DRS

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

As confidentially submitted to the Securities and Exchange Commission on May 20, 2019.

This draft registration statement has not been publicly filed with the Securities and Exchange Commission.

All information herein remains strictly confidential.

File No.                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g)

OF THE SECURITIES EXCHANGE ACT OF 1934

Cerence LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   83-4719946

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

1 Wayside Road

Burlington, Massachusetts

  01803
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code:

(781) 565-5000

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class to be so Registered    Name of Each Exchange on
Which Each Class is to be Registered

 

  

 

Common Stock, par value $0.01 per share    The NASDAQ Global Select Market

Securities to be registered pursuant to Section 12(g) of the Act:

None.

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer         Accelerated filer  
Non-accelerated filer         Smaller reporting company  
        Emerging growth company  

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

 

 


Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

Cerence LLC

Information Required in Registration Statement

Cross-Reference Sheet between the Information Statement and Items of Form 10

This Registration Statement on Form 10 incorporates by reference information contained in our Information Statement, which is Exhibit 99.1 to this Registration Statement on Form 10.

 

Item No.

 

Name of Item

 

Location in Information Statement

1.   Business   See “Information Statement Summary,” “The Spin-Off,” “Capitalization,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Where You Can Find More Information”
1A.   Risk Factors   See “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements”
2.   Financial Information   See “Capitalization,” “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
3.   Properties   See “Business—Properties”
4.   Security Ownership of Certain Beneficial Owners and Management   See “Security Ownership of Certain Beneficial Owners and Management”
5.   Directors and Executive Officers   See “Management”
6.   Executive Compensation   See “Management” and “Executive and Director Compensation”
7.   Certain Relationships and Related Transactions, and Director Independence   See “Risk Factors,” “Management” and “Certain Relationships and Related Party Transactions”
8.   Legal Proceedings   See “Business—Legal Proceedings”
9.   Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters   See “The Spin-Off,” “Dividend Policy,” “Security Ownership of Certain Beneficial Owners and Management” and “Description of Our Capital Stock”
10.   Recent Sales of Unregistered Securities   See “Description of Our Capital Stock”
11.   Description of Registrant’s Securities to be Registered   See “Description of Our Capital Stock”
12.   Indemnification of Directors and Officers   See “Description of Our Capital Stock” and “Certain Relationships and Related Party Transactions—Agreements with Nuance—Separation and Distribution Agreement”
13.   Financial Statements and Supplementary Data   See “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements” and “Index to Combined Financial Statements” and the financial statements referenced therein
14.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None
15.   Financial Statements and Exhibits  

(a) Combined Financial Statements

 

See “Unaudited Pro Forma Combined Financial Statements,” “Index to Combined Financial Statements” and the financial statements referenced therein

 

(b) Exhibits

 

See the Exhibit Index of this Registration Statement on Form 10

 


Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

EXHIBIT INDEX

 

Exhibit
Number

  

Exhibit Description

2.1    Form of Separation and Distribution Agreement between Nuance Communications, Inc. and the registrant*
3.1    Form of Amended and Restated Certificate of Incorporation of the registrant*
3.2    Form of Amended and Restated By-Laws of the registrant*
10.1    Form of Transition Services Agreement between Nuance Communications, Inc. and the registrant*
10.2    Form of Tax Matters Agreement between Nuance Communications, Inc. and the registrant*
10.3    Form of Employee Matters Agreement between Nuance Communications, Inc. and the registrant*
10.4    Form of Intellectual Property Agreement between Nuance Communications, Inc. and the registrant*
10.5    Form of Transitional Trademark License Agreement between Nuance Communications, Inc. and the registrant*
10.6    Form of Registration Rights Agreement between Nuance Communications, Inc. and the registrant*
21.1    List of subsidiaries of the registrant*
99.1    Preliminary Information Statement

 

*

To be filed by amendment.

 


Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused its Registration Statement on Form 10 to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CERENCE LLC

 

By: Nuance Communications, Inc., its sole member

By:    
 

Name:

Title:

Date:                         , 2019

EX-99.1
Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Exhibit 99.1

 

Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

 

Subject to Completion—Dated                         , 2019

INFORMATION STATEMENT

Cerence Inc.

Common Stock

(par value $0.01 per share)

 

 

We are sending you this Information Statement in connection with the spin-off by Nuance Communications, Inc. (“Nuance”) of its wholly-owned subsidiary, Cerence Inc. (the “Company” or “SpinCo”). To effect the spin-off, Nuance will distribute at least 80.1% of the shares of SpinCo common stock on a pro rata basis to the holders of Nuance common stock. We expect that the distribution of SpinCo common stock will be tax-free to holders of Nuance common stock for U.S. federal income tax purposes, except with respect to cash that stockholders may receive (if any) in lieu of fractional shares. Cerence Inc. was formed as a limited liability company and will be converted into a Delaware corporation prior to the spin-off.

If you are a record holder of Nuance common stock as of the close of business on                 , 2019, which is the record date for the distribution, you will be entitled to receive one share of SpinCo common stock for every                  shares of Nuance common stock that you hold on that date. Nuance will distribute its shares of SpinCo common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of SpinCo common stock.

The distribution will be effective as of                 , New York City time, on                 , 2019. Immediately after the distribution becomes effective, SpinCo will be a separate, publicly traded company.

Nuance’s stockholders are not required to vote on or take any other action to approve the spin-off. We are not asking you for a proxy, and request that you do not send us a proxy. Nuance stockholders will not be required to pay any consideration for the shares of SpinCo common stock they receive in the spin-off, and they will not be required to surrender or exchange their shares of Nuance common stock or take any other action in connection with the spin-off.

No trading market for SpinCo common stock currently exists. We expect, however, that a limited trading market for SpinCo common stock, commonly known as a “when-issued” trading market, will develop as early as one trading day prior to the record date for the distribution, and we expect “regular-way” trading of SpinCo common stock will begin on the first trading day after the distribution date. We intend to apply to list SpinCo common stock on the Nasdaq Global Select Market under the ticker symbol “CRNC.” The listing is subject to approval of our application.

In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 17 this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this Information Statement is                 , 2019.


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

TABLE OF CONTENTS

 

     Page  

Trademarks and Copyrights

     ii  

Industry and Market Data

     ii  

Information Statement Summary

     1  

Risk Factors

     17  

Cautionary Statement Concerning Forward-Looking Statements

     38  

The Spin-Off

     39  

Dividend Policy

     49  

Capitalization

     50  

Selected Combined Financial Data

     51  

Unaudited Pro Forma Combined Financial Statements

     53  

Business

     58  

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

     70  

Management

     96  

Executive and Director Compensation

     99  

Security Ownership of Certain Beneficial Owners and Management

     102  

Certain Relationships and Related Party Transactions

     104  

Description of Our Capital Stock

     110  

Where You Can Find More Information

     114  

Index to Combined Financial Statements

     F-1  

 

  i  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

TRADEMARKS AND COPYRIGHTS

We own or have rights to various trademarks, logos, service marks and trade names that we use in connection with the operation of our business. We also own or have the rights to copyrights that protect the content of our products. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this Information Statement are listed without the , ® or © symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks, trade names and copyrights included or referred to in this Information Statement.

INDUSTRY AND MARKET DATA

This Information Statement includes industry and market data that we obtained from various third-party industry and market data sources. These third-party sources include Grand View Research with respect to the automotive voice and speech recognition software market. All such industry data is available publicly or for purchase and was not commissioned specifically for us. Forecasts based upon such data involve inherent uncertainties, and actual results regarding the subject matter of such forecasts are subject to change based upon various factors beyond our control.

 

  ii  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

INFORMATION STATEMENT SUMMARY

In this Information Statement, unless the context otherwise requires:

 

   

The “Company,” “Cerence,” “SpinCo,” “we,” “our” and “us” refer to (a) Cerence LLC and (b) Cerence Inc. following the conversion of Cerence LLC into a Delaware corporation, which will occur prior to the Spin-Off, and, in each case, its consolidated subsidiaries after giving effect to the Spin-Off; and

 

   

Nuance” or “Parent” refers to Nuance Communications, Inc. and its consolidated subsidiaries.

The transaction in which Nuance will distribute to its stockholders all of its shares of our common stock is referred to in this Information Statement as the “Distribution” or the “Spin-Off.” Prior to Nuance’s Distribution of its shares of our common stock to its stockholders, Nuance will undertake a series of internal reorganization transactions, pursuant to which, among other transactions, SpinCo will be converted into a corporation and following which SpinCo will hold, directly or through its subsidiaries, Nuance’s automotive technology business, which we refer to as the “Business.” We refer to this series of internal reorganization transactions as the “Reorganization Transactions.” In addition, prior to the Distribution, Nuance will sell approximately 1.4% of the shares of our common stock to one or more third party purchasers (the “Sale Transaction”), which will hold such shares immediately after the Spin-Off.

The Spin-Off

On November 19, 2018, Nuance announced plans for the complete legal and structural separation of the Business from Nuance. In reaching the decision to pursue the Spin-Off, Nuance considered a range of potential structural alternatives for the Business and concluded that the Spin-Off is the most attractive alternative for enhancing stockholder value. To effect the separation, first, Nuance will undertake the series of Reorganization Transactions and the Sale Transaction. Nuance will subsequently distribute at least 80.1% of the shares of our common stock to Nuance’s stockholders, and following the Distribution, SpinCo, holding the Business, will become an independent, publicly traded company. Prior to completion of the Spin-Off, we intend to enter into a Separation and Distribution Agreement and several other agreements with Nuance related to the Spin-Off. These agreements will govern the relationship between Nuance and SpinCo up to and after completion of the Spin-Off and allocate between Nuance and SpinCo various assets, liabilities and obligations, including employee benefits, intellectual property and tax-related assets and liabilities. See “Certain Relationships and Related Party Transactions” for more information.

Completion of the Spin-Off is subject to the satisfaction or waiver of a number of conditions. In addition, Nuance has the right not to complete the Spin-Off if, at any time, Nuance’s board of directors, or the “Nuance Board,” determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Nuance or its stockholders, or is otherwise not advisable. See “The Spin-Off—Conditions to the Spin-Off” for more information.

Following the Spin-Off, Nuance and SpinCo will each have a more focused business that will be better positioned to invest in growth opportunities and execute strategic plans best suited to address the distinct market trends and opportunities for its business. Following the Reorganization Transactions, SpinCo will hold the only current Nuance business primarily focused on the automotive technology industry and SpinCo will be better positioned to focus on automotive technology industry growth areas as well as continued operational excellence. Further, the Spin-Off will allow our management team to devote its time and attention to the corporate strategies and policies and developing partnerships that are based specifically on the needs of our Business. We plan to create incentives for our management and employees that are closely tied to business performance and our stockholders’ expectations, which will help us attract and retain highly qualified personnel. In addition to the benefits for SpinCo, we believe that SpinCo’s separation from Nuance will allow Nuance to focus on the growth



 

  1  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

opportunities in its healthcare and enterprise businesses. Additionally, we believe the Spin-Off will provide greater transparency into both Nuance and our business and help align each stockholder base with the characteristics and risk profile of the respective businesses. See “The Spin-Off—Reasons for the Spin-Off” for more information.

Following the Spin-Off, subject to the approval of our application, we expect our common stock to trade on the Nasdaq Global Select Market under the ticker symbol “CRNC.”

Our Company

Cerence builds 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, such as “Hey BMW” and “Ni hao Banma”. Our customers include all major automobile manufacturers (“OEMs”) or their tier 1 suppliers worldwide, including BMW, Daimler, FCA Group, Ford, Geely, GM, Renault-Nissan, SAIC, Toyota, Volkswagen Group, Aptiv, Bosch, Continental, DENSO TEN and Harman. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users.

Our platform utilizes industry-leading speech recognition, natural language understanding, speech signal enhancement and acoustic modeling technology. Automotive virtual assistants built with our platform can enable a wide variety of modes of human-vehicle interaction, including speech, touch, handwriting, gaze tracking and gesture recognition, and can support the integration of third party virtual assistants into the in-vehicle experience. Our vision for the future is to power an ever-expanding range of interactions between humans and mobility products and services.

The market for automotive cognitive assistance is rapidly expanding. The proliferation of smartphones and smart speakers has encouraged consumers to rely on a growing number of virtual assistants and special-purpose bots for various tasks such as controlling entertainment systems and checking the news. Automobile drivers and passengers increasingly expect hands-free access to virtual assistants as part of the mobility experience, with common use cases in a variety of categories including mobility domains such as navigation, voice-activated texts, and telephone communication, automobile domains, such as automobile user guides, and ignition on-off, and generic domains, such as entertainment. To meet the increasing demand for automotive cognitive assistance and to offer differentiated mobility experiences, OEMs and suppliers are building proprietary virtual assistants into an increasing proportion of their vehicles. We believe that this trend will continue and that consumer appetite for automotive cognitive assistance will grow further as vehicles become more autonomous and drivers pursue new forms of human-vehicle engagement previously not feasible during vehicle operation.

Our software platform is a market leader for building integrated, branded and differentiated virtual assistants for automobiles. As a unified platform and common interface for automotive cognitive assistance, our software platform provides OEMs and suppliers with an important control point with respect to the mobility experience and their brand value. Our platform is fully customizable and designed to support our customers in creating their own ecosystem in the automobile and transforming the vehicle into a hub for numerous connected devices and services. Virtual assistants built with our software platform can address user requests across a wide variety of categories, such as navigation, control, media, communication and tools. Our software platform is comprised of edge computing and cloud-connected software components and a software framework linking these components together under a common programming interface. We implement our software platform for our customers through our professional services organization, which works with OEMs and suppliers to optimize our software for the requirements, configurations and acoustic characteristics of specific vehicle models.



 

  2  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

We generate revenue primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue from our work with OEMs and suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects. Through our over 20 years in the automotive industry, we have developed longstanding industry relationships and benefit from incumbency. We have existing relationships with all major OEMs or their tier 1 suppliers, and while our customer contracts vary, they generally represent multi-year engagements, giving us visibility into future revenue. We have master agreements or similar commercial arrangements in place with many of our customers, supporting customer retention over the long term.

We are being spun off of Nuance, a leading provider of speech and language solutions for businesses and consumers around the world. Nuance has won numerous awards for the performance of its speech recognition and conversational artificial intelligence software. Speech recognition, natural language understanding, artificial intelligence and predictive touch solutions from Nuance have powered many pioneering intelligent devices, including mobile devices, cars, televisions, and wearable devices, and are also established technologies in healthcare and enterprise services. Following the spin-off, we will have possession of approximately 1,400 patents and other intellectual property currently owned by Nuance. Additionally, we will employ over 700 personnel devoted to research and development who will continue to develop our artificial intelligence technology. We will also continue to benefit from Nuance’s deep portfolio of intellectual property and data, and we will provide certain of our intellectual property and data to Nuance, by entering into agreements with Nuance where we and Nuance provide to the other certain licenses or rights to certain intellectual property and data.

Our solutions have been installed in more than 250 million automobiles to date, including over 45 million new vehicles in 2018 alone. In aggregate, over 60 automobile brands worldwide use our solutions, covering over 70 languages and dialects, including English, German, Mandarin, Cantonese and Shanghainese.

In fiscal 2018, we generated revenue of $277.0 million and net income of $5.9 million.



 

  3  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Our Offerings

Our mission is to deliver automotive cognitive assistance solutions that are natural and intuitive and that enable OEMs to strengthen the emotional connection with their end users through a distinct, consistent, branded experience. Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information and take action across an expanding variety of categories, including navigation, media, communication, information and tools, which include common domains such as music, news, sports, telephone, messaging and weather. Our software, developed in deep partnership with the automotive industry, improves the mobility experience for drivers and passengers all over the world.

 

 

LOGO

User engagement with virtual assistants built with our software platform typically begins with a voice request. Upon receiving such an input, our software platform system determines what the user has said, infers user intent, and maps the request to the most applicable category and domain. Depending on the applicable domain, our software platform determines whether to respond directly or access an external data source or third party virtual assistant, in all cases resulting in a response including spoken words or taking action. Depending on the complexity of the request and other factors, engagement may consist of multiple rapid voice interactions with the user and may combine assistance in multiple domains.



 

  4  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Our software platform has a hybrid architecture combining edge software components, which are embedded in a vehicle’s head unit and integrated with onboard systems, with cloud-connected components, which access data and content on external networks and support over-the-air updates. This hybrid architecture enables our software platform to combine the performance, reliability, efficiency, security and tight vehicular integration of embedded software with the flexibility that cloud connectivity provides. Response frameworks can generally be customized such that requests are processed first at the edge, controlling cloud transmission costs, or in parallel at the edge and in the cloud, to achieve higher confidence responses with low latency. Through the edge computing capabilities, the platform is able to provide certain features, such as wake-up-word, while avoiding privacy and latency issues associated with always-listening cloud-connected technologies. Our software platform includes a common programming framework for its edge and cloud-connected components, and our customers can choose the software components that are necessary to power the experiences that they want to build and offer.

 

LOGO

We deliver our software platform through our professional services organization, which works with OEMs and suppliers to tailor it to the desired requirements, configurations and acoustic characteristics of specific vehicle models. For an initial implementation, our professional services engagements typically begin with the porting of our key technologies to the customer’s specific hardware platform and the development of specific dialogues and grammar libraries. Our professional services teams also work with OEMs on acoustic optimization of a system and application of our audio signal processing technologies. Following an initial implementation, our professional services organization may continue to provide services over the course of a head unit program and vehicle model lifecycle through maintenance and enhancement engagements.

Edge Software Components

Our software platform’s edge software components are installed on a vehicle’s head unit and can operate without access to external networks and information. We tailor our edge software components to a customer’s desired use cases and a vehicle model’s unique systems, sensors and data interfaces.

Capabilities of our edge software components include automatic speech recognition, natural language understanding, noise cancellation, driver and passenger voice isolation, voice biometrics, wake-up word and text-to-speech synthesis, as well certain non-speech technologies such as touch and text input. Edge deployment suits these technologies as it provides the following functionality and benefits:

 

   

Performance. Processing at the edge is often necessary to meet the low latency requirements of natural conversation.

 

   

Vehicle Systems Integration. Vehicle applications, sensors, and data interfaces can be integrated deeply with embedded systems.



 

  5  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

Availability. Edge-located systems are available regardless of cellular coverage and network connectivity.

 

   

Reduced cost. Processing at the edge reduces or eliminates cellular data transmission costs.

 

   

Privacy. Users’ utterances and system outputs processed at the edge remain onboard and can immediately be purged.

Certain forms of assistant speech invocation can only be implemented using edge software. The use of wake-up words like “Hey BMW” and “Ni hao Banma” require constant listening and signal processing to identify instances when a virtual assistant should activate and respond. Sending a constant stream of audio from the car interior to the cloud for processing would require enormous amounts of bandwidth and potentially create privacy concerns. The same requirements apply to our new JustTalk technology, which constantly listens to spoken conversation, determines speaker intent, and invokes assistance appropriately without requiring a specific invocation phrase.

We typically sell our edge software components under a traditional per unit perpetual software license model, in which a per unit fee is charged for each software instance installed on an automotive head unit. Our customers generally provide estimates of the units to be shipped for a particular program, and we review third-party market studies and work with our customers to refine and understand these projections. This provides us with some reasonable visibility into future revenue, however the number of units to be shipped for a particular program is not committed upfront.

Cloud-Connected Components

Our software platform’s cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-enabled personalization and context-based response frameworks, and content integration platforms. Our cloud-connected speech-related technologies perform many of the same tasks as our speech-related edge components while offering enhanced functionality through increased computational power and access to external content. Our principal content platform offering is Content Services, a data aggregation system which supports access to a wide range of live information such as news, traffic and weather. Cloud-connected components also support the replication of personalized settings such as voice profiles and preferences across multiple vehicles.

We offer cloud-connected components in the form of a connected service to the vehicle end user. Initial subscriptions typically have multi-year terms from the time of a vehicle’s sale and are paid in advance by the OEM or supplier. Renewal options vary and are managed by our customers on behalf of vehicle end users.

Virtual Assistant Coexistence

The wide variety of use cases encompassed by automotive cognitive assistance, in the context of evolving consumer preferences, necessitates the coexistence of multiple virtual assistants within the in-vehicle environment. For example, many vehicle-related categories such as navigation and control can best be addressed by a tightly integrated, vehicle-model-specific virtual assistant. At the same time, drivers and passengers often prefer to use familiar Internet-based virtual assistants for more general domains such as entertainment.

To enable our customers to provide a consistent automotive cognitive assistance experience across multiple coexisting virtual assistants, our software platform can support the integration of third-party virtual assistants, providing a uniform interface for virtual assistant engagement. We have invested in our platform to develop the technology and capabilities necessary to integrate third party virtual assistants with vehicles’ systems.

To make integration as seamless as possible, we have built cognitive arbitration technology that is capable of inferring user intent, determining which within a set of virtual assistants would be best suited to address a



 

  6  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

request, and sending the request to the selected assistant. Depending on a system’s configuration and the virtual assistants to which it is connected, output can be presented back to the user through a vehicle-specific personality or through the virtual assistant’s own interface. Cognitive arbitration represents an important control point with respect to the mobility experience and an important brand differentiation opportunity for OEMs and suppliers. Like the rest of our software platform, cognitive arbitration is a white label product that can be customized and branded.

Along with providing OEMs control over their brand identity, our cognitive arbitration technology is an important element in letting an OEM design the overall driver and passenger experience. This technology allows an OEM to dictate interactions with third-party virtual assistants within the vehicle, strengthening its ability to differentiate and control the overall in-vehicle experience.

 

LOGO

Professional Services

We have a large professional services team that works with our customers in the design, development and deployment phases of a vehicle head unit program and vehicle model lifecycle, as well as in maintenance and enhancement engagements. Our range of capabilities include personalization of grammar and natural language understanding development, localization, language selection and system coverage, navigation speech data generation, system prompt recordings, porting our platform’s framework and our ability to deploy cognitive arbitration technologies, and user experience reviews and studies. Our professional services team is globally distributed to serve our customers in their primary design and production jurisdictions. We typically charge manufacturers for our design and consulting work, although we have recently observed an industry shift towards connected services solutions and have changed our pricing strategy, both of which have moved fees from the professional services portion of our business to the license and connected services portion of our business. Our professional services contracts are primarily project-based, in line with customary non-recurring engineering industry practices.

Our Competitive Strengths

Our key competitive strengths include:

 

   

Industry-leading speech-related technology. Our research shows that consumers see speech as an increasingly attractive medium for human-vehicle interaction. Nevertheless, they are often frustrated with speech recognition solutions that misunderstand spoken language or require users to speak rigid, pre-defined commands associated with a limited set of functions. Developing speech-based automotive virtual assistants that users will perceive as natural is challenging as a matter of artificial intelligence technology, acoustic engineering and user interface design. We believe our software platform, as tailored for a specific vehicle model by our professional services organization, represents one of the most technologically advanced and highest-performing human-vehicle speech interaction systems available today. In tests performed by our customers to assess correct recognition of words, sentences, and domains, our solutions have achieved some of the highest marks relative to competitors and our offerings are backed by our portfolio of patents and associated rights.



 

  7  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

Hybrid edge-cloud system architecture. Our software platform’s hybrid architecture combines the performance, reliability and tight integration that only edge software can provide with the flexibility of cloud connectivity. Cloud-reliant solutions with which our software platform competes cannot match edge software’s low latency, its bandwidth efficiency or its availability in the absence of network connectivity. Moreover, emerging speech invocation paradigms such as wake up words and situationally aware invocation are most effectively implemented using edge technology.

 

   

Bespoke vehicle integration and acoustic tuning. Cognitive assistance in categories such as navigation, entertainment and control requires tight integration with onboard vehicle components, which vary widely among vehicle models. Separately, speech interaction systems can be significantly hampered by the noisy environment of a vehicle cabin and must be tuned for particular acoustics and audio system components. To achieve the tight vehicle integration necessary to address these concerns, our professional services team works closely with OEMs and suppliers to customize our offerings for the particular characteristics of specific vehicle models. Our expertise in acoustics enables us to implement systems that can isolate the voices of individual speakers and support simultaneous virtual assistance for speakers in multiple zones, representing a key point of differentiation.

 

   

Interoperability with third-party Internet-based virtual assistants. Virtual assistants from large technology companies have become popular with consumers. We believe that consumers want to use these assistants while traveling in their vehicles and that a comprehensive automotive cognitive assistance system requires the coexistence of multiple virtual assistants. To accommodate their end user preferences while still providing a unique and brand-specific experience, OEMs seek to offer a common in-vehicle interface with seamless integration across various virtual assistants. To this end, our software platform can support the integration of multiple third-party virtual assistants and provide a uniform interface for virtual assistant engagement. Our market-leading position and the large size of our installed base create incentives for third party virtual assistant providers to work with us and support this integration.

 

   

Independence from large technology companies and automobile industry players. As vehicles become more autonomous, mobility experiences are being increasingly defined by in-cabin features and alternative forms of human-vehicle engagement. Branded, differentiated automotive cognitive assistance is thus increasingly important to OEMs’ brand value. As a neutral, independent, white-label software platform vendor, we empower our customers to build branded and differentiated experiences and retain ownership of, or rights to, their system design and data. The virtual assistant coexistence enabled by our cognitive arbitration functionality is designed to allow our customers to provide access to third-party virtual assistants without ceding overall control of the cognitive assistance experience.

 

   

OEM alignment. The design and development of the head unit within the vehicle ecosystem is a complex process requiring tight integration of the software and hardware components used in and with the vehicle. We believe our demonstrated long-standing capabilities in working closely with OEMs, understanding their needs, product roadmaps and global go-to-market strategies enables us to innovate our technologies to meet an OEM’s specifications. Furthermore, our working relationships with OEMs uniquely allow us to market and sell our solutions on both a local and global basis in accordance with an OEM’s particular requirements.

 

   

Broad language coverage. Our software platform supports over 70 languages and dialects, far more than any of our competitors. As a result of our broad language support, our customers are already delivering cognitive assistance based on our software platform in over 60 countries across the Americas, Europe and Asia, including China, the U.S. and all other large automotive markets. Our language support also enables multi-lingual capabilities for domains such as music selection, point-of-interest selection, and cross-border navigation among others, representing a critical feature for markets such as Continental Europe in which automobiles may routinely traverse multiple lingual



 

  8  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

 

zones. We believe that our portfolio of languages and multi-lingual capabilities represent an important competitive advantage, as the development of capabilities to support a new language is expensive and time-consuming.

