UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition
period from _______ to ________
Commission File Number: 001-39030
CERENCE INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
15 Wayside Road
Burlington, Massachusetts
(Address of principal executive offices)
83-4177087
(I.R.S. Employer
Identification No.)
01803
(Zip Code)
Registrant’s telephone number, including area code: (857) 362-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.01 per share
Trading
Symbol(s)
CRNC
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☐
☐
☒
Accelerated filer
Smaller reporting company
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
As of March 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $561,451,876 based on the closing price
of the common stock on the Nasdaq Global Select Market for such date.
The number of shares of Registrant’s common stock outstanding as of November 12, 2020 was 37,426,832.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrant’s 2021 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K. Such Proxy Statement will be filed within 120 days of the Registrant’s fiscal year ended September 30,
2020.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
SIGNATURES
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or Form 10-K, filed by Cerence Inc. together with its consolidated subsidiaries, “Cerence” or the “Company,” or
“we,” “us” or “our” unless the context indicates otherwise, contains “forward-looking statements” that involve risks and uncertainties. These statements can
be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and
projections about our industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,”
“expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in
connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently
susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking
statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the
forward-looking statements contained in this Form 10-K are based on reasonable assumptions, you should be aware that many factors could affect our
actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including
but not limited to:
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the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance;
adverse conditions in the automotive industry or the global economy more generally, including as a result of the COVID-19 pandemic;
our employees are represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws of
the U.S.;
the highly competitive and rapidly changing market in which we operate;
our strategy to increase cloud services and fluctuations in our operating results;
escalating pricing pressures from our customers;
our failure to win, renew or implement service contracts;
the cancellation or postponement of service contracts after a design win;
the loss of business from any of our largest customers;
inability to recruit and retain qualified personnel;
cybersecurity and data privacy incidents that damage client relations;
economic, political, regulatory, foreign exchange and other risks of international operations;
unforeseen U.S. and foreign tax liabilities;
the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;
defects in our software products that result in lost revenue, expensive correction or claims against us;
our inability to quickly respond to changes in technology and to develop our intellectual property into commercially viable products;
a significant interruption in the supply or maintenance of our third-party hardware, software, services or data; and
certain factors discussed elsewhere in this Form 10-K.
These and other factors are more fully discussed in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” sections and elsewhere in this Form 10-K. These risks could cause actual results to differ materially from those implied by forward-
looking statements in this Form 10-K. Even if our results of operations, financial condition and liquidity and the development of the industry in which we
operate are consistent with the forward-looking statements contained in this Form 10-K, those results or developments may not be indicative of results or
developments in subsequent periods.
Any forward-looking statements made by us in this Form 10-K speak only as of the date on which they are made. We are under no obligation to, and
expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or
otherwise, except as required by law.
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Item 1. Business.
Overview
PART I
Cerence builds AI powered virtual assistants for the mobility/transportation market. Our primary target is the automobile market, but our solutions
can apply to all forms of transportation including but not limited to two-wheel vehicles, planes, tractors, cruise ships and elevators. Our solutions power
natural conversational and intuitive interactions between vehicles, drivers and passengers, and the broader digital world. We are a premier provider of AI-
powered assistants and innovations for connected and autonomous vehicles, including one of the world’s most popular software platforms for building
automotive virtual assistants, such as “Hey BMW” and “Ni hao Banma”. Our customers include all major automobile original equipment manufacturers, or
OEMs, or their tier 1 suppliers worldwide, including BMW, Daimler, FCA Group, Ford, Geely, GM, Renault-Nissan, SAIC, Toyota, Volkswagen Group,
Aptiv, Bosch, Continental, DENSO TEN and Harman. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual
assistants with unique, branded personalities and ultimately strengthening the bond between their brands and end users. Our vision is to enable a more
enjoyable, safer journey for everyone.
Our platform utilizes industry-leading speech recognition, natural language understanding, speech signal enhancement, text-to-speech, and acoustic
modeling technology to provide a conversational AI-based solution. Virtual assistants built with our platform can enable a wide variety of modes of human-
vehicle interaction, including speech, touch, handwriting, gaze tracking and gesture recognition, and can support the integration of third-party virtual
assistants into the in-vehicle experience.
Our software platform is a market leader for building integrated, branded and differentiated virtual assistants for automobiles. As a unified platform and
common interface for automotive cognitive assistance, our software platform provides OEMs and suppliers with an important control point with respect to the
mobility experience and their brand value. Our platform is fully customizable and designed to support our customers in creating their own ecosystem in the
automobile and transforming the vehicle into a hub for numerous connected devices and services. Virtual assistants built with our software platform can address
user requests across a wide variety of categories, such as navigation, control, media, communication and tools. Our software platform is comprised of edge
computing and cloud-connected software components and a software framework linking these components together under a common programming interface. We
implement our software platform for our customers through our professional services organization, which works with OEMs and suppliers to optimize our
software for the requirements, configurations and acoustic characteristics of specific vehicle models.
The market for automotive cognitive assistance is rapidly expanding. The proliferation of smartphones and smart speakers has encouraged consumers to
rely on a growing number of virtual assistants and special-purpose bots for various tasks such as controlling entertainment systems and checking the news.
Automobile drivers and passengers increasingly expect hands-free access to virtual assistants as part of the mobility experience, with common use cases in a
variety of categories including mobility domains such as navigation, voice-activated texts, and telephone communication, automobile domains, such as
automobile user guides, and ignition on-off, and generic domains, such as entertainment. To meet the increasing demand for automotive cognitive assistance and
to offer differentiated mobility experiences, OEMs and suppliers are building proprietary virtual assistants into an increasing proportion of their vehicles. We
believe that this trend will continue and that consumer appetite for automotive cognitive assistance will grow further as vehicles become more autonomous and
drivers pursue new forms of human-vehicle engagement previously not feasible during vehicle operation.
We generate revenue primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue
from our work with OEMs and suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance
and enhancement projects. Through our over 20 years in the automotive industry, we have developed longstanding industry relationships and benefit from
incumbency. We have existing relationships with all major OEMs or their tier 1 suppliers, and while our customer contracts vary, they generally represent
multi-year engagements, giving us visibility into future revenue. We have master agreements or similar commercial arrangements in place with many of
our customers, supporting customer retention over the long term.
As of September 30, 2020, we had fixed backlog of $387.5 million, which includes $325.1 million of estimated future revenue related to remaining
performance obligations and $62.4 million of contractual commitments which have not yet been invoiced. As of September 30, 2020, we had variable
backlog of $1.42 billion, which includes estimated future revenue from variable forecasted royalties related to our embedded and connected
businesses. Our estimation of forecasted royalties is based on our royalty rates for embedded and connected technologies from expected car shipments
under our existing contracts over the term of the programs. Anticipated shipments are based on historical shipping experience and current customer
projections that management believes are reasonable as of the date of this Form 10-K. Both our embedded and connected technologies are priced and sold
on a per-vehicle or device basis, where we receive a single fee for either or both the embedded license and the connected service term. However, our fixed
and variable backlog may not be indicative of our actual future revenue. The revenue we actually recognize is subject to several factors, including the
number and timing of vehicles our customers ship, potential terminations or changes in scope of customer contracts, and currency fluctuations. As of
September 30, 2020, we estimate our total backlog to be $1.81 billion, including $387.5 million of fixed backlog and $1.42 billion of variable backlog.
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Our solutions have been installed in more than 325 million automobiles to date, including over 38 million new vehicles in fiscal 2020 alone. Based
on royalty reports provided by our customers and third-party reports of total vehicle production worldwide, we estimate that approximately 53% of all
shipped cars during the fiscal year ended September 30, 2020 included Cerence technologies. Cerence hybrid solutions shipped on approximately 7.4
million vehicles during the fiscal year ended September 30, 2020. In aggregate, over 65 automobile brands worldwide use our solutions, covering over 70
languages and dialects, including English, German, Spanish, French, Mandarin, Cantonese and Shanghainese.
In fiscal 2020, we generated revenue of $329.6 million, an increase of 8.7% compared to $303.3 million for the fiscal year ended September 30,
2019. We recorded a net loss of $20.6 million for the fiscal year ended September 30, 2020, a decrease of 120.6% compared to net income of $100.3
million recorded for the fiscal year ended September 30. 2019. For fiscal years 2019 and 2018, our business was wholly-owned by Nuance
Communications, Inc., (“Nuance”), and our results for those fiscal years may not reflect what our results would have been had we been an independent,
publicly traded company during those fiscal years. In addition, the financial information included herein may not necessarily reflect our results of
operations in the future.
History and Corporate Information
On October 1, 2019 (which we refer to as the “Distribution Date”), Nuance, a leading provider of speech and language solutions for businesses and
consumers around the world, completed the legal and structural separation and distribution to its stockholders of all of the outstanding shares of our
common stock, and its consolidated subsidiaries, in a tax free spin-off (which we refer to as the Spin-Off). The distribution was made in the amount of one
share of our common stock for every eight shares of Nuance common stock (which we refer to as the “Distribution”) owned by Nuance’s stockholders as of
5:00 p.m. Eastern Time on September 17, 2019, the record date of the Distribution.
In connection with the Distribution, on September 30, 2019, we filed an Amended and Restated Certificate of Incorporation, or the Charter, with the
Secretary of State of the State of Delaware, which became effective on October 1, 2019. Our Amended and Restated By-laws also became effective on
October 1, 2019. On October 2, 2019, our common stock began regular-way trading on the Nasdaq Global Select Market under the ticker symbol CRNC.
Our principal executive offices are located at 15 Wayside Road, Burlington, Massachusetts 01803 and our telephone number at that address is (857)
362-7300. Our website is www.cerence.com. We are not including the information contained in our website as part of, or incorporating it by reference into,
this Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to these reports, as soon as reasonably practicable after we electronically file these materials with, or otherwise furnish them
to, the Securities and Exchange Commission, or the SEC. The SEC maintains an Internet website (https://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC.
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Our Capabilities
Our mission is to empower the transportation ecosystem with digital platform solutions for connected and autonomous vehicles. We deliver
automotive cognitive assistance solutions that are conversational and intuitive and that enable OEMs to strengthen the emotional connection with their end
users through a distinct, consistent, branded experience. We continue to extend these solutions to two-wheel vehicles and tractors and other transportation
means. Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information and take
action across an expanding variety of categories, including navigation, control, media, communication, information and tools. Our software, developed in
deep partnership with the automotive industry, improves the mobility experience for drivers and passengers all over the world.
User engagement with virtual assistants built with our software platform typically begins with a voice request. Upon receiving such an input, our
software platform determines what the user has said, infers user intent, and maps the request to the most applicable category and domain. Depending on the
applicable domain, our software platform determines whether to respond directly or access an external data source or third-party virtual assistant, in all
cases resulting in a response including spoken words or taking action. Depending on the complexity of the request and other factors, engagement may
consist of multiple rapid voice interactions with the user and may combine assistance in multiple domains.
Our software platform offers a hybrid architecture combining edge software components, which are embedded in a vehicle’s head unit and
integrated with onboard systems, with cloud-connected components, which access data and content on external networks and support over-the-air updates.
This hybrid architecture enables our software platform to combine the performance, reliability, efficiency, security and tight vehicular integration of
embedded software with the flexibility that cloud connectivity provides. Response frameworks can generally be customized such that requests are
processed first at the edge, controlling cloud transmission costs, or in parallel at the edge and in the cloud, to achieve higher confidence responses with low
latency. Through edge computing capabilities, the platform is able to provide certain features, such as wake up words, while avoiding privacy and latency
issues associated with always-listening cloud-connected technologies. Our software platform includes a common programming framework including
toolkits and applications for its edge and cloud-connected components, and our customers can choose the software components that are necessary to power
the experiences that they want to build and offer.
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Cerence Platform Framework - Hybrid Architecture
We deliver our software platform through our professional services organization, which works with OEMs and suppliers to tailor it to the desired
requirements, configurations and acoustic characteristics of specific vehicle models. For an initial implementation, our professional services engagements
typically begin with the porting of our key technologies to the customer’s specific hardware and software platforms and the development of specific
dialogues and grammar libraries. Our professional services teams also work with OEMs on acoustic optimization of a system and application of our audio
signal processing technologies. Following an initial implementation, our professional services organization may continue to provide services over the
course of a head unit program and vehicle model lifecycle through maintenance and enhancement engagements.
Edge Software Components
Our software platform’s edge software components are installed on a vehicle’s head unit and can operate without access to external networks and
information. We tailor our edge software components to a customer’s desired use cases and a vehicle model’s unique systems, sensors and data interfaces.
Capabilities of our edge software components include automatic speech recognition, natural language understanding, noise cancellation, driver and
passenger voice isolation, voice biometrics, wake-up word and text-to-speech synthesis, as well as certain non-speech technologies such as gaze, gesture
and touch input. Our software can support more than 70 languages. Edge deployment suits these technologies as it provides the following functionality and
benefits:
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Performance. Processing at the edge is often necessary to meet the low latency requirements of natural conversation.
Vehicle Systems Integration. Vehicle applications, sensors, and data interfaces can be integrated deeply with embedded systems.
Availability. Edge-located systems are available regardless of cellular coverage and network connectivity.
Reduced cost. Processing at the edge reduces or eliminates cellular data transmission costs.
Privacy. Users’ utterances and system outputs processed at the edge remain onboard and can immediately be purged.
Certain forms of assistant speech invocation can only be implemented using edge software. The use of wake-up words like “Hey BMW” and “Ni hao
Banma” require constant listening and signal processing to identify instances when a virtual assistant should activate and respond. The same requirements
apply to our new JustTalk technology, which constantly listens to spoken conversation, determines speaker intent, and invokes assistance appropriately
without requiring a specific invocation phase. The alternative of sending a constant stream of audio from the car interior to the cloud for processing would
require enormous amounts of bandwidth and potentially create privacy concerns.
We typically sell our edge software components under a traditional per unit perpetual software license model, in which a per unit fee is charged for
each software instance installed on an automotive head unit. Our customers generally provide estimates of the units to be shipped for a particular program,
and we review third-party market studies and work with our customers to refine and
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understand these projections. While these projections provide us with some reasonable visibility into future revenue, the number of units to be shipped for a
particular program is not committed upfront.
Cloud-Connected Components
Our software platform’s cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-
enabled personalization and context-based response frameworks, and content integration platforms. Our cloud-connected speech-related technologies
perform many of the same tasks as our speech-related edge components while offering enhanced functionality through increased computational power and
access to external content. Cloud-connected components also support the replication of personalized settings such as voice profiles and preferences across
multiple vehicles.
We offer cloud-connected components in the form of a connected service to the vehicle end user. Initial subscriptions typically have multi-year
terms from the time of a vehicle’s sale and are paid in advance by the OEM or supplier. Renewal options vary and are managed by our customers on behalf
of vehicle end users.
Virtual Assistant Coexistence
The wide variety of use cases encompassed by automotive cognitive assistance, in the context of evolving consumer preferences, necessitates the
coexistence of multiple virtual assistants within the in-vehicle environment. For example, many vehicle-related categories such as navigation and control
can best be addressed by a tightly integrated, vehicle-model-specific virtual assistant. At the same time, drivers and passengers often prefer to use familiar
Internet-based virtual assistants for more general domains such as entertainment.
To enable drivers and passengers to extend their digital life from outside the vehicle to inside the vehicle, our software platform can support the
integration of third-party virtual assistants, providing a uniform interface for virtual assistant engagement. We have invested in our platform to develop the
technology and capabilities necessary to integrate third party virtual assistants with vehicles’ systems.
To make integration as seamless as possible, we have built cognitive arbitration technology that is capable of inferring user intent, determining
which within a set of virtual assistants would be best suited to address a request, and sending the request to the selected assistant thus enabling users to
extend their digital life into the automobile. Depending on a system’s configuration and the virtual assistants to which it is connected, output can be
presented back to the user through a vehicle-specific personality or through the virtual assistant’s own interface. Cognitive arbitration represents an
important control point with respect to the mobility experience and an important brand differentiation opportunity for OEMs and suppliers. Like the rest of
our software platform, cognitive arbitration is a white label product that can be customized and branded.
Along with providing OEMs control over their brand identity, our cognitive arbitration technology is an important element in letting an OEM design
the overall driver and passenger experience. This technology allows an OEM to dictate interactions with third-party virtual assistants within the vehicle,
strengthening its ability to differentiate and control the overall in-vehicle experience.
Professional Services
We have a large professional services team that works with our customers in the design, development and deployment phases of a vehicle head unit
program and vehicle model lifecycle, as well as in maintenance and enhancement engagements. Our range of capabilities include personalization of
grammar and natural language understanding development, localization, language selection and system coverage, navigation speech data generation,
system prompt recordings, porting our platform’s framework and our ability to deploy cognitive arbitration technologies, and user experience reviews and
studies. Our professional services team is globally distributed to serve our customers in their primary design and production jurisdictions. We typically
charge manufacturers for our design and consulting work, which are primarily project-based, in line with customary non-recurring engineering industry
practices.
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Our Competitive Strengths
Our key competitive strengths include:
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Industry-leading speech-related technology. Our research shows that consumers see speech as an increasingly attractive medium for human-
vehicle interaction. Nevertheless, they are often frustrated with speech recognition solutions that misunderstand spoken language or require
users to speak rigid, pre-defined commands associated with a limited set of functions. Developing conversation-based automotive virtual
assistants that users will perceive as natural is challenging as a matter of artificial intelligence technology, acoustic engineering and user
interface design. We believe our software platform, as tailored for a specific vehicle model by our professional services organization, represents
one of the most technologically advanced and highest-performing human-vehicle speech interaction systems available today. In tests performed
by our customers to assess correct recognition of words, sentences, and domains, our solutions have achieved some of the highest marks
relative to competitors and our offerings are backed by our portfolio of patents and associated rights.
Hybrid edge-cloud system architecture. Our software platform’s hybrid architecture combines the performance, reliability and tight integration
that only edge software can provide with the flexibility of cloud connectivity. Cloud-reliant solutions with which our software platform
competes cannot match edge software’s low latency, its bandwidth efficiency or its availability in the absence of network connectivity.
Moreover, emerging speech invocation paradigms such as wake up words and situationally aware invocation are most effectively implemented
using edge technology.
Bespoke vehicle integration and acoustic tuning. Cognitive assistance for categories such as navigation, entertainment and control requires
tight integration with onboard vehicle components, which vary widely among vehicle models. Separately, speech interaction systems can be
significantly hampered by the noisy environment of a vehicle cabin and must be tuned for particular acoustics and audio system components.
To achieve the tight vehicle integration necessary to address these concerns, our professional services team works closely with OEMs and
suppliers to customize our offerings for the particular characteristics of specific vehicle models. Our expertise in acoustics enables us to
implement systems that can isolate the voices of individual speakers and support simultaneous virtual assistance for speakers in multiple zones,
representing a key point of differentiation.
Interoperability with third-party Internet-based virtual assistants. Virtual assistants from large technology companies have become popular
with consumers. We believe that consumers want to extend the use of these assistants while traveling in their vehicles and that a comprehensive
automotive cognitive assistance system requires the coexistence of multiple virtual assistants. To accommodate their end user preferences while
still providing a unique and brand-specific experience, OEMs seek to offer a common in-vehicle interface with seamless integration across
various virtual assistants. To this end, our software platform can support the coexistence of multiple third-party virtual assistants and provide a
uniform interface for virtual assistant engagement. Our market-leading position, our focus on the automotive market and the large size of our
installed base create incentives for third party virtual assistant providers to work with us and support this integration.
Independence from large technology companies and automobile industry players. As vehicles become more autonomous, mobility
experiences are being increasingly defined by in-cabin features and alternative forms of human-vehicle engagement. Branded, differentiated
automotive cognitive assistance is thus increasingly important to OEMs’ brand value. As a neutral, independent, white-label software platform
vendor, we empower our customers to build branded and differentiated experiences and retain ownership of, or rights to, their system design
and data. The virtual assistant coexistence enabled by our cognitive arbitration functionality is designed to allow our customers to provide
access to third-party virtual assistants without ceding overall control of the cognitive assistance experience.
OEM alignment. The design and development of the head unit within the vehicle ecosystem is a complex process requiring tight integration of
the software and hardware components used in and with the vehicle. We believe our demonstrated long-standing capabilities in working closely
with OEMs, understanding their needs, product roadmaps and global go-to-market strategies enables us to innovate our technologies to meet an
OEM’s specifications. Furthermore, our working relationships with OEMs uniquely allow us to market and sell our solutions on both a local
and global basis in accordance with an OEM’s particular requirements.
Broad language coverage. Our software platform supports over 70 languages and dialects, far more than any of our competitors. As a result of
our broad language support, our customers are already delivering cognitive assistance based on our software platform in over 60 countries
across the Americas, Europe and Asia, including China, the U.S. and all other large automotive markets. Our language support also enables
multi-lingual capabilities for domains such as music selection, point-of-interest selection, and cross-border navigation among others,
representing a critical feature for markets such as Continental Europe in which automobiles may routinely traverse multiple lingual zones. We
believe that our portfolio of languages and multi-lingual capabilities represent an important competitive advantage, as the development of
capabilities to support a new language is expensive and time-consuming.
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Broad, global network of deep relationships with OEMs and tier 1 suppliers. We have supplied speech recognition systems to OEMs and
suppliers for over 20 years, working closely with our customers through our global professional services organization to design and integrate
our solutions into their brands. Today, we work with all major OEMs or their tier 1 suppliers worldwide, leveraging the geographic breadth and
industry experience of our professional services teams. Our long history in the automotive industry and the global reach and experience of our
over 400 professional services employees across 12 countries gives us credibility with OEMs as we seek new business with OEMs, either
directly or through their tier 1 suppliers. We believe that OEMs who sell globally will value our experience in servicing and deploying
solutions on a global basis. We often have master agreements or similar commercial arrangements with our customers. These master
agreements help us retain customer relationships over the long term.
Our Growth Strategies
We believe our growth opportunity has three key facets: continued investment in expending our core technology, development of new applications
that extend our core technology into innovative applications, and expansion of our target market beyond automobiles. Successful execution of these key
objectives could lead to the greater penetration of our offerings and key enabling technologies throughout our target markets, resulting in an increase in the
revenue we are able to capture per vehicle and expansion of our market share relative to competitors.
Our primary strategies for pursuing our growth include the following:
• Maintain and extend product leadership. We intend to continue investing in developing our core product functionality and expanding the
breadth of categories and domains our software platform is able to address, particularly with a view toward maintaining our market share in
edge software components and growing our share in cloud-connected software functionalities. Our existing relationship with, and our
proximity in the design process to, OEMs provides us with insight into the needs of the end-users and roadmaps for innovation. For instance,
this insight has helped us identify and advance our technologies for autonomous driving systems, which technologies have been incorporated in
solutions currently under development. Additionally, we intend to continue to invest in customizing and supporting our solutions for specific
individual automobile vehicle models, resulting in tight integration of our solutions. We believe that increasing complexity of our edge
software components, including with respect to multi-modal interaction, and growth in our cloud-connected product areas, including the
enabling of third-party services, will enable us to increase the revenue per vehicle that we are able to generate. Additionally, these investments
will help maintain our position with existing customers through new vehicle models and enable us to grow with the overall market for
automotive cognitive assistance.
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Continue to invest in interoperability with third-party virtual assistants. We believe that the growing popularity of third-party virtual
assistants is creating increasing demand for access to these assistants as part of the mobility experience. We also believe that complete
automotive cognitive assistance requires the coexistence of multiple virtual assistants. We intend to continue to invest to develop our software
platform’s interoperability with third-party virtual assistants and its cognitive
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arbitration capabilities to maintain its position as a neutral automotive cognitive assistance platform. We believe a neutral automotive cognitive
assistance platform will increasingly be valued by OEMs that prioritize maintaining their unique and branded in-car experience and the ability
to control the mobility experience overall.
Deliver new functionality to existing installed base. Our solutions have been installed in over 325 million vehicles to date. Our large installed
base represents an opportunity to deliver new features and software. Depending on system capabilities, we are able to deliver updated
functionality to our users in the form of embedded software upgrades performed by dealers and over-the-air updates delivered from the cloud.
Develop products that leverage our expertise in new applications. We have developed are developing new products that leverage our expertise
in voice-AI into new applications that will be distinct from our Edge or Cloud-connected product offerings. These new applications are
expected to generate revenue using either a subscription or transaction-based model extending the company’s market opportunity into new
areas. Two of the new applications developed during fiscal year 2020 are Cerence Pay and Car Life. Cerence Pay offers a secure, contactless
payment experience for drivers via voice and facial biometrics. Cerence Car Life is a suite of AI-powered, software-as-a-service (SaaS)
offerings that provides drivers with up-to-date information about their cars via a companion application, voice output from the automotive
assistant, and imagery displayed on the car’s infotainment system.
Expand into adjacent transportation markets. Today we primarily target the automobile market. However, our products and technology also
have application to other modes of transportation. Any type of vehicle that moves people are potential applications for our technology. We have
developed some initial business in the two-wheel vehicle and tractor markets and have explored opportunities in the cruise ship and elevator
markets. In total, we believe these adjacent markets represent an important growth opportunity.
Competition
The automobile cognitive assistance market is competitive. Today, we face two primary sets of competitors:
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Large technology companies. Many large technology companies, including Amazon, Apple, Google, Microsoft, Alibaba, Baidu and Tencent,
offer Internet-based virtual assistants. Given the popularity in general of these virtual assistants, we believe that automobile drivers and riders
increasingly desire the ability to use them as part of the mobility experience. To meet this demand, some of these companies have invested in
technologies, such as Apple CarPlay, to make their virtual assistants more accessible within vehicle cabins.
While these third-party virtual assistants directly compete with some of the functionality we provide as part of our software platform, they also
increase the need for our software platform in two ways. First, given the fragmented and competitive nature of the virtual assistant market, it is
important for OEMs and suppliers to enable their passengers to utilize a variety of virtual assistants. Our software platform’s cognitive
arbitration functionality can, dependent on appropriate third-party agreements, enable OEMs and suppliers to provide access to multiple third-
party virtual assistants through a consistent, branded interface. Second, the noisy environment of a vehicle cabin presents significant speech
processing challenges for smartphone-based third-party virtual assistants that are not designed for a specific vehicle model. Our software
platform integrates with third-party virtual assistants and improves their functionality by improving the quality of speech input.
Small, focused competitors. We compete for business directly with certain companies focused on voice-based virtual assistance, including
SoundHound in the U.S., iFlyTek in China, and other regional and technology-focused competitors. These companies have had some success selling
into our customer base. However, we believe that we have multiple meaningful competitive advantages, including our scale, our globally distributed
team, our best-in-class portfolio of compatible languages, and our deep focus on the automotive market. We also believe that our technology,
particularly our speech signal enhancement and acoustic tuning, is superior based on benchmarking results against our competitors. We believe we
will continue to be able to compete successfully against these competitors as we continue to invest in our offerings.
Our industry has attracted, and may continue to attract, new entrants. Although we find that OEMs often prefer to maintain relationships with
suppliers that have a proven record of performance, they also rigorously reevaluate suppliers on the basis of product quality, price, reliability
and timeliness of delivery, product design capability, technical expertise and development capability, new product innovation, financial
viability, operational flexibility, customer service and overall management.
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Technology
Our software platform’s edge and cloud-connected software components are based on a number of proprietary technologies. We customize these
technologies for specific vehicle models and continuously update and improve our features and functionality. Our key technologies include but are not
limited to the following:
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Speech Signal Enhancement. A high-quality voice input signal is a precondition to reliable speech recognition and cognitive assistance.
However, in a typical vehicle cabin, ambient interior sounds and noise from around the vehicle mix with infotainment system output and
conversations between passengers, create a complex soundscape that can obscure virtual assistant requests. Audio signal processing
technologies are therefore critical to the cognitive assistance experience. We have been developing and combining highly advanced audio
signal enhancement technologies for over 20 years, and we tune our software in relation to the placement of microphones in a vehicle to create
defined acoustic zones and support the isolation of individual speakers. Our technologies deliver best-in-class speech recognition results, as
evidenced by tests performed by our customers to assess correct recognition of words, sentences, and domains, in which our solutions have
achieved some of the highest marks relative to competitors.
Automatic Speech Recognition. Our speech recognition technology, built using neural networks and specifically designed for automotive
applications, is recognized as the automotive industry leader in automatic speech recognition. We support over 70 languages and dialects,
representing the largest language portfolios in the speech industry. Key features of our speech recognition technology include free-form
conversational interpretation, as opposed to a rigid system of predefined commands, and barge-in capabilities, enabling users to correct and
modify their requests in the middle of stating them.
Natural Language Understanding. Once speech has been captured and accurately converted into words, natural language understanding
technology, or NLU, is necessary to match the request to the appropriate category and domain to interpret the user’s intent. Our NLU system
applies artificial intelligence reasoning, including predefined and learned preferences and real-time contextual information, to deliver
informative responses consistent with what a user desires. NLU processing is performed by a hybrid of edge and cloud-connected software
components to optimize performance, efficiency, reliability and security.
Vocalizer: Text-to-Speech and Natural Language Generation. In many cases, the most useful result of a spoken query or command is a
spoken response back to the user. To enable cognitive assistants to speak, we offer text-to-speech technology in more than 60 languages and
dialects and over 140 distinct voices. We also have developed the technology to read text using human-like inflection and emotion, as well as,
offer custom voices for customers who wish to differentiate themselves through an exclusive personality representing their brand.
Voice Biometrics. Our software platform includes biometric functionality which can authenticate and personalize the automotive experience by
recognizing users based on their voice and automatically load individual preferences and other automotive settings.
Push-to-Talk, Wake-Up Words and Just Talk. Through our software platform, we are capable of offering three methods for invoking the
virtual assistant, which can be implemented alone or in combination:
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Push-to-Talk, functionality, most commonly implemented as a button on the steering wheel or center console.
Wake-Up Word, functionality, involving a spoken keyword or phrase, such as “Hey BMW.”
Just Talk. Our active listening technology, introduced in 2017, filters out background noise and irrelevant conversation until it hears a
keyword, phrase, or command that it understands as related to an applicable domain and which is intended as a virtual assistant request.
False triggers are minimized through sophisticated syntax, cadence and intonation analysis performed in real-time and can be further
reduced using automobile sensors such as head or body movement trackers.
Cognitive Arbitration. Our cognitive arbitration technology can route arbitrary requests to the most appropriate virtual assistant or bot,
including third-party virtual assistants.
Non-Speech, Multimodal Input. Our technology seeks to mimic conversational human interaction by incorporating input methods beyond
speech. Our multimodal capabilities allow vehicle systems to accept multiple forms of input such as voice, gestures, gaze, predictive text and
handwriting.
• Multi-Seat Intelligence. Due to its flexible design, our speech signal enhancement technology can be easily configured for complex multi-zone
scenarios with various users and nearly arbitrary microphone configurations. Dedicated processing modes enable efficient and robust multi-
user speech recognition in challenging acoustical environments. This allows for passenger interaction in individual zones like sharing music or
interacting simultaneously with the car or infotainment systems, where some passengers can enjoy browsing their music by speech, while
others can send emails or other work-related activities.
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Research and Development
We maintain technical engineering centers in major regions of the world that help develop our software platform and its underlying components and
provide our customers with local engineering capabilities and design development.
We employ approximately 800 research and development personnel around the world, including scientists, engineers and technicians. Our total
research and development expenses were approximately $88.9 million, $93.1 million and $81.0 million for fiscal 2020, 2019 and 2018, respectively.
We believe that continued investment in research and development will be critical for us to continue to deliver market-leading solutions for
automotive cognitive assistance. Accordingly, we intend to continue to invest in our product portfolio and allocate capital and resources to our growth
opportunities.
Customers
Our customers include all major OEMs or their tier 1 suppliers worldwide. Our automobile manufacturer customers, commonly referred to as
OEMs, include BMW, FCA Group, Ford, Daimler, Geely, Renault-Nissan, SAIC, Toyota, Volkswagen Group and many others and represented
approximately 56% of our sales in fiscal 2020. Our largest customer, Toyota, represented approximately 23% of our revenue in fiscal 2020. Our tier 1
supplier customers, who typically sell automobile components to the OEMs, include Aptiv, Bosch, Continental, DENSO TEN, Harman and many others
and represented approximately 44% of our business in fiscal year 2020.
Our revenue base is geographically diverse. In fiscal 2020, approximately 39%, 38% and 23% of our revenue came from the Americas, Europe and
Asia, respectively.
Sales and Marketing and Professional Services
We market our offerings using a high-touch OEM solutions model. We sell directly to our customers, which include OEMs and suppliers and are
described in “—Customers,” and for each of our customers we assign a team comprising sales and marketing as well as professional services personnel.
Our customer contracts are bespoke and vary widely, but generally represent multi-year agreements providing visibility into future revenue and helping to
support retention of customer relationships over the long term.
Our sales and marketing team includes approximately 100 employees. This team includes sales representatives, account managers, sales engineers,
product managers and marketing experts. As we sell our offerings to all major OEMs or their tier 1 suppliers today, our sales strategy is primarily focused
on leveraging our existing customer relationships. Account managers typically have longstanding relationships with specific customers and are distributed
worldwide to provide local customer coverage. We oftentimes utilize customer-specific demo days and proof-of-concepts (“POCs”) in which we showcase
our technology and capabilities to OEMs and tier 1 suppliers on an individual basis. These events help maintain our market presence and awareness of our
platform’s offerings while also providing opportunities to solicit feedback and input from our customers on our roadmap and future technologies.
Our professional services organization includes approximately 400 employees. These employees work with our customers in the design phase of the
vehicle lifecycle to tailor our platform for specific requirements such as branding and also tune the software for the characteristics of a vehicle model. Our
professional services team also provides post-design phase services through maintenance engagements, particular with respect to our cloud-connected
solutions. The tight integration of our platform into our customers’ design process and their vehicles supports our ability to win future business with those
customers. Like our sales representatives, our professional services employees often have longstanding relationships with specific customers and are
distributed worldwide to provide local customer coverage.
Employees
As of September 30, 2020, we had approximately 1,500 full-time employees, including approximately 100 in sales and marketing, approximately
200 in administrative functions, approximately 400 in professional services, and approximately 800 in research and development. Approximately 90% of
our employees are based outside of the United States. None of our employees in the United States are represented by a labor union, however many of our
employees in Europe are represented by workers councils or labor unions. We believe that our relationships with our employees are satisfactory.
Intellectual Property
We own approximately 1,035 patents and patent applications and other intellectual property. Prior to our Spin-Off from Nuance, we entered into the
Intellectual Property Agreement, which provides us with certain non-exclusive rights with respect to patents that will continue to be held by Nuance. While
no individual patent or group of patents, taken alone, is considered material to our business, in the aggregate, these patents and rights provide meaningful
protection for our products, technologies, and technical innovations.
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Item 1A. Risk Factors.
You should carefully consider all of the information in this Form 10-K and each of the risks described below, which we believe are the material risks
that we face. Some of the risks relate to our business, others to our intellectual property and technology, and the consequences of the Spin-Off. Some risks
relate to the securities markets, our indebtedness and ownership of our common stock. Any of the following risks could materially and adversely affect our
business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Form 10-
K.
Risk Factor Summary
Risks Relating to Our Business
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Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, our business, which could adversely affect
our financial performance.
The market in which we operate is highly competitive and rapidly changing and we may be unable to compete successfully.
Adverse conditions in the automotive industry or the global economy more generally could have adverse effects on our results of operations.
Our strategy to increase cloud connected services may adversely affect our near-term revenue growth and results of operations.
Pricing pressures from our customers may adversely affect our business.
• We invest effort and money seeking OEMs’ validation of our technology, and there can be no assurance that we will win or be able to renew
service contracts, which could adversely affect our future business, results of operations and financial condition.
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Our business could be materially and adversely affected if we lost any of our largest customers.
Our operating results may fluctuate significantly from period to period, and this may cause our stock price to decline.
• We may not be successful with the adoption of new applications.
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Some of our employees represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws
of the U.S.
Cybersecurity and data privacy incidents or breaches may damage client relations and inhibit our growth.
A significant portion of our revenues and research and development activities originate outside the United States. Our results could be harmed
by economic, political, regulatory, foreign currency fluctuations and other risks associated with these international regions.
Our business in China is subject to aggressive competition and is sensitive to economic, market and political conditions.
Interruptions or delays in our services or services from data center hosting facilities or public clouds could impair the delivery of our services
and harm our business.
If our goodwill or other intangible assets become impaired, our operating results could be negatively impacted.
Tax matters may cause significant variability in our financial results and may impact our overall financial condition.
Risks Relating to our Intellectual Property and Technology
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Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could be exposed to significant
litigation or licensing expenses or be prevented from selling our products if such claims are successful.
Unauthorized use of our proprietary technology and intellectual property could adversely affect our business and results of operations.
Our software products may have bugs, which could result in delayed or lost revenue, expensive correction, liability to our customers and claims
against us.
• We may be unable to respond quickly enough to changes in technology and technological risks and to develop our intellectual property into
commercially viable products.
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• We utilize certain key technologies, content and services from, and integrate certain of our solutions with, third parties and may be unable to
replace those technologies, content and services if they become obsolete, unavailable or incompatible with our solutions.
Risks Relating to the Spin-Off
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If the Spin-Off were determined not to qualify as tax-free for U.S. federal income tax purposes, we could have an indemnification obligation to
Nuance, which could adversely affect our business, financial condition and results of operations.
• We have agreed to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and
operating flexibility.
• We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
• We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements
applicable to emerging growth companies could make our common stock less attractive to investors.
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Our historical combined financial information is not necessarily representative of the results we would have achieved as an independent,
publicly traded company.
• We may have potential business conflicts of interest with Nuance with respect to our past and ongoing relationships.
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A certain director may have actual or potential conflicts of interest because of their financial interests in Nuance.
The allocation of intellectual property rights and data between Nuance and Cerence as part of the Spin-Off, could adversely impact our
reputation, our ability to enforce certain intellectual property rights that are important to us and our competitive position.
Risks Relating to Our Securities and Indebtedness
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Our stock price may fluctuate significantly.
The terms of the Senior Credit Facilities restrict our current and future operations, particularly our ability to incur debt that we may need to
fund initiatives in response to changes in our business, the industry in which we operate, the economy and governmental regulations.
• We may evaluate whether to pay cash dividends on our common stock in the future, and the terms of our Senior Credit Facilities limit our
ability to pay dividends on our common stock.
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Servicing our debt may require a significant amount of cash. We may not have sufficient cash flow from our business to pay our indebtedness.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and results of operations and the
value of our common stock.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our
reported financial results.
The commercial and credit environment may adversely affect our access to capital.
Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and Delaware law may
discourage takeovers.
Our Amended and Restated Certificate of Incorporation will designate the courts of the State of Delaware as the sole and exclusive forum for
certain types of actions and proceedings, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired
and investors’ views of us could be harmed.
Risks Relating to Our Business
Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, our business, which could adversely affect our
financial performance.
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Our business depends on, and is directly affected by, the output and sales of the global automotive industry and the use of automobiles by
consumers. Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, global automotive industry customer sales
and production volumes. Vehicle production initially decreased significantly in China, which was first affected by COVID-19, then Europe and also the
United States. Subsequent events resulted in the shutdown of manufacturing operations in China, Europe and the United States, and even though
manufacturing operations has begun, in part, the capacity of such global manufacturing operations remains uncertain. As a result, we have experienced, and
may continue to experience, difficulties in entering into new contracts with our customers, a decline in revenues resulting from the decrease in the
production and sale of automobiles by our customers, the use of automobiles, increased difficulties in collecting payment obligations from our customers
and the possibility customers will continue with existing projects. These all may be further exacerbated by the global economic downturn resulting from
the pandemic which could further decrease consumer demand for vehicles or result in the financial distress of one or more of our customers.
As the COVID-19 pandemic continues, our business operations could be further disrupted or delayed. The pandemic has already resulted in, and
may continue to result in, work stoppages, slowdowns and delays, travel restrictions, and other factors that cause a decrease in the production and sale of
automobiles by our customers. The production of automobiles with our products has been and may continue to be adversely affected with production
delays and our ability to provide engineering support and implement design changes for customers may be impacted by restrictions on travel and
quarantine policies put in place by businesses and governments.
The full extent to which the ongoing COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of
which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its
severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions
can resume. The COVID-19 pandemic could also result in additional governmental restrictions and regulations, which could adversely affect our business
and financial results. In addition, a recession, depression or other sustained adverse market impact resulting from COVID-19 could materially and
adversely affect our business, our access to needed capital and liquidity, and the value of our common stock. Even after the COVID-19 pandemic has
lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact.
The market in which we operate is highly competitive and rapidly changing and we may be unable to compete successfully.
There are a number of companies that develop or may develop products that compete in the automotive voice assistance market. The market for our
products and services is characterized by intense competition, evolving industry and regulatory standards, emerging business and distribution models,
disruptive software technology developments, short product and service life cycles, price sensitivity on the part of customers, and frequent new product
introductions, including alternatives for certain of our products that offer limited functionality at significantly lower costs or free of charge. In addition,
some of our competitors have business objectives that may drive them to sell their alternative offerings at a significant discount to our offerings in the
automotive voice assistant market. Current and potential competitors have established, or may establish, cooperative relationships among themselves or
with third parties to increase the ability of their technologies to address the needs of our prospective customers. Furthermore, existing or prospective
customers may decide to develop competing products or have established, or may in the future establish, strategic relationships with our competitors. We
also face significant competition with respect to cloud-based solutions in the automotive cognitive assistance market where existing and new competitors
may have or have already established significant market share and product offerings.
The competition in the automotive cognitive assistance market could adversely affect our operating results by reducing the volume of the products
and solutions we license or sell or the prices we can charge. Some of our current or potential competitors are large technology companies that have
significantly greater financial, technical and marketing resources than we do, and others are smaller specialized companies that possess automotive
expertise or regional focus and may have greater price flexibility than we do. These competitors may be able to respond more rapidly than we can to new or
emerging technologies or changes in customer requirements, or may decide to offer products at low or unsustainable cost to win new business. They may
also devote greater resources to the development, promotion and sale of their products than we do, and in certain cases may be able to include or combine
their competitive products or technologies with other of their products or technologies in a manner whereby the competitive functionality is available at
lower cost or free of charge within the larger offering. To the extent they do so, penetration of our products, and therefore our revenue, may be adversely
affected. Our large competitors may also have greater access to data, including customer data, which provides them with a competitive advantage in
developing new products and technologies. Our success depends substantially upon our ability to enhance our products and technologies, to develop and
introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological
enhancements, and to maintain our alignment with the OEMs, their technology and market strategies. If we are unable to develop new products and
enhance functionalities or technologies to adapt to these changes and maintain our alignment with OEMs, our business will suffer.
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Adverse conditions in the automotive industry or the global economy more generally could have adverse effects on our results of operations.
Our business depends on, and is directly affected by, the global automobile industry. Automotive production and sales are highly cyclical and
depend on general economic conditions and other factors, including consumer spending and preferences, changes in interest rate levels and credit
availability, consumer confidence, fuel costs, fuel availability, environmental impact, governmental incentives and regulatory requirements, and political
volatility, especially in energy-producing countries and growth markets. Such factors may also negatively impact consumer demand for automobiles that
include features such as our products. In addition, automotive production and sales can be affected by our customers’ ability to continue operating in
response to challenging economic conditions, and in response to labor relations issues, regulatory requirements, trade agreements and other factors. The
volume of global automotive production has fluctuated, sometimes significantly, from year to year, and such fluctuations give rise to fluctuations in the
demand for our products. Any significant adverse change in any of these factors, including, but not limited to, general economic conditions and the
resulting bankruptcy of a customer or the closure of a customer manufacturing facility, may result in a reduction in automotive sales and production by our
customers, and could have a material adverse effect on our business, results of operations and financial condition.
Our strategy to increase cloud connected services may adversely affect our near-term revenue growth and results of operations.
Our leadership position has historically been derived from our products and services based on edge software technology. We have been and are
continuing to develop new products and services that incorporate cloud-connected components. The design and development of new cloud-connected
components will involve significant expense. Our research and development costs have greatly increased in recent years and, together with certain expenses
associated with delivering our connected services, are projected to continue to escalate in the near future. We may encounter difficulties with designing,
developing and releasing new cloud-connected components, as well as integrating these components with our existing hybrid technologies. These
development issues may further increase costs and may affect our ability to innovate in a manner demanded by the market. As a result, our strategy to
incorporate more cloud-connected components may adversely affect our revenue growth and results of operations.
Pricing pressures from our customers may adversely affect our business.
We may experience pricing pressure from our customers in the future, which could result from the strong purchasing power of major OEMs. As a
developer of automotive cognitive assistance components, we may be expected to quote fixed prices or be forced to accept prices with annual price
reduction commitments for long-term sales arrangements or discounted reimbursements for our work. We may encounter customers unwilling to accept the
terms of our software license or non-recurring engineering agreements. Any price reductions could impact our sales and profit margins. Our future
profitability will depend upon, among other things, our ability to continuously reduce the costs for our components and maintain our cost structure. Our
profitability is also influenced by our success in designing and marketing technological improvements in automotive cognitive assistance systems. If we are
unable to offset any price reductions in the future, our business, results of operations and financial condition would be adversely affected.
We invest effort and money seeking OEMs’ validation of our technology, and there can be no assurance that we will win or be able to renew service
contracts, which could adversely affect our future business, results of operations and financial condition.
We invest effort and money from the time an OEM or a tier 1 supplier begins designing for an upcoming program to the date on which the customer
chooses our technology to be incorporated directly or indirectly into one or more specific vehicle models to be produced by the customer. This selection
process is known as a “design win.” We could expend our resources without success. After a design win, it is typically quite difficult for a product or
technology that did not receive the design win to displace the winner until the customer begins a new selection process because it is very unlikely that a
customer will change complex technology until a vehicle model is revamped. In addition, the company with the winning design may have an advantage
with the customer going forward because of the established relationship between the winning company and such customer, which could make it more
difficult for such company’s competitors to win the designs for other service contracts. Even if we have an established relationship with a customer, any
failure to perform under a service contract or innovate in response to their feedback may neutralize our advantage with that customer. If we fail to win a
significant number of customer design competitions in the future or to renew a significant number of existing service contracts, our business, results of
operations and financial condition would be adversely affected. Moreover, due to the evolution of our connected offerings and architecture, trending away
from providing legacy infotainment and connected services and a change in our professional services pricing strategies, we expect our deferred revenue
balances to decrease in the future, including due to a wind-down of a legacy connected service relationship with a major OEM, since the majority of the
cash from the contract has been collected. To the extent we are unable to renew existing service contracts, such decrease could intensify. The period of time
from winning a contract to implementation is long and we are subject to the risks of cancellation or postponement of the contract or unsuccessful
implementation.
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Our products are technologically complex and incorporate many technological innovations. Prospective customers generally must make significant
commitments of resources to test and validate our products before including them in any particular vehicle model. The development cycles of our products
with new customers are approximately six months to two years after a design win, depending on the customer and the complexity of the product. These
development cycles result in us investing our resources prior to realizing any revenues from the customer contracts. Further, we are subject to the risk that a
customer cancels or postpones implementation of our technology, as well as that we will not be able to implement our technology successfully. Further, our
sales could be less than forecast if the vehicle model is unsuccessful, including reasons unrelated to our technology. Long development cycles and product
cancellations or postponements may adversely affect our business, results of operations and financial condition.
Our business could be materially and adversely affected if we lost any of our largest customers.
The loss of business from any of our major customers, whether by lower overall demand for vehicles, cancellation of existing contracts or the failure
to award us new business, could have a material adverse effect on our business, results of operations and financial condition. Alternatively, there is a risk
that one or more of our major customers could be unable to pay our invoices as they become due or that a customer will simply refuse to make such
payments given its financial difficulties. If a major customer becomes subject to bankruptcy or similar proceedings whereby contractual commitments are
subject to stay of execution and the possibility of legal or other modification, or if a major customer otherwise successfully procures protection against us
legally enforcing its obligations, it is likely that we will be forced to record a substantial loss. In addition, certain of our customers that are tier 1 suppliers
exclusively sell to certain OEMs, including some of our other customers. A bankruptcy of, or other significant disruption to, any of these OEMs could
intensify any adverse impact on our business and results of operations.
Our operating results may fluctuate significantly from period to period, and this may cause our stock price to decline.
Our revenue and operating results may fluctuate materially in the future. These fluctuations may cause our results of operations to not meet the
expectations of securities analysts or investors which would likely cause the price of our stock to decline. Factors that may contribute to fluctuations in
operating results include:
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given our limited customer base, the volume, timing and fulfillment of large customer contracts;
renewals of existing customer contracts and wins of new customer programs;
increased expenditures incurred pursuing new product or market opportunities;
the timing of the receipt of royalty reports;
fluctuating sales by our customers to their end-users;
contractual counterparties failing to meet their contractual commitments to us;
introduction of new products by us or our competitors;
cybersecurity or data breaches;
reduction in the prices of our products in response to competition, market conditions or contractual obligations;
impairment of goodwill or intangible assets;
accounts receivable that are not collectible;
higher than anticipated costs related to fixed-price contracts with our customers;
change in costs due to regulatory or trade restrictions;
expenses incurred in litigation matters, whether initiated by us or brought by third-parties against us, and settlements or judgments we are
required to pay in connection with disputes;
changes in our stock compensation practices, as relates to employee short term incentive payments; and
general economic trends as they affect the customer bases into which we sell.
Due to the foregoing factors, among others, our revenue and operating results may fluctuate significantly from period to period. Our expense levels
are based in significant part on our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to near-term
shortfalls in projected revenue. Therefore, our failure to meet revenue expectations would seriously harm our operating results, financial condition and cash
flows.
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We may not be successful with the adoption of new applications.
Part of our growth strategy includes the successful introduction of new products that will rely on subscription or transactional-based revenue
generation. These represent new applications and we cannot assure the introduction of these new products, the level of adoption of these new products, or
how quickly they can ramp to generate meaningful revenue. The development and launch of new products will require maintaining adequate resources,
such as the appropriate personnel and technology to develop such products. We may experience delays between the time we incur expenses associated with
the development and launch of new products and the revenue generated from the products. In addition, anticipated demand for the new products could
decrease after we have spent time and resources on the development of the new product, or our efforts may not lead to the successful introduction of new
products that are competitive, which would harm our business, results of operations and financial condition.
If we are unable to attract and retain key personnel, our business could be harmed.
If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in
productivity while any successor obtains the necessary training and experience. Although we have arrangements with some of our executive officers
designed to promote retention, our employment relationships are generally at-will and we have had key employees leave in the past. We cannot assure you
that one or more key employees will not leave in the future. We intend to continue to hire additional highly qualified personnel, including research and
development and operational personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate,
motivate and retain these employees could harm our business.
We depend on skilled employees and could be impacted by a shortage of critical skills.
Much of our future success depends on the continued service and availability of skilled employees, particularly with respect to technical areas.
