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 Customer Engagement Cloud Platform, we offer our customers and partners solutions that are based on artificial intelligence (“AI”) and are developed specifically for customer engagement. These solutions automate workflows across enterprise silos to optimize the workforce expense and at the same time drive an elevated consumer experience. Our solutions are used by approximately 10,000 organizations in over 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 organizations.
Verint is headquartered in Melville, New York, and has approximately 30 offices worldwide. We have approximately 4,200 passionate employees plus a few hundred contractors around the globe exclusively focused on helping brands provide Boundless Customer Engagement™.
Spin-Off of Cognyte Software Ltd.
On February 1, 2021, we completed the 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 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.
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”), on May 7, 2020, the Apax Investor purchased $200.0 million of our Series A convertible preferred stock (“Series A Preferred Stock”). In connection with the completion of the Spin-Off, on April 6, 2021, 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”). As of April 30, 2023, Apax’s ownership in us on an as-converted basis was approximately 13.0%. Please refer to Note 9, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
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, 2023 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 (loss), stockholders’ equity, and cash flows for the periods ended April 30, 2023 and 2022, and the condensed consolidated balance sheet as of April 30, 2023, are not audited but reflect all adjustments that, in the opinion of management, 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, 2023 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2023. 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, 2023 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.
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.
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.
Significant Accounting Policies
There have been no material changes in our significant accounting policies during the three months ended April 30, 2023, 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, 2023.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which adds contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue recognition guidance. We adopted this standard on a prospective basis for the annual and interim periods beginning February 1, 2023. The adoption of this standard did not have any impact on our condensed consolidated financial statements as the ultimate impact is dependent on the size and frequency of future acquisitions and does not affect contract assets or contract liabilities related to acquisitions completed prior to the adoption date.
In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the period of time entities can utilize the reference rate reform relief guidance under ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting from December 31, 2022 to December 31, 2024. We expect to elect various optional expedients for contract modifications related to financial instruments affected by the reference rate reform through the effective date of December 31, 2024, as extended by ASU 2022-06. The application of this guidance did not have any impact on our consolidated financial statements.
In August 2022, the Inflation Reduction Act (the "IRA") was signed into law. The IRA establishes a new book minimum tax of 15% on consolidated adjusted GAAP pre-tax earnings for corporations with average income in excess of $1 billion and is effective for us in tax years beginning after December 31, 2022. We do not expect to be subject to the corporate minimum tax. In addition, the IRA also introduced a nondeductible 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year. During the three months ended April 30, 2023 the calculated excise tax was $0.4 million and was recognized as part of the cost basis of shares acquired in our consolidated statement of stockholders' equity. We do not expect taxes due on future repurchases of our shares to have a material effect on our business.
New Accounting Pronouncements Not Yet Effective
There are no new accounting pronouncements not yet adopted or effective that are expected to have a material impact on our condensed consolidated financial statements and related disclosures.
2. 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, which consists primarily of software as a service (“SaaS”) revenue and optional managed services revenue.
▪SaaS revenue consists predominately of bundled SaaS (software access rights with standard managed services) and unbundled SaaS (software licensing rights accounted for as term-based licenses whereby customers have a license to our software with related support for a specific period).
▪Bundled SaaS revenue is recognized over time.
▪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. Unbundled SaaS can be deployed in the cloud, either by us or a cloud partner.
◦Support revenue, which consists of initial and renewal support.
•Nonrecurring revenue primarily consists of our perpetual licenses, hardware, installation services, business advisory consulting and training services, and patent license royalties.
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Recurring revenue: | | | | |
Bundled SaaS revenue | | $ | 59,453 | | | $ | 49,285 | |
Unbundled SaaS revenue | | 57,695 | | | 45,445 | |
Optional managed services revenue | | 12,865 | | | 15,913 | |
Total cloud revenue | | 130,013 | | | 110,643 | |
Support revenue | | 36,426 | | | 48,724 | |
Total recurring revenue | | 166,439 | | | 159,367 | |
Nonrecurring revenue: | | | | |
Perpetual revenue | | 24,334 | | | 33,258 | |
Professional services revenue | | 25,793 | | | 25,281 | |
Total nonrecurring revenue | | 50,127 | | | 58,539 | |
Total revenue | | $ | 216,566 | | | $ | 217,906 | |
Contract Balances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
| | | | | | | | | | | | | | |
(in thousands) | | April 30, 2023 | | January 31, 2023 |
Accounts receivable, net | | $ | 157,786 | | | $ | 188,414 | |
Contract assets, net | | $ | 58,862 | | | $ | 60,444 | |
Long-term contract assets, net (included in other assets) | | $ | 35,845 | | | $ | 37,950 | |
Contract liabilities | | $ | 254,418 | | | $ | 271,476 | |
Long-term contract liabilities | | $ | 15,914 | | | $ | 18,047 | |
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 months ended April 30, 2023 and 2022. As of April 30, 2023, two partners, both authorized global resellers of our solutions, accounted for more than 10% of our aggregated accounts receivable and contract assets; Partner A was approximately 22% and Partner B was approximately 15%. As of January 31, 2023, Partner A and Partner B each accounted for approximately 15% of our aggregated accounts receivable and contract assets. Credit losses relating to these customers 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 three months ended April 30, 2023 and 2022 from amounts included in contract liabilities at the beginning of each period was $101.5 million and $96.9 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 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:
