Verint Systems Inc.

12/06/2021 | Press release | Distributed by Public on 12/06/2021 15:13

Quarterly Report (Form 10-Q)

vrnt-20211031



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 001-34807

Verint Systems Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-3200514
(State or Other Jurisdiction of Incorporation or
Organization)
(I.R.S. Employer Identification No.)
175 Broadhollow Road
Melville, New York 11747
(Address of Principal Executive Offices) (Zip Code)
(631) 962-9600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Common Stock, $.001 par value per share VRNT (NASDAQ Global Select Market)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
There were 65,703,784 shares of the registrant's common stock outstanding on November 15, 2021.


Table of Contents
Verint Systems Inc. and Subsidiaries
Index to Form 10-Q
As of and For the Period Ended October 31, 2021
Page
Cautionary Note on Forward-Looking Statements
ii
Part I.
Financial Information
1
Item 1.
Financial Statements (Unaudited)
1
Condensed Consolidated Balance Sheets
2
Condensed Consolidated Statements of Operations
4
Condensed Consolidated Statements of Comprehensive Income
6
Condensed Consolidated Statements of Stockholders' Equity
7
Condensed Consolidated Statements of Cash Flows
9
Notes to Condensed Consolidated Financial Statements
11
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
47
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
68
Item 4.
Controls and Procedures
69
Part II.
Other Information
70
Item 1.
Legal Proceedings
70
Item 1A.
Risk Factors
70
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
71
Item 3.
Defaults Upon Senior Securities
71
Item 4.
Mine Safety Disclosures
72
Item 5.
Other Information
72
Item 6.
Exhibits
73
Signature
74
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Cautionary Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include, but are not limited to, financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and are often identified by future or conditional words such as "will", "plans", "expects", "intends", "believes", "seeks", "estimates", or "anticipates", or by variations of such words or by similar expressions. There can be no assurance that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements. Important risks, uncertainties, assumptions, and other factors that could cause our actual results or conditions to differ materially from our forward-looking statements include, among others:
uncertainties regarding the impact of changes in macroeconomic and/or global conditions, including as a result of slowdowns, recessions, economic instability, political unrest, armed conflicts, natural disasters, or outbreaks of disease, such as the COVID-19 pandemic, as well as the resulting impact on information technology spending by enterprises and government customers, on our business;
risks that our customers delay, cancel, or refrain from placing orders, refrain from renewing subscriptions or service contracts, or are unable to honor contractual commitments or payment obligations due to liquidity issues or other challenges in their budgets and business, due to the COVID-19 pandemic or otherwise;
risks that restrictions resulting from the COVID-19 pandemic or actions taken in response to the pandemic adversely impact our operations or our ability to fulfill orders, complete implementations, or recognize revenue;
challenges associated with our cloud transition, including increased importance of subscription renewal rates, and risk of increased variability in our period-to-period results based on the mix, terms, and timing of our transactions;
risks associated with our ability to keep pace with technological advances and challenges and evolving industry standards; to adapt to changing market potential from area to area within our markets; and to successfully develop, launch, and drive demand for new, innovative, high-quality products that meet or exceed customer challenges and needs in both existing and new areas, while simultaneously preserving our legacy businesses and migrating away from areas of commoditization;
risks due to aggressive competition in all of our markets, including with respect to maintaining revenue, margins, and sufficient levels of investment in our business and operations, and competitors with greater resources than we have;
risks relating to our ability to properly manage investments in our business and operations, execute on growth or strategic initiatives, and enhance our existing operations and infrastructure, including the proper prioritization and allocation of limited financial and other resources;
risks associated with our ability to identify suitable targets for acquisition or investment or successfully compete for, consummate, and implement mergers and acquisitions, including risks associated with valuations, reputational considerations, capital constraints, costs and expenses, maintaining profitability levels, expansion into new areas, management distraction, post-acquisition integration activities, and potential asset impairments;
challenges associated with selling sophisticated solutions, including with respect to longer sales cycles, more complex sales processes, and assisting customers in understanding and realizing the benefits of our solutions, as well as with developing, offering, implementing, and maintaining a broad solution portfolio;
risks that we may be unable to maintain, expand, and enable our relationships with partners as part of our growth strategy;
risks associated with our reliance on third-party suppliers, partners, or original equipment manufacturers ("OEMs") for certain components, products, or services, including companies that may compete with us or work with our competitors, as well as cloud hosting providers;
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risks associated with our ability to retain, recruit, and train qualified personnel in regions in which we operate, including in new markets and growth areas we may enter or due to applicable regulatory requirements such as vaccination mandates;
risks associated with our significant international operations, exposure to regions subject to political or economic instability, fluctuations in foreign exchange rates, and challenges associated with a significant portion of our cash being held overseas;
risks associated with a significant part of our business coming from government contracts and associated procurement processes;
risks associated with complex and changing domestic and foreign regulatory environments relating to our own operations, the products and services we offer, and/or the use of our solutions by our customers, including, among others, with respect to data privacy and protection, government contracts, anti-corruption, trade compliance, tax, and labor matters;
risks associated with the mishandling or perceived mishandling of sensitive or confidential information and data, including personally identifiable information or other information that may belong to our customers or other third parties, including in connection with our SaaS or other hosted or managed service offerings or when we are asked to perform service or support;
risks that our solutions or services, or those of third-party suppliers, partners, or OEMs which we use in or with our offerings or otherwise rely on, including third-party hosting platforms, may contain defects, develop operational problems, or be vulnerable to cyber-attacks;
risk of security vulnerabilities or lapses, including cyber-attacks, information technology system breaches, failures, or disruptions;
risks that our intellectual property rights may not be adequate to protect our business or assets or that others may make claims on our intellectual property, claim infringement on their intellectual property rights, or claim a violation of their license rights, including relative to free or open source components we may use;
risks associated with leverage resulting from our current debt position or our ability to incur additional debt, including with respect to liquidity considerations, covenant limitations and compliance, fluctuations in interest rates, dilution considerations (with respect to our convertible notes), and our ability to maintain our credit ratings;
risks that we may experience liquidity or working capital issues and related risks that financing sources may be unavailable to us on reasonable terms or at all;
risks arising as a result of contingent or other obligations or liabilities assumed in our acquisition of our former parent company, Comverse Technology, Inc. ("CTI"), or associated with formerly being consolidated with, and part of a consolidated tax group with, CTI, or as a result of the successor to CTI's business operations, Mavenir Inc. ("Mavenir"), being unwilling or unable to provide us with certain indemnities to which we are entitled;
risks associated with changing accounting principles or standards, tax laws and regulations, tax rates, and the continuing availability of expected tax benefits;
risks relating to the adequacy of our existing infrastructure, systems, processes, policies, procedures, internal controls, and personnel, and our ability to successfully implement and maintain enhancements to the foregoing, for our current and future operations and reporting needs, including related risks of financial statement omissions, misstatements, restatements, or filing delays;
risks associated with market volatility in the prices of our common stock and convertible notes based on our performance, third-party publications or speculation, or other factors and risks associated with actions of activist stockholders;
risks associated with Apax Partners' significant ownership position and potential that its interests will not be aligned with those of our common stockholders; and
risks associated with the recent spin-off of our Cyber Intelligence Solutions business, including the possibility that it does not achieve the benefits anticipated, does not qualify as a tax-free transaction, or exposes us to unexpected claims or liabilities.
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These risks, uncertainties, assumptions, and challenges, as well as other factors, are discussed in greater detail in "Risk Factors" under Item 1A of our Annual Report on Form 10-K for the year ended January 31, 2021 and under Item 1A of our Quarterly Report on Form 10-Q for the quarter ended April 30, 2021. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this report. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.

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Part I

Item 1. Financial Statements


VERINT SYSTEMS INC. AND SUBSIDIARIES
Index to Condensed Consolidated Financial Statements (Unaudited)
Page
Condensed Consolidated Balance Sheets as of October 31, 2021 and January 31, 2021
2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2021 and 2020
4
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended October 31, 2021 and 2020
6
Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended October 31, 2021 and 2020
7
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2021 and 2020
9
Notes to Condensed Consolidated Financial Statements
11


1
Table of Contents
VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
October 31, January 31,
(in thousands, except share and per share data) 2021 2021
Assets
Current Assets:
Cash and cash equivalents $ 307,847 $ 585,273
Restricted cash and cash equivalents, and restricted bank time deposits 6 15
Short-term investments 661 46,300
Accounts receivable, net of allowance for credit losses of $1.3 million and $1.6 million, respectively
161,020 206,157
Contract assets, net 35,276 36,716
Inventories 5,760 5,541
Prepaid expenses and other current assets 49,880 42,814
Current assets of discontinued operations - 354,926
Total current assets 560,450 1,277,742
Property and equipment, net 68,634 69,090
Operating lease right-of-use assets 45,698 57,849
Goodwill 1,361,420 1,327,407
Intangible assets, net 130,528 143,744
Other assets 131,555 104,511
Long-term assets of discontinued operations - 280,952
Total assets $ 2,298,285 $ 3,261,295
Liabilities, Temporary Equity, and Stockholders' Equity
Current Liabilities:
Accounts payable $ 32,994 $ 35,463
Accrued expenses and other current liabilities 138,502 211,517
Current maturities of long-term debt - 386,713
Contract liabilities 221,073 261,033
Current liabilities of discontinued operations - 268,713
Total current liabilities 392,569 1,163,439
Long-term debt 406,411 402,781
Long-term contract liabilities 17,162 16,502
Operating lease liabilities 43,880 56,712
Other liabilities 37,250 75,710
Long-term liabilities of discontinued operations - 58,118
Total liabilities 897,272 1,773,262
Commitments and Contingencies
Temporary Equity:
Preferred Stock- $0.001 par value; authorized 2,207,000 shares
Series A Preferred Stock; 200,000 shares issued and outstanding at October 31, 2021 and January 31, 2021, respectively; aggregate liquidation preference and redemption value of $203,467 and $206,067 at October 31, 2021 and January 31, 2021, respectively.
200,628 200,628
Series B Preferred Stock; 200,000 shares issued and outstanding at October 31, 2021; no shares issued and outstanding at January 31, 2021; aggregate liquidation preference and redemption value of $203,467 at October 31, 2021.
235,693 -
Equity component of currently redeemable convertible notes - 4,841
Total temporary equity 436,321 205,469
Stockholders' Equity:
Common stock - $0.001 par value; authorized 120,000,000 shares. Issued 65,694,000 and 70,177,000 shares; outstanding 65,694,000 and 65,773,000 shares at October 31, 2021 and January 31, 2021, respectively.
66 70
Additional paid-in capital 1,121,523 1,726,166
Treasury stock, at cost - No shares and 4,404,000 shares at October 31, 2021 and January 31, 2021, respectively.
- (208,124)
Accumulated deficit (49,886) (113,797)
Accumulated other comprehensive loss (109,523) (136,878)
Total Verint Systems Inc. stockholders' equity 962,180 1,267,437
Noncontrolling interests 2,512 15,127
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October 31, January 31,
(in thousands, except share and per share data) 2021 2021
Total stockholders' equity 964,692 1,282,564
Total liabilities, temporary equity, and stockholders' equity $ 2,298,285 $ 3,261,295

See notes to condensed consolidated financial statements.
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VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands, except per share data) 2021 2020 2021 2020
Revenue:
Recurring $ 158,811 $ 150,233 $ 459,442 $ 418,570
Nonrecurring 66,009 64,989 180,899 186,597
Total revenue 224,820 215,222 640,341 605,167
Cost of revenue:
Recurring 36,811 35,388 112,523 103,252
Nonrecurring 30,524 34,440 90,909 95,835
Amortization of acquired technology 4,749 4,044 13,559 12,589
Total cost of revenue 72,084 73,872 216,991 211,676
Gross profit 152,736 141,350 423,350 393,491
Operating expenses:
Research and development, net 31,029 33,293 91,969 95,853
Selling, general and administrative 89,778 80,167 268,800 234,733
Amortization of other acquired intangible assets 7,261 7,833 21,934 23,316
Total operating expenses 128,068 121,293 382,703 353,902
Operating income 24,668 20,057 40,647 39,589
Other income (expense), net:
Interest income 101 314 147 1,217
Interest expense (1,502) (9,718) (8,720) (30,530)
Losses on early retirements of debt - - (2,474) (143)
Other (expense) income, net (417) (11,670) 3,789 (26,246)
Total other expense, net (1,818) (21,074) (7,258) (55,702)
Income (loss) from continuing operations before provision for income taxes 22,850 (1,017) 33,389 (16,113)
Provision for income taxes 9,349 1,084 13,478 9,776
Net income (loss) from continuing operations 13,501 (2,101) 19,911 (25,889)
Net income from discontinued operations - 13,928 - 44,328
Net income 13,501 11,827 19,911 18,439
Net income from continuing operations attributable to noncontrolling interests 264 309 875 876
Net income from discontinued operations attributable to noncontrolling interests - 1,343 - 4,908
Net income attributable to Verint Systems Inc. 13,237 10,175 19,036 12,655
Dividends on preferred stock (5,200) (2,658) (13,722) (5,142)
Net income attributable to Verint Systems Inc. common shares $ 8,037 $ 7,517 $ 5,314 $ 7,513
Net income (loss) attributable to Verint Systems Inc. common shares
Net income (loss) from continuing operations attributable to Verint Systems Inc. common shares $ 8,037 $ (5,068) $ 5,314 $ (31,907)
Net income from discontinued operations attributable to Verint Systems Inc. common shares $ - $ 12,585 $ - $ 39,420
Basic net income (loss) per common share attributable to Verint Systems Inc.:
Continuing operations $ 0.12 $ (0.08) $ 0.08 $ (0.49)
Discontinued operations - 0.19 - 0.61
Total basic net income per common share attributable to Verint Systems Inc. $ 0.12 $ 0.11 $ 0.08 $ 0.12
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Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands, except per share data) 2021 2020 2021 2020
Diluted net income (loss) per common share attributable to Verint Systems Inc.:
Continuing operations $ 0.12 $ (0.08) $ 0.08 $ (0.48)
Discontinued operations - 0.19 - 0.59
Total diluted net income per common share attributable to Verint Systems Inc. $ 0.12 $ 0.11 $ 0.08 $ 0.11
Weighted-average common shares outstanding:
Basic 65,570 65,571 65,474 64,973
Diluted 66,328 66,234 67,268 66,000
See notes to condensed consolidated financial statements.
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VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Net income $ 13,501 $ 11,827 $ 19,911 $ 18,439
Other comprehensive (loss) income, net of reclassification adjustments:
Foreign currency translation adjustments (7,104) (4,973) (2,843) (7,348)
Distribution of Cognyte Software Ltd. - - 17,123 -
Net increase (decrease) from foreign exchange contracts designated as hedges 105 (550) 51 57
Net increase (decrease) from interest rate swap prior to dedesignation as a hedge - 1,356 1,014 (4,468)
Net increase from settlement of interest rate swap due to partial early retirement of 2017 Term Loan - - 12,017 -
(Provision for) benefit from income taxes on net increase (decrease) from foreign exchange contracts and interest rate swap designated as hedges (16) (209) (7) 914
Other comprehensive (loss) income (7,015) (4,376) 27,355 (10,845)
Comprehensive income 6,486 7,451 47,266 7,594
Comprehensive income attributable to noncontrolling interests 264 1,787 875 5,880
Comprehensive income attributable to Verint Systems Inc. $ 6,222 $ 5,664 $ 46,391 $ 1,714
See notes to condensed consolidated financial statements.
6

VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Verint Systems Inc. Stockholders' Equity
Common Stock Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Total Verint Systems Inc. Stockholders' Equity Total Stockholders' Equity
(in thousands) Shares Par
Value
Treasury
Stock
Accumulated
Deficit
Non-controlling
Interests
Balances as of January 31, 2021 65,773 $ 70 $ 1,726,166 $ (208,124) $ (113,797) $ (136,878) $ 1,267,437 $ 15,127 $ 1,282,564
Net income - - - - 799 - 799 295 1,094
Other comprehensive income, excluding the distribution of Cognyte Software Ltd. - - - - - 15,584 15,584 - 15,584
Distribution of Cognyte Software Ltd. - - (281,665) - - 17,123 (264,542) (12,870) (277,412)
Stock-based compensation - equity-classified awards - - 14,253 - - - 14,253 - 14,253
Common stock issued for stock awards and stock bonuses 827 1 (1) - - - - - -
Common stock repurchased and retired (1,058) (1) (49,580) - - - (49,581) - (49,581)
Treasury stock acquired (543) - - (25,868) - - (25,868) - (25,868)
Purchases of capped calls, net of taxes - - (32,416) - - - (32,416) - (32,416)
Cumulative effect of adoption of ASU No. 2020-06, net of taxes - - (43,445) - 44,875 - 1,430 - 1,430
Balances as of April 30, 2021 64,999 70 1,333,312 (233,992) (68,123) (104,171) 927,096 2,552 929,648
Net income - - - - 5,000 - 5,000 316 5,316
Other comprehensive income - - - - - 1,663 1,663 - 1,663
Stock-based compensation - equity-classified awards - - 15,984 - - - 15,984 - 15,984
Common stock issued for stock awards and stock bonuses 456 - - - - - - - -
Settlement of conversion premium upon maturity of 2014 Notes 1,250 - (59,139) 59,131 - - (8) - (8)
Common stock received from exercise of Note Hedges (1,250) - 57,695 (57,692) - - 3 - 3
Common stock received from exercise of Note Hedges related to repurchased 2014 Notes (42) - 1,959 (1,959) - - - - -
Purchases of capped calls, net of taxes - - (25) - - - (25) - (25)
Treasury stock acquired (1) - - (12) - - (12) - (12)
Preferred stock dividends - - (7,656) - - - (7,656) - (7,656)
Distribution to noncontrolling interest - - - - - - - (245) (245)
Balances as of July 31, 2021 65,412 70 1,342,130 (234,524) (63,123) (102,508) 942,045 2,623 944,668
Net income - - - - 13,237 - 13,237 264 13,501
Other comprehensive loss - - - - - (7,015) (7,015) - (7,015)
Stock-based compensation - equity-classified awards - - 14,386 - - - 14,386 - 14,386
Common stock issued for stock awards and stock bonuses 293 1 (1) - - - - - -
Treasury stock acquired (11) - - (473) - - (473) - (473)
Treasury stock retired - (5) (234,992) 234,997 - - - - -
Distribution to noncontrolling interest - - - - - - - (375) (375)
Balances as of October 31, 2021 65,694 $ 66 $ 1,121,523 $ - $ (49,886) $ (109,523) $ 962,180 $ 2,512 $ 964,692
7

Verint Systems Inc. Stockholders' Equity
Common Stock Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Total Verint Systems Inc. Stockholders' Equity Total Stockholders' Equity
(in thousands) Shares Par
Value
Treasury
Stock
Accumulated
Deficit
Non-controlling
Interests
Balances as of January 31, 2020 64,738 $ 68 $ 1,660,889 $ (174,134) $ (105,590) $ (151,865) $ 1,229,368 $ 13,069 $ 1,242,437
Net (loss) income - - - - (6,014) - (6,014) 2,039 (3,975)
Other comprehensive loss - - - - - (26,909) (26,909) (359) (27,268)
Stock-based compensation - equity-classified awards - - 15,029 - - - 15,029 - 15,029
Common stock issued, or to be issued, for stock awards and stock bonuses 399 1 1,845 - - - 1,846 - 1,846
Exercises of stock options 2 - 12 - - - 12 - 12
Treasury stock acquired (613) - - (33,990) - - (33,990) - (33,990)
Distribution to noncontrolling interest - - - - - - - (245) (245)
Cumulative effect of adoption of ASU No. 2016-13 - - - - (940) - (940) - (940)
Balances as of April 30, 2020 64,526 69 1,677,775 (208,124) (112,544) (178,774) 1,178,402 14,504 1,192,906
Net income - - - - 8,494 - 8,494 2,093 10,587
Other comprehensive income - - - - - 20,479 20,479 320 20,799
Stock-based compensation - equity-classified awards - - 13,420 - - - 13,420 - 13,420
Common stock issued for stock awards and stock bonuses 874 1 - - - - 1 - 1
Preferred stock dividends - - (1,589) - - - (1,589) - (1,589)
Reacquisition of equity component from convertible notes repurchases, net of taxes - - (218) - - - (218) - (218)
Distribution to noncontrolling interest - - - - - - - (404) (404)
Balances as of July 31, 2020 65,400 70 1,689,388 (208,124) (104,050) (158,295) 1,218,989 16,513 1,235,502
Net income - - - - 10,175 - 10,175 1,652 11,827
Other comprehensive (loss) income - - - - - (4,511) (4,511) 135 (4,376)
Stock-based compensation - equity-classified awards - - 15,733 - - - 15,733 - 15,733
Common stock issued for stock awards and stock bonuses 336 - 12,263 - - - 12,263 - 12,263
Distribution to noncontrolling interest - - - - - - - (100) (100)
Balances as of October 31, 2020 65,736 $ 70 $ 1,717,384 $ (208,124) $ (93,875) $ (162,806) $ 1,252,649 $ 18,200 $ 1,270,849

See notes to condensed consolidated financial statements.
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VERINT SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
October 31,
(in thousands) 2021 2020
Cash flows from operating activities:
Net income $ 19,911 $ 18,439
(Income) from discontinued operations, net of income taxes - (44,328)
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization 56,910 63,664
Stock-based compensation, excluding cash-settled awards 51,078 39,533
Change in fair value of future tranche right (15,810) 22,834
Amortization of discount on convertible notes - 9,620
Non-cash losses on derivative financial instruments, net 14,374 812
Losses on early retirements of debt 2,474 143
Other, net 264 (173)
Changes in operating assets and liabilities:
Accounts receivable 45,586 35,441
Contract assets 1,290 1,389
Inventories (758) (262)
Prepaid expenses and other assets (21,586) (11,755)
Accounts payable and accrued expenses (21,918) 25,682
Contract liabilities (42,618) (44,155)
Deferred income taxes (15,530) 2,677
Other, net (3,418) 1,693
Net cash provided by operating activities - continuing operations 70,249 121,254
Net cash (used in) provided by operating activities - discontinued operations (9,055) 36,577
Net cash provided by operating activities 61,194 157,831
Cash flows from investing activities:
Cash paid for business combinations, including adjustments, net of cash acquired (57,214) -
Purchases of property and equipment (11,903) (9,918)
Purchases of investments - (98,067)
Maturities and sales of investments 45,640 18,800
Cash paid for capitalized software development costs (5,637) (5,916)
Change in restricted bank time deposits, and other investing activities, net (26) (24)
Net cash used in investing activities - continuing operations (29,140) (95,125)
Net cash used in investing activities - discontinued operations - (5,551)
Net cash used in investing activities (29,140) (100,676)
Cash flows from financing activities:
Proceeds from issuance of preferred stock 198,731 197,254
Proceeds from borrowings 315,000 155,000
Repayments of borrowings and other financing obligations (312,415) (205,447)
Settlement of 2014 Notes (386,887) -
Purchases of capped calls (41,060) -
Payments of debt-related costs (10,708) (2,287)
Purchases of treasury stock and common stock for retirement (75,933) (36,836)
Payments to repurchase convertible notes - (13,032)
Preferred stock dividend payments (12,856) (1,589)
Distributions paid to noncontrolling interest (620) (749)
Payment for termination of interest rate swap (16,502) -
Net cash transferred to Cognyte Software Ltd. (114,657) -
Dividend and other settlements received from Cognyte Software Ltd. 38,280 -
Payments of contingent consideration for business combinations (financing portion), and other financing activities (4,621) (8,364)
Net cash (used in) provided by financing activities - continuing operations (424,248) 83,950
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Nine Months Ended
October 31,
(in thousands) 2021 2020
Net cash used in financing activities - discontinued operations - (4,877)
Net cash (used in) provided by financing activities (424,248) 79,073
Foreign currency effects on cash, cash equivalents, restricted cash, and restricted cash equivalents (29) (2,093)
Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents (392,223) 134,135
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period 700,133 411,657
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period $ 307,910 $ 545,792
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period to the condensed consolidated balance sheets:
Cash and cash equivalents $ 307,847 $ 526,815
Restricted cash and cash equivalents included in restricted cash and cash equivalents, and restricted bank time deposits 6 15,459
Restricted cash and cash equivalents included in other assets 57 3,518
Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 307,910 $ 545,792

See notes to condensed consolidated financial statements.
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VERINT SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements


1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Unless the context otherwise requires, the terms "Verint", "we", "us", and "our" in these notes to condensed consolidated financial statements refer to Verint Systems Inc. and its consolidated subsidiaries.

Verint helps brands provide Boundless Customer Engagement™. For more than two decades, the world's most iconic brands - including more than 85 of the Fortune 100 companies - have trusted Verint to provide the technology and domain expertise they require to effectively build enduring customer relationships. Through the Verint Cloud Platform, we offer our customers and partners solutions that are based on artificial intelligence ("AI") and analytics to automate workflows across enterprise silos to optimize workforce expense and drive an elevated consumer experience. These solutions are used by approximately 10,000 organizations in 175 countries across a diverse set of verticals, including financial services, healthcare, utilities, technology, and government. Our customers include large enterprises with thousands of employees, as well as small to medium sized business ("SMB") organizations.

