Notes to Consolidated Financial Statements
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Unless the context otherwise requires, the terms “Verint”, “we”, “us”, and “our” in these notes to 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. These 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 (“SMB”) organizations.
Verint is headquartered in Melville, New York, and has more than 30 offices worldwide. We have approximately 4,400 passionate professionals around the globe exclusively focused on helping brands provide Boundless Customer Engagement™.
Recent Developments
Spin-Off of Cognyte Software Ltd.
On February 1, 2021, we completed the previously announced spin-off (“the Spin-Off”) of Cognyte Software Ltd. (“Cognyte”), a company limited by shares incorporated by laws of the State of Israel whose business and operations consist of our former Cyber Intelligence Solutions business (the “Cognyte Business”). The Spin-Off of Cognyte was completed by way of a pro rata distribution in which holders of Verint’s common stock, par value $0.001 per share, received one ordinary share of Cognyte, no par value, for every share of common stock of Verint held of record as of the close of business on January 25, 2021. After the distribution, we do not beneficially own any ordinary shares of Cognyte and no longer consolidate Cognyte into our financial results for periods ending after January 31, 2021. The Spin-Off was intended to be generally tax-free to our stockholders for U.S. federal income tax purposes.
The financial results of Cognyte for the years ended January 31, 2021 and 2020 are presented as income from discontinued operations, net of taxes on the consolidated statements of operations and its assets and liabilities as of January 31, 2021 are presented as assets and liabilities of discontinued operations on the consolidated balance sheets. The historical consolidated statement of cash flows has also been revised to reflect the effect of the Spin-Off. The historical statements of comprehensive income (loss) and the balances related to stockholders’ equity have not been revised to reflect the effect of the Spin-Off. For further information on discontinued operations, see Note 2, “Discontinued Operations”. Unless noted otherwise, discussion in the notes to the consolidated financial statements pertain to continuing operations.
Apax Convertible Preferred Stock Investment
On December 4, 2019, we announced that an affiliate (the “Apax Investor”) of Apax Partners (“Apax”) would make an investment in us in an amount of up to $400.0 million. Under the terms of the Investment Agreement, dated as of December 4, 2019 (the “Investment Agreement”), the Apax Investor purchased $200.0 million of our Series A convertible preferred stock (“Series A Preferred Stock”) in an issuance that closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of Series B convertible preferred stock (“Series B Preferred Stock” and together with the Series A Preferred Stock, the “Preferred Stock”) in an issuance that closed on April 6, 2021. As of January 31, 2022, Apax’s ownership in us on an as-converted basis was approximately 12.9%. Please refer to Note 10, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
Impact of COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The pandemic has caused significant economic disruption and uncertainty, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Our customers, partners, and vendors have also implemented actions in response to the pandemic, including among others, office closings, site restrictions, and employee travel restrictions. In response to these challenges, we established remote working arrangements for our employees, limited non-essential business travel, and canceled or shifted our customer, employee, and industry events to a virtual-only format. As the pandemic has evolved, we have adapted our pandemic response on a localized basis based on the prevailing conditions in each country in which we and our customers, partners, or vendors operate.
Principles of Consolidation
The accompanying 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 consolidated balance sheet, but separately from our stockholders’ equity. On January 31, 2022, we exercised the option to acquire the noncontrolling interests in two majority owned subsidiaries. Prior to the exercise, we accounted for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We included the fair value of the option within accrued expenses and other current liabilities and did not recognize noncontrolling interests in these subsidiaries.
Equity investments in companies in which we have less than a 20% ownership interest and cannot exercise significant influence, and which do not have readily determinable fair values, are accounted for at cost, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, less any impairment.
We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
In light of the currently unknown extent and duration of the COVID-19 pandemic, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply to certain of our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of January 31, 2022 and through the date of this report. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Reclassifications
Following the Spin-Off, we began to operate as a pure-play customer engagement company and determined that presenting our revenue and cost of revenue as recurring and nonrecurring would be a more meaningful representation of the nature of our offerings, provide greater transparency and clarity to users of the financial statements, and is more consistent with industry practice and internal reporting. Accordingly, prior period amounts have been reclassified to conform to the current period presentation in our consolidated financial statements and the accompanying notes. For a description of the types of revenue included in each category, see Note 3, “Revenue Recognition”.
Restricted Cash and Cash Equivalents, and Restricted Bank Time Deposits
Restricted cash and cash equivalents, and restricted bank time deposits are pledged as collateral or otherwise restricted as to use for vendor payables, general liability insurance, workers’ compensation insurance, warranty programs, and other obligations.
Investments
Our investments generally consist of bank time deposits, and marketable debt securities of corporations, the U.S. government, and agencies of the U.S. government, all with remaining maturities in excess of 90 days at the time of purchase. We held no marketable debt securities at January 31, 2022 and 2021. Investments with maturities in excess of one year are included in other assets.
Accounts Receivable, Net
Trade accounts receivable are comprised of invoiced amounts due from customers for which we have an unconditional right to collect and are not interest-bearing. Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, bank time deposits, short-term investments, trade accounts receivable, and contract assets. We invest our cash in bank accounts, certificates of deposit, and money market accounts with major financial institutions, in U.S. government and agency obligations, and in debt securities of corporations. By policy, we seek to limit credit exposure on investments through diversification and by restricting our investments to highly rated securities.
We grant credit terms to our customers in the ordinary course of business. Concentrations of credit risk with respect to trade accounts receivable and contract assets are generally limited due to the large number of customers comprising our customer base and their dispersion across different industries and geographic areas. There was one customer, an authorized global reseller of our solutions, that accounted for approximately 14% of our aggregated accounts receivable and contract assets at January 31, 2022 and 2021, and approximately 10% of our total revenue for the year ended January 31, 2021, but did not represent 10% or greater of our total revenue for the years ended January 31, 2022 or 2020. Credit losses relating to this reseller have historically been immaterial. No end-customer represented more than 10% of our revenue during the years ended January 31, 2022, 2021, and 2020.
Allowance for Credit Losses
We adopted Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments on February 1, 2020. ASU No. 2016-13 requires us to make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables over the lifetime of the receivables. Our allowance for expected credit losses is estimated based on an analysis of the aging of our accounts receivable and contract assets, historical write-offs, customer payment patterns, individual customer creditworthiness, current economic trends, reasonable and supportable forecasts of future economic conditions, and/or establishment of specific reserves for customers in adverse financial condition. We write-off an account receivable and charge it against its recorded allowance at the point when it is considered uncollectible. We assess the adequacy of the allowance for credit losses on a quarterly basis.
The following table summarizes the activity in our allowance for credit losses for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Allowance for credit losses, beginning of year | | $ | 1,609 | | | $ | 1,239 | | | $ | 866 | |
Cumulative effect of adoption of ASU No. 2016-13 | | — | | | 577 | | | — | |
Provisions charged to expense | | 1,242 | | | 1,899 | | | 1,211 | |
Amounts written off | | (1,666) | | | (1,931) | | | (1,024) | |
Other, including fluctuations in foreign exchange rates | | 75 | | | (175) | | | 186 | |
Allowance for credit losses, end of year | | $ | 1,260 | | | $ | 1,609 | | | $ | 1,239 | |
Our estimated expected credit losses associated with contract assets were not material as historical write-offs have been insignificant.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted-average method of inventory accounting. The valuation of our inventories requires us to make estimates regarding excess or obsolete inventories,
including making estimates of the future demand for our products. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand, price, or technological developments could have a significant impact on the value of our inventory and reported operating results. Charges for excess and obsolete inventories are included within cost of revenue.
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method based over the estimated useful lives of the assets. The vast majority of equipment, furniture and other is depreciated over periods ranging from three years to seven years. Software is typically depreciated over periods ranging from three years to four years. Buildings are depreciated over periods ranging from ten years to twenty-five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. Finance leased assets are amortized over the related lease term.
The cost of maintenance and repairs of property and equipment is charged to operations as incurred. When assets are retired or disposed of, the cost and accumulated depreciation or amortization thereon are removed from the consolidated balance sheet and any resulting gain or loss is recognized in the consolidated statement of operations.
Business Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the enterprise’s chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance.
Prior to the Spin-Off, we conducted our business through two operating segments, which were also our two reportable segments—Customer Engagement and Cyber Intelligence. Upon completion of the Spin-Off, we are a pure-play customer engagement company that operates as a single reporting segment as our Chief Executive Officer, who is our CODM, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Goodwill and Other Acquired Intangible Assets
For business combinations, the purchase prices are allocated to the tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill.
We test goodwill for impairment at the reporting unit level, which can be an operating segment or one level below an operating segment, on an annual basis as of November 1, or more frequently if changes in facts and circumstances indicate that impairment in the value of goodwill may exist. Subsequent to the Spin-Off of Cognyte on February 1, 2021, we became a pure-play customer engagement company that operates as a single reporting unit.
In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we elect to bypass a qualitative assessment, or if our qualitative assessment indicates that goodwill impairment is more likely than not, we perform quantitative impairment testing. If our quantitative testing determines that the carrying value of the reporting unit exceeds its fair value, goodwill impairment is recognized in an amount equal to that excess, limited to the total goodwill allocated to the reporting unit.
We utilize some or all of three primary approaches to assess the fair value of a reporting unit: (a) an income-based approach, using projected discounted cash flows, (b) a market-based approach, using valuation multiples of comparable companies, and (c) a transaction-based approach, using valuation multiples for recent acquisitions of similar businesses made in the marketplace. Our estimate of fair value of our reporting unit is based on a number of subjective factors, including: (a) appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction approach), (b) estimates of future growth rates, (c) estimates of our future cost structure, (d) discount rates for our estimated cash flows, (e) selection of peer group companies for the comparable public company and the comparable market transaction approaches, (f) required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts.
The valuation methodology to determine the fair value of the reporting units is sensitive to management's forecasts of future revenue, profitability and market conditions. In addition, the extent to which the COVID-19 pandemic may adversely impact our business depends on future developments, which are uncertain and unpredictable, depending upon the severity and duration
of the outbreak, and the effectiveness of actions taken globally to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time but may adversely affect our business and financial results. If there were an adverse change in facts and circumstances, then an impairment charge may be necessary in the future. Should the fair value of our reporting unit fall below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. We monitor our reporting unit to determine if there is an indicator of potential impairment.
Acquired identifiable intangible assets include identifiable acquired technologies, customer relationships, trade names, distribution networks, non-competition agreements, sales backlog, and in-process research and development. We amortize the cost of finite-lived identifiable intangible assets over their estimated useful lives, which are periods of 10 years or less. Amortization is based on the pattern in which the economic benefits of the intangible asset are expected to be realized, which typically is on a straight-line basis. The fair values assigned to identifiable intangible assets acquired in business combinations are determined primarily by using the income approach, which discounts expected future cash flows attributable to these assets to present value using estimates and assumptions determined by management. The acquired identifiable finite-lived intangible assets are being amortized primarily on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
Fair Value Measurements
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This fair value hierarchy consists of three levels of inputs that may be used to measure fair value:
•Level 1: quoted prices in active markets for identical assets or liabilities;
•Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
•Level 3: unobservable inputs that are supported by little or no market activity.
We review the fair value hierarchy classification of our applicable assets and liabilities at each reporting period. Changes in the observability of valuation inputs may result in transfers within the fair value measurement hierarchy. Please refer to Note 14, “Fair Value Measurements”, for further discussion regarding transfers between levels of the fair value measurement hierarchy.
Fair Values of Financial Instruments
Our recorded amounts of cash and cash equivalents, restricted cash and cash equivalents, and restricted bank time deposits, accounts receivable, contract assets, investments, and accounts payable approximate fair value, due to the short-term nature of these instruments. We measure certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
Derivative Financial Instruments
As part of our risk management strategy, when considered appropriate, we use derivative financial instruments including foreign currency forward contracts and interest rate swap agreements to hedge against certain foreign currency and interest rate exposures. Our intent is to mitigate gains and losses caused by the underlying exposures with offsetting gains and losses on the derivative contracts. By policy, we do not enter into speculative positions with derivative instruments.
We record all derivatives as assets or liabilities on our consolidated balance sheets at their fair values. Gains and losses from the changes in values of these derivatives are accounted for based on the use of the derivative and whether it qualifies for hedge accounting.
The counterparties to our derivative financial instruments consist of several major international financial institutions. We regularly monitor the financial strength of these institutions. While the counterparties to these contracts expose us to credit-related losses in the event of a counterparty’s non-performance, the risk would be limited to the unrealized gains on such
affected contracts. We do not anticipate any such losses and we do not have a material portfolio of derivative financial instruments.
Revenue Recognition
We account for revenue in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted on February 1, 2018, using the modified retrospective transition method. For further discussion of our accounting policies related to revenue see Note 3, “Revenue Recognition.”
Cost of Revenue
Our cost of revenue includes costs of materials, compensation and benefit costs for operations and service personnel, subcontractor costs, royalties and license fees related to third-party software included in our products, cloud infrastructure costs, depreciation of equipment used in operations and service, amortization of capitalized software development costs and certain purchased intangible assets, and related overhead costs. Costs that relate to satisfied (or partially satisfied) performance obligations in customer contracts (i.e. costs that relate to past performance) are expensed as incurred. Please refer to Note 3, “Revenue Recognition” under the heading “Costs to Obtain and Fulfill Contracts” for further details regarding customer contract costs.
Research and Development, net
With the exception of certain software development costs, all research and development costs are expensed as incurred, and consist primarily of personnel and consulting costs, travel, depreciation of research and development equipment, and related overhead and other costs associated with research and development activities.
We periodically derive benefits from participation in government-sponsored programs in certain jurisdictions, for the support of research and development activities conducted in those locations.
Software Development Costs
Costs incurred to acquire or develop software to be sold, leased or otherwise marketed are capitalized after technological feasibility is established, and continue to be capitalized through the general release of the related software product. Amortization of capitalized costs begins in the period in which the related product is available for general release to customers and is recorded on a straight-line basis, which approximates the pattern in which the economic benefits of the capitalized costs are expected to be realized, over the estimated economic lives of the related software products, generally five years.
Internal-Use Software Development Costs and Cloud Computing Arrangements
We expense costs associated with the assessment stage of software development projects. Capitalization begins when the preliminary project stage has been completed and management with the relevant authority authorizes and commits to the funding of the project. These capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related costs for employees who are directly associated with the development of the applications. We expense the personnel-related costs of training and data conversion. We also expense costs associated with the post-implementation and operation stage, including maintenance and specified upgrades; however, we capitalize internal and external costs associated with significant upgrades to existing systems that result in additional functionality. Cloud computing arrangement costs follow the internal-use software accounting guidance to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized internal-use software development costs are generally amortized over periods ranging from four years to seven years on a straight-line basis, which best represents the pattern of the software’s use. Capitalized implementation costs related to a service contract will be amortized over the term of the hosting arrangement beginning when the component of the hosting arrangement is ready for its intended use. Periodically, we reassess the useful life considering technology, obsolescence, and other factors.
Income Taxes
We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus deferred taxes. Deferred taxes result from differences between the financial statement and tax bases of our
assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.
We are subject to income taxes in the United States and numerous foreign jurisdictions. The calculation of our income tax provision involves the application of complex tax laws and requires significant judgment and estimates.
We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date, and establish valuation allowances when it is more likely than not that all or a portion of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets are not more-likely-than-not realizable, we establish a valuation allowance.
We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more-likely-than-not sustainable, based solely on their technical merits, upon examination and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that we believe is more-likely-than-not realizable. Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets. Our policy is to include interest (expense and/or income) and penalties related to unrecognized income tax benefits as a component of the provision for income taxes.
Functional Currencies and Foreign Currency Transaction Gains and Losses
The functional currency for most of our foreign subsidiaries is the applicable local currency, although we have some subsidiaries with functional currencies that differ from their local currency, of which the most notable exception is our subsidiary in Israel, whose functional currency is the U.S. dollar.
Transactions denominated in currencies other than a functional currency are converted to the functional currency on the transaction date, and any resulting assets or liabilities are further remeasured at each reporting date and at settlement. Gains and losses recognized upon such remeasurements are included within other income (expense), net in the consolidated statements of operations. We recorded net foreign currency losses of $1.6 million for each of the years ended January 31, 2022 and 2021, and net foreign currency gains of $0.7 million for the year ended January 31, 2020.
For consolidated reporting purposes, in those instances where a foreign subsidiary has a functional currency other than the U.S. dollar, revenue and expenses are translated into U.S. dollars using average exchange rates for the reporting period, while assets and liabilities are translated into U.S. dollars using period-end rates. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive loss in the accompanying consolidated balance sheets.
Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of the award. We recognize the fair value of the award as compensation expense over the period during which an employee is required to provide service in exchange for the award.
For performance stock units for which vesting is in part dependent on total shareholder return, the fair value of the award is estimated on the date of grant using a Monte Carlo Simulation. Expected volatility and expected term are input factors for that model and may require significant management judgment. Expected volatility is estimated utilizing daily historical volatility for Verint common stock price and the constituents of the specific comparator index over a period commensurate with the remaining award performance period. The risk-free interest rate used is equal to the implied daily yield of the zero-coupon U.S. Treasury bill that corresponds with the remaining performance period of the award as of the valuation date.
Net Income (Loss) Per Common Share Attributable to Verint Systems Inc.
Basis net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average common stock outstanding during the respective period. Net income (loss) attributable to common shareholders is computed by deducting both the dividends declared in the period on the Preferred Stock and the dividends
accumulated for the period on the Preferred Stock from net income (loss). Shares used in the calculation of basic net income (loss) per common share include vested but unissued shares underlying awards of restricted stock units when all necessary conditions for earning those shares have been satisfied at the award’s vesting date, but exclude unvested shares of restricted stock because they are contingent upon future service conditions.
Diluted net income per common share is computed by dividing net income attributable to common and common equivalent shareholders by the total of the weighted-average common stock outstanding and common equivalent shares outstanding during the respective period. The number of common equivalent shares outstanding has been determined in accordance with the if-converted method for the Preferred Stock and the treasury stock method for employee stock options and restricted stock units to the extend they are dilutive. Under the treasury stock method, the exercise price paid by the option holder and future share-based compensation expense that we have not yet recognized are assumed to be used to repurchase shares.
Upon conversion of our 0.25% convertible senior notes due April 15, 2026 (the “2021 Notes”), further details for which appear in Note 8, “Long-Term Debt,” we are currently obligated to settle the principal amount of the 2021 Notes in cash upon conversion and as a result, only the amounts payable in excess of the principal amounts of the 2021 Notes, if any, are assumed to be settled with shares of common stock for purposes of computing diluted net income per share.
In periods for which we report a net loss, basic net loss per common share and diluted net loss per common share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.
Leases
We determine if an arrangement is a lease at inception. Operating lease assets are presented as operating lease right-of-use (“ROU”) assets, and corresponding operating lease liabilities are presented within accrued expenses and other current liabilities (current portions), and as operating lease liabilities (long-term portions), on our consolidated balance sheets. Finance lease assets are included in property and equipment, and corresponding finance lease liabilities are included within accrued expenses and other current liabilities (current portions), and other liabilities (long-term portions), on our consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the remaining lease payments over the lease term at commencement date. Our leases do not provide an implicit interest rate. We calculate the incremental borrowing rate to reflect the interest rate that we would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term, and consider our historical borrowing activities and market data in this determination. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which we account for as a single lease component. Some of our leases contain variable lease payments, which are expensed as incurred unless those payments are based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and included in the measurement of the lease liability; thereafter, changes to lease payments due to rate or index updates are recorded as rent expense in the period incurred. We have elected not to recognize ROU assets and lease liabilities for short-term leases that have a term of twelve months or less. The effect of short-term leases on our ROU assets and lease liabilities was not material. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, our related party leases and our sublease transactions are de minimis.
