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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 December 31, 2020

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.)

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.

 

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 January 26, 2021, the registrant had 37,712,708 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 Months Ended December 31, 2020 and 2019

3

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2020 and 2019

4

 

Condensed Consolidated Balance Sheets as of December 31, 2020 and September 30, 2020

5

 

Consolidated Statements of Stockholders' Equity for the Three Months Ended December 31, 2020 and 2019

6

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2020 and 2019

7

 

Notes to Condensed Consolidated 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

37

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

39

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 6.

Exhibits

40

Signatures

41

 

 

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” 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;

 

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

 

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.;

 

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;

 

inability to recruit and retain qualified personnel;

 

cybersecurity and data privacy incidents that damage client relations;

 

interruptions 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;

 

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;

 

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 successfully introduce new products, applications or services;

 

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, 2020 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.

1


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

(Dollars in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

License

 

$

46,414

 

 

$

40,767

 

Connected services

 

 

27,251

 

 

 

23,021

 

Professional services

 

 

21,299

 

 

 

13,671

 

Total revenues

 

 

94,964

 

 

 

77,459

 

Cost of revenues:

 

 

 

 

 

 

 

 

License

 

 

674

 

 

 

681

 

Connected services

 

 

7,013

 

 

 

8,675

 

Professional services

 

 

17,315

 

 

 

14,491

 

Amortization of intangible assets

 

 

1,879

 

 

 

2,087

 

Total cost of revenues

 

 

26,881

 

 

 

25,934

 

Gross profit

 

 

68,083

 

 

 

51,525

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

24,091

 

 

 

23,511

 

Sales and marketing

 

 

8,898

 

 

 

7,943

 

General and administrative

 

 

11,617

 

 

 

11,483

 

Amortization of intangible assets

 

 

3,158

 

 

 

3,131

 

Restructuring and other costs, net

 

 

47

 

 

 

7,554

 

Total operating expenses

 

 

47,811

 

 

 

53,622

 

Income (loss) from operations

 

 

20,272

 

 

 

(2,097

)

Interest income

 

 

18

 

 

 

281

 

Interest expense

 

 

(3,799

)

 

 

(6,798

)

Other income (expense), net

 

 

(2,237

)

 

 

(146

)

Income (loss) before income taxes

 

 

14,254

 

 

 

(8,760

)

(Benefit from) provision for income taxes

 

 

(7,384

)

 

 

3,002

 

Net income (loss)

 

$

21,638

 

 

$

(11,762

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

(0.33

)

Diluted

 

$

0.54

 

 

$

(0.33

)

Weighted-average common share outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

37,180

 

 

 

35,995

 

Diluted

 

 

43,363

 

 

 

35,995

 

 

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

3


CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

Net income (loss)

 

$

21,638

 

 

$

(11,762

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

14,170

 

 

 

4,904

 

Pension adjustments, net

 

 

(30

)

 

 

926

 

Total other comprehensive income

 

 

14,140

 

 

 

5,830

 

Comprehensive income (loss)

 

$

35,778

 

 

$

(5,932

)

 

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

4


CERENCE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

 

December 31, 2020

 

 

September 30, 2020

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

110,360

 

 

$

136,067

 

Marketable securities

 

 

17,088

 

 

 

11,662

 

Accounts receivable, net of allowances of $579 and $1,394

 

 

60,426

 

 

 

49,943

 

Deferred costs

 

 

7,748

 

 

 

7,256

 

Prepaid expenses and other current assets

 

 

43,703

 

 

 

44,220

 

Total current assets

 

 

239,325

 

 

 

249,148

 

Property and equipment, net

 

 

29,708

 

 

 

29,529

 

Deferred costs

 

 

36,913

 

 

 

38,161

 

Operating lease right of use assets

 

 

20,630

 

 

 

20,096

 

Goodwill

 

 

1,136,356

 

 

 

1,128,198

 

Intangible assets, net

 

 

41,070

 

 

 

45,616

 

Deferred tax assets

 

 

180,166

 

 

 

161,759

 

Other assets

 

 

16,580

 

 