Verint is headquartered in Melville, New York, and has more than 40 offices worldwide. We have approximately 4,400 professionals around the globe exclusively focused on helping brands provide Boundless Customer Engagement.

Recent Developments

Spin-Off of Cognyte Software Ltd.

On February 1, 2021, we completed the previously announced spin-off (the "Spin-Off") of Cognyte Software Ltd. ("Cognyte"), a company limited by shares incorporated under the laws of the State of Israel whose business and operations consist of our former Cyber Intelligence Solutions business (the "Cognyte Business"). The Spin-Off of Cognyte was completed by way of a pro rata distribution in which holders of Verint's common stock, par value $0.001 per share, received one ordinary share of Cognyte, no par value, for every share of common stock of Verint held of record as of the close of business on January 25, 2021. After the distribution, we do not beneficially own any ordinary shares of Cognyte and no longer consolidate Cognyte into our financial results for periods ending after January 31, 2021. The Spin-Off was intended to be generally tax-free to our stockholders for U.S. federal income tax purposes.

The financial results of Cognyte for the three and nine months ended October 31, 2020 are presented as income from discontinued operations, net of taxes on the condensed consolidated statements of operations and its assets and liabilities as of January 31, 2021 are presented as assets and liabilities of discontinued operations on the condensed consolidated balance sheets. The historical condensed consolidated statement of cash flows has also been revised to reflect the effect of the Spin-Off. The historical statements of comprehensive income and the balances related to stockholders' equity have not been revised to reflect the effect of the Spin-Off. For further information on discontinued operations, see Note 2, "Discontinued Operations". Unless noted otherwise, discussion in the notes to the condensed consolidated financial statements pertain to continuing operations.

Apax Convertible Preferred Stock Investment

On December 4, 2019, we announced that an affiliate (the "Apax Investor") of Apax Partners ("Apax") would make an investment in us in an amount of up to $400.0 million. Under the terms of the Investment Agreement, dated as of December 4, 2019 (the "Investment Agreement"), the Apax Investor purchased $200.0 million of our Series A convertible preferred stock ("Series A Preferred Stock") in an issuance that closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B convertible preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") in an issuance that closed on April 6, 2021. As of October 31, 2021, Apax's ownership in us on an as-converted basis was approximately 12.8%. Please refer to Note 10, "Convertible Preferred Stock" for a more detailed discussion of the Apax investment.

Impact of COVID-19 Pandemic

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On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. This pandemic has caused significant economic disruption and uncertainty, and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Our customers, partners, and vendors, have also implemented actions in response to the pandemic, including among others, office closings, site restrictions, and employee travel restrictions. In response to these challenges, we established remote working arrangements for our employees, limited non-essential business travel, and canceled or shifted our customer, employee, and industry events to a virtual-only format. As the pandemic has evolved, we have adapted our pandemic response on a localized basis based on the prevailing conditions in each country in which we and our customers, partners, or vendors operate.

Preparation of Condensed Consolidated Financial Statements

The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on the same basis as the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2021 filed with the U.S. Securities and Exchange Commission ("SEC"), except for the recently adopted accounting pronouncements described below. The condensed consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for the periods ended October 31, 2021 and 2020, and the condensed consolidated balance sheet as of October 31, 2021, are not audited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown. The condensed consolidated balance sheet as of January 31, 2021 is derived from the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended January 31, 2021. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the SEC. Because the condensed consolidated interim financial statements do not include all of the information and disclosures required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 2021 filed with the SEC. The results for interim periods are not necessarily indicative of a full year's results.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Verint Systems Inc., and our wholly owned or otherwise controlled subsidiaries. Noncontrolling interests in less than wholly owned subsidiaries are reflected within stockholders' equity on our condensed consolidated balance sheet, but separately from our stockholders' equity. We hold an option to acquire the noncontrolling interests in two majority owned subsidiaries and we account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We include the fair value of the option within accrued expenses and other current liabilities and do not recognize noncontrolling interests in these subsidiaries.

Equity investments in companies in which we have less than a 20% ownership interest and cannot exercise significant influence, and which do not have readily determinable fair values, are accounted for at cost, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, less any impairment.

We include the results of operations of acquired companies from the date of acquisition. All significant intercompany transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions, which may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

In light of the currently unknown extent and duration of the COVID-19 pandemic, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply to certain of our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of October 31, 2021 and through the date of this report. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Reclassifications
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Following the Spin-Off, we began to operate as a pure-play customer engagement company and determined that presenting our revenue and cost of revenue as recurring and nonrecurring would be a more meaningful representation of the nature of our offerings, provide greater transparency and clarity to users of the financial statements, and is more consistent with industry practice and internal reporting. Accordingly, prior period amounts have been reclassified to conform to the current period presentation in our condensed consolidated financial statements and the accompanying notes. For a description of the types of revenue included in each category, see Note 3, "Revenue Recognition".

Business Segment Information

Prior to the Spin-Off, we had two reportable segments-Customer Engagement and Cyber Intelligence. Upon completion of the Spin-Off, we are a pure-play customer engagement company that operates as a single reporting segment as our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

Significant Accounting Policies

There have been no material changes in our significant accounting policies during the nine months ended October 31, 2021, as compared to the significant accounting policies described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2021, other than the recently adopted accounting pronouncements described below.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which affects general principles within Topic 740, Income Taxes. The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the tax basis of goodwill after a business combination, and the recognition of deferred tax liabilities for outside basis differences. The new guidance also changes the calculation of the income tax impact of hybrid taxes and the methodology for calculating income taxes in an interim period. We adopted this standard as of February 1, 2021 on either a prospective basis, or through a modified retrospective approach, as required by the standard. There was no cumulative effect adjustment recorded to accumulated deficit as the amount was not material. The effects of this standard on our financial position, results of operations and cash flows were not material.

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity,which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Among other changes, ASU No. 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. ASU No. 2020-06 also eliminates the treasury stock method to calculate diluted earnings per share and requires the if-converted method for convertible instruments. We early adopted ASU No. 2020-06 as of February 1, 2021 using the modified retrospective transition method. Prior period financial statements have not been restated upon adoption.

Upon adoption of ASU No. 2020-06, we no longer presented the conversion feature of our 2014 convertible senior notes, which matured on June 1, 2021, in equity. Instead, we combined the previously separated equity component with the liability component, which prior to maturity of the 2014 convertible senior notes, was classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense until the notes matured. Accordingly, we recorded a decrease to accumulated deficit of approximately $44.9 million, a decrease to additional paid-in capital of $43.4 million, a decrease to temporary equity of $4.8 million, an increase to current maturities of long-term debt of $4.4 million, a decrease to deferred tax liabilities of $0.9 million, and an increase in debt issuance costs of $0.1 million. There was no impact to earnings per share as a result of the adoption.

New Accounting Pronouncements Not Yet Effective

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which will require companies to apply the definition of a performance obligation under ASC Topic 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities relating to contracts with customers that are acquired in a business combination. Under current GAAP, an
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acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.


2. DISCONTINUED OPERATIONS

On February 1, 2021 (the "Spin-Off Date"), we completed the previously announced Spin-Off of Cognyte by way of a pro rata and generally tax-free distribution of all of the then-issued and outstanding ordinary shares of Cognyte to holders of record of our common stock as of the close of business on January 25, 2021.

To effect the Spin-Off and provide a framework for our relationship with Cognyte post Spin-Off we entered into several agreements with Cognyte, including the following:

a Separation and Distribution Agreement;
a Tax Matters Agreement;
an Employee Matters Agreement;
a Transition Services Agreement;
an Intellectual Property Cross License Agreement; and
a Trademark Cross License Agreement.

These agreements provide for the allocation of assets, employees, liabilities, and obligations (including property, employee benefits, litigation, and tax-related assets and liabilities) between us and Cognyte attributable to periods prior to, at and after the Spin-Off.

Under the Transition Services Agreement ("TSA") with Cognyte, we and Cognyte will provide and/or make available various administrative services and assets to each other for a given period based on each individual service, with an option to extend certain services after the first year. In no case will services be provided for more than 24 months after the Spin-Off Date. In consideration for such services, we and Cognyte will each pay fees to the other for the services provided, and those fees will generally be in amounts intended to allow the party providing services to recover all of its direct and indirect costs incurred in providing those services, plus a standard markup, and subject to a mutually agreed-upon increase following an extension of the initial service term. The fees charged for the first year of services are fixed. Fees for services provided by third-party suppliers will be on a straight pass-through basis. During the three and nine months ended October 31, 2021, we invoiced Cognyte $1.5 million and $4.4 million, respectively, and Cognyte invoiced us $0.3 million and $0.8 million, respectively, for transition services provided under the TSA.

Under the Tax Matters Agreement with Cognyte, we and Cognyte each agreed to share the obligation to pay any taxes as shown on tax returns filed by Cognyte (or any member of its group), on one hand, and us (or any member of our group), on the other hand, such that we will be primarily responsible for any taxes related to, or arising in connection with our business and Cognyte will be responsible for any taxes related to, or arising in connection with, the Cognyte Business, regardless of which party prepares and files any such tax return and whether such taxes arise prior to or after the Spin-Off. We and Cognyte also agreed to share responsibility for preparing relevant tax returns, which responsibility will depend on the type of a tax return and the period for which such tax return is being filed. We and Cognyte agreed to indemnify each other under the Tax Matters Agreement for certain actions or inactions.

The Spin-Off met the criteria for classification as "discontinued operations" in accordance with the accounting guidance upon completion of the separation, and as such, the results of our former Cognyte Business have been classified as discontinued operations in our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of cash flows for all periods presented. As of October 31, 2021, there were no assets or liabilities from discontinued operations associated with Cognyte. There was no revenue earned or costs and expenses incurred by discontinued operations during the three and nine months ended October 31, 2021.

The following table summarizes the major classes of line items included within discontinued operations in our condensed consolidated statements of operations for the three and nine months ended October 31, 2020:
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(in thousands) Three Months Ended
October 31, 2020
Nine Months Ended
October 31, 2020
Revenue $ 112,979 $ 319,438
Cost of revenue 29,331 91,952
Operating expenses 65,964 180,843
Other income, net 3,317 4,399
Income from discontinued operations before benefit from income taxes 21,001 51,042
Provision for income taxes 7,073 6,714
Net income from discontinued operations 13,928 44,328
Net income from discontinued operations attributable to noncontrolling interests 1,343 4,908
Net income from discontinued operations attributable to Verint Systems Inc. common shares $ 12,585 $ 39,420

The following table summarizes the assets and liabilities that were transferred to Cognyte on February 1, 2021 and presented as discontinued operations in our condensed consolidated balance sheet as of January 31, 2021:

(in thousands) January 31, 2021
Assets
Current Assets:
Cash and cash equivalents $ 78,570
Restricted cash and cash equivalents, and restricted bank time deposits 27,042
Short-term investments 4,713
Accounts receivable, net 175,001
Contract assets, net 20,317
Inventories 14,542
Prepaid expenses and other current assets 34,741
Total current assets of discontinued operations 354,926
Property and equipment, net 37,152
Operating lease right-of-use assets 31,040
Goodwill 158,183
Intangible assets, net 5,299
Other assets 49,278
Total long-term assets of discontinued operations 280,952
Total assets of discontinued operations $ 635,878
Liabilities
Current Liabilities:
Accounts payable $ 41,512
Accrued expenses and other current liabilities 100,189
Contract liabilities 127,012
Total current liabilities of discontinued operations 268,713
Long-term contract liabilities 22,037
Operating lease liabilities 23,174
Other liabilities 12,907
Total long-term liabilities of discontinued operations 58,118
Total liabilities of discontinued operations $ 326,831

In connection with the Spin-Off, $17.1 million of accumulated other comprehensive income, net of income taxes, related to foreign currency translation adjustments and foreign exchange contracts designated as cash flow hedges were transferred to Cognyte on the Spin-Off Date. Additionally, Verint transferred its interests in Cognyte Technologies Israel Ltd. (formerly Verint Systems Limited) ("CTIL") on the Spin-Off Date. Prior to the transfer, CTIL was a wholly owned subsidiary of Verint and the CTIL board of directors declared a cash dividend in the aggregate amount of $35.0 million payable to Verint, as its sole
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holder of record of ordinary shares, on January 29, 2021. In April 2021, we received the dividend from Cognyte less applicable withholding taxes. The $78.6 million of cash and cash equivalents shown in the table above does not reflect the payment of the dividend, which occurred after the completion of the Spin-Off.


3. REVENUE RECOGNITION

We derive our revenue primarily from providing customers the right to access our cloud-based solutions, the right to use our software for an indefinite or specified period of time, and related services and support based on when access or control of the software passes to our customers or the services are provided, in an amount that reflects the consideration we expect to be entitled to in exchange for such goods or services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transactions, including mandatory government charges that are passed through to our customers.

We determine revenue recognition through the following five steps:

Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, performance obligations are satisfied.

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.

Disaggregation of Revenue

The following table provides a disaggregation of our recurring and nonrecurring revenue. Recurring revenue is the portion of our revenue that we believe is likely to be renewed in the future. The recurrence of these revenue streams in future periods depends on a number of factors including contractual periods and customers' renewal decisions.

Recurring revenue primarily consists of cloud revenue and initial and renewal support revenue.
Cloud revenue primarily consists of software as a service ("SaaS") revenue and some optional managed services revenue.
SaaS revenue primarily consists of bundled SaaS (software with standard managed services) and unbundled SaaS (software licensing rights accounted for as term-based licenses whereby customers use our software with related support for a specified period of time). Unbundled SaaS can be deployed in the cloud either by us or a cloud partner.
Bundled SaaS revenue is recognized over time and unbundled SaaS revenue is recognized at a point in time, except for the related support which is recognized over time. Unbundled SaaS contracts are eligible for renewal after the initial fixed term, which in most cases is between a one- and three-year time frame.
Nonrecurring revenue primarily consists of our perpetual licenses, hardware, installation services, and business advisory consulting and training services.

In order to conform with the presentation described above, unbundled SaaS revenue for the three and nine months ended October 31, 2020 has been revised to reflect $2.9 million and $7.2 million, respectively, of unbundled SaaS support revenue which had previously been presented within support revenue.

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Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Recurring revenue:
Bundled SaaS revenue $ 48,390 $ 37,406 $ 130,639 $ 106,617
Unbundled SaaS revenue 33,713 21,577 91,440 41,483
Optional managed services revenue 16,358 14,884 49,688 43,344
Total cloud revenue 98,461 73,867 271,767 191,444
Support revenue 60,350 76,366 187,675 227,126
Total recurring revenue 158,811 150,233 459,442 418,570
Nonrecurring revenue:
Perpetual revenue 40,436 35,461 102,108 99,815
Professional services revenue 25,573 29,528 78,791 86,782
Total nonrecurring revenue 66,009 64,989 180,899 186,597
Total revenue $ 224,820 $ 215,222 $ 640,341 $ 605,167

Contract Balances

The following table provides information about accounts receivable, contract assets, and contract liabilities from contracts with customers:

(in thousands) October 31, 2021 January 31, 2021
Accounts receivable, net $ 161,020 $ 206,157
Contract assets, net $ 35,276 $ 36,716
Long-term contract assets, net (included in other assets) $ 26,914 $ 17,210
Contract liabilities $ 221,073 $ 261,033
Long-term contract liabilities $ 17,162 $ 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 in the three and nine months ended October 31, 2021 and 2020. There was one customer, an authorized global reseller of our solutions, that accounted for approximately 19% and 14% of our aggregated accounts receivable and contract assets at October 31, 2021 and January 31, 2021, respectively. Credit losses relating to this reseller have historically been immaterial.

Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract. Revenue recognized during the nine months ended October 31, 2021 and 2020 from amounts included in contract liabilities at the beginning of each period was $223.4 million and $213.8 million, respectively.

Remaining Performance Obligations

Transaction price allocated to remaining performance obligations ("RPO") represents contracted revenue that has not yet been recognized, which includes contract liabilities and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. The majority of our arrangements are for periods of up to three years, with a significant portion being one year or less.

We elected to exclude amounts of variable consideration attributable to sales- or usage-based royalties in exchange for a license of our IP from the remaining performance obligations. The timing and amount of revenue recognition for our remaining performance obligations is influenced by several factors, including seasonality, the timing of support renewals, the timing of delivery of software licenses, the average length of the contract terms, and foreign currency exchange rates.

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The following table provides information about when we expect to recognize our remaining performance obligations:

(in thousands) October 31, 2021 January 31, 2021
RPO:
Expected to be recognized within 1 year $ 396,121 $ 405,714
Expected to be recognized in more than 1 year 249,302 229,951
Total RPO $ 645,423 $ 635,665


4. NET INCOME PER COMMON SHARE ATTRIBUTABLE TO VERINT SYSTEMS INC.

The following table summarizes the calculation of basic and diluted net income per common share attributable to Verint Systems Inc. for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands, except per share amounts) 2021 2020 2021 2020
Net income (loss) from continuing operations $ 13,501 $ (2,101) $ 19,911 $ (25,889)
Net income from discontinued operations, net of tax - 13,928 - 44,328
Net income 13,501 11,827 19,911 18,439
Net income attributable to noncontrolling interests from continuing operations 264 309 875 876
Net income attributable to noncontrolling interests from discontinued operations - 1,343 - 4,908
Net income attributable to Verint Systems Inc. 13,237 10,175 19,036 12,655
Dividends on preferred stock (5,200) (2,658) (13,722) (5,142)
Net income attributable to Verint Systems Inc. for basic net income per common share 8,037 7,517 5,314 7,513
Dilutive effect of dividends on preferred stock - - - -
Net income attributable to Verint Systems Inc. for diluted net income per common share $ 8,037 $ 7,517 $ 5,314 $ 7,513
Net income (loss) attributable to Verint Systems Inc. common shares
Net income (loss) from continuing operations attributable to Verint Systems Inc. common shares 8,037 (5,068) 5,314 (31,907)
Net income from discontinued operations attributable to Verint Systems Inc. common shares - 12,585 - 39,420
Weighted-average shares outstanding:
Basic 65,570 65,571 65,474 64,973
Dilutive effect of employee equity award plans 758 663 1,043 1,027
Dilutive effect of 2021 Notes - - - -
Dilutive effect of 2014 Notes - - 641 -
Dilutive effect of warrants - - 110 -
Dilutive effect of assumed conversion of preferred stock - - - -
Diluted 66,328 66,234 67,268 66,000
Basic net income (loss) per common share attributable to Verint Systems Inc.:
Continuing operations $ 0.12 $ (0.08) $ 0.08 $ (0.49)
Discontinued operations - 0.19 - 0.61
Total basic net income per common share attributable to Verint Systems Inc. $ 0.12 $ 0.11 $ 0.08 $ 0.12
Diluted net income (loss) per common share attributable to Verint Systems Inc.:
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Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands, except per share amounts) 2021 2020 2021 2020
Continuing operations $ 0.12 $ (0.08) $ 0.08 $ (0.48)
Discontinued operations - 0.19 - 0.59
Total diluted net income per common share attributable to Verint Systems Inc. $ 0.12 $ 0.11 $ 0.08 $ 0.11

We excluded the following weighted-average potential common shares from our diluted per share calculations during the applicable periods because their inclusion would have been anti-dilutive:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Common shares excluded from calculation:
Stock options and restricted stock-based awards 292 867 663 240
2014 Notes - 6,002 - 6,114
Warrants 8,333 6,205 - 6,205
Series A Preferred Stock 5,497 3,738 5,497 2,411
Series B Preferred Stock 3,980 - 3,047 -

Upon our adoption of ASU No. 2020-06 on February 1, 2021, use of the if-converted method is required for calculating any potential dilutive effect of convertible instruments. For the three months ended October 31, 2021, the average price of our common stock did not exceed the $62.08 per share conversion price of our 2021 Notes (as defined in Note 8, "Long-Term Debt"), and other requirements for the 2021 Notes to be convertible were not met. The 2021 Notes will have a dilutive impact on net income per common share at any time when the average market price of our common stock for a quarterly reporting period exceeds the conversion price.

The Capped Calls (as defined in Note 8, "Long-Term Debt") do not impact our diluted earnings per common share calculations as their effect would be anti-dilutive. The Capped Calls are intended generally to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the $62.08 conversion price, with such reduction and/or offset subject to a cap of $100.00.

There is no impact on our calculation of the dilutive effect of our 2014 Notes (as defined in Note 8, "Long-Term Debt") upon adoption of ASU No. 2020-06 as we were obligated to settle the principal amount of our 2014 Notes in cash and settled the conversion spread with shares of our common stock in connection with the maturity of the 2014 Notes. Following the completion of the Spin-Off on February 1, 2021, the strike prices of the conversion features of our 2014 Notes and Warrants (as defined in Note 8, "Long-Term Debt") were reduced to $40.55 per share and $47.18 per share, respectively, which increased the equivalent number of underlying common shares to 9,541,000 and 9,865,000, respectively.

Our Note Hedges (as defined in Note 8, "Long-Term Debt") did not impact our diluted earnings per common share calculations because their effect would be anti-dilutive. However, in connection with the maturity of the 2014 Notes, the common shares delivered to us under the Note Hedges neutralized the dilutive effect of the common shares that we issued under the 2014 Notes to settle the conversion premium. As a result, the settlement of the outstanding 2014 Notes did not increase our outstanding common stock.

Our Warrants (as defined in Note 8, "Long-Term Debt") would have a dilutive impact on net income per common share to the extent that we report net income for the applicable period and the average market value of our common stock exceeds the strike price of the Warrants. The Warrants began to expire incrementally on August 30, 2021 and will continue to expire incrementally on a series of expiration dates through January 21, 2022. We expect that at each expiration date the Warrants will be exercised if the market price per share of our common stock exceeds the strike price of the Warrants, and we will be obligated to issue shares of our common stock having a value equal to such excess. As of October 31, 2021, up to 5,525,000 common shares could be issued upon exercise of the Warrants.

Further details regarding the 2021 Notes, Capped Calls, 2014 Notes, Note Hedges, and the Warrants appear in Note 8, "Long-Term Debt".
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On December 4, 2019, we announced that the Apax Investor would invest up to $400.0 million in us, in the form of convertible preferred stock. On May 7, 2020, the purchase of $200.0 million of our Series A Preferred Stock closed. On April 6, 2021, in connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock. The weighted-average common shares underlying the assumed conversion of the Preferred Stock, on an as-converted basis, were excluded from the calculation of diluted net income per common share for the three and nine months ended October 31, 2021 and 2020, as their effect would have been anti-dilutive. Further details regarding the Preferred Stock investment appear in Note 10, "Convertible Preferred Stock".


5. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

The following tables summarize our cash, cash equivalents, and short-term investments as of October 31, 2021 and January 31, 2021:

October 31, 2021
(in thousands) Cost Basis Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
Cash and cash equivalents:
Cash and bank time deposits $ 160,818 $ - $ - $ 160,818
Money market funds 147,029 - - 147,029
Total cash and cash equivalents $ 307,847 $ - $ - $ 307,847
Short-term investments:
Bank time deposits $ 661 $ - $ - $ 661
Total short-term investments $ 661 $ - $ - $ 661

January 31, 2021
(in thousands) Cost Basis Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
Cash and cash equivalents:
Cash and bank time deposits $ 243,183 $ - $ - $ 243,183
Money market funds 342,090 - - 342,090
Total cash and cash equivalents $ 585,273 $ - $ - $ 585,273
Short-term investments:
Bank time deposits $ 46,300 $ - $ - $ 46,300
Total short-term investments $ 46,300 $ - $ - $ 46,300

Bank time deposits which are reported within short-term investments consist of deposits held outside of the U.S. with maturities of greater than 90 days, or without specified maturity dates which we intend to hold for periods in excess of 90 days. All other bank deposits are included within cash and cash equivalents.

During the nine months ended October 31, 2021 and 2020, proceeds from maturities and sales of short-term investments were $45.6 million and $18.8 million, respectively.


6. BUSINESS COMBINATIONS

Nine Months Ended October 31, 2021

Conversocial Limited

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On August 23, 2021, we completed the acquisition of all of the outstanding shares of Conversocial Limited (together with its subsidiaries, "Conversocial"), a leading messaging platform that enables brands to deliver superior customer experiences. Conversocial has offices in London, United Kingdom and New York, New York.

The purchase price consisted of (i) $53.4 million of cash paid at closing, funded from cash on hand, partially offset by $3.2 million of Conversocial's cash received in the acquisition, resulting in net cash consideration at closing of $50.2 million; and (ii) $0.2 million of other purchase price adjustments. The purchase price for Conversocial was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. The fair values assigned to identifiable intangible assets acquired were determined primarily by using the income approach, which discounts the expected future cash flows to present value using estimates and assumptions determined by management.

Among the factors contributing to the recognition of goodwill as a component of the Conversocial purchase price allocation were synergies in products and technologies, and the addition of a skilled, assembled workforce. The acquisition resulted in the recognition of $31.8 million of goodwill, of which $0.5 million is deductible for income tax purposes and $31.3 million is not deductible.

