Item 8. Financial Statements and Supplementary Data.
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
Refer to accompanying Notes to the Consolidated and Combined Financial Statements.
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 (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 (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 March 2020, the World Health Organization 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,” isolate residents to their homes or places of residence, and practice social distancing.
We have taken numerous steps in our approach to addressing the COVID-19 pandemic, and we will continue to closely monitor ongoing developments in connection with the COVID-19 pandemic and its impact on our business.
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 scope of the pandemic, its severity, the emergence of new variants of the virus, the development and availability of effective treatments and vaccines, the speed at which vaccines are administered, 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 2021 and 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 years presented. All such adjustments are of a normal recurring nature.
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Fiscal 2019
Standalone financial statements had not been historically prepared for the Cerence business. The accompanying combined financial statements have been prepared from the Parent’s historical accounting records and are presented on a “carve out” basis to include the historical financial position, results of operations and cash flows applicable to the Cerence business. 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 Statement of Operations includes 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 Statement of Cash Flows presents 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 17, 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 Statement of Operations. However, the stock-based compensation expense has been included within the net parent investment. Refer to Note 13 for further description of the accounting for stock-based compensation.
Transactions between the Parent and the Cerence business are considered to be effectively settled in the combined financial statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions was reflected in the Combined Statement of Cash Flows as a financing activity and in the Combined Statement of Changes in Parent Company Equity 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 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 years 2021 and 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 year 2019
The combined financial statements present the statement of operations, changes in 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 Statement of Changes in Parent Company Equity.
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(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 credit losses and 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
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.
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, 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 (when 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.
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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 and other allowances that represent variable consideration under Accounting Standards Codification (“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 product or services are 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. 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.
69
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.
(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:
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•
|
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.
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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.
(e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.
(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 Sheets until realized. Interest income earned from our marketable securities is reported within Interest income on the Consolidated and Combined Statements 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 gains 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 and Combined Statements 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 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, 2021, 2020, and 2019.
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
70
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.
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.
On July 1, 2021, 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.
(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 remaining 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 was no impairment of long-lived assets during the years ended September 30, 2021, 2020, and 2019.
(i) Allowance for Credit Losses
Fiscal year 2021
We are exposed to credit losses primarily through our sales of software licenses and services to customers. We determine credit ratings for each customer in our portfolio based upon public information and information obtained directly from our customers. A credit limit for each customer is established and in certain cases we may require collateral or prepayment to mitigate credit risk. Our expected loss methodology is developed using historical collection experience, current customer credit information, current and future economic and market conditions and a review of the current status of the customer's account balances. We monitor our ongoing credit
71
exposure through reviews of customer balances against contract terms and due dates, current economic conditions, and dispute resolution. Estimated credit losses are written off in the period in which the financial asset is no longer collectible.
The change in the allowance for credit losses for the fiscal year ended September 30, 2021 is as follows (dollars in thousands):
|
|
Allowance for Credit Losses
|
|
Balance as of September 30, 2020
|
|
$
|
1,394
|
|
Current period recoveries
|
|
|
(415
|
)
|
Write-offs
|
|
|
(112
|
)
|
Foreign exchange impact on ending balance
|
|
|
12
|
|
Balance as of September 30, 2021
|
|
$
|
879
|
|
Fiscal years 2020 and 2019
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 and 2019, the activity related to the allowance for doubtful accounts was as follows (dollars in thousands):
|
|
Allowance for
Doubtful
Accounts
|
|
Balance at October 1, 2018
|
|
$
|
954
|
|
Bad debt provisions
|
|
|
401
|
|
Write-offs, net of recoveries
|
|
|
(490
|
)
|
Balance at September 30, 2019
|
|
|
865
|
|
Bad debt provisions
|
|
|
704
|
|
Write-offs, net of recoveries
|
|
|
(175
|
)
|
Balance at September 30, 2020
|
|
$
|
1,394
|
|
(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):
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|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Transition and integration costs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
563
|
|
Professional service fees
|
|
|
—
|
|
|
|
—
|
|
|
|
381
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
944
|
|
72
(l) Income Taxes
Fiscal years 2021 and 2020
We account for income taxes using the assets and liabilities method, as prescribed by ASC No. 740, Income Taxes, or ASC 740.
Deferred Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying 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 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 using 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 tax for the repatriations of such foreign earnings.
Valuation Allowance
We regularly review our deferred tax assets for recoverability considering historical 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 are 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 year 2019
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
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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.
(m) Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, reflected in the Consolidated Statements of Equity, consists of the following (dollars in thousands):
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Foreign currency translation adjustments
|
|
$
|
3,284
|
|
|
$
|
5,264
|
|
Net unrealized losses on post-retirement benefits
|
|
|
(1,639
|
)
|
|
|
(1,552
|
)
|
Net unrealized losses on available-for-sale securities
|
|
|
(11
|
)
|
|
|
(1
|
)
|
Accumulated other comprehensive income
|
|
$
|
1,634
|
|
|
$
|
3,711
|
|
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. One customer accounted for 12.1% of our Accounts receivable, net balance at September 30, 2021. Two customers accounted for 14.8% and 10.9% of our Accounts receivable, net balance at September 30, 2020.
(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 income 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 fiscal years ended September 30, 2021, 2020 and 2019 were ($1.7) million, $2.4 million, and ($0.3) million, respectively.
74
(p) Net Parent Investment
In the Combined Statement of Changes in Parent Company Equity, 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 years 2021 and 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. For performance-based restricted stock units, the compensation cost is recognized based on the number of units expected to vest upon the achievement of the performance conditions. 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 to the employee 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 and Combined Statements of Operations. Excess tax benefits are recognized as deferred tax assets upon settlement and are subject to regular review for valuation allowance.
Fiscal year 2019
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. The 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 awards and the number of the awards expected to be vested based on service and performance conditions, net of forfeitures. We recorded any tax effect related to stock-based awards through the Combined Statement 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 seven years. Some of our leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Operating lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment.
Operating leases are included in Operating lease right of use assets, Short-term operating lease liabilities, and Long-term operating lease liabilities on our Consolidated Balance Sheets as of September 30, 2021 and 2020. Finance leases are included in Property and equipment, net, Accrued expenses and other current liabilities, and Other liabilities on our Consolidated Balance Sheets as of September 30, 2021 and 2020.
Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. For operating leases, costs are included within Cost of revenues, Research and development, Sales and marketing, and General and administrative lines on the Consolidated and Combined Statements of Operations. For financing leases, amortization of the finance right of use assets is included within Research and Development, Sales and marketing, and General and administrative lines on the Consolidated and Combined Statements of Operations, and interest expense is included within Interest expense.
For operating leases, the related cash payments are included in the operating cash flows on the Consolidated and Combined Statements of Cash Flows. For financing leases, the related cash payments for the principal portion of the lease liability are included in
75
the financing cash flows on the Consolidated and Combined Statement of Cash Flows and the related cash payments for the interest portion of the lease liability are included within the operating section of the Consolidated and Combined 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 and Combined Statements 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 Income (Loss) Per Share
Basic net income (loss) 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 18. The dilutive effect of the Notes is reflected in net 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.
(u) Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted ASU 2016-13 using the modified retrospective approach as of October 1, 2020. The effects of applying ASU 2016-13 as a cumulative-effect adjustment to Retained earnings was immaterial.
(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 consolidated financial position, results of operations or cash flows, or do not apply to our operations.
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
76
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. 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.
We 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, 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 (when 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. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under Accounting Standards Codification (“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 product or services are 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. 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
Embedded software and technology licenses operate without access to the external networks and information. Embedded licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology are
77
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.
Revenue from distinct embedded software and technology licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software and technology is made available to the customer and control is transferred. For income statement presentation purposes, we separate distinct embedded license revenue from professional services revenue based on their relative SSPs.
Revenue from embedded software and technology licenses sold on a royalty basis, where the license of non-exclusive intellectual property is the predominant item to which the royalty relates, is recognized in the period the usage occurs in accordance with ASC 606-10-55-65(A).
