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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 March 31, 2024

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 Number: 001-39030

 

CERENCE INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

83-4177087

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

25 Mall Road, Suite 416

Burlington, Massachusetts

01803

(Address of principal executive offices)

(Zip Code)

(857) 362-7300

(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

Common Stock, par value $0.01 per share

 

CRNC

 

The 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 1, 2024, the registrant had 41,777,242 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

Table of Contents

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2024 and 2023

3

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended March 31, 2024 and 2023

4

 

Condensed Consolidated Balance Sheets as of March 31, 2024 and September 30, 2023

5

 

Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended March 31, 2024 and 2023

6

Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2024 and 2023

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

45

PART II.

OTHER INFORMATION

46

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

47

Item 5

Other Information

47

Item 6.

Exhibits

48

Signatures

49

 

 

i


 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”), filed by Cerence Inc. together with its consolidated subsidiaries, “Cerence,” the “Company,” “we,” “us” or “our” unless the context indicates otherwise, contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions, plans and projections about our business, operations, industry, financial results, financial condition, strategy, goals or prospects. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals,” “objectives” and words and terms of similar substance in connection with discussions of our business and future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions as of the date of this report, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

the highly competitive and rapidly changing market in which we operate;
adverse conditions in the automotive industry or the global economy more generally, including the continuation of the semiconductor shortage being experienced by the automotive industry, consumer spending and preferences, changing in interest rate levels and credit availability, fuel costs and availability, governmental incentives and regulatory requirements, the conflict between Russia and Ukraine and the ongoing conflict between Israel and Hamas;
automotive production delays, including, without limitation, delays due to the increasing complexity of software included in automotive vehicles;
the continuing effects of the COVID-19 pandemic and its impact on our business and financial performance, including the impact of new variants;
our strategy to increase cloud services and ability to successfully introduce new products, applications or services and deploy generative AI and large language models (LLMs);
escalating pricing pressures from our customers;
the cancellation or postponement of service contracts after a design win;
the loss of business from any of our largest customers;
the impact on our business of the transition to a lower level of fixed contracts, including, but not limited to, the failure to achieve the expected predictability and growth in our reported revenue following a transition year of fiscal 2023;
our failure to win, renew or implement service contracts;
fluctuations in our financial and operating results, which may be contributed to by the following factors, among others: the volume, timing and fulfillment of customer contracts; changes in customer forecasts; the timing of receipt and accuracy of royalty reports; fluctuating sales by our customers to their end-users; pricing; and the mix of revenue from customer contracts;
our inability to control and successfully manage our expense and cash positions;
our inability to recruit and retain qualified personnel;
our employees are represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws of the U.S.;
cybersecurity and data privacy incidents that damage client relations;
interruption or delays in our services or services from data center hosting facilities or public clouds;
economic, political, regulatory, foreign exchange and other risks of international operations;
unforeseen U.S. and foreign tax liabilities;
increases or decreases to valuation allowances recorded against deferred tax assets;
impairment of our goodwill and other intangible assets;
the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;

1


 

defects in our software products that result in lost revenue, expensive corrections or claims against us;
our inability to quickly respond to changes in technology and to develop our intellectual property into commercially viable products;
our inability to expand into adjacent markets, including, without limitation, two-wheeled vehicles, trucks and AIoT, in the timeframes or levels expected;
a significant interruption in the supply or maintenance of our third-party hardware, software, services or data;
restrictions on our current and future operations under the terms of our debt and the use of cash to service our debt; and
certain factors discussed elsewhere in this Form 10-Q.

These and other factors are more fully discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 and elsewhere in this Form 10-Q, including Part II, “Item 1A, Risk Factors.” These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by law.