In connection with the purchase price allocation for Conversocial, the estimated fair value of undelivered performance obligations under customer contracts assumed in the acquisition was determined utilizing a cost build-up approach. The cost build-up approach calculated fair value by estimating the costs required to fulfill the obligations plus a reasonable profit margin, which approximates the amount that we believe would be required to pay a third party to assume the performance obligations. The estimated costs to fulfill the performance obligations were based on the historical direct costs for delivering similar services. As a result, in allocating the purchase price, we recorded $3.4 million of current and long-term contract liabilities, representing the estimated fair value of undelivered performance obligations for which payment had been received, which will be recognized as revenue as the underlying performance obligations are delivered. For undelivered performance obligations for which payment had not been received, we recorded a $1.2 million asset as a component of the purchase price allocation, representing the estimated fair value of these obligations, $0.7 million of which is included within prepaid expenses and other current assets and $0.5 million of which is included in other assets. We are amortizing this asset over the underlying delivery periods, which adjusts the revenue we recognize for providing these services to its estimated fair value.

Transaction and related costs directly related to the acquisition of Conversocial, consisting primarily of professional fees and integration expenses, were $1.3 million and $2.4 million for the three and nine months ended October 31, 2021, respectively, and were expensed as incurred and are included in selling, general and administrative expenses.

Revenue and net income (loss) attributable to Conversocial included in our consolidated statement of operations for the three months ended October 31, 2021 was not material.

The purchase price allocation for Conversocial has been prepared on a preliminary basis and changes to the allocation may occur as additional information becomes available during the measurement period (up to one year from the acquisition date). Fair values still under review include values assigned to identifiable intangible assets, deferred income taxes, and reserves for uncertain income tax positions.

The following table sets forth the components and the allocation of the purchase price for our acquisition of Conversocial:
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(in thousands) Amount
Components of Purchase Price:
Cash $ 53,409
Other purchase price adjustments (190)
Total purchase price $ 53,219
Allocation of Purchase Price:
Net tangible assets (liabilities):
Accounts receivable $ 1,694
Other current assets, including cash acquired 5,302
Other assets 511
Current and other liabilities (1,945)
Contract liabilities - current and long-term (3,410)
Deferred income taxes (615)
Net tangible assets 1,537
Identifiable intangible assets:
Customer relationships 9,800
Developed technology 9,900
Trademarks and trade names 200
Total identifiable intangible assets 19,900
Goodwill 31,782
Total purchase price allocation $ 53,219

The acquired customer relationships, developed technology, and trademarks and trade names were assigned estimated useful lives of seven years, five years, and one year, respectively, the weighted average of which is approximately 5.9 years. The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized, over their estimated useful lives.

Other Business Combinations

During the three months ended July 31, 2021, we completed the acquisition of certain assets from a leader in contact center hiring automation that qualified as a business combination. This transaction resulted in increases to goodwill, customer relationships, and acquired technology intangible assets, but was not material to our condensed consolidated financial statements, and as a result, additional business combination disclosures for this acquisition have been omitted. There were no other business combinations during the nine months ended October 31, 2021.

Year Ended January 31, 2021

We did not complete any business combinations during the year ended January 31, 2021.

Other Business Combination Information

The pro forma impact of the business combinations completed during the nine months ended October 31, 2021 was not material
to our historical consolidated operating results and is therefore not presented.

The acquisition date fair values of contingent consideration obligations associated with business combinations are estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs that are not observable in the market. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. At each reporting date, we revalue the contingent consideration obligations to their fair values and record increases and decreases in fair value within selling, general, and administrative expenses in our condensed consolidated statements of operations. Changes in the fair value of the contingent consideration obligations result from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.

For the three months ended October 31, 2021, changes in the fair values of contingent consideration obligations associated with business combinations were immaterial, and for the three months ended October 31, 2020, we recorded a benefit of $0.4 million. For the nine months ended October 31, 2021 and 2020, we recorded a charge of $0.7 million and a benefit of $2.8
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million, respectively, within selling, general and administrative expenses for changes in the fair values of contingent consideration obligations associated with business combinations. The aggregate fair values of the remaining contingent consideration obligations associated with business combinations was $7.6 million at October 31, 2021, which was recorded within accrued expenses and other current liabilities.

Payments of contingent consideration earned under these agreements were $9.6 million and $14.0 million for the nine months ended October 31, 2021 and 2020, respectively. There were no payments of contingent consideration earned under these agreements during the three months ended October 31, 2021 and 2020.


7. INTANGIBLE ASSETS AND GOODWILL
Acquisition-related intangible assets consisted of the following as of October 31, 2021 and January 31, 2021:
October 31, 2021
(in thousands) Cost Accumulated
Amortization
Net
Intangible assets with finite lives:
Customer relationships $ 475,038 $ (376,118) $ 98,920
Acquired technology 231,088 (200,965) 30,123
Trade names 5,686 (4,201) 1,485
Distribution network 2,440 (2,440) -
Total intangible assets $ 714,252 $ (583,724) $ 130,528
January 31, 2021
(in thousands) Cost Accumulated
Amortization
Net
Intangible assets with finite lives:
Customer relationships $ 464,586 $ (356,064) $ 108,522
Acquired technology 222,040 (189,687) 32,353
Trade names 9,424 (6,555) 2,869
Distribution network 2,440 (2,440) -
Total intangible assets $ 698,490 $ (554,746) $ 143,744

We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic to assess whether a triggering event had occurred that would result in a potential impairment of our indefinite-lived intangible assets. Based on this assessment, we concluded that a triggering event has not occurred which would require further impairment testing to be performed.

Total amortization expense recorded for acquisition-related intangible assets was $12.0 million and $11.9 million for the three months ended October 31, 2021 and 2020, respectively, and $35.5 million and $35.9 million for the nine months ended October 31, 2021 and 2020, respectively. The reported amount of net acquisition-related intangible assets can fluctuate from the impact of changes in foreign currency exchange rates on intangible assets not denominated in U.S. dollars.

Estimated future amortization expense on finite-lived acquisition-related intangible assets is as follows:

(in thousands)
Years Ending January 31, Amount
2022 (remainder of year) $ 11,333
2023 40,805
2024 31,617
2025 15,090
2026 13,774
2027 and thereafter 17,909
Total $ 130,528
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During the three and nine months ended October 31, 2021, we recorded $0.4 million of impairments for certain acquired trade names, which is included within selling, general and administrative expenses. Impairments of acquired intangible assets were insignificant during the three and nine months ended October 31, 2020.

Goodwill activity for the nine months ended October 31, 2021 was as follows:

(in thousands) Amount
Nine Months Ended October 31, 2021:
Goodwill, gross, at January 31, 2021 $ 1,383,450
Accumulated impairment losses through January 31, 2021 (56,043)
Goodwill, net, at January 31, 2021 1,327,407
Business combinations 36,214
Foreign currency translation and other (2,201)
Goodwill, net, at October 31, 2021 $ 1,361,420
Balance at October 31, 2021
Goodwill, gross, at October 31, 2021 $ 1,417,463
Accumulated impairment losses through October 31, 2021 (56,043)
Goodwill, net, at October 31, 2021 $ 1,361,420

We evaluated whether there has been a change in circumstances as of October 31, 2021 and as of the date of this filing in response to the economic impacts seen globally from COVID-19. The valuation methodology to determine the fair value of our reporting unit is sensitive to management's forecasts of future revenue, profitability and market conditions. At this time, the impact of COVID-19 on our forecasts is uncertain and increases the subjectivity that is involved in evaluating goodwill for potential impairment. Our reporting unit fair value may decline as a result of delayed or reduced demand for our products and services, driving lower revenue and operating income across our business. However, given the significant difference between the reporting unit fair value and its carrying value in the most recent quantitative analyses completed as of November 1, 2020, as well as expected long-term recovery, management does not believe that these events were severe enough to result in an impairment trigger. We will perform our annual goodwill impairment analysis as of November 1, 2021 during the three months ending January 31, 2022.


8. LONG-TERM DEBT

The following table summarizes our long-term debt at October 31, 2021 and January 31, 2021:

October 31, January 31,
(in thousands) 2021 2021
2021 Notes $ 315,000 $ -
2014 Notes - 386,887
2017 Term Loan 100,000 410,125
Less: unamortized debt discounts and issuance costs (8,589) (7,518)
Total debt 406,411 789,494
Less: current maturities - 386,713
Long-term debt $ 406,411 $ 402,781

2021 Notes

On April 9, 2021, we issued $315.0 million in aggregate principal amount of 0.25% convertible senior notes due April 15, 2026 (the "2021 Notes"), unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25% per annum.

We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding
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indebtedness under our 2017 Credit Agreement described below, to terminate an interest rate swap agreement, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.

The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. As of October 31, 2021, the 2021 Notes were not convertible.

We incurred approximately $8.9 million of issuance costs in connection with the 2021 Notes, which have been deferred and are presented as a reduction of long-term debt, and which are being amortized as interest expense over the term of the 2021 Notes. Including the impact of the deferred debt issuance costs, the effective interest rate on the 2021 Notes was approximately 0.83% at October 31, 2021.

Based on the closing market price of our common stock on October 31, 2021, the if-converted value of the 2021 Notes was less than their aggregate principal amount.

2014 Notes

On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes, with a maturity date of June 1, 2021 (the "2014 Notes"). Net proceeds from the 2014 Notes after underwriting discounts were $391.9 million. The 2014 Notes were unsecured and paid interest in cash semiannually in arrears at a rate of 1.50% per annum.

Effective December 1, 2020 until the close of business on the second scheduled trading day immediately preceding the June 1, 2021 maturity date, holders could have surrendered their 2014 Notes for conversion regardless of whether any of the other specified conditions for conversion had been satisfied. On February 26, 2021, we deposited approximately $390.0 million of cash, representing the full principal amount of the 2014 Notes then outstanding as well as the final interest payment on the 2014 Notes due at maturity, into an escrow account to cash collateralize the 2014 Notes.

In connection with the maturity of the 2014 Notes on June 1, 2021, we paid an aggregate of $389.8 million in cash for the settlement of the 2014 Notes, which included $386.9 million in satisfaction of the outstanding principal of the 2014 Notes and $2.9 million related to the final interest payment on the 2014 Notes. We funded the repayment of the outstanding principal amount of the 2014 Notes and accrued interest thereon using the cash we had placed in escrow. Additionally, the 2014 Notes had an incremental conversion value of $57.7 million, as the market value per share of our common stock, as measured under the terms of the 2014 Notes, was greater than the conversion price of the 2014 Notes. We issued approximately 1,250,000 shares of common stock to the holders of the 2014 Notes as payment of the conversion premium, which we issued from treasury stock.

As of January 31, 2021, the 2014 Notes had a conversion rate of 15.5129 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of approximately $64.46 per share of common stock and would have resulted in the issuance of approximately 6,002,000 shares if all of the 2014 Notes had been converted. As a result of the Spin-Off, the conversion rate was adjusted to 24.6622 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of $40.55 per share of common stock and would have resulted in the issuance of approximately 9,541,000 shares if all of the 2014 Notes had been converted prior to maturity.

At issuance, in accordance with then-applicable accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the 2014 Notes in a manner that reflected our estimated nonconvertible debt borrowing rate. We estimated the debt and equity components of the 2014 Notes to be $319.9 million and $80.1 million, respectively, at the issuance date, assuming a 5.00% non-convertible borrowing rate. The equity component was recorded as an increase to additional paid-in capital. Through January 31, 2021, the excess of the principal amount of the debt component over its carrying amount (the "debt discount") was being amortized as interest expense over the term of the 2014 Notes using the effective interest method. The equity component was not remeasured as long as it continued to meet the conditions for equity classification.

We allocated transaction costs related to the issuance of the 2014 Notes, including underwriting discounts, of $7.6 million and $1.9 million to the debt and equity components, respectively. Issuance costs attributable to the debt component of the 2014
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Notes were presented as a reduction of long-term debt and were amortized as interest expense over the term of the 2014 Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.

During the three months ended July 31, 2020, we repurchased $13.1 million principal amount of the 2014 Notes (the "Repurchased 2014 Notes") in open market transactions for an aggregate of $13.0 million in cash, resulting in a debt extinguishment loss of $0.1 million, and a $0.2 million charge to additional paid-in-capital.

At January 31, 2021, because the 2014 notes were convertible, $4.8 million of the 2014 Notes' equity component was classified as temporary equity on our consolidated balance sheet, representing the difference between the principal amount and the net carrying amount of the 2014 Notes that could be requested for conversion.

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Among other changes, ASU No. 2020-06 eliminates the liability and equity separation model for convertible instruments with a cash conversion feature, such as the 2014 Notes.

As permitted, on February 1, 2021, we early adopted ASU No. 2020-06, which otherwise would have been effective for us on February 1, 2022. As a result, effective February 1, 2021, we no longer presented separate liability and equity components for the 2014 Notes on our condensed consolidated balance sheet. We implemented the provisions of ASU No. 2020-06 using the modified retrospective approach, such that comparative information has not been restated and continues to be reported under accounting standards in effect for those periods.

The adoption of ASU No. 2020-06 resulted in the $78.0 million carrying value of the 2014 Notes' equity component at January 31, 2021, which included applicable issuance costs and the portion classified within temporary equity, being reclassified and combined with the liability component of the 2014 Notes. This resulted in a $43.4 million decrease to additional paid-in capital, a $4.8 million decrease to temporary equity, a $4.4 million increase to current maturities of long-term debt, a $0.9 million decrease to deferred tax liabilities, a $0.1 million increase in unamortized debt issuance costs (a component of long-term debt), and a $44.9 million decrease to our accumulated deficit.

As the 2014 Notes were due June 1, 2021, they are classified within current maturities of long-term debt on our condensed consolidated balance sheets as of January 31, 2021.

Capped Calls, Note Hedges and Warrants

Capped Calls

In connection with the issuance of the 2021 Notes, on April 6, 2021 and April 8, 2021, we entered into capped call transactions (the "Capped Calls") with certain counterparties. The Capped Calls are generally intended to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the conversion price, with such reduction and/or offset subject to a cap.

The Capped Calls exercise price is equal to the $62.08 initial conversion price of each of the 2021 Notes, and the cap price is $100.00, each subject to certain adjustments under the terms of the Capped Calls. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of October 31, 2021, no Capped Calls have been exercised.

Pursuant to their terms, the Capped Calls qualify for classification within stockholders' equity, and their fair value is not remeasured and adjusted as long as they continue to qualify for stockholders' equity classification. We paid approximately $41.1 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.

Note Hedges and Warrants

Concurrently with the issuance of the 2014 Notes, we entered into convertible note hedge transactions (the "Note Hedges") and sold warrants (the "Warrants"). The combination of the Note Hedges and the Warrants served to increase the effective initial conversion price for the 2014 Notes to $75.00 per share. Subsequent to the Spin-Off, as a result of conversion rate adjustments, the Note Hedges and the Warrants served to increase the effective conversion price for the 2014 Notes to $47.18 per share. The Note Hedges were, and Warrants are, each separate instruments from the 2014 Notes.
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Note Hedges

Pursuant to the Note Hedges, we purchased call options on our common stock, under which we had the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equaled the initial conversion price of the 2014 Notes. As a result of the Spin-Off, on February 1, 2021, the call options on our stock were adjusted to allow us to purchase up to 9,865,000 shares of our common stock at a price of $40.55, which was equal to the adjusted conversion price of the 2014 Notes. We were permitted to settle the Note Hedges in cash, shares of our common stock, or a combination thereof, at our option, and the Note Hedges were intended to reduce our exposure to potential dilution upon conversion of the 2014 Notes. We paid $60.8 million for the Note Hedges, which was recorded as a charge to additional paid-in capital. Our exercise rights under the Note Hedges were automatically triggered upon conversion of any 2014 Notes and the Note Hedges otherwise terminated upon maturity of the 2014 Notes on June 1, 2021. In connection with the maturity of the 2014 Notes on June 1, 2021, we received approximately 1,250,000 shares of our common stock from the counterparties under the Note Hedges, which offset the dilution resulting from the stock settlement of the conversion premium on the 2014 Notes as the market value per share of our common stock, as measured under the terms of the Note Hedges, was greater than the strike price of the Note Hedges.

The Repurchased 2014 Notes acquired during the three months ended July 31, 2020 as described above did not change the number of common shares subject to the Note Hedges as the counterparties agreed that the options under the Note Hedges remained outstanding notwithstanding such repurchase. Upon maturity of the 2014 Notes, we received approximately 42,000 shares of our common stock from the counterparties to the Note Hedges as reimbursement for the in-the-money portion of the Repurchased 2014 Notes.

Warrants

We sold the Warrants to several counterparties. The Warrants initially provided the counterparties rights to acquire from us up to approximately 6,205,000 shares of our common stock at a price of $75.00 per share. As a result of the Spin-Off, the terms of the Warrants were adjusted to provide the counterparties rights to acquire from us up to approximately 9,865,000 shares of our common stock at a price of $47.18 per share. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. The Warrants began to expire incrementally on August 30, 2021 and will continue to expire incrementally on a series of expiration dates through January 21, 2022. We expect that at each expiration date the Warrants will be exercised if the market price per share of our common stock exceeds the strike price of the Warrants, and we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants have a dilutive effect on net income per share to the extent that the average market value of our common stock, as measured under the terms of the Warrants, exceeds the strike price of the Warrants. As of October 31, 2021, no Warrants had been exercised, 4,340,000 Warrants had expired, and 5,525,000 Warrants remained outstanding. From November 1, 2021 through December 3, 2021, we issued 20,852 shares of common stock as part of the cashless exercise of approximately 1,776,000 Warrants.

The Note Hedges and Warrants both qualified for classification within stockholders' equity, and their respective fair values were not remeasured and adjusted as long as these instruments continued to qualify for stockholders' equity classification.

Credit Agreements

2017 Credit Agreement

On June 29, 2017, we entered into a credit agreement with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, and 2021, as further described below (as amended, the "2017 Credit Agreement").

The 2017 Credit Agreement currently provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the "2017 Term Loan"), of which $100.0 million and $410.1 million was outstanding at October 31, 2021 and January 31, 2021, respectively, and a $300.0 million revolving credit facility maturing on April 9, 2026 (the "2021 Revolving Credit Facility"), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement.

The 2017 Term Loan was subject to an original issuance discount of approximately $0.5 million, which is being amortized as interest expense over the term of the 2017 Term Loan using the effective interest method.

Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.
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During the three months ended April 30, 2021, in addition to our regular quarterly $1.1 million principal payment, we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100.0 million. As a result, $1.8 million of deferred debt issuance costs and $0.2 million of unamortized discount associated with the 2017 Term Loan were written off, and are included within losses on early retirements of debt on our condensed consolidated statement of operations for the nine months ended October 31, 2021. Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.

On April 9, 2021, we amended the 2017 Credit Agreement (the "2021 Amendment"), pursuant to which we refinanced our $300.0 million 2017 Revolving Credit Facility, which would otherwise have matured on June 29, 2022, with the $300.0 million 2021 Revolving Credit Facility. The 2021 Amendment also provides that for purposes of the acceleration of the maturity of the 2017 Term Loan and 2021 Revolving Credit Facility, neither the 2014 Notes nor the 2021 Notes will be deemed to be outstanding if such notes are cash collateralized prior to their respective maturity dates in accordance with the 2017 Credit Agreement. As noted above, we cash collateralized the 2014 Notes prior to settlement on June 1, 2021, and we currently intend to cash collateralize, or otherwise refinance or repurchase, the 2021 Notes prior to their maturity in 2026.

The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility would have been accelerated to March 1, 2021 if on such date any 2014 Notes remained outstanding, unless such outstanding 2014 Notes were cash collateralized pursuant to a second amendment to the 2017 Credit Agreement (the "2020 Amendment"), entered into on June 8, 2020. Pursuant to the 2020 Amendment, we were permitted to effect the Spin-Off of our Cyber Intelligence business within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes would not be deemed to be outstanding if such 2014 Notes were cash collateralized in accordance with the 2017 Credit Agreement for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility discussed above. On February 26, 2021, as noted above, we cash collateralized the 2014 Notes in satisfaction of the cash collateralization provisions of the 2020 Amendment. Accordingly, the maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility were not accelerated to March 1, 2021.

As of October 31, 2021, the interest rate on the 2017 Term Loan was 2.08%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 2.28% at October 31, 2021. As of January 31, 2021, the interest rate on the 2017 Term Loan was 2.14%.

For borrowings under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the "Leverage Ratio"). In addition, under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, we are required to pay a commitment fee with respect to unused availability at rates per annum determined by reference to our Leverage Ratio.

Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries, and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.

The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2021 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. The limitations imposed by the covenants are subject to certain exceptions as detailed in the 2017 Credit Agreement.

The 2017 Credit Agreement provides for events of default with corresponding grace periods that we believe are customary for credit facilities of this type. Upon an event of default, all of our obligations owed under the 2017 Credit Agreement may be declared immediately due and payable, and the lenders' commitments to make loans under the 2017 Credit Agreement may be terminated.

2017 Credit Agreement Issuance and Amendment Costs

We incurred debt issuance costs of approximately $6.8 million in connection with the 2017 Credit Agreement, of which $4.1 million were associated with the 2017 Term Loan, and $2.7 million were associated with the 2017 Revolving Credit Facility, which were deferred and are being amortized as interest expense over the terms of the facilities. During the year ended January 31, 2018, we wrote off $0.2 million of deferred debt issuance costs associated with the 2017 Term Loan as a result of the 2018 Amendment. We incurred $2.1 million of debt modification costs related to the 2020 Amendment, $1.2 million of which were expensed, and $0.9 million of which were deferred (comprised of $0.5 million associated with the 2017 Term Loan, and $0.4
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million associated with the 2017 Revolving Credit Facility), and which are being amortized along with the previously deferred debt issuance costs.

At the time of the 2021 Amendment, there were $1.3 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility, of which $0.8 million were associated with commitments under the 2017 Revolving Credit Facility provided by lenders that are continuing to provide commitments under the 2021 Revolving Credit Facility and therefore continued to be deferred, and which are now being amortized over the term of the 2021 Revolving Credit Facility. The remaining $0.5 million of unamortized deferred debt issuance costs associated with the 2017 Revolving Credit Facility were written off and are included within losses on early retirements of debt on our condensed consolidated statement of operations for the nine months ended October 31, 2021. We incurred $1.5 million of debt modification costs related to the 2021 Amendment, all of which are associated with the 2021 Revolving Credit Facility, which have been deferred and are being amortized along with the previously deferred debt issuance costs over the term of the 2021 Revolving Credit Facility.

Deferred debt issuance costs associated with the 2017 Term Loan are being amortized using the effective interest rate method, and deferred debt issuance costs associated with the 2021 Revolving Credit Facility are being amortized on a straight-line basis.

Future Principal Payments on the Term Loan

As a result of the significant 2017 Term Loan principal payments made during the three months ended April 30, 2021, no further principal payments are required prior to the maturity of the 2017 Term Loan on June 29, 2024.

Interest Expense

The following table presents the components of interest expense incurred on the 2021 Notes, the 2014 Notes, and on borrowings under our 2017 Credit Agreement, for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
2021 Notes:
Interest expense at 0.25% coupon rate
$ 197 $ - $ 442 $ -
Amortization of deferred debt issuance costs 436 - 978 -
Total Interest Expense - 2021 Notes $ 633 $ - $ 1,420 $ -
2014 Notes:
Interest expense at 1.50% coupon rate
$ - $ 1,450 $ 1,933 $ 4,436
Amortization of debt discount - 3,220 - 9,620
Amortization of deferred debt issuance costs - 303 522 907
Total Interest Expense - 2014 Notes $ - $ 4,973 $ 2,455 $ 14,963
Borrowings under 2017 Credit Agreement:
Interest expense at contractual rates $ 533 $ 2,790 $ 2,830 $ 10,766
Impact of interest rate swap reclassified from accumulated other comprehensive loss - 1,356 1,014 3,068
Amortization of debt discounts 5 18 13 55
Amortization of deferred debt issuance costs 218 497 713 1,327
Total Interest Expense - Borrowings under 2017 Credit Agreement $ 756 $ 4,661 $ 4,570 $ 15,216

On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the 2018 Swap (as defined in Note 14, "Derivative Financial Instruments") prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders' equity to other income (expense) on our condensed consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from
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accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021.

Please refer to Note 14, "Derivative Financial Instruments" for further information regarding our interest rate swap agreement.


9. SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
Condensed Consolidated Balance Sheets
Inventories consisted of the following as of October 31, 2021 and January 31, 2021:
October 31, January 31,
(in thousands) 2021 2021
Raw materials $ 2,265 $ 2,768
Work-in-process 286 26
Finished goods 3,209 2,747
Total inventories $ 5,760 $ 5,541

Condensed Consolidated Statements of Operations
Other (expense) income, net consisted of the following for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Foreign currency losses, net $ (687) $ (1,456) $ (1,691) $ (1,303)
Losses on derivative financial instruments, net - (949) (14,374) (812)
Change in fair value of future tranche right - (9,224) 15,810 (22,834)
Other, net 270 (41) 4,044 (1,297)
Other (expense) income, net $ (417) $ (11,670) $ 3,789 $ (26,246)

Please refer to Note 10, "Convertible Preferred Stock" and Note 13, "Fair Value Measurements" for additional information regarding the future tranche right.

