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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Cerence Inc.    CRNC

CERENCE INC.

(CRNC)
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CERENCE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

11/19/2020 | 01:55pm EST
The following discussion and analysis presented below should be read in
conjunction with the Combined Financial Statements and the corresponding notes,
and included elsewhere in this Form 10-K. The information presented in this
section includes forward-looking statements, which are described in detail in
the section titled "Cautionary Statement Concerning Forward-Looking Statements."
The matters discussed in these forward-looking statements are subject to risks,
uncertainties, and other factors that could cause actual results to differ
materially from those made, projected, or implied in the forward-looking
statements. See the section titled "Risk Factors" for a discussion of the risks,
uncertainties, and assumptions associated with these statements.

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 world's most
popular software platforms for building automotive virtual assistants. Our
customers include all major 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 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
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 all major OEMs or their tier 1 suppliers, and while our customer contracts
vary, they generally represent multi-year engagements, giving us visibility into
future revenue.

Impact of COVID-19 on our Business


As the full impact of the COVID-19 pandemic on our business continues to
develop, we are closely monitoring the global situation. As a premier supplier
to the automotive industry, we were adversely impacted by the decline in
automotive production and shipments due to the temporary shutdown of our
customers' factories during fiscal 2020. We are unable at this time to predict
the full impact of COVID-19 on our operations, liquidity, and financial results,
and, depending on the magnitude and duration of the COVID-19 pandemic, such
impact may be material. During the second half of fiscal 2020, the COVID-19
pandemic had a material impact on our billings and revenue recognized from
licenses and billings from connected services, which may also continue beyond
fiscal 2020. Accordingly, current results and financial condition discussed
herein may not be indicative of future operating results and trends. While we
are unable to accurately predict the full impact that COVID-19 will have on our
results from operations, financial condition, liquidity and cash flows due to
numerous uncertainties, including the duration and severity of the pandemic and
containment measures, these measures have impacted, and may continue to impact,
our business, as well as our customers and consumers.

We have taken numerous steps, and plan to continue to take further actions, in
our approach to addressing the COVID-19 pandemic. We shifted a portion of our
R&D and engineering workforces to support our professional service teams and
their successful completion of customer project milestones to help mitigate the
anticipated decline in revenues. We reduced expenses by limiting discretionary
spending, reducing third-party contractors, deferring the hiring of new
employees and implementing a reduction in our workforce. In order to further
conserve cash outflows, we implemented temporary reductions in salaries for our
current named executive officers and other senior executives.

We implemented our business continuity plans and our crisis response team
remains in place to respond to changes in our environment. At the onset of the
COVID-19 pandemic, we instructed employees across 18 different countries and 24
office locations to work from home on a temporary basis. Beginning in May 2020,
in jurisdictions where local restrictions implemented to prevent the further
spread of COVID-19 were lifted, we started reopening our offices to allow
employees to return to work at their option. For employees returning to our
offices, we have instituted social distancing protocols, increased the level of
cleaning and sanitizing, and undertaken other actions to make our offices safer.
While most of our employees continue to work remotely, we have experienced
minimal declines in workforce efficiency due to our investment in cloud-based
applications and tools. We have also instituted strict

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restrictions on travel for all employees. If government health authorities dictate further measures to limit further spread of COVID-19, we may need to adjust our safety protocols to comply with all revised measures in certain countries or regions in which we operate.

Business Trends


We experienced total revenue growth of 8.7% and 9.5%, during fiscal year 2020
and fiscal year 2019, respectively, primarily driven by our connected and
professional services revenues due to increased market penetration of our
connected and professional services solutions. License revenues decreased during
fiscal 2020 due to the impact of COVID-19 on the automotive industry, which led
to a reduction in reported royalties related to our licensed edge technologies.

Fiscal year 2020 was another key investment year for our business in which we
focused on establishing public company functions and expanding our professional
services team to meet customer demand. During fiscal year 2020, total cost of
revenues increased by 8.6%, primarily driven by investments in professional
staff. Total operating expenses grew by 4.8% during fiscal year 2020, primarily
driven by G&A expenses which were incurred to establish public company
functions. Our R&D expenses decreased 4.5%, as a result of shifting a portion of
our R&D and engineering workforces to support our professional service teams and
their successful completion of customer project milestones. Our acquisition of
Voicebox Technology Corporation, or Voicebox, on April 2, 2018, which provided
additional customer relationships and technology, and the winding down of costs
to establish the Cerence business as a standalone public company drove a $6.2
million decrease in restructuring and other costs, net. For fiscal year 2021,
subject to the continuing impact of the COVID-19 pandemic, we anticipate that
our R&D expenses will return to representing the majority of our operating
expenses as we focus on developing new products and advancing our core
technologies.

Basis of Presentation

Fiscal 2020

The accompanying consolidated financial statements of the Company have been
prepared in accordance with GAAP, and the rules and regulations of the SEC. The
consolidated financial statements reflect all adjustments considered necessary
for a fair presentation of the consolidated results of operations and financial
position for the fiscal year presented. All such adjustments are of a normal
recurring nature.

Fiscal 2019 and 2018

Standalone financial statements had not been historically prepared for the
Cerence business. The accompanying combined financial statements have been
prepared from the Parent's historical accounting records and are presented on a
"carve out" basis to include the historical financial position, results of
operations and cash flows applicable to the Cerence business. As a direct
ownership relationship did not exist among all the various business units
comprising the Cerence business, Nuance's investment in the Cerence business was
shown in lieu of stockholders' equity in the combined financial statements.

The Combined Statements of Operations included all revenues and costs directly
attributable to Cerence as well as an allocation of expenses related to
functions and services performed by centralized Parent organizations. These
corporate expenses have been allocated to the Cerence business based on direct
usage or benefit, where identifiable, with the remainder allocated on a pro rata
basis of revenues, headcount, number of transactions or other measures as
determined appropriate. The Combined Statements of Cash Flows presented these
corporate expenses that are cash in nature as cash flows from operating
activities, as this was the nature of these costs at the Parent. Non-cash
expenses allocated from the Parent included corporate depreciation and
amortization and stock-based compensation included as add-back adjustments to
reconcile net income to net cash provided by operations.

The combined financial statements included the allocation of certain assets and
liabilities that have historically been held at the Nuance corporate level or by
shared entities, but which are specifically identifiable or allocable to the
Cerence business. These shared assets and liabilities have been allocated to the
Cerence business on the basis of direct usage when identifiable, or allocated on
a pro rata basis of revenue, headcount or other systematic measures that reflect
utilization of the services provided to or benefits received by Cerence. The
Parent used a centralized approach to cash management and financing its
operations. Accordingly, none of the cash, cash equivalents, marketable
securities, foreign currency hedges or debt and related interest expense had
been allocated to the Cerence business in the combined financial statements. The
Parent's short and long-term debt had not been pushed down to the Cerence
business's combined financial statements because the Cerence business was not
the legal obligor of the debt and the Parent's borrowings were not directly
attributable to the Cerence business.

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Transactions between the Parent and the Cerence business are considered to be
effectively settled in the combined financial statements at the time the
transaction was recorded. The total net effect of the settlement of these
intercompany transactions was reflected in the Combined Statements of Cash Flows
as a financing activity and in the Combined Balance Sheets as net parent
investment.

All of the allocations and estimates in the combined financial statements are
based on assumptions which management believed are reasonable. However, the
combined financial statements included herein may not be indicative of the
financial position, results of operations and cash flows if the Cerence business
had been a separate, standalone entity during the periods presented.

Comparability of Results


As of October 1, 2018, we adopted ASC 606 using the modified retrospective
approach from the previous guidance, ASC 605. The adoption of ASC 606 limited
the comparability of revenue and expenses, including cost of revenue and certain
operating expenses, presented in the results of operations for the fiscal years
2020 and 2019, when compared to prior reporting periods.

Key Metrics

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

For the fiscal year 2020 as compared to fiscal year 2019:

• Total revenue increased by $26.3 million, or 8.7%, from $303.3 million to

       $329.6 million.


  • Operating margin increased 2.3 percentage points from 3.6% to 5.9%.

• Cash provided by operating activities decreased by $43.3 million, or 49.1%,

from $88.1 million to $44.8 million.

For fiscal year 2019 as compared to fiscal year 2018:

• Total revenue increased by $26.3 million, or 9.5%, from $277.0 million to

$303.3 million.

• Operating margin decreased by 9.7 percentage points from 13.3% to 3.6%.

• Cash provided by operating activities decreased by $27.2 million, or 23.6%,

       from $115.3 million to $88.1 million.


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Operating Results

The following table shows the consolidated statement of operations for the fiscal year 2020 and the combined statement of operations for the fiscal year 2019 and fiscal year 2018 (dollars in thousands):



                                                       Year Ended September 30,
                                                  2020           2019           2018
                                               (ASC 606)      (ASC 606)      (ASC 605)
   Revenues:
   License                                     $  164,268$  172,379$  171,075
   Connected services                              96,148         78,690         60,227
   Professional services                           69,230         52,246         45,682
   Total revenues                                 329,646        303,315        276,984
   Cost of revenues:
   License                                          2,783          2,069          1,156
   Connected services                              31,768         37,562         32,919
   Professional services                           64,963         51,214         41,123
   Amortization of intangibles                      8,337          8,498          7,766
   Total cost of revenues                         107,851         99,343         82,964
   Gross profit                                   221,795        203,972        194,020
   Operating expenses:
   Research and development                        88,899         93,061         80,957
   Sales and marketing                             33,398         36,261         30,553
   General and administrative                      49,386         25,926    

19,873

   Amortization of intangible assets               12,544         12,524    

8,840

   Restructuring and other costs, net              18,237         24,404         12,863
   Acquisition-related costs                            -            944          4,082
   Total operating expenses                       202,464        193,120        157,168
   Income from operations                          19,331         10,852         36,852
   Interest income                                    585              -              -
   Interest expense                               (22,737 )            -              -
   Other income (expense), net                    (23,319 )          332    

(54 )

   (Loss) income before income taxes              (26,140 )       11,184    

36,798

(Benefit from) provision for income taxes (5,509 ) (89,084 )

     30,917
   Net (loss) income                           $  (20,631 )$  100,268$    5,881




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, with costs of
license revenue primarily consisting of third-party royalty expenses for certain
external technologies we leverage. Connected services revenue represents the
subscription fee that provides access to our connected services components,
including the customization and construction of our connected services
solutions. 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
doubtful accounts.

