crnc-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2020

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

83-4719946

( State or other jurisdiction of

incorporation or organization)

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

15 Wayside Road

Burlington, Massachusetts

01803

(Address of principal executive offices)

(Zip Code)

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

CRNC

 

The Nasdaq Global Select Market

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

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

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

 

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

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Consolidated and Combined Financial Statements (Unaudited)

2

 

Statements of Operations

2

 

Statements of Comprehensive Income (Loss)

3

 

Balance Sheets

4

 

Statements of Equity

5

 

Statements of Cash Flows

7

 

Notes to Consolidated and Combined Financial Statements

8

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

41

PART II.

OTHER INFORMATION

42

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 5

Other Information

43

Item 6.

Exhibits

43

Signatures

44

 

 

i


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

 

the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance;

 

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

 

our employees represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws of the U.S.;

 

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

 

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

 

escalating pricing pressures from our customers;

 

our failure to win, renew or implement service contracts;

 

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

 

the loss of business from any of our largest customers;

 

transition difficulties with our first senior management team;

 

inability to recruit and retain qualified personnel;

 

cybersecurity and data privacy incidents that damage client relations;

 

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

 

unforeseen U.S. and foreign tax liabilities;

 

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

 

defects in our software products that result in lost revenue, expensive corrections or claims against us;

 

our inability to quickly respond to changes in technology and to develop our intellectual property into commercially viable products;

 

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

 

certain factors discussed elsewhere in this Form 10-Q.

These and other factors are more fully discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and elsewhere in this Form 10-Q, including Part II, “Item 1A, Risk Factors”. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

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

1


PART I—FINANCIAL INFORMATION

Item 1. Consolidated and Combined Financial Statements.

CERENCE INC.

CONSOLIDATED STATEMENT OF OPERATIONS FOR MARCH 31, 2020

COMBINED STATEMENT OF OPERATIONS FOR MARCH 31, 2019

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

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License

 

$

44,622

 

 

$

39,324

 

 

$

85,389

 

 

$

83,326

 

Connected services

 

 

23,131

 

 

 

18,858

 

 

 

46,152

 

 

 

36,113

 

Professional services

 

 

18,742

 

 

 

12,122

 

 

 

32,413

 

 

 

23,349

 

Total revenues

 

 

86,495

 

 

 

70,304

 

 

 

163,954

 

 

 

142,788

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License

 

 

843

 

 

 

567

 

 

 

1,524

 

 

 

907

 

Connected services

 

 

8,876

 

 

 

9,130

 

 

 

17,551

 

 

 

20,359

 

Professional services

 

 

16,753

 

 

 

12,726

 

 

 

31,244

 

 

 

23,189

 

Amortization of intangible assets

 

 

2,258

 

 

 

2,021

 

 

 

4,345

 

 

 

4,196

 

Total cost of revenues

 

 

28,730

 

 

 

24,444

 

 

 

54,664

 

 

 

48,651

 

Gross profit

 

 

57,765

 

 

 

45,860

 

 

 

109,290

 

 

 

94,137

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

21,346

 

 

 

22,561

 

 

 

44,857

 

 

 

46,369

 

Sales and marketing

 

 

7,706

 

 

 

9,799

 

 

 

15,649

 

 

 

19,244

 

General and administrative

 

 

10,712

 

 

 

5,689

 

 

 

22,195

 

 

 

11,410

 

Amortization of intangible assets

 

 

3,125

 

 

 

3,132

 

 

 

6,256

 

 

 

6,264

 

Restructuring and other costs, net

 

 

2,870

 

 

 

4,329

 

 

 

10,424

 

 

 

7,456

 

Acquisition-related costs

 

 

 

 

 

182

 

 

 

 

 

 

417

 

Total operating expenses

 

 

45,759

 

 

 

45,692

 

 

 

99,381

 

 

 

91,160

 

Income from operations

 

 

12,006

 

 

 

168

 

 

 

9,909

 

 

 

2,977

 

Interest income

 

 

244

 

 

 

 

 

 

525

 

 

 

 

Interest expense

 

 

(6,699

)

 

 

 

 

 

(13,497

)

 

 

 

Other income (expense), net

 

 

226

 

 

 

266

 

 

 

80

 

 

 

250

 

Income (loss) before income taxes

 

 

5,777

 

 

 

434

 

 

 

(2,983

)

 

 

3,227

 

(Benefit from) provision for income taxes

 

 

(6,718

)

 

 

(20

)

 

 

(3,716

)

 

 

518

 

Net income

 

$

12,495

 

 

$

454

 

 

$

733

 

 

$

2,709

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.01

 

 

$

0.02

 

 

$

0.07

 

Diluted

 

$

0.33

 

 

$

0.01

 

 

$

0.02

 

 

$

0.07

 

Weighted-average common share outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,441,350

 

 

 

36,391,445

 

 

 

36,218,143

 

 

 

36,391,445

 

Diluted

 

 

37,391,720

 

 

 

36,391,445

 

 

 

36,693,328

 

 

 

36,391,445

 

 

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

2


CERENCE INC.