Condensed Consolidated Statements of Cash Flows
The following table provides supplemental information regarding our condensed consolidated cash flows for the nine months ended October 31, 2021 and 2020:
Nine Months Ended
October 31,
(in thousands) 2021 2020
Cash paid for interest $ 9,150 $ 18,116
Cash payments of income taxes, net $ 37,371 $ 18,133
Cash payments for operating leases $ 14,854 $ 15,478
Non-cash investing and financing transactions:
Finance leases of property and equipment $ 4,276 $ 841
Liabilities for contingent consideration in business combinations $ 900 $ -
Accrued but unpaid purchases of property and equipment $ 479 $ 1,055
Settlement of Future Tranche Right upon issuance of Series B Preferred Stock $ 36,962 $ -
Retirement of treasury stock $ 234,997 $ -
Settlement of convertible note premium with common stock $ 59,131 $ -
Receipt of common stock from the counterparties under the Note Hedges $ 59,651 $ -


10. CONVERTIBLE PREFERRED STOCK
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On December 4, 2019, we entered into an Investment Agreement with the Apax Investor, whereby, subject to certain closing conditions, the Apax Investor agreed to make an investment in us in an amount up to $400.0 million as follows:

On May 7, 2020 (the "Series A Closing Date"), we issued a total of 200,000 shares of our Series A Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $2.7 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series A Preferred Stock.

In connection with the completion of the Spin-Off, on April 6, 2021, (the "Series B Closing Date" and together with the Series A Closing Date, as applicable, the "Applicable Closing Date") we issued a total of 200,000 shares of our Series B Preferred Stock for an aggregate purchase price of $200.0 million, or $1,000 per share, to the Apax Investor. In connection therewith, we incurred direct and incremental costs of $1.3 million, including financial advisory fees, closing costs, legal fees, and other offering-related costs. These direct and incremental costs reduced the carrying amount of the Series B Preferred Stock.

Each of the rights, preferences and privileges of the Series A Preferred Stock and Series B Preferred Stock are set forth in separate certificates of designation filed with the Secretary of State of the State of Delaware on the Applicable Closing Date.

Voting Rights

Holders of the Preferred Stock have the right to vote on matters submitted to a vote of the holders of our common stock, on an as-converted basis; however, in no event will the holders of Preferred Stock have the right to vote shares of the Preferred Stock on an as-converted basis in excess of 19.9% of the voting power of the common stock outstanding immediately prior to December 4, 2019.

Dividends and Liquidation Rights

The Preferred Stock ranks senior to the shares of our common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of our affairs. Shares of Preferred Stock have a liquidation preference of the greater of $1,000 per share or the amount that would be received if the shares are converted at the then applicable conversion price at the time of such liquidation.

Holders of the Preferred Stock are entitled to a cumulative dividend at a rate of 5.2% per annum until the 48-month anniversary of the Series A Closing Date and thereafter at a rate of 4.0% per annum. Dividends on the Preferred Stock are cumulative and payable semi-annually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of Preferred Stock. The dividend rate is subject to increase (i) to 6.0% per annum in the event the number of shares of common stock into which the Preferred Stock could be converted exceeds 19.9% of the voting power of outstanding common stock on the Series A Closing Date (unless we obtain shareholder approval of the issuance of common stock upon conversion of the Preferred Stock) and (ii) by 1.0% each year, up to a maximum dividend rate of 10.0% per annum, in the event we fail to satisfy our obligations to redeem the Preferred Stock in specified circumstances.

For the nine months ended October 31, 2021, we paid $12.9 million of preferred stock dividends, of which $5.2 million was accrued as of January 31, 2021, and there were $6.9 million of cumulative undeclared and unpaid preferred stock dividends at October 31, 2021. There were no dividends paid during the three months ended October 31, 2021, and we had no accrued dividends as of October 31, 2021. We reflected $5.2 million and $13.7 million of preferred stock dividends in our condensed consolidated results of operations, for purposes of computing net income attributable to Verint Systems Inc. common shares, for the three and nine months ended October 31, 2021, respectively. There were $2.7 million and $5.2 million of preferred stock dividends recorded in our condensed consolidated results of operations for the three and nine months ended October 31, 2020.

Conversion

The Series A Preferred Stock was convertible into common stock at the election of the holder, subject to certain conditions, at an initial conversion price of $53.50 per share. The initial conversion price represented a conversion premium of 17.1% over the volume-weighted average price per share of our common stock over the 45 consecutive trading days immediately prior to the date of the Investment Agreement. In accordance with the Investment Agreement, the Series A Preferred Stock did not participate in the Spin-Off distribution of the Cognyte shares, which occurred on February 1, 2021, and the Series A conversion price was instead adjusted to $36.38 per share based on the ratio of the relative trading prices of Verint and Cognyte following
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the Spin-Off. The Series B Preferred Stock is convertible at a conversion price of $50.25, based in part on our trading price over the 20 day trading period following the Spin-Off. As of October 31, 2021, the maximum number of shares of common stock that could be required to be issued upon conversion of the outstanding shares of Preferred Stock was approximately 9.6 million shares and Apax's ownership in us on an as-converted basis was approximately 12.8%.

At any time after 36 months following the Applicable Closing Date, we will have the option to require that all (but not less than all) of the then-outstanding shares of Preferred Stock of the series convert into common stock if the volume-weighted average price per share of the common stock for at least 30 trading days in any 45 consecutive trading day period exceeds 175% of the then-applicable conversion price of such series (a "Mandatory Conversion").

We may redeem any or all of the Preferred Stock of a series for cash at any time after the 72-month anniversary of the Applicable Closing Date at a redemption price equal to 100% of the liquidation preference of the shares of the Preferred Stock, plus any accrued and unpaid dividends to, but excluding, the redemption date, plus a make-whole amount designed to allow the Apax Investor to earn a total 8.0% internal rate of return on such shares.

The Apax Investor has agreed to restrictions on its ability to dispose of shares of the Series A Preferred Stock until the earlier of (1) the 36-month anniversary of the Series A Closing Date or (2) the 24-month anniversary of the consummation of the Spin-Off (the "Preferred Stock Restricted Period"). Following the Preferred Stock Restricted Period, the Preferred Stock may not be sold or transferred without the prior written consent of the Company. The Apax Investor has also agreed to restrictions on its ability to dispose of the common stock issued upon conversion of the Preferred Stock. The common stock may not be disposed of until the earlier of (1) the 12-month anniversary of consummation of the Spin-Off or (2) the 24-month anniversary of the Series A Closing Date. These restrictions do not apply to certain transfers to one or more permitted co-investors or transfers or pledges of the Preferred Stock or common stock pursuant to the terms of specified margin loans to be entered into by the Apax Investor as well as transfers effected pursuant to a merger, consolidation, or similar transaction consummated by us and transfers that are approved by our board of directors.

At any time after the 102-month anniversary of the Applicable Closing Date or upon the occurrence of a change of control triggering event (as defined in the Certificates of Designation), the holders of the applicable series of Preferred Stock will have the right to cause us to redeem all of the outstanding shares of Preferred Stock for cash at a redemption price equal to 100% of the liquidation preference of the shares of such series, plus any accrued and unpaid dividends to, but excluding, the redemption date. Therefore, the Preferred Stock has been classified as temporary equity on our condensed consolidated balance sheet as of October 31, 2021, separate from permanent equity, as the potential required repurchase of the Preferred Stock, however remote in likelihood, is not solely under our control.

As of October 31, 2021, the Preferred Stock was not redeemable, and we have concluded that it is currently not probable of becoming redeemable, including from the occurrence of a change in control triggering event. The holders' redemption rights which occur at the 102-month anniversary of the Applicable Closing Date are not considered probable because there is a more than remote likelihood that the Mandatory Conversion may occur prior to such redemption rights. We therefore did not adjust the carrying amount of the Preferred Stock to its current redemption amount, which was its liquidation preference, at October 31, 2021 plus accrued and unpaid dividends. As of October 31, 2021, the stated value of the liquidation preference for each series of Preferred Stock was $200.0 million and cumulative, unpaid dividends on the Series A Preferred Stock and the Series B Preferred Stock were $3.5 million and $3.5 million, respectively.

Future Tranche Right

We determined that our obligation to issue and the Apax Investor's obligation to purchase 200,000 shares of the Series B Preferred Stock in connection with the completion of the Spin-Off and the satisfaction of other customary closing conditions (the "Future Tranche Right") met the definition of a freestanding financial instrument as the Future Tranche Right is legally detachable and separately exercisable from the Series A Preferred Stock. At issuance, we allocated a portion of the proceeds from the issuance of the Series A Preferred Stock to the Future Tranche Right based upon its fair value at such time, with the remaining proceeds being allocated to the Series A Preferred Stock. The Future Tranche Right was remeasured at fair value each reporting period until the settlement of the right (at the time of the issuance of the Series B Preferred Stock), and changes in its fair value have been recognized as a non-cash charge or benefit within other income (expense), net on the condensed consolidated statement of operations.

At the Series A Closing Date, the Future Tranche Right was recorded as an asset of $3.4 million, as the purchase price of the Series B Preferred Stock was greater than its estimated fair value at the expected settlement date. This resulted in a $203.4 million carrying value, before direct and incremental issuance costs, for the Series A Preferred Stock.

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Immediately prior to the issuance of the Series B Preferred Stock the Future Tranche Right was remeasured to fair value and as a result we recorded a non-cash benefit of $15.8 million related to the change in fair value of the Future Tranche Right for the three months ended April 30, 2021, within other income (expense), net. Upon the issuance of the Series B Preferred Stock in April 2021, the Future Tranche Right was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. This resulted in a $237.0 million carrying value, before direct and incremental issuance costs, for the Series B Preferred Stock. As a result of the issuance of the Series B Preferred Stock, we no longer recognize changes in the fair value of the Future Tranche Right in our condensed consolidated statements of operations. For the three and nine months ended October 31, 2020, we recognized non-cash charges of $9.2 million and $22.8 million, respectively,within other (expense) income, net in the condensed consolidated statement of operations for the change in the fair value of the Future Tranche Right. Please refer to Note 13, "Fair Value Measurements" for additional information regarding valuations of the Future Tranche Right.


11. STOCKHOLDERS' EQUITY
Common Stock Dividends

We did not declare or pay any cash dividends on our common stock during the nine months ended October 31, 2021 and 2020. Under the terms of our 2017 Credit Agreement, we are subject to certain restrictions on declaring and paying dividends on our common stock.

In connection with the Spin-Off, each holder of Verint's common stock received one ordinary share of Cognyte for every share of common stock of Verint held of record as of the close of business on January 25, 2021.

Stock Repurchase Programs

On December 4, 2019, we announced that our board of directors had authorized a stock repurchase program whereby we were authorized to repurchase up to $300.0 million of common stock over the period ending on February 1, 2021. We made $34.0 million and $116.1 million in repurchases under the program during the years ended January 31, 2021 and January 31, 2020, respectively. This program expired on February 1, 2021.

On March 31, 2021, we announced that our board of directors had authorized a stock repurchase program whereby we were authorized to repurchase up to a number of shares of common stock approximately equal to the number of shares to be issued as equity compensation during the fiscal year ending January 31, 2022. During the three months ended April 30, 2021, we repurchased 1,600,000 shares of our common stock at a cost of $75.4 million under this program. There have been no repurchases under this program subsequent to April 30, 2021, and no further repurchases are expected under this program for the year ending January 31, 2022.

On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Repurchases are expected to be financed with available cash in the United States or through borrowing from the 2021 Revolving Credit Facility, subject to compliance with applicable laws, rules and regulations. Please refer to Note 17, "Subsequent Event", for more information regarding this stock repurchase program.

Treasury Stock
Repurchased shares of common stock are typically recorded as treasury stock, at cost, but may from time to time be retired. We periodically purchase common stock from directors, officers, and other employees to facilitate income tax withholding by us or the payment of required income taxes by such holders in connection with the vesting of equity awards. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired.

During the three months ended July 31, 2021, in connection with the maturity of our 2014 Notes, we issued approximately 1,250,000 treasury shares with an average cost of $47.30 per share to the holders of the 2014 Notes in satisfaction of the conversion premium, which was recorded as a $59.1 million reduction of treasury stock and additional paid-in capital. Additionally, we received approximately 1,250,000 shares of our common stock having a value of $57.7 million from the counterparties under the Note Hedges, as well as approximately 42,000 shares of our common stock having a value of $2.0 million from the counterparties related to the reimbursement for the in-the-money portion of the Repurchased 2014 Notes under the Note Hedge agreements, which was recorded as an increase to treasury stock and additional paid-in capital.

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During the nine months ended October 31, 2021, we repurchased approximately 1,613,000 shares of our common stock for a cost of $75.9 million, which includes $75.4 million of share repurchases under the 2021 share repurchase program described above, and other repurchases to facilitate income tax withholding upon vesting of equity awards. On March 30, 2021, our board of directors approved the retirement of such repurchased shares of common stock and any other shares held as treasury stock, at management's discretion. During the nine months ended October 31, 2021, we retired 1,058,300 shares of our common stock with a cost of $49.6 million that had been repurchased under the 2021 share repurchase program described above, as well as all of our common stock held as treasury stock, which totaled 5,000,738 shares, and restored them to the status of authorized and unissued shares. The aggregate cost of the treasury stock retired was $235.0 million, which was recorded as a reduction of common stock and additional paid-in capital.

During the nine months ended October 31, 2020, we repurchased approximately 613,000 shares of our common stock for a cost of $34.0 million under the 2019 share repurchase program described above.

At January 31, 2021, we held approximately 4,404,000 shares of treasury stock with a cost of $208.1 million.

Issuance of Convertible Preferred Stock

On December 4, 2019, in conjunction with the planned separation of our businesses into two independent publicly traded companies, we announced that an affiliate of Apax Partners would invest up to $400.0 million in us, in the form of convertible preferred stock. Under the terms of the Investment Agreement, the Apax Investor purchased $200.0 million of our Series A Preferred Stock, which closed on May 7, 2020. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock, which closed on April 6, 2021. As of October 31, 2021, Apax's ownership in us on an as-converted basis was approximately 12.8%. Please refer to Note 10, "Convertible Preferred Stock" for a more detailed discussion of the Apax investment.

Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities and derivative financial instruments designated as hedges. Accumulated other comprehensive income (loss) is presented as a separate line item in the stockholders' equity section of our condensed consolidated balance sheets. Accumulated other comprehensive income (loss) items have no impact on our net income as presented in our condensed consolidated statements of operations.

The following table summarizes changes to our accumulated other comprehensive income (loss) by component for the nine months ended October 31, 2021:

(in thousands) Unrealized Gains (Losses) on Foreign Exchange Contracts Designated as Hedges Unrealized Loss on Interest Rate Swap Designated as Hedge Foreign Currency Translation Adjustments Total
Accumulated other comprehensive income (loss) at January 31, 2021 $ 634 $ (13,031) $ (124,481) $ (136,878)
Distribution of Cognyte Software Ltd. (559) - 17,682 17,123
Other comprehensive income (loss) before reclassifications 180 - (2,843) (2,663)
Amounts reclassified out of accumulated other comprehensive income (loss) 136 (1,014) - (878)
Amounts reclassified upon partial early retirement of the 2017 Term Loan - (12,017) - (12,017)
Net other comprehensive (loss) income (515) 13,031 14,839 27,355
Accumulated other comprehensive income (loss) at
October 31, 2021
$ 119 $ - $ (109,642) $ (109,523)

All amounts presented in the table above are net of income taxes, if applicable. The accumulated net losses in foreign currency translation adjustments primarily reflect the strengthening of the U.S. dollar against the British pound sterling, which has resulted in lower U.S. dollar-translated balances of British pound sterling-denominated goodwill and intangible assets.
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On May 1, 2020, our interest rate swap agreement no longer qualified as a cash flow hedge for accounting purposes and as such, accumulated deferred losses on our interest rate swap that were previously recorded as a component of accumulated other comprehensive loss were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the interest rate swap, as the previously hedged interest payments occurred. On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders' equity to other income (expense) on our consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021. Please refer to Note 14, "Derivative Financial Instruments" for further information regarding our interest rate swap agreement.

The amounts reclassified out of accumulated other comprehensive income (loss) into the condensed consolidated statements of operations, with presentation location, for the three and nine months ended October 31, 2021 and 2020 were as follows:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020 Location
Unrealized gains (losses) on derivative financial instruments:
Foreign currency forward contracts $ - $ - $ 1 $ - Cost of recurring revenue
5 - 18 - Cost of nonrecurring revenue
28 28 100 28 Research and development, net
14 - 45 - Selling, general and administrative
47 28 164 28 Total, before income taxes
(7) (4) (28) (4) Provision for income taxes
$ 40 $ 24 $ 136 $ 24 Total, net of income taxes
Interest rate swap agreement $ - $ (1,356) $ (1,014) $ (3,067) Interest expense
- - (15,655) - Other income (expense), net
- (1,356) (16,669) (3,067) Total, before income taxes
- 294 3,638 666 Benefit from income taxes
$ - $ (1,062) $ (13,031) $ (2,401) Total, net of income taxes


12. INCOME TAXES
Our interim (benefit from) provision for income taxes is measured using an estimated annual effective income tax rate, adjusted for discrete items that occur within the periods presented.

For the three months ended October 31, 2021, we recorded an income tax provision of $9.3 million on pretax income of $22.9 million, which represented an effective income tax rate of 40.9%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign income, partially offset by lower statutory rates in certain foreign jurisdictions.

For the three months ended October 31, 2020, we recorded an income tax provision of $1.1 million on a pretax loss of $1.0 million, which represented a negative effective income tax rate of 106.6%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, limitations on certain tax deductions, and a change in the fair value of the Future Tranche Right associated with the Series A Preferred stock, offset by lower statutory rates in several foreign jurisdictions.

For the nine months ended October 31, 2021, we recorded an income tax provision of $13.5 million on pre-tax income of $33.4 million, which represented an effective income tax rate of 40.4%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign income and the impact of a tax rate change in a foreign
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jurisdiction, offset by a change in the fair value of the Future Tranche Right associated with the Series A Preferred Stock and by lower statutory rates in certain foreign jurisdictions.

For the nine months ended October 31, 2020, we recorded an income tax provision of $9.8 million on a pre-tax loss of $16.1 million, which represented a negative effective income tax rate of 60.7%. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, limitations on certain tax deductions, and a change in the fair value of the Future Tranche Right associated with the Series A Preferred Stock, offset by lower statutory rates in several foreign jurisdictions and the favorable impact of recently issued regulations.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred income tax assets on a jurisdictional basis at each reporting date. Accounting guidance for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred income tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred income tax assets are not more-likely-than-not realizable, we establish a valuation allowance. We determined that there is sufficient negative evidence to maintain the valuation allowances against certain state and foreign deferred income tax assets as a result of historical losses in the most recent three-year period in certain state and foreign jurisdictions. We intend to maintain valuation allowances until sufficient positive evidence exists to support a reversal.

We had unrecognized income tax benefits of $85.8 million and $84.8 million (excluding interest and penalties) as of October 31, 2021 and January 31, 2021, respectively, that if recognized, would impact our effective income tax rate. The accrued liability for interest and penalties was $3.2 million and $3.0 million at October 31, 2021 and January 31, 2021, respectively. Interest and penalties are recorded as a component of the provision for income taxes in our condensed consolidated statements of operations. We regularly assess the adequacy of our provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, we may adjust the reserves for unrecognized income tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitation. Further, we believe that it is reasonably possible that the total amount of unrecognized income tax benefits at October 31, 2021 could decrease by approximately $1.6 million in the next twelve months as a result of settlement of certain tax audits or lapses of statutes of limitation. Such decreases may involve the payment of additional income taxes, the adjustment of deferred income taxes including the need for additional valuation allowances, and the recognition of income tax benefits. Our income tax returns are subject to ongoing tax examinations in several jurisdictions in which we operate. We also believe that it is reasonably possible that new issues may be raised by tax authorities or developments in tax audits may occur, which would require increases or decreases to the balance of reserves for unrecognized income tax benefits; however, an estimate of such changes cannot reasonably be made. See Note 2, "Discontinued Operations" for discussion related to the Tax Matters agreement entered into between and us and Cognyte as result of the Spin-Off.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. However, we have deferred the timing of employer payroll taxes and accelerated the refund of AMT credits as permitted by the CARES Act.


13. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis consisted of the following as of October 31, 2021 and January 31, 2021:

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October 31, 2021
Fair Value Hierarchy Category
(in thousands) Level 1 Level 2 Level 3
Assets:
Money market funds $ 147,029 $ - $ -
Foreign currency forward contracts - 143 -
Contingent consideration receivable - - 329
Total assets $ 147,029 $ 143 $ 329
Liabilities:
Foreign currency forward contracts $ - $ 3 $ -
Contingent consideration - business combinations - - 7,615
Option to acquire noncontrolling interests of consolidated subsidiaries - - 4,000
Total liabilities $ - $ 3 $ 11,615
January 31, 2021
Fair Value Hierarchy Category
(in thousands) Level 1 Level 2 Level 3
Assets:
Money market funds $ 342,090 $ - $ -
Foreign currency forward contracts - 136 -
Contingent consideration receivable - - 565
Total assets $ 342,090 $ 136 $ 565
Liabilities:
Foreign currency forward contracts $ - $ 48 $ -
Interest rate swap agreements - 17,881 -
Future tranche right - - 52,772
Contingent consideration - business combinations - - 15,704
Option to acquire noncontrolling interests of consolidated subsidiaries - - 3,250
Total liabilities $ - $ 17,929 $ 71,726

We evaluated the Future Tranche Right associated with the Series A Preferred Stock issued on May 7, 2020 and determined that the Future Tranche Right was a freestanding financial instrument. The Future Tranche Right was initially recorded as an asset and was re-measured at each reporting period until the redemption feature was exercised in connection with the sale and issuance of the Series B Preferred Stock on April 6, 2021. Immediately prior to the issuance of the Series B Preferred Stock the Future Tranche Right was remeasured to fair value with the change in fair value recognized as a component of other income (expense). Upon the issuance of the Series B Preferred Stock, the Future Tranche Right liability was settled, resulting in a reclassification of the $37.0 million fair value of the Future Tranche Right liability at that time to the carrying value of the Series B Preferred Stock. Please refer to Note 10, "Convertible Preferred Stock" for additional information regarding the Future Tranche Right and preferred stock investment.

The following table presents the changes in the estimated fair value of the Future Tranche Right measured using significant unobservable inputs (Level 3) for the nine months ended October 31, 2021 and 2020.

Nine Months Ended
October 31,
(in thousands) 2021 2020
Fair value measurement at beginning of period $ (52,772) $ -
Fair value of future tranche right upon issuance of the Series A Preferred Stock - 3,374
Change in fair value, recorded in other income (expense), net 15,810 (22,834)
Reclassification of future tranche right liability upon settlement 36,962 -
Fair value measurement at end of period $ - $ (19,460)

In January 2020, we completed the sale of an insignificant subsidiary. In accordance with the terms of the sale agreement, 100% of the aggregate purchase price is contingent in nature based on a percentage of net sales of the former subsidiary's products during the thirty-six month period following the transaction closing. We include the fair value of the contingent
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consideration receivable within prepaid expenses and other current assets and other assets on our condensed consolidated balance sheet. The estimated fair value of this asset as of October 31, 2021, which is measured using Level 3 inputs, was $0.3 million. We received payments of $0.2 million, and the change in the estimated fair value of this contingent receivable was not material, during the nine months ended October 31, 2021. The estimated fair value of this asset as of October 31, 2020 was $0.6 million. We received payments of $0.1 million, and the change in the estimated fair value of this contingent receivable was not material, during the nine months ended October 31, 2020.

The following table presents the changes in the estimated fair values of our liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended October 31, 2021 and 2020:

Nine Months Ended
October 31,
(in thousands) 2021 2020
Fair value measurement at beginning of period $ 15,704 $ 31,367
Contingent consideration liabilities recorded for business combinations 900 -
Changes in fair values, recorded in operating expenses 669 (2,847)
Payments of contingent consideration (9,560) (13,980)
Foreign currency translation and other (98) 188
Fair value measurement at end of period $ 7,615 $ 14,728
Our estimated liability for contingent consideration represents potential payments of additional consideration for business combinations, payable if certain defined performance goals are achieved. Changes in fair value of contingent consideration are recorded in the condensed consolidated statements of operations within selling, general and administrative expenses.