 

14,938

 

Total assets

 

$

1,700,748

 

 

$

1,687,445

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,806

 

 

$

8,447

 

Deferred revenue

 

 

104,577

 

 

 

112,520

 

Short-term operating lease liabilities

 

 

6,259

 

 

 

5,700

 

Short-term debt

 

 

6,250

 

 

 

6,250

 

Accrued expenses and other current liabilities

 

 

52,200

 

 

 

67,857

 

Total current liabilities

 

 

174,092

 

 

 

200,774

 

Long-term debt

 

 

266,019

 

 

 

266,872

 

Deferred revenue, net of current portion

 

 

215,692

 

 

 

212,573

 

Long-term operating lease liabilities

 

 

16,823

 

 

 

17,821

 

Other liabilities

 

 

34,994

 

 

 

31,649

 

Total liabilities

 

 

707,620

 

 

 

729,689

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 560,000 shares authorized; 37,685 shares issued and outstanding as of December 31, 2020; 36,842 shares issued and outstanding as of September 30, 2020.

 

 

378

 

 

 

369

 

Accumulated other comprehensive income

 

 

17,851

 

 

 

3,711

 

Additional paid-in capital

 

 

973,892

 

 

 

974,307

 

Retained earnings (accumulated deficit)

 

 

1,007

 

 

 

(20,631

)

Total stockholders' equity

 

 

993,128

 

 

 

957,756

 

Total liabilities and stockholders' equity

 

$

1,700,748

 

 

$

1,687,445

 

 

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 December 31, 2020

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

(Accumulated Deficit) Retained Earnings

 

 

Net

Parent

Investment

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

 

Balance at September 30, 2020

 

 

36,842

 

 

$

369

 

 

$

974,307

 

 

$

(20,631

)

 

$

-

 

 

$

3,711

 

 

$

957,756

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

21,638

 

 

 

-

 

 

 

-

 

 

 

21,638

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,140

 

 

 

14,140

 

Issuance of common stock

 

 

1,276

 

 

 

13

 

 

 

3,650

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,663

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(433

)

 

 

(4

)

 

 

(30,254

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(30,258

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

26,189

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

26,189

 

Balance at December 31, 2020

 

 

37,685

 

 

$

378

 

 

$

973,892

 

 

$

1,007

 

 

$

 

 

$

17,851

 

 

$

993,128

 

 

 

Three Months Ended December 31, 2019

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Accumulated Deficit

 

 

Net

Parent

Investment

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at September 30, 2019

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,097,127

 

 

$

(28,999

)

 

$

1,068,128

 

Net (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,762

)

 

 

-

 

 

 

-

 

 

 

(11,762

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,830

 

 

 

5,830

 

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

 

 

21

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(9

)

 

 

(0

)

 

 

(141

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(141

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

5,685

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,685

 

Balance at December 31, 2019

 

 

36,403

 

 

$

364

 

 

$

945,054

 

 

$

(11,762

)

 

$

-

 

 

$

(7,441

)

 

$

926,215

 

 

 

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

6


CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,638

 

 

$

(11,762

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,624

 

 

 

7,359

 

Benefit from credit loss reserve

 

 

(410

)

 

 

 

Stock-based compensation

 

 

12,351

 

 

 

8,969

 

Non-cash interest expense

 

 

1,230

 

 

 

1,332

 

Deferred tax benefit

 

 

(14,106

)

 

 

(4,928

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,112

)

 

 

1,691

 

Prepaid expenses and other assets

 

 

1,025

 

 

 

(18,193

)

Deferred costs

 

 

2,051

 

 

 

(192

)

Accounts payable

 

 

(3,655

)

 

 

905

 

Accrued expenses and other liabilities

 

 

(1,960

)

 

 

22,210

 

Deferred revenue

 

 

(6,867

)

 

 

2,065

 

Net cash provided by operating activities

 

 

10,809

 

 

 

9,456

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,369

)

 

 

(3,612

)

Purchases of marketable securities

 

 

(6,358

)

 

 

 

Net cash used in investing activities

 

 

(8,727

)

