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Item 7. Management’s Discussion and Analysis

2021-11-23 compared with 2020-11-19 · 251 added, 246 removed, 504 unchanged (50% of the section changed)

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

The following discussion and analysis presented below should be read in conjunction with the Combined Financial Statements and the corresponding notes, and included elsewhere in this Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, (the "MD&A"), describes the principal factors, based on management’s assessment, which have a material impact on our results of operations, financial condition and liquidity, as well as our critical accounting policies and estimates.

Our MD&A generally includes a discussion of results of operations, financial condition, liquidity and capital resources related to year-over-year comparisons between fiscal years ended September 30, 2021, and 2020, as well as fiscal years ended September 30, 2020, and 2019.

The following discussion and analysis presented below should be read in conjunction with the Consolidated and Combined Financial Statements and the corresponding notes, and included elsewhere in this Form 10-K.

The information presented in this section includes forward-looking statements, which are described in detail in the section titled “Cautionary Statement Concerning Forward-Looking Statements.” The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements.

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As the full impact of the COVID-19 pandemic on our business continues to develop, we are closely monitoring the global situation.

As a premier supplier to the automotive industry, we were adversely impacted by the decline in automotive production and shipments due to the temporary shutdown of our customers’ factories during fiscal 2020.

We are unable at this time to predict the full impact of COVID-19 on our operations, liquidity, and financial results, and, depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material.

During the second half of fiscal 2020, the COVID-19 pandemic had a material impact on our billings and revenue recognized from licenses and billings from connected services, which may also continue beyond fiscal 2020.

We are unable to predict the full impact that COVID-19 will have on our operations, liquidity and financial results, and, depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material.

Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.

While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, these measures have impacted, and may continue to impact, our business, as well as our customers and consumers.

We have taken numerous steps, and plan to continue to take further actions, in our approach to addressing the COVID-19 pandemic.

We shifted a portion of our R&D and engineering workforces to support our professional service teams and their successful completion of customer project milestones to help mitigate the anticipated decline in revenues.

We reduced expenses by limiting discretionary spending, reducing third-party contractors, deferring the hiring of new employees and implementing a reduction in our workforce.

In order to further conserve cash outflows, we implemented temporary reductions in salaries for our current named executive officers and other senior executives.

We implemented our business continuity plans and our crisis response team remains in place to respond to changes in our environment.

At the onset of the COVID-19 pandemic, we instructed employees across 18 different countries and 24 office locations to work from home on a temporary basis.

Beginning in May 2020, in jurisdictions where local restrictions implemented to prevent the further spread of COVID-19 were lifted, we started reopening our offices to allow employees to return to work at their option.

For employees returning to our offices, we have instituted social distancing protocols, increased the level of cleaning and sanitizing, and undertaken other actions to make our offices safer.

While most of our employees continue to work remotely, we have experienced minimal declines in workforce efficiency due to our investment in cloud-based applications and tools.

We have also instituted strict

restrictions on travel for all employees .

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

For further discussion of the business risks associated with COVID-19, see Item 1A, Risk Factors, within this Form 10-K report.

Business Trends

We experienced total revenue growth of 17.0% and 9.1%, during fiscal year 2021 and fiscal year 2020, respectively, primarily driven by our connected and professional services revenues due to increased market penetration of our connected and professional services solutions.

License revenues decreased during fiscal 2020 due to the impact of COVID-19 on the automotive industry, which led to a reduction in reported royalties related to our licensed edge technologies.

Fiscal year 2020 was another key investment year for our business in which we focused on establishing public company functions and expanding our professional services team to meet customer demand.

During fiscal year 2020, total cost of revenues increased by 8.6%, primarily driven by investments in professional staff.

Total operating expenses grew by 4.8% during fiscal year 2020, primarily driven by G&A expenses which were incurred to establish public company functions.

Our R&D expenses decreased 4.5%, as a result of shifting a portion of our R&D and engineering workforces to support our professional service teams and their successful completion of customer project milestones.

Our acquisition of Voicebox Technology Corporation, or Voicebox, on April 2, 2018, which provided additional customer relationships and technology, and the winding down of costs to establish the Cerence business as a standalone public company drove a $6.2 million decrease in restructuring and other costs, net.

For fiscal year 2021, subject to the continuing impact of the COVID-19 pandemic, we anticipate that our R&D expenses will return to representing the majority of our operating expenses as we focus on developing new products and advancing our core technologies.

License revenues increased during fiscal 2021 due to higher volume of licensing royalties as the global auto industry recovered from the COVID-19 pandemic and OEMs increased production.

During fiscal year 202 1 , t otal cost of revenues decreased by 6.3% , primarily driven by our cost savings initiatives .

T otal operating expenses grew by 12.4% during fiscal year 20 2 1 , primarily driven by innovation initiatives in order to increase our competitive position in the market.

Our R&D expenses increased 26.1% , as our R&D and engineering workforces refocused on developing new products and advancing our core technologies.

Restructuring and other costs, net decreased $11.4 million as expenditures to establish the Cerence business as a standalone public company were not repeated in fiscal 2021.

W e anticipate that our R&D expenses will continue to represent a majority of our operating expenses as we focus on innovation and serving our customers.

Basis of Presentation

Fiscal years 2021 and 2020

The accompanying consolidated financial statements of the Company have been prepared in accordance with GAAP, and the rules and regulations of the SEC.

The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the fiscal year presented.

All such adjustments are of a normal recurring nature.

Fiscal 2019 and 2018

The consolidated financial statements include the accounts of the Company, as well as those of its wholly owned subsidiaries.

All significant intercompany transactions and balances are eliminated in consolidation.

During the second quarter of fiscal 2021, we identified and corrected immaterial errors related to previously issued consolidated financial statements.

In order to present the impact of the resulting adjustments, previously issued financial statements have been revised.

See Note 19 – Impact on Previously Issued Financial Statements for Immaterial Adjustments in the Notes to the Consolidated and Combined Financial Statements included in Item 8, Financial Statements and Supplementary Data, within this Form 10-K for additional details.

Accordingly, the tables presented in the MD&A reflect the impact of those revisions.

The errors had no impact on the discussions related to year-over-year comparisons between fiscal years 2020 and 2019.

Fiscal year 2019

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.

The accompanying combined financial statements have been prepared from Nuance Communications, Inc.

(“Nuance” or “Parent”)’s historical accounting records and are presented on a “carve out” basis to include the historical financial position, results of operations and cash flows applicable to the Cerence business.

As a direct ownership relationship did not exist among all the various business units comprising the Cerence business, Nuance’s investment in the Cerence business was shown in lieu of stockholders’ equity in the combined financial statements.

The Combined Statements of Operations included all revenues and costs directly attributable to Cerence as well as an allocation of expenses related to functions and services performed by centralized Parent organizations.

The Combined Statement of Operations included all revenues and costs directly attributable to Cerence as well as an allocation of expenses related to functions and services performed by centralized Parent organizations.

These corporate expenses have been allocated to the Cerence business based on direct usage or benefit, where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, number of transactions or other measures as determined appropriate.

The Combined Statements of Cash Flows presented these corporate expenses that are cash in nature as cash flows from operating activities, as this was the nature of these costs at the Parent.

