refer to Note 14, “Derivative Financial Instruments” for further information regarding our interest rate swap agreement.
There were no transfers between levels of the fair value measurement hierarchy during the nine months ended October 31, 2021 and 2020.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments, Corporate Debt Securities, and Commercial Paper - The fair values of short-term investments, as well as corporate debt securities and commercial paper classified as cash equivalents, are estimated using observable market prices
for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Future Tranche Right - The fair value of the Future Tranche Right was classified within Level 3 of the fair value hierarchy because it was valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The fair value of the Future Tranche Right was estimated using a binomial tree model to estimate the value of the Series B Preferred Stock and a Monte Carlo simulation to estimate our stock price post-Spin-Off, which we believe was reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of the Future Tranche Right. The fair value of the Future Tranche Right also reflected the likelihood of the Series B Preferred Stock being issued, which management considered to be highly probable for all periods the Future Tranche Right was outstanding.
Significant inputs and assumptions used in the valuation model immediately prior to the settlement date, April 6, 2021, and as of the issuance date, May 7, 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 6,
|
|
May 7,
|
|
|
2021
|
|
2020
|
Risk-free interest rate for preferred stock
|
|
2.35
|
%
|
|
1.31
|
%
|
Implied credit spread
|
|
6.78
|
%
|
|
10.78
|
%
|
Expected volatility
|
|
30.00
|
%
|
|
30.00
|
%
|
Verint common stock price
|
|
$
|
45.91
|
|
$
|
45.44
|
Interest Rate Swap Agreements - The fair value of our interest rate swap agreements were based in part on data received from the counterparty, and represented the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration Assets and Liabilities - Business Combinations and Divestitures - The fair value of the contingent consideration related to business combinations and divestitures is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from 2.5% to 2.6%, with a weighted average discount rate of 2.5%, in our calculations of the estimated fair values of our contingent consideration liabilities as of October 31, 2021. We utilized discount rates ranging from 3.3% to 3.8%, with a weighted average discount rate of 3.5% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2021. We utilized discount rates ranging from 2.4% to 3.0%, with a weighted average discount rate of 2.7%, in our calculation of the estimated fair value of our contingent consideration asset as of October 31, 2021. We utilized discount rates ranging from 3.3% to 4.0%, with a weighted average discount rate of 3.7% in our calculation of the estimated fair value of our contingent consideration asset as of January 31, 2021.
Option to Acquire Noncontrolling Interests of Consolidated Subsidiaries - The fair value of the option is determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. This fair value measurement is based upon significant inputs not observable in the market. We remeasure the fair value of the option at each reporting period, and any changes in fair value are recorded within selling, general, and administrative expenses. We utilized discount rates of 9.0% and 8.5% in our calculations of the estimated fair value of the option as of October 31, 2021 and January 31, 2021, respectively.
Other Financial Instruments
The carrying amounts of accounts receivable, contract assets, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
The estimated fair values of our term loan borrowings were approximately $100 million and $409 million at October 31, 2021 and January 31, 2021, respectively. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy because we cannot reasonably observe activity in the limited market in which participation in our term loans are traded. The indicative prices provided to us as at each of October 31, 2021 and January 31, 2021 did not significantly differ from par value. The estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our lenders.
The estimated fair value of our 2014 Notes, which matured in June 2021, was approximately $440 million at January 31, 2021. The estimated fair value of our 2021 Notes was approximately $313 million at October 31, 2021. The estimated fair values of the 2014 Notes and 2021 Notes were determined based on quoted bid and ask prices in the over-the-counter market in which the 2014 Notes and 2021 Notes traded. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right-of-use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
As of October 31, 2021, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $5.1 million, of which $4.4 million was remeasured to fair value based on an observable transaction during the nine months ended October 31, 2021. These investments are included within other assets on the condensed consolidated balance sheets. An unrealized gain of $3.1 million, which adjusted the carrying value of a noncontrolling equity investment based on an observable transaction was recorded in other income (expense), net on the condensed consolidated statement of operations for the nine months ended October 31, 2021. As of January 31, 2021, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $2.0 million. There were no observable price changes in our investments in privately-held companies during the year ended January 31, 2021. We did not recognize any impairments during the three and nine months ended October 31, 2021 and 2020.
14. DERIVATIVE FINANCIAL INSTRUMENTS
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $7.2 million and $6.6 million as of October 31, 2021 and January 31, 2021, respectively.