Skilled and experienced personnel in the areas where we compete are in high demand, and competition for their talents is intense. We expect that many of
our key employees will receive a total compensation package that includes equity awards. New regulations or volatility in the stock market could diminish
our use, and the value, of our equity awards. This would place us at a competitive disadvantage in attracting qualified personnel or force us to offer more
cash compensation.
Some of our employees are represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws of
the U.S.
Most of our employees in Europe are represented by workers councils or unions. Although we believe we have a good working relationship with our
employees and their legal representatives, they must approve any changes in terms which may impede efforts to restructure our workforce.
Cybersecurity and data privacy incidents or breaches may damage client relations and inhibit our growth.
The confidentiality and security of our information, and that of third parties, is critical to our business. Our services involve the transmission, use,
and storage of customers’ and their customers’ information, which may be confidential or contain personally identifiable information. Any cybersecurity or
data privacy incidents could have a material adverse effect on our results of operations and financial condition. While we maintain a broad array of
information security and privacy measures, policies and practices, our networks may be breached through a variety of means, resulting in someone
obtaining unauthorized access to our information, to information of our customers or their customers, or to our intellectual property; disabling or degrading
service; or sabotaging systems or information. In addition, hardware, software, systems, or applications we develop or procure from third parties may
contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also
attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our
employees, contractors, and vendors. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally
are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We
will continue to incur significant costs to continuously enhance our information security measures to defend against the threat of cybercrime. Any
cybersecurity or data privacy incident or breach may result in:
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loss of revenue resulting from the operational disruption;
loss of revenue or increased bad debt expense due to the inability to invoice properly or to customer dissatisfaction resulting in collection
issues;
loss of revenue due to loss of customers;
material remediation costs to recreate or restore systems;
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material investments in new or enhanced systems in order to enhance our information security posture;
cost of incentives offered to customers to restore confidence and maintain business relationships;
reputational damage resulting in the failure to retain or attract customers;
costs associated with potential litigation or governmental investigations;
costs associated with any required notices of a data breach;
costs associated with the potential loss of critical business data;
difficulties enhancing or creating new products due to loss of data or data integrity issues; and
other consequences of which we are not currently aware but will discover through the remediation process.
Our business is subject to a variety of domestic and international laws, rules, policies and other obligations.
We are subject to U.S. and international laws and regulations in multiple areas, including data protection, anticorruption, labor relations, tax, foreign
currency, anti-competition, import, export and trade regulations, and we are subject to a complex array of federal, state and international laws relating to the
collection, use, retention, disclosure, security and transfer of personally identifiable information. In many cases, these laws apply not only to transfers
between unrelated third-parties but also to transfers between us and our subsidiaries. Many jurisdictions have passed laws in this area, and other
jurisdictions are considering imposing additional restrictions. The European Commission adopted the European General Data Protection Regulation, or
GDPR, which went into effect on May 25, 2018. China adopted a new cybersecurity law as of June 2017. In addition, California adopted significant new
consumer privacy laws in June 2018 that went into effect in January 2020. Complying with the GDPR and other requirements may cause us to incur
substantial costs and may require us to change our business practices.
Any failure by us, our customers or other parties with whom we do business to comply with our privacy policy or with federal, state or international
privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others. Any alleged or actual
failure to comply with applicable privacy laws and regulations may:
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cause our customers to lose confidence in our solutions;
harm our reputation;
expose us to litigation, regulatory investigations and to resulting liabilities including reimbursement of customer costs, damages, penalties or
fines imposed by regulatory agencies; and
require us to incur significant expenses for remediation.
We are also subject to a variety of anticorruption laws in respect of our international operations, including the U.S. Foreign Corrupt Practices Act,
the U.K. Bribery Act and the Canadian Corruption of Foreign Public Officials Act, and regulations issued by the U.S. Customs and Border Protection, the
U.S. Bureau of Industry and Security, the U.S. Treasury Department’s Office of Foreign Assets Control, and various other foreign governmental agencies.
We cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in
which existing laws might be administered or interpreted. Actual or alleged violations of these laws and regulations could lead to enforcement actions and
financial penalties that could result in substantial costs.
A significant portion of our revenues are derived, and a significant portion of our research and development activities are based, outside the United
States. Our results could be harmed by economic, political, regulatory, foreign currency fluctuations and other risks associated with these international
regions.
Because we operate worldwide, our business is subject to risks associated with doing business internationally. We generate most of our international
revenue in Europe and Asia, and we anticipate that revenue from international operations could increase in the future. In addition, some of our products are
developed outside the United States. We conduct a significant portion of the development of our voice recognition and natural language understanding
solutions in Canada and Germany. We also have significant research and development resources in Belgium, China, India, Italy, and the United Kingdom.
We are exposed to fluctuating exchange rates of foreign currencies including the euro, British pound, Canadian dollar, Chinese RMB, Japanese yen, Indian
rupee and South Korean won. Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations,
including:
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adverse political and economic conditions, or changes to such conditions, in a specific region or country;
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trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional
authorities such as China, Canada or the European Union;
the impact on local and global economies of the United Kingdom leaving the European Union;
changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies;
compliance with laws and regulations in many countries and any subsequent changes in such laws and regulations;
geopolitical turmoil, including terrorism and war;
changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions;
evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in
the United States pursuant to the Foreign Investment Risk Preview Modernization Act and substantial restrictions on investment from China;
changes in applicable tax laws;
difficulties in staffing and managing operations in multiple locations in many countries;
longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and
less effective protection of intellectual property than in the United States.
Our business in China is subject to aggressive competition and is sensitive to economic, market and political conditions.
We operate in the highly competitive automotive cognitive assistance market in China and face competition from both international and smaller
domestic manufacturers. We anticipate that additional competitors, both domestic and international, may seek to enter the Chinese market resulting in
increased competition. Increased competition may result in price reductions, reduced margins and our inability to gain or hold market share. There have
been periods of increased market volatility and moderation in the levels of economic growth in China, which resulted in periods of lower automotive
production growth rates in China than those previously experienced. In addition, political tensions between China and the United States may negatively
impact our ability to conduct business in China. If we are unable to grow or maintain our position in the Chinese market, the pace of growth slows or
vehicle sales in China decrease, our business, results of operations and financial condition could be materially adversely effected. Government regulations
and business considerations may also require us to conduct business in China through joint ventures with Chinese companies. Our participation in joint
ventures would limit our control over Chinese operations and may expose our proprietary technologies to misappropriation by joint venture partners. The
above risks, if realized, could have a material adverse effect on our business, results of operations and financial condition.
Interruptions or delays in our services or services from data center hosting facilities or public clouds could impair the delivery of our services and harm
our business.
Because our services are complex and incorporate a variety of third-party hardware and software, our services may have errors or defects that could
result in unanticipated downtime for our customers and harm to our reputation and our business. We have from time to time, found defects in our services,
and new errors in our services may be detected in the future. In addition, we currently serve our customers from data center hosting facilities or third-party
public clouds we directly manage. Any damage to, or failure of, the systems and facilities that serve our customers in whole or in part could result in
interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay service level agreement penalties, cause
customers to terminate their on-demand services, and adversely affect our renewal rates and our ability to attract new customers.
If our goodwill or other intangible assets become impaired, our operating results could be negatively impacted.
We have significant intangible assets, including goodwill and other intangible assets, which are susceptible to valuation adjustments as a result of
changes in various factors or conditions. The most significant intangible assets are goodwill, customer relationships and patents and core technologies.
Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use
of the asset. Technologies and patents are amortized on a straight-line basis over their estimated useful lives. We assess the potential impairment of
goodwill on an annual basis. Whenever events or changes in circumstances indicate that the carrying value may not be recoverable, we will be required to
assess the potential impairment of goodwill and other intangible assets. Factors that could trigger an impairment of such assets include the following:
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changes in our organization or management reporting structure that could result in additional reporting units, which may require alternative methods
of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit;
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significant under performance relative to historical or projected future operating results;
significant changes in the strategy for our overall business;
significant negative industry or economic trends;
significant decline in our stock price for a sustained period; and
our market capitalization declining to below net book value.
Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact our results of operations and
financial position in the reporting period identified.
Tax matters may cause significant variability in our financial results and may impact our overall financial condition.
Our businesses are subject to income taxation in the United States, as well as in many tax jurisdictions throughout the world. Tax rates in these
jurisdictions may be subject to significant change. If our effective tax rate increases, our operating results and cash flow could be adversely affected. Our
effective income tax rate can vary significantly between periods due to a number of complex factors including:
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projected levels of taxable income;
pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory
rates;
increases or decreases to valuation allowances recorded against deferred tax assets;
tax audits conducted and settled by various tax authorities;
adjustments to income taxes upon finalization of income tax returns;
the ability to claim foreign tax credits;
the repatriation of non-U.S. earnings for which we have not previously provided for income taxes;
changes in tax laws and their interpretations in countries in which we are subject to taxation; and
changes to assessments of uncertain tax positions.
We regularly evaluate the need for a valuation allowance on deferred tax assets, considering historical profitability, projected future taxable income,
the expected timing of the reversals of existing temporary differences and tax planning strategies. This analysis is heavily dependent upon our current and
projected operating results. A decline in future operating results could provide substantial evidence that a full or partial valuation allowance for deferred tax
assets is necessary, which could have a material adverse effect on our results of operations and financial condition.
Risks Relating to our Intellectual Property and Technology
Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could be exposed to significant
litigation or licensing expenses or be prevented from selling our products if such claims are successful.
From time to time, we are subject to claims and legal actions alleging that we or our customers may be infringing or contributing to the infringement
of the intellectual property rights of others. We may be unaware of intellectual property rights of others that may cover some of our technologies and
products. If it appears necessary or desirable, we may seek licenses for these intellectual property rights. However, we may not be able to obtain licenses
from some or all claimants, the terms of any offered licenses may not be acceptable to us, and we may not be able to resolve disputes without litigation.
Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel
from our business operations. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing
arrangements on unfavorable terms, prevent us from licensing certain of our products, cause severe disruptions to our operations or the markets in which
we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various arrangements. Any of
these could seriously harm our business, financial condition or operations.
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Unauthorized use of our proprietary technology and intellectual property could adversely affect our business and results of operations.
Our success and competitive position depend in large part on our ability to obtain and maintain intellectual property rights protecting our products
and services. We rely on a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing
arrangements to establish and protect our intellectual property and proprietary rights. Unauthorized parties may attempt to copy or discover aspects of our
products or to obtain, license, sell or otherwise use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we
may not be able to protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are
substantially the same or superior to our technologies and that do not infringe our rights. In these cases, we would be unable to prevent our competitors
from selling or licensing these similar or superior technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the
same extent as the laws of the United States. Although the source code for our proprietary software is protected both as a trade secret and as a copyrighted
work, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation, regardless of the outcome, can be very expensive and can
divert management’s efforts.
Our software products may have bugs, which could result in delayed or lost revenue, expensive correction, liability to our customers and claims against
us.
Complex software products such as ours may contain errors, defects or bugs. Defects in the solutions or products that we develop and sell to our
customers could require expensive corrections and result in delayed or lost revenue, adverse customer reaction and negative publicity about us or our
products and services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful,
would likely be time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial
results and competitive position.
We may be unable to respond quickly enough to changes in technology and technological risks and to develop our intellectual property into
commercially viable products.
Changes in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete or less
attractive to our customers, which could adversely affect our results of operations. Our ability to anticipate changes in technology and regulatory standards
and to successfully develop and introduce new and enhanced products on a timely basis will be a significant factor in our ability to be competitive. There is
a risk that we will not be able to achieve the technological advances that may be necessary for us to be competitive or that certain of our products will
become obsolete. Moreover, restrictions on the use of our technology over the next four years under the Intellectual Property Agreement which we entered
into with Nuance in connection with the Spin-Off may limit our ability to adapt to technology and regulatory developments and thereby compete
effectively in the market. We are also subject to the risks generally associated with new product introductions and applications, including lack of market
acceptance, delays in product development and failure of products to operate properly. These risks could have a material adverse effect on our business,
results of operations and financial condition.
We utilize certain key technologies, content and services from, and integrate certain of our solutions with, third parties and may be unable to replace
those technologies, content and services if they become obsolete, unavailable or incompatible with our solutions.
We utilize certain key technologies and content from, and/or integrate certain of our solutions with, hardware, software, services and content of third
parties. Some of these vendors are also our competitors in various respects. These third-party vendors could, in the future, seek to charge us cost prohibitive
fees for such use or integration or may design or utilize their solutions in a manner that makes it more difficult for us to continue to utilize their solutions,
or integrate their technologies with our solutions, in the same manner or at all. Any significant interruption in the supply or maintenance of such third-party
hardware, software, services or content could negatively impact our ability to offer our solutions unless and until we replace the functionality provided by
this third-party hardware, software and/or content. In addition, we are dependent upon these third parties’ ability to enhance their current products, develop
new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. There can be no assurance
that we would be able to replace the functionality or content provided by third-party vendors in the event that such technologies become obsolete or
incompatible with future versions of our solutions or are otherwise not adequately maintained or updated. Any delay in or inability to replace any such
functionality could have a material adverse effect on our business, results of operations and financial condition. Furthermore, delays in the release of new
and upgraded versions of third-party software applications could have a material adverse effect on our business, results of operations and financial
condition.
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Risks Relating to the Spin-Off
If the Spin-Off were determined not to qualify as tax-free for U.S. federal income tax purposes, we could have an indemnification obligation to
Nuance, which could adversely affect our business, financial condition and results of operations.
On October 1, 2019, we were spun off from Nuance. Completion of the Spin-Off was conditioned on Nuance’s receipt of a written opinion from its
tax counsel to the effect that the Distribution will qualify for non-recognition of gain and loss under Section 355 and related provisions of the Internal
Revenue Code of 1986, as amended, or the Code.
The opinion of counsel does not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion assumed that the Spin-
Off was completed according to the terms of the Separation and Distribution Agreement and relied on the facts as stated in the Separation and Distribution
Agreement, the Tax Matters Agreement, the other ancillary agreements, Information Statement included as part of our registration statement on Form 10
and a number of other documents related to the Spin-Off. In addition, the opinion was based on certain assumptions as well as certain representations as to
factual matters from, and certain covenants by, Nuance and us. The opinion cannot be relied on if any of the assumptions, representations or covenants are
incorrect, incomplete or inaccurate or are violated in any material respect.
If, as a result of any of our representations being untrue or our covenants being breached, the Spin-Off, and certain related transactions or certain
transactions, were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, we could be required
to indemnify Nuance for the resulting taxes and related expenses. Those amounts could be material. Any such indemnification obligation could adversely
affect our business, financial condition and results of operations.
In addition, if we or our stockholders were to engage in transactions that resulted in a 50% or greater change by vote or value in the ownership of
our stock during the four-year period beginning on the date that begins two years before the date of the Spin-Off, the Spin-Off would generally be taxable
to Nuance, but not to stockholders, under Section 355(e) of the Code, unless it were established that such transactions and the Spin-Off were not part of a
plan or series of related transactions. If the Spin-Off were taxable to Nuance due to such a 50% or greater change in ownership of our stock, Nuance would
recognize gain equal to the excess of the fair market value on the Distribution Date of our common stock distributed to Nuance stockholders over Nuance’s
tax basis in our common stock and would also recognize gain in respect of certain reorganization transactions undertaken by Nuance to effect the
separation, and we generally would be required to indemnify Nuance for the tax on such gain and related expenses. Those amounts could be material. Any
such indemnification obligation could adversely affect our business, financial condition and results of operations.
We have agreed to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating
flexibility.
We have agreed in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355 and related
provisions of the Code and are intended to preserve the tax-free nature of the Spin-Off. These covenants include certain restrictions on our activity for a
period of two years following the Spin-Off, unless we or Nuance obtain a private letter ruling from the U.S. Internal Revenue Service, or the IRS, or an
opinion of counsel, in each case acceptable to Nuance in its reasonable discretion, that the restricted action would not impact the non-recognition treatment
of the Spin-Off, or unless Nuance otherwise gives its consent for us to take a restricted action. These covenants and indemnification obligations limit our
ability to pursue strategic transactions or engage in new businesses or other transactions that may maximize the value of our business, and might discourage
or delay a strategic transaction that our stockholders may consider favorable.
We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
We believe that, as an independent, publicly traded company, we will be able to, among other things, design and implement corporate strategies and
policies and develop partnerships that are better targeted to our business’s areas of strength and differentiation, better focus our financial and operational
resources on those specific strategies, create effective incentives for our management and employees that are more closely tied to our business
performance, provide investors more flexibility and enable us to achieve alignment with a more natural stockholder base and implement and maintain a
capital structure designed to meet our specific needs. We may be unable to achieve some or all of the benefits that we expect to achieve as an independent
company in the time we expect, if at all, for a variety of reasons, including:
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as an independent, publicly traded company, we may be more susceptible to market fluctuations and other adverse events than if it were still a
part of Nuance; and
as an independent, publicly traded company, our businesses are less diversified than Nuance’s businesses prior to the separation.
If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect,
our business, financial condition and results of operations could be adversely affected.
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We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements
applicable to emerging growth companies could make our common stock less attractive to investors and may make it more difficult to compare our
performance with other public companies.
We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of
exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to,
not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from
the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not
previously approved. We could be an emerging growth company for up to five years following the effectiveness of our registration statement on Form 10.
We will cease to be an emerging growth company upon the earliest of:
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the end of the fiscal year following the fifth anniversary of the effectiveness of our registration statement on Form 10,
the first fiscal year after our annual gross revenues are $1.07 billion or more,
the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or
the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the
second quarter of that fiscal year.
We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our
common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the
price of our common stock may be more volatile.
Under the Jumpstart Our Business Startups Act, or JOBS Act, emerging growth companies can also delay adopting new or revised accounting
standards until such time as those standards apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended
transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have
elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for
public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or
revised standard. This may make comparison of our financial statements with other public companies that are not emerging growth companies or emerging
growth companies that have opted out of using the extended transition period difficult or impossible because of the potential differences in accounting
standards used.
We intend to continue to improve our internal controls over financial reporting and ensure we are able to produce accurate and timely financial
statements. However, no assurance can be given that our actions will be successful.
Our historical combined financial information is not necessarily representative of the results we would have achieved as an independent, publicly
traded company.
For fiscal 2019 and fiscal 2018, we derived the historical combined financial information included in this Form 10-K from Nuance’s consolidated
financial statements, and this information does not necessarily reflect the results of operations and financial position we would have achieved as an
independent, publicly traded company during the periods presented. This is primarily because of the following factors:
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Prior to the Spin-Off, we operated as part of Nuance’s broader organization, and Nuance performed various corporate functions for us. Our
historical combined financial information for fiscal 2019 and fiscal 2018 reflects allocations of corporate expenses from Nuance for these and
similar functions. These allocations may not reflect the costs we would have incurred for similar services as an independent publicly traded
company.
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services, and undertaken indemnification obligations, which have caused us to incur new costs after the Spin-Off.
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Our historical combined financial information for fiscal 2019 and fiscal 2018 does not reflect changes that we experienced as a result of our
separation from Nuance, including changes in the financing, cash management, operations, cost structure and personnel needs of our business.
As part of Nuance, we enjoyed certain benefits from Nuance’s operating diversity, size, purchasing power, borrowing leverage and available
capital for investments that we can no longer enjoy after the Spin-Off. As an independent entity, we may be unable to purchase goods, services
and technologies, such as insurance and health care benefits and computer software licenses, or access capital markets, on terms as favorable to
us as those we obtained as part of Nuance prior to the Spin-Off, and our results of operations may be adversely affected. In addition, our
historical combined financial data for fiscal 2019 and fiscal 2018 does not include an allocation of interest expense comparable to the interest
expenses we incurred as a result of the Spin-Off and related transactions.
We may have potential business conflicts of interest with Nuance with respect to our past and ongoing relationships.
Conflicts of interest may arise between Nuance and us in a number of areas relating to our past and ongoing relationships, including:
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labor, tax, employee benefit, indemnification and other matters arising from our separation from Nuance;
intellectual property matters;
employee recruiting and retention; and
business combinations involving our company.
We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be less favorable to us than if we were dealing with
an unaffiliated party.
A certain director may have actual or potential conflicts of interest because of their financial interests in Nuance.
Because of his current position with Nuance, a certain director owns equity interests in Nuance. Continuing ownership of Nuance shares and equity
awards could create, or appear to create, potential conflicts of interest if we and Nuance face decisions that could have implications for both of us.
The allocation of intellectual property rights and data between Nuance and Cerence as part of the Spin-Off, the shared use of certain intellectual
property rights and data following the Spin-Off and restrictions on the use of intellectual property rights, could adversely impact our reputation, our
ability to enforce certain intellectual property rights that are important to us and our competitive position.
In connection with the Spin-Off, we are entered into agreements with Nuance governing the allocation of intellectual property rights and data related
to our business. These agreements include restrictions on our use of Nuance’s intellectual property rights and data licensed to us, including limitations on
the field of use in which we can exercise our license rights. As a result, we may not be able to pursue opportunities that require use of these license rights in
industries other than the automotive industry and certain ancillary fields. Moreover, the licenses granted to us under Nuance’s intellectual property rights
and data are non-exclusive, so Nuance may be able to license the rights and data to third parties that may compete with us. These agreements could
adversely affect our position and options relating to intellectual property enforcement, licensing negotiations and monetization and access to data used in
our business. We also may not have sufficient rights to grant sublicenses of intellectual property or data used in our business, and we may be subject to
third party rights pertaining to the underlying intellectual property or data. These circumstances could adversely affect our ability to protect our competitive
position in the industry and otherwise adversely affect our business, financial condition and results of operations.
Risks Relating to Our Securities and Indebtedness
Our stock price may fluctuate significantly.
The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:
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actual or anticipated fluctuations in our results of operations due to factors related to our business;
success or failure of our business strategies;
competition and industry capacity;
changes in interest rates and other factors that affect earnings and cash flow;
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our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed;
our ability to retain and recruit qualified personnel;
our quarterly or annual earnings, or those of other companies in our industry;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover, or positively cover, our common stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
investor perception of our company and our industry;
overall market fluctuations unrelated to our operating performance;
results from any material litigation or government investigation;
changes in laws and regulations (including tax laws and regulations) affecting our business;
changes in capital gains taxes and taxes on dividends affecting stockholders; and
general economic conditions and other external factors.
Low trading volume for our stock would amplify the effect of the above factors on our stock price volatility.
Should the market price of our shares drop significantly, stockholders may institute securities class action lawsuits against us. A lawsuit against us
could cause us to incur substantial costs and could divert the time and attention of our management and other resources.
The terms of the Senior Credit Facilities restrict our current and future operations, particularly our ability to incur debt that we may need to fund
initiatives in response to changes in our business, the industry in which we operate, the economy and governmental regulations.
The terms of the Senior Credit Facilities include a number of restrictive covenants that impose significant operating and financial restrictions on us
and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. These restrict our and our subsidiaries’ ability to
take some or all of the following actions:
•
•
•
•
•
•
•
•
•
•
incur or guarantee additional indebtedness or sell disqualified or preferred stock;
pay dividends on, make distributions in respect of, repurchase or redeem capital stock;
make investments or acquisitions;
create liens;
enter into sale/leaseback transactions;
enter into agreements restricting the ability to pay dividends or make other intercompany transfers;
enter into transactions with affiliates;
prepay, repurchase or redeem certain kinds of indebtedness;
consolidate, merge, sell or otherwise dispose of assets or sell stock of our subsidiaries; and/or
significantly change the nature of our business.
25
Furthermore, the lenders under the Senior Credit Facilities have required that we pledge our assets as collateral as security for our repayment
obligations and that we abide by certain financial or operational covenants. Our ability to comply with such covenants and restrictions may be affected by
events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability
to comply with these covenants may be impaired. A breach of any of these covenants, if applicable, could result in an event of default under the terms of
the Senior Credit Facilities. If an event of default occurred, the lenders would have the right to accelerate the repayment of such debt, and the event of
default or acceleration could result in the acceleration of the repayment of any other debt to which a cross-default or cross-acceleration provision applies.
We might not have, or be able to obtain, sufficient funds to make these accelerated payments, and lenders could then proceed against any collateral. Any
subsequent replacement of the agreements governing the Senior Credit Facilities or any new indebtedness could have similar or greater restrictions. The
occurrence and ramifications of an event of default could adversely affect our business, financial condition and results of operations. Moreover, as a result
of all of these restrictions, we may be limited in how we conduct our business and pursue our strategy, unable to raise additional debt financing to operate
during general economic or business downturns or unable to compete effectively or to take advantage of new business opportunities.
We may evaluate whether to pay cash dividends on our common stock in the future, and the terms of our Senior Credit Facilities limit our ability to pay
dividends on our common stock.
Our Board of Directors’, or our Board, decisions regarding the payment of dividends depends on consideration of many factors, such as our
financial condition, earnings, sufficiency of distributable reserves, opportunities to retain future earnings for use in the operation of our business and to
fund future growth, capital requirements, debt service obligations, legal requirements, regulatory constraints and other factors that our Board deems
relevant. Additionally, the terms of the Senior Credit Facilities limit our ability to pay cash dividends. There can be no assurance that we will pay a
dividend in the future or continue to pay any dividend if we do commence paying dividends.
Servicing our debt may require a significant amount of cash. We may not have sufficient cash flow from our business to pay our indebtedness, and we
may not have the ability to raise the funds necessary to settle for cash conversions of the Notes or to repurchase the Notes for cash upon a fundamental
change, which could adversely affect our business and results of operations.
In June 2020, we issued an aggregate principal amount of $175 million 3.00% convertible senior notes due 2025, or the Notes. The interest rate is
fixed at 3.00% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. Our ability to
make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the Notes, depends on our future performance,
which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flows from operations in the
future that are sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to
adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional debt financing or equity capital on terms that may be
onerous or highly dilutive. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We
may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
In addition, any of our future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives.
Holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture
governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
Upon conversion, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any
fractional share), we will be required to make cash payments in respect of the Notes being converted. We may not have enough available cash or be able to
obtain financing at the time we are required to make repurchases in connection with such conversion and our ability to pay may additionally be limited by
law, by regulatory authority, or by agreements governing our existing and future indebtedness. Our failure to repurchase the Notes at a time when the
repurchase is required by the indenture governing the Notes or to pay any cash payable on future conversions as required by such indenture would
constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements
governing our existing and future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace
periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof.
In addition, our indebtedness, combined with our other financial obligations and contractual commitments, could have other important
consequences. For example, it could:
•
•
make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse
changes in government regulations;
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
26
•
•
•
place us at a disadvantage compared to our competitors who have less debt;
limit our ability to borrow additional amounts for funding acquisitions, for working capital, and for other general corporate purposes; and
make an acquisition of our company less attractive or more difficult.
Any of these factors could harm our business, results of operations, and financial condition. In addition, if we incur additional indebtedness, the
risks related to our business and our ability to service or repay our indebtedness would increase.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and results of operations and the value of
our common stock.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during
specified periods at their option. If one or more holders elect to convert their Notes, 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 share), 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. In addition, even if holders do not elect to convert their
Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than
long-term liability, which would result in a material reduction of our net working capital.
The conversion of some or all of the Notes would dilute the ownership interests of existing stockholders to the extent we satisfy our conversion
obligation by delivering shares of our common stock upon any conversion of such Notes. Our Notes may become in the future convertible at the option of
their holders under certain circumstances. If holders of our Notes elect to convert their Notes, we may settle our conversion obligation by delivering to
them a significant number of shares of our common stock, which would cause dilution to our existing stockholders.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported
financial results.
Under FASB ASC Subtopic 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability
and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that
reflects the issuer’s economic interest cost. ASC 470-20 requires the value of the conversion options of the Notes, representing the equity component, to be
recorded as additional paid-in capital within stockholders’ equity in our consolidated balance sheet and as a discount to the Notes, which reduces their
initial carrying value. The carrying value of the Notes, net of the applicable discount recorded, will be accreted up to the principal amount of the Notes, as
the case may be, from the issuance date until maturity, which will result in non-cash charges to interest expense in our consolidated statement of operations.
Accordingly, we will report lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current
period’s accretion of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading
price of our common stock, and the respective trading price of the Notes.
In August 2020, the FASB issued Accounting Standards Update ASU 2020-06, or ASU 2020-06, with the intent to simplify ASC 470-20 and ASC
subtopic 815-40, Contracts in Entity’s Own Equity, or ASC 815-40. Among the changes, ASU 2020-06 removed the requirement to bifurcate the liability
and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion. The removal of
the bifurcation of liability and equity components would eliminate non-cash interest expense corresponding to the amounts recorded within equity. In
addition, ASU 2020-06 precludes the use of the treasury stock method, when calculating diluted earnings per share, for convertible debt instruments that
may be settled entirely or partially in cash upon conversion. The FASB has specified that public companies should adopt ASU 2020-06 as of the beginning
of its annual fiscal year, for fiscal years beginning after December 15, 2021. Early adoption is permitted for fiscal years beginning after December 15,
2020, including interim periods.
We currently already apply the “if-converted” method for calculating any potential dilutive effect of the conversion options embedded in the Notes
on diluted net income per share, which assumes that all of the Notes were converted solely into shares of common stock at the beginning of the reporting
period, unless the result would be anti-dilutive.
The commercial and credit environment may adversely affect our access to capital.
Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in
the demand for our products or in the solvency of our customers or suppliers or if there are other significantly unfavorable changes in economic conditions.
Volatility in the world financial markets could increase borrowing costs or affect our ability to access the capital markets. These conditions may adversely
affect our ability to obtain targeted credit ratings.
27
Your percentage ownership in Cerence may be diluted in the future.
Your percentage ownership in Cerence may be diluted in the future because of equity issuances for acquisitions, capital market transactions or
otherwise, including equity awards that we will be granting to our directors, officers, employees and other service providers. Shares of our common stock
are issuable upon the future vesting of certain Nuance equity awards held by our employees that are convertible into Cerence equity awards in connection
with the Spin-Off. In addition, our Board has adopted the Cerence 2019 Equity Incentive Plan, or the Equity Plan, for the benefit of certain of our current
and future employees, service providers and non-employee directors. Such awards will have a dilutive effect on our earnings per share, which could
adversely affect the market price of our common stock.
In addition, our Amended and Restated Certificate of Incorporation authorizes us to issue, without the approval of our stockholders, one or more
classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including
preferences over our common stock with respect to dividends and distributions, as our Board may generally determine. The terms of one or more classes or
series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock
the right to elect some number of the members of our Board in all events or upon the happening of specified events, or the right to veto specified
transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the
residual value of our common stock.
From time-to-time, Cerence may opportunistically evaluate and pursue acquisition opportunities, including acquisitions for which the consideration
thereof may consist partially or entirely of newly-issued shares of Cerence common stock and, therefore, such transactions, if consummated, would dilute
the voting power and/or reduce the value of our common stock.
Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and Delaware law may discourage
takeovers.
Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage,
delay or prevent a merger or acquisition. These include, among others, provisions that:
•
•
•
•
•
•
provide for staggered terms for directors on our Board for a period following the Spin-Off;
do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of
our stockholders, in each case except as such rights may otherwise be provided to holders of preferred stock;
provide for the removal of directors only for cause for a period following the Spin-Off;
establish advance notice requirements for stockholder nominations and proposals;
provide that a special meeting of our stockholders may only be called by our Board, the Chairman of our Board or our Chief Executive Officer,
or at the request of holders of not less than 20% of the outstanding shares of the common stock of Cerence; and
limit our ability to enter into business combination transactions.
These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may
discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Cerence, including
unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price
above the prevailing market price.
28
Our Amended and Restated Certificate of Incorporation will designate the courts of the State of Delaware as the sole and exclusive forum for certain
types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers or other employees.
Our Amended and Restated Certificate of Incorporation provides, in all cases to the fullest extent permitted by law, unless we consent in writing to
the selection of an alternative forum, the Court of Chancery located within the State of Delaware will be the sole and exclusive forum for any derivative
action or proceeding brought on behalf of Cerence, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other
employee or stockholder of Cerence to Cerence or Cerence’s stockholders, any action asserting a claim arising pursuant to the Delaware General Corporate
Law, or DGCL, or as to which the DGCL confers jurisdiction on the Court of Chancery located in the State of Delaware or any action asserting a claim
governed by the internal affairs doctrine or any other action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL.
However, if the Court of Chancery within the State of Delaware does not have jurisdiction, the action may be brought in any other state or federal court
located within the State of Delaware. Further, this exclusive forum provision would not apply to suits brought to enforce a duty or liability created by the
Exchange Act or the Securities Act of 1933, as amended, or the Securities Act, except that it may apply to such suits if brought derivatively on behalf of
Cerence. There is, however, uncertainty as to whether a court would enforce such provision in connection with suits to enforce a duty or liability created by
the Exchange Act or the Securities Act if brought derivatively on behalf of Cerence, and our stockholders will not be deemed to have waived our
compliance with the federal securities laws and the rules and regulations thereunder.
Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to
have consented to these provisions. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes
with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our
Amended and Restated Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or
proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and
investors’ views of us could be harmed.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls
and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow
management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, with auditor attestation of the effectiveness of our internal controls, beginning with our Annual Report
on Form 10-K for the year in which we cease to qualify as an emerging growth company. If we are not able to comply with the requirements of Section 404
in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that
are deemed to be material weaknesses, the market price of shares of common stock could decline and we could be subject to sanctions or investigations by
the SEC or other regulatory authorities, which would require additional financial and management resources.
Our ability to successfully implement our business plan and comply with Section 404 of the Sarbanes-Oxley Act requires us to be able to prepare
timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or
controls may cause our operations to suffer, and we may be unable to conclude that our internal control over financial reporting is effective and, once we
cease to qualify as an emerging growth company, to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the
Sarbanes-Oxley Act. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our
financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial
reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with United States Generally Accepted Accounting Principles, or GAAP, because of its inherent limitations, internal control over financial
reporting might not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our shares of common stock,
and could adversely affect our ability to access the capital markets.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters is located in Burlington, Massachusetts, and our international headquarters is located in Heerlen, Netherlands. Other
large leased sites include properties located in: Montreal, Canada; Bellevue, Washington; Aachen and Ulm, Germany; Shanghai and Chengdu, China;
Merelbeke, Belgium; Turin, Italy; Tokyo, Japan and Pune, India.
29
We believe our existing facilities and equipment are in good operating condition and are suitable for the conduct of our business.
Item 3. Legal Proceedings.
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise
from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property,
employment, benefits and securities matters. We evaluate the probability of adverse outcomes and, as applicable, estimate the amount of probable losses
that may result from pending matters. Probable losses that can be reasonably estimated are reflected in our combined financial statements. These recorded
amounts are not material to our combined financial statements for any of the periods presented in the accompanying combined financial statements. While
it is not possible to predict the outcome of these matters with certainty, we do not expect the results of any of these actions to have a material adverse effect
on our results of operations or financial position. However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or
smaller than the accruals reflected in our combined financial statements, and we could incur judgments or enter into settlements of claims that could
adversely affect our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not Applicable.
30
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been listed on the Nasdaq Global Select Market under the symbol “CRNC” since October 2, 2019. Prior to that date, there
was no public trading market for our common stock. A “when-issued” trading market for our common stock existed between September 17, 2019 and
October 1, 2019 under the symbol “CRNCV”.
Holders of Common Stock
As of November 12, 2020, there were 540 holders of record of our common stock. This number does not reflect beneficial owners whose shares are
held in street name.
Dividend Policy
We have not paid any dividends since our formation. We may evaluate whether to pay cash dividends to our stockholders. The timing, declaration,
amount and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Among the items we are considering in
establishing a dividend policy are the capital needs of our business and opportunities to retain future earnings for use in the operation of our business and to
fund future growth. Additionally, the terms of the Senior Credit Facilities limit our ability to pay cash dividends. There can be no assurance that we will
pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends.
Performance Graph
The graph below compares the cumulative total shareholder return of our common stock for the last four quarters with the Russell 2000 and the S&P
Software & Services Select indices. The information presented assumes an initial investment of $100 on October 2, 2019, the date our common stock
began regular-way trading on the Nasdaq Global Select Market. The graph shows the value that each of these investments would have had at the end of
each quarter.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is
not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
31
Cerence Inc.
Russell 2000
S&P Software & Services Select
$
$
$
100.00
100.00
100.00
$
$
$
147.43
112.76
111.69
October 2, 2019
December 31, 2019
March 31, 2020
$
$
$
100.33
77.93
90.53
$
$
$
June 30, 2020
September 30, 2020
266.06
97.41
122.93
$
$
$
318.37
101.90
131.74
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
Not applicable.
32
Item 6. Selected Financial Data.
The following table presents certain selected consolidated and combined financial information as of and for each of the years in the three-year
period ended September 30, 2020, 2019, and 2018. The selected consolidated and combined financial data as of and for each of the years ended September
30, 2020, 2019, and 2018 is derived from Consolidated and Combined Financial Statements included elsewhere in this Form 10-K. The Consolidated and
Combined Financial Statements for the fiscal year ended September 30, 2020 and 2019 have been prepared under Financial Accounting Standards Board,
or FASB, Accounting Standard Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, while the Combined Financial
Statements for the fiscal years ended September 30, 2018 have been prepared under FASB ASC Topic 605, Revenue Recognition, or ASC 605. In our
opinion, both financial statements include all adjustments, consisting of only ordinary recurring adjustments, necessary for a fair statement of the
information set forth in this Form 10-K.
ASC 606 was adopted as of October 1, 2018 using the modified retrospective approach from the previous guidance ASC 605. Our transition to ASC
606 represents a change in accounting policy that is reflected in our Consolidated and Combined Financial Statements for fiscal years 2020 and 2019. The
adoption of ASC 606 limits the comparability of revenue and expenses, including cost of revenue and certain operating expenses when compared to the
fiscal year 2018 and other prior reporting periods.
The selected consolidated and combined financial data presented below should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our Consolidated and Combined Financial Statements, including their respective accompanying
notes thereto included elsewhere in this Form 10-K. For fiscal year 2019 and fiscal year 2018, our business was wholly-owned by Nuance. The financial
information included herein may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial
position, results of operations and cash flows would have been had we been an independent, publicly traded company during those periods presented.
Further, the historical combined financial information includes allocations of certain Nuance corporate expenses, as described in Note 19 to the
Consolidated and Combined Financial Statements. We believe the assumptions and methodologies underlying the allocation of these expenses are
reasonable. However, such expenses may not be indicative of the actual level of expense that we would have incurred if we had operated as an independent,
publicly traded company.
Operations:
Total revenues
Gross profit
Income from operations
(Benefit from) provision for income taxes
Net (loss) income
Financial Position:
Deferred revenue
Total assets
Total stockholders' equity
Selected Data and Ratios:
Net working capital (deficit)
Depreciation of property and equipment
Amortization of intangible assets
Gross margin
Operating margin
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
$
$
329,646
221,795
19,331
(5,509)
(20,631)
$
303,315
203,972
10,852
(89,084)
100,268
325,093
1,687,445
957,756
353,284
1,483,829
1,068,128
48,374
9,160
20,881
67.3%
5.9%
(36,789)
7,822
21,022
67.2%
3.6%
276,984
194,020
36,852
30,917
5,881
348,649
1,397,548
993,319
(38,839)
9,159
16,606
70.0%
13.3%
33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis presented below should be read in conjunction with the Combined Financial Statements and the
corresponding notes, and included elsewhere in this Form 10-K. The information presented in this section includes forward-looking statements, which are
described in detail in the section titled “Cautionary Statement Concerning Forward-Looking Statements.” The matters discussed in these forward-looking
statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in
the forward-looking statements. See the section titled “Risk Factors” for a discussion of the risks, uncertainties, and assumptions associated with these
statements.
Overview
Cerence builds AI powered virtual assistants for the mobility/transportation market. Our primary target is the automobile market, but our solutions
can apply to all forms of transportation including but not limited to two-wheel vehicles, planes, tractors, cruise ships and elevators. Our solutions power
natural conversational and intuitive interactions between automobiles, drivers and passengers, and the broader digital world. We possess one of the world’s
most popular software platforms for building automotive virtual assistants. Our customers include all major OEMs or their tier 1 suppliers worldwide. We
deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and
ultimately strengthening the bond between automobile brands and end users. Our vision is to enable a more enjoyable, safer journey for everyone.
Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information and take
action across an expanding variety of categories. Our software platform has a hybrid architecture combining edge software components with cloud-
connected components. Edge software components are installed on a vehicle’s head unit and can operate without access to external networks and
information. Cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-enabled
personalization and context-based response frameworks, and content integration platform.
We generate revenue primarily by selling software licenses and cloud-connected services. Our edge software components are typically sold under a
traditional per unit perpetual software license model, in which a per unit fee is charged for each software instance installed on an automotive head unit. We
typically license cloud-connected software components in the form of a service to the vehicle end user, which is paid for in advance. In addition, we
generate professional services revenue from our work with our customers during the design, development and deployment phases of the vehicle model
lifecycle and through maintenance and enhancement projects. We have existing relationships with all major OEMs or their tier 1 suppliers, and while our
customer contracts vary, they generally represent multi-year engagements, giving us visibility into future revenue.
Impact of COVID-19 on our Business
As the full impact of the COVID-19 pandemic on our business continues to develop, we are closely monitoring the global situation. As a premier
supplier to the automotive industry, we were adversely impacted by the decline in automotive production and shipments due to the temporary shutdown of
our customers’ factories during fiscal 2020. We are unable at this time to predict the full impact of COVID-19 on our operations, liquidity, and financial
results, and, depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material. During the second half of fiscal 2020, the
COVID-19 pandemic had a material impact on our billings and revenue recognized from licenses and billings from connected services, which may also
continue beyond fiscal 2020. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and
trends. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and
cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, these measures have impacted,
and may continue to impact, our business, as well as our customers and consumers.
We have taken numerous steps, and plan to continue to take further actions, in our approach to addressing the COVID-19 pandemic. We shifted a
portion of our R&D and engineering workforces to support our professional service teams and their successful completion of customer project milestones
to help mitigate the anticipated decline in revenues. We reduced expenses by limiting discretionary spending, reducing third-party contractors, deferring the
hiring of new employees and implementing a reduction in our workforce. In order to further conserve cash outflows, we implemented temporary reductions
in salaries for our current named executive officers and other senior executives.
We implemented our business continuity plans and our crisis response team remains in place to respond to changes in our environment. At the onset
of the COVID-19 pandemic, we instructed employees across 18 different countries and 24 office locations to work from home on a temporary basis.
Beginning in May 2020, in jurisdictions where local restrictions implemented to prevent the further spread of COVID-19 were lifted, we started reopening
our offices to allow employees to return to work at their option. For employees returning to our offices, we have instituted social distancing protocols,
increased the level of cleaning and sanitizing, and undertaken other actions to make our offices safer. While most of our employees continue to work
remotely, we have experienced minimal declines in workforce efficiency due to our investment in cloud-based applications and tools. We have also
instituted strict
34
restrictions on travel for all employees. If government health authorities dictate further measures to limit further spread of COVID-19, we may need to
adjust our safety protocols to comply with all revised measures in certain countries or regions in which we operate.
Business Trends
We experienced total revenue growth of 8.7% and 9.5%, during fiscal year 2020 and fiscal year 2019, respectively, primarily driven by our
connected and professional services revenues due to increased market penetration of our connected and professional services solutions. License revenues
decreased during fiscal 2020 due to the impact of COVID-19 on the automotive industry, which led to a reduction in reported royalties related to our
licensed edge technologies.
Fiscal year 2020 was another key investment year for our business in which we focused on establishing public company functions and expanding
our professional services team to meet customer demand. During fiscal year 2020, total cost of revenues increased by 8.6%, primarily driven by
investments in professional staff. Total operating expenses grew by 4.8% during fiscal year 2020, primarily driven by G&A expenses which were incurred
to establish public company functions. Our R&D expenses decreased 4.5%, as a result of shifting a portion of our R&D and engineering workforces to
support our professional service teams and their successful completion of customer project milestones. Our acquisition of Voicebox Technology
Corporation, or Voicebox, on April 2, 2018, which provided additional customer relationships and technology, and the winding down of costs to establish
the Cerence business as a standalone public company drove a $6.2 million decrease in restructuring and other costs, net. For fiscal year 2021, subject to the
continuing impact of the COVID-19 pandemic, we anticipate that our R&D expenses will return to representing the majority of our operating expenses as
we focus on developing new products and advancing our core technologies.
Basis of Presentation
Fiscal 2020
The accompanying consolidated financial statements of the Company have been prepared in accordance with GAAP, and the rules and regulations
of the SEC. The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of
operations and financial position for the fiscal year presented. All such adjustments are of a normal recurring nature.
Fiscal 2019 and 2018
Standalone financial statements had not been historically prepared for the Cerence business. The accompanying combined financial statements have
been prepared from the Parent’s historical accounting records and are presented on a “carve out” basis to include the historical financial position, results of
operations and cash flows applicable to the Cerence business. As a direct ownership relationship did not exist among all the various business units
comprising the Cerence business, Nuance’s investment in the Cerence business was shown in lieu of stockholders’ equity in the combined financial
statements.
The Combined Statements of Operations included all revenues and costs directly attributable to Cerence as well as an allocation of expenses related
to functions and services performed by centralized Parent organizations. These corporate expenses have been allocated to the Cerence business based on
direct usage or benefit, where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, number of transactions or other
measures as determined appropriate. The Combined Statements of Cash Flows presented these corporate expenses that are cash in nature as cash flows
from operating activities, as this was the nature of these costs at the Parent. Non-cash expenses allocated from the Parent included corporate depreciation
and amortization and stock-based compensation included as add-back adjustments to reconcile net income to net cash provided by operations.
The combined financial statements included the allocation of certain assets and liabilities that have historically been held at the Nuance corporate
level or by shared entities, but which are specifically identifiable or allocable to the Cerence business. These shared assets and liabilities have been
allocated to the Cerence business on the basis of direct usage when identifiable, or allocated on a pro rata basis of revenue, headcount or other systematic
measures that reflect utilization of the services provided to or benefits received by Cerence. The Parent used a centralized approach to cash management
and financing its operations. Accordingly, none of the cash, cash equivalents, marketable securities, foreign currency hedges or debt and related interest
expense had been allocated to the Cerence business in the combined financial statements. The Parent’s short and long-term debt had not been pushed down
to the Cerence business’s combined financial statements because the Cerence business was not the legal obligor of the debt and the Parent’s borrowings
were not directly attributable to the Cerence business.
35
Transactions between the Parent and the Cerence business are considered to be effectively settled in the combined financial statements at the time
the transaction was recorded. The total net effect of the settlement of these intercompany transactions was reflected in the Combined Statements of Cash
Flows as a financing activity and in the Combined Balance Sheets as net parent investment.
All of the allocations and estimates in the combined financial statements are based on assumptions which management believed are reasonable.
However, the combined financial statements included herein may not be indicative of the financial position, results of operations and cash flows if the
Cerence business had been a separate, standalone entity during the periods presented.
Comparability of Results
As of October 1, 2018, we adopted ASC 606 using the modified retrospective approach from the previous guidance, ASC 605. The adoption of ASC
606 limited the comparability of revenue and expenses, including cost of revenue and certain operating expenses, presented in the results of operations for
the fiscal years 2020 and 2019, when compared to prior reporting periods.
Key Metrics
In evaluating our financial condition and operating performance, we focus on revenue, operating margins, and cash flow from operations.
For the fiscal year 2020 as compared to fiscal year 2019:
•
•
•
Total revenue increased by $26.3 million, or 8.7%, from $303.3 million to $329.6 million.
Operating margin increased 2.3 percentage points from 3.6% to 5.9%.
Cash provided by operating activities decreased by $43.3 million, or 49.1%, from $88.1 million to $44.8 million.
For fiscal year 2019 as compared to fiscal year 2018:
•
•
•
Total revenue increased by $26.3 million, or 9.5%, from $277.0 million to $303.3 million.
Operating margin decreased by 9.7 percentage points from 13.3% to 3.6%.
Cash provided by operating activities decreased by $27.2 million, or 23.6%, from $115.3 million to $88.1 million.
36
Operating Results
The following table shows the consolidated statement of operations for the fiscal year 2020 and the combined statement of operations for the fiscal
year 2019 and fiscal year 2018 (dollars in thousands):
Revenues:
License
Connected services
Professional services
Total revenues
Cost of revenues:
License
Connected services
Professional services
Amortization of intangibles
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Restructuring and other costs, net
Acquisition-related costs
Total operating expenses
Income from operations
Interest income
Interest expense
Other income (expense), net
(Loss) income before income taxes
(Benefit from) provision for income taxes
Net (loss) income
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
$
$
164,268 $
96,148
69,230
329,646
2,783
31,768
64,963
8,337
107,851
221,795
88,899
33,398
49,386
12,544
18,237
—
202,464
19,331
585
(22,737)
(23,319)
(26,140)
(5,509)
(20,631) $
172,379 $
78,690
52,246
303,315
2,069
37,562
51,214
8,498
99,343
203,972
93,061
36,261
25,926
12,524
24,404
944
193,120
10,852
—
—
332
11,184
(89,084)
100,268 $
171,075
60,227
45,682
276,984
1,156
32,919
41,123
7,766
82,964
194,020
80,957
30,553
19,873
8,840
12,863
4,082
157,168
36,852
—
—
(54)
36,798
30,917
5,881
Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services. License revenue primarily
consists of license royalties associated with our edge software components, with costs of license revenue primarily consisting of third-party royalty
expenses for certain external technologies we leverage. Connected services revenue represents the subscription fee that provides access to our connected
services components, including the customization and construction of our connected services solutions. Cost of connected service revenue primarily
consists of labor costs of software delivery services, infrastructure, and communications fees that support our connected services solutions. Professional
services revenue is primarily comprised of porting, integrating, and customizing our embedded solutions, with costs primarily consisting of compensation
for services personnel, contractors and overhead.
Our operating expenses include R&D, sales and marketing and general and administrative expenses. R&D expenses primarily consist of salaries,
benefits, and overhead relating to research and engineering staff. Sales and marketing expenses includes salaries, benefits, and commissions related to our
sales, product marketing, product management, and business unit management teams. General and administrative expenses primarily consist of personnel
costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and
provisions for doubtful accounts.
Amortization of acquired patents and core technology are included within cost of revenues whereas the amortization of other intangible assets, such
as acquired customer relationships, trade names and trademarks, are included within operating expenses. Customer relationships are amortized over their
estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Other identifiable intangible assets
are amortized on a straight-line basis over their estimated useful lives.
37
Restructuring costs are costs related to reorganizing various business units, including costs associated with employee severance, closing and opening
facilities, terminating contracts, and separation costs related to establishing Cerence business as a standalone public company.
Acquisition-related costs include transition and integration costs, professional service fees, and fair value adjustments related to business and asset
acquisitions, including potential acquisitions.