The Combined Statement of Cash Flows presented these corporate expenses that are cash in nature as cash flows from operating activities, as this was the nature of these costs at the Parent.

Non-cash expenses allocated from the Parent included corporate depreciation and amortization and stock-based compensation included as add-back adjustments to reconcile net income to net cash provided by operations.

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The Parent’s short and long-term debt had not been pushed down to the Cerence business’s combined financial statements because the Cerence business was not the legal obligor of the debt and the Parent’s borrowings were not directly attributable to the Cerence business.

Transactions between the Parent and the Cerence business are considered to be effectively settled in the combined financial statements a t the time the transaction was recorded.

The total net effect of the settlement of these intercompany transactions was reflected in the Combined Statements of Cash Flows as a financing activity and in the Combined Balance Sheets as net parent investment.

Transactions between the Parent and the Cerence business are considered to be effectively settled in the combined financial statements at the time the transaction was recorded.

The total net effect of the settlement of these intercompany transactions was reflected in the Combined Statement of Cash Flows as a financing activity and in the Combined Balance Sheet as net parent investment.

All of the allocations and estimates in the combined financial statements are based on assumptions which management believed are reasonable.

However, the combined financial statements included herein may not be indicative of the financial position, results of operations and cash flows if the Cerence business had been a separate, standalone entity during the periods presented.

Comparability of Results

As of October 1, 2018, we adopted ASC 606 using the modified retrospective approach from the previous guidance, ASC 605.

The adoption of ASC 606 limited the comparability of revenue and expenses, including cost of revenue and certain operating expenses, presented in the results of operations for the fiscal years 2020 and 2019, when compared to prior reporting periods.

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

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Operating margin increased 8.9 percentage points from 6.8% to 15.7%.

Cash provided by operating activities decreased by $43.3 million, or 49.1%, from $88.1 million to $44.8 million.

Cash provided by operating activities increased by $29.6 million, or 66.1%, from $44.8 million to $74.4 million.

For fiscal year 2020 as compared to fiscal year 2019:

Total revenue increased by $27.7 million, or 9.1%, from $303.3 million to $331.0 million.

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

Operating margin increased by 3.2 percentage points from 3.6% to 6.8%.

Cash provided by operating activities decreased by $43.3 million, or 49.1%, from $88.1 million to $44.8 million.

Operating Results

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

The following table shows the Consolidated Statements of Operations for the fiscal years 2021 and 2020 and the Combined Statement of Operations for the fiscal year 2019 (dollars in thousands):

Year Ended September 30,

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Other income (expense), net

(Loss) income before income taxes

(Benefit from) provision for income taxes

Net (loss) income

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services.

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Sales and marketing expenses includes salaries, benefits, and commissions related to our sales, product marketing, product management, and business unit management teams.

General and administrative expenses primarily consist of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for doubtful accounts.

Amortization of acquired patents and core technology are included within cost of revenues whereas the amortization of other intangible assets, such as acquired customer relationships, trade names and trademarks, are included within operating expenses.

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Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives.

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

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

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

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

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

Fiscal Year 2021 Compared with Fiscal Year 2020 and Fiscal Year 2020 Compared with Fiscal Year 2019

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Total revenues fiscal year 2021 were $387.2 million, an increase of $56.2 million, or 17.0%, from $331.0 million from fiscal year 2020.

This growth was primarily driven by increased demand for our connected and professional solutions.

The increase in revenues occurred across all product types.

License Revenue

License revenue for fiscal year 2020 was $164.3 million, a decrease of $8.1 million, or 4.7%, from $172.4 million for fiscal year 2019.

The decrease in license revenue was driven by the COVID-19 pandemic, which resulted in declining reported royalties from ongoing agreements.

As a percentage of total revenue, license revenue decreased by 7.0 percentage points from 56.8% for fiscal year 2019 to 49.8% for fiscal year 2020.

License revenue for fiscal year 2021 was $202.2 million, an increase of $37.9 million, or 23.1%, from $164.3 million for fiscal year 2020.

The increase in license revenue was primarily due to higher volume of licensing royalties as the global auto industry recovered from the COVID-19 pandemic and OEMs increased production.

As a percentage of total revenue, license revenue increased by 2.6 percentage points from 49.6% for fiscal year 2020 to 52.2% for fiscal year 2021.

Currently, the global automotive industry is experiencing a semiconductor shortage.

We are unable to predict the full extent this will have on our business, including our license revenue.

Connected Services Revenue

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This increase was primarily driven by continued market penetration from our connected services solutions as our customers increasingly deploy hybrid solutions.

As a percentage of total revenue, connected services revenue increased by 3.3 percentage points from 25.9% for fiscal year 2019 to 29.2% for fiscal year 2020.

As a percentage of total revenue, connected services revenue decreased by 1.2 percentage points from 29.5% for fiscal year 2020 to 28.3% for fiscal year 2021.

Professional Services Revenue

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This increase was primarily driven by demand for the integration and customization services related to our edge software and the timing of services rendered.

As a percentage of total revenue, professional services revenue increased by 3.8 percentage points from 17.2% for fiscal year 2019 to 21.0% for fiscal year 2020.

As a percentage of total revenue, professional services revenue decreased by 1.4 percentage points from 20.9% for fiscal year 2020 to 19.5% for fiscal year 2021.

Fiscal Year 2020 Compared with Fiscal Year 2019

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License Revenue

License revenue for fiscal year 2019 was $172.4 million, an increase of $1.3 million, or 0.8%, from $171.1 million for fiscal year 2018.

License revenue increased primarily due to a higher volume of licensing royalties from new and existing customers.

License revenue for fiscal year 2020 was $164.3 million, a decrease of $8.1 million, or 4.7%, from $172.4 million for fiscal year 2019.

The decrease in license revenue was driven by the COVID-19 pandemic, which resulted in declining reported royalties from ongoing agreements.

As a percentage of total revenue, license revenue decreased by 7.2 percentage points from 56.8% for fiscal year 2019 to 49.6% for fiscal year 2020.

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Connected services revenue for fiscal year 2020 was $97.5 million, an increase of $18.8 million, or 23.9%, from $78.7 million for fiscal year 2019.

This increase was primarily driven by greater demand for our connected services solutions as our customers increasingly deploy hybrid solutions.

This increase was primarily driven by continued market penetration from our connected services solutions as our customers increasingly deploy hybrid solutions.

As a percentage of total revenue, connected services revenue increased by 3.5 percentage points from 26.0% for fiscal year 2019 to 29.5% for fiscal year 2020.

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Fiscal Year 2021 Compared with Fiscal Year 2020

Total cost of revenues for fiscal year 2020 were $107.9 million, an increase of $8.5 million, or 8.6%, from $99.3 million for fiscal year 2019.

The increase in cost of revenues resulted primarily from our investments in professional services staff to meet customer program demands.

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

Total cost of revenues for fiscal year 2021 were $101.1 million, a decrease of $6.8 million, or 6.3%, from $107.9 million for fiscal year 2020.

The decrease in cost of revenues resulted primarily from our cost savings initiatives implemented in the second half of fiscal 2020.