2


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

License

 

$

35,527

 

 

$

30,800

 

 

$

56,350

 

 

$

76,217

 

Connected services

 

 

13,597

 

 

 

18,926

 

 

 

110,417

 

 

 

37,320

 

Professional services

 

 

18,701

 

 

 

18,667

 

 

 

39,393

 

 

 

38,514

 

Total revenues

 

 

67,825

 

 

 

68,393

 

 

 

206,160

 

 

 

152,051

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

License

 

 

1,404

 

 

 

2,209

 

 

 

3,008

 

 

 

3,823

 

Connected services

 

 

5,359

 

 

 

6,114

 

 

 

12,662

 

 

 

12,656

 

Professional services

 

 

14,119

 

 

 

16,587

 

 

 

31,444

 

 

 

34,511

 

Amortization of intangible assets

 

 

 

 

 

104

 

 

 

103

 

 

 

207

 

Total cost of revenues

 

 

20,882

 

 

 

25,014

 

 

 

47,217

 

 

 

51,197

 

Gross profit

 

 

46,943

 

 

 

43,379

 

 

 

158,943

 

 

 

100,854

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

31,846

 

 

 

28,494

 

 

 

65,152

 

 

 

57,988

 

Sales and marketing

 

 

5,619

 

 

 

8,217

 

 

 

11,690

 

 

 

17,379

 

General and administrative

 

 

16,659

 

 

 

19,177

 

 

 

29,452

 

 

 

33,434

 

Amortization of intangible assets

 

 

555

 

 

 

2,394

 

 

 

1,100

 

 

 

4,744

 

Restructuring and other costs, net

 

 

4,551

 

 

 

5,714

 

 

 

5,256

 

 

 

9,903

 

Goodwill impairment

 

 

252,096

 

 

 

 

 

 

252,096

 

 

 

 

Total operating expenses

 

 

311,326

 

 

 

63,996

 

 

 

364,746

 

 

 

123,448

 

Loss from operations

 

 

(264,383

)

 

 

(20,617

)

 

 

(205,803

)

 

 

(22,594

)

Interest income

 

 

1,190

 

 

 

1,163

 

 

 

2,622

 

 

 

2,033

 

Interest expense

 

 

(3,111

)

 

 

(4,003

)

 

 

(6,347

)

 

 

(7,517

)

Other (expense) income, net

 

 

(25

)

 

 

1,074

 

 

 

1,397

 

 

 

4,787

 

Loss before income taxes

 

 

(266,329

)

 

 

(22,383

)

 

 

(208,131

)

 

 

(23,291

)

Provision for income taxes

 

 

11,647

 

 

 

3,706

 

 

 

45,988

 

 

 

4,956

 

Net loss

 

$

(277,976

)

 

$

(26,089

)

 

$

(254,119

)

 

$

(28,247

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(6.66

)

 

$

(0.65

)

 

$

(6.13

)

 

$

(0.70

)

Diluted

 

$

(6.66

)

 

$

(0.65

)

 

$

(6.13

)

 

$

(0.70

)

Weighted-average common share outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

41,724

 

 

 

40,219

 

 

 

41,452

 

 

 

40,088

 

Diluted

 

 

41,724

 

 

 

40,219

 

 

 

41,452

 

 

 

40,088

 

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

3


 

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(277,976

)

 

$

(26,089

)

 

$

(254,119

)

 

$

(28,247

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(3,225

)

 

 

939

 

 

 

1,055

 

 

 

10,101

 

Pension adjustments, net

 

 

(39

)

 

 

(55

)

 

 

(12

)

 

 

(29

)

Net unrealized (losses) gains on available-for-sale securities

 

 

(3

)

 

 

193

 

 

 

160

 

 

 

292

 

Total other comprehensive (loss) income

 

 

(3,267

)

 

 

1,077

 

 

 

1,203

 

 

 

10,364

 

Comprehensive loss

 

$

(281,243

)

 

$

(25,012

)

 

$

(252,916

)

 

$

(17,883

)

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

4


 

CERENCE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

March 31, 2024

 

 

September 30, 2023

 

 

(Unaudited)

 

 

 

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

99,176

 

 

$

101,154

 

Marketable securities

 

 

9,356

 

 

 

9,211

 

Accounts receivable, net of allowances of $4,101 and $4,044

 

 

66,787

 

 

 

61,270

 

Deferred costs

 

 

5,296

 

 

 

6,935

 

Prepaid expenses and other current assets

 

 

52,121

 

 

 

47,157

 

Total current assets

 

 

232,736

 

 

 

225,727

 

Long-term marketable securities

 

 

6,711

 

 

 

10,607

 

Property and equipment, net

 

 

32,242

 

 

 

34,013

 

Deferred costs

 

 

18,857

 

 

 

20,299

 

Operating lease right of use assets

 

 

10,941

 

 

 

11,961

 

Goodwill

 

