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What changed in Cerence Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Cerence Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+362 added−354 removedSource: 10-K (2023-11-29) vs 10-K (2022-11-29)

Top changes in Cerence Inc.'s 2023 10-K

362 paragraphs added · 354 removed · 281 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeAnticipated shipments are based on historical shipping experience and current customer projections that management believes are reasonable as of the date of this Form 10-K. Both our embedded and connected technologies are priced and sold on a per-vehicle or device basis, where we receive a single fee for either or both the embedded license and the connected service term.
Biggest changeOur estimate of forecasted royalties is based on our royalty rates for embedded and connected technologies from expected car shipments under our existing contracts over the term of the programs. Anticipated shipments are based on historical shipping experience and current customer projections that management believes are reasonable as of the date of this Form 10-K.
Although we find that OEMs often prefer to maintain relationships with suppliers that have a proven record of performance, they also rigorously reevaluate suppliers on the basis 12 of product quality, price, reliability and timeliness of delivery, product design capability, technical expertise and development capability, new product innovation, financial viability, operational flexibility, customer service and overall management.
Although we find that OEMs often prefer to maintain relationships with suppliers that have a proven record of performance, they also rigorously reevaluate suppliers on the basis of product quality, price, reliability and timeliness of delivery, product design capability, technical expertise and development capability, new product innovation, financial viability, operational flexibility, customer service and overall management.
In total, we believe these adjacent markets represent an important growth opportunity. Competition The automobile cognitive assistance market is competitive. Today, we face two primary sets of competitors: • Large technology companies . Many large technology companies, including Amazon, Apple, Google, Microsoft, Alibaba, Baidu and Tencent, offer Internet-based virtual assistants.
In total, we believe these adjacent markets represent an important growth opportunity. 11 Competition The automobile cognitive assistance market is competitive. Today, we face two primary sets of competitors: • Large technology companies . Many large technology companies, including Amazon, Apple, Google, Microsoft, Alibaba, Baidu and Tencent, offer Internet-based virtual assistants.
NLU processing is performed by a hybrid of edge and cloud-connected software components to optimize performance, efficiency, reliability and security. • Vocalizer: Text-to-Speech and Natural Language Generation . In many cases, the most useful result of a spoken query or command is a spoken response back to the user.
NLU processing is performed by a hybrid of edge and cloud-connected software components to optimize performance, efficiency, reliability and security. 12 • Vocalizer: Text-to-Speech and Natural Language Generation . In many cases, the most useful result of a spoken query or command is a spoken response back to the user.
We believe that increasing complexity of our edge software components, including with respect to multi-modal interaction, and growth in our cloud-connected product areas, including the enabling of third-party services, will enable us to increase the revenue per vehicle that we are 11 able to generate.
We believe that increasing complexity of our edge software components, including with respect to multi-modal interaction, and growth in our cloud-connected product areas, including the enabling of third-party services, will enable us to increase the revenue per vehicle that we are able to generate.
Due to its flexible design, our speech signal enhancement technology can be easily configured for complex multi-zone scenarios with various users and nearly arbitrary microphone configurations. Dedicated processing 13 modes enable efficient and robust multi-user speech recognition in challenging acoustical environments.
Due to its flexible design, our speech signal enhancement technology can be easily configured for complex multi-zone scenarios with various users and nearly arbitrary microphone configurations. Dedicated processing modes enable efficient and robust multi-user speech recognition in challenging acoustical environments.
We believe a neutral automotive cognitive assistance platform will increasingly be valued by OEMs that prioritize maintaining their unique and branded in-car experience and the ability to control the mobility experience overall. • Deliver new functionality to existing installed base. Our solutions have been installed in more than 450 million vehicles to date.
We believe a neutral automotive cognitive assistance platform will increasingly be valued by OEMs that prioritize maintaining their unique and branded in-car experience and the ability to control the mobility experience overall. • Deliver new functionality to existing installed base. Our solutions have been installed in more than 475 million vehicles to date.
We deliver automotive cognitive assistance solutions that are conversational and intuitive and that enable OEMs to strengthen the emotional connection with their end users through a distinct, consistent, branded experience. We continue to extend these solutions to two-wheel vehicles and tractors and other transportation means.
We deliver automotive cognitive assistance solutions that are conversational and intuitive and that enable OEMs to strengthen the emotional connection with their end users through a distinct, consistent, branded experience. We continue to extend these solutions to two-wheel vehicles and trucks and other transportation means.
Our long history in the automotive industry and the global reach and experience of our over 500 professional services employees across 12 countries gives us credibility with OEMs as we seek new business with OEMs, either directly or through their tier 1 suppliers.
Our long history in the automotive industry and the global reach and experience of our over 400 professional services employees across 12 countries gives us credibility with OEMs as we seek new business with OEMs, either directly or through their tier 1 suppliers.
Our professional services organization includes approximately 500 employees. These employees work with our customers in the design phase of the vehicle lifecycle to tailor our platform for specific requirements such as branding and also tune the software for the characteristics of a vehicle model.
Our professional services organization includes approximately 400 employees. These employees work with our customers in the design phase of the vehicle lifecycle to tailor our platform for specific requirements such as branding and also tune the software for the characteristics of a vehicle model.
Research and Development We maintain technical engineering centers in major regions of the world that help develop our software platform and its underlying components and provide our customers with local engineering capabilities and design development. We employ approximately 900 research and development personnel around the world, including scientists, engineers and technicians.
Research and Development We maintain technical engineering centers in major regions of the world that help develop our software platform and its underlying components and provide our customers with local engineering capabilities and design development. We employ approximately 1,000 research and development personnel around the world, including scientists, engineers and technicians.
Cerence hybrid solutions shipped on approximately 8.0 million vehicles during the fiscal year ended September 30, 2022. In aggregate, over 80 OEMs and Tier 1 suppliers worldwide use our solutions, covering over 70 languages and dialects, including English, German, Spanish, French, Mandarin, Cantonese, Japanese and Hindi.
Cerence hybrid solutions shipped on approximately 11.0 million vehicles during the fiscal year ended September 30, 2023. In aggregate, over 80 OEMs and Tier 1 suppliers worldwide use our solutions, covering over 70 languages and dialects, including English, German, Spanish, French, Mandarin, Cantonese, Japanese and Hindi.
Our total research and development expenses were approximately $107.1 million, $112.1 million and $88.9 million for fiscal years 2022, 2021 and 2020, respectively. We believe that continued investment in research and development will be critical for us to continue to deliver market-leading solutions for automotive cognitive assistance.
Our total research and development expenses were approximately $123.3 million, $107.1 million and $112.1 million for fiscal years 2023, 2022 and 2021, respectively. We believe that continued investment in research and development will be critical for us to continue to deliver market-leading solutions for automotive cognitive assistance.
Our solutions have been installed in more than 450 million automobiles to date, including over 40 million new vehicles in fiscal 2022 alone. Based on royalty reports provided by our customers and third-party reports of total vehicle production worldwide, we estimate that approximately 51% of all cars shipped during the fiscal year ended September 30, 2022 included Cerence technologies.
Our solutions have been installed in more than 475 million automobiles to date, including over 47 million new vehicles in fiscal year 2023 alone. Based on royalty reports provided by our customers and third-party reports of total vehicle production worldwide, we estimate that approximately 54% of all cars shipped during the fiscal year ended September 30, 2023 included Cerence technologies.
Human Capital Summary As of September 30, 2022, we had approximately 1,700 full-time employees, including approximately 100 in sales and marketing, approximately 200 in administrative functions, approximately 500 in professional services, and approximately 900 in research and development. Approximately 90% of our employees are based outside of the United States.
Human Capital Summary As of September 30, 2023, we had approximately 1,700 full-time employees, including approximately 100 in sales and marketing, approximately 200 in administrative functions, approximately 400 in professional services, and approximately 1,000 in research and development. Approximately 90% of our employees are based outside of the United States.
It’s extremely important that every employee feel welcome and valued as we strive to make our company a great place to work. Intellectual Property We own approximately 989 patents and patent applications and other intellectual property.
It’s extremely important that every employee feel welcome and valued as we strive to make our company a great place to work. Intellectual Property As of September 30, 2023, we own approximately 752 patents and patent applications and other intellectual property.
However, our products and technology also have application to other modes of transportation. Any types of vehicles that move people are potential applications for our technology. We have integrated our technologies and solutions within the two-wheel vehicle market and have explored opportunities in the cruise line, public transit, fleet, and elevator markets.
Today, we primarily target the automobile market. However, our products and technology also have application to other modes of transportation. Any types of vehicles that move people are potential applications for our technology. We have integrated our technologies and solutions within the two-wheel vehicle market and have explored opportunities in trucks and recreational vehicles, public transit, and fleet markets.
Our automobile manufacturer customers, commonly referred to as OEMs, include BMW, XPeng, FCA Group, Ford, Daimler, Geely, Renault-Nissan, SAIC, Toyota, Volkswagen Group and many others and represented approximately 51% of our sales in fiscal year 2022.
Our automobile manufacturer customers, commonly referred to as OEMs, include BMW, XPeng, Stallantis, Ford, Daimler, Geely, Renault-Nissan, SAIC, Toyota, Harley Davidson, Volkswagen Group and many others and represented approximately 49% of our sales in fiscal year 2023.
We recorded net loss of $310.8 million for the fiscal year ended September 30, 2022, a change of 777.2% compared to net income of $45.9 million recorded for the fiscal year ended September 30. 2021. The financial information included herein may not necessarily reflect our results of operations in the future.
We recorded net loss of $56.3 million for the fiscal year ended September 30, 2023, a change of 81.9% compared to net loss of $310.8 million recorded for the fiscal year ended September 30. 2022. The financial information included herein may not necessarily reflect our results of operations in the future.
We have developed new products that leverage our expertise in voice-AI into new applications that will be distinct from our Edge or Cloud-connected product offerings. These new applications are expected to generate revenue using either a subscription or transaction-based model extending the company’s market opportunity into new areas. New applications developed include Cerence Tour Guide, Cerence Pay and Car Life.
We have developed new products that leverage our expertise in voice-AI into new applications that will be distinct from our Edge or Cloud-connected product offerings. These new applications are expected to generate revenue using either a subscription or transaction-based model extending the company’s market opportunity into new areas. • Expand into adjacent transportation markets.
Sales and Marketing and Professional Services We market our offerings using a high-touch OEM solutions model. We sell directly to our customers, which include OEMs and suppliers and as described above under “Customers”, and for each of our customers we assign a team comprising sales and marketing as well as professional services personnel.
We sell directly to our customers, which include OEMs and suppliers and as described above under “Customers”, and for each of our customers we assign a team comprising sales and marketing 13 as well as professional services personnel.
As of September 30, 2022, we estimate our five-year backlog to be $1.1 billion, including $303.5 million of five-year remaining performance obligations and $0.8 billion of five-year variable backlog. As of September 30, 2021, the estimated five-year backlog was $1.3 billion.
As of September 30, 2023, we estimate our five-year backlog to 5 be $1.2 billion, including $270.3 million of five-year remaining performance obligations and $975.4 million of five-year variable backlog. As of September 30, 2022, the estimated five-year backlog was $1.1 billion.
Our tier 1 supplier customers, who typically sell automobile components to the OEMs, include Aptiv, Bosch, Continental, DENSO TEN, NIO, Harman and many others and represented approximately 49% of our business in fiscal year 2022. Our revenue base is geographically diverse. In fiscal 2022, approximately 31%, 27% and 42% of our revenue came from the Americas, Europe and Asia, respectively.
Our tier 1 supplier customers, who typically sell automobile components to the OEMs, include Aptiv, Bosch, Continental, DENSO TEN, NIO, Harman and many others and represented approximately 51% of our business in fiscal year 2023. Our revenue base is geographically diverse.
However, our five-year backlog may not be indicative of our actual future revenue. The revenue we actually recognize is subject to several factors, including the number and timing of vehicles our customers ship, potential terminations or 5 changes in scope of customer contracts, and currency fluctuations.
The revenue we actually recognize is subject to several factors, including the number and timing of vehicles our customers ship, potential terminations or changes in scope of customer contracts, and currency fluctuations.
In fiscal year 2022, we generated revenue of $327.9 million, a decrease of 15.3% compared to $387.2 million for the fiscal year ended September 30, 2021.