Recent Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which affects general principles within Topic 740, Income Taxes. The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the tax basis of goodwill after a business combination, and the recognition of deferred tax liabilities for outside basis differences. The new guidance also changes the calculation of the income tax impact of hybrid taxes and the methodology for calculating income taxes in an interim period. We adopted this standard as of February 1, 2021 on either a prospective basis, or through a modified retrospective approach, as required by the standard. There was no cumulative effect adjustment recorded to accumulated deficit as the amount was not material. The effects of this standard on our financial position, results of operations and cash flows were not material.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU No. 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. ASU No. 2020-06 also eliminates the treasury stock method to calculate diluted earnings per share and requires the if-converted method for convertible instruments. We early adopted ASU No. 2020-06 as of February 1, 2021 using the modified retrospective transition method. Prior period financial statements have not been restated upon adoption.
Upon adoption of ASU No. 2020-06, we no longer presented the conversion feature of our 1.50% convertible senior notes due June 1, 2021 (the “2014 Notes”), in equity. Instead, we combined the previously separated equity component with the liability component, which prior to maturity of the 2014 Notes, was classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense until the 2014 Notes matured. Accordingly, we recorded a decrease to accumulated deficit of approximately $44.9 million, a decrease to additional paid-in capital of $43.4 million, a decrease to temporary equity of $4.8 million, an increase to current maturities of long-term debt of $4.4 million, a decrease to deferred tax liabilities of $0.9 million, and an increase in debt issuance costs of $0.1 million. There was no impact to earnings per share as a result of the adoption.
New Accounting Pronouncements Not Yet Effective
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU No. 2020-04 provides optional expedients and exceptions for applying GAAP if certain criteria are met to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. In January 2021, the FASB issued Update 2021-01, Reference Rate Reform (Topic 848): Scope. The update provides additional optional guidance on the transition from LIBOR to include derivative instruments that use an interest rate for margining, discounting or contract price alignment. The standard will ease, if warranted, the requirements for accounting for the future effects of the rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022. A portion of our indebtedness bears interest at variable interest rates, primarily based on euro-dollar LIBOR. We continue to monitor the impact of the discontinuance of LIBOR or another reference rate will have on our contracts, hedging relationships and other transactions. We are currently assessing the impact of this standard on our financial condition and results of operations.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. We do not expect the adoption of ASU No. 2021-04 to have any impact on our consolidated financial statements as the effect will largely depend on the terms of written call options or financings issued or modified in the future.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which will require companies to apply the definition of a performance obligation under ASC Topic 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities relating to contracts with customers that are acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
2.DISCONTINUED OPERATIONS
On February 1, 2021 (the “Spin-Off Date”), we completed the previously announced Spin-Off of Cognyte by way of a pro rata distribution of all of the then-issued and outstanding ordinary shares of Cognyte to holders of record of our common stock as of the close of business on January 25, 2021.
To effect the Spin-Off and provide a framework for our relationship with Cognyte post Spin-Off we entered into several agreements with Cognyte, including the following:
•a Separation and Distribution Agreement;
•a Tax Matters Agreement;
•an Employee Matters Agreement;
•a Transition Services Agreement;
•an Intellectual Property Cross License Agreement; and
•a Trademark Cross License Agreement.
These agreements provide for the allocation of assets, employees, liabilities, and obligations (including property, employee benefits, litigation, and tax-related assets and liabilities) between us and Cognyte attributable to periods prior to, at and after the Spin-Off.
Under the Transition Services Agreement with Cognyte, we and Cognyte agreed to provide and/or make available various administrative services and assets to each other for a given period based on each individual service, with an option to extend certain services after the first year. In no case will services be provided for more than 24 months after the Spin-Off Date. In consideration for such services, we and Cognyte each paid fees to the other for the services provided, and those fees were generally in amounts intended to allow the party providing services to recover all of its direct and indirect costs incurred in providing those services, plus a standard markup, and subject to a mutually agreed-upon increase following an extension of the initial service term. The fees charged for the first year of services were fixed. Fees for services provided by third-party suppliers were billed on a straight pass-through basis. For the year ended January 31, 2022, we invoiced Cognyte $5.9 million, and Cognyte invoiced us $1.1 million, for transition services provided under the Transition Services Agreement. As of January 31, 2022, the performance of services under the Transition Services Agreement was substantially concluded.
Under the Tax Matters Agreement with Cognyte, we and Cognyte each agreed to share the obligation to pay any taxes as shown on tax returns filed by Cognyte (or any member of its group), on one hand, and us (or any member of our group), on the other hand, such that we will be primarily responsible for any taxes related to, or arising in connection with our business and Cognyte will be responsible for any taxes related to, or arising in connection with, the Cognyte Business, regardless of which party prepares and files any such tax return and whether such taxes arise prior to or after the Spin-Off. We and Cognyte also agreed to share responsibility for preparing relevant tax returns, which responsibility will depend on the type of tax return and the period for which such tax return is being filed. We and Cognyte agreed to indemnify each other under the Tax Matters Agreement for certain actions or inactions.
The Spin-Off met the criteria for classification as “discontinued operations” in accordance with the accounting guidance upon completion of the separation, and as such, the results of our former Cognyte Business have been classified as discontinued operations in our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for all periods presented. As of January 31, 2022, there were no assets or liabilities from discontinued operations associated with Cognyte. There was no revenue earned or costs and expenses incurred by discontinued operations during the year ended January 31, 2022.
The following table summarizes the major classes of line items included within discontinued operations in our consolidated statements of operations for the years ended January 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| | Year ended January 31, |
(in thousands) | | 2021 | | 2020 |
Revenue | | $ | 443,458 | | | $ | 457,109 | |
Cost of revenue | | 128,043 | | | 159,603 | |
Operating expenses | | 264,132 | | | 207,677 | |
Other income, net | | 6,604 | | | 3,041 | |
Income from discontinued operations before benefit from income taxes | | 57,887 | | | 92,870 | |
Provision for income taxes | | 9,393 | | | 10,677 | |
Net income from discontinued operations | | 48,494 | | | 82,193 | |
Net income from discontinued operations attributable to noncontrolling interests | | 6,107 | | | 6,420 | |
Net income from discontinued operations attributable to Verint Systems Inc. common shares | | $ | 42,387 | | | $ | 75,773 | |
The following table summarizes the assets and liabilities that were transferred to Cognyte on February 1, 2021 and presented as discontinued operations in our consolidated balance sheet as of January 31, 2021:
| | | | | | | | |
(in thousands) | | January 31, 2021 |
Assets | | |
Current Assets: | | |
Cash and cash equivalents | | $ | 78,570 | |
Restricted cash and cash equivalents, and restricted bank time deposits | | 27,042 | |
Short-term investments | | 4,713 | |
Accounts receivable, net | | 175,001 | |
Contract assets, net | | 20,317 | |
Inventories | | 14,542 | |
Prepaid expenses and other current assets | | 34,741 | |
Total current assets of discontinued operations | | 354,926 | |
Property and equipment, net | | 37,152 | |
Operating lease right-of-use assets | | 31,040 | |
Goodwill | | 158,183 | |
Intangible assets, net | | 5,299 | |
Deferred income taxes | | 7,202 | |
Other assets | | 42,076 | |
Total long-term assets of discontinued operations | | 280,952 | |
Total assets of discontinued operations | | $ | 635,878 | |
| | |
Liabilities | | |
Current Liabilities: | | |
Accounts payable | | $ | 41,512 | |
Accrued expenses and other current liabilities | | 100,189 | |
Contract liabilities | | 127,012 | |
Total current liabilities of discontinued operations | | 268,713 | |
Long-term contract liabilities | | 22,037 | |
Operating lease liabilities | | 23,174 | |
Deferred income taxes | | 3,985 | |
Other liabilities | | 8,922 | |
Total long-term liabilities of discontinued operations | | 58,118 | |
Total liabilities of discontinued operations | | $ | 326,831 | |
In connection with the Spin-Off, $17.1 million of accumulated other comprehensive income, net of income taxes, related to foreign currency translation adjustments and foreign exchange contracts designated as cash flow hedges were transferred to Cognyte on the Spin-Off Date. Additionally, Verint transferred its interests in Cognyte Technologies Israel Ltd. (formerly Verint Systems Limited) (“CTIL”) on the Spin-Off Date. Prior to the transfer, CTIL was a wholly owned subsidiary of Verint and the CTIL board of directors declared a cash dividend in the aggregate amount of $35.0 million payable to Verint, as its sole holder of record of ordinary shares, on January 29, 2021. In April 2021, we received the dividend from Cognyte less applicable withholding taxes. The $78.6 million of cash and cash equivalents shown in the table above does not reflect the payment of the dividend, which occurred after the completion of the Spin-Off.
3.REVENUE RECOGNITION
Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. When an arrangement contains multiple performance obligations, we account for individual performance obligations separately if they are distinct. We recognize revenue through the application of the following five steps:
1) Identify the contract(s) with a customer
A contract with a customer exists when (i) we enter into an enforceable contract with the customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance, and (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or in the case of a new customer, published credit and financial information pertaining to the customer. Our customary business practice is to enter into legally enforceable written contracts with our customers. The majority of our contracts are governed by a master agreement between us and the customer, which sets forth the general terms and conditions of any individual contract between the parties, which is then supplemented by a customer purchase order to specify the different goods and services, the associated prices, and any additional terms for an individual contract. Multiple contracts with a single counterparty entered into at the same time are evaluated to determine if the contracts should be combined and accounted for as a single contract.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we must apply judgment to determine whether promised goods or services are capable of being distinct and are distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation. Generally, our contracts do not include non-distinct goods or services.
3) Determine the transaction price
The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer. We assess the timing of transfer of goods and services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less, which is the case in the majority of our customer contracts. The primary purpose of our invoicing terms is not to receive or provide financing from or to customers. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price, if we assessed that it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Typically, our contracts do not provide our customers with any right of return or refund, and we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or refund.
4) Allocate the transaction price to the performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct goods or services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, we must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. We allocate the variable amount to one or more distinct performance obligations but not all or to one or more distinct services that forms a part of a single performance obligation, when the payment terms of the variable amount relate solely to our efforts to satisfy that distinct performance obligation and it results in an allocation that is consistent with the overall allocation objective of ASU No. 2014-09. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. We determine standalone selling price (“SSP”) based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives, and internally approved pricing guidelines related to the performance obligation.
5) Recognize revenue when (or as) the entity satisfies a performance obligation
We satisfy performance obligations either over time or at a point in time depending on the nature of the underlying promise. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. In the case of contracts that include customer acceptance criteria, revenue is not
recognized until we can objectively conclude that the product or service meets the agreed-upon specifications in the contract.
We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customers. Revenue is measured based on consideration specified in a contract with a customer, and excludes taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer.
Shipping and handling activities that are billed to the customer and occur after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of revenue. Historically, these expenses have not been material.
Nature of Goods and Services
We derive and report our revenue in two categories: (a) recurring revenue, which includes bundled SaaS, unbundled SaaS, hosting services, optional managed services, initial and renewal support revenue, and product warranties, and (b) nonrecurring revenue, which primarily consists of perpetual licenses, hardware, installation services, and business advisory consulting and training services.
Our bundled SaaS contracts are typically comprised of a right to access our software, maintenance, hosting fees and standard managed services. We do not provide the customer with the contractual right to take possession of the software at any time during the hosting period under these contracts. The customer can only benefit from the SaaS license, maintenance and standard managed services when combined with the hosting service as the hosting service is the only way for the customer to access the software and benefit from the maintenance and managed services. Accordingly, each of the license, maintenance, hosting and standard managed services is not considered a distinct performance obligation in the context of the contract, and are combined into a single performance obligation (“bundled SaaS services”) and recognized ratably over the contract period. Our bundled SaaS customer contracts can consist of fixed, variable, and usage-based fees. Typically, we invoice fees at the outset of the contract, though quarterly or monthly billing terms are included in certain contracts. Certain bundled SaaS contracts include a nonrefundable upfront fee for setup services, which are not distinct from the bundled SaaS services. Non-distinct setup services represent an advanced payment for future bundled SaaS services, and are recognized as revenue when those bundled SaaS services are satisfied, unless the nonrefundable fee is considered to be a material right, in which case the nonrefundable fee is recognized over the expected benefit period, which includes anticipated renewals. We determine SSP for our bundled SaaS services based on the price at which the performance obligation is sold separately, which is observable through past renewal transactions. We satisfy our bundled SaaS services by providing access to our software over time and processing transactions for usage-based contracts. For non-usage based fees, the period of time over which we perform is commensurate with the contract term because that is the period during which we have an obligation to provide the service. The performance obligation is recognized on a time elapsed basis, by day for which the services are provided.
Our software licenses either provide our customers a perpetual right to use our software or, in the case of unbundled SaaS, the right to use our software for only a fixed term, in most cases between a one- and three-year time frame. Generally, our contracts do not provide significant services of integration and customization and installation services are not required to be purchased directly from us. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We have concluded that the software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered or made available for download to the customer. We rarely sell our software licenses on a standalone basis and as a result SSP is not directly observable and must be estimated. We apply the adjusted market assessment approach, considering both market conditions and entity specific factors such as assessment of historical data of sales of software licenses in combination with other promised goods and services in order to maximize the use of observable inputs. Software SSP is established based on an appropriate discount from our established list price, taking into consideration whether there are certain stratifications of the population with different pricing practices. Revenue for hardware is recognized at a point in time, generally upon shipment or delivery.
Professional services revenues primarily consist of fees for deployment and optimization services, as well as training, and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the professional services as the services are performed. Professional services that are billed on a time and materials basis are recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time using an input method based on labor hours expended to date relative to the total labor hours expected to be required to satisfy the related performance obligation. We determine SSP for our professional services based on the price at which the performance obligation is sold separately, which is observable through past transactions.
Customer support revenue is derived from providing remote technical support services, bug fixes and unspecified software updates and upgrades to customers on a when-and-if-available basis. Each of these performance obligations provide benefit to the customer on a standalone basis and are distinct in the context of the contract. Each of these distinct performance obligations represent a stand ready obligation to provide service to a customer, which is concurrently delivered and has the same pattern of transfer to the customer, which is why we account for these support services as a single performance obligation. We recognize support services ratably over the contractual term, which typically is one year for perpetual licenses and one to three years for unbundled SaaS. SSP for support services is developed based on standalone renewal contracts.
Our solutions are generally sold with a warranty of one year to three years for hardware and 90 days for software. These warranties do not represent an additional performance obligation as services beyond assuring that the software license and hardware complies with agreed-upon specifications are not provided.
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 usage 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, and business advisory consulting and training services.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Recurring revenue | | | | | | |
Bundled SaaS revenue | | $ | 183,035 | | | $ | 145,962 | | | $ | 115,925 | |
Unbundled SaaS revenue | | 139,729 | | | 71,990 | | | 48,018 | |
Optional managed services revenue | | 65,648 | | | 59,459 | | | 56,534 | |
Total cloud revenue | | 388,412 | | | 277,411 | | | 220,477 | |
Support revenue | | 244,717 | | | 298,213 | | | 313,901 | |
Total recurring revenue | | 633,129 | | | 575,624 | | | 534,378 | |
Nonrecurring revenue | | | | | | |
Perpetual revenue | | 138,078 | | | 141,840 | | | 179,882 | |
Professional services revenue | | 103,302 | | | 112,783 | | | 132,265 | |
Total nonrecurring revenue | | 241,380 | | | 254,623 | | | 312,147 | |
Total revenue | | $ | 874,509 | | | $ | 830,247 | | | $ | 846,525 | |
Contract Balances
The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Accounts receivable, net | | $ | 193,831 | | | $ | 206,157 | |
Contract assets, net | | $ | 42,688 | | | $ | 36,716 | |
Long-term contract assets, net (included in other assets) | | $ | 30,510 | | | $ | 17,210 | |
Contract liabilities | | $ | 271,271 | | | $ | 261,033 | |
Long-term contract liabilities | | $ | 15,872 | | | $ | 16,502 | |
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 for each of the years ended January 31, 2022, 2021, and 2020. There was one customer, an authorized global reseller of our solutions, that accounted for approximately 14% of our aggregated accounts receivable and contract assets at January 31, 2022 and 2021. Credit losses relating to this reseller have historically been immaterial. During the years ended January 31, 2022 and 2021, we transferred $37.7 million and $26.6 million, respectively, to accounts receivable from contract assets recognized at the beginning of each period, as a result of the right to the transaction consideration becoming unconditional. We recognized $57.4 million and $43.7 million of contract assets during the years ended January 31, 2022 and 2021, respectively. Contract assets recognized during each year primarily related to multi-year unbundled SaaS contracts that are invoiced annually with license revenue recognized upfront.
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 years ended January 31, 2022 and 2021 from amounts included in contract liabilities at the beginning of each period was $247.9 million and $239.2 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:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
RPO: | | | | |
Expected to be recognized within 1 year | | $ | 447,428 | | | $ | 405,714 | |
Expected to be recognized in more than 1 year | | 274,404 | | | 229,951 | |
Total RPO | | $ | 721,832 | | | $ | 635,665 | |
Costs to Obtain and Fulfill Contracts
We capitalize commissions paid to internal sales personnel and agent commissions that are incremental to obtaining customer contracts. We have determined that these commissions are in fact incremental and would not have occurred absent the customer contract. Capitalized sales and agent commissions are amortized on a straight-line basis over the period the goods or services are transferred to the customer to which the assets relate, which ranges from immediate to as long as six years, if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. A portion of the initial commission
payable on the majority of our contracts is amortized over the anticipated renewal period, which is generally four to six years, due to commissions paid on renewal contracts not being commensurate with amounts paid on the initial contract.
Total capitalized costs to obtain contracts were $55.8 million as of January 31, 2022, of which $3.9 million is included in prepaid expenses and other current assets and $51.9 million is included in other assets on our consolidated balance sheet. Total capitalized costs to obtain contracts were $48.4 million as of January 31, 2021, of which $2.0 million is included in prepaid expenses and other current assets and $46.4 million is included in other assets on our consolidated balance sheet. During the years ended January 31, 2022, 2021, and 2020, we expensed $33.1 million, $26.1 million and $26.2 million, respectively, of sales and agent commissions, which are included in selling, general and administrative expenses and there were no impairment losses recognized for these capitalized costs.
We capitalize costs incurred to fulfill our contracts when the costs relate directly to the contract and are expected to generate resources that will be used to satisfy the performance obligation under the contract and are expected to be recovered through revenue generated under the contract. Costs to fulfill contracts are expensed to cost of revenue as we satisfy the related performance obligations. Total capitalized costs to fulfill contracts were $6.1 million as of January 31, 2022, of which $0.2 million is included in prepaid expenses and other current assets and $5.9 million is included in other assets on our consolidated balance sheet. Total capitalized costs to fulfill contracts were $6.5 million as of January 31, 2021, of which $0.2 million is included in prepaid expenses and other current assets and $6.3 million is included in other assets on our consolidated balance sheet. Deferred cost of revenue is classified in its entirety as current or long-term based on whether the related revenue will be recognized within twelve months of the origination date of the arrangement. The amounts capitalized primarily relate to one-time costs incurred in the initial phase of our bundled SaaS arrangements (i.e., setup costs), which consist of costs related to the installation of systems and processes. Capitalized setup costs are amortized on a straight-line basis over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the transfer to the customer of the services to which the asset relates. During the years ended January 31, 2022, 2021, and 2020, we amortized $3.2 million, $2.7 million, and $1.7 million, respectively, of contract fulfillment costs.
4.NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.