 

650,623

 

 

 

900,342

 

Intangible assets, net

 

 

2,750

 

 

 

3,875

 

Deferred tax assets

 

 

7,059

 

 

 

46,601

 

Other assets

 

 

25,173

 

 

 

44,165

 

Total assets

 

$

987,092

 

 

$

1,297,590

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

16,429

 

 

$

16,873

 

Deferred revenue

 

 

45,483

 

 

 

77,068

 

Short-term operating lease liabilities

 

 

5,188

 

 

 

5,434

 

Accrued expenses and other current liabilities

 

 

39,552

 

 

 

48,718

 

Total current liabilities

 

 

106,652

 

 

 

148,093

 

Long-term debt

 

 

278,890

 

 

 

275,951

 

Deferred revenue, net of current portion

 

 

103,468

 

 

 

145,531

 

Long-term operating lease liabilities

 

 

7,010

 

 

 

7,947

 

Other liabilities

 

 

27,672

 

 

 

25,193

 

Total liabilities

 

 

523,692

 

 

 

602,715

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 560,000 shares authorized; 41,777 and 40,423 shares issued and outstanding, respectively

 

 

417

 

 

 

404

 

Accumulated other comprehensive loss

 

 

(26,763

)

 

 

(27,966

)

Additional paid-in capital

 

 

1,077,527

 

 

 

1,056,099

 

Accumulated deficit

 

 

(587,781

)

 

 

(333,662

)

Total stockholders' equity

 

 

463,400

 

 

 

694,875

 

Total liabilities and stockholders' equity

 

$

987,092

 

 

$

1,297,590

 

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

5


 

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

 

 

Three Months Ended March 31, 2024

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at December 31, 2023

 

 

41,237

 

$

412

 

 

$

1,064,022

 

 

$

(309,805

)

 

$

(23,496

)

 

$

731,133

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(277,976

)

 

 

-

 

 

 

(277,976

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,267

)

 

 

(3,267

)

Issuance of common stock

 

 

541

 

 

 

5

 

 

 

4,317

 

 

 

-

 

 

 

-

 

 

 

4,322

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(1

)

 

 

-

 

 

 

(3,535

)

 

 

-

 

 

 

-

 

 

 

(3,535

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

12,723

 

 

 

-

 

 

 

-

 

 

 

12,723

 

Balance at March 31, 2024

 

 

41,777

 

 

$

417

 

 

$

1,077,527

 

 

$

(587,781

)

 

$

(26,763

)

 

$

463,400

 

 

 

Three Months Ended March 31, 2023

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at December 31, 2022

 

 

40,017

 

 

$

400

 

 

$

1,023,467

 

 

$

(279,566

)

 

$

(24,450

)

 

$

719,851

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(26,089

)

 

 

-

 

 

 

(26,089

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,077

 

 

 

1,077

 

Issuance of common stock

 

 

276

 

 

 

3

 

 

 

2,668

 

 

 

-

 

 

 

-

 

 

 

2,671

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(1

)

 

 

-

 

 

 

(1,787

)

 

 

-

 

 

 

-

 

 

 

(1,787

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

13,700

 

 

 

-

 

 

 

-

 

 

 

13,700

 

Balance at March 31, 2023

 

 

40,292

 

 

$

403

 

 

$

1,038,048

 

 

$

(305,655

)

 

$

(23,373

)

 

$

709,423

 

 

 

 

 

 

6


 

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont.)

(In thousands)

(unaudited)

 

Six Months Ended March 31, 2024

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at September 30, 2023

 

 

40,423

 

$

404

 

 

$

1,056,099

 

 

$

(333,662

)

 

$

(27,966

)

 

$

694,875

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(254,119

)

 

 

-

 

 

 

(254,119

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,203

 

 

 

1,203

 

Issuance of common stock

 

 

1,355

 

 

 

13

 

 

 

10,510

 

 

 

-

 

 

 

-

 

 

 

10,523

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(1

)

 

 

-

 

 

 

(9,744

)

 

 

-

 

 

 

-

 

 

 

(9,744

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

20,662

 

 

 

-

 

 

 

-

 

 

 

20,662

 

Balance at March 31, 2024

 

 

41,777

 

 

$

417

 

 

$

1,077,527

 

 

$

(587,781

)

 

$

(26,763

)