During the year ended January 31, 2017, we acquired two majority owned subsidiaries for which we hold an option to acquire the noncontrolling interests. We account for the option as an in-substance investment in the noncontrolling common stock of each such subsidiary. We currently expect to exercise the option to acquire the noncontrolling interests prior to its expiration on January 31, 2022. As of October 31, 2021, we included the fair value of the option within accrued expenses and other current liabilities and did not recognize noncontrolling interests in these subsidiaries. As of January 31, 2021, we included the fair value of the option within other liabilities on our condensed consolidated balance sheet. The following table presents the change in the estimated fair value of this liability, which is measured using Level 3 inputs, for the nine months ended October 31, 2021 and 2020:

Nine Months Ended
October 31,
(in thousands) 2021 2020
Fair value measurement at beginning of period $ 3,250 $ 2,900
Change in fair value, recorded in operating expenses 750 300
Fair value measurement at end of period $ 4,000 $ 3,200
On April 13, 2021, we paid $16.5 million to the counterparty to settle the interest rate swap agreement prior to its June 2024 maturity, and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders' equity to other income (expense), net on our consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021. Please refer to Note 14, "Derivative Financial Instruments" for further information regarding our interest rate swap agreement.

There were no transfers between levels of the fair value measurement hierarchy during the nine months ended October 31, 2021 and 2020.

Fair Value Measurements
Money Market Funds- We value our money market funds using quoted active market prices for such funds.

Short-term Investments, Corporate Debt Securities, and Commercial Paper - The fair values of short-term investments, as well as corporate debt securities and commercial paper classified as cash equivalents, are estimated using observable market prices
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for identical securities that are traded in less-active markets, if available. When observable market prices for identical securities are not available, we value these short-term investments using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model.

Foreign Currency Forward Contracts- The estimated fair value of foreign currency forward contracts is based on quotes received from the counterparties thereto. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and market foreign currency exchange rates using readily observable market prices for similar contracts.

Future Tranche Right - The fair value of the Future Tranche Right was classified within Level 3 of the fair value hierarchy because it was valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. The fair value of the Future Tranche Right was estimated using a binomial tree model to estimate the value of the Series B Preferred Stock and a Monte Carlo simulation to estimate our stock price post-Spin-Off, which we believe was reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of the Future Tranche Right. The fair value of the Future Tranche Right also reflected the likelihood of the Series B Preferred Stock being issued, which management considered to be highly probable for all periods the Future Tranche Right was outstanding.

Significant inputs and assumptions used in the valuation model immediately prior to the settlement date, April 6, 2021, and as of the issuance date, May 7, 2020, are as follows:

April 6, May 7,
2021 2020
Risk-free interest rate for preferred stock 2.35 % 1.31 %
Implied credit spread 6.78 % 10.78 %
Expected volatility 30.00 % 30.00 %
Verint common stock price $ 45.91 $ 45.44

Interest Rate Swap Agreements - The fair value of our interest rate swap agreements were based in part on data received from the counterparty, and represented the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.
Contingent Consideration Assets and Liabilities -Business Combinations and Divestitures- The fair value of the contingent consideration related to business combinations and divestitures is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. We remeasure the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within selling, general, and administrative expenses. Increases or decreases in discount rates would have inverse impacts on the related fair value measurements, while favorable or unfavorable changes in expectations of achieving performance targets would result in corresponding increases or decreases in the related fair value measurements. We utilized discount rates ranging from 2.5% to 2.6%, with a weighted average discount rate of 2.5%, in our calculations of the estimated fair values of our contingent consideration liabilities as of October 31, 2021. We utilized discount rates ranging from 3.3% to 3.8%, with a weighted average discount rate of 3.5% in our calculations of the estimated fair values of our contingent consideration liabilities as of January 31, 2021. We utilized discount rates ranging from 2.4% to 3.0%, with a weighted average discount rate of 2.7%, in our calculation of the estimated fair value of our contingent consideration asset as of October 31, 2021. We utilized discount rates ranging from 3.3% to 4.0%, with a weighted average discount rate of 3.7% in our calculation of the estimated fair value of our contingent consideration asset as of January 31, 2021.

Option to Acquire Noncontrolling Interests of Consolidated Subsidiaries- The fair value of the option is determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. This fair value measurement is based upon significant inputs not observable in the market. We remeasure the fair value of the option at each reporting period, and any changes in fair value are recorded within selling, general, and administrative expenses. We utilized discount rates of 9.0% and 8.5% in our calculations of the estimated fair value of the option as of October 31, 2021 and January 31, 2021, respectively.

Other Financial Instruments
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The carrying amounts of accounts receivable, contract assets, accounts payable, and accrued liabilities and other current liabilities approximate fair value due to their short maturities.

The estimated fair values of our term loan borrowings were approximately $100 million and $409 million at October 31, 2021 and January 31, 2021, respectively. The estimated fair values of the term loans are based upon indicative bid and ask prices as determined by the agent responsible for the syndication of our term loans. We consider these inputs to be within Level 3 of the fair value hierarchy because we cannot reasonably observe activity in the limited market in which participation in our term loans are traded. The indicative prices provided to us as at each of October 31, 2021 and January 31, 2021 did not significantly differ from par value. The estimated fair value of our revolving credit borrowings, if any, is based upon indicative market values provided by one of our lenders.

The estimated fair value of our 2014 Notes, which matured in June 2021, was approximately $440 million at January 31, 2021. The estimated fair value of our 2021 Notes was approximately $313 million at October 31, 2021. The estimated fair values of the 2014 Notes and 2021 Notes were determined based on quoted bid and ask prices in the over-the-counter market in which the 2014 Notes and 2021 Notes traded. We consider these inputs to be within Level 2 of the fair value hierarchy.

Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right-of-use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset's projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.

As of October 31, 2021, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $5.1 million, of which $4.4 million was remeasured to fair value based on an observable transaction during the nine months ended October 31, 2021. These investments are included within other assets on the condensed consolidated balance sheets. An unrealized gain of $3.1 million, which adjusted the carrying value of a noncontrolling equity investment based on an observable transaction was recorded in other income (expense), net on the condensed consolidated statement of operations for the nine months ended October 31, 2021. As of January 31, 2021, the carrying amount of our noncontrolling equity investments in privately-held companies without readily determinable fair values was $2.0 million. There were no observable price changes in our investments in privately-held companies during the year ended January 31, 2021. We did not recognize any impairments during the three and nine months ended October 31, 2021 and 2020.


14. DERIVATIVE FINANCIAL INSTRUMENTS

Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.

Foreign Currency Forward Contracts

Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.

We held outstanding foreign currency forward contracts with notional amounts of $7.2 million and $6.6 million as of October 31, 2021 and January 31, 2021, respectively.

Interest Rate Swap Agreement

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In April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to partially mitigate risks associated with the variable interest rate on our 2017 Term Loan for periods following the termination of our prior interest rate swap in September 2019, under which we paid interest at a fixed rate of 2.949% and received variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the "2018 Swap"). The effective date of the 2018 Swap was September 6, 2019, and settlements with the counterparty began on November 1, 2019, and occurred on a quarterly basis. The 2018 Swap had a termination date of June 29, 2024.

Prior to May 1, 2020, the 2018 Swap was designated as a cash flow hedge for accounting purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and were reclassified into the condensed consolidated statement of operations within interest expense in the periods in which the hedged transactions affected earnings.

On May 1, 2020, which was an interest rate reset date on our 2017 Term Loan, we selected an interest rate other than three-month LIBOR. As a result, the 2018 Swap, which was designated specifically to hedge three-month LIBOR interest payments, no longer qualified as a cash flow hedge. Subsequent to May 1, 2020, changes in fair value of the 2018 Swap were accounted for as a component of other income (expense), net. Accumulated deferred losses on the 2018 Swap of $20.4 million, or $16.0 million after taxes, at May 1, 2020 that were previously recorded as a component of accumulated other comprehensive loss, were being reclassified to the condensed consolidated statement of operations as interest expense over the remaining term of the 2018 Swap, as the previously hedged interest payments occurred.

On April 13, 2021, we paid $16.5 million to the counterparty to settle the 2018 Swap agreement prior to its June 2024 maturity. Upon settlement, we recorded an unrealized gain of $1.3 million in other income (expense) to adjust the 2018 Swap to its fair value at settlement date and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders' equity to other income (expense), net on our condensed consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021.

Fair Values of Derivative Financial Instruments
The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of October 31, 2021 and January 31, 2021 were as follows:

Fair Value at
October 31, January 31,
(in thousands) Balance Sheet Classification 2021 2021
Derivative assets:
Foreign currency forward contracts:
Designated as cash flow hedges Prepaid expenses and other current assets $ 143 $ 136
Total derivative assets $ 143 $ 136
Derivative liabilities:
Foreign currency forward contracts:
Designated as cash flow hedges Accrued expenses and other current liabilities $ 3 $ 47
Not designated as hedging instruments Accrued expenses and other current liabilities - 1
Interest rate swap agreement:
Not designated as a hedging instrument Accrued expenses and other current liabilities - 4,316
Not designated as a hedging instrument Other liabilities - 13,565
Total derivative liabilities $ 3 $ 17,929

Derivative Financial Instruments in Cash Flow Hedging Relationships

The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss ("AOCL") and on the condensed consolidated statements of operations for the three and nine months ended October 31, 2021 and 2020 were as follows:
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Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Net gains (losses) recognized in AOCL:
Foreign currency forward contracts $ 153 $ 47 $ 215 $ 55
Interest rate swap agreement - - - (7,535)
$ 153 $ 47 $ 215 $ (7,480)
Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations:
Foreign currency forward contracts $ 47 $ 28 $ 164 $ 28
Interest rate swap agreement - (1,356) (16,669) (3,067)
$ 47 $ (1,328) $ (16,505) $ (3,039)
For information regarding the line item locations of the net gains (losses) on derivative financial instruments reclassified out of AOCL into the condensed consolidated statements of operations, see Note 11, "Stockholders' Equity".

All of the foreign currency forward contracts underlying the net unrealized gains recorded in our accumulated other comprehensive loss at October 31, 2021 mature within twelve months, and therefore we expect all such gains to be reclassified into earnings within the next twelve months.
Derivative Financial Instruments Not Designated as Hedging Instruments
Losses recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three and nine months ended October 31, 2021 and 2020 were as follows:

Classification in Condensed Consolidated Statements of Operations Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Interest rate swap agreement Other expense, net $ - $ (949) $ (14,374) $ (812)


15. STOCK-BASED COMPENSATION

Stock-Based Compensation Plan

On June 20, 2019, our stockholders approved the Verint Systems Inc. 2019 Long-Term Stock Incentive Plan (the "2019 Plan"). Upon approval of the 2019 Plan, new awards are no longer permitted under our prior stock-based compensation plan (the "2017 Amended Plan"). Awards outstanding at June 20, 2019 under the 2017 Amended Plan or other previous stock-based compensation plans were not impacted by the approval of the 2019 Plan. Collectively, our stock-based compensation plans are referred to herein as the "Plans".

The 2019 Plan authorizes our board of directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance awards, other stock-based awards, and performance compensation awards. Subject to adjustment as provided in the 2019 Plan, up to an aggregate of (i) 9,475,000 shares of our common stock plus (ii) the number of shares of our common stock available for issuance under the 2017 Amended Plan as of June 20, 2019, plus (iii) the number of shares of our common stock that become available for issuance as a result of awards made under the 2017 Amended Plan or the 2019 Plan that are forfeited, cancelled, exchanged, or that terminate or expire, may be issued or transferred in connection with awards under the 2019 Plan. Each stock option or stock-settled stock appreciation right granted under the 2019 Plan will reduce the available plan capacity by one share and each other award denominated in shares that is granted under the 2019 Plan will reduce the available plan capacity by 2.38 shares.

In March 2021, our board of directors approved an adjustment of the available plan capacity to the 2019 Plan to 14,239,656 shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off.

Stock-Based Compensation Expense

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We recognized stock-based compensation expense in the following line items on the condensed consolidated statements of operations for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Cost of revenue - recurring $ 540 $ 584 $ 1,531 $ 1,321
Cost of revenue - nonrecurring 690 1,169 2,387 2,126
Research and development, net 1,949 1,241 5,749 3,910
Selling, general and administrative 13,416 12,535 41,422 32,179
Total stock-based compensation expense $ 16,595 $ 15,529 $ 51,089 $ 39,536

The following table summarizes stock-based compensation expense by type of award for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands) 2021 2020 2021 2020
Restricted stock units and restricted stock awards $ 14,386 $ 11,777 $ 44,623 $ 33,073
Stock bonus program and bonus share program 2,203 3,748 6,455 6,460
Total equity-settled awards 16,589 15,525 51,078 39,533
Phantom stock units (cash-settled awards) 6 4 11 3
Total stock-based compensation expense $ 16,595 $ 15,529 $ 51,089 $ 39,536
Awards are generally subject to multi-year vesting periods. We recognize compensation expense for awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, reduced by estimated forfeitures.

Awards under our stock bonus and bonus share programs are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amounts that are generally known at inception of the obligation, to be settled with a variable number of shares of our common stock, which for awards under our stock bonus program is determined using a discounted average price of our common stock.

Restricted Stock Units and Performance Stock Units
We periodically award RSUs to our directors, officers, and other employees. These awards contain various vesting conditions and are subject to certain restrictions and forfeiture provisions prior to vesting. Some of these awards to executive officers and certain employees vest upon the achievement of specified performance goals or market conditions (performance stock units or "PSUs").

The following table ("Award Activity Table") summarizes activity for RSUs, PSUs, and other stock awards that reduce available Plan capacity under the Plans for the nine months ended October 31, 2021 and 2020:

Nine Months Ended October 31,
2021 2020
(in thousands, except per share data) Shares or Units Weighted-Average Grant Date Fair Value Shares or Units Weighted-Average Grant Date Fair Value
Beginning balance 2,950 $ 35.97 1,879 $ 52.96
Granted 1,503 $ 48.00 1,399 $ 46.82
Released (1,576) $ 34.87 (1,109) $ 47.53
Forfeited (185) $ 39.43 (159) $ 53.17
Ending balance 2,692 $ 43.10 2,010 $ 51.67

The beginning balance of the outstanding shares for the nine months ended October 31, 2021 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The related weighted-average
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grant date fair value for the beginning outstanding shares reflects the adjusted fair value of the awards on the Spin-Off Date. The adjusted shares preserve the same terms and conditions and vesting schedules as the original awards.

The beginning balance of the shares and the respective weighted-average grant date fair values for the nine months ended October 31, 2020 reflect the shares and fair values on the original date of grant without adjustment.

With respect to our stock bonus program, activity presented in the table above only includes shares earned and released in consideration of the discount provided under that program. Consistent with the provisions of the Plans under which such shares are issued, other shares issued under the stock bonus program are not included in the table above because they do not reduce available plan capacity (since such shares are deemed to be purchased by the grantee at fair value in lieu of receiving an earned cash bonus). Activity presented in the table above includes all shares awarded and released under the bonus share program. Further details appear below under "Stock Bonus Program" and "Bonus Share Program".

Our RSU awards may include a provision which allows the awards to be settled with cash payments upon vesting, rather than with delivery of common stock, at the discretion of our board of directors. As of October 31, 2021, for such awards that are outstanding, settlement with cash payments was not considered probable, and therefore these awards have been accounted for as equity-classified awards and are included in the table above.

In order to achieve an equitable modification of the existing awards following the Spin-Off, we converted unvested awards as of February 1, 2021 by a factor of approximately 1.45, resulting in additional awards being granted to remaining employees denominated solely in Verint common stock. As noted above, a corresponding adjustment was also made to the available capacity under the 2019 Plan.

The following table summarizes PSU activity in isolation under the Plans for the nine months ended October 31, 2021 and 2020 (these amounts are already included in the Award Activity Table above for 2021 and 2020):

Nine Months Ended
October 31,
(in thousands) 2021 2020
Beginning balance 635 423
Granted 213 297
Released (274) (182)
Forfeited (24) (27)
Ending balance 550 511

Consistent with the table above, the beginning balance of the outstanding shares for the nine months ended October 31, 2021 reflects the adjusted shares based on an adjustment ratio of approximately 1.45 as a result of the Spin-Off on February 1, 2021. The beginning balance of the outstanding shares of the nine months ended October 31, 2020 reflects the number of shares on the date of grant without adjustment.

Excluding PSUs, we granted 1,290,000 RSUs during the nine months ended October 31, 2021.

As of October 31, 2021, there was approximately $79.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 1.7 years.

Stock Bonus Program

Our stock bonus program permits eligible employees to receive a portion of their earned bonuses, otherwise payable in cash, in the form of discounted shares of our common stock. Executive officers are eligible to participate in this program to the extent that shares remain available for awards following the enrollment of all other participants. Shares awarded to executive officers with respect to the discount feature of the program are subject to a one-year vesting period. This program is subject to annual funding approval by our board of directors and an annual cap on the number of shares that can be issued. Subject to these limitations, the number of shares to be issued under the program for a given year is generally determined using a 5-day trailing average price of our common stock when the awards are calculated, reduced by a discount determined by the board of directors each year (the "discount"). To the extent that this program is not funded in a given year or the number of shares of common stock needed to fully satisfy employee enrollment exceeds the annual cap, the applicable portion of the employee bonuses will generally revert to being paid in cash.
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For bonuses in respect of the year ended January 31, 2021, our board of directors approved the use of up to 200,000 shares of common stock, and a discount of 15%, for awards under this program. However, the program was not used and no shares were issued in respect of the performance period ended January 31, 2021.

In March 2021, our board of directors approved the use of up to 300,000 shares of common stock, and a discount of 15%, for awards under our stock bonus program for the performance period ending January 31, 2022.

Bonus Share Program

Under our bonus share program, we may provide discretionary bonuses to employees or pay earned bonuses that are outside the stock bonus program in the form of shares of common stock. Unlike the stock bonus program, there is no enrollment for this program and no discount feature.

For bonuses in respect of the year ended January 31, 2021, our board of directors approved the use of up to 300,000 shares of common stock under the bonus share program, reduced by any shares issued under the stock bonus program in respect of the same performance period. However, the program was not used, and no shares were issued in respect of the performance period ended January 31, 2021.

For bonuses in respect of the year ending January 31, 2022, our board of directors has approved the use of up to 300,000 shares of common stock under this program, reduced by any shares used under the stock bonus program in respect of the same performance period (the maximum number of shares issuable under the stock bonus program and the bonus share program collectively for the performance period ending January 31, 2022 will not exceed 300,000).

The combined accrued liabilities for the stock bonus program and the bonus share program was $6.4 million at October 31, 2021. As noted above, no awards were made under the stock bonus program or the bonus share program for the performance period ended January 31, 2021 and bonuses for such period were paid in cash.


16. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In March 2009, one of our former employees, Ms. Orit Deutsch, commenced legal actions in Israel against our primary Israeli subsidiary, Verint Systems Limited ("VSL") (Case Number 4186/09) and against our affiliate CTI (Case Number 1335/09). Also, in March 2009, a former employee of Comverse Limited (CTI's primary Israeli subsidiary at the time), Ms. Roni Katriel, commenced similar legal actions in Israel against Comverse Limited (Case Number 3444/09). In these actions, the plaintiffs generally sought to certify class action suits against the defendants on behalf of current and former employees of VSL and Comverse Limited who had been granted stock options in Verint and/or CTI and who were allegedly damaged as a result of a suspension on option exercises during an extended filing delay period that is discussed in our and CTI's historical public filings. On June 7, 2012, the Tel Aviv District Court, where the cases had been filed or transferred, allowed the plaintiffs to consolidate and amend their complaints against the three defendants: VSL, CTI, and Comverse Limited.

On October 31, 2012, CTI distributed all of the outstanding shares of common stock of Comverse, Inc., its principal operating subsidiary and parent company of Comverse Limited, to CTI's shareholders (the "Comverse Share Distribution"). In the period leading up to the Comverse Share Distribution, CTI either sold or transferred substantially all of its business operations and assets (other than its equity ownership interests in Verint and in its then-subsidiary, Comverse, Inc.) to Comverse, Inc. or to unaffiliated third parties. As the result of these transactions, Comverse, Inc. became an independent company and ceased to be affiliated with CTI, and CTI ceased to have any material assets other than its equity interests in Verint. Prior to the completion of the Comverse Share Distribution, the plaintiffs sought to compel CTI to set aside up to $150.0 million in assets to secure any future judgment, but the District Court did not rule on this motion. In February 2017, Mavenir Inc. became successor-in-interest to Comverse, Inc.

On February 4, 2013, Verint acquired the remaining CTI shell company in a merger transaction (the "CTI Merger"). As a result of the CTI Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the foregoing legal actions. However, under the terms of a Distribution Agreement entered into in connection with the Comverse Share Distribution, we, as successor to CTI, are entitled to indemnification from Comverse, Inc. (now Mavenir) for any losses we may suffer in our capacity as successor to CTI related to the foregoing legal actions.
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Following an unsuccessful mediation process, on August 28, 2016, the District Court (i) denied the plaintiffs' motion to certify the suit as a class action with respect to all claims relating to Verint stock options and (ii) approved the plaintiffs' motion to certify the suit as a class action with respect to claims of current or former employees of Comverse Limited (now part of Mavenir) or of VSL who held unexercised CTI stock options at the time CTI suspended option exercises. The court also ruled that the merits of the case would be evaluated under New York law.

As a result of this ruling (which excluded claims related to Verint stock options from the case), one of the original plaintiffs in the case, Ms. Deutsch, was replaced by a new representative plaintiff, Mr. David Vaaknin. CTI appealed portions of the District Court's ruling to the Israeli Supreme Court. On August 8, 2017, the Israeli Supreme Court partially allowed CTI's appeal and ordered the case to be returned to the District Court to determine whether a cause of action exists under New York law based on the parties' expert opinions.

Following two unsuccessful rounds of mediation in mid to late 2018 and in mid-2019, the proceedings resumed. On April 16, 2020, the District Court accepted plaintiffs' application to amend the motion to certify a class action and set deadlines for filing amended pleadings by the parties. CTI submitted a motion to appeal the District Court's decision to the Supreme Court, as well as a motion to stay the proceedings in the District Court pending the resolution of the appeal. On July 6, 2020, the Supreme Court granted the motion for a stay. On July 27, 2020, the plaintiffs filed their response on the merits of the motion for leave to appeal, and the parties are waiting for further instructions or decisions from the Supreme Court.

On February 1, 2021, we completed the Spin-Off. As a result of the Spin-Off, Cognyte is now an independent, publicly traded company. Under the terms of the Separation and Distribution Agreement entered into between Verint and Cognyte, Cognyte has agreed to indemnify Verint for Cognyte's share of any losses that Verint may suffer related to the foregoing legal actions either in its capacity as successor to CTI, to the extent not indemnified by Mavenir, or due to its former ownership of Cognyte and VSL.

We are a party to various litigation matters and claims that arise from time to time in the ordinary course of our business. While we believe that the ultimate outcome of any such current matters will not have a material adverse effect on us, their outcomes are not determinable and negative outcomes may adversely affect our financial position, liquidity, or results of operations.


17. SUBSEQUENT EVENT

Stock Repurchase Program

On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Repurchases are expected to be financed with available cash in the United States or through borrowing from the 2021 Revolving Credit Facility, subject to compliance with applicable laws, rules and regulations. We may utilize a number of different methods to effect the repurchases, including open market purchases, which may include, without limitation, round lot or block transactions, including through one or more accelerated stock repurchase plans or pursuant to the terms of one or more repurchase plans in accordance with Rule 10b5-1 or Rule 10b-18 under the Securities Exchange Act of 1934. The specific timing, price, and size of purchases will depend on prevailing stock prices, general market and economic conditions, and other considerations, including the amount of cash available in the U.S. and other potential uses of cash. The program may be extended, suspended, or discontinued at any time without prior notice and does not obligate us to acquire any particular amount of common stock.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management's discussion and analysis is provided to assist readers in understanding our financial condition, results of operations, and cash flows. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended January 31, 2021 and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under "Cautionary Note on Forward-Looking Statements".


Overview

Recent Developments

Spin-Off of Cognyte Software Ltd.

On February 1, 2021, we completed the previously announced spin-off (the "Spin-Off") of Cognyte Software Ltd. ("Cognyte"), a company limited by shares incorporated under the laws of the State of Israel whose business and operations consist of our former Cyber Intelligence Solutions business (the "Cognyte Business"). The Spin-Off was completed by way of a pro rata distribution on February 1, 2021 of all of the then-issued and outstanding ordinary shares, no par value, of Cognyte to holders of record of our common stock as of the close of business on January 25, 2021. After the distribution, we do not beneficially own any ordinary shares of Cognyte and beginning February 1, 2021, we no longer consolidate Cognyte within our financial results or reflect the financial results of Cognyte within our continuing results of operations.

We incurred cumulative transaction costs of $53.0 million prior to the completion of the Spin-Off, of which $13.8 million and $27.9 million is reflected in our condensed consolidated statement of operations within discontinued operations for the three and nine months ended October 31, 2020, respectively. Transaction costs primarily consisted of costs incurred for the establishment of separate information systems for each company, along with related information technology costs, third-party advisory, consulting, legal and professional services, as well as other items that were incremental and one-time in nature that related to the Spin-Off.

In connection with the Spin-Off, we entered into several agreements with Cognyte that provide a framework for the relationship between the parties going forward, including a limited duration Transition Services Agreement under which we and Cognyte will provide and/or make available various administrative services and assets to each other for a given period based on each individual service. In no case will services be provided for more than 24 months after the Spin-Off. Services to be provided include certain services related to finance, accounting, business technology, human resources, information systems, facilities, document management and record retention and technical support. In consideration for such services, we and Cognyte will each pay fees to the other for the services provided, and those fees will generally be in amounts intended to allow the party providing services to recover all of its direct and indirect costs incurred in providing those services, plus a standard markup.

