Cerence Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risk from changes in foreign currency exchange rates and interest rates which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities. Exchange Rate Sensitivity We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations. Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has been related to transactions denominated in the Canadian dollar, Chinese yuan, Euro, and Japanese yen. We have the ability to enter into forward exchange contracts to hedge against foreign currency fluctuations when necessary. We did not maintain any hedging instruments in any of the historical or interim periods presented in the accompanying Consolidated and Combined Financial Statements. Interest Rate Sensitivity Historically, the Cerence business has not maintained financial instruments that would be exposed to interest rate risk. Since interest bearing financial instruments maintained at Nuance were not specifically identifiable to the Cerence business, interest rate risk has not impacted any of the historical or interim periods presented in the accompanying Consolidated and Combined Financial Statements. 57 We are expos ed to interest rate risk as a result of our cash and cash equivalents , marketable securities, and indebtedness related to the Senior Credit Facilities. At September 30, 2020, we held approximately $136.1 million of cash and cash equivalents consisting of cash and money-market funds. Assuming a 1% increase in interest rates, our interest income on our money-market funds classified as cash and cash equivalents would increase by $1.0 million per annum, based on September 30, 2020 reported balances. The borrowings under our Senior Credit Facilities are subject to interest rates based on LIBOR. As of September 30, 2020, assuming a 1% increase in interest rates and our Revolving Facility is fully drawn, our interest expense on our Senior Credit Facilities would increase by approximately $1.7 million per annum . 58 Item 8. Financial Statement s and Supplementary Data. Index to CONSOLIDATED AND Combined Financial Statements Report of Independent Registered Public Accounting Firm 60 Consolidated and Combined Statements of Operations for the years ended September 30, 2020, 2019, and 2018 61 Consolidated and Combined Statements of Comprehensive (Loss) Income for the years ended September 30, 2020, 2019, and 2018 62 Consolidated and Combined Balance Sheets as of September 30, 2020 and 2019 63 Consolidated Statement of Equity and Combined Statements of Changes in Parent Company Equity for the years ended September 30, 2020, 2019, and 2018 64 Consolidated and Combined Statements of Cash Flows for the years ended September 30, 2020, 2019, and 2018 65 Notes to the Consolidated and Combined Financial Statements 66 59 Report of Independent Regist ered Public Accounting Firm Board of Directors and Stockholders Cerence Inc. Burlington, Massachusetts Opinion on the Consolidated and Combined Financial Statements We have audited the accompanying consolidated and combined balance sheets of Cerence Inc. (the “Company”) as of September 30, 2020 and 2019, the related consolidated and combined statements of operations, comprehensive income, consolidated statement of equity and combined statements of changes in parent company equity, and cash flows for each of the three years in the period ended September 30, 2020, and the related notes (collectively referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion. Change in Accounting Principle As discussed in Note 3 to the consolidated and combined financial statements, effective October 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases (Topic 842) Emphasis of Matter As discussed in Note 2, the financial statements of the Cerence business are not those of a standalone entity. The combined financial statements of the Cerence business as of September 30, 2019 and for the two years in the period ended September 30, 2019 reflect the assets, liabilities, revenues and expenses directly attributable to the Cerence business, as well as allocations deemed reasonable by management, to present the financial position, results of operations, changes in parent company equity, and cash flows of the Cerence business on a standalone basis and do not necessarily reflect the financial position, results of operations, changes in parent company equity, and cash flows of the Cerence business in the future or what they would have been had the Cerence business been a separate, standalone entity during the years presented. /s/ BDO USA, LLP We have served as the Company’s auditor since 2017. Boston, Massachusetts November 19, 2020 60 CERENCE INC. CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (In thousands, except per share data) 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 intangible assets 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 Net (loss) income per share: Basic $ (0.57 ) $ 2.76 $ 0.16 Diluted $ (0.57 ) $ 2.76 $ 0.16 Weighted-average common share outstanding: Basic 36,428 36,391 36,391 Diluted 36,428 36,391 36,391 Refer to accompanying Notes to the Consolidated and Combined Financial Statements. 61 CERENCE INC. CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) Year Ended September 30, 2020 2019 2018 (ASC 606) (ASC 606) (ASC 605) Net (loss) income $ (20,631 ) $ 100,268 $ 5,881 Other comprehensive income (loss): Foreign currency translation adjustments 15,805 (3,866 ) (1,906 ) Pension adjustments, net 1,178 (1,176 ) 562 Unrealized loss on available-for-sale securities (1 ) — — Total other comprehensive income (loss) 16,982 (5,042 ) (1,344 ) Comprehensive (loss) income $ (3,649 ) $ 95,226 $ 4,537 Refer to accompanying Notes to the Consolidated and Combined Financial Statements. 62 CERENCE INC. CONSOLIDATED AND COMBINED BALANCE SHEETS (In thousands, except per share amounts) September 30, 2020 September 30, 2019 ASSETS Current assets: Cash and cash equivalents $ 136,067 $ — Marketable securities 11,662 — Accounts receivable, net of allowances of $1,394 and $865 at September 30, 2020 and September 30, 2019, respectively 49,943 65,787 Deferred costs 7,256 9,195 Prepaid expenses and other current assets 44,220 17,343 Total current assets 249,148 92,325 Property and equipment, net 29,529 20,113 Deferred costs 38,161 32,428 Operating lease right-of-use assets 20,096 — Goodwill 1,128,198 1,119,329 Intangible assets, net 45,616 65,561 Deferred tax assets 161,759 150,629 Other assets 14,938 3,444 Total assets $ 1,687,445 $ 1,483,829 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,447 $ 16,687 Deferred revenue 112,520 88,233 Short-term operating lease liabilities 5,700 — Short-term debt 6,250 — Accrued expenses and other current liabilities 67,857 24,194 Total current liabilities 200,774 129,114 Long-term debt, net of discounts and issuance costs 266,872 — Deferred revenue, net of current portion 212,573 265,051 Long-term operating lease liabilities 17,821 — Other liabilities 31,649 21,536 Total liabilities 729,689 415,701 Commitments and contingencies (Note 17) Stockholders' Equity: Common stock, $0.01 par value, 560,000 shares authorized as of September 30, 2020; 36,842 shares issued and outstanding as of September 30, 2020 369 — Net parent investment — 1,097,127 Accumulated other comprehensive income (loss) 3,711 (28,999 ) Additional paid-in capital 974,307 — Accumulated deficit (20,631 ) — Total stockholders' equity 957,756 1,068,128 Total liabilities and stockholders' equity $ 1,687,445 $ 1,483,829 Refer to accompanying Notes to the Consolidated and Combined Financial Statements. 63 CERENCE INC. CONSOLIDATED STATEMENT OF EQUITY AND COMBINED STATEMENTS OF CHANGES IN PARENT COMPANY EQUITY (In thousands) Shares Amount Additional Paid-In Capital Accumulated Deficit Net Parent Investment Accumulated Other Comprehensive Income (Loss) Total Balance at October 1, 2017 - $ — $ — $ — $ 1,019,792 $ (22,613 ) $ 997,179 Accumulated adjustment due to the adoption of ASU 2016-16 - - - - (1,510 ) - (1,510 ) Net income - - - - 5,881 - 5,881 Other comprehensive income - - - - - (1,344 ) (1,344 ) Net transfer to Parent - - - - (6,887 ) - (6,887 ) Balance at September 30, 2018 - - - - 1,017,276 (23,957 ) 993,319 Accumulated adjustment related to the adoption of ASC 606 - - - - 6,974 - 6,974 Net income - - - - 100,268 - 100,268 Other comprehensive loss - - - - - (5,042 ) (5,042 ) Net transfer to Parent - - - - (27,391 ) - (27,391 ) Balance at September 30, 2019 - - - - 1,097,127 (28,999 ) 1,068,128 Net loss - - - (20,631 ) - - (20,631 ) Other comprehensive income - - - - - 16,982 16,982 Distribution to Parent - - - - (152,978 ) - (152,978 ) Net (decrease) increase in net parent investment - - - - (6,098 ) 15,728 9,630 Reclassification of net parent investment in Cerence - - 938,051 - (938,051 ) - - Issuance of common stock at separation 36,391 364 (364 ) - - - - Issuance of common stock under employee stock plans 706 7 1,311 - - - 1,318 Stock withheld to cover tax withholdings requirements upon restricted stock vesting (255 ) (2 ) (9,367 ) (9,369 ) Convertible Senior Notes conversion feature (net of taxes of $4,678 and issuance costs of $627) - - 14,371 - - - 14,371 Stock-based compensation - - 30,305 - - - 30,305 Balance at September 30, 2020 36,842 $ 369 $ 974,307 $ (20,631 ) $ — $ 3,711 $ 957,756 Refer to accompanying Notes to the Consolidated and Combined Financial Statements. 64 CERENCE INC. CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (In thousands) Year Ended September 30, 2020 2019 2018 (ASC 606) (ASC 606) (ASC 605) Cash flows from operating activities: Net (loss) income $ (20,631 ) $ 100,268 $ 5,881 Adjustments to reconcile net (loss) income to net cash provided by operations: Depreciation and amortization 30,041 28,844 25,765 Provision for doubtful accounts 704 — — Stock-based compensation 47,285 29,682 22,043 Non-cash interest expense 5,286 — — Loss on debt extinguishment 19,279 — — Deferred tax (benefit) expense (11,354 ) (101,223 ) 12,473 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 16,112 904 8,472 Prepaid expenses and other assets (30,311 ) (8,836 ) (2,960 ) Deferred costs (1,381 ) 4,339 (12,528 ) Accounts payable (2,430 ) 10,130 (6,291 ) Accrued expenses and other liabilities 27,819 6,289 12,946 Deferred revenue (35,630 ) 17,674 49,458 Net cash provided by operating activities 44,789 88,071 115,259 Cash flows from investing activities: Capital expenditures (19,012 ) (4,517 ) (6,510 ) Purchases of marketable securities (11,663 ) — — Payments for business acquisitions, net of cash acquired — — (79,802 ) Net cash used in investing activities (30,675 ) (4,517 ) (86,312 ) Cash flows from financing activities: Net transactions with Parent 12,964 (83,554 ) (28,947 ) Distributions to Parent (152,978 ) — — Proceeds from long-term debt, net of discount 547,719 — — Payments for long-term debt issuance costs (6,402 ) — — Principal payments of long-term debt (271,563 ) — — Common stock repurchases for tax withholdings for net settlement of equity awards (9,369 ) — — Principal payments of lease liabilities arising from a finance lease (136 ) — — Proceeds from issuance of common stock from employee stock plans 1,318 — — Net cash provided by (used in) financing activities 121,553 (83,554 ) (28,947 ) Effects of exchange rate changes on cash and cash equivalents 400 — — Net change in cash and cash equivalents 136,067 — — Cash and cash equivalents at beginning of year — — — Cash and cash equivalents at end of year $ 136,067 $ — $ — Supplemental information: Cash paid for income taxes $ 2,181 $ 12,139 $ 18,444 Cash paid for interest $ 14,733 $ - $ - Refer to accompanying Notes to the Consolidated and Combined Financial Statements. 65 CERENCE INC. NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 1. Organization History On October 1, 2019, (the “Distribution Date”), Nuance Communications (“Nuance” or “the Parent”), a leading provider of speech and language solutions for businesses and consumers around the world, completed the complete legal and structural separation and distribution to its stockholders of all of the outstanding shares of our common stock, and its consolidated subsidiaries, in a tax free spin-off (which we refer to as the “Spin-Off”). The distribution was made in the amount of one share of our common stock for every eight shares of Nuance common stock (which we refer to as the “Distribution”) owned by Nuance’s stockholders as of 5:00 p.m. Eastern Time on September 17, 2019, the record date of the Distribution. In connection with the Distribution, on September 30, 2019, we filed an Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, which became effective on October 1, 2019. Our Amended and Restated By-laws also became effective on October 1, 2019. On October 2, 2019, our common stock began regular-way trading on the Nasdaq Global Select Market under the ticker symbol CRNC. Business Cerence Inc. (referred to in this Annual Report on Form 10-K as “we,” “our,” “us,” “ourselves,” the “Company” or “Cerence”) is a global, premier provider of AI-powered assistants and innovations for connected and autonomous vehicles. Our customers include all major automobile original equipment manufacturers (“OEMs”), or their tier 1 suppliers worldwide. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users. We generate revenue primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue from our work with OEMs and suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects. COVID-19 Update In December 2019, a novel strain of coronavirus, now known as COVID-19 (“COVID-19”), was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, some of which have been subsequently rescinded, modified or reinstated, including orders to close all businesses not deemed “essential,” isolating residents to their homes or places of residence, and practice social distancing. These extreme measures have negatively impacted businesses of all sizes, including the automotive industry and its suppliers. Automotive production and shipments ceased or were not operating at full capacity in order to ensure the safety of workers. Given the declines in automotive production and shipments, the COVID-19 pandemic has had a material impact on our billings and revenue recognized from licenses and billings from connected services during the second half of fiscal 2020 and may also continue beyond fiscal 2020. We have taken numerous steps 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 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 restrictions on travel for all employees. As of the date of this filing, we do not believe our work from home and return to office protocols have materially adversely impact our internal controls and financial reporting systems. 66 The full extent to which the on going COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pa ndemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. The COVID-19 pandemic could also result in additional governmental restricti ons and regulations, which could adversely affect our business and financial results. In addition, a recession, depression or other sustained adverse market impact resulting from COVID-19 could materially and adversely affect our business, our access to n eeded capital and liquidity, and the value of our common stock. Even after the COVID-19 pandemic has lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact. 2. Basis of Presentation Fiscal 2020 The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“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 is shown in lieu of stockholders’ equity in the combined financial statements. The Combined Statements of Operations include 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 present these corporate expenses that are cash in nature as cash flows from operating activities, as this is the nature of these costs at the Parent. Non-cash expenses allocated from the Parent include corporate depreciation and amortization and stock-based compensation included as add-back adjustments to reconcile net income to net cash provided by operations. As described in Note 3(l) and Note 20, current and deferred income taxes and related tax expense have been determined based on the standalone results of the Cerence business by applying Accounting Standards Codification (“ASC”) No. 740, Income Taxes, (“ASC 740”), to the Cerence business’s operations in each country as if it were a separate taxpayer (i.e. following the Separate Return Methodology). The Cerence business was dependent upon technologies which were owned by various entities within the Parent structure. While these combined financial statements use various methods to allocate the cost of these technologies to the Cerence business, this does not purport to reflect the cost of an arm’s length license arrangement. The combined financial statements include 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 has been allocated to the Cerence business in the combined financial statements. The Parent’s short and long-term debt has 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. The Parent maintained various stock-based compensation plans at a corporate level. Cerence employees participated in those programs and a portion of the cost of those plans has been included in the Cerence business’s Combined Statements of Operations. However, the stock-based compensation expense has been included within the net parent investment. Refer to Note 16 for further description of the accounting for stock-based compensation. 67 Transactions between the P arent and the Cerence business are considered to be effectively settled in the combined financial statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions was reflected in the Combined S tatements of Cash Flows as a financing activity and in the Combined Balance Sheets as net parent investment. Refer to Note 3( p ) for further description. All of the allocations and estimates in the combined financial statements are based on assumptions that management believes 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. 3. Summary of Significant Accounting Policies (a) Principles of Consolidation Fiscal year 2020 The accompanying consolidated financial statements include the accounts of the Company, as well as those of our wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. Fiscal years 2019 and 2018 The combined financial statements present the financial position, statement of operations, Parent company equity and cash flows of the Cerence business. All significant balances and transactions between entities in the Cerence business have been eliminated for these combined financial statements. All significant balances between Parent (excluding the Cerence business) and the Cerence business are included in Parent company equity in the Combined Balance Sheets. (b) Use of Estimates The Consolidated and Combined Financial Statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions. These estimates, judgments and assumptions can affect the reported amounts in the financial statements and the footnotes thereto. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, assumptions and judgments. Significant estimates inherent to the preparation of financial statements include: revenue recognition; the allowances for doubtful accounts; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations; accounting for stock-based compensation; accounting for income taxes; accounting for leases; accounting for convertible debt; and loss contingencies. We base our 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 amounts could differ significantly from these estimates. (c) Revenue Recognition ASC 606 for fiscal years 2020 and 2019 See Note 5 for revenue recognition under ASC 606 for fiscal years 2020 and 2019. ASC 605 for fiscal year 2018 We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable and (iv) collectability is probable. The revenue recognition policies for these revenue streams are discussed below. The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has access to take immediate possession of the software or technology. In select situations, we sell or license non-exclusive intellectual property in conjunction with, or in place of, embedding our intellectual property in software. We also have non-software arrangements including connected services where the customer does not take possession of the software at the outset of the arrangement either because they have no contractual right to do so or because significant penalties preclude them from doing so. Revenue from royalties on sales of our software products by OEMs, where no services are included, is recognized in the period earned so long as we have been notified by the OEM that such royalties are due, and provided that all other revenue recognition criteria are met. For our software and technology-related multiple element arrangements, where customers purchase both software or technology related products and software or technology related services, we use vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related services is based on evidence of the prices charged when the same 68 elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related services arrangement. We have established VSOE of fair value for the majority of our professional services. When we provide professional services considered essential to the functionality of the software or technology, we recognize revenue from the professional services as well as any related software or technology licenses on a percentage-of-completion basis whereby the arrangement consideration is recognized as the services are performed, as measured by an observable input. In these circumstances, we separate license revenue from professional service revenue for the Combined Statement of Operations by allocating VSOE of fair value of the professional services as professional services and connected services revenue and the residual portion as license revenue. We generally determine the percentage-of-completion by comparing the labor hours incurred to-date to the estimated total labor hours required to complete the project. We generally consider labor hours to be the most reliable, available measure of progress on these projects. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known. When the estimate indicates that a loss will be incurred, such loss is recorded in the period identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yield materially different results. We offer some of our products via a Software-as-a-Service (“SaaS”) model also known as a hosted model. In this type of arrangement, we are compensated in two ways: (1) fees for up-front set-up of the service environment and (2) fees charged for hosted service subscriptions. Our up-front set-up fees are nonrefundable. We recognize the up-front set-up fees ratably over the longer of the contract lives, or the expected lives of the customer relationships. The on-demand service subscription fees are recognized ratably over our estimate of useful life of devices on which the connected service is provided. We enter into multiple-element arrangements that may include a combination of our various software or technology related and non-software related products and services offerings including software or technology licenses, professional services and our connected services. In such arrangements, we allocate total arrangement consideration to software or technology-related elements and any non-software element separately based on the selling price hierarchy group following the guidance in ASC No. 985, Software , and our policies. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or Third Party Evidence (“TPE”) of selling price. Typically, we are unable to determine TPE of selling price. Therefore, when neither VSOE nor TPE of selling price exist for a deliverable, we use our Estimate of Selling Price (“ESP”) for the purposes of allocating the arrangement consideration. We determine ESP for a product or service by considering multiple factors including, but not limited to, major project groupings, market conditions, competitive landscape, price list and discounting practices. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. We record reimbursements received for out-of-pocket expenses as revenue, with offsetting costs recorded as cost of revenue. Out-of-pocket expenses generally include, but are not limited to, expenses related to transportation, lodging and meals. We record shipping and handling costs billed to customers as revenue with offsetting costs recorded as cost of revenue. (d) 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 date of acquisition. 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, which include: • 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); • estimated income tax assets and liabilities assumed from the acquiree; • estimated fair value of pre-acquisition contingencies assumed from the acquiree; and • estimated fair value of any contingent consideration which is established at the acquisition date and included in the total purchase price. The contingent consideration is then adjusted to fair value, with any measurement-period adjustment recorded against goodwill. Adjustments identified subsequent to the measurement period are recorded within acquisition-related costs. While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which is generally one year from the acquisition date, any adjustment to the assets acquired and liabilities assumed is recorded against goodwill in the period in which the amount is determined. Any adjustment identified subsequent to the measurement period is included in operating results in the period in which the amount is determined. 