| | | | | | | | | | | | | | |
(in thousands) | | April 30, 2023 | | January 31, 2023 |
RPO: | | | | |
Expected to be recognized within 1 year | | $ | 435,708 | | | $ | 464,346 | |
Expected to be recognized in more than 1 year | | 256,195 | | | 262,695 | |
Total RPO | | $ | 691,903 | | | $ | 727,041 | |
3. NET LOSS PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net loss per common share attributable to Verint Systems Inc. for the three months ended April 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands, except per share amounts) | | 2023 | | 2022 |
Net income | | $ | 3,634 | | | $ | 574 | |
Net income attributable to noncontrolling interests | | 339 | | | 288 | |
Net income attributable to Verint Systems Inc. | | 3,295 | | | 286 | |
Dividends on preferred stock | | (5,200) | | | (5,200) | |
Net loss attributable to Verint Systems Inc. for basic net loss per common share | | (1,905) | | | (4,914) | |
Dilutive effect of dividends on preferred stock | | — | | | — | |
Net loss attributable to Verint Systems Inc. for diluted net loss per common share | | $ | (1,905) | | | $ | (4,914) | |
| | | | |
Weighted-average shares outstanding: | | | | |
Basic | | 64,940 | | | 64,947 | |
Dilutive effect of employee equity award plans | | — | | | — | |
Dilutive effect of 2021 Notes | | — | | | — | |
Dilutive effect of assumed conversion of preferred stock | | — | | | — | |
Diluted | | 64,940 | | | 64,947 | |
| | | | |
Net loss per common share attributable to Verint Systems Inc.: | | | | |
Basic | | $ | (0.03) | | | $ | (0.08) | |
Diluted | | $ | (0.03) | | | $ | (0.08) | |
We excluded the following weighted-average potential common shares from the calculations of diluted net loss per common share during the applicable periods because their inclusion would have been anti-dilutive:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Common shares excluded from calculation: | | | | |
Stock options and restricted stock-based awards | | 2,080 | | | 1,571 | |
Series A Preferred Stock | | 5,498 | | | 5,498 | |
Series B Preferred Stock | | 3,980 | | | 3,980 | |
In periods for which we report a net loss attributable to Verint Systems Inc. common shares, basic net loss per common share and diluted net loss per common share are identical since the effect of all potential common shares is anti-dilutive and therefore excluded.
For the three months ended April 30, 2023, 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 7, “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 7, “Long-Term Debt”) do not impact our diluted earnings per common share calculations as their effect would be anti-dilutive. 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 $62.08 conversion price, with such reduction and/or offset subject to a cap of $100.00.
Further details regarding the 2021 Notes and Capped Calls appear in Note 7, “Long-Term Debt”.
The weighted-average common shares underlying the assumed conversion of the Preferred Stock, on an as-converted basis, were excluded from the calculations of diluted net loss per common share for the three months ended April 30, 2023 and 2022, as their effect would have been anti-dilutive. Further details regarding the Preferred Stock investment appear in Note 9, “Convertible Preferred Stock”.
4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of April 30, 2023 and January 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2023 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 148,871 | | | $ | — | | | $ | — | | | $ | 148,871 | |
Money market funds | | 80,624 | | | — | | | — | | | 80,624 | |
Commercial paper | | 30,975 | | | — | | | — | | | 30,975 | |
U.S. Treasury bills | | 249 | | | — | | | — | | | 249 | |
Total cash and cash equivalents | | $ | 260,719 | | | $ | — | | | $ | — | | | $ | 260,719 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 3,646 | | | $ | — | | | $ | — | | | $ | 3,646 | |
Total short-term investments | | $ | 3,646 | | | $ | — | | | $ | — | | | $ | 3,646 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 31, 2023 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 134,289 | | | $ | — | | | $ | — | | | $ | 134,289 | |
Money market funds | | 96,941 | | | — | | | — | | | 96,941 | |
Commercial paper | | 50,869 | | | — | | | — | | | 50,869 | |
Total cash and cash equivalents | | $ | 282,099 | | | $ | — | | | $ | — | | | $ | 282,099 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 697 | | | $ | — | | | $ | — | | | $ | 697 | |
Total short-term investments | | $ | 697 | | | $ | — | | | $ | — | | | $ | 697 | |
Bank time deposits which are reported within short-term investments consist of deposits held outside of the United States 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 three months ended April 30, 2023 and 2022, proceeds from maturities and sales of short-term investments were $0.2 million and $0.3 million, respectively.
5. BUSINESS COMBINATIONS AND DIVESTITURES
Three Months Ended April 30, 2023
We did not complete any business combinations during the three months ended April 30, 2023.
Year Ended January 31, 2023
During the year ended January 31, 2023, we completed two business combinations:
•In August 2022, we completed the acquisition of a company with conversational AI technology including six employees.
•In January 2023, we completed the acquisition of a provider of appointment scheduling solutions including approximately 20 employees.
These business combinations were not material to our consolidated financial statements.
The combined consideration for these business combinations was approximately $38.4 million, including $26.1 million of combined cash paid at the closings, contingent consideration with an estimated fair value of $12.2 million, and purchase price adjustments of $0.1 million. The combined consideration was partially offset by $4.2 million of combined cash received in the acquisitions. The contingent consideration had a maximum payout amount of approximately $21.4 million as of the respective acquisition dates, and is contingent upon the achievement of certain performance targets over periods extending through January 2026. Cash paid for these business combinations was funded by cash on hand.
The combined purchase prices were allocated to intangible assets, including the recognition of $6.0 million of developed technology, $4.2 million of customer relationships, and $0.1 million of trade names. The acquisitions resulted in the recognition of $25.6 million of goodwill, of which $5.1 million is deductible for income tax purposes and $20.5 million is not deductible. Included among the factors contributing to the recognition of goodwill in these transactions were synergies in products and technologies, and the addition of skilled, assembled workforces. We incurred approximately $0.2 million of acquisition related costs, which were recorded as selling, general, and administrative expenses for the three months ended April 30, 2023.
