Cerence Inc.: Form 10-Q for the period ended Mar 31, 2025

You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated Financial Statements, and the related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”), and our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024, filed with the Securities and Exchange Commission (“SEC”) on November 25, 2024. Some of the information contained in this discussion and analysis or elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, our performance and future success, our liquidity and capital resources, including our ability to meet our liquidity needs after the repayment of the Notes due in the third quarter of fiscal 2025, results of operations and financial condition, macroeconomic conditions, volatility in the political, legal and regulatory environment in which we operate including trade, tariffs and other policies implemented by the new administration in the United States or actions taken by other countries in response, trends in the global auto industry and adjacent markets, including shipping and production issues, new products, process optimization efforts and cost management, litigation, and tax estimates and other tax matters, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Concerning Forward-Looking Statements.” You should review the “Risk Factors” sections in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Note that the results of operations for the three and six months ended March 31, 2025 are not necessarily indicative of what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Cerence” and the “Company” refer to Cerence Inc. and its consolidated subsidiaries, collectively.

Overview

Cerence builds AI powered virtual assistants for the mobility/transportation market. Our primary target is the automobile market, but our solutions can apply to all forms of transportation, including, but not limited to, two-wheel vehicles, planes, tractors, cruise ships and elevators. Our solutions power natural conversational and intuitive interactions between automobiles, drivers and passengers, and the broader digital world. We possess one of the leading software platforms for building automotive virtual assistants. Our customers include nearly all major 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. Our vision is to enable a more enjoyable, safer journey for everyone.

Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information, and take action across an expanding variety of categories. Our software platform has a hybrid architecture combining edge software components with cloud-connected components. Edge software components are installed on a vehicle’s head unit and can operate without access to external networks and information. Cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-enabled personalization and context-based response frameworks, and a content integration platform.

We generate revenue primarily by selling software licenses and cloud-connected services. Our edge software components are typically sold under a traditional per unit perpetual software license model, in which a per unit fee is charged on a variable basis for each software instance installed on an automotive head unit. We typically license cloud-connected software components in the form of a service to the vehicle end user, which is paid for in advance. In addition, we generate professional services revenue from our work with our customers during the design, development, and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects. We have existing relationships with nearly all major OEMs or their tier 1 suppliers, and while our customer contracts vary, they generally represent multi-year engagements, giving us some level of visibility into future revenue; however, such revenue may not materialize as expected due to delays in automobile production, volatility in the political, legal and regulatory environment in which we operate including trade, tariffs and other policies implemented by the new administration in the United States or actions taken by other countries in response and automotive production curtailment or delays related thereto, changing customer forecasts, macroeconomic conditions or other factors discussed elsewhere in this Quarterly Report.

Basis of Presentation

The financial information presented in the accompanying unaudited condensed consolidated financial statements has been prepared in accordance with U.S. GAAP and in accordance with rules and regulations of the SEC regarding interim financial reporting. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The condensed consolidated balance sheet data as of September 30, 2024 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of our financial position and results of operations. The operating results for the three and six months ended March 31, 2025 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2025.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, as well as those of its wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

Key Financial Metrics

In evaluating our financial condition and operating performance, we focus on revenue, operating margins, and cash flow from operations.

For the three months ended March 31, 2025 as compared to the three months ended March 31, 2024:

• Total revenue increased by $10.2 million, or 15.0%, to $78.0 million from $67.8 million.
• Operating margin increased 412.0 percentage points to positive 22.2% from negative 389.8%.
• Cash provided by operating activities was $15.5 million, a net change of $14.4 million from cash provided by operating activities of $1.0 million.

For the six months ended March 31, 2025 as compared to the six months ended March 31, 2024:

• Total revenue decreased by $77.3 million, or 37.5%, to $128.9 million from $206.2 million.
• Operating margin increased 100.1 percentage points to positive 0.3% from negative 99.8%.
• Cash provided by operating activities was $24.7 million, a net change of $26.5 million from cash used in operating activities of $1.8 million.

Operating Results

The following table shows the Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2025 and 2024 (dollars in thousands):

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Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services. License revenue primarily consists of license royalties associated with our edge software components. Our edge software components are typically sold under a traditional per unit perpetual software license model, in which a per unit fee is charged for each software instance installed on an automotive head unit. Our contracts contain variable, fixed prepaid or fixed minimum purchase commitment components. Revenue is recognized and cash is collected for variable contracts over the license distribution period. The fixed contracts typically provide the customer with a price discount and can include the conversion of a variable contract that is already in our variable backlog. Revenue for fixed contracts is recognized when the software is made available to the customer, which has typically occurred at the time the contract is signed. Cash is typically expected to be collected for a fixed prepaid deal at the inception of the contract. Cash is expected to be collected for a fixed minimum commitment deal over the license distribution period. Going forward, we will continue to assess the levels of fixed license contracts and make adjustments, as necessary. See Note 3 to the accompanying unaudited condensed consolidated financial statements for further discussion of our revenue, deferred revenue performance obligations and the timing of revenue recognition. Costs of license revenue primarily consists of third-party royalty expenses for certain external technologies we leverage and costs associated with our Cerence Link product.

Connected services revenue primarily represents the subscription fee that provides access to our connected services components, including the customization and construction of our connected services solutions. We also derive revenue within our connected services business from usage contracts and there can be instances where a customer purchases a software license that allows them to take possession of the software to enable hosting by the customer or a third-party. Subscription and usage contracts typically have a term of one to five years. Subscription revenue is recognized over the subscription period and cash is expected to be collected at the start of the subscription period. Usage based revenue is recognized and cash is collected as the service is used. If the customer takes possession of the software to have it hosted by the customer or a third-party, revenue is recognized, and cash is collected at the time the license is delivered. On October 31, 2023, we entered into an early termination agreement relating to a legacy contract acquired by Nuance through a 2013 acquisition. Previously, the term of the contract ended on December 31, 2025, whereas the agreement signed on October 31, 2023 updated the termination date to December 31, 2023. For the three months ended December 31, 2023, a total of $76.3 million was recognized in relation to this contract including $67.8 million of deferred revenue that was accelerated into the first quarter of fiscal year 2024 as a result of the termination. There was no cash flow associated with this legacy contract. We provided services to a separate customer, who in turn provided services to our legacy customer. This separate customer terminated services on October 31, 2023. There was no cash flow associated with this contract. For the three months ended December 31, 2023, a total of $10.3 million was recognized in relation to this contract including $9.9 million of deferred revenue that was accelerated into the first quarter of fiscal year 2024. See Note 3 to the accompanying unaudited condensed consolidated financial statements for further discussion of our revenue, deferred revenue performance obligations and the timing of revenue recognition. Cost of connected service revenue primarily consists of labor costs of software delivery services, infrastructure, and communications fees that support our connected services solutions.