We experienced an increase in total gross profit of $63.0 million, or 28.2%, from $223.1 million to $286.1 million.

The increase was primarily driven by our license and connected services solutions.

Cost of License Revenue

Cost of license revenue for fiscal year 2021 was $3.5 million, an increase of $0.7 million, or 27.3%, from $2.8 million for fiscal year 2020.

Cost of license revenues increased due to third-party royalty expenses associated with external technologies we leverage in

our edge software compone nts .

Cost of license revenues increased due to third-party royalty expenses associated with external technologies we leverage in our edge software components.

As a percentage of total cost of revenue, cost of license revenue increased by 0.9 percentage points from 2.6% for fiscal year 2020 to 3.5% for fiscal year 2021.

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

License gross profit increased by $37.2 million, or 23.0%, primarily due to license revenue growth during fiscal year 2021.

Cost of Connected Services Revenue

Cost of connected services revenue for fiscal year 2021 was $25.7 million, a decrease of $6.1 million, or 19.0%, from $31.8 million for fiscal year 2020.

Cost of connected services revenue decreased primarily as a result of lower internal allocated costs.

Cost of connected services revenue decreased primarily due to a $1.8 million decrease in salary-related expenditures, $1.8 million decrease in third-party contractor costs, $1.7 million decrease from lower internal allocated labor, $1.7 million decrease in depreciation costs, $0.7 million decrease in cloud infrastructure costs and $0.5 million decrease in stock-based compensation.

These decreases were partly offset by a $3.2 million increase in amortization of costs previously deferred.

As a percentage of total cost of revenue, cost of connected service revenue decreased by 4.0 percentage points from 29.5% for fiscal year 2020 to 25.5% for fiscal year 2021.

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

Connected services gross profit increased $18.1 million, or 27.6%, from $65.7 million to $83.8 million which was primarily due to connected services revenue growth and cost savings initiatives.

Cost of Professional Services Revenue

Cost of professional services revenue fiscal year 2020 was $65.0 million, an increase of $13.7 million, or 26.8%, from $51.2 million for fiscal year 2019.

Cost of professional services revenue increased primarily due to our investments in professional services staff to meet customer program demands.

Investments included increases in internally allocated labor costs of $4.3 million, compensation-related expenses of $3.3 million, and stock-based compensation expenses of $3.1 million.

Cost of professional services revenue for fiscal year 2021 was $64.3 million, a decrease of $0.7 million, or 1.0%, from $65.0 million for fiscal year 2020.

Cost of professional services revenue decreased primarily due to $5.1 million in lower internal allocated labor, and a $1.9 million decrease in third-party contractor cost.

The decrease was partly offset by a $3.2 million increase in salary-related expenditures and $2.3 million increase in amortization of costs previously deferred.

As a percentage of total cost of revenue, cost of professional services revenue increased by 3.4 percentage points from 60.2% for fiscal year 2020 to 63.6% for fiscal year 2021.

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Our total cost of revenues for fiscal year 2020 were $107.9 million, an increase of $8.6 million, or 8.6%, from $99.3 million for fiscal year 2019.

The increase in cost of revenues resulted primarily from the growth of our cloud-based connected services revenue, which required an increase in cloud-based infrastructure and employee costs, and our investments in professional services staff to meet customer program demands.

We also experienced an increase in amortization of intangible assets that was included in costs of revenues primarily due to our acquisition of Voicebox on April 2, 2018, which increased the carrying value of our total intangible assets.

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

The increase in cost of revenues resulted primarily from our investments in professional services staff to meet customer program demands.

We experienced an increase in gross profit of $19.1 million, or 9.4%, from $204.0 million to $223.1 million which was primarily driven by increased demand for our connected services solutions and professional services.

Cost of License Revenue

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

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

License gross profit decreased $8.8 million, or 5.2%, from $170.3 million to $161.5 million, which was primarily due to declines in license revenue recognized during the year.

Cost of Connected Services Revenue

Cost of connected services revenue for fiscal year 2019 were $37.6 million, an increase of $4.6 million, or 14.1%, from $32.9 million for fiscal year 2018.

Cost of connected services revenue increased primarily as a result of the growth of cloud-based connected services revenue from new and existing customers utilizing our software delivery services for hybrid solutions.

Cost of connected services revenue for fiscal year 2020 were $31.8 million, a decrease of $5.8 million, or 15.4%, from $37.6 million for fiscal year 2019.

Cost of connected services revenue decreased primarily as a result of lower internal allocated costs.

As a percentage of total cost of revenue, cost of connected service revenue decreased by 8.3 percentage points from 37.8% for fiscal year 2019 to 29.5% for fiscal year 2020.

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

Connected services gross profit increased $24.6 million, or 59.7%, from $41.1 million to $65.7 million, which was primarily due to connected services revenue growth on relatively fixed cloud infrastructure costs.

Cost of Professional Services Revenue

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Cost of professional services revenue increased primarily due to our investments in professional services staff to meet customer program demands.

Investments included increases in internally allocated labor costs of $4.3 million, compensation-related expenses of $3.3 million, and stock-based compensation expenses of $3.1 million.

As a percentage of total cost of revenue, cost of professional services revenue increased by 8.6 percentage points from 51.6% for fiscal year 2019 to 60.2% for fiscal year 2020.

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

Professional services gross profit increased $3.3 million, or 313.5%, from $1.0 million to $4.3 million, which was primarily due to increases in professional services revenue recognized and continued cost reduction measures.

Operating Expenses

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Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies.

R&D expenses for fiscal year 2021 were $112.1 million, an increase of $23.2 million, or 26.1%, from $88.9 million for fiscal year 2020.

The increase in R&D expenses was primarily attributable to a $11.5 million increase in salary-related expenditures driven by headcount growth, as well as a $5.4 million increase in third-party contractor costs, a $2.6 million increase in stock-based compensation and a $6.5 million reduction in labor allocated to support our customer projects partially offset by a $5.1 million increase of capitalized cost associated with internally developed software.

As a percentage of total operating expenses, R&D expenses increased by 5.4 percentage points from 44.3% for fiscal year 2020 to 49.7% for fiscal year 2021.

Fiscal Year 2020 Compared with Fiscal Year 2019

R&D expenses for fiscal year 2020 were $88.9 million, a decrease of $4.2 million, or 4.5%, from $93.1 million for fiscal year 2019.

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As a percentage of total operating expenses, R&D expenses decreased by 3.9 percentage points from 48.2% for fiscal year 2019 to 44.3% for fiscal year 2020.

Fiscal Year 2019 Compared with Fiscal Year 2018

Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies.

R&D expenses for fiscal year 2019 were $93.1 million, an increase of $12.1 million, or 15.0%, from $81.0 million for fiscal year 2018.

R&D expense increased primarily as a result of hiring more engineers and other essential product innovation personnel.

Investing in R&D personnel is essential to advancing our technologies and enhancing in-car experiences.

As a percentage of total operating expenses, R&D expenses decreased by 3.3 percentage points from 51.5% for fiscal year 2018 to 48.2% for fiscal year 2019.

Sales & Marketing Expenses

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Fiscal Year 2021 Compared with Fiscal Year 2020

Sales and marketing expenses for fiscal year 2021 were $38.7 million, an increase of $5.3 million, or 15.8%, from $33.4 million for fiscal year 2020.