Interest Rate Swap Agreement
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of our prior interest rate swap in September 2019, under which we paid interest at a fixed rate of 2.949% and received variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap was September 6, 2019, and settlements with the counterparty began on November 1, 2019, and occurred on a quarterly basis. The 2018 Swap had a termination date of June 29, 2024.
Prior to May 1, 2020, the 2018 Swap was designated as a cash flow hedge for accounting purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and were reclassified into the condensed consolidated statement of operations within interest expense in the periods in which the hedged transactions affected earnings.
On May 1, 2020, which was an interest rate reset date on our 2017 Term Loan, we selected an interest rate other than three-month LIBOR. As a result, the 2018 Swap, which was designated specifically to hedge three-month LIBOR interest payments, no longer qualified as a cash flow hedge. Subsequent to May 1, 2020, changes in fair value of the 2018 Swap were accounted for as a component of other income (expense), net. Accumulated deferred losses on the 2018 Swap of $20.4 million, or $16.0 million after taxes, at May 1, 2020 that were previously recorded as a component of accumulated other comprehensive loss, were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the 2018 Swap, as the previously hedged interest payments occurred.
On April 13, 2021, we paid $16.5 million to the counterparty to settle the 2018 Swap agreement prior to its June 2024 maturity. Upon settlement, we recorded an unrealized gain of $1.3 million in other income (expense) to adjust the 2018 Swap to its fair value at settlement date and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense), net on our condensed consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of October 31, 2021 and January 31, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
October 31,
|
|
January 31,
|
(in thousands)
|
Balance Sheet Classification
|
|
2021
|
|
2021
|
Derivative assets:
|
|
|
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
Designated as cash flow hedges
|
Prepaid expenses and other current assets
|
|
$
|
143
|
|
|
$
|
136
|
|
Total derivative assets
|
|
|
$
|
143
|
|
|
$
|
136
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
Designated as cash flow hedges
|
Accrued expenses and other current liabilities
|
|
$
|
3
|
|
|
$
|
47
|
|
Not designated as hedging instruments
|
Accrued expenses and other current liabilities
|
|
—
|
|
|
1
|
|
Interest rate swap agreement:
|
|
|
|
|
|
Not designated as a hedging instrument
|
Accrued expenses and other current liabilities
|
|
—
|
|
|
4,316
|
|
Not designated as a hedging instrument
|
Other liabilities
|
|
—
|
|
|
13,565
|
|
Total derivative liabilities
|
|
|
$
|
3
|
|
|
$
|
17,929
|
|
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the condensed consolidated statements of operations for the three and nine months ended October 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net gains (losses) recognized in AOCL:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
153
|
|
|
$
|
47
|
|
|
$
|
215
|
|
|
$
|
55
|
|
Interest rate swap agreement
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,535)
|
|
|
|
$
|
153
|
|
|
$
|
47
|
|
|
$
|
215
|
|
|
$
|
(7,480)
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
47
|
|
|
$
|
28
|
|
|
$
|
164
|
|
|
$
|
28
|
|
Interest rate swap agreement
|
|
—
|
|
|
(1,356)
|
|
|
(16,669)
|
|
|
(3,067)
|
|
|
|
$
|
47
|
|
|
$
|
(1,328)
|
|
|
$
|
(16,505)
|
|
|
$
|
(3,039)
|
|
For information regarding the line item locations of the net gains (losses) on derivative financial instruments reclassified out of AOCL into the condensed consolidated statements of operations, see Note 11, “Stockholders’ Equity”.
All of the foreign currency forward contracts underlying the net unrealized gains recorded in our accumulated other comprehensive loss at October 31, 2021 mature within twelve months, and therefore we expect all such gains to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
Losses recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three and nine months ended October 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification in Condensed Consolidated Statements of Operations
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Interest rate swap agreement
|
|
Other expense, net
|
|
$
|
—
|
|
|
$
|
(949)
|
|
|
$
|
(14,374)
|
|
|
$
|
(812)
|
|
15. STOCK-BASED COMPENSATION
Stock-Based Compensation Plan
On June 20, 2019, our stockholders approved the Verint Systems Inc. 2019 Long-Term Stock Incentive Plan (the “2019 Plan”). Upon approval of the 2019 Plan, new awards are no longer permitted under our prior stock-based compensation plan (the “2017 Amended Plan”). Awards outstanding at June 20, 2019 under the 2017 Amended Plan or other previous stock-based compensation plans were not impacted by the approval of the 2019 Plan. Collectively, our stock-based compensation plans are referred to herein as the “Plans”.