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. There can be instances where the customer purchases a software license that allows them to take possession of the software to enable hosting by the customer or a third-party. For such arrangements, the performance obligation of the license is completed at a point in time once the customer takes possession of the software.
Professional Services
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. Furthermore, hybrid contracts that contain both embedded and connected license and professional services are analyzed to determine if the products and services are distinct or have stand-alone functionality to determine the revenue treatment.
Judgments are required to determine the SSP for each distinct performance obligation. 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. For contracts that contain future royalties, the allocation of SSP is determined using any fixed payments as well as the forecasted volume usage associated with royalties.
78
(c) Disaggregated Revenue
Revenues, classified by the major geographic region in which our customers are located, for the fiscal years ended September 30, 2021, 2020 and 2019 (dollars in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
135,033
|
|
|
$
|
129,338
|
|
|
$
|
131,877
|
|
Other Americas
|
|
|
175
|
|
|
|
16
|
|
|
|
1,044
|
|
Germany
|
|
|
114,936
|
|
|
|
100,674
|
|
|
|
78,258
|
|
Other Europe, Middle East and Africa
|
|
|
29,964
|
|
|
|
25,394
|
|
|
|
20,478
|
|
Japan
|
|
|
62,840
|
|
|
|
50,936
|
|
|
|
44,472
|
|
Other Asia-Pacific
|
|
|
44,234
|
|
|
|
24,609
|
|
|
|
27,186
|
|
Total net revenues
|
|
$
|
387,182
|
|
|
$
|
330,967
|
|
|
$
|
303,315
|
|
Revenues within the United States, Germany, and Japan accounted for more than 10% of revenue for all periods presented.
Revenues relating to two customers accounted for $72.0 million, or 18.6%, and $41.6 million, or 10.8% of revenue for the fiscal year ended September 30, 2021. Revenues relating to one customer accounted for $76.9 million, or 23.2%, 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.
(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, 2021 and 2020, we had $6.9 million and $5.6 million of contract acquisition costs. We had amortization expense of $1.9 million, $1.5 million and $0.7 million related to these costs during the fiscal years ended September 30, 2021, 2020 and 2019. There was no impairment related to contract acquisition costs.
(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, 2021 and 2020, we had $37.8 million and $45.4 million of capitalized contract costs.
We had amortization expense of $15.4 million, $12.0 million and $10.6 million related to these costs during the fiscal years ended September 30, 2021, 2020 and 2019, respectively. There was no impairment related to contract 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 in our Consolidated Balance Sheets at their net estimated realizable value. We maintain an
79
allowance for credit losses to provide for the estimated amount of receivables and contract assets 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, 2021, we had $59.1 million of current contract assets. The table below shows significant changes in contract assets (dollars in thousands):
|
|
Contract assets
|
|
Balance as of October 1, 2019
|
|
$
|
9,219
|
|
Revenues recognized but not billed
|
|
|
52,682
|
|
Amounts reclassified to accounts receivable, net
|
|
|
(31,624
|
)
|
Balance as of September 30, 2020
|
|
$
|
30,277
|
|
Revenues recognized but not billed
|
|
|
89,217
|
|
Amounts reclassified to accounts receivable, net
|
|
|
(60,351
|
)
|
Balance as of September 30, 2021
|
|
$
|
59,143
|
|
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 September 30, 2021, we had $276.7 million of deferred revenue. The table below shows significant changes in deferred revenue (dollars in thousands):
|
|
Deferred revenue
|
|
Balance as of October 1, 2019
|
|
$
|
353,284
|
|
Amounts billed but not recognized
|
|
|
96,126
|
|
Revenue recognized
|
|
|
(124,681
|
)
|
Balance as of September 30, 2020
|
|
$
|
324,729
|
|
Amounts billed but not recognized
|
|
|
105,540
|
|
Revenue recognized
|
|
|
(153,532
|
)
|
Balance as of September 30, 2021
|
|
$
|
276,737
|
|
(g) Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at September 30, 2021 (dollars in thousands):
|
|
Within One
Year
|
|
|
Two to Five
Years
|
|
|
Greater
than
Five Years
|
|
|
Total
|
|
Total revenue
|
|
$
|
144,679
|
|
|
$
|
172,723
|
|
|
$
|
19,028
|
|
|
$
|
336,430
|
|
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.
5. Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net 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 income per share by applying the treasury stock method.
The dilutive effect of the Notes (as defined in Note 18) is reflected in net 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
80
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.
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 income (loss) per share:
|
|
September 30,
|
|
in thousands, except per share data
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) - basic and diluted
|
|
$
|
45,893
|
|
|
$
|
(18,316
|
)
|
|
$
|
100,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
37,752
|
|
|
|
36,428
|
|
|
|
36,391
|
|
Dilutive effect of restricted stock awards
|
|
|
1,405
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive effect of contingently issuable stock awards
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average common shares outstanding - diluted
|
|
|
39,289
|
|
|
|
36,428
|
|
|
|
36,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.22
|
|
|
$
|
(0.50
|
)
|
|
$
|
2.76
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
(0.50
|
)
|
|
$
|
2.76
|
|
We exclude weighted-average potentially issuable shares from the calculations of diluted net income (loss) 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 for the fiscal years ended September 30, 2021, 2020 and 2019:
|
|
Year Ended September 30,
|
|
in thousands
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Restricted stock awards
|
|
|
-
|
|
|
|
1,058
|
|
|
|
-
|
|
Contingently issuable stock awards
|
|
|
-
|
|
|
|
151
|
|
|
|
-
|
|
Conversion option of our Notes
|
|
|
4,677
|
|
|
|
1,538
|
|
|
|
-
|
|
6. 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.
|
81
The following table presents information about our financial assets that are measured at fair value and indicates the fair value hierarchy of the valuation inputs used (dollars in thousands) as of:
|
|
September 30, 2021
|
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Marketable Securities
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (a)
|
|
$
|
75,873
|
|
|
$
|
75,873
|
|
|
$
|
-
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits, $2,965 at cost (a)
|
|
|
2,965
|
|
|
|
2,965
|
|
|
|
-
|
|
Commercial paper, $18,080 at cost (b)
|
|
|
18,080
|
|
|
|
-
|
|
|
|
18,080
|
|
Corporate bonds, $19,704 at cost (b)
|
|
|
19,694
|
|
|
|
-
|
|
|
|
19,694
|
|
Debt securities, $2,000 at cost (c)
|
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
118,612
|
|
|
$
|
78,838
|
|
|
$
|
37,774
|
|
|
|
September 30, 2020
|
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Marketable Securities
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (a)
|
|
$
|
101,437
|
|
|
$
|
101,437
|
|
|
$
|
-
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper, $9,883 at cost (b)
|
|
|
9,883
|
|
|
|
-
|
|
|
|
9,883
|
|
Corporate bonds, $1,780 at cost (b)
|
|
|
1,779
|
|
|
|
-
|
|
|
|
1,779
|
|
Total assets
|
|
$
|
113,099
|
|
|
$
|
101,437
|
|
|
$
|
11,662
|
|
|
(a)
|
Money market funds and other highly liquid investments with original maturities of 90 days or less are included within Cash and cash equivalents in the Consolidated Balance Sheets.
|
|
(b)
|
Commercial paper and corporate bonds with original maturities greater than 90 days are included within Marketable securities in the Consolidated Balance Sheets and classified as current or noncurrent based upon whether the maturity of the financial asset is less than or greater than 12 months.
|
|
(c)
|
Debt securities are included within Prepaid and other current assets in the Consolidated Balance Sheets and classified as current given the maturity of the financial asset is less than 12 months.
|
During the fiscal years ended September 30, 2021 and 2020, we recorded an immaterial amount of unrealized losses related to our marketable securities within Accumulated other comprehensive income. We did not have any marketable securities during fiscal year 2019.
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.
Derivative financial instruments are recognized at fair value and are classified within Level 2 of the fair value hierarchy. See Note 7 – Derivative Financial Instruments for additional details.