 

$

463,400

 

 

 

Six Months Ended March 31, 2023

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at September 30, 2022

 

 

39,430

 

 

$

394

 

 

$

1,029,542

 

 

$

(283,249

)

 

$

(33,737

)

 

$

712,950

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(28,247

)

 

 

-

 

 

 

(28,247

)

Cumulative effect adjustment due to the adoption of ASU 2020-06

 

 

-

 

 

 

-

 

 

 

(14,371

)

 

 

5,841

 

 

 

-

 

 

 

(8,530

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,364

 

 

 

10,364

 

Issuance of common stock

 

 

920

 

 

 

10

 

 

 

4,384

 

 

 

-

 

 

 

-

 

 

 

4,394

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(58

)

 

 

(1

)

 

 

(4,429

)

 

 

-

 

 

 

-

 

 

 

(4,430

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

22,922

 

 

 

-

 

 

 

-

 

 

 

22,922

 

Balance at March 31, 2023

 

 

40,292

 

 

$

403

 

 

$

1,038,048

 

 

$

(305,655

)

 

$

(23,373

)

 

$

709,423

 

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7


 

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Six Months Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(254,119

)

 

$

(28,247

)

Adjustments to reconcile net loss to net cash (used in) provided by operations:

 

 

 

 

 

 

Depreciation and amortization

 

 

5,384

 

 

 

10,033

 

Provision for credit loss reserve

 

 

6,065

 

 

 

3,626

 

Stock-based compensation

 

 

13,125

 

 

 

24,827

 

Non-cash interest expense

 

 

2,939

 

 

 

910

 

Deferred tax provision (benefit)

 

 

40,949

 

 

 

(422

)

Goodwill impairment

 

 

252,096

 

 

 

 

Unrealized foreign currency transaction gains

 

 

(262

)

 

 

(6,461

)

Other

 

 

474

 

 

 

(608

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(75

)

 

 

(14,836

)

Prepaid expenses and other assets

 

 

5,854

 

 

 

13,014

 

Deferred costs

 

 

3,423

 

 

 

2,559

 

Accounts payable

 

 

(292

)

 

 

7,864

 

Accrued expenses and other liabilities

 

 

(1,673

)

 

 

2,930

 

Deferred revenue

 

 

(75,659

)

 

 

(10,752

)

Net cash (used in) provided by operating activities

 

 

(1,771

)

 

 

4,437

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(2,776

)

 

 

(2,077

)

Purchases of marketable securities

 

 

 

 

 

(11,045

)

Sale and maturities of marketable securities

 

 

3,912

 

 

 

15,900

 

Other investing activities

 

 

(891

)

 

 

(552

)

Net cash provided by investing activities

 

 

245

 

 

 

2,226

 

Cash flows from financing activities:

 

 

 

 

 

 

Payments for long-term debt issuance costs

 

 

 

 

 

(403

)

Principal payments of long-term debt

 

 

 

 

 

(4,688

)

Common stock repurchases for tax withholdings for net settlement of equity awards

 

 

(9,744

)

 

 

(4,430

)

Principal payment of lease liabilities arising from a finance lease

 

 

(202

)

 

 

(316

)

Proceeds from the issuance of common stock

 

 

10,461

 

 

 

4,394

 

Net cash provided by (used in) financing activities

 

 

515

 

 

 

(5,443

)

Effects of exchange rate changes on cash and cash equivalents

 

 

(967

)

 

 

(690

)

Net change in cash and cash equivalents

 

 

(1,978

)

 

 

530

 

Cash and cash equivalents at beginning of period

 

 

101,154

 

 

 

94,847

 

Cash and cash equivalents at end of period

 

$

99,176

 

 

$

95,377

 

Supplemental information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

6,256

 

 

$

4,053

 

Cash paid for interest

 

$

3,076

 

 

$

6,492

 

 

Refer to accompanying Notes to the unaudited condensed consolidated financial statements.

8


 

CERENCE INC.

Notes to Condensed Consolidated Financial Statements

Note 1. Business Overview

Business

Cerence Inc. (referred to in this Quarterly Report on Form 10-Q as “we,” “our,” “us,” “ourselves,” the “Company” or “Cerence”) is a global, premier provider of AI-powered assistants and innovations for connected and autonomous vehicles. Our customers include all major automobile original equipment manufacturers (“OEMs”), or their tier 1 suppliers worldwide. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users. We generate revenue primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue from our work with OEMs and suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects.