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.

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Restructuring costs are costs related to reorganizing various business units,
including costs associated with employee severance, closing and opening
facilities, terminating contracts, and separation costs related to establishing
Cerence business as a standalone public company.

Acquisition-related costs include transition and integration costs, professional service fees, and fair value adjustments related to business and asset acquisitions, including potential acquisitions.

Other income (expense), net consists primarily of interest income, interest expense, foreign exchange gains (losses), and net gain (loss) from other non-operating activities.

Fiscal Year 2020 Compared with Fiscal Year 2019 and Fiscal Year 2019 Compared with Fiscal Year 2018


Total Revenues



The following table shows total revenues by product type, including the corresponding percentage change (dollars in thousands):



                                             Year Ended September 30,                                                                   % Change             % Change
                                       2020          % of Total         2019         % of Total         2018         % of Total       2020 vs. 2019        2019 vs. 2018
                                     (ASC 606)                       (ASC 606)                       (ASC 605)
License                             $   164,268         50%          $  172,379         57%          $  171,075         62%                       (5 )%                 1 %
Connected services                       96,148         29%              78,690         26%              60,227         22%                       22 %                 31 %
Professional services                    69,230         21%              52,246         17%              45,682         16%                       33 %                 14 %
Total revenues                      $   329,646$  303,315$  276,984                                    9 %                 10 %



Fiscal Year 2020 Compared with Fiscal Year 2019

Total revenues fiscal year 2020 were $329.6 million, an increase of $26.3 million, or 8.7%, from $303.3 million from fiscal year 2019. This growth was primarily driven by increased demand for our connected and professional solutions.

License Revenue


License revenue for fiscal year 2020 was $164.3 million, a decrease of $8.1
million, or 4.7%, from $172.4 million for fiscal year 2019. The decrease in
license revenue was driven by the COVID-19 pandemic, which resulted in declining
reported royalties from ongoing agreements. As a percentage of total revenue,
license revenue decreased by 7.0 percentage points from 56.8% for fiscal year
2019 to 49.8% for fiscal year 2020.

Connected Services Revenue


Connected services revenue for fiscal year 2020 was $96.1 million, an increase
of $17.5 million, or 22.2%, from $78.7 million for fiscal year 2019. This
increase was primarily driven by continued market penetration from our connected
services solutions as our customers increasingly deploy hybrid solutions. As a
percentage of total revenue, connected services revenue increased by 3.3
percentage points from 25.9% for fiscal year 2019 to 29.2% for fiscal year 2020.

Professional Services Revenue


Professional services revenue for fiscal year 2020 was $69.2 million, an
increase of $17.0 million, or 32.5%, from $52.2 million for fiscal year 2019.
This increase was primarily driven by demand for the integration and
customization services related to our edge software and the timing of services
rendered. As a percentage of total revenue, professional services revenue
increased by 3.8 percentage points from 17.2% for fiscal year 2019 to 21.0% for
fiscal year 2020.

Fiscal Year 2019 Compared with Fiscal Year 2018

Our total revenues for fiscal year 2019 were $303.3 million, an increase of $26.3 million, or 9.5%, from $277.0 million from fiscal year 2018. This growth was primarily driven by increased demand for our connected and professional solutions

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License Revenue


License revenue for fiscal year 2019 was $172.4 million, an increase of $1.3
million, or 0.8%, from $171.1 million for fiscal year 2018. License revenue
increased primarily due to a higher volume of licensing royalties from new and
existing customers. As a percentage of total revenue, license revenue decreased
by 5.0 percentage points from 61.8% for fiscal year 2018 to 56.8% for fiscal
year 2019.

Connected Services Revenue

Connected services revenue for fiscal year 2019 was $78.7 million, an increase
of $18.5 million, or 30.7%, from $60.2 million for fiscal year 2018. This
increase was primarily driven by greater demand for our connected services
solutions as our customers increasingly deploy hybrid solutions. As a percentage
of total revenue, connected services revenue increased by 4.2 percentage points
from 21.7% for fiscal year 2018 to 25.9% for fiscal year 2019.

Professional Services Revenue


Professional services revenue for fiscal year 2019 was $52.2 million, an
increase of $6.6 million, or 14.4%, from $45.7 million for fiscal year 2018.
This increase was primarily driven by demand for the integration and
customization services related to our edge software and the timing of services
rendered. As a percentage of total revenue, professional services revenue
increased by 0.7 percentage points from 16.5% for fiscal year 2018 to 17.2% for
fiscal year 2019.

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):



                                               Year Ended September 30,                 % Change             % Change
                                         2020           2019            2018          2020 vs. 2019        2019 vs. 2018
                                      (ASC 606)       (ASC 606)       (ASC 605)
License                               $    2,783$     2,069$     1,156                  35 %                 79 %
Connected services                        31,768          37,562          32,919                 (15 )%                14 %
Professional services                     64,963          51,214          41,123                  27 %                 25 %
Amortization of intangibles                8,337           8,498           7,766                  (2 )%                 9 %
Total cost of revenues                $  107,851$    99,343$    82,964                   9 %                 20 %



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



                                              Year Ended September 30,                % Change             % Change
                                         2020           2019           2018         2020 vs. 2019        2019 vs. 2018
                                      (ASC 606)      (ASC 606)      (ASC 605)
License                               $  161,485$  170,310$  169,919                  (5 )%                 0 %
Connected services                        64,380         41,128         27,308                  57 %                 51 %
Professional services                      4,267          1,032          4,559                 313 %                (77 )%
Amortization of intangibles               (8,337 )       (8,498 )       (7,766 )                (2 )%                 9 %
Total gross profit                    $  221,795$  203,972$  194,020                   9 %                  5 %



Fiscal Year 2020 Compared with Fiscal Year 2019


Total cost of revenues for fiscal year 2020 were $107.9 million, an increase of
$8.5 million, or 8.6%, from $99.3 million for fiscal year 2019. The increase in
cost of revenues resulted primarily from our investments in professional
services staff to meet customer program demands.

We experienced an increase in total gross profit of $17.8 million, or 8.7%, from
$204.0 million to $221.8 million, which was primarily driven by increased demand
for our connected services solutions and professional services.

Cost of License Revenue


Cost of license revenue for fiscal year 2020 was $2.8 million, an increase of
$0.7 million, or 34.5%, from $2.1 million for fiscal year 2019. Cost of license
revenues increased due to third-party royalty expenses associated with external
technologies we leverage in

                                       39
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our edge software components. As a percentage of total cost of revenue, cost of
license revenue increased by 0.5 percentage points from 2.1% for fiscal year
2019 to 2.6% for fiscal year 2020.

License gross profit decreased by $8.8 million, or 5.2%, primarily due to declines in license revenue recognized during the year.

Cost of Connected Services Revenue


Cost of connected services revenue for fiscal year 2020 was $31.8 million, a
decrease of $5.8 million, or 15.4%, from $37.6 million for fiscal year 2019.
Cost of connected services revenue decreased primarily as a result of lower
internal allocated costs. As a percentage of total cost of revenue, cost of
connected service revenue decreased by 8.3 percentage points from 37.8% for
fiscal year 2019 to 29.5% for fiscal year 2020.



Connected services gross profit increased $23.3 million, or 56.5%, from $41.1
million to $64.4 million which was primarily due to connected services revenue
growth on relatively fixed cloud infrastructure costs.



Cost of Professional Services Revenue


Cost of professional services revenue fiscal year 2020 was $65.0 million, an
increase of $13.7 million, or 26.8%, from $51.2 million for fiscal year 2019.
Cost of professional services revenue increased primarily due to our investments
in professional services staff to meet customer program demands. Investments
included increases in internally allocated labor costs of $4.3 million,
compensation-related expenses of $3.3 million, and stock-based compensation
expenses of $3.1 million. As a percentage of total cost of revenue, cost of
professional services revenue increased by 8.6 percentage points from 51.6% for
fiscal year 2019 to 60.2% for fiscal year 2020.

Professional services gross profit increased $3.2 million, or 313.5%, from $1.0
million to $4.3 million which was primarily due to increases in professional
services revenue recognized and continued cost reduction measures.

Fiscal Year 2019 Compared with Fiscal Year 2018


Our total cost of revenues for fiscal year 2019 were $99.3 million, an increase
of $16.4 million, or 19.7%, from $83.0 million for fiscal year 2018. The
increase in cost of revenues resulted primarily from the growth of our
cloud-based connected services revenue, which required an increase in
cloud-based infrastructure and employee costs, and our investments in
professional services staff to meet customer program demands. We also
experienced an increase in amortization of intangible assets that was included
in costs of revenues primarily due to our acquisition of Voicebox on April 2,
2018, which increased the carrying value of our total intangible assets.

We experienced an increase in gross profit of $10.0 million, or 5.1%, from $194.0 million to $204.0 million which was primarily driven by increased demand for our connected services solutions

Cost of License Revenue


Cost of license revenue for fiscal year 2019 were $2.1 million, an increase of
$0.9 million, or 79.0%, from $1.2 million for fiscal year 2018. Cost of license
revenues increased due to third-party royalty expenses associated with external
technologies we leverage in our edge software components. As a percentage of
total cost of revenue, cost of license revenue increased by 0.7 percentage
points from 1.4% for fiscal year 2018 to 2.1% for fiscal year 2019.

