Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” ~~“accelerated~~��accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May 1, 2020,~~January 26, 2021, the registrant had ~~36,495,452~~37,712,708 shares of common stock, $0.01 par value per share, outstanding.

This Quarterly Report on Form 10-Q or (“Form ~~10-Q,~~10-Q”), filed by Cerence Inc. together with its consolidated subsidiaries, “Cerence” or the “Company,” “we,” “us” or “our” unless the context indicates otherwise, contains “forward-looking statements” that involve risks and uncertainties. These statements can be identified by the fact that they do not relate strictly to historical or current facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and our business and financial results. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “continues,” “believes,” “may,” “will,” “goals” and words and terms of similar substance in connection with discussions of future operating or financial performance. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statement made by us or on our behalf. Although we believe that the forward-looking statements contained in this Form 10-Q are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:

These and other factors are more fully discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2019~~2020 and elsewhere in this Form 10-Q, including Part II, “Item 1A, Risk Factors”. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Form 10-Q. Even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.

Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by law.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF OPERATIONS ~~FOR MARCH 31, 2020~~

	Three Months Ended March 31,						Six Months Ended March 31,					Three Months Ended December 31,
	2020			2019			2020			2019		2020			2019
Revenues:
License	$	44,622		$	39,324		$	85,389		$	83,326	$	46,414		$	40,767
Connected services		23,131			18,858			46,152			36,113		27,251			23,021
Professional services		18,742			12,122			32,413			23,349		21,299			13,671
Total revenues		86,495			70,304			163,954			142,788		94,964			77,459
Cost of revenues:
License		843			567			1,524			907		674			681
Connected services		8,876			9,130			17,551			20,359		7,013			8,675
Professional services		16,753			12,726			31,244			23,189		17,315			14,491
Amortization of intangible assets		2,258			2,021			4,345			4,196		1,879			2,087
Total cost of revenues		28,730			24,444			54,664			48,651		26,881			25,934
Gross profit		57,765			45,860			109,290			94,137		68,083			51,525
Operating expenses:
Research and development		21,346			22,561			44,857			46,369		24,091			23,511
Sales and marketing		7,706			9,799			15,649			19,244		8,898			7,943
General and administrative		10,712			5,689			22,195			11,410		11,617			11,483
Amortization of intangible assets		3,125			3,132			6,256			6,264		3,158			3,131
Restructuring and other costs, net		2,870			4,329			10,424			7,456		47			7,554
Acquisition-related costs		—			182			—			417
Total operating expenses		45,759			45,692			99,381			91,160		47,811			53,622
Income from operations		12,006			168			9,909			2,977
Income (loss) from operations													20,272			(2,097	)
Interest income		244			—			525			—		18			281
Interest expense		(6,699	)		—			(13,497	)		—		(3,799	)		(6,798	)
Other income (expense), net		226			266			80			250		(2,237	)		(146	)
Income (loss) before income taxes		5,777			434			(2,983	)		3,227		14,254			(8,760	)
(Benefit from) provision for income taxes		(6,718	)		(20	)		(3,716	)		518		(7,384	)		3,002
Net income	$	12,495		$	454		$	733		$	2,709
Net income per share:
Net income (loss)												$	21,638		$	(11,762	)
Net income (loss) per share:
Basic	$	0.34		$	0.01		$	0.02		$	0.07	$	0.58		$	(0.33	)
Diluted	$	0.33		$	0.01		$	0.02		$	0.07	$	0.54		$	(0.33	)
Weighted-average common share outstanding:
Basic		36,441,350			36,391,445			36,218,143			36,391,445		37,180			35,995
Diluted		37,391,720			36,391,445			36,693,328			36,391,445		43,363			35,995

Refer to accompanying Notes to the unaudited condensed consolidated ~~and combined financials~~financial statements.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ~~FOR MARCH 31, 2020~~

Three Months Ended March 31,

Six Months Ended March 31,

2020

2019

2020

2019

Net income

$
12,495

$
454

$
733

$
2,709

Other comprehensive (loss) income:

Foreign currency translation adjustments

(7,284
)

527

(2,380
)

(3,180
)
Pension adjustments

90

45

1,016

367

Total other comprehensive (loss) income

(7,194
)

572

(1,364
)

(2,813
)
Comprehensive income (loss)

$
5,301

$
1,026

$
(631
)

$
(104
)

	Three Months Ended December 31,
	2020			2019
Net income (loss)	$	21,638		$	(11,762	)
Other comprehensive income:
Foreign currency translation adjustments		14,170			4,904
Pension adjustments, net		(30	)		926
Total other comprehensive income		14,140			5,830
Comprehensive income (loss)	$	35,778		$	(5,932	)

Refer to accompanying Notes to the unaudited condensed consolidated ~~and combined financials~~financial statements.

									December 31, 2020		September 30, 2020
		March 31, 2020			September 30, 2019				(Unaudited)
ASSETS	ASSETS							ASSETS
Current assets:
Cash and cash equivalents		$	95,584		$	-			$	110,360	$	136,067
Accounts receivable, net of allowances of $1,315 and $865 at March 31, 2020 and September 30, 2019, respectively			92,272			65,787
Marketable securities										17,088		11,662
Accounts receivable, net of allowances of $579 and $1,394										60,426		49,943
Deferred costs			7,220			9,195				7,748		7,256
Prepaid expenses and other current assets			27,779			17,343				43,703		44,220
Total current assets			222,855			92,325				239,325		249,148
Property and equipment, net			26,206			20,113				29,708		29,529
Deferred costs			36,142			32,428				36,913		38,161
Operating lease right of use assets			18,593			—				20,630		20,096
Goodwill			1,117,577			1,119,329				1,136,356		1,128,198
Intangible assets, net			55,107			65,561				41,070		45,616
Deferred tax assets			161,943			150,629				180,166		161,759
Other assets			14,867			3,444				16,580		14,938
Total assets		$	1,653,290		$	1,483,829			$	1,700,748	$	1,687,445
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY							LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	18,786		$	16,687			$	4,806	$	8,447
Deferred revenue			113,111			88,233				104,577		112,520
Short-term operating lease liabilities			5,270			—				6,259		5,700
Short-term debt			9,450			—				6,250		6,250
Accrued expenses and other current liabilities			42,581			24,194				52,200		67,857
Total current liabilities			189,198			129,114				174,092		200,774
Long-term debt			237,925			—				266,019		266,872
Deferred revenue, net of current portion			234,981			265,051				215,692		212,573
Long-term operating lease liabilities			15,669			—				16,823		17,821
Other liabilities			39,138			21,536				34,994		31,649
Total liabilities			716,911			415,701				707,620		729,689
Commitments and contingencies (Note 10)
Commitments and contingencies (Note 13)
Stockholders' Equity:
Common stock, $0.01 par value, 600,000,000 shares authorized as of March 31, 2020; 36,457,914 shares issued and outstanding as of March 31, 2020			365			—
Net parent investment			-			1,097,127
Accumulated other comprehensive loss			(14,635	)		(28,999	)
Common stock, $0.01 par value, 560,000 shares authorized; 37,685 shares issued and outstanding as of December 31, 2020; 36,842 shares issued and outstanding as of September 30, 2020.										378		369
Accumulated other comprehensive income										17,851		3,711
Additional paid-in capital			949,916			—				973,892		974,307
Accumulated earnings			733			—
Retained earnings (accumulated deficit)										1,007		(20,631	)
Total stockholders' equity			936,379			1,068,128				993,128		957,756
Total liabilities and stockholders' equity		$	1,653,290		$	1,483,829			$	1,700,748	$	1,687,445

Refer to accompanying Notes to the unaudited condensed consolidated ~~and combined financials~~financial statements.

Three Months Ended March 31, 2020

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Accumulated
(Deficit) Earnings

Net
Parent
Investment

Accumulated
Other
Comprehensive
Loss

Total

Balance at December 31, 2019

36,403

364

945,054

(11,762
)

-

(7,441
)

926,215

Net income

-

-

-

12,495

-

-

12,495

Other comprehensive loss

-

-

-

-

-

(7,194
)

(7,194
)
Stock issued pursuant to employee stock plans

55

1

(778
)

-

-

-

(777
)
Stock-based compensation

-

-

5,640

-

-

-

5,640

Balance at March 31, 2020

36,458

$
365

$
949,916

$
733

$
—

$
(14,635
)

$
936,379

Three Months Ended December 31, 2020
	Common Stock
	Shares			Amount			Additional Paid-In Capital			(Accumulated Deficit) Retained Earnings			Net Parent Investment		Accumulated Other Comprehensive Income		Total
Balance at September 30, 2020		36,842		$	369		$	974,307		$	(20,631	)	$	-	$	3,711	$	957,756
Net income		-			-			-			21,638			-		-		21,638
Other comprehensive income		-			-			-			-			-		14,140		14,140
Issuance of common stock		1,276			13			3,650			-			-		-		3,663
Stock withheld to cover tax withholdings requirements upon stock vesting		(433	)		(4	)		(30,254	)		-			-		-		(30,258	)
Stock-based compensation		-			-			26,189			-			-		-		26,189
Balance at December 31, 2020		37,685		$	378		$	973,892		$	1,007		$	—	$	17,851	$	993,128

Three Months Ended March 31, 2019

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Accumulated
Earnings

Net
Parent
Investment

Accumulated
Other
Comprehensive
Loss

Total

Balance at December 31, 2018

-

$
-

$
-

$
-

$
1,026,505

$
(27,342
)

$
999,163

Net income

-

-

-

-

454

-

454

Other comprehensive income

-

-

-

-

-

572

572

Net transfer to Parent

-

-

-

-

(17,003
)

-

(17,003
)
Balance at March 31, 2019

-

$
—

$
—

$
—

$
1,009,956

$
(26,770
)

$
983,186

Six Months Ended March 31, 2020

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Accumulated
Earnings

Net
Parent
Investment

Accumulated
Other
Comprehensive
Loss

Total

Balance at September 30, 2019

-

$
-

$
-

$
-

$
1,097,127

$
(28,999
)

$
1,068,128

Net income

-

-

-

733

-

-

733

Other comprehensive loss

-

-

-

-

-

(1,364
)

(1,364
)
Distribution to Parent

-

-

-

-

(152,978
)

-

(152,978
)
Net (decrease) increase in net parent investment

-

-

-

-

(4,275
)

15,728

11,453

Reclassification of net parent investment in Cerence

-

-

939,874

-

(939,874
)

-

—

Issuance of common stock at separation

36,391

364

(364
)

-

-

-

—

Stock issued pursuant to employee stock plans

67

1

(919
)

-

-

-

(918
)
Stock-based compensation

-

-

11,325

-

-

-

11,325

Balance at March 31, 2020

36,458

$
365

$
949,916

$
733

$
—

$
(14,635
)

$
936,379

Six Months Ended March 31, 2019

Common Stock

Shares

Amount

Additional
Paid-In
Capital

Accumulated
Earnings

Net
Parent
Investment

Accumulated
Other
Comprehensive
Loss

Total

Balance at September 30, 2018 (As reported, ASC 605)

-

$
-

$
-

$
-

$
1,017,276

$
(23,957
)

$
993,319

Accumulated adjustment related to the adoption of ASC 606

-

-

-

-

6,974

-

6,974

Net income

-

-

-

-

2,709

-

2,709

Other comprehensive loss

-

-

-

-

-

(2,813
)

(2,813
)
Net transfer to Parent

-

-

-

-

(17,003
)

-

(17,003
)
Balance at March 31, 2019

-

$
—

$
—

$
—

$
1,009,956

$
(26,770
)

$
983,186

Three Months Ended December 31, 2019
	Common Stock
	Shares			Amount			Additional Paid-In Capital			Accumulated Deficit			Net Parent Investment			Accumulated Other Comprehensive Loss			Total
Balance at September 30, 2019		-		$	-		$	-		$	-		$	1,097,127		$	(28,999	)	$	1,068,128
Net (loss)		-			-			-			(11,762	)		-			-			(11,762	)
Other comprehensive income		-			-			-			-			-			5,830			5,830
Distribution to Parent		-			-			-			-			(152,978	)		-			(152,978	)
Net (decrease) increase in net parent investment		-			-			-			-			(4,275	)		15,728			11,453
Reclassification of net parent investment in Cerence		-			-			939,874			-			(939,874	)		-			—
Issuance of common stock at separation		36,391			364			(364	)		-			-			-			—
Stock issued pursuant to employee stock plans		21			-			-			-			-			-			—
Stock withheld to cover tax withholdings requirements upon stock vesting		(9	)		(0	)		(141	)		-			-			-			(141	)
Stock-based compensation		-			-			5,685			-			-			-			5,685
Balance at December 31, 2019		36,403		$	364		$	945,054		$	(11,762	)	$	-		$	(7,441	)	$	926,215

Refer to accompanying Notes to the unaudited condensed consolidated ~~and combined financials~~financial statements.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CASH FLOWS ~~FOR MARCH 31, 2020~~

	Six Months Ended March 31,						Three Months Ended December 31,
	2020			2019			2020			2019
Cash flows from operating activities:
Net income	$	733		$	2,709
Adjustments to reconcile net income to net cash (used in) provided by operations:
Net income (loss)							$	21,638		$	(11,762	)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization		14,971			14,574			7,624			7,359
Provision for doubtful accounts		446			—
Benefit from credit loss reserve								(410	)		—
Stock-based compensation		15,529			13,367			12,351			8,969
Non-cash interest expense		2,646			—			1,230			1,332
Deferred tax benefit		(4,615	)		(2,898	)		(14,106	)		(4,928	)
Changes in operating assets and liabilities:
Accounts receivable		(26,692	)		5,584			(8,112	)		1,691
Prepaid expenses and other assets		(13,605	)		(6,848	)		1,025			(18,193	)
Deferred costs		(1,079	)		2,020			2,051			(192	)
Accounts payable		6,384			849			(3,655	)		905
Accrued expenses and other liabilities		13,028			832			(1,960	)		22,210
Deferred revenue		(8,481	)		12,062			(6,867	)		2,065
Net cash (used in) provided by operating activities		(735	)		42,251
Net cash provided by operating activities								10,809			9,456
Cash flows from investing activities:
Capital expenditures		(10,145	)		(2,472	)		(2,369	)		(3,612	)
Purchases of marketable securities								(6,358	)		—
Net cash used in investing activities		(10,145	)		(2,472	)		(8,727	)		(3,612	)
Cash flows from financing activities:
Net transaction with Parent		13,513			(39,779	)		—			11,384
Distribution to Parent		(152,978	)		—			—			(152,978	)
Proceeds from long-term debt, net of discount		249,705			—			—			249,705
Payments for long-term debt issuance costs		(515	)		—			(520	)		(515	)
Principal payments of long-term debt		(2,363	)		—			(1,563	)		—
Common stock repurchases for tax withholdings for net settlement of equity awards		(919	)		—			(30,258	)		(141	)
Principal payment of lease liabilities arising from a finance lease		(67	)		—			(101	)		(55	)
Net cash provided by (used in) financing activities		106,376			(39,779	)
Proceeds from the issuance of common stock								3,663			—
Net cash (used in) provided by financing activities								(28,779	)		107,400
Effects of exchange rate changes on cash and cash equivalents		88			—			990			152
Net change in cash and cash equivalents		95,584			—			(25,707	)		113,396
Cash and cash equivalents at beginning of period		—			—			136,067			—
Cash and cash equivalents at end of period	$	95,584		$	—		$	110,360		$	113,396
Supplemental information:
Cash paid for income taxes	$	627		$	3,267		$	563		$	1,472
Cash paid for interest	$	8,997		$	-		$	3,805		$	3,676

Refer to accompanying Notes to the unaudited condensed consolidated ~~and combined financials~~financial statements.

On October 1, 2019 (the “Distribution Date”), Nuance Communications, Inc. (“Nuance”), a leading provider of speech and language solutions for businesses and consumers around the world, completed the complete legal and structural separation and distribution to its stockholders of all of the outstanding shares of our common stock, and its consolidated subsidiaries, in a tax free spin-off (which we refer to as the “Spin-Off”). The distribution was made in the amount of one share of our common stock for every eight shares of Nuance common stock (which we refer to as the “Distribution”) owned by Nuance’s stockholders as of 5:00 p.m. Eastern Time on September 17, 2019, the record date of the Distribution.

In connection with the Distribution, on September 30, 2019, we filed an Amended and Restated Certificate of Incorporation ~~or the Charter,~~(the “Charter”) with the Secretary of State of the State of Delaware, which became effective on October 1, 2019. Our Amended and Restated By-laws also became effective on October 1, 2019. On October 2, 2019, our common stock began regular-way trading on the Nasdaq Global Select Market under the ticker symbol CRNC.

Cerence Inc. (referred to in this Quarterly Report on Form 10-Q as “we,” “our,” “us,” “ourselves,” the “Company” or “Cerence”) is a global, premier provider of AI-powered assistants and innovations for connected and autonomous vehicles. Our customers include all major automobile original equipment manufacturers ~~or OEMs,~~(“OEMs”), or their tier 1 suppliers worldwide. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users. We generate revenue primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue from our work with OEMs and suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects.