 

   

Broad, global network of deep relationships with OEMs and tier 1 suppliers. We have supplied speech recognition systems to OEMs and suppliers for over 20 years, working closely with our customers through our global professional services organization to design and integrate our solutions into their brands. Today, we work with all major OEMs or their tier 1 suppliers worldwide, leveraging the geographic breadth and industry experience of our professional services teams. Our long history in the automotive industry and the global reach and experience of our over 400 professional services employees across 10 countries gives us credibility with OEMs as we seek new business with OEMs, either directly or through their tier 1 suppliers. We believe that OEMs who sell globally will value our experience in servicing and deploying solutions on a global basis. We often have master agreements or similar commercial arrangements with our customers. These master agreements help us retain customer relationships over the long term.

Our Growth Strategies

Our primary growth strategies include the following:

 

   

Maintain and extend product leadership. We intend to continue investing in developing our product functionality, particularly with respect to the capabilities of our cloud-connected features and the breadth of categories and domains our software platform is able to address. Our existing relationship with, and our proximity in the design process to, OEMs provides us with insight into the needs of the end-users and roadmaps for innovation. Additionally, we intend to continue to invest in customizing and supporting our solutions for specific individual automobile vehicle models, resulting in tight integration of our solutions. We believe that increased product functionality and tighter integration will enable us to increase the revenue per vehicle that we are able to generate. Additionally, these investments will help maintain our position with existing customers through new vehicle models and enable us to grow with the overall market for automotive cognitive assistance.

 

   

Continue to invest in interoperability with third-party virtual assistants. We believe that the growing popularity of third-party virtual assistants is creating increasing demand for access to these assistants as part of the mobility experience. We also believe that complete automotive cognitive assistance requires the coexistence of multiple virtual assistants. We intend to continue to invest to develop our software platform’s interoperability with third-party virtual assistants and its cognitive arbitration capabilities to maintain its position as a neutral automotive cognitive assistance platform. We believe a neutral automotive cognitive assistance platform will increasingly be valued by OEMs that prioritize maintaining their unique and branded in-car experience and the ability to control the mobility experience overall.

 

   

Increase penetration in key geographic markets, including China. We operate worldwide today, including in emerging markets. However, our presence in certain large geographic automobile markets, such as India and Southeast Asia, is relatively small today primarily as a result of lower penetration of automobile cognitive assistance in those markets. We specifically invested in emerging markets such as Indonesia and Thailand in fiscal 2018 and expect to continue making investments in India in fiscal 2019. As these markets grow, we intend to continue to invest in manufacturer relationships and the development of localized technology to maintain and expand our local market share.

We currently serve the Chinese market through a combination of domestic OEMs and suppliers, such as Geely, Proton, Roewe, SAIC, Banma Network Technology and Huawei, and global non-Chinese manufacturers and suppliers who sell into the Chinese market, such as Audi, BMW, Daimler, Aptiv



 

  9  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

and Harman. We offer cognitive assistance in all the primary Chinese languages and dialects, including Mandarin, Cantonese and Shanghainese. Our current presence in China includes approximately 270 R&D, customization, and sales and marketing professionals across three R&D centers and six professional services hubs. We intend to continue to expand our presence in the Chinese market through the ongoing development of language capabilities and investment in relationships with manufacturers and suppliers that sell into that market.

 

   

Deliver new functionality to existing installed base. Our solutions have been installed in over 250 million vehicles to date. Our large installed base represents an opportunity to deliver new features and software. Depending on system capabilities, we are able to deliver updated functionality to our users in the form of embedded software upgrades performed by dealers and over-the-air updates delivered from the cloud.

Market Opportunity and Industry Trends

The market for automotive cognitive assistance is rapidly expanding. Grand View Research estimates that the automotive voice and speech recognition software market, comprised of Automatic Speech Recognition, Text to Speech, Speaker Identification and Speaker Verification, is expected to grow at an 18.6% compound annual growth rate to $3.7 billion by 2025. We believe that many of the features of our software platform represent additional market opportunity beyond this estimate, including Push-to-Talk, Wake-Up Words, Just Talk, Cognitive Arbitration, Non-Speech Multimodal Input, Speech Signal Enhancement, Multi-Seat Intelligence and onboard sensor integration. We believe the market for these technologies has generally not been estimated by third parties due to the limited set of companies with the ability to offer the features into the market. However, given interest from our customers, we believe that the market for these features is large and growing at a faster rate than the 18.6% compound annual growth rate cited by Grand View Research for the automotive voice and speech recognition market.

The market for automobile cognitive assistance is being driven by a number of key industry trends, including the following:

 

   

Increasing consumer use of virtual assistants. Smartphones have become ubiquitous, and smart speakers are becoming increasingly popular. Consumers are becoming increasingly accustomed to on-demand access to virtual assistants and special-purpose bots to help with various tasks. We believe that this results in increased demand for automotive cognitive assistance for two reasons. First, as consumers become increasingly accustomed to speech-based virtual assistants, they realize that speech is a natural interface for many automotive use cases including navigation, communication and entertainment system control. Second, with respect to more general informational domains including news, weather and sports, consumers want access to the same virtual assistants while riding in their vehicles as they increasingly have through smartphones and smart speakers in their homes.

 

   

Increasingly distracted driving. Smartphones present drivers with a source of potential distraction. Speech-based virtual assistance is hands-free and eyes-free, decreasing the risks of distracted driving while still enabling users to communicate, obtain information, take action and engage with applications.

 

   

Increasing vehicle intelligence and connectivity. Automobiles are becoming increasingly connected to the Internet, effectively operating as “rolling smartphones” with real-time external data access. At the same time, OEMs are increasing the computational power available onboard their vehicles to address a variety of aspects of mobility, including safety and navigation. We believe that the combination of increasing connectivity and increasing computational power will drive increases in the number and proportion of vehicles shipped with onboard proprietary virtual assistants.



 

  10  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

Autonomous driving. As vehicles become increasingly autonomous, their drivers are becoming increasingly passive and passenger-like. We believe that cognitive assistance in the domain of trip planning will gradually and partially replace physical driving control through steering wheels and pedals. As this happens, cognitive assistance in the categories of entertainment and productivity will become increasingly important to the mobility experience.

 

   

Shared mobility. Ridesharing and vehicle sharing are impacting how consumers interact with vehicles. Shared mobility reduces the amount of active driving that is required to achieve a given amount of transportation and therefore increases the time in which passengers are free to engage in entertainment and productivity activities. Shared mobility providers are increasingly competing on the basis of their ability to deliver a consistent, personalized mobility experience across mobile applications and vehicle cabins. We believe that cognitive assistance will play an important role in powering and differentiating these experiences.

Implications of being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or “JOBS Act.” As an emerging growth company, we may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include, among other things:

 

   

exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”), requiring mandatory audit firm rotation or a supplement to our auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;

 

   

an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

   

reduced disclosure about executive compensation arrangements.

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of the effectiveness of our registration statement on Form 10 or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the effectiveness of our registration statement on Form 10, (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We may choose to take advantage of some, but not all, of these reduced burdens. For example, we have taken advantage of the reduced reporting requirement with respect to disclosure regarding our executive compensation arrangements in this Information Statement and expect to take advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. For as long as we take advantage of the reduced reporting obligations, the information that we provide stockholders may be different from information provided by other public companies. We have not yet determined whether to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards. If we do not take advantage of the extended transition period, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.



 

  11  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Our Corporate Information

We were formed as a Delaware limited liability company on February 14, 2019 and will convert into a Delaware corporation in connection with the Reorganization Transactions prior to the Spin-Off. Our corporate headquarters are located at                         , Burlington, Massachusetts, and our telephone number is                 . Our website address is www.cerence.com. Information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this Information Statement.

Questions and Answers about the Spin-Off

The following provides only a summary of certain information regarding the Spin-Off. You should read this Information Statement in its entirety for a more detailed description of the matters described below.

 

  Q:

What is the Spin-Off?

 

  A:

The Spin-Off is the method by which we will separate from Nuance. In the Spin-Off, Nuance will distribute to its stockholders at least 80.1% of the shares of our common stock. Following the Spin-Off, we will be separate from Nuance and publicly traded. If a private letter ruling is obtained from the Internal Revenue Service (the “IRS”), Nuance may retain no more than approximately 18.5% ownership interest in us following the Sale Transaction and the Distribution, and otherwise will distribute all of its shares of our common stock and not retain any ownership in us. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off” for more information regarding the private letter ruling.

 

  Q:

What are the reasons for the Spin-Off?

 

  A:

The Nuance Board believes that the separation of the automotive technology business from Nuance is in the best interests of Nuance stockholders and for the success of the automotive technology business for a number of reasons. See “The Spin-Off—Reasons for the Spin-Off” for more information.

 

  Q:

Is the completion of the Spin-Off subject to the satisfaction or waiver of any conditions?

 

  A:

Yes, the completion of the Spin-Off is subject to the satisfaction, or the Nuance Board’s waiver, of certain conditions. Any of these conditions may be waived by the Nuance Board to the extent such waiver is permitted by law. In addition, Nuance may at any time until the Distribution decide to abandon the Distribution or modify or change the terms of the Distribution. See “The Spin-Off—Conditions to the Spin-Off” for more information.

 

  Q:

Will the number of Nuance shares I own change as a result of the Spin-Off?

 

  A:

No, the number of shares of Nuance common stock you own will not change as a result of the Spin-Off.

 

  Q:

Will the Spin-Off affect the trading price of my Nuance common stock?

 

  A:

We expect the trading price of shares of Nuance common stock immediately following the Distribution to be lower than the trading price immediately prior to the Distribution because the trading price will no longer reflect the value of the Business. There can be no assurance that, following the Distribution, the combined trading prices of the Nuance common stock and our common stock will equal or exceed what the trading price of Nuance common stock would have been in the absence of the Spin-Off.



 

  12  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

It is possible that after the Spin-Off, the combined equity value of Nuance and SpinCo will be less than Nuance’s equity value before the Spin-Off.

 

  Q:

What will I receive in the Spin-Off in respect of my Nuance common stock?

 

  A:

As a holder of Nuance common stock, you will receive a dividend of one share of our common stock for every                 shares of Nuance common stock you hold on the Record Date (as defined below). The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See “The Spin-Off—Treatment of Fractional Shares” for more information on the treatment of the fractional share you may be entitled to receive in the Distribution. Your proportionate interest in Nuance will not change as a result of the Spin-Off. For a more detailed description, see “The Spin-Off.”

 

  Q:

What is being distributed in the Spin-Off?

 

  A:

Nuance will distribute approximately                shares of our common stock in the Spin-Off, based on the approximately                 shares of Nuance common stock outstanding as of                 , 2019. The actual number of shares of our common stock that Nuance will distribute will depend on the total number of shares of Nuance common stock outstanding on the Record Date. The shares of our common stock that Nuance distributes will constitute at least 80.1% of the issued and outstanding shares of our common stock immediately prior to the Distribution. For more information on the shares being distributed in the Spin-Off, see “Description of Our Capital Stock—Common Stock.”

 

  Q:

What is the record date for the Distribution?

 

  A:

Nuance will determine record ownership as of the close of business on                 , 2019, which we refer to as the “Record Date.”

 

  Q:

When and how will the Distribution occur?

 

  A:

The Distribution will be effective as of                 , New York City time, on                 , 2019, which we refer to as the “Distribution Date.” On the Distribution Date, Nuance will release at least 80.1% of the shares of our common stock to the distribution agent to distribute to Nuance stockholders. The whole shares of our common stock will be credited in book-entry accounts for Nuance stockholders entitled to receive the shares in the Distribution.

 

  Q:

How will Nuance vote any shares of our common stock it retains?

 

  A:

Nuance has agreed to vote any shares of our common stock that it retains in proportion to the votes cast by our other stockholders and will grant us a proxy with respect to such shares. For additional information on these voting arrangements, see “Certain Relationships and Related Party Transactions—Relationship with Nuance Following the Separation.”

 

  Q:

What does Nuance intend to do with any shares of our common stock it retains?

 

  A:

If a private letter ruling from the IRS is obtained and Nuance retains any of our shares, Nuance will sell all such retained shares to third party purchasers as soon as reasonably practicable following the Spin-Off, but in no event later than                 , while seeking to maximize overall value to its stockholders. These sales may occur pursuant to one or more public or private offerings.



 

  13  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

  Q:

What do I have to do to participate in the Distribution?

 

  A:

All holders of Nuance’s common stock as of the Record Date will participate in the Distribution. You are not required to take any action in order to participate, but we urge you to read this Information Statement carefully. Holders of Nuance common stock on the Record Date will not need to pay any cash or deliver any other consideration, including any shares of Nuance common stock, in order to receive shares of our common stock in the Distribution. In addition, no stockholder approval of the Distribution is required. We are not asking you for a vote and request that you do not send us a proxy card.

 

  Q:

If I sell my shares of Nuance common stock on or before the Distribution Date, will I still be entitled to receive shares of SpinCo common stock in the Distribution?

 

  A:

If you sell your shares of Nuance common stock before the Record Date, you will not be entitled to receive shares of SpinCo common stock in the Distribution. If you hold shares of Nuance common stock on the Record Date and decide to sell them on or before the Distribution Date, you may have the ability to choose to sell your Nuance common stock with or without your entitlement to receive our common stock in the Distribution. You should discuss the available options in this regard with your bank, broker or other nominee. See “The Spin-Off—Trading Prior to the Distribution Date” for more information.

 

  Q:

How will fractional shares be treated in the Distribution?

 

  A:

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Nuance stockholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees, transfer taxes and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and “when-issued” trades will generally settle within two trading days following the Distribution Date. See “Q: How will our common stock trade?” for additional information regarding “when-issued” trading and “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation of the treatment of fractional shares. The distribution agent will, in its sole discretion, without any influence by Nuance or us, determine when, how, through which broker-dealer and at what price to sell the whole shares of our common stock. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Nuance or us.

 

  Q:

What are the U.S. federal income tax consequences to me of the Distribution?

 

  A:

For U.S. federal income tax purposes, no gain or loss will be recognized by, or be includible in the income of, a U.S. Holder (as defined in “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off”) as a result of the Distribution, except with respect to any cash (if any) received by Nuance stockholders in lieu of fractional shares. After the Distribution, Nuance stockholders will allocate their basis in their Nuance common stock held immediately before the Distribution between their Nuance common stock and our common stock in proportion to their relative fair market values on the date of Distribution.

See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off” for more information regarding the potential tax consequences to you of the Spin-Off.



 

  14  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

  Q:

Does SpinCo intend to pay cash dividends?

 

  A:

Once the Spin-Off is effective, we will be evaluating whether to pay cash dividends to our stockholders. The timing, declaration, amount and payment of future dividends to stockholders, if any, will fall within the discretion of our board of directors (our “Board”). Among the items we will consider when establishing a dividend policy will be the capital needs of our business and opportunities to retain future earnings for use in the operation of our business and to fund future growth. Additionally, the terms of the indebtedness we intend to incur in connection with the Spin-Off will limit our ability to pay cash dividends. See “Dividend Policy” for more information.

 

  Q:

Will SpinCo incur any debt prior to or at the time of the Distribution?

 

  A:

In connection with the Spin-Off, we expect to incur indebtedness in an aggregate principal amount of approximately $         million under a senior secured term loan facility, of which $         million of the net proceeds will be transferred to Nuance immediately prior to the consummation of the Spin-Off. We also intend to enter into a revolving credit facility, none of which is expected to be drawn at the closing of the Spin-Off. The terms of such indebtedness are subject to change and will be finalized prior to the closing of the Spin-Off. See “Capitalization,” “Unaudited Pro Forma Combined Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information.

 

  Q:

How will our common stock trade?

 

  A:

We intend to apply to list our common stock on the Nasdaq Global Select Market under the symbol “CRNC.” The listing is subject to approval of our application. Currently, there is no public market for our common stock.

We anticipate that trading in our common stock will begin on a “when-issued” basis as early as one trading day prior to the Record Date for the Distribution and will continue up to and including the Distribution Date. “When-issued” trading in the context of a spin-off refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. “When-issued” trades generally settle within two trading days after the Distribution Date. On the first trading day following the Distribution Date, any “when-issued” trading of our common stock will end and “regular-way” trading will begin. Regular-way trading refers to trading after the security has been distributed and typically involves a trade that settles on the second full trading day following the date of the trade. See “The Spin-Off—Trading Prior to the Distribution Date” for more information. We cannot predict the trading prices for our common stock before, on or after the Distribution Date.

 

  Q:

Do I have appraisal rights in connection with the Spin-Off?

 

  A:

No. Holders of Nuance common stock are not entitled to appraisal rights in connection with the Spin-Off.

 

  Q:

Who is the transfer agent and registrar for SpinCo common stock?

 

  A:

                 is the transfer agent and registrar for SpinCo common stock.

 

  Q:

Are there risks associated with owning shares of SpinCo common stock?

 

  A:

Yes, there are substantial risks associated with owning shares of SpinCo common stock. Accordingly, you should read carefully the information set forth under “Risk Factors” in this Information Statement.



 

  15  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

  Q:

Where can I get more information?

 

  A:

If you have any questions relating to the mechanics of the Distribution, you should contact the distribution agent at:

Before the Spin-Off, if you have any questions relating to the Spin-Off, you should contact Nuance at:

Investor Relations

Nuance Communications, Inc.

1 Wayside Road

Burlington, MA 01803

After the Spin-Off, if you have any questions relating to SpinCo, you should contact us at:

Investor Relations

Cerence Inc.

                    

Burlington, MA 01803



 

  16  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

RISK FACTORS

You should carefully consider all of the information in this Information Statement and each of the risks described below, which we believe are the principal risks that we face. Some of the risks relate to our business, others to the Spin-Off. Some risks relate principally to the securities markets and ownership of our common stock. Any of the following risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Information Statement.

Risks Relating to Our Business

The market in which we operate is highly competitive and rapidly changing and we may be unable to compete successfully.

There are a number of companies that develop or may develop products that compete in the automotive cognitive assistance market. The market for our products and services is characterized by intense competition, evolving industry and regulatory standards, emerging business and distribution models, disruptive software technology developments, short product and service life cycles, price sensitivity on the part of customers, and frequent new product introductions, including alternatives for certain of our products that offer limited functionality at significantly lower costs or free of charge. Current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the ability of their technologies to address the needs of our prospective customers. Furthermore, existing or prospective customers may decide to develop competing products or have established, or may in the future establish, strategic relationships with our competitors. We also face significant competition with respect to cloud-based solutions in the automotive cognitive assistance market where existing and new competitors may have or have already established significant market share and product offerings.

The competition in the automotive cognitive assistance market could adversely affect our operating results by reducing the volume of the products and solutions we license or sell or the prices we can charge. Some of our current or potential competitors are large technology companies that have significantly greater financial, technical and marketing resources than we do, and others are smaller specialized companies that possess automotive expertise or regional focus and may have greater price flexibility than we do. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements, or may decide to offer products at low or unsustainable cost to win new business. They may also devote greater resources to the development, promotion and sale of their products than we do, and in certain cases may be able to include or combine their competitive products or technologies with other of their products or technologies in a manner whereby the competitive functionality is available at lower cost or free of charge within the larger offering. To the extent they do so, penetration of our products, and therefore our revenue, may be adversely affected. Our large competitors may also have greater access to customer data, which provides them with a competitive advantage in developing new products and technologies. Our success depends substantially upon our ability to enhance our products and technologies, to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements, and to maintain our alignment with the OEMs, their technology and market strategies. If we are unable to develop new products and enhance functionalities or technologies to adapt to these changes and maintain our alignment with OEMs, our business will suffer.

Adverse conditions in the automotive industry or the global economy more generally could have adverse effects on our results of operations.

Our business depends on, and is directly affected by, the global automobile industry. Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences, changes in interest rate levels and credit availability, consumer confidence, fuel costs,

 

  17  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

fuel availability, environmental impact, governmental incentives and regulatory requirements, and political volatility, especially in energy-producing countries and growth markets. Such factors may also negatively impact consumer demand for automobiles that include features such as our products. In addition, automotive production and sales can be affected by our customers’ ability to continue operating in response to challenging economic conditions, and in response to labor relations issues, regulatory requirements, trade agreements and other factors. The volume of global automotive production has fluctuated, sometimes significantly, from year to year, and such fluctuations give rise to fluctuations in the demand for our products. Any significant adverse change in any of these factors, including, but not limited to, general economic conditions and the resulting bankruptcy of a customer or the closure of a customer manufacturing facility, may result in a reduction in automotive sales and production by our customers, and could have a material adverse effect on our business, results of operations and financial condition.

Our strategy to increase cloud connected services may adversely affect our near-term revenue growth and results of operations.

Our leadership position has historically been through our products and services based on edge software technology. We have been and are continuing to develop new products and services that incorporate cloud-connected components. The design and development of new cloud-connected components will involve significant expense. Our research and development costs have greatly increased in recent years and, together with certain expenses associated with delivering our connected services, are projected to continue to escalate in the near future. We may encounter difficulties with designing, developing and releasing new cloud-connected components, as well as integrating these components with our existing hybrid technologies. These development issues may further increase costs and may affect our ability to innovate in a manner demanded by the market. As a result, our strategy to incorporate more cloud-connected components may adversely affect our revenue growth and results of operations.

Pricing pressures from our customers may adversely affect our business.

We may experience pricing pressure from our customers in the future, which could result from the major OEMs’ strong purchasing power. As a developer of automotive cognitive assistance components, we may be expected to quote fixed prices or be forced to accept prices with annual price reduction commitments for long-term sales arrangements or discounted reimbursements for our work. Any price reductions could impact our sales and profit margins. Our future profitability will depend upon, among other things, our ability to continuously reduce the costs for our components and maintain our cost structure. Our profitability is also influenced by our success in designing and marketing technological improvements in automotive cognitive assistance systems. If we are unable to offset any price reductions in the future, our business, results of operations and financial condition would be adversely affected.

We invest effort and money seeking OEMs’ validation of our technology, and there can be no assurance that we will win or be able to renew service contracts, which could adversely affect our future business, results of operations and financial condition.

We invest effort and money from the time an OEM or a tier 1 supplier begins designing for an upcoming program to the date on which the customer chooses our technology to be incorporated directly or indirectly into one or more specific vehicle models to be produced by the customer. This selection process is known as a “design win.” We could expend our resources without success. After a design win, it is typically quite difficult for a product or technology that did not receive the design win to displace the winner until the customer begins a new selection process because it is very unlikely that a customer will change complex technology until a vehicle model is revamped. In addition, the company with the winning design may have an advantage with the customer going forward because of the established relationship between the winning company and such customer, which could make it more difficult for such company’s competitors to win the designs for other service contracts. Even

 

  18  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

if we have an established relationship with a customer, any failure to perform under a service contract or innovate in response to their feedback may neutralize our advantage with that customer. If we fail to win a significant number of customer design competitions in the future or to renew a significant number of existing service contracts, our business, results of operations and financial condition would be adversely affected. Moreover, due to the evolution of our connected offerings and architecture, trending away from providing legacy infotainment and connected services and a change in our professional services pricing strategies, we expect our deferred revenue balances to decrease in the future. To the extent we are unable to renew existing service contracts, such decrease could intensify. The period of time from winning a contract to implementation is long and we are subject to the risks of cancellation or postponement of the contract or unsuccessful implementation.

Our products are technologically complex and incorporate many technological innovations. Prospective customers generally must make significant commitments of resources to test and validate our products before including them in any particular vehicle model. The development cycles of our products with new customers are approximately six months to two years after a design win, depending on the customer and the complexity of the product. These development cycles result in our investing our resources prior to realizing any revenues from the customer contracts. Further, we are subject to the risk that a customer cancels or postpones implementation of our technology, as well as that we will not be able to implement our technology successfully. Further, our sales could be less than forecast if the vehicle model is unsuccessful, including reasons unrelated to our technology. Long development cycles and product cancellations or postponements may adversely affect our business, results of operations and financial condition.

Our business could be materially and adversely affected if we lost any of our largest customers.

The loss of business from any of our major customers, whether by lower overall demand for vehicles, cancellation of existing contracts or the failure to award us new business, could have a material adverse effect on our business, results of operations and financial condition. Alternatively, there is a risk that one or more of our major customers could be unable to pay our invoices as they become due or that a customer will simply refuse to make such payments given its financial difficulties. If a major customer becomes subject to bankruptcy or similar proceedings whereby contractual commitments are subject to stay of execution and the possibility of legal or other modification, or if a major customer otherwise successfully procures protection against us legally enforcing its obligations, it is likely that we will be forced to record a substantial loss. In addition, certain of our customers that are tier 1 suppliers exclusively sell to certain OEMs, including some of our other customers. A bankruptcy of, or other significant disruption to, any of these OEMs could intensify any adverse impact on our business and results of operations.

Our operating results may fluctuate significantly from period to period, and this may cause our stock price to decline.

Our revenue and operating results may fluctuate materially in the future. These fluctuations may cause our results of operations to not meet the expectations of securities analysts or investors which would likely cause the price of our stock to decline. Factors that may contribute to fluctuations in operating results include:

 

   

given our limited customer base, the volume, timing and fulfillment of large customer contracts;

 

   

renewals of existing customer contracts and wins of new customer programs;

 

   

increased expenditures incurred pursuing new product or market opportunities;

 

   

receipt of royalty reports;

 

   

fluctuating sales by our customers to their end-users;

 

   

contractual counterparties failing to meet their contractual commitments to us;

 

   

introduction of new products by us or our competitors;

 

  19  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

cybersecurity or data breaches;

 

   

reduction in the prices of our products in response to competition, market conditions or contractual obligations;

 

   

impairment of goodwill or intangible assets;

 

   

accounts receivable that are not collectible;

 

   

higher than anticipated costs related to fixed-price contracts with our customers;

 

   

change in costs due to regulatory or trade restrictions;

 

   

expenses incurred in litigation matters, whether initiated by us or brought by third-parties against us, and settlements or judgments we are required to pay in connection with disputes; and

 

   

general economic trends as they affect the customer bases into which we sell.

Due to the foregoing factors, among others, our revenue and operating results may fluctuate significantly from period to period. Our expense levels are based in significant part on our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to near-term shortfalls in projected revenue. Therefore, our failure to meet revenue expectations would seriously harm our operating results, financial condition and cash flows.

Following the Spin-Off, we will have our first senior management team. If we encounter difficulties in the transition, our business could be negatively impacted.