Professional services revenue is primarily comprised of porting, integrating, and customizing our embedded solutions, with costs primarily consisting of compensation for services personnel, contractors and overhead.

Our operating expenses include R&D, sales and marketing and general and administrative expenses. R&D expenses primarily consist of salaries, benefits, and overhead relating to research and engineering staff. Sales and marketing expenses includes salaries, benefits, and commissions related to our sales, product marketing, product management, and business unit management teams. General and administrative expenses primarily consist of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for credit losses.

Amortization of acquired patents and core technology are included within cost of revenues whereas the amortization of other intangible assets, such as acquired customer relationships, trade names and trademarks, are included within operating expenses. Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives.

Restructuring and other costs, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside the ordinary course of our business.

Total other expense, net consists primarily of foreign exchange gains (losses), interest income and interest expense related to the Notes and Senior Credit Facilities.

We expect our revenue to continue to be impacted by dynamics in the global automotive industry which has experienced production delays and slowdowns. Volatility in the political, legal and regulatory environment in which we operate, including trade, tariffs and related policies, also has resulted in increased pricing pressure from customers and delays in program timelines. Macroeconomic conditions such as high interest rates and lack of credit availability have contributed to these production delays and slowdowns. In addition, the software and technology systems in automobiles have become increasingly complex, leading to substantial challenges and delays in production for some of our customers. Our business in adjacent markets, such as two-wheeled vehicles, trucks and AIoT, is also developing slower than anticipated due to the challenges of introducing different technology into a new market. In light of these challenges, we intend to continue to focus on cost management and may take future cost reduction actions, which may result in additional restructuring costs and impairment charges. In particular, in August 2024, we announced a restructuring plan intended to reduce operating expenses and position us for profitable future growth (the “Plan”). The implementation of the Plan was substantially complete by the end of the first quarter of fiscal year 2025. The charges that we incur are subject to a number of assumptions, including legal requirements in various jurisdictions. For additional details, refer to the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

Total Revenues

The following table shows total revenues by product type, including the corresponding percentage change, for the three months ended March 31, 2025 and 2024 (dollars in thousands):

Total revenues for the three months ended March 31, 2025 were $78.0 million, an increase of $10.2 million, or 15.0%, from $67.8 million for the three months ended March 31, 2024. The increase in revenues was driven by license revenue. The increase was partly offset by decreases in connected service and professional service revenues.

License Revenue

License revenue for the three months ended March 31, 2025 was $51.5 million, an increase of $16.0 million, or 44.8%, from $35.5 million for the three months ended March 31, 2024. The increase in license revenue was primarily driven by a $11.0 million increase in fixed contracts and a $5.0 million increase associated with variable contract revenue, as we continue to assess the levels of fixed license contracts and make adjustments. As a percentage of total revenues, license revenue increased 13.6 percentage points from 52.4% for the three months ended March 31, 2024 to 66.0% for the three months ended March 31, 2025.

Connected Services Revenue

Connected services revenue for the three months ended March 31, 2025 was $12.6 million, a decrease of $1.0 million, or 7.0%, from $13.6 million for the three months ended March 31, 2024. This decrease was driven by a $2.6 million catch up recognized in the 2024 period related to amended customer royalty reports, which did not recur in the 2025 period, partially offset by increased demand for our connected services products. As a percentage of total revenues, connected services revenue decreased by 3.8 percentage points from 20.0% for the three months ended March 31, 2024 to 16.2% for the three months ended March 31, 2025.

Professional Services Revenue

Professional service revenue for the three months ended March 31, 2025 was $13.9 million, a decrease of $4.8 million, or 25.7%, from $18.7 million for the three months ended March 31, 2024. This decrease was driven by the increased standardization of our software product offerings, which requires less professional services effort to implement, other efficiencies in our professional services processes and, in some cases, customers opting to perform these activities internally. As a percentage of total revenues, professional services revenue decreased by 9.8 percentage points from 27.6% for the three months ended March 31, 2024 to 17.8% for the three months ended March 31, 2025.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Total Revenues

The following table shows total revenues by product type, including the corresponding percentage change, for the six months ended March 31, 2025 and 2024 (dollars in thousands):

Total revenues for the six months ended March 31, 2025 were $128.9 million, a decrease of $77.3 million, or 37.5%, from $206.2 million for the six months ended March 31, 2024. The decrease in revenues was driven primarily by connected services revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer and a decrease in professional services revenue. The decrease was partially offset by increases in license revenue primarily related to fixed contracts.

License Revenue

License revenue for the six months ended March 31, 2025 was $74.2 million, an increase of $17.8 million, or 31.7%, from $56.4 million for the six months ended March 31, 2024. The increase in license revenue was primarily driven by a $11.1 million increase in fixed license contracts, a $5.2 million increase associated with variable contract revenue, as we continue to assess the levels of fixed license contracts and make adjustments, and $1.5 million associated with our Cerence Link product. As a percentage of total revenues, license revenue increased 30.2 percentage points from 27.3% for the six months ended March 31, 2024 to 57.5% for the six months ended March 31, 2025.