In December 2019, a novel strain of coronavirus, now known as COVID-19 (“COVID-19”), was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, some of which have been subsequently rescinded, modified or reinstated, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing.

~~As a result of~~We have taken numerous steps in our approach to addressing the COVID-19 pandemic, ~~local, state,~~as fully described in our Annual Report on Form 10-K. While certain of these measures, including temporary reductions in salaries for our current named executive officers and ~~national governments have responded~~other senior executives, are no longer in effect as of the date of this report, we continue to the spread of COVID-19 by implementing various forms of social distancing and shelter-in-place orders to citizens, which have limited economic activity. These extreme measures to slow the spread of COVID-19 have negatively impacted businesses of all sizes, including the automotive industry and its suppliers. For the foreseeable future, automobile production and shipments have ceased or automotive production is not working at full capacity as manufacturing plants have closed or are not fully operatingclosely monitor ongoing developments in order to ensure the safety of their workforces or because of lack of demand. As automobile production continues to be delayed, we anticipate our billings and revenues recognized from license and connected services to be negatively impacted.

~~Due to the macroeconomic conditions driven by~~connection with the COVID-19 pandemic and ~~the anticipated negative~~its impact on our license and connected services revenues, we concluded that indicators of impairment were present relating to goodwill and long-lived assets as of March 31, 2020. We performed an interim assessment of goodwill and concluded that no impairment existed as the fair value of our reporting unit exceeded its carrying value as of March 31, 2020. We performed a test for recoverability of our long-lived asset group and determined the carrying amount was recoverable, resulting in no impairment of our long-lived asset group as of March 31, 2020. See Note 5 for additional details.business.

The full extent to which the ongoing COVID-19 pandemic adversely affects our financial performance will depend on future developments, many of which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. The COVID-19 pandemic could also result in additional governmental restrictions and regulations, which could adversely affect our business and financial results. In addition, a recession, depression or other sustained adverse market impact resulting from COVID-19 could materially and adversely affect our

business, our access to needed capital and liquidity, and the value of our common stock. Even after the COVID-19 pandemic has lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact.

On April 8, 2020, in response to the COVID-19 pandemic, we committed to a cost efficiency program that encompassed a series of measures primarily intended to allow us to more efficiently operate in a leaner, more directed cost structure. These included reductions in our workforce related to the transfer of certain business processes to lower cost regions. As a result, we involuntarily terminated approximately 75 employees and anticipate recording approximately $2.6 million in restructuring charges related to employee severance during the second half of fiscal 2020.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, as well as those of our wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

All prior period information is presented on a combined basis. The combined financial statements have been derived from Nuance’s historical accounting records and are presented on a “carve-out” basis to include the historical financial position, results of operations and cash flows applicable to the Cerence business. As a direct ownership relationship did not exist among all the various business units comprising the Cerence business, Nuance’s investment in the Cerence business is shown in lieu of stockholder’s equity in the combined financial statements.

The Combined Statements of Operations include all revenues and costs directly attributable to Cerence as well as an allocation of expenses related to functions and services performed by centralized parent organizations. These corporate expenses have been allocated to the Cerence business based on direct usage or benefit, where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, number of transactions or other measures as determined appropriate. The Combined Statements of Cash Flows present these corporate expenses that are cash in nature as cash flows from operating activities, as this is the nature of these costs for Nuance. Non-cash expenses allocated from Nuance include corporate depreciation and amortization and stock-based compensation included as add-back adjustments to reconcile net income to net cash provided by operations. Current and deferred income taxes and related tax expense have been determined based on the standalone results of the Cerence business by applying Accounting Standards Codification No. 740, Income Taxes (“ASC 740”), to the Cerence business’s operations in each country as if it were a separate taxpayer (i.e. following the Separate Return Methodology).

The combined financial statements include the allocation of certain assets and liabilities that have historically been held at the Nuance corporate level or by shared entities but which are specifically identifiable or allocable to the Cerence business. These shared assets and liabilities have been allocated to the Cerence business on the basis of direct usage when identifiable, or allocated on a pro rata basis of revenue, headcount or other systematic measures that reflect utilization of the services provided to or benefits received by Cerence. Nuance uses a centralized approach to cash management and financing its operations. Accordingly, none of the cash, cash equivalents, marketable securities, foreign currency hedges or debt and related interest expense has been allocated to the Cerence business in the combined financial statements. Nuance’s short and long-term debt has not been pushed down to the Cerence business’s combined financial statements because the Cerence business is not the legal obligor of the debt and Nuance’s borrowings were not directly attributable to the Cerence business.

Transactions between Nuance and the Cerence business are considered to be effectively settled in the combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Combined Statements of Cash Flows as a financing activity and in the Combined Balance Sheets as net parent investment. All of the allocations and estimates in the combined financial statements are based on assumptions that management believes are reasonable.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.

The condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three ~~and six~~ months ended ~~March~~December 31, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the year ending September 30, ~~2020.~~2021. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated and combined financial statements and notes contained in our Annual Report on Form 10-K for the year ended September 30, ~~2019.~~2020.

The financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions. These estimates, judgments and assumptions can affect the reported amounts in the financial statements and the footnotes thereto. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, assumptions and judgments. Significant estimates inherent to the preparation of financial statements include: revenue recognition; ~~the allowances~~allowance for ~~doubtful accounts;~~credit losses; 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, deferred tax assets, and related valuation allowances;~~taxes; accounting for leases; accounting for convertible debt; and loss contingencies. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.

Cash and cash equivalents consist of cash on hand, including money-market funds with original maturities of 90 days or less. As of December 31, 2020, the estimated fair value of our money-market funds was $82.9 million. We estimated the fair value of our money-market funds from quoted prices for identical assets in active markets on the last trading day of the reporting period (Level 1).

Financial instruments that potentially subject us to significant concentrations of credit risk primarily consist of trade accounts receivable. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed appropriate. NaN customers accounted for 15.1% and 12.9% of our accounts receivable, net balance at December 31, 2020. NaN customers accounted for 15.0% and 11.1% of our accounts receivable, net balance at September 30, 2020.

We use derivative instruments, including forward contracts, to help manage foreign currency exposures. Derivative instruments are viewed as risk management tools by us and are not used for trading or speculative purposes. Derivatives that qualify for hedge accounting can be designated as either cash flow hedges, net investment hedges, or fair value hedges. We may enter into derivative contracts that economically hedge certain risks, even when hedge accounting does not apply, or we elect not to apply hedge accounting.

Derivatives are recognized in the Condensed Consolidated Balance Sheet at fair value on a gross basis as either assets or liabilities and classified as current or noncurrent based upon whether the maturity of the instrument is less than or greater than 12 months.

Changes in the fair value of derivatives not designated as hedges are reported in earnings primarily in other income (expense), net. The cash flows associated with derivatives not designated as hedges are reported in cash flows from operating activities in the Condensed Consolidated Statement of Cash Flows.

In ~~February~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”), and codified as ASC 842, which became effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The guidance requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases.

In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to “Topic 842, Leases” and ASU 2018-11, “Leases Topic Targeted Improvements”, which provides an additional and optional transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. Additionally, in March 2019, the FASB issued ASU 2019-01, “Codification Improvements to Topic 842”, which provides guidance in the following areas: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers and (2) clarification of interim disclosure requirements during transition.

We adopted the new standard effective October 1, 2019 under the modified retrospective transition approach. Results for reporting periods beginning after October 1, 2019 are presented under ASC 842, while prior periods have not been adjusted and continue to be reported in accordance with our historic accounting under previous GAAP. We elected the package of practical expedients permitted under the transition guidance. The new standard does not have a material impact on our consolidated statement of operations and cash flows. Approximately $2.2 million of deferred rent balances were reclassified against the costs of the right of use assets. The effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of October 1, 2019 is immaterial.

~~The following tables summarize the impact of adopting ASC 842 on the consolidated balance sheet as of October 1, 2019 (dollars in thousands):~~

As of October 1, 2019

As Previously
Reported

Impact of Adoption
of Topic ASC 842

As Adjusted

Assets:

Operating lease right of use assets

$
—

$
19,594

$
19,594

Liabilities:

Current liabilities:

Short-term operating lease liabilities

$
—

$
4,863

$
4,863

Accrued expenses and other current liabilities

24,194

(1,465
)

22,729

Long-term operating lease liabilities

-

16,883

16,883

Other liabilities

$
21,536

$
(687
)

$
20,849

Equity:

Net parent investment

$
1,097,127

$
-

$
1,097,127

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), which is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance requires that implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or component of the hosting arrangement is ready for its intended use. The adoption of ASU 2018-15 did not have a material impact on our consolidated financial statements.

~~In June 2016, the FASB issued ASU No.~~ 2016-13, ~~“Financial~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments”~~Instruments, (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including trade receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. This standard is effective for interim and annual reporting periods beginning after December 15, 2019. This standard is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to ~~Retained earnings (Accumulated deficit)~~Accumulated deficit as of the beginning of the first reporting period in which the guidance of this standard is effective.

We ~~plan~~adopted ASU 2016-13 using the modified retrospective approach as of October 1, 2020. The effects of applying ASU 2016-13 as a cumulative-effect adjustment to ~~adopt this new standard in the first quarter of our fiscal 2021. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.~~Retained earnings was immaterial.

In March 2020, the FASB issued ASU No. 2020-04, ~~“Reference~~Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, (“ASU 2020-04”). The update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for debt with conversion options, revises the criteria for applying the derivatives scope exception for contracts in an entity’s own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2021, our fiscal year 2023. Early adoption is permitted for annual periods and interim periods within those annual periods beginning after December 15, 2020, our fiscal year 2022. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

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

We allocate the transaction price of the arrangement based on the relative estimated standalone selling price (“SSP”) of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:

We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ~~ASC~~Accounting Standards Codification (“ASC”) 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities. Other forms of contingent revenue or variable consideration are infrequent.

Revenue is recognized when control of these products or services isare transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.

We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.

Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.

Software and technology licenses sold with non-distinct professional services to customize and/or integrate the underlying software and technology are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours. For income statement presentation purposes, we separate license revenue from professional services revenue based on their relative SSPs.

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

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

Connected services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Subscription basis revenue represents a single promise to stand-ready to provide access to our connected services. Our connected services contract terms generally range from one to five years.

As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our connected services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).

Our connected service arrangements generally include services to develop, customize, and stand-up applications for each customer. In determining whether these services are distinct, we consider dependence of the Cloud service on the up-front development and stand-up, as well as availability of the services from other vendors. We have concluded that the up-front development, stand-up and customization services are not distinct performance obligations, and as such, revenue for these activities is

recognized over the period during which the cloud-connected services are provided, and is included within connected services revenue.

Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services. Furthermore, hybrid contracts that contain both embedded and connected license and professional services are analyzed to determine if the services are distinct or have stand-alone functionality to determine the revenue treatment.

Judgments are required to determine the SSP for each distinct performance obligation. When the SSP is directly observable, we estimate the SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where the SSP is not directly observable, we determine the SSP using information that may include market conditions and other observable inputs. We may have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP. Determining the SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay. For hybrid deals that contain future royalties, the allocation of SSP is determined using any fixed payments as well as the forecasted volume usage.

Revenues, classified by the major geographic region in which our customers are located, for the three ~~and six~~ months ended ~~March~~December 31, 2020 and 2019 (dollars in thousands):

	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended December 31,
	2020		2019		2020		2019		2020		2019
Revenues:
United States	$	36,505	$	29,630	$	71,546	$	67,694	$	33,051	$	35,041
Other Americas		-		278		8		632		43		8
Germany		20,102		15,114		40,319		28,830		32,044		20,217
Other Europe, Middle East and Africa		8,628		5,360		13,225		10,144		3,469		4,597
Japan		15,518		7,985		26,929		17,738		12,673		11,411
Other Asia-Pacific		5,742		11,937		11,927		17,750		13,684		6,185
Total net revenues	$	86,495	$	70,304	$	163,954	$	142,788	$	94,964	$	77,459

Revenues within the United States, Germany, and Japan accounted for more than 10% of revenue, respectively, for all periods presented.

Revenues relating to ~~two customers~~1 customer accounted for ~~$19.1~~$17.9 million, or ~~22.1%, and $9.7~~18.9% of revenues for the three months ended December 31, 2020. NaN customer accounted for $18.0 million, or ~~11.2%~~23.2%, of revenues for the three months ended March 31, 2020. Revenues relating to one customer accounted for $37.1 million, or 22.7%, of revenues for the six months ended March 31, 2020. Three customers accounted for $14.4 million, or 20.5%, $8.6 million, or 12.2%, and $7.7 million, or 11.0% of revenues for the three months ended March 31, 2019. Three customers accounted for $27.9 million, or 19.6%, $15.8 million, or 11.1%, and $14.7 million, or 10.3%, of revenues for the six months ended MarchDecember 31, 2019.

In conjunction with the adoption of ASC 606, we are required to capitalize certain contract acquisition costs. The capitalized costs primarily relate to paid commissions. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for groups of customer contracts. We elect to apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where the expected period of benefit is one year or less. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit, which we have estimated to be, on average, between one and ~~five~~eight years. The period of benefit was determined based on an average customer contract term, expected

contract renewals, changes in technology and our ability to retain customers, including canceled contracts. We assess the amortization term for all major transactions based on specific facts and circumstances. Contract acquisition costs are classified as current or noncurrent assets based on when the expense will be recognized. The current and noncurrent portions of contract acquisition costs are included in prepaid expenses and other current assets, and in other assets, respectively. As of ~~March~~December 31, 2020, we had ~~$3.5~~$5.9 million of contract acquisition costs. We had amortization expense of ~~$0.3~~$0.4 million and ~~$0.6~~$0.2 million related to these costs during the three ~~and six~~ months ended ~~March~~December 31, 2020 and 2019, respectively. There was no0 impairment related to contract acquisition costs.

We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Our capitalized costs consist primarily of setup costs, such as costs to standup, customize and develop applications for each customer, which are incurred to satisfy our stand-ready obligation to provide access to our connected offerings. These contract costs are expensed to cost of revenue as we satisfy our stand-ready obligation over the contract term which we estimate to be between one and ~~five~~eight years, on average. The contract term was determined based on an average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers, including canceled contracts. We classify these costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of capitalized contract fulfillment costs are presented as deferred costs. As of ~~March~~December 31, 2020, we had ~~$43.4~~$44.7 million of capitalized contract costs.

We had amortization expense of ~~$2.6~~$4.3 million and ~~$5.3~~$2.7 million related to these costs during the three ~~and six~~ months ended ~~March~~December 31, 2020 and 2019, respectively. There was no0 impairment related to contract costs capitalized.

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in accounts receivable, net at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely subject to the passage of time. Contract assets are included in prepaid expenses and other current assets. The table below shows significant changes in contract assets (dollars in thousands):

	Contract assets			Contract assets
Balance as of October 1, 2019	$	9,219
Balance as of October 1, 2020				$	30,277
Revenues recognized but not billed		24,624			17,535
Amounts reclassified to accounts receivable, net		(16,933	)		(12,997	)
Balance as of March 31, 2020	$	16,910
Balance as of December 31, 2020				$	34,815
Less: allowance for credit losses					(387	)
Balance as of December 31, 2020, net				$	34,428

Our contract liabilities, which we present as deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred revenue as current or noncurrent based on when we expect to recognize the revenues. The table below shows significant changes in deferred revenue (dollars in thousands):

	Deferred revenue			Deferred revenue
Balance as of October 1, 2019	$	353,284
Balance as of October 1, 2020				$	325,093
Amounts billed but not recognized		57,648			28,877
Revenue recognized		(62,840	)		(33,701	)
Balance as of March 31, 2020	$	348,092
Balance as of December 31, 2020				$	320,269

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at ~~March~~December 31, 2020 (dollars in thousands):

The table above includes fixed backlogs and does not include variable backlogs derived from contingent usage-based activities, such as royalties and usage-based connected services.

Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of restricted stock units are reflected in diluted net income per share by applying the treasury stock method. There were no Cerence equity awards outstanding prior to the Spin-Off, thus the computation of basic and diluted earnings per common share (“EPS”) for all prior periods disclosed was calculated using the shares issued in connection with the Spin-Off totaling 36.4 million shares.

The ~~numerator~~dilutive effect of the Notes (as defined in Note 15) is reflected in net income per share by application of the “if-converted” method. The “if-converted” method is only assumed in periods where such application would be dilutive. In applying the “if-converted” method for ~~both basic and~~ diluted ~~EPS is~~ net ~~income.~~income per share, we would assume conversion of the Notes at a ratio of 26.7271 shares of our common stock per $1,000 principal amount of the Notes. Assumed converted shares of our common stock are weighted for the period the Notes were outstanding. The shares of common stock underlying the conversion option of our Notes were included in the calculation of diluted income per share for the three months ended December 31, 2020.