The increase in sales and marketing expenses was primarily attributable to $3.1 million increase in salary related expenses, $3.0 million increase related to stock-based compensation, and $0.4 million related to commission expenses.

The increase was partly offset by a reduction of $0.9 million in travel-related expenditures as a result of COVID-19 and $0.7 million in marketing spending.

As a percentage of total operating expenses, sales and marketing expenses increased by 0.6 percentage points from 16.6% for fiscal year 2020 to 17.2% for fiscal year 2021.

Fiscal Year 2020 Compared with Fiscal Year 2019

Sales and marketing expenses for fiscal year 2020 were $33.4 million, a decrease of $2.9 million, or 7.9%, from $36.3 million for fiscal year 2019.

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As a percentage of total operating expenses, sales and marketing expenses decreased by 2.2 percentage points from 18.8% for fiscal year 2019 to 16.6% for fiscal year 2020.

Fiscal Year 201 9 Compared with Fiscal Year 201 8

Sales and marketing expenses for fiscal year 2019 were $36.3 million, an increase of $5.7 million, or 18.7%, from $30.6 million for fiscal year 2018.

Sales and marketing expenses increased primarily as a result of higher sales quota attainment and the expansion of our sales and marketing staff levels.

As a percentage of total operating expenses, sales and marketing expenses decreased by 0.6 percentage points from 19.4% for fiscal year 2018 to 18.8% for fiscal year 2019.

General & Administrative Expenses

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General and administrative expenses for fiscal year 2021 were $57.0 million, an increase of $7.6 million, or 15.4%, from $49.4 million for fiscal year 2020.

General and administrative expenses increased primarily due to our operation as a standalone public company during fiscal year 2020.

We incurred higher compensation related expenses, including $8.5 million attributed to salary-related expenses and $12.5 attributed to stock-based compensation expenses.

In addition, professional service expenses increased $3.0 million.

The increase in general and administrative expenses was primarily attributable to $7.5 million increase in stock-based compensation, a $2.1 million increase in depreciation, a $1.8 million increase in professional service fees and a $1.4 million increase in salary-related expenses.

The increases were partly offset by a $1.2 million decrease in third-party contractor costs, a $1.1 million decreases in bad debt expenses and $0.6 million decrease in travel-related expenditures as a result of COVID-19.

As a percentage of total operating expenses, general and administrative expenses increased by 0.7 percentage points from 24.6% for fiscal year 2020 to 25.3% for fiscal year 2021.

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General and administrative expenses for fiscal year 2020 were $49.4 million, an increase of $23.5 million, or 90.5%, from $25.9 million for fiscal year 2019.

The increase in general and administrative expenses was primarily attributable to professional and legal fees, administrative salaries expenses, and software fees.

General and administrative expenses increased primarily due to our operation as a standalone public company during fiscal year 2020.

We incurred higher compensation related expenses, including $8.5 million attributed to salary-related expenses and $12.5 attributed to stock-based compensation expenses.

In addition, professional service expenses increased $3.0 million.

As a percentage of total operating expenses, general and administrative expenses increased by 11.2 percentage points from 13.4% for fiscal year 2019 to 24.6% for fiscal year 2020.

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Intangible asset amortization for fiscal year 2021 was $20.2 million, a decrease of $0.7 million, or 3.2%, from $20.9 million for fiscal year 2020.

The decrease primarily relates to the composition of intangible assets allocated to the Cerence business prior to Spin-Off.

The decrease primarily relates to certain intangible assets having been fully amortized during fiscal year 2020.

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.3 percentage points from 7.7% for fiscal year 2020 to 7.4% for fiscal year 2021.

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Fiscal Year 2020 Compared with Fiscal Year 2019

Intangible asset amortization for fiscal year 2019 was $21.0 million, an increase of $4.4 million, or 26.6%, from $16.6 million for fiscal year 2018.

The increase primarily relates to our acquisition of Voicebox which resulted in the addition of several customer relationships that increased amortization expense.

Intangible asset amortization for fiscal year 2020 was $20.9 million, a decrease of $0.1 million, or 0.7%, from $21.0 million for fiscal year 2019.

The decrease primarily relates to the composition of intangible assets allocated to the Cerence business prior to Spin-Off.

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.9 percentage points from 8.6% for fiscal year 2019 to 7.7% for fiscal year 2020.

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

As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses decreased by 0.2 percentage points from 6.5% for fiscal year 2019 to 6.3% for fiscal year 2020.

Restructuring and Other Costs, Net

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Restructuring and other costs, net for fiscal year 2021 were $5.1 million, a decrease of $11.4 million, from $16.5 million for fiscal year 2020.

The decrease in restructuring and other costs, net was primarily driven by a $10.6 million decrease in expenditures to establish the Cerence business as a standalone public company.

As a percentage of total operating expense, restructuring and other costs, net decreased by 5.9 percentage points from 8.2% for fiscal year 2020 to 2.3% for fiscal year 2021.

Fiscal Year 2020 Compared with Fiscal Year 2019

Restructuring and other costs, net for fiscal year 2020 were $16.5 million, a decrease of $7.9 million, from $24.4 million for fiscal year 2019.

Restructuring and other costs, net decreased primarily due to the winding down of separation costs to establish the Cerence business as a standalone public company, which decreased $10.8 million.

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As a percentage of total operating expense, restructuring and other costs, net decreased by 4.4 percentage points from 12.6% for fiscal year 2019 to 8.2% for fiscal year 2020.

Fiscal Year 2019 Compared with Fiscal Year 2018

Restructuring and other costs, net for fiscal year 2019 were $24.4 million, an increase of $11.5 million, from $12.9 million for fiscal year 2018.

Restructuring and other costs, net increased primarily due to professional service fees incurred to establish the Cerence business as a standalone public company, which increased $13.9 million.

The increase was partly offset by the $4.0 million decrease in severance charges related to the elimination of personnel across multiple functions.

As a percentage of total operating expense, restructuring and other costs, net increased by 4.4 percentage points from 8.2% for fiscal year 2018 to 12.6% for fiscal year 2019.

Acquisition-related Costs

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As a percentage of total operating expense, acquisition-related costs decreased by 0.5 percentage points from 0.5% for fiscal year 2019 to 0.0% for fiscal year 2020.

Fiscal Year 2019 Compared with Fiscal Year 2018

Acquisition-related costs for fiscal year 2019 were $0.9 million, a decrease of $3.1 million, from $4.1 million for fiscal year 2018.

Acquisition costs decreased as a direct result of integration, legal, and other professional fees incurred resulting from the acquisition of Voicebox on April 2, 2018.

As a percentage of total operating expense, acquisition-related costs decreased by 2.1 percentage points from 2.6% for fiscal year 2018 to 0.5% for fiscal year 2019.

Total Other Expense, Net

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Fiscal Year 2021 Compared with Fiscal Year 2020

Total other expense, net for fiscal year 2020 was $45.5 million, an increase of $45.8 million from $0.3 million of total other income, net for fiscal year 2019.

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

Total other expense, net for fiscal year 2021 was $12.3 million, a decrease of $33.2 million from $45.5 million of expense for fiscal year 2020.

