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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

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.)

1 Burlington Woods Drive, Suite 301A

Burlington, Massachusetts

01803

(Address of principal executive offices)

(Zip Code)

(857) 362-7300

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

CRNC

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of May 1, 2023, the registrant had 40,309,111 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

Table of Contents

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2023 and 2022

3

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended March 31, 2023 and 2022

4

 

Condensed Consolidated Balance Sheets as of March 31, 2023 and September 30, 2022

5

 

Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended March 31, 2023 and 2022

6

Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2023 and 2022

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

48

PART II.

OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

50

Item 6.

Exhibits

52

Signatures

53

 

 

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” 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, 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:

adverse conditions in the automotive industry or the global economy more generally, including as a result of the COVID-19 pandemic, the conflict between Russia and Ukraine, inflation and rising interest rates;
the continuation of the semiconductor shortage being experienced by the automotive industry;
the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance, including the impact of new variants such as Omicron;
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.;
the transition in our senior management positions;
fluctuations in our financial and operating results;
our inability to control and successfully manage our expense and cash positions;
escalating pricing pressures from our customers;
the impact on our business of the transition to a lower level of fixed contracts, including, but not limited to, the failure to achieve the expected predictability and growth in our reported revenue following a transition year of fiscal 2023;
our failure to win, renew or implement service contracts;
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;
increases or decreases to valuation allowances recorded against deferred tax assets;
impairment of our goodwill and other intangible assets;
the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;
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 strategy to increase cloud services and ability 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;

1


 

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, 2022 and elsewhere in this Form 10-Q, including Part II, “Item 1A, Risk Factors." These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

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

2


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

License

 

$

30,800

 

 

$

46,308

 

 

$

76,217

 

 

$

93,158

 

Connected services

 

 

18,926

 

 

 

19,326

 

 

 

37,320

 

 

 

47,485

 

Professional services

 

 

18,667

 

 

 

20,646

 

 

 

38,514

 

 

 

40,063

 

Total revenues

 

 

68,393

 

 

 

86,280

 

 

 

152,051

 

 

 

180,706

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

License

 

 

2,209

 

 

 

386

 

 

 

3,823

 

 

 

1,107

 

Connected services

 

 

6,114

 

 

 

5,651

 

 

 

12,656

 

 

 

11,375

 

Professional services

 

 

16,587

 

 

 

17,372

 

 

 

34,511

 

 

 

33,275

 

Amortization of intangible assets

 

 

104

 

 

 

897

 

 

 

207

 

 

 

2,776

 

Total cost of revenues

 

 

25,014

 

 

 

24,306

 

 

 

51,197

 

 

 

48,533

 

Gross profit

 

 

43,379

 

 

 

61,974

 

 

 

100,854

 

 

 

132,173

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

28,494

 

 

 

29,976

 

 

 

57,988

 

 

 

55,768

 

Sales and marketing

 

 

8,217

 

 

 

8,309

 

 

 

17,379

 

 

 

14,188

 

General and administrative

 

 

19,177

 

 

 

13,800

 

 

 

33,434

 

 

 

21,327

 

Amortization of intangible assets

 

 

2,394

 

 

 

3,135

 

 

 

4,744

 

 

 

6,289

 

Restructuring and other costs, net

 

 

5,714

 

 

 

474

 

 

 

9,903

 

 

 

5,389

 

Total operating expenses

 

 

63,996

 

 

 

55,694

 

 

 

123,448

 

 

 

102,961

 

(Loss) income from operations

 

 

(20,617

)

 

 

6,280

 

 

 

(22,594

)

 

 

29,212

 

Interest income

 

 

1,163

 

 

 

83

 

 

 

2,033

 

 

 

173

 

Interest expense

 

 

(4,003

)

 

 

(3,360

)

 

 

(7,517

)

 

 

(6,787

)

Other income (expense), net

 

 

1,074

 

 

 

(34

)

 

 

4,787

 

 

 

(286

)

(Loss) income before income taxes

 

 

(22,383

)

 

 

2,969

 

 

 

(23,291

)

 

 

22,312

 

Provision for income taxes

 

 

3,706

 

 

 

3,445

 

 

 

4,956

 

 

 

3,744

 

Net (loss) income

 

$

(26,089

)

 

$

(476

)

 

$

(28,247

)

 

$

18,568

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.65

)

 

$

(0.01

)

 

$

(0.70

)

 

$

0.48

 

Diluted

 

$

(0.65

)

 

$

(0.01

)

 

$

(0.70

)

 

$

0.47

 

Weighted-average common share outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

40,219

 

 

 

39,189

 

 

 

40,088

 

 

 

39,013

 

Diluted

 

 

40,219

 

 

 

39,189

 

 

 

40,088

 

 

 

39,586

 

 

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

3


 

CERENCE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(26,089

)

 

$

(476

)

 