The historical results of operations and financial positions of Cognyte are reported as discontinued operations in our condensed consolidated financial statements. For further information on discontinued operations, see Note 2, "Discontinued Operations", to the condensed consolidated financial statements in Part I, Item 1 of this report. Pursuant to the Spin-Off of the Cognyte Business, we now operate in a single reportable segment, which is described in the "Our Business" section below.

Apax Investment

On December 4, 2019, we announced that an affiliate of Apax Partners would make an investment in us in an amount of up to $400.0 million. Under the terms of the Investment Agreement, on May 7, 2020 the Apax Investor purchased $200.0 million of our Series A convertible preferred stock ("Series A Preferred Stock"). In connection with the completion of the Spin-Off, on April 6, 2021 the Apax Investor purchased $200.0 million of our Series B convertible preferred stock ("Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Preferred Stock"). Further discussion regarding the Apax investments and details of the closing of both tranches appears in the "Liquidity and Capital Resources-Overview" section below.

COVID-19 Pandemic

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On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. This pandemic has caused significant economic disruption and uncertainty and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Our customers, partners, and vendors, have also implemented actions in response to the pandemic, including among others, office closings, site restrictions, and employee travel restrictions. In response to these challenges, we established remote working arrangements for our employees, limited non-essential business travel, and canceled or shifted our customer, employee, and industry events to a virtual-only format. During the first half of the year ended January 31, 2021, we also implemented certain cost-reduction actions of varying durations. Such actions included, but were not limited to, reducing our discretionary spending, decreasing capital expenditures, reconsidering the optimal uses of our cash and other capital resources, including with respect to our stock repurchases, and reducing workforce-related costs. During the first half of the year ended January 31, 2021, our revenue was adversely impacted by delays and reduced spending attributed to the impact of the pandemic on our customers' operational priorities and as a result of cost containment measures they had implemented. We saw a reduction or delay in certain large customer contracts, particularly on-premises arrangements, and limitations on access to the facilities of our customers also impacted our ability to deliver some of our products and complete certain implementations, negatively impacting our ability to recognize revenue.

We saw an improvement in the business environment during the second half of the year ended January 31, 2021, which has continued to date into the year ending January 31, 2022. During the nine months ended October 31, 2021, we continued to experience solid demand for our cloud solutions as our customers have accelerated the digitization of their customer interactions and internal operations due to the pandemic. This ongoing shift to a digital-first world has increased the importance and relevance of our solutions. Based on the improved business environment and our financial performance, we have in many cases resumed investments and other spending; however, these actions may need to be reassessed depending on how the facts and circumstances surrounding the pandemic evolve. Any such renewed cost controls may have an adverse impact on us, particularly if they remain in place for an extended period. As the pandemic has evolved, we have also 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. We expect to incur additional costs to the extent we further resume business-related travel and our employees return to our office locations, the timing and extent of which remains undetermined at this time. However, we anticipate that the ability to open offices will vary significantly from region to region based on a number of factors, including the availability of vaccines and the spread of new variants of the virus. As a result, we continue to evaluate our real estate needs to determine where we can exit, consolidate, or otherwise optimize our use of office space throughout the company. During the nine months ended October 31, 2021, we decided to exit certain leased offices, which resulted in the recognition of accelerated lease expense and other asset impairments of $2.2 million. We will continue to evaluate our real estate footprint to determine where we can exit, consolidate, or modify our office space leases, and we anticipate exiting or reducing additional office leases in the future as we continue to assess how and to what extent our employees will return to work in our offices.

Notwithstanding the strong demand for our cloud solutions and the recovery in the business environment, given the uncertainty associated with the pandemic, our ability to predict how it will impact our business, financial condition, liquidity, and financial results in future periods is limited, particularly if the pandemic fails to abate for an extended period of time or worsens.

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 CARES Act did not have a material impact on our consolidated financial condition or results of operations as of and for the nine months ended October 31, 2021. However, we have deferred the timing of employer payroll taxes and accelerated the refund of AMT credits as permitted by the CARES Act. Where taxes payable to government entities have been deferred to a later date, no reduction of expenses has been recorded.

On September 9, 2021, the U.S. federal government issued the mandatory vaccination and workplace safety protocols of Executive Order 14042 and subsequent guidance issued thereunder by the Safer Federal Workforce Task Force. This mandate applies broadly to require covered federal contractor employees on covered contracts, those who perform duties in connection with a covered contract, and those working at the same workplace as covered employees, to be fully vaccinated for COVID-19 by a recently-revised deadline of January 4, 2022, except for those that are legally entitled to an accommodation under applicable law. We are party to or perform duties under such contracts. We may similarly be required to flow-down our obligations to certain of our subcontractors and suppliers. The guidance remains subject to the interpretation of various government agencies and other entities, and questions remain regarding the specific application of the Executive Order and related guidance. As a result, if our understanding of its application to our workforce differs from our federal customers' interpretation, or many of our covered employees are unwilling to comply with the mandate, we may experience increased costs, business disruptions and attrition as a result of the mandate. Additionally, we may be subject to potential breach of
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contract claims, loss of business and assessment of fines if we or our affected subcontractors and suppliers are not able to fully comply in the time frame provided or if such subcontractors and suppliers choose to terminate their contract rather than comply.

Our Business

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.

Brands today are challenged by new workforce dynamics, ever-expanding customer engagement channels and exponentially more consumer interactions - often while facing limited budgets and resources. As a result, brands are finding it more challenging to deliver the desired customer experience. This creates an Engagement Capacity Gap™, which is widening as the digital transformation continues. Organizations are increasingly seeking technology to close this gap, solutions that are based on AI and analytics to automate workflows across enterprise silos to optimize the workforce expense and to drive an elevated consumer experience.

Verint is uniquely positioned to help organizations close the capacity gap with our differentiated Verint Cloud Platform.

Key Trends and Factors That May Impact our Performance

In addition to the impact of the COVID-19 pandemic discussed above, we see the following business trends and factors which may impact our performance:

Digital Transformation is Accelerating. Long gone are the days when customer journeys were limited to phone calls into a contact center. Today, customer journeys take place across many touchpoints in the enterprise and across many communication and collaboration platforms, with digital leading the way. Customer touchpoints take place in contact centers, in back-office and branch operations, in ecommerce, in digital marketing, in self-service, and in customer experience departments. The breadth of customer touchpoints, the rapid growth in digital interactions, and the emergence of the new workforce - with humans and bots working together - are creating demand for new solutions.

The Engagement Capacity Gap is Widening.Brands are seeking to differentiate themselves by providing consumers with a strong brand experience. But they cannot afford to do so by hiring more people. With the exponential growth in digital journeys and more demanding consumer expectations, organizations require more resources, but hiring more knowledge workers and further increasing workforce expenses is often not a sustainable solution. This creates an Engagement Capacity Gap, and as the digital transformation accelerates, the gap is widening. Brands are looking for new technology and solutions to help close the Engagement Capacity Gap.

The Market is Shifting Rapidly to Cloud-Based, AI-Driven Solutions. To effectively address the Engagement Capacity Gap, brands are seeking open, cloud-based solutions to break down silos and facilitate the sharing of data across enterprise functions. Brands are also seeking to leverage AI and other advanced data analytic tools to reduce manual work, increase workforce efficiency, and manage the new workforce of humans and bots.

As discussed above, the current COVID-19 pandemic is also a material factor that may negatively impact us and demand for our solutions.

Critical Accounting Policies and Estimates

Note 1, "Summary of Significant Accounting Policies" to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2021 describes the significant accounting policies and methods used in the preparation of the condensed consolidated financial statements appearing in this report. The accounting policies that reflect our more significant estimates, judgments and assumptions in the preparation of our condensed consolidated financial statements are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of our Annual Report on Form 10-K for the year ended January 31, 2021, and include the following:

Revenue recognition;
Accounting for business combinations;
Goodwill and other intangible assets;
Income taxes; and
Accounting for stock-based compensation.
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There were no significant changes to our critical accounting policies and estimates during the nine months ended October 31, 2021, except to the extent such policies or estimates related solely to the Cognyte Business or were no longer relevant as a result of the Spin-Off.


Results of Operations
Seasonality and Cyclicality
As is typical for many software and technology companies, our business is subject to seasonal 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, 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 incentive compensation 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, and more recently, the impact of the COVID-19 pandemic, also have an impact on our business and financial results.

Overview of Operating Results

The following table sets forth a summary of certain key financial information for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
Nine Months Ended
October 31,
(in thousands, except per share data) 2021 2020 2021 2020
Revenue $ 224,820 $ 215,222 $ 640,341 $ 605,167
Operating income $ 24,668 $ 20,057 $ 40,647 $ 39,589
Net income (loss) from continuing operations attributable to Verint Systems Inc. common shares $ 8,037 $ (5,068) $ 5,314 $ (31,907)
Net income (loss) from continuing operations per common share attributable to Verint Systems Inc.:
Basic $ 0.12 $ (0.08) $ 0.08 $ (0.49)
Diluted $ 0.12 $ (0.08) $ 0.08 $ (0.48)

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Our revenue increased approximately $9.6 million, or 4%, to $224.8 million in the three months ended October 31, 2021 from $215.2 million in the three months ended October 31, 2020. The increase consisted of an $8.6 million increase in recurring revenue and a $1.0 million increase in nonrecurring revenue. For additional details on our revenue by category, see "-Revenue". Revenue in the Americas, in Europe, the Middle East and Africa ("EMEA"), and in the Asia-Pacific ("APAC") regions represented approximately 70%, 20%, and 10%, respectively, in each of the three month periods ended October 31, 2021 and October 31, 2020. Further details of changes in revenue are provided below.

We reported operating income of $24.7 million in the three months ended October 31, 2021 compared to operating income of $20.1 million in the three months ended October 31, 2020. The increase in operating income was primarily due to an $11.3 million increase in gross profit, from $141.4 million to $152.7 million, partially offset by a $6.8 million increase in operating expenses, from $121.3 million to $128.1 million. The increase in operating expenses consisted of a $9.6 million increase in selling, general and administrative expenses, partially offset by a $2.3 million decrease in net research and development expenses and a $0.5 million decrease in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.

Net income from continuing operations attributable to Verint Systems Inc. common shares was $8.0 million, and diluted net income per common share was $0.12, in the three months ended October 31, 2021 compared to a net loss from continuing operations attributable to Verint Systems Inc. common shares of $5.1 million, and diluted net loss per common share of $0.08, in the three months ended October 31, 2020. The increase in net income from continuing operations attributable to Verint
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Systems Inc. common shares in the three months ended October 31, 2021 was primarily due to a $19.3 million decrease in total other expense, net and a $4.6 million increase in operating income as described above, partially offset by an $8.3 million increase in provision for income taxes and a $2.5 million increase in dividends on preferred stock. The decrease in total other expense, net was primarily due to the settlement of the Future Tranche Right in April 2021 upon the issuance of the Series B Preferred Stock, lower outstanding borrowings, and a decrease in debt discount amortization costs as a result of our adoption of ASU No. 2020-06. Further details of these changes are provided below.

A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates for the three months ended October 31, 2021 to average exchange rates for the three months ended October 31, 2020, the U.S. dollar weakened relative to the British pound sterling and the Australian dollar, resulting in an overall increase in our revenue, cost of revenue, and operating expenses on a U.S. dollar-denominated basis. For the three months ended October 31, 2021, had foreign currency exchange rates remained unchanged from rates in effect for the three months ended October 31, 2020, our revenue would have been approximately $1.4 million lower and our cost of revenue and operating expenses on a combined basis would have been approximately $2.3 million lower, which would have resulted in a $0.9 million increase in our operating income.

Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. Our revenue increased approximately $35.1 million, or 6%, to $640.3 million in the nine months ended October 31, 2021 from $605.2 million in the nine months ended October 31, 2020. The increase consisted of a $40.8 million increase in recurring revenue, partially offset by a $5.7 million decrease in nonrecurring revenue. For additional details on our revenue by category, see "-Revenue". Revenue in the Americas, EMEA, and APAC regions represented approximately 68%, 21%, and 11% of our total revenue, respectively, in the nine months ended October 31, 2021, compared to approximately 69%, 20%, and 11%, respectively, in the nine months ended October 31, 2020. Further details of changes in revenue are provided below.

We reported operating income of $40.6 million in the nine months ended October 31, 2021, compared to operating income of $39.6 million in the nine months ended October 31, 2020. The increase in operating income was primarily due to a $29.9 million increase in gross profit, from $393.5 million to $423.4 million, partially offset by a $28.8 million increase in operating expenses, from $353.9 million to $382.7 million. The increase in operating expenses consisted of a $34.1 million increase in selling, general and administrative expenses, partially offset by a $3.9 million decrease in net research and development expenses and a $1.4 million decrease in amortization of other acquired intangible assets. Further details of changes in operating income are provided below.

Net income from continuing operations attributable to Verint Systems Inc. common shares was $5.3 million, and diluted net income per common share was $0.08, in the nine months ended October 31, 2021 compared to a net loss from continuing operations attributable to Verint Systems Inc. common shares of $31.9 million, and diluted net loss per common share of $0.48, in the nine months ended October 31, 2020. The increase in net income from continuing operations attributable to Verint Systems Inc. common shares in the nine months ended October 31, 2021 was primarily due to a $48.4 million decrease in total other expense, net, and a $1.0 million increase in operating income as described above, partially offset by an $8.6 million increase in dividends on preferred stock and a $3.7 million increase in provision for income taxes. The decrease in total other expense, net was primarily due to a non-cash gain recognized on the final remeasurement of the Future Tranche Right immediately prior to settlement upon the issuance of the Series B Preferred Stock in April 2021, lower outstanding borrowings, and a decrease in debt discount amortization costs as a result of our adoption of ASU No. 2020-06, partially offset by losses on derivatives due to the partial early retirement of the 2017 Term Loan. Further details of these changes are provided below.

A portion of our business is conducted in currencies other than the U.S. dollar, and therefore our revenue and operating expenses are affected by fluctuations in applicable foreign currency exchange rates. When comparing average exchange rates for the nine months ended October 31, 2021 to average exchange rates for the nine months ended October 31, 2020, the U.S. dollar weakened relative to the British pound sterling, the Australian dollar and the euro, resulting in an overall increase in our revenue, cost of revenue, and operating expenses on a U.S. dollar-denominated basis. For the nine months ended October 31, 2021, had foreign currency exchange rates remained unchanged from rates in effect for the nine months ended October 31, 2020, our revenue would have been approximately $10.3 million lower and our cost of revenue and operating expenses on a combined basis would have been approximately $12.3 million lower, which would have resulted in a $2.0 million increase in our operating income.

As of October 31, 2021, we employed approximately 4,400 professionals, including part-time employees and certain contractors, as compared to approximately 4,200 at October 31, 2020.

Revenue
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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 our perpetual licenses, hardware, installation services, and business advisory consulting and training services.

The following table sets forth revenue by category for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended October 31, % Change Nine Months Ended October 31, % Change
(in thousands) 2021 2020 2021-2020 2021 2020 2021-2020
Recurring revenue
Bundled SaaS revenue $ 48,390 $ 37,406 29% $ 130,639 $ 106,617 23%
Unbundled SaaS revenue 33,713 21,577 56% 91,440 41,483 120%
Optional managed services revenue 16,358 14,884 10% 49,688 43,344 15%
Total cloud revenue 98,461 73,867 33% 271,767 191,444 42%
Support revenue 60,350 76,366 (21)% 187,675 227,126 (17)%
Total recurring revenue 158,811 150,233 6% 459,442 418,570 10%
Nonrecurring revenue
Perpetual revenue 40,436 35,461 14% 102,108 99,815 2%
Professional services revenue 25,573 29,528 (13)% 78,791 86,782 (9)%
Total nonrecurring revenue 66,009 64,989 2% 180,899 186,597 (3)%
Total revenue $ 224,820 $ 215,222 4% $ 640,341 $ 605,167 6%

Recurring Revenue

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Recurring revenue increased approximately $8.6 million, or 6%, from $150.2 million in the three months ended October 31, 2020 to $158.8 million in the three months ended October 31, 2021. The increase consisted of a $24.6 million increase in cloud revenue, partially offset by a $16.0 million decrease in support revenue. The increase in cloud revenue was primarily due to an increase in unbundled SaaS revenue resulting from support conversion transactions and new cloud deployments, and an increase in bundled SaaS and optional managed services as we continue to see positive demand from customers across our portfolio of cloud-based solutions and services. The decrease in support revenue was primarily due to customers migrating to our cloud-based solutions. We expect our revenue mix to continue to shift to recurring sources, which is consistent with our cloud-first strategy and a general market shift from on-premises to cloud solutions.

Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020.Recurring revenue increased approximately $40.8 million, or 10%, from $418.6 million in the nine months ended October 31, 2020 to $459.4 million in the nine months ended October 31, 2021. The increase consisted of an $80.3 million increase in cloud revenue, partially offset by a $39.5 million decrease in support revenue. The increase in cloud revenue was primarily due to an increase in unbundled SaaS revenue resulting from support conversion transactions and new cloud deployments, and an increase in bundled SaaS and optional managed services as we continue to see positive demand from customers across our portfolio for cloud-based solutions and services. The decrease in support revenue was primarily due to customers migrating to our cloud-based solutions.

Nonrecurring Revenue
Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Nonrecurring revenue increased approximately $1.0 million, or 2%, from $65.0 million in the three months ended October 31, 2020 to $66.0 million in the three months ended October 31, 2021. The increase consisted of a $5.0 million increase in perpetual revenue, partially offset by a $4.0 million decrease in professional services revenue. The increase in perpetual revenue was primarily due to the recognition of several large license arrangements executed during the three months ended October 31, 2021 that had been delayed due to the pandemic. The decrease in one-time professional services revenue was primarily driven by a decrease in implementation services as a result of the overall shift in our business to a cloud-based model. Our nonrecurring revenue can fluctuate from period to period, as some large contracts can represent a significant share of our nonrecurring revenue for a given period.

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Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. Nonrecurring revenue decreased approximately $5.7 million, or 3%, from $186.6 million in the nine months ended October 31, 2020 to $180.9 million in the nine months ended October 31, 2021. The decrease consisted of an $8.0 million decrease in professional services revenue, partially offset by a $2.3 million increase in perpetual revenue. The decrease in one-time professional services revenue was primarily driven by a decrease in implementation services as a result of the overall shift in our business to a cloud-based model. The increase in perpetual revenue was primarily due to the recognition of several large license arrangements executed during the nine months ended October 31, 2021 that had been delayed due to the pandemic.

Cost of Revenue
The following table sets forth cost of revenue by recurring and nonrecurring, as well as amortization of acquired technology for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
% Change Nine Months Ended
October 31,
% Change
(in thousands) 2021 2020 2021-2020 2021 2020 2021-2020
Cost of recurring revenue $ 36,811 $ 35,388 4% $ 112,523 $ 103,252 9%
Cost of nonrecurring revenue 30,524 34,440 (11)% 90,909 95,835 (5)%
Amortization of acquired technology 4,749 4,044 17% 13,559 12,589 8%
Total cost of revenue $ 72,084 $ 73,872 (2)% $ 216,991 $ 211,676 3%
Cost of Recurring Revenue
Cost of recurring revenue primarily consists of employee compensation and related expenses for our cloud operations and support teams, contractor costs, cloud infrastructure and data center costs, travel expenses relating to optional managed services and support, and royalties due to third parties for software components that are embedded in our cloud solutions. Cost of recurring revenue also includes stock-based compensation expenses, facility costs, and other allocated overhead expenses.

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Cost of recurring revenue increased approximately $1.4 million, or 4%, from $35.4 million in the three months ended October 31, 2020 to $36.8 million in the three months ended October 31, 2021. The increase was primarily due to an increase in data center and cloud costs associated with the increase in cloud revenue, and an increase in employee compensation and general overhead costs due to an increase in headcount, partially offset by a decrease in contractor expenses. Our recurring revenue gross margins increased from 76% in the three months ended October 31, 2020 to 77% in the three months ended October 31, 2021, primarily due to recurring revenue increasing at a faster rate than recurring costs.

Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. Cost of recurring revenue increased approximately $9.2 million, or 9%, from $103.3 million in the nine months ended October 31, 2020 to $112.5 million in the nine months ended October 31, 2021. The increase was primarily due to an increase in employee compensation, general overhead costs, and contractor costs compared to the prior year period during which we had implemented certain cost reduction measures due to the COVID-19 pandemic, as well as an increase in headcount, and an increase in data center and cloud costs associated with the increase in cloud revenue. Our recurring revenue gross margins increased from 75% in the nine months ended October 31, 2020 to 76% in the nine months ended October 31, 2021, primarily due to recurring revenue increasing at a faster rate than recurring costs.

We expect our cost of recurring revenue to continue to increase as we continue to invest in our cloud operations to support our growing cloud customer base and improve the security of our solutions.

Cost of Nonrecurring Revenue
Cost of nonrecurring revenue primarily consists of employee compensation and related expenses, contractor costs, travel expenses relating to installation, training and consulting services, hardware material costs, and royalties due to third parties for software components that are embedded in our on premises software solutions. Cost of nonrecurring revenue also includes amortization of capitalized software development costs, employee compensation and related expenses associated with our global operations, facility costs, and other allocated overhead expenses.

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Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Cost of nonrecurring revenue decreased approximately $3.9 million, or 11%, from $34.4 million in the three months ended October 31, 2020 to $30.5 million in the three months ended October 31, 2021. The decrease was primarily driven by a decrease in general overhead expenses as a result of the Spin-Off, and a decrease in employee compensation and related expenses and stock-based compensation expense, due to a decrease in headcount supporting nonrecurring revenue offerings. Our nonrecurring gross margins increased from 47% in the three months ended October 31, 2020 to 54% in the three months ended October 31, 2021, primarily due to a favorable offering mix and a decrease in nonrecurring costs.

Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. Cost of nonrecurring revenue decreased approximately $4.9 million, or 5%, from $95.8 million in the nine months ended October 31, 2020 to $90.9 million in the nine months ended October 31, 2021. The decrease was primarily driven by a decrease in general overhead expenses as a result of the Spin-Off, a decrease in employee compensation and related expenses due to a decrease in headcount supporting nonrecurring revenue offerings, and lower contractor costs. Our nonrecurring gross margins increased from 49% in the nine months ended October 31, 2020 to 50% in the nine months ended October 31, 2021, primarily due to a favorable offering mix and a decrease in nonrecurring costs.

Amortization of Acquired Technology
Amortization of acquired technology consists of amortization of technology assets acquired in connection with business combinations.

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Amortization of acquired technology increased approximately $0.7 million, or 17%, from $4.0 million in the three months ended October 31, 2020 to $4.7 million in the three months ended October 31, 2021. The increase was attributable to amortization expense of acquired technology intangible assets associated with recent business combinations, partially offset by acquired technology intangible assets from historical business combinations becoming fully amortized.

Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. Amortization of acquired technology increased approximately $1.0 million, or 8%, from $12.6 million in the nine months ended October 31, 2020 to $13.6 million in the nine months ended October 31, 2021. The increase was attributable to amortization expense of acquired technology intangible assets associated with recent business combinations, partially offset by acquired technology intangible assets from historical business combinations becoming fully amortized.

Further discussion regarding our business combinations appears in Note 6, "Business Combinations" to our condensed consolidated financial statements included under Part I, Item 1 of this report.

Research and Development, Net
Research and development expenses consist primarily of personnel and subcontracting expenses, facility costs, and other allocated overhead, net of certain software development costs that are capitalized, as well as reimbursements under government programs. Software development costs are capitalized upon the establishment of technological feasibility and continue to be capitalized through the general release of the related software product.
The following table sets forth research and development, net for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
% Change Nine Months Ended
October 31,
% Change
(in thousands) 2021 2020 2021-2020 2021 2020 2021-2020
Research and development, net $ 31,029 $ 33,293 (7)% $ 91,969 $ 95,853 (4)%

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020. Research and development, net ("R&D") decreased approximately $2.3 million, or 7%, from $33.3 million in the three months ended October 31, 2020 to $31.0 million in the three months ended October 31, 2021. This decrease was primarily attributable to a $4.3 million decrease in indirect R&D shared support services and facility expenses due to a reduction in our shared support services workforce as a result of the completion of the Spin-Off, a $1.0 million increase in capitalized software development costs, and a $0.9 million decrease in general overhead costs, partially offset by a $2.2 million increase in contractor costs and a $1.8 million increase in employee compensation and related expenses due to increased investment in R&D headcount.

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Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. R&D decreased approximately $3.9 million, or 4%, from $95.9 million in the nine months ended October 31, 2020 to $92.0 million in the nine months ended October 31, 2021. This decrease was primarily attributable to a $12.7 million decrease in indirect R&D shared support services and facility expenses due to a reduction in our shared support services workforce as a result of the completion of the Spin-Off and a $2.3 million decrease in general overhead costs, partially offset by a $5.2 million increase in employee compensation and related expenses compared to the prior year period during which we had implemented certain cost reduction measures due to the COVID-19 pandemic, and an increased investment in R&D headcount, a $4.3 million increase in contractor costs, and a $1.8 million increase in stock based compensation due to a shorter vesting schedule for prior year grants which resulted in a greater charge in the current period, additional performance based awards in connection with completion of the Spin-Off, and a change in the employee bonus payment structure.

Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel costs and related expenses, professional fees, changes in the fair values of our obligations under contingent consideration arrangements, sales and marketing expenses, including travel costs, sales commissions and sales referral fees, facility costs, communication expenses, and other administrative expenses.
The following table sets forth selling, general and administrative expenses for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
% Change Nine Months Ended
October 31,
% Change
(in thousands) 2021 2020 2021-2020 2021 2020 2021-2020
Selling, general and administrative $ 89,778 $ 80,167 12% $ 268,800 $ 234,733 15%
Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Selling, general and administrative ("SG&A") expenses increased approximately $9.6 million, or 12%, from $80.2 million in the three months ended October 31, 2020 to $89.8 million in the three months ended October 31, 2021. This increase was primarily due an increase of $6.5 million in employee compensation and related expenses and an increase of $1.7 million in contractor costs compared to the prior year due to an increase in headcount, a $1.7 million increase in stock-based compensation expense due to a shorter vesting schedule for prior year grants which resulted in a greater charge in the current period, a $1.2 million increase in general overhead costs due to an increase in headcount, a $0.8 million increase in professional service fees primarily related to recent business combinations, and $0.6 million of one-time nonrecurring operational costs incurred during the current period related to the Spin-Off, in that they are only necessary because of the Spin-Off, but they are not transactional-type costs. These increases in SG&A expenses were partially offset by a $3.3 million decrease in indirect SG&A shared support services and facilities expenses due to a reduction in our shared support services workforce as a result of the completion of the Spin-Off and a $0.8 million reduction of facilities costs primarily due to the early termination and non-renewal of certain office leases. SG&A expenses were also impacted by a $0.4 million increase due to a change in the fair value of our obligations under contingent consideration arrangements, from a net benefit of $0.4 million in the three months ended October 31, 2020 to an insignificant amount during the three months ended October 31, 2021, as a result of revised outlooks for achieving the performance targets under several unrelated contingent consideration arrangements.

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Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. SG&A expenses increased approximately $34.1 million, or 15%, from $234.7 million in the nine months ended October 31, 2020 to $268.8 million in the nine months ended October 31, 2021. This increase was primarily due to an increase of $15.2 million in employee compensation and related expenses and a $4.4 million increase in contractor costs compared to the prior year during which we had implemented certain cost reduction measures due to the COVID-19 pandemic, a $11.5 million increase in stock-based compensation expense due to a shorter vesting schedule for prior year grants which resulted in a greater charge in the current period, additional performance based awards in connection with completion of the Spin-Off, and a change in the employee bonus payment structure, a $4.3 million increase in professional service fees primarily related to recent business combinations, a $2.6 million increase in marketing related expenses, $2.1 million of one-time nonrecurring operational costs incurred during the current period related to the Spin-Off, in that they are only necessary because of the Spin-Off, but they are not transactional-type costs, and the absence of a $1.3 million insurance recovery received in the prior year related to a shareholder proxy contest. These increases in SG&A expenses were partially offset by a $9.9 million decrease in indirect SG&A shared support services and facilities expenses due to a reduction in our shared support services workforce as a result of the completion of the Spin-Off and a $1.6 million decrease in travel related expenses due to cost reduction initiatives we implemented in response to the COVID-19 pandemic. SG&A expenses were also impacted by a $3.5 million increase due to a change in the fair value of our obligations under contingent consideration arrangements, from a net benefit of $2.8 million in the nine months ended October 31, 2020 to a net charge of $0.7 million during the nine months ended October 31, 2021, as a result of revised outlooks for achieving the performance targets under several unrelated contingent consideration arrangements.

The impact of contingent consideration arrangements on our operating results can vary over time as we revise our outlook for achieving the performance targets underlying the arrangements. This impact on our operating results may be more significant in some periods than in others, depending on a number of factors, including the magnitude of the change in the outlook for each arrangement separately as well as the number of contingent consideration arrangements in place, the liabilities requiring adjustment in that period, and the net effect of those adjustments.

Amortization of Other Acquired Intangible Assets

Amortization of other acquired intangible assets consists of amortization of certain intangible assets acquired in connection with business combinations, including customer relationships, distribution networks, trade names, and non-compete agreements.

The following table sets forth amortization of other acquired intangible assets for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
% Change Nine Months Ended
October 31,
% Change
(in thousands) 2021 2020 2021-2020 2021 2020 2021-2020
Amortization of other acquired intangible assets $ 7,261 $ 7,833 (7)% $ 21,934 $ 23,316 (6)%

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Amortization of other acquired intangible assets decreased approximately $0.5 million, or 7%, from $7.8 million in the three months ended October 31, 2020 to $7.3 million in the three months ended October 31, 2021. The decrease was attributable to acquired customer-related intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense associated with acquired intangible assets from recent business combinations.

Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020.Amortization of other acquired intangible assets decreased approximately $1.4 million, or 6%, from $23.3 million in the nine months ended October 31, 2020 to $21.9 million in the nine months ended October 31, 2021. The decrease was attributable to acquired customer-related intangible assets from historical business combinations becoming fully amortized, partially offset by amortization expense associated with acquired intangible assets from recent business combinations.

Further discussion regarding our business combinations appears in Note 6, "Business Combinations" to our condensed consolidated financial statements included under Part I, Item 1 of this report.

Other Expense, Net

The following table sets forth total other expense, net for the three and nine months ended October 31, 2021 and 2020:

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Three Months Ended
October 31,
% Change Nine Months Ended
October 31,
% Change
(in thousands) 2021 2020 2021-2020 2021 2020 2021-2020
Interest income $ 101 $ 314 (68)% $ 147 $ 1,217 (88)%
Interest expense (1,502) (9,718) (85)% (8,720) (30,530) (71)%
Losses on early retirements of debt - - * (2,474) (143) *
Other (expense) income:
Foreign currency losses, net (687) (1,456) (53)% (1,691) (1,303) 30%
Losses on derivatives - (949) (100)% (14,374) (812) *
Fair value change of future tranche right - (9,224) (100)% 15,810 (22,834) *
Other, net 270 (41) * 4,044 (1,297) *
Total other (expense) income, net (417) (11,670) (96)% 3,789 (26,246) *
Total other expense, net $ (1,818) $ (21,074) (91)% $ (7,258) $ (55,702) (87)%

* Percentage is not meaningful.

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Total other expense, net, decreased by $19.3 million from $21.1 million in the three months ended October 31, 2020 to $1.8 million in the three months ended October 31, 2021.

Interest expense decreased from $9.7 million in the three months ended October 31, 2020 to $1.5 million in the three months ended October 31, 2021 due to our 2014 Notes maturing on June 1, 2021 and our early adoption of ASU No. 2020-06 on February 1, 2021. As a result of this adoption, the 2014 Notes were accounted for as a single liability until maturity as the new accounting guidance eliminated the amortization of the debt discount. Prior to February 1, 2021, the carrying amount of the equity component of the 2014 Notes was recorded as a debt discount and amortized to interest expense. Interest expense related to the amortization of debt discount costs associated with the 2014 Notes was $3.2 million in the three months ended October 31, 2020. See Note 1, "Description of Business and Summary of Significant Accounting Policies" in our notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding the adoption of ASU No. 2020-06. Interest expense also decreased due to lower interest rates on outstanding borrowings as well as lower outstanding borrowings as a result of the partial prepayment of our 2017 Term Loan in conjunction with the issuance of the 2021 Notes and the repayment of all outstanding borrowings under our 2017 Revolving Credit Facility during the three months ended October 31, 2020. Further discussion regarding our 2014 Notes, 2017 Term Loan, 2017 Revolving Credit Facility, and 2021 Notes appears in Note 8, "Long-term Debt" to our condensed consolidated financial statements included under Part I, Item 1 of this report.

We recorded $0.7 million of net foreign currency losses in the three months ended October 31, 2021 compared to $1.5 million of net foreign currency losses in the three months ended October 31, 2020. Our foreign currency losses in the current period resulted primarily from fluctuations associated with exchange rate movement of the U.S. dollar against the Brazilian real.

We recorded a non-cash Future TrancheRight revaluation loss of $9.2 million in the three months ended October 31, 2020, primarily due to changes in our stock price during the period. In April 2021, upon the issuance of the Series B Preferred Stock, the Future Tranche Right liability was reclassified to Series B Preferred Stock and no further fair value changes will be recorded. Please refer to Note 10, "Convertible Preferred Stock" and Note 13, "Fair Value Measurements" to our condensed consolidated financial statements included under Part I, Item 1 of this report for additional information regarding the Future Tranche Right.

Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. Total other expense, net, decreased by $48.4 million from $55.7 million in the nine months ended October 31, 2020 to $7.3 million in the nine months ended October 31, 2021.

Interest expense decreased from $30.5 million in the nine months ended October 31, 2020 to $8.7 million in the nine months ended October 31, 2021 due to lower interest expense related to our 2014 Notes, as a result of the 2014 Notes maturing on June 1, 2021 and our early adoption of ASU No. 2020-06 on February 1, 2021. As a result of this adoption, the 2014 Notes were accounted for as a single liability until maturity as the new accounting guidance eliminated the amortization of the debt discount. Prior to February 1, 2021, the carrying amount of the equity component of the 2014 Notes was recorded as a debt discount and amortized to interest expense. Interest expense related to the amortization of debt discount costs associated with the 2014 Notes was $9.6 million in the nine months ended October 31, 2020. Interest expense also decreased due to lower
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interest rates on outstanding borrowings as well as lower outstanding borrowings as a result of the partial prepayment of our 2017 Term Loan in conjunction with the issuance of the 2021 Notes and the repayment of all outstanding borrowings under our 2017 Revolving Credit Facility during the three months ended October 31, 2020.

During the nine months ended October 31, 2021, we recorded $2.5 million of losses on early retirements of debt, $2.0 million of which was a result of repaying $309.0 million of our 2017 Term Loan. In April 2021, we also amended the 2017 Credit Agreement and refinanced our 2017 Revolving Credit Facility, which otherwise would have matured on June 29, 2022, resulting in the write off of $0.5 million of unamortized deferred debt issuance costs related to certain lenders who will no longer provide commitments under the 2021 Revolving Credit Facility. Further discussion regarding our 2017 Credit Agreement, 2017 Term Loan and 2021 Revolving Credit Facility appears in Note 8, "Long-term Debt" to our condensed consolidated financial statements included under Part I, Item 1 of this report.

We recorded $1.7 million of net foreign currency losses in the nine months ended October 31, 2021 compared to $1.3 million of net foreign currency losses in the nine months ended October 31, 2020. Our foreign currency losses in the current period resulted primarily from fluctuations associated with exchange rate movement of the U.S. dollar against the British pound sterling, the Australian dollar, and the Brazilian real.

During the nine months ended October 31, 2021, we recorded a $14.4 million loss on our interest rate swap as a result of the partial early retirement of our 2017 Term Loan, with no comparable transaction in the prior period.

During the nine months ended October 31, 2021, we recorded a non-cash Future Tranche Right revaluation gain of $15.8 million compared to a revaluation loss of $22.8 million during nine months ended October 31, 2020. The non-cash gain for the current period relates to the final mark-to-market adjustment of the Future Tranche Right, issued in connection with the closing of the Series A Preferred Stock on May 7, 2020. The change in fair value was primarily due to a decrease in our stock price from January 31, 2021 to immediately prior to the issuance of the Series B Preferred Stock, which decreased the estimated fair value of the Future Tranche Right. Upon the issuance of the Series B Preferred Stock on April 6, 2021, the Future Tranche Right was settled and no further charges (or benefits) will be recorded. The non-cash charge for the prior year period relates to the change in fair value of the Future Tranche Right primarily due to declining credit market interest rates associated with worsened and uncertain economic conditions occurring during the period due to the COVID-19 pandemic.

We recorded $4.0 million of income within other, net in the nine months ended October 31, 2021, primarily due to the recognition of a $3.1 million unrealized gain from a fair value adjustment to a noncontrolling equity investment related to an observable price change in the period. During the nine months ended October 31, 2020 we recorded $1.3 million of expenses within other, net primarily due to fees in connection with our second amendment to the 2017 Credit Agreement.

Provision for Income Taxes
The following table sets forth our provision from income taxes for the three and nine months ended October 31, 2021 and 2020:

Three Months Ended
October 31,
% Change Nine Months Ended
October 31,
% Change
(in thousands) 2021 2020 2021-2020 2021 2020 2021-2020
Provision for income taxes $ 9,349 $ 1,084 * $ 13,478 $ 9,776 38%

Three Months Ended October 31, 2021 compared to Three Months Ended October 31, 2020.Our effective income tax rate was 40.9% for the three months ended October 31, 2021, compared to a negative effective income tax rate of 106.6% for the three months ended October 31, 2020.

For the three months ended October 31, 2021, the effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign income, partially offset by lower statutory rates in certain foreign jurisdictions. The result was an income tax provision of $9.3 million on pretax income of $22.9 million, which represented an effective income tax rate of 40.9%.

For the three months ended October 31, 2020, the income tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, limitations on certain tax deductions, and a change in the fair value of the Future Tranche Right associated with the Series A Preferred Stock, offset by lower statutory rates in several foreign jurisdictions. The result was an income tax provision of $1.1 million on a pretax loss of $1.0 million, which represented a negative effective income tax rate of 106.6%.
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Nine Months Ended October 31, 2021 compared to Nine Months Ended October 31, 2020. Our effective income tax rate was 40.4% for the nine months ended October 31, 2021, compared to a negative effective income tax rate of 60.7% for the nine months ended October 31, 2020.

For the nine months ended October 31, 2021, the effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the U.S. taxation of certain foreign income and the impact of a tax rate change in a foreign jurisdiction, offset by a change in the fair value of the Future Tranche Right associated with the Preferred Stock issuance and by lower statutory rates in certain foreign jurisdictions. The result was an income tax provision of $13.5 million on pretax income of $33.4 million, which represented an effective income tax rate of 40.4%.

For the nine months ended October 31, 2020, the income tax rate differs from the U.S. federal statutory rate of 21% primarily due to the impact of U.S. taxation of certain foreign activities, limitations on certain tax deductions, and a change in the fair value of the Future Tranche Right associated with the Series A Preferred Stock, offset by lower statutory rates in several foreign jurisdictions and the favorable impact of recently issued regulations. The result was an income tax provision of $9.8 million on a pretax loss of $16.1 million, which represented a negative effective income tax rate of 60.7%.

Net Income from Discontinued Operations

As more fully described in Note 2, "Discontinued Operations" to our condensed consolidated financial statements included under Part I, Item 1 of this report, on February 1, 2021, we completed the Spin-Off of our Cognyte Business into an independent public company, Cognyte. As a result, the historical results of operations for Cognyte have been included within discontinued operations in our condensed consolidated financial statements.


Liquidity and Capital Resources

Overview

Our primary recurring source of cash is the collection of proceeds from the sale of products and services to our customers, including cash periodically collected in advance of delivery or performance.

On December 4, 2019, we announced that an affiliate of Apax Partners 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 Apax Investor purchased $200.0 million of our Series A Preferred Stock in an issuance that closed on May 7, 2020, with an initial conversion price of $53.50 per share. In accordance with the Investment Agreement, the Series A Preferred Stock did not participate in the Spin-Off distribution of the Cognyte shares described above 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. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock in an issuance that closed on April 6, 2021. The Series B Preferred Stock is convertible at a conversion price of $50.25, based in part on our trading price over the 20 trading day period following the Spin-Off. As of October 31, 2021, Apax's ownership in us on an as-converted basis was approximately 12.8%.

Each series of Preferred Stock pays dividends at an annual rate of 5.2% until the 48-month anniversary of the closing of the Series A Preferred Stock investment, and thereafter at a rate of 4.0%, subject to adjustment under certain circumstances. Dividends will be cumulative and payable semiannually in arrears in cash. All dividends that are not paid in cash will remain accumulated dividends with respect to each share of preferred stock. We used the proceeds from the Apax investment to repay outstanding indebtedness, to fund a portion of our stock repurchase programs (as described below under "Liquidity and Capital Resources Requirements"), and/or for general corporate purposes. Please refer to Note 10, "Convertible Preferred Stock", to our condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding the Apax convertible preferred stock investment.

Our primary recurring use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for cloud operations, marketing, facilities and overhead costs, and capital expenditures. We also utilize cash for debt service, stock repurchases, dividends on the Preferred Stock, and business acquisitions. Cash generated from operations, along with our existing cash, cash equivalents, and short-term investments, are our primary sources of operating liquidity.

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On June 29, 2017, we entered into the 2017 Credit Agreement with certain lenders and terminated a prior credit agreement. The 2017 Credit Agreement was amended on January 31, 2018 (the "2018 Amendment"), again on June 8, 2020 (the "2020 Amendment"), and again on April 9, 2021 (the "2021 Amendment"). Pursuant to the 2020 Amendment, we were permitted to effect the Spin-Off within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes would not be deemed to be outstanding if such 2014 Notes were cash collateralized in accordance with the 2017 Credit Agreement, as amended, for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility. 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 in satisfaction of the cash collateralization provisions of the 2020 Amendment. On May 28, 2021, prior to the June 1, 2021 maturity date of the 2014 Notes, we used the escrowed cash to settle the principal amount, including the final interest payment, and the incremental conversion value of $57.7 million was settled with approximately 1,250,000 shares of common stock. Further discussion of our 2017 Credit Agreement as amended, appears below, under "Financing Arrangements".

We have historically expanded our business in part by investing in strategic growth initiatives, including acquisitions of products, technologies, and businesses. We may finance such acquisitions using cash, debt, stock, or a combination of the foregoing, however, we have used cash as consideration for substantially all of our historical business acquisitions, including approximately $57.2 million of net cash expended for business acquisitions during the nine months ended October 31, 2021. There were no business acquisitions during the year ended January 31, 2021. Please refer to Note 6, "Business Combinations", to our condensed consolidated financial statements included under Part I, Item 1 of this report for more information regarding our recent business combinations.

We continually examine our options with respect to terms and sources of existing and future short-term and long-term capital resources to enhance our operating results and to ensure that we retain financial flexibility, and may from time to time elect to raise capital through the issuance of additional equity or the incurrence of additional debt. In connection with the completion of the Spin-Off, the Apax Investor purchased $200.0 million of our Series B Preferred Stock in an issuance that closed on April 6, 2021. Additionally, 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, on April 9, 2021 (the "2021 Notes"). We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the issuance of the Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our 2017 Credit Agreement, 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.

A portion of our operating income is earned outside the United States. Cash, cash equivalents, short-term investments, and restricted cash, cash equivalents, and bank time deposits (excluding any long-term portions) held by our subsidiaries outside of the United States were $122.2 million and $241.1 million as of October 31, 2021 and January 31, 2021, respectively, and are generally used to fund the subsidiaries' operating requirements and to invest in growth initiatives, including business acquisitions. These subsidiaries also held long-term restricted cash and cash equivalents, and restricted bank time deposits of $0.4 million and $0.6 million, at October 31, 2021 and January 31, 2021, respectively.

We currently intend to continue to indefinitely reinvest a portion of the earnings of our foreign subsidiaries, which, as a result of the 2017 Tax Act, may now be repatriated without incurring additional U.S. federal income taxes.

Should other circumstances arise whereby we require more capital in the United States than is generated by our domestic operations, or should we otherwise consider it in our best interests, we could repatriate future earnings from foreign jurisdictions, which could result in higher effective tax rates. As noted above, we currently intend to indefinitely reinvest a portion of the earnings of our foreign subsidiaries to finance foreign activities. Except to the extent of the U.S. tax provided on earnings of our foreign subsidiaries as of October 31, 2021, 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.
The following table summarizes our total cash, cash equivalents, restricted cash, cash equivalents, and bank time deposits, and short-term investments, as well as our total debt, as of October 31, 2021 and January 31, 2021:

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October 31, January 31,
(in thousands) 2021 2021
Cash and cash equivalents $ 307,847 $ 585,273
Restricted cash and cash equivalents, and restricted bank time deposits (excluding long term portions) 6 15
Short-term investments 661 46,300
Total cash, cash equivalents, restricted cash and cash equivalents, restricted bank time deposits, and short-term investments $ 308,514 $ 631,588
Total debt, including current portions $ 406,411 $ 789,494
Capital Allocation Framework

As noted above, after cash utilization required for working capital, capital expenditures, required debt service, and dividends on the Preferred Stock, we expect that our primary usage of cash will be for business combinations, repayment of outstanding indebtedness, and/or stock repurchases including under our new stock repurchase program (subject to the terms of our 2017 Credit Agreement). Further discussion regarding this new stock repurchase program appears in the "Liquidity and Capital Resources Requirements" section below.

Condensed Consolidated Cash Flow Activity

The following table summarizes selected items from our condensed consolidated statements of cash flows for the nine months ended October 31, 2021 and 2020:

Nine Months Ended
October 31,
(in thousands) 2021 2020
Net cash provided by operating activities from continuing operations $ 70,249 $ 121,254
Net cash used in investing activities from continuing operations (29,140) (95,125)
Net cash (used in) provided by financing activities from continuing operations (424,248) 83,950
Effect of foreign currency exchange rate changes on cash and cash equivalents (29) (2,093)
Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents from discontinued operations (9,055) 26,149
Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents $ (392,223) $ 134,135

Our financing activities from continuing operations used $424.2 million of net cash and our investing activities from continuing operations used $29.1 million of net cash during the nine months ended October 31, 2021, which was partially offset by $70.2 million of cash generated from operating activities from continuing operations. Further discussion of these items appears below.

Net Cash Provided by Operating Activities from Continuing Operations
Net cash provided by operating activities is driven primarily by our net income or loss, as adjusted for non-cash items and working capital changes. Operating activities from continuing operations generated $70.2 million of net cash during the nine months ended October 31, 2021, compared to $121.3 million generated during the nine months ended October 31, 2020. Our operating cash flow in the current period decreased despite a strong year-over-year increase in collections due to lower cash operating costs in the prior year as a result of the COVID-19 pandemic, one-time separation costs and higher income tax payments related to the Spin-Off in the current period, and a greater portion of bonuses being paid in cash compared to the prior year.

Our cash flow from operating activities can fluctuate from period to period due to several factors, including the timing of our billings and collections, the timing and amounts of interest, income tax and other payments, and our operating results.
Net Cash Used in Investing Activities from Continuing Operations

During the nine months ended October 31, 2021, our investing activities from continuing operations used $29.1 million of net cash, including $57.2 million of net cash utilized for business combinations and $17.5 million of payments for property,
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equipment and capitalized software development costs, partially offset by $45.6 million of net sales and maturities of short-term investments.

During the nine months ended October 31, 2020, our investing activities from continuing operations used $95.1 million of net cash, consisting primarily of $79.3 million of net purchases of short-term investments and $15.8 million of payments for property, equipment and capitalized software development costs.

We had no significant commitments for capital expenditures at October 31, 2021.

Net Cash (Used in) Provided by Financing Activities
For the nine months ended October 31, 2021, our financing activities used $424.2 million of net cash, primarily due to $386.9 million of payments to settle our 2014 Notes, $310.1 million of repayments of borrowings under our 2017 Term Loan, $114.7 million of net cash transferred to Cognyte upon the completion of the Spin-Off, $75.9 million of payments to repurchase common stock, $41.1 million of payments to purchase the capped calls in connection with the issuance of our 2021 Notes, $16.5 million paid to terminate our interest rate swap, $12.9 million of payments of Preferred Stock dividends, $10.7 million paid for debt-related issuance fees, $4.5 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, $2.3 million of finance lease payments, and a $0.6 million distribution to a noncontrolling shareholder of one of our subsidiaries, partially offset by $315.0 million of proceeds from the issuance of our 2021 Notes, $198.7 million of net proceeds from the issuance of the Series B Preferred Stock, and $38.3 million from a dividend and other settlements received from Cognyte during the period in connection with the Spin-Off.

For the nine months ended October 31, 2020, our financing activities from continuing operations provided $84.0 million of net cash, primarily due to $197.3 million of net proceeds from the issuance of the Series A Preferred Stock and a $155.0 million increase in borrowings under our revolving credit facility, partially offset by $205.4 million of repayments of borrowings and other financing obligations, $36.8 million of payments to repurchase common stock, $13.0 million of payments to repurchase $13.1 million principal amount of our convertible notes, $8.5 million for the financing portion of payments under contingent consideration arrangements related to prior business combinations, $2.2 million paid for debt-related costs, $1.6 million of payments of Preferred Stock dividends, and a $0.6 million distribution to a noncontrolling shareholder of one of our subsidiaries.

Liquidity and Capital Resources Requirements

Based on past performance and current expectations, we believe that our cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to meet anticipated operating costs, required payments of principal and interest, dividends on Preferred Stock, working capital needs, ordinary course capital expenditures, research and development spending, and other commitments for at least the next 12 months. Currently, we have no plans to pay any cash dividends on our common stock, which are subject to certain restrictions under our 2017 Credit Agreement.