The following ~~is a~~table presents the reconciliation of ~~basic shares to diluted shares:~~the numerator and denominator for calculating net income (loss) per share:

Three Months Ended March 31,

Six Months Ended March 31,

in thousands

2020

2019

2020

2019

Basic shares

36,441

36,391

36,218

36,391

Effect of dilutive shares

951

—

475

—

Diluted shares

37,392

36,391

36,693

36,391

	Three Months Ended December 31,
in thousands, except per share data	2020		2019
Numerator:
Net income (loss) - basic	$	21,638	$	(11,762	)
Interest on Convertible Senior Notes, net of tax		1,831		-
Net income (loss) - diluted	$	23,469	$	(11,762	)

Denominator:
Weighted average common shares outstanding - basic		37,180		35,995
Dilutive effect of restricted stock awards		1,506		-
Dilutive effect of the Notes		4,677		-
Weighted average common shares outstanding - diluted		43,363		35,995

Net income (loss) per common share:
Basic	$	0.58	$	(0.33	)
Diluted	$	0.54	$	(0.33	)

We exclude weighted-average potential shares from the calculations of diluted net (loss) income per share during the applicable periods because their inclusion would have been anti-dilutive. The following table set forth potential shares that were considered anti-dilutive during the three months ended December 31, 2020 and at December 31, 2019:

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize

the use of unobservable inputs. When determining fair value measurements for assets and liabilities recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use in pricing the asset or liability.

The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement as of the measurement date as follows:

The following table presents information about our financial assets that are measured at fair value and indicates the fair value hierarchy of the valuation inputs used (dollars in thousands) as of:

During the three months ended December 31, 2020, we recorded an immaterial amount of unrealized losses related to our marketable securities within Accumulated other comprehensive loss. During the three months ended December 31, 2019, we did 0t possess any marketable securities.

The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.

The estimated fair value of our Long-term debt is determined by Level 2 inputs and is based on observable market data including prices for similar instruments. As of December 31, 2020 and September 30, 2020, the estimated fair value of our Notes was $501.8 million and $271.0 million, respectively. The Notes are recorded at face value less unamortized debt discount and transaction costs on our condensed consolidated balance sheets. The carrying amount of the Senior Credit Facilities (as defined in Note 15) approximates fair value given the underlying interest rate applied to such amounts outstanding which is currently set to the prevailing market rate.

We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates related to third-party vendor and intercompany payments for goods and services within our non-U.S. subsidiaries. We use foreign exchange forward contracts that are not designated as hedges to manage currency risk. The contracts can have maturities up to

three years. At December 31, 2020, the total notional amount of forward contracts not designated as cash flow hedges of forecasted cost transactions was $55.3 million. At December 31, 2020, the weighted-average remaining maturity of these instruments was approximately 11.7 months.

The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheet for derivative instruments as of December 31, 2020 and 2019 (dollars in thousands):

The following tables display a summary of the income (loss) related to foreign currency forward contracts for the three months ended December 31, 2020 and 2019 (dollars in thousand):

We are exposed to credit losses primarily through our sales of software licenses and services to customers. We determine credit ratings for each customer in our portfolio based upon public information and information obtained directly from our customers. A credit limit for each customer is established and in certain cases we may require collateral or prepayment to mitigate credit risk. Our expected loss methodology is developed using historical collection experience, current customer credit information, current and future economic and market conditions and a review of the current status of the customer's account balances. We monitor our ongoing credit exposure through reviews of customer balances against contract terms and due dates, current economic conditions, and dispute resolution. Estimated credit losses are written off in the period in which the financial asset is no longer collectible.

The change in the allowance for credit losses for the three months ended December 31, 2020 is as follows (dollars in thousands):

The determination of operating segments is the first step in determining reportable segments. To be an operating segment, the operating results of the component are regularly reviewed by the chief operating decision maker (“CODM”) in order to assess the performance of the individual segment and make decisions about resources to be allocated to the segment. The function of the CODM is to allocate resources to and assess the operating results of the operating segments of an entity. We believe our Chief Executive Officer (“CEO”) is our ~~CODM.~~chief operating decision maker (“CODM”). Our CEO approves all major decisions, including reorganizations and new business initiatives. ~~Our CEO assesses performance on a routine basis and make decisions on resource allocations.~~

The CODM must have discrete financial information available in order to assess performance and make resource allocation decisions. This financial information must be sufficiently detailed to allow the CODM to make decisions. Our CODM reviews routine consolidated operating information and makes decisions on the allocation of resources at this ~~level. As~~level, as such, we have concluded that we have ~~one~~1 operating ~~segment and one reportable~~ segment.

~~Goodwill represents the excess of the purchase price in a business combination over the fair value of net assets acquired. Goodwill has been allocated~~All goodwill is assigned to ~~Cerence based upon its relative fair value as of March 31, 2018, when Cerence became a~~one or more reporting ~~unit of Nuance. Goodwill is reported at the reporting unit level.~~units. A reporting unit isrepresents an operating segment or ~~one level below the~~a component within an operating segment ~~referred to as a component. The determination of whether the reporting unit should be identified at the operating segment or component level is based upon whether the component constitutes a business~~ for which discrete financial information is available and is regularly reviewed by segment ~~management.~~management for performance assessment and resource allocation. Upon consideration of ~~the discrete financial information reviewed by~~ our ~~CODM,~~components, we have concluded that our goodwill is associated with ~~one~~1 reporting unit.

~~Goodwill is not amortized but tested annually for impairment or when interim indicators of impairment are present. Upon our adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment~~”, the test for goodwill impairment involves an assessment of impairment indicators. If indicators are present, a quantitative test of impairment is performed. During the quantitative test, the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than the carrying value, the difference represents an impairment. If the fair value of the reporting unit is greater than the carrying value, no impairment is recognized.

On July 1, 2019, our goodwill was assessed for impairment as a reporting unit of Nuance. On July 1, 2019, the fair value of our reporting unit was determined using a combination of the income approach and the market approach. We assessed each valuation methodology based upon the relevance and availability of the data at the time and weighted the methodologies appropriately to calculate a fair value which exceeded the carrying value of our reporting unit by more than 50%.

~~Due to the macroeconomic conditions driven by the COVID-19 pandemic and the anticipated negative impact on our license and connected services revenues,~~December 31, 2020, we concluded that 0 goodwill impairment indicators were ~~present and performed an interim quantitative impairment test as of March 31, 2020. The fair value of our reporting unit was determined using a combination of~~present. We will continue to monitor the income approach and the market approach. For the income approach, fair value was determined based on the present value of estimated future after-tax cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, which were revised to reflect the anticipated impactimpacts of the COVID-19 pandemic ~~to estimate future after-tax cash flows and estimate the long-term growth rates based~~ on our most recent views of the long-term outlook for our reporting unit. For the market approach, we used a valuation technique in which values were derived based on valuation multiples of comparable publicly traded companies. We weighted the methodologies appropriately to estimate a fair value of approximately $951 million as of March 31, 2020. The estimated fair value exceeded the $936 million carrying value of our reporting unit ~~by approximately $15 million, or 2% of the carrying~~fair value. ~~Based upon the results of the impairment test, no goodwill impairment was recorded as of March 31, 2020.~~

The full extent to which the ongoing COVID-19 pandemic could adversely ~~affects~~affect our financial performance will depend on future developments, many of which are outside of our control. These uncertainties could adversely impact the significant estimates and assumptions, which we believe to be reasonable, that are incorporated in our valuation techniques used to estimate the fair value of our reporting unit on March 31, 2020. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, new market penetration, and determination of appropriate market comparables. Adverse impacts to the estimates and assumptions used in our valuation techniques could result in the determination that all or a portion of our goodwill may be impaired in future periods.

The changes in the carrying amount of goodwill for the ~~six~~three months ended ~~March~~December 31, 2020 are as follows (dollars in thousands):

~~Due to the macroeconomic conditions driven by the COVID-19 pandemic and the anticipated negative impact on our license and connected services revenues, we concluded that~~As of December 31, 2020, there were 0 indicators of impairment ~~were~~ present ~~and performed an interim test for recoverability of~~related to our long-lived asset group as of March 31, 2020. Based upon the results of the recoverability test, we determined that the carrying amounts of the long-lived asset group were considered recoverable, concluding the test and resulting in no impairment of our long-lived asset group as of March 31, 2020.group.

The following tables summarizes the gross carrying amounts and accumulated amortization of intangible assets by major class (dollars in thousands):

	March 31, 2020									December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Life (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Life (Years)
Customer relationships	$	108,034	$	(67,887	)	$	40,147		3.4	$	112,430	$	(80,499	)	$	31,931		2.8
Technology and patents		89,637		(74,677	)		14,960		2.0		91,408		(82,269	)		9,139		1.4
Total	$	197,671	$	(142,564	)	$	55,107			$	203,838	$	(162,768	)	$	41,070

	September 30, 2019									September 30, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Life (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Life (Years)
Customer relationships	$	104,783	$	(58,568	)	$	46,215		4.0	$	110,512	$	(75,915	)	$	34,597		3.0
Technology and patents		116,757		(97,411	)		19,346		2.5		90,658		(79,639	)		11,019		1.6
Total	$	221,540	$	(155,979	)	$	65,561			$	201,170	$	(155,554	)	$	45,616

Amortization expense related to intangible assets in the aggregate was ~~$5.4~~$5.0 million and $5.2 million for the three months ended ~~March 31, 2020 and 2019, respectively, and $10.6 million and $10.5 million for the six months ended March~~December 31, 2020 and 2019, respectively. We expect amortization of intangible assets to be approximately ~~$10.2~~$15.2 million for the remainder of ~~2020.~~fiscal year 2021.

We have entered into a number of facility leases to support our research and development activities, sales operations, and other corporate and administrative functions in North America, Europe, and Asia, which qualify as operating leases under GAAP. We also have a limited number of equipment leases that also qualify as operating leases. We determine if contracts with vendors represent a lease or have a lease component under GAAP at contract inception. As part of our acquisition of Voicebox Technologies Corporation (“Voicebox”), we assumed certain leases for various equipment, which we have accounted for as finance leases. Our leases have remaining terms ranging from less than one year to ~~eight~~seven years. Some of our leases include options to extend or terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

Operating lease right of use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the lease commencement date. As our leases generally do not provide an implicit rate, we use an estimated incremental borrowing rate in determining the present value of future payments. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular location and currency environment.

The following table presents certain information related to lease term and incremental borrowing rates for leases as of ~~March~~December 31, 2020 and September 30, 2020:

~~The following table presents the lease-related assets and liabilities reported in the consolidated balance sheet as of March 31, 2020 (in thousands):~~

Lease costs for minimum lease payments is recognized on a straight-line basis over the lease term. For operating leases, costs are included within cost of revenues, research and development, marketing and selling, and general and administrative lines on the condensed consolidated statements of operations. For financing leases, amortization of the finance right-of-use assets is included within research and development, marketing and selling, and general and administrative lines on the condensed consolidated statements of operations, and interest expense is included within the other income (expense), net.

The following table presents lease expense for the three ~~and six~~ months ended ~~March~~December 31, 2020 ~~(in~~and 2019 (dollars in thousands):

	Three months ended March 31, 2020			Six months ended March 31, 2020			Three months ended December 31, 2020			Three months ended December 31, 2019
Finance lease costs:
Amortization of right-of-use asset	$	33		$	69
Amortization of right of use asset							$	141		$	36
Interest on lease liability		2			2			15			-
Operating lease cost		1,960			3,850			2,229			1,890
Short-term lease cost		-			-
Variable lease cost		365			674			20			309
Sublease income		(55	)		(110	)		(53	)		(55	)
Total lease cost	$	2,305		$	4,485		$	2,352		$	2,180

For operating leases, the related cash payments are included in the operating cash flows on the condensed consolidated statements of cash flows. For the three ~~and six~~ months ended ~~March~~December 31, 2020 and 2019, cash payments related to operating leases were ~~$1.9~~$2.3 million and ~~$3.6~~$1.7 million, respectively. For financing leases, the related cash payments for the principal portion of the lease liability are included in the financing cash flows on the condensed consolidated statement of cash flows and the related cash payments for the interest portion of the lease liability are included within the operating section of the condensed consolidated statement of cash flows. For the three months ended ~~March~~December 31, 2020 and 2019, cash payments related to financing leases were ~~immaterial. For the six months ended March 31, 2020, cash payments related to financing leases were~~$0.1 million and $0.1 million, of which an immaterial amount related to the interest portion of the lease liability.

The table below reconciles the undiscounted future minimum lease payments under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance ~~sheets~~sheet as of ~~March~~December 31, 2020 ~~(in thousands):~~

~~The future minimum lease commitments under non-cancelable leases at September 30, 2019 were as follows (in~~(dollars in thousands):

Year Ending September 30,			Operating Leases			Financing Leases			Total
2020	$	6,323
2021		5,421
2021 (excluding three months ended December 31, 2020)			$	5,850		$	339		$	6,189
2022		4,493		6,811			416			7,227
2023		3,237		4,746			416			5,162
2024		2,922		4,218			365			4,583
2025				2,319			310			2,629
Thereafter		4,039		2,999			15			3,014
Total	$	26,435
Total future minimum lease payments			$	26,943		$	1,861		$	28,804
Less effects of discounting				(3,861	)		(163	)		(4,024	)
Total lease liabilities			$	23,082		$	1,698		$	24,780
Reported as of December 31, 2020
Short-term lease liabilities			$	6,259		$	370		$	6,629
Long-term lease liabilities				16,823			1,328			18,151
Total lease liabilities			$	23,082		$	1,698		$	24,780

Accrued expenses and other current liabilities consisted of the following (dollars in thousands):

	March 31, 2020		September 30, 2019		December 31, 2020		September 30, 2020
Compensation	$	21,717	$	13,031	$	22,065	$	37,960
Cost of revenue related liabilities		3,404		1,668		4,011		3,683
Sales and other taxes payable		5,981		219		18,031		14,688
Professional fees		3,660		3,863		3,223		2,458
Facilities related liabilities		68		273
Interest Payable						1,444		2,703
Other		7,751		5,140		3,426		6,365
Total	$	42,581	$	24,194	$	52,200	$	67,857

Restructuring and other costs, net ~~include~~includes restructuring expenses as well as other charges that are unusual in nature, are the result of unplanned events, and arise outside of the ordinary course of our ~~business such as employee severance costs, costs for consolidating duplicate facilities, and separation costs directly attributable to the Cerence business becoming a standalone public company.~~business. The following table sets forth accrual activity relating to restructuring reserves for the ~~six~~three months ended ~~March~~December 31, 2020 (dollars in thousands):

Personnel

Facilities

Separation

Total

Balance at October 1, 2019

$
489

$
26

$
3,876

$
4,391

Restructuring and other costs, net

681

—

9,743

10,424

Cash payments

(657
)

(10
)

(9,719
)

(10,386
)
Foreign exchange impact on ending balance

(7
)

—

—

(7
)
Balance at March 31, 2020

$
506

$
16

$
3,900

$
4,422

	Personnel			Facilities			Restructuring Subtotal			Other		Total
Balance at October 1, 2020	$	764		$	1,745		$	2,509		$	1,928	$	4,437
Restructuring and other costs, net		336			(315	)		21			26		47
Non-cash adjustments		—			1,074			1,074			—		1,074
Cash (payments) receipts		(264	)		(128	)		(392	)		567		175
Foreign exchange impact on ending balance		6			1			7			—		7
Balance at December 31, 2020	$	842		$	2,377		$	3,219		$	2,521	$	5,740

The following table sets forth restructuring ~~expenses~~and other costs, net recognized for the three ~~and six~~ months ended ~~March~~December 31, 2020 and 2019 (dollars in thousands):

	Three Months Ended March 31,					Six Months Ended March 31,					Three Months Ended December 31,
	2020		2019			2020		2019			2020			2019
Personnel	$	321	$	220		$	681	$	(443	)	$	336		$	360
Facilities		—		(381	)		—		1,674			(315	)		—
Separation		2,549		4,490			9,743		6,225
Restructuring subtotal												21			360
Other												26			7,194
Restructuring and other costs, net	$	2,870	$	4,329		$	10,424	$	7,456		$	47		$	7,554

For the three months ended ~~March~~December 31, 2020, we recorded restructuring charges of ~~$2.9 million,~~$47 thousand, which included a $0.3 million severance charge related to the elimination of personnel and ~~$2.5~~a $0.3 million ~~related~~recovery resulting from the restructuring of facilities that will no longer be utilized, including adjustments to ~~the costs incurred to establish the Cerence business as a standalone public company.~~assumptions associated with these facilities.