In connection with the Spin-Off, we plan to appoint our first senior management team, including our first Chief Executive Officer and Chief Financial Officer. Our future success will partly depend upon our first senior management team and other key employees to effectively implement our business strategies. Our first management team may require transition time to fully understand all aspects of our business and the transition may be disruptive to, or cause uncertainty in, our business and strategic direction. If we have failures in any aspects of this transition, or the strategies implemented by our management team are not successful, our business could be harmed.

If we are unable to attract and retain key personnel, our business could be harmed.

If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. Although we have arrangements with some of our executive officers designed to promote retention, our employment relationships are generally at-will and we have had key employees leave in the past. We cannot assure you that one or more key employees will not leave in the future. We intend to continue to hire additional highly qualified personnel, including research and development and operational personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our business.

We depend on skilled employees and could be impacted by a shortage of critical skills.

Much of our future success depends on the continued service and availability of skilled employees, particularly with respect to technical areas. Skilled and experienced personnel in the areas where we compete are in high demand, and competition for their talents is intense. We expect that many of our key employees will receive a total compensation package that includes equity awards. New regulations or volatility in the stock market could diminish our use, and the value, of our equity awards. This would place us at a competitive disadvantage in attracting qualified personnel or force us to offer more cash compensation.

 

  20  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Cybersecurity and data privacy incidents or breaches may damage client relations and inhibit our growth.

The confidentiality and security of our information, and that of third parties, is critical to our business. Our services involve the transmission, use, and storage of customers’ and their customers’ information, which may be confidential or contain personally identifiable information. Any cybersecurity or data privacy incidents could have a material adverse effect on our results of operations and financial condition. While we maintain a broad array of information security and privacy measures, policies and practices, our networks may be breached through a variety of means, resulting in someone obtaining unauthorized access to our information, to information of our customers or their customers, or to our intellectual property; disabling or degrading service; or sabotaging systems or information. In addition, hardware, software, systems, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our employees, contractors, and vendors. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We will continue to incur significant costs to continuously enhance our information security measures to defend against the threat of cybercrime. Any cybersecurity or data privacy incident or breach may result in:

 

   

loss of revenue resulting from the operational disruption;

 

   

loss of revenue or increased bad debt expense due to the inability to invoice properly or to customer dissatisfaction resulting in collection issues;

 

   

loss of revenue due to loss of customers;

 

   

material remediation costs to recreate or restore systems;

 

   

material investments in new or enhanced systems in order to enhance our information security posture;

 

   

cost of incentives offered to customers to restore confidence and maintain business relationships;

 

   

reputational damage resulting in the failure to retain or attract customers;

 

   

costs associated with potential litigation or governmental investigations;

 

   

costs associated with any required notices of a data breach;

 

   

costs associated with the potential loss of critical business data;

 

   

difficulties enhancing or creating new products due to loss of data or data integrity issues; and

 

   

other consequences of which we are not currently aware but will discover through the remediation process.

Our business is subject to a variety of domestic and international laws, rules, policies and other obligations including data protection and anticorruption.

We are subject to U.S. and international laws and regulations in multiple areas, including data protection, anticorruption, labor relations, tax, foreign currency, anti-competition, import, export and trade regulations, and we are subject to a complex array of federal, state and international laws relating to the collection, use, retention, disclosure, security and transfer of personally identifiable information. In many cases, these laws apply not only to transfers between unrelated third-parties but also to transfers between us and our subsidiaries. Many jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. The European Commission adopted the European General Data Protection Regulation (the “GDPR”), which went into effect on May 25, 2018. China adopted a new cybersecurity law as of June 2017. In addition, California adopted significant new consumer privacy laws in June 2018 that will be effective beginning in January 2020. Complying with the GDPR and other requirements may cause us to incur substantial costs and may require us to change our business practices.

 

  21  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Any failure by us, our customers or other parties with whom we do business to comply with our privacy policy or with federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others. Any alleged or actual failure to comply with applicable privacy laws and regulations may:

 

   

cause our customers to lose confidence in our solutions;

 

   

harm our reputation;

 

   

expose us to litigation, regulatory investigations and to resulting liabilities including reimbursement of customer costs, damages penalties or fines imposed by regulatory agencies; and

 

   

require us to incur significant expenses for remediation.

We are also subject to a variety of anticorruption laws in respect of our international operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and the Canadian Corruption of Foreign Public Officials Act, and regulations issued by the U.S. Customs and Border Protection, the U.S. Bureau of Industry and Security, the U.S. Treasury Department’s Office of Foreign Assets Control, and various other foreign governmental agencies. We cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. Actual or alleged violations of these laws and regulations could lead to enforcement actions and financial penalties that could result in substantial costs.

A significant portion of our revenue are derived, and a significant portion of our research and development activities are based, outside the United States. Our results could be harmed by economic, political, regulatory, foreign currency fluctuations and other risks associated with these international regions.

Because we operate worldwide, our business is subject to risks associated with doing business internationally. We generate most of our international revenue in Europe and Asia, and we anticipate that revenue from international operations could increase in the future. In addition, some of our products are developed outside the United States. We conduct a significant portion of the development of our voice recognition and natural language understanding solutions in Canada and Germany. We also have significant research and development resources in Austria, Belgium, China, India, Italy, and the United Kingdom. We are exposed to fluctuating exchange rates of foreign currencies including the euro, British pound, Canadian dollar, Chinese RMB, Japanese yen, Indian rupee and South Korean won. Accordingly, our future results could be harmed by a variety of factors associated with international sales and operations, including:

 

   

adverse political and economic conditions, or changes to such conditions, in a specific region or country;

 

   

trade protection measures, including tariffs and import/export controls, imposed by the United States and/or by other countries or regional authorities such as China, Canada or the European Union;

 

   

the impact on local and global economies of the United Kingdom leaving the European Union;

 

   

changes in foreign currency exchange rates or the lack of ability to hedge certain foreign currencies;

 

   

compliance with laws and regulations in many countries and any subsequent changes in such laws and regulations;

 

   

geopolitical turmoil, including terrorism and war;

 

   

changing data privacy regulations and customer requirements to locate data centers in certain jurisdictions;

 

   

evolving restrictions on cross-border investment, including recent enhancements to the oversight by the Committee on Foreign Investment in the United States pursuant to the Foreign Investment Risk Preview Modernization Act and substantial restrictions on investment from China;

 

  22  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

changes in applicable tax laws;

 

   

difficulties in staffing and managing operations in multiple locations in many countries;

 

   

longer payment cycles of foreign customers and timing of collections in foreign jurisdictions; and

 

   

less effective protection of intellectual property than in the United States.

Our business in China is subject to aggressive competition and is sensitive to economic, market and political conditions.

We operate in the highly competitive automotive cognitive assistance market in China and face competition from both international and smaller domestic manufacturers. We anticipate that additional competitors, both international and domestic, may seek to enter the Chinese market resulting in increased competition. Increased competition may result in price reductions, reduced margins and our inability to gain or hold market share. There have been periods of increased market volatility and moderation in the levels of economic growth in China, which resulted in periods of lower automotive production growth rates in China than those previously experienced. In addition, political tensions between China and the United States may negatively impact our ability to conduct business in China. If we are unable to grow or maintain our position in the Chinese market, the pace of growth slows or vehicle sales in China decrease, our business, results of operations and financial condition could be materially adversely effected. Government regulations and business considerations may also require us to conduct business in China through joint ventures with Chinese companies. Our participation in joint ventures would limit our control over Chinese operations and may expose our proprietary technologies to misappropriation by joint venture partners. The above risks, if realized, could have a material adverse effect on our business, results of operations and financial condition.

Interruptions or delays in our services or services from data center hosting facilities or public clouds could impair the delivery of our services and harm our business.

Because our services are complex and incorporate a variety of third-party hardware and software, our services may have errors or defects that could result in unanticipated downtime for our customers and harm to our reputation and our business. We have from time to time, found defects in our services, and new errors in our services may be detected in the future. In addition, we currently serve our customers from data center hosting facilities or third-party public clouds we directly manage. Any damage to, or failure of, the systems and facilities that serve our customers in whole or in part could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay service level agreement penalties, cause customers to terminate their on-demand services, and adversely affect our renewal rates and our ability to attract new customers.

If our goodwill or other intangible assets become impaired, our operating results could be negatively impacted.

We have significant intangible assets, including goodwill and other intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant intangible assets are goodwill, customer relationships and patents and core technologies. Customer relationships are amortized over their estimated economic lives based on the pattern of economic benefits expected to be generated from the use of the asset. Technologies and patents are amortized on a straight-line basis over their estimated useful lives. We assess the potential impairment of goodwill on an annual basis. Whenever events or changes in circumstances indicate that the carrying value may not be recoverable, we will be required to assess the potential impairment of goodwill and other intangible assets. Factors that could trigger an impairment of such assets include the following:

 

   

changes in our organization or management reporting structure that could result in additional reporting units, which may require alternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit;

 

   

significant under performance relative to historical or projected future operating results;

 

  23  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

significant changes in the strategy for our overall business;

 

   

significant negative industry or economic trends;

 

   

significant decline in our stock price for a sustained period; and

 

   

our market capitalization declining to below net book value.

Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact our results of operations and financial position in the reporting period identified.

Tax matters may cause significant variability in our financial results.

Our businesses are subject to income taxation in the United States, as well as in many tax jurisdictions throughout the world. Tax rates in these jurisdictions may be subject to significant change. If our effective tax rate increases, our operating results and cash flow could be adversely affected. Our effective income tax rate can vary significantly between periods due to a number of complex factors including:

 

   

projected levels of taxable income;

 

   

pre-tax income being lower than anticipated in countries with lower statutory rates or higher than anticipated in countries with higher statutory rates;

 

   

increases or decreases to valuation allowances recorded against deferred tax assets;

 

   

tax audits conducted and settled by various tax authorities;

 

   

adjustments to income taxes upon finalization of income tax returns;

 

   

the ability to claim foreign tax credits;

 

   

the repatriation of non-U.S. earnings for which we have not previously provided for income taxes; and

 

   

changes in tax laws and their interpretations in countries in which we are subject to taxation.

Risks Relating to our Intellectual Property and Technology

Third parties have claimed and may claim in the future that we are infringing their intellectual property, and we could be exposed to significant litigation or licensing expenses or be prevented from selling our products if such claims are successful.

From time to time, we are subject to claims and legal actions alleging that we or our customers may be infringing or contributing to the infringement of the intellectual property rights of others. We may be unaware of intellectual property rights of others that may cover some of our technologies and products. If it appears necessary or desirable, we may seek licenses for these intellectual property rights. However, we may not be able to obtain licenses from some or all claimants, the terms of any offered licenses may not be acceptable to us, and we may not be able to resolve disputes without litigation. Any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various arrangements. Any of these could seriously harm our business.

Unauthorized use of our proprietary technology and intellectual property could adversely affect our business and results of operations.

Our success and competitive position depend in large part on our ability to obtain and maintain intellectual property rights protecting our products and services. We rely on a combination of patents, copyrights,

 

  24  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property and proprietary rights. Unauthorized parties may attempt to copy or discover aspects of our products or to obtain, license, sell or otherwise use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to our technologies and that do not infringe our rights. In these cases, we would be unable to prevent our competitors from selling or licensing these similar or superior technologies. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Although the source code for our proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation, regardless of the outcome, can be very expensive and can divert management’s efforts.

Our software products may have bugs, which could result in delayed or lost revenue, expensive correction, liability to our customers and claims against us.

Complex software products such as ours may contain errors, defects or bugs. Defects in the solutions or products that we develop and sell to our customers could require expensive corrections and result in delayed or lost revenue, adverse customer reaction and negative publicity about us or our products and services. Customers who are not satisfied with any of our products may also bring claims against us for damages, which, even if unsuccessful, would likely be time-consuming to defend, and could result in costly litigation and payment of damages. Such claims could harm our reputation, financial results and competitive position.

We may be unable to respond quickly enough to changes in technology and technological risks and to develop our intellectual property into commercially viable products.

Changes in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete or less attractive to our customers, which could adversely affect our results of operations. Our ability to anticipate changes in technology and regulatory standards and to successfully develop and introduce new and enhanced products on a timely basis will be a significant factor in our ability to be competitive. There is a risk that we will not be able to achieve the technological advances that may be necessary for us to be competitive or that certain of our products will become obsolete. Moreover, restrictions on the use of our technology under the Separation and Distribution Agreement and the Intellectual Property Agreement over the next five years may limit our ability to adapt to technology and regulatory developments and thereby compete effectively in the market. We are also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in product development and failure of products to operate properly. These risks could have a material adverse effect on our business, results of operations and financial condition.

We utilize certain key technologies, content and services from, and integrate certain of our solutions with, third parties and may be unable to replace those technologies, content and services if they become obsolete, unavailable or incompatible with our solutions.

We utilize certain key technologies and content from, and/or integrate certain of our solutions with, hardware, software, services and content of third parties. Some of these vendors are also our competitors in various respects. These third-party vendors could, in the future, seek to charge us cost prohibitive fees for such use or integration or may design or utilize their solutions in a manner that makes it more difficult for us to continue to utilize their solutions, or integrate their technologies with our solutions, in the same manner or at all. Any significant interruption in the supply or maintenance of such third-party hardware, software, services or content could negatively impact our ability to offer our solutions unless and until we replace the functionality provided by this third-party hardware, software and/or content. In addition, we are dependent upon these third

 

  25  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

parties’ ability to enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. There can be no assurance that we would be able to replace the functionality or content provided by third-party vendors in the event that such technologies become obsolete or incompatible with future versions of our solutions or are otherwise not adequately maintained or updated. Any delay in or inability to replace any such functionality could have a material adverse effect on our business, results of operations and financial condition. Furthermore, delays in the release of new and upgraded versions of third-party software applications could have a material adverse effect on our business, results of operations and financial condition.

Risks Relating to the Spin-Off

The Spin-Off could result in significant tax liability to Nuance and its stockholders.

Completion of the Spin-Off is conditioned on Nuance’s receipt of a written opinion from Paul, Weiss, Rifkind, Wharton & Garrison LLP to the effect that the Distribution will qualify for non-recognition of gain and loss under Section 355 and related provisions of the Code. Nuance can waive receipt of the opinion as a condition to the completion of the Spin-Off.

In addition, Nuance has requested a private letter ruling from the IRS regarding Nuance’s potential retention of no more than approximately 18.5% of our common stock. If the private letter ruling is not obtained prior to the Distribution, Nuance will not retain any ownership interest in us, and will distribute all of its shares of our common stock. If the private letter ruling is obtained prior to the Distribution, Nuance may retain no more than an approximately 18.5% ownership interest in us for a limited period of time, which Nuance would sell to third party purchasers as soon as reasonably practicable after the Spin-Off, subject to market and regulatory conditions, but in no event later than                    .

The opinion of counsel does not, and the private letter ruling would not, address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion would rely on the private letter ruling with respect to matters covered by the private letter ruling (if obtained), assumes that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and relies on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents. In addition, the opinion is, and the private letter ruling would be, based on certain assumptions as well as certain representations as to factual matters from, and certain covenants by, Nuance and us. The opinion and the private letter ruling (if obtained) cannot be relied on if any of the assumptions, representations or covenants are incorrect, incomplete or inaccurate or are violated in any material respect.

The private letter ruling, if obtained, would generally be binding on the IRS. The opinion of counsel, however, is not binding on the IRS or the courts, and there can be no assurance that the IRS or a court will not take a contrary position. If the conclusions expressed in the opinion are challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences of the Spin-Off (including the tax consequences to Nuance and U.S. Holders) could be materially less favorable.

If the Spin-Off were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, each U.S. Holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in: (1) a taxable dividend to the U.S. Holder to the extent of that U.S. Holder’s pro rata share of Nuance’s current or accumulated earnings and profits; (2) a reduction in the U.S. Holder’s basis (but not below zero) in Nuance common stock to the extent the amount received exceeds the stockholder’s share of Nuance’s earnings and profits; and (3) taxable gain from the exchange of Nuance common stock to the extent the amount received exceeds the sum of the U.S. Holder’s share of Nuance’s earnings and profits and the U.S. Holder’s basis in its Nuance common stock. See below and “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

  26  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

If the Spin-Off were determined not to qualify as tax-free for U.S. federal income tax purposes, we could have an indemnification obligation to Nuance, which could adversely affect our business, financial condition and results of operations.

If, as a result of any of our representations being untrue or our covenants being breached, the Spin-Off, and certain of the Reorganization Transactions, were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, we could be required to indemnify Nuance for the resulting taxes and related expenses. Those amounts could be material. Any such indemnification obligation could adversely affect our business, financial condition and results of operations.

In addition, if we or our stockholders were to engage in transactions that resulted in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Distribution, the Spin-Off would generally be taxable to Nuance, but not to stockholders, under Section 355(e) of the Code, unless it were established that such transactions and the Spin-Off were not part of a plan or series of related transactions. If the Spin-Off were taxable to Nuance due to such a 50% or greater change in ownership of our stock, Nuance would recognize gain equal to the excess of the fair market value on the Distribution Date of our common stock distributed to Nuance stockholders over Nuance’s tax basis in our common stock and would also recognize gain in respect of certain of the Reorganization Transactions, and we generally would be required to indemnify Nuance for the tax on such gain and related expenses. Those amounts would be material. Any such indemnification obligation could adversely affect our business, financial condition and results of operations. See “Certain Relationships and Related Party Transactions—Agreements with Nuance—Tax Matters Agreement.”

We intend to agree to numerous restrictions to preserve the non-recognition treatment of the Spin-Off, which may reduce our strategic and operating flexibility.

We intend to agree in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355 and related provisions of the Code and are intended to preserve the tax-free nature of the Spin-Off. These covenants will include certain restrictions on our activity for a period of two years following the Spin-Off, unless we or Nuance obtain a private letter ruling from the IRS or an opinion of counsel, in each case acceptable to Nuance in its reasonable discretion, that the restricted action would not impact the non-recognition treatment of the Spin-Off, or unless Nuance otherwise gives its consent for us to take a restricted action. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that our stockholders may consider favorable. See “Certain Relationships and Related Party Transactions—Agreements with Nuance—Tax Matters Agreement.”

Until the separation occurs, Nuance has sole discretion to change the terms of the separation in ways that may be unfavorable to us.

Until the Sale Transaction and the Spin-Off occur, SpinCo will be a wholly-owned subsidiary of Nuance. Accordingly, Nuance will effectively have the sole and absolute discretion to determine and change the terms of the separation, including the establishment of the record date for the Distribution and the Distribution Date. These changes could be unfavorable to us. In addition, the separation and Distribution and related transactions are subject to the satisfaction or waiver by Nuance in its sole discretion of a number of conditions. We cannot assure you that any or all of these conditions will be met. Nuance may also decide at any time not to proceed with the separation and distribution.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.

We believe that, as an independent, publicly traded company, we will be able to, among other things, design and implement corporate strategies and policies and develop partnerships that are better targeted to our business’s areas of strength and differentiation, better focus our financial and operational resources on those

 

  27  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

specific strategies, create effective incentives for our management and employees that are more closely tied to our business performance, provide investors more flexibility and enable us to achieve alignment with a more natural stockholder base and implement and maintain a capital structure designed to meet our specific needs. We may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all, for a variety of reasons, including: (i) the completion of the Spin-Off will require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our business; (ii) following the Spin-Off, we may be more susceptible to market fluctuations and other adverse events than if it were still a part of Nuance; and (iii) following the Spin-Off, our businesses will be less diversified than Nuance’s businesses prior to the separation. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition and results of operations could be adversely affected.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent, publicly traded company, and we may experience increased costs after the Spin-Off.

We have historically operated as part of Nuance’s organization, and Nuance has provided us with various corporate functions. Following the Spin-Off, Nuance will have no obligation to provide us with assistance other than the transition and other services described under “Certain Relationships and Related Party Transactions.” These services do not include every service that we have received from Nuance in the past, and Nuance is only obligated to provide the transition services for limited periods following completion of the Spin-Off. The agreements relating to such transition services and to the Spin-Off more generally will be negotiated prior to the Spin-Off, at a time when SpinCo’s business will still be operated by Nuance. The agreements generally will be entered into on arms-length terms similar to those that would be agreed with an unaffiliated third party such as a buyer in sale transaction, but SpinCo will not have an independent board of directors or a management team independent of Nuance representing its interests while the agreements are being negotiated. It is possible that we might have been able to achieve more favorable terms if the circumstances differed. We will rely on Nuance to satisfy its performance and payment obligations under any transition services agreements and other agreements related to the Spin-Off, and if Nuance does not satisfy such obligations, we could incur operational difficulties or losses.

Following the Spin-Off and the cessation of any transition services agreements, we will need to provide internally or obtain from unaffiliated third parties the services we will no longer receive from Nuance. These services include legal, accounting, information technology, research and software development, human resources and other general administrative and infrastructure support, the effective and appropriate performance of which are critical to our operations. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from Nuance. Because our business has historically operated as part of the wider Nuance organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or may incur additional costs that could adversely affect our business. If we fail to obtain the quality of services necessary to operate effectively or incur greater costs in obtaining these services, our business, financial condition and results of operations may be adversely affected.

As we build our information technology infrastructure and transition our data to our own systems, we could incur substantial additional costs and experience temporary business interruptions, and our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Spin-Off.

Following the Spin-Off, we will install and implement information technology infrastructure to support certain of our business functions, including accounting and reporting, human resources, sales operations, customer service, and distribution. We may incur substantially higher costs than currently anticipated as we transition from the existing transactional and operational systems and data centers we currently use as part of Nuance. If we are unable to transition effectively, we may incur temporary interruptions in business operations. Any delay in implementing, or operational interruptions suffered while implementing, our new information

 

  28  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

technology infrastructure could disrupt our business and have a material adverse effect on our results of operations.

In addition, if we are unable to replicate or transition certain systems, our ability to comply with regulatory requirements could be impaired. As a result of the Spin-Off, we will be directly subject to reporting and other obligations under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Beginning with our second required Annual Report on Form 10-K, we intend to comply with Section 404 of the Sarbanes Oxley Act of 2002, as amended (the “Sarbanes Oxley Act”), which will require annual management assessments of the effectiveness of our internal control over financial reporting. In addition, once we cease to qualify as an “emerging growth company,” Section 404 of the Sarbanes Oxley Act will also require a report by our independent registered public accounting firm addressing these assessments in our Annual Report on Form 10-K for the year in which we cease to qualify as an “emerging growth company.” These reporting and other obligations may place significant demands on management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with these requirements, we may need to upgrade our systems, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. We expect to incur additional annual expenses for the purpose of addressing these, and other public company reporting, requirements. If we are unable to upgrade our financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, financial condition, results of operations and cash flow. See “—Risks Relating to Our Common Stock and the Securities Market—If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.”

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the effectiveness of our registration statement on Form 10. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the effectiveness of our registration statement on Form 10, (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have not yet determined whether to

 

  29  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

avail ourselves of this accommodation allowing for delayed adoption of new or revised accounting standards, but if we do not rely on this accommodation, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We intend to continue to improve our internal controls over financial reporting and ensure we are able to produce accurate and timely financial statements. However, no assurance can be given that our actions will be successful.

We have no operating history as an independent, publicly traded company, and our historical combined financial information is not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

We derived the historical combined financial information included in this Information Statement from Nuance’s consolidated financial statements, and this information does not necessarily reflect the results of operations and financial position we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

 

   

Prior to the Spin-Off, we operated as part of Nuance’s broader organization, and Nuance performed various corporate functions for us. Our historical combined financial information reflects allocations of corporate expenses from Nuance for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent publicly traded company.

 

   

We will enter into transactions with Nuance that did not exist prior to the Spin-Off, such as Nuance’s provision of transition and other services, and undertake indemnification obligations, which will cause us to incur new costs. See “Certain Relationships and Related Party Transactions—Agreements with Nuance.”

 

   

Our historical combined financial information does not reflect changes that we expect to experience in the future as a result of our separation from Nuance, including changes in the financing, cash management, operations, cost structure and personnel needs of our business. As part of Nuance, we enjoyed certain benefits from Nuance’s operating diversity, size, purchasing power, borrowing leverage and available capital for investments, and we will lose these benefits after the Spin-Off. As an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, or access capital markets, on terms as favorable to us as those we obtained as part of Nuance prior to the Spin-Off, and our results of operations may be adversely affected. In addition, our historical combined financial data do not include an allocation of interest expense comparable to the interest expense we will incur as a result of the Reorganization Transactions and the Spin-Off, including interest expense in connection with the incurrence of indebtedness at SpinCo.

Following the Spin-Off, we will also face additional costs and demands on management’s time associated with being an independent, publicly traded company, including costs and demands related to corporate governance, investor and public relations and public reporting. While we have been profitable as part of Nuance, we cannot assure you that our profits will continue at a similar level when we are an independent, publicly traded company. For additional information about our past financial performance and the basis of presentation of our Combined Financial Statements, see “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined Financial Statements and the Notes thereto included elsewhere in this Information Statement.

 

  30  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

We expect to incur new indebtedness immediately prior to the Distribution, and the degree to which we will be leveraged following completion of the Distribution could adversely affect our business, financial condition and results of operations.

In connection with the Spin-Off, we intend to incur substantial indebtedness in an aggregate principal amount of approximately $         million, of which $         million of the net proceeds will be transferred to Nuance immediately prior to the consummation of the Spin-Off.

We have historically relied upon Nuance to fund our working capital requirements and other cash requirements. After the Distribution, we will not be able to rely on the earnings, assets or cash flow of Nuance, and Nuance will not provide funds to finance our working capital or other cash requirements. As a result, after the Distribution, we will be responsible for servicing our own debt and obtaining and maintaining sufficient working capital and other funds to satisfy our cash requirements. After the Spin-Off, our access to and cost of debt financing will be different from the historical access to and cost of debt financing under Nuance. Differences in access to and cost of debt financing may result in differences in the interest rate charged to us on financings, as well as the amount of indebtedness, types of financing structures and debt markets that may be available to us.

Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Spin-Off, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

The terms of the new indebtedness we expect to incur in connection with the Distribution will restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industry in which we operate, the economy and governmental regulations.

We expect that the terms of the indebtedness we expect to incur in connection with the Distribution will include a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. These may restrict our and our subsidiaries’ ability to take some or all of the following actions:

 

   

incur or guarantee additional indebtedness or sell disqualified or preferred stock;

 

   

pay dividends on, make distributions in respect of, repurchase or redeem capital stock;

 

   

make investments or acquisitions;

 

   

sell, transfer or otherwise dispose of certain assets;

 

   

create liens;

 

   

enter into sale/leaseback transactions;

 

   

enter into agreements restricting the ability to pay dividends or make other intercompany transfers;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;

 

   

enter into transactions with affiliates;

 

   

prepay, repurchase or redeem certain kinds of indebtedness;

 

   

issue or sell stock of our subsidiaries; and/or

 

   

significantly change the nature of our business.