The following table summarizes the calculation of basic and diluted net (loss) income per common share attributable to Verint Systems Inc. for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands, except per share amounts) | | 2022 | | 2021 | | 2020 |
Net income (loss) from continuing operations | | $ | 15,651 | | | $ | (48,601) | | | $ | (46,510) | |
Net income from discontinued operations | | — | | | 48,494 | | | 82,193 | |
Net income (loss) | | 15,651 | | | (107) | | | 35,683 | |
Net income attributable to noncontrolling interests from continuing operations | | 1,238 | | | 1,053 | | | 579 | |
Net income attributable to noncontrolling interests from discontinued operations | | — | | | 6,107 | | | 6,420 | |
Net income (loss) attributable to Verint Systems Inc. | | 14,413 | | | (7,267) | | | 28,684 | |
Dividends on preferred stock | | (18,922) | | | (7,656) | | | — | |
Net (loss) income attributable to Verint Systems Inc. for basic net (loss) income per common share | | (4,509) | | | (14,923) | | | 28,684 | |
Dilutive effect of dividends on preferred stock | | — | | | — | | | — | |
Net (loss) income attributable to Verint Systems Inc. for diluted net (loss) income per common share | | $ | (4,509) | | | $ | (14,923) | | | $ | 28,684 | |
| | | | | | |
Net (loss) income attributable to Verint Systems Inc. common shares | | | | | | |
Net loss from continuing operations attributable to Verint Systems Inc. common shares | | (4,509) | | | (57,310) | | | (47,089) | |
Net income from discontinued operations attributable to Verint Systems Inc. common shares | | — | | | 42,387 | | | 75,773 | |
| | | | | | |
Weighted-average shares outstanding: | | | | | | |
Basic | | 65,591 | | | 65,173 | | | 66,129 | |
Dilutive effect of employee equity award plans | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands, except per share amounts) | | 2022 | | 2021 | | 2020 |
Dilutive effect of 2021 Notes | | — | | | — | | | — | |
Dilutive effect of 2014 Notes | | — | | | — | | | — | |
Dilutive effect of warrants | | — | | | — | | | — | |
Dilutive effect of assumed conversion of preferred stock | | — | | | — | | | — | |
Diluted | | 65,591 | | | 65,173 | | | 66,129 | |
| | | | | | |
Basic net (loss) income per common share attributable to Verint Systems Inc.: | | | | | | |
Continuing Operations | | $ | (0.07) | | | $ | (0.88) | | | $ | (0.71) | |
Discontinued Operations | | — | | | 0.65 | | | 1.14 | |
Total basic net (loss) income per common share attributable to Verint Systems Inc. | | $ | (0.07) | | | $ | (0.23) | | | $ | 0.43 | |
| | | | | | |
Diluted net (loss) income per common share attributable to Verint Systems Inc.: | | | | | | |
Continuing operations | | $ | (0.07) | | | $ | (0.88) | | | $ | (0.71) | |
Discontinued operations | | — | | | 0.65 | | | 1.14 | |
Total diluted net (loss) income per common share attributable to Verint Systems Inc. | | $ | (0.07) | | | $ | (0.23) | | | $ | 0.43 | |
We excluded the following weighted-average potential common shares from the calculations of diluted net (loss) income per common share during the applicable periods because their inclusion would have been anti-dilutive:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Common shares excluded from calculation: | | | | | | |
Stock options and restricted stock-based awards | | 1,580 | | | 1,337 | | | 2,126 | |
2014 Notes | | 481 | | | 6,002 | | | 6,205 | |
Warrants | | 117 | | | 6,205 | | | 6,205 | |
Series A Preferred Stock | | 5,498 | | | 2,743 | | | — | |
Series B Preferred Stock | | 3,282 | | | — | | | — | |
In periods for which we report a net loss attributable to Verint Systems Inc., 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.
Upon our adoption of ASU No. 2020-06 on February 1, 2021, use of the if-converted method is required for calculating any potential dilutive effect of convertible instruments. For the year ended January 31, 2022, the average price of our common stock did not exceed the $62.08 per share conversion price of our 2021 Notes, and other requirements for the 2021 Notes to be convertible were not met. The 2021 Notes will have a dilutive impact on net income per common share at any time when the average market price of our common stock for a quarterly reporting period exceeds the conversion price.
The Capped Calls (as defined in Note 8, “Long-Term Debt”) do not impact our diluted earnings per common share calculations as their effect would be anti-dilutive. The Capped Calls are 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.
There is no impact on our calculation of the dilutive effect of our 2014 Notes upon adoption of ASU No. 2020-06 as we were obligated to settle the principal amount of our 2014 Notes in cash and settled the conversion spread with shares of our common stock in connection with the maturity of the 2014 Notes. Following the completion of the Spin-Off on February 1, 2021, the strike prices of the conversion features of our 2014 Notes and Warrants (as defined in Note 8, “Long-Term Debt”) were reduced to $40.55 per share and $47.18 per share, respectively, which increased the equivalent number of underlying common shares to 9,541,000 and 9,865,000, respectively.
Our Note Hedges (as defined in Note 8, “Long-Term Debt”) did not impact our diluted earnings per common share calculations because their effect would be anti-dilutive. However, in connection with the maturity of the 2014 Notes, the common shares delivered to us under the Note Hedges neutralized the dilutive effect of the common shares that we issued under the 2014 Notes to settle the conversion premium. As a result, the settlement of the outstanding 2014 Notes did not increase our outstanding common stock.
Our Warrants (as defined in Note 8, “Long-Term Debt”) had a dilutive impact on net income per common share to the extent that we reported net income for the applicable period and the average market value of our common stock exceeded the strike price of the Warrants. The Warrants expired incrementally on a series of expirations dates between August 30, 2021 and January 21, 2022. At each expiration date the Warrants were exercised where the market price per share of our common stock exceeded the strike price of the Warrants, and we issued an aggregate of 293,143 shares of our common stock as part of the cashless exercise of approximately 5,031,000 Warrants. There are no Warrants outstanding as of January 31, 2022.
Further details regarding the 2021 Notes, Capped Calls, 2014 Notes, Note Hedges, and the Warrants appear in Note 8, “Long-Term Debt”.
On December 4, 2019, we announced that the Apax Investor would invest up to $400.0 million in us, in the form of convertible preferred stock. On May 7, 2020, the purchase of $200.0 million of our Series A Preferred Stock closed. On April 6, 2021, in connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock. The weighted-average common shares underlying the assumed conversion of the Preferred Stock, on an as-converted basis, were excluded from the calculation of diluted net income per common share for the years ended January 31, 2022 and 2021, as their effect would have been anti-dilutive. Further details regarding the Preferred Stock investment appear in Note 10, “Convertible Preferred Stock”.
5.CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The following tables summarize our cash, cash equivalents, and short-term investments as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 31, 2022 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 201,769 | | | $ | — | | | $ | — | | | $ | 201,769 | |
Money market funds | | 127,041 | | | — | | | — | | | 127,041 | |
Commercial paper | | 29,995 | | | — | | | — | | | 29,995 | |
Total cash and cash equivalents | | $ | 358,805 | | | $ | — | | | $ | — | | | $ | 358,805 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 765 | | | $ | — | | | $ | — | | | $ | 765 | |
Total short-term investments | | $ | 765 | | | $ | — | | | $ | — | | | $ | 765 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 31, 2021 |
(in thousands) | | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Cash and cash equivalents: | | | | | | | | |
Cash and bank time deposits | | $ | 243,183 | | | $ | — | | | $ | — | | | $ | 243,183 | |
Money market funds | | 342,090 | | | — | | | — | | | 342,090 | |
Total cash and cash equivalents | | $ | 585,273 | | | $ | — | | | $ | — | | | $ | 585,273 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Bank time deposits | | $ | 46,300 | | | $ | — | | | $ | — | | | $ | 46,300 | |
Total short-term investments | | $ | 46,300 | | | $ | — | | | $ | — | | | $ | 46,300 | |
Bank time deposits which are reported within short-term investments consist of deposits held outside of the 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 years ended January 31, 2022, 2021, and 2020, proceeds from maturities and sales of short-term investments were $46.3 million, $69.8 million, and $5.8 million, respectively.
The decrease in cash and cash equivalents primarily related to refinancing of our outstanding borrowings, further details of which appear in Note 8, “Long-term Debt”.
6.BUSINESS COMBINATIONS AND DIVESTITURES
Year Ended January 31, 2022
Conversocial Limited
On August 23, 2021, we completed the acquisition of all of the outstanding shares of Conversocial Limited (together with its subsidiaries, “Conversocial”), a leading messaging platform that enables brands to deliver superior customer experiences. Conversocial has offices in London, United Kingdom and New York, New York.
The purchase price consisted of (i) $53.4 million of cash paid at closing, funded from cash on hand, partially offset by $3.2 million of Conversocial’s cash received in the acquisition, resulting in net cash consideration at closing of $50.2 million; and (ii) $0.2 million of other purchase price adjustments. The purchase price for Conversocial was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts the expected future cash flows to present value using estimates and assumptions determined by management.
Among the factors contributing to the recognition of goodwill as a component of the Conversocial purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. The acquisition resulted in the recognition of $31.6 million of goodwill, of which $0.5 million is deductible for income tax purposes and $31.1 million is not deductible.
In connection with the purchase price allocation for Conversocial, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculated fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $3.4 million of current and long-term contract liabilities, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not been received, we recorded a $1.2 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $0.7 million of which is included within prepaid expenses and other current assets and $0.5 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.
Transaction and related costs directly related to the acquisition of Conversocial, consisting primarily of professional fees and integration expenses, were $3.4 million for the year ended January 31, 2022, and were expensed as incurred and are included in selling, general and administrative expenses.
Revenue and net income (loss) attributable to Conversocial included in our consolidated statement of operations for the year ended January 31, 2022 were not material.
The purchase price allocation for Conversocial has been prepared on a preliminary basis and changes to the allocation may occur as additional information becomes available during the measurement period (up to one year from the acquisition date). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes, and reserves for uncertain income tax positions.
The following table sets forth the components and the allocation of the purchase price for our acquisition of Conversocial:
| | | | | | | | |
(in thousands) | | Amount |
Components of Purchase Price: | | |
Cash | | $ | 53,409 | |
Other purchase price adjustments | | (190) | |
Total purchase price | | $ | 53,219 | |
| | |
Allocation of Purchase Price: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 1,694 | |
Other current assets, including cash acquired | | 5,302 | |
Other assets | | 511 | |
Current and other liabilities | | (1,945) | |
Contract liabilities - current and long-term | | (3,410) | |
Deferred income taxes | | (407) | |
Net tangible assets | | 1,745 | |
Identifiable intangible assets: | | |
Customer relationships | | 9,800 | |
Developed technology | | 9,900 | |
Trademarks and trade names | | 200 | |
Total identifiable intangible assets | | 19,900 | |
Goodwill | | 31,574 | |
Total purchase price allocation | | $ | 53,219 | |
The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of seven years, five years, and one year, respectively, the weighted average of which is approximately 5.9 years. The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.
Other Business Combinations
During the three months ended July 31, 2021, we completed the acquisition of certain assets from a leader in contact center hiring automation that qualified as a business combination. This transaction resulted in increases to goodwill, customer relationships, and acquired technology intangible assets, but was not material to our consolidated financial statements, and as a result, additional business combination disclosures for this acquisition have been omitted. There were no other business combinations during the year ended January 31, 2022.
Year Ended January 31, 2021
We did not complete any business combinations during the year ended January 31, 2021.
Year Ended January 31, 2020
During the year ended January 31, 2020, we completed three business combinations:
•On February 1, 2019, we completed the acquisition of a SaaS workforce optimization company focused on the small and medium-sized business (“SMB”) market as part of our strategy to expand our SMB portfolio.
•On July 25, 2019, we completed the acquisition of a SaaS company focused on cloud-based knowledge management solutions as part of our strategy to add additional artificial intelligence and machine learning capabilities into our portfolio.
•On January 13, 2020, we completed the acquisition of a SaaS based company providing web and mobile session replay solutions.
These business combinations were not individually material to our consolidated financial statements.
The combined consideration for these business combinations was approximately $65.9 million, and consisted of (i) $57.4 million of combined cash paid at closings or shortly thereafter, partially offset by $2.2 million of cash acquired, resulting in net cash consideration at closing of $55.2 million; (ii) the fair value of the contingent consideration arrangements described below of $8.2 million; and (iii) $0.3 million of other purchase price adjustments. For two of the business combinations, we agreed to make potential additional cash payments to the respective former shareholders aggregating up to approximately $14.3 million, contingent upon the achievement of certain performance targets over periods that extended through January 2022, the fair values of which were estimated to be $8.2 million at the acquisition dates. Cash paid for these business combinations was funded by cash on hand.
The purchase prices for these business combinations were allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the remaining unallocated purchase prices recorded as goodwill. The fair value assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.
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. These acquisitions resulted in the recognition of a combined $39.1 million of goodwill, $15.7 million of which is deductible for income tax purposes.
Revenue and net income (loss) attributable to these business acquisitions for the year ended January 31, 2020 were not material.
Transaction and related costs, consisting primarily of professional fees and integration expenses, directly related to these business combinations, totaled $1.3 million and $5.4 million for the years ended January 31, 2021 and 2020, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses.
The purchase price allocations for the business combinations completed during the year ended January 31, 2020 are final.
The following table sets forth the components and the allocations of the combined purchase prices for the business combinations completed during the year ended January 31, 2020, including adjustments identified subsequent to the valuation date, none of which were material:
| | | | | | | | |
(in thousands) | | Amount |
Components of Purchase Prices: | | |
Cash | | $ | 57,355 | |
Fair value of contingent consideration | | 8,230 | |
Other purchase price adjustments | | 281 | |
Total purchase prices | | $ | 65,866 | |
| | |
Allocation of Purchase Prices: | | |
Net tangible assets (liabilities): | | |
Accounts receivable | | $ | 1,790 | |
Other current assets, including cash acquired | | 6,590 | |
Other assets | | 3,799 | |
Current and other liabilities | | (5,428) | |
Contract liabilities - current and long-term | | (3,240) | |
Deferred income taxes | | (2,719) | |
Net tangible assets | | 792 | |
Identifiable intangible assets: | | |
Customer relationships | | 11,847 | |
Developed technology | | 13,083 | |
Trademarks and trade names | | 1,000 | |
Total identifiable intangible assets | | 25,930 | |
Goodwill | | 39,144 | |
Total purchase prices allocation | | $ | 65,866 | |
For these business acquisitions, customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of from seven years to nine years, four years to five years, and four years to five years, respectively, the weighted average of which is approximately 6.4 years.
Other Business Combination Information
The pro forma impact of all business combinations completed during the three years ended January 31, 2022 was not material to our historical consolidated operating results and is therefore not presented.
The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general and administrative expenses in our consolidated statements of operations. Changes in the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
For the years ended January 31, 2022 and 2020, we recorded charges of $0.9 million and $4.9 million, respectively, and we recorded a benefit of $0.8 million in the year ended January 31, 2021, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair value of the remaining contingent consideration obligations associated with business combinations was $7.8 million at January 31, 2022, all of which was recorded within accrued expenses and other current liabilities.
Payments of contingent consideration earned under these agreements were $9.6 million, $15.2 million, and $29.7 million for the years ended January 31, 2022, 2021, and 2020, respectively.
Divestiture
In January 2020, we completed the sale of an insignificant subsidiary which qualified as a separate business, as it no longer fit with our strategic direction or growth targets. In accordance with the terms of the sale agreement, the aggregate purchase price is equal to a percentage of net sales of the former subsidiary’s products during the thirty-six month period following the transaction closing date. We determined the estimated fair value of the contingent consideration with the assistance of a third-party valuation specialist and estimates made by management. The transaction reduced goodwill by $1.1 million and intangible assets by $1.9 million. The transaction resulted in a loss of approximately $2.2 million, which was recorded as part of selling, general, and administrative expenses in our consolidated statement of operations for the year ended January 31, 2020. Please refer to Note 14, “Fair Value Measurements” for a more detailed discussion of changes in the estimated fair value of the contingent consideration.
7.INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets, excluding certain intangible assets previously acquired that were fully amortized and removed from our consolidated balance sheets, consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2022 |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | | | | | |
Customer relationships | | $ | 467,408 | | | $ | (375,827) | | | $ | 91,581 | |
Acquired technology | | 229,501 | | | (203,895) | | | 25,606 | |
Trade names | | 5,677 | | | (4,610) | | | 1,067 | |
Distribution network | | 2,440 | | | (2,440) | | | — | |
Total intangible assets | | $ | 705,026 | | | $ | (586,772) | | | $ | 118,254 | |
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2021 |
(in thousands) | | Cost | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | | | | | |
Customer relationships | | $ | 464,586 | | | $ | (356,064) | | | $ | 108,522 | |
Acquired technology | | 222,040 | | | (189,687) | | | 32,353 | |
Trade names | | 9,424 | | | (6,555) | | | 2,869 | |
Distribution network | | 2,440 | | | (2,440) | | | — | |
Total intangible assets | | $ | 698,490 | | | $ | (554,746) | | | $ | 143,744 | |
Total amortization expense recorded for acquisition-related intangible assets was $46.8 million, $47.7 million, and $52.4 million for the years ended January 31, 2022, 2021, and 2020, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.
Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:
| | | | | | | | |
(in thousands) | | |
Years Ending January 31, | | Amount |
2023 | | $ | 40,479 | |
2024 | | 31,359 | |
2025 | | 14,978 | |
2026 | | 13,681 | |
2027 | | 9,733 | |
Thereafter | | 8,024 | |
Total | | $ | 118,254 | |
We recorded $0.4 million of impairments for certain acquired trade names, which is included within selling, general and administrative expenses for the year ended January 31, 2022. There were no material impairments for the years ended January 31, 2021 and 2020.
Goodwill activity for the years ended January 31, 2022, and 2021 was as follows:
| | | | | | | | |
| | |
(in thousands) | | Total |
Year Ended January 31, 2021: | | |
Goodwill, gross, at January 31, 2020 | | $ | 1,367,111 | |
Accumulated impairment losses through January 31, 2020 | | (56,043) | |
Goodwill, net, at January 31, 2020 | | 1,311,068 | |
Foreign currency translation and other | | 16,339 | |
Goodwill, net, at January 31, 2021 | | $ | 1,327,407 | |
| | |
Year Ended January 31, 2022: | | |
Goodwill, gross, at January 31, 2021 | | $ | 1,383,450 | |
Accumulated impairment losses through January 31, 2021 | | (56,043) | |
Goodwill, net, at January 31, 2021 | | 1,327,407 | |
Business combinations | | 36,006 | |
Foreign currency translation and other | | (9,992) | |
Goodwill, net, at January 31, 2022 | | $ | 1,353,421 | |
| | |
Balance at January 31, 2022 | | |
Goodwill, gross, at January 31, 2022 | | $ | 1,409,464 | |
Accumulated impairment losses through January 31, 2022 | | (56,043) | |
Goodwill, net, at January 31, 2022 | | $ | 1,353,421 | |
For purposes of reviewing for potential goodwill impairment, as of January 31, 2022, we had one reporting unit. Based on our November 1, 2021 and 2020 quantitative goodwill impairment reviews, we concluded that the estimated fair values of our reporting unit significantly exceeded its carrying value.
No changes in circumstances or indicators of potential impairment were identified between November 1 and January 31 in each of the years ended January 31, 2022 and 2021.
No goodwill impairment was identified for the years ended January 31, 2022, 2021, and 2020.
8.LONG-TERM DEBT
The following table summarizes our long-term debt at January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
2021 Notes | | $ | 315,000 | | | $ | — | |
2014 Notes | | — | | | 386,887 | |
2017 Term Loan | | 100,000 | | | 410,125 | |
Less: Unamortized debt discounts and issuance costs | | (8,046) | | | (7,518) | |
Total debt | | 406,954 | | | 789,494 | |
Less: current maturities | | — | | | 386,713 | |
Long-term debt | | $ | 406,954 | | | $ | 402,781 | |
2021 Notes
On April 9, 2021, we issued $315.0 million in aggregate principal amount of 0.25% convertible senior notes due April 15, 2026, unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25% per annum.