For the ~~six~~three months ended ~~March~~December 31, ~~2020,~~2019, we recorded restructuring charges of ~~$10.4~~$7.6 million, which included a ~~$0.7~~$0.4 million severance charge related to the elimination of personnel, and ~~$9.7~~$7.2 million related to costs incurred to establish the Cerence business as a standalone public company.

For the three months ended March 31, 2019, we recorded restructuring charges of $4.3 million, which included a $0.2 million severance charge related to the elimination of personnel across multiple functions, $0.4 million restructuring charge reversal related to facilities that will no longer be utilized, and $4.5 million related to professional services fees incurred to establish the Cerence business as a standalone public company.

For the six months ended March 31, 2019, we recorded restructuring charges of $7.5 million, which included a $0.4 million severance charge reversal related to the elimination of personnel across multiple functions, $1.7 million primarily resulting from the restructuring of facilities that will no longer be utilized, and $6.2 million related to professional services fees incurred to establish the Cerence business as a standalone public company.

Per the Amended and Restated Certificate of Incorporation, which was adopted on October 1, 2019, 600,000,000 shares of capital stock have been authorized, consisting of 40,000,000 shares of Preferred Stock, par value $0.01 per share, or Preferred Stock, and 560,000,000 shares of Common Stock, par value $0.01 per share or (“Common ~~Stock.~~Stock”).

On October 2, 2019, we registered the issuance of 6,350,000 shares of Common Stock, consisting of 5,300,000 shares of Common Stock reserved for issuance upon the exercise of options granted, or in respect of awards granted, under the Cerence 2019 Equity Incentive Plan, (“Equity Incentive Plan”), and 1,050,000 shares of Common Stock that are reserved for issuance under the Cerence 2019 Employee Stock Purchase Plan.

The Equity Incentive Plan provides for the grant of incentive stock options, stock awards, stock units, stock appreciation rights, and certain other stock-based awards. Awards issued under the Plan may not have a term greater than ten years from the date of grant.

In connection with the Spin-Off from Nuance, all outstanding Nuance restricted stock units and performance stock units held by Cerence employees were cancelled, and Cerence regranted such employees economically equivalent restricted stock units of Cerence. 1,208,931 restricted stock units were issued by Cerence in connection with the Spin-Off.

Information with respect to our non-vested restricted stock units for the ~~six~~three months ended ~~March~~December 31, 2020 was as follows:

	Non-Vested Restricted Stock Units														Non-Vested Restricted Stock Units
	Time-Based Shares			Performance- Based Shares		Total Shares			Weighted- Average Grant-Date Fair Value		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)		Time-Based Shares			Performance- Based Shares			Total Shares			Weighted- Average Grant-Date Fair Value		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Non-vested at October 1, 2019		—			—		—		$	—
Non-vested at October 1, 2020																2,042,918			771,387			2,814,305		$	18.63
Granted		2,714,653			770,204		3,484,857		$	16.38						635,810			289,380			925,190		$	56.97
Vested		(111,494	)		—		(111,494	)	$	16.94						(872,310	)		(403,502	)		(1,275,812	)	$	39.16
Forfeited		(12,901	)		—		(12,901	)	$	17.74						(6,754	)		(1,596	)		(8,350	)	$	35.94
Non-vested at March 31, 2020		2,590,258			770,204		3,360,462		$	16.35		1.26	$	51,740
Non-vested at December 31, 2020																1,799,664			655,669			2,455,333		$	36.79		1.40	$	246,896
Expected to vest							3,360,462		$	16.35		1.26	$	51,740								2,455,333		$	36.79		1.40	$	246,896

Stock-based compensation was included in the following captions in our ~~consolidated statements~~Condensed Consolidated Statements of ~~operations~~Operations for the three ~~and six~~ months ended ~~March~~December 31, 2020 and ~~combined statement of operations for the three and six months ended March 31,~~ 2019 (in thousands):

	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended December 31,
	2020		2019		2020		2019		2020		2019
Cost of licensing	$	—	$	3	$	—	$	8
Cost of connected services		188		489		540		617	$	291	$	352
Cost of professional services		433		261		1,304		508		1,294		871
Research and development		1,948		3,290		4,923		6,744		4,098		2,975
Sales and marketing		1,776		1,566		3,366		3,034		2,529		1,590
General and administrative		2,215		1,184		5,396		2,456		4,139		3,181
	$	6,560	$	6,793	$	15,529	$	13,367	$	12,351	$	8,969

Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including at times actions with respect to contracts, intellectual property, employment, benefits and securities matters. At each balance sheet date, we evaluate contingent liabilities associated with these matters in accordance with ASC 450 “Contingencies.” If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes, and estimates are based only on the best information available at the time. Due to the inherent uncertainties involved in claims and legal proceedings and in estimating losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods, which may have a material impact on our results of operations and financial position. As of ~~March~~December 31, 2020, accrued losses were not material to our condensed consolidated financial statements, and we do not expect any pending matter to have a material impact on our condensed consolidated financial statements.

We include indemnification provisions in the contracts we enter with customers and business partners. Generally, these provisions require us to defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed-upon amount. In some cases, our total liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency with which these provisions have been triggered.

We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the Company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitions, we agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a period of six years from the acquisition date. In certain cases, we purchase director and officer insurance policies related to these obligations, which fully cover the six-year period. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if any, as described above.

As of December 31, 2020, we have a $1.7 million letter of credit that is used as a security deposit in connection with our leased Bellevue, Washington office space. In the event of default on the underlying lease, the landlord would be eligible to draw against the letter of credit. The letter of credit is subject to aggregate reductions, provided that we are not in default under the underlying lease. We also have letters of credit in connection with security deposits for other facility leases totaling $0.7 million in the aggregate. These letters of credit have various terms and expire during fiscal year 2021 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.

The components of income (loss) before income taxes are as follows (dollars in thousands):

	Three Months Ended March 31,					Six Months Ended March 31,						Three Months Ended December 31,
	2020		2019			2020			2019			2020		2019
Domestic	$	2,060	$	(4,280	)	$	(5,068	)	$	(6,349	)	$	5,245	$	(7,128	)
Foreign		3,717		4,714			2,085			9,576			9,009		(1,632	)
Income (loss) before income taxes	$	5,777	$	434		$	(2,983	)	$	3,227		$	14,254	$	(8,760	)

The components of (benefit from) provision for income taxes are as follows (dollars in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended December 31,
	2020			2019			2020			2019			2020			2019
Domestic	$	2,427		$	(1,323	)	$	(791	)	$	(1,814	)	$	1,020		$	(3,218	)
Foreign		(9,145	)		1,303			(2,925	)		2,332			(8,404	)		6,220
(Benefit from) provision for income taxes	$	(6,718	)	$	(20	)	$	(3,716	)	$	518		$	(7,384	)	$	3,002
Effective income tax rate		(116.3	)%		(4.6	)%		124.6	%		16.1	%		(51.8	)%		(34.3	)%

The effective tax rates ~~were estimated based upon estimated income~~ for the ~~year, and~~periods presented are based on the ~~composition of the income in different countries. Our aggregate income~~statutory tax ~~rate in foreign jurisdictions is lower than our income tax rate~~rates enacted in the ~~United States. Our~~jurisdictions in which we operate. For both periods presented, the effective tax rate ~~may be adversely affected by~~differs from the 21.0% statutory U.S. tax rate due to the impact of the nondeductible stock-based compensation, U.S. inclusions of global intangible low-taxed income (GILTI), and our mix of jurisdictional earnings ~~being lower than anticipated~~and related differences in ~~countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher~~foreign statutory tax rates.

Our effective income tax rate was (116.3)% for the three months ended March 31, 2020, compared to (4.6)% for the three months ended March 31, 2019. The effective rate for the three months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of jurisdiction earnings and U.S. inclusions of foreign taxable income as a result of 2017 tax laws changes. The effective tax rate for the three months ended ~~March~~December 31, ~~2019 differed from the U.S. federal statutory rate of 21.0% primarily due~~2020 was negative 51.8% compared to ~~our earnings in foreign jurisdictions.~~

~~Our effective income tax rate was 124.6%~~negative 34.3% for the ~~six~~three months ended ~~March~~December 31, 2019. Consequently, our benefit from income taxes for the three months ended December 31, 2020 ~~compared to 16.1%~~was $7.4 million, a net change of $10.4 million for a provision for income taxes of $3.0 million for the ~~six~~three months ended ~~March~~December 31, 2019. ~~The effective~~This difference was attributable to a $15.8 million tax rate for the six months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of jurisdictional earnings, U.S. inclusions of foreign taxable incomebenefit recorded as a result of ~~2017~~an increase to the enacted Netherlands tax ~~laws changes,~~rate in the first quarter of fiscal 2021 and ~~an income~~the realization of a $2.6 million tax benefit ~~of approximately~~related to stock-based compensation in the period. This compares to a $5.0 million ~~related~~tax benefit realized during the three months ended December 31, 2019, which was the result of a previous change to ~~an increase in tax rates in~~ the Netherlands enacted tax rate.

Deferred tax assets and liabilities are measured using the statutory tax rates and laws expected to apply to taxable income in the ~~first quarter.~~years in which the temporary differences are expected to reverse. Valuation allowances are provided against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ~~effective~~ultimate realization of deferred tax ~~rate for~~assets is dependent upon the ~~six months ended March 31, 2019 differed from~~generation of future taxable income and the ~~U.S. federal statutory rate~~timing of ~~21.0% primarily due to our earnings~~the temporary differences becoming deductible. Management considers, among other available information, scheduled reversals of deferred tax liabilities, projected future taxable income, limitations of availability of net operating loss carryforwards, and other matters in ~~foreign jurisdictions.~~

	March 31, 2020		September 30, 2019		December 31, 2020			September 30, 2020
Senior Facilities, net of unamortized debt issuance costs and discount of $20,263 at March 31, 2020	$	247,375	$	—
3.00% Convertible Senior Notes due 2025, net of unamortized discount of $17,678 and deferred issuance costs of $4,445 at December 31, 2020. Effective interest rate 6.29%.					$	152,877		$	151,791
Senior Credit Facilities, net of unamortized discount of $2,216 and deferred issuance costs of $268 at December 31, 2020. Effective interest rate 3.39%.						119,392			121,331
Total debt					$	272,269		$	273,122
Less: current portion		9,450		—		(6,250	)		(6,250	)
Total long-term debt	$	237,925	$	—	$	266,019		$	266,872

The following table summarizes the maturities of our borrowing obligations as of ~~March~~December 31, 2020 (in thousands):

On June 2, 2020, in an effort to refinance our debt structure, we issued $175.0 million in aggregate principal amount of 3.00% Convertible Senior ~~Facilities~~

OnNotes due 2025 (the “Notes”), including the initial purchasers’ exercise in full of their option to purchase an additional $25.0 million principal amount of the Notes, between the Company and U.S. Bank National Association, as trustee (the “Trustee”), in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Notes were $169.8 million after deducting transaction costs. We used net proceeds from the issuance of the Notes to repay a portion of our indebtedness under the Credit Agreement, dated October 1, 2019, ~~in connection with the Spin-Off, Cerence entered into a Credit Agreement,~~ by and among ~~Cerence,~~the Company, the lenders and issuing banks party thereto and Barclays Bank PLC, as administrative agent (the “Existing Facility”).

The Notes are senior, unsecured obligations and will accrue interest payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020, at a rate of 3.00% per year. The Notes will mature on June 1, 2025, unless earlier converted, redeemed, or repurchased. The Notes are convertible into cash, shares of the Company’s Common Stock or a combination of cash and shares of the Company’s Common Stock, at the Company’s election.

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).

As of December 31, 2020, the carrying amount of the equity component, net of taxes and transaction costs was $14.4 million.

The interest expense recognized related to the Notes for the three months ended December 31, 2020 was as follows (dollars in thousands):

The conditional conversion feature of the Notes was triggered in the three months ended December 31, 2020, and the Notes are therefore convertible during the fiscal quarter ending on March 31, 2021. Whether any of the Notes will be convertible in future quarters will depend on the satisfaction of one or more of the conversion conditions in the future. If one or more holders elect to convert their Notes at a time when any such Notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.

On June 12, 2020 (the “Financing Closing Date”), in connection with our effort to refinance our existing indebtedness, we entered into a Credit Agreement, by and among the Borrower, the lenders and issuing banks party thereto and Wells Fargo Bank, N.A., as administrative agent (the “Credit Agreement”), consisting of a ~~five-year~~four-year senior secured term loan facility ~~(the “Term Loan Facility’)~~ in the aggregate principal amount of ~~$270.0~~$125.0 million (the “Term Loan Facility”). The net proceeds from the issuance of the Term Loan Facility were $123.0 million, which together with proceeds from the Convertible Senior Notes was ~~primarily~~ intended to ~~finance a cash distribution of approximately $153.0 million to Nuance~~pay in full all indebtedness under the Existing Facility, and ~~provide approximately $110.0 million initial support for~~paid fees and expenses in connection with the ~~cash flow needs of the Cerence business.~~Senior Credit Facilities. We also entered into a ~~54-month~~ senior secured first-lien revolving credit facility in an aggregate principal amount of ~~$75.0~~$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 (the “Revolving Facility” and collectively with the Term Loan Facility, the “Senior Facilities”).~~flow. As of ~~March~~December 31, 2020, there were no0 amounts outstanding under the Revolving ~~Credit~~ Facility.

~~Cerence’s obligations under~~On December 17, 2020 (the “Amendment No. 1 Effective Date”), we entered into Amendment No. 1 to the Credit Agreement ~~are jointly~~(the “Amendment”). The Amendment extended the scheduled maturity date of the revolving credit and ~~severally guaranteed by~~term facilities from June 12, 2024 to April 1, 2025. The Amendment was accounted for as a debt modification, and therefore, $0.5 million of the refinancing fees paid directly to lender were recorded as deferred debt issuance costs, and $0.1 million of the refinancing fees paid to third parties were expensed in the period.

The Amendment, among other things, revised certain interest rates in the Credit Agreement. Following delivery of ~~our existing~~a compliance certificate for the first full fiscal quarter after the Amendment No. 1 Effective Date, the applicable margins for the revolving credit and ~~future direct and indirect wholly owned domestic subsidiaries,~~term facilities is subject to ~~certain exceptions customary for financings of this type. All obligations are secured by substantially all of our tangible~~a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the applicable margin is LIBOR plus 3.00% or ABR plus 2.00%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the applicable margin is LIBOR plus 2.75% or ABR plus 1.75%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the applicable margin is LIBOR plus 2.50% or ABR plus 1.50%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the applicable margin is LIBOR plus 2.25% or ABR plus 1.25%; and ~~intangible personal property and material real property, including~~(v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the applicable margin is LIBOR plus 2.20% or ABR plus 1.00%. As a perfected first-priority pledge of all (or, in the case of foreign subsidiaries or subsidiaries (“FSHCO”) that own no material assets other than equity interests in foreign subsidiaries that are “controlled foreign corporations” or other FSHCOs, 65%)result of the ~~equity securities~~Amendment, the applicable LIBOR floor was reduced from 0.50% to 0.00%. From the Amendment No. 1 Effective Date until the date on which the financial statements are delivered for the fiscal quarter ended December 31, 2020, the interest rate will be LIBOR plus 2.50% or ABR plus 1.50%. Total interest expense relating to the Senior Credit Facilities for the fiscal quarter ended December 31, 2020 was $1.4 million, reflecting the coupon and accretion of ~~our subsidiaries held by any loan party,~~the discount.

In addition, the quarterly commitment fee required to be paid based on the unused portion of the revolving facility is subject to ~~certain customary exceptions~~a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the unused line fee is 0.500%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the unused line fee is 0.450%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the unused line fee is 0.400%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the unused line fee is 0.350%; and ~~limitations.~~(v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the unused line fee is 0.300%.

~~Cerence is~~The Amendment also 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 ~~on the last business day of each quarter~~ in an aggregate ~~annual~~ amount equal to ~~3.5%~~1.25% of the original principal amount of the Term Loan Facility. From the fiscal quarter ending March 31, 2023 and for each fiscal quarter thereafter, we are obligated to make quarterly principal payments in an aggregate amount equal to 2.50% of the original principal amount of the Term Loan Facility, ~~during the first two years of the Term Loan Facility, and 10% of the original principal amount of the Term Loan Facility thereafter,~~ with the balance payable at the maturity date. Quarterly principal payments commenced on March 31, 2020. Interest accrues on outstanding borrowings under the Senior Facilities at a rate of either a base rate (as defined in the Credit Agreement) plus 5.00% or a LIBOR rate (as defined in the Credit Agreement) plus 6.00%. Interest payments with respect to the Senior Facilities are required either on a quarterly basis (for ABR loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. Total interest expense for the three and six months ended March 31, 2020 was $6.7 million and $13.5 million, respectively, reflecting the coupon and accretion of the discount.