69 (e) Cash and Cash Equivalent s Cash and cash equivalents consist of cash on hand, including money-market funds with original maturities of 90 days or less. We estimated the fair value of our money-market funds from quoted prices for identical assets in active markets on the last trading day of the reporting period. (f) Marketable Securities Marketable securities consist of commercial paper and corporate bonds. We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. We classify our marketable securities as either short-term or long-term based on the nature of each security. We record marketable securities at fair value, with the unrealized gains or losses included within “Accumulated other comprehensive income (loss)” on the consolidated balance sheet until realized. Interest income earned from our marketable securities is reported within “Interest income” on the consolidated statement of operations. We evaluate our marketable securities to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairment to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gain and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in “Other income (expense), net” on the consolidated statement of operations. (g) Goodwill Goodwill represents the excess of the purchase price in a business combination over the fair value of net 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 is no goodwill impairment for the years ended September 30, 2020, 2019, and 2018. We believe our Chief Executive Officer (“CEO”) is our chief operating decision maker (“CODM”). Our CEO approves all major decisions, including reorganizations and new business initiatives. Our CODM reviews routine consolidated operating information and makes decisions on the allocation of resources at this level, as such, we have concluded that we have one operating segment. For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A reporting unit represents an operating segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by segment management for performance assessment and resource allocation. Components of similar economic characteristics are aggregated into one reporting unit for the purpose of goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically for recent acquisitions or any changes in segment reporting structure. Upon consideration of our components, we have concluded that our goodwill is associated with one reporting unit. Goodwill has been allocated to Cerence based upon its relative fair value as of March 31, 2018, when Cerence became a reporting unit of Nuance. 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. Due to the macroeconomic conditions driven by the COVID-19 pandemic, we concluded that indicators of impairment were present as of March 31, 2020. We performed an interim assessment of goodwill and concluded that no impairment existed as the fair value of our reporting unit exceeded its carrying value as of March 31, 2020. On July 1, 2020, we completed the annual impairment testing of our goodwill. We elected to rely on a qualitative assessment and as a result we determined it is more likely than not that the fair value of our reporting unit is greater than its carrying amount. 70 ( h ) Long-Lived Assets with Definite Lives Our long-lived assets consist principally of technology and patents, customer relationships, internally developed software, property 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 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 to design the software configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage, along with post-implementation stages of internally developed software, are expensed as incurred. Internally developed software costs that have been capitalized are typically amortized over the estimated useful life, commencing with the date when an asset is ready for its intended use. Equipment is stated at cost and depreciated over the estimated useful life. 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. During the years ended September 30, 2019 and 2018, there was no indication that the carrying value of our assets or asset groups may not be recoverable. Due to the macroeconomic conditions driven by the COVID-19 pandemic and the anticipated negative impact on our license revenue and connected services billings, we concluded that indicators of impairment were present and performed an interim test for recoverability of our long-lived asset group as of March 31, 2020. Based upon the results of the recoverability test, we determined that the carrying amounts of the long-lived asset group were considered recoverable, concluding the test and resulting in no impairment of our long-lived asset group as of March 31, 2020. As of September 30, 2020, there were no indicators of impairment present related to our long-lived asset group. (i) Accounts Receivable Allowances We record allowances for doubtful accounts for the estimated probable losses on uncollected accounts receivable. The allowance is based upon the credit worthiness of our customers, our historical experience, the age of the receivable, and current market and economic conditions. Receivables are written off against these allowances in the period they are determined to be uncollectible. For the years ended September 30, 2020, 2019, and 2018, the activity related to the allowance for doubtful accounts was as follows (dollars in thousands): Allowance for Doubtful Accounts Balance at October 1, 2017 $ 832 Bad debt provisions 366 Write-offs, net of recoveries (244 ) Balance at September 30, 2018 954 Bad debt provisions 401 Write-offs, net of recoveries (490 ) Balance at September 30, 2019 865 Bad debt provisions 704 Write-offs, net of recoveries (175 ) Balance at September 30, 2020 $ 1,394 71 ( j ) Research and Development Research and development (“R&D”) costs related to software that is or will be sold or licensed externally to third-parties, or for which a substantive plan exists to sell or license such software in the future, incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized and amortized to cost of revenue over the estimated useful life of the related products. We have determined that technological feasibility is reached shortly before the general release of the software products. Costs incurred after technological feasibility is established have not been material. R&D costs are otherwise expensed as incurred. (k) Acquisition-related Costs Acquisition-related costs include those costs related to potential and realized acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments, and other costs related to integration activities and (ii) professional service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities and disputes. The components of acquisition-related costs are as follows (dollars in thousands): Year Ended September 30, 2020 2019 2018 Transition and integration costs $ — $ 563 $ 1,616 Professional service fees — 381 2,466 Total $ — $ 944 $ 4,082 (l) Income Taxes Fiscal year 2020 We account for income taxes using the assets and liabilities method, as prescribed by ASC No. 740, Income Taxes , or ASC 740. Deferred Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carry amount of assets and liabilities and their respective tax bases. The method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. As the income tax returns are not due and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the current period reflect estimates for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the appropriate state and foreign income tax rates to use, the potential utilization of operating loss carry-forwards and valuation allowance required, if any, for tax assets that may not be realizable in the future. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the political and economic climate. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates currently in effect to determine both our currency and deferred tax positions. Any significant fluctuations in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future to change. Such changes could lead to either increases or decreases in our effective tax rates. We have historically estimated the future tax consequences of certain items, including bad debts and accruals that cannot be deducted for income tax purposes until such expenses are paid or the related assets are disposed. We believe the procedures and estimates used in our accounting for income taxes are reasonable and in accordance with established tax law. The income tax estimates used have not resulted in material adjustments to income tax expense in subsequent period when the estimates are adjusted to the actual filed tax return amounts. Deferred tax assets and liabilities are measured used enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue ta for the repatriations of such foreign earnings. Valuation Allowance We regularly review our deferred tax assets for recoverability considering historically profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. 72 The weight given to the positive and negative evidence is commensurate with the extend to which the evidence may be objectively verified. If positive evidence regar ding 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 years 2019 and 2018 Income taxes as presented herein attribute current and deferred income taxes of the Parent to the Cerence business’s standalone financial statements in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by ASC 740. Accordingly, the Cerence business’s income tax provision was prepared following the “Separate Return Method.” The Separate Return Method applies ASC 740 to the standalone financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise. As a result, actual tax transactions included in the consolidated financial statements of the Parent may not be included in the combined financial statements of the Cerence business. Similarly, the tax treatment of certain items reflected in the combined financial statements of the Cerence business may not be reflected in the consolidated financial statements and tax returns of the Parent; 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 the Parent’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 is 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 represents income taxes paid by the parent 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 consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weights assigned to the positive and negative evidences 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 the Parent’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 the Parent, in cash, in the period the liability arose and income taxes currently receivable are deemed to have been received from the Parent in the period that a refund could have been recognized by the Cerence business had the Cerence business been a separate taxpayer. 73 ( m ) Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, reflected in the Consolidated Statement of Equity and Combined Statements of Changes in Parent Company Equity, consists of the following (dollars in thousands): September 30, 2020 2019 Foreign currency translation adjustments $ 5,264 $ (26,216 ) Net unrealized losses on post-retirement benefits (1,552 ) (2,783 ) Net unrealized losses on available-for-sale securities (1 ) — Accumulated other comprehensive income (loss) $ 3,711 $ (28,999 ) No income tax provisions or benefits are recorded for foreign currency translation adjustments as the undistributed earnings in our foreign subsidiaries are expected to be indefinitely reinvested. (n) Concentration of Risk Financial instruments that potentially subject us to significant concentrations of credit risk primarily consist of trade accounts receivable. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed appropriate. Two customers accounted for 15.0% and 11.1% of our accounts receivable balance, net at September 30, 2020. Two customers accounted for 12.9% and 10.0% of our accounts receivable balance, net at September 30, 2019. One customer accounted for 23.3% of our revenues for the year ended September 30, 2020. Two customers accounted for 20.7% and 12.3% of our revenues for the year ended September 30, 2019, and one customer accounted for 18.4% of our revenues for the year ended September 30, 2018. (o) Foreign Currency Translation The functional currency of a foreign subsidiary is generally the local currency. We translate the financial statements of foreign subsidiaries to U.S. dollars using month-end exchange rates for assets and liabilities, and average rates for the reporting period for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive loss as a component of stockholders’ equity and parent company equity. We record net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to the functional currency within other income (expense), net. Foreign currency transaction (gains) losses for the years ended September 30, 2020, 2019 and 2018 were $2.4 million, ($0.3) million, and $0.1 million, respectively. (p) Net Parent Investment In the Consolidated and Combined Balance Sheets, net parent investment represents the Parent’s historical investment in the Cerence business, accumulated net earnings after taxes and the net effect of transactions with, and allocations from, the Parent. (q) Stock-Based Compensation Fiscal year 2020 Stock-based compensation primarily consists of restricted stock units with service or market/performance conditions. Equity awards are measured at the fair market value of the underlying stock at the grant date. We recognize stock compensation expense using the straight-line attribution method over the requisite service period. We record forfeitures as they occur. Shares are issued on the vesting dates net of the applicable statutory tax withholding to be paid by us on behalf of our employees. As a result, fewer shares are issued than the number of awards outstanding. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital. We record any income tax effect related to stock-based awards through the Consolidated Statements of Operations. Excess tax benefits are recognized as deferred tax assets upon settlement and are subject to regular review for valuation allowance. Fiscal years 2019 and 2018 The Parent maintained certain stock compensation plans for the benefit of certain of its officers, directors and employees, including grants of employee stock options, purchases under employee stock purchase plans and restricted awards. These combined financial statements included certain expenses of the Parent that were allocated to the Cerence business for stock-based compensation. The stock-based compensation expense was recognized over the requisite service period, based on the grant date fair value of the 74 awards and the number of the awards expected to be vested based on service and performance conditions, net of forfeitures. The Cerence business’ s Combined Balance Sheets d id not include any Parent outstanding equity related to these stock-based compensation programs. Effective the fourth quarter of fiscal year 2017, a s a result of the early adoption of Accounting Standards Update (“ ASU ”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting , (“ASU 2016-09”), we record ed any tax effect related to stock-based awards through the Combined Statements of Opera tions. Excess tax benefits were recognized as deferred tax assets upon settlement and were subject to regular review for valuation allowance. (r) 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 qualify as financing 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 and development, marketing and selling, and general and administrative lines on the consolidated statements of operations, and interest expense is included within the other income (expense), net. For operating leases, the related cash payments are included in the operating cash flows on the consolidated statements of cash flows. For financing leases, the related cash payments for the principal portion of the lease liability are included in the financing cash flows on the consolidated statement of cash flows and the related cash payments for the interest portion of the lease liability are included within the operating section of the consolidated statement of cash flows. (s) 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 component classified from additional paid-in capital to mezzanine equity, as needed. (t) Net (Loss) Income Per Share Basic net loss or income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares, giving effect to potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of restricted stock units, contingently issuable shares, and potential issuance of stock upon conversion of our Notes, as more fully described in Note 21. The dilutive effect of the Notes is reflected in net (loss) income per share by application of the “if-converted” method. The “if-converted” method is only assumed in periods where such application would be dilutive. In applying the “if-converted” method for diluted net income per share, 75 we would assume conversion of the Notes at a ratio of 26.7271 shares of our common stock per $1,000 principal amount of the Notes. Assumed converted shares of our common stock are weighted for the period the Notes were outstanding. (u) Recently Adopted Accounting Standards Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases , (“ASU 2016-02”), and codified as ASC 842, which became effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases Topic Targeted Improvements , which provides an additional and optional transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. Additionally, in March 2019, the FASB issued ASU 2019-01, Codification Improvements to Topic 842 , which provides guidance in the following areas: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers and (2) clarification of interim disclosure requirements during transition. We adopted the new standard effective October 1, 2019 under the modified retrospective transition approach. Results for reporting periods beginning after October 1, 2019 are presented under ASC 842, while prior periods have not been adjusted and continue to be reported in accordance with our historic accounting under previous GAAP. We elected the package of practical expedients permitted under the transition guidance. The new standard does not have a material impact on our consolidated statement of operations and cash flows. Approximately $2.2 million of deferred rent balances were reclassified against the costs of the right-of-use assets. The effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of October 1, 2019 is immaterial. The following tables summarize the impact of adopting ASC 842 on the consolidated balance sheet as of October 1, 2019 (dollars in thousands): As of October 1, 2019 As Previously Reported Impact of Adoption of Topic ASC 842 As Adjusted Assets: Operating lease right of use assets $ - $ 19,594 $ 19,594 Liabilities: Current liabilities: Short-term operating lease liabilities $ - $ 4,863 $ 4,863 Accrued expenses and other current liabilities 24,194 (1,465 ) 22,729 Long-term operating lease liabilities - 16,883 16,883 Other liabilities $ 21,536 $ (687 ) $ 20,849 Equity: Net parent investment $ 1,097,127 $ — $ 1,097,127 76 Other Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , (“ASU 2018-15”), which is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance requires that implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or component of the hosting arrangement is ready for its intended use. The adoption of ASU 2018-15 did not have a material impact on our consolidated financial statements during fiscal year 2020. (v) Issued Accounting Standards Not Yet Adopted From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our combined financial position, results of operations or cash flows, or do not apply to our operations. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. This standard is effective for interim and annual reporting periods beginning after December 15, 2019. This standard is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to Accumulated deficit as of the beginning of the first reporting period in which the guidance of this standard is effective. We plan to adopt this new standard in the first quarter of our fiscal 2021. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements. Implementation efforts related to ASU 2016-13 are underway, including model development, identification of additional data needs for new reporting requirements, and drafting of accounting policies and internal controls. We believe our accounts receivable and contact assets balances fall within the scope of ASU 2016-13 and will be impacted upon adoption. We plan to use models and other estimation techniques that are sensitive to changes in economic conditions in order to estimate a reserve for financial assets. We also plan to apply qualitative factors that could be related to distinctive risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, or other relevant factors to ensure the reserve reflects our best estimate of current expected credit losses. We do not believe the new standard will have a material impact on our consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , (“ASU 2020-04”). The update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for debt with conversion options, revises the criteria for applying the derivatives scope exception for contracts in an entity’s own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2021, our fiscal 2023. Early adoption is permitted for annual periods and interim periods within those annual periods beginning after December 15, 2020, our fiscal 2022. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements. 4. Business Acquisitions As part of our business strategy, we have acquired, and may acquire in the future, certain businesses and technologies primarily to expand our products and service offerings. On April 2, 2018, we completed the acquisition of Voicebox Technologies Corporation (“Voicebox”). Voicebox is a provider of conversational artificial intelligence, including voice recognition, natural language understanding, and artificial intelligence services. We expect this acquisition to expand our current automotive solutions with a range of new predictive intelligence, embedded natural language, and hybrid virtual assistant capabilities. We expect to be able to provide an end-to-end automotive intelligence platform that merges automated speech recognition, natural language understanding, and information management to increase customer satisfaction, strengthen customer loyalty and improve business results. The aggregate consideration for this transaction was $94.2 million which included $79.8 million in cash, net of $6.7 million 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 77 of an indemn ity period . Acquisition costs related to Voicebox were $4 .1 million . For further detail, refer to Note 3( k ). The results of operations of Voicebox are included within these C onsolidated and C ombined F inancial S tatements beginning on the date of acquisition . A summary of the final allocation of the purchase consideration for the acquisition of Voicebox adjusted for measurement period adjustments is as follows (dollars in thousands): Voicebox Purchase consideration: Cash $ 79,802 Settlement of pre-existing relationship 12,751 Deferred acquisition payment 1,600 Total purchase consideration $ 94,153 Allocation of purchase consideration: Accounts receivable $ 6,545 Prepaid expenses and other current assets 620 Property and equipment 4,008 Goodwill 50,508 Intangible assets 49,600 Deferred tax asset 124 Other assets 9 Total assets acquired 111,414 Current liabilities (7,332 ) Deferred tax liability (3,762 ) Other liabilities (6,167 ) Total liabilities assumed (17,261 ) Net assets acquired $ 94,153 The measurement period adjustments reflect new information obtained about facts and circumstances that existed at the date of the acquisition and primarily related to the recognition of a deferred tax liability. Goodwill from the Voicebox acquisition is not tax deductible. The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on final valuations (dollars in thousands): Voicebox Amount Weighted Average Life (Years) Core and completed technology $ 12,700 4.0 Customer relationships 36,900 5.0 Total $ 49,600 The results of Voicebox for the post-acquisition period from April 2, 2018 to September 30, 2018 are as follows: Total revenue $ 5,631 Net loss $ (9,238 ) 5. Revenue Recognition We primarily derive revenue from the following sources: (1) software license arrangements, primarily royalty 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. 78 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; • recognition of revenue when, or as, performance obligations are satisfied. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price (“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 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. Revenue is recognized when control of these product and services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products and 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. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component. Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration. (a) Performance Obligations Licenses 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 non-exclusive 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. 