Other income (expense), net consists primarily of interest income, interest expense, foreign exchange gains (losses), and net gain (loss) from other
non-operating activities.
Fiscal Year 2020 Compared with Fiscal Year 2019 and Fiscal Year 2019 Compared with Fiscal Year 2018
Total Revenues
The following table shows total revenues by product type, including the corresponding percentage change (dollars in thousands):
License
Connected services
Professional services
Total revenues
2020
(ASC 606)
$ 164,268
96,148
69,230
Year Ended September 30,
% of Total
2019
(ASC 606)
% of Total
2018
(ASC 605)
% of Total
% Change
2020 vs. 2019
% Change
2019 vs. 2018
50% $ 172,379
78,690
29%
52,246
21%
57% $ 171,075
60,227
26%
45,682
17%
62%
22%
16%
$ 329,646
$ 303,315
$ 276,984
(5)%
22%
33%
9%
1%
31%
14%
10%
Fiscal Year 2020 Compared with Fiscal Year 2019
Total revenues fiscal year 2020 were $329.6 million, an increase of $26.3 million, or 8.7%, from $303.3 million from fiscal year 2019. This growth
was primarily driven by increased demand for our connected and professional solutions.
License Revenue
License revenue for fiscal year 2020 was $164.3 million, a decrease of $8.1 million, or 4.7%, from $172.4 million for fiscal year 2019. The decrease
in license revenue was driven by the COVID-19 pandemic, which resulted in declining reported royalties from ongoing agreements. As a percentage of
total revenue, license revenue decreased by 7.0 percentage points from 56.8% for fiscal year 2019 to 49.8% for fiscal year 2020.
Connected Services Revenue
Connected services revenue for fiscal year 2020 was $96.1 million, an increase of $17.5 million, or 22.2%, from $78.7 million for fiscal year 2019.
This increase was primarily driven by continued market penetration from our connected services solutions as our customers increasingly deploy hybrid
solutions. As a percentage of total revenue, connected services revenue increased by 3.3 percentage points from 25.9% for fiscal year 2019 to 29.2% for
fiscal year 2020.
Professional Services Revenue
Professional services revenue for fiscal year 2020 was $69.2 million, an increase of $17.0 million, or 32.5%, from $52.2 million for fiscal year 2019.
This increase was primarily driven by demand for the integration and customization services related to our edge software and the timing of services
rendered. As a percentage of total revenue, professional services revenue increased by 3.8 percentage points from 17.2% for fiscal year 2019 to 21.0% for
fiscal year 2020.
Fiscal Year 2019 Compared with Fiscal Year 2018
Our total revenues for fiscal year 2019 were $303.3 million, an increase of $26.3 million, or 9.5%, from $277.0 million from fiscal year 2018. This
growth was primarily driven by increased demand for our connected and professional solutions
38
License Revenue
License revenue for fiscal year 2019 was $172.4 million, an increase of $1.3 million, or 0.8%, from $171.1 million for fiscal year 2018. License
revenue increased primarily due to a higher volume of licensing royalties from new and existing customers. As a percentage of total revenue, license
revenue decreased by 5.0 percentage points from 61.8% for fiscal year 2018 to 56.8% for fiscal year 2019.
Connected Services Revenue
Connected services revenue for fiscal year 2019 was $78.7 million, an increase of $18.5 million, or 30.7%, from $60.2 million for fiscal year 2018.
This increase was primarily driven by greater demand for our connected services solutions as our customers increasingly deploy hybrid solutions. As a
percentage of total revenue, connected services revenue increased by 4.2 percentage points from 21.7% for fiscal year 2018 to 25.9% for fiscal year 2019.
Professional Services Revenue
Professional services revenue for fiscal year 2019 was $52.2 million, an increase of $6.6 million, or 14.4%, from $45.7 million for fiscal year 2018.
This increase was primarily driven by demand for the integration and customization services related to our edge software and the timing of services
rendered. As a percentage of total revenue, professional services revenue increased by 0.7 percentage points from 16.5% for fiscal year 2018 to 17.2% for
fiscal year 2019.
Total Cost of Revenues and Gross Profits
The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands):
License
Connected services
Professional services
Amortization of intangibles
Total cost of revenues
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
% Change
% Change
2020 vs. 2019
2019 vs. 2018
$
$
2,783 $
31,768
64,963
8,337
107,851 $
2,069 $
37,562
51,214
8,498
99,343 $
1,156
32,919
41,123
7,766
82,964
35%
(15)%
27%
(2)%
9%
79%
14%
25%
9%
20%
The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):
License
Connected services
Professional services
Amortization of intangibles
Total gross profit
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
% Change
% Change
2020 vs. 2019
2019 vs. 2018
$
$
161,485 $
64,380
4,267
(8,337)
221,795 $
170,310 $
41,128
1,032
(8,498)
203,972 $
169,919
27,308
4,559
(7,766)
194,020
(5)%
57%
313%
(2)%
9%
0%
51%
(77)%
9%
5%
Fiscal Year 2020 Compared with Fiscal Year 2019
Total cost of revenues for fiscal year 2020 were $107.9 million, an increase of $8.5 million, or 8.6%, from $99.3 million for fiscal year 2019. The
increase in cost of revenues resulted primarily from our investments in professional services staff to meet customer program demands.
We experienced an increase in total gross profit of $17.8 million, or 8.7%, from $204.0 million to $221.8 million, which was primarily driven by
increased demand for our connected services solutions and professional services.
Cost of License Revenue
Cost of license revenue for fiscal year 2020 was $2.8 million, an increase of $0.7 million, or 34.5%, from $2.1 million for fiscal year 2019. Cost of
license revenues increased due to third-party royalty expenses associated with external technologies we leverage in
39
our edge software components. As a percentage of total cost of revenue, cost of license revenue increased by 0.5 percentage points from 2.1% for fiscal
year 2019 to 2.6% for fiscal year 2020.
License gross profit decreased by $8.8 million, or 5.2%, primarily due to declines in license revenue recognized during the year.
Cost of Connected Services Revenue
Cost of connected services revenue for fiscal year 2020 was $31.8 million, a decrease of $5.8 million, or 15.4%, from $37.6 million for fiscal year
2019. Cost of connected services revenue decreased primarily as a result of lower internal allocated costs. As a percentage of total cost of revenue, cost of
connected service revenue decreased by 8.3 percentage points from 37.8% for fiscal year 2019 to 29.5% for fiscal year 2020.
Connected services gross profit increased $23.3 million, or 56.5%, from $41.1 million to $64.4 million which was primarily due to connected
services revenue growth on relatively fixed cloud infrastructure costs.
Cost of Professional Services Revenue
Cost of professional services revenue fiscal year 2020 was $65.0 million, an increase of $13.7 million, or 26.8%, from $51.2 million for fiscal year 2019.
Cost of professional services revenue increased primarily due to our investments in professional services staff to meet customer program demands. Investments
included increases in internally allocated labor costs of $4.3 million, compensation-related expenses of $3.3 million, and stock-based compensation expenses of
$3.1 million. As a percentage of total cost of revenue, cost of professional services revenue increased by 8.6 percentage points from 51.6% for fiscal year 2019 to
60.2% for fiscal year 2020.
Professional services gross profit increased $3.2 million, or 313.5%, from $1.0 million to $4.3 million which was primarily due to increases in
professional services revenue recognized and continued cost reduction measures.
Fiscal Year 2019 Compared with Fiscal Year 2018
Our total cost of revenues for fiscal year 2019 were $99.3 million, an increase of $16.4 million, or 19.7%, from $83.0 million for fiscal year 2018.
The increase in cost of revenues resulted primarily from the growth of our cloud-based connected services revenue, which required an increase in cloud-
based infrastructure and employee costs, and our investments in professional services staff to meet customer program demands. We also experienced an
increase in amortization of intangible assets that was included in costs of revenues primarily due to our acquisition of Voicebox on April 2, 2018, which
increased the carrying value of our total intangible assets.
We experienced an increase in gross profit of $10.0 million, or 5.1%, from $194.0 million to $204.0 million which was primarily driven by
increased demand for our connected services solutions
Cost of License Revenue
Cost of license revenue for fiscal year 2019 were $2.1 million, an increase of $0.9 million, or 79.0%, from $1.2 million for fiscal year 2018. Cost of
license revenues increased due to third-party royalty expenses associated with external technologies we leverage in our edge software components. As a
percentage of total cost of revenue, cost of license revenue increased by 0.7 percentage points from 1.4% for fiscal year 2018 to 2.1% for fiscal year 2019.
License gross profit increased $0.4 million, or 0.2%, from $169.9 million to $170.3 million since costs associated with license royalties are minimal.
Cost of Connected Services Revenue
Cost of connected services revenue for fiscal year 2019 were $37.6 million, an increase of $4.6 million, or 14.1%, from $32.9 million for fiscal year 2018.
Cost of connected services revenue increased primarily as a result of the growth of cloud-based connected services revenue from new and existing customers
utilizing our software delivery services for hybrid solutions. As a percentage of total cost of revenue, cost of connected service revenue decreased by 1.9
percentage points from 39.7% for fiscal year 2018 to 37.8% for fiscal year 2019.
Connected services gross profit increased $13.8 million, or 50.6%, from $27.3 million to $41.1 million, which was primarily due to connected services
revenue growth on relatively fixed cloud infrastructure and employee costs.
40
Cost of Professional Services Revenue
Cost of professional services revenue for fiscal year 2019 were $51.2 million, an increase of $10.1 million, or 24.5%, from $41.1 million for fiscal
year 2018. Cost of professional services revenue increased primarily due to our investments in professional services staff to meet customer program demands. As
a percentage of total cost of revenue, cost of professional services revenue increased by 2.0 percentage points from 49.6% for fiscal year 2018 to 51.6% for
fiscal year 2019.
Professional services gross profit decreased $3.5 million, or 77.4%, from $4.6 million to $1.0 million, which was primarily due to changes made to
our professional services pricing strategy and continued cost reduction measures.
Operating Expenses
The tables below show each component of operating expense. Other income (expense), net and provision for income taxes are non-operating
expenses and presented in a similar format (dollars in thousands).
R&D Expenses
Research and development
2020
Year Ended September 30,
2019
% Change
% Change
2018
2020 vs. 2019
2019 vs. 2018
$
88,899
$
93,061
$
80,957
(4)%
15%
Fiscal Year 2020 Compared with Fiscal Year 2019
Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new
technologies. R&D expenses for fiscal year 2020 were $88.9 million, a decrease of $4.2 million, or 4.5%, from $93.1 million for fiscal year 2019. In
response to the COVID-19 pandemic, we shifted a portion of our R&D workforce to support our professional service teams, which led to a decline in R&D
expenses as a result of internal labor cost allocations. R&D costs also declined due to capitalization of costs associated with internally developed software
of $2.7 million and reduction of stock-based compensation of $2.0 million. The decline in R&D expenses were partially offset by a $0.8 million increase in
contractor costs. As a percentage of total operating expenses, R&D expenses decreased by 4.3 percentage points from 48.2% for fiscal year 2019 to 43.9%
for fiscal year 2020.
Fiscal Year 2019 Compared with Fiscal Year 2018
Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new
technologies. R&D expenses for fiscal year 2019 were $93.1 million, an increase of $12.1 million, or 15.0%, from $81.0 million for fiscal year 2018. R&D
expense increased primarily as a result of hiring more engineers and other essential product innovation personnel. Investing in R&D personnel is essential
to advancing our technologies and enhancing in-car experiences. As a percentage of total operating expenses, R&D expenses decreased by 3.3 percentage
points from 51.5% for fiscal year 2018 to 48.2% for fiscal year 2019.
Sales & Marketing Expenses
Sales and marketing
Fiscal Year 2020 Compared with Fiscal Year 2019
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
% Change
% Change
2020 vs. 2019
2019 vs. 2018
$
33,398
$
36,261
$
30,553
(8)%
19%
Sales and marketing expenses for fiscal year 2020 were $33.4 million, a decrease of $2.9 million, or 7.9%, from $36.3 million for fiscal year 2019. Sales
and marketing expenses decreased primarily due lower compensation related expenses, including $1.9 million attributed to salary-related expenses and $2.7
million related to commission expenses. We also experienced a reduction of $1.1 million in travel-related expenditures as a result of COVID-19. The decrease
was partly offset by stock-based compensation expenses, which increased $3.4 million. As a percentage of total operating expenses, sales and marketing
expenses decreased by 2.3 percentage points from 18.8% for fiscal year 2019 to 16.5% for fiscal year 2020.
41
Fiscal Year 2019 Compared with Fiscal Year 2018
Sales and marketing expenses for fiscal year 2019 were $36.3 million, an increase of $5.7 million, or 18.7%, from $30.6 million for fiscal year
2018. Sales and marketing expenses increased primarily as a result of higher sales quota attainment and the expansion of our sales and marketing staff levels. As
a percentage of total operating expenses, sales and marketing expenses decreased by 0.6 percentage points from 19.4% for fiscal year 2018 to 18.8% for
fiscal year 2019.
General & Administrative Expenses
General and administrative
Fiscal Year 2020 Compared with Fiscal Year 2019
2020
Year Ended September 30,
2019
% Change
% Change
2018
2020 vs. 2019
2019 vs. 2018
$
49,386
$
25,926
$
19,873
90%
30%
General and administrative expenses for fiscal year 2020 were $49.4 million, an increase of $23.5 million, or 90.5%, from $25.9 million for fiscal
year 2019. General and administrative expenses increased primarily due to our operation as a standalone public company during fiscal year 2020. We
incurred higher compensation related expenses, including $8.5 million attributed to salary-related expenses and $12.5 attributed to stock-based
compensation expenses. In addition, professional service expenses increased $3.0 million. As a percentage of total operating expenses, general and
administrative expenses increased by 11.0 percentage points from 13.4% for fiscal year 2019 to 24.4% for fiscal year 2020.
Fiscal Year 2019 Compared with Fiscal Year 2018
General and administrative expenses for fiscal year 2019 were $25.9 million, an increase of $6.1 million, or 30.5%, from $19.9 million for fiscal
year 2018. The increase in general and administrative expenses was primarily attributable to professional and legal fees, administrative salaries expenses,
and software fees. As a percentage of total operating expenses, general and administrative expenses increased by 0.8 percentage points from 12.6% for
fiscal year 2018 to 13.4% for fiscal year 2019.
Amortization of Intangible Assets
Cost of revenues
Operating expense
Total amortization
2020
Year Ended September 30,
2019
% Change
% Change
2018
2020 vs. 2019
2019 vs. 2018
$
$
8,337 $
12,544
20,881 $
8,498 $
12,524
21,022 $
7,766
8,840
16,606
(2)%
0%
(1)%
9%
42%
27%
Fiscal Year 2020 Compared with Fiscal Year 2019
Intangible asset amortization for fiscal year 2020 was $20.9 million, a decrease of $0.1 million, or 0.7%, from $21.0 million for fiscal year 2019.
The decrease primarily relates to the composition of intangible assets allocated to the Cerence business prior to Spin-Off.
As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.8 percentage points from 8.6% for
fiscal year 2019 to 7.7% for fiscal year 2020. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses
decreased by 0.3 percentage points from 6.5% for fiscal year 2019 to 6.2% for fiscal year 2020.
Fiscal Year 2019 Compared with Fiscal Year 2018
Intangible asset amortization for fiscal year 2019 was $21.0 million, an increase of $4.4 million, or 26.6%, from $16.6 million for fiscal year 2018.
The increase primarily relates to our acquisition of Voicebox which resulted in the addition of several customer relationships that increased amortization
expense.
As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.8 percentage points from 9.4% for
fiscal year 2018 to 8.6% for fiscal year 2019. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses
increased by 0.9 percentage points from 5.6% for fiscal year 2018 to 6.5% for fiscal year 2019.
42
Restructuring and Other Costs, Net
Restructuring and other costs, net
Fiscal Year 2020 Compared with Fiscal Year 2019
2020
Year Ended September 30,
2019
% Change
% Change
2018
2020 vs. 2019
2019 vs. 2018
$
18,237
$
24,404
$
12,863
(25)%
90%
Restructuring and other costs, net for fiscal year 2020 were $18.2 million, a decrease of $6.2 million, from $24.4 million for fiscal year 2019.
Restructuring and other costs, net decreased primarily due to the winding down of separation costs to establish the Cerence business as a standalone public
company, which decreased $10.8 million. The decrease was partly offset by the $3.6 million increase in severance charges related to the elimination of
personnel across multiple functions and the $1.1 million increase in facilities related charges. As a percentage of total operating expense, restructuring and
other costs, net decreased by 3.6 percentage points from 12.6% for fiscal year 2019 to 9.0% for fiscal year 2020.
Fiscal Year 2019 Compared with Fiscal Year 2018
Restructuring and other costs, net for fiscal year 2019 were $24.4 million, an increase of $11.5 million, from $12.9 million for fiscal year 2018.
Restructuring and other costs, net increased primarily due to professional service fees incurred to establish the Cerence business as a standalone public
company, which increased $13.9 million. The increase was partly offset by the $4.0 million decrease in severance charges related to the elimination of
personnel across multiple functions. As a percentage of total operating expense, restructuring and other costs, net increased by 4.4 percentage points from
8.2% for fiscal year 2018 to 12.6% for fiscal year 2019.
Acquisition-related Costs
Acquisition-related costs
Fiscal Year 2020 Compared with Fiscal Year 2019
2020
Year Ended September 30,
2019
% Change
% Change
2018
2020 vs. 2019
2019 vs. 2018
$
-
$
944
$
4,082
(100)%
(77)%
There were no acquisition-related costs for fiscal year 2020, which resulted in a decrease of $0.9 million, from $0.9 million for fiscal year 2019.
Acquisition costs decreased as a direct result of integration, legal, and other professional fees incurred resulting from the acquisition of Voicebox on
April 2, 2018. As a percentage of total operating expense, acquisition-related costs decreased by 0.5 percentage points from 0.5% for fiscal year 2019 to
0.0% for fiscal year 2020.
Fiscal Year 2019 Compared with Fiscal Year 2018
Acquisition-related costs for fiscal year 2019 were $0.9 million, a decrease of $3.1 million, from $4.1 million for fiscal year 2018. Acquisition costs
decreased as a direct result of integration, legal, and other professional fees incurred resulting from the acquisition of Voicebox on April 2, 2018. As a
percentage of total operating expense, acquisition-related costs decreased by 2.1 percentage points from 2.6% for fiscal year 2018 to 0.5% for fiscal year
2019.
Total Other Expense, Net
Interest income
Interest expense
Other income (expense), net
Total other income (expense), net
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
% Change
% Change
2020 vs. 2019
2019 vs. 2018
$
$
585 $
(22,737)
(23,319)
(45,471) $
- $
-
332
332 $
-
-
(54)
(54)
100%
(100)%
(7124)%
(13796)%
—
—
(715)%
(715)%
43
Fiscal Year 2020 Compared with Fiscal Year 2019
Total other expense, net for fiscal year 2020 was $45.5 million, an increase of $45.8 million from $0.3 million of total other income, net for fiscal
year 2019. The increase was primarily attributable to $22.7 million in interest expense related to our debt financings during fiscal year 2020, a $19.3
million loss on the extinguishment of debt related to our Existing Facilities and $1.2 million of expense related to a decrease in an asset corresponding with
the release of indemnified pre-Spin-Off liabilities for uncertain tax positions.
Fiscal Year 2019 Compared with Fiscal Year 2018
Total other income, net for fiscal year 2019 was $0.3 million, an increase of $0.4 million, or 714.8%, from total other expense, net of $0.1 million
for fiscal year 2018. The net increase in total other expense, net over the prior fiscal year was primarily the result of foreign currency gains (losses) year
over year.
(Benefit from) Provision for Income Taxes
2020
(Benefit from) provision for income taxes
$
Effective income tax rate%
Fiscal Year 2020 Compared with Fiscal Year 2019
Year Ended September 30,
2019
(89,084)
$
(796.5)%
$
21.1%
(5,509)
% Change
% Change
2018
2020 vs. 2019
2019 vs. 2018
30,917
84.0%
(94)%
(388)%
Our effective income tax rate for fiscal year 2020 was 21.1%, compared to (796.5)% for fiscal year 2019. Consequently, our benefit from income
taxes for fiscal year 2020 was $5.5 million, a net change of $83.6 million, or 93.8%, from a benefit from income taxes of $89.1 million for fiscal year 2019.
The effective tax rate for the fiscal year 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of jurisdictional
earnings, U.S. inclusions of foreign taxable income as a result of changes in applicable tax laws in 2017, and an income tax benefit of approximately $5.0
million related to an increase in tax rates in the Netherlands enacted in the first quarter.
Fiscal Year 2019 Compared with Fiscal Year 2018
Our effective income tax rate for fiscal year 2019 was (796.5)%, compared to 84.0% for fiscal year 2018. Consequently, our provision for income
taxes for fiscal year 2019 was $89.1 million, a net change of $120.0 million, or 388.1%, from $30.9 million for fiscal year 2018. The effective income tax
rate for fiscal year 2019 differed from the U.S. statutory rate of 21.0% primarily due to a net tax benefit of $91.7 million related to intangible property
transfers, partially offset by an uncertain tax position. The net tax benefit is also partially offset by global intangible low-taxed income, or GILTI, tax
expense of $3.9 million.
Liquidity and Capital Resources
Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding
in the capital markets as needed. Upon the Distribution, Nuance allocated $110.0 million in cash and cash equivalents to the Cerence business, which was
adequate to meet the short-term net working capital needs of our business at the close of the Distribution. As of September 30, 2020, our net working
capital, excluding current deferred revenue and deferred cost, was $153.6 million. This balance is representative of the short-term net cash inflows based on
the working capital at that date. Based on our history of generating positive cash flows and the $136.1 million of cash and cash equivalents as of September
30, 2020, we believe we will be able to meet our liquidity needs over the next 12 months. We believe we will meet longer-term expected future cash
requirements and obligations, through a combination of cash flows from operating activities, available cash balances, and available credit via our
Revolving Facility. Specifically, we anticipate our cost of revenues, funding our R&D activities, and debt obligations to be our primary uses of cash during
the year ended September 30, 2021.
However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity
needs. Given the economic uncertainty as a result of the pandemic, during fiscal year 2020, we took actions to improve our liquidity position, including,
reducing working capital, reducing operating costs by delaying research and development programs, initiating a workforce reduction, and substantially
reducing discretionary spending. Should we need to secure additional sources of liquidity, we believe that we could finance our needs through the issuance
of equity securities or debt offerings. However, we cannot guarantee that we will be able to obtain financing through the issuance of equity securities or
debt offerings on reasonable terms, or at all. The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and
disruption of financial
44
markets. An extended period of economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to
sources of liquidity and financial condition.
Beginning in fiscal 2021, we plan to enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. We plan to designate
these forward exchange contracts as cash flow hedges.
3.00% Senior Convertible Notes due 2025
On June 2, 2020, in an effort to refinance our debt structure, we issued $175.0 million in aggregate principal amount of 3.00% Convertible Senior
Notes due 2025 (the “Notes”), including the initial purchasers’ exercise in full of their option to purchase an additional $25.0 million principal amount of
the Notes, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the issuance of the Notes were $169.8
million after deducting transaction costs. We used net proceeds from the issuance of the Notes to repay a portion of our indebtedness under the Credit
Agreement, dated October 1, 2019, by and among the Company, the lenders and issuing banks party thereto and Barclays Bank PLC, as administrative
agent (the “Existing Facility”).
The Notes are senior, unsecured obligations and will accrue interest payable semiannually in arrears on June 1 and December 1 of each year,
beginning on December 1, 2020, at a rate of 3.00% per year. The Notes will mature on June 1, 2025, unless earlier converted, redeemed, or repurchased.
The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the
Company’s election.
A holder of Notes may convert all or any portion of its Notes at its option at any time prior to the close of business on the business day immediately
preceding March 1, 2025 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on September
30, 2020 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive)
during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or
equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period
(the “measurement period”) in which the “trading price” per $1,000 principal amount of Notes for each trading day of the measurement period was less
than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we calls such Notes for
redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of
specified corporate events. On or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity
date, a holder may convert all or any portion of its Notes at any time, regardless of the foregoing.
The conversion rate will initially be 26.7271 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion
price of approximately $37.42 per share of our common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any
accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if we delivers a notice of redemption, we
will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event or convert
its Notes called for redemption in connection with such notice of redemption, as the case may be.
We may not redeem the Notes prior to June 5, 2023. We may redeem for cash all or any portion of the Notes, at our option, on a redemption date
occurring on or after June 5, 2023 and on or before the 31st scheduled trading day immediately before the maturity date, if the last reported sale price of our
common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading
day immediately preceding the date on which we provides notice of redemption, during any 30 consecutive trading day period ending on, and including,
the trading day immediately preceding the date on which we provides notice of redemption at a redemption price equal to 100% of the principal amount of
the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If we undergo a “fundamental change”, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Notes
at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to,
but excluding, the fundamental change repurchase date.
The Notes contain customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare the entire principal amount of all the Notes plus
accrued special interest, if any, to be immediately due and payable.
At issuance, we accounted for the Notes by allocating proceeds from the Notes into debt and equity components according to the accounting
standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The initial carrying amount of the debt component,
which approximates its fair value, was estimated by using an interest rate for nonconvertible debt, with terms similar to the Notes. The excess of the
principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in
capital. The debt discount is accreted to the carrying
45
value of the Notes over their expected term as interest expense using the interest method. Upon issuance of the Notes, we recorded $155.3 million as debt
and $19.7 million as additional paid-in capital in stockholders’ equity.
We incurred transaction costs of $5.6 million relating to the issuance of the Notes. In accounting for these costs, we allocated the costs of the
offering between debt and equity in proportion to the fair value of the debt and equity recognized. The transaction costs allocated to the debt component of
approximately $5.0 million were recorded as a direct deduction from the face amount of the Notes and are being amortized as interest expense over the
term of the Notes using the interest method. The transaction costs allocated to the equity component of approximately $0.6 million were recorded as a
decrease in additional paid-in capital.
The interest expense recognized related to the Notes for the fiscal year ended September 30, 2020 was as follows (dollars in thousands):
Contractual interest expense
Amortization of debt discount
Amortization of issuance costs
Total interest expense related to the Notes
Year Ended
September 30, 2020
1,753
1,131
285
3,169
$
$
As of September 30, 2020, the conditions allowing holders of the Notes to convert have not been met and therefore the Notes are not yet
convertible.
Senior Credit Facilities
On June 12, 2020 (the “Financing Closing Date”), in connection with our effort to refinance our existing indebtedness, we entered into a Credit
Agreement, by and among the Borrower, the lenders and issuing banks party thereto and Wells Fargo Bank, N.A., as administrative agent (the “Credit
Agreement”), consisting of a four-year senior secured term loan facility in the aggregate principal amount of $125.0 million (the “Term Loan Facility”).
The net proceeds from the issuance of the Term Loan Facility were $123.0 million, which together with proceeds from the Notes was intended to pay in full
all indebtedness under the Existing Facility, and paid fees and expenses in connection with the Senior Credit Facilities. We also entered into a senior
secured first-lien revolving credit facility in an aggregate principal amount of $50.0 million (the “Revolving Facility” and, together with the Term Loan
Facility, the “Senior Credit Facilities”), which shall be drawn on in the event that our working capital and other cash needs are not supported by our
operating cash flow. As of September 30, 2020, there were no amounts outstanding under the Revolving Facility.
Our obligations under the Credit Agreement are jointly and severally guaranteed by certain of our existing and future direct and indirect wholly
owned domestic subsidiaries, subject to certain exceptions customary for financings of this type. All obligations are secured by substantially all of our
tangible and intangible personal property and material real property, including a perfected first-priority pledge of all (or, in the case of foreign subsidiaries
or subsidiaries (“FSHCO”) that own no material assets other than equity interests in foreign subsidiaries that are “controlled foreign corporations” or other
FSHCOs, 65%) of the equity securities of our subsidiaries held by any loan party, subject to certain customary exceptions and limitations.
We are obligated to make quarterly principal payments on the last day of each quarter in an aggregate annual amount equal to 5.0% of the original
principal amount of the Term Loan Facility during the first two years of the Term Loan Facility, and 10% of the original principal amount of the Term Loan
Facility thereafter, with the balance payable at the maturity date. Quarterly principal payments commenced on September 30, 2020.
Interest accrues on outstanding borrowings under the Senior Credit Facilities at a rate, at our option, of either (a) base rate determined by reference
to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the federal funds effective rate,
plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1% per annum (“ABR”) or (b) an adjusted LIBOR rate (“LIBOR”) (which shall not be less
than 0.50% per annum), in each case, plus an applicable margin. Initially, the applicable margin is LIBOR plus 3.00% or ABR plus 2.00%. Following
delivery of a compliance certificate for the first full fiscal quarter after the Financing Closing Date, the applicable margins for the Senior Credit Facilities is
subject to a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the applicable margin
is LIBOR plus 3.50% or ABR plus 2.50%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the applicable
margin is LIBOR plus 3.25% or ABR plus 2.25%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the
applicable margin is LIBOR plus 3.00% or ABR plus 2.00%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to
1.00, the applicable margin is LIBOR plus 2.75% or ABR plus 1.75%; and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the
applicable margin is LIBOR plus 2.50% or ABR plus 1.50%.
46
Total interest expense relating to the Senior Credit Facilities for the fiscal year ended September 30, 2020 was $1.5 million, reflecting the coupon and
accretion of the discount.
Borrowings under the Credit Agreement are prepayable at our option without premium or penalty. We may request, and each lender may agree in its
sole discretion, to extend the maturity date of all or a portion of the Senior Credit Facilities subject to certain conditions customary for financings of this
type. The Credit Agreement also contains certain mandatory prepayment provisions in the event that we incur certain types of indebtedness or receives net
cash proceeds from certain non-ordinary course asset sales or other dispositions of property, in each case subject to terms and conditions customary for
financings of this type.
The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit our
and our subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to designate subsidiaries as
unrestricted, to make certain investments, to prepay certain indebtedness and to pay dividends, or to make other distributions or redemptions/repurchases,
in respect of our and our subsidiaries’ equity interests. In addition, the Credit Agreement contains financial covenants, each tested quarterly commencing
with the quarter ended September 30, 2020, (1) a net secured leveraged ratio of not greater than 3.25 to 1.00; (2) a net total leverage ratio of not greater
than 4.25 to 1.00; and (3) minimum liquidity of at least $75 million. The Credit Agreement also contains events of default customary for financings of this
type, including certain customary change of control events. As of September 30, 2020, we were in compliance with all Credit Agreement covenants.
Existing Facilities
On October 1, 2019, in connection with the Spin-Off, we entered into the Existing Facility consisting of a five-year senior secured term loan facility
in the aggregate principal amount of $270.0 million. The net proceeds from the issuance of the Existing Facility were $249.7 million, which was primarily
intended to finance a cash distribution of approximately $153.0 million to Nuance and provide approximately $110.0 million initial support for the cash
flow needs of the Cerence business. We also entered into a 54-month senior secured first-lien revolving credit facility in an aggregate principal amount of
$75.0 million, which shall be drawn on in the event that our working capital and other cash needs are not supported by our operating cash flow (the
“Existing Revolving Facility” and collectively with the Existing Facility, the “Existing Facilities”).
During June 2020, in connection with the issuance of the Notes and Senior Credit Facilities, we initiated prepayments towards our Existing
Facilities in the amount of $267.6 million in cash. As a result, we recorded $267.6 million extinguishment of debt and $19.3 million loss on the
extinguishment of debt. As of September 30, 2020, our obligations related to the Existing Facilities have been settled. Total interest expense relating to the
Existing Facilities for the fiscal year ended September 30, 2020 was $18.0 million, reflecting the coupon and accretion of the discount.
Cash Flows
Cash flows from operating, investing and financing activities for the years ended September 30, 2020, 2019, and 2018, as reflected in the audited
consolidated and combined statement of cash flows included in Item 8 of this Form 10-K, are summarized in the following table (dollars in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of foreign currency exchange rates on cash and cash
equivalents
Net changes in cash and cash equivalents
$
2020
Year Ended September 30,
2019
44,789 $
(30,675)
121,553
88,071 $
(4,517)
(83,554)
2018
115,259
(86,312)
(28,947)
400
136,067 $
$
—
— $
—
—
47
% Change
% Change
2020 vs. 2019
2019 vs. 2018
(49)%
579%
(245)%
100%
100%
(24)%
(95)%
189%
—
—
Net Cash Provided by Operating Activities
Fiscal Year 2020 Compared with Fiscal Year 2019
Net cash provided by operating activities for fiscal year 2020 was $44.8 million, a net decrease of $43.3 million, or 49.1%, from net cash provided
by operating activities of $88.1 million for fiscal year 2019. The net decrease in cash provided by operating activities stems from unfavorable changes in
working capital. Outflows in prepaids and other assets and accounts payable increased by $21.5 million and $12.6 million, respectively. The timing of
billings and collections resulted in $15.2 million additional cash inflows from accounts receivable compared to prior year.
Cash outflows from deferred revenue increased $53.3 million. Deferred revenue represents a significant portion of our net cash provided by
operating activities and, depending on the nature of our contracts with customers, this balance can fluctuate significantly from period to period. We expect
our deferred revenue balances to decrease in the future, including due to a wind-down of a legacy connected service relationship with a major OEM, since
the majority of cash from the contract has been collected. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.
Fiscal Year 2019 Compared with Fiscal Year 2018
Net cash provided by operating activities for fiscal year 2019 was $88.1 million, a decrease of $27.2 million, or 23.6%, from $115.3 million for
fiscal year 2018. The net decrease in cash provided by operating activities stems from unfavorable changes in working capital, primarily due to the timing
of payments, which decreased accrued expenses and other liabilities by $6.7 million and increased prepaid expenses and other assets by $5.9 million. In
addition, the timing of billing and collections resulted in a decrease in accounts receivable of $7.6 million compared to the prior year.
Net Cash Used in Investing Activities
Fiscal Year 2020 Compared with Fiscal Year 2019
Net cash used in investing activities for the fiscal year 2020 was $30.7 million, an increase of $26.2 million, or 579.1%, from $4.5 million for fiscal
year 2019. The increase in cash outflows is due to the purchase of property and equipment to support the standalone operations of the Company and the
purchase of marketable securities, in the amount of $11.7 million.
Fiscal Year 2019 Compared with Fiscal Year 2018
Net cash used in investing activities for fiscal year 2019 was $4.5 million, a decrease of $81.8 million, from $86.3 million for fiscal year 2018. The
decrease in cash outflows was due to net cash payments of $79.8 million associated with the acquisition of Voicebox during the fiscal year ended
September 30, 2018 and a $2.0 million decrease in cash outflows for capital expenditures.
Net Cash Provided by (Used in) Financing Activities
Fiscal Year 2020 Compared with Fiscal Year 2019
Net cash provided by financing activities for the fiscal year 2020 was $121.6 million, a net increase of $205.1 million, from cash used in financing
activities of $83.6 million for fiscal year 2019. The increase in cashflows were the result of $169.8 million net proceeds from the issuance of the Notes,
$123.0 million net proceeds from the issuance of the Senior Credit Facilities, and $249.7 million net proceeds from the issuance of the Existing Facilities.
The increase in cashflows were partly offset by $271.6 million in principal payments of long-term debt, $6.4 million payments of debt issuance costs, and
the $153.0 million distribution paid to Nuance.
Fiscal Year 2019 Compared with Fiscal Year 2018
Net cash used in financing activities for fiscal year 2019 was $83.6 million, an increase of $54.6 million, or 188.6%, from net cash used in financing
activities of $28.9 million for fiscal year 2018. The change relates to the cash distributions associated with Nuance’s historical cash management process
Business Acquisitions
Historically, we have made several acquisitions. We approach the market with a focus on our core technologies and acquire companies based on a
careful assessment of potential post-acquisition synergies that will help us expand our software platform and connected car services and advance our
technologies.
48
On April 2, 2018, we acquired Voicebox, headquartered in Bellevue, Washington. Voicebox is a provider of conversational artificial intelligence,
including voice recognition, natural language understanding, and artificial intelligence services. The aggregate consideration for this transaction was
$94.2 million which included $79.8 million paid in cash, net of $6.7 million in cash acquired, a $12.8 million write-off of deferred revenues related to our
pre-existing relationship with Voicebox, and a $1.6 million deferred acquisition payment which would be paid in cash upon the conclusion of an indemnity
period. The transaction was accounted for as a business combination and is included in the accompanying Consolidated and Combined Financial
Statements beginning on the date of acquisition. Refer to Note 4 to the accompanying Consolidated and Combined Financial Statements included
elsewhere in this Form 10-K for more detail on the acquisition of Voicebox.
Contractual Obligations, Contingent Liabilities, and Commitments
Contractual obligations may include lease and other non-current liabilities that are enforceable and legally binding, excluding contingent liabilities
that may arise from litigation, arbitration, regulatory actions, or income taxes.
The following table outlines our contractual payment obligations as of September 30, 2020 (dollars in thousands):
Notes
Interest payable on the Notes (1)
Senior Credit Facilities
Interest payable on Senior Credit Facilities (2)
Operating leases
Finance leases
Total contractual obligations
2021
Payments Due by the Year Ended September 30,
Thereafter
2024 - 2025
2022 - 2023
$
$
-
5,246
6,250
4,220
7,200
319
23,235
$
$
-
10,493
20,313
7,624
10,764
618
49,812
$
$
175,000
8,768
96,875
2,184
6,832
563
290,222
$
$
-
-
-
-
3,097
10
3,107
$
$
Total
175,000
24,507
123,438
14,028
27,893
1,510
366,376
(1)
(2)
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
Refer to Note 3 to the accompanying audited Consolidated and Combined Financial Statements included elsewhere in this Form 10-K for a
description of certain issued accounting standards that have not been adopted by us and may impact our results of operations in future reporting periods.
Critical Accounting Policies, Judgments and Estimates
The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial
49
statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions
and judgments, including those related to revenue recognition; allowance for doubtful accounts; accounting for deferred costs; accounting for internally
developed software; the valuation of goodwill and intangible assets; accounting for business combinations; accounting for stock-based compensation;
accounting for income taxes; accounting for leases; accounting for convertible debt; and loss contingencies. Our management bases its estimates on
historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable
under the circumstances. Actual results could differ from these estimates.
We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and the results of our
operations. These policies require our most difficult and subjective judgements.
Revenue Recognition
We primarily derive revenue from the following sources: (1) royalty-based software license arrangements, (2) connected services, and
(3) professional services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related
transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved
and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability
of consideration is probable.
Our arrangements with customers may contain multiple products and services. We account for individual products and services separately if they are
distinct—that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with
other resources that are readily available to the customer.
As of October 1, 2018, we adopted ASC 606 using the modified retrospective approach, which requires the results for the current reporting periods
be presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies in
accordance with ASC 605, with a cumulative adjustment recorded to accumulated deficit. For a reconciliation of our old accounting policy and ASC 606,
please refer to Note 3 to the accompanying audited Consolidated and Combined Financial Statements included elsewhere in this Form 10-K. We currently
recognize revenue after applying the following five steps:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
determination of the transaction price, including the constraint on variable consideration;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, the performance obligations are satisfied.
We allocate the transaction price of the arrangement based on the relative estimated standalone selling price, or SSP, of each distinct performance
obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:
•
•
•
•
the pricing of standalone sales (in the instances where available);
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis; and
other pricing factors, such as the geographical region in which the products or services are sold and expected discounts based on the customer
size and type.
We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns that represent
variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding
refund liability as a component of accrued expenses and other current liabilities. Other forms of contingent revenue or variable consideration are infrequent.
Revenue is recognized when control of these products or services is transferred to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those products or services.
We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a
significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant
financing component when the difference between payment and transfer of deliverables is a year or less.
50
If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist.
The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or
provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.
Performance Obligations
License
Software and technology licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology
are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the
progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor
hours. For income statement presentation purposes, we separate license revenue from professional services revenue based on their relative SSPs.
Revenue from distinct software and technology licenses, which do not require professional service to customize and/or integrate the software
license, is recognized at the point in time when the software and technology is made available to the customer and control is transferred.
Revenue from software and technology licenses sold on a royalty basis, where the license of intellectual property is the predominant item to which
the royalty relates, is recognized in the period the usage occurs in accordance with the practical expedient in ASC 606-10-55-65(A).
Connected Services
Connected services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are
provided on a usage basis as consumed or on a fixed fee subscription basis. Subscription basis revenue represents a single promise to stand-ready to
provide access to our connected services. Our connected services contract terms generally range from one to five years.
As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is
provided, we have determined that our connected services arrangements are a single performance obligation comprised of a series of distinct services.
These services include variable consideration, typically a function of usage. We recognize revenue as each distinct service period is performed (i.e.,
recognized as incurred).
Our connected service arrangements generally include services to develop, customize, and stand-up applications for each customer. In determining
whether these services are distinct, we consider dependence of the cloud service on the up-front development and stand-up, as well as availability of the
services from other vendors. We have concluded that the up-front development, stand-up and customization services are not distinct performance
obligations, and as such, revenue for these activities is recognized over the period during which the cloud-connected services are provided, and is included
within connected services revenue.
Professional Services
Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project,
which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
Significant Judgements
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together
may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s
environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for
together with professional services.
Judgments are required to determine the SSP for each distinct performance obligation. When the SSP is directly observable, we estimate the SSP
based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances
where the SSP is not directly observable, we determine the SSP using information that may include market conditions and other observable inputs. We may
have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In
these instances, we may use information such as the size of the customer and geographic region in determining the SSP. Determining the SSP for
performance obligations which we never
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sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would have resulted from established pricing
practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.
Contract Acquisition Costs
In conjunction with the adoption of ASC 606, we are required to capitalize certain contract acquisition costs. The capitalized costs primarily relate to
paid commissions. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for
groups of customer contracts. We elect to apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where
the expected period of benefit is one year or less. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit,
which we have estimated to be between one and eight years. The period of benefit was determined based on an average customer contract term, expected
contract renewals, changes in technology and our ability to retain customers, including canceled contracts. We assess the amortization term for all major
transactions based on specific facts and circumstances. Contract acquisition costs are classified as current or noncurrent assets based on when the expense
will be recognized. The current and noncurrent portions of contract acquisition costs are included in prepaid expenses and other current assets and in other
assets, respectively. As of September 30, 2020 and 2019, we had $5.6 million and $2.7 million of contract acquisition costs. We had amortization expense
of $1.5 million and $0.7 million related to these costs during the fiscal year ended September 30, 2020 and 2019. There was no impairment related to
contract acquisition costs.
Capitalized Contract Costs
We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will
be used to satisfy our performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Our
capitalized costs consist primarily of setup costs, such as costs to standup, customize and develop applications for each customer, which are incurred to
satisfy our stand-ready obligation to provide access to our connected offerings. These contract costs are expensed to cost of revenue as we satisfy our stand-
ready obligation over the contract term which we estimate to be between one and eight years, on average. The contract term was determined based on an
average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers, including canceled contracts. We
classify these costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of
capitalized contract fulfillment costs are presented as deferred costs. As of September 30, 2020 and 2019, we had $45.4 million and $41.6 million of
capitalized contract costs.
We had amortization expense of $12.0 million and $10.6 million related to these costs during the fiscal year ended September 30, 2020 and 2019,
respectively. There was no impairment related to contract fulfillment costs capitalized.
Trade Accounts Receivable and Contract Balances
We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration
that is unconditional (i.e., only the passage of time is required before payment is due). We present such receivables in accounts receivable, net in our
condensed combined balance sheets at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated
amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience,
the age of outstanding receivables and other applicable factors.
Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Contract assets
include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely
subject to the passage of time. Contract assets are included in prepaid expenses and other current assets. As of September 30, 2020, we had $30.3 million of
contract assets.
Our contract liabilities, or deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred
revenue as current or noncurrent based on when we expect to recognize the revenues. As of September 30, 2020, we had $325.1 million of deferred
revenue.
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Business Combinations
We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the
business combination date. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition.
The purchase price allocation process requires us to use significant estimates and assumptions as of the date of the business acquisition, including fair value
estimates such as:
•
•
•
•
estimated fair values of intangible assets;
estimated fair values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations
(classified as deferred revenue) at the date of acquisition;
estimated income tax assets and liabilities assumed from the acquiree; and
estimated fair value of pre-acquisition contingencies from the acquiree.
While we use our best estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the date of acquisition, our
estimates and assumptions are inherently uncertain and subject to refinement. As a result, within the measurement period, which is generally one year from
the date of acquisition, we record adjustments to the assets acquired and liabilities assumed against goodwill in the period the amounts are determined.
Adjustments identified subsequent to the measurement period are recorded within Acquisition-related costs, net.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on
historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates
in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•
•
•
•
future expected cash flows from software license sales, support agreements, consulting contracts, connected services, other customer contracts
and acquired developed technologies and patents;
expected costs to develop in-process R&D projects into commercially viable products and the estimated cash flows from the projects when
completed;
the acquired company’s brand and competitive position, as well as assumptions about the period during which the acquired brand will continue
to be used in the combined company’s product portfolio; and
discount rates.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
In connection with the purchase price allocations for our acquisitions, we estimate the fair market value of legal performance commitments to
customers, which are classified as deferred revenue. The estimated fair market value of these obligations is determined and recorded as of the acquisition
date.
We may identify certain pre-acquisition contingencies. If, during the purchase price allocation period, we are able to determine the fair values of a
pre-acquisition contingencies, we will include that amount in the purchase price allocation. If we are unable to determine the fair value of a pre-acquisition
contingency at the end of the measurement period, we will evaluate whether to include an amount in the purchase price allocation based on whether it is
probable a liability had been incurred and whether an amount can be reasonably estimated. Subsequent to the end of the measurement period, any
adjustment to amounts recorded for a pre-acquisition contingency will be included within acquisition-related cost, net in the period in which the adjustment
is determined.
Goodwill Impairment Analysis
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired.
Goodwill is not amortized but tested annually for impairment or when interim indicators of impairment are present. The test for goodwill impairment
involves a qualitative assessment of impairment indicators. If indicators are present, a quantitative test of impairment is performed. Goodwill impairment,
if any, is determined by comparing the reporting unit’s fair value to its carrying value. An impairment loss is recognized in an amount equal to the excess of
the reporting unit’s carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit. Goodwill is tested for impairment
annually on July 1, the first day of the fourth quarter of the fiscal year. There was no goodwill impairment in any of the periods presented.
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For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A
reporting unit represents an operating segment or a component within an operating segment for which discrete financial information is available and is
regularly reviewed by segment management for performance assessment and resource allocation. Components of similar economic characteristics are
aggregated into one reporting unit for the purpose of goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically
for recent acquisitions or any changes in segment reporting structure. Upon consideration of our components, we have concluded that our goodwill is
associated with one reporting unit.
The fair value of a reporting unit is generally determined using a combination of the income approach and the market approach. For the income
approach, fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk-adjusted rate. We
use our internal forecasts to estimate future after-tax cash flows and estimate the long-term growth rates based on our most recent views of the long-term
outlook for each reporting unit. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing
model and analyzing published rates for industries relevant to our reporting units to estimate the weighted average cost of capital. We adjust the discount
rates for the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. For the market approach, we use a
valuation technique in which values are derived based on valuation multiples of comparable publicly traded companies. We assess each valuation
methodology based upon the relevance and availability of the data at the time we perform the valuation and weight the methodologies appropriately.
Long-Lived Assets with Definite Lives
Our long-lived assets consist principally of technology, customer relationships, internally developed software, land, building, and equipment.
Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use
of the asset. Other definite-lived assets are amortized over their estimated economic lives using the straight-line method. The remaining useful lives of
long-lived assets are re-assessed periodically at the asset group level for any events and circumstances that may change the future cash flows expected to be
generated from the long-lived asset or asset group.
Internally developed software consists of capitalized costs incurred during the application development stage, which include costs related design of
the software configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage and post-implementation
stage are expensed as incurred. Internally developed software is amortized over the estimated useful life, commencing on the date when the asset is ready
for its intended use. Land, building and equipment are stated at cost and depreciated over their estimated useful lives. Leasehold improvements are
depreciated over the shorter of the related lease term or the estimated useful life. Depreciation is computed using the straight-line method. Repair and
maintenance costs are expensed as incurred. The cost and related accumulated depreciation of sold or retired assets are removed from the accounts and any
gain or loss is included in the results of operations for the period.
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value of a specific
asset or asset group may not be recoverable. We assess the recoverability of long-lived assets with definite lives at the asset group level. Asset groups are
determined based upon the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the
asset group is also a reporting unit, goodwill assigned to the reporting unit is also included in the carrying amount of the asset group. For the purpose of the
recoverability test, we compare the total undiscounted future cash flows from the use and disposition of the assets with its net carrying amount. When the
carrying value of the asset group exceeds the undiscounted future cash flows, the asset group is deemed to be impaired. The amount of the impairment loss
represents the excess of the asset or asset group’s carrying value over its estimated fair value, which is generally determined based upon the present value
of estimated future pre-tax cash flows that a market participant would expect from use and disposition of the long-lived asset or asset group. There were no
long-lived asset impairments in any of the periods presented.
Stock-Based Compensation
We recognize stock-based compensation expense over the requisite service period, based on the grant date fair value of the awards and the number
of the awards expected to be vested based upon service and performance conditions. The fair value of restricted stock units is determined based on the
number of shares granted and the quoted price of our common stock, and the fair value of stock options is estimated on the date of grant using the Black-
Scholes model. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected dividends, share price
volatility, forfeiture rates and the number of performance-based restricted stock units expected to be granted. If actual results differ significantly from these
estimates, the actual stock-based compensation expense may significantly differ from our estimates.
Income Taxes
Fiscal 2020
We account for income taxes using the assets and liabilities method, as prescribed by ASC No. 740, Income Taxes, or ASC 740.
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Deferred Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carry amount of assets and liabilities and their respective tax bases. The method also requires the recognition of future tax benefits such as net
operating loss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. As the
income tax returns are not due and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the current
period reflect estimates for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the
appropriate state and foreign income tax rates to use, the potential utilization of operating loss carry-forwards and valuation allowance required, if any, for
tax assets that may not be realizable in the future. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the
political and economic climate. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates
currently in effect to determine both our currency and deferred tax positions.
Any significant fluctuations in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future
to change. Such changes could lead to either increases or decreases in our effective tax rates.
We have historically estimated the future tax consequences of certain items, including bad debts and accruals that cannot be deducted for income tax
purposes until such expenses are paid or the related assets are disposed. We believe the procedures and estimates used in our accounting for income taxes
are reasonable and in accordance with established tax law. The income tax estimates used have not resulted in material adjustments to income tax expense
in subsequent period when the estimates are adjusted to the actual filed tax return amounts.
Deferred tax assets and liabilities are measured used enacted tax rates expected to apply to taxable income in the fiscal years in which those
temporary differences are expected to be recovered or settled. With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue ta
for the repatriations of such foreign earnings.