Borrowings under the Credit Agreement are prepayable at Cerence’s option without premium or penalty, subject to a 1.00% prepayment premium in connection with any repricing transaction for the term loan facility in the first six months after the closing date. Cerence may request to extend the maturity date of all or a portion of the Senior Facilities subject to certain conditions customary for financings of this type. The Credit Agreement also contains certain mandatory prepayment provisions in the event that

Cerence incurs certain types of indebtedness or receives net cash proceeds from certain non-ordinary course asset sales or other dispositions of property or generates positive excess cash flow, in each case subject to terms and conditions customary for financings of this type.thereof.

The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit our and our subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to designate subsidiaries as unrestricted, to make certain investments, to prepay certain indebtedness and to pay dividends, or to make other distributions or redemptions/repurchases, in respect of our and our subsidiaries’ equity interests. In addition, the Credit Agreement contains a financial ~~covenant requiring the maintenance of~~covenants, each tested quarterly, (1) a net ~~first lien~~secured leveraged ratio of not greater than 3.25 to 1.00; (2) a net total leverage ratio of not greater than ~~6.00~~4.25 to ~~1.00.~~1.00; and (3) minimum liquidity of at least $75 million. The Credit Agreement also contains events of default customary for financings of this type, including certain customary change of control events. ~~Despite the economic uncertainty caused by the COVID-19 pandemic, we anticipate maintaining our compliance with all Credit Agreement covenants for the foreseeable future.~~ As of ~~March~~December 31, 2020, we were in compliance with ~~the~~all Credit Agreement covenants.

Item 2. Management’s Discussion and An~~alysis~~Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated ~~and Combined~~ Financial Statements, and the related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q ~~or Quarterly Report,~~(“Form 10-Q”), and our consolidated and combined financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended September 30, ~~2019,~~2020, filed with the Securities and Exchange Commission ~~or SEC,~~(“SEC”) on ~~December~~November 19, ~~2019.~~2020. Some of the information contained in this discussion and analysis or elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, our performance and future success, and the impact of the COVID-19 pandemic on our business, results of operations and financial condition, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Concerning Forward-Looking Statements.” You should review the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, ~~2019,~~2020, as updated by Part II, Item 1A of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Note that the results of operations for the three ~~and six~~ months ended ~~March~~December 31, 2020are not necessarily indicative of what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Cerence” and the “Company” refer to Cerence Inc. and its consolidated subsidiaries, collectively.

~~Cerence builds~~We build automotive cognitive assistance solutions to power natural and intuitive interactions between automobiles, drivers and passengers, and the broader digital world. We possess one of the world’s most popular software platforms for building automotive virtual assistants. Our customers include all major OEMs or their tier 1 suppliers worldwide. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users. Our vision is to enable a more enjoyable, safer journey for everyone.

Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information and take action across an expanding variety of categories. Our software platform has a hybrid architecture combining edge software components with cloud-connected components. Edge software components are installed on a vehicle’s head unit and can operate without access to external networks and information. Cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-enabled personalization and context-based response frameworks, and content integration platform.

As the full impact of the ~~COVID-19~~COVID-19 pandemic on our business continues to develop, we are ~~actively~~closely monitoring the global situation. ~~As a premier supplier to the automotive industry, we expect to be adversely impacted by the decline in automotive production and shipments due to the temporary shutdown of our customers’ factories.~~ We are unable at this time to predict the full impact of COVID-19 on our operations, liquidity, and financial results, and, depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material. We expect to see a material impact to our billings and revenue recognized from license and connected services, earnings and cash flows due to the COVID-19 pandemic in the second half of fiscal 2020, which may also continue beyond fiscal 2020. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, these measures have impacted, and may continue to impact, our business, as well as our customers and consumers. ~~Given~~For further discussion of the ~~level of volatility and uncertainty surrounding the future impact of~~business risks associated with COVID-19, ~~on the global economy, automotive industry and~~see Item 1A, Risk Factors, within our ~~business, we have withdrawn our previously issued fiscal~~Fiscal 2020 ~~guidance.~~

We have taken numerous steps, and plan to continue to take further actions, in our approach to addressing the COVID-19 pandemic. We have shifted a portion of our R&D and engineering workforces to support our professional service teams and their successful completion of customer project milestones to help mitigate the anticipated decline in revenues. We reduced expenses by limiting discretionary spending, reducing third-party contractors, deferring the hiring of new employees and implementing a reduction in our workforce. In order to further conserve cash outflows, we implemented temporary reductions in salaries for our current named executive officers and other senior executives.

We implemented our business continuity plans and our crisis response team is in place to respond to changes in our environment. We instructed employees across 18 different countries and 24 office locations to work from home on a temporary basis in accordance with local, state, and national guidelines. Given our investment in web-based applications and tools, we have

~~experienced minimal declines in workforce efficiency to date as a result of employees working remotely. In addition, we have instituted strict restrictions on travel for all employees.~~Form 10-K.

~~Fiscal~~The financial information presented in the accompanying unaudited condensed consolidated financial statements has been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The condensed consolidated balance sheet data as of September 30, 2020 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair presentation of our financial position and results of operations. The operating results for the three months ended December 31, 2020 are not necessarily indicative of the results expected for the full year ending September 30, 2021.

The accompanying unaudited condensed consolidated financial statements ~~at and for the three and six months ended March 31, 2020~~ include the accounts of the Company, as well as those of its wholly owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.

All prior period information is presented on a combined basis. The accompanying combined financial statements at and for the three and six months ended March 31, 2019 have been derived from Nuance’s historical accounting records and are presented on a “carve out” basis to include the historical financial position, results of operations and cash flows applicable to the Cerence business.

Cerence was spun off from Nuance, a leading provider of speech and language solutions for businesses and consumers around the world. The preparation of these financial statements required considerable judgment and reflect significant assumptions and allocations that we believe are reasonable. The prior period financial statements reflect the combined historical results of operations, financial position, and cash flows of the Cerence business in conformity with GAAP. The combined financial statements include certain assets and liabilities that have historically been held at the corporate level of Nuance, but are allocable to Cerence. Nuance provided certain services such as legal, accounting, information technology, human resources, treasury and other infrastructure support on our behalf. The cost of these services has been allocated to us based on various financial measures that we determined to most closely align with each service.Key Metrics

Following our Spin-Off, we incurred expenditures relating to the start-up of our own standalone corporate functions and information technology systems, reorganizing and hiring new employees, and other transactional related costs. We are also publicly traded on Nasdaq, which requires us to incur costs to establish public company functions such as internal audit, financial reporting, and investor relations. Additionally, we incurred costs for Nasdaq listing fees, compensation of our newly-formed Board, public company insurance, external audit, and external legal counsel.

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

For the three months ended ~~March~~December 31, 2020 as compared to the three months ended ~~March~~December 31, 2019:

•Cash ~~used in~~provided by operating activities was ~~$10.2~~$10.8 million, ~~a decreased~~an increase of ~~$35.7~~$1.3 million from cash provided by operating ~~activities.~~activities of $9.5 million.

~~For the six months ended March 31, 2020 as compared to the six months ended March 31, 2019:~~

~~Total revenue increased by $21.2 million, or 14.8%, to $164.0 million from $142.8 million.~~

~~Operating margin increased 4.0 percentage points to 6.0% from 2.1%.~~

~~Cash used in operating activities was $0.7 million, a decreased by $43.0 million from cash provided by operating activities.~~

Operating Results

The following table shows the condensed consolidated statement of operations for the three ~~and six~~ months ended ~~March~~December 31, 2020 and ~~the combined statement of operations for the three and six months ended March 31,~~ 2019 (dollars in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,					Three Months Ended December 31,
	2020			2019			2020			2019		2020			2019
Revenue:
License	$	44,622		$	39,324		$	85,389		$	83,326	$	46,414		$	40,767
Connected services		23,131			18,858			46,152			36,113		27,251			23,021
Professional services		18,742			12,122			32,413			23,349		21,299			13,671
Total revenues		86,495			70,304			163,954			142,788		94,964			77,459
Cost of Revenue:
Cost of revenue:
License		843			567			1,524			907		674			681
Connected services		8,876			9,130			17,551			20,359		7,013			8,675
Professional services		16,753			12,726			31,244			23,189		17,315			14,491
Amortization of intangibles		2,258			2,021			4,345			4,196		1,879			2,087
Total cost of revenues		28,730			24,444			54,664			48,651		26,881			25,934
Gross Profit		57,765			45,860			109,290			94,137
Operating Expenses:
Gross profit													68,083			51,525
Operating expenses:
Research and development		21,346			22,561			44,857			46,369		24,091			23,511
Sales and marketing		7,706			9,799			15,649			19,244		8,898			7,943
General and administrative		10,712			5,689			22,195			11,410		11,617			11,483
Amortization of intangible assets		3,125			3,132			6,256			6,264		3,158			3,131
Restructuring and other costs, net		2,870			4,329			10,424			7,456		47			7,554
Acquisition-related costs		—			182			—			417
Total operating expenses		45,759			45,692			99,381			91,160		47,811			53,622
Income from operations		12,006			168			9,909			2,977
Income (loss) from operations													20,272			(2,097	)
Interest income		244			—			525			—		18			281
Interest expense		(6,699	)		—			(13,497	)		—		(3,799	)		(6,798	)
Other income (expense), net		226			266			80			250		(2,237	)		(146	)
Income (loss) before income taxes		5,777			434			(2,983	)		3,227		14,254			(8,760	)
(Benefit from) provision for income taxes		(6,718	)		(20	)		(3,716	)		518		(7,384	)		3,002
Net income	$	12,495		$	454		$	733		$	2,709
Net income (loss)												$	21,638		$	(11,762	)

Our revenue consists primarily of license revenue, connected services revenue and revenue from professional services. License revenue primarily consists of license royalties associated with our edge software components, with costs of license revenue primarily consisting of third-party royalty expenses for certain external technologies we leverage. Connected services revenue represents the subscription fee that provides access to our connected services components, including the customization and construction of our connected services solutions. Cost of connected service revenue primarily consists of labor costs of software delivery services, infrastructure, and communications fees that support our connected services solutions. Professional services revenue is primarily comprised of porting, integrating, and customizing our embedded solutions, with costs primarily consisting of compensation for services personnel, contractors and overhead.

Our operating expenses include R&D, sales and marketing and general and administrative expenses. R&D expenses primarily consist of salaries, benefits, and overhead relating to research and engineering staff. Sales and marketing expenses includes salaries, benefits, and commissions related to our sales, product marketing, product management, and business unit management teams. General and administrative expenses primarily consist of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for ~~doubtful accounts.~~credit losses.

Amortization of acquired patents and core technology are included within cost of revenues whereas the amortization of other intangible assets, such as acquired customer relationships, trade names and trademarks, are included within operating expenses. Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives.

Restructuring and other costs, net include restructuring expenses as well as other charges that are ~~costs related to reorganizing~~unusual in nature, are the result of unplanned events, and arise outside the ordinary course of our business, including costs associated with employee severance, closing and opening facilities, terminating contracts, and separation costs related to establishing the Cerence business as a standalone public company.

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

Total other expense, net consists primarily of foreign exchange gains (losses), losses on the extinguishment of debt and interest expense related to the Existing Facilities, Notes, and Senior ~~Facilities entered into on October 1, 2019.~~Credit Facilities.

Three Months Ended ~~March~~December 31, 2020 Compared with Three Months Ended ~~March~~December 31, 2019

The following table shows total revenues by product type, including the corresponding percentage change, for the three months ended ~~March~~December 31, 2020 and 2019 (dollars in thousands):

	Three Months Ended March 31,						% Change			Three Months Ended December 31,						% Change
	2020		% of Total	2019		% of Total	2020 vs. 2019			2020		% of Total	2019		% of Total	2020 vs. 2019
License	$	44,622	52%	$	39,324	56%		13	%	$	46,414	48.9%	$	40,767	52.6%		13.9	%
Connected services		23,131	27%		18,858	27%		23	%		27,251	28.7%		23,021	29.7%		18.4	%
Professional services		18,742	22%		12,122	17%		55	%		21,299	22.4%		13,671	17.6%		55.8	%
Total revenues	$	86,495		$	70,304			23	%	$	94,964		$	77,459			22.6	%

Total revenues for the three months ended ~~March~~December 31, 2020 were ~~$86.5~~$95.0 million, an increase of ~~$16.2~~$17.5 million, or ~~23%~~22.6%, from ~~$70.3~~$77.5 million for the three months ended ~~March~~December 31, 2019. ~~This growth was primarily driven by increased demand for our connected and professional services. As a result of the COVID-19 pandemic, we anticipate our license and connected services~~The increase in revenues ~~to be negatively impacted during the second half of fiscal 2020.~~occurred across all product types.

License revenue for the three months ended ~~March~~December 31, 2020 was ~~$44.6~~$46.4 million, an increase of ~~$5.3~~$5.6 million, or ~~13.5%~~13.9%, from ~~$39.3~~$40.8 million for the three months ended ~~March~~December 31, 2019. The increase in license revenue was ~~driven by new royalty deals in~~primarily due to higher volume of licensing royalties as the ~~quarter, partly offset by decreases in reported royalties~~global auto industry recovered from ~~ongoing royalty agreements.~~the COVID-19 pandemic and OEMs increased production. As a percentage of total ~~revenue,~~revenues, license revenue decreased by ~~4.3~~3.7 percentage points from ~~55.9%~~52.6% for the three months ended ~~March~~December 31, 2019 to ~~51.6%~~48.9% for the three months ended ~~March~~December 31, 2020.

Connected services revenue for the three months ended ~~March~~December 31, 2020 was ~~$23.1~~$27.3 million, an increase of $4.3 million, or ~~22.7%~~18.4%, from ~~$18.9~~$23.0 million for the three months ended ~~March~~December 31, 2019. This increase was primarily driven by greater demand for our connected services solutions as our customers increasingly deploy hybrid solutions. As a percentage of total ~~revenue,~~revenues, connected

services revenue ~~increased~~decreased by ~~0.1~~1.0 percentage ~~points~~point from ~~26.8%~~29.7% for the three months ended ~~March~~December 31, 2019 to ~~26.7%~~28.7% for the three months ended ~~March~~December 31, 2020.

Professional service revenue for the three months ended ~~March~~December 31, 2020 was ~~$18.7~~$21.3 million, an increase of ~~$6.6~~$7.6 million, or ~~54.6%~~55.8%, from ~~$12.1~~$13.7 million for the three months ended ~~March~~December 31, 2019. This increase was primarily driven by our continued focus on integration and customization services related to our edge ~~software.~~software and timing of services rendered. As a percentage of total ~~revenue,~~revenues, professional services revenue increased by ~~4.4~~4.8 percentage points from ~~17.2%~~17.6% for the three months ended ~~March~~December 31, 2019 to ~~21.7%~~22.4% for the three months ended March 31, 2020. In response to the COVID-19 pandemic, we plan to continue our focus on professional service revenues streams during the second half of fiscal 2020 in an effort to help mitigate anticipated declines in license revenues.

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

~~The following table shows total revenues by product type, including the corresponding percentage change, for the six months ended March 31, 2020 and 2019 (dollars in thousands):~~

Total revenues for the six months ended March 31, 2020 were $164.0 million, an increase of $21.2 million, or 14.8%, from $142.8 million for the six months ended March 31, 2019. This growth was primarily driven by increased demand for our connected and professional services. As a result of the COVID-19 pandemic, we anticipate our license and connected services revenues will be negatively impacted during the second half of fiscal 2020.

License revenue for the six months ended March 31, 2020 was $85.4 million, an increase of $2.1 million, or 2.5%, from $83.3 million for the six months ended March 31, 2019. The increase in license revenue was driven by new royalty deals, partly offset by decreases in reported royalties from ongoing royalty agreements. As a percentage of total revenue, license revenue decreased by 6.3 percentage points from 58.4% for the six months ended March 31, 2019 to 52.1% for the six months ended MarchDecember 31, 2020.

Connected services revenue for the six months ended March 31, 2020 was $46.2 million, an increase of $10.0 million, or 27.8%, from $36.1 million for the six months ended March 31, 2019. This increase was primarily driven by greater demand for our connected services solutions as our customers increasingly deploy hybrid solutions. As a percentage of total revenue, connected services revenue increased by 2.9 percentage points from 25.3% for the six months ended March 31, 2019 to 28.1% for the six months ended March 31, 2020.

Professional service revenue for the six months ended March 31, 2020 was $32.4 million, an increase of $9.1 million, or 38.8%, from $23.3 million for the six months ended March 31, 2019. This increase was primarily driven by our focus on integration and customization services related to our edge software. As a percentage of total revenue, professional services revenue increased by 3.4 percentage points from 16.4% for the six months ended March 31, 2019 to 19.8% for the six months ended March 31, 2020. In

response to the COVID-19 pandemic, we plan to continue our focus on professional service revenues streams during the second half of fiscal 2020 in an effort to help mitigate any anticipated declines in license revenues.