License gross profit increased $0.4 million, or 0.2%, from $169.9 million to $170.3 million since costs associated with license royalties are minimal.

Cost of Connected Services Revenue


Cost of connected services revenue for fiscal year 2019 were $37.6 million, an
increase of $4.6 million, or 14.1%, from $32.9 million for fiscal year 2018.
Cost of connected services revenue increased primarily as a result of the growth
of cloud-based connected services revenue from new and existing customers
utilizing our software delivery services for hybrid solutions. As a percentage
of total cost of revenue, cost of connected service revenue decreased by 1.9
percentage points from 39.7% for fiscal year 2018 to 37.8% for fiscal year 2019.

Connected services gross profit increased $13.8 million, or 50.6%, from $27.3
million to $41.1 million, which was primarily due to connected services revenue
growth on relatively fixed cloud infrastructure and employee costs.

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Cost of Professional Services Revenue


Cost of professional services revenue for fiscal year 2019 were $51.2 million,
an increase of $10.1 million, or 24.5%, from $41.1 million for fiscal year 2018.
Cost of professional services revenue increased primarily due to our investments
in professional services staff to meet customer program demands. As a percentage
of total cost of revenue, cost of professional services revenue increased by
2.0 percentage points from 49.6% for fiscal year 2018 to 51.6% for fiscal year
2019.

Professional services gross profit decreased $3.5 million, or 77.4%, from $4.6 million to $1.0 million, which was primarily due to changes made to our professional services pricing strategy and continued cost reduction measures.

Operating Expenses

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

R&D Expenses



                                           Year Ended September 30,             % Change             % Change
                                        2020         2019         2018        2020 vs. 2019        2019 vs. 2018
Research and development              $ 88,899$ 93,061$ 80,957                  (4 )%                15 %



Fiscal Year 2020 Compared with Fiscal Year 2019


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 fiscal year 2020 were $88.9 million, a decrease of $4.2 million, or
4.5%, from $93.1 million for fiscal year 2019. In response to the COVID-19
pandemic, we shifted a portion of our R&D workforce to support our professional
service teams, which led to a decline in R&D expenses as a result of internal
labor cost allocations. R&D costs also declined due to capitalization of costs
associated with internally developed software of $2.7 million and reduction of
stock-based compensation of $2.0 million. The decline in R&D expenses were
partially offset by a $0.8 million increase in contractor costs. As a percentage
of total operating expenses, R&D expenses decreased by 4.3 percentage points
from 48.2% for fiscal year 2019 to 43.9% for fiscal year 2020.

Fiscal Year 2019 Compared with Fiscal Year 2018


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 fiscal year 2019 were $93.1 million, an increase of $12.1 million,
or 15.0%, from $81.0 million for fiscal year 2018. R&D expense increased
primarily as a result of hiring more engineers and other essential product
innovation personnel. Investing in R&D personnel is essential to advancing our
technologies and enhancing in-car experiences. As a percentage of total
operating expenses, R&D expenses decreased by 3.3 percentage points from 51.5%
for fiscal year 2018 to 48.2% for fiscal year 2019.

Sales & Marketing Expenses



                                               Year Ended September 30,                  % Change             % Change
                                         2020            2019            2018          2020 vs. 2019        2019 vs. 2018
                                       (ASC 606)       (ASC 606)       (ASC 605)
Sales and marketing                   $    33,398$    36,261     $   
30,553                  (8 )%                19 %



Fiscal Year 2020 Compared with Fiscal Year 2019


Sales and marketing expenses for fiscal year 2020 were $33.4 million, a decrease
of $2.9 million, or 7.9%, from $36.3 million for fiscal year 2019. Sales and
marketing expenses decreased primarily due lower compensation related expenses,
including $1.9 million attributed to salary-related expenses and $2.7 million
related to commission expenses. We also experienced a reduction of $1.1 million
in travel-related expenditures as a result of COVID-19. The decrease was partly
offset by stock-based compensation expenses, which increased $3.4 million. As a
percentage of total operating expenses, sales and marketing expenses decreased
by 2.3 percentage points from 18.8% for fiscal year 2019 to 16.5% for fiscal
year 2020.

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Fiscal Year 2019 Compared with Fiscal Year 2018


Sales and marketing expenses for fiscal year 2019 were $36.3 million, an
increase of $5.7 million, or 18.7%, from $30.6 million for fiscal year 2018.
Sales and marketing expenses increased primarily as a result of higher sales
quota attainment and the expansion of our sales and marketing staff levels. As a
percentage of total operating expenses, sales and marketing expenses decreased
by 0.6 percentage points from 19.4% for fiscal year 2018 to 18.8% for fiscal
year 2019.

General & Administrative Expenses



                                           Year Ended September 30,             % Change            % Change
                                        2020         2019         2018        2020 vs. 2019       2019 vs. 2018
General and administrative            $ 49,386$ 25,926$ 19,873                  90 %                30 %



Fiscal Year 2020 Compared with Fiscal Year 2019


General and administrative expenses for fiscal year 2020 were $49.4 million, an
increase of $23.5 million, or 90.5%, from $25.9 million for fiscal year 2019.
General and administrative expenses increased primarily due to our operation as
a standalone public company during fiscal year 2020. We incurred higher
compensation related expenses, including $8.5 million attributed to
salary-related expenses and $12.5 attributed to stock-based compensation
expenses. In addition, professional service expenses increased $3.0 million. As
a percentage of total operating expenses, general and administrative expenses
increased by 11.0 percentage points from 13.4% for fiscal year 2019 to 24.4% for
fiscal year 2020.

Fiscal Year 2019 Compared with Fiscal Year 2018


General and administrative expenses for fiscal year 2019 were $25.9 million, an
increase of $6.1 million, or 30.5%, from $19.9 million for fiscal year 2018. The
increase in general and administrative expenses was primarily attributable to
professional and legal fees, administrative salaries expenses, and software
fees. As a percentage of total operating expenses, general and administrative
expenses increased by 0.8 percentage points from 12.6% for fiscal year 2018 to
13.4% for fiscal year 2019.

Amortization of Intangible Assets



                           Year Ended September 30,             % Change             % Change
                        2020         2019         2018        2020 vs. 2019        2019 vs. 2018
 Cost of revenues     $  8,337$  8,498$  7,766                  (2 )%                 9 %
 Operating expense      12,544       12,524        8,840                   0 %                 42 %
 Total amortization   $ 20,881$ 21,022$ 16,606                  (1 )%                27 %



Fiscal Year 2020 Compared with Fiscal Year 2019


Intangible asset amortization for fiscal year 2020 was $20.9 million, a decrease
of $0.1 million, or 0.7%, from $21.0 million for fiscal year 2019. The decrease
primarily relates to the composition of intangible assets allocated to the
Cerence business prior to Spin-Off.

As a percentage of total cost of revenues, intangible asset amortization within
cost of revenues decreased by 0.8 percentage points from 8.6% for fiscal year
2019 to 7.7% for fiscal year 2020. As a percentage of total operating expenses,
intangible asset amortization expenses within operating expenses decreased by
0.3 percentage points from 6.5% for fiscal year 2019 to 6.2% for fiscal year
2020.

Fiscal Year 2019 Compared with Fiscal Year 2018


Intangible asset amortization for fiscal year 2019 was $21.0 million, an
increase of $4.4 million, or 26.6%, from $16.6 million for fiscal year 2018. The
increase primarily relates to our acquisition of Voicebox which resulted in the
addition of several customer relationships that increased amortization expense.

As a percentage of total cost of revenues, intangible asset amortization within
cost of revenues decreased by 0.8 percentage points from 9.4% for fiscal year
2018 to 8.6% for fiscal year 2019. As a percentage of total operating expenses,
intangible asset amortization expenses within operating expenses increased by
0.9 percentage points from 5.6% for fiscal year 2018 to 6.5% for fiscal year
2019.

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Restructuring and Other Costs, Net



                                           Year Ended September 30,             % Change             % Change
                                        2020         2019         2018        2020 vs. 2019        2019 vs. 2018
Restructuring and other costs, net    $ 18,237$ 24,404$ 12,863                 (25 )%                90 %



Fiscal Year 2020 Compared with Fiscal Year 2019


Restructuring and other costs, net for fiscal year 2020 were $18.2 million, a
decrease of $6.2 million, from $24.4 million for fiscal year 2019. Restructuring
and other costs, net decreased primarily due to the winding down of separation
costs to establish the Cerence business as a standalone public company, which
decreased $10.8 million. The decrease was partly offset by the $3.6 million
increase in severance charges related to the elimination of personnel across
multiple functions and the $1.1 million increase in facilities related charges.
As a percentage of total operating expense, restructuring and other costs, net
decreased by 3.6 percentage points from 12.6% for fiscal year 2019 to 9.0% for
fiscal year 2020.

Fiscal Year 2019 Compared with Fiscal Year 2018


Restructuring and other costs, net for fiscal year 2019 were $24.4 million, an
increase of $11.5 million, from $12.9 million for fiscal year 2018.
Restructuring and other costs, net increased primarily due to professional
service fees incurred to establish the Cerence business as a standalone public
company, which increased $13.9 million. The increase was partly offset by the
$4.0 million decrease in severance charges related to the elimination of
personnel across multiple functions. As a percentage of total operating expense,
restructuring and other costs, net increased by 4.4 percentage points from 8.2%
for fiscal year 2018 to 12.6% for fiscal year 2019.