The decrease in interest expense and other income (expense), net is primarily attributed to our debt refinancing in June 2020.

During fiscal year 2020, we recognized a $19.3 million loss on the extinguishment of debt.

Fiscal Year 20 20 Compared with Fiscal Year 201 9

Total other income, net for fiscal year 2019 was $0.3 million, an increase of $0.4 million, or 714.8%, from total other expense, net of $0.1 million for fiscal year 2018.

The net increase in total other expense, net over the prior fiscal year was primarily the result of foreign currency gains (losses) year over year.

(Benefit from) Provision for Income Taxes

Total other expense, net for fiscal year 2020 was $45.5 million, an increase of $45.8 million from total other income, net of $0.3 million for fiscal year 2019.

Provision for (Benefit from) Income Taxes

Year Ended September 30,

(Benefit from) provision for income taxes

Provision for (benefit from) income taxes

Effective income tax rate%

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Our effective income tax rate for fiscal year 2021 was 4.9%, compared to 20.5% for fiscal year 2020.

Consequently, our benefit from income taxes for fiscal year 2020 was $5.5 million, a net change of $83.6 million, or 93.8%, from a benefit from income taxes of $89.1 million for fiscal year 2019.

Consequently, our provision for income taxes for fiscal year 2021 was $2.4 million, a net change of $7.1 million, or 150.3%, from a benefit from income taxes of $4.7 million for fiscal year 2020.

The effective tax rate for the fiscal year 2021 differed from the U.S.

federal statutory rate of 21.0%, primarily due to our composition of jurisdictional earnings, U.S.

inclusions of foreign taxable income as a result of changes in applicable tax laws in 2017, and an income tax benefit of approximately $5.0 million related to an increase in tax rates in the Netherlands enacted in the first quarter.

inclusions of foreign taxable income as a result of changes in applicable tax laws in 2017, and an income tax benefit of approximately $15.9 million related to an increase in tax rates in the Netherlands enacted in the first quarter of fiscal year 2021.

Fiscal Year 2020 Compared with Fiscal Year 2019

Our effective income tax rate for fiscal year 2019 was (796.5)%, compared to 84.0% for fiscal year 2018.

Consequently, our provision for income taxes for fiscal year 2019 was $89.1 million, a net change of $120.0 million, or 388.1%, from $30.9 million for fiscal year 2018.

Our effective income tax rate for fiscal year 2020 was 20.5%, compared to negative 796.5% for fiscal year 2019.

Consequently, our benefit from income taxes for fiscal year 2020 was $4.7 million, a net change of $84.4 million, or 94.7%, from $89.1 million for fiscal year 2019.

The effective income tax rate for fiscal year 2020 differed from the U.S.

statutory rate of 21.0% primarily due to a net tax benefit of $91.7 million related to intangible property transfers, partially offset by an uncertain tax position.

The net tax benefit is also partially offset by global intangible low-taxed income, or GILTI, tax expense of $3.9 million.

statutory rate of 21.0% primarily due to our composition of jurisdictional earnings, U.S.

Liquidity and Capital Resources

Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding in the capital markets as needed.

Upon the Distribution, Nuance allocated $110.0 million in cash and cash equivalents to the Cerence business, which was adequate to meet the short-term net working capital needs of our business at the close of the Distribution.

As of September 30, 2020, our net working capital, excluding current deferred revenue and deferred cost, was $153.6 million.

Financial Condition

As of September 30, 2021, we had $166.2 million in cash, cash equivalents, and marketable securities.

Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.

Marketable securities include commercial paper and corporate bonds.

As of September 30, 2021, our net working capital, excluding deferred revenue and deferred costs, was $194.0 million.

This balance is representative of the short-term net cash inflows based on the working capital at that date.

Based on our history of generating positive cash flows and the $136.1 million of cash and cash equivalents as of September 30, 2020, we believe we will be able to meet our liquidity needs over the next 12 months.

Sources and Material Cash Requirements

Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, as well as the cash flows we generated from our operations.

The primary uses of cash include costs of revenues, funding of R&D activities, capital expenditures and debt obligations.

Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding in the capital markets as needed.

Based on our history of generating positive cash flows and the $166.2 million of cash, cash equivalents and marketable securities as of September 30, 2021, we believe we will be able to meet our liquidity needs over the next 12 months.

We believe we will meet longer-term expected future cash requirements and obligations, through a combination of cash flows from operating activities, available cash balances, and available credit via our Revolving Facility.

Specifically, we anticipate our cost of revenues, funding our R&D activities, and debt obligations to be our primary uses of cash during the year ended September 30, 2021.

However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs.

Given the economic uncertainty as a result of the pandemic, during fiscal year 2020, we took actions to improve our liquidity position, including, reducing working capital, reducing operating costs by delaying research and development programs, initiating a workforce reduction, and substantially reducing discretionary spending.

The following table presents our material cash requirements for future periods:

Material Cash Requirements Due by the Year Ended September 30,

Interest payable on the Notes (a)

Senior Credit Facilities

Interest payable on Senior Credit Facilities (b)

Operating leases

Operating leases under restructuring (c)

Finance leases

Total material cash requirements

Interest per annum is due and payable semiannually and is determined based on the outstanding principal as of September 30, 2021.

Interest per annum is due and payable monthly and is determined based on the outstanding principal as of September 30, 2021.

Contractual lease commitments are shown net of sublease income related to certain facilities.

As of September 30, 2021, we anticipate sublease income of $2.3 million through fiscal year 2024.

We sponsor certain defined benefit plans that are offered primarily by certain of our foreign subsidiaries.

Many of these plans were assumed as part of the Spin-Off 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 aggregate net liability of our defined benefit plans as of September 30, 2021 was $8.7 million.

As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs.

Should we need to secure additional sources of liquidity, we believe that we could finance our needs through the issuance of equity securities or debt offerings.

However, we cannot guarantee that we will be able to obtain financing through the issuance of equity securities or debt offerings on reasonable terms, or at all.

The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption of financial

However, we cannot guarantee that we will be able to obtain financing through the issuance of equity securities or debt offerings on reasonable terms.

The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption of financial markets.

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

Beginning in fiscal 2021, we plan to enter into forward exchange contracts to hedge against foreign exchange rate fluctuations.

We plan to designate these forward exchange contracts as cash flow hedges.

3.00% Senior Convertible Notes due 2025

On June 2, 2020, in an effort to refinance our debt structure, we issued $175.0 million in aggregate principal amount of 3.00% Convertible Senior Notes due 2025 (the “Notes”), including the initial purchasers’ exercise in full of their option to purchase an additional $25.0 million principal amount of the Notes, between the Company and U.S.

Bank National Association, as trustee (the “Trustee”), in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

The net proceeds from the issuance of the Notes were $169.8 million after deducting transaction costs.

We used net proceeds from the issuance of the Notes to repay a portion of our indebtedness under the Credit Agreement, dated October 1, 2019, by and among the Company, the lenders and issuing banks party thereto and Barclays Bank PLC, as administrative agent (the “Existing Facility”).

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 us, 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.

The Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

As of September 30, 2021, the if-converted value of the Notes exceeds its principal amount by $274.5 million.