Valuation Allowance
We regularly review our deferred tax assets for recoverability considering historically profitability, projected future taxable income, the expected
timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both
positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is
commensurate with the extent to which the evidence may be objectively verified. If positive evidence regarding projected future taxable income, exclusive
of reversing taxable temporary differences, existed it would be difficult for it to outweigh objective negative evidence of recent financial reporting losses.
Uncertain Tax Positions
We operate in multiple jurisdictions through wholly owned subsidiaries and our global structure is complex. The estimates of our uncertain tax
positions involve judgements and assessment of the potential tax implications related to legal entity restructuring, intercompany transfer and acquisition or
divestures. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. Our tax positions are subject to audit by taxing authorities across multiple global
jurisdictions and the resolution of such audits may span multiple years. Tax laws is complex and often subject to varied interpretations, accordingly, the
ultimate outcome with respect to taxes we may own may differ from the amounts recognized.
Fiscal 2019 and Fiscal 2018
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Income taxes as presented herein attribute current and deferred income taxes of Nuance to the Cerence business’s standalone financial statements in
a manner that is systematic, rational, and consistent with the asset and liability method prescribed by ASC 740. Accordingly, the Cerence business’s income
tax provision was prepared following the “Separate Return Method.” The Separate Return Method applies ASC 740 to the standalone financial statements
of each member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise. As a result, actual tax transactions
included in the consolidated financial statements of Nuance may not be included in the combined financial statements of the Cerence business. Similarly,
the tax treatment of certain items reflected in the combined financial statements of Cerence may not be reflected in the consolidated financial statements
and tax returns of Nuance; therefore, such items as net operating losses, credit carryforwards and valuation allowances may exist in the standalone financial
statements that may or may not exist in Nuance’s consolidated financial statements.
The breadth of the Cerence business’s operations and the global complexity of tax regulations require assessments of uncertainties and judgments in
estimating taxes that the Cerence business would have paid if it had been a separate taxpayer. The final taxes that would have been paid are dependent upon
many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from
federal, state and international tax audits in the normal course of business. The provision for income taxes was determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. This method also requires the recognition of future tax benefits relating to net operating loss
carryforwards and tax credits, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. The
provision for income taxes represented income taxes paid by Nuance or payable for the current year plus the change in deferred taxes during the year.
Deferred taxes result from differences between the financial and tax basis of the Cerence business’s assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In assessing the
need for a valuation allowance, we considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The
weights assigned to the positive and negative evidence are commensurate with the extent to which the evidence may be objectively verified. If positive
evidence regarding projected future taxable income, exclusive of reversing taxable temporary differences, existed, it would be difficult for it to outweigh
objective negative evidence of recent financial reporting losses.
In general, the taxable income (loss) of the various Cerence business entities was included in Nuance’s consolidated tax returns, where applicable in
jurisdictions around the world. As such, separate income tax returns were not prepared for any Cerence business entities. Consequently, income taxes
currently payable are deemed to have been remitted to Nuance, in cash, in the period the liability arose and income taxes currently receivable are deemed to
have been received from Nuance in the period that a refund could have been recognized by the Cerence business had the Cerence business been a separate
taxpayer.
Leases
We have entered into a number of facility and equipment leases which qualify as operating leases under GAAP. We also have a limited number of
equipment leases that also qualify as finance leases. We determine if contracts with vendors represent a lease or have a lease component under GAAP at
contract inception. Our leases have remaining terms ranging from less than one year to eight years. Some of our leases include options to extend or
terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or
terminate the lease when it is reasonably certain that we will exercise such options.
Operating lease right-of-use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease
term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in
determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease
commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency
environment.
Operating leases are included in “Operating lease right-of-use assets, “Short-term operating lease liabilities,” and “Long-term operating lease
liabilities” on our consolidated balance sheet as of September 30, 2020. Finance leases are included in “Property and equipment, net”, “Accrued expenses
and other current liabilities,” and “Other liabilities” on our consolidated balance sheet as of September 30, 2020.
Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. For operating leases, costs are included within
cost of revenues, research and development, marketing and selling, and general and administrative lines on the consolidated statements of operations. For
financing leases, amortization of the finance right-of-use assets is included within research
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and development, marketing and selling, and general and administrative lines on the consolidated statements of operations, and interest expense is included
within the other income (expense), net.
For operating leases, the related cash payments are included in the operating cash flows on the consolidated statements of cash flows. For financing
leases, the related cash payments for the principal portion of the lease liability are included in the financing cash flows on the consolidated statement of
cash flows and the related cash payments for the interest portion of the lease liability are included within the operating section of the consolidated statement
of cash flows.
Convertible Debt
We bifurcate the debt and equity (the contingently convertible feature) components of our convertible debt instruments in a manner that reflects our
nonconvertible debt borrowing rate at the time of issuance. The equity components of our convertible debt instruments are recorded within stockholders’
equity with an allocated issuance premium or discount. The debt issuance premium or discount is amortized to interest expense in our consolidated
statement of operations using the effective interest method over the expected term of the convertible debt.
We assess the short-term and long-term classification of our convertible debt on each balance sheet date. Whenever the holders have a contractual
right to convert, the carrying amount of the convertible debt is reclassified to current liabilities, with the corresponding equity components classified from
additional paid-in-capital to mezzanine equity, as needed.
Loss Contingencies
We may be subject to legal proceedings, lawsuits and other claims relating to labor, service, intellectual property, and other matters that arise from
time to time in the ordinary course of business. On a quarterly basis, we review the status of each significant matter and assess our potential financial
exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability
for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes. Due to the inherent
uncertainties, estimates are based only on the best information available at the time. Actual outcomes may differ from our estimates. As additional
information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions
may have a material impact on our results of operations and financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in foreign currency exchange rates and interest rates which could affect operating results, financial
position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities.
Exchange Rate Sensitivity
We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency
other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A
change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our
financial position and results of operations.
Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and
expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies
will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has been related to
transactions denominated in the Canadian dollar, Chinese yuan, Euro, and Japanese yen.
We have the ability to enter into forward exchange contracts to hedge against foreign currency fluctuations when necessary. We did not maintain any
hedging instruments in any of the historical or interim periods presented in the accompanying Consolidated and Combined Financial Statements.
Interest Rate Sensitivity
Historically, the Cerence business has not maintained financial instruments that would be exposed to interest rate risk. Since interest bearing
financial instruments maintained at Nuance were not specifically identifiable to the Cerence business, interest rate risk has not impacted any of the
historical or interim periods presented in the accompanying Consolidated and Combined Financial Statements.
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We are exposed to interest rate risk as a result of our cash and cash equivalents, marketable securities, and indebtedness related to the Senior Credit
Facilities.
At September 30, 2020, we held approximately $136.1 million of cash and cash equivalents consisting of cash and money-market funds. Assuming
a 1% increase in interest rates, our interest income on our money-market funds classified as cash and cash equivalents would increase by $1.0 million per
annum, based on September 30, 2020 reported balances.
The borrowings under our Senior Credit Facilities are subject to interest rates based on LIBOR. As of September 30, 2020, assuming a 1% increase
in interest rates and our Revolving Facility is fully drawn, our interest expense on our Senior Credit Facilities would increase by approximately
$1.7 million per annum.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Statements of Operations for the years ended September 30, 2020, 2019, and 2018
Consolidated and Combined Statements of Comprehensive (Loss) Income for the years ended September 30, 2020, 2019, and 2018
Consolidated and Combined Balance Sheets as of September 30, 2020 and 2019
Consolidated Statement of Equity and Combined Statements of Changes in Parent Company Equity for the years ended September 30, 2020,
2019, and 2018
Consolidated and Combined Statements of Cash Flows for the years ended September 30, 2020, 2019, and 2018
Notes to the Consolidated and Combined Financial Statements
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61
62
63
64
65
66
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Cerence Inc.
Burlington, Massachusetts
Opinion on the Consolidated and Combined Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Cerence Inc. (the “Company”) as of September 30, 2020 and 2019,
the related consolidated and combined statements of operations, comprehensive income, consolidated statement of equity and combined statements of
changes in parent company equity, and cash flows for each of the three years in the period ended September 30, 2020, and the related notes (collectively
referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in
all material respects, the financial position of the Company at September 30, 2020 and 2019, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 3 to the consolidated and combined financial statements, effective October 1, 2019, the Company adopted Accounting
Standards Codification Topic 842, Leases (Topic 842)
Emphasis of Matter
As discussed in Note 2, the financial statements of the Cerence business are not those of a standalone entity. The combined financial statements of
the Cerence business as of September 30, 2019 and for the two years in the period ended September 30, 2019 reflect the assets, liabilities, revenues and
expenses directly attributable to the Cerence business, as well as allocations deemed reasonable by management, to present the financial position, results of
operations, changes in parent company equity, and cash flows of the Cerence business on a standalone basis and do not necessarily reflect the financial
position, results of operations, changes in parent company equity, and cash flows of the Cerence business in the future or what they would have been had
the Cerence business been a separate, standalone entity during the years presented.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2017.
Boston, Massachusetts
November 19, 2020
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CERENCE INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenues:
License
Connected services
Professional services
Total revenues
Cost of revenues:
License
Connected services
Professional services
Amortization of intangible assets
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Restructuring and other costs, net
Acquisition-related costs
Total operating expenses
Income from operations
Interest income
Interest expense
Other income (expense), net
(Loss) income before income taxes
(Benefit from) provision for income taxes
Net (loss) income
Net (loss) income per share:
Basic
Diluted
Weighted-average common share outstanding:
Basic
Diluted
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
61
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
$
$
$
$
164,268 $
96,148
69,230
329,646
2,783
31,768
64,963
8,337
107,851
221,795
88,899
33,398
49,386
12,544
18,237
—
202,464
19,331
585
(22,737)
(23,319)
(26,140)
(5,509)
(20,631) $
(0.57) $
(0.57) $
172,379 $
78,690
52,246
303,315
2,069
37,562
51,214
8,498
99,343
203,972
93,061
36,261
25,926
12,524
24,404
944
193,120
10,852
—
—
332
11,184
(89,084)
100,268 $
2.76 $
2.76 $
36,428
36,428
36,391
36,391
171,075
60,227
45,682
276,984
1,156
32,919
41,123
7,766
82,964
194,020
80,957
30,553
19,873
8,840
12,863
4,082
157,168
36,852
—
—
(54)
36,798
30,917
5,881
0.16
0.16
36,391
36,391
CERENCE INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Net (loss) income
Other comprehensive income (loss):
Foreign currency translation adjustments
Pension adjustments, net
Unrealized loss on available-for-sale securities
Total other comprehensive income (loss)
Comprehensive (loss) income
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
62
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
$
(20,631)
$
100,268 $
5,881
15,805
1,178
(1)
16,982
(3,649)
$
(3,866)
(1,176)
—
(5,042)
95,226 $
(1,906)
562
—
(1,344)
4,537
$
CERENCE INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except per share amounts)
September 30,
2020
September 30,
2019
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowances of $1,394 and $865 at September 30, 2020 and September
30, 2019, respectively
Deferred costs
Prepaid expenses and other current assets
$
Total current assets
Property and equipment, net
Deferred costs
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Deferred tax assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Deferred revenue
Short-term operating lease liabilities
Short-term debt
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt, net of discounts and issuance costs
Deferred revenue, net of current portion
Long-term operating lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 17)
Stockholders' Equity:
Common stock, $0.01 par value, 560,000 shares authorized as of September 30, 2020; 36,842 shares
issued and outstanding as of September 30, 2020
Net parent investment
Accumulated other comprehensive income (loss)
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
63
$
$
$
136,067 $
11,662
49,943
7,256
44,220
249,148
29,529
38,161
20,096
1,128,198
45,616
161,759
14,938
1,687,445 $
8,447 $
112,520
5,700
6,250
67,857
200,774
266,872
212,573
17,821
31,649
729,689
369
—
3,711
974,307
(20,631)
957,756
1,687,445 $
—
—
65,787
9,195
17,343
92,325
20,113
32,428
—
1,119,329
65,561
150,629
3,444
1,483,829
16,687
88,233
—
—
24,194
129,114
—
265,051
—
21,536
415,701
—
1,097,127
(28,999)
—
—
1,068,128
1,483,829
CERENCE INC.
CONSOLIDATED STATEMENT OF EQUITY AND
COMBINED STATEMENTS OF CHANGES IN PARENT COMPANY EQUITY
(In thousands)
Balance at October 1, 2017
- $
— $
— $
— $ 1,019,792 $
(22,613) $ 997,179
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Net
Parent
Investment
Accumulated
Other
Comprehensive
Income (Loss)
Total
Accumulated adjustment due to the adoption of
ASU 2016-16
Net income
Other comprehensive income
Net transfer to Parent
Balance at September 30, 2018
Accumulated adjustment related to the adoption of
ASC 606
Net income
Other comprehensive loss
Net transfer to Parent
Balance at September 30, 2019
Net loss
Other comprehensive income
Distribution to Parent
Net (decrease) increase in net parent investment
Reclassification of net parent investment in
Cerence
Issuance of common stock at separation
Issuance of common stock under employee stock
plans
Stock withheld to cover tax withholdings
requirements upon restricted stock vesting
Convertible Senior Notes conversion feature (net
of taxes of $4,678 and issuance costs of $627)
Stock-based compensation
Balance at September 30, 2020
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
36,391
-
364
938,051
(364)
706
7
1,311
(255)
(2)
(9,367)
-
-
-
-
14,371
30,305
(20,631)
1,097,127
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,510)
5,881
-
(6,887)
-
-
(1,344)
-
1,017,276
(23,957)
(1,510)
5,881
(1,344)
(6,887)
993,319
6,974
100,268
-
(27,391)
(152,978)
(6,098)
(938,051)
-
-
-
-
-
(5,042)
6,974
100,268
(5,042)
(27,391)
(28,999) 1,068,128
(20,631)
16,982
(152,978)
9,630
-
16,982
-
15,728
-
-
-
-
-
1,318
(9,369)
-
-
— $
-
-
14,371
30,305
3,711 $ 957,756
36,842 $
369 $ 974,307 $ (20,631) $
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
64
CERENCE INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
2020
(ASC 606)
Year Ended September 30,
2019
(ASC 606)
2018
(ASC 605)
$
(20,631) $
100,268 $
5,881
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operations:
Depreciation and amortization
Provision for doubtful accounts
Stock-based compensation
Non-cash interest expense
Loss on debt extinguishment
Deferred tax (benefit) expense
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable
Prepaid expenses and other assets
Deferred costs
Accounts payable
Accrued expenses and other liabilities
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Purchases of marketable securities
Payments for business acquisitions, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Net transactions with Parent
Distributions to Parent
Proceeds from long-term debt, net of discount
Payments for long-term debt issuance costs
Principal payments of long-term debt
Common stock repurchases for tax withholdings for net settlement of equity awards
Principal payments of lease liabilities arising from a finance lease
Proceeds from issuance of common stock from employee stock plans
Net cash provided by (used in) financing activities
Effects of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental information:
Cash paid for income taxes
Cash paid for interest
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
65
$
$
$
30,041
704
47,285
5,286
19,279
(11,354)
16,112
(30,311)
(1,381)
(2,430)
27,819
(35,630)
44,789
(19,012)
(11,663)
—
(30,675)
12,964
(152,978)
547,719
(6,402)
(271,563)
(9,369)
(136)
1,318
121,553
400
136,067
—
136,067 $
28,844
—
29,682
—
—
(101,223)
904
(8,836)
4,339
10,130
6,289
17,674
88,071
(4,517)
—
—
(4,517)
(83,554)
—
—
—
—
—
—
—
(83,554)
—
—
—
— $
2,181 $
14,733 $
12,139 $
- $
25,765
—
22,043
—
—
12,473
8,472
(2,960)
(12,528)
(6,291)
12,946
49,458
115,259
(6,510)
—
(79,802)
(86,312)
(28,947)
—
—
—
—
—
—
—
(28,947)
—
—
—
—
18,444
-
CERENCE INC.
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. Organization
History
On October 1, 2019, (the “Distribution Date”), Nuance Communications (“Nuance” or “the Parent”), a leading provider of speech and language
solutions for businesses and consumers around the world, completed the complete legal and structural separation and distribution to its stockholders of all
of the outstanding shares of our common stock, and its consolidated subsidiaries, in a tax free spin-off (which we refer to as the “Spin-Off”). The
distribution was made in the amount of one share of our common stock for every eight shares of Nuance common stock (which we refer to as the
“Distribution”) owned by Nuance’s stockholders as of 5:00 p.m. Eastern Time on September 17, 2019, the record date of the Distribution.
In connection with the Distribution, on September 30, 2019, we filed an Amended and Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware, which became effective on October 1, 2019. Our Amended and Restated By-laws also became effective on October 1, 2019.
On October 2, 2019, our common stock began regular-way trading on the Nasdaq Global Select Market under the ticker symbol CRNC.
Business
Cerence Inc. (referred to in this Annual Report on Form 10-K as “we,” “our,” “us,” “ourselves,” the “Company” or “Cerence”) is a global, premier
provider of AI-powered assistants and innovations for connected and autonomous vehicles. Our customers include all major automobile original equipment
manufacturers (“OEMs”), or their tier 1 suppliers worldwide. We deliver our solutions on a white-label basis, enabling our customers to deliver customized
virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users. We generate revenue
primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue from our work with OEMs and
suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects.
COVID-19 Update
In December 2019, a novel strain of coronavirus, now known as COVID-19 (“COVID-19”), was reported in Wuhan, China and has since
extensively impacted the global health and economic environment. In January 2020, the World Health Organization (“WHO”) declared it a Public Health
Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global
level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a
pandemic.
In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, some of which have been
subsequently rescinded, modified or reinstated, including orders to close all businesses not deemed “essential,” isolating residents to their homes or places
of residence, and practice social distancing. These extreme measures have negatively impacted businesses of all sizes, including the automotive industry
and its suppliers. Automotive production and shipments ceased or were not operating at full capacity in order to ensure the safety of workers. Given the
declines in automotive production and shipments, the COVID-19 pandemic has had a material impact on our billings and revenue recognized from licenses
and billings from connected services during the second half of fiscal 2020 and may also continue beyond fiscal 2020.
We have taken numerous steps in our approach to addressing the COVID-19 pandemic. We shifted a portion of our R&D and engineering
workforces to support our professional service teams and their successful completion of customer project milestones to help mitigate the decline in
revenues. We reduced expenses by limiting discretionary spending, reducing third-party contractors, deferring the hiring of new employees and
implementing a reduction in our workforce. In order to further conserve cash outflows, we implemented temporary reductions in salaries for our current
named executive officers and other senior executives.
We implemented our business continuity plans and our crisis response team remains in place to respond to changes in our environment. At the onset
of the COVID-19 pandemic, we instructed employees across 18 different countries and 24 office locations to work from home on a temporary basis.
Beginning in May 2020, in jurisdictions where local restrictions implemented to prevent the further spread of COVID-19 were lifted, we started reopening
our offices to allow employees to return to work at their option. For employees returning to our offices, we have instituted social distancing protocols,
increased the level of cleaning and sanitizing, and undertaken other actions to make our offices safer. While most of our employees continue to work
remotely, we have experienced minimal declines in workforce efficiency due to our investment in cloud-based applications and tools. We have also
instituted strict restrictions on travel for all employees. As of the date of this filing, we do not believe our work from home and return to office protocols
have materially adversely impact our internal controls and financial reporting systems.
66
The full extent to which the ongoing COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of
which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its
severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions
can resume. The COVID-19 pandemic could also result in additional governmental restrictions and regulations, which could adversely affect our business
and financial results. In addition, a recession, depression or other sustained adverse market impact resulting from COVID-19 could materially and
adversely affect our business, our access to needed capital and liquidity, and the value of our common stock. Even after the COVID-19 pandemic has
lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact.
2. Basis of Presentation
Fiscal 2020
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial
statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the fiscal
year presented. All such adjustments are of a normal recurring nature.
Fiscal 2019 and 2018
Standalone financial statements had not been historically prepared for the Cerence business. The accompanying combined financial statements have
been prepared from the Parent’s historical accounting records and are presented on a “carve out” basis to include the historical financial position, results of
operations and cash flows applicable to the Cerence business. As a direct ownership relationship did not exist among all the various business units
comprising the Cerence business, Nuance’s investment in the Cerence business is shown in lieu of stockholders’ equity in the combined financial
statements.
The Combined Statements of Operations include all revenues and costs directly attributable to Cerence as well as an allocation of expenses related
to functions and services performed by centralized Parent organizations. These corporate expenses have been allocated to the Cerence business based on
direct usage or benefit, where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, number of transactions or other
measures as determined appropriate. The Combined Statements of Cash Flows present these corporate expenses that are cash in nature as cash flows from
operating activities, as this is the nature of these costs at the Parent. Non-cash expenses allocated from the Parent include corporate depreciation and
amortization and stock-based compensation included as add-back adjustments to reconcile net income to net cash provided by operations. As described in
Note 3(l) and Note 20, current and deferred income taxes and related tax expense have been determined based on the standalone results of the Cerence
business by applying Accounting Standards Codification (“ASC”) No. 740, Income Taxes, (“ASC 740”), to the Cerence business’s operations in each
country as if it were a separate taxpayer (i.e. following the Separate Return Methodology).
The Cerence business was dependent upon technologies which were owned by various entities within the Parent structure. While these combined
financial statements use various methods to allocate the cost of these technologies to the Cerence business, this does not purport to reflect the cost of an
arm’s length license arrangement.
The combined financial statements include the allocation of certain assets and liabilities that have historically been held at the Nuance corporate
level or by shared entities but which are specifically identifiable or allocable to the Cerence business. These shared assets and liabilities have been allocated
to the Cerence business on the basis of direct usage when identifiable, or allocated on a pro rata basis of revenue, headcount or other systematic measures
that reflect utilization of the services provided to or benefits received by Cerence. The Parent used a centralized approach to cash management and
financing its operations. Accordingly, none of the cash, cash equivalents, marketable securities, foreign currency hedges or debt and related interest
expense has been allocated to the Cerence business in the combined financial statements. The Parent’s short and long-term debt has not been pushed down
to the Cerence business’s combined financial statements because the Cerence business was not the legal obligor of the debt and the Parent’s borrowings
were not directly attributable to the Cerence business.
The Parent maintained various stock-based compensation plans at a corporate level. Cerence employees participated in those programs and a portion
of the cost of those plans has been included in the Cerence business’s Combined Statements of Operations. However, the stock-based compensation
expense has been included within the net parent investment. Refer to Note 16 for further description of the accounting for stock-based compensation.
67
Transactions between the Parent and the Cerence business are considered to be effectively settled in the combined financial statements at the time
the transaction was recorded. The total net effect of the settlement of these intercompany transactions was reflected in the Combined Statements of Cash
Flows as a financing activity and in the Combined Balance Sheets as net parent investment. Refer to Note 3(p) for further description.
All of the allocations and estimates in the combined financial statements are based on assumptions that management believes are reasonable.
However, the combined financial statements included herein may not be indicative of the financial position, results of operations and cash flows if the
Cerence business had been a separate, standalone entity during the periods presented.
3. Summary of Significant Accounting Policies
(a) Principles of Consolidation
Fiscal year 2020
The accompanying consolidated financial statements include the accounts of the Company, as well as those of our wholly owned subsidiaries. All
significant intercompany transactions and balances are eliminated in consolidation.
Fiscal years 2019 and 2018
The combined financial statements present the financial position, statement of operations, Parent company equity and cash flows of the Cerence
business. All significant balances and transactions between entities in the Cerence business have been eliminated for these combined financial statements.
All significant balances between Parent (excluding the Cerence business) and the Cerence business are included in Parent company equity in the Combined
Balance Sheets.
(b) Use of Estimates
The Consolidated and Combined Financial Statements are prepared in accordance with GAAP, which requires management to make estimates and
assumptions. These estimates, judgments and assumptions can affect the reported amounts in the financial statements and the footnotes thereto. Actual
results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, assumptions and judgments. Significant estimates
inherent to the preparation of financial statements include: revenue recognition; the allowances for doubtful accounts; accounting for deferred costs;
accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business combinations; accounting for stock-
based compensation; accounting for income taxes; accounting for leases; accounting for convertible debt; and loss contingencies. We base our estimates on
historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable
under the circumstances. Actual amounts could differ significantly from these estimates.
(c) Revenue Recognition
ASC 606 for fiscal years 2020 and 2019
See Note 5 for revenue recognition under ASC 606 for fiscal years 2020 and 2019.
ASC 605 for fiscal year 2018
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable and
(iv) collectability is probable. The revenue recognition policies for these revenue streams are discussed below.
The sale and/or license of software products and technology is deemed to have occurred when a customer either has taken possession of or has
access to take immediate possession of the software or technology. In select situations, we sell or license non-exclusive intellectual property in conjunction
with, or in place of, embedding our intellectual property in software. We also have non-software arrangements including connected services where the
customer does not take possession of the software at the outset of the arrangement either because they have no contractual right to do so or because
significant penalties preclude them from doing so.
Revenue from royalties on sales of our software products by OEMs, where no services are included, is recognized in the period earned so long as we
have been notified by the OEM that such royalties are due, and provided that all other revenue recognition criteria are met.
For our software and technology-related multiple element arrangements, where customers purchase both software or technology related products
and software or technology related services, we use vendor-specific objective evidence (“VSOE”) of fair value for software and software-related services to
separate the elements and account for them separately. VSOE exists when a company can support what the fair value of its software and/or software-related
services is based on evidence of the prices charged when the same
68
elements are sold separately. VSOE of fair value is required, generally, in order to separate the accounting for various elements in a software and related
services arrangement. We have established VSOE of fair value for the majority of our professional services.
When we provide professional services considered essential to the functionality of the software or technology, we recognize revenue from the
professional services as well as any related software or technology licenses on a percentage-of-completion basis whereby the arrangement consideration is
recognized as the services are performed, as measured by an observable input. In these circumstances, we separate license revenue from professional
service revenue for the Combined Statement of Operations by allocating VSOE of fair value of the professional services as professional services and
connected services revenue and the residual portion as license revenue. We generally determine the percentage-of-completion by comparing the labor hours
incurred to-date to the estimated total labor hours required to complete the project. We generally consider labor hours to be the most reliable, available
measure of progress on these projects. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known.
When the estimate indicates that a loss will be incurred, such loss is recorded in the period identified. Significant judgments and estimates are involved in
determining the percent complete of each contract. Different assumptions could yield materially different results.
We offer some of our products via a Software-as-a-Service (“SaaS”) model also known as a hosted model. In this type of arrangement, we are
compensated in two ways: (1) fees for up-front set-up of the service environment and (2) fees charged for hosted service subscriptions. Our up-front set-up
fees are nonrefundable. We recognize the up-front set-up fees ratably over the longer of the contract lives, or the expected lives of the customer
relationships. The on-demand service subscription fees are recognized ratably over our estimate of useful life of devices on which the connected service is
provided.
We enter into multiple-element arrangements that may include a combination of our various software or technology related and non-software related
products and services offerings including software or technology licenses, professional services and our connected services. In such arrangements, we
allocate total arrangement consideration to software or technology-related elements and any non-software element separately based on the selling price
hierarchy group following the guidance in ASC No. 985, Software, and our policies. We determine the selling price for each deliverable using VSOE of
selling price, if it exists, or Third Party Evidence (“TPE”) of selling price. Typically, we are unable to determine TPE of selling price. Therefore, when
neither VSOE nor TPE of selling price exist for a deliverable, we use our Estimate of Selling Price (“ESP”) for the purposes of allocating the arrangement
consideration. We determine ESP for a product or service by considering multiple factors including, but not limited to, major project groupings, market
conditions, competitive landscape, price list and discounting practices. Revenue allocated to each element is then recognized when the basic revenue
recognition criteria are met for each element.
We record reimbursements received for out-of-pocket expenses as revenue, with offsetting costs recorded as cost of revenue. Out-of-pocket
expenses generally include, but are not limited to, expenses related to transportation, lodging and meals. We record shipping and handling costs billed to
customers as revenue with offsetting costs recorded as cost of revenue.
(d) Business Combinations
We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the
date of acquisition. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition. The
purchase price allocation process requires us to use significant estimates and assumptions, which include:
•
•
•
•
•
estimated fair values of intangible assets;
estimated fair values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations
(classified as deferred revenue);
estimated income tax assets and liabilities assumed from the acquiree;
estimated fair value of pre-acquisition contingencies assumed from the acquiree; and
estimated fair value of any contingent consideration which is established at the acquisition date and included in the total purchase price. The
contingent consideration is then adjusted to fair value, with any measurement-period adjustment recorded against goodwill. Adjustments
identified subsequent to the measurement period are recorded within acquisition-related costs.
While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities
assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the
measurement period, which is generally one year from the acquisition date, any adjustment to the assets acquired and liabilities assumed is recorded against
goodwill in the period in which the amount is determined. Any adjustment identified subsequent to the measurement period is included in operating results
in the period in which the amount is determined.
69
(e) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, including money-market funds with original maturities of 90 days or less. We estimated the fair
value of our money-market funds from quoted prices for identical assets in active markets on the last trading day of the reporting period.
(f) Marketable Securities
Marketable securities consist of commercial paper and corporate bonds. We classify our marketable securities as available-for-sale at the time of
purchase and reevaluate such classification as of each balance sheet date. We may sell these securities at any time for use in current operations even if they
have not yet reached maturity. We classify our marketable securities as either short-term or long-term based on the nature of each security. We record
marketable securities at fair value, with the unrealized gains or losses included within “Accumulated other comprehensive income (loss)” on the
consolidated balance sheet until realized. Interest income earned from our marketable securities is reported within “Interest income” on the consolidated
statement of operations. We evaluate our marketable securities to assess whether those with unrealized loss positions are other than temporarily impaired.
We consider impairment to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the
recovery of their cost basis. Realized gain and losses and declines in value judged to be other than temporary are determined based on the specific
identification method and are reported in “Other income (expense), net” on the consolidated statement of operations.
(g) Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net assets acquired. Goodwill is not amortized
but tested annually for impairment or when interim indicators of impairment are present. The test for goodwill impairment involves a qualitative
assessment of impairment indicators. If indicators are present, a quantitative test of impairment is performed. Goodwill impairment, if any, is determined by
comparing the reporting unit’s fair value to its carrying value. An impairment loss is recognized in an amount equal to the excess of the reporting unit’s
carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit. Goodwill is tested for impairment annually on July 1, the
first day of the fourth quarter of the fiscal year. There is no goodwill impairment for the years ended September 30, 2020, 2019, and 2018.
We believe our Chief Executive Officer (“CEO”) is our chief operating decision maker (“CODM”). Our CEO approves all major decisions,
including reorganizations and new business initiatives. Our CODM reviews routine consolidated operating information and makes decisions on the
allocation of resources at this level, as such, we have concluded that we have one operating segment.
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units. A
reporting unit represents an operating segment or a component within an operating segment for which discrete financial information is available and is
regularly reviewed by segment management for performance assessment and resource allocation. Components of similar economic characteristics are
aggregated into one reporting unit for the purpose of goodwill impairment assessment. Reporting units are identified annually and re-assessed periodically
for recent acquisitions or any changes in segment reporting structure. Upon consideration of our components, we have concluded that our goodwill is
associated with one reporting unit.
Goodwill has been allocated to Cerence based upon its relative fair value as of March 31, 2018, when Cerence became a reporting unit of Nuance.
The fair value of a reporting unit is generally determined using a combination of the income approach and the market approach. For the income approach,
fair value is determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk-adjusted rate. We use our
internal forecasts to estimate future after-tax cash flows and estimate the long-term growth rates based on our most recent views of the long-term outlook
for each reporting unit. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and
analyzing published rates for industries relevant to our reporting units to estimate the weighted average cost of capital. We adjust the discount rates for the
risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. For the market approach, we use a valuation technique
in which values are derived based on valuation multiples of comparable publicly traded companies. We assess each valuation methodology based upon the
relevance and availability of the data at the time we perform the valuation and weight the methodologies appropriately.
Due to the macroeconomic conditions driven by the COVID-19 pandemic, we concluded that indicators of impairment were present as of March 31,
2020. We performed an interim assessment of goodwill and concluded that no impairment existed as the fair value of our reporting unit exceeded its
carrying value as of March 31, 2020. On July 1, 2020, we completed the annual impairment testing of our goodwill. We elected to rely on a qualitative
assessment and as a result we determined it is more likely than not that the fair value of our reporting unit is greater than its carrying amount.
70
(h) Long-Lived Assets with Definite Lives
Our long-lived assets consist principally of technology and patents, customer relationships, internally developed software, property and equipment.
Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use
of the asset. Other definite-lived assets are amortized over their estimated economic lives using the straight-line method. The remaining useful lives of
long-lived assets are re-assessed periodically for any events and circumstances that may change the future cash flows expected to be generated from the
long-lived asset or asset group.
Internally developed software consists of capitalized costs incurred during the application development stage, which include costs to design the
software configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage, along with post-implementation
stages of internally developed software, are expensed as incurred. Internally developed software costs that have been capitalized are typically amortized
over the estimated useful life, commencing with the date when an asset is ready for its intended use. Equipment is stated at cost and depreciated over the
estimated useful life. Leasehold improvements are depreciated over the shorter of the related lease term or the estimated useful life. Depreciation is
computed using the straight-line method. Repair and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of sold or
retired assets are removed from the accounts and any gain or loss is included in the results of operations for the period.
Long-lived assets with definite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value of a specific
asset or asset group may not be recoverable. We assess the recoverability of long-lived assets with definite lives at the asset group level. Asset groups are
determined based upon the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the
asset group is also a reporting unit, goodwill assigned to the reporting unit is also included in the carrying amount of the asset group. For the purpose of the
recoverability test, we compare the total undiscounted future cash flows from the use and disposition of the assets with its net carrying amount. When the
carrying value of the asset group exceeds the undiscounted future cash flows, the asset group is deemed to be impaired. The amount of the impairment loss
represents the excess of the asset or asset group’s carrying value over its estimated fair value, which is generally determined based upon the present value
of estimated future pre-tax cash flows that a market participant would expect from use and disposition of the long-lived asset or asset group. During the
years ended September 30, 2019 and 2018, there was no indication that the carrying value of our assets or asset groups may not be recoverable.
Due to the macroeconomic conditions driven by the COVID-19 pandemic and the anticipated negative impact on our license revenue and connected
services billings, we concluded that indicators of impairment were present and performed an interim test for recoverability of our long-lived asset group as
of March 31, 2020. Based upon the results of the recoverability test, we determined that the carrying amounts of the long-lived asset group were considered
recoverable, concluding the test and resulting in no impairment of our long-lived asset group as of March 31, 2020. As of September 30, 2020, there were
no indicators of impairment present related to our long-lived asset group.
(i) Accounts Receivable Allowances
We record allowances for doubtful accounts for the estimated probable losses on uncollected accounts receivable. The allowance is based upon the
credit worthiness of our customers, our historical experience, the age of the receivable, and current market and economic conditions. Receivables are
written off against these allowances in the period they are determined to be uncollectible. For the years ended September 30, 2020, 2019, and 2018, the
activity related to the allowance for doubtful accounts was as follows (dollars in thousands):
Balance at October 1, 2017
Bad debt provisions
Write-offs, net of recoveries
Balance at September 30, 2018
Bad debt provisions
Write-offs, net of recoveries
Balance at September 30, 2019
Bad debt provisions
Write-offs, net of recoveries
Balance at September 30, 2020
71
Allowance for
Doubtful
Accounts
832
366
(244)
954
401
(490)
865
704
(175)
1,394
$
$
(j) Research and Development
Research and development (“R&D”) costs related to software that is or will be sold or licensed externally to third-parties, or for which a substantive
plan exists to sell or license such software in the future, incurred subsequent to the establishment of technological feasibility, but prior to the general release
of the product, are capitalized and amortized to cost of revenue over the estimated useful life of the related products. We have determined that technological
feasibility is reached shortly before the general release of the software products. Costs incurred after technological feasibility is established have not been
material. R&D costs are otherwise expensed as incurred.
(k) Acquisition-related Costs
Acquisition-related costs include those costs related to potential and realized acquisitions. These costs consist of (i) transition and integration costs,
including retention payments, transitional employee costs and earn-out payments, and other costs related to integration activities and (ii) professional
service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities and disputes.
The components of acquisition-related costs are as follows (dollars in thousands):
Transition and integration costs
Professional service fees
Total
(l) Income Taxes
Fiscal year 2020
2020
Year Ended September 30,
2019
2018
$
$
— $
—
— $
563 $
381
944 $
1,616
2,466
4,082
We account for income taxes using the assets and liabilities method, as prescribed by ASC No. 740, Income Taxes, or ASC 740.
Deferred Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carry amount of assets and liabilities and their respective tax bases. The method also requires the recognition of future tax benefits such as net
operating loss carryforwards, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. As the
income tax returns are not due and filed until after the completion of our annual financial reporting requirements, the amounts recorded for the current
period reflect estimates for the tax-based activity for the period. In addition, estimates are often required with respect to, among other things, the
appropriate state and foreign income tax rates to use, the potential utilization of operating loss carry-forwards and valuation allowance required, if any, for
tax assets that may not be realizable in the future. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the
political and economic climate. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates
currently in effect to determine both our currency and deferred tax positions.
Any significant fluctuations in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future
to change. Such changes could lead to either increases or decreases in our effective tax rates.
We have historically estimated the future tax consequences of certain items, including bad debts and accruals that cannot be deducted for income tax
purposes until such expenses are paid or the related assets are disposed. We believe the procedures and estimates used in our accounting for income taxes
are reasonable and in accordance with established tax law. The income tax estimates used have not resulted in material adjustments to income tax expense
in subsequent period when the estimates are adjusted to the actual filed tax return amounts.
Deferred tax assets and liabilities are measured used enacted tax rates expected to apply to taxable income in the fiscal years in which those
temporary differences are expected to be recovered or settled. With respect to earnings expected to be indefinitely reinvested offshore, we do not accrue ta
for the repatriations of such foreign earnings.
Valuation Allowance
We regularly review our deferred tax assets for recoverability considering historically profitability, projected future taxable income, the expected
timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, we consider both
positive and negative evidence related to the likelihood of realization of the deferred tax assets.
72
The weight given to the positive and negative evidence is commensurate with the extend to which the evidence may be objectively verified. If positive
evidence regarding projected future taxable income, exclusive of reversing taxable temporary differences, existed it would be difficult for it to outweigh
objective negative evidence of recent financial reporting losses.
Uncertain Tax Positions
We operate in multiple jurisdictions through wholly owned subsidiaries and our global structure is complex. The estimates of our uncertain tax
positions involve judgements and assessment of the potential tax implications related to legal entity restructuring, intercompany transfer and acquisition or
divestures. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position. Our tax positions are subject to audit by taxing authorities across multiple global
jurisdictions and the resolution of such audits may span multiple years. Tax laws is complex and often subject to varied interpretations, accordingly, the
ultimate outcome with respect to taxes we may own may differ from the amounts recognized.
Fiscal years 2019 and 2018
Income taxes as presented herein attribute current and deferred income taxes of the Parent to the Cerence business’s standalone financial statements
in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by ASC 740. Accordingly, the Cerence business’s
income tax provision was prepared following the “Separate Return Method.” The Separate Return Method applies ASC 740 to the standalone financial
statements of each member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise. As a result, actual tax
transactions included in the consolidated financial statements of the Parent may not be included in the combined financial statements of the Cerence
business. Similarly, the tax treatment of certain items reflected in the combined financial statements of the Cerence business may not be reflected in the
consolidated financial statements and tax returns of the Parent; therefore, such items as net operating losses, credit carryforwards and valuation allowances
may exist in the standalone financial statements that may or may not exist in the Parent’s consolidated financial statements.
The breadth of the Cerence business’s operations and the global complexity of tax regulations require assessments of uncertainties and judgments in
estimating taxes that the Cerence business would have paid if it had been a separate taxpayer. The final taxes that would have been paid are dependent upon
many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from
federal, state and international tax audits in the normal course of business. The provision for income taxes is determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. This method also requires the recognition of future tax benefits relating to net operating loss
carryforwards and tax credits, to the extent that realization of such benefits is more likely than not after consideration of all available evidence. The
provision for income taxes represents income taxes paid by the parent or payable for the current year plus the change in deferred taxes during the year.
Deferred taxes result from differences between the financial and tax basis of the Cerence business’s assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In assessing the
need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The
weights assigned to the positive and negative evidences are commensurate with the extent to which the evidence may be objectively verified. If positive
evidence regarding projected future taxable income, exclusive of reversing taxable temporary differences, existed, it would be difficult for it to outweigh
objective negative evidence of recent financial reporting losses.
In general, the taxable income (loss) of the various Cerence business entities was included in the Parent’s consolidated tax returns, where applicable
in jurisdictions around the world. As such, separate income tax returns were not prepared for any Cerence business entities. Consequently, income taxes
currently payable are deemed to have been remitted to the Parent, in cash, in the period the liability arose and income taxes currently receivable are deemed
to have been received from the Parent in the period that a refund could have been recognized by the Cerence business had the Cerence business been a
separate taxpayer.
73
(m) Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, reflected in the Consolidated Statement of Equity and Combined Statements of Changes
in Parent Company Equity, consists of the following (dollars in thousands):
Foreign currency translation adjustments
Net unrealized losses on post-retirement benefits
Net unrealized losses on available-for-sale securities
Accumulated other comprehensive income (loss)
September 30,
2020
2019
5,264 $
(1,552)
(1)
3,711 $
(26,216)
(2,783)
—
(28,999)
$
$
No income tax provisions or benefits are recorded for foreign currency translation adjustments as the undistributed earnings in our foreign
subsidiaries are expected to be indefinitely reinvested.
(n) Concentration of Risk
Financial instruments that potentially subject us to significant concentrations of credit risk primarily consist of trade accounts receivable. We
perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed appropriate. Two customers
accounted for 15.0% and 11.1% of our accounts receivable balance, net at September 30, 2020. Two customers accounted for 12.9% and 10.0% of our
accounts receivable balance, net at September 30, 2019. One customer accounted for 23.3% of our revenues for the year ended September 30, 2020. Two
customers accounted for 20.7% and 12.3% of our revenues for the year ended September 30, 2019, and one customer accounted for 18.4% of our revenues
for the year ended September 30, 2018.
(o) Foreign Currency Translation
The functional currency of a foreign subsidiary is generally the local currency. We translate the financial statements of foreign subsidiaries to U.S.
dollars using month-end exchange rates for assets and liabilities, and average rates for the reporting period for revenues, costs, and expenses. We record
translation gains and losses in accumulated other comprehensive loss as a component of stockholders’ equity and parent company equity. We record net
foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to the functional currency within other income
(expense), net. Foreign currency transaction (gains) losses for the years ended September 30, 2020, 2019 and 2018 were $2.4 million, ($0.3) million, and
$0.1 million, respectively.
(p) Net Parent Investment
In the Consolidated and Combined Balance Sheets, net parent investment represents the Parent’s historical investment in the Cerence business,
accumulated net earnings after taxes and the net effect of transactions with, and allocations from, the Parent.
(q) Stock-Based Compensation
Fiscal year 2020
Stock-based compensation primarily consists of restricted stock units with service or market/performance conditions. Equity awards are measured at
the fair market value of the underlying stock at the grant date. We recognize stock compensation expense using the straight-line attribution method over the
requisite service period. We record forfeitures as they occur. Shares are issued on the vesting dates net of the applicable statutory tax withholding to be paid
by us on behalf of our employees. As a result, fewer shares are issued than the number of awards outstanding. We record a liability for the tax withholding
to be paid by us as a reduction to additional paid-in capital. We record any income tax effect related to stock-based awards through the Consolidated
Statements of Operations. Excess tax benefits are recognized as deferred tax assets upon settlement and are subject to regular review for valuation
allowance.
Fiscal years 2019 and 2018
The Parent maintained certain stock compensation plans for the benefit of certain of its officers, directors and employees, including grants of
employee stock options, purchases under employee stock purchase plans and restricted awards. These combined financial statements included certain
expenses of the Parent that were allocated to the Cerence business for stock-based compensation. The stock-based compensation expense was recognized
over the requisite service period, based on the grant date fair value of the
74
awards and the number of the awards expected to be vested based on service and performance conditions, net of forfeitures. The Cerence business’s
Combined Balance Sheets did not include any Parent outstanding equity related to these stock-based compensation programs. Effective the fourth quarter
of fiscal year 2017, as a result of the early adoption of Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based
Payment Accounting, (“ASU 2016-09”), we recorded any tax effect related to stock-based awards through the Combined Statements of Operations. Excess
tax benefits were recognized as deferred tax assets upon settlement and were subject to regular review for valuation allowance.
(r) Leases
We have entered into a number of facility and equipment leases which qualify as operating leases under GAAP. We also have a limited number of
equipment leases that qualify as financing leases. We determine if contracts with vendors represent a lease or have a lease component under GAAP at
contract inception. Our leases have remaining terms ranging from less than one year to eight years. Some of our leases include options to extend or
terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or
terminate the lease when it is reasonably certain that we will exercise such options.
Operating lease right-of-use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease
term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in
determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease
commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency
environment.
Operating leases are included in “Operating lease right-of-use assets, “Short-term operating lease liabilities,” and “Long-term operating lease
liabilities” on our consolidated balance sheet as of September 30, 2020. Finance leases are included in “Property and equipment, net”, “Accrued expenses
and other current liabilities,” and “Other liabilities” on our consolidated balance sheet as of September 30, 2020.
Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. For operating leases, costs are included within
cost of revenues, research and development, marketing and selling, and general and administrative lines on the consolidated statements of operations. For
financing leases, amortization of the finance right-of-use assets is included within research and development, marketing and selling, and general and
administrative lines on the consolidated statements of operations, and interest expense is included within the other income (expense), net.
For operating leases, the related cash payments are included in the operating cash flows on the consolidated statements of cash flows. For financing
leases, the related cash payments for the principal portion of the lease liability are included in the financing cash flows on the consolidated statement of
cash flows and the related cash payments for the interest portion of the lease liability are included within the operating section of the consolidated statement
of cash flows.
(s) Convertible Debt
We bifurcate the debt and equity (the contingently convertible feature) components of our convertible debt instruments in a manner that reflects our
nonconvertible debt borrowing rate at the time of issuance. The equity components of our convertible debt instruments are recorded within stockholders’
equity with an allocated issuance premium or discount. The debt issuance premium or discount is amortized to interest expense in our consolidated
statement of operations using the effective interest method over the expected term of the convertible debt.
We assess the short-term and long-term classification of our convertible debt on each balance sheet date. Whenever the holders have a contractual
right to convert, the carrying amount of the convertible debt is reclassified to current liabilities, with the corresponding equity component classified from
additional paid-in capital to mezzanine equity, as needed.
(t) Net (Loss) Income Per Share
Basic net loss or income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net
income per share is computed using the weighted-average number of common shares, giving effect to potentially dilutive securities outstanding during the
period. Potentially dilutive securities consist of restricted stock units, contingently issuable shares, and potential issuance of stock upon conversion of our
Notes, as more fully described in Note 21. The dilutive effect of the Notes is reflected in net (loss) income per share by application of the “if-converted”
method. The “if-converted” method is only assumed in periods where such application would be dilutive. In applying the “if-converted” method for diluted
net income per share,
75
we would assume conversion of the Notes at a ratio of 26.7271 shares of our common stock per $1,000 principal amount of the Notes. Assumed converted
shares of our common stock are weighted for the period the Notes were outstanding.
(u) Recently Adopted Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, (“ASU
2016-02”), and codified as ASC 842, which became effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early
adoption permitted. The guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for
the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures
designed to assess the amount, timing, and uncertainty of cash flows arising from leases.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases Topic Targeted
Improvements, which provides an additional and optional transition method whereby the new lease standard is applied at the adoption date and recognized
as an adjustment to retained earnings. Additionally, in March 2019, the FASB issued ASU 2019-01, Codification Improvements to Topic 842, which
provides guidance in the following areas: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers and (2)
clarification of interim disclosure requirements during transition.
We adopted the new standard effective October 1, 2019 under the modified retrospective transition approach. Results for reporting periods
beginning after October 1, 2019 are presented under ASC 842, while prior periods have not been adjusted and continue to be reported in accordance with
our historic accounting under previous GAAP. We elected the package of practical expedients permitted under the transition guidance. The new standard
does not have a material impact on our consolidated statement of operations and cash flows. Approximately $2.2 million of deferred rent balances were
reclassified against the costs of the right-of-use assets. The effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of
October 1, 2019 is immaterial.
The following tables summarize the impact of adopting ASC 842 on the consolidated balance sheet as of October 1, 2019 (dollars in thousands):
Assets:
Operating lease right of use assets
Liabilities:
Current liabilities:
Short-term operating lease liabilities
Accrued expenses and other current liabilities
Long-term operating lease liabilities
Other liabilities
Equity:
Net parent investment
As Previously
Reported
As of October 1, 2019
Impact of Adoption
of Topic ASC 842
As Adjusted
- $
19,594 $
19,594
- $
24,194
-
21,536 $
4,863 $
(1,465)
16,883
(687) $
4,863
22,729
16,883
20,849
$
$
$
$
1,097,127 $
— $
1,097,127
76
Other Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (“ASU 2018-15”), which is effective for
fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance requires that
implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement,
starting when the module or component of the hosting arrangement is ready for its intended use. The adoption of ASU 2018-15 did not have a material
impact on our consolidated financial statements during fiscal year 2020.
(v) Issued Accounting Standards Not Yet Adopted
From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless
otherwise discussed, such pronouncements did not have or will not have a significant impact on our combined financial position, results of operations or
cash flows, or do not apply to our operations.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost,
including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of
forward-looking information to calculate credit loss estimates. This standard is effective for interim and annual reporting periods beginning after December
15, 2019. This standard is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to Accumulated deficit as of
the beginning of the first reporting period in which the guidance of this standard is effective.
We plan to adopt this new standard in the first quarter of our fiscal 2021. We are currently evaluating the impact of the adoption of this standard on
our consolidated financial statements. Implementation efforts related to ASU 2016-13 are underway, including model development, identification of
additional data needs for new reporting requirements, and drafting of accounting policies and internal controls. We believe our accounts receivable and
contact assets balances fall within the scope of ASU 2016-13 and will be impacted upon adoption. We plan to use models and other estimation techniques
that are sensitive to changes in economic conditions in order to estimate a reserve for financial assets. We also plan to apply qualitative factors that could be
related to distinctive risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, or other relevant factors
to ensure the reserve reflects our best estimate of current expected credit losses. We do not believe the new standard will have a material impact on our
consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting, (“ASU 2020-04”). The update provides optional guidance for a limited period of time to ease the potential burden in accounting for
(or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. ASU 2020-04 is effective for all entities as of
March 12, 2020 through December 31, 2022. We are currently evaluating the impact of the adoption of this standard on our consolidated financial
statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, (“ASU
2020-06”). ASU 2020-06 simplifies the accounting for debt with conversion options, revises the criteria for applying the derivatives scope exception for
contracts in an entity’s own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting
periods and interim periods within those annual reporting periods beginning after December 15, 2021, our fiscal 2023. Early adoption is permitted for
annual periods and interim periods within those annual periods beginning after December 15, 2020, our fiscal 2022. We are currently evaluating the impact
of the adoption of this guidance on our consolidated financial statements.
