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crnc-10q_20200331.htm

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, 2020

☐	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	83-4719946
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
15 Wayside Road Burlington, Massachusetts	01803
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (857) 362-7300

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.

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, 2020, the registrant had 36,495,452 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Consolidated and Combined Financial Statements (Unaudited)	2
	Statements of Operations	2
	Statements of Comprehensive Income (Loss)	3
	Balance Sheets	4
	Statements of Equity	5
	Statements of Cash Flows	7
	Notes to Consolidated and Combined Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 5	Other Information	43
Item 6.	Exhibits	43
Signatures		44

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or Form 10-Q, filed by Cerence Inc. together with its consolidated subsidiaries, “Cerence” or 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 and projections about our industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of 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, 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 duration and severity of the COVID-19 pandemic and its impact on our business and financial performance;

•

adverse conditions in the automotive industry or the global economy more generally, including as a result of the COVID-19 pandemic;

•

our employees 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.;

•

the highly competitive and rapidly changing market in which we operate;

•

our strategy to increase cloud services and fluctuations in our operating results;

•

escalating pricing pressures from our customers;

•

our failure to win, renew or implement service contracts;

•

the cancellation or postponement of service contracts after a design win;

•

the loss of business from any of our largest customers;

•

transition difficulties with our first senior management team;

•

inability to recruit and retain qualified personnel;

•

cybersecurity and data privacy incidents that damage client relations;

•

economic, political, regulatory, foreign exchange and other risks of international operations;

•

unforeseen U.S. and foreign tax liabilities;

•

the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;

•

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;

•

a significant interruption in the supply or maintenance of our third-party hardware, software, services or data; 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, 2019 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.

PART I—FINANCIAL INFORMATION

Item 1. Consolidated and Combined Financial Statements.

CERENCE INC.

CONSOLIDATED STATEMENT OF OPERATIONS FOR MARCH 31, 2020

COMBINED STATEMENT OF OPERATIONS FOR MARCH 31, 2019

(Dollars in thousands, except share and per share data)

(unaudited)

	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
Revenues:
License	$	44,622		$	39,324		$	85,389		$	83,326
Connected services		23,131			18,858			46,152			36,113
Professional services		18,742			12,122			32,413			23,349
Total revenues		86,495			70,304			163,954			142,788
Cost of revenues:
License		843			567			1,524			907
Connected services		8,876			9,130			17,551			20,359
Professional services		16,753			12,726			31,244			23,189
Amortization of intangible assets		2,258			2,021			4,345			4,196
Total cost of revenues		28,730			24,444			54,664			48,651
Gross profit		57,765			45,860			109,290			94,137
Operating expenses:
Research and development		21,346			22,561			44,857			46,369
Sales and marketing		7,706			9,799			15,649			19,244
General and administrative		10,712			5,689			22,195			11,410
Amortization of intangible assets		3,125			3,132			6,256			6,264
Restructuring and other costs, net		2,870			4,329			10,424			7,456
Acquisition-related costs		—			182			—			417
Total operating expenses		45,759			45,692			99,381			91,160
Income from operations		12,006			168			9,909			2,977
Interest income		244			—			525			—
Interest expense		(6,699	)		—			(13,497	)		—
Other income (expense), net		226			266			80			250
Income (loss) before income taxes		5,777			434			(2,983	)		3,227
(Benefit from) provision for income taxes		(6,718	)		(20	)		(3,716	)		518
Net income	$	12,495		$	454		$	733		$	2,709
Net income per share:
Basic	$	0.34		$	0.01		$	0.02		$	0.07
Diluted	$	0.33		$	0.01		$	0.02		$	0.07
Weighted-average common share outstanding:
Basic		36,441,350			36,391,445			36,218,143			36,391,445
Diluted		37,391,720			36,391,445			36,693,328			36,391,445

Refer to accompanying Notes to the unaudited consolidated and combined financials statements.