Our liquidity could be negatively impacted by a decrease in demand for our products and service and support, including the impact of changes in customer buying behavior due to circumstances over which we have no control, including, but not limited to, the effects of the COVID-19 pandemic. If we determine to make additional business acquisitions or otherwise require additional funds, we may need to raise additional capital, which could involve the issuance of additional equity or debt securities or an increase in our borrowings under our credit facility.

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. During the year ended January 31, 2021, we acquired approximately 613,000 shares of our common stock at a cost of $34.0 million under this program. Total repurchases under the program, which expired on February 1, 2021, were $150.1 million.

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 nine months ended October 31, 2021, we acquired approximately 1,600,000 shares of our common stock at a cost of $75.4 million under this program. No further repurchases are expected under this program for the year ending January 31, 2022.

On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Repurchases are expected to be financed with available cash in the United
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States or through borrowing from the 2021 Revolving Credit Facility, subject to compliance with applicable laws, rules and regulations. Please refer to Note 17, "Subsequent Event", in Part I, Item 1, of this report for more information regarding this stock repurchase program.

Financing Arrangements

2021 Notes

On April 9, 2021, we issued $315.0 million in aggregate principal amount of 0.25% convertible senior notes due April 15, 2026 (the "2021 Notes"), unless earlier converted by the holders pursuant to their terms. The 2021 Notes are unsecured and pay interest in cash semiannually in arrears at a rate of 0.25% per annum.

We used a portion of the net proceeds from the issuance of the 2021 Notes to pay the costs of the capped call transactions described below. We also used a portion of the net proceeds from the issuance of the 2021 Notes, together with the net proceeds from the April 6, 2021 issuance of $200.0 million of Series B Preferred Stock, to repay a portion of the outstanding indebtedness under our 2017 Credit Agreement described below, to terminate an interest rate swap agreement, and to repurchase shares of our common stock. The remainder is being used for working capital and other general corporate purposes.

The 2021 Notes are convertible into shares of our common stock at an initial conversion rate of 16.1092 shares per $1,000 principal amount of 2021 Notes, which represents an initial conversion price of approximately $62.08 per share, subject to adjustment upon the occurrence of certain events, and subject to customary anti-dilution adjustments. Prior to January 15, 2026, the 2021 Notes will be convertible only upon the occurrence of certain events and during certain periods, and will be convertible thereafter at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2021 Notes. Upon conversion of the 2021 Notes, holders will receive cash up to the aggregate principal amount, with any remainder to be settled with cash or common stock, or a combination thereof, at our election. As of October 31, 2021, the 2021 Notes were not convertible.

Based on the closing market price of our common stock on October 31, 2021, the if-converted value of the 2021 Notes was less than their aggregate principal amount.

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 intended generally to reduce the potential dilution to our common stock upon any conversion of the 2021 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2021 Notes, in the event that at the time of conversion our common stock price exceeds the 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. The Capped Calls have the economic effect of increasing the conversion price of the 2021 Notes from $62.08 per share to $100.00 per share. Our exercise rights under the Capped Calls generally trigger upon conversion of the 2021 Notes, and the Capped Calls terminate upon maturity of the 2021 Notes, or the first day the 2021 Notes are no longer outstanding. As of October 31, 2021, no Capped Calls have been exercised.

Pursuant to their terms, the Capped Calls qualify for classification within stockholders' equity, and their fair value is not remeasured and adjusted, as long as they continue to qualify for stockholders' equity classification. We paid approximately $41.1 million for the Capped Calls, including applicable transaction costs, which was recorded as a reduction to additional paid-in capital.

2014 Notes

On June 18, 2014, we issued $400.0 million in aggregate principal amount of 1.50% convertible senior notes with a maturity date of June 1, 2021 (the "2014 Notes"). Net proceeds from the 2014 Notes after underwriting discounts were $391.9 million. The 2014 Notes paid interest in cash semiannually in arrears at a rate of 1.50% per annum.

The 2014 Notes were issued concurrently with our public issuance of 5,750,000 shares of common stock, the majority of the combined net proceeds of which were used to partially repay certain indebtedness under a prior credit agreement.

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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. On May 28, 2021, prior to 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 of common stock if all of the 2014 Notes had been converted. As a result of the Spin-Off, the conversion rate was adjusted to 24.6622 shares of common stock per $1,000 principal amount of 2014 Notes, which represented an effective conversion price of $40.55 per share of common stock and would have resulted in the issuance of approximately 9,541,000 shares of common stock if all of the 2014 Notes had been converted prior to maturity.

During the year ended January 31, 2021, we repurchased $13.1 million principal amount of our 2014 Notes in open market transactions for an aggregate of $13.0 million in cash.

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"). Prior to the Spin-Off, 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 the conversion rate adjustments, the Note Hedges and the Warrants served to increase the effective conversion price for the 2014 Notes to $47.18 per share. The Note Hedges were, and Warrants are, each separate instruments from the 2014 Notes.

Note Hedges

Pursuant to the Note Hedges, we purchased call options on our common stock, under which we had the right to acquire from the counterparties up to approximately 6,205,000 shares of our common stock, subject to customary anti-dilution adjustments, at a price of $64.46, which equaled the initial conversion price of the 2014 Notes. As a result of the Spin-Off, on February 1, 2021, the call options on our stock were adjusted to allow us to purchase up to 9,865,000 shares of our common stock at a price of $40.55, which was equal to the adjusted conversion price of the 2014 Notes. We were permitted to settle the Note Hedges in cash, shares of our common stock, or a combination thereof, at our option, and they 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 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 Warrants provided the counterparties rights to acquire from us up to approximately 9,865,000 shares of our common stock at a price of $47.18 per share. Proceeds from the sale of the Warrants were $45.2 million and were recorded as additional paid-in capital. The Warrants began to expire incrementally on August 30, 2021 and will continue to expire incrementally on a series of expiration dates through January 21, 2022. We expect that at each expiration date the Warrants will be exercised if the market
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price per share of our common stock exceeds the strike price of the Warrants, and we will be obligated to issue shares of our common stock having a value equal to such excess. The Warrants have a dilutive effect on net income per share to the extent that the average market value of our common stock exceeds the strike price of the Warrants. As of October 31, 2021, no Warrants had been exercised, 4,340,000 Warrants had expired, and 5,525,000 Warrants remained outstanding. From November 1, 2021 through December 3, 2021, we issued 20,852 shares of common stock as part of the cashless exercise of approximately 1,776,000 Warrants.

Credit Agreements
On June 29, 2017, we entered into a credit agreement with certain lenders and terminated a prior credit agreement. The credit agreement was amended in 2018, 2020, and 2021, as further described below (as amended, the "2017 Credit Agreement").

The 2017 Credit Agreement currently provides for $725.0 million of senior secured credit facilities, comprised of a $425.0 million term loan maturing on June 29, 2024 (the "2017 Term Loan"), of which $100.0 million and $410.1 million was outstanding at October 31, 2021 and January 31, 2021, respectively, and a $300.0 million revolving credit facility maturing on April 9, 2026 (the "2021 Revolving Credit Facility"), subject to increase and reduction from time to time according to the terms of the 2017 Credit Agreement.

Interest rates on loans under the 2017 Credit Agreement are periodically reset, at our option, at either a Eurodollar Rate or an ABR rate (each as defined in the 2017 Credit Agreement), plus in each case a margin.

During the three months ended April 30, 2021, in addition to our regular quarterly $1.1 million principal payment, we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100.0 million. As a result, $1.8 million of deferred debt issuance costs and $0.2 million of unamortized discount associated with the 2017 Term Loan were written off, and are included within losses on early retirements of debt on our condensed consolidated statement of operations for the nine months ended October 31, 2021.

On April 9, 2021, we amended the 2017 Credit Agreement (the "2021 Amendment"), pursuant to which we refinanced our $300.0 million 2017 Revolving Credit Facility, which would otherwise have matured on June 29, 2022, with the $300.0 million 2021 Revolving Credit Facility. The 2021 Amendment also provides that for purposes of the acceleration of the maturity of the 2017 Term Loan and 2021 Revolving Credit Facility, neither the 2014 Notes nor the 2021 Notes will be deemed to be outstanding if such notes are cash collateralized prior to their respective maturity dates in accordance with the 2017 Credit Agreement. As noted above, we cash collateralized the 2014 Notes prior to settlement on June 1, 2021, and we currently intend to cash collateralize, or otherwise refinance or repurchase, the 2021 Notes prior to their maturity in 2026.

The maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility would have been accelerated to March 1, 2021 if on such date any 2014 Notes remained outstanding, unless such outstanding 2014 Notes were cash collateralized pursuant to a second amendment to the 2017 Credit Agreement (the "2020 Amendment"), entered into on June 8, 2020. Pursuant to the 2020 Amendment, we were permitted to effect the Spin-Off of our Cyber Intelligence business within the parameters set forth in the 2017 Credit Agreement, as amended, and our 2014 Notes would not be deemed to be outstanding if such 2014 Notes were cash collateralized in accordance with the 2017 Credit Agreement for purposes of the determination of the maturity dates of the 2017 Term Loan and the 2017 Revolving Credit Facility discussed above. On February 26, 2021, as noted above, we cash collateralized the 2014 Notes in satisfaction of the cash collateralization provisions of the 2020 Amendment. Accordingly, the maturity dates of the 2017 Term Loan and 2017 Revolving Credit Facility were not accelerated to March 1, 2021. In connection with, the maturity of the 2014 Notes, we used the escrowed cash to settle the principal amount, including the final interest payment, and the incremental conversion value of $57.7 million was settled with approximately 1,250,000 shares of our common stock.

As of October 31, 2021, the interest rate on the 2017 Term Loan was 2.08%. Taking into account the impact of the original issuance discount and related deferred debt issuance costs, the effective interest rate on the 2017 Term Loan was approximately 2.28% at October 31, 2021. As of January 31, 2021, the interest rate on the 2017 Term Loan was 2.14%.

For borrowings under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, the margin is determined by reference to our Consolidated Total Debt to Consolidated EBITDA (each as defined in the 2017 Credit Agreement) leverage ratio (the "Leverage Ratio"). In addition, under the 2021 Revolving Credit Facility, and previously under the 2017 Revolving Credit Facility, we are required to pay a commitment fee with respect to unused availability at rates per annum determined by reference to our Leverage Ratio.

Optional prepayments of loans under the 2017 Credit Agreement are generally permitted without premium or penalty.
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Our obligations under the 2017 Credit Agreement are guaranteed by each of our direct and indirect existing and future material domestic wholly owned restricted subsidiaries and are secured by a security interest in substantially all of our assets and the assets of the guarantor subsidiaries, subject to certain exceptions.

The 2017 Credit Agreement contains certain customary affirmative and negative covenants for credit facilities of this type. The 2017 Credit Agreement also contains a financial covenant that, solely with respect to the 2021 Revolving Credit Facility, requires us to maintain a Leverage Ratio of no greater than 4.50 to 1. At October 31, 2021, our Leverage Ratio was approximately 1.1 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.

Interest Rate Swap

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, under which we paid interest at a fixed rate of 2.949% and received variable interest of three-month LIBOR (subject to a minimum of 0.00%), on a notional amount of $200.0 million (the "2018 Swap"). The effective date of the 2018 Swap was September 6, 2019, and settlements with the counterparty began on November 1, 2019 and occurred on a quarterly basis. The 2018 Swap had a termination date of June 29, 2024.

Prior to May 1, 2020, the 2018 Swap was designated as a cash flow hedge for accounting purposes and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and were reclassified into the condensed consolidated statement of operations within interest expense in the periods in which the hedged transactions affected earnings.
On May 1, 2020, which was an interest rate reset date on our 2017 Term Loan, we selected an interest rate other than three-month LIBOR. As a result, the 2018 Swap, which was designated specifically to hedge three-month LIBOR interest payments, no longer qualified as a cash flow hedge. Subsequent to May 1, 2020, changes in fair value of the 2018 Swap were accounted for as a component of other income (expense), net. Accumulated deferred losses on the 2018 Swap of $20.4 million, or $16.0 million after tax, at May 1, 2020 that were previously recorded as a component of accumulated other comprehensive loss, were being amortized to interest expense in the condensed consolidated statement of operations over the remaining term of the 2018 Swap, as the hedged interest payments occur.

On April 13, 2021, we paid $16.5 million to the counterparty to settle the 2018 Swap prior to its June 2024 maturity. Upon settlement, we recorded an unrealized gain of $1.3 million in other income (expense), net to adjust the 2018 Swap to its fair value at settlement date and reclassified the remaining $15.7 million of pretax accumulated deferred losses from accumulated other comprehensive loss within stockholders' equity to other income (expense), net on our condensed consolidated statement of operations for the nine months ended October 31, 2021. The associated $3.7 million deferred tax asset was reclassified from accumulated other comprehensive loss and netted against income taxes payable, which are included within other liabilities on our condensed consolidated balance sheet as of October 31, 2021.

Contractual Obligations

Our principal commitments primarily consist of long-term debt, dividends on Preferred Stock, leases for office space and open non-cancellable purchase orders. As of October 31, 2021, our total operating lease liabilities were $57.4 million, of which $13.5 million is included within accrued expenses and other current liabilities (current portions), and $43.9 million is included as operating lease liabilities (long-term portions), on our condensed consolidated balance sheets. We have no current plans to lease significant additional office space. During the nine months ended October 31, 2021, we decided to exit certain leased offices, and we anticipate exiting or reducing additional office leases in the future as we continue to assess how and to what extent our employees will return to work in our offices.

As of October 31, 2021, our unconditional purchase obligations totaled approximately $256.3 million, the majority of which is due over the next 12 to 36 months. Our purchase obligations are primarily commitments to vendors for the procurement of goods and services in the ordinary course of business, commitments with contract manufacturers, and data center hosting
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services. Agreements to purchase goods or services that have cancellation provisions with no penalties are excluded from these purchase obligations.

It is not our business practice to enter into off-balance sheet arrangements. However, in the normal course of business, we enter into contracts in which we make representations and warranties that guarantee the performance of our products and services. Historically, there have been no significant losses related to such guarantees.

Our consolidated balance sheet at October 31, 2021 included $13.0 million of non-current tax reserves, net of related benefits (including interest and penalties of $3.2 million) for uncertain tax positions. We do not expect to make any significant payments for these uncertain tax positions within the next 12 months.

For additional information regarding our long-term debt, Preferred Stock, and our commitments and contingencies, see Note 8, "Long-Term Debt", Note 10, "Convertible Preferred Stock", and Note 16, "Commitments and Contingencies" in the notes to our condensed consolidated financial statements included in Part I, Item 1 of this report.

Contingent Payments Associated with Business Combinations
In connection with certain of our business combinations, we have agreed to make contingent cash payments to the former owners of the acquired companies based upon achievement of performance targets following the acquisition dates.

For the nine months ended October 31, 2021, we made $9.6 million of payments under contingent consideration arrangements. As of October 31, 2021, potential future cash payments, and earned consideration expected to be paid, subsequent to October 31, 2021 under contingent consideration arrangements total $14.9 million, the estimated fair value of which was $7.6 million and was reported in accrued expenses and other current liabilities. The performance periods associated with these potential payments extend through January 2022.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, and the potential impact of these pronouncements on our condensed consolidated financial statements, see Note 1, "Basis of Presentation and Significant Accounting Policies" to the condensed consolidated financial statements in Part I, Item 1 of this report.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices and rates. We are exposed to market risk related to changes in interest rates and foreign currency exchange rate fluctuations. To manage the volatility relating to interest rate and foreign currency risks, we periodically enter into derivative instruments including foreign currency forward exchange contracts and interest rate swap agreements. It is our policy to use derivative instruments only to the extent considered necessary to meet our risk management objectives. We use derivative instruments solely to reduce the financial impact of these risks and do not use derivative instruments for speculative purposes.

Interest Rate Risk on Our Debt

The 2017 Credit Agreement bears interest at variable rates based on LIBOR plus a margin. The margin for the 2017 Term Loan is fixed at 2.00% for Eurodollar loans, and 1.00% for ABR loans. For loans under the 2021 Revolving Credit Facility, the margin is determined by reference to our Leverage Ratio. Because the interest rates applicable to borrowings under the 2017 Credit Agreement are variable, we are exposed to market risk from changes in the underlying index rates, which affect our cost of borrowing.

To partially mitigate risks associated with the variable interest rate on our 2017 Term Loan, in April 2018, we executed a pay-fixed, receive-variable interest rate swap agreement, which was originally set to expire on June 29, 2024. On April 13, 2021, we paid $16.5 million to the counterparty to early-settle the interest rate swap agreement as our interest rate risk exposure had been significantly reduced as we repaid $309.0 million of our 2017 Term Loan, reducing the outstanding balance to $100.0 million.

On March 5, 2021, the Financial Conduct Authority of the United Kingdom announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative: (a) immediately after December 31, 2021, in the case of the one week and two-month U.S. dollar settings; and (b) immediately after June 30, 2023, in the case of the remaining U.S. dollar settings. We are considering the impact the planned phase out would have on our credit facility. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to LIBOR. However, it is currently uncertain what, if any, alternative reference interest rates, including SOFR, or other reforms will be enacted in response to the planned phase out, and we cannot assure you that an alternative to LIBOR (on which the Eurodollar Rate is based) that we find acceptable will be available to us.

In April 2021, we issued $315.0 million in aggregate principal amount of the 2021 Notes. The 2021 Notes have a fixed annual interest rate; therefore, we do not have economic interest rate exposure on the 2021 Notes. We carry the 2021 Notes at face value less the unamortized issuance costs on our condensed consolidated balance sheets. Generally, the fair market value of the 2021 Notes will increase as interest rates decline and decrease as interest rates rise. In addition, the fair market value of the 2021 Notes fluctuates when the market price of our common stock fluctuates.

The section entitled "Quantitative and Qualitative Disclosures About Market Risk" under Part II, Item 7A of our Annual Report on Form 10-K for the year ended January 31, 2021 provides detailed quantitative and qualitative discussions of the market risks affecting our operations. Other than as described above under "Interest Rate Risk on Our Debt" and the market risk that is created by the global market disruptions and uncertainties resulting from COVID-19, we believe that our market risk profile did not materially change during the nine months ended October 31, 2021.


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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of October 31, 2021. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2021.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended October 31, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Due to the COVID-19 pandemic, a significant number of our employees are still working from home. The design of our financial reporting processes, systems, and controls allows for remote execution with accessibility to secure data.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be achieved. Further, the design of a control system must reflect the impact of resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all possible conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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Part II

Item 1. Legal Proceedings

See Note 16, "Commitments and Contingencies" of the Notes to the condensed consolidated financial statements under Part I, Item 1 for information regarding our legal proceedings.


Item 1A. Risk Factors

Other than as discussed below, there have been no material changes to the Risk Factors described in Part I "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended January 31, 2021 and the Risk Factor described in Part II "Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2021 (the "First Quarter Form 10-Q"). In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in our Annual Report on Form 10-K and the First Quarter Form 10-Q, which could materially affect our business, financial condition, or operating results. The risks described in our Annual Report on Form 10-K and the First Quarter Form 10-Q are not the only risks facing us, however. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition, or operating results in the future.

The full extent to which the COVID-19 pandemic will adversely affect our business and results of operations cannot be predicted at this time.

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. This pandemic has caused significant economic disruption and uncertainty and governmental authorities around the world have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, shutdowns, limitations or closures of non-essential businesses, and social distancing requirements. Our customers, partners, and vendors, have also implemented actions in response to the pandemic, including among others, office closings, site restrictions, and employee travel restrictions. In response to these challenges, we established remote working arrangements for our employees, limited non-essential business travel, and canceled or shifted our customer, employee, and industry events to a virtual-only format. During the first half of the year ended January 31, 2021, we also implemented certain cost-reduction actions of varying durations. Such actions included, but were not limited to, reducing our discretionary spending, decreasing capital expenditures, reconsidering the optimal uses of our cash and other capital resources, including with respect to our stock repurchases, and reducing workforce-related costs. During the first half of the year ended January 31, 2021, our revenue was adversely impacted by delays and reduced spending attributed to the impact of the pandemic on our customers' operational priorities and as a result of cost containment measures they had implemented. We saw a reduction or delay in certain large customer contracts, particularly on-premises arrangements, and limitations on access to the facilities of our customers also impacted our ability to deliver some of our products and complete certain implementations, negatively impacting our ability to recognize revenue.

We saw an improvement in the business environment during the second half of the year ended January 31, 2021, which has continued to date into the year ending January 31, 2022. During the nine months ended October 31, 2021, we continued to experience solid demand for our cloud solutions as our customers have accelerated the digitization of their customer interactions and internal operations due to the pandemic. Based on the improved business environment and our financial performance, we have in many cases resumed investments and other spending; however, these actions may need to be reassessed depending on how the facts and circumstances surrounding the pandemic evolve. Any such renewed cost controls may have an adverse impact on us, particularly if they remain in place for an extended period. As the pandemic has evolved, we have also 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.

Notwithstanding the strong demand for our cloud solutions and the recovery in the business environment, given the uncertainty associated with the pandemic, our ability to predict how it will impact our business, financial condition, liquidity, and financial results in future periods is limited, particularly if the pandemic fails to abate for an extended period of time or worsens.

On September 9, 2021, the U.S. federal government issued the mandatory vaccination and workplace safety protocols of Executive Order 14042 and subsequent guidance issued thereunder by the Safer Federal Workforce Task Force. This mandate applies broadly to require covered federal contractor employees on covered contracts, those who perform duties in connection with a covered contract, and those working at the same workplace as covered employees, to be fully vaccinated for COVID-19 by a recently-revised deadline of January 4, 2022, except for those that are legally entitled to an accommodation under applicable law. We are party to or perform duties under such contracts. We may similarly be required to flow-down our
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obligations to certain of our subcontractors and suppliers. The guidance remains subject to the interpretation of various government agencies and other entities, and questions remain regarding the specific application of the Executive Order and related guidance. As a result, if our understanding of its application to our workforce differs from our federal customers' interpretation, or many of our covered employees are unwilling to comply with the mandate, we may experience increased costs, business disruptions and attrition as a result of the mandate. Additionally, we may be subject to potential breach of contract claims, loss of business and assessment of fines if we or our affected subcontractors and suppliers are not able to fully comply in the time frame provided or if such subcontractors and suppliers choose to terminate their contract rather than comply.

The ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made or may make in response on our business, financial condition, liquidity, and financial results cannot be predicted at this time.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities and Use of Proceeds

From November 1, 2021 through December 3, 2021 we issued 20,852 shares of common stock as part of the cashless exercise of approximately 1,776,000 Warrants that were issued concurrently with the issuance of the 2014 Notes. For additional information regarding these Warrants or the issuance of equity in settlement of the cashless exercise of these Warrants, see "Management Discussion and Analysis of Financial Condition and Results of Operation-Liquidity and Capital Resources-Financing Arrangements-Note Hedges and Warrants-Warrants" in Part I, Item 2 of this report.


Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On December 2, 2021, we announced that our board of directors had authorized a new stock repurchase program for the fiscal year ending January 31, 2023 whereby we may repurchase up to 1.5 million shares of common stock to offset dilution from our equity compensation program for such fiscal year. Repurchases are expected to be financed with available cash in the United States or through borrowing from the 2021 Revolving Credit Facility, subject to compliance with applicable laws, rules and regulations. Please refer to Note 17, "Subsequent Event", in Part I, Item 1 of this report for more information regarding this stock repurchase program.

From time to time, we have purchased treasury stock from directors, officers, and other employees to facilitate income tax withholding and payment requirements upon vesting of equity awards during a Company-imposed trading blackout or lockup period. Share repurchase activity during the three months ended October 31, 2021 was as follows:

Period Total Number Shares Purchased Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that My Yet Be Purchased Under the Plans or Programs
(in thousands)
August 1, 2021 - August 31, 2021 - $ - - $ -
September 1, 2021 - September 30, 2021 10,625 44.57 - -
October 1, 2021 - October 31, 2021 - - - -
10,625 $ 44.57 - $ -

(1) Represents the approximate weighted-average price paid per share.

Item 3. Defaults Upon Senior Securities

None.


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Item 4. Mine Safety Disclosures
Not applicable.


Item 5. Other Information

Not applicable.
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Item 6. Exhibits

The following exhibit list includes agreements that we entered into or that became effective during the three months ended October 31, 2021:
Number Description Filed Herewith /
Incorporated by
Reference from
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 (1)
Filed herewith
32.2
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 (1)
Filed herewith
101.INS XBRL Instance Document Filed herewith
101.SCH XBRL Taxonomy Extension Schema Document Filed herewith
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith
101.DEF XBRL Taxonomy Extension Definition Linkbase Document Filed herewith
101.LAB XBRL Taxonomy Extension Label Linkbase Document Filed herewith
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith
(1)These exhibits are being "furnished" with this periodic report and are not deemed "filed" with the SEC and are not incorporated by reference in any filing of the company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.


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Signature


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Verint Systems Inc.
December 6, 2021 /s/ Douglas E. Robinson
Douglas E. Robinson
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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