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

The following table shows total cost of revenues by product type and the corresponding percentage change (dollars in thousands):

	Three Months Ended March 31,				% Change			Three Months Ended December 31,				% Change
	2020		2019		2020 vs. 2019			2020		2019		2020 vs. 2019
License	$	843	$	567		49	%	$	674	$	681		(1.0	)%
Connected services		8,876		9,130		(3	)%		7,013		8,675		(19.2	)%
Professional services		16,753		12,726		32	%		17,315		14,491		19.5	%
Amortization of intangibles		2,258		2,021		12	%		1,879		2,087		(10.0	)%
Total cost of revenues	$	28,730	$	24,444		18	%	$	26,881	$	25,934		3.7	%

The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):

	Three Months Ended March 31,						% Change			Three Months Ended December 31,						% Change
	2020			2019			2020 vs. 2019			2020			2019			2020 vs. 2019
License	$	43,779		$	38,757			13	%	$	45,740		$	40,086			14.1	%
Connected services		14,255			9,728			47	%		20,238			14,346			41.1	%
Professional services		1,989			(604	)		429	%		3,984			(820	)		585.9	%
Amortization of intangibles		(2,258	)		(2,021	)		(12	)%		(1,879	)		(2,087	)		10.0	%
Total gross profit	$	57,765		$	45,860			26	%	$	68,083		$	51,525			32.1	%

Total cost of revenues for the three months ended ~~March~~December 31, 2020 were ~~$28.7~~$26.9 million, an increase of ~~$4.3~~$1.0 million, or ~~17.5%~~3.7%, from ~~$24.4~~$25.9 million for the three months ended ~~March~~December 31, 2019. The increase in cost of revenues resulted primarily from our investments in professional services staff to meet customer program demands.

We experienced an increase in total gross profit of ~~$11.9~~$16.6 million, or ~~26.0%~~32.1%, from ~~$45.9~~$51.5 million for the three months ended ~~March~~December 31, 2019 to ~~$57.8~~$68.1 million for the three months ended ~~March~~December 31, ~~2020,~~2020. The increase occurred across all product types, which was primarily driven by increased demand for our connected services solutions and ~~an improvement in margins related to~~ professional services.

Cost of license revenue was relatively flat at $0.7 million for each of the three months ended ~~March~~December 31, 2020 ~~was $0.8 million, an increase of $0.3 million, or 48.7%, from $0.6 million for the three months ended March 31,~~and 2019. ~~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,~~revenues, cost of license revenue ~~increased~~decreased by ~~0.6~~0.1 percentage points from ~~2.3%~~2.6% for the three months ended ~~March~~December 31, 2019 to ~~2.9%~~2.5% for the three months ended ~~March~~December 31, 2020.

License gross profit increased by ~~$5.0~~$5.7 million, or ~~13.0%~~14.1%, for the three months ended ~~March~~December 31, 2020 when compared to the three months ended ~~March~~December 31, 2019, primarily ~~because costs associated with~~due to increases in license ~~royalties are minimal.~~revenue on relatively flat costs.

Cost of connected services revenue for the three months ended ~~March~~December 31, 2020 was ~~$8.9~~$7.0 million, a decrease of ~~$0.3~~$1.7 million, or ~~2.8%~~19.2%, from ~~$9.1~~$8.7 million for the three months ended ~~March~~December 31, 2019. Cost of connected services revenue decreased primarily asdue to a ~~result of lower allocated labor~~$0.5 million decrease in our cloud infrastructure costs, ~~of software delivery services, which decreased $1.0 million. The~~$0.4 million decrease ~~was partially offset by increases~~ in ~~third-party contractors expenses, which increased $0.7 million.~~outside contractor costs, and $0.3 million decrease in depreciation costs. As a percentage of total cost of ~~revenue,~~revenues, cost of connected service revenue decreased by ~~6.5~~ 7.4

percentage points from ~~37.4%~~33.5% for the three months ended ~~March~~December 31, 2019 to ~~30.9%~~26.1% for the three months ended ~~March~~December 31, 2020.

Connected services gross profit increased ~~$4.5~~$5.9 million, or ~~46.5%~~41.1%, from ~~$9.7 million for the three months ended March 31, 2019 to~~ $14.3 million for the three months ended ~~March~~December 31, 2019 to $20.2 million for the three months ended December 31, 2020, ~~which was primarily due to connected services~~driven by continued revenue growth ~~on relatively fixed cloud infrastructure~~ and ~~employee costs.~~cost savings initiatives.

Cost of professional services revenue for the three months ended ~~March~~December 31, 2020 was ~~$16.8~~$17.3 million, an increase of ~~$4.0~~$2.8 million, or ~~31.6%~~19.5%, from ~~$12.7~~$14.5 million for the three months ended ~~March~~December 31, 2019. Cost of professional services revenue increased primarily due to ~~investments~~a $2.0 million increase in ~~professional services staff to meet customer program demands. Investments included increases~~project labor costs, $0.4 million increase in contractor costs, ~~related to third-party contractors of $2.5~~and $0.4 million ~~and salary-related expenses of $1.5 million.~~increase in stock-based compensation. As a percentage of total cost of ~~revenue,~~revenues, cost of professional services revenue increased by ~~6.3~~8.5 percentage points from ~~52.1%~~55.9% for the three months ended ~~March~~December 31, 2019 to ~~58.3%~~64.4% for the three months ended ~~March~~December 31, 2020.

Professional services gross profit increased ~~$2.6~~$4.8 million, or ~~429.3%~~585.9%, from negative ~~$0.6~~$0.8 million for the three months ended ~~March~~December 31, 2019 to ~~$2.0~~$4.0 million for the three months ended ~~March~~December 31, 2020, which was due to ~~an increased focus on improving professional service margins.~~

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

~~The following table shows total cost of revenues by product type and~~ the ~~corresponding percentage change (dollars in thousands):~~

~~The following table shows total gross profit by product type and the corresponding percentage change (dollars in thousands):~~

Total cost of revenues for the six months ended March 31, 2020 were $54.7 million, an increase of $6.0 million, or 12.4%, from $48.7 million for the six months ended March 31, 2019. The increase in cost of revenues resulted primarily from our investmentsgrowth in professional services ~~staff~~revenues in relation to ~~meet customer program demands.~~

We experienced an increase in total gross profit of $15.2 million, or 16.1%, from $94.1 million for the six months ended March 31, 2019 to $109.3 million for the six months ended March 31, 2020, which was primarily driven by increased demand for our connected services solutions.

Cost of license revenue for the six months ended March 31, 2020 was $1.5 million, an increase of $0.6 million, or 68.0%, from $0.9 million for the six months ended March 31, 2019. 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 1.9% for the six months ended March 31, 2019 to 2.8% for the six months ended March 31, 2020.

~~License gross profit increased by $1.4 million, or 1.8%, for the six months ended March 31, 2020 primarily because costs associated with license royalties are minimal.~~

Cost of connected services revenue for the six months ended March 31, 2020 was $17.6 million, a decrease of $2.8 million, or 13.8%, from $20.4 million for the six months ended March 31, 2019. Cost of connected services revenue decreased primarily as a result of lower allocated laborincreasing costs. As a percentage of total cost of revenue, cost of connected service revenue decreased by 9.7 percentage points from 41.8% for the six months ended March 31, 2019 to 32.1% for the six months ended March 31, 2020.

Connected services gross profit increased $12.8 million, or 81.5%, from $15.8 million for the six months ended March 31, 2019 to $28.6 million for the six months ended March 31, 2020, which was primarily due to connected services revenue growth on relatively fixed cloud infrastructure and employee costs.

Cost of professional services revenue for the six months ended March 31, 2020 was $31.2 million, an increase of $8.1 million, or 34.7%, from $23.2 million for the six months ended March 31, 2019. Cost of professional services revenue increased primarily due to investments in professional services staff to meet customer program demands. Investments included increases in third-party contractors costs of $3.7 million, salary-related expenses of $3.2 million, and stock-based compensation expense of $0.8 million. As a percentage of total cost of revenue, cost of professional services revenue increased by 9.5 percentage points from 47.7% for the six months ended March 31, 2019 to 57.2% for the six months ended March 31, 2020.

Professional services gross profit increased $1.0 million, or 630.6%, from $0.2 million for the six months ended March 31, 2019 to $1.2 million for the six months ended March 31, 2020, which was primarily due to our focus on improving professional services margin.

The tables below show each component of operating expense. Total other income (expense), net and provision for income taxes are non-operating expenses and presented in a similar format (dollars in thousands).

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies. R&D expenses for the three months ended ~~March~~December 31, 2020 were ~~$21.3~~$24.1 million, ~~a decrease~~an increase of ~~$1.2~~$0.6 million, or ~~5.4%~~2.5%, from ~~$22.6~~$23.5 million for the three months ended ~~March~~December 31, 2019. The increase in R&D ~~expense decreased~~expenses was primarily attributable to a $1.2 million increase in contractor costs and a $1.1 million increase in stock-based compensation. The increase was partly offset by a reduction in expenditures, including $1.0 million of labor allocated to support customer projects and a $0.3 million reduction related to travel-related expenditures as a result of ~~lower stock-based compensation expense related to R&D staff.~~COVID-19. As a percentage of total operating expenses, R&D expenses ~~decreased~~increased by ~~2.7~~6.6 percentage points from ~~49.4%~~43.8% for the three months ended ~~March~~December 31, 2019 to ~~46.6%~~50.4% for the three months ended ~~March~~December 31, 2020. In response to the COVID-19 pandemic, we plan to shift a portion of our R&D workforce to support our professional service teams, which we anticipate will lead to a decline in R&D expenses during the second half of fiscal 2020.

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

R&D expenses for the six months ended March 31, 2020 were $44.9 million, a decrease of $1.5 million, or 3.3%, from $46.4 million for the six months ended March 31, 2019. R&D expense decreased primarily as a result of lower stock-based compensation expense related to R&D staff. As a percentage of total operating expenses, R&D expenses decreased by 5.7 percentage points from

50.9% for the six months ended March 31, 2019 to 45.1% for the six months ended March 31, 2020. In response to the COVID-19 pandemic, we plan to shift a portion of our R&D workforce to support our professional service teams, which we anticipate will lead to a decline in R&D expenses during the second half of fiscal 2020.

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

Sales and marketing expenses for the three months ended ~~March~~December 31, 2020 were ~~$7.7~~$8.9 million, ~~a decrease~~an increase of ~~$2.1~~$1.0 million, or ~~21.4%~~12.0%, from ~~$9.8~~$7.9 million for the three months ended ~~March~~December 31, 2019. ~~Sales~~The increase in sales and marketing expenses ~~decreased~~was primarily attributable to higher compensation related expenses of $1.0 million and stock-based compensation of $0.9 million. The increase was partly offset by a reduction of $0.9 million in travel-related expenditures as a result of ~~lower sales quota attainment, which decreased $1.5 million, and marketing staff levels, which decreased $0.6 million.~~COVID-19. As a percentage of total operating expenses, sales and marketing expenses ~~decreased~~increased by ~~4.6~~3.8 percentage points from ~~21.4%~~14.8% for the three months ended ~~March~~December 31, 2019 to ~~16.8%~~18.6% for the three months ended ~~March 31, 2020.~~

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

Sales and marketing expenses for the six months ended March 31, 2020 were $15.6 million, a decrease of $3.6 million, or 18.7%, from $19.2 million for the six months ended March 31, 2019. Sales and marketing expenses decreased primarily as a result of lower sales quota attainment, which decreased $2.0 million, and marketing staff levels, which decreased $1.6 million. As a percentage of total operating expenses, sales and marketing expenses decreased by 5.4 percentage points from 21.1% for the six months ended March 31, 2019 to 15.7% for the six months ended MarchDecember 31, 2020.

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

General and administrative expenses for the three months ended ~~March~~December 31, 2020 were ~~$10.7~~$11.6 million, an increase of ~~$5.0~~$0.1 million, or ~~88.3%~~1.2%, from ~~$5.7~~$11.5 million for the three months ended ~~March~~December 31, 2019. The increase in general and administrative expenses was primarily attributable to ~~salaries~~higher compensation-related expenses ~~which increased $2.7~~of $0.4 million and stock-based compensation ~~expense, which increased $1.1~~of $0.9 million. The increase was partly offset by a $0.9 million ~~software fees, which increased $0.8 million, and bad debt allowances, which increased $0.4 million.~~decrease in contractor costs. As a percentage of total operating expenses, general and administrative expenses increased by ~~11.0~~2.9 percentage points from ~~12.5%~~21.4% for the three months ended ~~March~~December 31, 2019 to ~~23.4%~~24.3% for the three months ended ~~March 31, 2020.~~

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

General and administrative expenses for the six months ended March 31, 2020 were $22.2 million, an increase of $10.8 million, or 94.5% from $11.4 million for the six months ended March 31, 2019. The increase in general and administrative expenses was primarily attributable to salaries expenses, which increased $4.7 million, stock-based compensation expense, which increased $2.9 million, professional services, which increased $2.7 million, and bad debt allowances, which increased $0.4 million. As a percentage of total operating expenses, general and administrative expenses increased by 9.8 percentage points from 12.5% for the six months ended March 31, 2019 to 22.3% for the six months ended MarchDecember 31, 2020.

	Three Months Ended March 31,				% Change			Three Months Ended December 31,				% Change
	2020		2019		2020 vs. 2019			2020		2019		2020 vs. 2019
Cost of revenues	$	2,258	$	2,021		12	%	$	1,879	$	2,087		(10.0	)%
Operating expense		3,125		3,132		(0	)%		3,158		3,131		0.9	%
Total amortization	$	5,383	$	5,153		4	%	$	5,037	$	5,218		(3.5	)%

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

Intangible asset amortization for the three months ended ~~March~~December 31, 2020 was ~~$5.4~~$5.0 million, ~~an increase~~a decrease of $0.2 million, or ~~4.5%~~3.5%, from $5.2 million for the three months ended ~~March~~December 31, 2019. Amortization expense for acquired technology and patents is included in the cost of ~~revenue~~revenues in the accompanying condensed consolidated ~~and combined~~ statements of operations. Amortization expense for customer relationships is included in operating expenses in the accompanying condensed consolidated ~~and combined~~ statements of operations. The ~~increase~~decrease primarily relates to ~~the composition of~~certain intangible assets ~~allocated to the Cerence business prior to the Spin-Off.~~having been fully amortized during fiscal year 2020.

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by ~~0.4~~1.0 percentage ~~points~~point from ~~8.3%~~8.0% for the three months ended ~~March~~December 31, 2019 to ~~7.9%~~7.0% for the three months ended ~~March~~December 31, 2020. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses ~~was relatively flat at 6.9%~~increased by 0.8 percentage points from 5.8% for the three months ended ~~March~~December 31, 2019 as compared to ~~6.8%~~6.6% for the three months ended ~~March 31, 2020.~~

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

Intangible asset amortization for the six months ended March 31, 2020 was $10.6 million, an increase of $0.1 million, or 1.3%, from $10.5 million for the six months ended March 31, 2019. The increase primarily relates to the composition of intangible assets allocated to the Cerence business prior to the Spin-Off.

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.7 percentage points from 8.6% for the six months ended March 31, 2019 to 7.9% for the six months ended March 31, 2020. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses decreased by 0.6 percentage points from 6.9% for the six months ended March 31, 2019 to 6.3% for the six months ended MarchDecember 31, 2020.

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

Restructuring and other costs, net for the three months ended ~~March~~December 31, 2020 were ~~$2.9~~$0.0 million, a decrease of ~~$1.5~~$7.5 million, or ~~33.7%~~99.4%, from ~~$4.3~~$7.6 million for the three months ended ~~March~~December 31, 2019. The decrease in restructuring and other costs, net iswas primarily attributed to the winding down of costs to establish the Cerence business as a standalone public company during the three months ended ~~March~~December 31, 2020. As a percentage of total operating ~~expense,~~expenses, restructuring and other costs, net decreased by ~~3.2~~14.0 percentage points from ~~9.5%~~14.1% for the three months ended ~~March~~December 31, 2019 to ~~6.3%~~0.1% for the three months ended ~~March 31, 2020.~~

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

Restructuring and other costs, net for the six months ended March 31, 2020 were $10.4 million, an increase of $3.0 million, or 39.8%, from $7.5 million for the six months ended March 31, 2019. Restructuring and other costs, net increased primarily due to costs incurred to establish the Cerence business as a standalone public company. As a percentage of total operating expense, restructuring and other costs, net increased by 2.3 percentage points from 8.2% for the six months ended March 31, 2019 to 10.5% for the six months ended March 31, 2020.

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

There were no acquisition-related costs for the three months ended March 31, 2020, a decrease of $0.2 million, from $0.2 million for the three months ended March 31, 2019. Acquisition costs in the prior period related to integration, legal, and other professional fees incurred resulting from the acquisition of Voicebox on April 2, 2018. We did not have any acquisition activities in the three months ended March 31, 2020. As a percentage of total operating expense, acquisition-related costs decreased by 0.4 percentage points from 0.4% for the three months ended March 31, 2019 to 0.0% for the three months ended March 31, 2020.