In fiscal year 2023, we generated revenue of $294.5 million, a decrease of 10.2% compared to $327.9 million for the fiscal year ended September 30, 2022.
We are committed to attracting and retaining the best and brightest talent and building a culture of transparency, trust, and respect. We are proactively nurturing our culture by investing in our people, processes and professional development. We understand our people are critical for our continued success and are focused on helping our employees grow at every stage of their career.
We are proactively nurturing our culture by investing in our people, processes and professional development. We understand our people are critical for our continued success and are focused on helping our employees grow at every stage of their career.
Compensation, Rewards and Benefits In addition to competitive base salaries, we provide incentive-based compensation programs to reward performance relative to key metrics. We also provide compensation in the form of restricted stock unit grants as well as a competitive time-off policy.
Our social committees organize numerous events including luncheons, karaoke, archery, yoga, hiking, fun runs, and community cleanup days. Compensation, Rewards and Benefits In addition to competitive base salaries, we provide incentive-based compensation programs to reward performance relative to key metrics. We also provide compensation in the form of restricted stock unit grants as well as a competitive time-off policy.
None of our employees in the United States are represented by a labor union; however many of our employees in Europe are represented by workers councils or labor unions.
None of our employees in the United States are represented by a labor union; however many of our employees in Europe are represented by workers councils or labor unions. To date, we have experienced no work stoppages and believe that we have a good relationship with our employees.
To date, we have experienced no work stoppages and believe that we have a good relationship with our employees. 14 Culture and Work Environment We’re a group of highly motivated collaborators who share a common passion for creating meaningful change in our industry and shaping the future of mobility.
Culture and Work Environment We’re a group of highly motivated collaborators who share a common passion for creating meaningful change in our industry and shaping the future of mobility. We are committed to attracting and retaining the best and brightest talent and building a culture of transparency, trust, and respect.
As of September 30, 2022, we had variable five-year backlog of $0.8 billion, which includes estimated future revenue from variable forecasted royalties related to our embedded and connected businesses. Our estimation of forecasted royalties is based on our royalty rates for embedded and connected technologies from expected car shipments under our existing contracts over the term of the programs.
As of September 30, 2023, we had five-year remaining performance obligations of $270.3 million. As of September 30, 2023, we had variable five-year backlog of $975.4 million, which includes estimated future revenue from variable forecasted royalties related to our embedded, connected, and professional service businesses.
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As of September 30, 2022, we had five-year remaining performance obligations of $303.5 million, which includes $217.6 million of estimated future revenue related to remaining performance obligations and $85.9 million of contractual commitments which have not yet been invoiced.
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Both our embedded and connected technologies are priced and sold on a per-vehicle or device basis, where we receive a single fee for either or both the embedded license and the connected service term. However, our five-year remaining performance obligations may not be indicative of our actual future revenue.
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Cerence Tour Guide is an AI-powered application for automotive assistants that brings guided tour content directly into the car via an ecosystem of partners. Cerence Pay offers a secure, contactless payment experience for drivers via voice and facial biometrics.
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In fiscal year 2023, approximately 30%, 35% and 35% of our revenue came from the Americas, Europe and Asia, respectively. Sales and Marketing and Professional Services We market our offerings using a high-touch OEM solutions model.
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Cerence Car Life is a suite of AI-powered, software-as-a-service (SaaS) offerings that provides drivers with up-to-date information about their cars via a companion application, voice output from the automotive assistant, and imagery displayed on the car’s infotainment system. • Expand into adjacent transportation markets. Today, we primarily target the automobile market.
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To help employees at every level develop professional skills to advance in their careers, we offer the Take Charge of Your Career Program. Through regular seminars and workshops, our people learn diverse skills that include leadership, negotiating, communicating, goal setting, and more. We provide access to world-class continuing education opportunities and resources including on-demand, self-paced learning opportunities via Linkedin Learning.
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We have education opportunities and training and development programs that help to enrich the knowledge and talents across the organization. From wellbeing programs and holiday celebrations to our virtual book club and LBGTQ alliance, we’re focused on maintaining our connections regardless of our physical locations.
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Our teams are also continuously connecting through our local social committees, which bring teams together while promoting engagement, inclusion, and community-service. With more than 80 employees serving on these committees and approximately 70% of employees participating in at least one event live or digitally, this employee-driven initiative supports our company’s values.
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We have successfully launched affinity groups for Diversity and Inclusion , Women in Technology , and Working Parents , as well as our Book Club . We celebrated important cultural observances such as Black History Month, Women’s History Month , and Pride Month .
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Our leadership and our people recognize that our efforts must include and support racial, ethnic, cultural, age, experience, gender, and LGBTQ+ diversity.
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To support our efforts, break down biases, and improve our ways of working collaboratively toward greater innovation, we have a company-wide Gender Diversity Program designed to elevate female and underrepresented voices within our teams. 14 We are committed to pay fairness. To that end, we performed a compensation analysis across the organization.
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Our analysis confirmed our commitment to a healthy, fair compensation system. Overall, in each country large enough to permit statistical comparisons, we saw no significant differences in pay by gender when controlling for factors such as job family, level, and years of service, nor did we see differences by gender or race in the United States.
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We will continue to monitor compensation fairness and, where necessary, will make compensation adjustments to ensure fairness. A diverse business must be intentionally created. While we prioritize attracting top talent, we equally value developing our people.
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Our Women in Technology Group is an employee-led employee resource group ( “ERG”) focused on promoting leadership development and career advancement for women within Cerence. Approximately 30% of women are actively involved, with more than 20% attending events regularly.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese include, among others, provisions that: • do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of our stockholders, in each case except as such rights may otherwise be provided to holders of preferred stock; • establish advance notice requirements for stockholder nominations and proposals; • provide that a special meeting of our stockholders may only be called by our Board, the Chairman of our Board or our Chief Executive Officer, or at the request of holders of not less than 20% of the outstanding shares of our common stock; and 30 • limit our ability to enter into certain business combination transactions.
Biggest changeThese include, among others, provisions that: • do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of our stockholders, in each case except as such rights may otherwise be provided to holders of preferred stock; • establish advance notice requirements for stockholder nominations and proposals; • provide that a special meeting of our stockholders may only be called by our Board, the Chairman of our Board or our Chief Executive Officer, or at the request of holders of not less than 20% of the outstanding shares of our common stock; and • limit our ability to enter into certain business combination transactions. 29 These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Cerence, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.
Factors that may contribute to fluctuations in operating results include: • given our limited customer base, the volume, timing and fulfillment of large customer contracts; • renewals of existing customer contracts and wins of new customer programs; • our mix of variable, fixed prepaid or fixed minimum purchase commitment license contracts; • increased expenditures incurred pursuing new product or market opportunities; • the timing of the receipt of royalty reports; • fluctuating sales by our customers to their end-users; • contractual counterparties failing to meet their contractual commitments to us; • introduction of new products by us or our competitors; • cybersecurity or data breaches; • reduction in the prices of our products in response to competition, market conditions or contractual obligations; • impairment of goodwill or intangible assets; • accounts receivable that are not collectible; • higher than anticipated costs related to fixed-price contracts with our customers; • change in costs due to regulatory or trade restrictions; 18 • expenses incurred in litigation matters, whether initiated by us or brought by third-parties against us, and settlements or judgments we are required to pay in connection with disputes; • changes in our stock compensation practices, as relates to employee short-term incentive payments; and • general economic trends as they affect the customer bases into which we sell.
Factors that may contribute to fluctuations in operating results include: • given our limited customer base, the volume, timing and fulfillment of large customer contracts; • renewals of existing customer contracts and wins of new customer programs; • our mix of variable, fixed prepaid or fixed minimum purchase commitment license contracts; • increased expenditures incurred pursuing new product or market opportunities; • the timing of the receipt of royalty reports; • fluctuating sales by our customers to their end-users; • contractual counterparties failing to meet their contractual commitments to us; • introduction of new products by us or our competitors; • cybersecurity or data breaches; • reduction in the prices of our products in response to competition, market conditions or contractual obligations; • impairment of goodwill or intangible assets; • accounts receivable that are not collectible; • higher than anticipated costs related to fixed-price contracts with our customers; • change in costs due to regulatory or trade restrictions; 18 • expenses incurred in litigation matters, whether initiated by us or brought by third-parties against us, and settlements or judgments we are required to pay in connection with disputes; • changes in our stock compensation practices, as it relates to employee short-term incentive payments; and • general economic trends as they affect the customer bases into which we sell.
We may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all, for a variety of reasons, including: • as an independent, publicly traded company, we may be more susceptible to market fluctuations and other adverse events than if it were still a part of Nuance; and • as an independent, publicly traded company, our businesses are less diversified than Nuance’s businesses prior to the separation.
We may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all, for a variety of reasons, including: • as an independent, publicly traded company, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Nuance; and • as an independent, publicly traded company, our businesses are less diversified than Nuance’s businesses prior to the separation.
Our Board of Directors’, or our Board, decisions regarding the payment of dividends depends on consideration of many factors, such as our financial condition, earnings, sufficiency of distributable reserves, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, legal requirements, regulatory constraints and other factors that our Board deems relevant.
Our Board of Directors’, or our Board's, decisions regarding the payment of dividends depends on consideration of many factors, such as our financial condition, earnings, sufficiency of distributable reserves, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, legal requirements, regulatory constraints and other factors that our Board deems relevant.
Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, global automotive industry customer sales and production volumes. Vehicle production initially decreased significantly in China, which was first affected by COVID-19, then Europe and also the United States.
Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, global 16 automotive industry customer sales and production volumes. Vehicle production initially decreased significantly in China, which was first affected by COVID-19, then Europe and also the United States.
Our success depends substantially upon our ability to enhance our products and technologies, to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements, and to maintain our alignment with the OEMs, their technology and market strategies.
Our success depends substantially upon our ability to enhance our products and technologies, to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements, and to maintain 15 our alignment with the OEMs, their technology and market strategies.
We may not have sufficient cash flow from our business to pay our indebtedness, and we may not have the ability to raise the funds necessary to settle for cash conversions of the Notes or to repurchase the Notes for cash upon a fundamental change, which could adversely affect our business and results of operations.
We may not have sufficient cash flow from our business to pay our indebtedness, and we may not have the ability to raise the funds necessary to settle for cash conversions of our outstanding notes (the "Notes") or to repurchase the Notes for cash upon a fundamental change, which could adversely affect our business and results of operations.
We believe that, as an independent, publicly traded company, we will be able to, among other things, design and implement corporate strategies and policies and develop partnerships that are better targeted to our business’s areas of strength and differentiation, better focus our financial and operational resources on those specific strategies, create effective incentives for our management and employees that are more closely tied to our business performance, provide investors more flexibility and enable us to achieve alignment with a more natural stockholder base and implement and maintain a capital structure designed to meet our specific needs.
We believe that, as an independent, publicly traded company, we are able to, among other things, design and implement corporate strategies and policies and develop partnerships that are better targeted to our business’s areas of strength and differentiation, better focus our financial and operational resources on those specific strategies, create effective incentives for our management and employees that are more closely tied to our business performance, provide investors more flexibility and enable us to achieve alignment with a more natural stockholder base and implement and maintain a capital structure designed to meet our specific needs.
Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations, including: • adverse political and economic conditions, or changes to such conditions, in a specific region or country; • trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional authorities such as China, Canada or the European Union; • the impact on local and global economies of the United Kingdom leaving the European Union; • changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies; • compliance with laws and regulations in many countries, including with respect to data protection, anticorruption, labor relations, tax, foreign currency, anti-competition, import, export and trade regulations, and any subsequent changes in such laws and regulations; • geopolitical turmoil, including terrorism and war, such as the conflict between Russia and Ukraine; • changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions; • evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in the United States pursuant to the Foreign Investment Risk Preview Modernization Act and substantial restrictions on investment from China; • changes in applicable tax laws; • difficulties in staffing and managing operations in multiple locations in many countries; • longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and • less effective protection of intellectual property than in the United States.
Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations, including: • adverse political and economic conditions, or changes to such conditions, in a specific region or country; • trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional authorities such as China, Canada or the European Union; • the impact on local and global economies of the United Kingdom leaving the European Union; • changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies; • compliance with laws and regulations in many countries, including with respect to data protection, anticorruption, labor relations, tax, foreign currency, anti-competition, import, export and trade regulations, and any subsequent changes in such laws and regulations; 22 • geopolitical turmoil, including terrorism and war, such as the conflict between Russia and Ukraine and the developing conflict between Israel and Hamas; • changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions; • evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in the United States pursuant to the Foreign Investment Risk Preview Modernization Act and substantial restrictions on investment from China; • changes in applicable tax laws; • difficulties in staffing and managing operations in multiple locations in many countries; • longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and • less effective protection of intellectual property than in the United States.
These circumstances could adversely affect our ability to protect our competitive position in the industry and otherwise adversely affect our business, financial condition and results of operations. 27 Risks Relating to Our Securities and Indebtedness The terms of the Senior Credit Facilities restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industry in which we operate, the economy and governmental regulations.
These circumstances could adversely affect our ability to protect our competitive position in the industry and otherwise adversely affect our business, financial condition and results of operations. 26 Risks Relating to Our Securities and Indebtedness The terms of the Senior Credit Facilities restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industry in which we operate, the economy and governmental regulations.
Subsequent events resulted in the shutdown of manufacturing operations in China, Europe and the United States, and even though manufacturing operations have resumed, the capacity of such 16 global manufacturing operations remains uncertain.
Subsequent events resulted in the shutdown of manufacturing operations in China, Europe and the United States, and even though manufacturing operations have resumed, the capacity of such global manufacturing operations remains uncertain.
In addition, our Board has adopted the Cerence 2019 Equity Incentive Plan, or the Equity Plan, for the benefit of certain of our current and future employees, service providers and non-employee directors. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.
Our Board has adopted the Cerence 2019 Equity Incentive Plan, or the Equity Plan, for the benefit of certain of our current and future employees, service providers and non-employee directors. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.
The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including: • actual or anticipated fluctuations in our results of operations due to factors related to our business; • success or failure of our business strategies; • competition and industry capacity; • changes in interest rates and other factors that affect earnings and cash flow; • our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed; • our ability to retain and recruit qualified personnel; • our quarterly or annual earnings, or those of other companies in our industry; • announcements by us or our competitors of significant acquisitions or dispositions; • changes in accounting standards, policies, guidance, interpretations or principles; • the failure of securities analysts to cover, or positively cover, our common stock; • changes in earnings estimates by securities analysts or our ability to meet those estimates; • the operating and stock price performance of other comparable companies; • investor perception of our company and our industry; • overall market fluctuations unrelated to our operating performance; • results from any material litigation or government investigation; • changes in laws and regulations (including tax laws and regulations) affecting our business; • changes in capital gains taxes and taxes on dividends affecting stockholders; and • general economic conditions and other external factors. 32 Low trading volume for our stock would amplify the effect of the above factors on our stock price volatility.
The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including: • actual or anticipated fluctuations in our results of operations due to factors related to our business; • success or failure of our business strategies; • competition and industry capacity; • changes in interest rates and other factors that affect earnings and cash flow; • our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed; • our ability to retain and recruit qualified personnel; • our quarterly or annual earnings, or those of other companies in our industry; • announcements by us or our competitors of significant acquisitions or dispositions; • changes in accounting standards, policies, guidance, interpretations or principles; • the failure of securities analysts to cover, or positively cover, our common stock; • changes in earnings estimates by securities analysts or our ability to meet those estimates; • the operating and stock price performance of other comparable companies; • investor perception of our company and our industry; • overall market fluctuations unrelated to our operating performance; • results from any material litigation or government investigation; • changes in laws and regulations (including tax laws and regulations) affecting our business; • changes in capital gains taxes and taxes on dividends affecting stockholders; and • general economic conditions, war, conflict or other political instability, and other external factors. 31 Low trading volume for our stock would amplify the effect of the above factors on our stock price volatility.
Additionally, the terms of the Senior Credit Facilities limit our ability to pay cash dividends. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. 28 Servicing our debt may require a significant amount of cash.
Additionally, the terms of the Senior Credit Facilities limit our ability to pay cash dividends. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. 27 Servicing our debt may require a significant amount of cash.
In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase. 29 The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and results of operations and the value of our common stock.
In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase. 28 The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and results of operations and the value of our common stock.
Holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
Holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indentures governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
ASC 470-20 requires the value of the conversion options of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in our consolidated balance sheet and as a discount to the Notes, which reduces their initial carrying value.
ASC 470-20 requires the value of the conversion options of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in our consolidated balance sheet and as a discount to the Notes, which reduced their initial carrying value.
This, in turn, could have an adverse impact on trading prices for shares of our common stock, and could adversely affect our ability to access the capital markets. 33 Item 1B. Unresolved Staff Comments. None.
This, in turn, could have an adverse impact on trading prices for shares of our common stock, and could adversely affect our ability to access the capital markets. 32 Item 1B. Unresolved Staff Comments. None.
We may encounter customers unwilling to accept the terms of our software license or non-recurring engineering agreements. Any price reductions could impact our sales and profit margins. Our future profitability will depend upon, among other things, our ability to continuously reduce the costs for our components and maintain our cost structure.
We have in the past, and may in the future encounter customers unwilling to accept the terms of our software license or non-recurring engineering agreements. Any price reductions could impact our sales and profit margins. Our future profitability will depend upon, among other things, our ability to continuously reduce the costs for our components and maintain our cost structure.
Among the changes, ASU 2020-06 removed the requirement to bifurcate the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion. The removal of the bifurcation of liability and equity components would eliminate non-cash interest expense corresponding to the amounts recorded within equity.
Among the changes, ASU 2020-06 removed the requirement to bifurcate the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion. The removal of the bifurcation of liability and equity components eliminated non-cash interest expense corresponding to the amounts recorded within equity.
The competition in the automotive cognitive assistance market could adversely affect our operating results by reducing the volume of the products and solutions we license or sell or the prices we can charge.
The competition in the automotive cognitive assistance market has and could adversely affect in the future, our operating results by reducing the volume of the products and solutions we license or sell or the prices we can charge.
For example, in June 2018, California enacted the CCPA, which became operative on January 1, 2020 and broadly defines personal information, gives California residents expanded privacy rights and protections, and provides for civil penalties for violations and a private right of action for data breaches.
At the legislative level, for example, in June 2018, California enacted the CCPA, which became operative on January 1, 2020 and broadly defines personal information, gives California residents expanded privacy rights and protections, and provides for civil penalties for violations and a private right of action for data breaches.
In June 2020, we issued an aggregate principal amount of $175 million 3.00% convertible senior notes due 2025, or the Notes. The interest rate is fixed at 3.00% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020.
In June 2020, we issued an aggregate principal amount of $175 million 3.00% convertible senior notes due 2025, the “2025 Notes.” The interest rate is fixed at 3.00% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020.
A change in senior management, such as we experienced over the past year, also could result in our future strategy and plans differing from those of the past.
A change in senior management, such as we experienced over the past years, also could result in our future strategy and plans differing from those of the past.
Moreover, restrictions on the use of our technology over the next two years under the Intellectual Property Agreement which we entered into with Nuance in connection with the Spin-Off may limit our ability to adapt to technology and regulatory developments and thereby compete effectively in the market.
Moreover, restrictions on the use of our technology over the next year under the Intellectual Property Agreement which we entered into with Nuance in connection with the Spin-Off may limit our ability to adapt to technology and regulatory developments and thereby compete effectively in the market.
The Information Commissioner’s Office, or ICO, has recently introduced new mechanisms for international transfers of personal data originating from the U.K. (an International Data Transfer Agreement, or IDTA, along with a separate addendum to the EU SCCs).
The Information Commissioner’s Office, or ICO, has recently introduced new mechanisms for international transfers of personal data originating from the UK (an International Data Transfer Agreement, or IDTA, along with a separate addendum to the EU SCCs).
The loss of business from any of our major customers, whether by lower overall demand for vehicles, cancellation of existing contracts or the failure to award us new business, could have a material adverse effect on our business, results of operations and financial condition.
The loss of business from any of our major customers, whether by lower overall demand for vehicles, cancellation of existing contracts or the failure to award us new business, has in the past and could in the future have a material adverse effect on our business, results of operations and financial condition.
In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, with auditor attestation of the effectiveness of our internal controls.
In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
These developments, along with continued uncertainty about economic stability related to the global outbreak of COVID-19 and more recently the Russian invasion of Ukraine, have resulted in supply chain disruption, inflation, higher interest rates, fluctuations in currency exchange rates, and uncertainty about business continuity, which may adversely affect our business and our results of operations.
These developments, along with continued uncertainty about economic stability related to the global outbreak of COVID-19 and more recently the Russian invasion of Ukraine and the developing conflict between Israel and Hamas, have resulted in supply chain disruption, inflation, higher interest rates, fluctuations in currency exchange rates, and uncertainty about business continuity, which may adversely affect our business and our results of operations.
The carrying value of the Notes, net of the applicable discount recorded, will be accreted up to the principal amount of the Notes, as the case may be, from the issuance date until maturity, which will result in non-cash charges to interest expense in our consolidated statement of operations.
The carrying value of the Notes, net of the applicable discount recorded, were accreted up to the principal amount of the Notes, as the case may be, from the issuance date until maturity, which resulted in non-cash charges to interest expense in our consolidated statement of operations.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option.
In the event the conditional conversion feature of either series of the Notes is triggered, holders of such series of Notes will be entitled to convert the Notes of such series at any time during specified periods at their option.
The GDPR applies to any company established in the EEA as well as any company outside the EEA that collects or otherwise processes personal data in connection with the offering of goods or services to individuals in the EEA or the monitoring of their behavior.
The GDPR applies to any company established in the European Economic Area (“EEA”) as well as any company outside the EEA that collects or otherwise processes personal data in connection with the offering of goods or services to individuals in the EEA or the monitoring of their behavior.
This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits.
These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits.
Under FASB ASC Subtopic 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost.
Under FASB ASC Subtopic 470-20, Debt with Conversion and Other Options, or ASC 470-20, an issuer was required to separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost.
We may have potential business conflicts of interest with Nuance with respect to our past and ongoing relationships. 26 Conflicts of interest may arise between Nuance and us in a number of areas relating to our past and ongoing relationships, including: • labor, tax, employee benefit, indemnification and other matters arising from our separation from Nuance; • intellectual property matters; • employee recruiting and retention; and • business combinations involving our company.
Conflicts of interest may arise between Nuance and us in a number of areas relating to our past and ongoing relationships, including: • labor, tax, employee benefit, indemnification and other matters arising from our separation from Nuance; • intellectual property matters; • employee recruiting and retention; and • business combinations involving our company.
In addition, any of our future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives.
In addition, our Senior Credit Facilities contain and any of our future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives.
The full extent to which the ongoing COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of COVID-19, including variants such as Delta and Omicron, its severity, the effectiveness of actions to treat or contain the virus and its impact and how quickly and to what extent normal economic and operating conditions can resume.
The full extent to which the COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of COVID-19, including variants, its severity, the effectiveness of actions to treat or contain the virus and its impact and the extent to which normal economic and operating conditions are impacted.
Our effective income tax rate can vary significantly between periods due to a number of complex factors including: • projected levels of taxable income; • pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory rates; • increases or decreases to valuation allowances recorded against deferred tax assets; • tax audits conducted and settled by various tax authorities; • adjustments to income taxes upon finalization of income tax returns; • the ability to claim foreign tax credits; • the repatriation of non-U.S. earnings for which we have not previously provided for income taxes; • changes in tax laws and their interpretations in countries in which we are subject to taxation; and • changes to assessments of uncertain tax positions. 31 We regularly evaluate the need for a valuation allowance on deferred tax assets, considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.
Our effective income tax rate can vary significantly between periods due to a number of complex factors including: • projected levels of taxable income; • pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory rates; • increases or decreases to valuation allowances recorded against deferred tax assets; • tax audits conducted and settled by various tax authorities; • adjustments to income taxes upon finalization of income tax returns; • the ability to claim foreign tax credits; • the repatriation of non-U.S. earnings for which we have not previously provided for income taxes; • changes in tax laws and their interpretations in countries in which we are subject to taxation; and • changes to assessments of uncertain tax positions.