Long-term debt
The estimated fair value of our Long-term debt is determined by Level 2 inputs and is based on observable market data including prices for similar instruments. As of September 30, 2021 and 2020, the estimated fair value of our Notes was $469.0 million and $271.0 million, respectively. The Notes are recorded at face value less unamortized debt discount and transaction costs on our Consolidated Balance Sheets. The carrying amount of the Senior Credit Facilities (as defined in Note 18) approximates fair value given the underlying interest rate applied to such amounts outstanding is currently set to the prevailing market rate.
Equity securities
During the fiscal year 2021, we made a non-controlling equity investment in a privately held company. We evaluated the equity investment under the voting model and concluded consolidation was not applicable. We accounted for the investment by electing the measurement alternative for investments without readily determinable fair values and for which we do not have the ability to exercise significant influence. The non-marketable equity securities are carried at cost less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which is recorded within the Consolidated and Combined Statements of Operations. We hold $2.6 million of investments without readily determinable
82
fair values as of September 30, 2021. The investment is included within Other assets on the Consolidated Balance Sheets. There have been no adjustments to the carrying value of the investment resulting from impairments or observable price changes.
7. Derivative Financial Instruments
We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates related to third-party vendor and intercompany payments for goods and services within our non-U.S. subsidiaries. We use foreign exchange forward contracts that are not designated as hedges to manage currency risk. The contracts can have maturities up to three years. At September 30, 2021, the total notional amount of forward contracts was $61.0 million. At September 30, 2021, the weighted-average remaining maturity of these instruments was approximately 11.9 months.
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of September 30, 2021 and 2020 (dollars in thousands):
|
|
|
|
Fair Value
|
|
Derivatives not designated as hedges
|
|
Classification
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
1,235
|
|
|
$
|
-
|
|
Foreign currency forward contracts
|
|
Other assets
|
|
|
365
|
|
|
|
-
|
|
Foreign currency forward contracts
|
|
Accrued expenses and other current liabilities
|
|
|
131
|
|
|
|
-
|
|
Foreign currency forward contracts
|
|
Other liabilities
|
|
$
|
148
|
|
|
$
|
-
|
|
The following tables display a summary of the income (loss) related to foreign currency forward contracts within the Consolidated and Combined Statements of Operations for the fiscal years ended September 30, 2021, 2020 and 2019 (dollars in thousand):
|
|
|
|
Gain recognized in earnings
|
|
|
|
|
|
Year Ended September 30,
|
|
Derivatives not designated as hedges
|
|
Classification
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2019
|
|
Foreign currency forward contracts
|
|
Other income (expense), net
|
|
$
|
2,512
|
|
|
$
|
-
|
|
|
$
|
-
|
|
8. Goodwill and Intangible Assets
(a) Goodwill
The changes in the carrying amount of goodwill for the fiscal years ended September 30, 2021 and 2020 were as follows (dollars in thousands):
|
Total
|
|
Balance as of October 1, 2019
|
$
|
1,119,329
|
|
Effect of foreign currency translation
|
|
8,869
|
|
Balance as of September 30, 2020
|
|
1,128,198
|
|
Effect of foreign currency translation
|
|
313
|
|
Balance as of September 30, 2021
|
$
|
1,128,511
|
|
(b) Intangible Assets, Net
The following tables summarizes the gross carrying amounts and accumulated amortization of intangible assets by major class (dollars in thousands):
|
|
September 30, 2021
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted Average
Remaining Life
(Years)
|
|
Customer relationships
|
|
$
|
110,485
|
|
|
$
|
(88,638
|
)
|
|
$
|
21,847
|
|
|
|
2.2
|
|
Technology and patents
|
|
|
90,738
|
|
|
|
(87,237
|
)
|
|
|
3,501
|
|
|
|
0.9
|
|
Total
|
|
$
|
201,223
|
|
|
$
|
(175,875
|
)
|
|
$
|
25,348
|
|
|
|
|
|
83
|
|
September 30, 2020
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted Average
Remaining Life
(Years)
|
|
Customer relationships
|
|
$
|
110,512
|
|
|
$
|
(75,915
|
)
|
|
$
|
34,597
|
|
|
|
3.0
|
|
Technology and patents
|
|
|
90,658
|
|
|
|
(79,639
|
)
|
|
|
11,019
|
|
|
|
1.6
|
|
Total
|
|
$
|
201,170
|
|
|
$
|
(155,554
|
)
|
|
$
|
45,616
|
|
|
|
|
|
Amortization expense for acquired technology and patents is included in the cost of revenue in the accompanying Consolidated and Combined Statements of Operations and amounted to $7.5 million, $8.3 million, and $8.5 million for the fiscal years ended September 30, 2021, 2020, and 2019, respectively. Additionally, amortization expense for intangible assets of the Parent utilized by the Cerence business amounted to $22 thousand in the fiscal year ended September 30, 2019, and is included in the cost of revenue as shown in Note 16. Amortization expense for customer relationships is included in operating expenses and amounted to $12.7 million, $12.6 million, and $12.5 million in the fiscal years ended September 30, 2021, 2020, and 2019, respectively. Estimated amortization for each of the five succeeding years and thereafter as of September 30, 2021, is as follows (dollars in thousands):
Year Ending September 30,
|
|
Cost of
Revenues
|
|
|
Operating
Expenses
|
|
|
Total
|
|
2022
|
|
$
|
2,983
|
|
|
$
|
11,661
|
|
|
$
|
14,644
|
|
2023
|
|
|
414
|
|
|
|
6,052
|
|
|
|
6,466
|
|
2024
|
|
|
104
|
|
|
|
2,362
|
|
|
|
2,466
|
|
2025
|
|
|
|
|
|
|
1,772
|
|
|
|
1,772
|
|
2026
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,501
|
|
|
$
|
21,847
|
|
|
$
|
25,348
|
|
9. Property and Equipment, Net
Property and equipment, net consisted of the following (dollars in thousands):
|
|
Useful Life
|
|
September 30,
|
|
|
|
(In years)
|
|
2021
|
|
|
2020
|
|
Machinery and equipment
|
|
3-5
|
|
$
|
7,577
|
|
|
$
|
7,746
|
|
Computers, software and equipment
|
|
3-5
|
|
|
42,380
|
|
|
|
42,705
|
|
Leasehold improvements
|
|
2-15
|
|
|
8,493
|
|
|
|
10,513
|
|
Furniture and fixtures
|
|
5-7
|
|
|
4,150
|
|
|
|
4,691
|
|
Finance leases
|
|
|
|
|
3,437
|
|
|
|
2,710
|
|
Construction in progress
|
|
|
|
|
12,379
|
|
|
|
4,547
|
|
Subtotal
|
|
|
|
|
78,416
|
|
|
|
72,912
|
|
Less: accumulated depreciation
|
|
|
|
|
(46,911
|
)
|
|
|
(43,383
|
)
|
Total
|
|
|
|
$
|
31,505
|
|
|
$
|
29,529
|
|
As of September 30, 2021 and 2020, the net book value of capitalized internal-use software costs was $5.3 million and $6.9 million, respectively, which are included within computers, software, and equipment. Depreciation expense for the fiscal years ended September 30, 2021, 2020, and 2019 was $9.5 million, $9.2 million, and $6.2 million, respectively, which included amortization expense of $3.4 million, $3.1 million, and $2.7 million, respectively, for internally developed software costs.