Revenue and net income (loss) attributable to these acquisitions for the three months ended April 30, 2023 were not material.
Other Business Combination Information
For the three months ended April 30, 2023 and 2022, we recorded a charge of $0.2 million and benefit of $0.2 million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations, which was based on our historical business combinations achieving certain objectives and milestones. The aggregate fair values of the remaining contingent consideration obligations associated with business combinations was $12.9 million at April 30, 2023, of which $7.1 million was recorded within accrued expenses and other current liabilities, and $5.8 million was recorded within other liabilities.
Payments of contingent consideration earned under these agreements were $0.3 million and $2.7 million for the three months ended April 30, 2023 and 2022, respectively.
Divestiture
In March 2023, we completed the sale of an insignificant product line that we inherited as part of a legacy acquisition and did not fit with our current business priorities or strategic direction. The total consideration for the sale was $0.7 million, which is payable to us in three equal installments beginning July 2023, and through March 2025. The transaction reduced goodwill by $0.3 million and intangible assets by $0.2 million and resulted in a gain of approximately $0.2 million, which was recorded within other income, net in our condensed consolidated statement of operations.
6. INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets, excluding certain intangible assets previously acquired that were fully amortized and removed from our condensed consolidated balance sheets, consisted of the following as of April 30, 2023 and January 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| | April 30, 2023 |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | | | | | |
Customer relationships | | $ | 458,478 | | | $ | (396,652) | | | $ | 61,826 | |
Acquired technology | | 227,375 | | | (211,851) | | | 15,524 | |
Trade names | | 4,487 | | | (4,380) | | | 107 | |
Distribution network | | 2,440 | | | (2,440) | | | — | |
Total intangible assets | | $ | 692,780 | | | $ | (615,323) | | | $ | 77,457 | |
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2023 |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | | | | | |
Customer relationships | | $ | 458,013 | | | $ | (390,113) | | | $ | 67,900 | |
Acquired technology | | 229,317 | | | (212,065) | | | 17,252 | |
Trade names | | 4,479 | | | (4,359) | | | 120 | |
Distribution network | | 2,440 | | | (2,440) | | | — | |
Total intangible assets | | $ | 694,249 | | | $ | (608,977) | | | $ | 85,272 | |
Total amortization expense recorded for acquisition-related intangible assets was $8.3 million and $10.5 million for the three months ended April 30, 2023 and 2022, 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 |
2024 (remainder of year) | | $ | 24,068 | |
2025 | | 16,730 | |
2026 | | 15,346 | |
2027 | | 11,572 | |
2028 | | 6,905 | |
2029 and thereafter | | 2,836 | |
Total | | $ | 77,457 | |
There were no impairments of acquired intangible assets during the three months ended April 30, 2023 and 2022.
Goodwill activity for the three months ended April 30, 2023 was as follows:
| | | | | | | | |
(in thousands) | | Amount |
Three Months Ended April 30, 2023 | | |
Goodwill, gross, at January 31, 2023 | | $ | 1,403,256 | |
Accumulated impairment losses through January 31, 2023 | | (56,043) | |
Goodwill, net, at January 31, 2023 | | 1,347,213 | |
Foreign currency translation and other | | 7,408 | |
Business combinations, including adjustments to prior period acquisitions | | 140 | |
Goodwill, net, at April 30, 2023 | | $ | 1,354,761 | |
| | |
Balance at April 30, 2023 | | |
Goodwill, gross, at April 30, 2023 | | $ | 1,410,804 | |
Accumulated impairment losses through April 30, 2023 | | (56,043) | |
Goodwill, net, at April 30, 2023 | | $ | 1,354,761 | |
No events or circumstances indicating the potential for goodwill impairment were identified during the three months ended April 30, 2023.
7. LONG-TERM DEBT
The following table summarizes our long-term debt at April 30, 2023 and January 31, 2023:
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
(in thousands) | | 2023 | | 2023 |
2021 Notes | | $ | 315,000 | | | $ | 315,000 | |
Term Loan | | — | | | 100,000 | |
Revolving Credit Facility | | 100,000 | | | — | |
Less: unamortized debt discounts and issuance costs | | (5,328) | | | (6,092) | |
Total debt | | 409,672 | | | 408,908 | |
Less: current maturities | | — | | | — | |
Long-term debt | | $ | 409,672 | | | $ | 408,908 | |
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 Calls 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 Credit Agreement described below, to terminate an interest rate swap, 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 April 30, 2023, the 2021 Notes were not convertible.
We incurred approximately $8.9 million of issuance costs in connection with the 2021 Notes, which were 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 April 30, 2023.
Based on the closing market price of our common stock on April 30, 2023, the if-converted value of the 2021 Notes was less than their aggregate principal amount.
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 April 30, 2023, 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.
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, 2021, and 2023, as further described below (as amended, the “Credit Agreement”).
The Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan originally set to mature on June 29, 2024 (the “Term Loan”), and a $300.0 million revolving credit facility maturing on April 9, 2026 (the “Revolving Credit Facility”). The Revolving Credit Facility replaced our prior $300.0 million revolving credit facility (the “Prior Revolving Credit Facility”) and is subject to increase and reduction from time to time according to the terms of the Credit Agreement. The majority of the proceeds from the Term Loan were used to repay all outstanding term loans under our prior credit agreement.
Optional prepayments of loans under the Credit Agreement are generally permitted without premium or penalty. 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 Term Loan, reducing the outstanding principal balance to $100.0 million. On April 27, 2023, we repaid the remaining $100.0 million outstanding principal balance on our Term Loan utilizing proceeds from borrowings under our Revolving Credit Facility, along with $0.5 million of accrued interest thereon. As a result, $0.2 million of combined deferred debt issuance costs and unamortized discount associated with the Term Loan were written off and are included within interest expense on our condensed consolidated statement of operations for the three months ended April 30, 2023.