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:

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(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;

(3) if we call 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.

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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.

In addition, following certain corporate events that occur prior to the maturity date or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 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.

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 provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide 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.

The indenture governing the Notes contains 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.

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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.

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.

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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):

The interest expense recognized related to the Notes for the fiscal years ended September 30, 2021 and 2020 was as follows (dollars in thousands):

September 30,

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Total interest expense related to the Notes

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.

The conditional conversion feature of the Notes was triggered during the fiscal year ended September 30, 2021, and the Notes were convertible as of September 30, 2021, with no Notes being converted.

Whether any of the Notes will be converted in future quarters will depend on the satisfaction of one or more of the conversion conditions in the future.

If one or more holders elect to convert their Notes at a time when any such Notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional shares), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.

Senior Credit Facilities

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All obligations are secured by substantially all of our tangible and intangible personal property and material real property, including a perfected first-priority pledge of all (or, in the case of foreign subsidiaries or subsidiaries (“FSHCO”) that own no material assets other than equity interests in foreign subsidiaries that are “controlled foreign corporations” or other FSHCOs, 65%) of the equity securities of our subsidiaries held by any loan party, subject to certain customary exceptions and limitations.

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

Quarterly principal payments commenced on September 30, 2020.

Interest accrues on outstanding borrowings under the Senior Credit Facilities at a rate, at our option, of either (a) base rate determined by reference to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the federal funds effective rate, plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1% per annum (“ABR”) or (b) an adjusted LIBOR rate (“LIBOR”) (which shall not be less than 0.50% per annum), in each case, plus an applicable margin.

Initially, the applicable margin is LIBOR plus 3.00% or ABR plus 2.00%.

Following delivery of a compliance certificate for the first full fiscal quarter after the Financing Closing Date, the applicable margins for the Senior Credit Facilities is subject to a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the applicable margin is LIBOR plus 3.50% or ABR plus 2.50%;

On December 17, 2020 (the “Amendment No.

1 Effective Date”), we entered into Amendment No.

1 to the Credit Agreement (the “Amendment”).

The Amendment extended the scheduled maturity date of the revolving credit and term facilities from June 12, 2024 to April 1, 2025.

The Amendment revised certain interest rates in the Credit Agreement.

Following delivery of a compliance certificate for the first full fiscal quarter after the Amendment No.

1 Effective Date, the applicable margins for the revolving credit and term 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 3.00% or ABR plus 2.00%;

(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 2.75% or ABR plus 1.75%;

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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 2.20% or ABR plus 1.00%.

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.

As a result of the Amendment, the applicable LIBOR floor was reduced from 0.50% to 0.00%.

From the Amendment No.

1 Effective Date until the fiscal quarter ended December 31, 2020, the interest rate was LIBOR plus 2.50%.

For the three months ended March 31, 2021, the interest rate was LIBOR plus 2.25%.

For the three months ended June 30, 2021, the interest rate was LIBOR plus 2.25%.

For the three months ended September 30, 2021, the interest rate was LIBOR plus 2.25%.

Total interest expense relating to the Senior Credit Facilities for the fiscal year ended September 30, 2021 and 2020 was $4.1 million and $1.5 million, respectively, reflecting the coupon and accretion of the discount.

In addition, the quarterly commitment fee required to be paid based on the unused portion of the Revolving Facility 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 unused line fee is 0.500%;

(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 unused line fee is 0.450%;

(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 unused line fee is 0.400%;

(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 unused line fee is 0.350%;

and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the unused line fee is 0.300%.

The Amendment revised the amount by which we are obligated to make quarterly principal payments.

Through the fiscal quarter ending December 31, 2022, we are obligated to make quarterly principal payments in an aggregate amount equal to 1.25% of the original principal amount of the Term Loan Facility.

From the fiscal quarter ending March 31, 2023 and for each fiscal quarter thereafter, we are obligated to make quarterly principal payments in an aggregate amount equal to 2.50% of the original principal amount of the Term Loan Facility, with the balance payable at the maturity date thereof.

Borrowings under the Credit Agreement are prepayable at our option without premium or penalty.

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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;

In addition, the Credit Agreement contains financial covenants, each tested quarterly, (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;

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As of September 30, 202 1 , we were in compliance with all Credit Agreement covenants.

Existing Facilities

On October 1, 2019, in connection with the Spin-Off, we entered into the Existing Facility consisting of a five-year senior secured term loan facility in the aggregate principal amount of $270.0 million.

The net proceeds from the issuance of the Existing Facility were $249.7 million, which was primarily intended to finance a cash distribution of approximately $153.0 million to Nuance and provide approximately $110.0 million initial support for the cash flow needs of the Cerence business.

We also entered into a 54-month senior secured first-lien revolving credit facility in an aggregate principal amount of $75.0 million, which shall be drawn on in the event that our working capital and other cash needs are not supported by our operating cash flow (the “Existing Revolving Facility” and collectively with the Existing Facility, the “Existing Facilities”).

During June 2020, in connection with the issuance of the Notes and Senior Credit Facilities, we initiated prepayments towards our Existing Facilities in the amount of $267.6 million in cash.

As a result, we recorded $267.6 million extinguishment of debt and $19.3 million loss on the extinguishment of debt.

As of September 30, 2020, our obligations related to the Existing Facilities have been settled.

Total interest expense relating to the Existing Facilities for the fiscal year ended September 30, 2020 was $18.0 million, reflecting the coupon and accretion of the discount.

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

Cash flows from operating, investing and financing activities for the fiscal years ended September 30, 2021, 2020, and 2019, as reflected in the audited Consolidated and Combined Statements of Cash Flows included in Item 8 of this Form 10-K, are summarized in the following table (dollars in thousands):

Year Ended September 30,

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Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities

Effect of foreign currency exchange rates on cash and cash equivalents

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Fiscal Year 2021 Compared with Fiscal Year 2020

Net cash provided by operating activities for fiscal year 2020 was $44.8 million, a net decrease of $43.3 million, or 49.1%, from net cash provided by operating activities of $88.1 million for fiscal year 2019.

The net decrease in cash provided by operating activities stems from unfavorable changes in working capital.

Outflows in prepaids and other assets and accounts payable increased by $21.5 million and $12.6 million, respectively.

The timing of billings and collections resulted in $15.2 million additional cash inflows from accounts receivable compared to prior year.

Cash outflows from deferred revenue increased $53.3 million.

Net cash provided by operating activities for fiscal year 2021 was $74.4 million, a net increase of $29.6 million, or 66.1%, from net cash provided by operating activities of $44.8 million for fiscal year 2020.

The change in cash flows were primarily due to:

An increase of $62.0 million from income before non-cash charges

A decrease of $22.7 million due to unfavorable changes in working capital primarily related to cash outflows from accrued expenses and other liabilities;

A decrease of $9.7 million from changes in deferred revenue.

Deferred revenue represents a significant portion of our net cash provided by operating activities and, depending on the nature of our contracts with customers, this balance can fluctuate significantly from period to period.

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Net cash provided by operating activities for fiscal year 2020 was $44.8 million, a decrease of $43.3 million, or 49.1%, from $88.1 million for fiscal year 2019.