We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our 2017 Credit Agreement described below, to terminate an interest rate swap agreement, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.
The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. As of January 31, 2022, the 2021 Notes were not convertible.
We incurred approximately $8.9 million of issuance costs in connection with the 2021 Notes, which have been deferred and are presented as a reduction of long-term debt, and which are being amortized as interest expense over the term of the 2021 Notes. Including the impact of the deferred debt issuance costs, the effective interest rate on the 2021 Notes was approximately 0.83% at January 31, 2022.
Based on the closing market price of our common stock on January 31, 2022, the if-converted value of the 2021 Notes was less than their aggregate principal amount.
2014 Notes
On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes, with a maturity date of June 1, 2021. Net proceeds from the 2014 Notes after underwriting discounts were $391.9 million. The 2014 Notes were unsecured and paid interest in cash semiannually in arrears at a rate of 1.50% per annum.
Effective December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the June 1, 2021 maturity date, holders could have surrendered their 2014 Notes for conversion regardless of whether any of the other specified conditions for conversion had been satisfied. On February 26, 2021, we deposited approximately $390.0 million of cash, representing the full principal amount of the 2014 Notes then outstanding as well as the final interest payment on the 2014 Notes due at maturity, into an escrow account to cash collateralize the 2014 Notes.
In connection with the maturity of the 2014 Notes on June 1, 2021, we paid an aggregate of $389.8 million in cash for the settlement of the 2014 Notes, which included $386.9 million in satisfaction of the outstanding principal of the 2014 Notes and $2.9 million related to the final interest payment on the 2014 Notes. We funded the repayment of the outstanding principal amount of the 2014 Notes and accrued interest thereon using the cash we had placed in escrow. Additionally, the 2014 Notes had an incremental conversion value of $57.7 million as the market value per share of our common stock, as measured under the terms of the 2014 Notes, was greater than the conversion price of the 2014 Notes. We issued approximately 1,250,000 shares of common stock to the holders of the 2014 Notes as payment of the conversion premium, which we issued from treasury stock.
As of January 31, 2021, the 2014 Notes had a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of approximately $64.46 per share of common stock and would have resulted in the issuance of approximately 6,002,000 shares if all of the 2014 Notes had been converted and the conversions were settled entirely in common stock. As a result of the Spin-Off, the conversion rate was adjusted to 24.6622 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of $40.55 per share of common stock and would have resulted in the issuance of approximately 9,541,000 shares if all of the 2014 Notes had been converted prior to maturity and the conversions were settled entirely in common stock.
At issuance, in accordance with then-applicable accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the 2014 Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the 2014 Notes to be $319.9 million and $80.1 million, respectively, at the issuance date, assuming a 5.00% non-convertible borrowing rate. The equity component was recorded as an increase to additional paid-in capital. Through January 31, 2021, the excess of the principal amount of the debt component over its carrying amount (the “debt discount”) was being amortized as interest expense over the term of the 2014 Notes using the effective interest method. The equity component was not remeasured as long as it continued to meet the conditions for equity classification.
We allocated transaction costs related to the issuance of the 2014 Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component of the 2014 Notes are presented as a reduction of long-term debt and were amortized as interest expense over the term of the 2014 Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.
During the three months ended July 31, 2020, we repurchased $13.1 million principal amount of the 2014 Notes (the “Repurchased 2014 Notes”) in open market transactions for an aggregate of $13.0 million in cash, resulting in a debt extinguishment loss of $0.1 million, and a $0.2 million charge to additional paid-in-capital.
At January 31, 2021, because the 2014 Notes were convertible, $4.8 million of the 2014 Notes’ equity component was classified as temporary equity on our consolidated balance sheet, representing the difference between the principal amount and the net carrying amount of the 2014 Notes that could be requested for conversion.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU No. 2020-06 eliminates the liability and equity separation model for convertible instruments with a cash conversion feature, such as the 2014 Notes.
As permitted, on February 1, 2021, we early adopted ASU No. 2020-06, which otherwise would have been effective for us on February 1, 2022. As a result, effective February 1, 2021, we no longer presented separate liability and equity components for the 2014 Notes on our consolidated balance sheet. We implemented the provisions of ASU No. 2020-06 using the modified retrospective approach, such that comparative information has not been restated and continues to be reported under accounting standards in effect for those periods.
The adoption of ASU No. 2020-06 resulted in the $78.0 million carrying value of the 2014 Notes’ equity component at January 31, 2021, which included applicable issuance costs and the portion classified within temporary equity, being reclassified and combined with the liability component of the 2014 Notes. This resulted in a $43.4 million decrease to additional paid-in capital,
a $4.8 million decrease to temporary equity, a $4.4 million increase to current maturities of long-term debt, a $0.9 million decrease to deferred tax liabilities, a $0.1 million increase in unamortized debt issuance costs (a component of long-term debt), and a $44.9 million decrease to our accumulated deficit.
As the 2014 Notes were due June 1, 2021, they are classified within current maturities of long-term debt on our consolidated balance sheets as of January 31, 2021.
Capped Calls, Note Hedges and Warrants
Capped Calls
In connection with the issuance of the 2021 Notes, on April 6, 2021 and April 8, 2021, we entered into capped call transactions (the “Capped Calls”) with certain counterparties. The Capped Calls are generally intended to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the conversion price, with such reduction and/or offset subject to a cap.
The Capped Calls exercise price is equal to the $62.08 initial conversion price of each of the 2021 Notes, and the cap price is $100.00, each subject to certain adjustments under the terms of the Capped Calls. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of January 31, 2022, no Capped Calls have been exercised.
Pursuant to their terms, the Capped Calls qualify for classification within stockholders’ equity, and their fair value is not remeasured and adjusted as long as they continue to qualify for stockholders’ equity classification. We paid approximately $41.1 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.
Note Hedges and Warrants
Concurrently with the issuance of the 2014 Notes, we entered into convertible note hedge transactions (the “Note Hedges”) and sold warrants (the “Warrants”). The combination of the Note Hedges and the Warrants served to increase the effective initial conversion price for the 2014 Notes to $75.00 per share. Subsequent to the Spin-Off, as a result of conversion rate adjustments, the Note Hedges and the Warrants served to increase the effective conversion price for the 2014 Notes to $47.18 per share. The Note Hedges and Warrants were each separate instruments from the 2014 Notes.
Note Hedges
Pursuant to the Note Hedges, we purchased call options on our common stock, under which we had the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equaled the initial conversion price of the 2014 Notes. As a result of the Spin-Off, on February 1, 2021, the call options on our stock were adjusted to allow us to purchase up to 9,865,000 shares of our common stock at a price of $40.55, which is equal to the adjusted conversion price of the 2014 Notes. We were permitted to settle the Note Hedges in cash, shares of our common stock, or a combination thereof, at our option, and the Note Hedges were intended to reduce our exposure to potential dilution upon conversion of the 2014 Notes. We paid $60.8 million for the Note Hedges, which was recorded as a charge to additional paid-in capital. Our exercise rights under the Note Hedges were automatically triggered upon conversion of any 2014 Notes and the Note Hedges otherwise terminated upon maturity of the 2014 Notes on June 1, 2021. In connection with the maturity of the 2014 Notes on June 1, 2021, we received approximately 1,250,000 shares of our common stock from the counterparties under the Note Hedges, which offset the dilution resulting from the stock settlement of the conversion premium on the 2014 Notes as the market value per share of our common stock, as measured under the terms of the Note Hedges, was greater than the strike price of the Note Hedges.
The Repurchased 2014 Notes acquired during the three months ended July 31, 2020 as described above did not change the number of common shares subject to the Note Hedges as the counterparties agreed that the options under the Note Hedges remained outstanding notwithstanding such repurchase. Upon maturity of the 2014 Notes, we received approximately 42,000 shares of our common stock from the counterparties to the Note Hedges as reimbursement for the in-the-money portion of the Repurchased 2014 Notes.
Warrants
We sold the Warrants to several counterparties. The Warrants initially provided the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. As a result of the Spin-Off, the terms of the Warrants were adjusted to provide the counterparties the rights to acquire from us up to approximately 9,865,000 shares of our common stock at a price of $47.18 per share. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. The Warrants expired incrementally on a series of expiration dates between August 30, 2021 and January 21, 2022. At each expiration date the Warrants were exercised where the market price per share of our common stock exceeded the strike price of the Warrants, and we issued an aggregate of 293,143 shares of our common stock as part of the cashless exercise of approximately 5,031,000 Warrants. The Warrants had a dilutive effect on net income per share to the extent that the average market value of our common stock, as measured under the terms of the Warrants, exceeded the strike price of the Warrants. There are no Warrants outstanding as of January 31, 2022.
The Note Hedges and Warrants both qualified for classification within stockholders’ equity and therefore no changes to their respective fair values were recorded in our consolidated statements of operations for any period.
Credit Agreements
2017 Credit Agreement
On June 29, 2017, we entered into a credit agreement (the “2017 Credit Agreement”) with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, and 2021, as further described below (as amended, the “2017 Credit Agreement”).
The 2017 Credit Agreement provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the “2017 Term Loan”), of which $100.0 million and $410.1 million was outstanding at January 31, 2022 and 2021, respectively, and a $300.0 million revolving credit facility maturing on April 9, 2026 (the “2021 Revolving Credit Facility”), which refinanced our prior $300.0 million revolving credit facility (the “2017 Revolving Credit Facility”), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement.
The majority of the proceeds from the 2017 Term Loan were used to repay all outstanding terms loans under our prior credit agreement.
The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million, which is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.
Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin. On January 31, 2018, we entered into an amendment to the 2017 Credit Agreement (the “2018 Amendment”) providing for, among other things, a reduction of the interest rate margins on the 2017 Term Loan from 2.25% to 2.00% for Eurodollar loans, and from 1.25% to 1.00% for ABR loans.
During the three months ended April 30, 2021, in addition to our regular quarterly $1.1 million principal payment, we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100.0 million. As a result, $1.8 million of deferred debt issuance costs and $0.2 million of unamortized discount associated with the 2017 Term Loan were written off, and are included within losses on early retirements of debt on our consolidated statement of operations for the year ended January 31, 2022. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
On April 9, 2021, we amended the 2017 Credit Agreement (the “2021 Amendment”), pursuant to which we refinanced the 2017 Revolving Credit Facility, which would otherwise have matured on June 29, 2022, with the $300.0 million 2021 Revolving Credit Facility maturing on April 9, 2026.
The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility would have been accelerated to March 1, 2021 if on such date any 2014 Notes remained outstanding, unless such outstanding 2014 Notes were cash collateralized pursuant to a second amendment to the 2017 Credit Agreement (the “2020 Amendment”), entered into on June 8, 2020. Pursuant to the 2020 Amendment, we were permitted to effect the previously announced Spin-Off of our Cyber Intelligence Solutions business within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes would not be deemed to be outstanding for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility discussed above if such 2014 Notes were cash collateralized in accordance with the 2017 Credit Agreement. On February 26, 2021, as noted above, we cash collateralized the 2014 Notes in satisfaction of the cash collateralization provisions of the 2020 Amendment. Accordingly, the maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility were not accelerated to March 1, 2021.
As of January 31, 2022, the interest rate on the 2017 Term Loan was 2.10%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 2.30% at January 31, 2022. As of January 31, 2021, the interest rate on the 2017 Term Loan was 2.14%.
For borrowings under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the "Leverage Ratio"). In addition, under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, we are required to pay a commitment fee with respect to unused availability at rates per annum determined by reference to our Leverage Ratio. During the three months ended October 31, 2020, we repaid in full $200.0 million of borrowings then outstanding under the 2017 Revolving Credit Facility using available cash on hand.
Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2017 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.
The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders’ commitments to make loans under the 2017 Credit Agreement may be terminated.
2017 Credit Agreement Issuance and Amendment Costs
We incurred debt issuance costs of approximately $6.8 million in connection with the 2017 Credit Agreement, of which $4.1 million were associated with the 2017 Term Loan and $2.7 million were associated with the 2017 Revolving Credit Facility, which were deferred and are being amortized as interest expense over the terms of the facilities. During the year ended January 31, 2018, we wrote off $0.2 million of deferred debt issuance costs associated with the 2017 Term Loan as a result of the 2018 Amendment. During the year ended January 31, 2021, we incurred $2.1 million of debt modification costs related to the 2020 Amendment, $1.2 million of which were expensed, and $0.9 million of which were deferred (comprised of $0.5 million associated with the 2017 Term Loan, and $0.4 million associated with the 2017 Revolving Credit Facility), and which are being amortized along with the existing unamortized debt issuance costs.
At the time of the 2021 Amendment, there were $1.3 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility, of which $0.8 million were associated with commitments under the 2017 Revolving Credit Facility provided by lenders that are continuing to provide commitments under the 2021 Revolving Credit Facility and therefore continued to be deferred, and which are now being amortized over the term of the 2021 Revolving Credit Facility. The remaining $0.5 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility were written off and are included within losses on early retirements of debt on our consolidated statement of operations for the year ended January 31, 2022. We incurred $1.5 million of debt modification costs related to the 2021 Amendment, all of which are associated with the 2021 Revolving Credit Facility, which have been deferred and are being amortized along with the previously deferred debt issuance costs over the term of the 2021 Revolving Credit Facility.
Deferred debt issuance costs associated with the 2017 Term Loan are being amortized using the effective interest rate method, and deferred debt issuance costs associated with the 2017 Revolving Credit Facility are being amortized on a straight-line basis.
Future Principal Payments on the Term Loan
As a result of the significant 2017 Term Loan principal payments made during the three months ended April 30, 2021, no further principal payments are required prior to the maturity of the 2017 Term Loan on June 29, 2024.
Interest Expense
The following table presents the components of interest expense incurred on the 2021 Notes, 2014 Notes, and on borrowings under our 2017 Credit Agreement for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
2021 Notes: | | | | | | |
Interest expense at 0.25% coupon rate | | $ | 639 | | | $ | — | | | $ | — | |
Amortization of deferred debt issuance costs | | 1,416 | | | — | | | — | |
Total Interest Expense - 2021 Notes | | $ | 2,055 | | | $ | — | | | $ | — | |
| | | | | | |
2014 Notes: | | | | | | |
Interest expense at 1.50% coupon rate | | $ | 1,933 | | | $ | 5,887 | | | $ | 6,000 | |
Amortization of debt discount | | — | | | 12,884 | | | 12,490 | |
Amortization of deferred debt issuance costs | | 522 | | | 1,215 | | | 1,177 | |
Total Interest Expense - 2014 Notes | | $ | 2,455 | | | $ | 19,986 | | | $ | 19,667 | |
| | | | | | |
Borrowings under 2017 Credit Agreement: | | | | | | |
Interest expense at contractual rates | | $ | 3,366 | | | $ | 13,018 | | | $ | 18,021 | |
Impact of interest rate swap agreement | | 1,014 | | | 4,368 | | | 792 | |
Amortization of debt discounts | | 18 | | | 74 | | | 68 | |
Amortization of deferred debt issuance costs | | 930 | | | 1,811 | | | 1,569 | |
Total Interest Expense - Borrowings under 2017 Credit Agreement | | $ | 5,328 | | | $ | 19,271 | | | $ | 20,450 | |
On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the 2018 Swap (as defined in Note 15, “Derivative Financial Instruments”) prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense) on our consolidated statement of operations for the year ended January 31, 2022. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes receivable, which are included within prepaid expenses and other current assets on our consolidated balance sheet as of January 31, 2022.
Please refer to Note 15, “Derivative Financial Instruments” for a more detailed discussion of our interest rate swap agreement.
9.SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Consolidated Balance Sheets
Inventories consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Raw materials | | $ | 3,001 | | | $ | 2,768 | |
Work-in-process | | 150 | | | 26 | |
Finished goods | | 2,186 | | | 2,747 | |
Total inventories | | $ | 5,337 | | | $ | 5,541 | |
Property and equipment, net consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Land and buildings | | $ | 7,994 | | | $ | 8,124 | |
Leasehold improvements | | 18,155 | | | 23,153 | |
Software | | 76,152 | | | 61,871 | |
Equipment, furniture, and other | | 64,363 | | | 66,444 | |
Total cost | | 166,664 | | | 159,592 | |
Less: accumulated depreciation and amortization | | (102,574) | | | (90,502) | |
Total property and equipment, net | | $ | 64,090 | | | $ | 69,090 | |
The amounts in the table above as of January 31, 2021 have been revised to decrease previously presented equipment, furniture and other, and increase previously presented software by $44.5 million, respectively. This reclassification did not affect total property and equipment, net on our consolidated balance sheet as of January 31, 2021.
Depreciation expense on property and equipment was $20.7 million, $30.6 million, and $23.5 million in the years ended January 31, 2022, 2021, and 2020, respectively.
Prepaid and other current assets consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Prepaid expenses | | $ | 22,639 | | | $ | 23,125 | |
Other current assets | | 31,107 | | | 19,689 | |
Total prepaid expenses and other current assets | | $ | 53,746 | | | $ | 42,814 | |
Other assets consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Deferred commissions | | $ | 51,714 | | | $ | 46,379 | |
Long-term contract assets, net | | 30,510 | | | 17,210 | |
Capitalized software development costs, net | | 22,483 | | | 19,250 | |
Long-term deferred cost of revenue | | 5,907 | | | 6,316 | |
Noncontrolling equity investments | | 5,146 | | | 2,034 | |
Deferred debt issuance costs, net | | 1,950 | | | 1,449 | |
Long-term security deposits | | 702 | | | 567 | |
Long-term restricted cash and time deposits | | 409 | | | 651 | |
Other | | 7,817 | | | 3,368 | |
Total other assets | | $ | 126,638 | | | $ | 97,224 | |
Accrued expenses and other current liabilities consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Compensation and benefits | | $ | 86,777 | | | $ | 77,942 | |
Operating lease obligations - current portion | | 24,551 | | | 14,230 | |
Taxes other than income taxes | | 16,313 | | | 21,764 | |
Preferred Stock dividends payable | | 10,400 | | | 5,200 | |
Contingent consideration - current portion | | 7,776 | | | 9,595 | |
Professional and consulting fees | | 3,771 | | | 4,996 | |
Income taxes | | 602 | | | 1,514 | |
Fair value of future tranche right | | — | | | 52,772 | |
Other | | 18,504 | | | 23,504 | |
Total accrued expenses and other current liabilities | | $ | 168,694 | | | $ | 211,517 | |
Other liabilities consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Unrecognized tax benefits, including interest and penalties | | $ | 16,345 | | | $ | 14,441 | |
Finance lease obligations - long-term portion | | 3,831 | | | 2,969 | |
Derivative financial instruments - long-term portion | | — | | | 13,565 | |
Contingent consideration - long-term portion | | — | | | 6,109 | |
Other | | 1,820 | | | 5,635 | |
Total other liabilities | | $ | 21,996 | | | $ | 42,719 | |
Consolidated Statements of Operations
Other income (expense), net consisted of the following for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Foreign currency (losses) gains, net | | $ | (1,644) | | | $ | (1,584) | | | $ | 672 | |
(Losses) gains on derivative financial instruments, net | | (14,374) | | | (1,267) | | | 204 | |
Change in fair value of future tranche right | | 15,810 | | | (56,146) | | | — | |
Other, net | | 5,435 | | | (1,604) | | | (267) | |
Total other income (expense), net | | $ | 5,227 | | | $ | (60,601) | | | $ | 609 | |
Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our consolidated cash flows for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Cash paid for interest | | $ | 9,716 | | | $ | 24,612 | | | $ | 23,209 | |
Cash payments of income taxes, net | | $ | 42,917 | | | $ | 21,476 | | | $ | 14,859 | |
Non-cash investing and financing transactions: | | | | | | |
Liabilities for contingent consideration in business combinations | | $ | 900 | | | $ | — | | | $ | 8,230 | |
Preferred Stock dividends declared | | $ | 10,400 | | | $ | 5,200 | | | $ | — | |
Finance leases of property and equipment | | $ | 4,041 | | | $ | 903 | | | $ | 3,287 | |
Settlement of Future Tranche Right upon issuance of Series B Preferred Stock | | $ | 36,962 | | | $ | — | | | $ | — | |
Retirement of treasury stock | | $ | 234,999 | | | $ | — | | | $ | — | |
Settlement of convertible note premium with common stock | | $ | 59,131 | | | $ | — | | | $ | — | |
Receipt of common stock from the counterparties under the Note Hedges | | $ | 59,651 | | | $ | — | | | $ | — | |
Accrued but unpaid purchases of property and equipment | | $ | 750 | | | $ | 2,731 | | | $ | 962 | |
Accrued but unpaid purchases of treasury stock | | $ | — | | | $ | — | | | $ | 2,846 | |
Leasehold improvements funded by lease incentives | | $ | — | | | $ | 119 | | | $ | 2,604 | |
Contingent receivable in exchange for sale of subsidiary | | $ | — | | | $ | — | | | $ | 738 | |
10.CONVERTIBLE PREFERRED STOCK
On December 4, 2019, we entered into an Investment Agreement with the Apax Investor, whereby, subject to certain closing conditions, the Apax Investor agreed to make an investment in us in an amount up to $400.0 million as follows:
•On May 7, 2020 (the “Series A Closing Date”), we issued a total of 200,000 shares of our Series A Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $2.7 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series A Preferred Stock.