Furthermore, the lenders of this indebtedness may require that we pledge our assets as collateral as security for our repayment obligations or that we abide by certain financial or operational covenants. Our ability to

 

  31  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

comply with such covenants and restrictions may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. A breach of any of these covenants, if applicable, could result in an event of default under the terms of this indebtedness. If an event of default occurred, the lenders would have the right to accelerate the repayment of such debt, and the event of default or acceleration could result in the acceleration of the repayment of any other debt to which a cross-default or cross-acceleration provision applies. We might not have, or be able to obtain, sufficient funds to make these accelerated payments, and lenders could then proceed against any collateral. Any subsequent replacement of the agreements governing such indebtedness or any new indebtedness could have similar or greater restrictions. The occurrence and ramifications of an event of default could adversely affect our business, financial condition and results of operations. Moreover, as a result of all of these restrictions, we may be limited in how we conduct our business and pursue our strategy, unable to raise additional debt financing to operate during general economic or business downturns or unable to compete effectively or to take advantage of new business opportunities.

The commercial and credit environment may adversely affect our access to capital.

Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or if there are other significantly unfavorable changes in economic conditions. Volatility in the world financial markets could increase borrowing costs or affect our ability to access the capital markets. These conditions may adversely affect our ability to obtain targeted credit ratings prior to and following the Spin-Off.

We may have potential business conflicts of interest with Nuance with respect to our past and ongoing relationships.

Conflicts of interest may arise between Nuance and us in a number of areas relating to our past and ongoing relationships, including:

 

   

labor, tax, employee benefit, indemnification and other matters arising from our separation from Nuance;

 

   

intellectual property matters;

 

   

employee recruiting and retention; and

 

   

business combinations involving our company.

We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

Following the Spin-Off, certain of our directors and employees may have actual or potential conflicts of interest because of their financial interests in Nuance.

Because of their current or former positions with Nuance, certain of our expected executive officers and directors own equity interests in Nuance. Continuing ownership of Nuance shares and equity awards could create, or appear to create, potential conflicts of interest if SpinCo and Nuance face decisions that could have implications for both SpinCo and Nuance.

The allocation of intellectual property rights and data between Nuance and SpinCo as part of the Spin-Off, and the shared use of certain intellectual property rights and data following the Spin-Off, could adversely impact our reputation, our ability to enforce certain intellectual property rights that are important to us and our competitive position.

In connection with the Spin-Off, we are entering into agreements with Nuance governing the allocation of intellectual property rights and data related to our business. See “Certain Relationships and Related Party

 

  32  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Transactions—Agreements with Nuance—Agreements Governing Intellectual Property.” These agreements could adversely affect our position and options relating to intellectual property enforcement, licensing negotiations and monetization and access to data used in our business. We also may not have sufficient rights to grant sublicenses of intellectual property or data used in our business, and we may be subject to third party rights pertaining to the underlying intellectual property or data. These circumstances could adversely affect our ability to protect our competitive position in the industry.

Risks Relating to Our Common Stock and the Securities Market

No market for our common stock currently exists and an active trading market may not develop or be sustained after the Spin-Off. Following the Spin-Off our stock price may fluctuate significantly.

There is currently no public market for our common stock. Following the Spin-Off, we intend to list our common stock on a national securities exchange. We anticipate that before the Distribution Date, trading of shares of our common stock will begin on a “when-issued” basis and this trading will continue up to and including the Distribution Date. However, an active trading market for our common stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for stockholders to sell our shares and could lead to our share price being depressed or volatile.

We cannot predict the prices at which our common stock may trade after the Spin-Off or whether the combined market value of a share of our common stock and a share of Nuance’s common stock will be less than, equal to or greater than the market value of a share of Nuance common stock prior to the Spin-Off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

   

actual or anticipated fluctuations in our results of operations due to factors related to our business;

 

   

success or failure of our business strategies;

 

   

competition and industry capacity;

 

   

changes in interest rates and other factors that affect earnings and cash flow;

 

   

our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed;

 

   

our ability to retain and recruit qualified personnel;

 

   

our quarterly or annual earnings, or those of other companies in our industry;

 

   

announcements by us or our competitors of significant acquisitions or dispositions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

the failure of securities analysts to cover, or positively cover, our common stock after the Spin-Off;

 

   

changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

   

the operating and stock price performance of other comparable companies;

 

   

investor perception of our company and our industry;

 

   

overall market fluctuations unrelated to our operating performance;

 

   

results from any material litigation or government investigation;

 

   

changes in laws and regulations (including tax laws and regulations) affecting our business;

 

   

changes in capital gains taxes and taxes on dividends affecting stockholders; and

 

   

general economic conditions and other external factors.

 

  33  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Furthermore, our business profile and market capitalization may not fit the investment objectives of some Nuance stockholders and, as a result, these Nuance stockholders may sell their shares of our common stock after the Distribution. See “—Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.” Low trading volume for our stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility.

Should the market price of our shares drop significantly, stockholders may institute securities class action lawsuits against SpinCo. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

Substantial sales of our common stock may occur in connection with the Spin-Off or in the future, either of which could cause our stock price to decline.

Nuance stockholders receiving shares of our common stock in the Distribution generally may sell those shares immediately in the public market. It is likely that some Nuance stockholders, including some of its larger stockholders, will sell their shares of our common stock received in the Distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or, in the case of index funds, we are not a participant in the index in which they are investing.

After completion of the Distribution, if a private letter ruling from the IRS is obtained, Nuance may retain no more than approximately 18.5% of our total shares outstanding and sell such shares as soon as reasonably practicable following the Spin-Off, but in no event later than             . We will agree that, upon the request of Nuance, we will use our reasonable best efforts to effect a registration under applicable federal and state securities laws of any shares of our common stock retained by Nuance. In addition, any third party purchasers of approximately 1.4% of the shares of our common stock in the Sale Transaction may sell such shares following the Distribution.

The sales of significant amounts of our common stock or the perception in the market that such sales might occur may decrease the market price of our common stock.

We will evaluate whether to pay cash dividends on our common stock in the future, and the terms of our indebtedness will limit our ability to pay dividends on our common stock.

Once the Spin-Off is effective, we will be evaluating whether to pay cash dividends to our stockholders. The timing, declaration, amount and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Our Board’s decisions regarding the payment of dividends will depend on consideration of many factors, such as our financial condition, earnings, sufficiency of distributable reserves, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, legal requirements, regulatory constraints and other factors that our Board deems relevant. Additionally, the terms of the indebtedness we intend to incur in connection with the Spin-Off will limit our ability to pay cash dividends. For more information, see “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends.

Your percentage ownership in SpinCo may be diluted in the future.

Your percentage ownership in SpinCo may be diluted in the future because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and other employees. We expect that shares of SpinCo common stock will be issuable upon the future vesting of certain Nuance equity awards held by our employees that will be convertible into SpinCo equity awards in connection with the Spin-Off. In addition, prior to the Spin-Off, we expect our Board to adopt, and Nuance, as our sole stockholder, to approve, the Cerence 2019 Equity Incentive Plan (the “Equity Plan”) for the

 

  34  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

benefit of certain of our current and future employees, service providers and non-employee directors. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

In addition, our Amended and Restated Certificate of Incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock with respect to dividends and distributions, as our board of directors may generally determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of the members of our Board in all events or upon the happening of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the residual value of our common stock. See “Description of Our Capital Stock.”

From time-to-time, SpinCo may opportunistically evaluate and pursue acquisition opportunities, including acquisitions for which the consideration thereof may consist partially or entirely of newly-issued shares of SpinCo common stock and, therefore, such transactions, if consummated, would dilute the voting power and/or reduce the value of our common stock.

The rights associated with SpinCo common stock will differ from the rights associated with Nuance common stock.

Upon completion of the Distribution, the rights of Nuance stockholders who become SpinCo stockholders will be governed by the Amended and Restated Certificate of Incorporation of SpinCo and by Delaware law. The rights associated with Nuance shares are different from the rights associated with SpinCo shares. Material differences between the rights of stockholders of Nuance and the rights of stockholders of SpinCo include differences with respect to, among other things, the removal of directors, the convening of annual meetings of stockholders, stockholder approval of certain transactions, and certain anti-takeover measures. See “Description of Our Capital Stock—Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws” for more information.

Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and Delaware law may discourage takeovers.

Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage, delay or prevent a merger or acquisition. These include, among others, provisions that:

 

   

provide for staggered terms for directors on our Board for a period following the Spin-Off;

 

   

do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of our stockholders, in each case except as such rights may otherwise be provided to holders of preferred stock;

 

   

provide for the removal of directors only for cause for a period following the Spin-Off;

 

   

establish advance notice requirements for stockholder nominations and proposals;

 

   

provide that a special meeting of our stockholders may only be called by our Board, the Chairman of our Board or our Chief Executive Officer, or at the request of holders of not less than 20% of the outstanding shares of the common stock of SpinCo; and

 

   

limit our ability to enter into business combination transactions.

These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage, delay or prevent certain types of transactions involving an

 

  35  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

actual or a threatened acquisition or change in control of SpinCo, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. See “Description of Our Capital Stock” for more information.

Our Amended and Restated Certificate of Incorporation will designate the courts of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Amended and Restated Certificate of Incorporation will provide, in all cases to the fullest extent permitted by law, unless we consent in writing to the selection of an alternative forum, the Court of Chancery located within the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of SpinCo, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee or stockholder of SpinCo to SpinCo or SpinCo’s stockholders, any action asserting a claim arising pursuant to the Delaware General Corporate Law (“DGCL”) or as to which the DGCL confers jurisdiction on the Court of Chancery located in the State of Delaware or any action asserting a claim governed by the internal affairs doctrine or any other action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. However, if the Court of Chancery within the State of Delaware does not have jurisdiction, the action may be brought in any other state or federal court located within the State of Delaware. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our Amended and Restated Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, with auditor attestation of the effectiveness of our internal controls, beginning with our Annual Report on Form 10-K for the year in which we cease to qualify as an “emerging growth company.” If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of shares of common stock could decline and we could be subject to sanctions or investigations by the U.S. Securities and Exchange Commission (the “SEC”) or other regulatory authorities, which would require additional financial and management resources.

Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls may cause our operations to suffer, and we may be unable to conclude that our internal control over financial reporting is effective and, once we cease to qualify as an “emerging growth company,” to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial

 

  36  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

statements for external purposes in accordance with United States Generally Accepted Accounting Principles (“GAAP”), because of its inherent limitations, internal control over financial reporting might not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our shares of common stock, and could adversely affect our ability to access the capital markets. See “—Risks Relating to the Spin-Off—As we build our information technology infrastructure and transition our data to our own systems, we could incur substantial additional costs and experience temporary business interruptions, and our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the Spin-Off.”

 

  37  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Information Statement 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 Information Statement 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:

 

   

the highly competitive and rapidly changing market in which we operate;

 

   

adverse conditions in the automotive industry or the global economy more generally;

 

   

our strategy to increase cloud services and fluctuations in our operating results;

 

   

escalating pricing pressures from our customers;

 

   

our failure to win, renew or implement service contracts;

 

   

the cancellation or postponement of service contracts after a design win;

 

   

the loss of business from any of our largest customers;

 

   

transition difficulties for SpinCo with its first senior management team;

 

   

inability to recruit and retain qualified personnel;

 

   

cybersecurity and data privacy incidents that damage client relations;

 

   

economic, political, regulatory, foreign exchange and other risks of international operations;

 

   

unforeseen U.S. and foreign tax liabilities;

 

   

the failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;

 

   

defects in our software products that result in lost revenue, expensive correction or claims against us;

 

   

our inability to quickly respond to changes in technology and to develop our intellectual property into commercially viable products;

 

   

a significant interruption in the supply or maintenance of our third-party hardware, software, services or data; and

 

   

certain factors discussed elsewhere in this Information Statement.

These and other factors are more fully discussed in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this Information Statement. These risks could cause actual results to differ materially from those implied by forward-looking statements in this Information Statement. 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 Information Statement, those results or developments may not be indicative of results or developments in subsequent periods.

Any forward-looking statements made by us in this Information Statement 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.

 

  38  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

THE SPIN-OFF

Background

On November 19, 2018, Nuance announced plans for the complete legal and structural separation of the Business from Nuance. To effect the separation, Nuance is undertaking the Reorganization Transactions described under “Certain Relationships and Related Party Transactions—Agreements with Nuance—Separation and Distribution Agreement” and the Sale Transaction.

Following the Reorganization Transactions and the Sale Transaction, Nuance will distribute at least 80.1% of the outstanding shares of our common stock to holders of Nuance’s common stock on a pro rata basis. Following the Spin-Off, we will be separate from Nuance and publicly traded. Subject to obtaining a private letter ruling from the IRS, Nuance may retain no more than approximately 18.5% ownership interest in us following the Sale Transaction and the Distribution. No approval of Nuance’s stockholders is required in connection with the Spin-Off, and Nuance’s stockholders will not have any appraisal rights in connection with the Spin-Off. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off” for more information regarding the private letter ruling.

Completion of the Spin-Off is subject to the satisfaction, or the Nuance Board’s waiver, to the extent permitted by law, of a number of conditions. In addition, Nuance may at any time until the Distribution decide to abandon the Distribution or modify or change the terms of the Distribution. For a more detailed discussion, see “—Conditions to the Spin-Off.”

Reasons for the Spin-Off

In 2018, the Nuance Board authorized a review of Nuance’s business portfolio and capital allocation options, with the goal of enhancing stockholder value. Due to differences in operational and strategic focus between Nuance and our Business and because the automotive technology industry is evolving rapidly with developments in shared mobility, connectivity and enhanced driver assistance that require the focus and investment by an independent company, Nuance considered a variety of alternatives for separating the Business from Nuance. As part of its review process, Nuance evaluated a range of potential structural alternatives in addition to the Spin-Off, including potential opportunities for dispositions and other separation transactions.

As part of this evaluation, Nuance considered a number of factors, including strategic clarity and flexibility for Nuance and SpinCo after the Spin-Off, the ability of the Business to compete and operate efficiently and effectively in the automotive technology market (including the ability to retain and attract management talent), the financial profile of SpinCo, SpinCo’s ability to optimize merger, acquisition and other capital allocation strategies for its focus areas, the expected tax impact of each structural alternative, and the potential reaction of investors. After evaluating each of these considerations, the Nuance Board concluded that the other alternatives considered, including a sale of the SpinCo business, did not present the same advantages as a Spin-Off, that the separation of SpinCo from the remainder of Nuance as a stand-alone, public company is the most attractive alternative for enhancing stockholder value and that proceeding with the Spin-Off would be in the best interests of Nuance and its stockholders.

In particular, Nuance considered the following potential benefits of this approach:

 

   

Enhanced Strategic and Operational Focus. Following the Spin-Off, Nuance and SpinCo will each have a more focused business and be better able to dedicate financial, management and other resources to their respective areas of strength and differentiation. Each company will pursue growth opportunities and execute strategic plans best suited to address the distinct market trends and opportunities for its business. Given that SpinCo is the only current Nuance business primarily focused on the automotive technology industry, SpinCo will be better positioned as an independent company to properly channel

 

  39  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

 

and fund investments and develop partnerships to capitalize on long-term industry trends. SpinCo plans to focus on automotive technology industry growth areas as well as continued operational excellence. We believe that SpinCo’s separation from Nuance will allow Nuance to focus on the core growth opportunities in its healthcare and enterprise businesses.

 

   

Simplified Organizational Structure and Resources. The Spin-Off will allow the management of each of Nuance and SpinCo to devote their time and attention to the development and implementation of corporate strategies and policies that are based on the specific company’s business characteristics. Each company will be able to adapt faster to customers’ changing needs, address specific market dynamics, target innovation and investments in select growth areas and accelerate decision-making processes.

 

   

Distinct and Clear Financial Profiles and Compelling Investment Cases. Investment in one company or the other may appeal to investors with different goals, interests and concerns. The Spin-Off will allow investors to make independent investment decisions with respect to Nuance and SpinCo and may result in greater alignment between the interests of SpinCo’s stockholder base and the characteristics of SpinCo’s business, capital structure and financial results.

 

   

Performance Incentives. We believe that the Spin-Off will enable SpinCo to create incentives for its management and employees that are more closely tied to its business performance and stockholder expectations. SpinCo’s equity-based compensation arrangements will more closely align the interests of SpinCo’s management and employees with the interests of its stockholders and should increase SpinCo’s ability to attract and retain personnel.

 

   

Capital Structure. The Spin-Off will enable each of Nuance and SpinCo to leverage its distinct growth profile and cash flow characteristics to optimize its capital structure and capital allocation strategy.

In determining whether to effect the Spin-Off, Nuance considered the costs and risks associated with the transaction, including the costs associated with preparing SpinCo to become an independent, publicly traded company, the risk of volatility in our stock price immediately following the Spin-Off due to sales by Nuance’s stockholders whose investment objectives may no longer be met by our common stock, the time it may take for us to attract our optimal stockholder base, the possibility of disruptions in our business as a result of the Spin-Off, the risk that the combined trading prices of our common stock and Nuance’s common stock after the Spin-Off may drop below the trading price of Nuance’s common stock before the Spin-Off and the loss of synergies and scale from operating as one company. Notwithstanding these costs and risks, taking into account the factors discussed above, Nuance determined that the Spin-Off provided the best opportunity to achieve the above benefits and enhance stockholder value.

When and How You Will Receive SpinCo Shares

Nuance will distribute to its stockholders, as a pro rata dividend, one share of our common stock for every                  shares of Nuance common stock outstanding as of                 , 2019, the Record Date of the Distribution.

Prior to the Distribution, Nuance will deliver at least 80.1% of the issued and outstanding shares of our common stock to the distribution agent.                 will serve as distribution agent in connection with the Distribution and as transfer agent and registrar for our common stock.

If you own Nuance common stock as of the close of business on                 , 2019, the shares of our common stock that you are entitled to receive in the Distribution will be issued to your account as follows:

 

   

Registered stockholders. If you own your shares of Nuance common stock directly through Nuance’s transfer agent, you are a registered stockholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Distribution by way of direct registration in book-entry form to a new account with our transfer agent. Registration in book-entry form refers to a method of

 

  40  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

 

recording share ownership where no physical stock certificates are issued to stockholders, as is the case in the Distribution. You will be able to access information regarding your book-entry account for SpinCo shares at or by calling                 .

Commencing on or shortly after the Distribution Date, the distribution agent will mail to you an account statement that indicates the number of whole shares of our common stock that have been registered in book-entry form in your name. We expect it will take the distribution agent up to two weeks after the Distribution Date to complete the distribution of the shares of our common stock and mail statements of holding to all registered stockholders.

 

   

“Street name” or beneficial stockholders. If you own your shares of Nuance common stock beneficially through a bank, broker or other nominee, the bank, broker or other nominee holds the shares in “street name” and records your ownership on its books. In this case, your bank, broker or other nominee will credit your account with the whole shares of our common stock that you receive in the Distribution on or shortly after the Distribution Date. We encourage you to contact your bank, broker or other nominee if you have any questions concerning the mechanics of having shares held in “street name.”

If you sell any of your shares of Nuance common stock on or before the Distribution Date, the buyer of those shares may in some circumstances be entitled to receive the shares of our common stock to be distributed in respect of the Nuance shares you sold. See “—Trading Prior to the Distribution Date” for more information.

We are not asking Nuance stockholders to take any action in connection with the Spin-Off. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to make any payment or surrender or exchange any of your shares of Nuance common stock for shares of our common stock. The number of outstanding shares of Nuance common stock will not change as a result of the Spin-Off.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Nuance stockholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees, transfer taxes and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and “when-issued” trades will generally settle within two trading days following the Distribution Date. See “—Trading Prior to the Distribution Date” for additional information regarding “when-issued” trading. The distribution agent will, in its sole discretion, without any influence by Nuance or us, determine when, how, through which broker-dealer and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Nuance or us.

The distribution agent will send to each registered holder of Nuance common stock entitled to a fractional share a check in the cash amount deliverable in lieu of that holder’s fractional share as soon as practicable following the Distribution Date. We expect the distribution agent to take about two weeks after the Distribution Date to complete the distribution of cash in lieu of fractional shares to Nuance stockholders. If you hold your shares through a bank, broker or other nominee, your bank, broker or nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of a fractional share. The cash you receive in lieu of a fractional share will generally be taxable to you for U.S. federal income tax purposes. See “—Material U.S. Federal Income Tax Consequences of the Spin-Off” below for more information.

 

  41  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Material U.S. Federal Income Tax Consequences of the Spin-Off

Consequences to U.S. Holders of Nuance common stock

The following is a summary of the material U.S. federal income tax consequences to holders of Nuance common stock in connection with the Distribution. This summary is based on the Code, the Treasury Regulations promulgated under the Code and judicial and administrative interpretations of those laws, in each case as in effect and available as of the date of this Information Statement and all of which are subject to change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below.

This summary is limited to holders of Nuance common stock that are U.S. Holders, as defined immediately below, that hold their Nuance common stock as a capital asset. A “U.S. Holder” is a beneficial owner of Nuance common stock that is, for U.S. federal income tax purposes:

 

   

an individual who is a citizen or a resident of the United States;

 

   

a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

   

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust if (1) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (2) in the case of a trust that was treated as a domestic trust under law in effect before 1997, a valid election is in place under applicable Treasury Regulations.

This summary does not discuss all tax considerations that may be relevant to stockholders in light of their particular circumstances, nor does it address the consequences to stockholders subject to special treatment under the U.S. federal income tax laws, such as:

 

   

dealers or traders in securities or currencies;

 

   

tax-exempt entities;

 

   

banks, financial institutions or insurance companies;

 

   

real estate investment trusts, regulated investment companies or grantor trusts;

 

   

persons who acquired Nuance common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

   

stockholders who own, or are deemed to own, 10% or more, by voting power or value, of Nuance equity;

 

   

stockholders owning Nuance common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

   

certain former citizens or long-term residents of the United States;

 

   

stockholders who are subject to the alternative minimum tax;

 

   

persons who are subject to special accounting rules under Section 451(b) of the Code;

 

   

persons who own Nuance common stock through partnerships or other pass-through entities; or

 

   

persons who hold Nuance common stock through a tax-qualified retirement plan.

This summary does not address any U.S. state or local or foreign tax consequences or any estate, gift or other non-income tax consequences.

 

  42  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Nuance common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership is urged to consult its own tax advisor as to its tax consequences.

YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL AND FOREIGN TAX CONSEQUENCES OF THE DISTRIBUTION.

General

Completion of the Spin-Off is conditioned upon Nuance’s receipt of a written opinion from Paul, Weiss, Rifkind, Wharton & Garrison LLP, counsel to Nuance, to the effect that the Distribution will qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code.

In addition, Nuance has requested a private letter ruling from the IRS regarding Nuance’s potential retention of no more than approximately 18.5% of our common stock. If the private letter ruling is not obtained prior to the Distribution, Nuance will not retain any ownership interest in us, and will distribute all of its shares of our common stock. If the private letter ruling is obtained prior to the Distribution, Nuance may retain no more than an approximately 18.5% ownership interest in us for a limited period of time, which Nuance would sell to third party purchasers as soon as reasonably practicable after the Spin-Off, subject to market and regulatory conditions, but in no event later than            .

The opinion will be, and the private letter ruling would be, based on the assumption that, among other things, the representations made, and information submitted, in connection with each (as applicable) are accurate. If the Distribution qualifies for non-recognition treatment and subject to the qualifications and limitations set forth herein (including the discussion below relating to the receipt of cash in lieu of fractional shares), for U.S. federal income tax purposes:

 

   

no gain or loss will be recognized by, or be includible in the income of, a U.S. Holder as a result of the Distribution, except with respect to any cash received in lieu of fractional shares;

 

   

the aggregate tax basis of the Nuance common stock and our common stock held by each U.S. Holder immediately after the Distribution will be the same as the aggregate tax basis of the Nuance common stock held by the U.S. Holder immediately before the Distribution, allocated between the Nuance common stock and our common stock in proportion to their relative fair market values on the date of the Distribution (subject to reduction upon the deemed sale of any fractional shares, as described below); and

 

   

the holding period of our common stock received by each U.S. Holder will include the holding period of their Nuance common stock, provided that such Nuance common stock is held as a capital asset on the date of the Distribution.

U.S. Holders that have acquired different blocks of Nuance common stock at different times or at different prices are urged to consult their tax advisors regarding the allocation of their aggregate adjusted tax basis among, and the holding period of, shares of our common stock distributed with respect to such blocks of Nuance common stock.

The opinion of counsel will not, and the private letter ruling would not, address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion will rely on the private letter ruling with respect to matters covered by the private letter ruling (if obtained), will assume that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents. In addition, the opinion will be, and the private letter ruling would be, based

 

  43  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

on certain assumptions as well as certain representations as to factual matters from, and certain covenants by, Nuance and us. The opinion and the private letter ruling (if obtained) cannot be relied on if any of the assumptions, representations or covenants is incorrect, incomplete or inaccurate or are violated in any material respect.

The private letter ruling, if obtained, would generally be binding on the IRS. The opinion of counsel, however, will not be binding on the IRS or the courts, and there can be no assurance that the IRS or a court will not take a contrary position. If the conclusions expressed in the opinion are challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences of the Spin-Off could be materially less favorable.

If the Distribution were determined not to qualify for non-recognition of gain or loss, the above consequences would not apply and each U.S. Holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in:

 

   

a taxable dividend to the U.S. Holder to the extent of that U.S. Holder’s pro rata share of Nuance’s current or accumulated earnings and profits;

 

   

a reduction in the U.S. Holder’s basis (but not below zero) in Nuance common stock to the extent the amount received exceeds the stockholder’s share of Nuance’s earnings and profits; and

 

   

a taxable gain from the exchange of Nuance common stock to the extent the amount received exceeds the sum of the U.S. Holder’s share of Nuance’s earnings and profits and the U.S. Holder’s basis in its Nuance common stock.