$

(28,247

)

 

$

18,568

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

939

 

 

 

(5,295

)

 

 

10,101

 

 

 

(10,684

)

Pension adjustments, net

 

 

(55

)

 

 

61

 

 

 

(29

)

 

 

134

 

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

 

 

193

 

 

 

(132

)

 

 

292

 

 

 

(167

)

Total other comprehensive income (loss)

 

 

1,077

 

 

 

(5,366

)

 

 

10,364

 

 

 

(10,717

)

Comprehensive (loss) income

 

$

(25,012

)

 

$

(5,842

)

 

$

(17,883

)

 

$

7,851

 

 

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

4


 

CERENCE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

March 31, 2023

 

 

September 30, 2022

 

 

(Unaudited)

 

 

 

 

ASSETS

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

95,377

 

 

$

94,847

 

Marketable securities

 

 

11,661

 

 

 

20,317

 

Accounts receivable, net of allowances of $3,921 and $157

 

 

61,449

 

 

 

45,073

 

Deferred costs

 

 

7,709

 

 

 

7,098

 

Prepaid expenses and other current assets

 

 

55,663

 

 

 

60,184

 

Total current assets

 

 

231,859

 

 

 

227,519

 

Long-term marketable securities

 

 

15,676

 

 

 

11,584

 

Property and equipment, net

 

 

35,630

 

 

 

37,707

 

Deferred costs

 

 

21,207

 

 

 

22,451

 

Operating lease right of use assets

 

 

15,298

 

 

 

14,702

 

Goodwill

 

 

904,050

 

 

 

890,802

 

Intangible assets, net

 

 

5,299

 

 

 

9,700

 

Deferred tax assets

 

 

54,387

 

 

 

51,989

 

Other assets

 

 

52,041

 

 

 

52,039

 

Total assets

 

$

1,335,447

 

 

$

1,318,493

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

18,992

 

 

$

10,372

 

Deferred revenue

 

 

75,765

 

 

 

72,662

 

Short-term operating lease liabilities

 

 

6,003

 

 

 

5,071

 

Short-term debt

 

 

12,500

 

 

 

10,938

 

Accrued expenses and other current liabilities

 

 

52,698

 

 

 

47,990

 

Total current liabilities

 

 

165,958

 

 

 

147,033

 

Long-term debt

 

 

264,687

 

 

 

259,436

 

Deferred revenue, net of current portion

 

 

160,452

 

 

 

165,972

 

Long-term operating lease liabilities

 

 

10,949

 

 

 

11,375

 

Other liabilities

 

 

23,978

 

 

 

21,727

 

Total liabilities

 

 

626,024

 

 

 

605,543

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 560,000 shares authorized; 40,292 and 39,430 shares issued and outstanding, respectively

 

 

403

 

 

 

394

 

Accumulated other comprehensive loss

 

 

(23,373

)

 

 

(33,737

)

Additional paid-in capital

 

 

1,038,048

 

 

 

1,029,542

 

Accumulated deficit

 

 

(305,655

)

 

 

(283,249

)

Total stockholders' equity

 

 

709,423

 

 

 

712,950

 

Total liabilities and stockholders' equity

 

$

1,335,447

 

 

$

1,318,493

 

 

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

5


 

CERENCE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

 

 

Three Months Ended March 31, 2023

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at December 31, 2022

 

 

40,017

 

 

$

400

 

 

$

1,023,467

 

 

$

(279,566

)

 

$

(24,450

)

 

$

719,851

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(26,089

)

 

 

-

 

 

 

(26,089

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,077

 

 

 

1,077

 

Issuance of common stock

 

 

276

 

 

 

3

 

 

 

2,668

 

 

 

-

 

 

 

-

 

 

 

2,671

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(1

)

 

 

-

 

 

 

(1,787

)

 

 

-

 

 

 

-

 

 

 

(1,787

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

13,700

 

 

 

-

 

 

 

-

 

 

 

13,700

 

Balance at March 31, 2023

 

 

40,292

 

 

$

403

 

 

$

1,038,048

 

 

$

(305,655

)

 

$

(23,373

)

 

$

709,423

 

 

 

Three Months Ended March 31, 2022

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Retained Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total

 

Balance at December 31, 2021

 

 

39,162

 

 

$

392

 

 

$

1,006,205

 

 

$

46,621

 

 

$

(3,717

)

 

$

1,049,501

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(476

)

 

 

-

 

 

 

(476

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,366

)

 

 

(5,366

)

Issuance of common stock

 

 

144

 

 

 

1

 

 

 

2,700

 

 

 

-

 

 

 

-

 

 

 

2,701

 

Stock withheld to cover tax withholdings requirements upon stock vesting

 

 

(1

)

 

 

-

 

 

 

(1,538

)

 

 

-

 

 

 

-

 

 

 

(1,538

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

11,364

 

 

 

-