In addition to European data protection requirements, the United States Federal Trade Commission and many state attorney generals are interpreting federal and state consumer protection laws as imposing standards for the online collection, use, dissemination, and security of data.
Furthermore, the United States Federal Trade Commission and many state attorney generals are interpreting existing federal and state consumer protection laws as imposing standards for the online collection, use, dissemination, and security of data.
Our Amended and Restated Certificate of Incorporation designates the courts of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our organizational documents designate the courts of the State of Delaware or the U.S. district courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
While the FADP provides broad protections to personal data, on September 25, 2020, the Swiss federal Parliament enacted a revised version of the FADP, which is anticipated to become effective in 2022 or the beginning of 2023. The new version of the FADP aligns Swiss data protection law with the GDPR.
While the FADP provides broad protections to personal data, on September 25, 2020, the Swiss federal Parliament enacted a revised version of the FADP, which became effective September 1, 2023. The new version of the FADP aligns Swiss data protection law with the GDPR.
If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition and results of operations could be adversely affected.
If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition and results of operations could be adversely affected. We may have potential business conflicts of interest with Nuance with respect to our past and ongoing relationships.
Alternatively, if a court were to find this provision of our Amended and Restated Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.
Alternatively, if a court were to find any of these provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.
Future adverse changes in these or other unforeseeable factors could result in additional impairment charges that would impact our results of operations and financial position in the reporting period identified.
Based upon the results of the impairment test, no goodwill impairment was recorded as of September 30, 2023. Future adverse changes in these or other unforeseeable factors could result in additional impairment charges that would impact our results of operations and financial position in the reporting period identified.
Item 1A. Ris k Factors. You should carefully consider all of the information in this Form 10-K and each of the risks described below, which we believe are the material risks that we face. Some of the risks relate to our business, others to our intellectual property and technology, and the consequences of the Spin-Off.
Item 1A. Ris k Factors. You should carefully consider all of the information in this Form 10-K and each of the risks described below, which we believe are the material risks that we face.
Virginia enacted the VCDA and Colorado enacted the CDA, respectively, which have similar requirements and obligations to the CCPA. The regulatory framework governing the collection, processing, storage, use and sharing of certain information, particularly financial and other personal data, is rapidly evolving and is likely to continue to be subject to uncertainty and varying interpretations.
The regulatory framework governing the collection, processing, storage, use and sharing of certain information, particularly financial and other personal data, is rapidly evolving and is likely to continue to be subject to uncertainty and varying interpretations.
We may experience pricing pressure from our customers in the future, which could result from the strong purchasing power of major OEMs. As a developer of automotive cognitive assistance components, we may be expected to quote fixed prices or be forced to accept prices with annual price reduction commitments for long-term sales arrangements or discounted reimbursements for our work.
As a developer of automotive cognitive assistance components, we have been in the past, and may be in the future, expected to quote fixed prices or be forced to accept prices with annual price reduction commitments for long-term sales arrangements or discounted reimbursements for our work.
Such factors may also negatively impact consumer demand for automobiles that include features such as our products. In addition, automotive production and sales can be affected by our customers’ ability to continue operating in response to challenging economic conditions, and in response to labor relations issues, regulatory requirements, trade agreements and other factors.
In addition, automotive production and sales can be affected by our customers’ ability to continue operating in response to challenging economic conditions, and in response to labor relations issues, regulatory requirements, trade agreements and other factors.
In addition, ASU 2020-06 precludes the use of the treasury stock method, when calculating diluted earnings per share, for convertible debt instruments that may be settled entirely or partially in cash upon conversion.
In addition, ASU 2020-06 precludes the use of the treasury stock method, when calculating diluted earnings per share, for convertible debt instruments that may be settled entirely or partially in cash upon conversion. We adopted ASU 2020-06 on October 1, 2022 using the modified retrospective approach. Please see Note 2(t) for further discussion.
This analysis is heavily dependent upon our current and projected operating results. A decline in future operating results could provide substantial evidence that a full or partial valuation allowance for deferred tax assets is necessary, which could have a material adverse effect on our results of operations and financial condition.
A decline in future operating results could provide substantial evidence that a full or partial valuation allowance for deferred tax assets is necessary, which could have a material adverse effect on our results of operations and financial condition. 30 The commercial and credit environment, may adversely affect our access to, and the cost of, capital.
If we are unable to grow or maintain our position in the Chinese market, the pace of growth slows or vehicle sales in China decrease, our business, results of operations and financial condition could be materially adversely affected. 22 Government regulations and business considerations may also require us to conduct business in China through joint ventures with Chinese companies.
In addition, political tensions between China and the United States may negatively impact our ability to conduct business in China. If we are unable to grow or maintain our position in the Chinese market, the pace of growth slows or vehicle sales in China decrease, our business, results of operations and financial condition could be materially adversely affected.
Our leadership position has historically been derived from our products and services based on edge software technology. We have been and are continuing to develop new products and services that incorporate cloud-connected components. The design and development of new cloud-connected components will involve significant expense.
Our strategy to increase cloud connected services may adversely affect our near-term revenue growth and results of operations. Our leadership position has historically been derived from our products and services based on edge software technology. We have been and are continuing to develop new products and services that incorporate cloud-connected components.
Some risks relate to the securities markets, our indebtedness and ownership of our securities. Any of the following risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Form 10-K.
Any of the following risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Form 10-K. Risks Relating to Our Business The market in which we operate is highly competitive and rapidly changing and we may be unable to compete successfully.
The GDPR imposes additional obligations and risk upon our business and substantially increases the penalties to which we could be subject in the event of any non-compliance.
The GDPR imposes additional obligations and risk upon our business and substantially increases the penalties to which we could be subject in the event of any non-compliance. Failure to comply with the requirements of the GDPR may result in warning letters, mandatory audits, orders to cease/change the use of data, and financial penalties.
Even if we have an established relationship with a customer, any failure to perform under a service contract or innovate in response to their feedback may neutralize our advantage with that customer. 17 If we fail to win a significant number of customer design competitions in the future or to renew a significant number of existing service contracts, our business, results of operations and financial condition would be adversely affected.
If we fail to win a significant number of customer design competitions in the future or to renew a significant number of existing service contracts, our business, results of operations and financial condition would be adversely affected.
We will be required to implement these new safeguards when conducting restricted cross-border data transfers and doing so will require significant effort and cost.
We will be required to implement these new safeguards when conducting restricted cross-border data transfers and doing so will require significant effort and cost. In addition to European data protection requirements, we face a growing body of privacy and data security requirements in the United States.
Our research and development costs have greatly increased in recent years and, together with certain expenses associated with delivering our connected services, are projected to continue to escalate in the near future. We may encounter difficulties with designing, developing and releasing new cloud-connected components, as well as integrating these components with our existing hybrid technologies.
The design and development of new cloud-connected components will involve significant expense. Our research and development costs have greatly increased in recent years and, together with certain expenses associated with delivering our connected services, are projected to continue to escalate in the near future.
Interruptions or delays in our services or services from data center hosting facilities or public clouds could impair the delivery of our services and harm our business.
The above risks, if realized, could have a material adverse effect on our business, results of operations and financial condition. Interruptions or delays in our services or services from data center hosting facilities or public clouds could impair the delivery of our services and harm our business.
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. Our strategy to increase cloud connected services may adversely affect our near-term revenue growth and results of operations.
Even after the COVID-19 pandemic has lessened or subsided, we may continue to experience adverse impacts on our business and financial performance, our ability to access needed capital and liquidity, and the value of our common stock as a result of its global economic impact.
Some of our current or potential competitors are large technology companies that have significantly greater financial, technical and marketing resources than we do, and others are smaller specialized companies that possess automotive expertise or regional focus and may have greater price flexibility than we do. 15 These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, or may decide to offer products at low or unsustainable cost to win new business.
Some of our current or potential competitors are large technology companies that have significantly greater financial, technical and marketing resources than we do, and others are smaller specialized companies that possess automotive expertise or regional focus and may have greater price flexibility than we do.
This selection process is known as a “design win.” We could expend our resources without success.
This selection process is known as a “design win.” We could expend our resources without success, and in the past we have not always been selected despite the investment of effort and money.
Those amounts could be material. Any such indemnification obligation could adversely affect our business, financial condition and results of operations. We have agreed to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility.
Those amounts could be material. Any such indemnification obligation could adversely affect our business, financial condition and results of operations. We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
These development issues may further increase costs and may affect our ability to innovate in a manner demanded by the market. As a result, our strategy to incorporate more cloud-connected components may adversely affect our revenue growth and results of operations. Pricing pressures from our customers may adversely affect our business.
As a result, our strategy to incorporate more cloud-connected components may adversely affect our revenue growth and results of operations. Pricing pressures from our customers may adversely affect our business. We have in the past, and may in the future experience pricing pressure from our customers, including from the strong purchasing power of major OEMs.
Risks Relating to Our Business The market in which we operate is highly competitive and rapidly changing and we may be unable to compete successfully. There are a number of companies that develop or may develop products that compete in the automotive voice assistance market.
There are a number of companies that develop or may develop products that compete in the automotive voice assistance market.
We may also incur additional indebtedness to meet future financing needs.
We may also incur additional indebtedness to meet future financing needs, including under our secured revolving credit facility portion of our Senior Credit Facilities.
At September 30, 2022, we concluded indicators of impairment were present due to the current macroeconomic conditions, including continued declines in our stock price. Based upon the results of the impairment test, we recorded a goodwill impairment charge of $213.7 million within the Consolidated Statement of Operations.
During the fiscal year ended September 30, 2022, we recorded a goodwill impairment charge of $213.7 million within the Consolidated Statement of Operations. Due to the update of our multi-year target plan, we concluded that indicators of impairment were present and performed a quantitative impairment test as of September 30, 2023.
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 or related to COVID-19 could materially and adversely affect our business, our access to needed capital and liquidity, and the value of our common stock.
The COVID-19 pandemic could also result in additional governmental restrictions and regulations, which could adversely affect our business and financial results.
Our participation in joint ventures would limit our control over Chinese operations and may expose our proprietary technologies to misappropriation by joint venture partners. The above risks, if realized, could have a material adverse effect on our business, results of operations and financial condition.
Government regulations and business considerations may also require us to conduct business in China through joint ventures with Chinese companies. Our participation in joint ventures would limit our control over Chinese operations and may expose our proprietary technologies to misappropriation by joint venture partners.
Additionally, a new privacy law, the CPRA, recently was approved by California voters in the November 2020 election. The CPRA will significantly modify the CCPA, and goes into effect and fully supersedes CCPA on January 1, 2023.
Additionally, the CPRA, a ballot initiative approved in November 2020, which went into effect on January 1, 2023 significantly modified the CCPA, including by expanding consumers’ rights and establishing a new state agency that has authority to implement and enforce the CPRA.
While we have taken steps to mitigate the impact on us with respect to transfers of data, In addition, we are subject to Swiss data protection laws, including the Federal Act on Data Protection, or the FADP.
Where relying on the SCCs for data transfers, we may also be required to carry out transfer impact assessments to assess whether the recipient is subject to local laws which allow public authority access to personal data. In addition, we are subject to Swiss data protection laws, including the Federal Act on Data Protection, or the FADP.
Removed
As the COVID-19 pandemic continues, given the elevated number of COVID-19 cases throughout the world as a result of the highly transmissible Delta and Omicron variants, our business operations could be further disrupted or delayed.
Added
Some of the risks relate to our business, others to our intellectual property and technology, the consequences of the Spin-Off, the securities markets, our indebtedness and ownership of our securities.
Removed
The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, 20 mandatory data breach notification requirements and onerous obligations on services providers.
Added
These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, or may decide to offer products at low or unsustainable cost to win new business.
Removed
The CPRA will significantly modify the CCPA, including by expanding consumers’ rights and establishing a new state agency that will be vested with authority to implement and enforce the CPRA. For example, the CPRA and the CCPA may lead other states to pass comparable legislation, with potentially greater penalties, and more rigorous compliance requirements relevant to our business.
Added
Such factors have in the past and may in the future also negatively impact consumer demand for automobiles that include features such as our products.
Removed
In addition, political tensions between China and the United States may negatively impact our ability to conduct business in China.
Added
Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or the financial services industry generally, have in the past and may in the future lead to market-wide liquidity problems.