4. Business Acquisitions
As part of our business strategy, we have acquired, and may acquire in the future, certain businesses and technologies primarily to expand our
products and service offerings.
On April 2, 2018, we completed the acquisition of Voicebox Technologies Corporation (“Voicebox”). Voicebox is a provider of conversational
artificial intelligence, including voice recognition, natural language understanding, and artificial intelligence services. We expect this acquisition to expand
our current automotive solutions with a range of new predictive intelligence, embedded natural language, and hybrid virtual assistant capabilities. We
expect to be able to provide an end-to-end automotive intelligence platform that merges automated speech recognition, natural language understanding, and
information management to increase customer satisfaction, strengthen customer loyalty and improve business results. The aggregate consideration for this
transaction was $94.2 million which included $79.8 million in cash, net of $6.7 million cash acquired, a $12.8 million write-off of deferred revenues related
to our pre-existing relationship with Voicebox, and a $1.6 million deferred acquisition payment which would be paid in cash upon the conclusion
77
of an indemnity period. Acquisition costs related to Voicebox were $4.1 million. For further detail, refer to Note 3(k). The results of operations of Voicebox
are included within these Consolidated and Combined Financial Statements beginning on the date of acquisition.
A summary of the final allocation of the purchase consideration for the acquisition of Voicebox adjusted for measurement period adjustments is as
follows (dollars in thousands):
Purchase consideration:
Cash
Settlement of pre-existing relationship
Deferred acquisition payment
Total purchase consideration
Allocation of purchase consideration:
Accounts receivable
Prepaid expenses and other current assets
Property and equipment
Goodwill
Intangible assets
Deferred tax asset
Other assets
Total assets acquired
Current liabilities
Deferred tax liability
Other liabilities
Total liabilities assumed
Net assets acquired
Voicebox
79,802
12,751
1,600
94,153
6,545
620
4,008
50,508
49,600
124
9
111,414
(7,332)
(3,762)
(6,167)
(17,261)
94,153
$
$
$
$
The measurement period adjustments reflect new information obtained about facts and circumstances that existed at the date of the acquisition and
primarily related to the recognition of a deferred tax liability.
Goodwill from the Voicebox acquisition is not tax deductible. The following are the identifiable intangible assets acquired and their respective
weighted average useful lives, as determined based on final valuations (dollars in thousands):
Core and completed technology
Customer relationships
Total
Voicebox
Amount
Weighted Average
Life (Years)
$
$
12,700
36,900
49,600
4.0
5.0
The results of Voicebox for the post-acquisition period from April 2, 2018 to September 30, 2018 are as follows:
Total revenue
Net loss
5. Revenue Recognition
$
$
5,631
(9,238)
We primarily derive revenue from the following sources: (1) software license arrangements, primarily royalty arrangements, (2) connected services,
and (3) professional services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related
transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved
and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability
of consideration is probable.
Our arrangements with customers may contain multiple products and services. We account for individual products and services separately if they are
distinct—that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with
other resources that are readily available to the customer.
78
We currently recognize revenue after applying the following five steps:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
determination of the transaction price, including the constraint on variable consideration;
allocation of the transaction price to the performance obligations in the contract;
recognition of revenue when, or as, performance obligations are satisfied.
We allocate the transaction price of the arrangement based on the relative estimated standalone selling price (“SSP”) of each distinct performance
obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:
•
•
•
•
the pricing of standalone sales (in the instances where available);
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis; and
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and
type.
We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is resolved.
Revenue is recognized when control of these product and services is transferred to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those products and services.
We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a
significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant
financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other
than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to
provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not
consider set-up fees nor other upfront fees paid by our customers to represent a financing component.
Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from
reimbursed out-of-pocket costs is accounted for as variable consideration.
(a) Performance Obligations
Licenses
Software and technology licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology
are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the
progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor
hours. For income statement presentation purposes, we separate license revenue from professional services revenue based on their relative SSPs.
Revenue from distinct software and technology licenses, which do not require professional service to customize and/or integrate the software
license, is recognized at the point in time when the software and technology is made available to the customer and control is transferred.
Revenue from software and technology licenses sold on a royalty basis, where the license of non-exclusive intellectual property is the predominant
item to which the royalty relates, is recognized in the period the usage occurs in accordance with the practical expedient in ASC 606-10-55-65(A).
Connected Services
Connected services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are
provided on a usage basis as consumed or on a fixed fee subscription basis. Subscription basis revenue represents a single promise to stand-ready to
provide access to our connected services. Our connected services contract terms generally range from one to five years.
79
As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is
provided, we have determined that our connected services arrangements are a single performance obligation comprised of a series of distinct services.
These services include variable consideration, typically a function of usage. We recognize revenue as each distinct service period is performed (i.e.,
recognized as incurred).
Our connected service arrangements generally include services to develop, customize, and stand-up applications for each customer. In determining
whether these services are distinct, we consider dependence of the Cloud service on the up-front development and stand-up, as well as availability of the
services from other vendors. We have concluded that the up-front development, stand-up and customization services are not distinct performance
obligations, and as such, revenue for these activities is recognized over the period during which the cloud-connected services are provided, and is included
within connected services revenue.
Professional Services
Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project,
which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.
(b) Significant Judgments
Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together
may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s
environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for
together with professional services.
Judgments are required to determine the SSP for each distinct performance obligation. When the SSP is directly observable, we estimate the SSP
based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances
where the SSP is not directly observable, we determine the SSP using information that may include market conditions and other observable inputs. We may
have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In
these instances, we may use information such as the size of the customer and geographic region in determining the SSP. Determining the SSP for
performance obligations which we never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would
have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.
(c) Disaggregated Revenue
Revenues, classified by the major geographic region in which our customers are located, for the fiscal years ended September 30, 2020, 2019 and
2018 (dollars in thousands):
Revenues:
United States
Other Americas
Germany
Other Europe, Middle East and Africa
Japan
Other Asia-Pacific
Total net revenues (1)
2020
(ASC 606)
September 30,
2019
(ASC 606)
2018
(ASC 605)
$
$
128,381 $
16
100,674
25,394
50,936
24,245
329,646 $
131,877 $
1,044
78,258
20,478
44,472
27,186
303,315 $
109,564
1,492
64,417
16,755
57,303
27,453
276,984
(1) As a result of our adoption of ASC 606 effective October 1, 2018 using the modified retrospective method, prior period amounts have not been
adjusted to conform with ASC 606 and therefore may not be comparable.
Revenues within the United States, Germany, and Japan accounted for more than 10% of revenue for all periods presented.
Revenues relating to one customer accounted for $76.9 million, or 23.3%, of revenue for the fiscal year ended September 30, 2020. Revenues
relating to two customers accounted for $62.7 million, or 20.7%, and $37.4 million, or 12.3% of revenue for the fiscal year ended September 30, 2019. One
customer accounted for $51.0 million, or 18.4% of revenue for the fiscal year ended September 30, 2018.
80
(d) Contract Acquisition Costs
In conjunction with the adoption of ASC 606, we are required to capitalize certain contract acquisition costs. The capitalized costs primarily relate to
paid commissions. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for
groups of customer contracts. We elect to apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where
the expected period of benefit is one year or less. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit,
which we have estimated to be, on average, between one and eight years. The period of benefit was determined based on an average customer contract
term, expected contract renewals, changes in technology and our ability to retain customers, including canceled contracts. We assess the amortization term
for all major transactions based on specific facts and circumstances. Contract acquisition costs are classified as current or noncurrent assets based on when
the expense will be recognized. The current and noncurrent portions of contract acquisition costs are included in prepaid expenses and other current assets,
and in other assets, respectively. As of September 30, 2020 and 2019, we had $5.6 million and $2.7 million of contract acquisition costs. We had
amortization expense of $1.5 million and $0.7 million related to these costs during the fiscal year ended September 30, 2020 and 2019. There was no
impairment related to contract acquisition costs.
(e) Capitalized Contract Costs
We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will
be used to satisfy our performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Our
capitalized costs consist primarily of setup costs, such as costs to standup, customize and develop applications for each customer, which are incurred to
satisfy our stand-ready obligation to provide access to our connected offerings. These contract costs are expensed to cost of revenue as we satisfy our stand-
ready obligation over the contract term which we estimate to be between one and eight years, on average. The contract term was determined based on an
average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers, including canceled contracts. We
classify these costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of
capitalized contract fulfillment costs are presented as deferred costs. As of September 30, 2020 and 2019, we had $45.4 million and $41.6 million of
capitalized contract costs.
We had amortization expense of $12.0 million and $10.6 million related to these costs during the fiscal year ended September 30, 2020 and 2019,
respectively. There was no impairment related to contract costs capitalized.
(f) Trade Accounts Receivable and Contract Balances
We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration
that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in accounts receivable, net at their net
estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected.
The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other
applicable factors.
Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to
payment is not solely subject to the passage of time. Contract assets are included in prepaid expenses and other current assets. As of September 30, 2020,
we had $30.3 million of current contract assets. The table below shows significant changes in contract assets (dollars in thousands):
Balance as of October 1, 2018
Revenues recognized but not billed
Amounts reclassified to accounts receivable, net
Balance as of September 30, 2019
Revenues recognized but not billed
Amounts reclassified to accounts receivable, net
Balance as of September 30, 2020
$
$
$
Contract assets
6,470
42,661
(39,912)
9,219
52,682
(31,624)
30,277
Our contract liabilities, which we present as deferred revenue, consist of advance payments and billings in excess of revenues recognized. We
classify deferred revenue as current or noncurrent based on when we expect to recognize the revenues. As of
81
September 30, 2020, we had $325.1 million of deferred revenue. The table below shows significant changes in deferred revenue (dollars in thousands):
Balance as of October 1, 2018
Amounts billed but not recognized
Revenue recognized
Balance as of September 30, 2019
Amounts billed but not recognized
Revenue recognized
Balance as of September 30, 2020
(g) Remaining Performance Obligations
$
$
$
Deferred revenue
335,252
117,201
(99,169)
353,284
96,126
(124,317)
325,093
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or
partially unsatisfied at September 30, 2020 (dollars in thousands):
Total revenue
Within One
Year
Two to Five
Years
Greater
than
Five Years
Total
$
148,936 $
189,538 $
49,010 $
387,484
The table above includes fixed backlogs and does not include variable backlogs derived from contingent usage-based activities, such as royalties and
usage-based connected services.
6. Earnings Per Share
Basic earnings per share is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during
the period. Diluted earnings per share is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding
during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common
stock been issued. The dilutive effect of restricted stock units is reflected in diluted net (loss) income per share by applying the treasury stock method. Due
to the net loss recognized for the fiscal year ended September 30, 2020, there were no dilutive shares.
The dilutive effect of the Notes (as defined in Note 21) is reflected in net (loss) income per share by application of the “if-converted” method. The
“if-converted” method is only assumed in periods where such application would be dilutive. In applying the “if-converted” method for diluted net income
per share, we would assume conversion of the Notes at a ratio of 26.7271 shares of our common stock per $1,000 principal amount of the Notes. Assumed
converted shares of our common stock are weighted for the period the Notes were outstanding. The shares of common stock underlying the conversion
option of our Notes were not included in the
82
calculation of diluted loss per share for the fiscal year ended September 30, 2020 due to their anti-dilutive impact as a result of our net loss position for the
periods presented.
There were no Cerence equity awards outstanding prior to the Spin-Off, thus the computation of basic and diluted earnings per common share for all
prior periods disclosed was calculated using the shares issued in connection with the Spin-Off totaling 36.4 million shares.
The following table presents the reconciliation of the numerator and denominator for calculating net (loss) income per share:
in thousands, except per share data
Numerator:
Net (loss) income - basic and diluted
Denominator:
Weighted average common shares outstanding - basic
Dilutive effect of restricted stock awards
Dilutive effect of contingently issuable stock awards
Dilutive effect of the Notes
Weighted average common shares outstanding - diluted
Net (loss) income per common share:
Basic
Diluted
2020
September 30,
2019
2018
$
(20,631) $
100,268 $
5,881
36,428
-
-
-
36,428
36,391
-
-
-
36,391
$
$
(0.57) $
(0.57) $
2.76 $
2.76 $
36,391
-
-
-
36,391
0.16
0.16
We exclude weighted-average potentially issuable shares from the calculations of diluted net (loss) income per share during the applicable periods
because their inclusion would have been anti-dilutive. The following table sets forth potential shares that were considered anti-dilutive at September 30,
2020 and for the fiscal year ended September 30, 2019 and 2018:
in thousands
Restricted stock awards
Contingently issuable stock awards
Conversion option of our Notes
Fiscal Year Ended
September 30,
2019
2020
1,058
151
1,538
-
-
-
2018
-
-
-
83
7. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When
determining fair value measurements for assets and liabilities recorded at fair value, we consider the principal or most advantageous market in which we
would transact and consider assumptions that market participants would use in pricing the asset or liability.
The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value
measurement as of the measurement date as follows:
•
•
•
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either
directly or indirectly through market corroboration, for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity.
The following table presents information about our financial assets that are measured at fair value and indicates the fair value hierarchy of the
valuation inputs used (dollars in thousands) as of:
Assets:
Cash and cash equivalents:
Money market funds
Marketable securities:
Commercial paper, $9,883 at cost
Corporate bonds, $1,780 at cost
Total assets
Level 1
Level 2
Level 3
Total
September 30, 2020
$
$
$
101,437
$
-
$
-
-
101,437
$
84
9,883
1,779
11,662
$
$
-
-
-
-
$
$
101,437
9,883
1,779
113,099
During fiscal year 2020, we recorded an immaterial amount of unrealized losses related to our marketable securities within Accumulated other
comprehensive loss.
As of September 30, 2019, we did not have any cash and cash equivalents or marketable securities.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable, approximate fair
value due to their short-term maturities and are excluded from the fair value tables above.
Long-term debt
The estimated fair value of our Long-term debt is determined by Level 2 inputs and is based observable market data including prices for similar
instruments. As of September 30, 2020, the estimated fair value of our Notes was $271.0 million. The Notes are recorded at face value less unamortized
debt discount and transaction costs on our consolidated balance sheet. The carrying amount of the Senior Credit Facilities (as defined in Note 21)
approximates fair value given the underlying interest rate applied to such amounts outstanding is currently set to the prevailing market rate.
8. Goodwill and Intangible Assets
(a) Goodwill
On July 1, 2019, our goodwill was assessed for impairment as a reporting unit of Nuance. On July 1, 2019, the fair value of our reporting unit was
determined using a combination of the income approach and the market approach. We assessed each valuation methodology based upon the relevance and
availability of the data at the time and weighted the methodologies appropriately to calculate a fair value which exceeded the carrying value of our
reporting unit by more than 50%.
On March 31, 2020, we concluded that goodwill impairment indicators were present due to the macroeconomic conditions driven by the COVID-19
pandemic and the anticipated negative impact on our license revenue and connected services billings, therefore we performed an interim quantitative
impairment test. The fair value of our reporting unit was determined using a combination of the income approach and the market approach. For the income
approach, fair value was determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk-adjusted rate. We
used our internal forecasts, which were revised to reflect the anticipated impact of the COVID-19 pandemic, to estimate future after-tax cash flows and
estimate the long-term growth rates based on our most recent views of the long-term outlook for our reporting unit. For the market approach, we used a
valuation technique in which values were derived based on valuation multiples of comparable publicly traded companies. We weighted the methodologies
appropriately to estimate a fair value of approximately $951 million as of March 31, 2020. The estimated fair value exceeded the $936 million carrying
value of our reporting unit by approximately $15 million, or 2% of the carrying value. Based upon the results of the impairment test, no goodwill
impairment was recorded as of March 31, 2020.
On July 1, 2020, we completed the annual impairment testing of our goodwill. We elected to rely on a qualitative assessment and as a result we
determined it is more likely than not that the fair value of our reporting unit is greater than its carrying amount. We will continue to monitor the impacts of
the COVID-19 pandemic on our reporting unit fair value. The full extent to which the ongoing COVID-19 pandemic could adversely affect our financial
performance will depend on future developments, many of which are outside of our control.
The changes in the carrying amount of goodwill for the years ended September 30, 2020 and 2019 were as follows (dollars in thousands):
Balance as of October 1, 2018
Acquisitions
Effect of foreign currency translation
Balance as of September 30, 2019
Effect of foreign currency translation
Balance as of September 30, 2020
85
$
$
Total
1,119,946
3,591
(4,208)
1,119,329
8,869
1,128,198
(b) Intangible Assets, Net
The following tables summarizes the gross carrying amounts and accumulated amortization of intangible assets by major class (dollars in
thousands):
Customer relationships
Technology and patents
Total
Customer relationships
Technology and patents
Total
September 30, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Weighted Average
Remaining Life
(Years)
$
$
110,512 $
90,658
201,170 $
(75,915) $
(79,639)
(155,554) $
34,597
11,019
45,616
3.0
1.6
Gross
Carrying
Amount
September 30, 2019
Net
Carrying
Amount
Accumulated
Amortization
Weighted Average
Remaining Life
(Years)
$
$
104,783 $
116,757
221,540 $
(58,568) $
(97,411)
(155,979) $
46,215
19,346
65,561
4.0
2.5
Amortization expense for acquired technology and patents is included in the cost of revenue in the accompanying statements of operations and
amounted to $8.3 million, $8.5 million, and $6.6 million for the years ended September 30, 2020, 2019, and 2018, respectively. Additionally, amortization
expense for intangible assets of the Parent utilized by the Cerence business amounted to $22 thousand and $1.2 million in the years ended September 30,
2019 and 2018, respectively, and is included in the cost of revenue as shown in Note 19. Amortization expense for customer relationships is included in
operating expenses and amounted to $12.6 million, $12.5 million, and $8.8 million in the years ended September 30, 2020, 2019, and 2018, respectively.
Estimated amortization for each of the five succeeding years and thereafter as of September 30, 2020, is as follows (dollars in thousands):
Year Ending September 30,
2021
2022
2023
2024
2025
Thereafter
Total
9. Accounts Receivable, Net
Accounts receivable, net consisted of the following (dollars in thousands):
Trade accounts receivable
Unbilled accounts receivable under long-term contracts
Gross accounts receivable
Less: allowance for doubtful accounts
Total
86
Cost of
Revenues
Operating
Expenses
Total
$
$
7,517 $
2,984
414
104
—
—
11,019 $
12,648 $
11,688
6,080
2,390
1,791
—
34,597 $
September 30,
2020
2019
$
$
51,337 $
—
51,337
(1,394)
49,943 $
20,165
14,672
6,494
2,494
1,791
—
45,616
65,532
1,120
66,652
(865)
65,787
10. Property and Equipment, Net
Property and equipment, net consisted of the following (dollars in thousands):
Machinery and equipment
Computers, software and equipment
Leasehold improvements
Furniture and fixtures
Finance leases
Construction in progress
Subtotal
Less: accumulated depreciation
Total
Useful Life
(In years)
3-5
3-5
2-15
5-7
September 30,
2020
2019
$
$
7,746 $
42,705
10,513
4,691
2,710
4,547
72,912
(43,383)
29,529 $
8,424
32,894
9,147
3,819
—
1,043
55,327
(35,214)
20,113
As of September 30, 2020 and 2019, the net book value of capitalized internal-use software costs was $6.9 million and $2.2 million, respectively,
which are included within computers, software, and equipment. Depreciation expense for the years ended September 30, 2020, 2019, and 2018 was $9.2
million, $6.2 million, and $7.7 million, respectively, which included amortization expense of $3.1 million, $2.7 million, and $4.2 million, respectively, for
internally developed software costs.
The following table presents our property and equipment, net by geography at September 30, 2020 and 2019 (dollars in thousands):
Long-lived assets:
United States
Canada
Germany
Other countries
Total long-lived assets
11. Deferred Revenue
September 30,
2020
2019
$
$
19,898 $
3,464
2,573
3,594
29,529 $
10,333
3,889
2,390
3,501
20,113
Unearned revenue includes fees for upfront setup of the service environment and fees charged for on-demand service.
Deferred revenue consisted of the following (dollars in thousands):
Current Liabilities:
Unearned revenue
Total
Non-current Liabilities:
Unearned revenue
Total
September 30,
2020
2019
$
$
$
112,520 $
112,520 $
212,573
212,573 $
88,233
88,233
265,051
265,051
87
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (dollars in thousands):
Compensation
Cost of revenue related liabilities
Sales and other taxes payable
Professional fees
Facilities related liabilities
Other
Total
13. Asset Retirement Obligations
September 30,
2020
2019
$
$
37,960 $
3,683
14,688
2,458
2,041
7,027
67,857 $
13,031
1,668
219
3,863
273
5,140
24,194
Asset retirement obligations consist primarily of costs related to restoring long-lived assets to their original condition. Asset retirement obligations
may include disposal costs, maintenance of buildings, and costs to remove leasehold improvements. The balance of the asset retirement obligations for the
periods presented are classified as noncurrent liabilities and included in “Other liabilities” in the Consolidated and Combined Balance Sheets. Activity
related to asset retirement obligations was as follows (dollars in thousands):
Balance at the beginning of period
Additions
Remeasurement/translation
Settlements/payments
Balance at the end of the period
14. Restructuring and Other Costs, Net
2020
September 30,
2019
2018
$
$
1,051 $
205
72
(87)
1,241 $
1,155 $
5
(51)
(58)
1,051 $
784
398
(8)
(19)
1,155
Restructuring and other costs, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned
events, and arise outside of the ordinary course of our business such as employee severance costs, costs for consolidating duplicate facilities, and separation
costs directly attributable to the Cerence business becoming a standalone public company.
Restructuring and other costs, net related to personnel and facilities are included in accrued expenses and other current liabilities in the Consolidated
and Combined Balance Sheets. Separation costs are included in accounts payable. The following table sets forth the year ended September 30, activity
relating to restructuring charges (dollars in thousands):
Balance at October 1, 2017
Restructuring and other costs, net
Cash payments
Balance at September 30, 2018
Restructuring and other costs, net
Cash payments
Balance at September 30, 2019
Restructuring and other costs, net
Non-cash adjustment
Cash payments
Foreign exchange impact on ending balance
Balance at September 30, 2020
Personnel
Facilities
Separation
Total
108 $
4,130
(1,969)
2,269
130
(1,910)
489
3,694
—
(3,420)
1
764 $
114 $
20
(128)
6
1,704
(1,684)
26
2,816
(1,031)
(26)
(40)
1,745 $
— $
8,713
(7,936)
777
22,570
(19,471)
3,876
11,727
—
(13,675)
—
1,928 $
222
12,863
(10,033)
3,052
24,404
(23,065)
4,391
18,237
(1,031)
(17,121)
(39)
4,437
$
$
88
Fiscal Year 2020
For the year ended September 30, 2020, we recorded restructuring charges of $18.2 million, which included a $3.7 million severance charge related
to the elimination of personnel across multiple functions, $2.8 million resulting from the restructuring of facilities that will no longer be utilized, and $11.7
million related to costs incurred to establish the Cerence business as a standalone public company.
Fiscal Year 2019
For the year ended September 30, 2019, we recorded restructuring charges of $24.4 million, which included $0.1 million severance charge related to
the elimination of personnel across multiple functions, $1.7 million primarily resulting from the restructuring of facilities that will no longer be utilized,
and $22.6 million related to professional service fees incurred to establish Cerence business as a standalone public company.
Fiscal Year 2018
For the year ended September 30, 2018, we recorded restructuring charges of $12.9 million, which included a $4.1 million severance charge related
to the elimination of personnel across multiple functions, $20 thousand primarily resulting from the restructuring of facilities that will no longer be utilized,
and $8.7 million related to professional services fees incurred to establish the Cerence business as a standalone public company.
15. Leases
We have entered into a number of facility and equipment leases which qualify as operating leases under GAAP. We also have a limited number of
equipment leases that qualify as finance leases. We determine if contracts with vendors represent a lease or have a lease component under GAAP at
contract inception. Our leases have remaining terms ranging from less than one year to eight years. Some of our leases include options to extend or
terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or
terminate the lease when it is reasonably certain that we will exercise such options.
Operating lease right-of-use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease
term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in
determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease
commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency
environment.
The following table presents certain information related to lease term and incremental borrowing rates for leases as of September 30, 2020:
Weighted-average remaining lease term (in months):
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
89
September 30, 2020
55.9
55.8
7.4%
4.4%
The following table presents the lease-related assets and liabilities reported in the consolidated balance sheet as of September 30, 2020 (dollars in
thousands):
Assets
Operating lease assets
Finance lease assets
Total lease assets
Liabilities
Current
Operating
Finance
Noncurrent
Operating
Finance
Total lease liability
Classification
September 30, 2020
Operating lease right-of-use assets
Property and equipment, net
Short-term operating lease liabilities
Accrued expenses and other current liabilities
Long-term operating lease liabilities
Other liabilities
$
$
$
$
$
20,096
1,414
21,510
5,700
271
17,821
1,088
24,880
Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. For operating leases, costs are included within
cost of revenues, research and development, marketing and selling, and general and administrative lines on the consolidated statements of operations. For
financing leases, amortization of the finance right-of-use assets is included within research and development, marketing and selling, and general and
administrative lines on the consolidated statements of operations, and interest expense is included within the other income (expense), net.
The following table presents lease expense for the fiscal year ended September 30, 2020 (dollars in thousands):
Finance lease costs:
Amortization of right-of-use asset
Interest on lease liability
Operating lease cost
Variable lease cost
Sublease income
Total lease cost
Fiscal year ended
September 30, 2020
$
$
255
22
8,245
1,060
(206)
9,376
For operating leases, the related cash payments are included in the operating cash flows on the consolidated statements of cash flows. For the fiscal
year ended September 30, 2020, cash payments related to operating leases were $8.0 million. For financing leases, the related cash payments for the
principal portion of the lease liability are included in the financing cash flows on the consolidated statement of cash flows and the related cash payments for
the interest portion of the lease liability are included within the
90
operating section of the consolidated statement of cash flows. For the fiscal year ended September 30, 2020, cash payments related to financing leases were
$0.1 million, of which an immaterial amount related to the interest portion of the lease liability.
The table below reconciles the undiscounted future minimum lease payments under non-cancelable leases with terms of more than one year to the
total lease liabilities recognized on the consolidated balance sheet as of September 30, 2020 (dollars in thousands):
Year Ending September 30,
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less effects of discounting
Total lease liabilities
Reported as of September 30, 2020
Short-term lease liabilities
Long-term lease liabilities
Total lease liabilities
Operating Leases
$
7,200
6,116
4,648
4,249
2,583
3,097
27,893
(4,372)
23,521
5,700
17,821
23,521
Financing Leases
Total
$
$
$
$
$
319
309
309
309
254
10
1,510
(151)
1,359
271
1,088
1,359
$
$
$
$
$
7,519
6,425
4,957
4,558
2,837
3,107
29,403
(4,523)
24,880
5,971
18,909
24,880
$
$
$
$
In accordance with the transition disclosure requirements under ASC 840, the future minimum lease commitments under non-cancelable leases at
September 30, 2019 were as follows (dollars in thousands):
Year Ending September 30,
2020
2021
2022
2023
2024
Thereafter
Total
16. Stockholders’ Equity
Share-based Compensation Plans
$
$
6,323
5,421
4,493
3,237
2,922
4,039
26,435
Prior to the Spin-Off from Nuance, the Parent maintained a number of stock-based compensation programs at the corporate level in which the
Cerence business’s employees participate. All awards granted under the programs relate to the Parent’s common stock.
Per the Amended and Restated Certificate of Incorporation, which was adopted on October 1, 2019, 600,000,000 shares of capital stock have been
authorized, consisting of 40,000,000 shares of Preferred Stock, par value $0.01 per share, or (“Preferred Stock”), and 560,000,000 shares of Common
Stock, par value $0.01 per share (“Common Stock”).
On October 2, 2019, we registered the issuance of 6,350,000 shares of Common Stock, consisting of 5,300,000 shares of Common Stock reserved
under the Cerence 2019 Equity Incentive Plan, (“Equity Incentive Plan”), and 1,050,000 shares of Common Stock that are reserved for issuance under the
Cerence 2019 Employee Stock Purchase Plan (“ESPP”).
The Equity Incentive Plan provides for the grant of incentive stock options, stock awards, stock units, stock appreciation rights, and certain other
stock-based awards. Awards issued under the Plan may not have a term greater than ten years from the date of grant.
In connection with the Spin-Off from Nuance, all outstanding Nuance restricted stock units and performance stock units held by Cerence employees
were cancelled, and Cerence regranted such employees economically equivalent restricted stock units of Cerence. 1,208,931 restricted stock units were
issued by Cerence in connection with the Spin-Off.
Restricted Awards
91
The fair value of Restricted Awards, including Restricted Stock Units and Restricted Stock, is measured based upon the market price of the
underlying common stock as of the date of grant. Restricted Awards generally vest over a period of two to four years. We also include certain Restricted
Awards with vesting solely dependent on the achievement of specified performance targets. The fair value of Restricted Awards is amortized to expense
over the awards applicable requisite service period. In the event that the employees’ employment with us terminates, or in the case of awards with only
performance targets, if those targets are not met, any unvested shares are forfeited.
In fiscal year 2020, we withheld payroll taxes totaling $9.4 million related to the vesting of Restricted Awards.
Restricted Units are not included in issued and outstanding common stock until the shares are vested and released. The table below summarizes
activity related to Restricted Stock Units:
Non-vested at October 1, 2019
Granted
Vested
Forfeited
Non-vested at September 30, 2020
Expected to vest
Employee Stock Purchase Plan
Non-Vested Restricted Stock Units
Time-Based
Shares
Performance-
Based Shares Total Shares
Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
—
2,758,634
(642,404)
(73,312)
2,042,918
—
778,968
—
(7,581)
771,387
— $
3,537,602 $
(642,404) $
(80,893) $
2,814,305 $
2,814,305 $
—
18.87
20.06
17.54
18.63
18.63
0.98 $
0.98 $
137,529
137,529
On October 2, 2019, we adopted the ESPP and approved 1,050,000 shares for issuance under this plan. The ESPP is administered by our Board of
Directors’ Compensation Committee.
The ESPP provides for the issuance of shares of our common stock to participating employees. At the end of each designated offering period, which
occurs every six months on February 15 and August 15, employees can elect to purchase shares of our common stock with contributions of up to 12% of
their base pay, accumulated via payroll deductions, at an amount equal to 85% of the lower of our stock price on (i) the first day of the offering period, or
(ii) the last day of the offering period.
We use the Black-Scholes option pricing model to calculate the fair value of shares issued under the ESPP. The Black-Scholes model relies on a
number of key assumptions to calculate estimated fair values. The following table sets forth the weighted-average key assumptions and fair value results
for shares issued under the ESPP during the fiscal year ended September 30, 2020:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
Weighted-average fair value of shares issued (per share)
Year Ended September 30,
2020
0.00%
1.56%
58.18%
0.50
8.93
$
The following table sets forth the quantities and average prices of shares issued under the ESPP for the fiscal year ended September 30, 2020:
Shares issued under the ESPP
Average price of shares issued
92
Year Ended September 30,
2020
63,503
20.66
Stock-based Compensation
Prior to the Spin-Off, stock-based compensation expense recorded by the Cerence business includes the expense associated with the employees
historically attributable to the Cerence business’s operations and the expense associated with the allocation of stock compensation expense for corporate
employees.
During fiscal 2020, we recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified
within equity. In May 2020, we modified the performance targets for certain of the Restricted Awards issued pursuant to our Equity Incentive Plan at the
beginning of fiscal 2020. Stock-based compensation for the anticipated Restricted Awards has been adjusted to reflect our estimated achievement under the
modified targets and is recorded prospectively over the requisite service period.
The amounts included in the Consolidated and Combined Statements of Operations related to stock-based compensation are as follows (dollars in
thousands):
Cost of licensing
Cost of connected services
Cost of professional services
Research and development
Sales and marketing
General and administrative
Total
17. Commitments and Contingencies
Litigation and Other Claims
2020
Year Ended September 30,
2019
2018
$
$
— $
1,382
4,191
13,944
9,580
18,188
47,285 $
21 $
827
1,048
15,946
6,137
5,703
29,682 $
12
495
1,569
11,112
3,985
4,870
22,043
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise
from time to time relating to matters incidental to the ordinary course of our business, including at times actions with respect to contracts, intellectual
property, employment, benefits and securities matters. At each balance sheet date, we evaluate contingent liabilities associated with these matters in
accordance with ASC 450 Contingencies. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably
estimated, we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the
outcomes, and estimates are based only on the best information available at the time. Due to the inherent uncertainties involved in claims and legal
proceedings and in estimating losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses
were not estimable in one period may become probable, or losses may become estimable in later periods, which may have a material impact on our results
of operations and financial position. As of September 30, 2020, accrued losses were not material to our consolidated financial statements, and we do not
expect any pending matter to have a material impact on our consolidated financial statements.
Guarantees and Other
We include indemnification provisions in the contracts we enter with customers and business partners. Generally, these provisions require us to
defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or
otherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all
cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed-upon amount. In some cases, our total
liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential
amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these
provisions is minimal due to the low frequency with which these provisions have been triggered.
We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to
directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of
the Company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in
connection with certain acquisitions, we agreed to indemnify the former officers and members of the boards of directors of those companies, on similar
terms as described above, for a period of six years from the acquisition date. In certain cases, we purchase director and officer insurance policies related to
these obligations, which fully cover the six-year period. To the extent that we do not purchase a director and officer insurance policy for the full period of
any contractual
93
indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if
any, as described above.
As of September 30, 2020, we have a $1.8 million letter of credit that is used as a security deposit in connection with our leased Bellevue,
Washington office space. In the event of default on the underlying lease, the landlord would be eligible to draw against the letter of credit. The letter of
credit is subject to aggregate reductions, provided that we are not in default under the underlying lease. We also have letters of credit in connection with
security deposits for other facility leases totaling $0.3 million in the aggregate. These letters of credit have various terms and expire during fiscal 2021 and
beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.
18. Pension and Other Post-Retirement Benefits
As discussed within Note 19, we entered into an Employee Matters Agreement with Nuance, which provides that we establish certain compensation
and benefit plans for the benefit of our employees following the Spin-Off, including a 401(k) savings plan, which accepts direct rollovers of account
balances from the Nuance 401(k) savings plan for any of our employees who elect to do so. In addition, we assumed certain assets and liabilities with
respect to our current and former employees under certain of Nuance’s U.S. and non-U.S. defined benefit pension plans (with assets and liabilities allocated
based on formulas specified in the Employee Matters Agreement for each pension plan).
Defined Contribution Plans
We have established a retirement savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers
substantially all of our U.S. employees who meet minimum age and service requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. We match 50% of employee contributions up to 6% of eligible salary. We incurred charges for contributions to these
401(k) defined contribution plans of $0.7 million, $1.0 million, and $0.7 million for the years ended September 30, 2020, 2019, and 2018, respectively.
Defined Benefit Pension Plans
We sponsor certain defined benefit pension plans that are offered primarily by our foreign subsidiaries. Many of these plans were assumed through
acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees or into
government-managed accounts consistent with local regulatory requirements, as applicable.
The total defined benefit plan pension expenses incurred for these plans were $0.5 million, $0.4 million, and $0.4 million for the years ended
September 30, 2020, 2019, and 2018, respectively. Our aggregate projected benefit obligation and aggregate net liability for defined benefit plans as of
September 30, 2020 was $8.3 million and $7.1 million, as of September 30, 2019 was $7.3 million and $6.8 million, and as of September 30, 2018 was
$5.0 million and $4.2 million, respectively.
For the years ended September 30, 2020, 2019 and 2018, charges for contributions to defined benefit pension plans were not material to the
Consolidated and Combined Statements of Operations.
94
19. Relationship with Parent and Related Entities
Prior to the Spin-Off, the Cerence business had been managed and operated in the normal course of business consistent with other affiliates of the
Parent. Accordingly, certain shared costs had been allocated to the Cerence business and reflected as expenses in the standalone combined financial
statements. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the historical Parent expenses
attributable to the Cerence business for purposes of the standalone financial statements. However, the expenses reflected in the combined financial
statements may not be indicative of the actual expenses that would have been incurred during the periods presented if the Cerence business historically
operated as a separate, standalone entity.
(a) General Corporate Overhead Allocation
The Parent provided facilities, information services and certain corporate and administrative services to the Cerence business. Expenses relating to
these services have been allocated to the Cerence business and are reflected in the combined financial statements. Where direct assignment is not possible
or practical, these costs were allocated on a pro rata basis of revenues, headcount or other measures. The following table summarizes the components of
general allocated corporate expenses for the years ended September 30, 2019 and 2018 (dollars in thousands):
Facility
Depreciation
Amortization
Facility and other usage charges
Information services
Corporate and administrative services
Total
(b) Cash Management and Financing
Year Ended September 30,
2019
2018
$
$
6,299 $
1,637
22
7,958
8,633
22,166
38,757 $
6,125
1,467
1,150
8,742
7,947
18,414
35,103
The Cerence business participated in the Parent’s centralized cash management and financing programs. Disbursements were made through
centralized accounts payable systems, which were operated by the Parent.
Cash receipts were transferred to centralized accounts which were also maintained by the Parent. As cash was disbursed and received by the Parent,
it was accounted for by the Cerence business through the net parent investment.
Historically, the Cerence business had received funding from the Parent for the Cerence business’s operating and investing cash needs. Parent’s
third-party debt and the related interest expense were not allocated to the Cerence business for any of the years presented prior to the Spin-Off, as the
Cerence business was not the legal obligor of the debt and the Parent’s borrowings were not directly attributable to the Cerence business.
(c) Intercompany Receivables/Payables
All significant intercompany transactions between the Cerence business and the Parent and its non-Cerence businesses have been included in these
Consolidated and Combined Financial Statements and are considered to be effectively settled for cash at the time the transaction is recorded. The total net
effect of the settlement of these intercompany transactions have been accounted for through parent company net investment in the Consolidated and
Combined Balance Sheets and is reflected in the Consolidated and Combined Statements of Cash Flows as a financing activity.
95
The following table summarizes the components of the net transfers to Parent for the years ended September 30, 2020, 2019, and 2018 (dollars in
thousands):
Net transactions with Parent
Distribution to Parent
Net reclassification of net parent investment in Cerence
Stock-based compensation
Accrued bonus
Corporate depreciation and amortization
Fixed asset reclasses from the Parent
Voicebox Purchase Accounting Adjustment
Intangible asset reclasses from the Parent
Net transfer to Parent
Agreements with Nuance
2020
Year Ended September 30,
2019
2018
$
(6,098) $
(152,978)
(938,051)
—
—
—
—
—
—
$
(1,097,127) $
(83,554) $
—
—
29,682
9,478
1,659
10,088
3,591
1,665
(27,391) $
(28,947)
—
—
22,043
(2,859)
2,617
259
—
—
(6,887)
In connection with the Spin-Off, Cerence entered into several agreements with Nuance that set forth the principal actions taken or to be taken in
connection with the Spin-Off and that govern the relationship of the parties following the Spin-Off, including the following:
•
•
•
•
•
•
•
Separation and Distribution Agreement: We entered into a Separation and Distribution Agreement with Nuance in advance of the
Distribution. The Separation and Distribution Agreement sets forth our agreements with Nuance regarding the principal actions to be taken in
connection with the Spin-Off. It also sets forth other agreements that govern aspects of our relationship with Nuance following the Spin-Off.
Tax Matters Agreement: We entered into a Tax Matters Agreement with Nuance that governs the respective rights, responsibilities and
obligations of Nuance and us after the Distribution with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax
contests).
Transition Services Agreement: We entered into a Transition Services Agreement pursuant to which Nuance will provide us, and we will
provide Nuance, with certain specified services for a limited time to help ensure an orderly transition following the Distribution.
Employee Matters Agreement: We entered into an Employee Matters Agreement with Nuance that addresses employment and employee
compensation and benefits matters. The Employee Matters Agreement addresses the allocation and treatment of assets and liabilities relating to
employees and compensation and benefit plans and programs in which our employees participated prior to the Spin-Off.
Intellectual Property Agreement: We entered into an Intellectual Property Agreement with Nuance, pursuant to which we granted to Nuance,
and Nuance granted to us, perpetual, non-exclusive, royalty-free licenses to certain patents and technology, as well as certain other intellectual
property that have historically been shared between us and Nuance.
Transitional Trademark License Agreement: We entered into a Transitional Trademark License Agreement with Nuance, pursuant to which
Nuance granted us a non-exclusive, royalty free license to continue using certain of Nuance’s trademarks, trade names and service marks with
respect to the “Nuance” and “Dragon” brands in connection with the sale, marketing and other commercialization of our products and services.
OEM and Distribution License Agreements: We entered into four OEM and Distribution License Agreements with Nuance. Under three of
the four agreements, Cerence licenses to Nuance designated Cerence technologies for Nuance’s internal use and for distribution to Nuance end-
users and resellers. Under the final agreement, Nuance licenses to Cerence designated Nuance technologies for Cerence’s internal use and for
distribution to Cerence end-users and resellers. All agreements contain customary commercial terms for arrangements of this nature.
96
20. Income Taxes
Prior to the consummation of the Spin-Off, Cerence’s operating results were included in Parent’s various consolidated U.S. federal and state income
tax returns, as well as non-U.S. filings. For the purposes of our Consolidated and Combined Financial Statements for periods prior to the Spin-Off, income
tax expense and deferred tax balances have been recorded as if we filed tax returns on a standalone basis separate from the Parent. The Separate Return
Method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone
enterprise prior to the separation from Parent.
Recent Tax Legislation
The Coronavirus Aid, Relief, and Economic Security Act (“CARES ACT”) became law on March 27, 2020. The CARES ACT was in response to
the market volatility and instability resulting from the COVID-19 pandemic and includes provisions to support individuals and businesses in the form of
loans, grants, and tax changes, among other types of relief. The CARES ACT did not have a material impact on our (benefit from) provision for income
taxes during the period.
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. The TCJA significantly revises the U.S. corporate income tax by,
among other things, lowering corporate income tax rates, implementing a hybrid territorial tax system and imposing a one-time repatriation tax on foreign
cash and earnings.
We are subject to additional requirements of the TCJA during the year ended September 30, 2020. Those provisions include a tax on global
intangible low-taxed income (“GILTI”) and foreign-derived intangible income (“FDII”). We have elected to account for GILTI as a period cost and
therefore included GILTI expense in the effective tax rate calculation. Our estimates may be revised in future period as we obtain additional data and as the
IRS issues new guidance implementing the law changes.
As a result of the TCJA, in fiscal year 2018 we re-measured certain deferred tax assets and liabilities at the lower rates and recorded approximately
$23.1 million of tax expense.
(Benefit from) provision for income taxes
The components of (loss) income before income taxes are as follows (dollars in thousands):
Domestic
Foreign
(Loss) income before income taxes
2020
Year Ended September 30,
2019
2018
$
$
(28,846) $
2,706
(26,140) $
(22,904) $
34,088
11,184 $
16,371
20,427
36,798
The components of (benefit) provision for income taxes are as follows (dollars in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
(Benefit from) provision for income taxes
Effective income tax rate
2020
Year Ended September 30,
2019
2018
$
$
$
—
—
5,845
5,845
$
$
(1,871)
(239)
(9,244)
(11,354)
(5,509) $
21.1%
5,352
1,059
5,728
12,139
$
$
(6,210)
(1,593)
(93,420)
(101,223)
(89,084)
$
11,413
2,500
4,531
18,444
14,393
(1,284)
(636)
12,473
30,917
(796.5)%
84.0%
97
The (benefit from) provision for income taxes differed from the amount computed by applying the federal statutory rate to our (loss) income before
income taxes as follows (dollars in thousands):
Federal tax provision at statutory rate
State tax, net of federal benefit
Foreign tax rate and other foreign related tax items
Uncertain tax positions
Stock-based compensation
Global intangible low-taxed income
Foreign-derived intangible income
Capital losses
Change in U.S. valuation allowance
Non-deductible expenditures
R&D credits
Domestic Production Activities Deduction
TCJA impact
Intangible property transfers
(Benefit from) provision for income taxes
2020
Year Ended September 30,
2019
2018
(5,489) $
(239)
(2,463)
(887)
3,456
336
—
—
—
2,728
(2,951)
—
—
—
(5,509) $
2,270 $
(490)
(4,764)
57,631
—
3,923
(547)
8,187
(8,187)
2,707
(1,675)
—
—
(148,139)
(89,084) $
9,026
917
(104)
(95)
—
—
—
—
—
514
(1,313)
(1,143)
23,115
—
30,917
$
$
The effective income tax rate is based upon the income for the year, the composition of the income in different countries, and adjustments, if any, for
the potential tax consequences, benefits or resolutions of audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower
than our income tax rate in the United States. Our effective tax rate may be adversely affected by earnings being lower than anticipated in countries where
we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates. We believe that it is not more likely than
not that the tax benefit from the U.S. capital loss will be realized. As a result, we recorded a full valuation allowance against the capital loss.
The effective tax rate for the fiscal year 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of
jurisdictional earnings, U.S. inclusions of foreign taxable income as a result of changes in applicable tax laws in 2017, R&D incentives, and an income tax
benefit of approximately $5.0 million related to an increase in tax rates in the Netherlands enacted in the first quarter.
The effective income tax rate in fiscal year 2019 differs from the U.S. federal statutory rate of 21.0% primarily due to a net tax benefit of $91.7
million related to intangible property transfers, partially offset by an uncertain tax position. The net tax benefit is also partially offset by GILTI tax expense
of $3.9 million.
The effective income tax rate in fiscal year 2018 differs from the U.S. federal statutory rate of 24.5% primarily due to the net tax expense resulting
from the TCJA re-measurement of deferred tax assets and liabilities at the lower enacted rate, our research and development credits and the domestic
production activities deduction.
As of September 30, 2020, we have not provided taxes on undistributed earnings of our foreign subsidiaries, which may be subject to foreign
withholding taxes upon repatriation, as we consider these earnings indefinitely reinvested. Our indefinite reinvestment determination is based on the future
operational and capital requirements of our domestic and foreign operations. We expect our international cash and cash equivalents and marketable
securities will continue to be used for our foreign operations and therefore do not anticipate repatriating these funds. As of September 30, 2020, it is not
practical to calculate the unrecognized deferred tax liability on these earnings due to the complexities of the utilization of foreign tax credits and other tax
assets.
98
Deferred tax assets (liabilities) consist of the following as of September 30, 2020 and 2019 (dollars in thousands):
Deferred tax assets:
Net operating loss carryforwards
Capital loss carryforwards
Federal credit carryforwards
Accrued expenses and other reserves
Difference in timing of revenue related items
Acquired intangibles
Interest limitations carryforward
Operating lease liabilities
Depreciation
Deferred compensation
Pension obligation
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Deferred tax assets
Deferred tax liabilities:
Depreciation
Acquired intangibles
Convertible debt
Operating lease right-of-use assets
Other
Total deferred tax liabilities
Net deferred tax assets
September 30,
2020
2019
$
$
$
$
$
17,582 $
9,557
3,665
5,086
51,483
94,389
9,399
6,568
1,682
1,465
2,522
1,726
205,124 $
(13,491)
191,633 $
(3,381) $
(21,255)
(4,406)
(5,677)
(2,457)
(37,176)
154,457 $
6,567
8,187
9,367
2,830
50,677
90,635
—
—
—
—
1,969
—
170,232
(11,064)
159,168
(1,360)
(7,179)
—
—
—
(8,539)
150,629
We have determined that a revision was required to correct the September 30, 2019 disclosure of certain gross deferred tax liabilities and deferred
tax assets, of $7.2 million, within the above table. Our disclosure of the related net deferred tax assets and valuation allowance at September 30, 2019 was
correctly presented and this revision had no impact on our combined balance sheet, statement of operations or statement of cash flow as previously
reported.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than
not that some portion or all the deferred tax assets will not be realized. As of September 30, 2020, we have $9.8 million and $3.7 million in valuation
allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2019, we had $11.03 million and $0.03 million in
valuation allowance against our net domestic and foreign deferred tax assets, respectively.
We have U.S. federal net operating loss (“NOL”) carryforwards of $21.1 million, state NOL carryforwards of $22.7 million, and foreign NOL
carryforwards of $57.4 million. These carryforwards will expire at various dates beginning in 2026 and extending up to an unlimited period.
We have research and development carryforwards of $3.1 million.
Uncertain Tax Positions
ASC 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements. We regularly assess the outcome of
potential examinations in each of the taxing jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. We recognize
tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the
largest benefit which is more likely than not to be realized upon ultimate settlement. We recognize interest and penalties related to unrecognized tax
positions in our (benefit from) provision for income taxes line of our Consolidated and Combined Statements of Operations.
99
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (dollars in thousands):
Balance at the beginning of the year
Beginning balance adjustment
Increases related to tax positions taken from prior periods
Decreases related to tax positions taken from prior periods
Increases related to tax positions taken during current period
Decreases for tax settlements and lapse in statutes
Balance at the end of the year
2020
$
$
September 30,
2019
2018
63,369 $
3,392
5,158
—
328
(1,215)
71,032 $
5,738 $
—
1,312
(120)
56,439
—
63,369 $
5,833
—
103
(198)
—
—
5,738
For the periods prior to the Spin-Off, the unrecognized tax benefits reflected in the financial statements were determined using the Separate Return
Method. As a result of the Spin-Off, we recognized $3.4 million of liabilities for unrecognized tax benefits, determined on an asset and liability method,
that stay with the legal entities included in the Spin-Off of the Cerence business from the Parent, which were recorded through Parent company investment,
net of corresponding indemnification assets.
As of September 30, 2020, $71.0 million of the unrecognized tax benefits, if recognized, would impact our effective tax rate. We do not expect a
significant change in the amount of unrecognized tax benefits within the next 12 months. We recorded $0.4 million and $0.4 million of interest and
penalties related to uncertain tax positions as of September 30, 2020 and September 30, 2019, respectively.
We are subject to U.S. federal income tax, various state and local taxes and international income taxes in numerous jurisdictions. The 2017 through
2019 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.
21. Long-Term Debt
Long-term debt consisted of the following (in thousands):
3.00% Convertible Senior Notes due 2025, net of unamortized discount of $18,546 and deferred
issuance costs of $4,664 at September 30, 2020. Effective interest rate 6.29%.
Senior Credit Facilities, net of unamortized discount of $1,820 and deferred issuance costs of $287 at
September 30, 2020. Effective interest rate 4.02%.