CERENCE INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) FOR MARCH 31, 2020

COMBINED STATEMENT OF COMPREHENSIVE INCOME (LOSS) FOR MARCH 31, 2019

(Dollars in thousands)

(unaudited)

	Three Months Ended March 31,					Six Months Ended March 31,
	2020			2019		2020			2019
Net income	$	12,495		$	454	$	733		$	2,709
Other comprehensive (loss) income:
Foreign currency translation adjustments		(7,284	)		527		(2,380	)		(3,180	)
Pension adjustments		90			45		1,016			367
Total other comprehensive (loss) income		(7,194	)		572		(1,364	)		(2,813	)
Comprehensive income (loss)	$	5,301		$	1,026	$	(631	)	$	(104	)

Refer to accompanying Notes to the unaudited consolidated and combined financials statements.

CERENCE INC.

CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2020 (UNAUDITED)

COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2019

(Dollars in thousands, except share data)

	March 31, 2020			September 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	95,584		$	-
Accounts receivable, net of allowances of $1,315 and $865 at March 31, 2020 and September 30, 2019, respectively		92,272			65,787
Deferred costs		7,220			9,195
Prepaid expenses and other current assets		27,779			17,343
Total current assets		222,855			92,325
Property and equipment, net		26,206			20,113
Deferred costs		36,142			32,428
Operating lease right of use assets		18,593			—
Goodwill		1,117,577			1,119,329
Intangible assets, net		55,107			65,561
Deferred tax assets		161,943			150,629
Other assets		14,867			3,444
Total assets	$	1,653,290		$	1,483,829
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	18,786		$	16,687
Deferred revenue		113,111			88,233
Short-term operating lease liabilities		5,270			—
Short-term debt		9,450			—
Accrued expenses and other current liabilities		42,581			24,194
Total current liabilities		189,198			129,114
Long-term debt		237,925			—
Deferred revenue, net of current portion		234,981			265,051
Long-term operating lease liabilities		15,669			—
Other liabilities		39,138			21,536
Total liabilities		716,911			415,701
Commitments and contingencies (Note 10)
Stockholders' Equity:
Common stock, $0.01 par value, 600,000,000 shares authorized as of March 31, 2020; 36,457,914 shares issued and outstanding as of March 31, 2020		365			—
Net parent investment		-			1,097,127
Accumulated other comprehensive loss		(14,635	)		(28,999	)
Additional paid-in capital		949,916			—
Accumulated earnings		733			—
Total stockholders' equity		936,379			1,068,128
Total liabilities and stockholders' equity	$	1,653,290		$	1,483,829

Refer to accompanying Notes to the unaudited consolidated and combined financials statements.

CERENCE INC.

CONSOLIDATED STATEMENT OF EQUITY AND

COMBINED STATEMENT OF CHANGES IN PARENT COMPANY EQUITY

(Dollars in thousands)

(unaudited)

Three Months Ended March 31, 2020
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated (Deficit) Earnings			Net Parent Investment		Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2019		36,403		364		945,054			(11,762	)		-		(7,441	)		926,215
Net income		-		-		-			12,495			-		-			12,495
Other comprehensive loss		-		-		-			-			-		(7,194	)		(7,194	)
Stock issued pursuant to employee stock plans		55		1		(778	)		-			-		-			(777	)
Stock-based compensation		-		-		5,640			-			-		-			5,640
Balance at March 31, 2020		36,458	$	365	$	949,916		$	733		$	—	$	(14,635	)	$	936,379

Three Months Ended March 31, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital		Accumulated Earnings		Net Parent Investment			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2018		-	$	-	$	-	$	-	$	1,026,505		$	(27,342	)	$	999,163
Net income		-		-		-		-		454			-			454
Other comprehensive income		-		-		-		-		-			572			572
Net transfer to Parent		-		-		-		-		(17,003	)		-			(17,003	)
Balance at March 31, 2019		-	$	—	$	—	$	—	$	1,009,956		$	(26,770	)	$	983,186

CERENCE INC.