Connected Services Revenue

Connected services revenue for the six months ended March 31, 2025 was $26.4 million, a decrease of $84.0 million, or 76.1%, from $110.4 million for the six months ended March 31, 2024. This decrease was primarily driven by the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer. The effect of these changes was an acceleration of $67.8 million and $9.9 million of deferred revenue, respectively, as well as in period revenue of $8.9 million for these terminated contracts, in the first quarter of fiscal year 2024. This decrease was offset by an increase of $2.6 million in new connected revenue during the first half of fiscal year 2025. As a percentage of total revenues, connected services revenue decreased by 33.2 percentage points from 53.6% for the six months ended March 31, 2024 to 20.4% for the six months ended March 31, 2025.

Professional Services Revenue

Professional service revenue for the six months ended March 31, 2025 was $28.4 million, a decrease of $11.0 million, or 28.0%, from $39.4 million for the six months ended March 31, 2024. This decrease was primarily driven by the increased standardization of our software product offerings, which requires less professional services effort to implement, other efficiencies in our professional services processes and, in some cases, customers opting to perform these activities internally. As a percentage of total revenues, professional services revenue increased by 3.0 percentage points from 19.1% for the six months ended March 31, 2024 to 22.1% for the six months ended March 31, 2025.

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

Total Cost of Revenues and Gross Profits

The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands):

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The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):

Total cost of revenues for the three months ended March 31, 2025 were $17.8 million, a decrease of $3.1 million, or 14.6%, from $20.9 million for the three months ended March 31, 2024.

We experienced an increase in total gross profit of $13.3 million, or 28.2%, from $46.9 million for the three months ended March 31, 2024 to $60.2 million for the three months ended March 31, 2025. The increase was primarily driven by the increase in license revenues due to a higher volume of fixed contracts.

Cost of License Revenue

Cost of license revenue for the three months ended March 31, 2025 was $2.4 million, an increase of $1.0 million, or 73.2%, from $1.4 million for the three months ended March 31, 2024. Cost of license revenues increased due to the costs associated with our Cerence Link product revenue. As a percentage of total cost of revenues, cost of license revenue increased by 6.9 percentage points from 6.7% for the three months ended March 31, 2024 to 13.6% for the three months ended March 31, 2025.

License gross profit increased by $14.9 million, or 43.7%, for the three months ended March 31, 2025 when compared to the three months ended March 31, 2024, primarily due to increases in license revenues.

Cost of Connected Services Revenue

Cost of connected services revenue for the three months ended March 31, 2025 was $5.0 million, a decrease of $0.4 million, or 7.1%, from $5.4 million for the three months ended March 31, 2024. Cost of connected services revenue decreased primarily due to a $0.2 million decrease in our cloud infrastructure costs and $0.1 million decrease in amortization of costs previously deferred, and a $0.1 million decrease in internal allocated labor. As a percentage of total cost of revenues, cost of connected services revenue increased by 2.2 percentage points from 25.7% for the three months ended March 31, 2024 to 27.9% for the three months ended March 31, 2025.

Connected services gross profit decreased $0.5 million, or 6.9%, from $8.2 million for the three months ended March 31, 2024 to $7.7 million for the three months ended March 31, 2025, primarily due to declines in connected services revenues.

Cost of Professional Services Revenue

Cost of professional services revenue for the three months ended March 31, 2025 was $10.4 million, a decrease of $3.7 million, or 26.2%, from $14.1 million for the three months ended March 31, 2024. Cost of professional services revenue decreased primarily due to a $2.4 million decrease in third party contract labor and a $1.3 million decrease in salary-related expenditures. Decreases were driven by the increased standardization of our software product offerings, which requires less professional services effort to implement, and other efficiencies in our professional services processes. As a percentage of total cost of revenues, cost of professional services revenue decreased by 9.2 percentage points from 67.6% for the three months ended March 31, 2024 to 58.4% for the three months ended March 31, 2025.

Professional services gross profit decreased $1.1 million, or 24.0%, from $4.6 million for the three months ended March 31, 2024 to $3.5 million for the three months ended March 31, 2025, which was primarily due to a decrease in professional services revenue.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Total Cost of Revenues and Gross Profits

The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands):

The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):

Total cost of revenues for the six months ended March 31, 2025 were $35.7 million, a decrease of $11.5 million, or 24.5%, from $47.2 million for the six months ended March 31, 2024.

We experienced a decrease in total gross profit of $65.6 million, or 41.3%, from $158.9 million for the six months ended March 31, 2024 to $93.3 million for the six months ended March 31, 2025. The decrease was primarily driven by the decrease in connected service revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer.

Cost of License Revenue

Cost of license revenue for the six months ended March 31, 2025 was $4.2 million, an increase of $1.2 million, or 40.1%, from $3.0 million for the six months ended March 31, 2024. Cost of license revenues increased primarily due to costs associated with our Cerence Link product revenue. As a percentage of total cost of revenues, cost of license revenue increased by 5.4 percentage points from 6.4% for the six months ended March 31, 2024 to 11.8% for the six months ended March 31, 2025.

License gross profit increased by $16.6 million, or 31.2%, for the six months ended March 31, 2025 when compared to the six months ended March 31, 2024, primarily due to increases in license revenues.

Cost of Connected Services Revenue

Cost of connected services revenue for the six months ended March 31, 2025 was $11.3 million, a decrease of $1.4 million, or (10.8)%, from $12.7 million for the six months ended March 31, 2024. Cost of connected services revenue decreased primarily due to a $0.7 million decrease in amortization of costs previously deferred, a $0.3 million decrease in our cloud infrastructure costs and a $0.4 million decrease in internally allocated labor costs. As a percentage of total cost of revenues, cost of connected service revenue increased by 4.9 percentage points from 26.8% for the six months ended March 31, 2024 to 31.7% for the six months ended March 31, 2025.

Connected services gross profit decreased $82.7 million, or 84.6%, from $97.8 million for the six months ended March 31, 2024 to $15.1 million for the six months ended March 31, 2025, primarily due to the decrease in connected service revenue due to the early termination of a legacy contract acquired by Nuance through a 2013 acquisition and the termination of services provided to a separate customer, who in turn provided services to our legacy customer.

Cost of Professional Services Revenue

Cost of professional services revenue for the six months ended March 31, 2025 was $20.1 million, a decrease of $11.3 million, or 35.9%, from $31.4 million for the six months ended March 31, 2024. Cost of professional services revenue decreased primarily due to a $7.6 million decrease in third-party contractor costs, a $1.7 million decrease in salary-related expenditures, a $1.7 million decrease in internally allocated labor, a $0.2 million decrease in travel-related expenses, and a $0.1 million decrease in hardware costs. Decreases were driven by the increased standardization of our software product offerings, which requires less professional services effort to implement, and other efficiencies in our professional services processes. As a percentage of total cost of revenues, cost of professional services revenue decreased by 10.1 percentage points from 66.6% for the six months ended March 31, 2024 to 56.5% for the six months ended March 31, 2025.

Professional services gross profit increased $0.3 million, or 3.4%, from $7.9 million for the six months ended March 31, 2024 to $8.2 million for the six months ended March 31, 2025, which was primarily due to the composition of our professional service arrangements.

Operating Expenses

The tables below show each component of operating expense. Total other expense, net and (benefit from) provision for income taxes are non-operating expenses and presented in a similar format (dollars in thousands).

R&D Expenses

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies. R&D expenses for the three months ended March 31, 2025 were $23.3 million, a decrease of $8.5 million, or 26.7%, from $31.8 million for the three months ended March 31, 2024. The decrease was primarily attributable to a $2.6 million decrease in third-party contract labor, a $2.2 million international tax credit catch-up, $2.0 million in capitalized costs associated with internally developed software and a $1.7 million decrease in salary-related expenditures. As a percentage of total operating expenses, R&D expenses increased by 44.3 percentage points from 10.2% for the three months ended March 31, 2024 to 54.5% for the three months ended March 31, 2025.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies. R&D expenses for the six months ended March 31, 2025 were $44.2 million, a decrease of $21.0 million, or 32.2%, from $65.2 million for the six months ended March 31, 2024. The decrease was primarily attributable to a $5.3 million decrease in third-party contractor costs, a $4.9 million international tax credit catch-up related to two different tax jurisdictions, a $5.9 million decrease in salary-related expenditures, a $1.9 million decrease in stock-based compensation expense, and a $3.2 million decrease in capitalized costs associated with internally developed software. The decreases are offset by a $0.2 million increase in our cloud infrastructure costs. As a percentage of total operating expenses, R&D expenses increased by 29.7 percentage points from 17.9% for the six months ended March 31, 2024 to 47.6% for the six months ended March 31, 2025.

Sales & Marketing Expenses

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

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Sales and marketing expenses for the three months ended March 31, 2025 were $4.9 million, a decrease of $0.7 million, or 12.3%, from $5.6 million for the three months ended March 31, 2024. The decrease in sales and marketing expenses was primarily attributable to a $0.5 million decrease in professional services, and a $0.2 million decrease in commissions expenditures. As a percentage of total operating expenses, sales and marketing expenses decreased by 9.7 percentage points from 1.8% for the three months ended March 31, 2024 to 11.5% for the three months ended March 31, 2025.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Sales and marketing expenses for the six months ended March 31, 2025 were $9.7 million, a decrease of $2.0 million, or 17.1%, from $11.7 million for the six months ended March 31, 2024. The decrease in sales and marketing expenses was primarily attributable to a $1.2 million decrease in salary-related expenditures, a $0.5 million decrease in travel-related expenditures, and a $0.3 million decrease in professional services. As a percentage of total operating expenses, sales and marketing expenses increased by 7.2 percentage points from 3.2% for the six months ended March 31, 2024 to 10.4% for the six months ended March 31, 2025.

General & Administrative Expenses

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

General and administrative expenses for the three months ended March 31, 2025 were $11.2 million, a decrease of $5.5 million, or 32.8%, from $16.7 million for the three months ended March 31, 2024. The decrease in general and administrative expenses was primarily attributable to a $6.1 million credit loss provision related to the bankruptcy of one fitness equipment manufacturer recognized in the second quarter of 2024, a $0.5 million decrease in salary-related expenditures, and a $0.4 million decrease in rent expenditures. The decrease was partially offset by a $0.8 million increase in stock-based compensation costs and a $0.7 million increase in depreciation expense. As a percentage of total operating expenses, general and administrative expenses increased by 20.7 percentage points from 5.4% for the three months ended March 31, 2024 to 26.1% for the three months ended March 31, 2025.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

General and administrative expenses for the six months ended March 31, 2025 were $24.0 million, a decrease of $5.5 million, or 18.7%, from $29.5 million for the six months ended March 31, 2024. The decrease in general and administrative expenses was primarily attributable to a $6.1 million credit loss provision related to the bankruptcy of one fitness equipment manufacturer recognized in the second quarter of 2024. The decrease was partially offset by a $0.6 million increase in third-party contract labor. As a percentage of total operating expenses, general and administrative expenses increased by 17.7 percentage points from 8.1% for the six months ended March 31, 2024 to 25.8% for the six months ended March 31, 2025.

Amortization of Intangible Assets

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

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Intangible asset amortization for the three months ended March 31, 2025 was $0.5 million, a decrease of $0.1 million, or 3.4%, from $0.6 million for the three months ended March 31, 2024. The decrease in amortization relates to certain intangible assets having been fully amortized during fiscal year 2025 and 2024. Amortization expense for acquired technology and patents is included in the cost of revenues in the accompanying Condensed Consolidated Statements of Operations. Acquired technology and patents were fully amortized as of December 31, 2024. Amortization expense for customer relationships is included in operating expenses in the accompanying Condensed Consolidated Statements of Operations.

As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses increased by 1.1 percentage point from 0.2% for the six months ended March 31, 2024 as compared to 1.3% for the six months ended March 31, 2025.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Intangible asset amortization for the six months ended March 31, 2025 was $1.1 million, a decrease of $0.1 million, or 9.4%, from $1.2 million for the six months ended March 31, 2024. The decrease in amortization relates to certain intangible assets having been fully amortized during fiscal year 2025 and 2024. Amortization expense for acquired technology and patents is included in the cost of revenues in the accompanying Condensed Consolidated Statements of Operations. Amortization expense for customer relationships is included in operating expenses in the accompanying Condensed Consolidated Statements of Operations.

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.2 percentage points from 0.2% for the six months ended March 31, 2024 to 0.0% for the six months ended March 31, 2025. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses increased by 0.9 percentage points from 0.3% for the six months ended March 31, 2024 as compared to 1.2% for the six months ended March 31, 2025.

Other Components of Operating Expense

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

Fiscal Year 2025

For the three months ended March 31, 2025, we recorded restructuring and other costs, net of $2.8 million, which included a $1.6 million charge related to the elimination of personnel, and a $1.1 million charge related to our transformation initiatives.

Whenever events or changes in circumstances indicate that the carrying value may not be recoverable, we will be required to assess the potential impairment of goodwill and other intangible assets. Examples of factors that could trigger an impairment of such assets include, but are not limited to, our market capitalization declining to below net book value, declines in our stock price for sustained periods of time, and negative industry or economic trends. Future adverse changes in these or other unforeseeable factors could result in additional impairment charges that would impact our results of operations and financial position in the reporting period identified.

Fiscal Year 2024

For the three months ended March 31, 2024, we recorded restructuring and other costs, net of $4.6 million which included a $4.4 million severance charge related to the elimination of personnel and a $0.1 million charge resulting from the closure of facilities that will no longer be utilized.

Goodwill impairment for the three months ended March 31, 2024 was $252.1 million. At March 31, 2024, we concluded indicators of impairment were present due to the current macroeconomic conditions, including declines in our stock price. The fair value of our reporting unit was determined using a combination of the income approach and the market approach. We weighted the methodologies appropriately to estimate a fair value of approximately $463.4 million as of March 31, 2024. The carrying value of our reporting unit exceeded the estimated fair value. Based upon the results of the impairment test, we recorded a goodwill impairment charge of $252.1 million.

Whenever events or changes in circumstances indicate that the carrying value may not be recoverable, we will be required to assess the potential impairment of goodwill and other intangible assets. Examples of factors that could trigger an impairment of such assets include, but are not limited to, our market capitalization declining to below net book value, declines in our stock price for sustained periods of time and negative industry or economic trends. Future adverse changes in these or other unforeseeable factors could result in additional impairment charges that would impact our results of operations and financial position in the reporting period identified.

As a percentage of total operating expenses, restructuring and other costs, net increased by 5.1 percentage points from 1.5% for the three months ended March 31, 2024 to 6.6% for the three months ended March 31, 2025.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Fiscal Year 2025

For the six months ended March 31, 2025,we recorded restructuring and other costs, net of $13.9 million, which included an $12.0 million charge related to the elimination of personnel, of which $3.0 million related to the stock-based compensation expense for the termination of our former senior management employees, and a $1.9 million charge related to our transformation initiatives. We are focused on pursuing actions intended to position us to deliver on our generative AI and LLM product roadmap and also deliver improved financial results which include process optimization efforts and cost reductions. During the remainder of fiscal year 2025, we expect additional personnel-related restructuring costs in connection with the Plan as we better align our cost structure with current levels of revenue.

Fiscal Year 2024

For the six months ended March 31, 2024, we recorded restructuring and other costs, net of $5.3 million, which included a $4.5 million severance charge related to the elimination of personnel, $0.4 million related to other one-time charges and a $0.3 million charge resulting from the closure of facilities that will no longer be utilized.

Goodwill impairment for the six months ended March 31, 2024 was $252.1 million. At March 31, 2024, we concluded indicators of impairment were present due to the current macroeconomic conditions, including declines in our stock price. The fair value of our reporting unit was determined using a combination of the income approach and the market approach. We weighted the methodologies appropriately to estimate a fair value of approximately $463.4 million as of March 31, 2024.

Whenever events or changes in circumstances indicate that the carrying value may not be recoverable, we will be required to assess the potential impairment of goodwill and other intangible assets. Examples of factors that could trigger an impairment of such assets include, but are not limited to, our market capitalization declining to below net book value, declines in our stock price for sustained periods of time, and negative industry or economic trends. Future adverse changes in these or other unforeseeable factors could result in additional impairment charges that would impact our results of operations and financial position in the reporting period identified.

As a percentage of total operating expenses, restructuring and other costs, net increased by 13.6 percentage points from 1.4% for the six months ended March 31, 2024 to 15.0% for the six months ended March 31, 2025.

Total Other Expense, Net

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

Total other expense, net for the three months ended March 31, 2025 was expense of $1.3 million, a change of $0.6 million from $1.9 million of expense for the three months ended March 31, 2024. The decrease in interest expense was primarily attributable to a lower principal balance of the 2025 Notes. The change in Other income (expense), net was primarily driven by foreign exchange gains. For further information, see “Liquidity and Capital Resources” below.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Total other expense, net for the six months ended March 31, 2025 was expense of $3.0 million, a change of $0.7 million from $2.3 million of expense for the six months ended March 31, 2024. The decrease in interest income was primarily attributable to lower returns on investments. The decrease in interest expense was primarily attributable to a lower average principal balance on our 2025 Notes and the termination of our Senior Credit Facilities in December of 2024. The change in Other income, net was primarily driven by a reduction in gains from foreign exchange offset by a $0.3 million gain on the extinguishment of debt related to our repurchase of $27.4 million principal value of the 2025 Notes. For further information, see “Liquidity and Capital Resources” below.

Provision For (Benefit From) Income Taxes

Three Months Ended March 31, 2025 Compared with Three Months Ended March 31, 2024

Our effective income tax rate for the three months ended March 31, 2025 was negative 34.9%, compared to negative 4.4% for the three months ended March 31, 2024. Our benefit from income taxes for the three months ended March 31, 2025 was $5.6 million, a net change of $17.2 million from a provision for income taxes of $11.6 million for the three months ended March 31, 2024. This difference was attributable to the impairment of book goodwill in the three months ended March 31, 2024.

Six Months Ended March 31, 2025 Compared with Six Months Ended March 31, 2024

Our effective income tax rate for the six months ended March 31, 2025 was negative 2.7%, compared to negative 22.1% for the six months ended March 31, 2024. Our provision for income taxes for the six months ended March 31, 2025 was $0.1 million, a net change of $45.9 million from a provision for income taxes of $46.0 million for the six months ended March 31, 2024. This difference was attributable to the impairment of book goodwill and one-time acceleration of legacy deferred revenue in the six months ended March 31, 2024.

Liquidity and Capital Resources

Financial Condition

As of March 31, 2025, we had $122.8 million in cash, cash equivalents, and marketable securities. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. Marketable securities include corporate bonds and government securities.

Sources and Material Cash Requirements

Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, as well as the cash flows we generate from our operations. The primary uses of cash include costs of revenues, funding of R&D activities, capital expenditures and debt obligations.

Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and access additional funding in the capital and debt markets as needed. Based on our expectations to generate positive cash flows and the $122.8 million of cash, cash equivalents, and marketable securities as of March 31, 2025, we believe that we will be able to meet our liquidity needs over the next 12 months. Our assessment included the repayment of the $60.1 million of the 2025 Modified Notes due in the third quarter of fiscal 2025.

The following table presents our material cash requirements for future periods (dollars in thousands):

(a) Interest per annum is due and payable semiannually and is determined based on the outstanding principal as of March 31, 2025.

Should we need to secure additional sources of liquidity, we believe that we could finance our needs through the issuance of equity securities or debt offerings. However, we cannot guarantee that we will be able to obtain financing through the issuance of equity securities or debt offerings or that, if such financing is obtained, that it will be on acceptable terms. Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or if there are other significantly unfavorable changes in economic conditions. For instance, inflation and persistently high interest rates, changes in the political, legal and regulatory environment, including trade policies and tariffs, and disruptions and instability in the banking industry have negatively impacted the global economy and created significant volatility and disruption of financial markets. An extended period of economic disruption or market volatility, could materially affect our business, results of operations, access to sources of liquidity and financial condition.

1.50% Senior Convertible Notes due 2028

On June 26, 2023, we issued $190.0 million in aggregate principal amount of 2028 Notes, which are governed by the 2028 Indenture, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. On July 3, 2023, we issued an additional $20.0 million in aggregate principal amount of 2028 Notes. The initial net proceeds from the issuance of the 2028 Notes were $193.2 million after deducting transaction costs.

The 2028 Notes are senior, unsecured obligations and accrue interest payable semiannually in arrears on January 1 and July 1 of each year at a rate of 1.50% per year. The 2028 Notes will mature on July 1, 2028, unless earlier converted, redeemed, or repurchased. The 2028 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

The conversion rate is 24.5586 shares of our common stock per $1,000 principal amount of 2028 Notes (equivalent to an initial conversion price of approximately $40.72 per share of our common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.

In connection with the offering of the 2028 Notes, we repurchased $87.5 million in aggregate principal amount of the 2025 Notes in a privately negotiated transaction. We specifically negotiated the repurchase of the 2025 Notes with investors who concurrently purchased the 2028 Notes. We evaluated the transaction to determine whether the exchange should be accounted for as a modification or extinguishment under the provisions of ASC 470-50, which allows for an exchange of debt instruments between the same debtor and creditor to be accounted for as a modification so long as the instruments do not have substantially different terms. Because the concurrent redemption of the 2025 Notes and a portion of issuance of the 2028 Notes were executed with the same investors, we evaluated the transaction as a debt modification, on a creditor by creditor basis. The repurchase of the 2025 Notes and issuance of the 2028 Notes were deemed to not have substantially different terms on the basis that (1) the present value of the cash flows under the terms of the new debt instrument were less than 10% different from the present value of the remaining cash flows under the terms of the original instrument and (2) the fair value of the conversion feature did not change by more than 10% of the carrying value of the 2025 Notes, and therefore, the repurchase of the 2025 Notes was accounted for as a debt modification.

As a result, $87.5 million of the 2028 Notes are considered a modification of the 2025 Notes and are included in the balances of the 2025 Notes along with the remaining $87.5 million of the 2025 Notes (together the "2025 Modified Notes") that were not repurchased as part of the transaction. We recorded $14.3 million of fees paid directly to the lenders as deferred debt issuance costs, and $3.8 million of fees paid to third-parties were expensed in the period. As of March 31, 2025, the carrying amount of the 2025 Modified Notes was $136.7 million, net of unamortized costs of $10.9 million.

If a convertible debt instrument is modified or exchanged in a transaction that is not accounted for as an extinguishment, an increase in the fair value of the embedded conversion option shall reduce the carrying amount of the debt instrument with a corresponding increase in Additional paid-in capital. We recognized the increase in the fair value of the embedded conversion feature of $4.1 million as Additional paid-in capital and an equivalent discount that reduced the carrying value of the 2025 Modified Notes.

We accounted for $122.5 million of the 2028 Notes, that were not negotiated with the investors of the 2025 Notes, as a single liability. We incurred transaction costs of $2.4 million relating to the issuance of the 2028 Notes, which were recorded as a direct deduction from the face amount of the 2028 Notes and are being amortized as interest expense over the term of the 2028 Notes using the interest method. As of March 31, 2025, the carrying amount of the 2028 Notes was $120.9 million and unamortized issuance costs of $1.6 million. As of March 31, 2025, the 2028 Notes were not convertible.

3.00% Senior Convertible Notes due 2025

On June 2, 2020, we issued $175.0 million in aggregate principal amount of 2025 Notes, including the initial purchasers’ exercise in full of their option to purchase $25.0 million principal amount of the 2025 Notes, which are governed by the 2025 Indenture, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the 2025 Notes were $169.8 million after deducting transaction costs.

The 2025 Notes are senior, unsecured obligations and accrue interest payable semiannually in arrears on June 1 and December 1 of each year at a rate of 3.00% per year. The 2025 Notes will mature on June 1, 2025, unless earlier converted, redeemed, or repurchased. The repayment of the 2025 Notes in cash upon maturity could adversely affect our liquidity.

The 2025 Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The conversion rate is 26.7271 shares of our common stock per $1,000 principal amount of 2025 Notes (equivalent to an initial conversion price of approximately $37.42 per share of our common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2025 Notes in connection with such a corporate event or convert its 2025 Notes called for redemption in connection with such notice of redemption, as the case may be.

During the three months ended December 31, 2024, we repurchased $27.4 million aggregate principal amount of our 2025 Notes for $27.0 million in cash, including accrued interest and fees, via privately negotiated transactions with certain holders. The repurchased notes were subsequently cancelled and retired, resulting in a gain on extinguishment of debt of $0.3 million.

See “1.50% Senior Convertible Notes due 2028” section above for discussion on the modification of the 2025 Notes as part of the offering of the 2028 Notes.

The interest expense recognized related to the Notes for the three and six months ended March 31, 2025 and 2024 was as follows (dollars in thousands):

The conditional conversion feature of the Notes was not triggered during the three and six months ended March 31, 2025. As of March 31, 2025, the Notes were not convertible. As of this Quarterly Report, no Notes have been converted by the holders. Whether any of the Notes will be convertible in future quarters will depend on the satisfaction of one or more of the conversion conditions in the future. If one or more holders elect to convert their Notes at a time when any such Notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional shares), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.

Senior Credit Facilities

On June 12, 2020, we entered into the Term Loan Facility. The net proceeds from the issuance of the Term Loan Facility were $123.0 million. We also entered into the Revolving Facility, which could have been drawn on in the event that our working capital and other cash needs were not supported by our operating cash flow. In connection with the issuance of the 2028 Notes, in the third quarter of fiscal year 2023, we borrowed $24.7 million under our Revolving Facility and paid $106.3 million towards our Term Loan Facility. As a result, we recorded $104.9 million extinguishment of debt and $1.3 million loss on the extinguishment of debt. All principal and interest on the Term Loan Facility have been paid in full.

On December 31, 2024, we terminated the Credit Agreement. On the date of termination, there were no revolving loans outstanding under the Credit Agreement. As a result of the Credit Agreement termination, we will not have access to the Revolving Facility and we will not be subject to the applicable Credit Agreement covenants.

Total interest expense relating to the Senior Credit Facilities for the three months ended March 31, 2025 and 2024 was zero and $0.1 million, respectively, and was $0.4 million and $0.1 million for the six months ended March 31, 2025 and 2024, respectively. Amounts reflect the coupon and accretion of the discount.

Cash Flows

Cash flows from operating, investing and financing activities for the six months ended March 31, 2025 and 2024, as reflected in the unaudited Condensed Consolidated Statements of Cash Flows included in Item 1 of this Form 10-Q, are summarized in the following table (dollars in thousands):

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities for the six months ended March 31, 2025 was $24.7 million, a net change of $26.5 million, or 1495.8%, from net cash used in operating activities of $1.8 million for the six months ended March 31, 2024. The change in cash flows were primarily due to:

• A decrease of $50.5 million from income before non-cash charges;
• A decrease of $9.0 million due to unfavorable changes in working capital primarily related to accrued expenses and other liabilities, accounts receivable, prepaid expenses and other assets; and
• An increase of $86.0 million from changes in deferred revenue.

Deferred revenue represents a significant portion of our net cash used in or provided by operating activities and, depending on the nature of our contracts with customers and foreign currency exchange rates, this balance can fluctuate significantly from period to period. Fluctuations in deferred revenue are not a reliable indicator of future performance and the related revenue associated with these contractual commitments. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.

Net Cash (Used in) Provided by Investing Activities

Net cash provided by investing activities for the six months ended March 31, 2025 was $0.9 million, a net change of $1.1 million, or 478.0%, from $0.2 million of cash used in investing activities for the six months ended March 31, 2024. The change in cash flows were primarily due to an decrease of $0.4 million net cash inflow related to marketable securities and $0.9 million related to additional capital expenditures.

Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities for the six months ended March 31, 2025 was $27.2 million, a net change of $27.7 million, from cash provided by financing activities of $0.5 million for the six months ended March 31, 2024. The change in cash flows were primarily due to:

• An increase of $27.0 million in principal payments for short-term debt;
• A decrease of $8.3 million in proceeds from the issuance of our common stock; and
• A decrease of $7.6 million in payments of tax related withholdings due to the net settlement of equity awards.

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that have a material impact on the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.

We believe that our critical accounting estimates are those related to revenue recognition; allowance for credit losses; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for stock-based compensation; accounting for income taxes; accounting for convertible debt; and loss contingencies. We believe these estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting estimates may be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates” and below.

Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements To Be Adopted

Refer to Note 2 to the accompanying unaudited condensed consolidated financial statements for a description of certain issued accounting standards that have been recently adopted and are expected to be adopted by us and may impact our results of operations in future reporting periods.

We are exposed to market risk from changes in foreign currency exchange rates and interest rates which could affect our operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities, and through the use of derivative financial instruments.

Exchange Rate Sensitivity

We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations.

Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has been related to transactions denominated in the Canadian dollar, Chinese yuan, Euro, and Japanese yen.

We use foreign currency forward contracts to hedge the foreign currency exchange risk associated with forecasted foreign denominated payments related to our ongoing business. The aggregate notional amount of our outstanding foreign currency forward contracts was $31.0 million at March 31, 2025. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates. A 10% unfavorable exchange rate movement in our portfolio of foreign currency contracts would have resulted in unrealized losses of $2.6 million at March 31, 2025. Such losses would be offset by corresponding gains in the remeasurement of the underlying transactions being hedged. We believe these foreign currency forward exchange contracts and the offsetting underlying commitments, when taken together, do not create material market risk.

Interest Rate Sensitivity

We are exposed to interest rate risk as a result of our cash and cash equivalents. At March 31, 2025, we held approximately $117.4 million of cash and cash equivalents consisting of cash and highly liquid investments, including money-market funds and time deposits. Assuming a 1% increase in interest rates, our interest income on our highly liquid investments would increase by $0.6 million per annum, based on March 31, 2025 reported balances.