84
The following table presents our property and equipment, net by geography at September 30, 2021 and 2020 (dollars in thousands):
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
22,550
|
|
|
$
|
19,898
|
|
Canada
|
|
|
2,850
|
|
|
|
3,464
|
|
Germany
|
|
|
1,973
|
|
|
|
2,573
|
|
Other countries
|
|
|
4,132
|
|
|
|
3,594
|
|
Total long-lived assets
|
|
$
|
31,505
|
|
|
$
|
29,529
|
|
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (dollars in thousands):
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Compensation
|
|
$
|
39,536
|
|
|
$
|
37,960
|
|
Sales and other taxes payable
|
|
|
8,574
|
|
|
|
14,688
|
|
Cost of revenue related liabilities
|
|
|
4,634
|
|
|
|
3,683
|
|
Professional fees
|
|
|
3,604
|
|
|
|
2,458
|
|
Interest payable
|
|
|
1,919
|
|
|
|
2,703
|
|
Other
|
|
|
6,200
|
|
|
|
4,586
|
|
Total
|
|
$
|
64,467
|
|
|
$
|
66,078
|
|
11. Restructuring and Other Costs, Net
Restructuring and other costs, net include restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside of the ordinary course of our business such as employee severance costs, costs for consolidating duplicate facilities, and separation costs directly attributable to the Cerence business becoming a standalone public company.
The following table sets forth the fiscal year ended September 30, activity relating to restructuring charges (dollars in thousands):
|
|
Personnel
|
|
|
Facilities
|
|
|
Restructuring
Subtotal
|
|
|
Other
|
|
|
Total
|
|
Balance at October 1, 2018
|
|
$
|
2,269
|
|
|
$
|
6
|
|
|
$
|
2,275
|
|
|
$
|
777
|
|
|
$
|
3,052
|
|
Restructuring and other costs, net
|
|
|
130
|
|
|
|
1,704
|
|
|
|
1,834
|
|
|
|
22,570
|
|
|
|
24,404
|
|
Cash payments
|
|
|
(1,910
|
)
|
|
|
(1,684
|
)
|
|
|
(3,594
|
)
|
|
|
(19,471
|
)
|
|
|
(23,065
|
)
|
Balance at September 30, 2019
|
|
|
489
|
|
|
|
26
|
|
|
|
515
|
|
|
|
3,876
|
|
|
|
4,391
|
|
Restructuring and other costs, net
|
|
|
3,694
|
|
|
|
1,037
|
|
|
|
4,731
|
|
|
|
11,727
|
|
|
|
16,458
|
|
Non-cash adjustment
|
|
|
—
|
|
|
|
(1,031
|
)
|
|
|
(1,031
|
)
|
|
|
—
|
|
|
|
(1,031
|
)
|
Cash payments
|
|
|
(3,420
|
)
|
|
|
(26
|
)
|
|
|
(3,446
|
)
|
|
|
(13,675
|
)
|
|
|
(17,121
|
)
|
Foreign exchange impact on ending balance
|
|
|
1
|
|
|
|
4
|
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Balance at September 30, 2020
|
|
|
764
|
|
|
|
10
|
|
|
|
774
|
|
|
|
1,928
|
|
|
|
2,702
|
|
Restructuring and other costs, net
|
|
|
1,689
|
|
|
|
1,394
|
|
|
|
3,083
|
|
|
|
2,009
|
|
|
|
5,092
|
|
Non-cash adjustment
|
|
|
—
|
|
|
|
1,809
|
|
|
|
1,809
|
|
|
|
—
|
|
|
|
1,809
|
|
Cash payments
|
|
|
(839
|
)
|
|
|
(1,265
|
)
|
|
|
(2,104
|
)
|
|
|
(2,403
|
)
|
|
|
(4,507
|
)
|
Foreign exchange impact on ending balance
|
|
|
6
|
|
|
|
(67
|
)
|
|
|
(61
|
)
|
|
|
—
|
|
|
|
(61
|
)
|
Balance at September 30, 2021
|
|
$
|
1,620
|
|
|
$
|
1,881
|
|
|
$
|
3,501
|
|
|
$
|
1,534
|
|
|
$
|
5,035
|
|
85
Fiscal Year 2021
For the fiscal year ended September 30, 2021, we recorded restructuring charges of $5.1 million, which included a $1.7 million severance charge related to the elimination of personnel across multiple functions, $1.4 million charge resulting from the closure of facilities that will no longer be utilized, and $2.0 million related to other one-time charges.
Fiscal Year 2020
For the fiscal year ended September 30, 2020, we recorded restructuring charges of $16.5 million, which included a $3.7 million severance charge related to the elimination of personnel across multiple functions, $1.0 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 fiscal 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.
12. 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 seven years. Some of our leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Operating lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment.
The following table presents certain information related to lease term and incremental borrowing rates for leases as of September 30, 2021 and 2020:
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Weighted-average remaining lease term (in months):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
52.2
|
|
|
|
55.9
|
|
Finance leases
|
|
|
47.1
|
|
|
|
55.8
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5.1
|
%
|
|
|
7.4
|
%
|
Finance leases
|
|
|
4.4
|
%
|
|
|
4.4
|
%
|
86
The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheets as of September 30, 2021 and 2020 (dollars in thousands):
|
|
Classification
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right of use assets
|
|
$
|
14,901
|
|
|
$
|
20,096
|
|
Finance lease assets
|
|
Property and equipment, net
|
|
|
1,700
|
|
|
|
1,414
|
|
Total lease assets
|
|
|
|
$
|
16,601
|
|
|
$
|
21,510
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Short-term operating lease liabilities
|
|
$
|
4,562
|
|
|
$
|
5,700
|
|
Finance
|
|
Accrued expenses and other current liabilities
|
|
|
430
|
|
|
|
271
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Long-term operating lease liabilities
|
|
$
|
12,216
|
|
|
$
|
17,821
|
|
Finance
|
|
Other liabilities
|
|
|
1,234
|
|
|
|
1,088
|
|
Total lease liability
|
|
|
|
$
|
18,442
|
|
|
$
|
24,880
|
|
The following table presents lease expense for the fiscal years ended September 30, 2021 and 2020 (dollars in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right of use asset
|
|
$
|
410
|
|
|
$
|
255
|
|
Interest on lease liability
|
|
|
63
|
|
|
|
22
|
|
Operating lease cost
|
|
|
7,619
|
|
|
|
8,245
|
|
Variable lease cost
|
|
|
2,142
|
|
|
|
1,060
|
|
Sublease income
|
|
|
(207
|
)
|
|
|
(206
|
)
|
Total lease cost
|
|
$
|
10,027
|
|
|
$
|
9,376
|
|
For the fiscal years ended September 30, 2021 and 2020, cash payments related to operating leases were $7.8 million and $8.0 million, respectively. For the fiscal years ended September 30, 2021 and 2020, cash payments related to financing leases were $0.5 million and $0.1 million, respectively, of which an immaterial amount related to the interest portion of the lease liability. For the fiscal years ended September 30, 2021 and 2020, right of use assets obtained in exchange for lease obligations were $2.9 million and $7.9 million, respectively.
87
The table below reconciles the undiscounted future minimum lease payments under non-cancelable leases to the total lease liabilities recognized on the Consolidated Balance Sheet as of September 30, 2021 (dollars in thousands):
Year Ending September 30,
|
|
Operating Leases
|
|
|
Financing Leases
|
|
|
Total
|
|
2022
|
|
$
|
5,289
|
|
|
$
|
480
|
|
|
$
|
5,769
|
|
2023
|
|
|
4,087
|
|
|
|
468
|
|
|
|
4,555
|
|
2024
|
|
|
3,748
|
|
|
|
417
|
|
|
|
4,165
|
|
2025
|
|
|
2,319
|
|
|
|
362
|
|
|
|
2,681
|
|
2026
|
|
|
1,525
|
|
|
|
53
|
|
|
|
1,578
|
|
Thereafter
|
|
|
1,521
|
|
|
|
—
|
|
|
|
1,521
|
|
Total future minimum lease payments
|
|
$
|
18,489
|
|
|
$
|
1,780
|
|
|
$
|
20,269
|
|
Less effects of discounting
|
|
|
(1,711
|
)
|
|
|
(116
|
)
|
|
|
(1,827
|
)
|
Total lease liabilities
|
|
$
|
16,778
|
|
|
$
|
1,664
|
|
|
$
|
18,442
|
|
Reported as of September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term lease liabilities
|
|
$
|
4,562
|
|
|
$
|
430
|
|
|
$
|
4,992
|
|
Long-term lease liabilities
|
|
|
12,216
|
|
|
|
1,234
|
|
|
|
13,450
|
|
Total lease liabilities
|
|
$
|
16,778
|
|
|
$
|
1,664
|
|
|
$
|
18,442
|
|
13. Stockholders’ Equity
Share-based Compensation Plans
Prior to the Spin-Off from Nuance, the Parent maintained a number of stock-based compensation programs at the corporate level in which the Cerence business’s employees participated. 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”). On January 1, 2021, in accordance with the automatic annual increase provision of the Equity Incentive Plan, an aggregate of 1,130,547 shares of Common Stock were added to the shares available for issuance under the Equity Incentive Plan.