The net decrease in cash provided by operating activities stems from unfavorable changes in working capital, primarily due to the timing of payments, which decreased accrued expenses and other liabilities by $6.7 million and increased prepaid expenses and other assets by $5.9 million.

In addition, the timing of billing and collections resulted in a decrease in accounts receivable of $7.6 million compared to the prior year.

The net decrease in cash provided by operating activities stems from unfavorable changes in working capital.

Outflows in prepaids and other assets and accounts payable increased by $21.5 million and $12.6 million, respectively.

The timing of billings and collections resulted in $14.3 million additional cash inflows from accounts receivable compared to prior year.

Net Cash Used in Investing Activities

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Net cash used in investing activities for the fiscal year 2021 was $41.6 million, an increase of $10.9 million, or 35.7%, from $30.7 million for fiscal year 2020.

The change in cash flows were driven by:

$26.1 million net purchase of marketable securities for fiscal year 2021

$2.6 million paid in connection with equity investments during the fiscal year 2021

$2.0 million paid related to debt securities;

A decrease of $7.0 million in capital expenditures.

Fiscal Year 2020 Compared with Fiscal Year 2019

Net cash used in investing activities for fiscal year 2020 was $30.7 million, an increase of $26.2 million, or 579.1%, from $4.5 million for fiscal year 2019.

The increase in cash outflows is due to the purchase of property and equipment to support the standalone operations of the Company and the purchase of marketable securities, in the amount of $11.7 million.

Net Cash (Used in) Provided by Financing Activities

Fiscal Year 2021 Compared with Fiscal Year 2020

Net cash used in investing activities for fiscal year 2019 was $4.5 million, a decrease of $81.8 million, from $86.3 million for fiscal year 2018.

The decrease in cash outflows was due to net cash payments of $79.8 million associated with the acquisition of Voicebox during the fiscal year ended September 30, 2018 and a $2.0 million decrease in cash outflows for capital expenditures.

Net Cash Provided by (Used in) Financing Activities

Net cash used in financing activities for the fiscal year 2021 was $41.5 million, a net change of $163.1 million, from cash provided by financing activities of $121.6 million for fiscal year 2020.

The change in cash flows were primarily due to:

• $249.7 million proceeds from the issuance of the Existing Facilities during the first quarter of fiscal year 2020;

• $169.8 million proceeds from the issuance of the Notes during the quarter ended June 30, 2020;

• $123.0 million proceeds from the issuance of the Senior Credit Facilities during the quarter ended June 30, 2020;

• $27 1.6 million principal payments of long-term debt during the fiscal year 2020;

• $153.0 million distribution paid to Nuance related to our Spin-Off during the first quarter of fiscal year 2020;

• $ 45.8 million payment of tax related withholdings due to the net settlement of equity awards during the fiscal year 2021.

Fiscal Year 2020 Compared with Fiscal Year 2019

Net cash provided by financing activities for the fiscal year 2020 was $121.6 million, a net increase of $205.1 million, from cash used in financing activities of $83.6 million for fiscal year 2019.

Net cash provided by financing activities for fiscal year 2020 was $121.6 million, an increase of $205.1 million, or 245.5%, from net cash used in financing activities of $83.6 million for fiscal year 2019.

The increase in cashflows were the result of $169.8 million net proceeds from the issuance of the Notes, $123.0 million net proceeds from the issuance of the Senior Credit Facilities, and $249.7 million net proceeds from the issuance of the Existing Facilities.

The increase in cashflows were partly offset by $271.6 million in principal payments of long-term debt, $6.4 million payments of debt issuance costs, and the $153.0 million distribution paid to Nuance.

Fiscal Year 2019 Compared with Fiscal Year 2018

Net cash used in financing activities for fiscal year 2019 was $83.6 million, an increase of $54.6 million, or 188.6%, from net cash used in financing activities of $28.9 million for fiscal year 2018.

The change relates to the cash distributions associated with Nuance’s historical cash management process

Business Acquisitions

Historically, we have made several acquisitions.

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

On April 2, 2018, we acquired Voicebox, headquartered in Bellevue, Washington.

Voicebox is a provider of conversational artificial intelligence, including voice recognition, natural language understand ing, and artificial intelligence services.

The aggregate consideration for this transaction was $94.

2 million which included $79.8 million paid in cash, net of $6.7 million in cash acquired, a $12.

8 million write-off of deferred revenues related to our pre -existing relationship with Voicebox, and a $ 1 .

6 million deferred acquisition payment which would be paid in cash upon the conclusion of an indemnity period.

The transaction was accounted for as a business combination and is included in the accompanying Co nsolidated and Combined Financial Statements beginning on the date of acquisition.

Refer to Note 4 to the accompanying Consolidated and Combined Financial Statements included elsewhere in this Form 10-K for more detail on the acquisition of Voicebox.

Contractual Obligations, Contingent Liabilities, and Commitments

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

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

Payments Due by the Year Ended September 30,

Interest payable on the Notes (1)

Senior Credit Facilities

Interest payable on Senior Credit Facilities (2)

Operating leases

Finance leases

Total contractual obligations

Interest per annum is due and payable semiannually and is determined based on the outstanding principal as of September 30, 2020.

Interest per annum is due and payable monthly and is determined based on the outstanding principal as of September 30, 2020.

Other Matters

Off-Balance Sheet Arrangements

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

Defined Benefit Plans

We sponsor certain defined benefit plans that are offered primarily by certain of our foreign subsidiaries.

Many of these plans were assumed through our acquisitions or are required by local regulatory requirements.

We may deposit funds for these plans with insurance companies, third-party trustees, or into government-managed accounts consistent with local regulatory requirements, as applicable.

Our total defined benefit plan pension expense was $0.5 million, $0.4 million, and $0.4 million for fiscal years 2020, 2019, and 2018, respectively.

The aggregate projected benefit obligation as of fiscal years 2020, 2019, and 2018 was $8.3 million, $7.3 million and $5.0 million, respectively.

The aggregate net liability of our defined benefit plans as of September 30, 2020, 2019, and 2018 was $7.1 million, $6.8 million, and $4.2 million, respectively.

Issued Accounting Standards Not Yet Adopted

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Critical Accounting Policies, Judgments and Estimates

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

statements, and the reported amounts of revenue and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those rel ated to revenue recognition;

allowance for doubtful accounts;

The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that have a material impact on the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition;

allowance for credit losses and doubtful accounts;

accounting for deferred costs;

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accounting for business combinations;

accounting for stock-based com pensation;

accounting for stock-based compensation;

accounting for income taxes;

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and loss contingencies.

Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances.

Our management bases its estimates on historical

experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances.

Actual results could differ from these estimates.

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

As of October 1, 2018, we adopted ASC 606 using the modified retrospective approach, which requires the results for the current reporting periods be presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies in accordance with ASC 605, with a cumulative adjustment recorded to accumulated deficit.

For a reconciliation of our old accounting policy and ASC 606, please refer to Note 3 to the accompanying audited Consolidated and Combined Financial Statements included elsewhere in this Form 10-K.

We currently recognize revenue after applying the following five steps:

We recognize revenue after applying the following five steps:

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

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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 c ustomer or us, no financing component is deemed to exist.