 

 

(3,612

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net transaction with Parent

 

 

 

 

 

11,384

 

Distribution to Parent

 

 

 

 

 

(152,978

)

Proceeds from long-term debt, net of discount

 

 

 

 

 

249,705

 

Payments for long-term debt issuance costs

 

 

(520

)

 

 

(515

)

Principal payments of long-term debt

 

 

(1,563

)

 

 

 

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

 

 

(30,258

)

 

 

(141

)

Principal payment of lease liabilities arising from a finance lease

 

 

(101

)

 

 

(55

)

Proceeds from the issuance of common stock

 

 

3,663

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(28,779

)

 

 

107,400

 

Effects of exchange rate changes on cash and cash equivalents

 

 

990

 

 

 

152

 

Net change in cash and cash equivalents

 

 

(25,707

)

 

 

113,396

 

Cash and cash equivalents at beginning of period

 

 

136,067

 

 

 

 

Cash and cash equivalents at end of period

 

$

110,360

 

 

$

113,396

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

563

 

 

$

1,472

 

Cash paid for interest

 

$

3,805

 

 

$

3,676

 

 

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

 

7


 

 

CERENCE INC.

Notes to Condensed Consolidated Financial Statements

Note 1. Business Overview

History

On October 1, 2019 (the “Distribution Date”), Nuance Communications, Inc. (“Nuance”), a leading provider of speech and language solutions for businesses and consumers around the world, completed the complete legal and structural separation and distribution to its stockholders of all of the outstanding shares of our common stock, and its consolidated subsidiaries, in a tax free spin-off (which we refer to as the “Spin-Off”). The distribution was made in the amount of one share of our common stock for every eight shares of Nuance common stock (which we refer to as the “Distribution”) owned by Nuance’s stockholders as of 5:00 p.m. Eastern Time on September 17, 2019, the record date of the Distribution.

In connection with the Distribution, on September 30, 2019, we filed an Amended and Restated Certificate of Incorporation (the “Charter”) with the Secretary of State of the State of Delaware, which became effective on October 1, 2019. Our Amended and Restated By-laws also became effective on October 1, 2019. On October 2, 2019, our common stock began regular-way trading on the Nasdaq Global Select Market under the ticker symbol CRNC. 

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.

COVID-19 Update

In December 2019, a novel strain of coronavirus, now known as COVID-19 (“COVID-19”), was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, some of which have been subsequently rescinded, modified or reinstated, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing.

We have taken numerous steps in our approach to addressing the COVID-19 pandemic, as fully described in our Annual Report on Form 10-K. While certain of these measures, including temporary reductions in salaries for our current named executive officers and other senior executives, are no longer in effect as of the date of this report, we continue to closely monitor ongoing developments in connection with the COVID-19 pandemic and its impact on our business.

The full extent to which the ongoing COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. The COVID-19 pandemic could also result in additional governmental restrictions and regulations, which could adversely affect our business and financial results.  In addition, a recession, depression or other sustained adverse market impact resulting from COVID-19 could materially and adversely affect our business, our access to needed capital and liquidity, and the value of our common stock. Even after the COVID-19 pandemic has lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact. 

 

8


 

 

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 months ended December 31, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the year ending September 30, 2021. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated and combined financial statements and notes contained in our Annual Report on Form 10-K for the year ended September 30, 2020.

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.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, including money-market funds with original maturities of 90 days or less. As of December 31, 2020, the estimated fair value of our money-market funds was $82.9 million. We estimated the fair value of our money-market funds from quoted prices for identical assets in active markets on the last trading day of the reporting period (Level 1).  

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. Two customers accounted for 15.1% and 12.9% of our accounts receivable, net balance at December 31, 2020. Two customers accounted for 15.0% and 11.1% of our accounts receivable, net balance at September 30, 2020.

Derivative Financial Instruments

We use derivative instruments, including forward contracts, to help manage foreign currency exposures. Derivative instruments are viewed as risk management tools by us and are not used for trading or speculative purposes. Derivatives that qualify for hedge accounting can be designated as either cash flow hedges, net investment hedges, or fair value hedges. We may enter into derivative contracts that economically hedge certain risks, even when hedge accounting does not apply, or we elect not to apply hedge accounting.

Derivatives are recognized in the Condensed Consolidated Balance Sheet at fair value on a gross basis as either assets or liabilities and classified as current or noncurrent based upon whether the maturity of the instrument is less than or greater than 12 months.

Changes in the fair value of derivatives not designated as hedges are reported in earnings primarily in other income (expense), net. The cash flows associated with derivatives not designated as hedges are reported in cash flows from operating activities in the Condensed Consolidated Statement of Cash Flows.

9


 

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. This standard is effective for interim and annual reporting periods beginning after December 15, 2019. This standard is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to Accumulated deficit as of the beginning of the first reporting period in which the guidance of this standard is effective.

We adopted ASU 2016-13 using the modified retrospective approach as of October 1, 2020. The effects of applying ASU 2016-13 as a cumulative-effect adjustment to Retained earnings was immaterial.

Recently Issued Accounting Pronouncements to be Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, (“ASU 2020-04”). The update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for debt with conversion options, revises the criteria for applying the derivatives scope exception for contracts in an entity’s own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2021, our fiscal year 2023. Early adoption is permitted for annual periods and interim periods within those annual periods beginning after December 15, 2020, our fiscal year 2022. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

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.

Our arrangements with customers may contain multiple products and services. We account for individual products and services separately if they are distinct—that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

We currently recognize revenue after applying the following five steps:

 

identification of the contract, or contracts, with a customer;

 

identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;

 

determination of the transaction price, including the constraint on variable consideration;

 

allocation of the transaction price to the performance obligations in the contract;

 

recognition of revenue when, or as, performance obligations are satisfied.

We allocate the transaction price of the arrangement based on the relative estimated standalone selling price (“SSP”) of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:

 

the pricing of standalone sales (in the instances where available);

 

the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;

10


 

 

contractually stated prices for deliverables that are intended to be sold on a standalone basis; and

 

other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under Accounting Standards Codification (“ASC”) 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities. Other forms of contingent revenue or variable consideration are infrequent.

Revenue is recognized when control of these products or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.

We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.

Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.

(a) Performance Obligations

Licenses

Software and technology licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours. For income statement presentation purposes, we separate license revenue from professional services revenue based on their relative SSPs.

Revenue from distinct software and technology licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software and technology is made available to the customer and control is transferred.

Revenue from software and technology licenses sold on a royalty basis, where the license of non-exclusive intellectual property is the predominant item to which the royalty relates, is recognized in the period the usage occurs in accordance with ASC 606-10-55-65(A).

Connected Services

Connected services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Subscription basis revenue represents a single promise to stand-ready to provide access to our connected services. Our connected services contract terms generally range from one to five years.

As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our connected services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).

Our connected service arrangements generally include services to develop, customize, and stand-up applications for each customer. In determining whether these services are distinct, we consider dependence of the Cloud service on the up-front development and stand-up, as well as availability of the services from other vendors. We have concluded that the up-front development, stand-up and customization services are not distinct performance obligations, and as such, revenue for these activities is

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recognized over the period during which the cloud-connected services are provided, and is included within connected services revenue.

Professional Services

Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.

(b) Significant Judgments

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services. Furthermore, hybrid contracts that contain both embedded and connected license and professional services are analyzed to determine if the services are distinct or have stand-alone functionality to determine the revenue treatment.

Judgments are required to determine the SSP for each distinct performance obligation. When the SSP is directly observable, we estimate the SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where the SSP is not directly observable, we determine the SSP using information that may include market conditions and other observable inputs. We may have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP. Determining the SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay. For hybrid deals that contain future royalties, the allocation of SSP is determined using any fixed payments as well as the forecasted volume usage.

(c) Disaggregated Revenue

Revenues, classified by the major geographic region in which our customers are located, for the three months ended December 31, 2020 and 2019 (dollars in thousands):

 

 

 

Three Months Ended December 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

United States

 

$

33,051

 

 

$