•In connection with the completion of the Spin-Off, on April 6, 2021 (the “Series B Closing Date” and together with the Series A Closing Date, as applicable, the “Applicable Closing Date”), we issued a total of 200,000 shares of our Series B Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $1.3 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series B Preferred Stock.
Each of the rights, preferences, and privileges of the Series A Preferred Stock and Series B Preferred Stock are set forth in separate certificates of designation filed with the Secretary of State of the State of Delaware on the Applicable Closing Date.
Voting Rights
Holders of the Preferred Stock have the right to vote on matters submitted to a vote of the holders of our common stock, on an as-converted basis; however, in no event will the holders of Preferred Stock have the right to vote shares of the Preferred Stock on an as-converted basis in excess of 19.9% of the voting power of the Common Stock outstanding immediately prior to December 4, 2019.
Dividends and Liquidation Rights
The Preferred Stock ranks senior to the shares of our common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of our affairs. Shares of Preferred Stock have a liquidation preference of the greater of $1,000 per share or the amount that would be received if the shares are converted at the then applicable conversion price at the time of such liquidation.
Each series of Preferred Stock pays dividends at an annual rate of 5.2% until the 48-month anniversary of the Series A Closing Date, 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 the Series A Closing Date (unless we obtain shareholder approval of the issuance of common stock upon conversion of the Preferred Stock) and (ii) by 1.0% each year, up to a maximum dividend rate of 10.0% per annum, in the event we fail to satisfy our obligations to redeem the Preferred Stock in specified circumstances.
For the year ended January 31, 2022, we paid $12.9 million of preferred stock dividends, of which $5.2 million was accrued as of January 31, 2021, and there were $12.1 million of cumulative unpaid preferred stock dividends at January 31, 2022, of which $10.4 million was declared and recorded within accrued expenses and other liabilities on our consolidated balance sheet as of January 31, 2022. We reflected $18.9 million and $7.7 million of preferred stock dividends in our consolidated results of operations, for purposes of computing net (loss) income attributable to Verint Systems Inc. common shares, for the years ended January 31, 2022 and 2021.
Conversion
The Series A Preferred Stock was convertible into common stock at the election of the holder, subject to certain conditions, at an initial conversion price of $53.50 per share. The initial conversion price represented a conversion premium of 17.1% over the volume-weighted average price per share of our common stock over the 45 consecutive trading days immediately prior to the date of the Investment Agreement. In accordance with the Investment Agreement, the Series A Preferred Stock did not participate in the Spin-Off distribution of the Cognyte shares, which occurred on February 1, 2021, and the Series A conversion price was instead adjusted to $36.38 per share based on the ratio of the relative trading prices of Verint and Cognyte following the Spin-Off. The Series B Preferred Stock is convertible at a conversion price of $50.25, based in part on our trading price over the 20 day trading period following the Spin-Off. As of January 31, 2022, 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 9.8 million shares and Apax’s ownership in us on an as-converted basis was approximately 12.9%.
At any time after 36 months following the Applicable Closing Date, we will have the option to require that all (but not less than all) of the then-outstanding shares of Preferred Stock of the series convert into common stock if the volume-weighted average price per share of the common stock for at least 30 trading days in any 45 consecutive trading day period exceeds 175% of the then-applicable conversion price of such series (a “Mandatory Conversion”).
We may redeem any or all of the Preferred Stock of a series for cash at any time after the 72-month anniversary of the Applicable Closing Date at a redemption price equal to 100% of the liquidation preference of the shares of the Preferred Stock, plus any accrued and unpaid dividends to, but excluding, the redemption date, plus a make-whole amount designed to allow the Apax Investor to earn a total 8.0% internal rate of return on such shares.
The Apax Investor has agreed to restrictions on its ability to dispose of shares of the Preferred Stock until the earlier of (1) the 36-month anniversary of the Series A Closing Date or (2) the 24-month anniversary of the consummation of the Spin-Off (the “Preferred Stock Restricted Period”). Following the Preferred Stock Restricted Period, the Preferred Stock may not be sold or transferred without the prior written consent of the Company. The Apax Investor has also agreed to restrictions on its ability to dispose of the common stock issued upon conversion of the Preferred Stock. The common stock may not be disposed of until the earlier of (1) the 12-month anniversary of consummation of the Spin-Off or (2) the 24-month anniversary of the Series A Closing Date. These restrictions do not apply to certain transfers to one or more permitted co-investors or transfers or pledges of the Preferred Stock or common stock pursuant to the terms of specified margin loans to be entered into by the Apax Investor as well as transfers effected pursuant to a merger, consolidation, or similar transaction consummated by us and transfers that are approved by our board of directors.
At any time after the 102-month anniversary of the Applicable Closing Date or upon the occurrence of a change of control triggering event (as defined in the Certificates of Designation), the holders of the applicable series of Preferred Stock will have the right to cause us to redeem all of the outstanding shares of Preferred Stock for cash at a redemption price equal to 100% of the liquidation preference of the shares of such series, plus any accrued and unpaid dividends to, but excluding, the redemption date. Therefore, the Preferred Stock has been classified as temporary equity on our consolidated balance sheets as of January 31, 2022 and 2021, separate from permanent equity, as the potential required repurchase of the Preferred Stock, however remote in likelihood, is not solely under our control.
As of January 31, 2022, the Preferred Stock was not redeemable, and we have concluded that it is currently not probable of becoming redeemable, including from the occurrence of a change in control triggering event. The holders’ redemption rights which occur at the 102-month anniversary of the Applicable Closing Date are not considered probable because there is a more than remote likelihood that the Mandatory Conversion may occur prior to such redemption rights. We therefore did not adjust the carrying amount of the Preferred Stock to its current redemption amount, which was its liquidation preference, at January 31, 2022 plus accrued and unpaid dividends. As of January 31, 2022, the stated value of the liquidation preference for each series of Preferred Stock was $200.0 million and cumulative, unpaid dividends on the Series A Preferred Stock and the Series B Preferred Stock were $6.1 million and $6.1 million, respectively.
Future Tranche Right
We determined that our obligation to issue and the Apax Investor’s obligation to purchase 200,000 shares of the Series B Preferred Stock in connection with the completion of the Spin-Off and the satisfaction of other customary closing conditions (the “Future Tranche Right”) met the definition of a freestanding financial instrument as the Future Tranche Right is legally detachable and separately exercisable from the Series A Preferred Stock. At issuance, we allocated a portion of the proceeds from the issuance of the Series A Preferred Stock to the Future Tranche Right based upon its fair value at such time, with the remaining proceeds being allocated to the Series A Preferred Stock. The Future Tranche Right was remeasured at fair value each reporting period until the settlement of the right (at the time of the issuance of the Series B Preferred Stock), and changes in its fair value have been recognized as a non-cash charge or benefit within other income (expense), net on the consolidated statement of operations.
At the Series A Closing Date, the Future Tranche Right was recorded as an asset of $3.4 million, as the purchase price of the Series B Preferred Stock was greater than its estimated fair value at the expected settlement date. This resulted in a $203.4 million carrying value, before direct and incremental issuance costs, for the Series A Preferred Stock.
Immediately prior to the issuance of the Series B Preferred Stock, the Future Tranche Right was remeasured to fair value and as a result we recorded a non-cash benefit of $15.8 million related to the change in fair value of the Future Tranche Right for the three months ended April 30, 2021, within other income (expense), net. Upon the issuance of the Series B Preferred Stock in April 2021, the Future Tranche Right was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. This resulted in a $237.0 million carrying value, before direct and incremental issuance costs, for the Series B Preferred Stock. As a result of the issuance of the Series B Preferred Stock, we no longer recognize changes in the fair value of the Future Tranche Right in our consolidated statement of operations. For the year ended January 31, 2021, we recognized non-cash charges of $56.1 million within other income (expense), net in the consolidated statement of operations for the change in the fair value of the Future Tranche Right.
Please refer to Note 14, “Fair Value Measurements” for additional information regarding valuations of the Future Tranche Right.
11.STOCKHOLDERS’ EQUITY
Common Stock Dividends
We did not declare or pay any cash dividends on our common stock during the years ended January 31, 2022, 2021, and 2020. Under the terms of our 2017 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.
Stock Repurchase Programs
On December 4, 2019, we announced that our board of directors had authorized a stock repurchase program whereby we were authorized to repurchase up to $300.0 million of common stock over the period ending on February 1, 2021. We made $34.0 million and $116.1 million in repurchases under the program during the years ended January 31, 2021 and January 31, 2020, respectively. This program expired on February 1, 2021.
On March 31, 2021, we announced that our board of directors had authorized a stock repurchase program whereby we were authorized to repurchase up to a number of shares of common stock approximately equal to the number of shares to be issued as equity compensation during the fiscal year ending January 31, 2022. During the three months ended April 30, 2021, we repurchased 1,600,000 shares of our common stock at a cost of $75.4 million under this program. There were no repurchases under this program subsequent to April 30, 2021, and this program expired on January 31, 2022.
On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Subsequent to January 31, 2022, through the date of filing this report, we repurchased 1,500,000 shares of our common stock for $78.2 million under this program. Repurchases were financed with available cash in the United States. On March 22, 2022, our board of directors authorized an additional 500,000 shares of common stock to be repurchased under this program. Please refer to Note 21, “Subsequent Event”, for more information regarding this stock repurchase program.
Treasury Stock
From time to time, our board of directors has approved limited programs to repurchase shares of our common stock from 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.
Repurchased shares of common stock are typically recorded as treasury stock, at cost, but may from time to time be retired. We periodically purchase common stock from 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. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired.
During the three months ended July 31, 2021, in connection with the maturity of our 2014 Notes, we issued approximately 1,250,000 treasury shares with an average cost of $47.30 per share to the holders of the 2014 Notes in satisfaction of the conversion premium, which was recorded as a $59.1 million reduction of treasury stock and additional paid-in capital. Additionally, we received approximately 1,250,000 shares of our common stock having a value of $57.7 million from the counterparties under the Note Hedges, as well as approximately 42,000 shares of our common stock having a value of $2.0 million from the counterparties related to the reimbursement for the in-the-money portion of the Repurchased 2014 Notes under the Note Hedge agreements, which was recorded as increase to treasury stock and additional paid-in capital.
During the year ended January 31, 2022, we repurchased approximately 1,613,000 shares of our common stock for a cost of $76.0 million, which includes $75.4 million of share repurchased under the 2021 share repurchase program described above, and other repurchases to facilitate income tax withholding upon vesting of equity awards. On March 30, 2021, our board of directors approved the retirement of such repurchased shares of common stock and any other shares held as treasury stock, at management’s discretion. During the year ended January 31, 2022, we retired 1,058,300 shares of our common stock with a cost of $49.6 million that had been repurchased under the 2021 share repurchase program described above, as well as all of our common stock held as treasury stock, which totaled 5,000,786 shares, and restored them to the status of authorized and unissued shares. The aggregate cost of the treasury stock retired was $235.0 million, which was recorded as a reduction of common stock and additional paid-in capital.
During the year ended January 31, 2021 we repurchased 613,000 shares of our common stock for a cost of $34.0 million under the 2019 share repurchase program described above. During the year ended January 31, 2020, we repurchased approximately 2,126,000 shares of our common stock for a cost of $116.5 million, which included $116.1 million of share repurchases under the December 2019 stock repurchase program described above and other purchases to facilitate income tax withholding upon vesting of equity awards.
At January 31, 2021, we held approximately 4,404,000 shares of treasury stock with a cost of $208.1 million.
Issuance of Convertible Preferred Stock
On December 4, 2019, in conjunction with the planned separation of our businesses into two independent publicly traded companies, we announced that an affiliate of Apax Partners would invest up to $400.0 million in us, in the form of convertible preferred stock. Under the terms of the Investment Agreement, the Apax Investor purchased $200.0 million of our Series A Preferred Stock, which closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock, which closed on April 6, 2021. As of January 31, 2022, Apax’s ownership in us on an as-converted basis was approximately 12.9%. Please refer to Note 10, “Convertible Preferred Stock” for a more detailed discussion of the Apax investment.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders’ equity section of our consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income (loss) as presented in our consolidated statements of operations.
The following table summarizes changes in the components of our accumulated other comprehensive income (loss) by component for the years ended January 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges | | Unrealized Losses on Interest Rate Swap Designated as Hedge | | Foreign Currency Translation Adjustments | | Total |
Accumulated other comprehensive income (loss) at January 31, 2020 | | $ | 626 | | | $ | (10,528) | | | $ | (141,963) | | | $ | (151,865) | |
Other comprehensive income (loss) before reclassifications | | 1,869 | | | (5,916) | | | 17,482 | | | 13,435 | |
Amounts reclassified out of accumulated other comprehensive income (loss) from continuing operations | | 225 | | | (3,413) | | | — | | | (3,188) | |
Amounts reclassified out of accumulated other comprehensive income (loss) from discontinued operations | | 1,636 | | | — | | | — | | | 1,636 | |
Net other comprehensive income (loss) | | 8 | | | (2,503) | | | 17,482 | | | 14,987 | |
Accumulated other comprehensive income (loss) at January 31, 2021 | | 634 | | | (13,031) | | | (124,481) | | | (136,878) | |
Distribution of Cognyte Software Ltd. | | (559) | | | — | | | 17,682 | | | 17,123 | |
Other comprehensive income (loss) before reclassifications | | 70 | | | — | | | (11,668) | | | (11,598) | |
Amounts reclassified out of accumulated other comprehensive income (loss) | | 193 | | | (1,014) | | | — | | | (821) | |
Amounts reclassified upon partial early retirement of the 2017 Term Loan | | — | | | (12,017) | | | — | | | (12,017) | |
Net other comprehensive (loss) income | | (682) | | | 13,031 | | | 6,014 | | | 18,363 | |
Accumulated other comprehensive loss at January 31, 2022 | | $ | (48) | | | $ | — | | | $ | (118,467) | | | $ | (118,515) | |
All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.
On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense) on our consolidated statement of operations for the year ended January 31, 2022. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes receivable, which are included within prepaid expenses and other current assets on our consolidated balance sheet as of January 31, 2022. Please refer to Note 15, “Derivative Financial Instruments” for further information regarding our interest rate swap agreement.
The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated statement of operations, with presentation location, for the years ended January 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, | | Financial Statement Location |
(in thousands) | | 2022 | | 2021 | | 2020 | |
Unrealized gains (losses) on derivative financial instruments: | | | | | | | | |
Foreign currency forward contracts | | $ | 1 | | | $ | 1 | | | $ | (3) | | | Cost of recurring revenue |
| | 24 | | | 28 | | | 5 | | | Cost of nonrecurring revenue |
| | 142 | | | 182 | | | 42 | | | Research and development, net |
| | 65 | | | 56 | | | 20 | | | Selling, general and administrative |
| | 232 | | | 267 | | | 64 | | | Total, before income taxes |
| | (39) | | | (42) | | | (6) | | | Provision for income taxes |
| | $ | 193 | | | $ | 225 | | | $ | 58 | | | Total, net of income taxes |
| | | | | | | | |
Interest rate swap agreement | | $ | (1,014) | | | $ | (4,367) | | | $ | (792) | | | Interest expense |
| | (15,655) | | | — | | | — | | | Other income (expense), net |
| | (16,669) | | | (4,367) | | | (792) | | | Total, before income taxes |
| | 3,638 | | | 954 | | | 175 | | | Benefit from income taxes |
| | $ | (13,031) | | | $ | (3,413) | | | $ | (617) | | | Total, net of income taxes |
12.RESEARCH AND DEVELOPMENT, NET
Our gross research and development expenses for the years ended January 31, 2022, 2021, and 2020, were $123.3 million, $128.2 million, and $134.2 million, respectively.
We capitalize certain costs incurred to develop our commercial software products, and we then recognize those costs within cost of revenue as the products are sold. Activity for our capitalized software development costs for the years ended January 31, 2022, 2021, and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Capitalized software development costs, net, beginning of year | | $ | 19,250 | | | $ | 15,351 | | | $ | 7,266 | |
Software development costs capitalized during the year | | 7,560 | | | 7,312 | | | 9,584 | |
Amortization of capitalized software development costs | | (4,247) | | | (3,304) | | | (1,538) | |
Write-offs of capitalized software development costs | | — | | | (129) | | | — | |
Foreign currency translation and other | | (80) | | | 20 | | | 39 | |
Capitalized software development costs, net, end of year | | $ | 22,483 | | | $ | 19,250 | | | $ | 15,351 | |
During the year ended January 31, 2021, we recorded an impairment charge of $0.1 million in nonrecurring cost of revenue, reflecting the write-off of previously capitalized software development costs that were deemed non-recoverable based on our expectations of future market conditions. There were no impairments of such capitalized costs during the years ended January 31, 2022 and 2020.
13.INCOME TAXES
The components of income (loss) before provision for income taxes for the years ended January 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Domestic | | $ | (12,492) | | | $ | 127,909 | | | $ | (46,896) | |
Foreign | | 51,996 | | | (169,573) | | | 7,329 | |
Total income (loss) before provision for income taxes | | $ | 39,504 | | | $ | (41,664) | | | $ | (39,567) | |
The provision for income taxes from continuing operations for the years ended January 31, 2022, 2021, and 2020 consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Current provision for income taxes: | | | | | | |
Federal | | $ | 3,215 | | | $ | 373 | | | $ | 7,204 | |
State | | 1,121 | | | 1,663 | | | 974 | |
Foreign | | 30,840 | | | 6,299 | | | 3,049 | |
Total current provision for income taxes | | 35,176 | | | 8,335 | | | 11,227 | |
Deferred provision for (benefit from) income taxes: | | | | | | |
Federal | | 6,714 | | | 1,366 | | | (4,430) | |
State | | 255 | | | (188) | | | 862 | |
Foreign | | (18,292) | | | (2,576) | | | (716) | |
Total deferred benefit from income taxes | | (11,323) | | | (1,398) | | | (4,284) | |
Total provision for income taxes from continuing operations | | $ | 23,853 | | | $ | 6,937 | | | $ | 6,943 | |
Intra-period allocation rules require us to allocate our provision for income taxes between continuing operations and other categories such as discontinued operations or comprehensive income (loss). As described in Note 2, “Discontinued Operations”, the results of Cognyte have been reported as discontinued operations for all periods presented.