79 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. (b) Significant Judgments 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 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. (c) Disaggregated Revenue Revenues, classified by the major geographic region in which our customers are located, for the fiscal years ended September 30, 2020, 2019 and 2018 (dollars in thousands): September 30, 2020 2019 2018 (ASC 606) (ASC 606) (ASC 605) Revenues: United States $ 128,381 $ 131,877 $ 109,564 Other Americas 16 1,044 1,492 Germany 100,674 78,258 64,417 Other Europe, Middle East and Africa 25,394 20,478 16,755 Japan 50,936 44,472 57,303 Other Asia-Pacific 24,245 27,186 27,453 Total net revenues (1) $ 329,646 $ 303,315 $ 276,984 (1) As a result of our adoption of ASC 606 effective October 1, 2018 using the modified retrospective method, prior period amounts have not been adjusted to conform with ASC 606 and therefore may not be comparable. Revenues within the United States, Germany, and Japan accounted for more than 10% of revenue for all periods presented. Revenues relating to one customer accounted for $76.9 million, or 23.3%, of revenue for the fiscal year ended September 30, 2020. Revenues relating to two customers accounted for $62.7 million, or 20.7%, and $37.4 million, or 12.3% of revenue for the fiscal year ended September 30, 2019. One customer accounted for $51.0 million, or 18.4% of revenue for the fiscal year ended September 30, 2018. 80 ( d ) 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, on average, 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. (e) 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 costs capitalized. (f) 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 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 current contract assets. The table below shows significant changes in contract assets (dollars in thousands): Contract assets Balance as of October 1, 2018 $ 6,470 Revenues recognized but not billed 42,661 Amounts reclassified to accounts receivable, net (39,912 ) Balance as of September 30, 2019 $ 9,219 Revenues recognized but not billed 52,682 Amounts reclassified to accounts receivable, net (31,624 ) Balance as of September 30, 2020 $ 30,277 Our contract liabilities, which we present as 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 81 September 30, 20 20 , we had $325.1 million of deferred revenue. The table below shows significant changes in deferred revenue (dollars in thousands): Deferred revenue Balance as of October 1, 2018 $ 335,252 Amounts billed but not recognized 117,201 Revenue recognized (99,169 ) Balance as of September 30, 2019 $ 353,284 Amounts billed but not recognized 96,126 Revenue recognized (124,317 ) Balance as of September 30, 2020 $ 325,093 (g) Remaining Performance Obligations The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at September 30, 2020 (dollars in thousands): Within One Year Two to Five Years Greater than Five Years Total Total revenue $ 148,936 $ 189,538 $ 49,010 $ 387,484 The table above includes fixed backlogs and does not include variable backlogs derived from contingent usage-based activities, such as royalties and usage-based connected services. 6. Earnings Per Share Basic earnings per share is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of restricted stock units is reflected in diluted net (loss) income per share by applying the treasury stock method. Due to the net loss recognized for the fiscal year ended September 30, 2020, there were no dilutive shares. The dilutive effect of the Notes (as defined in Note 21) is reflected in net (loss) income per share by application of the “if-converted” method. The “if-converted” method is only assumed in periods where such application would be dilutive. In applying the “if-converted” method for diluted net income per share, we would assume conversion of the Notes at a ratio of 26.7271 shares of our common stock per $1,000 principal amount of the Notes. Assumed converted shares of our common stock are weighted for the period the Notes were outstanding. The shares of common stock underlying the conversion option of our Notes were not included in the 82 calculation of diluted loss per share for the fiscal year e nded September 30, 2020 due to their anti-dilutive impact as a result of our net loss position for the periods presented. There were no Cerence equity awards outstanding prior to the Spin-Off, thus the computation of basic and diluted earnings per common share for all prior periods disclosed was calculated using the shares issued in connection with the Spin-Off totaling 36.4 million shares. The following table presents the reconciliation of the numerator and denominator for calculating net (loss) income per share: September 30, in thousands, except per share data 2020 2019 2018 Numerator: Net (loss) income - basic and diluted $ (20,631 ) $ 100,268 $ 5,881 Denominator: Weighted average common shares outstanding - basic 36,428 36,391 36,391 Dilutive effect of restricted stock awards - - - Dilutive effect of contingently issuable stock awards - - - Dilutive effect of the Notes - - - Weighted average common shares outstanding - diluted 36,428 36,391 36,391 Net (loss) income per common share: Basic $ (0.57 ) $ 2.76 $ 0.16 Diluted $ (0.57 ) $ 2.76 $ 0.16 We exclude weighted-average potentially issuable shares from the calculations of diluted net (loss) income per share during the applicable periods because their inclusion would have been anti-dilutive. The following table sets forth potential shares that were considered anti-dilutive at September 30, 2020 and for the fiscal year ended September 30, 2019 and 2018: Fiscal Year Ended September 30, in thousands 2020 2019 2018 Restricted stock awards 1,058 - - Contingently issuable stock awards 151 - - Conversion option of our Notes 1,538 - - 83 7. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining fair value measurements for assets and liabilities recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use in pricing the asset or liability. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement as of the measurement date as follows: • Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2 - Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the assets or liabilities. • Level 3 - Unobservable inputs that are supported by little or no market activity. The following table presents information about our financial assets that are measured at fair value and indicates the fair value hierarchy of the valuation inputs used (dollars in thousands) as of: September 30, 2020 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents: Money market funds $ 101,437 $ - $ - $ 101,437 Marketable securities: Commercial paper, $9,883 at cost $ - 9,883 $ - 9,883 Corporate bonds, $1,780 at cost - 1,779 - 1,779 Total assets $ 101,437 $ 11,662 $ - $ 113,099 84 During fiscal year 2020, we recorded an immaterial amount of unrealized losses related to our marketable securities within Accumulated other comprehensive loss. As of September 30, 2019, we did not have any cash and cash equivalents or marketable securities. The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value tables above. Long-term debt The estimated fair value of our Long-term debt is determined by Level 2 inputs and is based observable market data including prices for similar instruments. As of September 30, 2020, the estimated fair value of our Notes was $271.0 million. The Notes are recorded at face value less unamortized debt discount and transaction costs on our consolidated balance sheet. The carrying amount of the Senior Credit Facilities (as defined in Note 21) approximates fair value given the underlying interest rate applied to such amounts outstanding is currently set to the prevailing market rate. 8. Goodwill and Intangible Assets (a) Goodwill On July 1, 2019, our goodwill was assessed for impairment as a reporting unit of Nuance. On July 1, 2019, the fair value of our reporting unit was determined using a combination of the income approach and the market approach. We assessed each valuation methodology based upon the relevance and availability of the data at the time and weighted the methodologies appropriately to calculate a fair value which exceeded the carrying value of our reporting unit by more than 50%. On March 31, 2020, we concluded that goodwill impairment indicators were present due to the macroeconomic conditions driven by the COVID-19 pandemic and the anticipated negative impact on our license revenue and connected services billings, therefore we performed an interim quantitative impairment test. The fair value of our reporting unit was determined using a combination of the income approach and the market approach. For the income approach, fair value was determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, which were revised to reflect the anticipated impact of the COVID-19 pandemic, 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 our reporting unit. For the market approach, we used a valuation technique in which values were derived based on valuation multiples of comparable publicly traded companies. We weighted the methodologies appropriately to estimate a fair value of approximately $951 million as of March 31, 2020. The estimated fair value exceeded the $936 million carrying value of our reporting unit by approximately $15 million, or 2% of the carrying value. Based upon the results of the impairment test, no goodwill impairment was recorded as of March 31, 2020. On July 1, 2020, we completed the annual impairment testing of our goodwill. We elected to rely on a qualitative assessment and as a result we determined it is more likely than not that the fair value of our reporting unit is greater than its carrying amount. We will continue to monitor the impacts of the COVID-19 pandemic on our reporting unit fair value. The full extent to which the ongoing COVID-19 pandemic could adversely affect our financial performance will depend on future developments, many of which are outside of our control. The changes in the carrying amount of goodwill for the years ended September 30, 2020 and 2019 were as follows (dollars in thousands): Total Balance as of October 1, 2018 $ 1,119,946 Acquisitions 3,591 Effect of foreign currency translation (4,208 ) Balance as of September 30, 2019 1,119,329 Effect of foreign currency translation 8,869 Balance as of September 30, 2020 $ 1,128,198 85 (b) Intangible Assets, Net The following tables summarizes the gross carrying amounts and accumulated amortization of intangible assets by major class (dollars in thousands): September 30, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (Years) Customer relationships $ 110,512 $ (75,915 ) $ 34,597 3.0 Technology and patents 90,658 (79,639 ) 11,019 1.6 Total $ 201,170 $ (155,554 ) $ 45,616 September 30, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Life (Years) Customer relationships $ 104,783 $ (58,568 ) $ 46,215 4.0 Technology and patents 116,757 (97,411 ) 19,346 2.5 Total $ 221,540 $ (155,979 ) $ 65,561 Amortization expense for acquired technology and patents is included in the cost of revenue in the accompanying statements of operations and amounted to $8.3 million, $8.5 million, and $6.6 million for the years ended September 30, 2020, 2019, and 2018, respectively. Additionally, amortization expense for intangible assets of the Parent utilized by the Cerence business amounted to $22 thousand and $1.2 million in the years ended September 30, 2019 and 2018, respectively, and is included in the cost of revenue as shown in Note 19. Amortization expense for customer relationships is included in operating expenses and amounted to $12.6 million, $12.5 million, and $8.8 million in the years ended September 30, 2020, 2019, and 2018, respectively. Estimated amortization for each of the five succeeding years and thereafter as of September 30, 2020, is as follows (dollars in thousands): Year Ending September 30, Cost of Revenues Operating Expenses Total 2021 $ 7,517 $ 12,648 $ 20,165 2022 2,984 11,688 14,672 2023 414 6,080 6,494 2024 104 2,390 2,494 2025 — 1,791 1,791 Thereafter — — — Total $ 11,019 $ 34,597 $ 45,616 9. Accounts Receivable, Net Accounts receivable, net consisted of the following (dollars in thousands): September 30, 2020 2019 Trade accounts receivable $ 51,337 $ 65,532 Unbilled accounts receivable under long-term contracts — 1,120 Gross accounts receivable 51,337 66,652 Less: allowance for doubtful accounts (1,394 ) (865 ) Total $ 49,943 $ 65,787 86 10 . Property and Equipment, Net Property and equipment, net consisted of the following (dollars in thousands): Useful Life September 30, (In years) 2020 2019 Machinery and equipment 3-5 $ 7,746 $ 8,424 Computers, software and equipment 3-5 42,705 32,894 Leasehold improvements 2-15 10,513 9,147 Furniture and fixtures 5-7 4,691 3,819 Finance leases 2,710 — Construction in progress 4,547 1,043 Subtotal 72,912 55,327 Less: accumulated depreciation (43,383 ) (35,214 ) Total $ 29,529 $ 20,113 As of September 30, 2020 and 2019, the net book value of capitalized internal-use software costs was $6.9 million and $2.2 million, respectively, which are included within computers, software, and equipment. Depreciation expense for the years ended September 30, 2020, 2019, and 2018 was $9.2 million, $6.2 million, and $7.7 million, respectively, which included amortization expense of $3.1 million, $2.7 million, and $4.2 million, respectively, for internally developed software costs. The following table presents our property and equipment, net by geography at September 30, 2020 and 2019 (dollars in thousands): September 30, 2020 2019 Long-lived assets: United States $ 19,898 $ 10,333 Canada 3,464 3,889 Germany 2,573 2,390 Other countries 3,594 3,501 Total long-lived assets $ 29,529 $ 20,113 11. Deferred Revenue Unearned revenue includes fees for upfront setup of the service environment and fees charged for on-demand service. Deferred revenue consisted of the following (dollars in thousands): September 30, 2020 2019 Current Liabilities: Unearned revenue $ 112,520 $ 88,233 Total $ 112,520 $ 88,233 Non-current Liabilities: Unearned revenue 212,573 265,051 Total $ 212,573 $ 265,051 87 1 2 . Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (dollars in thousands): September 30, 2020 2019 Compensation $ 37,960 $ 13,031 Cost of revenue related liabilities 3,683 1,668 Sales and other taxes payable 14,688 219 Professional fees 2,458 3,863 Facilities related liabilities 2,041 273 Other 7,027 5,140 Total $ 67,857 $ 24,194 13. Asset Retirement Obligations Asset retirement obligations consist primarily of costs related to restoring long-lived assets to their original condition. Asset retirement obligations may include disposal costs, maintenance of buildings, and costs to remove leasehold improvements. The balance of the asset retirement obligations for the periods presented are classified as noncurrent liabilities and included in “Other liabilities” in the Consolidated and Combined Balance Sheets. Activity related to asset retirement obligations was as follows (dollars in thousands): September 30, 2020 2019 2018 Balance at the beginning of period $ 1,051 $ 1,155 $ 784 Additions 205 5 398 Remeasurement/translation 72 (51 ) (8 ) Settlements/payments (87 ) (58 ) (19 ) Balance at the end of the period $ 1,241 $ 1,051 $ 1,155 14. Restructuring and Other Costs, Net Restructuring and other costs, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside of the ordinary course of our business such as employee severance costs, costs for consolidating duplicate facilities, and separation costs directly attributable to the Cerence business becoming a standalone public company. Restructuring and other costs, net related to personnel and facilities are included in accrued expenses and other current liabilities in the Consolidated and Combined Balance Sheets. Separation costs are included in accounts payable. The following table sets forth the year ended September 30, activity relating to restructuring charges (dollars in thousands): Personnel Facilities Separation Total Balance at October 1, 2017 $ 108 $ 114 $ — $ 222 Restructuring and other costs, net 4,130 20 8,713 12,863 Cash payments (1,969 ) (128 ) (7,936 ) (10,033 ) Balance at September 30, 2018 2,269 6 777 3,052 Restructuring and other costs, net 130 1,704 22,570 24,404 Cash payments (1,910 ) (1,684 ) (19,471 ) (23,065 ) Balance at September 30, 2019 489 26 3,876 4,391 Restructuring and other costs, net 3,694 2,816 11,727 18,237 Non-cash adjustment — (1,031 ) — (1,031 ) Cash payments (3,420 ) (26 ) (13,675 ) (17,121 ) Foreign exchange impact on ending balance 1 (40 ) — (39 ) Balance at September 30, 2020 $ 764 $ 1,745 $ 1,928 $ 4,437 88 Fiscal Year 2020 For the year ended September 30, 2020, we recorded restructuring charges of $18.2 million, which included a $3.7 million severance charge related to the elimination of personnel across multiple functions, $2.8 million resulting from the restructuring of facilities that will no longer be utilized, and $11.7 million related to costs incurred to establish the Cerence business as a standalone public company. Fiscal Year 2019 For the year ended September 30, 2019, we recorded restructuring charges of $24.4 million, which included $0.1 million severance charge related to the elimination of personnel across multiple functions, $1.7 million primarily resulting from the restructuring of facilities that will no longer be utilized, and $22.6 million related to professional service fees incurred to establish Cerence business as a standalone public company. Fiscal Year 2018 For the year ended September 30, 2018, we recorded restructuring charges of $12.9 million, which included a $4.1 million severance charge related to the elimination of personnel across multiple functions, $20 thousand primarily resulting from the restructuring of facilities that will no longer be utilized, and $8.7 million related to professional services fees incurred to establish the Cerence business as a standalone public company. 15. 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 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. The following table presents certain information related to lease term and incremental borrowing rates for leases as of September 30, 2020: September 30, 2020 Weighted-average remaining lease term (in months): Operating leases 55.9 Finance leases 55.8 Weighted-average discount rate: Operating leases 7.4 % Finance leases 4.4 % 89 The following table presents the lease-related assets and liabilities reported in the consolidated balance sheet as of September 30, 2020 (dollars in thousands): Classification September 30, 2020 Assets Operating lease assets Operating lease right-of-use assets $ 20,096 Finance lease assets Property and equipment, net 1,414 Total lease assets $ 21,510 Liabilities Current Operating Short-term operating lease liabilities $ 5,700 Finance Accrued expenses and other current liabilities 271 Noncurrent Operating Long-term operating lease liabilities $ 17,821 Finance Other liabilities 1,088 Total lease liability $ 24,880 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 and development, marketing and selling, and general and administrative lines on the consolidated statements of operations, and interest expense is included within the other income (expense), net. The following table presents lease expense for the fiscal year ended September 30, 2020 (dollars in thousands): Fiscal year ended September 30, 2020 Finance lease costs: Amortization of right-of-use asset $ 255 Interest on lease liability 22 Operating lease cost 8,245 Variable lease cost 1,060 Sublease income (206 ) Total lease cost $ 9,376 For operating leases, the related cash payments are included in the operating cash flows on the consolidated statements of cash flows. For the fiscal year ended September 30, 2020, cash payments related to operating leases were $8.0 million. 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 90 operating section of the consolidated statement of cash flows. For the fiscal year ended September 30, 2020, cash payments related to financing leases were $0.1 million, of which an immaterial amount related to the interest portion of the lea se liability. The table below reconciles the undiscounted future minimum lease payments under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the consolidated balance sheet as of September 30, 2020 (dollars in thousands): Year Ending September 30, Operating Leases Financing Leases Total 2021 $ 7,200 $ 319 $ 7,519 2022 6,116 309 6,425 2023 4,648 309 4,957 2024 4,249 309 4,558 2025 2,583 254 2,837 Thereafter 3,097 10 3,107 Total future minimum lease payments $ 27,893 $ 1,510 $ 29,403 Less effects of discounting (4,372 ) (151 ) (4,523 ) Total lease liabilities $ 23,521 $ 1,359 $ 24,880 Reported as of September 30, 2020 Short-term lease liabilities $ 5,700 $ 271 $ 5,971 Long-term lease liabilities 17,821 1,088 18,909 Total lease liabilities $ 23,521 $ 1,359 $ 24,880 In accordance with the transition disclosure requirements under ASC 840, the future minimum lease commitments under non-cancelable leases at September 30, 2019 were as follows (dollars in thousands): Year Ending September 30, 2020 $ 6,323 2021 5,421 2022 4,493 2023 3,237 2024 2,922 Thereafter 4,039 Total $ 26,435 16. Stockholders’ Equity Share-based Compensation Plans Prior to the Spin-Off from Nuance, the Parent maintained a number of stock-based compensation programs at the corporate level in which the Cerence business’s employees participate. All awards granted under the programs relate to the Parent’s common stock. Per the Amended and Restated Certificate of Incorporation, which was adopted on October 1, 2019, 600,000,000 shares of capital stock have been authorized, consisting of 40,000,000 shares of Preferred Stock, par value $0.01 per share, or (“Preferred Stock”), and 560,000,000 shares of Common Stock, par value $0.01 per share (“Common Stock”). On October 2, 2019, we registered the issuance of 6,350,000 shares of Common Stock, consisting of 5,300,000 shares of Common Stock reserved under the Cerence 2019 Equity Incentive Plan, (“Equity Incentive Plan”), and 1,050,000 shares of Common Stock that are reserved for issuance under the Cerence 2019 Employee Stock Purchase Plan (“ESPP”). The Equity Incentive Plan provides for the grant of incentive stock options, stock awards, stock units, stock appreciation rights, and certain other stock-based awards. Awards issued under the Plan may not have a term greater than ten years from the date of grant. In connection with the Spin-Off from Nuance, all outstanding Nuance restricted stock units and performance stock units held by Cerence employees were cancelled, and Cerence regranted such employees economically equivalent restricted stock units of Cerence. 1,208,931 restricted stock units were issued by Cerence in connection with the Spin-Off. Restricted Awards 91 The fair value of Restricted Awards, including Restricted Stock Units and Restricted Stock, is measured based upon the market price of the underlying common stock as of the date of grant. Restricted Awards generally ve st over a period of two to four years. We also include certain Restricted Awards with vesting solely dependent on the achievement of specified performance targets. The fair value of Restricted Awards is amortized to expense over the awards applicable requi site service period. In the event that the employees’ employment with us terminates, or in the case of awards with only performance targets, if those targets are not met, any unvested shares are forfeited . In fiscal year 2020, we withheld payroll taxes totaling $9.4 million related to the vesting of Restricted Awards. Restricted Units are not included in issued and outstanding common stock until the shares are vested and released. The table below summarizes activity related to Restricted Stock Units: Non-Vested Restricted Stock Units Time-Based Shares Performance- Based Shares Total Shares Weighted- Average Grant-Date Fair Value Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Non-vested at October 1, 2019 — — — $ — Granted 2,758,634 778,968 3,537,602 $ 18.87 Vested (642,404 ) — (642,404 ) $ 20.06 Forfeited (73,312 ) (7,581 ) (80,893 ) $ 17.54 Non-vested at September 30, 2020 2,042,918 771,387 2,814,305 $ 18.63 0.98 $ 137,529 Expected to vest 2,814,305 $ 18.63 0.98 $ 137,529 Employee Stock Purchase Plan On October 2, 2019, we adopted the ESPP and approved 1,050,000 shares for issuance under this plan. The ESPP is administered by our Board of Directors’ Compensation Committee. The ESPP provides for the issuance of shares of our common stock to participating employees. At the end of each designated offering period, which occurs every six months on February 15 and August 15, employees can elect to purchase shares of our common stock with contributions of up to 12% of their base pay, accumulated via payroll deductions, at an amount equal to 85% of the lower of our stock price on (i) the first day of the offering period, or (ii) the last day of the offering period. We use the Black-Scholes option pricing model to calculate the fair value of shares issued under the ESPP. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The following table sets forth the weighted-average key assumptions and fair value results for shares issued under the ESPP during the fiscal year ended September 30, 2020: Year Ended September 30, 2020 Expected dividend yield 0.00 % Risk-free interest rate 1.56 % Expected volatility 58.18 % Expected life (in years) 0.50 Weighted-average fair value of shares issued (per share) $ 8.93 The following table sets forth the quantities and average prices of shares issued under the ESPP for the fiscal year ended September 30, 2020: Year Ended September 30, 2020 Shares issued under the ESPP 63,503 Average price of shares issued 20.66 92 Stock-based Compensation Prior to the Spin-Off, stock-based compensation expense recorded by the Cerence business includes the expense associated with the employees historically attributable to the Cerence business’s operations and the expense associated with the allocation of stock compensation expense for corporate employees. During fiscal 2020, we recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified within equity. In May 2020, we modified the performance targets for certain of the Restricted Awards issued pursuant to our Equity Incentive Plan at the beginning of fiscal 2020. Stock-based compensation for the anticipated Restricted Awards has been adjusted to reflect our estimated achievement under the modified targets and is recorded prospectively over the requisite service period. The amounts included in the Consolidated and Combined Statements of Operations related to stock-based compensation are as follows (dollars in thousands): Year Ended September 30, 2020 2019 2018 Cost of licensing $ — $ 21 $ 12 Cost of connected services 1,382 827 495 Cost of professional services 4,191 1,048 1,569 Research and development 13,944 15,946 11,112 Sales and marketing 9,580 6,137 3,985 General and administrative 18,188 5,703 4,870 Total $ 47,285 $ 29,682 $ 22,043 17. Commitments and Contingencies Litigation and Other Claims Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including at times actions with respect to contracts, intellectual property, employment, benefits and securities matters. At each balance sheet date, we evaluate contingent liabilities associated with these matters in accordance with ASC 450 Contingencies. 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, and estimates are based only on the best information available at the time. Due to the inherent uncertainties involved in claims and legal proceedings and in estimating losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods, which may have a material impact on our results of operations and financial position. As of September 30, 2020, accrued losses were not material to our consolidated financial statements, and we do not expect any pending matter to have a material impact on our consolidated financial statements. Guarantees and Other We include indemnification provisions in the contracts we enter with customers and business partners. Generally, these provisions require us to defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed-upon amount. In some cases, our total liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency with which these provisions have been triggered. We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the Company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitions, we agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a period of six years from the acquisition date. In certain cases, we purchase director and officer insurance policies related to these obligations, which fully cover the six-year period. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual 93 indemnification, and such directors and officers do not have coverage under separate insurance pol icies, we would be required to pay for costs incurred, if any, as described above. As of September 30, 2020, we have a $1.8 million letter of credit that is used as a security deposit in connection with our leased Bellevue, Washington office space. In the event of default on the underlying lease, the landlord would be eligible to draw against the letter of credit. The letter of credit is subject to aggregate reductions, provided that we are not in default under the underlying lease. We also have letters of credit in connection with security deposits for other facility leases totaling $0.3 million in the aggregate. These letters of credit have various terms and expire during fiscal 2021 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements. 18. Pension and Other Post-Retirement Benefits As discussed within Note 19, we entered into an Employee Matters Agreement with Nuance, which provides that we establish certain compensation and benefit plans for the benefit of our employees following the Spin-Off, including a 401(k) savings plan, which accepts direct rollovers of account balances from the Nuance 401(k) savings plan for any of our employees who elect to do so. In addition, we assumed certain assets and liabilities with respect to our current and former employees under certain of Nuance’s U.S. and non-U.S. defined benefit pension plans (with assets and liabilities allocated based on formulas specified in the Employee Matters Agreement for each pension plan). Defined Contribution Plans We have established a retirement savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers substantially all of our U.S. employees who meet minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. We match 50% of employee contributions up to 6% of eligible salary. We incurred charges for contributions to these 401(k) defined contribution plans of $0.7 million, $1.0 million, and $0.7 million for the years ended September 30, 2020, 2019, and 2018, respectively. Defined Benefit Pension Plans We sponsor certain defined benefit pension plans that are offered primarily by our foreign subsidiaries. Many of these plans were assumed through 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. The total defined benefit plan pension expenses incurred for these plans were $0.5 million, $0.4 million, and $0.4 million for the years ended September 30, 2020, 2019, and 2018, respectively. Our aggregate projected benefit obligation and aggregate net liability for defined benefit plans as of September 30, 2020 was $8.3 million and $7.1 million, as of September 30, 2019 was $7.3 million and $6.8 million, and as of September 30, 2018 was $5.0 million and $4.2 million, respectively. For the years ended September 30, 2020, 2019 and 2018, charges for contributions to defined benefit pension plans were not material to the Consolidated and Combined Statements of Operations. 94 1 9 . Relationship with Paren t and Related Entities Prior to the Spin-Off, the Cerence business had been managed and operated in the normal course of business consistent with other affiliates of the Parent. Accordingly, certain shared costs had been allocated to the Cerence business and reflected as expenses in the standalone combined financial statements. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the historical Parent expenses attributable to the Cerence business for purposes of the standalone financial statements. However, the expenses reflected in the combined financial statements may not be indicative of the actual expenses that would have been incurred during the periods presented if the Cerence business historically operated as a separate, standalone entity. (a) General Corporate Overhead Allocation The Parent provided facilities, information services and certain corporate and administrative services to the Cerence business. Expenses relating to these services have been allocated to the Cerence business and are reflected in the combined financial statements. Where direct assignment is not possible or practical, these costs were allocated on a pro rata basis of revenues, headcount or other measures. The following table summarizes the components of general allocated corporate expenses for the years ended September 30, 2019 and 2018 (dollars in thousands): Year Ended September 30, 2019 2018 Facility $ 6,299 $ 6,125 Depreciation 1,637 1,467 Amortization 22 1,150 Facility and other usage charges 7,958 8,742 Information services 8,633 7,947 Corporate and administrative services 22,166 18,414 Total $ 38,757 $ 35,103 (b) Cash Management and Financing The Cerence business participated in the Parent’s centralized cash management and financing programs. Disbursements were made through centralized accounts payable systems, which were operated by the Parent. Cash receipts were transferred to centralized accounts which were also maintained by the Parent. As cash was disbursed and received by the Parent, it was accounted for by the Cerence business through the net parent investment. Historically, the Cerence business had received funding from the Parent for the Cerence business’s operating and investing cash needs. Parent’s third-party debt and the related interest expense were not allocated to the Cerence business for any of the years presented prior to the Spin-Off, as the Cerence business was not the legal obligor of the debt and the Parent’s borrowings were not directly attributable to the Cerence business. (c) Intercompany Receivables/Payables All significant intercompany transactions between the Cerence business and the Parent and its non-Cerence businesses have been included in these Consolidated and Combined Financial Statements and are considered to be effectively settled for cash at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions have been accounted for through parent company net investment in the Consolidated and Combined Balance Sheets and is reflected in the Consolidated and Combined Statements of Cash Flows as a financing activity. 95 The following table summarizes the components of the net transfers to Par ent for the years ended September 30, 20 20 , 201 9 , and 201 8 (dollars in thousands): Year Ended September 30, 2020 2019 2018 Net transactions with Parent $ (6,098 ) $ (83,554 ) $ (28,947 ) Distribution to Parent (152,978 ) — — Net reclassification of net parent investment in Cerence (938,051 ) — — Stock-based compensation — 29,682 22,043 Accrued bonus — 9,478 (2,859 ) Corporate depreciation and amortization — 1,659 2,617 Fixed asset reclasses from the Parent — 10,088 259 Voicebox Purchase Accounting Adjustment — 3,591 — Intangible asset reclasses from the Parent — 1,665 — Net transfer to Parent $ (1,097,127 ) $ (27,391 ) $ (6,887 ) Agreements with Nuance In connection with the Spin-Off, Cerence entered into several agreements with Nuance that set forth the principal actions taken or to be taken in connection with the Spin-Off and that govern the relationship of the parties following the Spin-Off, including the following: • Separation and Distribution Agreement : We entered into a Separation and Distribution Agreement with Nuance in advance of the Distribution. The Separation and Distribution Agreement sets forth our agreements with Nuance regarding the principal actions to be taken in connection with the Spin-Off. It also sets forth other agreements that govern aspects of our relationship with Nuance following the Spin-Off. • Tax Matters Agreement : We entered into a Tax Matters Agreement with Nuance that governs the respective rights, responsibilities and obligations of Nuance and us after the Distribution with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). • Transition Services Agreement: We entered into a Transition Services Agreement pursuant to which Nuance will provide us, and we will provide Nuance, with certain specified services for a limited time to help ensure an orderly transition following the Distribution. • Employee Matters Agreement: We entered into an Employee Matters Agreement with Nuance that addresses employment and employee compensation and benefits matters. The Employee Matters Agreement addresses the allocation and treatment of assets and liabilities relating to employees and compensation and benefit plans and programs in which our employees participated prior to the Spin-Off. • Intellectual Property Agreement: We entered into an Intellectual Property Agreement with Nuance, pursuant to which we granted to Nuance, and Nuance granted to us, perpetual, non-exclusive, royalty-free licenses to certain patents and technology, as well as certain other intellectual property that have historically been shared between us and Nuance. • Transitional Trademark License Agreement: We entered into a Transitional Trademark License Agreement with Nuance, pursuant to which Nuance granted us a non-exclusive, royalty free license to continue using certain of Nuance’s trademarks, trade names and service marks with respect to the “Nuance” and “Dragon” brands in connection with the sale, marketing and other commercialization of our products and services. • OEM and Distribution License Agreements: We entered into four OEM and Distribution License Agreements with Nuance. Under three of the four agreements, Cerence licenses to Nuance designated Cerence technologies for Nuance’s internal use and for distribution to Nuance end-users and resellers. Under the final agreement, Nuance licenses to Cerence designated Nuance technologies for Cerence’s internal use and for distribution to Cerence end-users and resellers. All agreements contain customary commercial terms for arrangements of this nature. 96 20 . Income Taxes Prior to the consummation of the Spin-Off, Cerence’s operating results were included in Parent’s various consolidated U.S. federal and state income tax returns, as well as non-U.S. filings. For the purposes of our Consolidated and Combined Financial Statements for periods prior to the Spin-Off, income tax expense and deferred tax balances have been recorded as if we filed tax returns on a standalone basis separate from the Parent. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise prior to the separation from Parent. Recent Tax Legislation The Coronavirus Aid, Relief, and Economic Security Act (“CARES ACT”) became law on March 27, 2020. The CARES ACT was in response to the market volatility and instability resulting from the COVID-19 pandemic and includes provisions to support individuals and businesses in the form of loans, grants, and tax changes, among other types of relief. The CARES ACT did not have a material impact on our (benefit from) provision for income taxes during the period. On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. The TCJA significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing a hybrid territorial tax system and imposing a one-time repatriation tax on foreign cash and earnings. We are subject to additional requirements of the TCJA during the year ended September 30, 2020. Those provisions include a tax on global intangible low-taxed income (“GILTI”) and foreign-derived intangible income (“FDII”). We have elected to account for GILTI as a period cost and therefore included GILTI expense in the effective tax rate calculation. Our estimates may be revised in future period as we obtain additional data and as the IRS issues new guidance implementing the law changes. As a result of the TCJA, in fiscal year 2018 we re-measured certain deferred tax assets and liabilities at the lower rates and recorded approximately $23.1 million of tax expense. (Benefit from) provision for income taxes The components of (loss) income before income taxes are as follows (dollars in thousands): Year Ended September 30, 2020 2019 2018 Domestic $ (28,846 ) $ (22,904 ) $ 16,371 Foreign 2,706 34,088 20,427 (Loss) income before income taxes $ (26,140 ) $ 11,184 $ 36,798 The components of (benefit) provision for income taxes are as follows (dollars in thousands): Year Ended September 30, 2020 2019 2018 Current: Federal $ — $ 5,352 $ 11,413 State — 1,059 2,500 Foreign 5,845 5,728 4,531 Total current $ 5,845 $ 12,139 $ 18,444 Deferred: Federal (1,871 ) (6,210 ) 14,393 State (239 ) (1,593 ) (1,284 ) Foreign (9,244 ) (93,420 ) (636 ) Total deferred (11,354 ) (101,223 ) 12,473 (Benefit from) provision for income taxes $ (5,509 ) $ (89,084 ) $ 30,917 Effective income tax rate 21.1 % (796.5 )% 84.0 % 97 The (benefit from) provision for income taxes differed from the amount computed by applying the federal statutory rate to our (loss) income before income taxes as follows (dollars in thousands): Year Ended September 30, 2020 2019 2018 Federal tax provision at statutory rate $ (5,489 ) $ 2,270 $ 9,026 State tax, net of federal benefit (239 ) (490 ) 917 Foreign tax rate and other foreign related tax items (2,463 ) (4,764 ) (104 ) Uncertain tax positions (887 ) 57,631 (95 ) Stock-based compensation 3,456 — — Global intangible low-taxed income 336 3,923 — Foreign-derived intangible income — (547 ) — Capital losses — 8,187 — Change in U.S. valuation allowance — (8,187 ) — Non-deductible expenditures 2,728 2,707 514 R&D credits (2,951 ) (1,675 ) (1,313 ) Domestic Production Activities Deduction — — (1,143 ) TCJA impact — — 23,115 Intangible property transfers — (148,139 ) — (Benefit from) provision for income taxes $ (5,509 ) $ (89,084 ) $ 30,917 The effective income tax rate is based upon the income for the year, the composition of the income in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates. We believe that it is not more likely than not that the tax benefit from the U.S. capital loss will be realized. As a result, we recorded a full valuation allowance against the capital loss. 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, R&D incentives, 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. The effective income tax rate in fiscal year 2019 differs from the U.S. federal 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 GILTI tax expense of $3.9 million. The effective income tax rate in fiscal year 2018 differs from the U.S. federal statutory rate of 24.5% primarily due to the net tax expense resulting from the TCJA re-measurement of deferred tax assets and liabilities at the lower enacted rate, our research and development credits and the domestic production activities deduction. As of September 30, 2020, we have not provided taxes on undistributed earnings of our foreign subsidiaries, which may be subject to foreign withholding taxes upon repatriation, as we consider these earnings indefinitely reinvested. Our indefinite reinvestment determination is based on the future operational and capital requirements of our domestic and foreign operations. We expect our international cash and cash equivalents and marketable securities will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds. As of September 30, 2020, it is not practical to calculate the unrecognized deferred tax liability on these earnings due to the complexities of the utilization of foreign tax credits and other tax assets. 98 Deferred tax assets (liabilities) consist of the following as of September 30, 20 20 and 201 9 (dollars in thousands): September 30, 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 17,582 $ 6,567 Capital loss carryforwards 9,557 8,187 Federal credit carryforwards 3,665 9,367 Accrued expenses and other reserves 5,086 2,830 Difference in timing of revenue related items 51,483 50,677 Acquired intangibles 94,389 90,635 Interest limitations carryforward 9,399 — Operating lease liabilities 6,568 — Depreciation 1,682 — Deferred compensation 1,465 — Pension obligation 2,522 1,969 Other 1,726 — Total deferred tax assets $ 205,124 $ 170,232 Valuation allowance for deferred tax assets (13,491 ) (11,064 ) Deferred tax assets $ 191,633 $ 159,168 Deferred tax liabilities: Depreciation $ (3,381 ) $ (1,360 ) Acquired intangibles (21,255 ) (7,179 ) Convertible debt (4,406 ) — Operating lease right-of-use assets (5,677 ) — Other (2,457 ) — Total deferred tax liabilities (37,176 ) (8,539 ) Net deferred tax assets $ 154,457 $ 150,629 We have determined that a revision was required to correct the September 30, 2019 disclosure of certain gross deferred tax liabilities and deferred tax assets, of $7.2 million, within the above table. Our disclosure of the related net deferred tax assets and valuation allowance at September 30, 2019 was correctly presented and this revision had no impact on our combined balance sheet, statement of operations or statement of cash flow as previously reported. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized. As of September 30, 2020, we have $9.8 million and $3.7 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2019, we had $11.03 million and $0.03 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. We have U.S. federal net operating loss (“NOL”) carryforwards of $21.1 million, state NOL carryforwards of $22.7 million, and foreign NOL carryforwards of $57.4 million. These carryforwards will expire at various dates beginning in 2026 and extending up to an unlimited period. We have research and development carryforwards of $3.1 million. Uncertain Tax Positions ASC 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements. We regularly assess the outcome of potential examinations in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. 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. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit which is more likely than not to be realized upon ultimate settlement. We recognize interest and penalties related to unrecognized tax positions in our (benefit from) provision for income taxes line of our Consolidated and Combined Statements of Operations. 99 The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (dollars in thousands): September 30, 2020 2019 2018 Balance at the beginning of the year $ 63,369 $ 5,738 $ 5,833 Beginning balance adjustment 3,392 — — Increases related to tax positions taken from prior periods 5,158 1,312 103 Decreases related to tax positions taken from prior periods — (120 ) (198 ) Increases related to tax positions taken during current period 328 56,439 — Decreases for tax settlements and lapse in statutes (1,215 ) — — Balance at the end of the year $ 71,032 $ 63,369 $ 5,738 For the periods prior to the Spin-Off, the unrecognized tax benefits reflected in the financial statements were determined using the Separate Return Method. As a result of the Spin-Off, we recognized $3.4 million of liabilities for unrecognized tax benefits, determined on an asset and liability method, that stay with the legal entities included in the Spin-Off of the Cerence business from the Parent, which were recorded through Parent company investment, net of corresponding indemnification assets. As of September 30, 2020, $71.0 million of the unrecognized tax benefits, if recognized, would impact our effective tax rate. We do not expect a significant change in the amount of unrecognized tax benefits within the next 12 months. We recorded $0.4 million and $0.4 million of interest and penalties related to uncertain tax positions as of September 30, 2020 and September 30, 2019, respectively. We are subject to U.S. federal income tax, various state and local taxes and international income taxes in numerous jurisdictions. The 2017 through 2019 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions. 21. Long-Term Debt Long-term debt consisted of the following (in thousands): September 30, 2020 September 30, 2019 3.00% Convertible Senior Notes due 2025, net of unamortized discount of $18,546 and deferred issuance costs of $4,664 at September 30, 2020. Effective interest rate 6.29%. $ 151,791 $ — Senior Credit Facilities, net of unamortized discount of $1,820 and deferred issuance costs of $287 at September 30, 2020. Effective interest rate 4.02%. 121,331 — Total debt $ 273,122 $ — Less: current portion (6,250 ) — Total long-term debt $ 266,872 $ — The following table summarizes the maturities of our borrowing obligations as of September 30, 2020 (in thousands): Fiscal Year Convertible Senior Notes Senior Facilities Total 2021 $ — $ 6,250 $ 6,250 2022 — 7,813 7,813 2023 — 12,500 12,500 2024 — 96,875 96,875 2025 175,000 — 175,000 Thereafter — — — Total before unamortized discount and issuance costs and current portion $ 175,000 $ 123,438 $ 298,438 Less: unamortized discount and issuance costs (23,209 ) (2,107 ) (25,316 ) Less: current portion of long-term debt — (6,250 ) (6,250 ) Total long-term debt $ 151,791 $ 115,081 $ 266,872 100 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 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 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. As of September 30, 2020, the carrying amount of the equity component, net of taxes and transaction costs was $14.4 million. 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 101 costs allocated to the debt component of approximately $5.0 milli on 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 Convertible Senior 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 Facilities at a rate, at the option of the Borrower, 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%. 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 102 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 con ditions 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 an 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. 22. Quarterly Data (Unaudited) The following information has been derived from unaudited Consolidated and Combined Financial Statements that, in the opinion of management, include all recurring adjustments necessary for a fair statement of such information (in thousands, except per share data). First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year 2020 Total revenues $ 77,459 $ 86,495 $ 74,810 $ 90,882 $ 329,646 Gross profit $ 51,525 $ 57,765 $ 47,207 $ 65,298 $ 221,795 Net (loss) income $ (11,762 ) $ 12,495 $ (28,181 ) $ 6,817 $ (20,631 ) Net (loss) income per share: Basic $ (0.33 ) $ 0.34 $ (0.77 ) $ 0.19 $ (0.57 ) Diluted $ (0.33 ) $ 0.33 $ (0.77 ) $ 0.17 $ (0.57 ) Weighted-average common share outstanding: Basic 35,995 36,441 36,509 36,765 36,428 Diluted 35,995 37,392 36,509 39,041 36,428 103 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year 2019 Total revenues $ 72,484 $ 70,304 $ 77,569 $ 82,958 $ 303,315 Gross profit $ 48,277 $ 45,860 $ 53,894 $ 55,941 $ 203,972 Net income $ 2,255 $ 454 $ 1,770 $ 95,789 $ 100,268 Net income per share: Basic $ 0.06 $ 0.01 $ 0.05 $ 2.63 $ 2.76 Diluted $ 0.06 $ 0.01 $ 0.05 $ 2.63 $ 2.76 Weighted-average common share outstanding: Basic 36,391 36,391 36,391 36,391 36,391 Diluted 36,391 36,391 36,391 36,391 36,391 Item 9. Changes in and Disagreements w ith Accountants on Accounting and Financial Disclosure. Not Applicable.