Acquisition-related Costs



                                             Year Ended September 30,                 % Change              % Change
                                        2020            2019           2018         2020 vs. 2019         2019 vs. 2018
Acquisition-related costs             $       -       $     944      $ 
4,082                  (100 )%               (77 )%



Fiscal Year 2020 Compared with Fiscal Year 2019


There were no acquisition-related costs for fiscal year 2020, which resulted in
a decrease of $0.9 million, from $0.9 million for fiscal year 2019. Acquisition
costs decreased as a direct result of integration, legal, and other professional
fees incurred resulting from the acquisition of Voicebox on April 2, 2018. As a
percentage of total operating expense, acquisition-related costs decreased by
0.5 percentage points from 0.5% for fiscal year 2019 to 0.0% for fiscal year
2020.

Fiscal Year 2019 Compared with Fiscal Year 2018


Acquisition-related costs for fiscal year 2019 were $0.9 million, a decrease of
$3.1 million, from $4.1 million for fiscal year 2018. Acquisition costs
decreased as a direct result of integration, legal, and other professional fees
incurred resulting from the acquisition of Voicebox on April 2, 2018. As a
percentage of total operating expense, acquisition-related costs decreased by
2.1 percentage points from 2.6% for fiscal year 2018 to 0.5% for fiscal year
2019.

Total Other Expense, Net



                                                Year Ended September 30,                    % Change               % Change
                                          2020             2019            2018           2020 vs. 2019          2019 vs. 2018
                                       (ASC 606)         (ASC 606)       (ASC 605)
Interest income                       $        585      $         -     $         -                   100 %                    -
Interest expense                           (22,737 )              -               -                  (100 )%                   -
Other income (expense), net                (23,319 )            332             (54 )               (7124 )%                (715 )%

Total other income (expense), net $ (45,471 )$ 332 $

    (54 )              (13796 )%                (715 )%




                                       43
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Fiscal Year 2020 Compared with Fiscal Year 2019


Total other expense, net for fiscal year 2020 was $45.5 million, an increase of
$45.8 million from $0.3 million of total other income, net for fiscal year 2019.
The increase was primarily attributable to $22.7 million in interest expense
related to our debt financings during fiscal year 2020, a $19.3 million loss on
the extinguishment of debt related to our Existing Facilities and $1.2 million
of expense related to a decrease in an asset corresponding with the release of
indemnified pre-Spin-Off liabilities for uncertain tax positions.

Fiscal Year 2019 Compared with Fiscal Year 2018


Total other income, net for fiscal year 2019 was $0.3 million, an increase of
$0.4 million, or 714.8%, from total other expense, net of $0.1 million for
fiscal year 2018. The net increase in total other expense, net over the prior
fiscal year was primarily the result of foreign currency gains (losses) year
over year.

(Benefit from) Provision for Income Taxes



                                            Year Ended September 30,              % Change              % Change
                                        2020         2019           2018        2020 vs. 2019         2019 vs. 2018
(Benefit from) provision for income
taxes                                 $ (5,509 )$ (89,084 )$ 30,917                 (94 )%                (388 )%
Effective income tax rate%                21.1 %      (796.5 )%       84.0 %



Fiscal Year 2020 Compared with Fiscal Year 2019


Our effective income tax rate for fiscal year 2020 was 21.1%, compared to
(796.5)% for fiscal year 2019. Consequently, our benefit from income taxes for
fiscal year 2020 was $5.5 million, a net change of $83.6 million, or 93.8%, from
a benefit from income taxes of $89.1 million for fiscal year 2019. The effective
tax rate for the fiscal year 2020 differed from the U.S. federal statutory rate
of 21.0%, primarily due to our composition of jurisdictional earnings, U.S.
inclusions of foreign taxable income as a result of changes in applicable tax
laws in 2017, and an income tax benefit of approximately $5.0 million related to
an increase in tax rates in the Netherlands enacted in the first quarter.

Fiscal Year 2019 Compared with Fiscal Year 2018


Our effective income tax rate for fiscal year 2019 was (796.5)%, compared to
84.0% for fiscal year 2018. Consequently, our provision for income taxes for
fiscal year 2019 was $89.1 million, a net change of $120.0 million, or 388.1%,
from $30.9 million for fiscal year 2018. The effective income tax rate for
fiscal year 2019 differed from the U.S. statutory rate of 21.0% primarily due to
a net tax benefit of $91.7 million related to intangible property transfers,
partially offset by an uncertain tax position. The net tax benefit is also
partially offset by global intangible low-taxed income, or GILTI, tax expense of
$3.9 million.

Liquidity and Capital Resources


Our ability to fund future operating needs will depend on our ability to
generate positive cash flows from operations and finance additional funding in
the capital markets as needed. Upon the Distribution, Nuance allocated
$110.0 million in cash and cash equivalents to the Cerence business, which was
adequate to meet the short-term net working capital needs of our business at the
close of the Distribution. As of September 30, 2020, our net working capital,
excluding current deferred revenue and deferred cost, was $153.6 million. This
balance is representative of the short-term net cash inflows based on the
working capital at that date. Based on our history of generating positive cash
flows and the $136.1 million of cash and cash equivalents as of September 30,
2020, we believe we will be able to meet our liquidity needs over the next 12
months. We believe we will meet longer-term expected future cash requirements
and obligations, through a combination of cash flows from operating activities,
available cash balances, and available credit via our Revolving Facility.
Specifically, we anticipate our cost of revenues, funding our R&D activities,
and debt obligations to be our primary uses of cash during the year ended
September 30, 2021.

However, as the impact of the COVID-19 pandemic on the economy and our
operations evolves, we will continue to assess our liquidity needs. Given the
economic uncertainty as a result of the pandemic, during fiscal year 2020, we
took actions to improve our liquidity position, including, reducing working
capital, reducing operating costs by delaying research and development programs,
initiating a workforce reduction, and substantially reducing discretionary
spending. 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 on
reasonable terms, or at all. The COVID-19 pandemic has negatively impacted the
global economy and created significant volatility and disruption of financial

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markets. An extended period of economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.


Beginning in fiscal 2021, we plan to enter into forward exchange contracts to
hedge against foreign exchange rate fluctuations. We plan to designate these
forward exchange contracts as cash flow hedges.

3.00% Senior Convertible Notes due 2025


On June 2, 2020, in an effort to refinance our debt structure, we issued $175.0
million in aggregate principal amount of 3.00% Convertible Senior Notes due 2025
(the "Notes"), including the initial purchasers' exercise in full of their
option to purchase an additional $25.0 million principal amount of the Notes,
between the Company and U.S. Bank National Association, as trustee (the
"Trustee"), in a private offering to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act").
The net proceeds from the issuance of the Notes were $169.8 million after
deducting transaction costs. We used net proceeds from the issuance of the Notes
to repay a portion of our indebtedness under the Credit Agreement, dated October
1, 2019, by and among the Company, the lenders and issuing banks party thereto
and Barclays Bank PLC, as administrative agent (the "Existing Facility").

The Notes are senior, unsecured obligations and will accrue interest payable
semiannually in arrears on June 1 and December 1 of each year, beginning on
December 1, 2020, at a rate of 3.00% per year. The Notes will mature on June 1,
2025, unless earlier converted, redeemed, or repurchased. The Notes are
convertible into cash, shares of the Company's common stock or a combination of
cash and shares of the Company's common stock, at the Company's election.

A holder of Notes may convert all or any portion of its Notes at its option at
any time prior to the close of business on the business day immediately
preceding March 1, 2025 only under the following circumstances: (1) during any
fiscal quarter commencing after the fiscal quarter ending on September 30, 2020
(and only during such fiscal quarter), if the last reported sale price of our
common stock for at least 20 trading days (whether or not consecutive) during a
period of 30 consecutive trading days ending on, and including, the last trading
day of the immediately preceding fiscal quarter is greater than or equal to 130%
of the conversion price on each applicable trading day; (2) during the five
business day period after any ten consecutive trading day period (the
"measurement period") in which the "trading price" per $1,000 principal amount
of Notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of our common stock and the conversion
rate on each such trading day; (3) if we calls such Notes for redemption, at any
time prior to the close of business on the business day immediately preceding
the redemption date; or (4) upon the occurrence of specified corporate events.
On or after March 1, 2025 until the close of business on the second scheduled
trading day immediately preceding the maturity date, a holder may convert all or
any portion of its Notes at any time, regardless of the foregoing.

The conversion rate will initially be 26.7271 shares of our common stock per
$1,000 principal amount of 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 delivers a notice of redemption, we will, in
certain circumstances, increase the conversion rate for a holder who elects to
convert its Notes in connection with such a corporate event or convert its Notes
called for redemption in connection with such notice of redemption, as the case
may be.

We may not redeem the Notes prior to June 5, 2023. We may redeem for cash all or
any portion of the Notes, at our option, on a redemption date occurring on or
after June 5, 2023 and on or before the 31st scheduled trading day immediately
before the maturity date, if the last reported sale price of our common stock
has been at least 130% of the conversion price then in effect for at least 20
trading days (whether or not consecutive), including the trading day immediately
preceding the date on which we provides notice of redemption, during any 30
consecutive trading day period ending on, and including, the trading day
immediately preceding the date on which we provides notice of redemption at a
redemption price equal to 100% of the principal amount of the notes to be
redeemed, plus accrued and unpaid interest to, but excluding, the redemption
date. No sinking fund is provided for the Notes.

If we undergo a "fundamental change", subject to certain conditions, holders may
require us to repurchase for cash all or any portion of their Notes at a
fundamental change repurchase price equal to 100% of the principal amount of the
Notes to be repurchased, plus any accrued and unpaid interest to, but excluding,
the fundamental change repurchase date.

The Notes contain customary terms and covenants, including that upon certain
events of default occurring and continuing, either the Trustee or the holders of
not less than 25% in aggregate principal amount of the Notes then outstanding
may declare the entire principal amount of all the Notes plus accrued special
interest, if any, to be immediately due and payable.