Note 2. Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, as well as those of our wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.

The condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and six months ended March 31, 2024 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending September 30, 2024. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

Use of Estimates

The financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions. These estimates, judgments and assumptions can affect the reported amounts in the financial statements and the footnotes thereto. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, assumptions and judgments. Significant estimates inherent to the preparation of financial statements include: revenue recognition; allowance for credit losses; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations; accounting for stock-based compensation; accounting for income taxes; accounting for leases; accounting for convertible debt; and loss contingencies. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.

Concentration of Risk

Financial instruments that potentially subject us to significant concentrations of credit risk primarily consist of trade accounts receivable. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed appropriate. One customer accounted for 12.5% of our Accounts receivable, net balance at March 31, 2024. Two customers accounted for 10.8% and 10.1% of our Accounts receivable, net balance at September 30, 2023.

Allowance for Credit Losses

We are exposed to credit losses primarily through our sales of software licenses and services to customers. We determine credit ratings for each customer in our portfolio based upon public information and information obtained directly from our customers. A credit limit for each customer is established and in certain cases we may require collateral or prepayment to mitigate credit risk. Our expected loss methodology is developed using historical collection experience, current customer credit information, current and future economic and market conditions and a review of the current status of the customer's account balances. We monitor our ongoing credit

 


 

exposure through reviews of customer balances against contract terms and due dates, current economic conditions, and dispute resolution. Estimated credit losses are written off in the period in which the financial asset is no longer collectible.

The change in the allowance for credit losses for the six months ended March 31, 2024 is as follows (dollars in thousands):

 

 

Allowance for Credit Losses

 

Balance as of September 30, 2023

 

$

4,131

 

Credit loss provision

 

 

6,065

 

Write-offs, net of recoveries

 

 

(6,065

)

Effect of foreign currency translation

 

 

4

 

Balance as of March 31, 2024

 

$

4,135

 

During the three months ended March 31, 2024, we recorded a $6.1 million provision relating to the bankruptcy of one fitness equipment manufacturer, of which $6.0 million relates to a contract asset and $0.1 million relates to a trade receivable.

Inventory

Inventory, consisting primarily of finished goods related to our Cerence Link product, is accounted for using the first in, first out method, and is valued at the lower of cost and net realizable value. Inventory is included within Prepaid expenses and other current assets. As of March 31, 2024 and September 30, 2023, inventory was $1.1 million and $0.5 million, respectively.

Recently Adopted Accounting Standards

None.

Issued Accounting Standards Not Yet Adopted

In November 2023, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), to expand reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in the ASU require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker (“CODM”), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. ASU 2023-07 applies to entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. A public entity should apply ASU 2023-07 retrospectively to all prior periods presented in the financial statements, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our condensed consolidated financial statements and disclosures.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid and is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. We are currently in the process of evaluating the effects of this pronouncement on our condensed consolidated financial statements and disclosures.

10


 

Note 3. Revenue Recognition

We primarily derive revenue from the following sources: (1) royalty-based software license arrangements, (2) connected services, and (3) professional services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

(a) Disaggregated Revenue

Revenues, classified by the major geographic region in which our customers are located, for the three and six months ended March 31, 2024 and 2023 (dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

16,018

 

 

$

21,742

 

 

$

115,487

 

 

$

43,098

 

Other Americas

 

 

52

 

 

 

28

 

 

 

136

 

 

 

54

 

Germany

 

 

35,424

 

 

 

24,627

 

 

 

54,557

 

 

 

42,791

 

Other Europe, Middle East and Africa

 

 

3,457

 

 

 

3,512

 

 

 

8,232

 

 

 

7,184

 

Japan

 

 

4,548

 

 

 

5,738

 

 

 

10,171

 

 

 

31,579

 

Other Asia-Pacific

 

 

8,326

 

 

 

12,746

 

 

 

17,577

 

 

 

27,345

 

Total net revenues

 

$

67,825

 

 

$

68,393

 

 

$

206,160

 

 

$

152,051

 

 

For the three and six months ended March 31, 2023, revenues within China were $7.0 million and $16.7 million, respectively, which were over