The 2019 Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards, other stock-based awards, and performance compensation awards. Subject to adjustment as provided in the 2019 Plan, up to an aggregate of (i) 9,475,000 shares of our common stock plus (ii) the number of shares of our common stock available for issuance under the 2017 Amended Plan as of June 20, 2019, plus (iii) the number of shares of our common stock that become available for issuance as a result of awards made under the 2017 Amended Plan or the 2019 Plan that are forfeited, cancelled, exchanged, or that terminate or expire, may be issued or transferred in connection with awards under the 2019 Plan. Each stock option or stock-settled stock appreciation right granted under the 2019 Plan will reduce the available plan capacity by one share and each other award denominated in shares that is granted under the 2019 Plan will reduce the available plan capacity by 2.38 shares.
In March 2021, our board of directors approved an adjustment of the available plan capacity to the 2019 Plan to 14,239,656 shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off.
Stock-Based Compensation Expense
We recognized stock-based compensation expense in the following line items on the condensed consolidated statements of operations for the three and nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Cost of revenue - recurring
|
|
$
|
540
|
|
|
$
|
584
|
|
|
$
|
1,531
|
|
|
$
|
1,321
|
|
Cost of revenue - nonrecurring
|
|
690
|
|
|
1,169
|
|
|
2,387
|
|
|
2,126
|
|
Research and development, net
|
|
1,949
|
|
|
1,241
|
|
|
5,749
|
|
|
3,910
|
|
Selling, general and administrative
|
|
13,416
|
|
|
12,535
|
|
|
41,422
|
|
|
32,179
|
|
Total stock-based compensation expense
|
|
$
|
16,595
|
|
|
$
|
15,529
|
|
|
$
|
51,089
|
|
|
$
|
39,536
|
|
The following table summarizes stock-based compensation expense by type of award for the three and nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Restricted stock units and restricted stock awards
|
|
$
|
14,386
|
|
|
$
|
11,777
|
|
|
$
|
44,623
|
|
|
$
|
33,073
|
|
Stock bonus program and bonus share program
|
|
2,203
|
|
|
3,748
|
|
|
6,455
|
|
|
6,460
|
|
Total equity-settled awards
|
|
16,589
|
|
|
15,525
|
|
|
51,078
|
|
|
39,533
|
|
Phantom stock units (cash-settled awards)
|
|
6
|
|
|
4
|
|
|
11
|
|
|
3
|
|
Total stock-based compensation expense
|
|
$
|
16,595
|
|
|
$
|
15,529
|
|
|
$
|
51,089
|
|
|
$
|
39,536
|
|
Awards are generally subject to multi-year vesting periods. We recognize compensation expense for awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, reduced by estimated forfeitures.
Awards under our stock bonus and bonus share programs are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of our common stock, which for awards under our stock bonus program is determined using a discounted average price of our common stock.
Restricted Stock Units and Performance Stock Units
We periodically award RSUs to our directors, officers, and other employees. These awards contain various vesting conditions and are subject to certain restrictions and forfeiture provisions prior to vesting. Some of these awards to executive officers and certain employees vest upon the achievement of specified performance goals or market conditions (performance stock units or “PSUs”).
The following table (“Award Activity Table”) summarizes activity for RSUs, PSUs, and other stock awards that reduce available Plan capacity under the Plans for the nine months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
|
2021
|
|
2020
|
(in thousands, except per share data)
|
|
Shares or Units
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares or Units
|
|
Weighted-Average Grant Date Fair Value
|
Beginning balance
|
|
2,950
|
|
|
$
|
35.97
|
|
|
1,879
|
|
|
$
|
52.96
|
|
Granted
|
|
1,503
|
|
|
$
|
48.00
|
|
|
1,399
|
|
|
$
|
46.82
|
|
Released
|
|
(1,576)
|
|
|
$
|
34.87
|
|
|
(1,109)
|
|
|
$
|
47.53
|
|
Forfeited
|
|
(185)
|
|
|
$
|
39.43
|
|
|
(159)
|
|
|
$
|
53.17
|
|
Ending balance
|
|
2,692
|
|
|
$
|
43.10
|
|
|
2,010
|
|
|
$
|
51.67
|
|
The beginning balance of the outstanding shares for the nine months ended October 31, 2021 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The related weighted-average
grant date fair value for the beginning outstanding shares reflects the adjusted fair value of the awards on the Spin-Off Date. The adjusted shares preserve the same terms and conditions and vesting schedules as the original awards.