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

There were no acquisition-related costs for the six months ended March 31, 2020, a decrease of $0.4 million, from $0.4 million for the six months ended March 31, 2019. Acquisition costs in the prior period related to integration, legal, and other professional fees incurred resulting from the acquisition of Voicebox on April 2, 2018. We did not have any acquisition activities in the six months ended March 31, 2020. As a percentage of total operating expense, acquisition-related costs decreased by 0.5 percentage points from 0.5% for the six months ended March 31, 2019 to 0.0% for the six months ended MarchDecember 31, 2020.

	Three Months Ended March 31,					% Change			Three Months Ended December 31,						% Change
	2020			2019		2020 vs. 2019			2020			2019			2020 vs. 2019
Interest income	$	244		$	-		100	%	$	18		$	281			(93.6	)%
Interest expense		(6,699	)		-		(100	)%		(3,799	)		(6,798	)		(44.1	)%
Other income (expense), net		226			266		(15	)%		(2,237	)		(146	)		1432.2	%
Total other expense, net	$	(6,229	)	$	266		(2442	)%	$	(6,018	)	$	(6,663	)		(9.7	)%

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

Total other expense, net for the three months ended ~~March~~December 31, 2020 was expense of ~~$6.2~~$6.0 million, ~~an increase~~a decrease of ~~$6.5~~$0.7 million from ~~$0.3~~$6.7 million of income for the three months ended ~~March~~December 31, 2019. The ~~increase over~~decrease in interest expense from the prior year was primarily ~~due~~attributable to lower applicable interest ~~expense~~rates related to our outstanding borrowing obligations during the ~~Senior Facilities entered into on October 1, 2019.~~three months ended December 31, 2020. For further information, see “Liquidity and Capital ~~Resources – Senior Facilities”~~Resources” below.

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

~~Total other expense, net for the six months ended March 31, 2020 was expense of $12.9 million, an increase of $13.1 million from $0.3 million of income for the six months ended March 31, 2019.~~ The increase ~~over the prior year~~in other income (expense), net was primarily ~~due~~attributable to ~~interest expense related to~~foreign exchange losses from the ~~Senior Facilities entered into on October 1, 2019.~~strengthening of the Euro against the U.S. dollar.

	Three Months Ended March 31,						% Change			Three Months Ended December 31,						% Change
	2020			2019			2020 vs. 2019			2020			2019			2020 vs. 2019
Benefit from income taxes	$	(6,718	)	$	(20	)		33490	%
(Benefit from) provision for income taxes										$	(7,384	)	$	3,002			(346.0	)%
Effective income tax rate%		(116.3	)%		(4.6	)%					(51.8	)%		(34.3	)%

~~Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019~~

Our effective income tax rate for the three months ended ~~March~~December 31, 2020 was ~~(116.3)%~~negative 51.8%, compared to ~~(4.6)%~~negative 34.3% for the three months ended ~~March~~December 31, 2019. Consequently, our benefit from income taxes for the three months ended ~~March~~December 31, 2020 was ~~$6.7~~$7.4 million, a net change of ~~$6.7~~$10.4 million from a benefit from income taxes of $0.02 million for the three months ended March 31, 2019. The effective tax rate for the three months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of jurisdictional earnings and U.S. inclusions of foreign taxable income as a result of 2017 tax law changes. The effective tax rate for the three months ended March 31, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to our earnings in foreign jurisdictions.

~~Six Months Ended March 31, 2020 Compared with Six Months Ended March 31, 2019~~

Our effective income tax rate for the six months ended March 31, 2020 was 124.6%, compared to 16.1% for the six months ended March 31, 2019. Consequently, our benefit from income taxes for the six months ended March 31, 2020 was $3.7 million, a net change of $4.2 million, or 817.4%, from a provision for income taxes of ~~$0.5~~$3.0 million for the ~~six~~three months ended ~~March~~December 31, 2019. ~~The effective~~This difference was attributable to a $15.8 million tax rate for the six months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to our composition of jurisdictional earnings, U.S. inclusions of foreign taxable incomebenefit recorded as a result of ~~2017~~an increase to the enacted Netherlands tax ~~law changes,~~rate in the first quarter of fiscal 2021 and ~~an income~~the realization of a $2.6 million tax benefit ~~of approximately~~related to stock-based compensation in the period. This compares to a $5.0 million ~~related~~tax benefit realized during the three months ended December 31, 2019, which was the result of a previous change to ~~an increase in tax rates in~~ the Netherlands enacted ~~in the first quarter. The effective~~ tax ~~rate for the six months ended March 31, 2019 differed from the U.S. federal statutory rate of 21.0% primarily due to our earnings in foreign jurisdictions.~~rate.

Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding in the capital markets as needed. ~~Upon the Distribution, Nuance allocated $110.0 million in cash and cash equivalents to the Cerence business, which was adequate to meet the short-term net working capital needs~~As of ~~our business at the close of the Distribution. More specifically, as of March~~December 31, 2020, net working capital of our business, excluding current deferred revenue and deferred cost, was ~~$139.5~~$162.1 million. This balance is representative of the short-term net cash inflows based on the working capital at that date. Based on the history of the Cerence business generating positive cash flows and the ~~$95.6~~$110.4 million of cash and cash equivalents as of ~~March~~December 31, 2020, we believe that we will be able to meet our liquidity needs over the next 12 months. We believe that we will meet longer-term expected future cash requirements and obligations, through a combination of cash flows from operating activities, available cash balances, and available credit via our Revolving Credit Facility. Specifically, we anticipate our cost of revenues, funding our R&D activities, and debt obligations to be our primary uses of cash during the year ending September 30, ~~2020.~~ 2021.

However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including , reducing working capital, ~~and~~ reducing operating costs by delaying research and development programs, initiating a workforce reduction, and substantially reducing discretionary ~~spending~~spending. Should we need to secure additional sources of liquidity, we believe that we could finance our needs through the issuance of equity securities or debt offerings. However, we cannot guarantee that we will be able to obtain financing through the issuance of equity securities or debt offerings on reasonable terms in the future. The COVID-19 pandemic has negatively impacted the global economy and created significant volatility and disruption of financial markets. An extended period of economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.

On ~~October 1, 2019,~~June 2, 2020, in an effort to refinance our debt structure, we ~~incurred substantial indebtedness~~issued $175.0 million in ~~the~~ aggregate principal amount of Notes, including the initial purchasers’ exercise in full of their option to purchase an additional $25.0 million principal amount of the Notes, between the Company and the Trustee, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance of the Notes were $169.8 million after deducting transaction costs. We used net proceeds from the issuance of the Notes to repay a portion of our indebtedness related to the Existing Facility.

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 ~~$270.0 million under~~$37.42 per share of our Common Stock).

The interest expense recognized related to the Notes for the three months ended December 31, 2020 was as follows (dollars in thousands):

On June 12, 2020, in connection with our effort to refinance our existing indebtedness, we entered into a Term Loan Facility. The net proceeds from the issuance of the Term Loan Facility were $123.0 million, which ~~financed~~together with proceeds from the ~~cash distribution~~Notes was

intended to ~~Nuance~~pay in full all indebtedness under the Existing Facility, and ~~provided initial support for~~paid fees and expenses in connection with the ~~cash flow needs of the Cerence business.~~Senior Credit Facilities. We also entered ~~into a $75.0 million~~ Revolving ~~Credit~~ Facility, towhich shall be drawn on in the event that our working capital and other cash needs are not supported by our operating cash ~~flow, in accordance with the terms of the Revolving Credit Facility can be drawn if our unrestricted cash is less than $85.0 million.~~flow. As of ~~March~~December 31, 2020, there were no amounts outstanding under the Revolving Facility.

On December 17, 2020 (the “Amendment No. 1 Effective Date”), we entered into Amendment No. 1 to the Credit ~~Facility.~~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 ~~Revolving Credit Facility matures 54 months after October 1, 2019, with~~Amendment revised certain ~~extension rights~~interest rates in the ~~discretion~~Credit Agreement. Following delivery of ~~each lender. The Term Loan Facility matures five years~~a compliance certificate for the first full fiscal quarter after ~~October~~the Amendment No. 1 ~~2019, with certain extension rights in~~Effective Date, the discretion of each lender. The Senior Facilities are subject to an interest rate, at our option, of either (a) a base rate determined by reference to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the federal funds effective rate, plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1% per annum, or ABR, or (b) an adjusted LIBOR rate, or LIBOR, (which may not be less than 1% per annum), in each case, plus an applicable margin. The applicable margins for the ~~Senior Facilities~~revolving credit and term facilities is subject to a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the applicable margin is LIBOR plus 3.00% or ABR plus 2.00%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the applicable margin is LIBOR plus 2.75% or ABR plus 1.75%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the applicable margin is LIBOR plus 2.50% or ABR plus 1.50%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the applicable margin is LIBOR plus 2.25% or ABR plus 1.25%; and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the applicable margin is LIBOR plus 2.20% or ABR plus 1.00%. As a result of the Amendment, the applicable LIBOR floor was reduced from 0.50% to 0.00%. From the Amendment No. 1 Effective Date until the date on which the financial statements are ~~6.00% per annum (for LIBOR loans) and 5.00% per annum (for ABR loans). Accordingly,~~delivered for the fiscal quarter ended December 31, 2020, the interest ~~rates for the Senior Facilities~~rate will ~~fluctuate during the term of the Credit Agreement based on changes in the~~be LIBOR plus 2.50% or ABR ~~or LIBOR.~~plus 1.50%. Total interest expense relating to the Senior Credit Facilities for the ~~three and six months~~fiscal quarter ended ~~March~~December 31, 2020 was ~~$6.7~~$1.4 million, ~~and $13.5 million, respectively,~~ reflecting the coupon and accretion of the discount.

WeIn addition, the quarterly commitment fee required to be paid based on the unused portion of the revolving facility is subject to a pricing grid based upon the net total leverage ratio as follows (i) if the net total leverage ratio is greater than 3.00 to 1.00, the unused line fee is 0.500%; (ii) if the net total leverage ratio is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, the unused line fee is 0.450%; (iii) if the net total leverage ratio is less than or equal to 2.50 to 1.00 but greater than 2.00 to 1.00, the unused line fee is 0.400%; (iv) if the net total leverage ratio is less than or equal to 2.00 to 1.00 but greater than 1.50 to 1.00, the unused line fee is 0.350%; and (v) if the net total leverage ratio is less than or equal to 1.50 to 1.00, the unused line fee is 0.300%.

The Amendment revised the amount by which we are obligated to make quarterly principal payments. Through the fiscal quarter ending December 31, 2022, we are obligated to make quarterly principal payments ~~on the last business day of each quarter~~ in an aggregate ~~annual~~ amount equal to ~~3.5%~~1.25% of the original principal amount of the Term Loan Facility. From the fiscal quarter ending March 31, 2023 and for each fiscal quarter thereafter, we are obligated to make quarterly principal payments in an aggregate amount equal to 2.50% of the original principal amount of the Term Loan Facility, ~~during the first two years of the Term Loan Facility, and 10% of the original principal amount of the Term Loan Facility thereafter.~~ ~~Quarterly principal payments commenced on March 31, 2020. Borrowings under the Credit Agreement~~ for the Senior Facilities are prepayable at our option without premium or penalty, subject to a 1.00% prepayment premium in connection with any repricing transaction for the Term Loan Facility in the first six months after the closing date. The Credit Agreement also contains certain mandatory prepayment provisions in the event that we incur certain types of indebtedness, receive net cash proceeds from certain non-ordinary course asset sales or other dispositions of property or generate excess cash flow, starting with the fiscal year ending on September 30, 2020, 75% of excess cash flow on an annual basis (with step-downs to 50%, 25% and 0% subject to compliance with certain net first lien leverage ratios), in each case subject to terms and conditions customary for financings of this kind.balance payable at the maturity date thereof.

The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit our and our subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, ~~enter into restrictive agreements,~~ to designate subsidiaries as unrestricted, to make certain investments, ~~loans, advances, guarantees and acquisitions~~ to prepay certain indebtedness and to pay dividends, or to make other distributions or redemptions/repurchases, in respect of usour and our subsidiaries’ equity ~~interests, to engage in transactions with affiliates or to amend certain material documents.~~interests. In addition, the ~~credit agreement~~Credit Agreement contains a financial ~~covenant requiring the maintenance of~~covenants, each tested quarterly, (1) a net ~~first lien~~secured leveraged ratio of not greater than 3.25 to 1.00; (2) a net total leverage ratio of not greater than ~~6.00~~4.25 to

~~1.00. Despite the economic uncertainty caused by the COVID-19 pandemic, we anticipate maintaining our compliance with all~~ 1.00; and (3) minimum liquidity of at least $75 million. The Credit Agreement ~~covenants~~also contains events of default customary for ~~the foreseeable future.~~financings of this type, including certain customary change of control events. As of ~~March~~December 31, 2020, we were in compliance with ~~the~~all Credit Agreement covenants.

Our obligations under the Credit Agreement are jointly and severally guaranteed by certain of our existing and future direct and indirect wholly owned domestic subsidiaries, subject to certain exceptions customary for financings of this type. All obligations of the borrowers and the guarantors are secured by certain assets of such borrowers and guarantors, including a perfected first-priority pledge of all (or, in the case of foreign subsidiaries or subsidiaries, or FSHCO, that own no material assets other than equity interests in foreign subsidiaries that are “controlled foreign corporations” or other FSHCOs, 65%) of the equity securities of each wholly owned subsidiary of Cerence held by any loan party, subject to certain customary exceptions and limitations.

Cash flows from operating, investing and financing activities for the ~~six~~three months ended ~~March~~December 31, 2020 and 2019, as reflected in the unaudited condensed consolidated ~~and combined statement~~statements of cash flows included in Item 1 of this Form 10-Q, are summarized in the following table (dollars in thousands):

	Six Months Ended March 31,						% Change			Three Months Ended December 31,						% Change
	2020			2019			2020 vs. 2019			2020			2019			2020 vs. 2019
Net cash (used in) provided by operating activities	$	(735	)	$	42,251			(102	)%
Net cash provided by operating activities										$	10,809		$	9,456			14.3	%
Net cash used in investing activities		(10,145	)		(2,472	)		310	%		(8,727	)		(3,612	)		141.6	%
Net cash provided by (used in) financing activities		106,376			(39,779	)		(367	)%
Net cash (used in) provided by financing activities											(28,779	)		107,400			(126.8	)%
Effect of foreign currency exchange rates on cash and cash equivalents		88			—			(100	)%		990			152			551.3	%
Net changes in cash and cash equivalents	$	95,584		$	—			100	%	$	(25,707	)	$	113,396			(122.7	)%

Net cash ~~used in~~provided by operating activities for the ~~six~~three months ended ~~March~~December 31, 2020 was ~~$0.7~~$10.8 million, a net ~~decrease~~increase of ~~$43.0~~$1.3 million, or ~~101.7%~~14.3%, from net cash provided by operating activities of ~~$42.3~~$9.5 million for the ~~six~~three months ended ~~March~~December 31, 2019. The net ~~decrease~~increase in ~~cashflows stems from unfavorable changes in working capital,~~cash provided by operating activities was primarily due ~~to the timing of cash receipts and payments, which increased accounts receivable by $32.3 million and prepaid expenses and other assets by $6.8 million, compared to the prior year.~~to:

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. ~~Due to~~Fluctuations in deferred revenue are not a reliable indicator of future performance and the ~~evolution of our connected offerings and architecture, trending away from providing legacy infotainment and connected services and a change in our professional services pricing strategies, we~~related revenue associated with these contractual commitments. 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 ~~contractual~~ obligations.

Net cash used in investing activities for the ~~six~~three months ended ~~March~~December 31, 2020 was ~~$10.1~~$8.7 million, an increase in cash used of ~~$7.7~~$5.1 million, or ~~310%~~141.6%, from ~~$2.5~~$3.6 million for the ~~six~~three months ended ~~March~~December 31, 2019. The increase in cash outflows ~~reflects~~were driven by the purchase of ~~property and equipment to support~~marketable securities during the ~~standalone operations of the Company.~~quarter.