CONSOLIDATED STATEMENT OF EQUITY AND

COMBINED STATEMENT OF CHANGES IN PARENT COMPANY EQUITY (Cont.)

(Dollars in thousands)

(unaudited)

Six Months Ended March 31, 2020
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Earnings		Net Parent Investment			Accumulated Other Comprehensive Loss			Total
Balance at September 30, 2019		-	$	-	$	-		$	-	$	1,097,127		$	(28,999	)	$	1,068,128
Net income		-		-		-			733		-			-			733
Other comprehensive loss		-		-		-			-		-			(1,364	)		(1,364	)
Distribution to Parent		-		-		-			-		(152,978	)		-			(152,978	)
Net (decrease) increase in net parent investment		-		-		-			-		(4,275	)		15,728			11,453
Reclassification of net parent investment in Cerence		-		-		939,874			-		(939,874	)		-			—
Issuance of common stock at separation		36,391		364		(364	)		-		-			-			—
Stock issued pursuant to employee stock plans		67		1		(919	)		-		-			-			(918	)
Stock-based compensation		-		-		11,325			-		-			-			11,325
Balance at March 31, 2020		36,458	$	365	$	949,916		$	733	$	—		$	(14,635	)	$	936,379

Six Months Ended March 31, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital		Accumulated Earnings		Net Parent Investment			Accumulated Other Comprehensive Loss			Total
Balance at September 30, 2018 (As reported, ASC 605)		-	$	-	$	-	$	-	$	1,017,276		$	(23,957	)	$	993,319
Accumulated adjustment related to the adoption of ASC 606		-		-		-		-		6,974			-			6,974
Net income		-		-		-		-		2,709			-			2,709
Other comprehensive loss		-		-		-		-		-			(2,813	)		(2,813	)
Net transfer to Parent		-		-		-		-		(17,003	)		-			(17,003	)
Balance at March 31, 2019		-	$	—	$	—	$	—	$	1,009,956		$	(26,770	)	$	983,186

Refer to accompanying Notes to the unaudited consolidated and combined financials statements.

CERENCE INC.

CONSOLIDATED STATEMENT OF CASH FLOWS FOR MARCH 31, 2020

COMBINED STATEMENT OF CASH FLOWS FOR MARCH 31, 2019

(Dollars in thousands)

(unaudited)

	Six Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net income	$	733		$	2,709
Adjustments to reconcile net income to net cash (used in) provided by operations:
Depreciation and amortization		14,971			14,574
Provision for doubtful accounts		446			—
Stock-based compensation		15,529			13,367
Non-cash interest expense		2,646			—
Deferred tax benefit		(4,615	)		(2,898	)
Changes in operating assets and liabilities:
Accounts receivable		(26,692	)		5,584
Prepaid expenses and other assets		(13,605	)		(6,848	)
Deferred costs		(1,079	)		2,020
Accounts payable		6,384			849
Accrued expenses and other liabilities		13,028			832
Deferred revenue		(8,481	)		12,062
Net cash (used in) provided by operating activities		(735	)		42,251
Cash flows from investing activities:
Capital expenditures		(10,145	)		(2,472	)
Net cash used in investing activities		(10,145	)		(2,472	)
Cash flows from financing activities:
Net transaction with Parent		13,513			(39,779	)
Distribution to Parent		(152,978	)		—
Proceeds from long-term debt, net of discount		249,705			—
Payments for long-term debt issuance costs		(515	)		—
Principal payments of long-term debt		(2,363	)		—
Common stock repurchases for tax withholdings for net settlement of equity awards		(919	)		—
Principal payment of lease liabilities arising from a finance lease		(67	)		—
Net cash provided by (used in) financing activities		106,376			(39,779	)
Effects of exchange rate changes on cash and cash equivalents		88			—
Net change in cash and cash equivalents		95,584			—
Cash and cash equivalents at beginning of period