Removed
We have agreed in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355 and related provisions of the Code and are intended to preserve the tax-free nature of the Spin-Off.
Added
For example, on March 10, 2023, Silicon Valley Bank (“SVB”), was placed into receivership with the Federal Deposit Insurance Corporation (“FDIC”), which resulted in all funds held at SVB being temporarily inaccessible by SVB’s customers.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

7 edited+7 added−0 removed9 unchanged
Biggest changeOn October 19, 2022, plaintiff Melinda Hipp filed a shareholder derivative complaint in the Delaware Court of Chancery on behalf of Cerence Inc. against the defendants named in the Consolidated Derivative Action and board member Douglas Davis. This complaint makes factual and legal contentions substantially similar to those made in the Consolidated Derivative Actions.
Biggest changeTwo shareholder derivative complaints making factual and legal contentions substantially similar to those raised in the consolidated action have been also filed in the Delaware Court of Chancery: one filed on October 19, 2022 by plaintiff Melinda Hipp against the defendants named in the consolidated action and board member Douglas Davis, and one filed on August 17, 2023 by plaintiff Catherine Fleming against the defendants named in the consolidated action.
However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows. 34 Item 4. Mine Safe ty Disclosures.
However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows. Item 4. Mine Safe ty Disclosures.
(the "Securities Action") was filed in the United States District Court for the District of Massachusetts, naming the Company and two of its former officers as defendants. Following the court's selection of a lead plaintiff and lead counsel, an amended complaint was filed on July 26, 2022.
(the “Securities Action”) was filed in the United States District Court for the District of Massachusetts, naming the Company and two of its former officers as defendants. Following the court's selection of a lead plaintiff and lead counsel, an amended complaint was filed on July 26, 2022.
Gallenberger as well as board members Arun Sarin, Thomas Beaudoin, Marianne Budnik, Sanjay Jha, Kristi Ann Matus, Alfred Nietzel and current CEO and board member Stefan Ortmanns.
Gallenberger as well as board members Arun Sarin, Thomas Beaudoin, Marianne Budnik, Sanjay Jha, Kristi Ann Matus, Alfred Nietzel and current CEO and board member Stefan Ortmanns. These actions are premised on factual contentions substantially similar to those made in the Securities Action and contain substantially similar legal contentions.
These actions contain substantially similar factual and legal contentions and, as such, on June 13, 2022, at the parties' request, the court consolidated these derivative actions into a single action (the "Consolidated Derivative Action") and appointed Co-Lead Counsel for plaintiffs.
As such, on June 13, 2022, at the parties' request, the court consolidated these derivative actions into a single action and appointed co-lead counsel for plaintiffs in that consolidated action. The parties agreed to stay the consolidated action pending a ruling on the forthcoming motion to dismiss in the Securities Action, and the court has ordered that stay.
In addition, the parties agreed to stay the Consolidated Derivative Action pending a ruling on the forthcoming motion to dismiss in the Securities Action, and the court has ordered that stay.
The parties have respectively agreed to stay those actions pending a ruling on the motion to dismiss in the Securities Action, and the courts hearing those actions have ordered those stays.
The plaintiff seeks unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. We intend to defend the claims vigorously.
The plaintiff seeks unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including attorney’s fees. On September 9, 2022, the defendants in the Securities Action moved to dismiss the action in its entirety. That motion is now fully briefed but it has not yet been resolved. We intend to defend the claims vigorously.
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A.P., a minor, by and through her guardian, Carlos Pena and Carlos Pena Action On March 24, 2023, plaintiffs A.P., a minor, by and through her guardian, Carlos Pena, and Carlos Pena, each individually and on behalf of similarly situated individuals filed a purported class action lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division (Case.
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No. 2023CH02866 (Cir. Ct. Cook Cnty. 2023)). The case was removed to Federal Court (Case No. 1:23CV2667 (N.D. Ill.)), and then severed and remanded back in part, so there are two pending cases.
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Plaintiffs subsequently amended the federal complaint twice, with the latest second amended complaint, filed on July 13, 2023, adding plaintiffs Randolph Freshour and Vincenzo Allan, each also filing individually and on behalf of similarly situated individuals.
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Plaintiffs allege that Cerence violated the Illinois Biometric Information Privacy Act (“BIPA”), 740 ILCS 14/1 et seq. through Cerence’s Drive Platform technology, which is integrated in various automobiles. The named plaintiffs allegedly drove or rode in a vehicle with Cerence’s Drive Platform technology.
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Across both cases, plaintiffs allege that Cerence violated: (1) BIPA Section 15(a) by possessing biometrics 33 without any public written policy for their retention or destruction; (2) BIPA Section 15(b) by collecting, capturing, or obtaining biometrics without written notice or consent; (3) BIPA Section 15(c) by profiting from biometrics obtained from Plaintiffs and putative class members; and (4) BIPA Section 15(d) by disclosing biometrics to third party companies without consent.
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Cerence has filed motions to dismiss both cases. Plaintiffs are seeking statutory damages of $5,000 for each willful and/or reckless violation of BIPA and, alternatively, damages of $1,000 for each negligent violation of BIPA.
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Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 35 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36 Item 6 Reserved 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 63 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 34 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35 Item 6 Reserved 36 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 60 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeWe caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. 36 10/2/2019 3/31/2020 9/30/2020 3/31/2021 9/30/2021 3/31/2022 9/30/2022 Cerence Inc. $ 100.00 $ 100.33 $ 318.37 $ 583.58 $ 626.12 $ 235.18 $ 102.61 S&P MidCap 400 (1) $ 100.00 $ 77.03 $ 99.33 $ 139.25 $ 140.92 $ 143.75 $ 117.60 Russell 2000 (1) $ 100.00 $ 77.93 $ 101.90 $ 150.07 $ 148.98 $ 87.90 $ 70.92 S&P Software & Services Select $ 100.00 $ 90.53 $ 131.74 $ 173.65 $ 189.66 $ 162.70 $ 118.19 (1) During fiscal year 2022, our common stock was removed from the S&P MidCap 400 Index.
Biggest changeWe caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. 35 10/2/2019 9/30/2020 9/30/2021 9/30/2022 9/30/2023 Cerence Inc. $ 100.00 $ 318.37 $ 626.12 $ 102.61 $ 132.70 Russell 2000 $ 100.00 $ 101.90 $ 148.98 $ 112.51 $ 120.65 S&P Software & Services Select $ 100.00 $ 131.74 $ 189.66 $ 118.19 $ 140.34 Recent Sales of Unregistered Securities and Use of Proceeds None.
The information presented assumes an initial investment of $100 on October 2, 2019, the date our common stock began regular-way trading on the Nasdaq Global Select Market. The graph shows the value that each of these investments would have had at the end of each quarter. The comparisons shown in the graph below are based upon historical data.
The information presented assumes an initial investment of $100 on October 2, 2019, the date our common stock began regular-way trading on the Nasdaq Global Select Market. The graph shows the value that each of these investments would have had at the end of each fiscal year. The comparisons shown in the graph below are based upon historical data.
A “when-issued” trading market for our common stock existed between September 17, 2019 and October 1, 2019 under the symbol “CRNCV”. Holders of Common Stock As of November 15, 2022, there were 486 holders of record of our common stock. This number does not reflect beneficial owners whose shares are held in street name.
A “when-issued” trading market for our common stock existed between September 17, 2019 and October 1, 2019 under the symbol “CRNCV”. Holders of Common Stock As of November 13, 2023, there were 461 holders of record of our common stock. This number does not reflect beneficial owners whose shares are held in street name.
Performance Graph The graph below compares the cumulative total shareholder return of our common stock for the last three years with the S&P MidCap 400, Russell 2000 and the S&P Software & Services Select indices.
There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends. Performance Graph The graph below compares the cumulative total shareholder return of our common stock for the last four years with the Russell 2000 and the S&P Software & Services Select indices.
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There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends.
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As such, we have included the Russell 2000 Index as our broad market equity index comparative and will no longer include the S&P MidCap 400 Index. We believe the Russell 2000 Index generally includes companies with more comparable market capitalization to us.
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The stock performance line graph and table includes a comparison of our cumulative total return to the selected indices ((i) the Russell 2000 Index and (ii) the S&P Software and Select Services) and the discontinued index ((iii) the S&P MidCap 400 Index.) Recent Sales of Unregistered Securities and Use of Proceeds None. Issuer Purchases of Equity Securities Not applicable.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeFor fiscal year 2021 as compared to fiscal year 2020: • Total revenue increased by $56.2 million, or 17.0%, from $331.0 million to $387.2 million. • Operating margin increased by 8.9 percentage points from 6.8% to 15.7%. • Cash provided by operating activities increased by $29.6 million, or 66.1%, from $44.8 million to $74.4 million. 39 Operating Results The following table shows the Consolidated Statements of Operations for the fiscal years 2022, 2021 and 2020 (dollars in thousands): 2022 2021 2020 Revenues: License $ 158,610 $ 202,183 $ 164,268 Connected services 85,571 109,534 97,469 Professional services 83,710 75,465 69,230 Total revenues 327,891 387,182 330,967 Cost of revenues: License $ 2,698 $ 3,544 $ 2,783 Connected services 22,722 25,727 31,768 Professional services 68,764 64,287 64,963 Amortization of intangibles 2,984 7,516 8,337 Total cost of revenues 97,168 101,074 107,851 Gross profit 230,723 286,108 223,116 Operating expenses: Research and development $ 107,116 $ 112,070 $ 88,899 Sales and marketing 31,098 38,683 33,398 General and administrative 42,653 56,979 49,386 Amortization of intangible assets 11,516 12,690 12,544 Restructuring and other costs, net 8,965 5,092 16,458 Goodwill impairment 213,720 — — Total operating expenses 415,068 225,514 200,685 (Loss) income from operations (184,345 ) 60,594 22,431 Interest income 1,007 109 585 Interest expense (14,394 ) (13,997 ) (22,737 ) Other income (expense), net (1,019 ) 1,563 (23,319 ) (Loss) income before income taxes (198,751 ) 48,269 (23,040 ) Provision for (benefit from) income taxes 112,075 2,376 (4,724 ) Net (loss) income $ (310,826 ) $ 45,893 $ (18,316 ) Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services.
Biggest changeFor fiscal year 2022 as compared to fiscal year 2021: • Total revenue decreased by $59.3 million, or 15.3%, from $387.2 million to $327.9 million. • Operating margin decreased by 71.9 percentage points from 15.7% to negative 56.2%. • Cash from operating activities changed by $76.5 million, or 102.9%, from cash provided by operating activities of $74.4 million to cash used in operating activities of $2.1 million. 38 Operating Results The following table shows the Consolidated Statements of Operations for the fiscal years 2023, 2022 and 2021 (dollars in thousands): 2023 2022 2021 Revenues: License $ 145,159 $ 158,610 $ 202,183 Connected services 75,071 85,571 109,534 Professional services 74,245 83,710 75,465 Total revenues 294,475 327,891 387,182 Cost of revenues: License $ 8,522 $ 2,698 $ 3,544 Connected services 22,995 22,722 25,727 Professional services 63,232 68,764 64,287 Amortization of intangibles 414 2,984 7,516 Total cost of revenues 95,163 97,168 101,074 Gross profit 199,312 230,723 286,108 Operating expenses: Research and development $ 123,333 $ 107,116 $ 112,070 Sales and marketing 27,504 31,098 38,683 General and administrative 57,903 42,653 56,979 Amortization of intangible assets 5,854 11,516 12,690 Restructuring and other costs, net 11,917 8,965 5,092 Goodwill impairment — 213,720 — Total operating expenses 226,511 415,068 225,514 (Loss) income from operations (27,199 ) (184,345 ) 60,594 Interest income 4,471 1,007 109 Interest expense (14,769 ) (14,394 ) (13,997 ) Other income (expense), net 1,108 (1,019 ) 1,563 (Loss) income before income taxes (36,389 ) (198,751 ) 48,269 Provision for income taxes 19,865 112,075 2,376 Net (loss) income $ (56,254 ) $ (310,826 ) $ 45,893 Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services.
Deferred revenue represents a significant portion of our net cash provided by operating activities and, depending on the nature of our contracts with customers, this balance can fluctuate significantly from period to period.