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

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

(Dollars in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

12,495

 

 

$

454

 

 

$

733

 

 

$

2,709

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(7,284

)

 

 

527

 

 

 

(2,380

)

 

 

(3,180

)

Pension adjustments

 

 

90

 

 

 

45

 

 

 

1,016

 

 

 

367

 

Total other comprehensive (loss) income

 

 

(7,194

)

 

 

572

 

 

 

(1,364

)

 

 

(2,813

)

Comprehensive income (loss)

 

$

5,301

 

 

$

1,026

 

 

$

(631

)

 

$

(104

)

 

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

3


CERENCE INC.

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

COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2019

(Dollars in thousands, except share data)

 

 

 

March 31, 2020

 

 

September 30, 2019

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

95,584

 

 

$

-

 

Accounts receivable, net of allowances of $1,315 and $865 at March 31, 2020 and September 30, 2019, respectively

 

 

92,272

 

 

 

65,787

 

Deferred costs

 

 

7,220

 

 

 

9,195

 

Prepaid expenses and other current assets

 

 

27,779

 

 

 

17,343

 

Total current assets

 

 

222,855

 

 

 

92,325

 

Property and equipment, net

 

 

26,206

 

 

 

20,113

 

Deferred costs

 

 

36,142

 

 

 

32,428

 

Operating lease right of use assets

 

 

18,593

 

 

 

 

Goodwill

 

 

1,117,577

 

 

 

1,119,329

 

Intangible assets, net

 

 

55,107

 

 

 

65,561

 

Deferred tax assets

 

 

161,943

 

 

 

150,629

 

Other assets

 

 

14,867

 

 

 

3,444

 

Total assets

 

$

1,653,290

 

 

$

1,483,829

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

18,786

 

 

$

16,687

 

Deferred revenue

 

 

113,111

 

 

 

88,233

 

Short-term operating lease liabilities

 

 

5,270

 

 

 

 

Short-term debt

 

 

9,450

 

 

 

 

Accrued expenses and other current liabilities

 

 

42,581

 

 

 

24,194

 

Total current liabilities

 

 

189,198

 

 

 

129,114

 

Long-term debt

 

 

237,925

 

 

 

 

Deferred revenue, net of current portion

 

 

234,981

 

 

 

265,051

 

Long-term operating lease liabilities

 

 

15,669

 

 

 

 

Other liabilities

 

 

39,138

 

 

 

21,536

 

Total liabilities

 

 

716,911

 

 

 

415,701

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 600,000,000 shares authorized as of March 31, 2020; 36,457,914 shares issued and outstanding as of March 31, 2020

 

 

365

 

 

 

 

Net parent investment

 

 

-

 

 

 

1,097,127

 

Accumulated other comprehensive loss

 

 

(14,635

)

 

 

(28,999

)

Additional paid-in capital

 

 

949,916

 

 

 

 

Accumulated earnings

 

 

733

 

 

 

 

Total stockholders' equity

 

 

936,379

 

 

 

1,068,128

 

Total liabilities and stockholders' equity

 

$

1,653,290

 

 

$

1,483,829

 

 

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

4


CERENCE INC.

CONSOLIDATED STATEMENT OF EQUITY AND

COMBINED STATEMENT OF CHANGES IN PARENT COMPANY EQUITY

(Dollars in thousands)

(unaudited)

 

 

Three Months Ended March 31, 2020

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Accumulated

(Deficit) Earnings

 

 

Net

Parent

Investment

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at December 31, 2019

 

 

36,403

 

 

 

364

 

 

 

945,054

 

 

 

(11,762

)

 

 

-

 

 

 

(7,441

)

 

 

926,215

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,495

 

 

 

-

 

 

 

-

 

 

 

12,495

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,194

)

 

 

(7,194

)

Stock issued pursuant to employee stock plans

 

 

55

 

 

 

1

 

 

 

(778

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(777

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

5,640

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,640

 

Balance at March 31, 2020

 

 

36,458

 

 

$

365

 

 

$

949,916

 

 

$

733

 

 

$

 

 

$

(14,635

)

 

$

936,379

 

 

 

Three Months Ended March 31, 2019

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Earnings

 

 

Net

Parent

Investment

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at December 31, 2018

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,026,505

 

 

$

(27,342

)

 

$

999,163

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

454

 

 

 

-

 

 

 

454

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

572

 

 

 

572

 

Net transfer to Parent

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,003

)

 

 

-

 

 

 

(17,003

)

Balance at March 31, 2019

 

 

-

 

 

$

 

 

$

 

 

$

 

 

$

1,009,956

 

 

$

(26,770

)

 

$

983,186

 

5


CERENCE INC.