Cash in Lieu of Fractional Shares

If a U.S. Holder receives cash in lieu of a fractional share of common stock as part of the Distribution, the U.S. Holder will be treated as though it first received a distribution of the fractional share in the Distribution and then sold it for the amount of cash actually received. Provided the fractional share is considered to be held as a capital asset on the date of the Distribution, the U.S. Holder will generally recognize capital gain or loss measured by the difference between the cash received for such fractional share and the U.S. Holder’s tax basis in that fractional share, as determined above. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period for the Nuance common stock is more than one year on the date of the Distribution.

Payments of cash in lieu of a fractional share of our common stock may, under certain circumstances, be subject to “backup withholding,” unless a U.S. Holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding is not an additional tax, and it may be refunded or credited against a U.S. Holder’s U.S. federal income tax liability if the required information is timely supplied to the IRS.

Information Reporting

Treasury Regulations require each Nuance stockholder that, immediately before the Distribution, owned 5% or more (by vote or value) of the total outstanding stock of Nuance to attach to such stockholder’s U.S. federal income tax return for the year in which the Distribution occurs a statement setting forth certain information related to the Distribution.

Consequences to Nuance

The following is a summary of the material U.S. federal income tax consequences to Nuance in connection with the Spin-Off that may be relevant to holders of Nuance common stock.

 

  44  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

As discussed above, completion of the Spin-Off is conditioned upon Nuance’s receipt of a written opinion from Paul, Weiss, Rifkind, Wharton & Garrison LLP, counsel to Nuance to the effect that the Distribution will qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code. If the Distribution qualifies for non-recognition of gain or loss under Section 355 and related provisions of the Code, no gain or loss will be recognized by Nuance as a result of the Distribution (other than income or gain arising from any imputed income or other adjustment to Nuance, us or our respective subsidiaries if and to the extent that the Separation and Distribution Agreement or any ancillary agreement is determined to have terms that are not at arm’s length). The opinion is subject to the qualifications and limitations as are set forth above under “—Consequences to U.S. Holders of Nuance common stock.”

If the Distribution were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, then Nuance would recognize gain equal to the excess of the fair market value of our common stock distributed to Nuance stockholders over Nuance’s tax basis in our common stock, and would also recognize gain in respect of certain of the Reorganization Transactions.

Indemnification Obligation

If, as a result of any of our representations being untrue or our covenants being breached, the Spin-Off were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, we could be required to indemnify Nuance for the resulting taxes and related expenses. In addition, if we or our stockholders were to engage in transactions that resulted in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Distribution, the Spin-Off would generally be taxable to Nuance, but not to stockholders, under Section 355(e) of the Code, unless it were established that such transactions and the Spin-Off were not part of a plan or series of related transactions. If the Spin-Off were taxable to Nuance due to such a 50% or greater change in ownership of our stock, Nuance would recognize gain equal to the excess of the fair market value of our common stock distributed to Nuance stockholders over Nuance’s tax basis in our common stock and would also recognize gain in respect of certain of the Reorganization Transactions, and we generally would be required to indemnify Nuance for the tax on such gain and related expenses.

Results of the Spin-Off

After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately                shares of our common stock outstanding, based in-part on the number of Nuance stockholders and shares of Nuance common stock outstanding on                 , 2019. The actual number of shares of our common stock Nuance will distribute in the Spin-Off will depend on the actual number of shares of Nuance common stock outstanding on the Record Date, which will reflect any issuance of new shares or exercises of outstanding options pursuant to Nuance’s equity plans, and any repurchase of Nuance shares by Nuance under its common stock repurchase program, on or prior to the Record Date. Shares of Nuance common stock held by Nuance as treasury shares will not be considered outstanding for purposes of, and will not be entitled to participate in, the Distribution. The Spin-Off will not affect the number of outstanding shares of Nuance common stock or any rights of Nuance stockholders. However, following the Distribution, the equity value of Nuance will no longer reflect the value of the Business. There can be no assurance that the combined trading prices of the Nuance common stock and our common stock will equal or exceed what the trading price of Nuance common stock would have been in absence of the Spin-Off.

Before our separation from Nuance, we intend to enter into a Separation and Distribution Agreement and several other agreements with Nuance related to the Spin-Off. These agreements will govern the relationship between us and Nuance up to and after completion of the Spin-Off and allocate between us and Nuance various assets, liabilities, rights and obligations, including employee benefits, environmental, intellectual property and tax-related assets and liabilities. We describe these arrangements in greater detail under “Certain Relationships And Related Party Transactions—Agreements with Nuance.”

 

  45  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Listing and Trading of Our Common Stock

As of the date of this Information Statement, we are a wholly-owned subsidiary of Nuance. Accordingly, no public market for our common stock currently exists, although a “when-issued” market in our common stock may develop prior to the Distribution. See “—Trading Prior to the Distribution Date” below for an explanation of a “when-issued” market. We intend to apply to list our shares of common stock on the Nasdaq Global Select Market under the symbol “CRNC.” The listing is subject to approval of our application. Following the Spin-Off, Nuance common stock will continue to trade on the Nasdaq Global Select Market under the symbol “NUAN.”

Neither we nor Nuance can assure you as to the trading price of Nuance common stock or our common stock after the Spin-Off, or as to whether the combined trading prices of our common stock and the Nuance common stock after the Spin-Off will equal or exceed the trading prices of Nuance common stock prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off.

The shares of our common stock distributed to Nuance stockholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act of 1933, or the “Securities Act,” or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(a)(1) of the Securities Act or Rule 144 thereunder.

As described in “Certain Relationships and Related Party Transactions—Agreements with Nuance—Registration Rights Agreement,” we will enter into the Registration Rights Agreement with Nuance. We do not have any other contractual obligations to register our common stock.

Trading Prior to the Distribution Date

We expect a “when-issued” market in our common stock to develop as early as one trading day prior to the Record Date for the Distribution and continue up to and including the Distribution Date. “When-issued” trading refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of Nuance common stock at the close of business on the Record Date, you will be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of our common stock, without the shares of Nuance common stock you own, on the “when-issued” market. We expect “when-issued” trades of our common stock to settle within two trading days after the Distribution Date. On the first trading day following the Distribution Date, we expect that “when-issued” trading of our common stock will end and “regular-way” trading will begin.

We also anticipate that, as early as one trading day prior to the Record Date and continuing up to and including the Distribution Date, there will be two markets in Nuance common stock: a “regular-way” market and an “ex-distribution” market. Shares of Nuance common stock that trade on the regular-way market will trade with an entitlement to receive shares of our common stock in the Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of our common stock in the Distribution. Therefore, if you sell shares of Nuance common stock in the regular-way market up to and including the Distribution Date, you will be selling your right to receive shares of our common stock in the Distribution. However, if you own shares of Nuance common stock at the close of business on the Record Date and sell those shares on the ex-distribution market up to and including the Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive in the Distribution.

If “when-issued” trading occurs, the listing for our common stock is expected to be under a trading symbol different from our regular-way trading symbol. We will announce our “when-issued” trading symbol when and if it becomes available. If the Spin-Off does not occur, all “when-issued” trading will be null and void.

 

  46  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Conditions to the Spin-Off

We expect that the Spin-Off will be effective on the Distribution Date, provided that the following conditions shall have been satisfied or waived by Nuance, including the following conditions:

 

   

the Nuance Board shall have approved the Reorganization Transactions and Distribution and not withdrawn such approval, and shall have declared the dividend of our common stock to Nuance stockholders;

 

   

the ancillary agreements contemplated by the Separation and Distribution Agreement shall have been executed by each party to those agreements;

 

   

the SEC shall have declared effective our registration statement on Form 10, of which this Information Statement is a part, under the Exchange Act, and no stop order suspending the effectiveness of our registration statement shall be in effect and no proceedings for that purpose shall be pending before or threatened by the SEC;

 

   

our common stock shall have been accepted for listing on a national securities exchange approved by Nuance, subject to official notice of issuance;

 

   

Nuance shall have received the written opinion of Paul, Weiss, Rifkind, Wharton & Garrison LLP, which shall remain in full force and effect, regarding the intended treatment of the Distribution under the Code;

 

   

the Reorganization Transactions shall have been completed (other than those steps that are expressly contemplated to occur at or after the Distribution);

 

   

no order, injunction or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Distribution shall be in effect, and no other event outside the control of Nuance shall have occurred or failed to occur that prevents the consummation of the Distribution;

 

   

no other events or developments shall have occurred prior to the Distribution that, in the judgment of the Nuance Board, would result in the Distribution having a material adverse effect on Nuance or its stockholders;

 

   

prior to the Distribution Date, this Information Statement shall have been mailed to the holders of Nuance common stock as of the Record Date; and

 

   

certain other conditions set forth in the Separation and Distribution Agreement.

Any of the above conditions may be waived by the Nuance Board to the extent such waiver is permitted by law. If the Nuance Board waives any condition prior to the effectiveness of our registration statement on Form 10, of which this Information Statement Forms a part, and the result of such waiver is material to Nuance stockholders, we will file an amendment to our registration statement on Form 10, of which this Information Statement forms a part, to revise the disclosure in the Information Statement accordingly. In the event that Nuance waives a condition after our registration statement on Form 10 becomes effective and such waiver is material, we would communicate such change to Nuance’s stockholders by filing a Form 8-K describing the change.

The fulfillment of the above conditions will not create any obligation on Nuance’s part to complete the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the approval for listing of our common stock and the SEC’s declaration of the effectiveness of our registration statement on Form 10, in connection with the Distribution. Nuance may at any time until the Distribution decide to abandon the Distribution or modify or change the terms of the Distribution.

 

  47  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Reasons for Furnishing this Information Statement

We are furnishing this Information Statement solely to provide information to Nuance’s stockholders who will receive shares of our common stock in the Distribution. You should not construe this Information Statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Nuance. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither we nor Nuance undertakes any obligation to update the information except in the normal course of our and Nuance’s public disclosure obligations and practices.

 

  48  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

DIVIDEND POLICY

Once the Spin-Off is effective, we will be evaluating whether to pay cash dividends to our stockholders. The timing, declaration, amount and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Among the items we will consider when establishing a dividend policy will be the capital needs of our business and opportunities to retain future earnings for use in the operation of our business and to fund future growth. Additionally, the terms of the indebtedness we intend to incur in connection with the Spin-Off will limit our ability to pay cash dividends. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends.

 

  49  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2018, on a historical basis and on an as adjusted basis to give effect to the Spin-Off and the transactions related to the Spin-Off, as if they occurred on December 31, 2018. You should review the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our historical Condensed Combined Financial Statements and the accompanying notes thereto, and our Unaudited Pro Forma Combined Financial Statements and the accompanying notes thereto included elsewhere in this Information Statement. For information on how each adjustment in the following table was computed, including a discussion of significant assumptions and estimates used to arrive at such adjustments, refer to the indicated note in the notes accompanying our Unaudited Pro Forma Combined Financial Statements. See “Unaudited Pro Forma Combined Financial Statements.”

 

     As of December 31, 2018  
     Historical
as Reported
     Notes      As Adjusted  
     (Dollars in thousands)  

Cash and cash equivalents

   $ —          (d)      $                    
  

 

 

       

 

 

 

Capitalization:

        

Indebtedness:

        

Current portion of long-term debt (1)

   $ —          (d)      $    

Long-term debt (1)

     —          (d)     
  

 

 

       

 

 

 

Total indebtedness

   $ —           $    
  

 

 

       

 

 

 

Total equity

   $ 996,924       
(d)
(e)
 
 
   $    
  

 

 

       

 

 

 

Total capitalization

   $ 996,924         $    
  

 

 

       

 

 

 

 

(1)

We expect to enter a senior secured term loan facility of $        million aggregate principal amount outstanding without giving effect to financing fees of approximately $        million, which is primarily intended to finance a cash transfer to Nuance and support operating the cash flow needs of the Cerence business. We also intend to enter into a $        million revolving credit facility to be drawn on in the event that our working capital and other cash needs are not supported by our operating cash flow and cash available from the senior secured term loan.

 

  50  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

SELECTED COMBINED FINANCIAL DATA

The following table presents certain selected historical combined financial information as of and for each of the years ended September 30, 2018 and 2017 and as of and for the three months ended December 31, 2018 and 2017. The selected historical combined financial data as of and for each of the years ended September 30, 2018 and 2017 is derived from historical Combined Financial Statements included elsewhere in this Information Statement. The selected historical combined financial data as of and for each of the three months ended December 31, 2018 and 2017 are derived from our Condensed Combined Financial Statements included elsewhere in this Information Statement. The Condensed Combined Financial Statements for the three months ended December 31, 2018 has been prepared under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), while the historical Combined Financial Statements have been prepared under FASB ASC Topic 605, “Revenue Recognition” (“ASC 605”). In our opinion, both financial statements include all adjustments, consisting of only ordinary recurring adjustments, necessary for a fair statement of the information set forth in this Information Statement.

ASC 606 was adopted as of October 1, 2018 using the modified retrospective approach from the previous guidance ASC 605. Our transition to ASC 606 represents a change in accounting policy that is reflected in our Condensed Combined Financial Statements for the three months ended December 31, 2018. The adoption of ASC 606 limits the comparability of revenue and expenses, including cost of revenue and certain operating expenses when compared to the three months ended December 31, 2017 and prior reporting periods. Refer to Note 3 to our Condensed Combined Financial Statements included elsewhere in this Information Statement for further details on our adoption of ASC 606 and a reconciliation of our operating results for the first quarter of fiscal 2019 under ASC 606 to the results under ASC 605.

 

  51  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

The selected historical combined financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined Financial Statements and Condensed Combined Financial Statements, including their respective accompanying Notes thereto included elsewhere in this Information Statement. For each of the periods presented, our business was wholly-owned by Nuance. The financial information included herein may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented. In addition, our historical combined financial information does not reflect changes that we expect to experience in the future as a result of our separation from Nuance, including changes in the financing, operations, cost structure and personnel needs of our business. Further, the historical combined financial information includes allocations of certain Nuance corporate expenses, as described in Note 16 to the Combined Financial Statements. We believe the assumptions and methodologies underlying the allocation of these expenses are reasonable. However, such expenses may not be indicative of the actual level of expense that we would have incurred if we had operated as an independent, publicly traded company or of the costs expected to be incurred in the future.

 

    Three Months Ended December 31,     Year Ended September 30,  
    2018     2018     2017     2018     2017  
    (ASC 606)     (ASC 605)     (ASC 605)     (ASC 605)     (ASC 605)  
    (Unaudited)     (Unaudited)     (Unaudited)              

Operations:

         

Total revenues

  $ 72,539     $ 74,029     $ 61,955     $ 276,984     $ 244,729  

Gross profit

    45,534       51,127       42,455       194,020       176,195  

Income from operations

    66       5,374       5,718       36,852       63,685  

(Benefit) provision for income taxes

    (14     1,027       24,211       30,917       15,926  

Net income (loss)

    64       4,354       (18,740     5,881       47,276  

Financial Position:

         

Deferred revenue

  $ 337,878     $ 354,289     $ 312,123     $ 348,649     $ 300,182  

Total assets

    1,382,991       1,396,234       1,325,261       1,397,548       1,335,752  

Total parent company entity

    996,924       993,805       972,547       993,319       997,179  

Selected Data and Ratios:

         

Working capital

  $ (26,921   $ (22,590   $ (9,771   $ (38,839   $ (13,599

Depreciation of property and equipment

    2,038       2,038       2,066       9,159       7,008  

Amortization of intangible assets

    5,307       5,307       2,999       16,606       12,661  

Gross margin percentage

    62.8     69.1     68.5     70.0     72.0

Operating margin percentage

    0.1     7.3     9.2     13.3     26.0

 

  52  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following pro forma combined financial data of Cerence consists of pro forma combined statements of operations for the year ended September 30, 2018 and the three months ended December 31, 2018, and the pro forma combined balance sheet as of December 31, 2018.

The pro forma financial statements illustrate the financial impacts of the Spin-Off and the related transactions described below. The pro forma balance sheet gives effect to the Spin-Off and related transactions described below as if they had occurred on December 31, 2018. The pro forma combined statements of operations for the year ended September 30, 2018 and for the three months ended December 31, 2018 assume that the Spin-Off and related transactions described below had occurred as of October 1, 2017.

The following pro forma combined financial data is subject to assumptions and adjustments described in the accompanying notes. Cerence’s management believes these assumptions and adjustments are reasonable under the circumstances and given the information available at this time. However, these adjustments are subject to change as Nuance and Cerence finalize the terms of the separation, including the Separation and Distribution Agreement and related transaction agreements. The pro forma combined financial data does not purport to represent what Cerence’s financial position and results of operations actually would have been had the Spin-Off and related transactions occurred on the dates indicated, or to project Cerence’s financial performance for any future period following the Spin-Off.

The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to the following factors:

 

   

the pro forma adjustments are estimated based on the operating structure of Cerence during each of the historical periods presented, which may differ from the operating structure at the closing;

 

   

we did not track the assets and liabilities of the Cerence historically—the pro forma adjustments are based on our estimates of the assets, liabilities and employees related to Cerence in each historical period presented, which may differ from the assets, liabilities and employees assumed at the closing of the Spin-Off; and

 

   

the allocation of certain corporate costs for corporate administrative services, including general corporate expenses related to tax, treasury, finance, audit, risk management, legal, information technology, human resources, shareholder relations, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation—these historical allocations may not be indicative of Cerence’s future cost structure; however, the pro forma results have not been adjusted to reflect any potential changes associated with Cerence being an independent public company as such amounts are estimates that are not factually supportable.

The pro forma combined balance sheet and statements of operations have been derived from Cerence’s Combined Financial Statements and Condensed Combined Financial Statements included elsewhere in this Information Statement and have been adjusted to give effect to the following items related to the Spin-Off and the related transactions:

 

   

the contribution by Nuance to Cerence, pursuant to the Separation and Distribution Agreement, of all the assets and liabilities that comprise Cerence’s business;

 

   

the impact of the Separation and Distribution Agreement, Transition Services Agreement, Employee Matters Agreement, Tax Matters Agreement and other agreements related to the Spin-Off between Nuance and Cerence and the provisions contained therein; and

 

   

the expected incurrence of approximately $         million of debt at an expected weighted-average interest rate of     % and a cash distribution of approximately $         million to Nuance.

The pro forma combined financial data reported below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Combined Financial Statements and corresponding notes included elsewhere in this Information Statement.

 

  53  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

As of December 31, 2018

(Dollars in thousands)

 

     Historical     Pro Forma
Adjustments
     Notes      Adjusted  

ASSETS

 

Current assets:

          

Cash and cash equivalents

   $ —       $                          [D]      $                    

Accounts receivable, net

     73,328          

Prepaid expenses and other current assets

     4,111          

Deferred costs

     3,740          
  

 

 

   

 

 

       

 

 

 

Total current assets

     81,179          
  

 

 

   

 

 

       

 

 

 

Property and equipment, net

     12,192          

Deferred costs

     41,892          

Goodwill

     1,116,254          

Intangible assets, net

     79,629          

Deferred tax assets

     50,934          [E]     

Other assets

     911          [D]     
  

 

 

   

 

 

       

 

 

 

Total assets

   $ 1,382,991     $           $    
  

 

 

   

 

 

       

 

 

 

LIABILITIES AND EQUITY

 

Current liabilities:

          

Accounts payable

   $ 5,396     $           $    

Deferred revenue

     79,917          

Accrued expenses and other current liabilities

     22,787          

Current portion of long-term debt

     —            [D]     
  

 

 

   

 

 

       

 

 

 

Total current liabilities

     108,100          

Long-term debt, net of current portion

     —            [D]     

Deferred revenue, net of current portion

     257,961          

Other liabilities

     20,006          
  

 

 

   

 

 

       

 

 

 

Total liabilities

     386,067          
  

 

 

   

 

 

       

 

 

 

Equity:

          

Common stock

     —            
Additional paid-in capital      —            

Net parent investment

     1,024,265          [D] [E]     

Accumulated other comprehensive income (loss)

     (27,341        
  

 

 

   

 

 

       

 

 

 

Total equity

     996,924          
  

 

 

   

 

 

       

 

 

 

Total liabilities and equity

   $ 1,382,991     $           $    
  

 

 

   

 

 

       

 

 

 

Refer to accompanying Notes to the Pro Forma Combined Financial Data

 

  54  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the three months ended December 31, 2018

(Dollars in thousands, except per share data)

 

     Historical     Pro Forma
Adjustments
     Notes      Adjusted  

Revenues:

          

License

   $ 42,781     $                       $                    

Connected services

     16,300          

Professional services

     13,458          

Other

     —            
  

 

 

   

 

 

       

 

 

 

Total revenues

     72,539          
  

 

 

   

 

 

       

 

 

 

Cost of revenues:

          

License

     341          

Connected services

     11,773          

Professional services

     12,716          

Amortization of intangible assets

     2,175          
  

 

 

   

 

 

       

 

 

 

Total cost of revenues

     27,005          
  

 

 

   

 

 

       

 

 

 

Gross profit

     45,534          
  

 

 

   

 

 

       

 

 

 

Operating expenses:

          

Research and development

     23,808          

Sales and marketing

     9,445          

General and administrative

     5,721          

Amortization of intangible assets

     3,132          

Restructuring and other costs, net

     3,127          [B]     

Acquisition-related costs

     235          
  

 

 

   

 

 

       

 

 

 

Total operating expenses

     45,468          
  

 

 

   

 

 

       

 

 

 

Income from operations

     66          

Other income (expense):

          

Interest expense

     —            [A]     

Other income (expense), net

     (16        
  

 

 

   

 

 

       

 

 

 

Income before income taxes

     50          

Benefit from income taxes

     (14        
  

 

 

   

 

 

       

 

 

 

Net income

   $ 64     $           $    
  

 

 

   

 

 

       

 

 

 

Pro forma earnings per share:

          

Basic

          [F]      $    
          

 

 

 

Diluted

          [F]      $    
          

 

 

 

Pro forma weighted average common shares outstanding:

          

Basic

          
          

 

 

 

Diluted

          
          

 

 

 

Refer to accompanying Notes to the Pro Forma Combined Financial Data

 

  55  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

For the year ended September 30, 2018

(Dollars in thousands, except per share data)

 

     Historical     Pro Forma
Adjustments
     Notes      Adjusted  

Revenues:

          

License

   $ 171,075     $                       $                

Connected services

     60,227          

Professional services

     45,451          

Other

     231          
  

 

 

   

 

 

       

 

 

 

Total revenues

     276,984          
  

 

 

   

 

 

       

 

 

 

Cost of revenues:

          

License

     1,156          

Connected services

     32,919          

Professional services

     41,123          

Amortization of intangible assets

     7,766          
  

 

 

   

 

 

       

 

 

 

Total cost of revenues

     82,964          
  

 

 

   

 

 

       

 

 

 

Gross profit

     194,020          
  

 

 

   

 

 

       

 

 

 

Operating expenses:

          

Research and development

     80,957          

Sales and marketing

     30,553          

General and administrative

     19,873          

Amortization of intangible assets

     8,840          

Restructuring and other costs, net

     12,863          [B]     

Acquisition-related costs

     4,082          
  

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     157,168          
  

 

 

   

 

 

       

 

 

 

Income from operations

     36,852          

Other income (expense):

          

Interest expense

     —            [A]     

Other income (expense), net

     (54        
  

 

 

   

 

 

       

 

 

 

Income before income taxes

     36,798          

Provision for income taxes

     30,917          
  

 

 

   

 

 

       

 

 

 

Net income

   $ 5,881     $           $    
  

 

 

   

 

 

       

 

 

 

Pro forma earnings per share:

          

Basic

          [F]      $    
          

 

 

 

Diluted

          [F]      $    
          

 

 

 

Pro forma weighted average common shares outstanding:

          

Basic

          
          

 

 

 

Diluted

          
          

 

 

 

Refer to accompanying Notes to the Pro Forma Combined Financial Data

 

  56  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

(Dollars in thousands)

 

(A)

Reflects interest expense related to a $         senior secured term loan that we expect to enter into in connection with the Spin-Off, offset by amortization of an anticipated facility financing fees of $         to be paid by Cerence. The expected weighted-average interest rate on the debt is approximately     %. We estimate that interest expense would have been $         and $         and for the year ended September 30, 2018 and for the three months ended December 31, 2018, respectively. Interest expense was calculated assuming constant debt levels throughout the periods. Interest expense may be higher or lower if our actual interest rate changes. A 1/8% change to the annual interest rate would change interest expense by $         on an annual basis, assuming the revolving credit facility was fully drawn. Cerence estimates that amortization of the financing fees would have been $        and $         and for the year ended September 30, 2018 and for the three months ended December 31, 2018, respectively.

 

(B)

Reflects an adjustment to restructuring expenses that removes $         and $         of expenses incurred during the year ended September 30, 2018 and three months ended December 31, 2018, respectively, that are directly related to the Spin-Off. As these costs represent material, nonrecurring costs directly related to the separation, a pro forma adjustment was performed to reverse the costs.

 

(C)

Reflects $         and $         for the year ended September 30, 2018 and for the three months ended December 31, 2018 for costs to be incurred by Cerence for the services to be provided by Nuance under the Transition Services Agreement.

 

(D)

Reflects $         of borrowings expected to be incurred in connection with the separation offset by anticipated financing fees to be paid by us of $        . We plan to distribute $         of the proceeds to Nuance in connection with the Spin-Off. We also intend to enter into a $         revolving credit facility to support our business post-Spin-Off, but do not expect to draw on this facility immediately. The financing fees related to the revolving credit facility are shown as an adjustment to other assets.

 

(E)

Reflects the tax effects of the pro forma adjustments at the applicable statutory income tax rates.

 

(F)

The number of shares used to compute basic earnings per share for the year ended September 30, 2018 and for the three months ended December 31, 2018 is based on the number of shares of Nuance common stock outstanding on September 30, 2018 and December 31, 2018, respectively, assuming the anticipated distribution ratio of              shares of our common stock for each share of Nuance common stock outstanding, and, assuming a private letter ruling is obtained from the IRS allowing Nuance to retain no more than approximately 18.5% of our common stock,         additional shares to be retained by Nuance. The number of Nuance shares used to determine the assumed distribution reflects the Nuance shares outstanding as of each balance sheet date, which is the most current information as of the date of those financial statements. While the actual future impact of potential dilution from shares of common stock related to equity awards granted to our employees under Nuance’s share-based plans will depend on various factors, pro forma diluted shares outstanding were not adjusted as we do not currently have an estimate of the future dilutive impact.