The reconciliation of the U.S. federal statutory rate to our effective tax rate on income (loss) before provision for income taxes from continuing operations for the years ended January 31, 2022, 2021, and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
U.S. federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| | | | | | |
Income tax provision (benefit) at the U.S. federal statutory rate | | $ | 8,296 | | | $ | (8,733) | | $ | (8,307) |
State income tax (benefit) provision | | (1,238) | | | 2,017 | | 106 |
Foreign tax rate differential | | 6,262 | | | 5,992 | | 10,134 |
Tax incentives | | (6,378) | | | (2,681) | | (6,224) |
Valuation allowances | | 2,616 | | | (3,269) | | 2,311 |
Stock-based and other compensation | | 897 | | | 2,958 | | (926) |
Non-deductible expenses | | (238) | | | (1,007) | | 1,127 |
Tax credits | | 117 | | | 875 | | 266 |
Tax contingencies | | 2,108 | | | (5,652) | | 161 |
Change in fair value of future tranche right | | (3,320) | | | 11,791 | | — |
Changes in tax laws | | 1,552 | | | — | | — |
U.S. tax effects of foreign operations | | 13,480 | | | 3,828 | | 8,299 |
Other, net | | (301) | | | 818 | | (4) |
Total provision for income taxes | | $ | 23,853 | | | $ | 6,937 | | $ | 6,943 |
Effective income tax rate | | 60.4 | % | | (16.6) | % | | (17.5) | % |
Change in the effective tax rate from the prior year to the current year presentation are due to the allocation of tax expense between continuing operations and discontinued operations when applying intra-period allocation rules.
Our operations in Israel have been granted “Approved Enterprise” (“AE”) status by the Investment Center of the Israeli Ministry of Industry, Trade and Labor, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the program, income attributable to an approved enterprise is exempt from income tax for a period of two years and is subject to a reduced income tax rate for the subsequent five years to eight years (generally 10% - 23%, depending on the percentage of foreign investment in the company). Our AE status remained in effect through January 31, 2020. Beginning January 31, 2021, based on the current law, the company qualifies for an alternative tax incentive program as a Preferred Technological Enterprise (“PTE”). Pursuant to Amendment 73 to the Investment Law adopted in 2017, a company located in the Center of Israel that meets the conditions for PTE is subject to a 12% tax rate on eligible income. Income not eligible for PTE benefits is taxed at the regular corporate rate of 23%, excluding income derived from manufacturing activity which is entitled to tax benefits according to the “Preferred Enterprise” regime. Income eligible for tax benefits under the Preferred Enterprise regime is taxed at 16%.
In total, tax incentives decreased our effective tax rate by 16.1% for the year ended January 31, 2022, and increased our effective tax rate by 6.4%, and 15.8% for the years ended January 31, 2021, and 2020, respectively. The negative benefits are a result of taxable losses in Israel on a continuing operations basis in prior years.
Deferred tax assets and liabilities from continuing operations consisted of the following at January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
Deferred tax assets: | | | | |
Accrued expenses | | $ | 4,464 | | | $ | 5,383 | |
Operating lease liabilities | | 9,275 | | | 11,040 | |
Fair value of derivatives | | — | | | 4,149 | |
Loss carryforwards | | 21,764 | | | 17,672 | |
Tax credits | | 5,780 | | | 5,946 | |
Stock-based and other compensation | | 6,802 | | | 7,434 | |
Total deferred tax assets | | 48,085 | | | 51,624 | |
Deferred tax liabilities: | | | | |
Deferred cost of revenue | | (8,457) | | | (5,100) | |
Goodwill and other intangible assets | | (20,810) | | | (29,876) | |
Unremitted earnings of foreign subsidiaries | | (970) | | | (14,882) | |
Operating lease right-of-use assets | | (4,959) | | | (8,569) | |
Other, net | | (1,547) | | | (2,140) | |
Total deferred tax liabilities | | (36,743) | | | (60,567) | |
Valuation allowance | | (20,711) | | | (16,761) | |
Net deferred tax liabilities | | $ | (9,369) | | | $ | (25,704) | |
| | | | |
Recorded as: | | | | |
Deferred tax assets | | $ | 8,091 | | | $ | 7,287 | |
Deferred tax liabilities | | (17,460) | | | (32,991) | |
Net deferred tax liabilities | | $ | (9,369) | | | $ | (25,704) | |
At January 31, 2022, we had U.S. federal NOL carryforwards of approximately $309.1 million. Except for $13.1 million of NOLs that can be carried forward indefinitely, these loss carryforwards expire in various years ending from January 31, 2023 to January 31, 2037. We had state NOL carryforwards of approximately $206.7 million. Except for $2.4 million of NOLs that can be carried forward indefinitely, those loss carryforwards expire in various years ending from January 31, 2023 to January 31, 2040. We had foreign NOL carryforwards of approximately $33.1 million. At January 31, 2022, all but $2.9 million of these foreign loss carryforwards had indefinite carryforward periods. Certain of these federal, state, and foreign loss carryforwards and credits are subject to Internal Revenue Code Section 382 or similar provisions, which impose limitations on their utilization following certain changes in ownership of the entity generating the loss carryforward. We had U.S. federal, state, and foreign tax credit carryforwards of approximately $8.9 million at January 31, 2022, the utilization of which is subject to limitation. At January 31, 2022, approximately $2.7 million of these tax credit carryforwards may be carried forward indefinitely. The balance of $6.2 million expires in various years ending from January 31, 2023 to January 31, 2037.
We currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent that earnings of our foreign subsidiaries have been subject to U.S. taxation as of January 31, 2022 and withholding taxes of $1.0 million accrued as of January 31, 2022 with respect to certain identified cash that may be repatriated to the United States, we have not provided tax on the outside basis difference of foreign subsidiaries nor have we provided for any additional withholding or other tax that may be applicable should a future distribution be made from any unremitted earnings of foreign subsidiaries. Due to complexities in the laws of the foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income and withholding taxes that would have to be provided on such earnings.
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 have recorded valuation allowances in the amounts of $20.7 million and $16.8 million at January 31, 2022 and 2021, respectively.
Activity in the recorded valuation allowance consisted of the following for the years ended January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 |
Valuation allowance, beginning of year | | $ | (16,761) | | | $ | (19,512) | |
Income tax (provision) benefit | | (2,616) | | | 3,269 | |
Fair value of derivatives and convertible debt instruments | | (1,139) | | | — | |
Currency translation adjustment and other | | (195) | | | (518) | |
Valuation allowance, end of year | | $ | (20,711) | | | $ | (16,761) | |
In accordance with the authoritative guidance on accounting for uncertainty in income taxes, differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements, determined by applying the prescribed methodologies of accounting for uncertainty in income taxes, represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets.
For the years ended January 31, 2022, 2021, and 2020, the aggregate changes in the balance of gross unrecognized tax benefits were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Gross unrecognized tax benefits, beginning of year | | $ | 84,847 | | | $ | 85,327 | | | $ | 86,312 | |
Increases related to tax positions taken during the current year | | 672 | | | 706 | | | 575 | |
Increases related to tax positions taken during prior years | | 430 | | | — | | | 147 | |
Increases related to foreign currency exchange rates | | 45 | | | 136 | | | 146 | |
Reductions for tax positions of prior years | | (152) | | | (193) | | | (1,555) | |
Lapses of statutes of limitations | | (1,613) | | | (1,129) | | | (298) | |
Gross unrecognized tax benefits, end of year | | $ | 84,229 | | | $ | 84,847 | | | $ | 85,327 | |
We had unrecognized income tax benefits of $84.2 million (excluding interest and penalties) as of January 31, 2022, that, if recognized, would impact the effective income tax rate. We recorded $0.5 million, $0.4 million, and $0.2 million of tax expense for interest and penalties related to uncertain tax positions in our provision for income taxes for the years ended January 31, 2022, 2021, and 2020, respectively. The accrued liability for interest and penalties was $3.4 million and $3.0 million at January 31, 2022 and 2021, respectively. Interest and penalties are recorded as a component of the provision for income taxes in the consolidated statements of operations.
Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. In the United Kingdom, with the exception of years which are currently under examination, we are no longer subject to income tax examination for years prior to January 31, 2019. In the United States, our federal returns are no longer subject to income tax examination for years prior to January 31, 2019. However, to the extent we generated NOLs or tax credits in closed tax years, future use of the NOL or tax credit carry forward balance would be subject to examination within the relevant statute of limitations for the year in which utilized.
As of January 31, 2022, income tax returns are under examination in the following significant tax jurisdictions:
| | | | | | | | |
Jurisdiction | | Tax Years |
United Kingdom | | December 31, 2006, January 31, 2008 |
India | | March 31, 2008, March 31, 2010 - March 31, 2013, March 31, 2017, March 31, 2020 |
Israel | | January 31, 2018 - January 31, 2020 |
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 January 31, 2022 could decrease by approximately $0.3 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur, which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made. See Note 2, “Discontinued Operations” for discussion related to the Tax Matters Agreement entered into between us and Cognyte as a result of the Spin-Off.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. However, we deferred the timing of employer payroll taxes and accelerated the refund of AMT credits as permitted by the CARES Act.
14.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 January 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2022 |
| | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | |
Money market funds | | $ | 127,041 | | | $ | — | | | $ | — | |
Commercial paper, classified as cash and cash equivalents | | — | | | 29,995 | | | — | |
Foreign currency forward contracts | | — | | | 33 | | | — | |
Contingent consideration receivable | | — | | | — | | | 271 | |
Total assets | | $ | 127,041 | | | $ | 30,028 | | | $ | 271 | |
Liabilities: | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 91 | | | $ | — | |
Contingent consideration — business combinations | | — | | | 7,776 | | | — | |
Total liabilities | | $ | — | | | $ | 7,867 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | January 31, 2021 |
| | Fair Value Hierarchy Category |
(in thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | |
Money market funds | | $ | 342,090 | | | $ | — | | | $ | — | |
Foreign currency forward contracts | | — | | | 136 | | | — | |
Contingent consideration receivable | | — | | | — | | | 565 | |
Total assets | | $ | 342,090 | | | $ | 136 | | | $ | 565 | |
Liabilities: | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 48 | | | $ | — | |
Interest rate swap agreements | | — | | | 17,881 | | | — | |
Future tranche right | | — | | | — | | | 52,772 | |
Contingent consideration — business combinations | | — | | | — | | | 15,704 | |
Option to acquire noncontrolling interests of consolidated subsidiaries | | — | | | — | | | 3,250 | |
Total liabilities | | $ | — | | | $ | 17,929 | | | $ | 71,726 | |
We evaluated the Future Tranche Right associated with the Series A Preferred Stock issued on May 7, 2020 and determined that the Future Tranche Right was a freestanding financial instrument. The Future Tranche Right was initially recorded as an
asset and was re-measured at each reporting period until the redemption feature was exercised in connection with the sale and issuance of the Series B Preferred Stock on April 6, 2021. Immediately prior to the issuance of the Series B Preferred Stock, the Future Tranche Right was remeasured to fair value with the change in fair value recognized as a component of other income (expense). Upon the issuance of the Series B Preferred Stock, the Future Tranche Right liability was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. Please refer to Note 10, “Convertible Preferred Stock” for additional information regarding the Future Tranche Right and preferred stock investment.
The following table presents the changes in the estimated fair value of the Future Tranche Right measured using significant unobservable inputs (Level 3) for the years ended January 31, 2022 and 2021.
| | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 |
Fair value measurement, beginning of year | | $ | (52,772) | | | $ | — | |
Fair value of future tranche right upon issuance of the Series A Preferred Stock | | — | | | 3,374 | |
Change in fair value, recorded in other income (expense), net | | 15,810 | | | (56,146) | |
Reclassification of future tranche right liability upon settlement | | 36,962 | | | — | |
Fair value measurement, end of year | | $ | — | | | $ | (52,772) | |
In January 2020, we completed the sale of an insignificant subsidiary. In accordance with the terms of the sale agreement, 100% of the aggregate purchase price is contingent in nature based on a percentage of net sales of the former subsidiary’s products during the thirty-six month period following the transaction closing. We include the fair value of the contingent consideration receivable within prepaid expenses and other current assets and other assets on our consolidated balance sheets. The estimated fair value of this asset as of January 31, 2022, which is measured using Level 3 inputs, was $0.3 million. We received payments of $0.3 million, and the change in the estimated fair value of this contingent receivable was not material, during the year ended January 31, 2022. The estimated fair value of this asset as of January 31, 2021 was $0.6 million. We received payments of $0.1 million, and the change in the estimated fair value of this contingent receivable was not material, during the year ended January 31, 2021. Due to the timing of this transaction, there was no change to the estimated fair value of this receivable recorded in operating expenses for the year ended January 31, 2020.
The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the years ended January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 |
Fair value measurement, beginning of year | | $ | 15,704 | | | $ | 31,367 | |
Contingent consideration liabilities recorded for business combinations | | 900 | | | — | |
Changes in fair values, recorded in operating expenses | | 883 | | | (806) | |
Payments of contingent consideration | | (9,560) | | | (15,183) | |
Foreign currency translation and other | | (151) | | | 326 | |
Transfer of contingent consideration liability to Level 2 of the fair value hierarchy | | (7,776) | | | — | |
Fair value measurement, end of year | | $ | — | | | $ | 15,704 | |
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 consolidated statements of operations within selling, general and administrative expenses.
On January 31, 2022, we exercised an option to acquire the noncontrolling interests in two majority owned subsidiaries. Prior to the exercise, we accounted for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We included the fair value of the option within accrued expenses and other current liabilities and did not recognize noncontrolling interests in these subsidiaries.
The following table presents the change in the estimated fair value of this liability, which is measured using Level 3 inputs, for the years ended January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 |
Fair value measurement, beginning of year | | $ | 3,250 | | | $ | 2,900 | |
Change in fair value, recorded in operating expenses | | 1,245 | | | 350 | |
Amount paid upon exercise of option to acquire noncontrolling interests of consolidated subsidiaries | | (4,495) | | | — | |
Fair value measurement, end of year | | $ | — | | | $ | 3,250 | |
On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense), net on our consolidated statement of operations for the year ended January 31, 2022. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes receivable, which are included within prepaid expenses and other current assets on our consolidated balance sheet as of January 31, 2022. Please refer to Note 15, “Derivative Financial Instruments” for further information regarding our interest rate agreement.
Fair Value Measurements
Money Market Funds - We value our money market funds using quoted active market prices for such funds.
Short-term Investments, Corporate Debt Securities, and Commercial Paper - The fair values of short-term investments, as well as corporate debt securities and commercial paper classified as cash equivalents, are estimated using observable market prices for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.
Foreign Currency Forward Contracts - The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.
Future Tranche Right - The fair value of the Future Tranche Right was classified within Level 3 of the fair value hierarchy because it was valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The fair value of the Future Tranche Right was estimated using a binomial tree model to estimate the value of the Series B Preferred Stock and a Monte Carlo simulation to estimate our stock price post-Spin-Off, which we believe was reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of the Future Tranche Right. The fair value of the Future Tranche Right also reflected the likelihood of the Series B Preferred Stock being issued, which management considered to be highly probable for all periods the Future Tranche Right was outstanding.
Significant inputs and assumptions used in the valuation model immediately prior to the settlement date, April 6, 2021, and as of January 31, 2021, are as follows:
| | | | | | | | | | | | | | |
| | April 6, | | January 31, |
| | 2021 | | 2021 |
Risk-free interest rate for preferred stock | | 2.35 | % | | 1.86 | % |
Implied credit spread | | 6.78 | % | | 6.78 | % |
Expected volatility | | 30.00 | % | | 30.00 | % |
Verint common stock price | | $ | 45.91 | | $ | 73.83 |
Interest Rate Swap Agreement - The fair value of our interest rate swap agreement was based in part on data received from the counterparty, and represented the estimated amount we would receive or pay to settle the agreement, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration Assets and Liabilities - Business Combinations and Divestitures - The fair value of the contingent consideration related to business combinations and divestitures is estimated using a probability-adjusted discounted cash flow
model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from 3.3% to 3.8%, with a weighted average discount rate of 3.5% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2021. We utilized discount rates ranging from 3.5% to 3.9%, with a weighted average discount rate of 3.7%, in our calculation of the estimated fair value of our contingent consideration assets as of January 31, 2022. We utilized discount rates ranging from 3.3% to 4.0%, with a weighted average discount rate of 3.7% in our calculation of the estimated fair value of our contingent consideration assets as of January 31, 2021.
As of January 31, 2022, the $7.8 million fair value of the contingent consideration liability was based on actual achievement through the performance periods ended January 31, 2022, and was transferred to Level 2 of the fair value hierarchy as the fair value was determined based on other significant observable inputs.
Option to Acquire Noncontrolling Interests of Consolidated Subsidiaries - The fair value of the option was determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. This fair value measurement is based upon significant inputs not observable in the market. We remeasured the fair value of the option at each reporting period, and any changes in fair value were recorded within selling, general, and administrative expenses. We utilized a discount rate of 8.5% in our calculation of the estimated fair value of the option as of January 31, 2021.
Other Financial Instruments
The carrying amounts of accounts receivable, contract assets, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.
The estimated fair values of our term loan borrowings were approximately $100 million and $409 million at January 31, 2022 and 2021, respectively. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy because we cannot reasonably observe activity in the limited market in which participation in our term loans are traded. The indicative prices provided to us as at each of January 31, 2022 and 2021 did not significantly differ from par value. The estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our lenders.
The estimated fair value of our 2014 Notes, which matured in June 2021, was approximately $440 million at January 31, 2021. The estimated fair value of our 2021 Notes was approximately $330 million at January 31, 2022. The estimated fair values of the 2014 Notes and 2021 Notes were determined based on quoted bid and ask prices in the over-the-counter market in which the 2014 Notes and 2021 Notes traded. We consider these inputs to be within Level 2 of the fair value hierarchy.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right-of-use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized. Further details regarding our regular impairment reviews appear in Note 1, “Summary of Significant Accounting Policies”.
As of January 31, 2022, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $5.1 million, of which $4.4 million was remeasured to fair value based on an observable transaction during the year ended January 31, 2022. These investments are included within other assets on the consolidated balance sheets. An unrealized gain of $3.1 million, which adjusted the carrying value of a noncontrolling equity investment based on an observable transaction was recorded in other income (expense), net on the consolidated statement of operations for the year ended January 31, 2022. As of January 31, 2021, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $2.0 million. There were no observable price changes in
our investments in privately-held companies during the year ended January 31, 2021. We did not recognize any impairments during the years ended January 31, 2022 and 2021.
15.DERIVATIVE FINANCIAL INSTRUMENTS
Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.
Foreign Currency Forward Contracts
Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.
We held outstanding foreign currency forward contracts with notional amounts of $7.4 million and $6.6 million as of January 31, 2022 and 2021, respectively.
Interest Rate Swap Agreements
To partially mitigate risks associated with the variable interest rates on the term loan borrowings under the prior credit agreement, in February 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution under which we paid interest at a fixed rate of 4.143% and received variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million (the “2016 Swap”). Although the prior credit agreement was terminated on June 29, 2017, the 2016 Swap agreement remained in effect until September 6, 2019, and served as an economic hedge to partially mitigate the risk of higher borrowing costs under our 2017 Credit Agreement resulting from increases in market interest rates. Settlements with the counterparty under the 2016 Swap occurred quarterly and the 2016 Swap matured on September 6, 2019.