Interest rates on loans under the Credit Agreement are periodically reset, at our option, originally at either a Eurodollar Rate (which was derived from LIBOR) or an ABR Rate (each as defined in the Credit Agreement), plus in each case a margin.
On May 10, 2023, we entered into an amendment to the Credit Agreement (the “Fourth Amendment”) related to the planned phase-out of LIBOR by the UK Financial Conduct Authority. Effective July 1, 2023, borrowings under the Credit Agreement will bear interest, at our option, at either: (i) the alternate base rate (as defined in the Credit Agreement), plus the applicable margin therefor (as defined in the Credit Agreement) or (ii) the adjusted Term Secured Overnight Financing Rate published by the CME Term SOFR Administrator (as more fully defined and set forth in the Credit Agreement, “Adjusted Term SOFR”), plus the applicable margin therefor. The applicable margin in each case is determined based on our Leverage Ratio (as defined below) and ranges from 0.25% to 1.25% for borrowings bearing interest at the alternate base rate and from 1.25% to 2.25% for borrowings bearing interest based on Adjusted Term SOFR.
Borrowings outstanding under the Revolving Credit Facility were $100.0 million at April 30, 2023, which is included in long-term debt on our condensed consolidated balance sheet. For borrowings under the Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the Credit Agreement)
leverage ratio (the "Leverage Ratio"). As of April 30, 2023, the interest rate on our revolving credit facility borrowings was 6.52%. In addition, we are required to pay a commitment fee with respect to unused availability under the Revolving Credit Facility at rates per annum determined by reference to our Leverage Ratio. The proceeds of borrowings under the Revolving Credit Facility may be used for our working capital and general corporate purposes, including for permitted acquisitions and permitted stock repurchases, and the repayment of term loans, if any.
Our obligations under the 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 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The Credit Agreement also contains a financial covenant that, solely with respect to the 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 Credit Agreement.
The 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 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the Credit Agreement may be terminated.
Deferred debt issuance costs associated with the Term Loan were amortized using the effective interest rate method, and deferred debt issuance costs associated with the Revolving Credit Facility are being amortized on a straight-line basis.
Interest Expense
The following table presents the components of interest expense incurred on the 2021 Notes and on borrowings under our Credit Agreement, for the three months ended April 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
2021 Notes: | | | | |
Interest expense at 0.25% coupon rate | | $ | 197 | | | $ | 195 | |
Amortization of deferred debt issuance costs | | 443 | | | 439 | |
Total Interest Expense — 2021 Notes | | $ | 640 | | | $ | 634 | |
| | | | |
Borrowings under Credit Agreement: | | | | |
Interest expense at contractual rates | | $ | 1,650 | | | $ | 560 | |
Amortization of debt discounts | | 5 | | | 5 | |
Amortization of deferred debt issuance costs | | 204 | | | 211 | |
Losses on early retirements of debt | | 237 | | | — | |
Total Interest Expense — Borrowings under Credit Agreement | | $ | 2,096 | | | $ | 776 | |
8. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of April 30, 2023 and January 31, 2023:
| | | | | | | | | | | | | | |
| | April 30, | | January 31, |
(in thousands) | | 2023 | | 2023 |
Raw materials | | $ | 3,505 | | | $ | 3,325 | |
Work-in-process | | 40 | | | 40 | |
Finished goods | | 10,008 | | | 9,263 | |
Total inventories | | $ | 13,553 | | | $ | 12,628 | |
Condensed Consolidated Statements of Operations
Other income, net consisted of the following for the three months ended April 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Foreign currency gains, net | | $ | 237 | | | $ | 1,713 | |
Other, net | | (213) | | | (39) | |
Total other income, net | | $ | 24 | | | $ | 1,674 | |
Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the three months ended April 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Cash paid for interest | | $ | 2,513 | | | $ | 930 | |
Cash payments of income taxes, net | | $ | 3,758 | | | $ | 2,238 | |
Cash payments for operating leases | | $ | 1,640 | | | $ | 12,195 | |
Non-cash investing and financing transactions: | | | | |
Finance leases of property and equipment | | $ | 212 | | | $ | 12 | |
Accrued but unpaid purchases of property and equipment | | $ | 360 | | | $ | 988 | |
Accrued but unpaid purchases of treasury stock | | $ | — | | | $ | 453 | |
Excise tax on share repurchases | | $ | 417 | | | $ | — | |
9. CONVERTIBLE PREFERRED STOCK
On December 4, 2019, we entered into the 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, 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, 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 issuance 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.
Each series of Preferred Stock pays dividends at an annual rate of 5.2% until May 7, 2024, and thereafter at a rate of 4.0%, subject to adjustment under certain circumstances. 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 December 4, 2019 (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 three months ended April 30, 2023, we paid $10.4 million of preferred stock dividends, all of which was accrued as of January 31, 2023, and there were $6.9 million of cumulative undeclared and unpaid preferred stock dividends at April 30, 2023. There were no accrued dividends as of April 30, 2023. We reflected $5.2 million of preferred stock dividends in our condensed consolidated results of operations, for purposes of computing net loss attributable to Verint Systems Inc. common shares, for each of the three months ended April 30, 2023 and 2022.
Conversion
The Series A Preferred Stock was initially 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 December 4, 2019. 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 Preferred Stock 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 April 30, 2023, 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 13.0%.