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 regranted such employees economically equivalent restricted stock units of Cerence. 1,208,931 restricted stock units were issued in connection with the Spin-Off.
Restricted Awards
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 years ended September 30, 2021 and 2020, we withheld payroll taxes totaling $46.0 million and $9.4 million, respectively, related to the vesting of Restricted Awards.
88
Restricted Units are not included in issued and outstanding common stock until the shares are vested and released. The table below summarizes activity related to Restricted Stock Units:
|
Non-Vested Restricted Stock Units
|
|
|
Time-Based
Shares
|
|
Performance-
Based Shares
|
|
Total Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Non-vested at October 1, 2020
|
|
2,042,918
|
|
|
771,387
|
|
|
2,814,305
|
|
$
|
18.63
|
|
|
|
|
|
|
|
Granted
|
|
678,647
|
|
|
290,035
|
|
|
968,682
|
|
$
|
61.48
|
|
|
|
|
|
|
|
Vested
|
|
(1,267,363
|
)
|
|
(403,502
|
)
|
|
(1,670,865
|
)
|
$
|
35.78
|
|
|
|
|
|
|
|
Forfeited
|
|
(33,670
|
)
|
|
(3,301
|
)
|
|
(36,971
|
)
|
$
|
52.48
|
|
|
|
|
|
|
|
Non-vested at September 30, 2021
|
|
1,420,532
|
|
|
654,619
|
|
|
2,075,151
|
|
$
|
44.20
|
|
|
0.82
|
|
$
|
199,435
|
|
Expected to vest
|
|
|
|
|
|
|
|
2,075,151
|
|
$
|
44.20
|
|
|
0.82
|
|
$
|
199,435
|
|
Employee Stock Purchase Plan
On October 2, 2019, we adopted the ESPP and approved 1,050,000 shares for issuance under this plan. The ESPP is administered by our Board of Directors’ Compensation Committee.
The ESPP provides for the issuance of shares of our common stock to participating employees. At the end of each designated offering period, which occurs every six months on February 15 and August 15, employees can elect to purchase shares of our common stock with contributions of up to 12% of their base pay, accumulated via payroll deductions, at an amount equal to 85% of the lower of our stock price on (i) the first day of the offering period, or (ii) the last day of the offering period.
We use the Black-Scholes option pricing model to calculate the fair value of shares issued under the ESPP. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The following table sets forth the weighted-average key assumptions and fair value results for shares issued under the ESPP during the fiscal years ended September 30, 2021 and 2020:
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
0.10
|
%
|
|
|
1.56
|
%
|
Expected volatility
|
|
|
96.61
|
%
|
|
|
58.18
|
%
|
Expected life (in years)
|
|
|
0.50
|
|
|
|
0.50
|
|
Weighted-average fair value of shares issued (per share)
|
|
$
|
35.13
|
|
|
$
|
8.93
|
|
The following table sets forth the quantities and average prices of shares issued under the ESPP for the fiscal years ended September 30, 2021 and 2020:
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Shares issued under the ESPP
|
|
|
44,172
|
|
|
|
63,503
|
|
Average price of shares issued
|
|
$
|
73.40
|
|
|
$
|
20.66
|
|
89
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 years ended September 30, 2021 and 2020, we recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified within equity. Stock-based compensation for the anticipated Restricted Awards has been adjusted to reflect our estimated achievement under the modified targets and is recorded prospectively over the requisite service period.
The amounts included in the Consolidated and Combined Statements of Operations related to stock-based compensation are as follows (dollars in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Cost of licensing
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Cost of connected services
|
|
|
865
|
|
|
|
1,382
|
|
|
|
827
|
|
Cost of professional services
|
|
|
4,895
|
|
|
|
4,191
|
|
|
|
1,048
|
|
Research and development
|
|
|
16,538
|
|
|
|
13,944
|
|
|
|
15,946
|
|
Sales and marketing
|
|
|
12,533
|
|
|
|
9,580
|
|
|
|
6,137
|
|
General and administrative
|
|
|
25,724
|
|
|
|
18,188
|
|
|
|
5,703
|
|
Total
|
|
$
|
60,555
|
|
|
$
|
47,285
|
|
|
$
|
29,682
|
|
14. Commitments and Contingencies
Litigation and Other Claims
Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including at times actions with respect to contracts, intellectual property, employment, benefits and securities matters. At each balance sheet date, we evaluate contingent liabilities associated with these matters in accordance with ASC 450 Contingencies. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes, and estimates are based only on the best information available at the time. Due to the inherent uncertainties involved in claims and legal proceedings and in estimating losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods, which may have a material impact on our results of operations and financial position. As of September 30, 2021, accrued losses were not material to our consolidated and combined financial statements, and we do not expect any pending matter to have a material impact on our consolidated and combined 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
90
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, 2021, we have a $1.7 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 $0.6 million in the aggregate. These letters of credit have various terms and expire during fiscal year 2022 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.
15. Pension and Other Post-Retirement Benefits
As discussed within Note 16, 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, $0.7 million, and $1.0 million for the fiscal years ended September 30, 2021, 2020, and 2019, 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 as part of the Spin-Off or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees or into government-managed accounts consistent with local regulatory requirements, as applicable.
The total defined benefit plan pension expenses incurred for these plans were $0.9 million, $0.5 million, and $0.4 million for the fiscal years ended September 30, 2021, 2020, and 2019, respectively. Our aggregate projected benefit obligation and aggregate net liability for defined benefit plans as of September 30, 2021 was $14.7 million and $8.7 million, as of September 30, 2020 was $8.3 million and $7.1 million, and as of September 30, 2019 was $7.3 million and $6.8 million, respectively.
For the fiscal years ended September 30, 2021, 2020 and 2019, charges for contributions to defined benefit pension plans were not material to the Consolidated and Combined Statements of Operations.
91
16. 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 year ended September 30, 2019 (dollars in thousands):
|
|
Year Ended September 30, 2019
|
|
Facility
|
|
$
|
6,299
|
|
Depreciation
|
|
|
1,637
|
|
Amortization
|
|
|
22
|
|
Facility and other usage charges
|
|
|
7,958
|
|
Information services
|
|
|
8,633
|
|
Corporate and administrative services
|
|
|
22,166
|
|
Total
|
|
$
|
38,757
|
|
(b) Cash Management and Financing
The Cerence business participated in the Parent’s centralized cash management and financing programs. Disbursements were made through centralized accounts payable systems, which were operated by the Parent.
Cash receipts were transferred to centralized accounts which were also maintained by the Parent. As cash was disbursed and received by the Parent, it was accounted for by the Cerence business through the net parent investment.
Historically, the Cerence business had received funding from the Parent for the Cerence business’s operating and investing cash needs. Parent’s third-party debt and the related interest expense were not allocated to the Cerence business for any of the years presented prior to the Spin-Off, as the Cerence business was not the legal obligor of the debt and the Parent’s borrowings were not directly attributable to the Cerence business.
(c) Intercompany Receivables/Payables
All significant intercompany transactions between the Cerence business and the Parent and its non-Cerence businesses have been included in these Consolidated and Combined Financial Statements and are considered to be effectively settled for cash at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions have been accounted for through parent company net investment in the Combined Statements of Changes in Parent Company Equity and the Combined Statement of Cash Flows as a financing activity.
