UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 August 1,
Table of Contents
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PART I. |
3 |
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Item 1. |
3 |
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3 |
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4 |
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Condensed Consolidated Balance Sheets as of June 30, 2024 and September 30, 2023 |
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6 |
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2024 and 2023 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 |
Item 3. |
45 |
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Item 4. |
46 |
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PART II. |
47 |
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Item 1. |
47 |
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Item 1A. |
48 |
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Item 5 |
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Item 6. |
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50 |
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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:
1
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)
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Three Months Ended June 30, |
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Nine Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenues: |
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License |
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$ |
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$ |
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$ |
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$ |
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Connected services |
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Professional services |
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Total revenues |
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Cost of revenues: |
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License |
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Connected services |
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Professional services |
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Amortization of intangible assets |
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Total cost of revenues |
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Gross profit |
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Operating expenses: |
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Research and development |
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Sales and marketing |
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General and administrative |
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Amortization of intangible assets |
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Restructuring and other costs, net |
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Goodwill impairment |
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Total operating expenses |
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Loss from operations |
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Interest income |
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Interest expense |
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Other income (expense), net |
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Loss before income taxes |
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(Benefit from) provision for income taxes |
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( |
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Net loss |
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$ |
( |
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$ |
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$ |
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$ |
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Net loss per share: |
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Basic |
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$ |
( |
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$ |
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$ |
( |
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$ |
( |
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Diluted |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Weighted-average common share outstanding: |
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Basic |
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Diluted |
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Refer to accompanying Notes to the unaudited condensed consolidated financial statements.
3
CERENCE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
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Three Months Ended June 30, |
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Nine Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Other comprehensive (loss) income: |
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Foreign currency translation adjustments |
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( |
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( |
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( |
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Pension adjustments, net |
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( |
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( |
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Net unrealized gains (losses) on available-for-sale securities |
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Total other comprehensive (loss) income |
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( |
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( |
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Comprehensive loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Refer to accompanying Notes to the unaudited condensed consolidated financial statements.
4
CERENCE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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June 30, 2024 |
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September 30, 2023 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Marketable securities |
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Accounts receivable, net of allowances of $ |
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Deferred costs |
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Prepaid expenses and other current assets |
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Total current assets |
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Long-term marketable securities |
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Property and equipment, net |
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Deferred costs |
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Operating lease right of use assets |
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Goodwill |
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Intangible assets, net |
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Deferred tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Deferred revenue |
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Short-term operating lease liabilities |
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Short-term debt |
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- |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term debt |
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Deferred revenue, net of current portion |
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Long-term operating lease liabilities |
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Other liabilities |
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Total liabilities |
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Stockholders' Equity: |
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Common stock, $ |
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Accumulated other comprehensive loss |
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( |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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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 June 30, 2024 |
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Common Stock |
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Shares |
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Amount |
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Additional |
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Accumulated Deficit |
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Accumulated |
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Total |
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Balance at March 31, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Other comprehensive loss |
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- |
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- |
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- |
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- |
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( |
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( |
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Issuance of common stock |
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- |
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- |
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Stock withheld to cover tax withholdings requirements upon stock vesting |
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- |
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- |
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( |
) |
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- |
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- |
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( |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Balance at June 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Three Months Ended June 30, 2023 |
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Common Stock |
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Shares |
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Amount |
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Additional |
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Accumulated Deficit |
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Accumulated |
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Total |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Other comprehensive loss |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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Issuance of common stock |
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- |
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- |
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- |
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Increase in fair value of conversion option |
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- |
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- |
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- |
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- |
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Stock withheld to cover tax withholdings requirements upon stock vesting |
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( |
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- |
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( |
) |
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- |
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- |
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( |
) |
Stock-based compensation |
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- |
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- |
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- |
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- |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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6
CERENCE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Cont.)
(In thousands)
(unaudited)
Nine Months Ended June 30, 2024 |
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Common Stock |
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Shares |
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Amount |
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Additional |
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Accumulated Deficit |
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Accumulated |
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Total |
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Balance at September 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net loss |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
Other comprehensive loss |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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Issuance of common stock |
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- |
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- |
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Stock withheld to cover tax withholdings requirements upon stock vesting |
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( |
) |
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- |
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( |
) |
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- |
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- |
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( |
) |
Stock-based compensation |
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- |
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- |
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- |
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- |
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Balance at June 30, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Nine Months Ended June 30, 2023 |
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Common Stock |
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Shares |
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Amount |
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Additional |
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Accumulated Deficit |
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Accumulated |
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Total |
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Balance at September 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Net loss |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
Cumulative effect adjustment due to the adoption of |
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- |
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- |
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( |
) |
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- |
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( |
) |
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Other comprehensive income |
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- |
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- |
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- |
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- |
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Issuance of common stock |
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|
- |
|
|
|
- |
|
|
|
|
||||
Increase in fair value of conversion option |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Stock withheld to cover tax withholdings requirements upon stock vesting |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Balance at June 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Refer to accompanying Notes to the unaudited condensed consolidated financial statements.
7
CERENCE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
Nine Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operations: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Provision for credit loss reserve |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Non-cash interest expense |
|
|
|
|
|
|
||
Loss on debt extinguishment |
|
|
— |
|
|
|
|
|
Deferred tax (benefit) provision |
|
|
( |
) |
|
|
|
|
Goodwill impairment |
|
|
|
|
|
— |
|
|
Unrealized foreign currency transaction losses (gains) |
|
|
|
|
|
( |
) |
|
Other |
|
|
( |
) |
|
|
( |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other assets |
|
|
|
|
|
|
||
Deferred costs |
|
|
|
|
|
|
||
Accounts payable |
|
|
( |
) |
|
|
|
|
Accrued expenses and other liabilities |
|
|
( |
) |
|
|
( |
) |
Deferred revenue |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) operating activities |
|
|
|
|
|
( |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
Purchases of marketable securities |
|
|
— |
|
|
|
( |
) |
Sale and maturities of marketable securities |
|
|
|
|
|
|
||
Other investing activities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) investing activities |
|
|
|
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from revolving credit facility |
|
|
— |
|
|
|
|
|
Proceeds from long-term debt, net of discount |
|
|
— |
|
|
|
|
|
Payments for long-term debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Principal payments of long-term debt |
|
|
— |
|
|
|
( |
) |
Common stock repurchases for tax withholdings for net settlement of equity awards |
|
|
( |
) |
|
|
( |
) |
Principal payment of lease liabilities arising from a finance lease |
|
|
( |
) |
|
|
( |
) |
Proceeds from the issuance of common stock |
|
|
|
|
|
|
||
Net cash provided by (used in) financing activities |
|
|
|
|
|
( |
) |
|
Effects of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Net change in cash and cash equivalents |
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
Supplemental information: |
|
|
|
|
|
|
||
Cash paid for income taxes |
|
$ |
|
|
$ |
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
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 nearly 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 nine months ended June 30, 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, judgments 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.
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 nine months ended June 30, 2024 is as follows (dollars in thousands):
|
|
Allowance for Credit Losses |
|
|
Balance as of September 30, 2023 |
|
$ |
|
|
Credit loss provision |
|
|
|
|
Write-offs, net of recoveries |
|
|
( |
) |
Effect of foreign currency translation |
|
|
|
|
Balance as of June 30, 2024 |
|
$ |
|
|
During the three months ended March 31, 2024, we recorded a $
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 June 30, 2024 and September 30, 2023, inventory was $
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 nine months ended June 30, 2024 and 2023 (dollars in thousands):
|
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
|
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