At any time after May 7, 2023, in the case of the Series A Preferred Stock, and April 6, 2024, in the case of the Series B Preferred Stock, 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 May 7, 2026, in the case of the Series A Preferred Stock, and April 6, 2027, in the case of the Series B Preferred Stock, 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 Preferred Stock may not be sold or transferred without our prior written consent. The common stock issuable upon conversion of the Preferred Stock is not subject to this restriction. The restriction on the sale or transfer of the Preferred Stock does not apply to certain transfers to one or more permitted co-investors or transfers or pledges of the Preferred Stock pursuant to the terms of specified margin loans 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 November 7, 2028, in the case of the Series A Preferred Stock, and October 6, 2029, in the case of the Series B Preferred Stock, 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 sheets as of April 30, 2023 and January 31, 2023, 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 April 30, 2023, 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 November 7, 2028, in the case of the Series A Preferred Stock, and October 6, 2029, in the case of the Series B Preferred Stock, 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 April 30, 2023 plus accrued and unpaid dividends. As of April 30, 2023, the stated value of the liquidation preference for each series of Preferred Stock was $200.0 million and cumulative, unpaid dividends on each series of Preferred Stock was $3.5 million.
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 were recognized as a non-cash charge or benefit within other income (expense), net on the condensed consolidated statement of operations.
Upon issuance of the Series A Preferred Stock on May 7, 2020, 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 and 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.
10. STOCKHOLDERS’ EQUITY
Common Stock Dividends
We did not declare or pay any cash dividends on our common stock during the three months ended April 30, 2023 and 2022. Under the terms of our Credit Agreement, we are subject to certain restrictions on declaring and paying cash 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.
Treasury Stock
From time to time, our board of directors has approved limited programs to repurchase shares of our common stock from our directors or officers in connection with the vesting of restricted stock or restricted stock units to facilitate required income tax withholding by us or the payment of required income taxes by such holders. In addition, the terms of some of our equity award agreements with all grantees provide for automatic repurchases by us for the same purpose if a vesting-related or delivery-related tax event occurs at a time when the holder is not permitted to sell shares in the market. Our stock bonus program contains similar terms. Any such repurchases of common stock occur at prevailing market prices and are recorded as treasury stock.
We periodically purchase common stock from our 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 occurring during a Company-imposed trading blackout or lockup period. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired.
No treasury stock remained outstanding at April 30, 2023 and January 31, 2023, respectively.
Stock Repurchase Programs
On December 7, 2022, we announced that our board of directors had authorized a stock repurchase program for the period from December 12, 2022 until January 31, 2025, whereby we may repurchase shares of common stock in an amount not to exceed, in the aggregate, $200.0 million during the repurchase period.
During the year ended January 31, 2023, we repurchased approximately 649,000 shares of our common stock for a cost of $23.5 million under the current stock repurchase program. During the three months ended April 30, 2023, we repurchased approximately 1,593,000 shares of our common stock for a cost of $60.1 million, including excise tax of $0.4 million, under the current stock repurchase program. During the three months ended April 30, 2023, we retired all 1,593,000 shares, which was recorded as a reduction of common stock and additional paid-in capital. These shares were returned to the status of authorized and unissued shares. Our share repurchases in excess of issuances are subject to a 1% excise tax enacted by the IRA. The excise tax of $0.4 million was recognized as part of the cost basis of shares acquired in the condensed consolidated statements of stockholders’ equity during the three months ended April 30, 2023. Subsequent to April 30, 2023 through June 1, 2023, we repurchased approximately 159,000 shares of our common stock for $5.5 million under this program.
During the three months ended April 30, 2022, we repurchased 2,000,000 shares of our common stock for a cost of $105.7 million under a prior stock repurchase program.
Issuance of Convertible Preferred Stock
On December 4, 2019, in conjunction with the planned Spin-Off, 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 April 30, 2023, Apax’s ownership in us on an as-converted basis was approximately 13.0%. Please refer to Note 9, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive 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 loss is presented as a separate line item in the stockholders’ equity section of our condensed consolidated balance sheets. Accumulated other comprehensive loss items have no impact on our net income as presented in our condensed consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive loss for the three months ended April 30, 2023:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Unrealized Losses on Foreign Exchange Contracts Designated as Hedges | | Foreign Currency Translation Adjustments | | Total |
Accumulated other comprehensive loss at January 31, 2023 | | $ | (87) | | | $ | (154,012) | | | $ | (154,099) | |
Other comprehensive (loss) income before reclassifications | | (290) | | | 8,612 | | | 8,322 | |
Amounts reclassified out of accumulated other comprehensive loss | | (188) | | | — | | | (188) | |
Net other comprehensive (loss) income | | (102) | | | 8,612 | | | 8,510 | |
Accumulated other comprehensive loss at April 30, 2023 | | $ | (189) | | | $ | (145,400) | | | $ | (145,589) | |
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.
The amounts reclassified out of accumulated other comprehensive loss into the condensed consolidated statements of operations, with presentation location, for the three months ended April 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, | | |
(in thousands) | | 2023 | | 2022 | | Financial Statement Location |
Unrealized losses on derivative financial instruments: | | | | | | |
Foreign currency forward contracts | | $ | (2) | | | $ | — | | | Cost of recurring revenue |
| | (20) | | | (9) | | | Cost of nonrecurring revenue |
| | (140) | | | (49) | | | Research and development, net |
| | (65) | | | (24) | | | Selling, general and administrative |
| | (227) | | | (82) | | | Total, before income taxes |
| | 39 | | | 14 | | | Benefit from income taxes |
| | $ | (188) | | | $ | (68) | | | Total, net of income taxes |
11. INCOME TAXES
Our interim 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 April 30, 2023, we recorded an income tax provision of $4.4 million on pretax income of $8.0 million, which represented an effective income tax rate of 54.6%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign activities, offset by lower statutory rates in certain foreign jurisdictions.