At issuance, we accounted for the Notes by allocating proceeds from the Notes
into debt and equity components according to the accounting standards for
convertible debt instruments that may be fully or partially settled in cash upon
conversion. The initial carrying amount of the debt component, which
approximates its fair value, was estimated by using an interest rate for
nonconvertible debt, with terms similar to the Notes. The excess of the
principal amount of the Notes over the fair value of the debt component was
recorded as a debt discount and a corresponding increase in additional paid-in
capital. The debt discount is accreted to the carrying

                                       45

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value of the Notes over their expected term as interest expense using the interest method. Upon issuance of the Notes, we recorded $155.3 million as debt and $19.7 million as additional paid-in capital in stockholders' equity.


We incurred transaction costs of $5.6 million relating to the issuance of the
Notes. In accounting for these costs, we allocated the costs of the offering
between debt and equity in proportion to the fair value of the debt and equity
recognized. The transaction costs allocated to the debt component of
approximately $5.0 million were recorded as a direct deduction from the face
amount of the Notes and are being amortized as interest expense over the term of
the Notes using the interest method. The transaction costs allocated to the
equity component of approximately $0.6 million were recorded as a decrease in
additional paid-in capital.

The interest expense recognized related to the Notes for the fiscal year ended September 30, 2020 was as follows (dollars in thousands):



                                                          Year Ended
                                                      September 30, 2020
        Contractual interest expense                  $             1,753
        Amortization of debt discount                               1,131
        Amortization of issuance costs                                285
        Total interest expense related to the Notes   $             3,169



As of September 30, 2020, the conditions allowing holders of the Notes to convert have not been met and therefore the Notes are not yet convertible.

Senior Credit Facilities


On June 12, 2020 (the "Financing Closing Date"), in connection with our effort
to refinance our existing indebtedness, we entered into a Credit Agreement, by
and among the Borrower, the lenders and issuing banks party thereto and Wells
Fargo Bank, N.A., as administrative agent (the "Credit Agreement"), consisting
of a four-year senior secured term loan facility in the aggregate principal
amount of $125.0 million (the "Term Loan Facility"). The net proceeds from the
issuance of the Term Loan Facility were $123.0 million, which together with
proceeds from the Notes was intended to pay in full all indebtedness under the
Existing Facility, and paid fees and expenses in connection with the Senior
Credit Facilities. We also entered into a senior secured first-lien revolving
credit facility in an aggregate principal amount of $50.0 million (the
"Revolving Facility" and, together with the Term Loan Facility, the "Senior
Credit Facilities"), which shall be drawn on in the event that our working
capital and other cash needs are not supported by our operating cash flow. As of
September 30, 2020, there were no amounts outstanding under the Revolving
Facility.

Our obligations under the Credit Agreement are jointly and severally guaranteed
by certain of our existing and future direct and indirect wholly owned domestic
subsidiaries, subject to certain exceptions customary for financings of this
type. All obligations are secured by substantially all of our tangible and
intangible personal property and material real property, including a perfected
first-priority pledge of all (or, in the case of foreign subsidiaries or
subsidiaries ("FSHCO") that own no material assets other than equity interests
in foreign subsidiaries that are "controlled foreign corporations" or other
FSHCOs, 65%) of the equity securities of our subsidiaries held by any loan
party, subject to certain customary exceptions and limitations.

We are obligated to make quarterly principal payments on the last day of each
quarter in an aggregate annual amount equal to 5.0% of the original principal
amount of the Term Loan Facility during the first two years of the Term Loan
Facility, and 10% of the original principal amount of the Term Loan Facility
thereafter, with the balance payable at the maturity date. Quarterly principal
payments commenced on September 30, 2020.

Interest accrues on outstanding borrowings under the Senior Credit Facilities at
a rate, at our option, of either (a) base rate determined by reference to the
highest of (1) the rate of interest last quoted by The Wall Street Journal as
the "prime rate" in the United States, (2) the federal funds effective rate,
plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1% per annum ("ABR")
or (b) an adjusted LIBOR rate ("LIBOR") (which shall not be less than 0.50% per
annum), in each case, plus an applicable margin. Initially, the applicable
margin is LIBOR plus 3.00% or ABR plus 2.00%. Following delivery of a compliance
certificate for the first full fiscal quarter after the Financing Closing Date,
the applicable margins for the Senior Credit Facilities is subject to a pricing
grid based upon the net total leverage ratio as follows (i) if the net total
leverage ratio is greater than 3.00 to 1.00, the applicable margin is LIBOR plus
3.50% or ABR plus 2.50%; (ii) if the net total leverage ratio is less than or
equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the applicable margin is
LIBOR plus 3.25% or ABR plus 2.25%; (iii) if the net total leverage ratio is
less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the applicable
margin is LIBOR plus 3.00% or ABR plus 2.00%; (iv) if the net total leverage
ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the
applicable margin is LIBOR plus 2.75% or ABR plus 1.75%; and (v) if the net
total leverage ratio is less than or equal to 1.50 to 1.00, the applicable
margin is LIBOR plus 2.50% or ABR plus 1.50%.

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Total interest expense relating to the Senior Credit Facilities for the fiscal year ended September 30, 2020 was $1.5 million, reflecting the coupon and accretion of the discount.


Borrowings under the Credit Agreement are prepayable at our option without
premium or penalty. We may request, and each lender may agree in its sole
discretion, to extend the maturity date of all or a portion of the Senior Credit
Facilities subject to certain conditions customary for financings of this type.
The Credit Agreement also contains certain mandatory prepayment provisions in
the event that we incur certain types of indebtedness or receives net cash
proceeds from certain non-ordinary course asset sales or other dispositions of
property, in each case subject to terms and conditions customary for financings
of this type.

The Credit Agreement contains certain affirmative and negative covenants
customary for financings of this type that, among other things, limit our and
our subsidiaries' ability to incur additional indebtedness or liens, to dispose
of assets, to make certain fundamental changes, to designate subsidiaries as
unrestricted, to make certain investments, to prepay certain indebtedness and to
pay dividends, or to make other distributions or redemptions/repurchases, in
respect of our and our subsidiaries' equity interests. In addition, the Credit
Agreement contains financial covenants, each tested quarterly commencing with
the quarter ended September 30, 2020, (1) a net secured leveraged ratio of not
greater than 3.25 to 1.00; (2) a net total leverage ratio of not greater than
4.25 to 1.00; and (3) minimum liquidity of at least $75 million. The Credit
Agreement also contains events of default customary for financings of this type,
including certain customary change of control events. As of September 30, 2020,
we were in compliance with all Credit Agreement covenants.

Existing Facilities


On October 1, 2019, in connection with the Spin-Off, we entered into the
Existing Facility consisting of a five-year senior secured term loan facility in
the aggregate principal amount of $270.0 million. The net proceeds from the
issuance of the Existing Facility were $249.7 million, which was primarily
intended to finance a cash distribution of approximately $153.0 million to
Nuance and provide approximately $110.0 million initial support for the cash
flow needs of the Cerence business. We also entered into a 54-month senior
secured first-lien revolving credit facility in an aggregate principal amount of
$75.0 million, which shall be drawn on in the event that our working capital and
other cash needs are not supported by our operating cash flow (the "Existing
Revolving Facility" and collectively with the Existing Facility, the "Existing
Facilities").

During June 2020, in connection with the issuance of the Notes and Senior Credit
Facilities, we initiated prepayments towards our Existing Facilities in the
amount of $267.6 million in cash. As a result, we recorded $267.6 million
extinguishment of debt and $19.3 million loss on the extinguishment of debt. As
of September 30, 2020, our obligations related to the Existing Facilities have
been settled. Total interest expense relating to the Existing Facilities for the
fiscal year ended September 30, 2020 was $18.0 million, reflecting the coupon
and accretion of the discount.

Cash Flows

Cash flows from operating, investing and financing activities for the years ended September 30, 2020, 2019, and 2018, as reflected in the audited consolidated and combined statement of cash flows included in Item 8 of this Form 10-K, are summarized in the following table (dollars in thousands):



                                            Year Ended September 30,                % Change              % Change
                                        2020          2019          2018          2020 vs. 2019         2019 vs. 2018
Net cash provided by operating
activities                            $  44,789$  88,071$ 115,259                   (49 )%               (24 )%
Net cash used in investing
activities                              (30,675 )      (4,517 )     (86,312 )                 579 %                (95 )%
Net cash provided by (used in)
financing activities                    121,553       (83,554 )     (28,947 )                (245 )%               189 %
Effect of foreign currency exchange
rates on cash and cash equivalents          400             -             -                   100 %                  -
Net changes in cash and cash
equivalents                           $ 136,067     $       -     $       -                   100 %                  -




                                       47
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Net Cash Provided by Operating Activities

Fiscal Year 2020 Compared with Fiscal Year 2019


Net cash provided by operating activities for fiscal year 2020 was $44.8
million, a net decrease of $43.3 million, or 49.1%, from net cash provided by
operating activities of $88.1 million for fiscal year 2019. The net decrease in
cash provided by operating activities stems from unfavorable changes in working
capital. Outflows in prepaids and other assets and accounts payable increased by
$21.5 million and $12.6 million, respectively. The timing of billings and
collections resulted in $15.2 million additional cash inflows from accounts
receivable compared to prior year.

Cash outflows from deferred revenue increased $53.3 million. Deferred revenue
represents a significant portion of our net cash provided by operating
activities and, depending on the nature of our contracts with customers, this
balance can fluctuate significantly from period to period. We expect our
deferred revenue balances to decrease in the future, including due to a
wind-down of a legacy connected service relationship with a major OEM, since the
majority of cash from the contract has been collected. We do not expect any
changes in deferred revenue to affect our ability to meet our obligations.

Fiscal Year 2019 Compared with Fiscal Year 2018


Net cash provided by operating activities for fiscal year 2019 was $88.1
million, a decrease of $27.2 million, or 23.6%, from $115.3 million for fiscal
year 2018. The net decrease in cash provided by operating activities stems from
unfavorable changes in working capital, primarily due to the timing of payments,
which decreased accrued expenses and other liabilities by $6.7 million and
increased prepaid expenses and other assets by $5.9 million. In addition, the
timing of billing and collections resulted in a decrease in accounts receivable
of $7.6 million compared to the prior year.