Deferred revenue represents a significant portion of our net cash provided by operating activities and, depending on the nature of our contracts with customers, this balance can fluctuate significantly from period to period.
We expect our deferred revenue balances to decrease in the future, including due to a wind-down of a legacy connected service relationship with a major OEM, since the majority of cash from the contract has been collected. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.
We expect our deferred revenue balances to decrease in the future, including due to a wind-down of a legacy connected service relationship with a major OEM, since the majority of cash from the contract has been collected. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.
Performance Obligations License Embedded software and technology licenses operate without access to the external networks and information. Embedded licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology are accounted for as a combined performance obligation.
Performance Obligations License Embedded software and technology licenses operate without access to external networks and information. Embedded licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology are accounted for as a combined performance obligation.
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.
In determining whether these services are distinct, we consider the dependence of the cloud service on the up-front development and stand-up, as well as availability of the services from other vendors.
Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates. We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and the results of our operations.
Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates. We believe the following critical accounting estimates most significantly affect the portrayal of our financial condition and the results of our operations.
For the income approach, fair value was determined based on the present value of estimated future after-tax cash flows using our multi-year target plan, discounted at an appropriate risk-adjusted rate. For the market approach, we used a valuation technique in which values were derived based on valuation multiples of comparable publicly traded companies.
For the income approach, fair value was determined based on the present value of 56 estimated future after-tax cash flows using our multi-year target plan, discounted at an appropriate risk-adjusted rate. For the market approach, we used a valuation technique in which values were derived based on valuation multiples of comparable publicly traded companies.
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 56 average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers, including canceled contracts.
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.
The effective tax rate for the fiscal year 2022 differed from the U.S. federal statutory rate of 21.0%, primarily due to the establishment of a valuation allowance in a foreign jurisdiction, impairment of book goodwill, the tax impacts of stock-based compensation, and our composition of jurisdictional earnings.
The effective income tax rate for fiscal year 2022 differed from the U.S. federal statutory rate of 21.0%, primarily due to the establishment of a valuation allowance in a foreign jurisdiction, impairment of book goodwill, the tax impacts of stock-based compensation, and our composition of jurisdictional earnings.
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.
In addition, the Credit Agreement contains financial covenants, each tested quarterly, (1) a net secured leverage 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.
Our operating expenses include R&D, sales and marketing and general and administrative expenses. R&D expenses primarily consist of salaries, benefits, and overhead relating to research and engineering staff. Sales and marketing expenses includes salaries, benefits, and commissions related to our sales, product marketing, product management, and business unit management teams.
Our operating expenses include R&D, sales and marketing and general and administrative expenses. R&D expenses primarily consist of salaries, benefits, and overhead relating to research and engineering staff. Sales and marketing expenses include salaries, benefits, and commissions related to our sales, product marketing, product management, and business unit management teams.
Net Cash Used in Investing Activities Fiscal Year 2022 Compared with Fiscal Year 2021 Net cash used in investing activities for the fiscal year 2022 was $10.6 million, a decrease of $31.0 million, or 74.6%, from $41.6 million for fiscal year 2021.
Fiscal Year 2022 Compared with Fiscal Year 2021 Net cash used in investing activities for fiscal year 2022 was $10.6 million, a decrease of $31.0 million, or 74.6%, from $41.6 million for fiscal year 2021.
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.
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 may be drawn on in the event that our working capital and other cash needs are not supported by our operating cash flow.
We reduce transaction prices for estimated returns that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities. Other forms of contingent revenue or variable consideration are infrequent.
When applicable, we reduce transaction prices for estimated returns that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities. Other forms of contingent revenue or variable consideration are infrequent.
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.
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. When applicable, revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.
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.
The conversion rate is 26.7271 shares of our common stock per $1,000 principal amount of 2025 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.
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.
On December 17, 2020 (the “Amendment No. 1 Effective Date”), we entered into Amendment No. 1 to the Credit Agreement (the “Amendment No. 1”). Amendment No. 1 extended the scheduled maturity date of the revolving credit and term facilities from June 12, 2024 to April 1, 2025. Amendment No. 1 revised certain interest rates in the Credit Agreement.
Critical Accounting Policies, Judgments and Estimates The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that have a material impact on the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Critical Accounting Estimates The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that have a material impact on the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Our MD&A generally includes a discussion of results of operations, financial condition, liquidity and capital resources related to year-over-year comparisons between fiscal years ended September 30, 2022, and 2021, as well as fiscal years ended September 30, 2021, and 2020.
Our MD&A generally includes a discussion of results of operations, financial condition, liquidity and capital resources related to year-over-year comparisons between fiscal years ended September 30, 2023, and 2022, as well as fiscal years ended September 30, 2022, and 2021.
These policies require our most difficult and subjective judgments. Revenue Recognition We primarily derive revenue from the following sources: (1) royalty-based software license arrangements, (2) connected services, and (3) professional services.
These estimates require our most difficult and subjective judgments. Revenue Recognition We primarily derive revenue from the following sources: (1) royalty-based software license arrangements, (2) connected services, and (3) professional services.
During the third quarter of fiscal year 2022, we established a valuation allowance of $107.6 million against our deferred tax assets in the Netherlands, which consists of tax amortizable intellectual property and net operating loss carryforwards. We determined we had new negative evidence, based on updates to transfer pricing arrangements and changes to the earnings guidance for fiscal year 2022.
During the third quarter of fiscal year 2022, we established a valuation allowance of $107.6 million against our deferred tax assets in a foreign jurisdiction, which consists of tax amortizable intellectual property and net operating loss carryforwards. We determined we had negative evidence, based on updates to transfer pricing arrangements and changes to the earnings guidance for fiscal year 2022.
Total other expense, net consists primarily of foreign exchange gains (losses), losses on the extinguishment of debt and interest expense related to the Existing Facility, Notes, and Senior Credit Facilities.
Total other expense, net consists primarily of foreign exchange gains (losses), losses on the extinguishment of debt and interest expense related to the Notes and Senior Credit Facilities.
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. 50 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 Company (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”).
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. 49 Senior Credit Facilities On June 12, 2020 (the “Financing Closing Date”), 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”).
There was no goodwill impairment for the fiscal years ending September 30, 2021 and 2020. 58 For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units.
There was no goodwill impairment for the fiscal years ending September 30, 2021 and 2023. For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination is assigned to one or more reporting units.
For royalty arrangements that include fixed consideration related to a minimum usage guarantees, the fixed consideration is recognized when the software is made available to the customer.
For royalty arrangements that include fixed consideration related to usage guarantees, the fixed consideration is recognized when the software is made available to the customer.
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 SOFR 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 SOFR 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 SOFR 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 SOFR 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 SOFR plus 2.20% or ABR plus 1.00%.
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 SOFR plus 10 basis point credit spread adjustment 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 SOFR plus 10 basis point credit spread adjustment 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 SOFR plus 10 basis point credit spread adjustment plus 2.50% or ABR plus 50 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 SOFR plus 10 basis point credit spread adjustment 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 SOFR plus 10 basis point credit spread adjustment plus 2.20% or ABR plus 1.00%.
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.
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 enacted to determine both our current and deferred tax positions.
The decrease primarily relates to certain intangible assets having been fully amortized during fiscal year 2022. As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 4.3 percentage points from 7.4% for fiscal year 2021 to 3.1% for fiscal year 2022.
The decrease primarily relates to certain intangible assets having been fully amortized during fiscal year 2023. As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 2.7 percentage points from 3.1% for fiscal year 2022 to 0.4% for fiscal year 2023.
As of September 30, 2022 and 2021, we had $8.3 million and $6.9 million of contract acquisition costs. We had amortization expense of $2.5 million, $1.9 million, and $1.5 million related to these costs during the fiscal years ended September 30, 2022, 2021, and 2020. There was no impairment related to contract acquisition costs.
As of September 30, 2023 and 2022, we had $8.0 million and $8.3 million of contract acquisition costs. We had amortization expense of $3.8 million, $2.5 million, and $1.9 million related to these costs during the fiscal years ended September 30, 2023, 2022, and 2021. There was no impairment related to contract acquisition costs.
We will continue to maintain a valuation allowance against our Netherlands deferred tax assets until we believe it is more likely than not that these assets will be realized.
We will continue to maintain a valuation allowance against these deferred tax assets until we believe it is more likely than not that they will be realized.
As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions may have a material impact on our results of operations and financial position.
Actual outcomes may differ from our estimates. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions may have a material impact on our results of operations and financial position.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations, (the "MD&A"), describes the principal factors, based on management’s assessment, which have a material impact on our results of operations, financial condition and liquidity, as well as our critical accounting policies and estimates.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations, (the “MD&A”), describes the principal factors, based on management’s assessment, which have a material impact on our results of operations, financial condition and liquidity, as well as our critical accounting estimates.
At September 30, 2022, we concluded indicators of impairment were present due to the current macroeconomic conditions, including continued declines in our stock price. The fair value of our reporting unit was determined using a combination of the income approach and the market approach.
At September 30, 2022, we concluded indicators of impairment were present due to the current macroeconomic conditions, including continued declines in our stock price. The fair value of our reporting unit was determined using a combination of the income approach and the market approach. We weighted the methodologies appropriately to estimate a fair value as of September 30, 2022.
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.
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.
Liquidity and Capital Resources Financial Condition As of September 30, 2022, we had $126.7 million in cash, cash equivalents, and marketable securities. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. Marketable securities include commercial paper, corporate bonds, and government securities.
Liquidity and Capital Resources Financial Condition As of September 30, 2023, we had $121.0 million in cash, cash equivalents, and marketable securities. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. Marketable securities include commercial paper, corporate bonds, and government securities.
Cost of professional services revenue decreased primarily due to $5.1 million in lower internal allocated labor, and a $1.9 million decrease in third-party contractor cost. The decrease was partly offset by a $3.2 million increase in salary-related expenditures and $2.3 million increase in amortization of costs previously deferred.
Cost of professional services revenue decreased primarily due to a $5.8 million decrease in salary-related expenditures, and a $2.0 million decrease in third-party contractor costs. The decrease was partially offset by a $2.1 million increase in internal allocated labor, and a $0.9 million increase in amortization of costs previously deferred.
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. 49 We may not redeem the Notes prior to June 5, 2023.
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 2025 Notes in connection with such a corporate event or convert its 2025 Notes called for redemption in connection with such notice of redemption, as the case may be.
Total interest expense relating to the Senior Credit Facilities for the fiscal year ended September 30, 2022, 2021 and 2020 was $4.3 million, $4.1 million and $1.5 million, respectively, reflecting the coupon and accretion of the discount.
Total interest expense relating to the Senior Credit Facilities for the fiscal year ended September 30, 2023, 2022 and 2021 was $6.7 million, $4.3 million, $4.1 million, respectively, reflecting the coupon and accretion of the discount.
As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.3 percentage points from 7.7% for fiscal year 2020 to 7.4% for fiscal year 2021.
As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 4.3 percentage points from 7.4% for fiscal year 2021 to 3.1% for fiscal year 2022.
On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition; allowance for credit losses and doubtful accounts; accounting for deferred costs; 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.
On an ongoing basis, we evaluate our estimates, including those related to revenue recognition; allowance for credit losses; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for stock-based compensation; accounting for income taxes; accounting for convertible debt; and loss contingencies.
Cash is expected to be collected for a fixed minimum commitment deal over the license distribution period. During fiscal year 2023, we expect a reduction in contributions from our fixed license contracts due to our decision to limit the level of such contracts on a go-forward basis.
Cash is expected to be collected for a fixed minimum commitment deal over the license distribution period. During fiscal year 2023, we had a reduction in contributions from our fixed license contracts due to our decision to limit the level of such contracts on a go-forward basis which contributed to a decline in reported license revenue for fiscal year 2023.
We review the SSP for each distinct performance obligation on a periodic basis, or when the underlying factors are deemed to have changed, and make updates when appropriate. 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.
We review the SSP for each distinct performance obligation on a periodic basis, or when the underlying factors are deemed to have changed, and make updates when appropriate. Contract Acquisition Costs We are required to capitalize certain contract acquisition costs. The capitalized costs primarily relate to paid commissions.
The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications related to legal entity restructuring, intercompany transfer and acquisition or divestures.
The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications related to legal entity restructuring, intercompany transfers and acquisitions or divestures.