For the three months ended April 30, 2022, we recorded an income tax provision of $0.3 million on pretax income of $0.9 million, which represented an effective income tax rate of 34.0%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign activities, partially offset by lower statutory rates in certain foreign jurisdictions.
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 for income taxes guidance 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 $87.7 million and $87.9 million (excluding interest and penalties) as of April 30, 2023 and January 31, 2023, respectively, that if recognized, would impact our effective income tax rate. The accrued liability for interest and penalties was $5.3 million and $5.2 million at April 30, 2023 and January 31, 2023, 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 April 30, 2023 could decrease by approximately $7.0 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.
12. 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 April 30, 2023 and January 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| | April 30, 2023 |
| | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | |
Money market funds | | $ | 80,624 | | | $ | — | | | $ | — | |
U.S. Treasury bills, classified as cash and cash equivalents | | 249 | | | — | | | — | |
Commercial paper, classified as cash and cash equivalents | | — | | | 30,975 | | | — | |
Foreign currency forward contracts | | — | | | 5 | | | — | |
Total assets | | $ | 80,873 | | | $ | 30,980 | | | $ | — | |
Liabilities: | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 235 | | | $ | — | |
Contingent consideration — business combinations | | — | | | — | | | 12,884 | |
Total liabilities | | $ | — | | | $ | 235 | | | $ | 12,884 | |
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2023 |
| | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | |
Money market funds | | $ | 96,941 | | | $ | — | | | $ | — | |
Commercial paper, classified as cash and cash equivalents | | — | | | 50,869 | | | — | |
Foreign currency forward contracts | | — | | | 19 | | | — | |
Contingent consideration receivable | | — | | | 8 | | | — | |
Total assets | | $ | 96,941 | | | $ | 50,896 | | | $ | — | |
Liabilities: | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 124 | | | $ | — | |
Contingent consideration — business combinations | | — | | | — | | | 12,717 | |
Total liabilities | | $ | — | | | $ | 124 | | | $ | 12,717 | |
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 three months ended April 30, 2023:
| | | | | | | | |
| | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 |
Fair value measurement at beginning of period | | $ | 12,717 | |
Contingent consideration liabilities recorded for business combinations | | — | |
Changes in fair values, recorded in operating expenses | | 220 | |
Payments of contingent consideration | | (250) | |
Foreign currency translation and other | | 197 | |
Fair value measurement at end of period | | $ | 12,884 | |
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. There
were no liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the three months ended April 30, 2022.
There were no transfers between levels of the fair value measurement hierarchy during the three months ended April 30, 2023 and 2022.
Fair Value Measurements
Money Market Funds and U.S. Treasury Bills - We value our money market funds and U.S. treasury bills using quoted active market prices for such instruments.
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.
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 6.6% to 7.7%, with a weighted average discount rate of 7.2% in our calculation of the estimated fair values of our contingent consideration liabilities as of April 30, 2023. We utilized discount rates ranging from 6.6% to 7.6%, with a weighted average discount rate of 6.9% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2023. The contingent consideration receivable was fully paid as of April 30, 2023.
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 value of our Revolving Credit Facility borrowing was approximately $99.0 million at April 30, 2023. The estimated fair value of our Term Loan borrowing was approximately $100 million at January 31, 2023. On April 27, 2023, we repaid in full the remaining $100 million outstanding balance on our Term Loan utilizing proceeds from borrowings under our Revolving Credit Facility. We had no borrowings under our Revolving Credit Facility at January 31, 2023. The estimated fair values of the Term Loan borrowings were based upon indicative bid and ask prices as determined by the agent responsible for the syndication of our term loans. We considered 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 Loan traded. The estimated fair value of borrowings under our Revolving Credit Facility is based upon indicative market values provided by one of our lenders. The indicative prices provided to us as at each of April 30, 2023 and January 31, 2023 did not significantly differ from par value.
The estimated fair values of our 2021 Notes were approximately $279.0 million and $282.0 million at April 30, 2023 and January 31, 2023, respectively. The estimated fair values of the 2021 Notes were determined based on quoted bid and ask prices in the over-the-counter market in which the 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.
Investments
During the three months ended April 30, 2023, we invested approximately $1.1 million in a privately-held company via a simple agreement for future equity (“SAFE”). The SAFE provides that, upon the completion by such company of a qualified equity financing, we will automatically receive the number of shares of capital stock of such company equal to the SAFE purchase amount divided by the Discount Price (as such term is defined in the SAFE). If there is a liquidity event affecting such company, such as a change in control or initial public offering, we will receive a cash payment equal to the greater of (a) the SAFE purchase amount or (b) the amount payable on the number of shares of common stock of such company equal to the SAFE purchase amount divided by the Liquidity Price (as such term is defined in the SAFE). Our investment is carried at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and is included within other assets on the condensed consolidated balance sheets as of April 30, 2023.
The carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $5.1 million as of April 30, 2023 and January 31, 2023. These investments were included within other assets on the condensed consolidated balance sheets as of April 30, 2023 and January 31, 2023. There were no observable price changes in our investments in privately-held companies during the three months ended April 30, 2023 and 2022. We did not recognize any impairments during the three months ended April 30, 2023 and 2022.
13. 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 $6.6 million and $6.8 million as of April 30, 2023 and January 31, 2023, respectively.