Net Cash Used in Investing Activities

Fiscal Year 2020 Compared with Fiscal Year 2019




Net cash used in investing activities for the fiscal year 2020 was $30.7
million, an increase of $26.2 million, or 579.1%, from $4.5 million for fiscal
year 2019. The increase in cash outflows is due to the purchase of property and
equipment to support the standalone operations of the Company and the purchase
of marketable securities, in the amount of $11.7 million.

Fiscal Year 2019 Compared with Fiscal Year 2018


Net cash used in investing activities for fiscal year 2019 was $4.5 million, a
decrease of $81.8 million, from $86.3 million for fiscal year 2018. The decrease
in cash outflows was due to net cash payments of $79.8 million associated with
the acquisition of Voicebox during the fiscal year ended September 30, 2018 and
a $2.0 million decrease in cash outflows for capital expenditures.

Net Cash Provided by (Used in) Financing Activities

Fiscal Year 2020 Compared with Fiscal Year 2019


Net cash provided by financing activities for the fiscal year 2020 was $121.6
million, a net increase of $205.1 million, from cash used in financing
activities of $83.6 million for fiscal year 2019. The increase in cashflows were
the result of $169.8 million net proceeds from the issuance of the Notes, $123.0
million net proceeds from the issuance of the Senior Credit Facilities, and
$249.7 million net proceeds from the issuance of the Existing Facilities. The
increase in cashflows were partly offset by $271.6 million in principal payments
of long-term debt, $6.4 million payments of debt issuance costs, and the $153.0
million distribution paid to Nuance.

Fiscal Year 2019 Compared with Fiscal Year 2018


Net cash used in financing activities for fiscal year 2019 was $83.6 million, an
increase of $54.6 million, or 188.6%, from net cash used in financing activities
of $28.9 million for fiscal year 2018. The change relates to the cash
distributions associated with Nuance's historical cash management process

Business Acquisitions


Historically, we have made several acquisitions. We approach the market with a
focus on our core technologies and acquire companies based on a careful
assessment of potential post-acquisition synergies that will help us expand our
software platform and connected car services and advance our technologies.

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On April 2, 2018, we acquired Voicebox, headquartered in Bellevue, Washington.
Voicebox is a provider of conversational artificial intelligence, including
voice recognition, natural language understanding, and artificial intelligence
services. The aggregate consideration for this transaction was $94.2 million
which included $79.8 million paid in cash, net of $6.7 million in cash acquired,
a $12.8 million write-off of deferred revenues related to our pre-existing
relationship with Voicebox, and a $1.6 million deferred acquisition payment
which would be paid in cash upon the conclusion of an indemnity period. The
transaction was accounted for as a business combination and is included in the
accompanying Consolidated and Combined Financial Statements beginning on the
date of acquisition. Refer to Note 4 to the accompanying Consolidated and
Combined Financial Statements included elsewhere in this Form 10-K for more
detail on the acquisition of Voicebox.

Contractual Obligations, Contingent Liabilities, and Commitments


Contractual obligations may include lease and other non-current liabilities that
are enforceable and legally binding, excluding contingent liabilities that may
arise from litigation, arbitration, regulatory actions, or income taxes.

The following table outlines our contractual payment obligations as of September 30, 2020 (dollars in thousands):



                                                     Payments Due by the Year Ended September 30,
                                        2021        2022 - 2023       2024 - 2025       Thereafter        Total
Notes                                 $      -     $           -     $     175,000     $          -     $ 175,000
Interest payable on the Notes (1)        5,246            10,493             8,768                -        24,507
Senior Credit Facilities                 6,250            20,313            96,875                -       123,438
Interest payable on Senior Credit        4,220             7,624             2,184                -        14,028
Facilities (2)
Operating leases                         7,200            10,764             6,832            3,097        27,893
Finance leases                             319               618               563               10         1,510

Total contractual obligations $ 23,235$ 49,812$ 290,222$ 3,107$ 366,376

(1) Interest per annum is due and payable semiannually and is determined based

on the outstanding principal as of September 30, 2020.

(2) Interest per annum is due and payable monthly and is determined based on

the outstanding principal as of September 30, 2020.

Other Matters

Off-Balance Sheet Arrangements


We do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a material current or future effect on our financial condition,
changes in financial condition, revenues, expenses, results of operations,
liquidity, capital expenditures, or capital resources.

Defined Benefit Plans


We sponsor certain defined benefit plans that are offered primarily by certain
of our foreign subsidiaries. Many of these plans were assumed through our
acquisitions or are required by local regulatory requirements. We may deposit
funds for these plans with insurance companies, third-party trustees, or into
government-managed accounts consistent with local regulatory requirements, as
applicable. Our total defined benefit plan pension expense was $0.5 million,
$0.4 million, and $0.4 million for fiscal years 2020, 2019, and 2018,
respectively. The aggregate projected benefit obligation as of fiscal years
2020, 2019, and 2018 was $8.3 million, $7.3 million and $5.0 million,
respectively. The aggregate net liability of our defined benefit plans as of
September 30, 2020, 2019, and 2018 was $7.1 million, $6.8 million, and $4.2
million, respectively.

Issued Accounting Standards Not Yet Adopted


Refer to Note 3 to the accompanying audited Consolidated and Combined Financial
Statements included elsewhere in this Form 10-K for a description of certain
issued accounting standards that have not been adopted by us and may impact our
results of operations in future reporting periods.

Critical Accounting Policies, Judgments and Estimates


The preparation of financial statements in conformity with GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and the disclosure of contingent assets and liabilities
at the date of the financial

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statements, and the reported amounts of revenue and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates, assumptions
and judgments, including those related to revenue recognition; allowance for
doubtful accounts; accounting for deferred costs; accounting for internally
developed software; the valuation of goodwill and intangible assets; accounting
for business combinations; accounting for stock-based compensation; accounting
for income taxes; accounting for leases; accounting for convertible debt; and
loss contingencies. Our management bases its estimates on historical experience,
market participant fair value considerations, projected future cash flows, and
various other factors that are believed to be reasonable under the
circumstances. Actual results could differ from these estimates.

We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and the results of our operations. These policies require our most difficult and subjective judgements.

Revenue Recognition


We primarily derive revenue from the following sources: (1) royalty-based
software license arrangements, (2) connected services, and (3) professional
services. Revenue is reported net of applicable sales and use tax, value-added
tax and other transaction taxes imposed on the related transaction including
mandatory government charges that are passed through to our customers. We
account for a contract when both parties have approved and committed to the
contract, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance and collectability of
consideration is probable.

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

As of October 1, 2018, we adopted ASC 606 using the modified retrospective
approach, which requires the results for the current reporting periods be
presented under ASC 606, while prior period amounts are not adjusted and
continue to be reported in accordance with our historic accounting policies in
accordance with ASC 605, with a cumulative adjustment recorded to accumulated
deficit. For a reconciliation of our old accounting policy and ASC 606, please
refer to Note 3 to the accompanying audited Consolidated and Combined Financial
Statements included elsewhere in this Form 10-K. We currently recognize revenue
after applying the following five steps:

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

• identification of the performance obligations in the contract, including

whether they are distinct within the context of the contract;

• determination of the transaction price, including the constraint on

variable consideration;

• allocation of the transaction price to the performance obligations in the

contract; and

• recognition of revenue when, or as, the performance obligations are

satisfied.

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

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

• the pricing established by management when setting prices for deliverables

that are intended to be sold on a standalone basis;

• contractually stated prices for deliverables that are intended to be sold

on a standalone basis; and

• other pricing factors, such as the geographical region in which the

products or services are sold and expected discounts based on the customer

size and type.



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

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

We assess the timing of the transfer of products or services to the customer as
compared to the timing of payments to determine whether a significant financing
component exists. In accordance with the practical expedient in ASC
606-10-32-18, we do not assess the existence of a significant financing
component when the difference between payment and transfer of deliverables is a
year or less.

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If the difference in timing arises for reasons other than the provision of
finance to either the customer or us, no financing component is deemed to exist.
The primary purpose of our invoicing terms is to provide customers with
simplified and predictable ways of purchasing our services, not to receive or
provide financing from or to customers. We do not consider set-up fees nor other
upfront fees paid by our customers to represent a financing component.

Performance Obligations

License


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

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


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

Connected Services


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

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

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

Professional Services

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

Significant Judgements

Determining whether products and services are considered distinct performance
obligations that should be accounted for separately versus together may require
significant judgment. Our license contracts often include professional services
to customize and/or integrate the licenses into the customer's environment.
Judgment is required to determine whether the license is considered distinct and
accounted for separately, or not distinct and accounted for together with
professional services.

Judgments are required to determine the SSP for each distinct performance
obligation. When the SSP is directly observable, we estimate the SSP based upon
the historical transaction prices, adjusted for geographic considerations,
customer classes, and customer relationship profiles. In instances where the SSP
is not directly observable, we determine the SSP using information that may
include market conditions and other observable inputs. We may have more than one
SSP for individual products and services due to the stratification of those
products and services by customers and circumstances. In these instances, we may
use information such as the size of the customer and geographic region in
determining the SSP. Determining the SSP for performance obligations which we
never

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sell separately also requires significant judgment. In estimating the SSP, we
consider the likely price that would have resulted from established pricing
practices had the deliverable been offered separately and the prices a customer
would likely be willing to pay.

