Cerence Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 34 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. 35 Transactions between the Parent and the Cerence business are considered to be effectively settled in the combined financial statements a t 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. 36 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. 37 Restructuring costs are costs related to reorganizing various business units, including costs associated with employee severance, closing and opening facilit ies, 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 38 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 our edge software compone nts . As a percentage of total cost of revenue, cost of license revenue increased by 0.5 percentage points from 2.1% for fiscal year 201 9 to 2.6% for fiscal year 20 20 . 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. 40 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. 41 Fiscal Year 201 9 Compared with Fiscal Year 201 8 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. 42 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 Fiscal Year 20 20 Compared with Fiscal Year 201 9 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 44 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 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%. 46 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 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. 48 On April 2, 2018, we acquired Voicebox, headquartered in Bellevue, Washington. Voicebox is a provider of conversational artificial intelligence, including voice recognition, natural language understand ing, 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 Co nsolidated 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 Facilities (2) 4,220 7,624 2,184 - 14,028 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 49 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 rel ated 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 com pensation; 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. 50 If the difference in timing arises for reasons other than the provision of finance to either the c ustomer 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 no t 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 51 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. 52 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. 53 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 operati ng 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 a re 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 c ompo nents , 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. 54 Deferr ed 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 55 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 systemati c, 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 standalon e 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 include d 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 and development, marketing and selling, and general and administrative lines on the consolid ated 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.