92
The following table summarizes the components of the net transfers to Parent for the fiscal years ended September 30, 2021, 2020, and 2019 (dollars in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Net transactions with Parent
|
|
$
|
—
|
|
|
$
|
(6,098
|
)
|
|
$
|
(83,554
|
)
|
Distribution to Parent
|
|
|
—
|
|
|
|
(152,978
|
)
|
|
|
—
|
|
Net reclassification of net parent investment in Cerence
|
|
|
—
|
|
|
|
(938,051
|
)
|
|
|
—
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
29,682
|
|
Accrued bonus
|
|
|
—
|
|
|
|
—
|
|
|
|
9,478
|
|
Corporate depreciation and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
1,659
|
|
Fixed asset reclasses from the Parent
|
|
|
—
|
|
|
|
—
|
|
|
|
10,088
|
|
Voicebox Purchase Accounting Adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
3,591
|
|
Intangible asset reclasses from the Parent
|
|
|
—
|
|
|
|
—
|
|
|
|
1,665
|
|
Net transfer to Parent
|
|
$
|
—
|
|
|
$
|
(1,097,127
|
)
|
|
$
|
(27,391
|
)
|
Agreements with Nuance
In connection with the Spin-Off, we 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.
|
93
17. 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 fiscal years ended September 30, 2021, 2020 and 2019. 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 periods as we obtain additional data and as the IRS issues new guidance implementing the law changes.
Provision for (benefit from) income taxes
The components of income (loss) before income taxes are as follows (dollars in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Domestic
|
|
$
|
20,933
|
|
|
$
|
(27,889
|
)
|
|
$
|
(22,904
|
)
|
Foreign
|
|
|
27,336
|
|
|
|
4,849
|
|
|
|
34,088
|
|
Income (loss) before income taxes
|
|
$
|
48,269
|
|
|
$
|
(23,040
|
)
|
|
$
|
11,184
|
|
The components of provision for (benefit from) income taxes are as follows (dollars in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,352
|
|
State
|
|
|
35
|
|
|
|
—
|
|
|
|
1,059
|
|
Foreign
|
|
|
6,760
|
|
|
|
5,844
|
|
|
|
5,728
|
|
Total current
|
|
$
|
6,795
|
|
|
$
|
5,844
|
|
|
$
|
12,139
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,437
|
|
|
|
(1,636
|
)
|
|
|
(6,210
|
)
|
State
|
|
|
5,001
|
|
|
|
(239
|
)
|
|
|
(1,593
|
)
|
Foreign
|
|
|
(14,857
|
)
|
|
|
(8,693
|
)
|
|
|
(93,420
|
)
|
Total deferred
|
|
|
(4,419
|
)
|
|
|
(10,568
|
)
|
|
|
(101,223
|
)
|
Provision for (benefit from) income taxes
|
|
$
|
2,376
|
|
|
$
|
(4,724
|
)
|
|
$
|
(89,084
|
)
|
Effective income tax rate
|
|
|
4.9
|
%
|
|
|
20.5
|
%
|
|
|
(796.5
|
)%
|
94
The provision for (benefit from) income taxes differed from the amount computed by applying the federal statutory rate to our income (loss) before income taxes as follows (dollars in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Federal tax provision at statutory rate
|
|
$
|
10,137
|
|
|
$
|
(4,838
|
)
|
|
$
|
2,270
|
|
State tax, net of federal benefit
|
|
|
3,979
|
|
|
|
(221
|
)
|
|
|
(490
|
)
|
Foreign tax rate and other foreign related tax items
|
|
|
(15,626
|
)
|
|
|
(2,347
|
)
|
|
|
(4,764
|
)
|
Uncertain tax positions
|
|
|
861
|
|
|
|
(887
|
)
|
|
|
57,631
|
|
Stock-based compensation
|
|
|
1,629
|
|
|
|
3,456
|
|
|
|
—
|
|
Global intangible low-taxed income
|
|
|
554
|
|
|
|
336
|
|
|
|
3,923
|
|
Foreign-derived intangible income
|
|
—
|
|
|
|
—
|
|
|
|
(547
|
)
|
Capital losses
|
|
—
|
|
|
|
—
|
|
|
|
8,187
|
|
Change in U.S. valuation allowance
|
|
|
(225
|
)
|
|
|
—
|
|
|
|
(8,187
|
)
|
Non-deductible expenditures
|
|
|
3,999
|
|
|
|
2,728
|
|
|
|
2,707
|
|
R&D credits
|
|
|
(2,932
|
)
|
|
|
(2,951
|
)
|
|
|
(1,675
|
)
|
Intangible property transfers
|
|
|
—
|
|
|
|
—
|
|
|
|
(148,139
|
)
|
Provision for (benefit from) income taxes
|
|
$
|
2,376
|
|
|
$
|
(4,724
|
)
|
|
$
|
(89,084
|
)
|
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.
Our effective tax rate for the fiscal year 2021 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of jurisdictional earnings, U.S. inclusions of foreign taxable income as a result of changes in applicable tax laws in 2017, and an income tax benefit of $15.9 million related to an increase in the Netherlands tax rate enacted in the first quarter of fiscal year 2021.
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, 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 of fiscal year 2020.
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.
As of September 30, 2021, 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, 2021, 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.
95
Deferred tax assets (liabilities) consist of the following as of September 30, 2021 and 2020 (dollars in thousands):
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
17,098
|
|
|
$
|
17,347
|
|
Capital loss carryforwards
|
|
|
8,187
|
|
|
|
9,557
|
|
Federal credit carryforwards
|
|
|
5,160
|
|
|
|
3,665
|
|
Accrued expenses and other reserves
|
|
|
5,992
|
|
|
|
4,536
|
|
Difference in timing of revenue related items
|
|
|
39,105
|
|
|
|
51,483
|
|
Acquired intangibles
|
|
|
102,481
|
|
|
|
94,389
|
|
Interest limitations carryforward
|
|
|
7,319
|
|
|
|
9,399
|
|
Operating lease liabilities
|
|
|
5,065
|
|
|
|
6,568
|
|
Depreciation
|
|
|
2,723
|
|
|
|
1,682
|
|
Deferred compensation
|
|
|
2,174
|
|
|
|
1,465
|
|
Pension obligation
|
|
|
1,870
|
|
|
|
2,522
|
|
Other
|
|
|
1,249
|
|
|
|
1,726
|
|
Total deferred tax assets
|
|
$
|
198,423
|
|
|
$
|
204,339
|
|
Valuation allowance for deferred tax assets
|
|
|
(12,209
|
)
|
|
|
(13,491
|
)
|
Deferred tax assets
|
|
$
|
186,214
|
|
|
$
|
190,848
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(4,636
|
)
|
|
$
|
(3,381
|
)
|
Acquired intangibles
|
|
|
(17,204
|
)
|
|
|
(21,255
|
)
|
Convertible debt
|
|
|
(3,349
|
)
|
|
|
(4,406
|
)
|
Operating lease right-of-use assets
|
|
|
(4,303
|
)
|
|
|
(5,677
|
)
|
Other
|
|
|
(163
|
)
|
|
|
(2,457
|
)
|
Total deferred tax liabilities
|
|
|
(29,655
|
)
|
|
|
(37,176
|
)
|
Net deferred tax assets
|
|
$
|
156,559
|
|
|
$
|
153,672
|
|
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, 2021, we have $8.2 million and $4.0 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively. As of September 30, 2020, we had $9.8 million and $3.7 million in valuation allowance against our net domestic and foreign deferred tax assets, respectively.
As of September 30, 2021, we have U.S. federal net operating loss (“NOL”) carryforwards of $15.0 million, state NOL carryforwards of $4.3 million, and foreign NOL carryforwards of $99.9 million, before uncertain tax positions of $32.8 million. As of September 30, 2020, we have U.S. federal NOL carryforwards of $20.1 million, state NOL carryforwards of $6.1 million, and foreign NOL carryforwards of $75.6 million, before uncertain tax position amounts of $18.2 million. These carryforwards will expire at various dates beginning in 2026 and extending up to an unlimited period. As of September 30, 2021 and 2020, unlimited federal NOLs are $15.0 million and $20.1 million, respectively, and unlimited Netherlands NOLs include $70.1 million and $57.1 million, respectively.