On June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the prior credit agreement, the 2016 Swap was no longer designated as a cash flow hedge for accounting purposes and because occurrence of the specific forecasted variable cash flows which had been hedged by the 2016 Swap was no longer probable, the $0.9 million fair value of the 2016 Swap at that date was reclassified from accumulated other comprehensive income (loss) into the consolidated statement of operations as income within other income (expense), net. Ongoing changes in the fair value of the 2016 Swap were recognized within other income (expense), net in the consolidated statement of operations.
In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of the 2016 Swap in September 2019, under which we paid interest at a fixed rate of 2.949% and received variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the “2018 Swap”). The effective date of the 2018 Swap was September 6, 2019, and settlements with the counterparty began on November 1, 2019 and occurred on a quarterly basis. The 2018 Swap had a termination date of June 29, 2024.
Prior to May 1, 2020, the 2018 Swap was designated as a cash flow hedge for accounting purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and were reclassified into the consolidated statement of operations within interest expense in the periods in which the hedged transactions affected earnings.
On May 1, 2020, which was an interest rate reset date on our 2017 Term Loan, we selected an interest rate other than three-month LIBOR. As a result, the 2018 Swap, which was designated specifically to hedge three-month LIBOR interest payments, no longer qualified as a cash flow hedge. Subsequent to May 1, 2020, changes in the fair value of the 2018 Swap were accounted for as a component of other income (expense), net. Accumulated deferred losses on the 2018 Swap of $20.4 million,
or $16.0 million after taxes, at May 1, 2020 that were previously recorded as a component of accumulated other comprehensive loss, were being reclassified to the consolidated statement of operations as interest expense over the remaining term of the 2018 Swap, as the previously hedged interest payments occurred.
On April 13, 2021, we paid $16.5 million to the counterparty to settle the 2018 Swap agreement prior to its June 2024 maturity. Upon settlement, we recorded an unrealized gain of $1.3 million in other income (expense) to adjust the 2018 Swap to its fair value at settlement date and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders’ equity to other income (expense), net on our consolidated statement of operations for the year ended January 31, 2022. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes receivable, which are included within prepaid expenses and other current assets on our consolidated balance sheet as of January 31, 2022.
Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our consolidated balance sheets as of January 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | January 31, |
(in thousands) | | Balance Sheet Classification | | 2022 | | 2021 |
Derivative assets: | | | | | | |
Foreign currency forward contracts: | | | | | | |
Designated as cash flow hedges | | Prepaid expenses and other current assets | | $ | 33 | | | $ | 136 | |
Total derivative assets | | | | $ | 33 | | | $ | 136 | |
| | | | | | |
Derivative liabilities: | | | | | | |
Foreign currency forward contracts: | | | | | | |
Designated as cash flow hedges | | Accrued expenses and other current liabilities | | $ | 91 | | | $ | 47 | |
Not designated as hedging instruments | | Accrued expenses and other current liabilities | | — | | | 1 | |
Interest rate swap agreements: | | | | | | |
Not designated as a hedging instrument | | Accrued expenses and other current liabilities | | — | | | 4,316 | |
Not designated as a hedging instrument | | Other liabilities | | — | | | 13,565 | |
Total derivative liabilities | | | | $ | 91 | | | $ | 17,929 | |
Derivative Financial Instruments in Cash Flow Hedging Relationships
The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the consolidated statement of operations for the years ended January 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Net gains (losses) recognized in AOCL: | | | | | | |
Foreign currency forward contracts | | $ | 85 | | | $ | 323 | | | $ | 289 | |
Interest rate swap agreement | | — | | | (7,535) | | | (10,265) | |
| | $ | 85 | | | $ | (7,212) | | | $ | (9,976) | |
Net (losses) gains reclassified from AOCL to the consolidated statements of operations: | | | | | | |
Foreign currency forward contracts | | $ | 232 | | | $ | 267 | | | $ | 64 | |
Interest rate swap agreement | | (16,669) | | | (4,367) | | | (792) | |
| | $ | (16,437) | | | $ | (4,100) | | | $ | (728) | |
For information regarding the line item locations of the net (losses) gains on derivative financial instruments reclassified out of AOCL into the consolidated statements of operations, see Note 11, “Stockholders’ Equity”.
All of the foreign currency forward contracts underlying the net unrealized gains recorded in our accumulated other comprehensive loss at January 31, 2022 mature within twelve months, and therefore we expect all such gains to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
(Losses) gains recognized on derivative financial instruments not designated as hedging instruments in our consolidated statements of operations for the years ended January 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Classification in Consolidated Statements of Operations | | Year Ended January 31, |
(in thousands) | | | 2022 | | 2021 | | 2020 |
Foreign currency forward contracts | | Other income (expense), net | | $ | — | | | $ | — | | | $ | 251 | |
Interest rate swap agreements | | Other income (expense), net | | (14,374) | | | (1,267) | | | (48) | |
| | | | $ | (14,374) | | | $ | (1,267) | | | $ | 203 | |
16.STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS
Stock-Based Compensation Plans
Plan Summaries
We issue stock-based incentive awards to eligible employees, directors and consultants, including restricted stock units (“RSUs”), performance stock units (“PSUs”), stock options (both incentive and non-qualified), and other awards, under the terms of our outstanding stock benefit plans (the “Plans” or “Stock Plans”) and forms of equity award agreements approved by our board of directors.
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. Upon issuance of restricted stock, exercise of stock options, or issuance of shares under the Plans, we generally issue new shares of common stock, but may issue treasury shares.
Stock-Based Compensation Plans
On June 20, 2019, our stockholders approved the Verint Systems Inc. 2019 Long-Term Stock Incentive Plan (the “2019 Plan”). Upon approval of the 2019 Plan, new awards are no longer permitted under our prior stock-based compensation plan (the “2017 Amended Plan”). Awards outstanding at June 20, 2019 under the 2017 Amended Plan or other previous stock-based compensation plans were not impacted by the approval of the 2019 Plan. Collectively, our stock-based compensation plans are referred to herein as the “Plans”.
The 2019 Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, other stock-based awards, and performance compensation awards. Subject to adjustment as provided in the 2019 Plan, up to an aggregate of (i) 9,475,000 shares of our common stock plus (ii) the number of shares of our common stock available for issuance under the 2017 Amended Plan as of June 20, 2019, plus (iii) the number of shares of our common stock that become available for issuance as a result of awards made under the 2017 Amended Plan or the 2019 Plan that are forfeited, cancelled, exchanged, or that terminate or expire, may be issued or transferred in connection with awards under the 2019 Plan. Each stock option or stock-settled stock appreciation right granted under the 2019 Plan will reduce the available plan capacity by one share and each other award denominated in shares that is granted under the 2019 Plan will reduce the available plan capacity by 2.38 shares.
In March 2021, our board of directors approved an adjustment of the available plan capacity to the 2019 Plan to 14,239,656 shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off.
Stock-Based Compensation Expense
We recognized stock-based compensation expense in the following line items on the consolidated statements of operations for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Component of income before provision for income taxes: | | | | | | |
Cost of revenue — recurring | | $ | 1,999 | | | $ | 1,109 | | | $ | 2,100 | |
Cost of revenue — nonrecurring | | 3,029 | | | 2,184 | | | 3,316 | |
Research and development, net | | 7,565 | | | 3,918 | | | 7,212 | |
Selling, general and administrative | | 52,672 | | | 37,989 | | | 52,211 | |
Total stock-based compensation expense | | 65,265 | | | 45,200 | | | 64,839 | |
Income tax benefits related to stock-based compensation (before consideration of valuation allowances) | | 10,615 | | | 6,684 | | | 7,357 | |
Total stock-based compensation, net of taxes | | $ | 54,650 | | | $ | 38,516 | | | $ | 57,482 | |
The following table summarizes stock-based compensation expense by type of award for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Restricted stock units and restricted stock awards | | $ | 58,678 | | | $ | 47,598 | | | $ | 49,475 | |
Stock bonus program and bonus share program | | 6,568 | | | (2,390) | | | 15,327 | |
Total equity-settled awards | | 65,246 | | | 45,208 | | | 64,802 | |
Phantom stock units (cash-settled awards) | | 19 | | | (8) | | | 37 | |
Total stock-based compensation expense | | $ | 65,265 | | | $ | 45,200 | | | $ | 64,839 | |
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.
We recorded a $2.5 million net excess tax benefit, a $0.9 million net excess tax deficiency, and a $1.9 million net excess tax benefit resulting from our Stock Plans as a component of income tax expense for the years ended January 31, 2022, 2021, and 2020, respectively.
Restricted Stock Units and Performance Stock Units
We periodically award RSUs to our directors, officers, and other employees. The fair value of these awards is equivalent to the market value of our common stock on the grant date. RSUs are not shares of our common stock and do not have any of the rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share of our common stock. RSUs are subject to certain restrictions and forfeiture provisions prior to vesting.
We periodically award PSUs to executive officers and certain employees that vest upon the achievement of specified performance goals or market conditions. We separately recognize compensation expense for each tranche of a PSU award as if it were a separate award with its own vesting date. For certain PSUs, an accounting grant date may be established prior to the requisite service period.
Once a performance vesting condition has been defined and communicated, and the requisite service period has begun, our estimate of the fair value of PSUs requires an assessment of the probability that the specified performance criteria will be achieved, which we update at each reporting date and adjust our estimate of the fair value of the PSUs, if necessary. All compensation expense for PSUs with market conditions is recognized if the requisite service period is fulfilled, even if the market condition is not satisfied.
RSUs, PSUs, or phantom stock units that are expected to settle with cash payments upon vesting, if any, are reflected as liabilities on our consolidated balance sheets. Such awards were insignificant at January 31, 2022, 2021, and 2020.
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 years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
| | 2022 | | 2021 | | 2020 |
(in thousands, except grant date fair values) | | Shares or Units | | Weighted-Average Grant-Date Fair Value | | Shares or Units | | Weighted-Average Grant-Date Fair Value | | Shares or Units | | Weighted-Average Grant-Date Fair Value |
Beginning balance | | 2,950 | | | $ | 35.97 | | | 1,879 | | | $ | 52.96 | | | 1,877 | | | $ | 40.98 | |
Granted | | 1,540 | | | $ | 48.01 | | | 1,469 | | | $ | 47.30 | | | 1,157 | | | $ | 59.89 | |
Released | | (1,800) | | | $ | 36.14 | | | (1,125) | | | $ | 47.53 | | | (1,009) | | | $ | 39.76 | |
Forfeited | | (236) | | | $ | 40.23 | | | (206) | | | $ | 52.59 | | | (146) | | | $ | 45.07 | |
Ending balance | | 2,454 | | | $ | 42.99 | | | 2,017 | | | $ | 51.90 | | | 1,879 | | | $ | 52.96 | |
The beginning balance of the outstanding shares for the year ended January 31, 2022 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The related weighted-average grant date fair value for the beginning outstanding shares reflects the adjusted fair value of the awards on the Spin-Off Date. The adjusted shares preserve the same terms and conditions and vesting schedules as the original awards.
The beginning balance of the shares and the respective weighted-average grant date fair value for the years ended January 31, 2021 and 2020 reflect the shares and fair values on the original date of grant without adjustment.
With respect to our stock bonus program, activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the Plans under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving an earned cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under “Stock Bonus Program” and “Bonus Share Program”.
Our RSU 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 January 31, 2022, 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 years ended January 31, 2022, 2021, and 2020 (these amounts are also included in the Award Activity Table above for 2022, 2021, and 2020):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Beginning balance | | 743 | | | 423 | | | 414 | |
Granted | | 212 | | | 297 | | | 237 | |
Released | | (381) | | | (182) | | | (200) | |
Forfeited | | (27) | | | (27) | | | (28) | |
Ending balance | | 547 | | | 511 | | | 423 | |
Consistent with the table above, the beginning balance of the outstanding shares for the year ended January 31, 2022 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The beginning balance of the outstanding shares of the years ended January 31, 2021 and 2020 reflects the number of shares on the date of grant without adjustment.
Excluding PSUs, we granted 1,328,000 RSUs during the year ended January 31, 2022.
As of January 31, 2022, there was approximately $66.8 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, which is expected to be recognized over a weighted average period of 1.4 years.
Stock Options
We did not grant stock options during the years ended January 31, 2022, 2021, and 2020, and activity from stock options awarded in prior periods was not material during these years.
Phantom Stock Units
We have periodically issued phantom stock units to certain employees that settle, or are expected to settle, with cash payments upon vesting. Like equity-settled awards, phantom stock units are awarded with vesting conditions and are subject to certain forfeiture provisions prior to vesting.
Phantom stock unit activity for the years ended January 31, 2022, 2021, and 2020 was not significant.
Adjustment in Connection with the Spin-Off
In accordance with the terms of our applicable equity incentive plans, following the completion of the Spin-Off on February 1, 2021, we equitably adjusted the number of shares underlying our remaining unvested awards by a factor of approximately 1.45 based on the ratio of the trading prices of our common stock prior to the Spin-Off to the trading prices of our common stock following the Spin-Off.
Stock Bonus Program
Our stock bonus program permits eligible employees to receive a portion of their earned bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers are eligible to participate in this program to the extent that shares remain available for awards following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a one-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is 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. Obligations under this program are accounted for as liabilities, 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 common stock determined using a discounted average price of our common stock. Shares earned under the program are issued after the end of the performance period, in the subsequent fiscal year.
For bonuses in respect of the year ended January 31, 2019, our board of directors approved the use of up to 200,000 shares of common stock, and a discount of 15%, for awards under this program. We issued 97,000 shares in lieu of cash bonuses and 13,000 shares for the discount feature in the year ended January 31, 2020 (in respect of the performance period ended January 31, 2019).
For bonuses in respect of the year ended January 31, 2020, our board of directors approved the use of up to 200,000 shares of common stock, and a discount of 15%, for awards under this program. We issued 32,000 shares in lieu of cash bonuses and 3,000 shares for the discount feature in the year ended January 31, 2021 (in respect of the performance period ended January 31, 2020).
For bonuses in respect of the year ended January 31, 2021, our board of directors approved the use of up to 200,000 shares of common stock, and a discount of 15%, for awards under this program. However, the program was not used for such performance period and no shares were issued during the year ended January 31, 2022 (in respect of the performance period ended January 31, 2021).
For bonuses in respect of the year ended January 31, 2022, our board of directors approved the use of up to 300,000 shares of common stock, and a discount of 15%, for awards under this program. Shares earned under the program will be calculated and issued during the first half of the year ending January 31, 2023.
The following table summarizes activity under the stock bonus program during the years ended January 31, 2022, 2021, and 2020 in isolation from other share activity. As noted above, shares issued in a given fiscal year are in respect of the prior fiscal year’s program period. Also, as noted above, shares issued in respect of the discount feature under the program reduce available plan capacity and are included in the Award Activity Table above. Other shares issued under the program do not reduce available plan capacity and are therefore excluded from the Award Activity Table above.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Shares in lieu of cash bonus — granted and released (not included in the Award Activity Table above) | | — | | | 32 | | | 97 | |
Shares in respect of discount (included in the Award Activity Table above): | | | | | | |
Granted | | — | | | — | | | 16 | |
Released | | — | | | 3 | | | 13 | |
As noted above, the shares to be issued in respect of the program period ended January 31, 2022 will be calculated and issued during the first half of the year ending January 31, 2023 and are therefore not shown in this table.
In March 2022, our board of directors approved 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, 2023. Any shares earned under the program will be issued during the year ending January 31, 2024.
Bonus Share Program
Under our bonus share program, we may provide discretionary bonuses to employees or pay earned bonuses that are outside the stock bonus program in the form of shares of common stock. Unlike the stock bonus program, there is no enrollment for this program and no discount feature. Similar to the accounting for the stock bonus program, obligations for these bonuses are accounted for as liabilities, because the obligations are based predominantly on fixed monetary amounts that are generally known, to be settled with a variable number of shares of common stock. As noted above, all shares issued under this program are included in the Award Activity Table above. Like the stock bonus program, shares awarded under the program are issued after the end of the performance period, in the subsequent fiscal year.
For bonuses in respect of the year ended January 31, 2019, our board of directors approved the use of up to 300,000 shares of common stock under this program, minus any shares used under the stock bonus program in respect of the same performance period. Approximately 59,000 shares of common stock were awarded and released under this program during the year ended January 31, 2020 (in respect of the performance period ended January 31, 2019).
For bonuses in respect of the year ended January 31, 2020, our board of directors approved the use of up to 305,000 shares of common stock under this program, minus any shares used under the stock bonus program in respect of the same performance period. Approximately 272,000 shares of common stock were awarded and released under this program during the year ended January 31, 2021 (in respect of the performance period ended January 31, 2020).
For bonuses in respect of the year ended January 31, 2021, our board of directors approved the use of up to 300,000 shares of common stock under this program, minus any shares used under the stock bonus program in respect of the same performance period. Any shares awarded under this program would have been issued during the first half of the year ended January 31, 2022, however the program was not used, and no shares of common stock were issued during the year ended January 31, 2022 (in respect of the performance period ended January 31, 2021). Bonuses in respect of the year ended January 31, 2021 were paid solely in cash.
For bonuses in respect of the year ended January 31, 2022, our board of directors has approved the use of up to 300,000 shares of common stock under this program, minus any shares used under the stock bonus program in respect of the same performance period (the maximum numbers of shares issuable under the stock bonus program and the bonus share program collectively for the performance period ended January 31, 2022 will not exceed 300,000). Any shares awarded under this program will be issued during the first half of the year ending January 31, 2023, however, we do not currently expect to issue any shares under this program in respect of the performance period ended January 31, 2022.
For bonuses in respect of the year ended January 31, 2023, in March 2022 our board of directors approved the use of up to 300,000 shares of common stock under this program, minus any shares used under the stock bonus program in respect of the
same performance period. Any shares awarded under this program will be issued during the first half of the year ending January 31, 2024.
The combined accrued liabilities for the stock bonus program and the bonus share program was $6.5 million at January 31, 2022.
Other Benefit Plans
401(k) Plan and Other Retirement Plans
We maintain a 401(k) Plan for our full-time employees in the United States. The plan allows eligible employees who attain the age of 21 beginning with the first of the month following their date of hire to elect to contribute up to 60% of their annual compensation, subject to the prescribed maximum amount. We match employee contributions at a rate of 50%, up to a maximum annual matched contribution of $2,000 per employee.
Employee contributions are always fully vested, while our matching contributions for each year vest on the last day of the calendar year provided the employee remains employed with us on that day.
Our matching contribution expenses for our 401(k) Plan were $2.6 million, $2.6 million, and $2.9 million for the years ended January 31, 2022, 2021, and 2020, respectively.
We provide retirement benefits for non-U.S. employees as required by local laws or to a greater extent as we deem appropriate through plans that function similar to 401(k) plans. Funding requirements for programs required by local laws are determined on an individual country and plan basis and are subject to local country practices and market circumstances.
Severance Pay
We are obligated to make severance payments for the benefit of certain employees of our foreign subsidiaries. Severance payments made to Israeli employees are considered significant compared to all other subsidiaries with severance payment arrangements. Under Israeli law, we are obligated to make severance payments to employees of our Israeli subsidiary, subject to certain conditions. In most cases, our liability for these severance payments is fully provided for by regular deposits to funds administered by insurance providers and by an accrual for the amount of our liability which has not yet been deposited.
Severance expenses for our Israeli employees for the years ended January 31, 2022, 2021, and 2020 were $1.3 million, $1.1 million, and $1.1 million, respectively.
17.LEASES
We have entered into operating leases primarily for corporate offices, research and development facilities, datacenters, and automobiles. Our finance leases primarily relate to infrastructure equipment. Our leases have remaining lease terms of 1 year to 8 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 to 3 years. As of January 31, 2022 and 2021, assets recorded under finance leases were $14.4 million and $11.0 million, respectively. As of January 31, 2022 and 2021, accumulated depreciation associated with finance leases was $5.0 million and $2.7 million, respectively.