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 April 30, 2023 and January 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | |
| | | Fair Value at |
| | | April 30, | | January 31, |
(in thousands) | Balance Sheet Classification | | 2023 | | 2023 |
Derivative assets: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Prepaid expenses and other current assets | | $ | 5 | | | $ | 19 | |
Total derivative assets | | | $ | 5 | | | $ | 19 | |
| | | | | |
Derivative liabilities: | | | | | |
Foreign currency forward contracts: | | | | | |
Designated as cash flow hedges | Accrued expenses and other current liabilities | | $ | 235 | | | $ | 124 | |
Total derivative liabilities | | | $ | 235 | | | $ | 124 | |
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 statement of operations for the three months ended April 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Net losses recognized in AOCL: | | | | |
Foreign currency forward contracts | | $ | (350) | | | $ | (270) | |
| | | | |
Net losses reclassified from AOCL to the condensed consolidated statements of operations: | | | | |
Foreign currency forward contracts | | $ | (227) | | | $ | (82) | |
For information regarding the line item locations of the net losses on derivative financial instruments reclassified out of AOCL into the condensed consolidated statements of operations, see Note 10, “Stockholders’ Equity”.
All of the foreign currency forward contracts underlying the net unrealized losses recorded in our accumulated other comprehensive loss at April 30, 2023 mature within twelve months, and therefore we expect all such losses to be reclassified into earnings within the next twelve months.
14. 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 were 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.
At our annual meeting of stockholders on June 22, 2023, our stockholders will be asked to consider a proposal to approve the Verint Systems Inc. 2023 Long-Term Stock Incentive Plan (the “2023 Plan”). If the 2023 Plan is approved, no further awards will be made under the 2019 Plan following the date of such approval.
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 months ended April 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Cost of revenue — recurring | | $ | 296 | | | $ | 525 | |
Cost of revenue — nonrecurring | | 140 | | | 640 | |
Research and development, net | | 2,327 | | | 2,419 | |
Selling, general and administrative | | 12,216 | | | 14,785 | |
Total stock-based compensation expense | | $ | 14,979 | | | $ | 18,369 | |
The following table summarizes stock-based compensation expense by type of award for the three months ended April 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Restricted stock units and restricted stock awards | | $ | 13,436 | | | $ | 16,011 | |
Stock bonus program and bonus share program | | 1,378 | | | 2,353 | |
Total equity-settled awards | | 14,814 | | | 18,364 | |
Phantom stock units (cash-settled awards) | | 165 | | | 5 | |
Total stock-based compensation expense | | $ | 14,979 | | | $ | 18,369 | |
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 three months ended April 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
| | 2023 | | 2022 |
(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 | | 2,230 | | | $ | 52.42 | | | 2,454 | | | $ | 42.99 | |
Granted | | 1,665 | | | $ | 37.36 | | | 1,557 | | | $ | 56.42 | |
Released | | (475) | | | $ | 50.22 | | | (465) | | | $ | 42.20 | |
Forfeited | | (32) | | | $ | 50.63 | | | (47) | | | $ | 43.13 | |
Ending balance | | 3,388 | | | $ | 45.34 | | | 3,499 | | | $ | 49.07 | |
With respect to our stock bonus program, the 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 and PSU 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 April 30, 2023, 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 three months ended April 30, 2023 and 2022 (these amounts are also included in the Award Activity Table above for 2023 and 2022):
| | | | | | | | | | | | | | |
| | Three Months Ended April 30, |
(in thousands) | | 2023 | | 2022 |
Beginning balance | | 532 | | | 547 | |
Granted | | 277 | | | 278 | |
Released | | (230) | | | (89) | |
Forfeited | | (10) | | | — | |
Ending balance | | 569 | | | 736 | |
Excluding PSUs, we granted 1,388,000 RSUs during the three months ended April 30, 2023.
As of April 30, 2023, there was approximately $119.7 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 2.2 years.
Stock Bonus Program and Bonus Share 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 capacity remains available under the program 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 determined using a five-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.
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, 2023, our board of directors approved the use of up to 300,000 shares of common stock in the aggregate for awards under these two programs, with up to 200,000 shares of common stock, and a discount of 15% approved for awards under our stock bonus program. We currently expect to issue approximately 27,000 shares under the stock bonus program and 178,000 shares under the bonus share program, in respect of the year ended January 31, 2023, which are expected to be issued during the first half of the year ending January 31, 2024.
In March 2023, our board of directors approved the use of up to 300,000 shares of common stock in the aggregate under these two programs, with up to 200,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the performance period ending January 31, 2024. Any shares earned under these programs will be issued during the year ended January 31, 2025.
The combined accrued liabilities for these two programs were $9.2 million and $7.9 million at April 30, 2023 and January 31, 2023, respectively.
15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
CTI Litigation
In March 2009, one of our former employees, Ms. Orit Deutsch, commenced legal actions in Israel against our former primary Israeli subsidiary, Cognyte Technologies Ltd. (formerly known as Verint Systems Limited or “VSL”) (Case Number 4186/09) and against our former 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, (ii) dismissed the motion to certify the suit against VSL and Comverse Limited, and (iii) approved the plaintiffs’ motion to certify the suit as a class action against CTI
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 the 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 Israeli 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 Israeli 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. On December 15, 2021, the Israeli Supreme Court rejected CTI’s motion to appeal and the proceedings in the District Court resumed.
At the recommendation of the District Court, in June 2022, the parties conducted another round of mediation in New York. On July 10, 2022, the parties reached an agreement to settle the matter on terms set forth in a settlement agreement that was executed by all parties and submitted a motion for approval of the settlement agreement to the District Court. Under the terms of the settlement agreement, subject to full and final waiver, Mavenir Inc. and/or Comverse, Inc. and/or Mavenir Ltd. agreed to pay a total of $16.0 million (such amount to be paid in three phases as set forth in the settlement agreement) as compensation to the plaintiffs and members of the class. The compensation amount is comprehensive, final and absolute and includes within it all the amounts and expenses to be paid in connection with the settlement agreement. Under the terms of an associated guaranty agreement, Verint has guaranteed the payment of the compensation amount in the event it is not paid by the primary obligors. On February 7, 2023, the District Court approved the settlement without material changes. As of April 30, 2023, the first installment of the compensation amount had been paid by Mavenir, leaving two installments of approximately $4.7 million each to be paid between September 2023 and April 2024.