The beginning balance of the shares and the respective weighted-average grant date fair values for the nine months ended October 31, 2020 reflect the shares and fair values on the original date of grant without adjustment.
With respect to our stock bonus program, activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the Plans under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving an earned cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under “Stock Bonus Program” and “Bonus Share Program”.
Our RSU awards may include a provision which allows the awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of October 31, 2021, for such awards that are outstanding, settlement with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards and are included in the table above.
In order to achieve an equitable modification of the existing awards following the Spin-Off, we converted unvested awards as of February 1, 2021 by a factor of approximately 1.45, resulting in additional awards being granted to remaining employees denominated solely in Verint common stock. As noted above, a corresponding adjustment was also made to the available capacity under the 2019 Plan.
The following table summarizes PSU activity in isolation under the Plans for the nine months ended October 31, 2021 and 2020 (these amounts are already included in the Award Activity Table above for 2021 and 2020):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
October 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Beginning balance
|
|
635
|
|
|
423
|
|
Granted
|
|
213
|
|
|
297
|
|
Released
|
|
(274)
|
|
|
(182)
|
|
Forfeited
|
|
(24)
|
|
|
(27)
|
|
Ending balance
|
|
550
|
|
|
511
|
|
Consistent with the table above, the beginning balance of the outstanding shares for the nine months ended October 31, 2021 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The beginning balance of the outstanding shares of the nine months ended October 31, 2020 reflects the number of shares on the date of grant without adjustment.
Excluding PSUs, we granted 1,290,000 RSUs during the nine months ended October 31, 2021.
As of October 31, 2021, there was approximately $79.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 1.7 years.
Stock Bonus Program
Our stock bonus program permits eligible employees to receive a portion of their earned bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers are eligible to participate in this program to the extent that shares remain available for awards following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a one-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is generally determined using a 5-day trailing average price of our common stock when the awards are calculated, reduced by a discount determined by the board of directors each year (the “discount”). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash.
For bonuses in respect of the year ended January 31, 2021, our board of directors approved the use of up to 200,000 shares of common stock, and a discount of 15%, for awards under this program. However, the program was not used and no shares were issued in respect of the performance period ended January 31, 2021.
In March 2021, our board of directors approved the use of up to 300,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the performance period ending January 31, 2022.
Bonus Share Program
Under our bonus share program, we may provide discretionary bonuses to employees or pay earned bonuses that are outside the stock bonus program in the form of shares of common stock. Unlike the stock bonus program, there is no enrollment for this program and no discount feature.
For bonuses in respect of the year ended January 31, 2021, our board of directors approved the use of up to 300,000 shares of common stock under the bonus share program, reduced by any shares issued under the stock bonus program in respect of the same performance period. However, the program was not used, and no shares were issued in respect of the performance period ended January 31, 2021.
For bonuses in respect of the year ending January 31, 2022, our board of directors has approved the use of up to 300,000 shares of common stock under this program, reduced by any shares used under the stock bonus program in respect of the same performance period (the maximum number of shares issuable under the stock bonus program and the bonus share program collectively for the performance period ending January 31, 2022 will not exceed 300,000).
The combined accrued liabilities for the stock bonus program and the bonus share program was $6.4 million at October 31, 2021. As noted above, no awards were made under the stock bonus program or the bonus share program for the performance period ended January 31, 2021 and bonuses for such period were paid in cash.
16. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In March 2009, one of our former employees, Ms. Orit Deutsch, commenced legal actions in Israel against our primary Israeli subsidiary, Verint Systems Limited (“VSL”) (Case Number 4186/09) and against our affiliate CTI (Case Number 1335/09). Also, in March 2009, a former employee of Comverse Limited (CTI’s primary Israeli subsidiary at the time), Ms. Roni Katriel, commenced similar legal actions in Israel against Comverse Limited (Case Number 3444/09). In these actions, the plaintiffs generally sought to certify class action suits against the defendants on behalf of current and former employees of VSL and Comverse Limited who had been granted stock options in Verint and/or CTI and who were allegedly damaged as a result of a suspension on option exercises during an extended filing delay period that is discussed in our and CTI’s historical public filings. On June 7, 2012, the Tel Aviv District Court, where the cases had been filed or transferred, allowed the plaintiffs to consolidate and amend their complaints against the three defendants: VSL, CTI, and Comverse Limited.