Net cash used in financing activities for the three months ended December 31, 2020 was $28.8 million, a net change of $136.2 million, from cash provided by financing activities ~~for the six months ended March 31, 2020 was $106.4 million, a net increase~~ of ~~$146.2 million, from cash used in financing activities of $39.8~~$107.4 million for the ~~six~~three months ended ~~March~~December 31, 2019. The ~~increase~~change in cashflows were ~~the result of proceeds from the Credit Agreement, partly offset by related debt issuance costs, principal payments of debt and the distribution paid to Nuance.~~primarily due to:

The following table outlines our contractual payment obligations as of ~~March~~December 31, 2020 (dollars in thousands):

	Contractual Payments Due in Fiscal Year										Contractual Payments Due by Period
Contractual Obligations	2020		2021 - 2023		2024 - 2025		Thereafter		Total		2021		2022 - 2023		2024 - 2025		Thereafter		Total
Senior Facilities	$	4,725	$	63,450	$	199,463	$	-	$	267,638
Interest payable on Senior Facilities (1)		10,656		57,098		15,052		-		82,806
Notes											$	-	$	-	$	175,000	$	-	$	175,000
Interest payable on the Notes (1)												3,924		10,493		8,768		-		23,185
Senior Credit Facilities												4,688		17,188		100,000		-		121,876
Interest payable on Senior Credit Facilities (1)												2,544		6,271		3,901		-		12,716
Operating leases		3,581		14,767		6,941		-		25,289		5,850		11,557		6,537		2,999		26,943
Financing leases		91		20		-		-		111		339		832		675		15		1,861
Total contractual cash obligations	$	19,053	$	135,335	$	221,456	$	-	$	375,844	$	17,345	$	46,341	$	294,881	$	3,014	$	361,581

As of ~~March~~December 31, 2020, there were no off-balance sheet arrangements that may have a material impact on the condensed consolidated financial statements.

Our condensed consolidated ~~and combined~~ financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.

We believe that our critical accounting policies and estimates are those related to revenue ~~recognition,~~recognition; allowance for credit losses; accounting for deferred costs; accounting for internally developed software; the valuation of goodwill and intangible assets; accounting for business ~~combinations, goodwill impairment, long-lived assets with definite lives,~~combinations; accounting for stock-based ~~compensation,~~compensation; accounting for income ~~taxes~~taxes; accounting for leases; accounting for convertible debt; and loss contingencies. We believe these policies and estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for the year ended September 30, ~~2019~~2020 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” and below.

We primarily derive revenue from the following sources: (1) royalty-based software license arrangements, (2) connected services, and (3) professional services. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

See Note 3 to the accompanying unaudited condensed consolidated financial statements for further discussion of our revenue, deferred revenue performance obligations and the timing of revenue recognition.

We have operating and financing leases for facilities and certain equipment in North America, Europe, and Asia. Our lease right-of-use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases generally do not provide an implicit rate, we use our incremental borrowing rate based on the

information available at commencement date in determining the present value of future payments. An average incremental borrowing rate of 8% as of October 1, 2019, the adoption date of ASC 842, was used for our operating leases that commenced prior to that date.

Goodwill represents the excess of the purchase price in a business combination over the fair value of net assets acquired. Goodwill has been allocated to Cerence based upon its relative fair value as of March 31, 2018, when Cerence became a reporting unit of Nuance. Goodwill is reported at the reporting unit level. Upon consideration of the discrete financial information reviewed by our CODM, we have concluded that our goodwill is associated with one reporting unit.

Goodwill is not amortized but tested annually for impairment or when interim indicators of impairment are present. Upon our adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment”, the test for goodwill impairment involves an assessment of impairment indicators. If indicators are present, a quantitative test of impairment is performed. During the quantitative test, the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than the carrying value, the difference represents an impairment. If the fair value of the reporting unit is greater than the carrying value, no impairment is recognized.

~~Due to the macroeconomic conditions driven by the COVID-19 pandemic and the anticipated negative impact on our license and connected services revenues,~~December 31, 2020, we concluded that no goodwill impairment indicators ~~of impairment~~ were present as of March 31, 2020. We performed an interim assessment of goodwill and concluded that no impairment existed as the fair value of our reporting unit exceeded its carrying value as of March 31, 2020.present.

See Note 58 to the accompanying unaudited condensed consolidated financial statements for further discussion onof our goodwill.

Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements To Be Adopted

Refer to Note 2 to the accompanying unaudited condensed consolidated ~~financial statements and combined~~ financial statements for a description of certain issued accounting standards that have been recently adopted and are expected to be adopted by us and may impact our results of operations in future reporting periods.

We are exposed to market risk from changes in foreign currency exchange rates and interest rates which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities, and ~~when appropriate,~~ through the use of derivative financial instruments.

We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations.

Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has been related to transactions denominated in the Canadian dollar, Chinese yuan, Euro, ~~Indian rupee,~~and Japanese ~~yen, and Korean won. Based on~~yen.

We use foreign currency forward contracts to hedge the ~~nature~~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 $55.3 million at December 31, 2020. 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 $4.8 million at December 31, 2020. Such losses would be offset by corresponding gains in the remeasurement of the underlying transactions ~~for which our contracts are purchased, a hypothetical 10% change in exchange rates would not have a material impact on the financial position, results of operations or cash flows.~~

being hedged. We ~~have the ability to enter into~~believe these foreign currency forward exchange contracts ~~to hedge against foreign currency fluctuations~~and the offsetting underlying commitments, when ~~necessary. The Cerence business did~~taken together, do not ~~maintain any hedging instruments in any of the historical or interim periods presented in the accompanying combined financial statements.~~create material market risk.

We are exposed to interest rate risk as a result of our cash and cash equivalents and indebtedness related to the Senior Credit Facilities. ~~We are subject to~~

At December 31, 2020, we held approximately $110.2 million of cash and cash equivalents consisting of cash and money-market funds. Assuming a 1% increase in interest ~~rate risk because the~~rates, our interest income on our money-market funds classified as cash and cash equivalents would increase by $0.8 million per annum, based on December 31, 2020 reported balances.

The borrowings under our Senior Credit Facilities are subject to interest rates based on LIBOR. As of ~~March~~December 31, 2020, assuming a 1% increase in interest rates and our Revolving Facility being fully drawn, our interest expense on our Senior Credit Facilities would increase by approximately $~~3.43~~1.7 million per annum.

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended ~~or the Exchange Act,~~(the “Exchange Act”), as of the end of the period covered by this quarterly report. Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of ~~March~~December 31, 2020 to ensure that all material information required to be disclosed by us in reports that

we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the effectiveness of internal control. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

From time to time, we may become a party to other legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes, governmental inquiries and investigations (which may in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty, in our opinion none of our pending matters are currently anticipated to have a material adverse effect on our consolidated financial position, liquidity or results of operations.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2019,~~2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. ~~In addition to the~~ risk factors disclosed by us under Part I, Item 1A. Risk Factors contained in the Annual Report on Form 10-K for the fiscal year ended September 30, 2019, we believe the following factors may also present a material risk to our business, results of operations or financial condition:

~~Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, our business, which could adversely affect our financial performance.~~

~~Our business depends on, and is directly affected by, the output and sales of the global automotive industry and~~ the use of automobiles by consumers. Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, global automotive industry customer sales and production volumes. Vehicle production initially decreased significantly in China, which was first affected by COVID-19, then Europe and also the United States. Subsequent events resulted in the shutdown of manufacturing operations in China, Europe and the United States. As a result, we have experienced, and may continue to experience, difficulties in entering into new contracts with our customers, a decline in revenues resulting from the decrease in the production and sale of automobiles by our customers, the use of automobiles, increased difficulties in collecting payment obligations from our customers and the possibility customers will continue with existing projects. These all may be further exacerbated by the global economic downturn resulting from the pandemic which could further decrease consumer demand for vehicles or result in the financial distress of one or more of our customers.

As COVID-19 pandemic continues, our business operations could be further disrupted or delayed. The pandemic has already resulted in, and may continue to result in, work stoppages, slowdowns and delays, travel restrictions, and other factors that cause a decrease in the production and sale of automobiles by our customers. The production of automobiles with our products has been and may continue to be adversely affected with production delays and our ability to provide engineering support and implement design changes for customers may be impacted by restrictions on travel and quarantine policies put in place by businesses and governments.

To the extent that the COVID-19 pandemic adversely affects our business, results of operations, financial condition or liquidity, it also may heighten many of the other risks described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

~~Some of our employees represented by workers councils or unions or are subject to local laws that are less favorable to employers than the laws of the U.S.~~

Most of our employees in Europe are represented by workers councils or unions. Although we believe we have a good working relationship with our employees and their legal representatives, they must approve any changes in terms which may impede efforts to restructure our workforce.

As part of a series of measures to manage controllable expenses due to the unexpected disruption in vehicle production and the economic uncertainty caused by the COVID-19 pandemic, as part of the incremental cost reductions being implemented by the Company in response to the economic impacts of the COVID-19 pandemic, the Company implemented temporary reductions in salaries for the Chief Executive Officer and each current named executive officer as disclosed in the Company’s proxy statement for its 2020 annual stockholders meeting filed with the SEC on January 24, 2020, as well as other senior executives of the Company. The Chief Executive Officer’s base salary will temporarily be reduced by 20% and such named executive officers’ salaries will temporarily be reduced by 10%. The amounts reflected in these reductions may be paid by the Company in the future as determined by the Compensation Committee of the Board of Directors. The reductions in salary were effective as of April 1, 2020.

The exhibits listed on the Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.

¹ Certain schedules and similar attachments have been omitted. The Company agrees to furnish a supplemental copy of any omitted schedule or attachment to the Securities and Exchange Commission upon request.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Delaware	~~83-4719946~~83-4177087
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
15 Wayside Road Burlington, Massachusetts	01803
(Address of principal executive offices)	(Zip Code)

		Page
PART I.	FINANCIAL INFORMATION	23
Item 1.	Condensed Consolidated ~~and Combined~~ Financial Statements (Unaudited)	2
	~~Statements of Operations~~	2
	~~Statements of Comprehensive Income (Loss)~~	3
	~~Balance Sheets~~Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2020 and 2019	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2020 and 2019	4
	~~Statements~~Condensed Consolidated Balance Sheets as of ~~Equity~~December 31, 2020 and September 30, 2020	5
	Consolidated Statements of Stockholders' Equity for the Three Months Ended December 31, 2020 and 2019	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2020 and 2019	7
	Notes to Condensed Consolidated ~~and Combined~~ Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4037
Item 4.	Controls and Procedures	4137
PART II.	OTHER INFORMATION	4239
Item 1.	Legal Proceedings	4239
Item 1A.	Risk Factors	42
~~Item 5~~	~~Other Information~~	4339
Item 6.	Exhibits	4340
Signatures		4441

	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money market funds	$	82,891	$	-	$	-	$	82,891
Marketable securities:
Commercial paper, $14,384 at cost	$	-	$	14,384	$	-	$	14,384
Corporate bonds, $3,637 at cost		-		3,637		-		3,637
Total assets	$	82,891	$	18,021	$	-	$	100,912

	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money market funds	$	101,437	$	-	$	-	$	101,437
Marketable securities:
Commercial paper, $9,883 at cost	$	-	$	9,883	$	-	$	9,883
Corporate bonds, $1,780 at cost		-		1,779		-		1,779
Total assets	$	101,437	$	11,662	$	-	$	113,099

Three Months Ended March 31, 2020
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated (Deficit) Earnings			Net Parent Investment		Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2019		36,403		364		945,054			(11,762	)		-		(7,441	)		926,215
Net income		-		-		-			12,495			-		-			12,495
Other comprehensive loss		-		-		-			-			-		(7,194	)		(7,194	)
Stock issued pursuant to employee stock plans		55		1		(778	)		-			-		-			(777	)
Stock-based compensation		-		-		5,640			-			-		-			5,640
Balance at March 31, 2020		36,458	$	365	$	949,916		$	733		$	—	$	(14,635	)	$	936,379

Three Months Ended March 31, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital		Accumulated Earnings		Net Parent Investment			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2018		-	$	-	$	-	$	-	$	1,026,505		$	(27,342	)	$	999,163
Net income		-		-		-		-		454			-			454
Other comprehensive income		-		-		-		-		-			572			572
Net transfer to Parent		-		-		-		-		(17,003	)		-			(17,003	)
Balance at March 31, 2019		-	$	—	$	—	$	—	$	1,009,956		$	(26,770	)	$	983,186

Six Months Ended March 31, 2020
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Earnings		Net Parent Investment			Accumulated Other Comprehensive Loss			Total
Balance at September 30, 2019		-	$	-	$	-		$	-	$	1,097,127		$	(28,999	)	$	1,068,128
Net income		-		-		-			733		-			-			733
Other comprehensive loss		-		-		-			-		-			(1,364	)		(1,364	)
Distribution to Parent		-		-		-			-		(152,978	)		-			(152,978	)
Net (decrease) increase in net parent investment		-		-		-			-		(4,275	)		15,728			11,453
Reclassification of net parent investment in Cerence		-		-		939,874			-		(939,874	)		-			—
Issuance of common stock at separation		36,391		364		(364	)		-		-			-			—
Stock issued pursuant to employee stock plans		67		1		(919	)		-		-			-			(918	)
Stock-based compensation		-		-		11,325			-		-			-			11,325
Balance at March 31, 2020		36,458	$	365	$	949,916		$	733	$	—		$	(14,635	)	$	936,379

Six Months Ended March 31, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital		Accumulated Earnings		Net Parent Investment			Accumulated Other Comprehensive Loss			Total
Balance at September 30, 2018 (As reported, ASC 605)		-	$	-	$	-	$	-	$	1,017,276		$	(23,957	)	$	993,319
Accumulated adjustment related to the adoption of ASC 606		-		-		-		-		6,974			-			6,974
Net income		-		-		-		-		2,709			-			2,709
Other comprehensive loss		-		-		-		-		-			(2,813	)		(2,813	)
Net transfer to Parent		-		-		-		-		(17,003	)		-			(17,003	)
Balance at March 31, 2019		-	$	—	$	—	$	—	$	1,009,956		$	(26,770	)	$	983,186

	As of October 1, 2019
	As Previously Reported		Impact of Adoption of Topic ASC 842			As Adjusted
Assets:
Operating lease right of use assets	$	—	$	19,594		$	19,594

Liabilities:
Current liabilities:
Short-term operating lease liabilities	$	—	$	4,863		$	4,863
Accrued expenses and other current liabilities		24,194		(1,465	)		22,729
Long-term operating lease liabilities		-		16,883			16,883
Other liabilities	$	21,536	$	(687	)	$	20,849

Equity:
Net parent investment	$	1,097,127	$	-		$	1,097,127

	Three Months Ended March 31,				Six Months Ended March 31,
in thousands	2020		2019		2020		2019
Basic shares		36,441		36,391		36,218		36,391
Effect of dilutive shares		951		—		475		—
Diluted shares		37,392		36,391		36,693		36,391

	December 31,		December 31,
in thousands	2020		2019
Restricted stock unit awards		-		1,923

		Fair Value
Derivatives not designated as hedges	Classification	December 31, 2020		September 30, 2020
Foreign currency forward contracts	Prepaid expenses and other current assets	$	496	$	-
Foreign currency forward contracts	Other assets		296		-
Foreign currency forward contracts	Accrued expenses and other current liabilities		279		-
Foreign currency forward contracts	Other liabilities	$	182	$	-

		Gain recognized in earnings
		Three Months Ended
Derivatives not designated as hedges	Classification	December 31, 2020		December 31, 2019
Foreign currency forward contracts	Other income (expense), net	$	386	$	-

	Allowance for Credit Losses
Balance as of September 30, 2020	$	(1,394	)
Current period recovery for expected credit losses		483
Write-offs charged against the allowance for expected credit losses		(73	)
Foreign exchange impact on ending balance		18
Balance as of December 31, 2020	$	(966	)

	~~March 31, 2020~~
~~Weighted-average remaining lease term (in months):~~
~~Operating leases~~		~~55.8~~
~~Finance leases~~		~~8.0~~
~~Weighted-average discount rate:~~
~~Operating leases~~		~~8.0~~	%
~~Finance leases~~		~~8.4~~	%

	December 31, 2020			September 30, 2020
Weighted-average remaining lease term (in months):
Operating leases		51.8			55.9
Finance leases		52.7			55.8
Weighted-average discount rate:
Operating leases		7.2	%		7.4	%
Finance leases		4.4	%		4.4	%

Fiscal Year	Convertible Senior Notes			Senior Facilities			Total
2021	$	—		$	4,688		$	4,688
2022		—			6,250			6,250
2023		—			10,938			10,938
2024		—			12,500			12,500
2025		175,000			87,500			262,500
Thereafter		—			—			—
Total before unamortized discount and issuance costs and current portion	$	175,000		$	121,876		$	296,876
Less: unamortized discount and issuance costs		(22,123	)		(2,484	)		(24,607	)
Less: current portion of long-term debt		—			(6,250	)		(6,250	)
Total long-term debt	$	152,877		$	113,142		$	266,019

	Three Months Ended December 31, 2020
Contractual interest expense	$	1,322
Amortization of debt discount		868
Amortization of issuance costs		218
Total interest expense related to the Notes	$	2,408

	Cerence Inc.

Date: ~~May~~February 8, ~~2020~~2021	By:	/s/ Sanjay Dhawan
		Sanjay Dhawan
		Chief Executive Officer (Principal Executive Officer)

Date: ~~May~~February 8, ~~2020~~2021	By:	/s/ Mark Gallenberger
		Mark Gallenberger
		Chief Financial Officer (Principal Financial and Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company