CONSOLIDATED STATEMENT OF EQUITY AND

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

(Dollars in thousands)

(unaudited)

 

 

Six Months Ended March 31, 2020

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Earnings

 

 

Net

Parent

Investment

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at September 30, 2019

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,097,127

 

 

$

(28,999

)

 

$

1,068,128

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

733

 

 

 

-

 

 

 

-

 

 

 

733

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,364

)

 

 

(1,364

)

Distribution to Parent

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(152,978

)

 

 

-

 

 

 

(152,978

)

Net (decrease) increase in net parent investment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,275

)

 

 

15,728

 

 

 

11,453

 

Reclassification of net parent investment in Cerence

 

 

-

 

 

 

-

 

 

 

939,874

 

 

 

-

 

 

 

(939,874

)

 

 

-

 

 

 

 

Issuance of common stock at separation

 

 

36,391

 

 

 

364

 

 

 

(364

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

Stock issued pursuant to employee stock plans

 

 

67

 

 

 

1

 

 

 

(919

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(918

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

11,325

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,325

 

Balance at March 31, 2020

 

 

36,458

 

 

$

365

 

 

$

949,916

 

 

$

733

 

 

$

 

 

$

(14,635

)

 

$

936,379

 

 

 

Six Months Ended March 31, 2019

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Earnings

 

 

Net

Parent

Investment

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at September 30, 2018 (As reported, ASC 605)

 

 

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,017,276

 

 

$

(23,957

)

 

$

993,319

 

Accumulated adjustment related to the adoption of ASC 606

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,974

 

 

 

-

 

 

 

6,974

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,709

 

 

 

-

 

 

 

2,709

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,813

)

 

 

(2,813

)

Net transfer to Parent

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,003

)

 

 

-

 

 

 

(17,003

)

Balance at March 31, 2019

 

 

-

 

 

$

 

 

$

 

 

$

 

 

$

1,009,956

 

 

$

(26,770

)

 

$

983,186

 

 

 

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

6


CERENCE INC.

CONSOLIDATED STATEMENT OF CASH FLOWS FOR MARCH 31, 2020

COMBINED STATEMENT OF CASH FLOWS FOR MARCH 31, 2019

(Dollars in thousands)

(unaudited)

 

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

733

 

 

$

2,709

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,971

 

 

 

14,574

 

Provision for doubtful accounts

 

 

446

 

 

 

 

Stock-based compensation

 

 

15,529

 

 

 

13,367

 

Non-cash interest expense

 

 

2,646

 

 

 

 

Deferred tax benefit

 

 

(4,615

)

 

 

(2,898

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(26,692

)

 

 

5,584

 

Prepaid expenses and other assets

 

 

(13,605

)

 

 

(6,848

)

Deferred costs

 

 

(1,079

)

 

 

2,020

 

Accounts payable

 

 

6,384

 

 

 

849

 

Accrued expenses and other liabilities

 

 

13,028

 

 

 

832

 

Deferred revenue

 

 

(8,481

)

 

 

12,062

 

Net cash (used in) provided by operating activities

 

 

(735

)

 

 

42,251

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(10,145

)

 

 

(2,472

)

Net cash used in investing activities

 

 

(10,145

)

 

 

(2,472

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net transaction with Parent

 

 

13,513

 

 

 

(39,779

)

Distribution to Parent

 

 

(152,978

)

 

 

 

Proceeds from long-term debt, net of discount

 

 

249,705

 

 

 

 

Payments for long-term debt issuance costs

 

 

(515

)

 

 

 

Principal payments of long-term debt

 

 

(2,363

)

 

 

 

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

 

 

(919

)

 

 

 

Principal payment of lease liabilities arising from a finance lease

 

 

(67

)

 

 

 

Net cash provided by (used in) financing activities

 

 

106,376

 

 

 

(39,779

)

Effects of exchange rate changes on cash and cash equivalents

 

 

88

 

 

 

 

Net change in cash and cash equivalents

 

 

95,584

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

95,584

 

 

$

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

627

 

 

$

3,267

 

Cash paid for interest

 

$

8,997

 

 

$

-

 

 

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

 

7


 

CERENCE INC.

Notes to Consolidated and Combined Financial Statements

Note 1. Business Overview

History

On October 1, 2019, (the “Distribution Date”), Nuance Communications (“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, or 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, or 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.

As a result of the COVID-19 pandemic, local, state, and national governments have responded to the spread of COVID-19 by implementing various forms of social distancing and shelter-in-place orders to citizens, which have limited economic activity. These extreme measures to slow the spread of COVID-19 have negatively impacted businesses of all sizes, including the automotive industry and its suppliers. For the foreseeable future, automobile production and shipments have ceased or automotive production is not working at full capacity as manufacturing plants have closed or are not fully operating in order to ensure the safety of their workforces or because of lack of demand. As automobile production continues to be delayed, we anticipate our billings and revenues recognized from license and connected services to be negatively impacted.

Due to the macroeconomic conditions driven by the COVID-19 pandemic and the anticipated negative impact on our license and connected services revenues, we concluded that indicators of impairment were present relating to goodwill and long-lived assets as of March 31, 2020. We performed an interim assessment of goodwill and concluded that no impairment existed as the fair value of our reporting unit exceeded its carrying value as of March 31, 2020. We performed a test for recoverability of our long-lived asset group and determined the carrying amount was recoverable, resulting in no impairment of our long-lived asset group as of March 31, 2020. See Note 5 for additional details.

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

8


 

business, our access to needed capital and liquidity, and the value of our common stock. Even after the COVID-19