As of September 30, 2021, we have U.S. federal research and development carryforwards and foreign tax credit carryforwards of $10.8 million, before uncertain tax positions of $9.1 million, state research and development credits of $0.3 million, and foreign research and development credits of $4.3 million. As of September 30, 2020, we have U.S. federal research and development carryforwards $0.9 million, and foreign research and development credits of $2.8 million. These carryforwards will expire at various dates beginning in 2022 and extending up to 2041.
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 provision for (benefit from) income taxes line of our Consolidated and Combined Statements of Operations.
96
The aggregate changes in the balance of our gross unrecognized tax benefits were as follows (dollars in thousands):
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Balance at the beginning of the year
|
|
$
|
67,358
|
|
|
$
|
60,821
|
|
Beginning balance adjustment
|
|
|
9,884
|
|
|
|
3,999
|
|
Increases related to tax positions taken from prior periods
|
|
|
9,367
|
|
|
|
3,304
|
|
Increases related to tax positions taken during current period
|
|
|
768
|
|
|
|
328
|
|
Decreases for tax settlements and lapse in statutes
|
|
|
(233
|
)
|
|
|
(1,094
|
)
|
Balance at the end of the year
|
|
$
|
87,144
|
|
|
$
|
67,358
|
|
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, in fiscal year 2020, we recognized a beginning balance adjustment of $2.1 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. During fiscal year 2021, we finalized pre-spin tax attributes and recognized as beginning balance adjustments uncertain tax positions of $9.1 million on certain tax credit carryforwards. As of September 30, 2021 and 2020, beginning balance adjustments include cumulative translation adjustments of $0.8 million and $1.9 million, respectively.
Increases related to tax positions taken from prior period include the effect of tax rate changes of $9.4 million and $3.3 million at September 30, 2021 and 2020, respectively.
As of September 30, 2021, $87.1 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 recognized interest related to uncertain tax positions in our provision for (benefit from) income taxes of $0.3 million, ($0.1) million and $0.5 million during fiscal years 2021, 2020 and 2019 respectively. We recorded interest of $4.2 million and $3.7 million as of September 30, 2021 and 2020, respectively.
We are subject to U.S. federal income tax, various state and local taxes and international income taxes in numerous jurisdictions. The 2018 through 2020 years remain open for all purposes of examination by the IRS and other taxing authorities in material jurisdictions.
18. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
3.00% Convertible Senior Notes due 2025, net of unamortized discount of $15,019 and $18,546, respectively, and deferred issuance costs of $3,776 and $4,664, respectively. Effective interest rate 6.29%.
|
|
$
|
156,205
|
|
|
$
|
151,791
|
|
Senior Credit Facilities, net of unamortized discount of $1,829 and $1,820, respectively, and deferred issuance costs of $221 and $287, respectively. Effective interest rate 2.86% and 4.02%, respectively.
|
|
|
115,138
|
|
|
|
121,331
|
|
Total debt
|
|
$
|
271,343
|
|
|
$
|
273,122
|
|
Less: current portion
|
|
|
(6,250
|
)
|
|
|
(6,250
|
)
|
Total long-term debt
|
|
$
|
265,093
|
|
|
$
|
266,872
|
|
97
The following table summarizes the maturities of our borrowing obligations as of September 30, 2021 (in thousands):
Fiscal Year
|
|
Convertible
Senior Notes
|
|
|
Senior Facilities
|
|
|
Total
|
|
2022
|
|
$
|
—
|
|
|
$
|
6,250
|
|
|
$
|
6,250
|
|
2023
|
|
|
—
|
|
|
|
10,938
|
|
|
|
10,938
|
|
2024
|
|
|
—
|
|
|
|
12,500
|
|
|
|
12,500
|
|
2025
|
|
|
175,000
|
|
|
|
87,500
|
|
|
|
262,500
|
|
2026
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total before unamortized discount and issuance costs and current portion
|
|
$
|
175,000
|
|
|
$
|
117,188
|
|
|
$
|
292,188
|
|
Less: unamortized discount and issuance costs
|
|
|
(18,795
|
)
|
|
|
(2,050
|
)
|
|
|
(20,845
|
)
|
Less: current portion of long-term debt
|
|
|
—
|
|
|
|
(6,250
|
)
|
|
|
(6,250
|
)
|
Total long-term debt
|
|
$
|
156,205
|
|
|
$
|
108,888
|
|
|
$
|
265,093
|
|
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 us 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 us, the lenders and issuing banks party thereto and Barclays Bank PLC, as administrative agent (the “Existing Facility”).
The Notes are senior, unsecured obligations and will accrue interest payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020, at a rate of 3.00% per year. The Notes will mature on June 1, 2025, unless earlier converted, redeemed, or repurchased. The Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. As of September 30, 2021, the if-converted value of the Notes exceeds its principal amount by $274.5 million.
A holder of Notes may convert all or any portion of its Notes at its option at any time prior to the close of business on the business day immediately preceding March 1, 2025 only under the following circumstances: (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 call such Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. 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 deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event or convert its Notes called for redemption in connection with such notice of redemption, as the case may be.
We may not redeem the Notes prior to June 5, 2023. We may redeem for cash all or any portion of the Notes, at our option, on a redemption date occurring on or after June 5, 2023 and on or before the 31st scheduled trading day immediately before the maturity date, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on
98
which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If we undergo a “fundamental change”, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The indenture governing the Notes contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare the entire principal amount of all the Notes plus accrued special interest, if any, to be immediately due and payable.
At issuance, we accounted for the Notes by allocating proceeds from the Notes into debt and equity components according to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. 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, 2021 and 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 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 years ended September 30, 2021 and 2020 was as follows (dollars in thousands):
|
|
Year Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Contractual interest expense
|
|
$
|
5,246
|
|
|
$
|
1,753
|
|
Amortization of debt discount
|
|
|
3,527
|
|
|
|
1,131
|
|
Amortization of issuance costs
|
|
|
887
|
|
|
|
285
|
|
Total interest expense related to the Notes
|
|
$
|
9,660
|
|
|
$
|
3,169
|
|
The conditional conversion feature of the Notes was triggered during the fiscal year ended September 30, 2021, and the Notes were convertible as of September 30, 2021, with no Notes being converted. Whether any of the Notes will be converted in future quarters will depend on the satisfaction of one or more of the conversion conditions in the future. If one or more holders elect to convert their Notes at a time when any such Notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional shares), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
Senior Credit Facilities
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, 2021, 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
99
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.
On December 17, 2020 (the “Amendment No. 1 Effective Date”), we entered into Amendment No. 1 to the Credit Agreement (the “Amendment”). The Amendment extended the scheduled maturity date of the revolving credit and term facilities from June 12, 2024 to April 1, 2025.
The Amendment revised certain interest rates in the Credit Agreement. Following delivery of a compliance certificate for the first full fiscal quarter after the Amendment No. 1 Effective Date, the applicable margins for the revolving credit and term facilities is subject to a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the applicable margin is LIBOR plus 3.00% or ABR plus 2.00%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the applicable margin is LIBOR plus 2.75% or ABR plus 1.75%; (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 2.50% or ABR plus 1.50%; (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 2.25% or ABR plus 1.25%; and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the applicable margin is LIBOR plus 2.20% or ABR plus 1.00%. As a result of the Amendment, the applicable LIBOR floor was reduced from 0.50% to 0.00%. From the Amendment No. 1 Effective Date until the fiscal quarter ended December 31, 2020, the interest rate was LIBOR plus 2.50%. For the three months ended March 31, 2021, the interest rate was LIBOR plus 2.25%. For the three months ended June 30, 2021, the interest rate was LIBOR plus 2.25%. For the three months ended September 30, 2021, the interest rate was LIBOR plus 2.25%. Total interest expense relating to the Senior Credit Facilities for the fiscal year ended September 30, 2021 and 2020 was $4.1 million and $1.5 million, respectively, reflecting the coupon and accretion of the discount.