Based on our expectation to generate positive cash flows and the $126.7 million of cash, cash equivalents and marketable securities as of September 30, 2022, we believe we will be able to meet our liquidity needs over the next 12 months.
Based on our expectation to generate positive cash flows and the $121.0 million of cash, cash equivalents and marketable securities as of September 30, 2023, we believe we will be able to meet our liquidity needs over the next 12 months.
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.
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.
Professional services gross profit increased $3.7 million, or 33.7%, from $11.2 million to $14.9 million which was primarily due to an increase in professional services revenues and cost savings initiatives implemented during the first half of fiscal year 2022.
Professional services gross profit increased $3.7 million, or 33.7%, from $11.2 million to $14.9 million which was primarily due to an increase in professional services revenues and cost savings initiatives implemented during the first half of fiscal year 2022. Operating Expenses The tables below show each component of operating expense.
Cost of license revenues increased due to third-party royalty expenses associated with external technologies we leverage in our edge software components. As a percentage of total cost of revenue, cost of license revenue increased by 0.9 percentage points from 2.6% for fiscal year 2020 to 3.5% for fiscal year 2021.
Cost of license revenues decreased due to third-party royalty expenses associated with external technologies we leverage in our edge software components. As a percentage of total cost of revenue, cost of license revenue decreased by 0.7 percentage points from 3.5% for fiscal year 2021 to 2.8% for fiscal year 2022.
As of September 30, 2022, our net working capital, excluding deferred revenue and deferred costs, was $146.1 million. This balance is representative of the short-term net cash inflows based on the working capital at that date. During the fiscal year ended September 30, 2022, we converted existing variable long-term contracts into minimum purchase commitment deals with our largest customer.
As of September 30, 2023, our net working capital, excluding deferred revenue and deferred costs, was $147.8 million. This balance is representative of the short-term net cash inflows based on the working capital at that date. During the fiscal year ended September 30, 2022, certain existing variable long-term contracts with our largest customer were converted into minimum purchase commitments deals.
Other income (expense), net and provision for (benefit from) income taxes are non-operating expenses and presented in a similar format (dollars in thousands). 44 R&D Expenses Year Ended September 30, % Change % Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Research and development $ 107,116 $ 112,070 $ 88,899 (4.4 )% 26.1 % Fiscal Year 2022 Compared with Fiscal Year 2021 Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies.
Other income (expense), net and provision for income taxes are non-operating expenses and presented in a similar format (dollars in thousands). 43 R&D Expenses Year Ended September 30, % Change % Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 Research and development $ 123,333 $ 107,116 $ 112,070 15.1 % (4.4 )% Fiscal Year 2023 Compared with Fiscal Year 2022 Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies.
Amendment No. 2 modified certain financial covenants between the fiscal quarter ended March 31, 2023 to the fiscal quarter ended December 31, 2023 (the "covenant adjustment period").
Amendment No. 2 modified certain financial covenants between the fiscal quarter ended March 31, 2023 to the fiscal quarter ended December 31, 2023 (the “covenant adjustment period”).
Amortization of Intangible Assets Year Ended September 30, % Change % Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Cost of revenues $ 2,984 $ 7,516 $ 8,337 (60.3 )% (9.8 )% Operating expense 11,516 12,690 12,544 (9.3 )% 1.2 % Total amortization $ 14,500 $ 20,206 $ 20,881 (28.2 )% (3.2 )% Fiscal Year 2022 Compared with Fiscal Year 2021 Intangible asset amortization for fiscal year 2022 was $14.5 million, a decrease of $5.7 million, or 28.2%, from $20.2 million for fiscal year 2021.
Amortization of Intangible Assets Year Ended September 30, % Change % Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 Cost of revenues $ 414 $ 2,984 $ 7,516 (86.1 )% (60.3 )% Operating expense 5,854 11,516 12,690 (49.2 )% (9.3 )% Total amortization $ 6,268 $ 14,500 $ 20,206 (56.8 )% (28.2 )% Fiscal Year 2023 Compared with Fiscal Year 2022 Intangible asset amortization for fiscal year 2023 was $6.3 million, a decrease of $8.2 million, or 56.8%, from $14.5 million for fiscal year 2022.
For income statement presentation purposes, we separate distinct embedded license revenue from professional services revenue based on their relative SSPs.
For income statement presentation purposes, we separate distinct embedded license revenue from professional services revenue by allocating the transaction price based on their relative SSPs.
This decrease was primarily driven by the winding down of a legacy contract acquired by Nuance through a 2013 acquisition. As a percentage of total revenue, connected services revenue decreased by 2.2 percentage points from 28.3% for fiscal year 2021 to 26.1% for fiscal year 2022.
This decrease was primarily driven by the winding down of a legacy contract acquired by Nuance through a 2013 acquisition. As a percentage of total revenue, connected services revenue decreased by 0.6 percentage points from 26.1% for fiscal year 2022 to 25.5% for fiscal year 2023.
Fiscal Year 2021 Compared with Fiscal Year 2020 Intangible asset amortization for fiscal year 2021 was $20.2 million, a decrease of $0.7 million, or 3.2%, from $20.9 million for fiscal year 2020. The decrease primarily relates to certain intangible assets having been fully amortized during fiscal year 2020.
Fiscal Year 2022 Compared with Fiscal Year 2021 Intangible asset amortization for fiscal year 2022 was $14.5 million, a decrease of $5.7 million, or 28.2%, from $20.2 million for fiscal year 2021. The decrease primarily relates to certain intangible assets having been fully amortized during fiscal year 2022.
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. At September 30, 2022, we performed a quantitative impairment test.
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.
For performance-based restricted stock units, the compensation cost is recognized based on the number of units expected to vest upon the achievement of the performance conditions. We recognize stock-based compensation as an expense on a straight-line basis, over the requisite service period.
For performance-based restricted stock units, the compensation cost is recognized based on the number of units expected to vest upon the achievement of the performance conditions. We recognize stock-based compensation as an expense on a straight-line basis, over the requisite service period. We account for forfeitures as they occur, rather than applying an estimated forfeiture rate.
This increase was primarily driven by demand for the integration and customization services related to our edge software and the timing of services rendered.
This increase was primarily driven by our continued focus on integration and customization services related to our edge software and timing of services rendered.
Cash Flows Cash flows from operating, investing and financing activities for the fiscal years ended September 30, 2022, 2021, and 2020, as reflected in the audited Consolidated Statements of Cash Flows included in Item 8 of this Form 10-K, are summarized in the following table (dollars in thousands): Year Ended September 30, % Change % Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Net cash (used in) provided by operating activities $ (2,138 ) $ 74,389 $ 44,789 (102.9 )% 66.1 % Net cash used in investing activities (10,565 ) (41,631 ) (30,675 ) (74.6 )% 35.7 % Net cash (used in) provided by financing activities (19,606 ) (41,505 ) 121,553 (52.8 )% (134.1 )% Effect of foreign currency exchange rates on cash and cash equivalents (1,272 ) 1,108 400 (214.8 )% 177.0 % Net changes in cash and cash equivalents $ (33,581 ) $ (7,639 ) $ 136,067 339.6 % (105.6 )% 52 Net Cash (Used in) Provided by Operating Activities Fiscal Year 2022 Compared with Fiscal Year 2021 Net cash used in operating activities for fiscal year 2022 was $2.1 million, a net change of $76.5 million, or 102.9%, from net cash provided by operating activities of $74.4 million for fiscal year 2021 .
Cash Flows Cash flows from operating, investing and financing activities for the fiscal years ended September 30, 2023, 2022, and 2021, as reflected in the audited Consolidated Statements of Cash Flows included in Item 8 of this Form 10-K, are summarized in the following table (dollars in thousands): Year Ended September 30, % Change % Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 Net cash provided by (used in) operating activities $ 7,498 $ (2,138 ) $ 74,389 (450.7 )% (102.9 )% Net cash provided by (used in) investing activities 5,820 (10,565 ) (41,631 ) (155.1 )% (74.6 )% Net cash used in financing activities (5,334 ) (19,606 ) (41,505 ) (72.8 )% (52.8 )% Effect of foreign currency exchange rates on cash and cash equivalents (1,677 ) (1,272 ) 1,108 31.8 % (214.8 )% Net changes in cash and cash equivalents $ 6,307 $ (33,581 ) $ (7,639 ) (118.8 )% 339.6 % 51 Net Cash Provided by (Used in) Operating Activities Fiscal Year 2023 Compared with Fiscal Year 2022 Net cash provided by operating activities for fiscal year 2023 was $7.5 million, a net change of $9.6 million, or 450.7%, from net cash used in operating activities of $2.1 million for fiscal year 2022 .
Fiscal Year 2022 Compared with Fiscal Year 2021 and Fiscal Year 2021 Compared with Fiscal Year 2020 Total Revenues The following table shows total revenues by product type, including the corresponding percentage change (dollars in thousands): Year Ended September 30, % Change % Change 2022 % of Total 2021 % of Total 2020 % of Total 2022 vs. 2021 2021 vs. 2020 License $ 158,610 48.4% $ 202,183 52.2% $ 164,268 49.6% (21.6 )% 23.1 % Connected services 85,571 26.1% 109,534 28.3% 97,469 29.5% (21.9 )% 12.4 % Professional services 83,710 25.5% 75,465 19.5% 69,230 20.9% 10.9 % 9.0 % Total revenues $ 327,891 $ 387,182 $ 330,967 (15.3 )% 17.0 % Fiscal Year 2022 Compared with Fiscal Year 2021 Total revenues for fiscal year 2022 were $327.9 million, a decrease of $59.3 million, or 15.3%, from $387.2 million from fiscal year 2021.
Fiscal Year 2023 Compared with Fiscal Year 2022 and Fiscal Year 2022 Compared with Fiscal Year 2021 Total Revenues The following table shows total revenues by product type, including the corresponding percentage change (dollars in thousands): Year Ended September 30, % Change % Change 2023 % of Total 2022 % of Total 2021 % of Total 2023 vs. 2022 2022 vs. 2021 License $ 145,159 49.3% $ 158,610 48.4% $ 202,183 52.2% (8.5 )% (21.6 )% Connected services 75,071 25.5% 85,571 26.1% 109,534 28.3% (12.3 )% (21.9 )% Professional services 74,245 25.2% 83,710 25.5% 75,465 19.5% (11.3 )% 10.9 % Total revenues $ 294,475 $ 327,891 $ 387,182 (10.2 )% (15.3 )% Fiscal Year 2023 Compared with Fiscal Year 2022 Total revenues for fiscal year 2023 were $294.5 million, a decrease of $33.4 million, or 10.2%, from $327.9 million from fiscal year 2022.
Revenue is recognized and cash is collected for variable contracts over the license distribution period. The fixed contracts typically provide the customer with a price discount and can include the conversion of a variable contract that is already in our variable backlog.
Revenue is recognized and cash is collected for variable contracts over the license distribution period. The fixed contracts typically provide the customer with a price discount and can include the conversion of a variable contract that was previously included in our estimated future revenues from variable forecasted royalties.
As a percentage of total revenue, connected services revenue decreased by 1.2 percentage points from 29.5% for fiscal year 2020 to 28.3% for fiscal year 2021. Professional Services Revenue Professional services revenue for fiscal year 2021 was $75.5 million, an increase of $6.3 million, or 9.0%, from $69.2 million for fiscal year 2020.
As a percentage of total revenue, connected services revenue decreased by 2.2 percentage points from 28.3% for fiscal year 2021 to 26.1% for fiscal year 2022. Professional Services Revenue Professional services revenue for fiscal year 2022 was $83.7 million, an increase of $8.2 million, or 10.9%, from $75.5 million for fiscal year 2021.
As a percentage of total cost of revenue, cost of license revenue decreased by 0.7 percentage points from 3.5% for fiscal year 2021 to 2.8% for fiscal year 2022. License gross profit decreased by $42.7 million, or 21.5%, primarily due to decreases in license revenues.
As a percentage of total cost of revenue, cost of license revenue increased by 6.2 percentage points from 2.8% for fiscal year 2022 to 9.0% for fiscal year 2023. License gross profit decreased by $19.3 million, or 12.4%, primarily due to decreases in license revenues.