Total debt
Less: current portion
Total long-term debt
$
$
$
151,791 $
121,331
273,122 $
(6,250)
266,872 $
—
—
—
—
—
September 30, 2020
September 30, 2019
The following table summarizes the maturities of our borrowing obligations as of September 30, 2020 (in thousands):
Fiscal Year
2021
2022
2023
2024
2025
Thereafter
Total before unamortized discount and issuance costs and current portion
Less: unamortized discount and issuance costs
Less: current portion of long-term debt
Total long-term debt
100
Convertible
Senior Notes
Senior Facilities
Total
$
$
$
— $
—
—
—
175,000
—
175,000 $
(23,209)
—
151,791 $
6,250 $
7,813
12,500
96,875
—
—
123,438 $
(2,107)
(6,250)
115,081 $
6,250
7,813
12,500
96,875
175,000
—
298,438
(25,316)
(6,250)
266,872
3.00% Senior Convertible Notes due 2025
On June 2, 2020, in an effort to refinance our debt structure, we issued $175.0 million in aggregate principal amount of 3.00% Convertible Senior
Notes due 2025 (the “Notes”), including the initial purchasers’ exercise in full of their option to purchase an additional $25.0 million principal amount of
the Notes, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Notes were $169.8 million after deducting
transaction costs. We used net proceeds from the issuance of the Notes to repay a portion of our indebtedness under the Credit Agreement, dated October 1,
2019, by and among the Company, the lenders and issuing banks party thereto and Barclays Bank PLC, as administrative agent (the “Existing Facility”).
The Notes are senior, unsecured obligations and will accrue interest payable semiannually in arrears on June 1 and December 1 of each year,
beginning on December 1, 2020, at a rate of 3.00% per year. The Notes will mature on June 1, 2025, unless earlier converted, redeemed, or repurchased.
The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the
Company’s election.
A holder of Notes may convert all or any portion of its Notes at its option at any time prior to the close of business on the business day immediately
preceding March 1, 2025 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on September
30, 2020 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive)
during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or
equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period
(the “measurement period”) in which the “trading price” per $1,000 principal amount of Notes for each trading day of the measurement period was less
than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we calls such Notes for
redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of
specified corporate events. On or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity
date, a holder may convert all or any portion of its Notes at any time, regardless of the foregoing.
The conversion rate will initially be 26.7271 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion
price of approximately $37.42 per share of our common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any
accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if we delivers a notice of redemption, we
will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event or convert
its Notes called for redemption in connection with such notice of redemption, as the case may be.
We may not redeem the Notes prior to June 5, 2023. We may redeem for cash all or any portion of the Notes, at our option, on a redemption date
occurring on or after June 5, 2023 and on or before the 31st scheduled trading day immediately before the maturity date, if the last reported sale price of our
common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading
day immediately preceding the date on which we provides notice of redemption, during any 30 consecutive trading day period ending on, and including,
the trading day immediately preceding the date on which we provides notice of redemption at a redemption price equal to 100% of the principal amount of
the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If we undergo a “fundamental change”, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Notes
at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to,
but excluding, the fundamental change repurchase date.
The Notes contain customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare the entire principal amount of all the Notes plus
accrued special interest, if any, to be immediately due and payable.
At issuance, we accounted for the Notes by allocating proceeds from the Notes into debt and equity components according to the accounting
standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The initial carrying amount of the debt component,
which approximates its fair value, was estimated by using an interest rate for nonconvertible debt, with terms similar to the Notes. The excess of the
principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in
capital. The debt discount is accreted to the carrying value of the Notes over their expected term as interest expense using the interest method. Upon
issuance of the Notes, we recorded $155.3 million as debt and $19.7 million as additional paid-in capital in stockholders’ equity. As of September 30, 2020,
the carrying amount of the equity component, net of taxes and transaction costs was $14.4 million.
We incurred transaction costs of $5.6 million relating to the issuance of the Notes. In accounting for these costs, we allocated the costs of the
offering between debt and equity in proportion to the fair value of the debt and equity recognized. The transaction
101
costs allocated to the debt component of approximately $5.0 million were recorded as a direct deduction from the face amount of the Notes and are being
amortized as interest expense over the term of the Notes using the interest method. The transaction costs allocated to the equity component of
approximately $0.6 million were recorded as a decrease in additional paid-in capital.
The interest expense recognized related to the Notes for the fiscal year ended September 30, 2020 was as follows (dollars in thousands):
Contractual interest expense
Amortization of debt discount
Amortization of issuance costs
Total interest expense related to the Notes
Year Ended
September 30, 2020
1,753
1,131
285
3,169
$
$
As of September 30, 2020, the conditions allowing holders of the Notes to convert have not been met and therefore the Notes are not yet
convertible.
Senior Credit Facilities
On June 12, 2020 (the “Financing Closing Date”), in connection with our effort to refinance our existing indebtedness, we entered into a Credit
Agreement, by and among the Borrower, the lenders and issuing banks party thereto and Wells Fargo Bank, N.A., as administrative agent (the “Credit
Agreement”), consisting of a four-year senior secured term loan facility in the aggregate principal amount of $125.0 million (the “Term Loan Facility”).
The net proceeds from the issuance of the Term Loan Facility were $123.0 million, which together with proceeds from the Convertible Senior Notes was
intended to pay in full all indebtedness under the Existing Facility, and paid fees and expenses in connection with the Senior Credit Facilities. We also
entered into a senior secured first-lien revolving credit facility in an aggregate principal amount of $50.0 million (the “Revolving Facility” and, together
with the Term Loan Facility, the “Senior Credit Facilities”), which shall be drawn on in the event that our working capital and other cash needs are not
supported by our operating cash flow. As of September 30, 2020, there were no amounts outstanding under the Revolving Facility.
Our obligations under the Credit Agreement are jointly and severally guaranteed by certain of our existing and future direct and indirect wholly
owned domestic subsidiaries, subject to certain exceptions customary for financings of this type. All obligations are secured by substantially all of our
tangible and intangible personal property and material real property, including a perfected first-priority pledge of all (or, in the case of foreign subsidiaries
or subsidiaries (“FSHCO”) that own no material assets other than equity interests in foreign subsidiaries that are “controlled foreign corporations” or other
FSHCOs, 65%) of the equity securities of our subsidiaries held by any loan party, subject to certain customary exceptions and limitations.
We are obligated to make quarterly principal payments on the last day of each quarter in an aggregate annual amount equal to 5.0% of the original
principal amount of the Term Loan Facility during the first two years of the Term Loan Facility, and 10% of the original principal amount of the Term Loan
Facility thereafter, with the balance payable at the maturity date. Quarterly principal payments commenced on September 30, 2020.
Interest accrues on outstanding borrowings under the Senior Facilities at a rate, at the option of the Borrower, of either (a) base rate determined by
reference to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the federal funds
effective rate, plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1% per annum (“ABR”) or (b) an adjusted LIBOR rate (“LIBOR”) (which shall
not be less than 0.50% per annum), in each case, plus an applicable margin. Initially, the applicable margin is LIBOR plus 3.00% or ABR plus
2.00%. Following delivery of a compliance certificate for the first full fiscal quarter after the Financing Closing Date, the applicable margins for the Senior
Credit Facilities is subject to a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the
applicable margin is LIBOR plus 3.50% or ABR plus 2.50%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to
1.00, the applicable margin is LIBOR plus 3.25% or ABR plus 2.25%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than
2.00 to 1.00, the applicable margin is LIBOR plus 3.00% or ABR plus 2.00%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but
greater than 1.50 to 1.00, the applicable margin is LIBOR plus 2.75% or ABR plus 1.75%; and (v) if the net total leverage ratio is less than or equal to 1.50
to 1.00, the applicable margin is LIBOR plus 2.50% or ABR plus 1.50%. Total interest expense relating to the Senior Credit Facilities for the fiscal year
ended September 30, 2020 was $1.5 million, reflecting the coupon and accretion of the discount.
Borrowings under the Credit Agreement are prepayable at our option without premium or penalty. We may request, and each lender may agree in its
sole discretion, to extend the maturity date of all or a portion of the Senior Credit Facilities subject to certain conditions customary for financings of this
type. The Credit Agreement also contains certain mandatory prepayment provisions in the
102
event that we incur certain types of indebtedness or receives net cash proceeds from certain non-ordinary course asset sales or other dispositions of
property, in each case subject to terms and conditions customary for financings of this type.
The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit our
and our subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to designate subsidiaries as
unrestricted, to make certain investments, to prepay certain indebtedness and to pay dividends, or to make other distributions or redemptions/repurchases,
in respect of our and our subsidiaries’ equity interests. In addition, the Credit Agreement contains financial covenants, each tested quarterly commencing
with the quarter ended September 30, 2020, (1) a net secured leveraged ratio of not greater than 3.25 to 1.00; (2) a net total leverage ratio of not greater
than 4.25 to 1.00; and (3) minimum liquidity of at least $75 million. The Credit Agreement also contains events of default customary for financings of this
type, including certain customary change of control events. As of September 30, 2020, we were in compliance with all Credit Agreement covenants.
Existing Facilities
On October 1, 2019, in connection with the Spin-Off, we entered into an Existing Facility consisting of a five-year senior secured term loan facility
in the aggregate principal amount of $270.0 million. The net proceeds from the issuance of the Existing Facility were $249.7 million, which was primarily
intended to finance a cash distribution of approximately $153.0 million to Nuance and provide approximately $110.0 million initial support for the cash
flow needs of the Cerence business. We also entered into a 54-month senior secured first-lien revolving credit facility in an aggregate principal amount of
$75.0 million, which shall be drawn on in the event that our working capital and other cash needs are not supported by our operating cash flow (the
“Existing Revolving Facility” and collectively with the Existing Facility, the “Existing Facilities”).
During June 2020, in connection with the issuance of the Notes and Senior Credit Facilities, we initiated prepayments towards our Existing
Facilities in the amount of $267.6 million in cash. As a result, we recorded $267.6 million extinguishment of debt and $19.3 million loss on the
extinguishment of debt. As of September 30, 2020, our obligations related to the Existing Facilities have been settled. Total interest expense relating to the
Existing Facilities for the fiscal year ended September 30, 2020 was $18.0 million, reflecting the coupon and accretion of the discount.
22. Quarterly Data (Unaudited)
The following information has been derived from unaudited Consolidated and Combined Financial Statements that, in the opinion of management,
include all recurring adjustments necessary for a fair statement of such information (in thousands, except per share data).
2020
Total revenues
Gross profit
Net (loss) income
Net (loss) income per share:
Basic
Diluted
Weighted-average common share outstanding:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
$
$
$
$
$
77,459 $
51,525 $
(11,762) $
86,495 $
57,765 $
12,495 $
74,810 $
47,207 $
(28,181) $
90,882 $
65,298 $
6,817 $
329,646
221,795
(20,631)
(0.33) $
(0.33) $
0.34 $
0.33 $
(0.77) $
(0.77) $
0.19 $
0.17 $
(0.57)
(0.57)
35,995
35,995
36,441
37,392
36,509
36,509
36,765
39,041
36,428
36,428
103
2019
Total revenues
Gross profit
Net income
Net income per share:
Basic
Diluted
Weighted-average common share outstanding:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal
Year
$
$
$
$
$
72,484 $
48,277 $
2,255 $
70,304 $
45,860 $
454 $
77,569 $
53,894 $
1,770 $
82,958 $
55,941 $
95,789 $
303,315
203,972
100,268
0.06 $
0.06 $
0.01 $
0.01 $
0.05 $
0.05 $
2.63 $
2.63 $
2.76
2.76
36,391
36,391
36,391
36,391
36,391
36,391
36,391
36,391
36,391
36,391
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act required by Exchange Act) Rules 13a-15(b) or 15d-15(b), our principal executive officer and principal financial
officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by Cerence in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and include controls and procedures designed to ensure that information required to be disclosed
by us in such reports is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management report on internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the
degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2020, utilizing the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on the
results of this assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of September 30,
2020, our internal control over financial reporting was effective based on those criteria.
Changes in internal control over financial reporting. There were no material changes in our internal control over financial reporting during the three
months ended September 30, 2020 that have materially affected, or are reasonability likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
104
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Our Board of Directors adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees on October 2, 2019. Our
Code of Business Conduct and Ethics can be found at our website: www.cerence.com. We will provide to any person without charge, upon request, a copy
of our Code of Business Conduct and Ethics. Such a request should be made in writing and addressed to Investor Relations, Cerence Inc., 15 Wayside
Road, Burlington, MA 01803.
To date, there have been no waivers under our Code of Business Conduct and Ethics. We will post any waivers, if and when granted, of our Code of
Business Conduct and Ethics on our website at www.cerence.com.
The additional information required by this Item for the Company will be set forth in the Company’s Proxy Statement for the 2021 Annual Meeting
of Stockholders, which information is hereby incorporated by reference.
Item 11. Executive Compensation.
The information required by this Item for the Company will be set forth in the Company’s Proxy Statement for the 2021 Annual Meeting of
Stockholders, which information is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item for the Company will be set forth in Company’s Proxy Statement for the 2021 Annual Meeting of
Stockholders, which information is hereby incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item for the Company will be set forth in the Company’s Proxy Statement for the 2021 Annual Meeting of
Stockholders, which information is hereby incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item for the Company will be set forth in Company’s Proxy Statement for the 2021 Annual Meeting of
Stockholders, which information is hereby incorporated herein by reference.
105
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as a part of this Report:
(1) All Financial Statements— See Index to Financial Statements in Item 8 of this Report;
PART IV
(2) Financial Statement Schedules — All schedules have been omitted as the requested information is inapplicable or the information is presented in
the financial statements or related notes included as part of this Report.
(3) Exhibits — See Item 15(b) of this Report below.
(b) Exhibits.
Exhibit
Index #
2.1
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6†
10.7†
10.8†
10.9†
Exhibit Description
Separation and Distribution Agreement between
Nuance Communications, Inc. and Cerence Inc.
Amended and Restated Certificate of
Incorporation of Cerence Inc.
Amended and Restated By-Laws of Cerence
Inc.
Indenture, dated as of June 2, 2020, between
Cerence Inc. and U.S. Bank, National
Association, as Trustee.
Form of Global Note, representing Cerence
Inc.’s 3.00% Convertible Senior Notes due 2025
(included as Exhibit A to the Indenture filed as
Exhibit 4.1).
Description of Registrant's Securities
X
Tax Matters Agreement between Nuance
Communications, Inc. and Cerence Inc.
Transition Services Agreement between Nuance
Communications, Inc. and Cerence Operating
Company
Employee Matters Agreement between Nuance
Communications, Inc. and Cerence Inc.
Intellectual Property Agreement between
Nuance Communications, Inc. and Cerence Inc.
Transitional Trademark License Agreement
between Nuance Communications, Inc. and
Cerence Inc.
Offer Letter of Sanjay Dhawan, dated February
14, 2019
Change of Control and Severance Agreement
between Sanjay Dhawan and Nuance
Communications, Inc.
Amendment to Offer Letter of Sanjay Dhawan,
dated August 26, 2019
Cerence 2019 Equity Incentive Plan
106
EXHIBIT INDEX
Filed
Herewith
Form
File No.
Exhibit
Incorporated by Reference
8-K
8-K
8-K
001-39030
001-39030
001-39030
8-K
001-39030
2.1
3.1
3.2
4.1
Filing
Date
October 2, 2019
October 2, 2019
October 2, 2019
June 2, 2020
8-K
001-39030
4.1
June 2, 2020
8-K
001-39030
10.1
October 2, 2019
8-K
8-K
8-K
001-39030
10.2
October 2, 2019
001-39030
10.3
October 2, 2019
001-39030
10.4
October 2, 2019
8-K
001-39030
10.5
October 2, 2019
10
10
10/A
S-8
001-39030
10.6
August 21, 2019
001-39030
10.7
August 21, 2019
001-39030
333-234040
10.8
4.3
September 4,
2019
October 2, 2019
S-8
10-K
10-K
333-234040
001-39030
001-39030
4.6
10.14
10.15
October 2, 2019
December 19,
2020
December 19,
2020
8-K
001-39030
10.1
June 17, 2020
8-K
001-39030
10.2
June 17, 2020
8-K
001-39030
10.3
June 17, 2020
10.10†
10.11†
10.12
10.13†
10.14†
10.15
10.16
10.17
10.18†
21.1
23.1
24.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
Cerence 2019 Employee Stock Purchase Plan
Form of Change of Control and Severance
Agreement - NEO
Indemnification Agreement
Restricted Stock Unit Award Agreement
Performance-Based Restricted Stock Unit
Award Agreement
Credit Agreement, dated June 12, 2020, by and
between Cerence Inc., the lenders and issuing
banks party thereto and Wells Fargo Bank, N.A.,
as administrative agent.
Subsidiary Guarantee Agreement, dated June 12,
2020, by and between certain domestic
subsidiaries of Cerence, as subsidiary
guarantors, and Wells Fargo Bank, N.A., as
administrative agent.
Collateral Agreement, dated June 12, 2020, by
and between Cerence Inc. and certain
subsidiaries of Cerence, as pledgors, and Wells
Fargo Bank, N.A., as collateral agent.
Amendment No. 1 to Cerence 2019 Equity
Incentive Plan
Subsidiaries of the Registrant
Consent of BDO USA, LLP, Independent
Registered Public Accounting Firm.
Power of Attorney (including in signature pages
hereto)
Certification of Principal Executive Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document.
X
X
X
X
X
X
X
X
X
X
X
X
107
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Calculation
Linkbase Document.
XBRL Taxonomy Extension Definition
Linkbase Document.
XBRL Taxonomy Extension Label Linkbase
Document.
XBRL Taxonomy Extension Presentation
Linkbase Document.
† Management contract or compensatory plan or arrangement
Item 16. Form 10-K Summary
Not applicable.
X
X
X
X
108
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: November 19, 2020
CERENCE INC.
By:
/s/ Sanjay Dhawan
Sanjay Dhawan
Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints each of Sanjay
Dhawan, Mark Gallenberger and Leanne Fitzgerald, acting singly, his or her true and lawful agent, proxy and attorneys-in-fact, each with full power of
substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, and hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This
power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name
/s/ Sanjay Dhawan
Sanjay Dhawan
/s/ Mark Gallenberger
Mark Gallenberger
/s/ Arun Sarin
Arun Sarin
/s/ Thomas Beaudoin
Thomas Beaudoin
/s/ Marianne Budnik
Marianne Budnik
/s/ Sanjay Jha
Sanjay Jha
/s/ Kristi Ann Matus
Kristi Ann Matus
/s/ Alfred Nietzel
Alfred Nietzel
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date
November 19, 2020
November 19, 2020
Chairman of the Board
November 19, 2020
Director
Director
Director
Director
Director
109
November 19, 2020
November 19, 2020
November 19, 2020
November 19, 2020
November 19, 2020
Description of the Registrant’s Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended
Exhibit 4.3
The summary of the general terms and provisions of the registered securities of Cerence Inc. (“Cerence,” “we,” or “our”) set forth below
does not purport to be complete and is subject to and qualified in its entirety by reference to our Amended and Restated Certificate of
Incorporation (our “certificate of incorporation”) and our Amended and Restated By-laws (our “by-laws” and, together with our certificate of
incorporation, our “Charter Documents”), each of which is incorporated by reference as an exhibit to our most recent Annual Report on Form
10-K filed with the Securities and Exchange Commission. We encourage you to read our Charter Documents and the applicable provisions of
the General Corporation Law of the State of Delaware (the “DGCL”) for additional information.
General
Our authorized capital stock consists of 560,000,000 shares of common stock, $0.01 par value per share, and 40,000,000 shares of preferred
stock, $0.01 par value per share.
Common Stock
Only our common stock is registered under Section 12 of the Securities Exchange Act of 1934, as amended.
Dividends
Holders of shares of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors (the “Board”) at
its discretion out of funds legally available for that purpose, subject to the preferential rights of any preferred stock that may be outstanding.
The timing, declaration, amount and payment of future dividends depends on our financial condition, earnings, capital requirements and debt
service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant.
Additionally, the terms of the Credit Agreement we entered into on June 12, 2020, between us, the lenders and issuing banks party thereto
and Wells Fargo Bank, N.A. as administrative agent, limit our ability to pay cash dividends. Our Board makes all decisions regarding our
payment of dividends from time to time in accordance with applicable law.
Voting Rights
The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders.
Other Rights
Subject to the preferential liquidation rights of any preferred stock that may be outstanding upon our liquidation, dissolution or winding-up,
the holders of our common stock are entitled to share ratably in our assets legally available for distribution to our stockholders.
Fully Paid
The issued and outstanding shares of our common stock are fully paid and non-assessable. Any additional shares of common stock that we
may issue in the future will also be fully paid and non-assessable.
The holders of our common stock do not have preemptive rights or preferential rights to subscribe for shares of our capital stock.
Preferred Stock
Our certificate of incorporation authorizes our Board to designate and issue from time to time one or more series of preferred stock without
stockholder approval. Our Board may fix and determine the preferences, limitations and relative rights of each series of preferred stock.
There are no present plans to issue any shares of preferred stock.
No shares of preferred stock are outstanding as of the date of our Annual Report on Form 10-K with which this Exhibit 4.3 is filed as an
exhibit.
Anti-Takeover Effects of Delaware Law and Provisions of our Charter Documents
Certain provisions of the DGCL and our Charter Documents contain provisions that could be deemed to have an anti-takeover effect and may
delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that
might result in a premium being paid over the market price for the shares held by stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our Board and in the policies formulated by our Board and to discourage certain
types of transactions that may involve an actual or threatened change of control.
Charter Document Provisions
Our Charter Documents include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our Board
or management team, including the following:
•
•
Classified Board. Our certificate of incorporation provides that, until the annual stockholder meeting in the year that is three years
after October 1, 2019 (the date of our tax free spin-off from Nuance Communications), our Board will be divided into three
classes, with each class consisting, as nearly as may be possible, of one-third of the total number of directors. The directors
designated as Class I directors have terms expiring at the first annual meeting of stockholders, which we expect to hold in 2020.
The directors designated as Class II directors have terms expiring at the following year’s annual meeting, which we expect to hold
in 2021, and the directors designated as Class III directors have terms expiring at the following year’s annual meeting, which we
expect to hold in 2022. Commencing with the first annual meeting following October 1, 2019, directors elected to succeed those
directors whose terms then expire will be elected for a term of office to expire at the 2023 annual meeting. Beginning at the 2023
annual meeting, all of our directors will stand for election each year for annual terms, and our Board will therefore no longer be
divided into three classes. Before our Board is declassified, it would take at least two elections of directors for any individual or
group to gain control of our Board. Accordingly, while the classified board is in effect, these provisions could discourage a third
party from initiating a proxy contest, making a tender offer or otherwise attempting to control us.
Removal. Our certificate of incorporation provides that (i) prior to our Board being declassified as discussed above, our
stockholders may remove directors only for cause and (ii) after our Board has been fully declassified, our stockholders may
remove directors with or without cause. Removal requires the affirmative vote of holders of shares representing at least a majority
of the voting power of the then-outstanding shares of all classes and series of our capital stock entitled generally to vote on the
election of our directors.
•
•
•
•
•
•
Blank Check Preferred Stock. Our certificate of incorporation authorizes our Board to designate and issue, without any further
vote or action by the stockholders, up to 40,000,000 shares of preferred stock from time to time in one or more series and, with
respect to each such series, to fix the number of shares constituting the series and the designation of the series, the voting powers
(if any) of the shares of the series, and the preferences and relative, participating, optional and other rights, if any, and any
qualifications, limitations or restrictions, of the shares of such series. The ability to issue such preferred stock could discourage
potential acquisition proposals and could delay or prevent a change in control.
No Stockholder Action by Written Consent. Our certificate of incorporation expressly excludes the right of our stockholders to act
by written consent. Stockholder action must take place at an annual meeting or at a special meeting of our stockholders.
Special Stockholder Meetings. Our Charter Documents provide that a special meeting of our stockholders may only be called by
our Board, the Chairman of our Board or our Chief Executive Officer, or at the request of holders of not less than 20% of the
outstanding shares of the common stock of Cerence.
Requirements for Advance Notification of Stockholder Nominations and Proposals. Under our by-laws, stockholders of record are
able to nominate persons for election to our Board or bring other business constituting a proper matter for stockholder action only
by providing proper notice to our secretary. In the case of annual meetings, proper written notice must be given, generally between
90 and 120 days prior to the first anniversary of the prior year’s annual meeting as first specified in the notice of meeting (without
regard to any postponements or adjournments of such meeting after such notice was first sent). In the case of special meetings,
proper notice must be given no earlier than the 90th day prior to the relevant meeting and no later than the later of the 60th day
prior to such meeting or the 10th day following the public announcement of the meeting. Such notice must include, among other
information, certain information with respect to each stockholder nominating persons for election to the Board (including, the
name and address, the number of shares directly or indirectly held by such stockholder, a description of any agreement with
respect to the business to be brought before the annual meeting, a description of any derivative instruments based on or linked to
the value of or return on our securities as of the date of the notice, a description of any proxy, contract or other relationship
pursuant to which such stockholder has a right to vote any shares of our stock and any profit-sharing or performance-related fees
that such stockholder is entitled to, based on any increase or decrease in the value of our securities, as of the date of such notice).
Such notice must also include a representation that such stockholder is a holder of record of our common stock as of the date of
the notice, each stockholder nominee’s written consent to being named as a nominee and to serving as a director if elected, a
completed questionnaire and representation that such person has not and will not give any commitment as to how such person will
act or vote if elected as a director or becomes a party to any agreement with respect to any compensation, reimbursement or
indemnification in connection with service as a director, and that such person will comply with all policies applicable to directors,
a description of all compensation and other monetary agreements during the past three years and a representation as to whether
such stockholder intends to solicit proxies.
Cumulative Voting. The DGCL provides that stockholders are denied the right to cumulate votes in the election of directors unless
the company’s certificate of incorporation provides otherwise. Our certificate of incorporation does not provide for cumulative
voting.
Amendments to Certificate of Incorporation and By-Laws. The DGCL provides that the
affirmative vote of holders of a majority of a company’s voting stock then outstanding is required to amend the company’s
certificate of incorporation unless the company’s certificate of incorporation provides a higher threshold, and our certificate of
incorporation does not provide for a higher threshold. Our certificate of incorporation provides that our by-laws may be amended
by a majority of our Board or by the affirmative vote of holders of at least a majority of our voting stock entitled to vote in the
election of directors.
Delaware Anti-Takeover Statute
We are subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of
three years following the date the person became an interested stockholder unless:
•
•
•
prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested stockholder;
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the voting stock outstanding, but not for determining the outstanding voting stock owned by the
interested stockholder, (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock
plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation
and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock which is not owned by the interested stockholder.
Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect the existence of
this provision to have an anti-takeover effect with respect to transactions our Board does not approve in advance. We also anticipate that
Section 203 of the DGCL may discourage business combinations or other attempts that might result in a premium over the market price for
the shares of common stock held by our stockholders.
The provisions of Delaware law and our Charter Documents could have the effect of discouraging others from attempting hostile takeovers
and, as a consequence, may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or
rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that
these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
Exclusive Forum
Our certificate of incorporation provides, in all cases to the fullest extent permitted by law, that unless we consent in writing to the selection
of an alternative forum, the Court of Chancery located within the State of Delaware will be the sole and exclusive forum for any derivative
action or proceeding brought on behalf of Cerence, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or
other employee or stockholder of Cerence to Cerence or Cerence’s stockholders, any action asserting a claim arising pursuant to the DGCL or
as to which the DGCL confers jurisdiction on the Court of Chancery located in the State of Delaware, any action asserting a claim governed
by the internal affairs doctrine or any other action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL.
However, if the Court of Chancery within the State of Delaware does not have jurisdiction, the action may be brought in any other state or
federal court located within the State of Delaware. Further, this exclusive forum provision does not apply to suits brought to enforce a duty or
liability created by the Exchange Act or the Securities Act, except that it may apply to such suits if brought derivatively on behalf of Cerence.
There is, however, uncertainty as to whether a court would enforce such provision in connection with suits to enforce a duty or liability
created by the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, if brought derivatively on behalf of
Cerence, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and
regulations thereunder.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.
Listing
Our common stock is listed on the NASDAQ Global Select Market, under the ticker symbol “CRNC.”
Exhibit 10.13
Name:
Number of Restricted Stock Units subject to Award:
Date of Grant:
Vesting Commencement Date
[●]
[●]
[●]
[●]
CERENCE INC.
2019 EQUITY INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
This agreement, including any appendix, exhibit and/or addendum hereto (collectively, this “Agreement”), evidences
an award (the “Award”) of restricted stock units granted by Cerence Inc., a Delaware corporation (the “Company”), to the
individual named above (the “Participant”), pursuant to and subject to the terms of the Cerence Inc. 2019 Equity Incentive Plan
(as from time to time amended and in effect, the “Plan”). Except as otherwise defined herein, all capitalized terms used herein
have the same meaning as in the Plan.
1.
Grant of Restricted Stock Unit Award. The Company grants to the Participant on the date set forth above (the “Date of
Grant”) the number of restricted stock units (the “RSUs”) set forth above giving the Participant the conditional right to receive,
without payment and pursuant to and subject to the terms and conditions set forth in this Agreement and in the Plan, one share of
Stock (a “Share”) with respect to each RSU forming part of the Award, subject to adjustment pursuant to Section 7 of the Plan in
respect of transactions occurring after the date hereof.
2.
Vesting; Cessation of Employment.
(a)
Vesting. Unless earlier terminated, forfeited, relinquished or expired, the RSUs will vest in accordance with
the terms of Exhibit A attached hereto.
(b)
Cessation of Employment. Except as described in Exhibit A attached hereto, automatically and immediately
upon the cessation of the Participant’s Employment any then unvested RSUs and, if such termination is for Cause or occurs in
circumstances that in the determination of the Administrator would have constituted grounds for the Participant’s Employment to
be terminated for Cause (in each case, without regard to the lapsing of any required notice or cure periods in connection
therewith), any vested RSUs will terminate and be forfeited for no consideration.
3.
Agreement Not to Compete; Non-Solicitation
(a)
Participant hereby agrees for a period commencing on the date hereof and ending one (1) year following the
termination of Participant’s employment with Company, Participant shall not: (i) provide services to a Competitor in any role or
position (as employee, consultant or otherwise) that would involve Conflicting Business Activities; (ii) knowingly for participate
in soliciting or communication with a Company employee on behalf of a Competitor for the purpose of persuading or helping the
Company employee to end or reduce his or her relationship with the Company and (iii) knowingly or participate or solicit or
communicating with any established
customer of Company in pursuit of a Competing Line of Business if Participant had business-related contact with that customer.
(b)
Definitions
(i)
(ii)
For purposes of 3(a) and 3(b) the following definitions apply
“Competitor” means an individual, corporation, other business entity or separately operated
business unit of an entity that engages in a Competing Line of Business.
(iii)
“Competing Line of Business” means a business that involves a product or service offered or
under development by anyone other than Cerence that would replace or compete with any product or service offered, to be
offered, or under development by Cerence with which I had involvement while employed by Cerence (unless Cerence is no
longer engaged in or planning to engage in that line of business).
(iv)
“Conflicting Business Activities” means: engaging in Restricted Activities as defined below. For
purposes of this clause, “Restricted Activities” means engaging in job duties or business-related activities (as an employee,
consultant, or otherwise) for a Competitor that: are the same as, or substantially similar to, the job duties or business-related
activities in which I participate while employed by Cerence; or otherwise could put Cerence’s Confidential Business Information
at risk.
4.
Delivery of Shares. Subject to Section 4 below, the Company shall, as soon as practicable upon the vesting of any
RSUs subject to this Award (but in no event later than 30 days following the date on which such RSUs vest), effect delivery of
the Shares with respect to such vested RSUs to the Participant (or, in the event of the Participant’s death, to the person to whom
the Award has passed by will or the laws of descent and distribution). No Shares will be issued pursuant to this Award unless and
until all legal requirements applicable to the issuance or transfer of such Shares have been complied with to the satisfaction of the
Administrator.
5.
Forfeiture; Recovery of Compensation. The Administrator may cancel, rescind, withhold or otherwise limit or restrict
this Award at any time if the Participant is not in compliance with all applicable provisions of this Agreement and the Plan. By
accepting, or being deemed to have accepted, this Award, the Participant expressly acknowledges and agrees that his or her
rights, and those of any permitted transferee of this Award, under this Award, including the right to any Shares acquired under
this Award or proceeds from the disposition thereof, are subject to Section 6(a)(5) of the Plan (including any successor
provision). The Participant further agrees to be bound by the terms of any clawback or recoupment policy of the Company that
applies to incentive compensation that includes Awards such as the RSUs. Nothing in the preceding sentence may be construed
as limiting the general application of Section 9 of this Agreement.
6.
Dividends; Other Rights. This Award may not be interpreted to bestow upon the Participant any equity interest or
ownership in the Company or any subsidiary prior to the date on which the Company delivers Shares to the Participant. The
Participant is not entitled to vote any Shares by reason of the granting of this Award or to receive or be credited with any
dividends declared and payable on any Share prior to the date on which any such Share is delivered to the
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Participant hereunder. The Participant will have the rights of a shareholder only as to those Shares, if any, that are actually
delivered under this Award.
7.
8.
Nontransferability. This Award may not be transferred except as expressly permitted under Section 6(a)(3) of the Plan.
Taxes.
(a)
Responsibility for Taxes. The Participant acknowledges that, regardless of any action taken by the Company
or, if different, the Participant’s employer (the “Employer”), the ultimate liability for all income tax, social insurance, payroll tax,
fringe benefits tax, payment on account and other tax-related items and withholdings related to the Participant’s participation in
the Plan and any Award granted thereunder and legally applicable to the Participant as a result of participation in the Plan
(collectively, “Tax-Related Items”) is and remains the Participant’s responsibility and may exceed the amount (if any) withheld
by the Company or the Employer. The Participant further acknowledges that Company and the Employer (i) make no
representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs,
including, but not limited to, the grant, vesting or settlement of the RSUs, the delivery of Shares, the subsequent sale of any
Shares acquired in respect of the RSUs or the receipt of any dividend equivalents or dividends, if applicable; and (ii) do not
commit to and are under no obligation to structure the terms of the grant or any aspect of the RSUs to reduce or eliminate the
Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, if the Participant is subject to Tax-
Related Items in more than one jurisdiction, the Participant acknowledges that the Company and/or the Employer (or former
employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
(b)
Withholding. Prior to the relevant taxable or withholding event, as applicable, the Participant agrees to make
arrangements satisfactory to the Company to satisfy all Tax-Related Items. In this regard, for any Participant who is a U.S.
taxpayer, unless otherwise determined by the Administrator, the Company and/or the Employer’s required U.S. tax withholding
obligation with regard to all Tax-Related Items shall be satisfied in full by an arrangement whereby (i) the Company issues to a
broker designated by the Company and acting on behalf of the Participant a number of Shares to be issued upon settlement of the
RSUs sufficient to satisfy the withholding amount due along with any applicable third-party commission with irrevocable
instructions to sell such Shares (“Sale-to-Cover”) and (ii) the proceeds from such Sale-to-Cover will be remitted to the Company
and/or the Employer. In the event the proceeds from the Sale-to-Cover are insufficient to fully satisfy the applicable withholding
taxes with regard to all Tax-Related Items, the Participant authorizes withholding from payroll and any other amounts payable to
the Participant, in the same calendar year, and otherwise agrees to make adequate provision through the submission of cash, a
check or its equivalent for any sums required to satisfy the remaining applicable withholding taxes. Given that the Sale-to-Cover
is both mandatory and non-discretionary, it is the intent of the parties that this Section 8(b) comply with the requirements of Rule
10b5-1(c)(1)(i)(B) under the Exchange Act, and the Agreement will be interpreted to comply with the requirements of Rule
10b5-1(c) under the Exchange Act. Unless the withholding tax obligations of the Company and/or the Employer are satisfied by
the Participant in accordance with this provision, the Company shall have no obligation to issue any Shares on the Participant’s
behalf pursuant to the vesting of this Award. For all Participants who are not U.S. taxpayers, the
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Participant authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy their
withholding obligations with regard to all Tax-Related Items by one or a combination of the following: (i) withholding from the
Participant’s wages or other compensation payable to the Participant by the Company and/or the Employer; (ii) requiring the
Participant to tender a payment in cash in an amount equal to the Tax-Related Items to the Company and/or the Employer; (iii)
withholding from the proceeds from the sale of Shares acquired upon settlement of the RSUs, either through a voluntary sale or
through a mandatory sale arranged by the Company (on the Participant’s behalf pursuant to this authorization without further
consent); (iv) withholding Shares to be issued upon settlement of the RSUs; and/or (v) any other method determined by the
Company and permitted under applicable laws.
Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering applicable
minimum statutory withholding rates or other applicable withholding rates, including applicable maximum rates in the
Participant’s jurisdiction, in which case the Participant may receive a refund of any over-withheld amount in cash and will not be
entitled to the equivalent amount in Shares. If the obligation for Tax-Related Items is satisfied by withholding Shares, for tax
purposes, the Participant will be deemed to have been issued the full number of Shares subject to the vested RSUs,
notwithstanding that Shares were held back solely for the purpose of satisfying the Tax-Related Items. The Company may refuse
to deliver the Shares or the proceeds from the sale of the Shares if the Participant fails to comply with the Participant’s
obligations in connection with the Tax-Related Items as described in this Section 7(b).
(c)
Section 409A. Subject to Section 11(b) of the Plan, this Award is intended to be exempt from Section 409A
as a short-term deferral thereunder and shall be construed and administered in accordance with that intent.
Effect on Employment. Neither the grant of this Award, nor the issuance of Shares upon the vesting of this Award, will
9.
give the Participant any right to be retained in the employ or service of the Company or any of its subsidiaries, affect the right of
the Company or any of its subsidiaries to discharge the Participant at any time, or affect any right of the Participant to terminate
his or her Employment at any time.
Provisions of the Plan. This Agreement is subject in its entirety to the provisions of the Plan, which are incorporated
10.
herein by reference. A copy of the Plan as in effect on the Date of Grant has been made available to the Participant. By
accepting this Award, the Participant agrees to be bound by the terms of the Plan and this Agreement. In the event of any conflict
between the terms of this Agreement and the Plan, the terms of the Plan will control.
11.
Non-U.S. and Country-Specific Provisions. The RSUs and any Shares subject to the RSUs shall be subject to any
special terms and conditions set forth in Exhibit B attached hereto. Moreover, if the Participant relocates to one of the countries
included in Exhibit B, the special terms and conditions for such country will apply to the Participant, to the extent the Company
determines that the application of such terms and conditions is necessary or advisable for legal or administrative
purposes. Exhibit B constitutes part of this Agreement.
12.
participation in the Plan, on the RSUs and on any Shares subject
Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant’s
-4-
to the RSUs, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require
the Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
13.
Acknowledgements. The Participant acknowledges and agrees that (i) this Agreement may be executed in two or more
counterparts, each of which will be an original and all of which together will constitute one and the same instrument; (ii) this
Agreement may be executed and exchanged using facsimile, portable document format (PDF) or electronic signature, which, in
each case, will constitute an original signature for all purposes hereunder; and (iii) such signature by the Company will be
binding against the Company and will create a legally binding agreement when this Agreement is countersigned by the
Participant.
[Signature page follows.]
-5-
The Company, by its duly authorized officer, and the Participant have executed this Agreement as of the date first set
forth above.
CERENCE INC.
By:
Name:
Title:
Agreed and Accepted:
By
[●]
Signature Page to Restricted Stock Unit Award Agreement
EXHIBIT A
Vesting Schedule
This Exhibit A describes the terms and conditions upon which the RSUs will become vested. All capitalized terms used in this
Exhibit A, unless separately defined, have the meanings set forth in the Restricted Stock Unit Award Agreement to which this
Exhibit A is attached.
Unless earlier terminated, forfeited, relinquished or expired, the RSUs shall vest on the following schedule:
Number of RSUs
[●]
[●]
[●]
[●]
[●]
[●]
[●]
Vesting Date
[●]
[●]
[●]
[●]
[●]
[●]
[●]
subject, in each case, to the Participant remaining in continuous Employment from the Date of Grant through such vesting date.
EXHIBIT B
NON-U.S. AND COUNTRY-SPECIFIC PROVISIONS
Terms and Conditions
This Exhibit B includes special terms and conditions applicable to the Participant if the Participant resides, is employed or is
otherwise subject to laws outside the U.S. and, as applicable, in one of the countries listed below. These terms and conditions
supplement or replace (as indicated) the terms and conditions set forth in the Restricted Stock Unit Award Agreement to which it
is attached. All capitalized terms used in this Exhibit B, unless separately defined, have the meanings set forth in the Restricted
Stock Unit Award Agreement to which this Exhibit B is attached.
Notifications
This Exhibit B also includes information regarding exchange controls and certain other issues of which the Participant should be
aware with respect to his or her participation in the Plan. The information is based on the exchange control, securities and other
laws in effect in the respective countries as of June 2019. Such laws are often complex and change frequently. In addition, other
laws and regulations generally applicable to the acquisition, holding or disposal of securities and financial instruments as well as
cross-border fund transfers may apply to the Participant. As a result, the Participant should not rely on the information noted
herein as the only source of information relating to the consequences of participation in the Plan because the information may be
out of date at the time the RSUs vest or the Participant receives or sells Shares.
In addition, the information in this Exhibit B is general in nature and may not apply to the Participant’s particular situation. The
Company is not in a position to assure the Participant of any particular result. Accordingly, the Participant should seek
appropriate professional advice as to how the relevant laws in the relevant country apply to the Participant’s situation.
* * * * *
If the Participant is a citizen or resident of a country other than the one in which the Participant is currently residing and/or
working, transfers employment and/or residency after the date of grant, or is considered a resident of another country for local
law purposes, the terms and conditions and information contained herein may not be applicable to the Participant. The Company
shall, in its sole discretion, determine to what extent the terms and conditions herein shall apply to the Participant in such a case.
TERMS AND CONDITIONS FOR ALL PARTICIPANTS OUTSIDE THE U.S.
1.
Nature of Grant. By accepting the grant of RSUs, the Participant acknowledges, understands and agrees that:
(a)
the Plan is established voluntarily by the Company, is discretionary in nature and may be amended,
suspended or terminated by the Company at any time to the extent permitted in the Plan;
(b)
the grant of RSUs is exceptional, voluntary and occasional and does not create any contractual or other right
to receive future grants of restricted stock units, or benefits in lieu of restricted stock units, even if restricted stock units have
been awarded in the past;
(c)
all decisions with respect to future grants of restricted stock units, if any, will be at the sole discretion of the
Company;
(d)
(e)
the Participant is voluntarily participating in the Plan;
the grant of RSUs and any Shares subject to the RSUs, and the income from and value of same, are not
intended to replace any pension rights or compensation;
(f)
unless otherwise agreed with the Company, the RSUs and the Shares subject to the RSUs, and the income
from and value of same, are not granted as consideration for, or in connection with, any service the Participant may provide as a
director of a subsidiary of the Company;
(g)
the future value of the Shares underlying the RSUs is unknown, indeterminable and cannot be predicted with
certainty;
(h)
no claim or entitlement to compensation or damages shall arise from forfeiture of the RSUs resulting from (i)
the application of any compensation recovery or clawback policy adopted by the Company or required by applicable laws or (ii)
termination of the Participant’s Employment (for any reason whatsoever and whether or not later found to be invalid or in breach
of employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment
agreement, if any);
(i)
for purposes of the RSUs, the Participant’s Employment will be considered terminated as of the date the
Participant is no longer actively providing services to the Company or a subsidiary of the Company (regardless of the reason for
such termination and whether or not later to be found invalid or in breach of employment laws in the jurisdiction where the
Participant is employed or the terms of the Participant’s employment agreement, if any) and, unless otherwise expressly provided
in the Agreement or determined by the Company, the Participant’s right to vest in the RSUs under the Plan, if any, will terminate
as of such date and will not be extended by any notice period (e.g., the Participant’s period of service would not include any
contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction
where the Participant is employed or the terms of the Participant’s employment agreement, if any); the Administrator shall have
the exclusive discretion to determine when the Participant is no longer actively providing services for purposes of the RSUs, and
(j)
neither the Company, the Employer nor any subsidiary of the Company shall be liable for any exchange rate
fluctuation between the Participant’s local currency and the United States Dollar that may affect the value of the RSUs or of any
amounts due to the Participant pursuant to the vesting and settlement of the RSUs or the subsequent sale of any Shares acquired
upon settlement.
Additional Conditions to Issuance of Shares. If at any time the Company determines, in its discretion, that the listing,
2.
registration or qualification of the Shares upon any securities exchange or under any law (including any U.S. or non-U.S. federal,
state or local law), or the consent or approval of any governmental regulatory authority is necessary or desirable as a condition to
the issuance of Shares to the Participant, such issuance will not occur unless and until such listing, registration, qualification,
consent or approval has been effected or obtained free of any conditions not acceptable to the Company.
3.
No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company
making any recommendations regarding the Participant’s participation in the Plan or sale of the Shares acquired upon vesting and
settlement of the RSUs. The Participant should consult with his or her own personal tax, legal and financial advisors regarding
his or her participation in the Plan before taking any action related to the Plan.
4.
Data Privacy. If the Participant would like to participate in the Plan, the Participant will need to review the
information provided in this Section 4 and, where applicable, declare the Participant’s consent to the processing and/or
transfer of personal data as described below.
(a) EEA+ Controller and Representative. If the Participant is based in the European Union (“EU”), the European
Economic Area, Switzerland or, if and when the United Kingdom leaves the European Union, the United
Kingdom (collectively “EEA+”), Participant should note that the Company, with its registered address at [insert
address], United States of America, is the controller responsible for the processing of the Participant’s personal
data in connection with the Agreement and the Plan. The Company’s representative in the EU is [insert name,
address and contact details of EU representative designated by the Company according to Article 27 GDPR].
(b) Data Collection and Usage. The Company collects, uses and otherwise processes certain personal data about
the Participant, including, but not limited to, the Participant’s name, home address and telephone number,
email address, date of birth, social insurance number, passport or other identification number (e.g., resident
registration number), salary, nationality, job title, any shares of stock or directorships held in the Company,
details of all RSUs or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or
outstanding in the Participant’s favor, which the Company receives from the Participant, Participant’s
Employer or otherwise in connection with this Agreement or the Plan (“Data”), for the purposes of
implementing, administering and managing the Plan and allocating Shares pursuant to the Plan.
If the Participant is based in the EEA+, the legal basis, where required, for the processing of Data by the
Company is the necessity of the data processing for the
Company to (i) perform its contractual obligations under this Agreement, (ii) comply with legal obligations
established in the EEA+, or (iii) pursue the legitimate interest of complying with legal obligations established
outside of the EEA+.
If the Participant is based outside of the EEA+, the legal basis, where required, for the processing of Data by
the Company is the Participant’s consent, as further described below.
(c) Stock Plan Administration Service Providers. The Company transfers Data to E*TRADE Corporate Financial
Services, Inc., and E*TRADE Securities LLC (collectively, “E*TRADE”), an independent service provider,
which is assisting the Company with the implementation, administration and management of the Plan. In the
future, the Company may select a different service provider and share Data with such other provider serving in
a similar manner. E*TRADE will open an account for the Participant to receive and trade Shares acquired
under the Plan. The Participant may be asked to agree on separate terms and data processing practices with
E*TRADE, with such agreement being a condition to the ability to participate in the Plan.
(d)
International Data Transfers. In the event the Participant resides, works or is otherwise located outside of the
U.S., Data will be transferred from the Participant’s country to the U.S., where the Company and its service
providers are based. The Participant understands and acknowledges that the U.S. is not subject to an unlimited
adequacy finding by the European Commission and might not provide a level of protection of personal data
equivalent to the level of protection in the Participant’s country. As a result, in the absence of a
self‑certification of the data recipient in the U.S. under the EU/U.S. Privacy Shield Framework and the
implementation of appropriate safeguards such as the Standard Contractual Clauses adopted by the EU
Commission, the processing of personal data might not be subject to substantive data processing principles or
supervision by data protection authorities. In addition, data subjects might have no or less enforceable rights
regarding the processing of their personal data.
Neither the Company nor E*TRADE is currently self-certified under the EU/U.S. Privacy Shield
Framework. If the Participant is based in the EEA+, Data will be transferred from the EEA+ to the Company
based on the EU Standard Contractual Clauses. The Participant may request a copy of such appropriate
safeguards by contacting [insert contact details, e.g., Company’s data privacy officer]. The onward transfer of
Data from the Company to E*TRADE or, as the case may be, a different service provider of the Company is
conducted without appropriate safeguards based solely on the Participant’s consent, as further described below.
If the Participant is based outside of the EEA+, the Company’s legal basis, where required, for the transfer of
Data from the Participant’s country to the Company and from the Company onward to E*TRADE or, as the
case may be, a different service provider of the Company is the Participant’s consent, as further described
below.
(e) Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer
and manage the Participant’s participation in the Plan, or as required to comply with legal or regulatory
obligations, including under tax and security laws.
(f) Data Subject Rights. The Participant may have a number of rights under data privacy laws in his or her
jurisdiction. Depending on where the Participant is based, such rights may include the right to (i) request
access or copies of Data the Company processes, (ii) the rectification or amendment of incorrect or incomplete
Data, (iii) the deletion of Data, (iv) request restrictions on the processing of Data, (v) object to the processing of
Data for legitimate interests, (vi) the portability of Data, (vi) lodge complaints with competent authorities in the
Participant’s jurisdiction, and/or to (viii) receive a list with the names and addresses of any potential recipients
of Data. To receive additional information regarding these rights or to exercise these rights, the Participant can
contact [insert contact details, e.g., Company’s data privacy officer].
(g) Necessary Disclosure of Personal Data. The Participant understands that providing the Company with Data is
necessary for the performance of the Agreement and that the Participant’s refusal to provide Data would make
it impossible for the Company to perform its contractual obligations and may affect the Participant’s ability to
participate in the Plan.
(h) Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and
the Participant is providing any consents referred to herein on a purely voluntary basis. The Participant
understands that he or she may withdraw any such consent at any time with future effect for any or no
reason. If the Participant does not consent, or if the Participant later seeks to withdraw the Participant’s
consent, the Participant’s salary from or employment and career with the Employer will not be affected; the
only consequence of refusing or withdrawing the Participant’s consent is that the Company would not be able
to grant the RSUs or other awards to the Participant or administer or maintain the RSUs. For more
information on the consequences of refusal to consent or withdrawal of consent, the Participant should contact
[insert contact, e.g., Company’s data privacy officer].
Declaration of Consent. If the Participant is based in the EEA+, by accepting the RSUs and indicating consent via the
Company’s online acceptance procedure, the Participant explicitly declares his or her consent to the onward transfer of
Data by the Company to E*TRADE or, as the case may be, a different service provider of the Company in the U.S. as
described in Section 4(e) above.
If the Participant is based outside of the EEA+, by accepting the RSUs and indicating consent via the Company’s online
acceptance procedure, the Participant explicitly declares his or her consent to the entirety of the Data processing
operations described in this Section 4 including, without limitation, the onward transfer of Data by the Company to
E*TRADE or, as the case may be, a different service provider of the Company in the U.S.
5.
Agreement Severable. In the event that any provision in this Agreement is held invalid or unenforceable, such
provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the
remaining provisions of this Agreement.
6.
Language. The Participant acknowledges and represents that the Participant is sufficiently proficient in the English
language or has consulted with an advisor who is sufficiently proficient in English as to allow the Participant to understand the
terms and conditions of this Agreement and any other documents related to the Plan. If the Participant has received this
Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the
translated version is different from the English version, the English version will control.
Electronic Delivery and Participation. The Company may, in its sole discretion, deliver any documents related to this
7.
Agreement or to participation in the Plan or to future awards that may be granted under the Plan by electronic means or to request
the Participant’s consent to participate in the Plan by electronic means. The Participant hereby consents to receive such
documents by electronic delivery and to participate in the Plan through an online or electronic system established and maintained
by the Company or a third party designated by the Company.
8.
Waiver. The Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement
shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the
Participant or any other participant.
9.
Insider Trading Restrictions/Market Abuse Laws. The Participant acknowledges that he or she may be subject to insider
trading restrictions and/or market abuse laws in applicable jurisdictions including, but not limited to, the United States and the
Participant’s country of residence, which may affect the Participant’s ability to directly or indirectly acquire, sell or attempt to sell
Shares or rights to Shares (e.g., RSUs) under the Plan during such times as the Participant is considered to have “insider
information” regarding the Company (as defined by the laws in the applicable jurisdictions). Any restrictions under these laws or
regulations are separate from and in addition to any restrictions that may be imposed under any applicable insider trading policy
of the Company. The Participant is responsible for ensuring compliance with any applicable restrictions and should consult his or
her personal legal advisor on this matter.
10.
Foreign Asset/Account, Exchange Control, and Tax Reporting. Depending on the Participant’s country, the Participant
may be subject to foreign asset/account, exchange control and/or tax reporting requirements as a result of the vesting and
settlement of the RSUs, the acquisition, holding, and/or transfer of Shares or cash resulting from participation in the Plan and/or
the opening and maintenance of a brokerage or bank account in connection with the Plan. The Participant may be required to
report such assets, accounts, account balances and values and/or related transactions to the applicable authorities in his or her
country and/or repatriate funds received in connection with the Plan to the Participant’s country within a certain time period
and/or according to certain procedure. The Participant acknowledges that he or she is responsible for ensuring compliance with
any applicable foreign asset/account, exchange control and tax reporting requirements and that the Participant should consult
with his or her personal legal advisor to ensure compliance with applicable laws.
BELGIUM
Notifications
Foreign Asset/Account Reporting Information. The Participant is required to report any securities (e.g., Shares acquired under the
Plan) or bank accounts (including brokerage accounts) held outside of Belgium on the Participant’s annual tax return. The
Participant will also be required to complete a separate report providing the National Bank of Belgium with details regarding any
such account (including the account number, the name of the bank in which such account is held and the country in which such
account is located). This report, as well as additional information on how to complete it, can be found on the website of the
National Bank of Belgium, www.nbb.be, under Kredietcentrales/Centrales des crédits caption.
Stock Exchange Tax Alert. A stock exchange tax may apply to transactions under the Plan, such as the sale of Shares acquired
under the Plan. The Participant should consult with his or her personal tax advisor for details regarding the Participant’s
obligations with respect to the stock exchange tax.
Brokerage Account Tax Alert. A brokerage account tax may apply if the average annual value of the securities the Participant
holds (including Shares acquired under the Plan) in a brokerage or other securities account exceeds certain thresholds. The
Participant should consult with his or her personal tax advisor for details regarding the Participant’s obligations with respect to
the brokerage account tax.
CANADA
Terms and Conditions
Delivery of Shares. This provision supplements Section 3 of the Restricted Stock Unit Award Agreement:
The discretion to pay cash in lieu of delivering Shares for the RSUs, as described in the Plan, shall not apply to any RSUs in
Canada. All vested RSUs in Canada will be settled by the Company issuing Shares to the Participant.
Nature of Grant. This provision replaces Section 1(i) of this Exhibit B:
For purposes of the RSUs, the Participant’s Employment will be considered terminated as of the date that is the earliest of: (a) the
date the Participant’s Employment with the Employer is terminated, (b) the date the Participant receives written notice of
termination from the Employer, regardless of any notice period or period of pay in lieu of such notice mandated under the
employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment contract, if
any, or (c) the date the Participant is no longer actively providing services to the Company or a subsidiary of the Company
(regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the
jurisdiction where the Participant is employed or the terms of the Participant’s employment contract, if any) and, unless otherwise
expressly provided in the Agreement or determined by the Company, the Participant’s right to vest in the RSUs under the Plan, if
any, will terminate as of such date; the Administrator shall have the exclusive discretion to determine when the Participant is no
longer actively providing services for purposes of the RSUs.
If the Participant is a resident of Quebec, the following provisions also will apply:
Language Consent. The parties acknowledge that it is their express wish that the Agreement, including this Exhibit B, as well as
all documents, notices, and legal proceedings entered into, given or instituted pursuant hereto or relating directly or indirectly
hereto, be drawn up in English.
Consentement Relatif à la Langue Utilisée. Les parties reconnaissent avoir expressément souhaité que la convention ainsi que
cette Exhibit B, ainsi que tous les documents, avis et procédures judiciares, éxécutés, donnés ou intentés en vertu de, ou liés
directement ou indirectement à la présente convention, soient rédigés en langue anglaise.
Data Privacy. This provision supplements Section 4 of this Exhibit B:
The Participant hereby authorizes the Company and the Company’s representatives to discuss with and obtain all relevant
information from all personnel, professional or not, involved in the administration and operation of the Plan. The Participant
further authorizes the Company and any subsidiary of the Company, as well as E*TRADE or such other stock plan service
provider as may be selected by the Company to assist with the Plan, to disclose and discuss the Plan with their advisors. The
Participant further authorizes the Company and any subsidiary of the Company to record such information and to keep such
information in the Participant’s employee file.
Notifications
Securities Law Information. The Participant is permitted to sell Shares acquired under the Plan through the Company’s
designated broker, provided the resale of such Shares takes place outside of Canada through the facilities of a stock exchange on
which the Shares are listed. The Shares are currently listed on the Nasdaq Stock Market.
Foreign Asset/Account Reporting Information. Foreign specified property held by a Canadian resident must be reporting
annually on a Form T1135 (Foreign Income Verification Statement) if the total cost of the foreign specified property exceeds
C$100,000 at any time during the year. Thus, unvested RSUs must be reported (generally at a nil cost) if the C$100,000 cost
threshold is
exceeded because of other foreign specified property held by the Participant. When Shares are acquired, their cost generally is
the adjusted cost base (“ACB”) of the Shares. The ACB would ordinarily equal the fair market value of the Shares at the time of
acquisition, but if the Participant owns other Shares, this ACB may need to be averaged with the ACB of the other Shares. The
Participant should consult with his or her personal legal advisor regarding what reporting obligations, if any, will apply to the
Participant with respect to Shares acquired under the Plan.
CHINA
Terms and Conditions
Delivery of Shares. This provision supplements Section 3 of the Restricted Stock Unit Award Agreement:
The settlement of the Award upon vesting is conditioned upon the Company obtaining and maintaining all necessary approvals
from the People’s Republic of China State Administration of Foreign Exchange (“SAFE”) and any other applicable government
entities required to permit the operation of the Plan in China, as determined by the Company it its sole discretion. If or to the
extent the Company is unable to obtain or maintain the registration or otherwise comply with applicable regulatory requirements
in China, no Shares shall be issued under the Plan. In this case, and notwithstanding Section 3 of the Restricted Stock Unit
Award Agreement, the Company retains the discretion to settle the Award through local payroll in the form of a cash payment
equal to the fair market value of the Shares subject to the vested RSUs on the vesting date, subject to any obligation to satisfy
Tax-Related Items; and any references in the Restricted Stock Unit Award Agreement to the issuance of Shares shall not apply to
the Participant.
To facilitate compliance with any applicable laws and regulations in China, the Participant agrees that the Company (or a
brokerage firm instructed by the Company, if applicable) is entitled to (i) sell all Shares issued to the Participant at settlement (on
the Participant’s behalf and at the Participant’s direction pursuant to this authorization), either at the time of settlement, at the
time the Participant ceases employment with the Employer, or at such other time as determined by the Company, and (ii) require
that any Shares acquired under the Plan be held with a designated brokerage firm until such Shares are sold.
The Participant also agrees to sign any agreements, forms and/or consents that may be reasonably requested by the Company (or
the Company’s designated brokerage firm) to effectuate the sale of the Shares and acknowledges that neither the Company nor
the designated brokerage firm is under any obligation to arrange for such sale of Shares at any particular price (it being
understood that the sale will occur at the then-current market price) and that brokerage fees or commissions may be incurred in
any such sale. In any event, when Shares acquired under the Plan are sold, the proceeds of the sale of the Shares, less any Tax-
Related Items and brokerage fees or commissions, will be remitted to the Participant in accordance with applicable exchange
control laws and regulations.
Exchange Control Restrictions. The Participant understands and agrees that he or she is required to immediately repatriate the
proceeds of the sale of Shares, any cash dividends or dividend equivalents, and any other funds realized under the Plan to
China. The Participant further
understands that the repatriation of such funds may need to be effected through a special exchange control account established by
the Company or a subsidiary of the Company and the Participant hereby consents and agrees that such funds may be transferred
to such special account prior to being delivered to the Participant’s personal account.
The Participant also understands that the Company will deliver sale proceeds, any cash dividends or dividend equivalents, and
any other funds realized under the Plan to the Participant as soon as practicable, but that there may be delays in distributing the
funds due to exchange control requirements in China. Funds may be paid to the Participant in U.S. dollars or local currency at
the Company’s discretion. If the funds are paid in U.S. dollars, the Participant will be required to set up a U.S. dollar bank
account in China so that the proceeds may be deposited into this account. If the funds are paid in local currency, the Company is
under no obligation to secure any particular currency conversion rate and the Company may face delays in converting the funds
to local currency. The Participant agrees to bear any currency fluctuation risk between the time the Shares are sold and the time
(i) the Tax-Related Items are converted to local currency and remitted to the tax authorities and/or (ii) the net proceeds are
converted to local currency and distributed to the Participant.
The Participant further agrees to comply with any other requirements that may be imposed by the Company in the future in order
to facilitate compliance with exchange control requirements in China.
GERMANY
Notifications
Exchange Control Information. The Participant must report any cross-border payments in excess of €12,500 to the German
Federal Bank (Bundesbank). The report must be filed electronically and the form of report (Allgemeine Meldeportal Statistik)
can be accessed via the Bundesbank’s website (www.bundesbank.de). The Participant is responsible for complying with
applicable reporting obligations and should consult his or her personal legal advisor on this matter.
HONG KONG
Terms and Conditions
Delivery of Shares. This provision supplements Section 3 of the Restricted Stock Unit Award Agreement:
The discretion to pay cash in lieu of delivering Shares for the RSUs, as described in the Plan, shall not apply to any RSUs in
Hong Kong. All vested RSUs in Hong Kong will be settled by the Company issuing Shares to the Participant.
Notifications
Securities Law Information. WARNING: The RSUs and the Shares issued upon settlement of the RSUs do not constitute a public
offering of securities and are available only to employees of the Company or subsidiaries of the Company.
The Agreement, the Plan and other incidental communication materials are intended only for the personal use of the Participant
and not for distribution to any other persons. The Agreement, the Plan and other incidental communication materials have not
been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the
applicable companies and securities legislation in Hong Kong, nor have the documents been reviewed by any regulatory
authority in Hong Kong. If the Participant has questions about any of the contents of the Agreement or the Plan, he or she
should contact a legal or other professional advisor.
INDIA
Notifications
Exchange Control Information. Any funds realized in connection with the Plan (e.g., proceeds from the sale of Shares and cash
dividends paid on Shares) must be repatriated to India within a specified period of time after receipt as prescribed under Indian
exchange control laws. It is the Participant’s responsibility to obtain an inward remittance certificate (“FIRC”) from the bank
where the Participant deposits the foreign currency. The Participant should maintain the FIRC as evidence of the repatriation of
funds in the event the Reserve Bank of India or the Employer requests proof of repatriation.
Foreign Asset/Account Reporting Requirement. The Participant is required to declare foreign bank accounts and any foreign
financial assets (including Shares and, possibly, rights to Shares held outside India) in the Participant’s annual tax return. The
Participant should consult with his or her personal tax advisor to ensure compliance with applicable reporting obligations.
ITALY
Terms and Conditions
Plan Document Acknowledgment. By accepting the Agreement, the Participant further acknowledges that the Participant has
received a copy of the Plan, has reviewed the Plan and the Agreement in their entirety and fully understands and accepts all
provisions of the Plan and the Agreement. The Participant further acknowledges that the Participant has read and specifically and
expressly approves, without limitation, the following sections of the Restricted Stock Unit Award Agreement: Section 2,
“Vesting; Cessation of Employment”; Section 3, “Delivery of Shares”; Section 4, “Forfeiture; Recovery”; Section 7, “Taxes”; and
Section 11, “Imposition of Other Requirements”; and the following sections of Appendix B: Section 1, “Nature of Grant”;
Section 2, “Additional Conditions to Issuance of Shares”; Section 4, “Data Privacy”; Section 7, “Electronic Delivery and
Participation”; Section 9, “Insider Trading Restrictions/Market Abuse Laws”; and Section 10, “Foreign Asset/Account, Exchange
Control and Tax Reporting” (including the “Foreign Asset/Account Reporting Information” below for Italy).
Notifications
Foreign Asset/Account Reporting Information. If the Participant holds investments abroad or foreign financial assets (e.g., cash,
Shares) that may generate income taxable in Italy, the Participant is required to report them on his or her annual tax return
(UNICO Form, RW Schedule)
or on a special form if no tax return is due. The same reporting duties apply if the Participant is the beneficial owner of the
investments, even if the Participant does not directly hold investments abroad or foreign assets.
Foreign Financial Assets Tax Alert. The value of any Shares (and certain other foreign assets) held outside of Italy may be
subject to a foreign financial assets tax. The taxable amount is equal to the fair market value of Shares on December 31 or on the
last day the Shares were held (the tax is levied in proportion to the number of days Shares were held over the calendar year). The
value of financial assets held abroad must be reported in the annual tax return. The Participant should consult with his or her
personal tax advisor for details regarding the Participant’s obligations with respect to the foreign financial assets tax.
JAPAN
Notifications
Foreign Asset/Account Reporting Information. The Participant is required to report details of any assets (such as Shares) held
outside of Japan as of December 31st to the extent such assets have a total net fair market value exceeding ¥50,000,000. Such
report is due by March 15th each year. The Participant should consult with his or her personal tax advisor as to whether the
reporting obligation extends to any outstanding RSUs held by the Participant and to ensure compliance with applicable reporting
obligations.
KOREA
Notifications
Foreign Asset/Account Reporting Information. Korean residents must declare all foreign financial accounts (e.g., brokerage
accounts, bank accounts) to the Korean tax authorities and file a report with respect to such accounts if the value of such accounts
exceeds KRW 500 million (or an equivalent amount in foreign currency) on any month-end date during the calendar year. The
Participant should consult with his or her personal tax advisor to ensure compliance with applicable reporting obligations.
SPAIN
Terms and Conditions
Nature of Grant. This section supplements Section 1 of this Exhibit B:
By accepting the RSUs, the Participant consents to participate in the Plan and acknowledges having received a copy of the Plan.
The Participant understands that, as a condition of the grant of the RSUs, the termination of the Participant’s employment for any
reason will automatically result in the forfeiture of any and all RSUs that have not vested as of the date of termination. In
particular, the Participant understands and agrees that any unvested RSUs will be forfeited without entitlement to the underlying
Shares or to any amount as indemnification in the event of a termination of the Participant’s employment
prior to vesting by reason of, including, but not limited to: death, disability, resignation, retirement, disciplinary dismissal
adjudged to be with cause, disciplinary dismissal adjudged or recognized to be without cause, individual or collective layoff on
objective grounds, whether adjudged to be with cause or adjudged or recognized to be without cause, material modification of the
terms of employment under Article 41 of the Workers’ Statute, relocation under Article 40 of the Workers’ Statute, Article 50 of
the Workers’ Statute, unilateral withdrawal by the Employer, and under Article 10.3 of Royal Decree 1382/1985.
Furthermore, the Participant understands that the Company has unilaterally, gratuitously and discretionally decided to grant the
RSUs under the Plan to individuals who may be employees of the Company or subsidiary of the Company throughout the
world. The decision is a limited decision that is entered into upon the express assumption and condition that any grant will not
economically or otherwise bind the Company or any subsidiary of the Company on an ongoing basis (other than as set forth in
this Agreement and the Plan). Consequently, the Participant understands that the RSUs are granted on the assumption and
condition that the RSUs and the related Shares shall not become a part of any employment or contract (either with the Company
or any subsidiary of the Company) and shall not be considered a mandatory benefit, salary for any purposes (including severance
compensation) or any other right whatsoever. In addition, the Participant understands that the grant of the RSUs would not be
made to the Participant but for the assumptions and conditions referred to above; thus, the Participant acknowledges and freely
accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, then the
grant of RSUs shall be null and void.
Notifications
Securities Law Information. No “offer of securities to the public,” as defined under Spanish law, has taken place or will take
place in the Spanish territory in connection with the grant of the RSUs under the Plan. This Agreement and the Plan have not
been nor will they be registered with the Comisión Nacional del Mercado de Valores, and do not constitute a public offering
prospectus.
Exchange Control Information. The Participant must declare the acquisition, ownership and disposition of stock in a foreign
company (including Shares acquired under the Plan) to the Spanish Dirección General de Comercio e Inversiones (the “DGCI”),
the Bureau for Commerce and Investments, which is a department of the Ministry of Economy and Competitiveness, for
statistical purposes. Generally, the declaration must be filed in January for Shares acquired or sold during (or owned as of
December 31) the prior year; however, if the value of the Shares acquired under the Plan or the amount of the sale proceeds
exceeds €1,502,530, the declaration must be filed within one month of the acquisition or sale, as applicable.
The Participant may be required to declare electronically to the Bank of Spain any foreign accounts (including brokerage
accounts held abroad), any foreign instruments (including Shares acquired under the Plan), and any transactions with non-
Spanish residents (including any payment of cash or Shares made by the Company) depending on the value of the transactions
during the relevant year or the balances in such accounts and the value of such instruments as of December 31 of the relevant
year. The Participant should consult with his or her personal legal advisor regarding the applicable thresholds and corresponding
reporting requirements.
Foreign Asset/ Account Reporting Information. The Participant is required to report assets or rights deposited or held outside of
Spain (including the Shares acquired under the Plan or cash proceeds from the sale of the Shares acquired under the Plan) if the
value per type of asset or right exceeds a certain threshold. This obligation applies to assets and rights held as of December 31
and requires that information on such assets and rights be included in the Participant’s tax return filed with the Spanish tax
authorities for such year. After such assets or rights are initially reported, the reporting obligation will apply for subsequent years
only if the value of any previously reported asset or right increases by more than a certain threshold or if ownership of such asset
or right is transferred or relinquished during the year. The Participant should consult with his or her personal tax advisor
regarding the applicable thresholds and corresponding reporting requirements.
SWITZERLAND
Notifications
Securities Law Information. The RSUs are not intended to be publicly offered in or from Switzerland. Neither this document nor
any other materials relating to the RSUs (i) constitutes a prospectus as such term is understood pursuant to article 652a of the
Swiss Code of Obligations, or (ii) may be publicly distributed or otherwise made publicly available in Switzerland. Further,
neither this document nor any other offering or marketing material relating to the offering of the RSUs has been or will be filed
with or approved or supervised by any Swiss regulatory authority (in particular, the Swiss Financial Market Supervisory
Authority (FINMA)).
UNITED KINGDOM
Terms and Conditions
Delivery of Shares. This provision supplements Section 3 of the Restricted Stock Unit Award Agreement:
RSUs shall be settled only in Shares. In no event shall the RSUs be paid in cash, notwithstanding any discretion contained in the
Plan to the contrary.
Taxes. This provision supplements Section 7 of the Restricted Stock Unit Award Agreement:
Without limitation to Section 7 of the Restricted Stock Unit Award Agreement, the Participant hereby agrees that the Participant
is liable for all Tax-Related Items and hereby covenants to pay all such Tax-Related Items, as and when requested by the
Company or if different, the Employer or by Her Majesty’s Revenue & Customs (“HMRC”) (or any other tax authority or any
other relevant authority). The Participant also hereby agrees to indemnify and keep indemnified the Company and, if different,
the Employer against any Tax-Related Items that they are required to pay or withhold or have paid or will pay to HMRC (or any
other tax authority or any other relevant authority) on the Participant’s behalf.
Notwithstanding the foregoing, if the Participant is a director or executive officer of the Company (within the meaning of Section
13(k) of the Exchange Act), the terms of the immediately foregoing provision will not apply. In the event that the Participant is a
director or executive officer of the Company and the income tax is not collected from or paid by the Participant within ninety
(90)
days of the end of the U.K. tax year in which an event giving rise to the indemnification described above occurs, the amount of
any uncollected income tax may constitute a benefit to the Participant on which additional income tax and National Insurance
contributions (“NICs”) may be payable. The Participant will be responsible for reporting and paying any income tax due on this
additional benefit directly to HMRC under the self-assessment regime and for paying to the Company and/or the Employer (as
appropriate) the amount of any employee NICs due on this additional benefit.
NIC Joint Election. As a condition of participation in the Plan, the Participant agrees to accept liability for any secondary Class 1
National Insurance contributions that may be payable by the Company and/or the Employer (or any successor to the Company or
the Employer) in connection with the RSUs and any event giving rise to Tax-Related Items (“Employer NICs”).
Without prejudice to the foregoing, the Participant agrees to enter into the following joint election with the Company, the form of
such NICs Joint Election being formally approved by HMRC (the “NIC Joint Election”), and any other consent or elections
required to accomplish the transfer of the Employer NICs to the Participant. The Participant further agrees to execute such other
elections as may be required between the Participant and any successor to the Company and/or the Employer for the purpose of
continuing the effectiveness of the Participant’s NIC Joint Election. The Participant understands that the NIC Joint Election
applies to any RSUs granted to him or her under the Plan after the execution of the NIC Joint Election. The Participant agrees
that the Employer NICs may be collected by the Company or the Employer by any of the methods set forth in Section 7 of the
Restricted Stock Unit Award Agreement.
If the Participant does not enter into the NIC Joint Election, he or she will not be entitled to vest in the RSUs or receive any
benefit in connection with the RSUs unless and until he or she enters into a NIC Joint Election and no Shares or other benefit
pursuant to the RSUs will be issued to the Participant under the Plan, without any liability to the Company and/or the Employer.
IMPORTANT NOTE: By accepting the Agreement (whether by clicking on the acceptance buttons as part of the Company’s
electronic acceptance procedure or by signing the Agreement in hard copy), the Participant is agreeing to be bound by the
terms of the NIC Joint Election. The Participant should read the terms of the NIC Joint Election carefully before accepting
the Agreement and the NIC Joint Election. However, if requested by the Company, the Participant agrees to separately
execute the NIC Joint Election.
ATTACHMENT FOR THE UNITED KINGDOM
Important Note on the Joint Election to Transfer
Employer National Insurance Contributions
As a condition of participation in the Cerence Inc. 2019 Equity Incentive Plan, as amended (the “Plan”) and the restricted
stock units (the “RSUs”) that have been granted to you (the “Participant”) by Cerence Inc., a Delaware corporation (the
“Company”), the Participant is required to enter into a joint election to transfer to the Participant any liability for
employer national insurance contributions (the “Employer’s Liability”) that may arise in connection with the grant of the
RSUs or in connection with any restricted stock units that may be granted by the Company to the Participant under the
Plan (the “Joint Election”).
If the Participant does not agree to enter into the Joint Election, the grant of the RSUs will be worthless and the
Participant will not be able to vest in the RSUs or receive any benefit in connection with the RSUs.
By entering into the Joint Election:
•
•
•
the Participant agrees that any Employer’s Liability that may arise in connection with or pursuant to the vesting
of the RSUs (or any restricted stock units granted to the Participant under the Plan) or the acquisition of Shares
or other taxable events in connection with the RSUs (or any other restricted stock units granted under the Plan)
will be transferred to the Participant;
the Participant authorises the Company and/or the Participant’s employer to recover an amount sufficient to
cover this liability by any method set forth in the Restricted Stock Unit Award Agreement and/or the Joint
Election; and
the Participant acknowledges that even if he or she has accepted the Joint Election via the Company’s online
procedure, the Company or the Participant’s employer may still require the Participant to sign a paper copy of
the Joint Election (or a substantially similar form) if the Company determines such is necessary to give effect to
the Joint Election.
By accepting the RSUs through the Company’s online acceptance procedure (or by signing the Restricted Stock Unit Award
Agreement), the Participant is agreeing to be bound by the terms of the Joint Election.
Please read the terms of the Joint Election carefully before accepting the Restricted Stock Unit Award Agreement and the
Joint Election.
Please print and keep a copy of the Joint Election for your records.
Election To Transfer the Employer’s National Insurance Liability to the Employee
CERENCE INC. 2019 EQUITY INCENTIVE PLAN
(UK Employees)
1.
Parties
This Election is between:
(A)
You, the individual who has gained access to this Election (the “Employee”), who is employed by one of the
employing companies listed in the attached schedule (the “Employer”) and who is eligible to receive restricted stock units
(“RSUs”) granted by Cerence Inc. pursuant to the terms and conditions of the Cerence Inc. 2019 Equity Incentive Plan, as
amended (the “Plan”), and
(B)
Cerence Inc. of 15 Wayside Road, Burlington, Massachusetts, United States (the “Company”), which may
grant RSUs under the Plan and is entering into this Form of Election on behalf of the Employer.
2.
2.1
2.2
Purpose of Election
This Election relates to RSUs granted by the Company to the Employee under the Plan on or after [date].
In this Election the following words and phrases have the following meanings:
“Taxable Event” means .any event giving rise to Relevant Employment Income.
“ITEPA” means the Income Tax (Earnings and Pensions) Act 2003.
“Relevant Employment Income” from RSUs on which employer’s National Insurance Contributions becomes due is defined as:
i.
ii.
iii.
(A)
(B)
an amount that counts as employment income of the earner under section 426 ITEPA (restricted securities:
charge on certain post-acquisition events);
an amount that counts as employment income of the earner under section 438 of ITEPA (convertible
securities: charge on certain post-acquisition events); or
any gain that is treated as remuneration derived from the earner’s employment by virtue of section 4(4)(a)
SSCBA, including without limitation:
the acquisition of securities pursuant to the RSUs (within the meaning of section 477(3)(a) of ITEPA);
the assignment (if applicable) or release of the RSUs in return for consideration (within the meaning of
section 477(3)(b) of ITEPA);
(C)
the receipt of a benefit in connection with the RSUs, other than a benefit within (i) or (ii) above (within the
meaning of section 477(3)(c) of ITEPA).
“SSCBA” means the Social Security Contributions and Benefits Act 1992.
2.3
This Election relates to the Employer’s secondary Class 1 National Insurance Contributions (the “Employer’s
Liability”) which may arise in respect of the Relevant Employment Income in respect of RSUs pursuant to section 4(4)(a) and/or
paragraph 3B(1A) of Schedule 1 of the SSCBA.
2.4
This Election does not apply in relation to any liability, or any part of any liability, arising as a result of regulations
being given retrospective effect by virtue of section 4B(2) of either the SSCBA or the Social Security Contributions and Benefits
(Northern Ireland) Act 1992.
2.5
This Election does not apply to the extent that it relates to relevant employment income which is employment income
of the earner by virtue of Chapter 3A of Part VII of ITEPA (employment income: securities with artificially depressed market
value).
2.6
Any reference to the Company and/or the Employer shall include that entity’s successors in title and assigns as
permitted in accordance with the terms of the Plan and the Restricted Stock Unit Award Agreement. This Election will have
effect in respect of the RSUs and any awards which replace or replaced the RSUs following their grant in circumstances where
section 483 of ITEPA applies.
3.
Election
The Employee and the Company jointly elect that the entire liability of the Employer to pay the Employer’s Liability that arises
on any Relevant Employment Income is hereby transferred to the Employee. The Employee understands that by accepting the
RSUs (whether by clicking on the acceptance buttons as part of the Company’s electronic acceptance procedure or by signing the
Restricted Stock Unit Award Agreement in hard copy), he or she will become personally liable for the Employer’s Liability
covered by this Election. This Election is made in accordance with paragraph 3B(1) of Schedule 1 to SSCBA.
4.
Payment of the Employer’s Liability
4.1
any Relevant Employment Income from the Employee at any time after the Taxable Event:
The Employee hereby authorises the Company and/or the Employer to collect the Employer’s Liability in respect of
(i)
Event; and/or
by deduction from salary or any other payment payable to the Employee at any time on or after the date of the Taxable
(ii)
directly from the Employee by payment in cash or cleared funds; and/or
(iii)
receive in respect of the RSUs; and/or
by arranging, on behalf of the Employee, for the sale of some of the securities which the Employee is entitled to
(iv)
by any other means specified in the Restricted Stock Unit Award Agreement.
4.2
of the RSUs to the Employee until full payment of the Employer’s Liability is received.
The Company hereby reserves for itself and the Employer the right to withhold the transfer of any securities in respect
4.3
The Company agrees to procure the remittance by the Employer of the Employer’s Liability to HM Revenue and
Customs on behalf of the Employee within 14 days after the end of the UK tax month during which the Taxable Event occurs (or
within 17 days after the end of the UK tax month during which the Taxable Event occurs, if payments are made electronically).
5.
Duration of Election
5.1
transferred abroad or is not employed by the Employer on the date on which the Employer’s Liability becomes due.
The Employee and the Company agree to be bound by the terms of this Election regardless of whether the Employee is
5.2
(i)
(ii)
(iii)
This Election will continue in effect until the earliest of the following:
the Employee and the Company agree in writing that it should cease to have effect;
on the date the Company serves written notice on the Employee terminating its effect;
on the date HM Revenue and Customs withdraws approval of this Election; or
(iv)
could relate, such that the Election ceases to have effect in accordance with its terms.
after due payment of the Employer’s Liability in respect of the entirety of the RSUs to which this Election relates or
Acceptance by the Employee
The Employee acknowledges that by accepting the RSUs (whether by clicking on the acceptance buttons as part of the
Company’s electronic acceptance procedure or by signing the Restricted Stock Unit Award Agreement in hard copy), the
Employee agrees to be bound by the terms of this Election.
Acceptance by the Company
The Company acknowledges that, by arranging for the scanned signature of an authorised representative to appear on this
Election, the Company agrees to be bound by the terms of this Election.
Signed for and on behalf of the Company
[insert signature and signatory details]
SCHEDULE OF EMPLOYER COMPANIES
The following are employer companies to which this Joint Election may apply:
Cerence Limited
Registered Office:
79 Clerkenwell Rd, Farringdon, London EC1R 5AR, UK
Company Registration Number:
Corporation Tax Reference:
PAYE Reference:
12000685
[insert]
[insert]
Exhibit 10.14
Name:
Number of Target PSUs subject to Award:
Date of Grant:
Vesting Commencement Date
[●]
[●]
[●]
[●]
CERENCE INC.
2019 EQUITY INCENTIVE PLAN
PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT
This agreement, including any appendix, exhibit and/or addendum hereto (collectively, this “Agreement”), evidences
an award (the “Award”) of performance-based restricted stock units granted by Cerence Inc., a Delaware corporation (the
“Company”), to the individual named above (the “Participant”), pursuant to and subject to the terms of the Cerence Inc. 2019
Equity Incentive Plan (as from time to time amended and in effect, the “Plan”). Except as otherwise defined herein, all
capitalized terms used herein have the same meaning as in the Plan.
1.
Grant of Performance-Based Restricted Stock Unit Award. The Company grants to the Participant on the date set forth
above (the “Date of Grant”) an Award consisting of a target number of performance-based restricted stock units (the “Target
Award” and such performance-based restricted stock units, the “PSUs”) set forth above giving the Participant the conditional
right to receive, without payment and pursuant to and subject to the terms and conditions set forth in this Agreement and in the
Plan, one share of Stock (a “Share”) with respect to each PSU forming part of the Award, subject to adjustment pursuant to
Section 7 of the Plan in respect of transactions occurring after the date hereof. The percentage of the Target Award that may be
earned by the Participant will be determined in accordance with Exhibit A hereto.
Earned PSUs. The PSUs shall become “Earned PSUs” following the end of the Performance Period (as such term is
2.
defined in Exhibit A hereto) to the extent earned in accordance with the performance objectives set forth on Exhibit A (the
“Performance Objectives”), subject to the Compensation Committee determining, in its sole discretion, the level of achievement
of the applicable Performance Objectives.
3.
Vesting of Earned PSUs; Cessation of Employment.
(a)
Vesting. Unless earlier terminated, forfeited, relinquished or expired, the Earned PSUs will vest in full on the
Vesting Date (as such term is defined in Exhibit A hereto), subject to the Participant remaining in continuous Employment
through such date.
(b)
Cessation of Employment. Except as described in Exhibit A attached hereto, automatically and immediately
upon the cessation of the Participant’s Employment any then unvested PSUs, whether or not then Earned PSUs, and, if such
termination is for Cause or occurs in circumstances that in the determination of the Administrator would have constituted grounds
for the Participant’s Employment to be terminated for Cause (in each case, without regard to the lapsing of any required notice or
cure periods in connection therewith), any vested PSUs, including any vested Earned PSUs, will terminate and be forfeited for no
consideration.
4.
Restrictive Covenants.
(a)
Applicability of Restrictive Covenants. The Participant hereby agrees to comply with the restrictions set
forth below as part of the consideration for the Award; provided that if the Participant’s primary residence or primary place of
employment is in a Designated State (as defined below) on the date of execution of this Agreement or if the Participant’s primary
place of employment is in a Designated State on the date when the Participant’s employment terminates, the terms of this Section
4 shall be modified as specified in Exhibit B. For these purposes, the Participant’s primary place of employment is the physical
location from which the Participant primarily performs services for a Cerence Company, as defined below. If there is no such
fixed location, the place of employment is the place of the Participant’s primary residence. The “Designated States” are
California, Colorado, Massachusetts, Oregon and Washington State.
(b)
Noncompetition. The Participant hereby agrees that throughout the Participant’s employment with the
Company or any other Cerence Company and for the one (1) year period immediately following any termination of the
Participant’s employment, regardless of whether voluntary or involuntary, the Participant shall not provide services to a
Competitor in any role or position (as employee, consultant or otherwise) that involves engaging in Restricted Activities in a
Restricted Territory.
(c)
Nonsolicitation. The Participant hereby agrees that throughout the Participant’s employment with the
Company or any other Cerence Company and for the one (1) year period immediately following any termination of the
Participant’s employment, regardless of whether voluntary or involuntary, the Participant shall not: (i) knowingly participate in
soliciting or communicating with an employee of a Cerence Company for the purpose of persuading or helping the Cerence
Company employee to end or reduce his or her relationship with the Cerence Company; or (ii) knowingly participate in soliciting
or communicating with any established customer of a Cerence Company in pursuit of a Competing Line of Business if the
Participant either had business-related contact with that customer or received confidential information concerning such customer,
in either case, in the last two (2) years of the Participant’s employment with any Cerence Company.
(d)
Continuity of Employment. For the avoidance of doubt, for purposes of this Agreement, changes in the
Participant’s title, position, duties, geographic location, salary, compensation or benefits or other terms and conditions of
employment shall not be considered to constitute a termination of employment if the Participant remains employed with a
Cerence Company. Furthermore, a transfer of the Participant’s employment relationship between different Cerence Companies
shall not constitute a termination of employment for purposes of this Agreement.
(e)
Definitions. Certain terms used in this Section 4 are defined as follows:
the Company.
(i)
“Cerence Company” means the Company or any direct or indirect subsidiary or other affiliate of
business unit of an entity that engages in a Competing Line of Business. As of
(ii)
“Competitor” means an individual, corporation, other business entity or separately operated
-2-
the date of execution of this Agreement, Competitors include, without limitation, the following businesses and their respective
affiliates: Amazon.com, Inc., Apple Inc., Google LLC, iFlytek Co., Ltd., Microsoft Corporation, Sensory Inc, and Soundhound
Inc. For the avoidance of doubt, the Competitors are not limited to such listed businesses and affiliates.
(iii)
“Competing Line of Business” means a business that involves a product or service offered or
under development by anyone other than a Cerence Company that would replace or compete with any product or service offered,
to be offered, or under development by a Cerence Company with which the Participant had involvement while employed by a
Cerence Company (unless such Cerence Company is no longer engaged in or planning to engage in that line of business).
(iv)
“Restricted Activities” means job duties or business-related activities (as an employee,
consultant, or otherwise) for a Competitor that (A) are the same as, or substantially similar to, any substantial portion of the job
duties or business-related activities in which Participant participated while employed by a Cerence Company; or (B) otherwise
could be reasonably expected to put any Cerence Company’s confidential information at risk.
the time when the Participant’s employment with a Cerence Company terminates:
(v)
“Restricted Territory” means the following as applicable based upon the Participant’s job title at
•
•
•
•
if the Participant holds the title of Vice President or above, the Restricted Territory is the United
States and any other country, province, state, county, city or other political subdivision where any
Cerence Company does business; or
if the Participant holds the title of Director, the Restricted Territory is the United States and any
state, county, city or other political subdivision within the United States where any Cerence
Company does business; or
if the Participant has sales responsibilities for a Cerence Company and does not hold the title of
Director or above, the Restricted Territory is the territory or territories (including any country,
province, state, county, city or other political subdivision within the United States) in which the
Participant conducted business for a Cerence Company at any time within the two (2) years prior to
the termination of the Participant’s employment; or
if the Participant’s title is below the level of Director, and the Participant does not have sales
responsibilities for a Cerence Company, the Restricted Territory is the state, county, city and other
political subdivision within the state in which the Participant lives.
For the avoidance of doubt, the Participant will be deemed to be engaging in activities in a particular territory where (i) the
Participant’s primary residence or principal place of employment is in the territory; or (ii) the Participant’s job duties or other
business-related activities involve
-3-
calling on or providing services to customers in a territory notwithstanding the fact that the Participant’s residence or principal
place of employment may be in another territory.
5.
Delivery of Shares. Subject to Section 6 below, the Company shall, as soon as practicable upon the vesting of any
Earned PSUs subject to this Award (but in no event later than thirty (30) days following the date on which such Earned PSUs
vest), effect delivery of the Shares with respect to such vested Earned PSUs to the Participant (or, in the event of the Participant’s
death, to the person to whom the Award has passed by will or the laws of descent and distribution). No Shares will be issued
pursuant to this Award unless and until all legal requirements applicable to the issuance or transfer of such Shares have been
complied with to the satisfaction of the Administrator.
6.
Forfeiture; Recovery of Compensation. The Administrator may cancel, rescind, withhold or otherwise limit or restrict
this Award at any time if the Participant is not in compliance with all applicable provisions of this Agreement and the Plan. By
accepting, or being deemed to have accepted, this Award, the Participant expressly acknowledges and agrees that his or her
rights, and those of any permitted transferee of this Award, under this Award, including the right to any Shares acquired under
this Award or proceeds from the disposition thereof, are subject to Section 6(a)(5) of the Plan (including any successor
provision). The Participant further agrees to be bound by the terms of any clawback or recoupment policy of the Company that
applies to incentive compensation that includes Awards such as the PSUs. Nothing in the preceding sentence may be construed
as limiting the general application of Section 12 of this Agreement.
7.
Dividends; Other Rights. This Award may not be interpreted to bestow upon the Participant any equity interest or
ownership in the Company or any subsidiary prior to the date on which the Company delivers Shares to the Participant. The
Participant is not entitled to vote any Shares by reason of the granting of this Award or to receive or be credited with any
dividends declared and payable on any Share prior to the date on which any such Share is delivered to the Participant
hereunder. The Participant will have the rights of a shareholder only as to those Shares, if any, that are actually delivered under
this Award.
8.
9.
Nontransferability. This Award may not be transferred except as expressly permitted under Section 6(a)(3) of the Plan.
Taxes.
(a)
Responsibility for Taxes. The Participant acknowledges that, regardless of any action taken by the Company
or, if different, the Participant’s employer (the “Employer”), the ultimate liability for all income tax, social insurance, payroll tax,
fringe benefits tax, payment on account and other tax-related items and withholdings related to the Participant’s participation in
the Plan and any Award granted thereunder and legally applicable to the Participant as a result of participation in the Plan
(collectively, “Tax-Related Items”) is and remains the Participant’s responsibility and may exceed the amount (if any) withheld
by the Company or the Employer. The Participant further acknowledges that Company and the Employer (i) make no
representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the PSUs,
including, but not limited to, the grant, vesting or settlement of the PSUs, the delivery of Shares, the subsequent sale of any
Shares acquired in respect of the PSUs or the receipt of any
-4-
dividend equivalents or dividends, if applicable; and (ii) do not commit to and are under no obligation to structure the terms of
the grant or any aspect of the PSUs to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any
particular tax result. Further, if the Participant is subject to Tax-Related Items in more than one jurisdiction, the Participant
acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account
for Tax-Related Items in more than one jurisdiction.
(b)
Withholding. Prior to the relevant taxable or withholding event, as applicable, the Participant agrees to make
arrangements satisfactory to the Company to satisfy all Tax-Related Items. In this regard, for any Participant who is a U.S.
taxpayer, unless otherwise determined by the Administrator, the Company and/or the Employer’s required tax withholding
obligation with regard to all Tax-Related Items shall be satisfied in full by an arrangement whereby (i) the Company issues to a
broker designated by the Company and acting on behalf of the Participant a number of Shares to be issued upon settlement of the
Earned PSUs sufficient to satisfy the withholding amount due along with any applicable third-party commission with irrevocable
instructions to sell such Shares (“Sale-to-Cover”) and (ii) the proceeds from such Sale-to-Cover will be remitted to the Company
and/or the Employer. In the event the proceeds from the Sale-to-Cover are insufficient to fully satisfy the applicable withholding
taxes with regard to all Tax-Related Items, the Participant authorizes withholding from payroll and any other amounts payable to
the Participant, in the same calendar year, and otherwise agrees to make adequate provision through the submission of cash, a
check or its equivalent for any sums required to satisfy the remaining applicable withholding taxes. Given that the Sale-to-Cover
is both mandatory and non-discretionary, it is the intent of the parties that this Section 8(b) comply with the requirements of Rule
10b5-1(c)(1)(i)(B) under the Exchange Act, and the Agreement will be interpreted to comply with the requirements of Rule
10b5-1(c) under the Exchange Act. Unless the withholding tax obligations of the Company and/or the Employer are satisfied by
the Participant in accordance with this provision, the Company shall have no obligation to issue any Shares on the Participant’s
behalf pursuant to the vesting of this Award. For all Participants who are not U.S. taxpayers, the Participant authorizes the
Company and/or the Employer, or their respective agents, at their discretion, to satisfy their withholding obligations with regard
to all Tax-Related Items by one or a combination of the following: (i) withholding from the Participant’s wages or other
compensation payable to the Participant by the Company and/or the Employer; (ii) requiring the Participant to tender a payment
in cash in an amount equal to the Tax-Related Items to the Company and/or the Employer; (iii) withholding from the proceeds
from the sale of Shares acquired upon settlement of the Earned PSUs, either through a voluntary sale or through a mandatory sale
arranged by the Company (on the Participant’s behalf pursuant to this authorization without further consent); (iv) withholding
Shares to be issued upon settlement of the Earned PSUs; and/or (v) any other method determined by the Company and permitted
under applicable laws.
Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering applicable
minimum statutory withholding rates or other applicable withholding rates, including applicable maximum rates in the
Participant’s jurisdiction, in which case the Participant may receive a refund of any over-withheld amount in cash and will not be
entitled to the equivalent amount in Shares. If the obligation for Tax-Related Items is satisfied by withholding Shares, for tax
purposes, the Participant will be deemed to have been issued the full number of Shares subject to the vested Earned PSUs,
notwithstanding that Shares were held back solely for the purpose of satisfying the Tax-Related Items. The Company may refuse
to deliver
-5-
the Shares or the proceeds from the sale of the Shares if the Participant fails to comply with the Participant’s obligations in
connection with the Tax-Related Items as described in this Section 9(b).
(c)
Section 409A. Subject to Section 11(b) of the Plan, this Award is intended to be exempt from Section 409A
as a short-term deferral thereunder and shall be construed and administered in accordance with that intent.
10.
Effect on Employment. Neither the grant of this Award, nor the issuance of Shares upon the vesting of this Award,
will give the Participant any right to be retained in the employ or service of the Company or any of its subsidiaries, affect the
right of the Company or any of its subsidiaries to discharge the Participant at any time, or affect any right of the Participant to
terminate his or her Employment at any time.
11.
Provisions of the Plan. This Agreement is subject in its entirety to the provisions of the Plan, which are incorporated
herein by reference. A copy of the Plan as in effect on the Date of Grant has been made available to the Participant. By
accepting this Award, the Participant agrees to be bound by the terms of the Plan and this Agreement. In the event of any conflict
between the terms of this Agreement and the Plan, the terms of the Plan will control.
12.
Non-U.S. and Country-Specific Provisions. The PSUs and any Shares subject to the PSUs shall be subject to any
special terms and conditions set forth in Exhibit C attached hereto. Moreover, if the Participant relocates to one of the countries
included in Exhibit C, the special terms and conditions for such country will apply to the Participant, to the extent the Company
determines that the application of such terms and conditions is necessary or advisable for legal or administrative
purposes. Exhibit C constitutes part of this Agreement.
Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant’s
13.
participation in the Plan, on the PSUs and on any Shares subject to the PSUs, to the extent the Company determines it is
necessary or advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or
undertakings that may be necessary to accomplish the foregoing.
14.
Acknowledgments. The Participant acknowledges and agrees that (i) this Agreement may be executed in two or more
counterparts, each of which will be an original and all of which together will constitute one and the same instrument; (ii) this
Agreement may be executed and exchanged using facsimile, portable document format (PDF) or electronic signature, which, in
each case, will constitute an original signature for all purposes hereunder; and (iii) such signature by the Company will be
binding against the Company and will create a legally binding agreement when this Agreement is countersigned by the
Participant.
[Signature page follows.]
-6-
The Company, by its duly authorized officer, and the Participant have executed this Agreement as of the date first set
forth above.
CERENCE INC.
By:
Name:
Title:
Agreed and Accepted:
By
[●]
Signature Page to Performance-Based Restricted Stock Unit Award Agreement
EXHIBIT A
Vesting Schedule
This Exhibit A describes the terms and conditions upon which the PSUs will become Earned PSUs.
1.
Definitions. All capitalized terms used in this Exhibit A, unless separately defined, have the meanings set forth in
the Performance-Based Restricted Stock Unit Award Agreement to which this Exhibit A is attached. The terms set forth below, as
used in this Exhibit A, shall have the following meanings:
a.
b.
“Performance Period” shall mean [●].
“Vesting Date” shall mean [●].
2.
Earning of the PSUs. [●]1
1 NTD: Performance Objectives to be described here once determined.
EXHIBIT B
STATE-SPECIFIC MODIFICATIONS OF SECTION 4
This Exhibit B sets forth modifications of Section 4 of this Agreement for the Participant if the Participant’s primary residence or
primary place of employment is in a Designated State on the date when the Participant executes this Agreement or if the
Participant’s primary place of employment is in a Designated State on the date when the Participant’s employment terminates, the
terms set forth under the heading below for the Designated State supplement, modify or replace the terms set forth in Section 4 as
follows:
CALIFORNIA
Delete Section 4(b), replace Section 4(c) with the following and renumber Sections 4(d) and (e) accordingly:
(b)
Nonsolicitation. The Participant hereby agrees that throughout the Participant’s employment with the
Company or any other Cerence Company and for the one (1) year period immediately following any termination of the
Participant’s employment, regardless of whether voluntary or involuntary, the Participant shall not knowingly participate in
soliciting or communicating with an employee of a Cerence Company for the purpose of persuading or helping the Cerence
Company employee to end or reduce his or her relationship with the Cerence Company. “Cerence Company” means the
Company or any direct or indirect subsidiary or other affiliate of the Company.
COLORADO
Insert the following at the end of Section 4(b):
Notwithstanding the foregoing, this Section 4(b) shall not apply to the Participant unless the Participant is an executive, a
member of management or a member of the professional staff to executive and management personnel, within the meaning of
Colo. Rev. Stat. § 8-2-113(2)(d).
MASSACHUSETTS
Replace Section 4(b) with the following:
(b)
Noncompetition. The Participant hereby agrees that throughout the Participant’s employment with the
Company or any other Cerence Company and, in the event of a Qualifying Termination, for the one (1) year period immediately
following such Qualifying Termination, the Participant shall not provide services to a Competitor in any role or position (as
employee, consultant or otherwise) that involves engaging in Restricted Activities in a Restricted Territory. “Qualifying
Termination” means a voluntary termination of the Participant’s employment with any Cerence Company or any involuntary
termination other than a termination without “cause” or in which the Participant was “laid off,” as the terms “cause” and “laid
off” are used in the Massachusetts Noncompetition Agreement Act, M.G.L. c. 149, § 24L(c). Notwithstanding the foregoing, this
Section 4(b) shall not apply to the Participant if the Participant is classified as a nonexempt employee for purposes of the Fair
Labor Standards Act, 29 U.S.C. § 201 et seq.
Insert the following after Section 4(d) and renumber Section 4(e) accordingly:
(e)
Effective Date. Notwithstanding any other provision of this Agreement, this Agreement shall not become
effective until at least ten (10) business days after notice of this Agreement was provided to the Participant.
(f)
Certain Acknowledgments. The Participant acknowledges each of the following:
(i)
(ii)
The terms of the Award pursuant to this Agreement constitute fair and reasonable consideration
independent from the continuation of employment for the obligations of this Section 4, including
without limitation Section 3(b).
The Award constitutes mutually agreed-upon consideration for the obligations in Section 4, including
without limitation Section 4(b). The Participant further acknowledges that the Participant had the
option of declining the Award and thereby declining to enter into this Agreement, including Section
4(b), and freely chose to enter into this Agreement.
(iii)
The Company has advised the Participant that the Participant had the right to consult with counsel
prior to signing this Agreement.
(g)
Jurisdiction. The Participant hereby consents to the personal jurisdiction of the state and federal courts
situated within Massachusetts for purposes of enforcing Section 4 of this Agreement, and waives any objection that the
Participant might have to personal jurisdiction or venue in those courts. The Company and the Participant agree that all civil
actions relating to Section 4 of this Agreement shall be brought in the county of Suffolk, Massachusetts and that the superior
court or the business litigation session of the superior court shall have exclusive jurisdiction. This Section 4(g) supersedes
Section 13(c) of the Plan with respect to disputes arising under Section 4 of this Agreement.
OREGON
Delete Section 4(b) and renumber Sections 4(c), (d) and (e) accordingly.
WASHINGTON
Replace Section 4(b) with the following:
(b)
Noncompetition. The Participant hereby agrees that throughout the Participant’s employment with the Company or
any other Cerence Company and for the one (1) year period immediately following any termination of the Participant’s
employment, regardless of whether voluntary or involuntary, other than a termination as a result of a layoff, the Participant shall
not provide services to a Competitor in any role or position (as employee, consultant or otherwise) that involves engaging in
Restricted Activities in a Restricted Territory. The Participant acknowledges that the Award constitutes independent
consideration for the obligations in this Section 4(b). Notwithstanding the foregoing, this Section 4(b) shall not apply to the
Participant if the Participant’s earnings from any and all Cerence Companies are less than $100,000 or are less than such greater
amount as determined by the Washington State Department of Labor and Industries
based on adjustments for inflation effective on and after January 1, 2021. “Earnings” for these purposes consist of compensation
reflected on box one of the Participant’s Form W-2 that is paid to the Participant over the prior year, or portion thereof for which
the Participant was employed, annualized and calculated as of the date of termination of employment or any earlier enforcement.
EXHIBIT C
NON-U.S. AND COUNTRY-SPECIFIC PROVISIONS
Terms and Conditions
This Exhibit C includes special terms and conditions applicable to the Participant if the Participant resides, is employed or is
otherwise subject to laws outside the U.S. and, as applicable, in one of the countries listed below. These terms and conditions
supplement or replace (as indicated) the terms and conditions set forth in the Performance-Based Restricted Stock Unit Award
Agreement to which it is attached. All capitalized terms used in this Exhibit C, unless separately defined, have the meanings set
forth in the Performance-Based Restricted Stock Unit Award Agreement to which this Exhibit C is attached.
Notifications
This Exhibit C also includes information regarding exchange controls and certain other issues of which the Participant should be
aware with respect to his or her participation in the Plan. The information is based on the exchange control, securities and other
laws in effect in the respective countries as of June 2019. Such laws are often complex and change frequently. In addition, other
laws and regulations generally applicable to the acquisition, holding or disposal of securities and financial instruments as well as
cross-border fund transfers may apply to the Participant. As a result, the Participant should not rely on the information noted
herein as the only source of information relating to the consequences of participation in the Plan because the information may be
out of date at the time the PSUs vest or the Participant receives or sells Shares.
In addition, the information in this Exhibit C is general in nature and may not apply to the Participant’s particular situation. The
Company is not in a position to assure the Participant of any particular result. Accordingly, the Participant should seek
appropriate professional advice as to how the relevant laws in the relevant country apply to the Participant’s situation.
* * * * *
If the Participant is a citizen or resident of a country other than the one in which the Participant is currently residing and/or
working, transfers employment and/or residency after the date of grant, or is considered a resident of another country for local
law purposes, the terms and conditions and information contained herein may not be applicable to the Participant. The Company
shall, in its sole discretion, determine to what extent the terms and conditions herein shall apply to the Participant in such a case.
-1-
TERMS AND CONDITIONS FOR ALL PARTICIPANTS OUTSIDE THE U.S.
1.
Nature of Grant. By accepting the grant of PSUs, the Participant acknowledges, understands and agrees that:
(a)
the Plan is established voluntarily by the Company, is discretionary in nature and may be amended,
suspended or terminated by the Company at any time to the extent permitted in the Plan;
(b)
the grant of PSUs is exceptional, voluntary and occasional and does not create any contractual or other right
to receive future grants of performance-based restricted stock units, or benefits in lieu of performance-based restricted stock
units, even if performance-based restricted stock units have been awarded in the past;
(c)
all decisions with respect to future grants of performance-based restricted stock units, if any, will be at the
sole discretion of the Company;
(d)
(e)
the Participant is voluntarily participating in the Plan;
the grant of PSUs and any Shares subject to the PSUs, and the income from and value of same, are not
intended to replace any pension rights or compensation;
(f)
unless otherwise agreed with the Company, the PSUs and the Shares subject to the PSUs, and the income
from and value of same, are not granted as consideration for, or in connection with, any service the Participant may provide as a
director of a subsidiary of the Company;
(g)
the future value of the Shares underlying the PSUs is unknown, indeterminable and cannot be predicted with
certainty;
(h)
no claim or entitlement to compensation or damages shall arise from forfeiture of the PSUs resulting from (i)
the application of any compensation recovery or clawback policy adopted by the Company or required by applicable laws or (ii)
termination of the Participant’s Employment (for any reason whatsoever and whether or not later found to be invalid or in breach
of employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment
agreement, if any);
(i)
for purposes of the PSUs, the Participant’s Employment will be considered terminated as of the date the
Participant is no longer actively providing services to the Company or a subsidiary of the Company (regardless of the reason for
such termination and whether or not later to be found invalid or in breach of employment laws in the jurisdiction where the
Participant is employed or the terms of the Participant’s employment agreement, if any) and, unless otherwise expressly provided
in the Agreement or determined by the Company, the Participant’s right to vest in the Earned PSUs under the Plan, if any, will
terminate as of such date and will not be extended by any notice period (e.g., the Participant’s period of service would not include
any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the
jurisdiction where the Participant is employed or the terms of the Participant’s employment
agreement, if any); the Administrator shall have the exclusive discretion to determine when the Participant is no longer actively
providing services for purposes of the PSUs, and
(j)
neither the Company, the Employer nor any subsidiary of the Company shall be liable for any exchange rate
fluctuation between the Participant’s local currency and the United States Dollar that may affect the value of the PSUs or of any
amounts due to the Participant pursuant to the vesting and settlement of the Earned PSUs or the subsequent sale of any Shares
acquired upon settlement.
2.
Additional Conditions to Issuance of Shares. If at any time the Company determines, in its discretion, that the listing,
registration or qualification of the Shares upon any securities exchange or under any law (including any U.S. or non-U.S. federal,
state or local law), or the consent or approval of any governmental regulatory authority is necessary or desirable as a condition to
the issuance of Shares to the Participant, such issuance will not occur unless and until such listing, registration, qualification,
consent or approval has been effected or obtained free of any conditions not acceptable to the Company.
3.
No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company
making any recommendations regarding the Participant’s participation in the Plan or sale of the Shares acquired upon vesting and
settlement of the Earned PSUs. The Participant should consult with his or her own personal tax, legal and financial advisors
regarding his or her participation in the Plan before taking any action related to the Plan.
4.
Data Privacy. If the Participant would like to participate in the Plan, the Participant will need to review the
information provided in this Section 4 and, where applicable, declare the Participant’s consent to the processing and/or
transfer of personal data as described below.
(a) EEA+ Controller and Representative. If the Participant is based in the European Union (“EU”), the European
Economic Area, Switzerland or, if and when the United Kingdom leaves the European Union, the United
Kingdom (collectively “EEA+”), Participant should note that the Company, with its registered address at 15
Wayside Road, Burlington, MA 01803, United States of America, is the controller responsible for the
processing of the Participant’s personal data in connection with the Agreement and the Plan. The Company’s
representative in the EU is Cerence B.V. CBS-weg 11, Heerlen, Netherlands.
(b) Data Collection and Usage. The Company collects, uses and otherwise processes certain personal data about
the Participant, including, but not limited to, the Participant’s name, home address and telephone number,
email address, date of birth, social insurance number, passport or other identification number (e.g., resident
registration number), salary, nationality, job title, any shares of stock or directorships held in the Company,
details of all PSUs or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or
outstanding in the Participant’s favor, which the Company receives from the Participant, Participant’s
Employer or otherwise in connection with this Agreement or the Plan (“Data”), for the purposes of
implementing, administering and managing the Plan and allocating Shares pursuant to the Plan.
If the Participant is based in the EEA+, the legal basis, where required, for the processing of Data by the
Company is the necessity of the data processing for the Company to (i) perform its contractual obligations
under this Agreement, (ii) comply with legal obligations established in the EEA+, or (iii) pursue the legitimate
interest of complying with legal obligations established outside of the EEA+.
If the Participant is based outside of the EEA+, the legal basis, where required, for the processing of Data by
the Company is the Participant’s consent, as further described below.
(c) Stock Plan Administration Service Providers. The Company transfers Data to E*TRADE Corporate Financial
Services, Inc., and E*TRADE Securities LLC (collectively, “E*TRADE”), an independent service provider,
which is assisting the Company with the implementation, administration and management of the Plan. In the
future, the Company may select a different service provider and share Data with such other provider serving in
a similar manner. E*TRADE will open an account for the Participant to receive and trade Shares acquired
under the Plan. The Participant may be asked to agree on separate terms and data processing practices with
E*TRADE, with such agreement being a condition to the ability to participate in the Plan.
(d)
International Data Transfers. In the event the Participant resides, works or is otherwise located outside of the
U.S., Data will be transferred from the Participant’s country to the U.S., where the Company and its service
providers are based. The Participant understands and acknowledges that the U.S. is not subject to an unlimited
adequacy finding by the European Commission and might not provide a level of protection of personal data
equivalent to the level of protection in the Participant’s country. As a result, in the absence of a
self‑certification of the data recipient in the U.S. under the EU/U.S. Privacy Shield Framework and the
implementation of appropriate safeguards such as the Standard Contractual Clauses adopted by the EU
Commission, the processing of personal data might not be subject to substantive data processing principles or
supervision by data protection authorities. In addition, data subjects might have no or less enforceable rights
regarding the processing of their personal data.
Neither the Company nor E*TRADE is currently self-certified under the EU/U.S. Privacy Shield
Framework. If the Participant is based in the EEA+, Data will be transferred from the EEA+ to the Company
based on the EU Standard Contractual Clauses. The Participant may request a copy of such appropriate
safeguards by contacting generalcounsel@cerence.com. The onward transfer of Data from the Company to
E*TRADE or, as the case may be, a different service provider of the Company is conducted without appropriate
safeguards based solely on the Participant’s consent, as further described below.
If the Participant is based outside of the EEA+, the Company’s legal basis, where required, for the transfer of
Data from the Participant’s country to the Company and from the Company onward to E*TRADE or, as the
case may be, a different service provider of the Company is the Participant’s consent, as further described
below.
(e) Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer
and manage the Participant’s participation in the Plan, or as required to comply with legal or regulatory
obligations, including under tax and security laws.
(f) Data Subject Rights. The Participant may have a number of rights under data privacy laws in his or her
jurisdiction. Depending on where the Participant is based, such rights may include the right to (i) request
access or copies of Data the Company processes, (ii) the rectification or amendment of incorrect or incomplete
Data, (iii) the deletion of Data, (iv) request restrictions on the processing of Data, (v) object to the processing of
Data for legitimate interests, (vi) the portability of Data, (vi) lodge complaints with competent authorities in the
Participant’s jurisdiction, and/or to (viii) receive a list with the names and addresses of any potential recipients
of Data. To receive additional information regarding these rights or to exercise these rights, the Participant can
contact generalcounsel@cerence.com.
(g) Necessary Disclosure of Personal Data. The Participant understands that providing the Company with Data is
necessary for the performance of the Agreement and that the Participant’s refusal to provide Data would make
it impossible for the Company to perform its contractual obligations and may affect the Participant’s ability to
participate in the Plan.
(h) Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and
the Participant is providing any consents referred to herein on a purely voluntary basis. The Participant
understands that he or she may withdraw any such consent at any time with future effect for any or no
reason. If the Participant does not consent, or if the Participant later seeks to withdraw the Participant’s
consent, the Participant’s salary from or employment and career with the Employer will not be affected; the
only consequence of refusing or withdrawing the Participant’s consent is that the Company would not be able
to grant the PSUs or other awards to the Participant or administer or maintain the PSUs. For more
information on the consequences of refusal to consent or withdrawal of consent, the Participant should contact
generalcounsel@cerence.com.
Declaration of Consent. If the Participant is based in the EEA+, by accepting the PSUs and indicating consent via the
Company’s online acceptance procedure, the Participant explicitly declares his or her consent to the onward transfer of
Data by the Company to E*TRADE or, as the case may be, a different service provider of the Company in the U.S. as
described in Section 4(e) above.
If the Participant is based outside of the EEA+, by accepting the PSUs and indicating consent via the Company’s online
acceptance procedure, the Participant explicitly declares his or her consent to the entirety of the Data processing
operations described in this Section 4 including, without limitation, the onward transfer of Data by the Company to
E*TRADE or, as the case may be, a different service provider of the Company in the U.S.
5.
Agreement Severable. In the event that any provision in this Agreement is held invalid or unenforceable, such
provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the
remaining provisions of this Agreement.
6.
Language. The Participant acknowledges and represents that the Participant is sufficiently proficient in the English
language or has consulted with an advisor who is sufficiently proficient in English as to allow the Participant to understand the
terms and conditions of this Agreement and any other documents related to the Plan. If the Participant has received this
Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the
translated version is different from the English version, the English version will control.
Electronic Delivery and Participation. The Company may, in its sole discretion, deliver any documents related to this
7.
Agreement or to participation in the Plan or to future awards that may be granted under the Plan by electronic means or to request
the Participant’s consent to participate in the Plan by electronic means. The Participant hereby consents to receive such
documents by electronic delivery and to participate in the Plan through an online or electronic system established and maintained
by the Company or a third party designated by the Company.
8.
Waiver. The Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement
shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by the
Participant or any other participant.
9.
Insider Trading Restrictions/Market Abuse Laws. The Participant acknowledges that he or she may be subject to insider
trading restrictions and/or market abuse laws in applicable jurisdictions including, but not limited to, the United States and the
Participant’s country of residence, which may affect the Participant’s ability to directly or indirectly acquire, sell or attempt to sell
Shares or rights to Shares (e.g., PSUs) under the Plan during such times as the Participant is considered to have “insider
information” regarding the Company (as defined by the laws in the applicable jurisdictions). Any restrictions under these laws or
regulations are separate from and in addition to any restrictions that may be imposed under any applicable insider trading policy
of the Company. The Participant is responsible for ensuring compliance with any applicable restrictions and should consult his or
her personal legal advisor on this matter.
10.
Foreign Asset/Account, Exchange Control, and Tax Reporting. Depending on the Participant’s country, the Participant
may be subject to foreign asset/account, exchange control and/or tax reporting requirements as a result of the vesting and
settlement of the PSUs, the acquisition, holding, and/or transfer of Shares or cash resulting from participation in the Plan and/or
the opening and maintenance of a brokerage or bank account in connection with the Plan. The Participant may be required to
report such assets, accounts, account balances and values and/or related transactions to the applicable authorities in his or her
country and/or repatriate funds received in connection with the Plan to the Participant’s country within a certain time period
and/or according to certain procedure. The Participant acknowledges that he or she is responsible for ensuring compliance with
any applicable foreign asset/account, exchange control and tax reporting requirements and that the Participant should consult
with his or her personal legal advisor to ensure compliance with applicable laws.
11.
Restrictive Covenants. If under applicable law of the Participant’s country, an employer must pay post-employment
compensation for one or more of the restrictive covenants in Section 4 to be enforceable, the Company reserves the right to pay
such compensation. An election not to pay such compensation shall be deemed a waiver of a restrictive covenant to the extent
that such post-termination compensation is required for such restrictive covenant to be enforceable.
BELGIUM
Notifications
Foreign Asset/Account Reporting Information. The Participant is required to report any securities (e.g., Shares acquired under the
Plan) or bank accounts (including brokerage accounts) held outside of Belgium on the Participant’s annual tax return. The
Participant will also be required to complete a separate report providing the National Bank of Belgium with details regarding any
such account (including the account number, the name of the bank in which such account is held and the country in which such
account is located). This report, as well as additional information on how to complete it, can be found on the website of the
National Bank of Belgium, www.nbb.be, under Kredietcentrales/Centrales des crédits caption.
Stock Exchange Tax Alert. A stock exchange tax may apply to transactions under the Plan, such as the sale of Shares acquired
under the Plan. The Participant should consult with his or her personal tax advisor for details regarding the Participant’s
obligations with respect to the stock exchange tax.
Brokerage Account Tax Alert. A brokerage account tax may apply if the average annual value of the securities the Participant
holds (including Shares acquired under the Plan) in a brokerage or other securities account exceeds certain thresholds. The
Participant should consult with his or her personal tax advisor for details regarding the Participant’s obligations with respect to
the brokerage account tax.
CANADA
Terms and Conditions
Delivery of Shares. This provision supplements Section 5 of the Performance-Based Restricted Stock Unit Award Agreement:
The discretion to pay cash in lieu of delivering Shares for the PSUs, as described in the Plan, shall not apply to any PSUs in
Canada. All vested Earned PSUs in Canada will be settled by the Company issuing Shares to the Participant.
Nature of Grant. This provision replaces Section 1(i) of this Exhibit C:
For purposes of the PSUs, the Participant’s Employment will be considered terminated as of the date that is the earliest of: (a) the
date the Participant’s Employment with the Employer is terminated, (b) the date the Participant receives written notice of
termination from the Employer, regardless of any notice period or period of pay in lieu of such notice mandated under the
employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment contract, if
any, or (c) the date the Participant is no longer actively providing services to the Company or a subsidiary of the Company
(regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the
jurisdiction where the Participant is employed or the terms of the Participant’s employment contract, if any) and, unless otherwise
expressly provided in the Agreement, Exhibit A or determined by the Company, the Participant’s right to vest in the Earned PSUs
under the Plan, if any, will terminate as of such date; the Administrator shall have the exclusive discretion to determine when the
Participant is no longer actively providing services for purposes of the PSUs.
If the Participant is a resident of Quebec, the following provisions also will apply:
Language Consent. The parties acknowledge that it is their express wish that the Agreement, including this Exhibit C, as well as
all documents, notices, and legal proceedings entered into, given or instituted pursuant hereto or relating directly or indirectly
hereto, be drawn up in English.
Consentement Relatif à la Langue Utilisée. Les parties reconnaissent avoir expressément souhaité que la convention ainsi que
cette Exhibit C, ainsi que tous les documents, avis et procédures judiciares, éxécutés, donnés ou intentés en vertu de, ou liés
directement ou indirectement à la présente convention, soient rédigés en langue anglaise.
Data Privacy. This provision supplements Section 4 of this Exhibit C:
The Participant hereby authorizes the Company and the Company’s representatives to discuss with and obtain all relevant
information from all personnel, professional or not, involved in the administration and operation of the Plan. The Participant
further authorizes the Company and any subsidiary of the Company, as well as E*TRADE or such other stock plan service
provider as may be selected by the Company to assist with the Plan, to disclose and discuss the Plan with their advisors. The
Participant further authorizes the Company and any subsidiary of the Company to record such information and to keep such
information in the Participant’s employee file.
Notifications
Securities Law Information. The Participant is permitted to sell Shares acquired under the Plan through the Company’s
designated broker, provided the resale of such Shares takes place outside of Canada through the facilities of a stock exchange on
which the Shares are listed. The Shares are currently listed on the Nasdaq Stock Market.
Foreign Asset/Account Reporting Information. Foreign specified property held by a Canadian resident must be reporting
annually on a Form T1135 (Foreign Income Verification Statement) if the total cost of the foreign specified property exceeds
C$100,000 at any time during the year. Thus, unvested PSUs must be reported (generally at a nil cost) if the C$100,000 cost
threshold is exceeded because of other foreign specified property held by the Participant. When Shares are acquired, their cost
generally is the adjusted cost base (“ACB”) of the Shares. The ACB would ordinarily equal the fair market value of the Shares at
the time of acquisition, but if the Participant owns other Shares, this ACB may need to be averaged with the ACB of the other
Shares. The Participant should consult with his or her personal legal advisor regarding what reporting obligations, if any, will
apply to the Participant with respect to Shares acquired under the Plan.
CHINA
Terms and Conditions
Delivery of Shares. This provision supplements Section 5 of the Performance-Based Restricted Stock Unit Award Agreement:
The settlement of the Award upon vesting is conditioned upon the Company obtaining and maintaining all necessary approvals
from the People’s Republic of China State Administration of Foreign Exchange (“SAFE”) and any other applicable government
entities required to permit the operation of the Plan in China, as determined by the Company it its sole discretion. If or to the
extent the Company is unable to obtain or maintain the registration or otherwise comply with applicable regulatory requirements
in China, no Shares shall be issued under the Plan. In this case, and notwithstanding Section 5 of the Performance-Based
Restricted Stock Unit Award Agreement, the Company retains the discretion to settle the Award through local payroll in the form
of a cash payment equal to the fair market value of the Shares subject to the vested Earned PSUs on the vesting date, subject to
any obligation to satisfy Tax-Related Items; and any references in the Performance-Based Restricted Stock Unit Award
Agreement to the issuance of Shares shall not apply to the Participant.
To facilitate compliance with any applicable laws and regulations in China, the Participant agrees that the Company (or a
brokerage firm instructed by the Company, if applicable) is entitled to (i) sell all Shares issued to the Participant at settlement (on
the Participant’s behalf and at the Participant’s direction pursuant to this authorization), either at the time of settlement, at the
time the Participant ceases employment with the Employer, or at such other time as determined by the Company, and (ii) require
that any Shares acquired under the Plan be held with a designated brokerage firm until such Shares are sold.
The Participant also agrees to sign any agreements, forms and/or consents that may be reasonably requested by the Company (or
the Company’s designated brokerage firm) to effectuate the sale of
the Shares and acknowledges that neither the Company nor the designated brokerage firm is under any obligation to arrange
for such sale of Shares at any particular price (it being understood that the sale will occur at the then-current market price) and
that brokerage fees or commissions may be incurred in any such sale. In any event, when Shares acquired under the Plan are
sold, the proceeds of the sale of the Shares, less any Tax-Related Items and brokerage fees or commissions, will be remitted to the
Participant in accordance with applicable exchange control laws and regulations.
Exchange Control Restrictions. The Participant understands and agrees that he or she is required to immediately repatriate the
proceeds of the sale of Shares, any cash dividends or dividend equivalents, and any other funds realized under the Plan to
China. The Participant further understands that the repatriation of such funds may need to be effected through a special exchange
control account established by the Company or a subsidiary of the Company and the Participant hereby consents and agrees that
such funds may be transferred to such special account prior to being delivered to the Participant’s personal account.
The Participant also understands that the Company will deliver sale proceeds, any cash dividends or dividend equivalents, and
any other funds realized under the Plan to the Participant as soon as practicable, but that there may be delays in distributing the
funds due to exchange control requirements in China. Funds may be paid to the Participant in U.S. dollars or local currency at
the Company’s discretion. If the funds are paid in U.S. dollars, the Participant will be required to set up a U.S. dollar bank
account in China so that the proceeds may be deposited into this account. If the funds are paid in local currency, the Company is
under no obligation to secure any particular currency conversion rate and the Company may face delays in converting the funds
to local currency. The Participant agrees to bear any currency fluctuation risk between the time the Shares are sold and the time
(i) the Tax-Related Items are converted to local currency and remitted to the tax authorities and/or (ii) the net proceeds are
converted to local currency and distributed to the Participant.
The Participant further agrees to comply with any other requirements that may be imposed by the Company in the future in order
to facilitate compliance with exchange control requirements in China.
GERMANY
Notifications
Exchange Control Information. The Participant must report any cross-border payments in excess of €12,500 to the German
Federal Bank (Bundesbank). The report must be filed electronically and the form of report (Allgemeine Meldeportal Statistik)
can be accessed via the Bundesbank’s website (www.bundesbank.de). The Participant is responsible for complying with
applicable reporting obligations and should consult his or her personal legal advisor on this matter.
HONG KONG
Terms and Conditions
Delivery of Shares. This provision supplements Section 5 of the Performance-Based Restricted Stock Unit Award Agreement:
The discretion to pay cash in lieu of delivering Shares for the PSUs, as described in the Plan, shall not apply to any PSUs in Hong
Kong. All vested Earned PSUs in Hong Kong will be settled by the Company issuing Shares to the Participant.
Notifications
Securities Law Information. WARNING: The PSUs and the Shares issued upon settlement of the PSUs do not constitute a public
offering of securities and are available only to employees of the Company or subsidiaries of the Company.
The Agreement, the Plan and other incidental communication materials are intended only for the personal use of the Participant
and not for distribution to any other persons. The Agreement, the Plan and other incidental communication materials have not
been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the
applicable companies and securities legislation in Hong Kong, nor have the documents been reviewed by any regulatory
authority in Hong Kong. If the Participant has questions about any of the contents of the Agreement or the Plan, he or she
should contact a legal or other professional advisor.
INDIA
Notifications
Exchange Control Information. Any funds realized in connection with the Plan (e.g., proceeds from the sale of Shares and cash
dividends paid on Shares) must be repatriated to India within a specified period of time after receipt as prescribed under Indian
exchange control laws. It is the Participant’s responsibility to obtain an inward remittance certificate (“FIRC”) from the bank
where the Participant deposits the foreign currency. The Participant should maintain the FIRC as evidence of the repatriation of
funds in the event the Reserve Bank of India or the Employer requests proof of repatriation.
Foreign Asset/Account Reporting Requirement. The Participant is required to declare foreign bank accounts and any foreign
financial assets (including Shares and, possibly, rights to Shares held outside India) in the Participant’s annual tax return. The
Participant should consult with his or her personal tax advisor to ensure compliance with applicable reporting obligations.
ITALY
Terms and Conditions
Plan Document Acknowledgment. By accepting the Agreement, the Participant further acknowledges that the Participant has
received a copy of the Plan, has reviewed the Plan and the Agreement in their entirety and fully understands and accepts all
provisions of the Plan and the Agreement. The Participant further acknowledges that the Participant has read and specifically and
expressly approves, without limitation, the following sections of the Performance-Based Restricted Stock Unit Award
Agreement: Section 2, “Earned PSUs”; Section 3, “Vesting of Earned PSUs; Cessation of Employment”; Section 4, “Restrictive
Covenants”; Section 5, “Delivery of Shares”; Section 6 “Forfeiture; Recovery”; Section 9, “Taxes”; and Section 13, “Imposition
of Other Requirements”; and the following sections of Exhibit C: Section 1, “Nature of Grant”; Section 2, “Additional Conditions
to Issuance of Shares”; Section 4, “Data Privacy”; Section 7, “Electronic Delivery and Participation”; Section 9, “Insider Trading
Restrictions/Market Abuse Laws”; Section 10, “Foreign Asset/Account, Exchange Control and Tax Reporting” (including the
“Foreign Asset/Account Reporting Information” below for Italy); and Section 11, “Restrictive Covenants.”
Notifications
Foreign Asset/Account Reporting Information. If the Participant holds investments abroad or foreign financial assets (e.g., cash,
Shares) that may generate income taxable in Italy, the Participant is required to report them on his or her annual tax return
(UNICO Form, RW Schedule) or on a special form if no tax return is due. The same reporting duties apply if the Participant is
the beneficial owner of the investments, even if the Participant does not directly hold investments abroad or foreign assets.
Foreign Financial Assets Tax Alert. The value of any Shares (and certain other foreign assets) held outside of Italy may be
subject to a foreign financial assets tax. The taxable amount is equal to the fair market value of Shares on December 31 or on the
last day the Shares were held (the tax is levied in proportion to the number of days Shares were held over the calendar year). The
value of financial assets held abroad must be reported in the annual tax return. The Participant should consult with his or her
personal tax advisor for details regarding the Participant’s obligations with respect to the foreign financial assets tax.
JAPAN
Notifications
Foreign Asset/Account Reporting Information. The Participant is required to report details of any assets (such as Shares) held
outside of Japan as of December 31st to the extent such assets have a total net fair market value exceeding ¥50,000,000. Such
report is due by March 15th each year. The Participant should consult with his or her personal tax advisor as to whether the
reporting obligation extends to any outstanding PSUs held by the Participant and to ensure compliance with applicable reporting
obligations.
KOREA
Notifications
Foreign Asset/Account Reporting Information. Korean residents must declare all foreign financial accounts (e.g., brokerage
accounts, bank accounts) to the Korean tax authorities and file a report with respect to such accounts if the value of such accounts
exceeds KRW 500 million (or an equivalent amount in foreign currency) on any month-end date during the calendar year. The
Participant should consult with his or her personal tax advisor to ensure compliance with applicable reporting obligations.
SPAIN
Terms and Conditions
Nature of Grant. This section supplements Section 1 of this Exhibit C:
By accepting the PSUs, the Participant consents to participate in the Plan and acknowledges having received a copy of the Plan.
The Participant understands that, as a condition of the grant of the PSUs, unless otherwise set forth in Exhibit A, the termination
of the Participant’s employment for any reason will automatically result in the forfeiture of any and all PSUs that have not vested
as of the date of termination. In particular, the Participant understands and agrees that, unless otherwise set forth in Exhibit A,
any unvested PSUs will be forfeited without entitlement to the underlying Shares or to any amount as indemnification in the
event of a termination of the Participant’s employment prior to vesting by reason of, including, but not limited to: death,
disability, resignation, retirement, disciplinary dismissal adjudged to be with cause, disciplinary dismissal adjudged or recognized
to be without cause, individual or collective layoff on objective grounds, whether adjudged to be with cause or adjudged or
recognized to be without cause, material modification of the terms of employment under Article 41 of the Workers’ Statute,
relocation under Article 40 of the Workers’ Statute, Article 50 of the Workers’ Statute, unilateral withdrawal by the Employer,
and under Article 10.3 of Royal Decree 1382/1985.
Furthermore, the Participant understands that the Company has unilaterally, gratuitously and discretionally decided to grant the
PSUs under the Plan to individuals who may be employees of the Company or subsidiary of the Company throughout the
world. The decision is a limited decision that is entered into upon the express assumption and condition that any grant will not
economically or otherwise bind the Company or any subsidiary of the Company on an ongoing basis (other than as set forth in
this Agreement and the Plan). Consequently, the Participant understands that the PSUs are granted on the assumption and
condition that the PSUs and the related Shares shall not become a part of any employment or contract (either with the Company
or any subsidiary of the Company) and shall not be considered a mandatory benefit, salary for any purposes (including severance
compensation) or any other right whatsoever. In addition, the Participant understands that the grant of the PSUs would not be
made to the Participant but for the assumptions and conditions referred to above; thus, the Participant acknowledges and freely
accepts that should any or all of the assumptions be mistaken or should any of the conditions not be met for any reason, then the
grant of PSUs shall be null and void.
Notifications
Securities Law Information. No “offer of securities to the public,” as defined under Spanish law, has taken place or will take
place in the Spanish territory in connection with the grant of the PSUs under the Plan. This Agreement and the Plan have not
been nor will they be registered with the Comisión Nacional del Mercado de Valores, and do not constitute a public offering
prospectus.
Exchange Control Information. The Participant must declare the acquisition, ownership and disposition of stock in a foreign
company (including Shares acquired under the Plan) to the Spanish Dirección General de Comercio e Inversiones (the “DGCI”),
the Bureau for Commerce and Investments, which is a department of the Ministry of Economy and Competitiveness, for
statistical purposes. Generally, the declaration must be filed in January for Shares acquired or sold during (or owned as of
December 31) the prior year; however, if the value of the Shares acquired under the Plan or the amount of the sale proceeds
exceeds €1,502,530, the declaration must be filed within one month of the acquisition or sale, as applicable.
The Participant may be required to declare electronically to the Bank of Spain any foreign accounts (including brokerage
accounts held abroad), any foreign instruments (including Shares acquired under the Plan), and any transactions with non-
Spanish residents (including any payment of cash or Shares made by the Company) depending on the value of the transactions
during the relevant year or the balances in such accounts and the value of such instruments as of December 31 of the relevant
year. The Participant should consult with his or her personal legal advisor regarding the applicable thresholds and corresponding
reporting requirements.
Foreign Asset/ Account Reporting Information. The Participant is required to report assets or rights deposited or held outside of
Spain (including the Shares acquired under the Plan or cash proceeds from the sale of the Shares acquired under the Plan) if the
value per type of asset or right exceeds a certain threshold. This obligation applies to assets and rights held as of December 31
and requires that information on such assets and rights be included in the Participant’s tax return filed with the Spanish tax
authorities for such year. After such assets or rights are initially reported, the reporting obligation will apply for subsequent years
only if the value of any previously reported asset or right increases by more than a certain threshold or if ownership of such asset
or right is transferred or relinquished during the year. The Participant should consult with his or her personal tax advisor
regarding the applicable thresholds and corresponding reporting requirements.
SWITZERLAND
Notifications
Securities Law Information. The PSUs are not intended to be publicly offered in or from Switzerland. Neither this document nor
any other materials relating to the PSUs (i) constitutes a prospectus as such term is understood pursuant to article 652a of the
Swiss Code of Obligations, or (ii) may be publicly distributed or otherwise made publicly available in Switzerland. Further,
neither this document nor any other offering or marketing material relating to the offering of the PSUs has been or will be filed
with or approved or supervised by any Swiss regulatory authority (in particular, the Swiss Financial Market Supervisory
Authority (FINMA)).
UNITED KINGDOM
Terms and Conditions
Delivery of Shares. This provision supplements Section 5 of the Performance-Based Restricted Stock Unit Award Agreement:
PSUs shall be settled only in Shares. In no event shall the PSUs be paid in cash, notwithstanding any discretion contained in the
Plan to the contrary.
Taxes. This provision supplements Section 9 of the Performance-Based Restricted Stock Unit Award Agreement:
Without limitation to Section 9 of the Performance-Based Restricted Stock Unit Award Agreement, the Participant hereby agrees
that the Participant is liable for all Tax-Related Items and hereby covenants to pay all such Tax-Related Items, as and when
requested by the Company or if different, the Employer or by Her Majesty’s Revenue & Customs (“HMRC”) (or any other tax
authority or any other relevant authority). The Participant also hereby agrees to indemnify and keep indemnified the Company
and, if different, the Employer against any Tax-Related Items that they are required to pay or withhold or have paid or will pay to
HMRC (or any other tax authority or any other relevant authority) on the Participant’s behalf.
Notwithstanding the foregoing, if the Participant is a director or executive officer of the Company (within the meaning of Section
13(k) of the Exchange Act), the terms of the immediately foregoing provision will not apply. In the event that the Participant is a
director or executive officer of the Company and the income tax is not collected from or paid by the Participant within ninety
(90) days of the end of the U.K. tax year in which an event giving rise to the indemnification described above occurs, the amount
of any uncollected income tax may constitute a benefit to the Participant on which additional income tax and National Insurance
contributions (“NICs”) may be payable. The Participant will be responsible for reporting and paying any income tax due on this
additional benefit directly to HMRC under the self-assessment regime and for paying to the Company and/or the Employer (as
appropriate) the amount of any employee NICs due on this additional benefit.
NIC Joint Election. As a condition of participation in the Plan, the Participant agrees to accept liability for any secondary Class 1
National Insurance contributions that may be payable by the Company and/or the Employer (or any successor to the Company or
the Employer) in connection with the PSUs and any event giving rise to Tax-Related Items (“Employer NICs”).
Without prejudice to the foregoing, the Participant agrees to enter into the following joint election with the Company, the form of
such NICs Joint Election being formally approved by HMRC (the “NIC Joint Election”), and any other consent or elections
required to accomplish the transfer of the Employer NICs to the Participant. The Participant further agrees to execute such other
elections as may be required between the Participant and any successor to the Company and/or the Employer for the purpose of
continuing the effectiveness of the Participant’s NIC Joint Election. The Participant understands that the NIC Joint Election
applies to any PSUs granted to him or her under the Plan after the execution of the NIC Joint Election. The Participant agrees
that the Employer NICs may be collected by the Company or the Employer by any of the methods set forth in Section 9 of the
Performance-Based Restricted Stock Unit Award Agreement.
If the Participant does not enter into the NIC Joint Election, he or she will not be entitled to vest in the Earned PSUs or receive
any benefit in connection with the PSUs unless and until he or she enters into a NIC Joint Election and no Shares or other benefit
pursuant to the PSUs will be issued to the Participant under the Plan, without any liability to the Company and/or the Employer.
IMPORTANT NOTE: By accepting the Agreement (whether by clicking on the acceptance buttons as part of the Company’s
electronic acceptance procedure or by signing the Agreement in hard copy), the Participant is agreeing to be bound by the
terms of the NIC Joint Election. The Participant should read the terms of the NIC Joint Election carefully before accepting
the Agreement and the NIC Joint Election. However, if requested by the Company, the Participant agrees to separately
execute the NIC Joint Election.
ATTACHMENT FOR THE UNITED KINGDOM
Important Note on the Joint Election to Transfer
Employer National Insurance Contributions
As a condition of participation in the Cerence Inc. 2019 Equity Incentive Plan, as amended (the “Plan”) and the
performance-based restricted stock units (the “PSUs”) that have been granted to you (the “Participant”) by Cerence Inc.,
a Delaware corporation (the “Company”), the Participant is required to enter into a joint election to transfer to the
Participant any liability for employer national insurance contributions (the “Employer’s Liability”) that may arise in
connection with the grant of the PSUs or in connection with any performance-based restricted stock units that may be
granted by the Company to the Participant under the Plan (the “Joint Election”).
If the Participant does not agree to enter into the Joint Election, the grant of the PSUs will be worthless and the
Participant will not be able to vest in the PSUs or receive any benefit in connection with the PSUs.
By entering into the Joint Election:
•
•
•
the Participant agrees that any Employer’s Liability that may arise in connection with or pursuant to the vesting
of the PSUs (or any performance-based restricted stock units granted to the Participant under the Plan) or the
acquisition of Shares or other taxable events in connection with the PSUs (or any other performance-based
restricted stock units granted under the Plan) will be transferred to the Participant;
the Participant authorises the Company and/or the Participant’s employer to recover an amount sufficient to
cover this liability by any method set forth in the Performance-Based Restricted Stock Unit Award Agreement
and/or the Joint Election; and
the Participant acknowledges that even if he or she has accepted the Joint Election via the Company’s online
procedure, the Company or the Participant’s employer may still require the Participant to sign a paper copy of
the Joint Election (or a substantially similar form) if the Company determines such is necessary to give effect to
the Joint Election.
By accepting the PSUs through the Company’s online acceptance procedure (or by signing the Performance-Based Restricted
Stock Unit Award Agreement), the Participant is agreeing to be bound by the terms of the Joint Election.
Please read the terms of the Joint Election carefully before accepting the Performance-Based Restricted Stock Unit
Award Agreement and the Joint Election.
Please print and keep a copy of the Joint Election for your records.
Election To Transfer the Employer’s National Insurance Liability to the Employee
CERENCE INC. 2019 EQUITY INCENTIVE PLAN
(UK Employees)
1.
Parties
This Election is between:
(A)
You, the individual who has gained access to this Election (the “Employee”), who is employed by one of the
employing companies listed in the attached schedule (the “Employer”) and who is eligible to receive performance-based
restricted stock units (“PSUs”) granted by Cerence Inc. pursuant to the terms and conditions of the Cerence Inc. 2019 Equity
Incentive Plan, as amended (the “Plan”), and
(B)
Cerence Inc. of 15 Wayside Road, Burlington, Massachusetts, United States (the “Company”), which may
grant PSUs under the Plan and is entering into this Form of Election on behalf of the Employer.
2.
2.1
2.2
Purpose of Election
This Election relates to PSUs granted by the Company to the Employee under the Plan on or after [date].
In this Election the following words and phrases have the following meanings:
“Taxable Event” means .any event giving rise to Relevant Employment Income.
“ITEPA” means the Income Tax (Earnings and Pensions) Act 2003.
“Relevant Employment Income” from PSUs on which employer’s National Insurance Contributions becomes due is defined as:
i.
ii.
iii.
(A)
(B)
an amount that counts as employment income of the earner under section 426 ITEPA (restricted securities:
charge on certain post-acquisition events);
an amount that counts as employment income of the earner under section 438 of ITEPA (convertible
securities: charge on certain post-acquisition events); or
any gain that is treated as remuneration derived from the earner’s employment by virtue of section 4(4)(a)
SSCBA, including without limitation:
the acquisition of securities pursuant to the PSUs (within the meaning of section 477(3)(a) of ITEPA);
the assignment (if applicable) or release of the PSUs in return for consideration (within the meaning of
section 477(3)(b) of ITEPA);
(C)
the receipt of a benefit in connection with the PSUs, other than a benefit within (i) or (ii) above (within the
meaning of section 477(3)(c) of ITEPA).
“SSCBA” means the Social Security Contributions and Benefits Act 1992.
2.3
This Election relates to the Employer’s secondary Class 1 National Insurance Contributions (the “Employer’s
Liability”) which may arise in respect of the Relevant Employment Income in respect of PSUs pursuant to section 4(4)(a) and/or
paragraph 3B(1A) of Schedule 1 of the SSCBA.
2.4
This Election does not apply in relation to any liability, or any part of any liability, arising as a result of regulations
being given retrospective effect by virtue of section 4B(2) of either the SSCBA or the Social Security Contributions and Benefits
(Northern Ireland) Act 1992.
2.5
This Election does not apply to the extent that it relates to relevant employment income which is employment income
of the earner by virtue of Chapter 3A of Part VII of ITEPA (employment income: securities with artificially depressed market
value).
2.6
Any reference to the Company and/or the Employer shall include that entity’s successors in title and assigns as
permitted in accordance with the terms of the Plan and the Performance-Based Restricted Stock Unit Award Agreement. This
Election will have effect in respect of the PSUs and any awards which replace or replaced the PSUs following their grant in
circumstances where section 483 of ITEPA applies.
3.
Election
The Employee and the Company jointly elect that the entire liability of the Employer to pay the Employer’s Liability that arises
on any Relevant Employment Income is hereby transferred to the Employee. The Employee understands that by accepting the
PSUs (whether by clicking on the acceptance buttons as part of the Company’s electronic acceptance procedure or by signing the
Performance-Based Restricted Stock Unit Award Agreement in hard copy), he or she will become personally liable for the
Employer’s Liability covered by this Election. This Election is made in accordance with paragraph 3B(1) of Schedule 1 to
SSCBA.
4.
Payment of the Employer’s Liability
4.1
any Relevant Employment Income from the Employee at any time after the Taxable Event:
The Employee hereby authorises the Company and/or the Employer to collect the Employer’s Liability in respect of
(i)
Event; and/or
by deduction from salary or any other payment payable to the Employee at any time on or after the date of the Taxable
(ii)
directly from the Employee by payment in cash or cleared funds; and/or
(iii)
receive in respect of the PSUs; and/or
by arranging, on behalf of the Employee, for the sale of some of the securities which the Employee is entitled to
(iv)
by any other means specified in the Performance-Based Restricted Stock Unit Award Agreement.
4.2
of the PSUs to the Employee until full payment of the Employer’s Liability is received.
The Company hereby reserves for itself and the Employer the right to withhold the transfer of any securities in respect
4.3
The Company agrees to procure the remittance by the Employer of the Employer’s Liability to HM Revenue and
Customs on behalf of the Employee within 14 days after the end of the UK tax month during which the Taxable Event occurs (or
within 17 days after the end of the UK tax month during which the Taxable Event occurs, if payments are made electronically).
5.
Duration of Election
5.1
transferred abroad or is not employed by the Employer on the date on which the Employer’s Liability becomes due.
The Employee and the Company agree to be bound by the terms of this Election regardless of whether the Employee is
5.2
(i)
(ii)
(iii)
This Election will continue in effect until the earliest of the following:
the Employee and the Company agree in writing that it should cease to have effect;
on the date the Company serves written notice on the Employee terminating its effect;
on the date HM Revenue and Customs withdraws approval of this Election; or
(iv)
could relate, such that the Election ceases to have effect in accordance with its terms.
after due payment of the Employer’s Liability in respect of the entirety of the PSUs to which this Election relates or
Acceptance by the Employee
The Employee acknowledges that by accepting the PSUs (whether by clicking on the acceptance buttons as part of the
Company’s electronic acceptance procedure or by signing the Performance-Based Restricted Stock Unit Award Agreement in
hard copy), the Employee agrees to be bound by the terms of this Election.
Acceptance by the Company
The Company acknowledges that, by arranging for the scanned signature of an authorised representative to appear on this
Election, the Company agrees to be bound by the terms of this Election.
Signed for and on behalf of the Company
[insert signature and signatory details]
SCHEDULE OF EMPLOYER COMPANIES
The following are employer companies to which this Joint Election may apply:
Cerence Limited
Registered Office:
Company Registration Number:
Corporation Tax Reference:
PAYE Reference:
79 Clerkenwell Rd, Farringdon, London EC1R 5AR, UK
12000685
[insert]
[insert]
AMENDMENT NO. 1
TO THE
CERENCE INC.
2019 EQUITY INCENTIVE PLAN
Exhibit 10.18
WHEREAS, Cerence Inc. (the “Company”) maintains the Cerence Inc. 2019 Equity Incentive Plan (the “Plan”), which was
previously adopted by the Board of Directors of the Company (the “Board”) and approved by the stockholders of the Company;
WHEREAS, the Board desires to amend the tax withholding provisions of the Plan; and
WHEREAS, Section 9 of the Plan provides that the Board may amend the Plan at any time, subject to certain conditions set forth
therein.
NOW, THEREFORE:
1.
Section 6(a)(6) of the Plan is hereby deleted it in its entirety and replaced with the following:
“Taxes. The grant of an Award and the issuance, delivery, vesting and retention of Stock, cash or other property under an Award
are conditioned upon the full satisfaction by the Participant of all tax and other withholding requirements with respect to the Award. The
Administrator will prescribe such rules for the withholding of taxes and other amounts with respect to any Award as it deems necessary.
Without limitation to the foregoing, the Company or any parent or subsidiary of the Company shall have the authority and the right to deduct
or withhold (by any means set forth herein or in an Award agreement), or require a Participant to remit to the Company or a parent or
subsidiary of the Company, an amount sufficient to satisfy all U.S. and non-U.S. federal, state and local income tax, social insurance, payroll
tax, fringe benefits tax, payment on account or other tax-related items related to participation in the Plan and legally applicable to the
Participant and required by law to be withheld (including any amount deemed by the Company, in its discretion, to be an appropriate charge
to the Participant even if legally applicable to the Company or any parent or subsidiary of the Company). The Administrator, in its sole
discretion, may hold back shares of Stock from an Award or permit a Participant to tender previously owned shares of Stock in satisfaction of
tax or other withholding requirements (but not in excess of the maximum withholding amount consistent with the Award being subject to
equity accounting treatment under the Accounting Rules). Any amounts withheld pursuant to this Section 6(a)(6) will be treated as though
such amounts had been made directly to the Participant. The Administrator may also require the Company’s tax withholding obligation to be
satisfied, in whole or in part, by an arrangement whereby a certain number of shares of Stock issued pursuant to any Award are immediately
sold and proceeds from such sale are remitted to the Company in an amount that would satisfy the withholding amount due. In addition, the
Company may, to the extent permitted by law, deduct any such tax and other withholding amounts from any payment of any kind otherwise
due to a Participant from the Company or any parent or subsidiary of the Company.”
the Board.
2.
3.
Effective Date of Amendment. This Amendment to the Plan shall become effective upon the date that it is approved by
Other Provisions. Except as set forth above, all other provisions of the Plan shall remain unchanged.
IN WITNESS WHEREOF, this Amendment No. 1 to the Plan has been adopted by the Board of Directors of the Company this 3rd
day of November 2020.
2
Subsidiary Name
Cerence AI LLC
Cerence Operating Company
Consolidated Mobile Corporation
VoiceBox Technologies LLC
AMS Solutions Corporation
Multi-Corp International Ltd.
Cerence BVBA
Cerence Acquisition ULC
Cerence Holding Inc.
Cerence Technologies Inc.
Zi Corporation
Zi Corporation of Canada, Inc.
845162 Alberta Ltd.
Cerence Communications Technology (Shanghai) Co. Ltd.
Cerence Software Technology (Beijing) Co. Ltd.
Huayu Zi Software Technology (Beijing) Co, Ltd.
USA Shenyu Technologies (Shenzhen) Co., Ltd.
VoiceBox Technologies France S.A.S.
Cerence Deutschland GmbH
Cerence GmbH
VoiceBox Technologies Deutschland GmbH
Asia Translations & Telecommunications Ltd.
Cerence Hong Kong Limited
Huayu Zi Software Technology Ltd.
Telecom Technology Corporation Limited
Zi Corporation (H.K.) Ltd.
Zi Corporation of Hong Kong Ltd.
Cerence Services (India) LLP
Cerence Services Ireland Limited
Cerence S.r.l.
Cerence Japan K.K.
Cerence B.V.
Cerence Holding B.V.
Cerence Service B.V.
VoiceBox Technologies Europe B.V.
Cerence Operations S.L.
Cerence Ltd.
Cerence AB
Cerence Switzerland AG
Cerence Taiwan Ltd.
Cerence Limited
SUBSIDIARIES OF CERENCE INC.
Exhibit 21.1
Jurisdiction
Delaware
Delaware
Delaware
Delaware
Massachusetts
Barbados
Belgium
Canada
Canada
Canada
Canada
Canada
Canada
China
China
China
China
France
Germany
Germany
Germany
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
Hong Kong SAR
India
Ireland
Italy
Japan
Netherlands
Netherlands
Netherlands
Netherlands
Spain
South Korea
Sweden
Switzerland
Taiwan
United Kingdom
Type
Domestic
Domestic
Domestic
Domestic
Domestic
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
International
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Cerence Inc.
Burlington, Massachusetts
We hereby consent to the incorporation by reference in the Registration Statements on Form S-1 (No. 333-234214) and Form S-8 (No. 333-
234040) of Cerence Inc. of our report dated November 19, 2020, relating to the consolidated and combined financial statements (which report expresses an
unqualified opinion and includes an explanatory paragraph related to the Company’s change in method of accounting for leases due to the adoption of the
new lease standard), which appears in this Form 10-K.
/s/ BDO USA, LLP
Boston, Massachusetts
November 19, 2020
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sanjay Dhawan, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Cerence Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the fiscal years covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the fiscal years presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 19, 2020
By:
/s/ Sanjay Dhawan
Sanjay Dhawan
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark Gallenberger, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Cerence Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the fiscal years covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the fiscal years presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 19, 2020
By:
/s/ Mark Gallenberger
Mark Gallenberger
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Cerence Inc. (the “Company”) on Form 10-K for the year ending September 30, 2020 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: November 19, 2020
By:
/s/ Sanjay Dhawan
Sanjay Dhawan
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Cerence Inc. (the “Company”) on Form 10-K for the year ending September 30, 2020 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: November 19, 2020
By:
/s/ Mark Gallenberger
Mark Gallenberger
Chief Financial Officer
(Principal Financial Officer)