In addition, the quarterly commitment fee required to be paid based on the unused portion of the Revolving Facility is subject to a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the unused line fee is 0.500%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the unused line fee is 0.450%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the unused line fee is 0.400%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the unused line fee is 0.350%; and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the unused line fee is 0.300%.
The Amendment revised the amount by which we are obligated to make quarterly principal payments. Through the fiscal quarter ending December 31, 2022, we are obligated to make quarterly principal payments in an aggregate amount equal to 1.25% of the original principal amount of the Term Loan Facility. From the fiscal quarter ending March 31, 2023 and for each fiscal quarter thereafter, we are obligated to make quarterly principal payments in an aggregate amount equal to 2.50% of the original principal amount of the Term Loan Facility, with the balance payable at the maturity date thereof.
Borrowings under the Credit Agreement are prepayable at our option without premium or penalty. 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, (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, 2021, we were in compliance with all Credit Agreement covenants.
19. Impact on Previously Issued Financial Statements for Immaterial Adjustments
During the quarter ended March 31, 2021, we identified three immaterial errors and made adjustments to correct those errors that affected previously issued consolidated financial statements.
•During the first quarter of fiscal 2021, we recognized an immaterial amount of connected services revenue which related to fiscal year 2020.
•During the first quarter of fiscal 2021, the estimated achievement percentage relating to our long-term incentive plan increased. We did not originally record the corresponding cumulative adjustment to stock-based compensation during the three months ended December 31, 2020.
100
•During the fourth quarter of fiscal 2020, we recorded a restructuring accrual relating to the closure of a facility under ASC 420 Exit or Disposal Cost Obligation when ASC 842 Leases should have been applied. During the three months ended December 31, 2020, a partial true up was recorded to the restructuring accrual.
We also recorded certain adjustments to income taxes reflecting the tax effect of the aforementioned adjustments.
During the year ended September 30, 2020, right of use assets obtained in exchange for lease obligations was $7.9 million. We have updated Note 12 - Leases to reflect the prior year amount.
We assessed the materiality, both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No. 108, and concluded that these identified errors were not material to any of the previously issued
101
financial statements. In order to present the impact of these resulting adjustments, previously issued financial statements have been revised and are presented as “As Revised” in the tables presented below.
|
|
Three Months Ended December 31, 2019
|
|
Revised Consolidated Statement of Operations Amounts:
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Total revenues
|
|
|
77,459
|
|
|
|
246
|
|
|
|
77,705
|
|
Gross profit
|
|
|
51,525
|
|
|
|
246
|
|
|
|
51,771
|
|
Loss from operations
|
|
|
(2,097
|
)
|
|
|
246
|
|
|
|
(1,851
|
)
|
Loss before income taxes
|
|
|
(8,760
|
)
|
|
|
246
|
|
|
|
(8,514
|
)
|
Provision for income taxes
|
|
|
3,002
|
|
|
|
(233
|
)
|
|
|
2,769
|
|
Net loss
|
|
$
|
(11,762
|
)
|
|
$
|
479
|
|
|
$
|
(11,283
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
$
|
(0.31
|
)
|
Diluted
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
$
|
(0.31
|
)
|
|
|
Three Months Ended March 31, 2020
|
|
Revised Consolidated Statement of Operations Amounts:
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Total revenues
|
|
|
86,495
|
|
|
|
328
|
|
|
|
86,823
|
|
Gross profit
|
|
|
57,765
|
|
|
|
328
|
|
|
|
58,093
|
|
Income from operations
|
|
|
12,006
|
|
|
|
328
|
|
|
|
12,334
|
|
Income before income taxes
|
|
|
5,777
|
|
|
|
328
|
|
|
|
6,105
|
|
Benefit from income taxes
|
|
|
(6,718
|
)
|
|
|
11
|
|
|
|
(6,707
|
)
|
Net income
|
|
$
|
12,495
|
|
|
$
|
317
|
|
|
$
|
12,812
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
|
|
|
|
$
|
0.35
|
|
Diluted
|
|
$
|
0.33
|
|
|
|
|
|
|
$
|
0.34
|
|
|
|
Three Months Ended June 30, 2020
|
|
Revised Consolidated Statement of Operations Amounts:
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Total revenues
|
|
|
74,810
|
|
|
|
387
|
|
|
|
75,197
|
|
Gross profit
|
|
|
47,207
|
|
|
|
387
|
|
|
|
47,594
|
|
Loss from operations
|
|
|
(4,696
|
)
|
|
|
387
|
|
|
|
(4,309
|
)
|
Loss before income taxes
|
|
|
(30,650
|
)
|
|
|
387
|
|
|
|
(30,263
|
)
|
Benefit from income taxes
|
|
|
(2,469
|
)
|
|
|
258
|
|
|
|
(2,211
|
)
|
Net loss
|
|
$
|
(28,181
|
)
|
|
$
|
129
|
|
|
$
|
(28,052
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
$
|
(0.77
|
)
|
Diluted
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
$
|
(0.77
|
)
|
|
|
Year Ended September 30, 2020
|
|
Revised Consolidated Statement of Operations Amounts:
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Total revenues
|
|
|
329,646
|
|
|
|
1,321
|
|
|
|
330,967
|
|
Gross profit
|
|
|
221,795
|
|
|
|
1,321
|
|
|
|
223,116
|
|
Income from operations
|
|
|
19,331
|
|
|
|
3,100
|
|
|
|
22,431
|
|
Loss before income taxes
|
|
|
(26,140
|
)
|
|
|
3,100
|
|
|
|
(23,040
|
)
|
Benefit from income taxes
|
|
|
(5,509
|
)
|
|
|
785
|
|
|
|
(4,724
|
)
|
Net loss
|
|
$
|
(20,631
|
)
|
|
$
|
2,315
|
|
|
$
|
(18,316
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
$
|
(0.50
|
)
|
Diluted
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
$
|
(0.50
|
)
|
102
|
|
September 30, 2020
|
|
Revised Consolidated Balance Sheet Amounts:
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
ASSETS
|
|
Total current assets
|
|
|
249,148
|
|
|
|
957
|
|
|
|
250,105
|
|
Total assets
|
|
$
|
1,687,445
|
|
|
$
|
172
|
|
|
$
|
1,687,617
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
Total current liabilities
|
|
|
200,774
|
|
|
|
(2,143
|
)
|
|
|
198,631
|
|
Total liabilities
|
|
|
729,689
|
|
|
|
(2,143
|
)
|
|
|
727,546
|
|
Total stockholders' equity
|
|
|
957,756
|
|
|
|
2,315
|
|
|
|
960,071
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,687,445
|
|
|
$
|
172
|
|
|
$
|
1,687,617
|
|
|
|
Three Months Ended December 31, 2020
|
|
Revised Condensed Consolidated Statement of Operations Amounts:
|
|
As Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
Total revenues
|
|
|
94,964
|
|
|
|
(1,321
|
)
|
|
|
93,643
|
|
Total cost of revenues
|
|
|
26,881
|
|
|
|
7
|
|
|
|
26,888
|
|
Gross profit
|
|
|
68,083
|
|
|
|
(1,328
|
)
|
|
|
66,755
|
|
Total operating expenses
|
|
|
47,811
|
|
|
|
1,400
|
|
|
|
49,211
|
|
Income from operations
|
|
|
20,272
|
|
|
|
(2,728
|
)
|
|
|
17,544
|
|
Income before income taxes
|
|
|
14,254
|
|
|
|
(2,728
|
)
|
|
|
11,526
|
|
Benefit from income taxes
|
|
|
(7,384
|
)
|
|
|
(2,031
|
)
|
|
|
(9,415
|
)
|
Net income
|
|
$
|
21,638
|
|
|
$
|
(697
|
)
|
|
$
|
20,941
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
|
|
|
|
|
$
|
0.56
|
|
Diluted
|
|
$
|
0.54
|
|
|
|
|
|
|
$
|
0.53
|
|
103