Contract Acquisition Costs


In conjunction with the adoption of ASC 606, we are required to capitalize
certain contract acquisition costs. The capitalized costs primarily relate to
paid commissions. In accordance with the practical expedient in ASC 606-10-10-4,
we apply a portfolio approach to estimate contract acquisition costs for groups
of customer contracts. We elect to apply the practical expedient in ASC
340-40-25-4 and will expense contract acquisition costs as incurred where the
expected period of benefit is one year or less. Contract acquisition costs are
deferred and amortized on a straight-line basis over the period of benefit,
which we have estimated to be between one and eight years. The period of benefit
was determined based on an average customer contract term, expected contract
renewals, changes in technology and our ability to retain customers, including
canceled contracts. We assess the amortization term for all major transactions
based on specific facts and circumstances. Contract acquisition costs are
classified as current or noncurrent assets based on when the expense will be
recognized. The current and noncurrent portions of contract acquisition costs
are included in prepaid expenses and other current assets and in other assets,
respectively. As of September 30, 2020 and 2019, we had $5.6 million and $2.7
million of contract acquisition costs. We had amortization expense of $1.5
million and $0.7 million related to these costs during the fiscal year ended
September 30, 2020 and 2019. There was no impairment related to contract
acquisition costs.

Capitalized Contract Costs


We capitalize incremental costs incurred to fulfill our contracts that (i)
relate directly to the contract, (ii) are expected to generate resources that
will be used to satisfy our performance obligation under the contract, and (iii)
are expected to be recovered through revenue generated under the contract. Our
capitalized costs consist primarily of setup costs, such as costs to standup,
customize and develop applications for each customer, which are incurred to
satisfy our stand-ready obligation to provide access to our connected offerings.
These contract costs are expensed to cost of revenue as we satisfy our
stand-ready obligation over the contract term which we estimate to be between
one and eight years, on average. The contract term was determined based on an
average customer contract term, expected contract renewals, changes in
technology, and our ability to retain customers, including canceled contracts.
We classify these costs as current or noncurrent based on the timing of when we
expect to recognize the expense. The current and noncurrent portions of
capitalized contract fulfillment costs are presented as deferred costs. As of
September 30, 2020 and 2019, we had $45.4 million and $41.6 million of
capitalized contract costs.

We had amortization expense of $12.0 million and $10.6 million related to these
costs during the fiscal year ended September 30, 2020 and 2019, respectively.
There was no impairment related to contract fulfillment costs capitalized.

Trade Accounts Receivable and Contract Balances


We classify our right to consideration in exchange for deliverables as either a
receivable or a contract asset. A receivable is a right to consideration that is
unconditional (i.e., only the passage of time is required before payment is
due). We present such receivables in accounts receivable, net in our condensed
combined balance sheets at their net estimated realizable value. We maintain an
allowance for doubtful accounts to provide for the estimated amount of
receivables that may not be collected. The allowance is based upon an assessment
of customer creditworthiness, historical payment experience, the age of
outstanding receivables and other applicable factors.

Our contract assets and liabilities are reported in a net position on a
contract-by-contract basis at the end of each reporting period. Contract assets
include unbilled amounts from long-term contracts when revenue recognized
exceeds the amount billed to the customer, and right to payment is not solely
subject to the passage of time. Contract assets are included in prepaid expenses
and other current assets. As of September 30, 2020, we had $30.3 million of
contract assets.

Our contract liabilities, or deferred revenue, consist of advance payments and
billings in excess of revenues recognized. We classify deferred revenue as
current or noncurrent based on when we expect to recognize the revenues. As of
September 30, 2020, we had $325.1 million of deferred revenue.

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Business Combinations


We determine and allocate the purchase price of an acquired company to the
tangible and intangible assets acquired and liabilities assumed as of the
business combination date. Results of operations and cash flows of acquired
companies are included in our operating results from the date of acquisition.
The purchase price allocation process requires us to use significant estimates
and assumptions as of the date of the business acquisition, including fair value
estimates such as:

• estimated fair values of intangible assets;

• estimated fair values of legal performance commitments to customers,

       assumed from the acquiree under existing contractual obligations
       (classified as deferred revenue) at the date of acquisition;

• estimated income tax assets and liabilities assumed from the acquiree; and

• estimated fair value of pre-acquisition contingencies from the acquiree.



While we use our best estimates and assumptions to determine the fair values of
assets acquired and liabilities assumed at the date of acquisition, our
estimates and assumptions are inherently uncertain and subject to refinement. As
a result, within the measurement period, which is generally one year from the
date of acquisition, we record adjustments to the assets acquired and
liabilities assumed against goodwill in the period the amounts are determined.
Adjustments identified subsequent to the measurement period are recorded within
Acquisition-related costs, net.

Although we believe the assumptions and estimates we have made in the past have
been reasonable and appropriate, they are based in part on historical experience
and information obtained from the management of the acquired companies and are
inherently uncertain. Examples of critical estimates in valuing certain of the
intangible assets we have acquired or may acquire in the future include but are
not limited to:

• future expected cash flows from software license sales, support agreements,

       consulting contracts, connected services, other customer contracts and
       acquired developed technologies and patents;

• expected costs to develop in-process R&D projects into commercially viable

products and the estimated cash flows from the projects when completed;

• the acquired company's brand and competitive position, as well as

assumptions about the period during which the acquired brand will continue

       to be used in the combined company's product portfolio; and


  • discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.


In connection with the purchase price allocations for our acquisitions, we
estimate the fair market value of legal performance commitments to customers,
which are classified as deferred revenue. The estimated fair market value of
these obligations is determined and recorded as of the acquisition date.

We may identify certain pre-acquisition contingencies. If, during the purchase
price allocation period, we are able to determine the fair values of a
pre-acquisition contingencies, we will include that amount in the purchase price
allocation. If we are unable to determine the fair value of a pre-acquisition
contingency at the end of the measurement period, we will evaluate whether to
include an amount in the purchase price allocation based on whether it is
probable a liability had been incurred and whether an amount can be reasonably
estimated. Subsequent to the end of the measurement period, any adjustment to
amounts recorded for a pre-acquisition contingency will be included within
acquisition-related cost, net in the period in which the adjustment is
determined.

Goodwill Impairment Analysis


Goodwill represents the excess of the purchase price in a business combination
over the fair value of net tangible and intangible assets acquired. Goodwill is
not amortized but tested annually for impairment or when interim indicators of
impairment are present. The test for goodwill impairment involves a qualitative
assessment of impairment indicators. If indicators are present, a quantitative
test of impairment is performed. Goodwill impairment, if any, is determined by
comparing the reporting unit's fair value to its carrying value. An impairment
loss is recognized in an amount equal to the excess of the reporting unit's
carrying value over its fair value, up to the amount of goodwill allocated to
the reporting unit. Goodwill is tested for impairment annually on July 1, the
first day of the fourth quarter of the fiscal year. There was no goodwill
impairment in any of the periods presented.

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For the purpose of testing goodwill for impairment, all goodwill acquired in a
business combination is assigned to one or more reporting units. A reporting
unit represents an operating segment or a component within an operating segment
for which discrete financial information is available and is regularly reviewed
by segment management for performance assessment and resource allocation.
Components of similar economic characteristics are aggregated into one reporting
unit for the purpose of goodwill impairment assessment. Reporting units are
identified annually and re-assessed periodically for recent acquisitions or any
changes in segment reporting structure. Upon consideration of our components, we
have concluded that our goodwill is associated with one reporting unit.

The fair value of a reporting unit is generally determined using a combination
of the income approach and the market approach. For the income approach, fair
value is determined based on the present value of estimated future after-tax
cash flows, discounted at an appropriate risk-adjusted rate. We use our internal
forecasts to estimate future after-tax cash flows and estimate the long-term
growth rates based on our most recent views of the long-term outlook for each
reporting unit. Actual results may differ from those assumed in our forecasts.
We derive our discount rates using a capital asset pricing model and analyzing
published rates for industries relevant to our reporting units to estimate the
weighted average cost of capital. We adjust the discount rates for the risks and
uncertainty inherent in the respective businesses and in our internally
developed forecasts. For the market approach, we use a valuation technique in
which values are derived based on valuation multiples of comparable publicly
traded companies. We assess each valuation methodology based upon the relevance
and availability of the data at the time we perform the valuation and weight the
methodologies appropriately.

Long-Lived Assets with Definite Lives


Our long-lived assets consist principally of technology, customer relationships,
internally developed software, land, building, and equipment. 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 definite-lived assets are amortized over their estimated economic lives
using the straight-line method. The remaining useful lives of long-lived assets
are re-assessed periodically at the asset group level for any events and
circumstances that may change the future cash flows expected to be generated
from the long-lived asset or asset group.

Internally developed software consists of capitalized costs incurred during the
application development stage, which include costs related design of the
software configuration and interfaces, coding, installation and testing. Costs
incurred during the preliminary project stage and post-implementation stage are
expensed as incurred. Internally developed software is amortized over the
estimated useful life, commencing on the date when the asset is ready for its
intended use. Land, building and equipment are stated at cost and depreciated
over their estimated useful lives. Leasehold improvements are depreciated over
the shorter of the related lease term or the estimated useful life. Depreciation
is computed using the straight-line method. Repair and maintenance costs are
expensed as incurred. The cost and related accumulated depreciation of sold or
retired assets are removed from the accounts and any gain or loss is included in
the results of operations for the period.

Long-lived assets with definite lives are tested for impairment whenever events
or changes in circumstances indicate the carrying value of a specific asset or
asset group may not be recoverable. We assess the recoverability of long-lived
assets with definite lives at the asset group level. Asset groups are determined
based upon the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. When the asset
group is also a reporting unit, goodwill assigned to the reporting unit is also
included in the carrying amount of the asset group. For the purpose of the
recoverability test, we compare the total undiscounted future cash flows from
the use and disposition of the assets with its net carrying amount. When the
carrying value of the asset group exceeds the undiscounted future cash flows,
the asset group is deemed to be impaired. The amount of the impairment loss
represents the excess of the asset or asset group's carrying value over its
estimated fair value, which is generally determined based upon the present value
of estimated future pre-tax cash flows that a market participant would expect
from use and disposition of the long-lived asset or asset group. There were no
long-lived asset impairments in any of the periods presented.