 

  57  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

BUSINESS

Overview

Cerence builds 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, such as “Hey BMW” and “Ni hao Banma”. Our customers include all major OEMs or their tier 1 suppliers worldwide, including BMW, Daimler, FCA Group, Ford, Geely, GM, Renault-Nissan, SAIC, Toyota, Volkswagen Group, Aptiv, Bosch, Continental, DENSO TEN and Harman. We deliver our solutions on a white-label basis, enabling our customers to deliver customized virtual assistants with unique, branded personalities and ultimately strengthening the bond between automobile brands and end users.

Our platform utilizes industry-leading speech recognition, natural language understanding, speech signal enhancement and acoustic modeling technology. Automotive virtual assistants built with our platform can enable a wide variety of modes of human-vehicle interaction, including speech, touch, handwriting, gaze tracking and gesture recognition, and can support the integration of third party virtual assistants into the in-vehicle experience. Our vision for the future is to power an ever-expanding range of interactions between humans and mobility products and services.

The market for automotive cognitive assistance is rapidly expanding. The proliferation of smartphones and smart speakers has encouraged consumers to rely on a growing number of virtual assistants and special-purpose bots for various tasks such as controlling entertainment systems and checking the news. Automobile drivers and passengers increasingly expect hands-free access to virtual assistants as part of the mobility experience, with common use cases in a variety of categories including mobility domains such as navigation, voice-activated texts, and telephone communication, automobile domains, such as automobile user guides, and ignition on-off, and generic domains, such as entertainment. To meet the increasing demand for automotive cognitive assistance and to offer differentiated mobility experiences, OEMs and suppliers are building proprietary virtual assistants into an increasing proportion of their vehicles. We believe that this trend will continue and that consumer appetite for automotive cognitive assistance will grow further as vehicles become more autonomous and drivers pursue new forms of human-vehicle engagement previously not feasible during vehicle operation.

Our software platform is a market leader for building integrated, branded and differentiated virtual assistants for automobiles. As a unified platform and common interface for automotive cognitive assistance, our software platform provides OEMs and suppliers with an important control point with respect to the mobility experience and their brand value. Our platform is fully customizable and designed to support our customers in creating their own ecosystem in the automobile and transforming the vehicle into a hub for numerous connected devices and services. Virtual assistants built with our software platform can address user requests across a wide variety of categories, such as navigation, control, media, communication and tools. Our software platform is comprised of edge computing and cloud-connected software components and a software framework linking these components together under a common programming interface. We implement our software platform for our customers through our professional services organization, which works with OEMs and suppliers to optimize our software for the requirements, configurations and acoustic characteristics of specific vehicle models.

We generate revenue primarily by selling software licenses and cloud-connected services. In addition, we generate professional services revenue from our work with OEMs and suppliers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects. Through our over 20 years in the automotive industry, we have developed longstanding industry relationships and benefit from incumbency. We have existing relationships with all major OEMs or their tier 1 suppliers, and while our customer contracts vary, they generally represent multi-year engagements, giving us visibility into future revenue. We have master agreements or similar commercial arrangements in place with many of our customers, supporting customer retention over the long term.

 

  58  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

We are being spun off of Nuance, a leading provider of speech and language solutions for businesses and consumers around the world. Nuance has won numerous awards for the performance of its speech recognition and conversational artificial intelligence software. Speech recognition, natural language understanding, artificial intelligence and predictive touch solutions from Nuance have powered many pioneering intelligent devices, including mobile devices, cars, televisions, and wearable devices, and are also established technologies in healthcare and enterprise services. Following the Spin-Off, we will have possession of approximately 1,400 patents and other intellectual property currently owned by Nuance. Additionally, we will employ over 700 personnel devoted to research and development who will continue to develop our artificial intelligence technology. We will also continue to benefit from Nuance’s deep portfolio of intellectual property and data, and we will provide certain of our intellectual property and data to Nuance, by entering into agreements with Nuance where we and Nuance provide to the other certain licenses or rights to certain intellectual property and data.

Our solutions have been installed in more than 250 million automobiles to date, including over 45 million new vehicles in 2018 alone. In aggregate, over 60 automobile brands worldwide use our solutions, covering over 70 languages and dialects, including English, German, Mandarin, Cantonese and Shanghainese.

In fiscal 2018, we generated revenue of $277.0 million and net income of $5.9 million.

Our Offerings

Our mission is to deliver automotive cognitive assistance solutions that are natural and intuitive and that enable OEMs to strengthen the emotional connection with their end users through a distinct, consistent, branded experience. Our principal offering is our software platform, which our customers use to build virtual assistants that can communicate, find information and take action across an expanding variety of categories, including navigation, media, communication, information and tools, which include common domains such as music, news, sports, telephone, messaging and weather. Our software, developed in deep partnership with the automotive industry, improves the mobility experience for drivers and passengers all over the world.

 

 

LOGO

User engagement with virtual assistants built with our software platform typically begins with a voice request. Upon receiving such an input, our software platform system determines what the user has said, infers user intent, and maps the request to the most applicable category and domain. Depending on the applicable domain, our software platform determines whether to respond directly or access an external data source or third party virtual assistant, in all cases resulting in a response including spoken words or taking action. Depending on the complexity of the request and other factors, engagement may consist of multiple rapid voice interactions with the user and may combine assistance in multiple domains.

 

  59  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Our software platform has a hybrid architecture combining edge software components, which are embedded in a vehicle’s head unit and integrated with onboard systems, with cloud-connected components, which access data and content on external networks and support over-the-air updates. This hybrid architecture enables our software platform to combine the performance, reliability, efficiency, security and tight vehicular integration of embedded software with the flexibility that cloud connectivity provides. Response frameworks can generally be customized such that requests are processed first at the edge, controlling cloud transmission costs, or in parallel at the edge and in the cloud, to achieve higher confidence responses with low latency. Through the edge computing capabilities, the platform is able to provide certain features, such as wake-up-word, while avoiding privacy and latency issues associated with always-listening cloud-connected technologies. Our software platform includes a common programming framework for its edge and cloud-connected components, and our customers can choose the software components that are necessary to power the experiences that they want to build and offer.

 

LOGO

We deliver our software platform through our professional services organization, which works with OEMs and suppliers to tailor it to the desired requirements, configurations and acoustic characteristics of specific vehicle models. For an initial implementation, our professional services engagements typically begin with the porting of our key technologies to the customer’s specific hardware platform and the development of specific dialogues and grammar libraries. Our professional services teams also work with OEMs on acoustic optimization of a system and application of our audio signal processing technologies. Following an initial implementation, our professional services organization may continue to provide services over the course of a head unit program and vehicle model lifecycle through maintenance and enhancement engagements.

Edge Software Components

Our software platform’s edge software components are installed on a vehicle’s head unit and can operate without access to external networks and information. We tailor our edge software components to a customer’s desired use cases and a vehicle model’s unique systems, sensors and data interfaces.

Capabilities of our edge software components include automatic speech recognition, natural language understanding, noise cancellation, driver and passenger voice isolation, voice biometrics, wake-up word and text-to-speech synthesis, as well certain non-speech technologies such as touch and text input. Edge deployment suits these technologies as it provides the following functionality and benefits:

 

   

Performance. Processing at the edge is often necessary to meet the low latency requirements of natural conversation.

 

   

Vehicle Systems Integration. Vehicle applications, sensors, and data interfaces can be integrated deeply with embedded systems.

 

   

Availability. Edge-located systems are available regardless of cellular coverage and network connectivity.

 

  60  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

Reduced cost. Processing at the edge reduces or eliminates cellular data transmission costs.

 

   

Privacy. Users’ utterances and system outputs processed at the edge remain onboard and can immediately be purged.

Certain forms of assistant speech invocation can only be implemented using edge software. The use of wake-up words like “Hey BMW” and “Ni hao Banma” require constant listening and signal processing to identify instances when a virtual assistant should activate and respond. Sending a constant stream of audio from the car interior to the cloud for processing would require enormous amounts of bandwidth and potentially create privacy concerns. The same requirements apply to our new JustTalk technology, which constantly listens to spoken conversation, determines speaker intent, and invokes assistance appropriately without requiring a specific invocation phrase.

We typically sell our edge software components under a traditional per unit perpetual software license model, in which a per unit fee is charged for each software instance installed on an automotive head unit. Our customers generally provide estimates of the units to be shipped for a particular program, and we review third-party market studies and work with our customers to refine and understand these projections. This provides us with some reasonable visibility into future revenue, however the number of units to be shipped for a particular program is not committed upfront.

Cloud-Connected Components

Our software platform’s cloud-connected components are comprised of certain speech and natural language understanding related technologies, AI-enabled personalization and context-based response frameworks, and content integration platforms. Our cloud-connected speech-related technologies perform many of the same tasks as our speech-related edge components while offering enhanced functionality through increased computational power and access to external content. Our principal content platform offering is Content Services, a data aggregation system which supports access to a wide range of live information such as news, traffic and weather. Cloud-connected components also support the replication of personalized settings such as voice profiles and preferences across multiple vehicles.

We offer cloud-connected components in the form of a connected service to the vehicle end user. Initial subscriptions typically have multi-year terms from the time of a vehicle’s sale and are paid in advance by the OEM or supplier. Renewal options vary and are managed by our customers on behalf of vehicle end users.

Virtual Assistant Coexistence

The wide variety of use cases encompassed by automotive cognitive assistance, in the context of evolving consumer preferences, necessitates the coexistence of multiple virtual assistants within the in-vehicle environment. For example, many vehicle-related categories such as navigation and control can best be addressed by a tightly integrated, vehicle-model-specific virtual assistant. At the same time, drivers and passengers often prefer to use familiar Internet-based virtual assistants for more general domains such as entertainment.

To enable our customers to provide a consistent automotive cognitive assistance experience across multiple coexisting virtual assistants, our software platform can support the integration of third-party virtual assistants, providing a uniform interface for virtual assistant engagement. We have invested in our platform to develop the technology and capabilities necessary to integrate third party virtual assistants with vehicles’ systems.

To make integration as seamless as possible, we have built cognitive arbitration technology that is capable of inferring user intent, determining which within a set of virtual assistants would be best suited to address a request, and sending the request to the selected assistant. Depending on a system’s configuration and the virtual assistants to which it is connected, output can be presented back to the user through a vehicle-specific personality or through the virtual assistant’s own interface. Cognitive arbitration represents an important control point with

 

  61  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

respect to the mobility experience and an important brand differentiation opportunity for OEMs and suppliers. Like the rest of our software platform, cognitive arbitration is a white label product that can be customized and branded.

Along with providing OEMs control over their brand identity, our cognitive arbitration technology is an important element in letting an OEM design the overall driver and passenger experience. This technology allows an OEM to dictate interactions with third-party virtual assistants within the vehicle, strengthening its ability to differentiate and control the overall in-vehicle experience.

 

LOGO

Professional Services

We have a large professional services team that works with our customers in the design, development and deployment phases of a vehicle head unit program and vehicle model lifecycle, as well as in maintenance and enhancement engagements. Our range of capabilities include personalization of grammar and natural language understanding development, localization, language selection and system coverage, navigation speech data generation, system prompt recordings, porting our platform’s framework and ability to deploy cognitive arbitration technologies, and user experience reviews and studies. Our professional services team is globally distributed to serve our customers in their primary design and production jurisdictions. We typically charge manufacturers for our design and consulting work, although we have recently observed an industry shift towards connected services solutions and have changed our pricing strategy, both of which have moved fees from the professional services portion of our business to the license and connected services portion of our business. Our professional services contracts are primarily project-based, in line with customary non-recurring engineering industry practices.

Our Competitive Strengths

Our key competitive strengths include:

 

   

Industry-leading speech-related technology. Our research shows that consumers see speech as an increasingly attractive medium for human-vehicle interaction. Nevertheless, they are often frustrated with speech recognition solutions that misunderstand spoken language or require users to speak rigid, pre-defined commands associated with a limited set of functions. Developing speech-based automotive virtual assistants that users will perceive as natural is challenging as a matter of artificial intelligence technology, acoustic engineering and user interface design. We believe our software platform, as tailored for a specific vehicle model by our professional services organization, represents one of the most technologically advanced and highest-performing human-vehicle speech interaction systems available today. In tests performed by our customers to assess correct recognition of words, sentences, and domains, our solutions have achieved some of the highest marks relative to competitors and our offerings are backed by our portfolio of patents and associated rights.

 

   

Hybrid edge-cloud system architecture. Our software platform’s hybrid architecture combines the performance, reliability and tight integration that only edge software can provide with the flexibility of cloud connectivity. Cloud-reliant solutions with which our software platform competes cannot match

 

  62  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

 

edge software’s low latency, its bandwidth efficiency or its availability in the absence of network connectivity. Moreover, emerging speech invocation paradigms such as wake up words and situationally aware invocation are most effectively implemented using edge technology.

 

   

Bespoke vehicle integration and acoustic tuning. Cognitive assistance in categories such as navigation, entertainment and control requires tight integration with onboard vehicle components, which vary widely among vehicle models. Separately, speech interaction systems can be significantly hampered by the noisy environment of a vehicle cabin and must be tuned for particular acoustics and audio system components. To achieve the tight vehicle integration necessary to address these concerns, our professional services team works closely with OEMs and suppliers to customize our offerings for the particular characteristics of specific vehicle models. Our expertise in acoustics enables us to implement systems that can isolate the voices of individual speakers and support simultaneous virtual assistance for speakers in multiple zones, representing a key point of differentiation.

 

   

Interoperability with third-party Internet-based virtual assistants. Virtual assistants from large technology companies have become popular with consumers. We believe that consumers want to use these assistants while traveling in their vehicles and that a comprehensive automotive cognitive assistance system requires the coexistence of multiple virtual assistants. To accommodate their end user preferences while still providing a unique and brand-specific experience, OEMs seek to offer a common in-vehicle interface with seamless integration across various virtual assistants. To this end, our software platform can support the integration of multiple third-party virtual assistants and provide a uniform interface for virtual assistant engagement. Our market-leading position and the large size of our installed base create incentives for third party virtual assistant providers to work with us and support this integration.

 

   

Independence from large technology companies and automobile industry players. As vehicles become more autonomous, mobility experiences are being increasingly defined by in-cabin features and alternative forms of human-vehicle engagement. Branded, differentiated automotive cognitive assistance is thus increasingly important to OEMs’ brand value. As a neutral, independent, white-label software platform vendor, we empower our customers to build branded and differentiated experiences and retain ownership of, or rights to, their system design and data. The virtual assistant coexistence enabled by our cognitive arbitration functionality is designed to allow our customers to provide access to third-party virtual assistants without ceding overall control of the cognitive assistance experience.

 

   

OEM alignment. The design and development of the head unit within the vehicle ecosystem is a complex process requiring tight integration of the software and hardware components used in and with the vehicle. We believe our demonstrated long-standing capabilities in working closely with OEMs, understanding their needs, product roadmaps and global go-to-market strategies enables us to innovate our technologies to meet an OEM’s specifications. Furthermore, our working relationships with OEMs uniquely allow us to market and sell our solutions on both a local and global basis in accordance with an OEM’s particular requirements.

 

   

Broad language coverage. Our software platform supports over 70 languages and dialects, far more than any of our competitors. As a result of our broad language support, our customers are already delivering cognitive assistance based on our software platform in over 60 countries across the Americas, Europe and Asia, including China, the U.S. and all other large automotive markets. Our language support also enables multi-lingual capabilities for domains such as music selection, point-of-interest selection, and cross-border navigation among others, representing a critical feature for markets such as Continental Europe in which automobiles may routinely traverse multiple lingual zones. We believe that our portfolio of languages and multi-lingual capabilities represent an important competitive advantage, as the development of capabilities to support a new language is expensive and time-consuming.

 

   

Broad, global network of deep relationships with OEMs and tier 1 suppliers. We have supplied speech recognition systems to OEMs and suppliers for over 20 years, working closely with our

 

  63  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

 

customers through our global professional services organization to design and integrate our solutions into their brands. Today, we work with all major OEMs or their tier 1 suppliers worldwide, leveraging the geographic breadth and industry experience of our professional services teams. Our long history in the automotive industry and the global reach and experience of our over 400 professional services employees across 10 countries gives us credibility with OEMs as we seek new business with OEMs, either directly or through their tier 1 suppliers. We believe that OEMs who sell globally will value our experience in servicing and deploying solutions on a global basis. We often have master agreements or similar commercial arrangements with our customers. These master agreements help us retain customer relationships over the long term.

Our Growth Strategies

Our primary growth strategies include the following:

 

   

Maintain and extend product leadership. We intend to continue investing in developing our product functionality, particularly with respect to the capabilities of our cloud-connected features and the breadth of categories and domains our software platform is able to address. Our existing relationship with, and our proximity in the design process to, OEMs provides us with insight into the needs of the end-users and roadmaps for innovation. Additionally, we intend to continue to invest in customizing and supporting our solutions for specific individual automobile vehicle models, resulting in tight integration of our solutions. We believe that increased product functionality and tighter integration will enable us to increase the revenue per vehicle that we are able to generate. Additionally, these investments will help maintain our position with existing customers through new vehicle models and enable us to grow with the overall market for automotive cognitive assistance.

 

   

Continue to invest in interoperability with third-party virtual assistants. We believe that the growing popularity of third-party virtual assistants is creating increasing demand for access to these assistants as part of the mobility experience. We also believe that complete automotive cognitive assistance requires the coexistence of multiple virtual assistants. We intend to continue to invest to develop our software platform’s interoperability with third-party virtual assistants and its cognitive arbitration capabilities to maintain its position as a neutral automotive cognitive assistance platform. We believe a neutral automotive cognitive assistance platform will increasingly be valued by OEMs that prioritize maintaining their unique and branded in-car experience and the ability to control the mobility experience overall.

 

   

Increase penetration in key geographic markets, including China. We operate worldwide today, including in emerging markets. However, our presence in certain large geographic automobile markets, such as India and Southeast Asia, is relatively small today primarily as a result of lower penetration of automobile cognitive assistance in those markets. We specifically invested in emerging markets such as Indonesia and Thailand in fiscal 2018 and expect to continue making investments in India in fiscal 2019. As these markets grow, we intend to continue to invest in manufacturer relationships and the development of localized technology to maintain and expand our local market share.

We currently serve the Chinese market through a combination of domestic OEMs and suppliers, such as Geely, Proton, Roewe, SAIC, Banma Network Technology and Huawei, and global non-Chinese manufacturers and suppliers who sell into the Chinese market, such as Audi, BMW, Daimler, Aptiv and Harman. We offer cognitive assistance in all the primary Chinese languages and dialects, including Mandarin, Cantonese and Shanghainese. Our current presence in China includes approximately 270 R&D, customization, and sales and marketing professionals across three R&D centers and six professional services hubs. We intend to continue to expand our presence in the Chinese market through the ongoing development of language capabilities and investment in relationships with manufacturers and suppliers that sell into that market.

 

   

Deliver new functionality to existing installed base. Our solutions have been installed in over 250 million vehicles to date. Our large installed base represents an opportunity to deliver new features

 

  64  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

 

and software. Depending on system capabilities, we are able to deliver updated functionality to our users in the form of embedded software upgrades performed by dealers and over-the-air updates delivered from the cloud.

Market Opportunity and Industry Trends

The market for automotive cognitive assistance is rapidly expanding. Grand View Research estimates that the automotive voice and speech recognition software market, comprised of Automatic Speech Recognition, Text to Speech, Speaker Identification and Speaker Verification, is expected to grow at an 18.6% compound annual growth rate to $3.7 billion by 2025. We believe that many of the features of our software platform represent additional market opportunity beyond this estimate, including Push-to-Talk, Wake-Up Words, Just Talk, Cognitive Arbitration, Non-Speech Multimodal Input, Speech Signal Enhancement, Multi-Seat Intelligence and onboard sensor integration. We believe the market for these technologies has generally not been estimated by third parties due to the limited set of companies with the ability to offer the features into the market. However, given interest from our customers, we believe that the market for these features is large and growing at a faster rate than the 18.6% compound annual growth rate cited by Grand View for the automotive voice and speech recognition market.

The market for automobile cognitive assistance is being driven by a number of key industry trends, including the following:

 

   

Increasing consumer use of virtual assistants. Smartphones have become ubiquitous, and smart speakers are becoming increasingly popular. Consumers are becoming increasingly accustomed to on-demand access to virtual assistants and special-purpose bots to help with various tasks. We believe that this results in increased demand for automotive cognitive assistance for two reasons. First, as consumers become increasingly accustomed to speech-based virtual assistants, they realize that speech is a natural interface for many automotive use cases including navigation, communication and entertainment system control. Second, with respect to more general informational domains including news, weather and sports, consumers want access to the same virtual assistants while riding in their vehicles as they increasingly have through smartphones and smart speakers in their homes.

 

   

Increasingly distracted driving. Smartphones present drivers with a source of potential distraction. Speech-based virtual assistance is hands-free and eyes-free, decreasing the risks of distracted driving while still enabling users to communicate, obtain information, take action and engage with applications.

 

   

Increasing vehicle intelligence and connectivity. Automobiles are becoming increasingly connected to the Internet, effectively operating as “rolling smartphones” with real-time external data access. At the same time, OEMs are increasing the computational power available onboard their vehicles to address a variety of aspects of mobility, including safety and navigation. We believe that the combination of increasing connectivity and increasing computational power will drive increases in the number and proportion of vehicles shipped with onboard proprietary virtual assistants.

 

   

Autonomous driving. As vehicles become increasingly autonomous, their drivers are becoming increasingly passive and passenger-like. We believe that cognitive assistance in the domain of trip planning will gradually and partially replace physical driving control through steering wheels and pedals. As this happens, cognitive assistance in the categories of entertainment and productivity will become increasingly important to the mobility experience.

 

   

Shared mobility. Ridesharing and vehicle sharing are impacting how consumers interact with vehicles. Shared mobility reduces the amount of active driving that is required to achieve a given amount of transportation and therefore increases the time in which passengers are free to engage in entertainment and productivity activities. Shared mobility providers are increasingly competing on the basis of their ability to deliver a consistent, personalized mobility experience across mobile applications and vehicle cabins. We believe that cognitive assistance will play an important role in powering and differentiating these experiences.

 

  65  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Competition

The automobile cognitive assistance market is competitive. Today, we face two primary sets of competitors:

 

   

Large technology companies. Many large technology companies, including Amazon, Apple, Google, Microsoft, Alibaba, Baidu and Tencent, offer Internet-based virtual assistants. Given the popularity in general of these virtual assistants, we believe that automobile drivers and riders increasingly desire the ability to use them as part of the mobility experience. To meet this demand, some of these companies have invested in technologies, such as Apple CarPlay, to make their virtual assistants more accessible within vehicle cabins.

While these third-party virtual assistants directly compete with some of the functionality we provide as part of our software platform, they also increase the need for our software platform in two ways. First, given the fragmented and competitive nature of the virtual assistant market, it is important for OEMs and suppliers to enable their passengers to utilize a variety of virtual assistants. Our software platform’s cognitive arbitration functionality can, dependent on appropriate third party agreements, enable OEMs and suppliers to provide access to multiple third-party virtual assistants through a consistent, branded interface. Second, the noisy environment of a vehicle cabin presents significant speech processing challenges for smartphone-based third-party virtual assistants that are not designed for a specific vehicle model. Our software platform integrates with third-party virtual assistants and improves their functionality by improving the quality of speech input.

 

   

Small, focused competitors. We compete for business directly with certain companies focused on cognitive assistance, including SoundHound in the U.S., iFlyTek in China, and other regional and technology-focused competitors. These companies have had some success selling into our customer base. However, we believe that we have multiple meaningful competitive advantages, including our scale, our globally distributed team, our best-in-class portfolio of compatible languages, and our deep focus on the automotive market. We also believe that our technology, particularly our speech signal enhancement and acoustic tuning, is superior based on benchmarking results against our competitors. We believe we will continue to be able to compete successfully against these competitors as we continue to invest in our offerings.

Our industry has attracted, and may continue to attract, new entrants. Although we find that OEMs often prefer to maintain relationships with suppliers that have a proven record of performance, they also rigorously reevaluate suppliers on the basis of product quality, price, reliability and timeliness of delivery, product design capability, technical expertise and development capability, new product innovation, financial viability, operational flexibility, customer service and overall management.

Technology

Our software platform’s edge and cloud-connected software components are based on a number of proprietary technologies. We customize these technologies for specific vehicle models and continuously update and improve our features and functionality. Our key technologies include but are not limited to the following:

 

   

Speech Signal Enhancement. A high-quality voice input signal is a precondition to reliable speech recognition and cognitive assistance. However, in a typical vehicle cabin, ambient interior sounds and noise from around the vehicle mix with infotainment system output and conversations between passengers, creating a complex soundscape that can obscure virtual assistant requests. Audio signal processing technologies are therefore critical to the cognitive assistance experience. We have been developing and combining highly advanced audio signal enhancement technologies for over 20 years, and we tune our software in relation to the placement of microphones in a vehicle to create defined acoustic zones and support the isolation of individual speakers. Our technologies deliver best-in-class speech recognition results, as evidenced by tests performed by our customers to assess correct recognition of words, sentences, and domains, in which our solutions have achieved some of the highest marks relative to competitors.

 

  66  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

Automatic Speech Recognition. Our speech recognition technology, built using neural networks and specifically designed for automotive applications, is recognized as the automotive industry leader in automatic speech recognition. We support 70 languages and dialects, representing one of the largest language portfolios in the speech industry. Key features of our speech recognition technology include free-form conversational interpretation, as opposed to a rigid system of predefined commands, and barge-in capabilities, enabling users to correct and modify their requests in the middle of stating them.

 

   

Natural Language Understanding. Once speech has been captured and accurately converted into words, natural language understanding technology, or NLU, is necessary to match the request to the appropriate category and domain to interpret the user’s intent. Our NLU system applies artificial intelligence reasoning, including predefined and learned preferences and real-time contextual information, to deliver informative responses consistent with what a user desires. NLU processing is performed by a hybrid of edge and cloud-connected software components to optimize performance, efficiency, reliability and security.

 

   

Vocalizer: Text-to-Speech and Natural Language Generation. In many cases, the most useful result of a spoken query or command is a spoken response back to the user. To enable cognitive assistants to speak, we offer text-to-speech technology in more than 70 languages and dialects and over 130 distinct voices. We also develop custom voices for customers who wish to differentiate themselves through an exclusive personality representing their brand.

 

   

Voice Biometrics. Our software platform includes biometric functionality that can detect minute differences in humans’ voices and securely store and match users’ voiceprints. The voice biometrics enables personalization of the automotive experience by recognizing users based on their voice and automatically loading individual preferences and other automotive settings.