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2025 to ensure that all material information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the effectiveness of internal control. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024, which could materially affect our business, financial condition or future results of operations. The risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 and those described in this Quarterly Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Other than as updated below, there are no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Adverse conditions in the automotive industry or the global economy more generally could have adverse effects on our results of operations.

Our business depends on, and is directly affected by, the global automotive industry. Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences, changes in interest rate levels and credit availability, consumer confidence, fuel costs, fuel availability, environmental impact, governmental incentives and regulatory requirements, trade restrictions, customs regulations, tariffs and price or exchange controls, preferences by nations for domestically manufactured products and political volatility, especially in energy-producing countries and large or high growth markets. Such factors have in the past and may in the future also negatively impact consumer demand for automobiles that include features such as our products. In addition, automotive production and sales can be affected by our customers’ ability to continue operating in response to challenging economic conditions, and in response to labor relations issues, regulatory requirements, trade agreements and other factors. The volume of global automotive production has fluctuated, sometimes significantly, from year to year, and such fluctuations give rise to fluctuations in the demand for our products. For example, the U.S. government and governments of other countries recently adopted tariffs that apply to the automotive industry and may affect the business of our customers, which in turn could impact our own business. Any significant adverse change in any of these factors, including, but not limited to, general economic conditions and the resulting bankruptcy of a customer, the closure of a customer manufacturing facility or the ability of a customer manufacturing facility to obtain supplies to manufacture automobiles and to ship or receive shipments of parts, supplies or finished product on prices that are acceptable to them, or imposition of tariffs that affect the prices at which end consumers purchase automobiles, may result in a reduction in automotive sales and production by our customers, and could have a material adverse effect on our business, results of operations and financial condition.

In the past couple of years, we have observed increased economic uncertainty in the United States and abroad. Impacts of such economic weakness include:

• falling overall demand for goods and services, leading to reduced profitability;
• reduced credit availability;
• higher borrowing costs;
• reduced liquidity;
• recession risks;
• volatility in credit, equity and foreign exchange markets; and
• bankruptcies.

Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or the financial services industry generally, have in the past and may in the future lead to market-wide liquidity problems. If banks or financial institutions where we maintain deposits enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, then our ability to access our cash and cash equivalents may be threatened and could have a material adverse effect on our business and financial condition. In addition, if any of our customers, suppliers or other parties with whom we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected.

These developments, along with continued uncertainty about tariffs and trade policies,economic stability related to the global outbreak of COVID-19, and the ongoing conflicts in Ukraine and the Middle East, have resulted in supply chain disruption, inflation, higher interest rates, fluctuations in currency exchange rates, and uncertainty about business continuity, which may adversely affect our business and our results of operations. As our customers react to global political, trade and economic conditions and the potential for a global recession, we may see them increase pricing pressure on us, reduce spending on our products and take additional precautionary measures to limit or delay expenditures and preserve capital and liquidity. Reductions in spending on our solutions, delays in automobile production or purchasing decisions, lack of renewals or the inability to attract new customers, as well as pressure for extended billing terms or pricing discounts, would limit our ability to grow our business and negatively affect our operating results and financial condition.

Our operating results may fluctuate significantly from period to period, and this may cause our stock price to decline.

Our revenue and operating results may fluctuate materially in the future. These fluctuations may cause our results of operations to not meet the expectations of securities analysts or investors which would likely cause the price of our stock to decline. Factors that may contribute to fluctuations in operating results include:

• given our limited customer base, the volume, timing and fulfillment of large customer contracts;
• renewals of existing customer contracts and wins of new customer programs;
• our mix of variable, fixed prepaid or fixed minimum purchase commitment license contracts;
• increased expenditures incurred pursuing new product or market opportunities;
• the timing of the receipt and accuracy of royalty reports;
• fluctuating sales by our customers to their end-users;
• contractual counterparties failing to meet their contractual commitments to us;
• introduction of new products by us or our competitors;
• cybersecurity or data breaches;
• reduction in the prices of our products in response to competition, market conditions or contractual obligations;
• impairment of goodwill or intangible assets;
• accounts receivable that are not collectible;
• higher than anticipated costs related to fixed-price contracts with our customers;
• change in costs and demand for our products due to tariffs, or regulatory or trade restrictions;
• expenses incurred in litigation matters, whether initiated by us or brought by third-parties against us, and settlements or judgments we are required to pay in connection with disputes;
• changes in our stock compensation practices, as it relates to employee short-term incentive payments; and
• general economic trends as they affect the customer bases into which we sell.

Due to the foregoing factors, among others, our financial and operating results may fluctuate significantly from period to period. Our expense levels are based in significant part on our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to near-term shortfalls in projected revenue. Therefore, our failure to meet revenue expectations would seriously harm our operating results, financial condition and cash flows.

Unauthorized use of our proprietary technology and intellectual property could adversely affect our business and results of operations.

Our success and competitive position depend in large part on our ability to obtain and maintain intellectual property rights protecting our products and services. We rely on a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. Unauthorized parties may attempt to copy or discover aspects of our products or to obtain, license, sell or otherwise use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to our technologies and that do not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar or superior technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States.

Litigation may be necessary to enforce our intellectual property rights, including our patents, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. For example, we have initiated legal proceedings to enforce or defend our intellectual property rights or the terms of existing agreements against multiple third parties. Litigation, regardless of the outcome, can be very expensive and can divert management’s efforts, which could harm our business and financial results, and third parties may have the ability to dedicate substantially greater resources to these legal actions than us. The potential outcomes of litigation are unpredictable and, as a result, there can be no assurance that we will prevail in any such litigation or, if we prevail, what remedies might be awarded. Moreover, such litigation has resulted, and may in the future result, in counterclaims against us which may be costly to defend and could subject us to significant liabilities or cause severe disruptions to our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property rights which could harm the Company’s business, financial condition and results of operations.