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.
As of April 30, 2023, we had a remaining liability of $9.5 million, which is included within accrued expenses and other current liabilities, and an offsetting indemnification receivable of $9.5 million, which is included in prepaid expenses and other current assets. There was no impact to our condensed consolidated statement of operations.
Unfair Competition Litigation and Related Investigation
As previously disclosed, Verint Americas Inc., as successor to ForeSee Results, Inc. (“ForeSee”), was the defendant in two Eastern District of Michigan cases captioned ACSI LLC v. ForeSee Results, Inc., and CFI Group USA LLC v. Verint Americas Inc. The former case was filed on October 24, 2018 against ForeSee Results, Inc. by American Customer Satisfaction Index, LLC (“ACSI LLC”) (Case No. 2:18-cv-13319) and alleged infringement of two federally registered trademarks and common law unfair competition under federal and state law. The latter case was filed on September 5, 2019 against Verint Americas Inc. (as successor in interest to ForeSee) by CFI Group USA LLC (“CFI”) (Case No. 2:19-cv-12602) and alleged unfair competition and false advertising under federal and state law, as well as tortious interference with contract. We believe that the claims asserted by the plaintiffs in these matters were without merit. Following the filing of the Eastern District of Michigan litigation, ForeSee filed affirmative litigation in the U.S. District Court for the District of Delaware (Case No. 1:21-cv-00674, Complaint filed on May 7, 2021) against ACSI LLC, CFI, Claes Fornell, and CFI Software LLC (the “Fornell Group”) asserting fraud and other claims against ACSI LLC, CFI, Fornell, and CFI Software for, among other things, their breach of a “Joinder and Waiver Agreement” entered into in connection with the December 2013 sale of ForeSee to its previous owner and misrepresentations in the associated deal documents. Verint acquired ForeSee in December 2018.
In April 2023, the parties reached an agreement in principle to settle these actions, and on June 1, 2023, the parties signed a definitive settlement agreement. Under the terms of the settlement agreement, Verint will pay $9.0 million to the Fornell Group and the parties have agreed to certain restrictive covenants with respect to the future business activities of both ForeSee and the Fornell Group. The agreement provides that the settlement does not constitute a ruling on the merits, an admission as to any issue of fact or principle of law, or an admission of liability or wrongdoing by either ForeSee or Verint. Following the
execution of the settlement agreement, the two cases in Michigan against us, and the case in Delaware filed by us, have been [or are in the process of being] dismissed.
Verint was also informed that the U.S. Attorney’s Office for the Eastern District of Michigan’s Civil Division (“USAO”) is conducting a False Claims Act investigation concerning allegations ForeSee and/or Verint failed to provide the federal government the services described in certain government contracts related to ForeSee’s products inherited by Verint in the acquisition. Verint received a Civil Investigation Demand (“CID”) in connection with this investigation and provided responses. The False Claims Act contains provisions that allow for private persons (“relators”) to initiate actions by filing claims under seal. We believe that this investigation was initiated in coordination with the Eastern District of Michigan litigation discussed above. Verint continues to work cooperatively with the USAO in its review of this matter.
In March 2023, Verint and the Assistant U.S. Attorney overseeing the USAO investigation reached an agreement in principle to resolve the USAO matter. The proposed settlement, which would result in the payment by Verint of $7.0 million and would contain a statement of no admission to liability, is subject to definitive documentation as well as review and approval by the USAO, potential objection by any relators, and approval by a court if the investigation is in connection with a lawsuit initiated by a relator.
As of January 31, 2023, we recognized a $7.0 million legal settlement liability in respect of the USAO matter and a $3.5 million legal settlement liability in respect of the ACSI and CFI matters within accrued expenses and other current liabilities, and a corresponding insurance recovery receivable in prepaid expenses and other current assets on our consolidated balance sheets. These loss accruals and insurance recoveries were offset within selling, general and administrative expenses in our consolidated statements of operations for the year ended January 31, 2023, resulting in no impact on our consolidated statements of operations.
As of April 30, 2023, we have accrued a $7.0 million legal settlement liability in respect of the USAO matter and a $9.0 million legal settlement liability in respect of the ACSI and CFI matters within accrued expenses and other current liabilities. The incremental settlement costs of $5.5 million related to the ACSI and CFI matters as a result of the settlement described above, is included within selling, general and administrative expenses in our condensed consolidated statement of operations for the three months ended April 30, 2023. We reached a final settlement with one of our insurance carriers for a total cumulative insurance recovery of $14.5 million for the losses we incurred related to these actions, which offset settlement and legal expenses during the year ended January 31, 2023. We collected $2.0 million during the year ended January 31, 2023 and $12.5 million was collected in April 2023.
We are a party to various other 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.
16. SUBSEQUENT EVENTS
Credit Agreement Amendment
On May 10, 2023, we entered into the Fourth Amendment (“Fourth Amendment”) to the Credit Agreement, with JPMorgan Chase Bank, N.A., as administrative agent, which amended the Credit Agreement to provide for the Eurodollar Rate thereunder, which was derived from LIBOR, together with all related LIBOR-based mechanics and provisions, to be replaced with Term SOFR (as defined in the Credit Agreement) and the administrative agent’s customary Term SOFR interest rate-based mechanics and related provisions. Please refer to Note 7, “Long-Term Debt” for a more detailed discussion of the Fourth Amendment and Credit Agreement.
Settlement of Litigation
On June 1, 2023, Verint and the Fornell Group signed a definitive settlement agreement to settle several litigation matters. Please refer to Note 15, “Commitments and Contingencies” for additional disclosure regarding the settlement.