 

   

Push-to-Talk, Wake-Up Words and Just Talk. Through our software platform, we are capable of offering three methods for invoking the virtual assistant, which can be implemented alone or in combination:

 

   

Push-to-Talk, functionality, most commonly implemented as a button on the steering wheel or center console.

 

   

Wake-Up Word, functionality, involving a spoken keyword or phrase, such as “Hey BMW.”

 

   

Just Talk. Our active listening technology, introduced in 2017, filters out background noise and irrelevant conversation until it hears a keyword, phrase, or command that it understands as related to an applicable domain and intended as a virtual assistant request. False triggers are minimized through sophisticated syntax, cadence and intonation analysis performed in real-time and can be further reduced using automobile sensors such as head or body movement trackers.

 

   

Cognitive Arbitration. Our cognitive arbitration technology can route arbitrary requests to the most appropriate virtual assistant or bot, including third party virtual assistants.

 

   

Non-Speech, Multimodal Input. Our technology seeks to mimic conversational human interaction by incorporating input methods beyond speech. Our multimodal capabilities allow vehicle systems to accept multiple forms of input such as voice, gestures, gaze, predictive text and handwriting.

 

   

Multi-Seat Intelligence. Due to its flexible design our speech signal enhancement technology can be easily configured for complex multi-zone scenarios with various users and nearly arbitrary microphone configurations. Dedicated processing modes enable efficient and robust multi-user speech recognition in challenging acoustical environments. This allows for passenger interaction in individual zones like sharing music or interacting simultaneously with the car or infotainment systems, where some passengers can enjoy browsing their music by speech, while others can send emails or other work-related activities.

 

  67  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Research, Development, and Intellectual Property

Our company is being spun off of Nuance, a leader in the development of speech recognition, natural language understanding and conversational artificial intelligence for a variety of industrial applications. As part of Nuance, our research and development efforts have taken two forms. First, we have maintained technical engineering centers in major regions of the world that help develop our software platform and its underlying components and provide our customers with local engineering capabilities and design development. Second, we have collaborated with Nuance’s centralized research and development efforts and participated in the development of various technologies beneficial to our company and the broader Nuance organization.

Following the Spin-Off, our company will remain responsible for its own research and development efforts. SpinCo employees who have been engaged in research and development attributable to SpinCo will generally become employees of SpinCo. After the Spin-Off, we will employ approximately 700 research and development personnel around the world, including scientists, engineers and technicians. Our total research and development expenses were approximately $81.0 million and $56.8 million for fiscal 2018 and 2017, respectively.

We believe that continued investment in research and development will be critical for us to continue to deliver market-leading solutions for automotive cognitive assistance. Accordingly, we intend to continue to invest in our product portfolio and allocate capital and resources to our growth opportunities.

Additionally, as part of the Spin-Off, our company will take possession of approximately 1,400 active patents and patent applications currently held by Nuance. We will also enter into the Intellectual Property Agreement, which will provide us with certain rights with respect to patents that will continue to be held by Nuance. While no individual patent or group of patents, taken alone, is considered material to our business, in the aggregate, these patents and rights provide meaningful protection for our products, technologies, and technical innovations.

Customers

Our customers include all major OEMs or their tier 1 suppliers worldwide. Our automobile manufacturer customers, commonly referred to as OEMs, include BMW, FCA Group, Ford, Daimler, Geely, Renault-Nissan, SAIC, Toyota, Volkswagen Group and many others and represented 36% of our sales in fiscal 2018. Our largest customer, Toyota, represented 19% of our revenue in fiscal 2018. Our tier 1 supplier customers, who typically sell automobile components to the OEMs, include Aptiv, Bosch, Continental, DENSO TEN, Harman and many others and represented 60% of our business in 2018.

Our revenue base is geographically diverse. In fiscal 2018, approximately 40%, 30% and 30% of our revenue came from the Americas, Europe and Asia, respectively.

Sales and Marketing and Professional Services

We market our offerings using a high-touch OEM solutions model. We sell directly to our customers, which include OEMs and suppliers and are described in “—Customers”, and for each of our customers we assign a team comprising sales and marketing as well as professional services personnel. Our customer contracts are bespoke and vary widely, but generally represent multi-year agreements providing strong visibility into future revenue and supporting retention of customer relationships over the long term.

Our sales and marketing team includes approximately 85 employees. This team includes sales representatives, account managers, sales engineers, product managers and marketing experts. As we sell our offerings to all major OEMs or their tier 1 suppliers today, our sales strategy is primarily focused on leveraging our existing client relationships. Account managers typically have longstanding relationships with specific customers and are distributed worldwide to provide local customer coverage. We oftentimes utilize customer-

 

  68  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

specific demo days in which we showcase our technology and capabilities to OEMs and tier 1 suppliers on an individual basis. These events help maintain our market presence and awareness of our platform’s offerings while also providing opportunities to solicit feedback and input from our customers on our roadmap and future technologies.

Our professional services organization includes approximately 90 employees. These employees work with our customers in the design phase of the vehicle lifecycle to tailor our platform for specific requirements such as branding and also tune the software for the characteristics of a vehicle model. Our professional services team also provides post-design phase services through maintenance engagements, particular with respect to our cloud-connected solutions. The tight integration of our platform into our customers’ design process and their vehicles supports our ability to win future business with those customers. Like our sales representatives, our professional services employees often have longstanding relationships with specific customers and are distributed worldwide to provide local customer coverage.

Employees

As of December 31, 2018, we had approximately 1,300 full-time employees, including approximately 90 in sales and marketing, approximately 450 in professional services and approximately 700 in research and development. Approximately 85% of our employees are based outside of the United States. None of our employees in the United States is represented by a labor union, however certain of our employees in Europe are represented by workers councils or labor unions. We believe that our relationships with our employees are satisfactory.

Legal Proceedings

Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, employment, benefits and securities matters. We evaluate the probability of adverse outcomes and, as applicable, estimate the amount of probable losses that may result from pending matters. Probable losses that can be reasonably estimated are reflected in our combined financial statements. These recorded amounts are not material to our combined financial statements for any of the periods presented in the accompanying combined financial statements. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our results of operations or financial position. However, each of these matters is subject to uncertainties, the actual losses may prove to be larger or smaller than the accruals reflected in our combined financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows.

Properties

Our corporate headquarters will be located in the greater Boston area, and our international headquarters will be located in the Maastricht area in the Netherlands. As of December 31, 2018, we leased approximately 280,000 square feet of building space in the United States, the Asia-Pacific region, Europe and Canada. Larger leased sites include properties located in: Montreal, Canada; Bellevue, Washington; Aachen and Ulm, Germany; and Shanghai and Chengdu, China.

We believe our existing facilities and equipment are in good operating condition and are suitable for the conduct of our business.

 

  69  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis presented below should be read in conjunction with the Combined Financial Statements and Condensed Combined Financial Statements, the corresponding notes, and the each included elsewhere in this information statement. The financial information presented in this section is derived from forward looking statements, which are described in detail in the section titled “Cautionary Statement Concerning Forward Looking Statements”. The matters discussed in these forward looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected, or implied in the forward-looking statements. See the section titled “Risk Factors” for a discussion of the risks, uncertainties, and assumptions associated with these statements.

Overview

Cerence builds 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 for the future is to power an ever-expanding range of interactions between humans and mobility products and services.

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

We generate revenue primarily by selling software licenses and cloud-connected services. Our edge software components are typically sold under a traditional per unit perpetual software license model, in which a per unit fee is charged for each software instance installed on an automotive head unit. We typically license cloud-connected software components in the form of a connected service to the vehicle end user, which is paid for in advance. In addition, we generate professional services revenue from our work with our customers during the design, development and deployment phases of the vehicle model lifecycle and through maintenance and enhancement projects. We have existing relationships with all major OEMs or their tier 1 suppliers, and while our customer contracts vary, they generally represent multi-year engagements, giving us visibility into future revenue.

Business Trends

During fiscal year 2018, we experienced total revenue growth of 13.2%, primarily driven by our license and connected services revenues due to increased market penetration of our edge technologies and connected services solutions. Professional service revenue decreased primarily due to an industry shift towards connected services solutions, and a change in our pricing strategy, but we expect professional service revenue to continue to be a significant component of our revenue and a meaningful part of our business. Due to the increase in demand for hybrid solutions, the historical strength of licensed edge technologies and connected services solutions, and our interpretation of industry trends, we believe license and connected services revenues will continue to experience growth into the future.

Consistent with the increased revenue and customer demand in fiscal year 2018 compared to fiscal year 2017, fiscal year 2018 was a key investment year for the Cerence business in which we focused on accelerating

 

  70  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

R&D and expanding our professional services team to improve the end user experience we are able to deliver. Total cost of revenues increased by 21.1% during fiscal year 2018, primarily driven by the hiring of more professional services staff. Total operating expenses grew by 39.7% during fiscal year 2018, primarily driven by innovation initiatives in order to increase our competitive position in the market. We hired a significant amount of new engineering and product innovation personnel, resulting in a 42.6% increase in R&D expenses. Our acquisition of Voicebox Technologies Corporation (“Voicebox”) on April 2, 2018, which provided additional customer relationships and technology, and the incurrence of professional service costs to establish the Cerence business as a stand-alone public company drove a 589.7% increase in restructuring and other costs, net. We anticipate that our R&D expenses will continue to represent the majority of our operating expenses as we focus on developing new products and advancing our core technologies.

Basis of Presentation

The accompanying combined financial data was derived from the consolidated financial statements and accounting records of Nuance. The Combined Financial Statements were prepared for the year ended September 30, 2018 (“fiscal year 2018”) and the year ended September 30, 2017 (“fiscal year 2017”). The Condensed Combined Financial Statements were prepared for the three months ended December 31, 2018 (“the first quarter of fiscal 2019”) and the three months ended December 31, 2017 (“the first quarter of fiscal 2018”).

Cerence is being 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 judgement and reflect significant assumptions and allocations that we believe are reasonable. These financial statements reflect the combined historical results of operations, financial position, and cash flows of the Cerence business in conformity with GAAP. However, the historical combined financial information may not be indicative of our future performance and does not necessarily reflect what our combined results of operations, financial position, and cash flows would have been had our business operated as a separate publicly traded company during the periods presented.

Specifically, the Combined Financial Statements and the Condensed 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 provides 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. While we have determined these allocations are a reasonable representation of benefits received and services utilized by the Cerence business, actual costs that would have been incurred if we had been a stand-alone company would depend on factors such as the organizational structure, infrastructure, information technology, and strategic decision making.

Following the completion of the Spin-Off, we expect to incur expenditures relating to the start-up of our own stand-alone corporate functions and information technology systems, reorganizing and hiring employees, and other miscellaneous transaction related costs. Since we expect to be publicly traded on Nasdaq following the Spin-Off, subject to approval of our application, we will be required to incur costs to establish public company functions such as internal audit, corporate treasury, and investor relations. Additionally, we will incur costs for Nasdaq listing fees, compensation of our newly formed Board, public company insurance, external audit, and external legal counsel. We do not expect the expenditures associated with operating as a stand-alone public company to be materially higher than those historically allocated to us from Nuance. Refer to Note 2 to the accompanying Combined Financial Statements included elsewhere in this Information Statement for additional information.

 

  71  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Comparability of Results

As of October 1, 2018, we adopted ASC 606 using the modified retrospective approach from the previous guidance 605. Our transition to ASC 606 represents a change in accounting policy that is reflected in our Condensed Combined Financial Statements for the first quarter of fiscal 2019. The adoption of ASC 606 limits the comparability of revenue and expenses, including cost of revenue and certain operating expenses, presented in the results of operations for the first quarter of fiscal 2019 when compared to the first quarter of fiscal 2018 and prior reporting periods. Refer to Note 3 to our Condensed Combined Financial Statements included elsewhere in this Information Statement for further details on our adoption of ASC 606 and a reconciliation of our operating results for the first quarter of fiscal 2019 under ASC 606 to the results under ASC 605.

Key Metrics

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

For the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018:

 

   

Total revenue under ASC 606 increased by $10.6 million, or 17.1%, from $62.0 million to $72.5 million as compared to total revenue in the first quarter of fiscal 2018 under ASC 605. Comparing both periods under ASC 605, total revenue increased by $12.1 million or 19.5%, from $62.0 million to $74.0 million.

 

   

Operating margin under ASC 606 decreased by 9.1 percentage points from 9.2% to 0.1% as compared to operating margin in the first quarter of fiscal 2018 under ASC 605. Comparing both periods under ASC 605, operating margin decreased by 1.9 percentage points from 9.2% to 7.3%.

 

   

Cash provided by operating activities for the first quarter of fiscal 2019 was $14.5 million, a decrease of $5.1 million, or 25.9%, from cash provided by operating activities of $19.6 million for the first quarter of fiscal 2018.

For fiscal year 2018 as compared to fiscal year 2017:

 

   

Total revenue increased by $32.3 million, or 13.2%, from $244.7 million to $277.0 million.

 

   

Operating margin decreased by 12.7 percentage points from 26.0% to 13.3%.

 

   

Cash provided by operating activities increased by $16.0 million, or 16.6%, from $96.4 million to $112.4 million.

 

  72  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Operating Results

The following table shows the total operating results of the Cerence business for the first quarter of fiscal 2019 under ASC 606 and ASC 605, the first quarter of fiscal 2018, fiscal year 2018, and fiscal year 2017 (dollars in thousands):

 

     Three Months Ended December 31,     Year Ended September 30,  
     2018     2018      2017           2018                 2017          
     (ASC 606)     (ASC 605)      (ASC 605)     (ASC 605)     (ASC 605)  

Revenue:

           

License

   $ 42,781     $ 44,266      $ 36,718     $ 171,075     $ 148,803  

Connected services

     16,300       17,648        13,558       60,227       45,696  

Professional services

     13,458       12,115        11,649       45,451       49,645  

Other

     —         —          30       231       585  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     72,539       74,029        61,955       276,984       244,729  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cost of Revenue:

           

License

     341       341        206       1,156       773  

Connected services

     11,773       9,739        7,024       32,919       25,292  

Professional services

     12,716       10,647        10,558       41,123       35,571  

Amortization of intangible assets

     2,175       2,175        1,712       7,766       6,898  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenues

     27,005       22,902        19,500       82,964       68,534  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Profit

     45,534       51,127        42,455       194,020       176,195  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating Expenses:

           

Research and development

     23,808       23,808        17,176       80,957       56,755  

Sales and marketing

     9,445       9,730        8,017       30,553       29,909  

General and administrative

     5,721       5,721        5,686       19,873       17,485  

Amortization of intangible assets

     3,132       3,132        1,287       8,840       5,763  

Restructuring and other costs, net

     3,127       3,127        4,130       12,863       1,865  

Acquisition-related costs

     235       235        441       4,082       733  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     45,468       45,753        36,737       157,168       112,510  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     66       5,374        5,718       36,852       63,685  

Other income (expense), net

     (16     7        (247     (54     (483
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income before income taxes

     50       5,381        5,471       36,798       63,202  

(Benefit) provision for income taxes

     (14     1,027        24,211       30,917       15,926  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 64     $ 4,354      $ (18,740   $ 5,881     $ 47,276  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

  73  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for doubtful accounts.

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

Restructuring and other costs are costs related to reorganizing various business units, including costs associated with employee severance, closing and opening facilities, terminating contracts, and separation costs related to establishing the Cerence business as a stand-alone public company.

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

Other income (expense), net consists primarily of foreign exchange gains (losses).

Three Months Ended December 31, 2018 Compared with Three Months Ended December 31, 2017

Total Revenues

The following table shows total revenues by products type, including the corresponding percentage change (dollars in thousands):

 

     Three Months Ended December 31,        
     2018      2018      % of Total     2017      % of Total     % Change  
     (ASC 606)      (ASC 605)            (ASC 605)            (ASC 605)  

License

   $ 42,781      $ 44,266        59.8   $ 36,718        59.3     20.6

Connected services

     16,300        17,648        23.8     13,558        21.9     30.2

Professional services

     13,458        12,115        16.4     11,649        18.8     4.0

Other

     —          —          0.0     30        0.0     -100.0
  

 

 

    

 

 

      

 

 

      

Total revenues

   $ 72,539      $ 74,029        $ 61,955          19.5
  

 

 

    

 

 

      

 

 

      

Total revenues under ASC 606 for the first quarter of fiscal 2019 decreased by $1.5 million compared to revenue for the same period presented under ASC 605 primarily due to the re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, total revenues for the first quarter of fiscal 2019 were $74.0 million, an increase of $12.1 million, or 19.5%, from $62.0 million from the first quarter of fiscal 2018. This growth was primarily driven by license royalties. We also experienced notable growth in connected services revenues resulting from increased demand for our hybrid solutions.

License Revenue

License revenue under ASC 606 for the first quarter of fiscal 2019 decreased by $1.5 million compared to the same period presented under ASC 605 primarily due to previously recognizing certain license revenues ratably because vendor specific objective evidence of fair value (“VSOE”) did not exist for certain elements of the transaction. Under ASC 606, VSOE of fair value is no longer required when allocating transaction price to performance obligations. Accordingly, under ASC 606 license revenue is recognized as control is transferred and based upon the standalone selling price proportionally allocated to the license from the contract transaction price. Under ASC 605, license revenue for the first quarter of fiscal 2019 was $44.3 million, an increase of $7.6 million, or 20.6%, from $36.7 million for the first quarter of fiscal 2018. License revenue increased primarily due to a higher volume of licensing royalties from new and existing customers. As a percentage of total revenue, license revenue increased by 0.5 percentage points from 59.3% for the first quarter of fiscal 2018 to 59.8% for the first quarter of fiscal 2019.

 

  74  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Connected Services Revenue

Connected services revenue under ASC 606 for the first quarter of fiscal 2019 decreased by $1.3 million compared to the same period presented under ASC 605 primarily due to re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, connected services revenue for the first quarter of fiscal 2019 was $17.6 million, an increase of $4.1 million, or 30.2%, from $13.6 million for the first quarter of fiscal 2018. This increase was primarily driven by greater demand for our connected services solutions as our customers increasingly deploy hybrid solutions. As a percentage of total revenue, connected services revenue increased by 1.9 percentage points from 21.9% for first quarter of fiscal 2018 to 23.8% for the first quarter of fiscal 2019.

Professional Services Revenue

Professional services revenue under ASC 606 for the first quarter of fiscal 2019 increased by $1.3 million compared to the same period presented under ASC 605 primarily due to re-allocation of contract consideration to multiple performance obligations based on standalone selling prices. Under ASC 605, professional service revenue for the first quarter of fiscal 2019 was $12.1 million, an increase of $0.5 million, or 4.0%, from $11.6 million for the first quarter of fiscal 2018. Professional services revenue remained relatively consistent period over period.

Total Cost of Revenues and Gross Profits

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

 

     Three Months Ended December 31,         
     2018      2018      2017      % Change  
     (ASC 606)      (ASC 605)      (ASC 605)      (ASC 605)  

License

   $ 341      $ 341      $ 206        65.5

Connected services

     11,773        9,739        7,024        38.7

Professional services

     12,716        10,647        10,558        0.8

Amortization of intangible assets

     2,175        2,175        1,712        27.0
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 27,005      $ 22,902      $ 19,500        17.4
  

 

 

    

 

 

    

 

 

    

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

 

     Three Months Ended December 31,         
     2018      2018      2017      % Change  
     (ASC 606)      (ASC 605)      (ASC 605)      (ASC 605)  

License

   $ 42,440      $ 43,925      $ 36,512        20.3

Connected services

     4,527        7,909        6,534        21.0

Professional services

     742        1,468        1,091        34.6

Other

     —          —          30        -100.0

Amortization of intangible assets

     (2,175      (2,175      (1,712      27.0
  

 

 

    

 

 

    

 

 

    

Total gross profit

   $ 45,534      $ 51,127      $ 42,455        20.4
  

 

 

    

 

 

    

 

 

    

Total cost of revenues under ASC 606 for the first quarter of fiscal 2019 increased by $4.1 million compared to total cost of revenues for the same period presented under ASC 605. Under ASC 605, total cost of revenues for the first quarter of fiscal 2019 were $22.9 million, an increase of $3.4 million, or 17.4%, from $19.5 million for the first quarter of fiscal 2018. The increase in cost of revenues resulted primarily from the growth of our cloud-based connected services revenue, which required an increase in cloud-based infrastructure and employee costs.

 

  75  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

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

Total gross profit under ASC 606 for the first quarter of fiscal 2019 decreased by $5.6 million compared to total gross profit for the same period presented under ASC 605. Under ASC 605, we experienced an increase in total gross profit of $8.7 million, or 20.4%, from $42.5 million to $51.1 million, which was primarily driven by increased demand for our license and connected services solutions, which have costs that do not increase proportionally with revenue.

Cost of License Revenue

Cost of license revenue for the first quarter of fiscal 2019 was $0.3 million, an increase of $0.1 million from $0.2 million for the first quarter of fiscal 2018. Cost of license revenues increased due to third-party royalty expenses associated with external technologies we leverage in our edge software components. As a percentage of total cost of revenue, cost of license revenue increased by 0.4 percentage points from 1.1% for the first quarter of fiscal 2018 to 1.5% for the first quarter of fiscal 2019.

License gross profit under ASC 606 for the first quarter of fiscal 2019 decreased by $1.5 million compared to license gross profit for the same period presented under ASC 605. Under ASC 605, license gross profit increased by $7.4 million, or 20.3% from $36.5 million to $43.9 million since costs associated with license royalties are minimal.

Cost of Connected Services Revenue

Cost of connected services revenue under ASC 606 for the first quarter of fiscal 2019 increased by $2.0 million compared to cost of connected services revenue for the same period presented under ASC 605. Under ASC 605, cost of connected services revenue for the first quarter of fiscal 2019 was $9.7 million, an increase of $2.7 million, or 38.7%, from $7.0 million for the first quarter of fiscal 2018. Cost of connected services revenue increased primarily as a result of the growth of cloud-based connected services revenue from new and existing customers utilizing our software delivery services for connected services solutions. As a percentage of total cost of revenue, cost of connected service revenue increased by 6.5 percentage points from 36.0% for the first quarter of fiscal 2018 to 42.5% for the first quarter of fiscal 2019.

Connected services gross profit under ASC 606 for the first quarter of fiscal 2019 decreased by $3.3 million compared to connected services gross profit for the same period presented under ASC 605. Under ASC 605, connected services gross profit increased $1.4 million, or 21.0%, from $6.5 million to $7.9 million which was primarily due to connected services revenue growth on relatively fixed cloud infrastructure and employee costs.

Cost of Professional Services Revenue

Cost of professional services revenue under ASC 606 for the first quarter of fiscal 2019 increased by $2.1 million compared to cost of professional services revenue for the same period presented under ASC 605 due to ASC 606 implementation adjustments. Under ASC 605, cost of professional services revenue for the first quarter of fiscal 2019 was $10.6 million which did not change from the first quarter of fiscal 2018. Cost of professional services revenue remained the same primarily due to consistent professional services demand from customers. As a percentage of total cost of revenue, cost of professional services revenue decreased by 7.6 percentage points from 54.1% for the first quarter of fiscal 2018 to 46.5% for the first quarter of fiscal 2019.

Professional services gross profit under ASC 606 for the first quarter of fiscal 2019 decreased by $0.7 million compared to professional services gross profit for the same period presented under ASC 605. Under ASC 605, professional services gross profit increased $0.4 million, or 34.6%, from $1.1 million to $1.5 million, which was primarily the result of maintaining a consistent cost basis.

 

  76  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Operating Expenses

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

R&D Expenses

 

     Three Months Ended December 31,         
             2018                      2017              % Change  

Research and development

   $ 23,808      $ 17,176        38.6

R&D expenses for the first quarter of fiscal 2019 were $23.8 million, an increase of $6.6 million, or 38.6%, from $17.2 million for the first quarter of fiscal 2018. R&D expenses increased primarily as a result of hiring more engineers and other product innovation personnel. As a percentage of total operating expenses, R&D expenses increased by 5.2 percentage points from 46.8% for the first quarter of fiscal 2018 to 52.0% for the first quarter of fiscal 2019.

Sales & Marketing Expenses

 

     Three Months Ended December 31,         
     2018      2018      2017      % Change  
     (ASC 606)      (ASC 605)      (ASC 605)      (ASC 605)  

Sales and marketing

   $ 9,445      $ 9,730      $ 8,017        21.4

Sales and marketing expenses under ASC 606 for the first quarter of fiscal 2019 decreased by $0.3 million compared to sales and marketing expenses for the same period presented under ASC 605 due to the amortization of capitalized sales commission expenses over the period of benefit. Under ASC 605, sales commission was expensed as incurred. Under ASC 605, sales and marketing expenses for the first quarter of fiscal 2019 were $9.7 million, an increase of $1.7 million, or 21.4%, from $8.0 million for the first quarter of fiscal 2018. Sales and marketing expenses increased primarily as a result of higher sales quota attainment and the expansion of our sales and marketing staff levels. As a percentage of total operating expenses, sales and marketing expenses decreased by 0.5 percentage points from 21.8% for the first quarter of fiscal 2018 to 21.3% for the first quarter of fiscal 2019.

General & Administrative Expenses

 

     Three Months Ended December 31,         
             2018                      2017              % Change  

General and administrative

   $ 5,721      $ 5,686        0.6

General and administrative expenses remained the same primarily due to consistent allocation from Nuance. As a percentage of total operating expenses, general and administrative expenses decreased by 2.9 percentage points from 15.5% for the first quarter of fiscal 2018 to 12.6% for the first quarter of fiscal 2019.

Amortization of Intangible Assets

 

     Three Months Ended December 31,         
             2018                      2017              % Change  

Cost of revenues

   $ 2,175      $ 1,712        27.0

Operating expense

     3,132        1,287        143.4
  

 

 

    

 

 

    

Total amortization expense

   $ 5,307      $ 2,999        77.0
  

 

 

    

 

 

    

 

  77  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Intangible asset amortization for the first quarter of fiscal 2019 was $5.3 million, an increase of $2.3 million, or 77.0%, from $3.0 million for the first quarter of fiscal 2018. The increase primarily relates to our acquisition of Voicebox which resulted in the addition of several customer relationships and technology that increased amortization expense by $2.6 million. This increase was partially offset by certain other customer relationships and tradenames becoming fully amortized during fiscal year 2018.