Stock-Based Compensation


We recognize stock-based compensation expense over the requisite service period,
based on the grant date fair value of the awards and the number of the awards
expected to be vested based upon service and performance conditions. The fair
value of restricted stock units is determined based on the number of shares
granted and the quoted price of our common stock, and the fair value of stock
options is estimated on the date of grant using the Black-Scholes model.
Determining the fair value of share-based awards at the grant date requires
judgment, including estimating expected dividends, share price volatility,
forfeiture rates and the number of performance-based restricted stock units
expected to be granted. If actual results differ significantly from these
estimates, the actual stock-based compensation expense may significantly differ
from our estimates.

Income Taxes

Fiscal 2020

We account for income taxes using the assets and liabilities method, as prescribed by ASC No. 740, Income Taxes, or ASC 740.

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Deferred Taxes


Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carry
amount of assets and liabilities and their respective tax bases. The method also
requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not after consideration of all available evidence. As the income tax
returns are not due and filed until after the completion of our annual financial
reporting requirements, the amounts recorded for the current period reflect
estimates for the tax-based activity for the period. In addition, estimates are
often required with respect to, among other things, the appropriate state and
foreign income tax rates to use, the potential utilization of operating loss
carry-forwards and valuation allowance required, if any, for tax assets that may
not be realizable in the future. Tax laws and tax rates vary substantially in
these jurisdictions and are subject to change given the political and economic
climate. We report and pay income tax based on operational results and
applicable law. Our tax provision contemplates tax rates currently in effect to
determine both our currency and deferred tax positions.

Any significant fluctuations in rates or changes in tax laws could cause our
estimates of taxes we anticipate either paying or recovering in the future to
change. Such changes could lead to either increases or decreases in our
effective tax rates.

We have historically estimated the future tax consequences of certain items,
including bad debts and accruals that cannot be deducted for income tax purposes
until such expenses are paid or the related assets are disposed. We believe the
procedures and estimates used in our accounting for income taxes are reasonable
and in accordance with established tax law. The income tax estimates used have
not resulted in material adjustments to income tax expense in subsequent period
when the estimates are adjusted to the actual filed tax return amounts.

Deferred tax assets and liabilities are measured used enacted tax rates expected
to apply to taxable income in the fiscal years in which those temporary
differences are expected to be recovered or settled. With respect to earnings
expected to be indefinitely reinvested offshore, we do not accrue ta for the
repatriations of such foreign earnings.

Valuation Allowance


We regularly review our deferred tax assets for recoverability considering
historically profitability, projected future taxable income, the expected timing
of the reversals of existing temporary differences and tax planning strategies.
In assessing the need for a valuation allowance, we consider both positive and
negative evidence related to the likelihood of realization of the deferred tax
assets. The weight given to the positive and negative evidence is commensurate
with the extent to which the evidence may be objectively verified. If positive
evidence regarding projected future taxable income, exclusive of reversing
taxable temporary differences, existed it would be difficult for it to outweigh
objective negative evidence of recent financial reporting losses.

Uncertain Tax Positions


We operate in multiple jurisdictions through wholly owned subsidiaries and our
global structure is complex. The estimates of our uncertain tax positions
involve judgements and assessment of the potential tax implications related to
legal entity restructuring, intercompany transfer and acquisition or divestures.
We recognize tax benefits from uncertain tax positions only if it is more likely
than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. Our tax positions
are subject to audit by taxing authorities across multiple global jurisdictions
and the resolution of such audits may span multiple years. Tax laws is complex
and often subject to varied interpretations, accordingly, the ultimate outcome
with respect to taxes we may own may differ from the amounts recognized.

Fiscal 2019 and Fiscal 2018

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Income taxes as presented herein attribute current and deferred income taxes of
Nuance to the Cerence business's standalone financial statements in a manner
that is systematic, rational, and consistent with the asset and liability method
prescribed by ASC 740. Accordingly, the Cerence business's income tax provision
was prepared following the "Separate Return Method." The Separate Return Method
applies ASC 740 to the standalone financial statements of each member of the
consolidated group as if the group member were a separate taxpayer and a
standalone enterprise. As a result, actual tax transactions included in the
consolidated financial statements of Nuance may not be included in the combined
financial statements of the Cerence business. Similarly, the tax treatment of
certain items reflected in the combined financial statements of Cerence may not
be reflected in the consolidated financial statements and tax returns of Nuance;
therefore, such items as net operating losses, credit carryforwards and
valuation allowances may exist in the standalone financial statements that may
or may not exist in Nuance's consolidated financial statements.

The breadth of the Cerence business's operations and the global complexity of
tax regulations require assessments of uncertainties and judgments in estimating
taxes that the Cerence business would have paid if it had been a separate
taxpayer. The final taxes that would have been paid are dependent upon many
factors, including negotiations with taxing authorities in various
jurisdictions, outcomes of tax litigation and resolution of disputes arising
from federal, state and international tax audits in the normal course of
business. The provision for income taxes was determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. This method also
requires the recognition of future tax benefits relating to net operating loss
carryforwards and tax credits, to the extent that realization of such benefits
is more likely than not after consideration of all available evidence. The
provision for income taxes represented income taxes paid by Nuance or payable
for the current year plus the change in deferred taxes during the year. Deferred
taxes result from differences between the financial and tax basis of the Cerence
business's assets and liabilities and are adjusted for changes in tax rates and
tax laws when changes are enacted.

Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized. In assessing the need
for a valuation allowance, we considered both positive and negative evidence
related to the likelihood of realization of the deferred tax assets. The weights
assigned to the positive and negative evidence are commensurate with the extent
to which the evidence may be objectively verified. If positive evidence
regarding projected future taxable income, exclusive of reversing taxable
temporary differences, existed, it would be difficult for it to outweigh
objective negative evidence of recent financial reporting losses.

In general, the taxable income (loss) of the various Cerence business entities
was included in Nuance's consolidated tax returns, where applicable in
jurisdictions around the world. As such, separate income tax returns were not
prepared for any Cerence business entities. Consequently, income taxes currently
payable are deemed to have been remitted to Nuance, in cash, in the period the
liability arose and income taxes currently receivable are deemed to have been
received from Nuance in the period that a refund could have been recognized by
the Cerence business had the Cerence business been a separate taxpayer.

Leases


We have entered into a number of facility and equipment leases which qualify as
operating leases under GAAP. We also have a limited number of equipment leases
that also qualify as finance leases. We determine if contracts with vendors
represent a lease or have a lease component under GAAP at contract inception.
Our leases have remaining terms ranging from less than one year to eight years.
Some of our leases include options to extend or terminate the lease prior to the
end of the agreed upon lease term. For purposes of calculating lease
liabilities, lease terms include options to extend or terminate the lease when
it is reasonably certain that we will exercise such options.

Operating lease right-of-use assets and liabilities are recognized based on the
present value of the future minimum lease payments over the lease term at the
lease commencement date. As our leases generally do not provide an implicit
rate, we use an estimated incremental borrowing rate in determining the present
value of future payments. The incremental borrowing rate represents an estimate
of the interest rate we would incur at lease commencement to borrow an amount
equal to the lease payments on a collateralized basis over the term of a lease
within a particular location and currency environment.

Operating leases are included in "Operating lease right-of-use assets,
"Short-term operating lease liabilities," and "Long-term operating lease
liabilities" on our consolidated balance sheet as of September 30, 2020. Finance
leases are included in "Property and equipment, net", "Accrued expenses and
other current liabilities," and "Other liabilities" on our consolidated balance
sheet as of September 30, 2020.

Lease costs for minimum lease payments is recognized on a straight-line basis
over the lease term. For operating leases, costs are included within cost of
revenues, research and development, marketing and selling, and general and
administrative lines on the consolidated statements of operations. For financing
leases, amortization of the finance right-of-use assets is included within
research

                                       56

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and development, marketing and selling, and general and administrative lines on the consolidated statements of operations, and interest expense is included within the other income (expense), net.


For operating leases, the related cash payments are included in the operating
cash flows on the consolidated statements of cash flows. For financing leases,
the related cash payments for the principal portion of the lease liability are
included in the financing cash flows on the consolidated statement of cash flows
and the related cash payments for the interest portion of the lease liability
are included within the operating section of the consolidated statement of cash
flows.

Convertible Debt

We bifurcate the debt and equity (the contingently convertible feature)
components of our convertible debt instruments in a manner that reflects our
nonconvertible debt borrowing rate at the time of issuance. The equity
components of our convertible debt instruments are recorded within stockholders'
equity with an allocated issuance premium or discount. The debt issuance premium
or discount is amortized to interest expense in our consolidated statement of
operations using the effective interest method over the expected term of the
convertible debt.

We assess the short-term and long-term classification of our convertible debt on
each balance sheet date. Whenever the holders have a contractual right to
convert, the carrying amount of the convertible debt is reclassified to current
liabilities, with the corresponding equity components classified from additional
paid-in-capital to mezzanine equity, as needed.

Loss Contingencies


We may be subject to legal proceedings, lawsuits and other claims relating to
labor, service, intellectual property, and other matters that arise from time to
time in the ordinary course of business. On a quarterly basis, we review the
status of each significant matter and assess our potential financial exposure.
If the potential loss from any claim or legal proceeding is considered probable
and the amount can be reasonably estimated, we accrue a liability for the
estimated loss. Significant judgments are required for the determination of
probability and the range of the outcomes. Due to the inherent uncertainties,
estimates are based only on the best information available at the time. Actual
outcomes may differ from our estimates. As additional information becomes
available, we reassess the potential liability related to our pending claims and
litigation and may revise our estimates. Such revisions may have a material
impact on our results of operations and financial position.

© Edgar Online, source Glimpses

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