CONVERTIBLE PREFERRED STOCK

6 Months Ended

Jul. 31, 2020

Equity [Abstract]

CONVERTIBLE PREFERRED STOCK

CONVERTIBLE PREFERRED STOCK

On December 4, 2019, we entered into an Investment Agreement with the Apax Investor, whereby, subject to certain closing conditions, the Apax Investor has 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 Convertible Perpetual Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), pursuant to a certificate of designation of preferences, rights, and limitations (the “Series A Certificate of Designation”) filed with the Delaware Secretary of State, for an aggregate purchase price of $200.0 million, or $1,000 per share (the “Series A Private Placement”) 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.

•Upon completion of the Spin-Off and certain customary closing conditions, we will issue up to 200,000 shares of Series B Convertible Perpetual Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”) at a purchase price of $1,000 per share (the “Series B Private Placement”) to the Apax Investor, subject to certain conditions. The closing of the Series B Private Placement (the “Series B Closing Date”) is contingent on, among other conditions, completion of the Spin-Off and the respective enterprise values of our Customer Engagement Solutions business and Cyber Intelligence Solutions business at the time of the Spin-Off being above a specified floor, as well as satisfaction or waiver of certain customary closing conditions. The closing of the Series B Private Placement is expected to occur shortly after the consummation of the Spin-Off and determination of the relative enterprise values of the two businesses.

Voting Rights

Holders of the Series A Preferred Stock have the right to vote on matters submitted to a vote of the holders of our common stock, par value $0.001 per share (the “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 Series A 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 Series A 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 Series A 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 Series A 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 Series A Preferred Stock. The applicable 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 Series A Preferred Stock in specified circumstances.

As of July 31, 2020, we had declared and accrued dividends of $1.6 million associated with the Series A Preferred Stock.

Conversion

The Series A Preferred Stock is convertible into Common stock at the election of the holder, subject to certain conditions including conditions associated with the Spin-Off, at an initial conversion price of $53.50 per share. Assuming completion of the Spin-Off, the Series A Preferred Stock will not participate in the Spin-Off distribution of the shares of the company holding our Cyber Intelligence Solutions business, and instead, the conversion price of the Series A Preferred Stock will be adjusted based on the ratio of the trading prices of the two post-Spin-Off companies over a short period following the Spin-Off, subject to a collar. As of July 31, 2020, the maximum number of shares of Common Stock that could be required to be issued upon conversion of the outstanding shares of Series A Preferred Stock was 3.7 million shares.

At any time after 36 months following the Series A Closing Date, we will have the option to require that all of the then-outstanding shares of Series A Preferred Stock 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 the Series A Preferred Stock (a “Mandatory Conversion”).

We may redeem any or all of the Series A Preferred Stock for cash at any time after the 72-month anniversary of the Series A Closing Date at a redemption price equal to 100% of the liquidation preference of the shares of the Series A 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 Series A 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 Series A 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 Series A 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 Series A Closing Date or upon the occurrence of a change of control triggering event (as set forth in the Series A Certificate of Designation), the holders of the Series A Preferred Stock will have the right to cause us to redeem all of the outstanding shares of Series A Preferred Stock for cash at a redemption price equal to 100% of the liquidation preference of the shares of Series A Preferred Stock, plus any accrued and unpaid dividends to, but excluding, the redemption date. Therefore, the Series A Preferred Stock has been classified as mezzanine equity on our condensed consolidated balance sheet as of July 31, 2020, separate from permanent equity, as the potential required repurchase of the Series A Preferred Stock, however remote in likelihood, is not solely under our control.

As of July 31, 2020, the Series A Preferred Stock is 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 Series A 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 Series A Preferred Stock to its current redemption amount, which was its liquidation preference, at July 31, 2020 plus accrued and unpaid dividends. As of July 31, 2020, the stated value of the Series A Preferred Stock liquidation preference was $200.0 million and cumulative, unpaid dividends on the Series A Preferred Stock were $2.5 million.

Future Tranche Right

We have determined that our obligation to issue and the Apax Investor’s obligation to purchase up to 200,000 shares of the Series B Preferred Stock upon the completion of the Spin-Off and other customary closing conditions (the “Future Tranche Right”) meets the definition of a freestanding financial instrument as the Future Tranche Right is legally detachable and separately exercisable from the Series A Preferred Stock. Since the Future Tranche Right is subject to fair value accounting, we allocated the proceeds from the issuance of the Series A Preferred Stock to the Future Tranche Right based upon its fair value at the date of issuance, with the remaining proceeds being allocated to the Series A Preferred Stock. The Future Tranche Right is remeasured at fair value each reporting period until settlement, and changes in its fair value are recognized as a component of 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.

At July 31, 2020, the fair value of the Future Tranche Right was a liability of $10.2 million, due primarily to declining credit market interest rates associated with worsened and uncertain economic conditions occurring during the period. The $13.6 million change in fair value of the Future Tranche Right was recorded as an expense for the three months ended July 31, 2020 within other (expense) income, net. The $10.2 million fair value of the Future Tranche Right is included within accrued expenses and other liabilities on our condensed consolidated balance sheet at July 31, 2020. Please refer to Note 12, “Fair Value Measurements” for additional information regarding valuations of the Future Tranche Right.