Sales & Marketing Expenses Year Ended September 30, % Change % Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Sales and marketing $ 31,098 $ 38,683 $ 33,398 (19.6 )% 15.8 % Fiscal Year 2022 Compared with Fiscal Year 2021 Sales and marketing expenses for fiscal year 2022 were $31.1 million, a decrease of $7.6 million, or 19.6%, from $38.7 million for fiscal year 2021.
Sales & Marketing Expenses Year Ended September 30, % Change % Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 Sales and marketing $ 27,504 $ 31,098 $ 38,683 (11.6 )% (19.6 )% Fiscal Year 2023 Compared with Fiscal Year 2022 Sales and marketing expenses for fiscal year 2023 were $27.5 million, a decrease of $3.6 million, or 11.6%, from $31.1 million for fiscal year 2022.
The interest expense recognized related to the Notes for the fiscal years ended September 30, 2022, 2021 and 2020 was as follows (dollars in thousands): Year Ended September 30, 2022 2021 2020 Contractual interest expense $ 5,246 $ 5,246 $ 1,753 Amortization of debt discount 3,755 3,527 1,131 Amortization of issuance costs 944 887 285 Total interest expense related to the Notes $ 9,945 $ 9,660 $ 3,169 The conditional conversion feature of the Notes was triggered during the fiscal year ended September 30, 2022, and the Notes were not convertible as of September 30, 2022, with no Notes being converted.
The interest expense recognized related to the Notes for the fiscal years ended September 30, 2023, 2022 and 2021 was as follows (dollars in thousands): Year Ended September 30, 2023 2022 2021 Contractual interest expense $ 5,383 $ 5,246 $ 5,246 Amortization of debt discount 258 3,755 3,527 Amortization of issuance costs 2,119 944 887 Total interest expense related to the Notes $ 7,760 $ 9,945 $ 9,660 The conditional conversion feature of the Notes was not triggered during the fiscal year ended September 30, 2023.
We had amortization expense of $10.2 million, $15.4 million and $12.0 million related to these costs during the fiscal years ended September 30, 2022, 2021 and 2020, respectively. There was no impairment related to contract fulfillment costs capitalized.
The current and noncurrent portions of capitalized contract fulfillment costs are presented as Deferred costs. 55 We had amortization expense of $9.9 million, $10.2 million and $15.4 million related to these costs during the fiscal years ended September 30, 2023, 2022 and 2021, respectively. There was no impairment related to contract fulfillment costs capitalized.
As a percentage of total operating expense, restructuring and other costs, net decreased by 5.9 percentage points from 8.2% for fiscal year 2020 to 2.3% for fiscal year 2021.
As a percentage of total operating expense, restructuring and other costs, net increased by 3.1 percentage points from 2.2% for fiscal year 2022 to 5.3% for fiscal year 2023.
For further discussion of the business risks associated with COVID-19, see Item 1A, Risk Factors, within this Annual Report on Form 10-K. Business Trends 38 We experienced a 15.3% decrease in total revenue during fiscal year 2022, primarily driven by our license and connected services revenues. Our license revenue is highly dependent on vehicle production.
For further discussion of the business risks associated with COVID-19, see Item 1A, Risk Factors, within this Annual Report on Form 10-K. Business Trends We experienced a 10.2% decrease in total revenue during fiscal year 2023. The decrease in revenue was across all products types. Our license revenue is highly dependent on vehicle production.
As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses decreased by 0.7 percentage points from 6.3% for fiscal year 2020 to 5.6% for fiscal year 2021.
As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses decreased by 0.2 percentage points from 2.8% for fiscal year 2022 to 2.6% for fiscal year 2023.
We recognize revenue after applying the following five steps: • identification of the contract, or contracts, with a customer; 54 • identification of the performance obligations in the contract, including whether they are distinct within the context of the contract; • determination of the transaction price, including the constraint on variable consideration; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, the performance obligations are satisfied.
We recognize revenue after applying the following five steps for arrangements with customers within the scope of ASC 606: • identification of the contract, or contracts, with a customer; • identification of the performance obligations in the contract, including whether they are distinct within the context of the contract; • determination of the transaction price, including the constraint on variable consideration; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, the performance obligations are satisfied. 53 We allocate the transaction price of the arrangement based on the relative estimated standalone selling price (“SSP”) of each distinct performance obligation.
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.
We classify these costs as current or noncurrent based on the timing of when we expect to recognize the expense.
We assess each valuation methodology based upon the relevance and availability of the data at the time we perform the valuation and weight the methodologies appropriately. Due to macroeconomic conditions, we concluded that indicators of impairment were present and performed an interim quantitative impairment test as of June 30, 2022.
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. At September 30, 2022, we performed a quantitative impairment test. We concluded indicators of impairment were present due to the current macroeconomic conditions, including continued declines in our stock price.
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.
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.
Cost of professional services revenue increased primarily due to a $8.6 million increase in third-party contractor costs. The increase was partially offset by a $2.2 million decrease in internal allocated labor, $1.6 million decrease in stock-based compensation costs, and $1.5 million decrease in amortization of costs previously deferred.
The increase was partially offset by a $2.2 million decrease in internal allocated labor, $1.6 million decrease in stock-based compensation costs, and $1.5 million decrease in amortization of costs previously deferred.
Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding in the capital markets as needed.
The primary uses of cash include costs of revenues, funding of R&D activities, capital expenditures and debt obligations. Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding in the capital markets as needed.
Fiscal Year 2021 Compared with Fiscal Year 2020 Net cash used in financing activities for fiscal year 2021 was $41.5 million, a net change of $163.1 million, from cash provided by financing activities of $121.6 million for fiscal year 2020.
Fiscal Year 2022 Compared with Fiscal Year 2021 Net cash used in financing activities for fiscal year 2022 was $19.6 million, a net change of $21.9 million, from cash used in financing activities of $41.5 million for fiscal year 2021.
Deferred Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carry amount of assets and liabilities and their respective tax bases.
Income Taxes We account for income taxes using the assets and liabilities method, as prescribed by ASC No. 740, Income Taxes , or ASC 740. Deferred Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carry amount of assets and liabilities and their respective tax bases.
Provision for (Benefit from) Income Taxes Year Ended September 30, % Change % Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Provision for (benefit from) income taxes $ 112,075 $ 2,376 $ (4,724 ) 4617.0 % (150.3 )% Effective income tax rate% (56.4 )% 4.9 % 20.5 % 47 Fiscal Year 2022 Compared with Fiscal Year 2021 Our effective income tax rate for fiscal year 2022 was (56.4)%, compared to 4.9% for fiscal year 2021.
Provision for Income Taxes Year Ended September 30, % Change % Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 Provision for income taxes $ 19,865 $ 112,075 $ 2,376 (82.3 )% 4617.0 % Effective income tax rate% (54.6 )% (56.4 )% 4.9 % Fiscal Year 2023 Compared with Fiscal Year 2022 Our effective income tax rate for fiscal year 2023 was negative 54.6%, compared to negative 56.4% for fiscal year 2022.
As a percentage of total revenue, professional services revenue decreased by 1.4 percentage points from 20.9% for fiscal year 2020 to 19.5% for fiscal year 2021. 42 Total Cost of Revenues and Gross Profits The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands): Year Ended September 30, % Change % Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 License $ 2,698 $ 3,544 $ 2,783 (23.9 )% 27.3 % Connected services 22,722 25,727 31,768 (11.7 )% (19.0 )% Professional services 68,764 64,287 64,963 7.0 % (1.0 )% Amortization of intangibles 2,984 7,516 8,337 (60.3 )% (9.8 )% Total cost of revenues $ 97,168 $ 101,074 $ 107,851 (3.9 )% (6.3 )% The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands): Year Ended September 30, % Change % Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 License $ 155,912 $ 198,639 $ 161,485 (21.5 )% 23.0 % Connected services 62,849 83,807 65,701 (25.0 )% 27.6 % Professional services 14,946 11,178 4,267 33.7 % 162.0 % Amortization of intangibles (2,984 ) (7,516 ) (8,337 ) (60.3 )% (9.8 )% Total gross profit $ 230,723 $ 286,108 $ 223,116 (19.4 )% 28.2 % Fiscal Year 2022 Compared with Fiscal Year 2021 Total cost of revenues for fiscal year 2022 were $97.2 million, a decrease of $3.9 million, or 3.9%, from $101.1 million for fiscal year 2021.
As a percentage of total revenue, professional services revenue increased by 6.0 percentage points from 19.5% for fiscal year 2021 to 25.5% for fiscal year 2022. 41 Total Cost of Revenues and Gross Profits The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands): Year Ended September 30, % Change % Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 License $ 8,522 $ 2,698 $ 3,544 215.9 % (23.9 )% Connected services 22,995 22,722 25,727 1.2 % (11.7 )% Professional services 63,232 68,764 64,287 (8.0 )% 7.0 % Amortization of intangibles 414 2,984 7,516 (86.1 )% (60.3 )% Total cost of revenues $ 95,163 $ 97,168 $ 101,074 (2.1 )% (3.9 )% The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands): Year Ended September 30, % Change % Change 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 License $ 136,637 $ 155,912 $ 198,639 (12.4 )% (21.5 )% Connected services 52,076 62,849 83,807 (17.1 )% (25.0 )% Professional services 11,013 14,946 11,178 (26.3 )% 33.7 % Amortization of intangibles (414 ) (2,984 ) (7,516 ) (86.1 )% (60.3 )% Total gross profit $ 199,312 $ 230,723 $ 286,108 (13.6 )% (19.4 )% Fiscal Year 2023 Compared with Fiscal Year 2022 Total cost of revenues for fiscal year 2023 was $95.2 million, a decrease of $2.0 million, or 2.1%, from $97.2 million for fiscal year 2022.
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.
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. Our connected services contract terms generally range from one to five years.
We weighted the methodologies appropriately to estimate a fair value of approximately $713.0 million as of September 30, 2022. The carrying value of our reporting unit exceeded the estimated fair value.
We weighted the methodologies appropriately to estimate a fair value as of September 30, 2023. The estimated fair value exceeded the carrying value of our reporting unit by greater than 10% of the carrying value.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeAssuming a 1% increase in interest rates, our interest income on our money-market funds and time deposits classified as cash and cash equivalents would increase by $0.6 million per annum, based on September 30, 2022 reported balances. The borrowings under our Senior Credit Facilities are subject to interest rates based on LIBOR.
Biggest changeAssuming a 1% increase in interest rates, our interest income on our money-market funds and time deposits classified as cash and cash equivalents would increase by $0.7 million per annum, based on September 30, 2023 reported balances. The borrowings under our Senior Credit Facilities are subject to interest rates based on SOFR.
We use foreign currency forward contracts to hedge the foreign currency exchange risk associated with forecasted foreign denominated payments related to our ongoing business. The aggregate notional amount of our outstanding foreign currency forward contracts was $63.3 million at September 30, 2022. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates.
We use foreign currency forward contracts to hedge the foreign currency exchange risk associated with forecasted foreign denominated payments related to our ongoing business. The aggregate notional amount of our outstanding foreign currency forward contracts was $98.0 million at September 30, 2023. Foreign currency forward contracts are sensitive to changes in foreign currency exchange rates.
A 10% unfavorable exchange rate movement in our portfolio of foreign currency contracts would have resulted in unrealized losses of $5.1 million at September 30, 2022. Such losses would be offset by corresponding gains in the remeasurement of the underlying transactions being hedged.
A 10% unfavorable exchange rate movement in our portfolio of foreign currency contracts would have resulted in unrealized losses of $6.9 million at September 30, 2023. Such losses would be offset by corresponding gains in the remeasurement of the underlying transactions being hedged.
As of September 30, 2022, assuming a 1% increase in interest rates and our Revolving Facility is fully drawn, our interest expense on our Senior Credit Facilities would increase by approximately $1.6 million per annum. 63
As of September 30, 2023, assuming a 1% increase in interest rates and our Revolving Facility is fully drawn, our interest expense on our Senior Credit Facilities would increase by approximately $0.5 million per annum. 60
At September 30, 2022, we held approximately $94.8 million of cash and cash equivalents consisting of cash and highly liquid investments, including money-market funds and time deposits.
At September 30, 2023, we held approximately $101.2 million of cash and cash equivalents consisting of cash and highly liquid investments, including money-market funds and time deposits.

Other CRNC 10-K year-over-year comparisons