The components of lease expenses for the years ended January 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Operating lease expenses | | $ | 24,241 | | | $ | 28,617 | | | $ | 26,583 | |
Finance lease expenses: | | | | | | |
Amortization of right-of-use assets | | 3,223 | | | 2,295 | | | 581 | |
Interest on lease liabilities | | 260 | | | 312 | | | 204 | |
Total finance lease expenses | | 3,483 | | | 2,607 | | | 785 | |
Variable lease expenses | | 6,344 | | | 5,504 | | | 5,609 | |
Short-term lease expenses | | 1,055 | | | 584 | | | 657 | |
Sublease income | | (1,804) | | | (966) | | | (908) | |
Total lease expenses | | $ | 33,319 | | | $ | 36,346 | | | $ | 32,726 | |
During the years ended January 31, 2022 and 2021, we exited certain leased offices primarily due to our workforce operating under remote work environments in certain locations due to the COVID-19 pandemic, which resulted in the recognition of accelerated operating lease costs of $9.8 million and $2.4 million, respectively. Operating lease expenses for the years ended January 31, 2021 and 2020 included $6.9 million and $6.7 million, respectively, of indirect shared facility expenses, which were no longer a component of lease cost subsequent to the completion of the Spin-Off.
Other information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(dollars in thousands) | | 2022 | | 2021 | | 2020 |
Supplemental cash flow information | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 19,360 | | $ | 21,243 | | $ | 20,083 |
Operating cash flows from finance leases | | 260 | | 312 | | 204 |
Financing cash flows from finance leases | | 3,189 | | 2,389 | | 1,930 |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
Operating leases | | $ | 11,282 | | $ | 7,619 | | $ | 17,843 |
Finance leases | | 4,041 | | 903 | | 3,288 |
Weighted average remaining lease terms | | | | | | |
Operating leases | | 3 years | | 6 years | | 6 years |
Finance leases | | 3 years | | 3 years | | 3 years |
Weighted average discount rates | | | | | | |
Operating leases | | 4.8 | % | | 5.8 | % | | 5.7 | % |
Finance leases | | 3.8 | % | | 4.0 | % | | 5.1 | % |
Maturities of lease liabilities as of January 31, 2022 were as follows: | | | | | | | | | | | | | | |
| | January 31, 2022 |
(in thousands) | | Operating Leases | | Finance Leases |
Year Ending January 31, | | | | |
2023 | | $ | 26,526 | | | $ | 2,804 | |
2024 | | 9,808 | | | 2,017 | |
2025 | | 8,221 | | | 1,418 | |
2026 | | 5,056 | | | 550 | |
2027 | | 4,312 | | | 19 | |
Thereafter | | 5,423 | | | — | |
Total future minimum lease payments | | 59,346 | | | 6,808 | |
Less: imputed interest | | (6,338) | | | (348) | |
Total | | $ | 53,008 | | | $ | 6,460 | |
| | | | |
Reported as of January 31, 2022: | | | | |
Accrued expenses and other current liabilities | | $ | 24,551 | | | $ | 2,629 | |
Operating lease liabilities | | 28,457 | | | — | |
Other liabilities | | — | | | 3,831 | |
Total | | $ | 53,008 | | | $ | 6,460 | |
As of January 31, 2022, we have additional operating leases for office facilities, equipment, and vehicles that have not yet commenced with future lease obligations of $2.4 million. These operating leases will commence in the year ending January 31, 2023 with lease terms of 3 years to 4 years.
18.COMMITMENTS AND CONTINGENCIES
Unconditional Purchase Obligations
In the ordinary course of business, we enter into certain unconditional purchase obligations, which are agreements to purchase goods or services that are enforceable, legally binding, and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on current needs and are typically fulfilled by our vendors within a relatively short time horizon. As of January 31, 2022, our unconditional purchase obligations totaled approximately $240.3 million.
Licenses and Royalties
We license certain technology and pay royalties under such licenses and other agreements entered into in connection with research and development activities.
Historically, we have received non-refundable grants from the Israeli Innovation Authority (“IIA”) that funded a portion of our research and development expenditures. The Israeli law under which the IIA grants are made limits our ability to manufacture products, or transfer technologies, developed using these grants outside of Israel. If we were to seek approval to manufacture products, or transfer technologies, developed using these grants outside of Israel, we could be subject to additional royalty requirements or be required to pay certain redemption fees. If we were to violate these restrictions, we could be required to refund any grants previously received, together with interest and penalties, and may be subject to criminal penalties. Funds received from the IIA were recorded as a reduction to research and development expenses and amounts received were not material during the years ended January 31, 2022, 2021 and 2020.
Off-Balance Sheet Risk
In the normal course of business, we provide certain customers with financial performance guarantees, which are generally backed by standby letters of credit or surety bonds. In general, we would only be liable for the amounts of these guarantees in the event that our nonperformance permits termination of the related contract by our customer, which we believe is remote. At January 31, 2022, we had approximately $1.5 million of outstanding letters of credit and surety bonds relating primarily to these performance guarantees. As of January 31, 2022, we believe we were in compliance with our performance obligations under all
contracts for which there is a financial performance guarantee, and the ultimate liability, if any, incurred in connection with these guarantees will not have a material adverse effect on our consolidated results of operations, financial position, or cash flows. Our historical non-compliance with our performance obligations has been insignificant.
Indemnifications
In the normal course of business, we provide indemnifications of varying scopes to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law or other applicable law, we indemnify our directors, officers, employees, and agents against claims they may become subject to by virtue of serving in such capacities for us. We also have contractual indemnification agreements with our directors, officers, and certain senior executives. The maximum amount of future payments we could be required to make under these indemnification arrangements and agreements is potentially unlimited; however, we have insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We are not able to estimate the fair value of these indemnification arrangements and agreements in excess of applicable insurance coverage, if any.
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 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.
On February 1, 2021, we completed the Spin-Off. As a result of the Spin-Off, Cognyte is now an independent, publicly traded company. Under the terms of the Separation and Distribution Agreement entered into between Verint and Cognyte, Cognyte has agreed to indemnify Verint for Cognyte’s share of any losses that Verint may suffer related to the foregoing legal actions either in its capacity as successor to CTI, to the extent not indemnified by Mavenir, or due to its former ownership of Cognyte and VSL.
Unfair Competition Litigation and Related Investigation
On February 14, 2022, Verint Americas Inc., as successor to ForeSee Results, Inc. (“ForeSee”), received negative partial summary judgment decisions in two cases pending against it in the United States District Court for the Eastern District of Michigan. As discussed below, we believe that the court’s decisions were wrongly decided and are contrary to the facts and the law. We are seeking reconsideration of the rulings and will ultimately appeal the rulings if necessary. We believe that the claims asserted by the plaintiffs are without merit. In addition, as explained in our affirmative Delaware litigation, we also believe that by bringing the claims, plaintiffs breached an agreement not to pursue such claims in an improper attempt by them and their founder, Claes Fornell, to extract additional monies from ForeSee.
The two Eastern District of Michigan cases are 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. Verint completed its acquisition of ForeSee on December 19, 2018. In its complaint, ACSI LLC alleged infringement of two federally registered trademarks and common law unfair competition under federal and state law. ACSI LLC asserts that ForeSee, despite cancelling its license to use ACSI LLC’s alleged trademarks in 2013, has continued to use ACSI LLC’s trademarks. The trademark infringement claim was subsequently dismissed, but the common law unfair competition claims have proceeded. 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. In its complaint, CFI alleges unfair competition and false advertising under federal and state law, as well as tortious interference with contract. CFI asserts that ForeSee engaged in unfair competition by using ACSI LLC’s trademarks without a license, and that ForeSee engaged in false advertising by mis-describing its customer satisfaction products. ACSI LLC’s and CFI’s complaints seek unspecified damages on their claims.
Following discovery, on June 3, 2021, ACSI LLC and CFI moved for partial summary judgment on their claims and ForeSee moved for summary judgment against their claims. On February 14, 2022, the Eastern District of Michigan generally granted ACSI LLC’s and CFI’s motions for partial summary judgment and generally denied ForeSee’s motions for summary judgment. As noted above, ForeSee believes that the court’s decisions were wrongly decided, ignore substantial factual evidence in the record, and are contrary to applicable law. On February 28, 2022, ForeSee moved for reconsideration, and that motion is pending before the court. ForeSee continues to believe that there are substantial defenses to the claims in the ACSI LLC and CFI litigations and intends to continue to defend them vigorously.
Verint has also been 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. Verint received a Civil Investigation Demand (“CID”) in connection with this investigation and has provided responses. The False Claims Act contains provisions that allow for private persons 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. At this point, Verint has not determined that there were any deficiencies in ForeSee’s and/or Verint’s performance of the government contracts.
ForeSee also filed affirmative litigation in the Northern District of Georgia (Case No. 1:19-cv-02892, Complaint filed on June 25, 2019) against ACSI LLC’s predecessor in interest. ACSI LLC has now been substituted as the named defendant. In that action, ForeSee seeks cancellation of ACSI LLC’s federally registered trademarks. In response to ASCI LLC’s motion to dismiss the action, on March 15, 2022, the Georgia court issued an order transferring that action to the Eastern District of Michigan.
ForeSee has also filed affirmative litigation in 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. Claes Fornell founded both ACSI LLC and CFI, and previously co-founded ForeSee before selling it in December 2013 for a significant gain. The Delaware action asserts claims against ACSI LLC, CFI, Fornell, and CFI Software for their breach of a “Joinder and Waiver Agreement” entered into in connection with the December 2013 sale in which they represented that they had no claims against ForeSee and in which they released any such claims. The Delaware action alleges that the Eastern District of Michigan litigations effectively represent an improper attempt by Fornell and his affiliates to profit off of ForeSee a second time (first by selling it in 2013 as a law-abiding company, only to sue it in 2018 and 2019 claiming violations of law for business practices that began while Fornell owned a significant position in ForeSee (via CFI Software) and during the time that Fornell served as chairman of ForeSee’s board). The Delaware action also asserts fraud claims against Fornell and CFI Software for affirmative statements they made in the December 2013 merger agreement which effectuated the sale and in other contemporaneous materials that ForeSee was not engaging in unfair competition or other violations of law. The Delaware litigation seeks as damages any amounts recovered by ACSI LLC, CFI or the USAO in the proceedings discussed above, as well as attorneys’ fees. Defendants moved to dismiss, stay or transfer the Delaware litigation, and the magistrate judge assigned to the case denied the motions to dismiss and transfer but recommended temporarily staying the case pending decisions on the motions for summary judgment in the Eastern District of Michigan. ForeSee objected to the recommended stay, and those objections are currently pending before the Delaware court.
No amounts have been recognized in our consolidated financial statements for these loss contingencies as it is not probable a loss has been incurred and the range of a possible loss is not yet estimable. However, in light of the recent rulings by the court in the Eastern District of Michigan, we consider the potential exposure reasonably possible. An estimate of a reasonably possible loss (or a range of loss) cannot be made in either the commercial litigation or False Claims Act investigation at this time. As these matters are ongoing it is at least reasonably possible that our estimates will change in the near term and the effect may be material.
We are a party to other various litigation matters and claims that arise from time to time in the ordinary course of our business. While we believe that the ultimate outcome of any such current matters will not have a material adverse effect on us, their outcomes are not determinable and negative outcomes may adversely affect our financial position, liquidity, or results of operations.
19.SEGMENT, GEOGRAPHIC, AND SIGNIFICANT CUSTOMER INFORMATION
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is
evaluated regularly by the enterprise’s chief operating decision maker, or CODM, or decision making group, in deciding how to allocate resources and in assessing performance. Our Chief Executive Officer is our CODM.
Prior to the Spin-Off, we had two reportable segments—Customer Engagement and Cyber Intelligence. Upon completion of the Spin-Off, we began operating as a pure-play customer engagement company that operates as a single reporting segment as our CODM reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Geographic Information
Revenue by major geographic region is based upon the geographic location of the customers who purchase our products and services. The geographic locations of distributors, resellers, and systems integrators who purchase and resell our products may be different from the geographic locations of end customers.
Revenue in the Americas includes the United States, Canada, Mexico, Brazil, and other countries in the Americas. Revenue in Europe, the Middle East and Africa (“EMEA”) includes the United Kingdom, Germany, Israel, and other countries in EMEA. Revenue in the Asia-Pacific (“APAC”) region includes Australia, India, and other Asia-Pacific countries.
The information below summarizes revenue from unaffiliated customers by geographic area for the years ended January 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended January 31, |
(in thousands) | | 2022 | | 2021 | | 2020 |
Americas: | | | | | | |
United States | | $ | 552,680 | | | $ | 515,480 | | | $ | 539,586 | |
Other | | 48,043 | | | 54,470 | | | 49,489 | |
Total Americas | | 600,723 | | | 569,950 | | | 589,075 | |
EMEA: | | | | | | |
United Kingdom | | 100,606 | | | 100,855 | | | 100,107 | |
Other | | 79,560 | | | 72,361 | | | 68,835 | |
Total EMEA | | 180,166 | | | 173,216 | | | 168,942 | |
APAC | | 93,620 | | | 87,081 | | | 88,508 | |
Total revenue | | $ | 874,509 | | | $ | 830,247 | | | $ | 846,525 | |
Our long-lived assets primarily consist of net property and equipment, operating lease right-of-use assets, goodwill and other intangible assets, and deferred income taxes. We believe that our tangible long-lived assets, which consist of our net property and equipment, are exposed to greater geographic area risks and uncertainties than intangible assets, operating lease right of use assets, and long-term cost deferrals, because these tangible assets are difficult to move and are relatively illiquid.
Property and equipment, net by geographic area consisted of the following as of January 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | January 31, |
(in thousands) | | 2022 | | 2021 |
United States | | $ | 50,241 | | | $ | 51,537 | |
United Kingdom | | 9,225 | | | 11,345 | |
Other countries | | 4,624 | | | 6,208 | |
Total property and equipment, net | | $ | 64,090 | | | $ | 69,090 | |
Significant Customers
No end-customer represented more than 10% of our total revenue during the years ended January 31, 2022, 2021, and 2020. In the year ended January 31, 2021, we had an authorized global reseller of our solutions that represented approximately 10% of our total revenue, but did not represent 10% or greater of our total revenue for the years ended January 31, 2022 or 2020.
20.SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized condensed quarterly financial information for the years ended January 31, 2022 and 2021 appears in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
(in thousands, except per share data) | | April 30, 2021 | | July 31, 2021 | | October 31, 2021 | | January 31, 2022 |
Revenue | | $ | 200,904 | | | $ | 214,617 | | | $ | 224,820 | | | $ | 234,168 | |
Gross profit | | $ | 128,564 | | | $ | 142,050 | | | $ | 152,736 | | | $ | 152,587 | |
Income from continuing operations before provision for income taxes | | $ | 1,022 | | | $ | 9,517 | | | $ | 22,850 | | | $ | 6,115 | |
Net income (loss) from continuing operations | | $ | 1,094 | | | $ | 5,316 | | | $ | 13,501 | | | $ | (4,260) | |
Net income (loss) attributable to Verint Systems Inc. | | $ | 799 | | | $ | 5,000 | | | $ | 13,237 | | | $ | (4,623) | |
Net (loss) income attributable to Verint Systems Inc. common shares | | $ | (2,523) | | | $ | (200) | | | $ | 8,037 | | | $ | (9,823) | |
| | | | | | | | |
Net (loss) income from continuing operations attributable to Verint Systems Inc. common shares | | | | | | | | |
Basic | | $ | (0.04) | | | $ | — | | | $ | 0.12 | | | $ | (0.15) | |
Diluted | | $ | (0.04) | | | $ | — | | | $ | 0.12 | | | $ | (0.15) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
(in thousands, except per share data) | | April 30, 2020 | | July 31, 2020 | | October 31, 2020 | | January 31, 2021 |
Revenue | | $ | 185,865 | | | $ | 204,080 | | | $ | 215,222 | | | $ | 225,080 | |
Gross profit | | $ | 114,962 | | | $ | 137,179 | | | $ | 141,350 | | | $ | 149,205 | |
Loss from continuing operations before provision for income taxes | | $ | (14,071) | | | $ | (1,025) | | | $ | (1,017) | | | $ | (25,551) | |
Net loss from continuing operations | | $ | (14,418) | | | $ | (9,370) | | | $ | (2,101) | | | $ | (22,712) | |
Net (loss) income attributable to Verint Systems Inc. | | $ | (6,014) | | | $ | 8,494 | | | $ | 10,175 | | | $ | (19,922) | |
Net loss from continuing operations attributable to Verint Systems Inc. common shares | | $ | (14,658) | | | $ | (12,181) | | | $ | (5,068) | | | $ | (25,403) | |
Net income from discontinued operations attributable to Verint Systems Inc. common shares | | $ | 8,644 | | | $ | 18,191 | | | $ | 12,585 | | | $ | 2,967 | |
| | | | | | | | |
Net loss per common share attributable to Verint Systems Inc. from continuing operations | | | | | | | | |
Basic | | $ | (0.23) | | | $ | (0.19) | | | $ | (0.08) | | | $ | (0.39) | |
Diluted | | $ | (0.23) | | | $ | (0.18) | | | $ | (0.08) | | | $ | (0.39) | |
| | | | | | | | |
Net income per common share attributable to Verint Systems Inc. from discontinued operations | | | | | | | | |
Basic | | $ | 0.14 | | | $ | 0.28 | | | $ | 0.19 | | | $ | 0.05 | |
Diluted | | $ | 0.14 | | | $ | 0.27 | | | $ | 0.19 | | | $ | 0.05 | |
Net (loss) income per common share attributable to Verint Systems Inc. is computed independently for each quarterly period and for the year. Therefore, the sum of quarterly net (loss) income per common share amounts may not equal the amounts reported for the years.
As a result of the Spin-Off, the statement of operations, balance sheets, and related financial information reflect Cognyte’s operations, assets and liabilities as discontinued operations. Please refer to Note 2, “Discontinued Operations” for a more detailed discussion of the Spin-Off.
The quarterly operating results for the year ended January 31, 2022 did not include any material unusual or infrequently occurring items.
Net loss from continuing operations attributable to Verint Systems Inc. common shares for the three months ended January 31, 2021 reflects a non-cash Future Tranche Right charge of $33.3 million. Please refer to Note 10, “Convertible Preferred Stock” and Note 14, “Fair Value Measurements” for additional information regarding the Future Tranche Right.
As is typical for many software and technology companies, our business is subject to seasonable and cyclical factors. In most years, our revenue and operating income are typically highest in the fourth quarter and lowest in the first quarter (prior to the impact of unusual or nonrecurring items). Moreover, revenue and operating income in the first quarter of a new year may be lower than in the fourth quarter of the preceding year, in some years, potentially by a significant margin. In addition, we generally receive a higher volume of orders in the last month of a quarter, with orders concentrated in the later part of that month. We believe that these seasonal and cyclical factors primarily reflect customer spending patterns and budget cycles, as well as the impact of compensation incentive plans for our sales personnel. While seasonal and cyclical factors such as these are common in the software and technology industry, this pattern should not be considered a reliable indicator of our future revenue or financial performance. Many other factors, including general economic conditions, also have an impact on our business and financial results. See “Risk Factors” in Item 1A of this report for a more detailed discussion of factors which may affect our business and financial results.
21.SUBSEQUENT EVENT
On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Subsequent to January 31, 2022, through the date of filing this report, we repurchased 1.5 million shares of our common stock for an aggregate purchase price of $78.2 million at an average price of $52.11 per share under our stock repurchase program. Repurchases were financed with available cash in the United States.
On March 22, 2022, our board of directors authorized an additional 500,000 shares of common stock to be repurchased under this program.