Restructuring and Other Costs, Net

 

     Three Months Ended December 31,         
             2018                      2017              % Change  

Restructuring and other costs, net

   $ 3,127      $ 4,130        -24.3

Restructuring and other costs, net for the first quarter of fiscal 2019 were $3.1 million, a decrease of $1.0 million, or 24.3%, from $4.1 million for the first quarter of fiscal 2018. Restructuring and other costs, net decreased primarily due to lower professional service fees related to establishing the Cerence business as a stand-alone public company. As a percentage of total operating expense, restructuring and other costs, net decreased by 4.3 percentage points from 11.2% for the first quarter of fiscal 2018 to 6.9% for the first quarter of fiscal 2019.

Acquisition-related Costs

 

     Three Months Ended December 31,         
             2018                      2017              % Change  

Acquisition-related costs

   $ 235      $ 441        -46.7

Acquisition-related costs for the first quarter of fiscal 2019 were $0.2 million, a decrease of $0.2 million, or 46.7%, from $0.4 million for the first quarter of fiscal 2018. Acquisition-related costs decreased as a direct result of lower fees related to assessing potential acquisitions. As a percentage of total operating expense, acquisition-related costs decreased by 0.7 percentage points from 1.2% for the first quarter of fiscal 2018 to 0.5% for the first quarter of fiscal 2019.

Other Income (Expense), Net

 

     Three Months Ended December 31,         
             2018                      2017              % Change  

Other income (expense), net

   $ (16    $ (247      93.5

Other income (expense), net for the first quarter of fiscal 2019 was less than $(0.1) million, an increase of $0.2 million, or 93.5%, from $(0.2) million for the first quarter of fiscal 2018. The net increase in other income (expense), net over the prior fiscal year is primarily the result of foreign currency differences year over year.

Provision for Income Taxes

 

     Three Months Ended December 31,        
             2018                     2017             % Change  

(Benefit) provision for income taxes

   $ (14   $ 24,211       -100.1
      

Effective income tax rate

     -28.0     442.5  
      

Our effective income tax rate for the first quarter of fiscal 2019 was -28.0%, compared to 442.5% for the first quarter of fiscal 2018. Consequently, benefit from income taxes for the first quarter of fiscal 2019 was less than $(0.1) million, a net change of $24.2 million, or -100.1%, from $24.2 million for the first quarter of fiscal

 

  78  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

2018. The effective income tax rate for the first quarter of fiscal 2019 differed from the U.S. statutory rate of 21.0%, primarily due to our earnings in foreign jurisdictions that are subject to lower tax rates. The effective income tax rate for the first quarter of fiscal 2018 differed from the blended U.S. statutory rate of 24.5% primarily due to the recognition of $23.1 million in deferred tax expense from the remeasurement of deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act (“TCJA”) enacted in December 2017.

Fiscal Year 2018 Compared with Fiscal Year 2017

Total Revenues

The following table shows total revenues by product type, including the corresponding percentage change (dollars in thousands):

 

     Year Ended September 30        
     2018      % of Total     2017      % of Total     % Change  

License

   $ 171,075        61.8   $ 148,803        60.8     15.0

Connected services

     60,227        21.7     45,696        18.7     31.8

Professional services

     45,451        16.4     49,645        20.3     -8.4

Other

     231        0.1     585        0.2     -60.5
  

 

 

      

 

 

      

Total revenues

   $ 276,984        $ 244,729          13.2
  

 

 

      

 

 

      

Our total revenues for fiscal year 2018 were $277.0 million, an increase of $32.3 million, or 13.2%, from $244.7 million for fiscal year 2017. This growth was primarily driven by license royalties. We also experienced notable growth in connected services revenues resulting from increased demand for our hybrid solutions.

License Revenue

License revenue for fiscal year 2018 was $171.1 million, an increase of $22.3 million, or 15.0%, from $148.8 million for fiscal year 2017. License revenues increased primarily due to a higher volume of licensing royalties from new and existing customers utilizing our technologies. This was a result of an increase in overall cars shipped and more customers licensing suites of our software and technologies. As a percentage of total revenue, license revenue increased by 1.0 percentage points from 60.8% for fiscal year 2017 to 61.8% for fiscal year 2018.

Connected Services Revenue

Connected services revenue for fiscal year 2018 was $60.2 million, an increase of 31.8%, or $14.5 million, from $45.7 million for fiscal year 2017. This increase is primarily driven by greater demand for our connected services solutions as our customers shift their preferences from shipping automobiles with fully customized embedded solutions to hybrid solutions. As a percentage of total revenue, connected services revenue increased by 3.0 percentage points from 18.7% for fiscal year 2017 to 21.7% for fiscal year 2018.

Professional Services Revenue

Professional services revenue for fiscal year 2018 was $45.5 million, a decrease of $4.2 million, or 8.4%, from $49.6 million for fiscal year 2017. Professional services revenue decreased primarily due to industry shift towards connected service solutions and a change in our pricing strategy. As a percentage of total revenue, professional services revenue decreased by 3.9 percentage points from 20.3% for fiscal year 2017 to 16.4% for fiscal year 2018.

 

  79  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Total Cost of Revenues and Gross Profit

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

 

     Year Ended September 30,         
             2018                      2017              % Change  

License

   $ 1,156      $ 773        49.5

Connected services

     32,919        25,292        30.2

Professional services

     41,123        35,571        15.6

Amortization of intangible assets

     7,766        6,898        12.6
  

 

 

    

 

 

    

Total cost of revenues

   $ 82,964      $ 68,534        21.1
  

 

 

    

 

 

    

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

 

     Year Ended September 30,         
             2018                      2017              % Change  

License

   $ 169,919      $ 148,030        14.8

Connected services

     27,308        20,404        33.8

Professional services

     4,328        14,074        -69.2

Other

     231        585        -60.5

Amortization of intangible assets

     (7,766      (6,898      12.6
  

 

 

    

 

 

    

Total gross profit

   $ 194,020      $ 176,195        10.1
  

 

 

    

 

 

    

Our total cost of revenues for fiscal year 2018 were $83.0 million, an increase of $14.4 million, or 21.1%, from $68.5 million for fiscal year 2017. The increase in cost of revenues was primarily the result of hiring more professional services staff and higher cloud infrastructure and employee costs for connected services, to provide our customization and implementation services to our customers. We experienced an increase in amortization of intangible assets that was included in costs of revenues primarily due to our acquisition of Voicebox, which increased the carrying value of our total intangible assets. We experienced an increase in gross profit of $17.8 million, or 10.1%, from $176.2 million to $194.0 million which was primarily driven by increased demand for our license and connected services solutions which require costs that do not increase proportionally with revenue.

Cost of License Revenue

Cost of license revenue for fiscal year 2018 were $1.2 million, an increase of $0.4 million, or 49.5%, from $0.8 million for fiscal year 2017. Cost of license revenues increased due to third-party royalty expenses associated with external technologies we leverage in our edge software components. As our license revenue grows, we expect our cost of license revenue to grow at a lower rate due to the nature of our royalty expenses. As a percentage of total cost of revenue, cost of license revenue increased by 0.3 percentage points from 1.1% for fiscal year 2017 to 1.4% for fiscal year 2018. License gross profit increased $21.9 million, or 14.8%, from $148.0 million to $169.9 million since costs associated with license royalties are minimal.

Cost of Connected Services Revenue

Cost of connected services revenue for fiscal year 2018 were $32.9 million, an increase of $7.6 million, or 30.2%, from $25.3 million for fiscal year 2017. Cost of connected services revenue increased primarily as a result of the growth of cloud-based connected services revenue from new and existing customers utilizing our software delivery services for connected services solutions. As a percentage of total cost of revenue, cost of

 

  80  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

connected service revenue increased by 2.8 percentage points from 36.9% for fiscal year 2017 to 39.7% for fiscal year 2018. Connected services gross profit increased by $6.9 million, or 33.8%, from $20.4 million to $27.3 million, which was primarily due to connected services revenue growth on relatively fixed cloud infrastructure and employee costs.

Cost of Professional Services Revenue

Cost of professional services revenue for fiscal year 2018 were $41.1 million, an increase of $5.6 million, or 15.6%, from $35.6 million for fiscal year 2017. Cost of professional services revenue increased primarily due to our investments in professional services staff to meet customer program demands which differentiate our service offerings. As a percentage of total cost of revenue, cost of professional services revenue decreased by 2.3 percentage points from 51.9% for fiscal year 2017 to 49.6% for fiscal year 2018. Professional services gross profit decreased $9.7 million, or 69.2%, from $14.1 million to $4.3 million, which was primarily the result of a change in our pricing strategy and increased hiring of professional services staff as we invest in expanding and differentiating our professional services offerings.

Operating Expenses

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

R&D Expenses

 

     Year Ended September 30,         
             2018                      2017              % Change  

Research and development

   $ 80,957      $ 56,755        42.6

Historically, R&D expenses are our largest operating expense as we continue to build on our existing software platforms and develop new technologies. R&D expenses for fiscal year 2018 were $81.0 million, an increase of $24.2 million, or 42.6%, from $56.8 million for fiscal year 2017. R&D expense increased primarily as a result of hiring more engineers and other essential product innovation personnel. Investing in R&D personnel is essential to advancing our technologies and enhancing in-car experiences. As a percentage of total operating expenses, R&D expenses increased by 1.1 percentage points from 50.4% for fiscal year 2017 to 51.5% for fiscal year 2018.

Sales & Marketing Expenses

 

     Year Ended September 30,         
             2018                      2017              % Change  

Sales and marketing

   $ 30,553      $ 29,909        2.2

Sales and marketing expenses for fiscal year 2018 were $30.6 million, an increase of $0.6 million, or 2.2%, from $29.9 million for fiscal year 2017. Sales and marketing expenses increased primarily as a result of higher compensation expenses associated with our existing sales and marketing staff, third party service fees, and other miscellaneous sales and marketing expenses of $1.7 million, $0.6 million, and $0.6 million, respectively. This increase was offset by reduced commission expenses resulting from recent changes in our commission plans and stock compensation expenses of $1.2 million and $1.0 million, respectively. As a percentage of total operating expenses, sales and marketing expenses decreased by 7.2 percentage points from 26.6% for fiscal year 2017 to 19.4% for fiscal year 2018.

General & Administrative Expenses

 

     Year Ended September 30,         
             2018                      2017              % Change  

General and administrative

   $ 19,873      $ 17,485        13.7

 

  81  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

General and administrative expenses for fiscal year 2018 were $19.9 million, an increase of $2.4 million, or 13.7%, from $17.5 million for fiscal year 2017. General and administrative expenses increased primarily as a result of costs incurred by Nuance on our behalf. The increase in general and administrative expenses was primarily attributable to professional and legal fees, administrative salaries expenses, and software fees. As a percentage of total operating expenses, general and administrative expenses decreased by 2.9 percentage points from 15.5% for fiscal year 2017 to 12.6% for fiscal year 2018.

Amortization of Intangible Assets

 

     Year Ended September 30,         
             2018                      2017              % Change  

Cost of revenues

   $ 7,766      $ 6,898        12.6

Operating expense

     8,840        5,763        53.4
  

 

 

    

 

 

    

Total amortization

   $ 16,606      $ 12,661        31.2
  

 

 

    

 

 

    

Intangible asset amortization for fiscal year 2018 were $16.6 million, an increase of $3.9 million, or 31.2%, from $12.7 million for fiscal year 2017. The increase primarily relates to our acquisition of Voicebox which resulted in the addition of several customer relationships that increased amortization expense. This increase was partially offset by certain other customer relationships and tradenames becoming fully amortized during fiscal year 2018. Additional intangibles amortization due to restructuring is included in restructuring and other costs, net as discussed below.

As a percentage of total cost of revenues, intangible asset amortization within cost of revenues decreased by 0.7 percentage points from 10.1% for fiscal year 2017 to 9.4% for fiscal year 2018. As a percentage of total operating expenses, intangible asset amortization expenses within operating expenses increased by 0.5 percentage points from 5.1% for fiscal year 2017 to 5.6% for fiscal year 2018.

Restructuring and Other Costs, Net

 

     Year Ended September 30,         
             2018                      2017              % Change  

Restructuring and other costs, net

   $ 12,863      $ 1,865        589.7

Restructuring and other costs, net for fiscal year 2018 were $12.9 million, an increase of $11.0 million, or 589.7%, from $1.9 million for fiscal year 2017. Restructuring and other costs, net increased primarily due to professional service fees incurred to establish the Cerence business as a stand-alone public company and the reorganization of Voicebox business units in order to achieve process optimization and cost reductions following the acquisition. As a percentage of total operating expense, restructuring and other costs, net increased by 6.5 percentage points from 1.7% for fiscal year 2017 to 8.2% for fiscal year 2018.

Acquisition-related Costs

 

     Year Ended September 30,         
             2018                      2017              % Change  

Acquisition-related costs

   $ 4,082      $ 733        456.9

 

  82  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Acquisition-related costs for fiscal year 2018 were $4.1 million, an increase of $3.3 million, or 456.9%, from $0.7 million for fiscal year 2017. Acquisition costs increased as a direct result of integration, legal, and other professional fees incurred resulting from the acquisition of Voicebox on April 2, 2018. As a percentage of total operating expense, acquisition-related costs increased by 1.9 percentage points from 0.7% for fiscal year 2017 to 2.6% for fiscal year 2018.

Other Income (Expense), Net

 

     Year Ended September 30,         
             2018                      2017              % Change  

Other income (expense), net

   $ (54    $ (483      88.8

Other income (expense), net for fiscal year 2018 was $(0.1) million, a decrease of $0.4 million, or 88.8%, from $(0.5) million for fiscal year 2017. The net increase in other income (expense), net over the prior fiscal year is primarily the result of foreign currency gains (losses) year over year.

Provision for Income Taxes

 

     Year Ended September 30,        
             2018                     2017             % Change  

Provision for income taxes

   $ 30,917     $ 15,926       94.1

Effective income tax rate

     84.0     25.2  

Our effective income tax rate for fiscal year 2018 was 84.0%, compared to 25.2% for fiscal year 2017. Consequently, provision for income taxes for fiscal year 2018 was $30.9 million, an increase of $15.0 million, or 94.1 %, from $15.9 million for fiscal year 2017. The effective income tax rate for fiscal year 2018 differed from the blended U.S. statutory rate of 24.5%, primarily due to the net tax provisions resulting from the TCJA remeasurement of deferred tax assets and liabilities at the lower enacted rate, our R&D credits, and the domestic production activities deduction. The effective income tax rate for fiscal year 2017 differed from the U.S. statutory rate of 35.0% due to our earnings in foreign jurisdictions that are subject to significantly lower rates, R&D credits, and the domestic production activities deduction.

Liquidity and Capital Resources

Historically, the Cerence business has generated positive cash flows from operations. As part of Nuance, the Cerence business utilized a centralized approach to cash management and financing its operations. Under this approach, the Cerence business did not maintain their own cash and cash equivalent balances. Nuance bills customers and collects cash associated with the Cerence business’ operations. Nuance approves and provides all cash required for operating or investing activities outside of the Cerence business’ normal course of business. This cash management arrangement is not reflective of the manner in which the Cerence business would have financed its operations if it had been a standalone business during the historical periods presented. Historically, the Cerence business was not allocated cash or cash equivalents from Nuance. Additionally, the Cerence business was not allocated any debt or interest expense since Nuance’s corporate borrowings were not specifically identifiable to the Cerence business for any of the historical periods presented.

 

  83  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Three Months Ended December 31, 2018 Compared with Three Months Ended December 31, 2017

The following table shows net cash provided by or used in operating, investing, and financing activities (dollars in thousands):

 

     Three Months Ended December 31,         
             2018                      2017              % Change  

Net cash provided by operating activities

   $ 14,509      $ 19,584        -25.9

Net cash used in investing activities

     (498      (1,754      -71.6

Net cash used in financing activities

     (14,011      (17,830      -21.4
  

 

 

    

 

 

    

Net changes in cash and cash equivalents

   $ —        $ —          0.0
  

 

 

    

 

 

    

Cash Provided by Operating Activities

Cash provided by operating activities for the first quarter of fiscal 2019 was $14.5 million, a net decrease of $5.1 million, or 25.9%, from cash provided by operating activities of $19.6 million for the first quarter of fiscal 2018. The change in cash used in operating activities stems mainly from unfavorable changes in working capital, primarily due to the timing of billing and collections which resulted in a decrease in cash from deferred revenue of $6.7 million compared to prior year. Further, payments for separation costs related to establishing the Cerence business as a stand-alone public company were approximately $2.2 million for the first quarter of fiscal 2019.

Deferred revenue represents a significant portion of our 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 the evolution of our connected offerings and architecture, trending away from providing legacy infotainment connected services and a change in our professional services pricing strategy, we expect a decrease in our deferred revenue as certain legacy contracts with content attributes wind down and the new business model begins to ramp up. We do not expect any changes in deferred revenue to affect our ability to meet our obligations.

Cash Used in Investing Activities

Cash used in investing activities for the first quarter of fiscal 2019 was $0.5 million, a decrease of $1.3 million, or 71.6%, from $1.8 million for the first quarter of fiscal 2018. The decrease related to the timing of cash outflows for capital expenditures.

Cash Used in Financing Activities

Cash used in financing activities for the first quarter of fiscal 2019 was $14.0 million, a net decrease of $3.8 million, or 21.4%, from cash used in financing activities of $17.8 million for the first quarter of fiscal 2018. The change is comparable period over period and related to the net cash distributions associated with Nuance’s historical cash management process.

 

  84  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Fiscal Year 2018 Compared with Fiscal Year 2017

The following table shows net cash provided by or used in operating, investing, and financing activities (dollars in thousands):

 

     Year Ended September 31,         
             2018                      2017              % Change  

Net cash provided by operating activities

   $ 112,420      $ 96,439        16.6

Net cash used in investing activities

     (83,473      (4,369      1810.6

Net cash used in financing activities

     (28,947      (92,070      -68.6
  

 

 

    

 

 

    

Net changes in cash and cash equivalents

   $ —        $ —          0.0
  

 

 

    

 

 

    

Cash Provided by Operating Activities

Cash provided by operating activities for fiscal year 2018 was $112.4 million, an increase of $16.0 million, or 16.6%, from $96.4 million for fiscal year 2017. The net increase in cash provided by operating activities was primarily due to favorable changes in working capital, primarily due to the timing of billing and collections which resulted in an increase in cash from accounts receivable of $26.4 million compared to the prior year. This increase was partially offset by other changes in working capital, an increase in operating expenses primarily due to continuing investments in R&D and $7.9 million of separation costs related to establishing the Cerence business as a stand-alone public company.

Cash Used in Investing Activities

Cash used in investing activities for fiscal year 2018 was $83.5 million, an increase of $79.1 million, or 1810.6%, from $4.4 million for fiscal year 2017. The increase in cash outflows was due to net cash payments of $79.8 million associated with the acquisition of Voicebox, offset by a $0.7 million decrease in cash outflows for capital expenditures.

Cash Used in Financing Activities

Cash used in financing activities for fiscal year 2018 was $28.9 million, a decrease of $63.2 million, or 68.6%, from cash used in financing activities of $92.1 million for fiscal year 2017. The decrease in cash used in financing activities is the result of net cash distributions associated with Nuance’s historical cash management process.

Business Acquisitions

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

On April 2, 2018, we acquired Voicebox, headquartered in Bellevue, Washington. Voicebox is a provider of conversational artificial intelligence, including voice recognition, natural language understanding, and artificial intelligence services. The aggregate consideration for this transaction was $94.3 million which included $79.8 million paid in cash, net of $6.7 million in cash acquired, a $12.9 million write-off of deferred revenues related to the Cerence business’ pre-existing relationship with Voicebox, and a $1.6 million deferred acquisition payment which will be paid in cash upon the conclusion of an indemnity period in the fiscal year 2019. The transaction was accounted for as a business combination and is included in the accompanying historical Combined Financial Statements beginning on the date of acquisition. Refer to Note 4 to the accompanying historical Combined Financial Statements included elsewhere in this Information Statement for more detail on the of Voicebox.

 

  85  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Future Liquidity

Our ability to fund future operating needs will depend on our ability to generate positive cash flows from operations and finance additional funding in the capital markets as needed. Based on our history of generating positive cash flows, we believe we will be able to meet our short-term operating cash needs. We believe we will meet all expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and available credit via our debt arrangements. Specifically, we anticipate our debt obligations and funding our R&D activities to be our largest uses of cash during the year ended September 30, 2020. Should we need to secure additional sources of liquidity, we believe 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.

In connection with the Spin-Off, we intend to incur substantial indebtedness in the aggregate principal amount of approximately $             million in the form of a senior secured term loan facility, which is primarily intended to finance a cash distribution to Nuance and provide initial support for the cash flow needs of the Cerence business. We also intend to enter into a $             million revolving credit facility to be drawn on in the event that our working capital and other cash needs are not supported by our operating cash flow. We will require cash to fund interest payments in respect of this indebtedness and borrowings under the revolving credit facility.

Contractual Obligations, Contingent Liabilities, and Commitments

The table below outlines our contractual payment obligations as of September 30, 2018 (dollars in thousands):

 

     Contractual Payments Due in Fiscal Year  
     2019      2020 and 2021      2022 and 2023      Thereafter      Total  

Operating leases

   $ 5,501      $ 9,019      $ 6,543      $ 3,481      $ 24,544  

Contractual obligations may include lease, pension contribution requirements, and other non-current liabilities that are enforceable and legally binding on the Cerence business, excluding contingent liabilities that may arise from litigation, arbitration, regulatory actions, or income taxes. As of the first quarter of fiscal 2019, the Cerence business was only subject to contractual obligations regarding operating leases.

Other Matters

Off-Balance Sheet Arrangements

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

Defined Benefit Plans

We sponsor certain defined benefit plans that are offered primarily by certain of our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third-party trustees, or into government-managed accounts consistent with local regulatory requirements, as applicable. Our total defined benefit plan pension expense was $0.4 million for fiscal year 2018 and fiscal year 2017, respectively. The aggregate projected benefit obligation as of fiscal year 2018 and fiscal year 2017 was $5.0 million and $5.1 million, respectively. The aggregate net liability of our defined benefit plans as of fiscal year 2018 and fiscal year 2017 was $4.2 million, respectively.

 

  86  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Issued Accounting Standards Not Yet Adopted

Refer to Note 3 to the accompanying historical Audited Combined Financial Statements included elsewhere in this Information Statement for a description of certain issued accounting standards that have not been adopted by us and may impact its results of operations in future reporting periods.

Critical Accounting Policies, Judgments and Estimates

The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition; allowance for doubtful accounts and sales returns; 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 and related valuation allowances; and loss contingencies. Our management bases its estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.

We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and the results of our operations. There policies require our most difficult and subjective judgements.

Revenue Recognition

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

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

As of October 1, 2018, we adopted ASC 606 using the modified retrospective approach. For a reconciliation of our old accounting policy and ASC 606, please refer to our historical Audited Combined Financial Statements and Unaudited Condensed Combined Financial Statements included elsewhere in this Information Statement. We currently recognize revenue after applying the following five steps:

 

   

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

 

   

identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;

 

   

determination of the transaction price, including the constraint on variable consideration;

 

   

allocation of the transaction price to the performance obligations in the contract; and

 

   

recognition of revenue when, or as, the performance obligations are satisfied.

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

 

   

the pricing of standalone sales (in the instances where available);

 

  87  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

   

the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;

 

   

contractually stated prices for deliverables that are intended to be sold on a standalone basis; and

 

   

other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under 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 services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those 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.

Performance Obligations

License

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

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

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

Connected Services

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

As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our connected services arrangements are a

 

  88  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

single performance obligation comprised of a series of distinct services. These services include variable consideration, typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).

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

Professional Services

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

Significant Judgements

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services.

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

Contract Acquisition Costs

In conjunction with the adoption of ASC 606, we are required to capitalize certain contract acquisition costs. The capitalized costs primarily relate to paid commissions. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for groups of customer contracts. We elect to apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where the expected period of benefit is one year or less. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit, which we have estimated to be, on average, between one and five 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 December 31, 2018, contract acquisition costs were not material to the condensed combined financial statements.

 

  89  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

Capitalized Contract Costs

We capitalize incremental costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (iii) are expected to be recovered through revenue generated under the contract. Our capitalized costs consist primarily of setup costs, such as costs to standup, customize and develop applications for each customer, which are incurred to satisfy our stand-ready obligation to provide access to our connected offerings. These contract costs are expensed to cost of revenue as we satisfy our stand-ready obligation over the contract term which we estimate to be between one and five 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 December 31, 2018, we had $45.6 million of capitalized contract costs. We had amortization expense of $5.3 million related to these costs during the three months ended December 31, 2018. There was no impairment related to contract costs capitalized.

Trade Accounts Receivable and Contract Balances

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

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely subject to the passage of time. Contract assets are included in prepaid expenses and other current assets. As of the first quarter of fiscal 2019, we had $0.5 million of contract assets.

Our contract liabilities, or deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred revenue as current or noncurrent based on when we expect to recognize the revenues. As of the first quarter of fiscal 2019, we had $337.9 million of deferred revenue.

Business Combinations

We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition. The purchase price allocation process requires us to use significant estimates and assumptions as of the date of the business acquisition, including fair value estimates such as:

 

   

estimated fair values of intangible assets;

 

   

estimated fair values of legal performance commitments to customers, assumed from the acquiree under existing contractual obligations (classified as deferred revenue) at the date of acquisition;

 

   

estimated income tax assets and liabilities assumed from the acquiree; and

 

   

estimated fair value of pre-acquisition contingencies from the acquiree.

While we use our best estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the date of acquisition, our estimates and assumptions are inherently uncertain and subject

 

  90  


Table of Contents

Confidential Treatment Requested by Cerence LLC

Pursuant to 17 C.F.R. Section 200.83

 

to refinement. As a result, within the measurement period, which is generally one year from the date of acquisition, we record adjustments to the assets acquired and liabilities assumed against goodwill in the period the amounts are determined. Adjustments identified subsequent to the measurement period are recorded within Acquisition-related costs, net.

Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:

 

   

future expected cash flows from software license sales, support agreements, consulting contracts, connected services, other customer contracts and acquired developed technologies and patents;

 

   

expected costs to develop in-process R&D projects into commercially viable products and the estimated cash flows from the projects when completed;

 

   

the acquired company’s brand and competitive position, as well as assumptions about the period during which the acquired brand will continue to be used in the combined company’s product portfolio; and

 

   

discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

In connection with the purchase price allocations for our acquisitions, we estimate the fair market value of legal performance commitments to customers, which are classified as deferred revenue. The estimated fair market value of these obligations is determined and