On October 31, 2012, CTI distributed all of the outstanding shares of common stock of Comverse, Inc., its principal operating subsidiary and parent company of Comverse Limited, to CTI’s shareholders (the “Comverse Share Distribution”). In the period leading up to the Comverse Share Distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in Verint and in its then-subsidiary, Comverse, Inc.) to Comverse, Inc. or to unaffiliated third parties. As the result of these transactions, Comverse, Inc. became an independent company and ceased to be affiliated with CTI, and CTI ceased to have any material assets other than its equity interests in Verint. Prior to the completion of the Comverse Share Distribution, the plaintiffs sought to compel CTI to set aside up to $150.0 million in assets to secure any future judgment, but the District Court did not rule on this motion. In February 2017, Mavenir Inc. became successor-in-interest to Comverse, Inc.
On February 4, 2013, Verint acquired the remaining CTI shell company in a merger transaction (the “CTI Merger”). As a result of the CTI Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the foregoing legal actions. However, under the terms of a Distribution Agreement entered into in connection with the Comverse Share Distribution, we, as successor to CTI, are entitled to indemnification from Comverse, Inc. (now Mavenir) for any losses we may suffer in our capacity as successor to CTI related to the foregoing legal actions.
Following an unsuccessful mediation process, on August 28, 2016, the District Court (i) denied the plaintiffs’ motion to certify the suit as a class action with respect to all claims relating to Verint stock options and (ii) approved the plaintiffs’ motion to certify the suit as a class action with respect to claims of current or former employees of Comverse Limited (now part of Mavenir) or of VSL who held unexercised CTI stock options at the time CTI suspended option exercises. The court also ruled that the merits of the case would be evaluated under New York law.
As a result of this ruling (which excluded claims related to Verint stock options from the case), one of the original plaintiffs in the case, Ms. Deutsch, was replaced by a new representative plaintiff, Mr. David Vaaknin. CTI appealed portions of the District Court’s ruling to the Israeli Supreme Court. On August 8, 2017, the Israeli Supreme Court partially allowed CTI’s appeal and ordered the case to be returned to the District Court to determine whether a cause of action exists under New York law based on the parties’ expert opinions.
Following two unsuccessful rounds of mediation in mid to late 2018 and in mid-2019, the proceedings resumed. On April 16, 2020, the District Court accepted plaintiffs’ application to amend the motion to certify a class action and set deadlines for filing amended pleadings by the parties. CTI submitted a motion to appeal the District Court’s decision to the Supreme Court, as well as a motion to stay the proceedings in the District Court pending the resolution of the appeal. On July 6, 2020, the Supreme Court granted the motion for a stay. On July 27, 2020, the plaintiffs filed their response on the merits of the motion for leave to appeal, and the parties are waiting for further instructions or decisions from the Supreme Court.
On February 1, 2021, we completed the Spin-Off. As a result of the Spin-Off, Cognyte is now an independent, publicly traded company. Under the terms of the Separation and Distribution Agreement entered into between Verint and Cognyte, Cognyte has agreed to indemnify Verint for Cognyte’s share of any losses that Verint may suffer related to the foregoing legal actions either in its capacity as successor to CTI, to the extent not indemnified by Mavenir, or due to its former ownership of Cognyte and VSL.
We are a party to various litigation matters and claims that arise from time to time in the ordinary course of our business. While we believe that the ultimate outcome of any such current matters will not have a material adverse effect on us, their outcomes are not determinable and negative outcomes may adversely affect our financial position, liquidity, or results of operations.
17. SUBSEQUENT EVENT
Stock Repurchase Program
On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Repurchases are expected to be financed with available cash in the United States or through borrowing from the 2021 Revolving Credit Facility, subject to compliance with applicable laws, rules and regulations. We may utilize a number of different methods to effect the repurchases, including open market purchases, which may include, without limitation, round lot or block transactions, including through one or more accelerated stock repurchase plans or pursuant to the terms of one or more repurchase plans in accordance with Rule 10b5-1 or Rule 10b-18 under the Securities Exchange Act of 1934. The specific timing, price, and size of purchases will depend on prevailing stock prices, general market and economic conditions, and other considerations, including the amount of cash available in the U.S. and other potential uses of cash. The program may be extended, suspended, or discontinued at any time without prior notice and does not obligate us to acquire any particular amount of common stock.