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 no t consider set-up fees nor other upfront fees paid by our customers to represent a financing component.

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.

Performance Obligations

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.

Embedded software and technology licenses operate without access to the external networks and information.

Embedded licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology are accounted for as a combined performance obligation.

Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.

For income statement presentation purposes, we separate license revenue from professional services revenue based on their relative SSPs.

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

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

Revenue from distinct embedded software and technology licenses, which do not require professional services 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.

For income statement presentation purposes, we separate distinct embedded license revenue from professional services revenue based on their relative SSPs.

Revenue from embedded 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 ASC 606-10-55-65(A).

For usage-based royalty arrangements, which include fixed consideration related to a minimum usage guarantees, the fixed consideration is recognized when the software is made available to the customer.

Connected Services

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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.

There can be instances where the customer purchases a software license that allows them to take possession of the software to enable hosting by the customer or a third-party.

For such arrangements, the performance obligation of the license is completed at a point in time once the customer takes possession of the software.

Professional Services

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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.

Furthermore, hybrid contracts that contain both embedded and connected license and professional services are analyzed to determine if the products and services are distinct or have stand=alone functionality to determine the revenue treatment.

Judgments are required to determine the SSP for each distinct performance obligation.

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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 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.

For contracts that contain future royalties, the allocation of SSP is determined using any fixed payments as well as the forecasted volume usage associated with royalties.

Contract Acquisition Costs

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As of September 30, 2021 and 2020, we had $6.9 million and $5.6 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.

We had amortization expense of $1.9 million, $1.5 million, and $0.7 million related to these costs during the fiscal years ended September 30, 2021, 2020, and 2019.

There was no impairment related to contract acquisition costs.

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As of September 30, 2021 and 2020, we had $37.8 million and $45.4 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.

We had amortization expense of $15.4 million, $12.0 million and $10.6 million related to these costs during the fiscal years ended September 30, 2021, 2020 and 2019, respectively.

There was no impairment related to contract fulfillment costs capitalized.

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A receivable is a right to consideration that is unconditional (i.e., only the passage of time is required before payment is due).

We present such receivables in accounts receivable, net in our condensed combined balance sheets at their net estimated realizable value.

We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected.

We present such receivables in Accounts receivable, net in our Consolidated Balance Sheets at their net estimated realizable value.

We maintain an allowance for credit losses 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.

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Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired.

Goodwill is not amortized but tested annually for impairment or when interim indicators of impairment are present.

Goodwill is not amortized but tested annually for impairment or when indicators of impairment are present.

The test for goodwill impairment involves a qualitative assessment of impairment indicators.

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For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units.

A reporting unit represents an operati ng segment or a component within an operating segment for which discrete financial information is available and is regularly reviewed by segment management for performance assessment and resource allocation.

Components of similar economic characteristics a re aggregated into one reporting unit for the purpose of goodwill impairment assessment.

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 c ompo nents , we have concluded that our goodwill is associated with one reporting unit.

Upon consideration of our compo nents , we have concluded that our goodwill is associated with one reporting unit.

The fair value of a reporting unit is generally determined using a combination of the income approach and the market approach.

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Stock-Based Compensation

We recognize stock-based compensation expense over the requisite service period, based on the grant date fair value of the awards and the number of the awards expected to be vested based upon service and performance conditions.

The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is estimated on the date of grant using the Black-Scholes model.

Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends, share price volatility, forfeiture rates and the number of performance-based restricted stock units expected to be granted.

If actual results differ significantly from these estimates, the actual stock-based compensation expense may significantly differ from our estimates.

We grant equity awards to certain employees which include stock options and restricted awards in accordance with provisions of the Cerence 2019 Equity Incentive Plan (“Equity Incentive Plan”).

We account for stock-based compensation through recognition of the fair value of the stock-based compensation as a charge against earnings.

The fair value for time-based restricted stock units and performance-based restricted stock units is based on the closing share price of our common stock on the date of grant.

For performance-based restricted stock units, the compensation cost is recognized based on the number of units expected to vest upon the achievement of the performance conditions.

We recognize stock-based compensation as an expense on a straight-line basis, over the requisite service period.

We account for forfeitures as they occur, rather than applying an estimated forfeiture rate.

Fiscal years 2021 and 2020

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

740, Income Taxes , or ASC 740.

Deferr ed Taxes

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.

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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.

With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue tax for the repatriations of such foreign earnings.

Valuation Allowance

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Tax laws is complex and often subject to varied interpretations, accordingly, the ultimate outcome with respect to taxes we may own may differ from the amounts recognized.

Fiscal 2019 and Fiscal 2018

Income taxes as presented herein attribute current and deferred income taxes of Nuance to the Cerence business’ s standalone financial statements in a manner that is systemati c, rational, and consistent with the asset and liability method prescribed by ASC 740 .

Accordingly, the Cerence business’ s income tax provision was prepared following the “Separate Return Method.” The Separate Return Method applies ASC 740 to the standalon e financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise.

As a result, actual tax transactions included in the consolidated financial statements of Nuance may not be include d in the combined financial statements of the Cerence business.

Similarly, the tax treatment of certain items reflected in the combined financial statements of Cerence may not be reflected in the consolidated financial statements and tax returns of Nuance;

Fiscal year 2019

Income taxes as presented herein attribute current and deferred income taxes of Nuance to the Cerence business’s standalone financial statements in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by ASC 740.

Accordingly, the Cerence business’s income tax provision was prepared following the “Separate Return Method.” The Separate Return Method applies ASC 740 to the standalone financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise.

As a result, actual tax transactions included in the consolidated financial statements of Nuance may not be included in the combined financial statements of the Cerence business.

Similarly, the tax treatment of certain items reflected in the combined financial statements of Cerence may not be reflected in the consolidated financial statements

and tax returns of Nuance;

therefore, such items as net operating losses, credit carryforwards and valuation allowances may exist in the standalone financial statements that may or may not exist in Nuance’s consolidated financial statements.

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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.

Our leases have remaining terms ranging from less than one year to seven 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.

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 Sheets as of September 30, 2021 and 2020.

Finance leases are included in Property and equipment, net, Accrued expenses and other current liabilities, and Other liabilities on our Consolidated Balance Sheets as of September 30, 2021 and 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 consolid ated statements of operations, and interest expense is included within the other income (expense), net.

For operating leases, the related cash payments are included in the operating cash flows on the consolidated statements of cash flows.

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

For operating leases, costs are included within Cost of revenues, Research and development, Sales and marketing, and General and administrative lines on the Consolidated and Combined Statements of Operations.

For financing leases, amortization of the finance right of use assets is included within Research and development, Sales and marketing, and General and administrative lines on the Consolidated and Combined Statements of Operations, and interest expense is included within Interest expense.

For operating leases, the related cash payments are included in the operating cash flows on the Consolidated and Combined 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 and Combined Statement of Cash Flows and the related cash payments for the interest portion of the lease liability are included in the operating cash flows on the Consolidated and Combined Statement of Cash Flows.

Convertible Debt

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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.

The debt issuance premium or discount is amortized to Interest expense in our Consolidated and Combined 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis