Stock-Based Compensation

6 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement, Noncash Expense [Abstract]

Stock-Based Compensation

On January 22, 2020, our shareholders adopted our 2020 Stock Plan (the "2020 Stock Plan"). The 2020 Stock Plan (i) grants the Company's compensation committee the discretionary authority over the plan; (ii) makes employees, directors, consultants, and advisors of the Company and its subsidiaries eligible to receive awards; (iii) sets the number of shares of common stock that may be issued in satisfaction of awards to be 9,000,000 shares, plus the number of shares available for issuance under the amended and restated 2000 Stock Plan (the "Amended and Restated 2000 Stock Plan"); and (iv) identifies the annual limits on shares granted to each individual and the types of awards permissible.

As of March 31, 2020, we had 13.9 million shares available for future grants under the 2020 Stock Plan. We recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified within equity upon issuance.

The amounts included in the consolidated statements of operations related to stock-based compensation are as follows (dollars in thousands): 

	Three Months Ended March 31,				Six Months Ended March 31,
	2020		2019		2020		2019
Cost of hosting and professional services	$	6,504	$	4,731	$	12,045	$	11,688
Cost of product and licensing	130		132		259		396
Cost of maintenance and support	453		381		846		147
Research and development	8,682		4,530		17,386		9,906
Sales and marketing	7,991		6,616		15,019		14,868
General and administrative	9,902		8,408		19,340		17,290
Total	$	33,662	$	24,798	$	64,895	$	54,295

Modifications of Equity Awards

In connection with the spin-off of our Automotive business (the "Distribution") on October 1, 2019, under the provisions of our Amended and Restated 2000 Stock Plan and our Amended and Restated Directors Stock Plan, we adjusted our then outstanding equity awards in accordance with the terms of the Employee Matters Agreement that Nuance entered into in connection with the Distribution. Effective upon the Distribution, Nuance stock options, Nuance restricted stock units ("RSUs"), and Nuance performance-based restricted stock units ("PSUs") held by employees and other service providers continuing with Nuance following the Distribution, were adjusted based on a conversion ratio of 1.16667 to 1, as outlined in the Employee Matters Agreement. Effective upon the Distribution, RSUs held by employees continuing with Cerence following the Distribution that were scheduled to vest on or before November 30, 2019 vested in full as of immediately prior to the Distribution, PSUs held by such employees that were eligible to vest based on Nuance's relative total shareholder return ("TSR") as of November 6, 2019 were cancelled in exchange for a cash payment based on the portion of the PSUs that were then earned, and all other RSUs and PSUs held by such employees were forfeited for no consideration upon their termination of employment with Nuance. As of the Distribution (or an applicable employee's later transfer date), all employees continuing with Cerence following the Distribution ceased to be eligible to participate in Nuance's Employee Stock Purchase Plan ("ESPP"). As of December 31, 2019, the employees participating in the Company's ESPP were all Nuance employees. There were no changes to the plan terms of any of the foregoing plans except as described above. The incremental expense as a result of these modification was immaterial to the condensed consolidated financial statements.

Stock Options

The table below summarizes activities related to stock options for the six months ended March 31, 2020:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (a)
Outstanding at September 30, 2019	11,302		$	20.04
Exercised	(3,207	)	$	17.18
Equitable Adjustment - Cerence Spin-off (b)	1,883
Outstanding at March 31, 2020	9,978		$	17.18	2.1 years	$	—
Exercisable at March 31, 2020	9,978		$	17.18	2.1 years	$	—
Exercisable at March 31, 2019	13,116		$	17.63	2.9 years	$	0.1	million

^(a)  The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of March 31, 2020 ($16.78) over the exercise price of the underlying options.

^(b)  Effective with the spin-off of our Automotive business on October 1, 2019, outstanding equity awards were equitably adjusted by a conversion ratio of 1.16667 per one Nuance share then held.

The aggregate intrinsic values of stock options exercised during the six months ended March 31, 2020 and 2019 were de minimis.

Restricted Units

Restricted units are not included in issued and outstanding common stock until the units are vested and underlying shares are released. The purchase price for vested restricted units is $0.001 per share. The table below summarizes activities relating to restricted units for the six months ended March 31, 2020:

	Number of Shares Underlying Restricted Units — Performance-Based Awards		Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2019	1,991,325		8,998,944
Granted	1,067,900		4,415,974
Earned/released	(303,198	)	(5,821,353	)
Forfeited	(418,834	)	(1,324,501	)
Equitable Adjustment - Cerence Spin-off (b)	303,074		1,316,006
Outstanding at March 31, 2020	2,640,267		7,585,070
Weighted average remaining recognition period of outstanding Restricted Units	1.9 years		1.7 years
Unrecognized stock-based compensation expense of outstanding Restricted Units	$25.0 million		$67.1 million
Aggregate intrinsic value of outstanding Restricted Units (a)	$44.3 million		$127.3 million

^(a)  The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of March 31, 2020 ($16.78) over the purchase price of the underlying restricted units.

^(b)  Effective with the spin-off of our Automotive business on October 1, 2019, outstanding equity awards were equitably adjusted by a conversion ratio of 1.16667 per one Nuance share then held.

A summary of the weighted-average grant-date fair value of restricted units granted, and the aggregate intrinsic value of restricted units vested during the periods noted is as follows: 

	Six Months Ended March 31,
	2020		2019
Weighted-average grant-date fair value per share	$	17.52	$	16.35
Total intrinsic value of shares vested (in millions)	$	106.4	$	95.2

Performance-based restricted units outstanding as of March 31, 2020 and issued in fiscal year 2019 include performance goals based on total shareholder return relative to our peers during the performance period. The awards actually earned will be up to two hundred percent of the target number of the performance-based restricted units. Compensation expense is recorded ratably over the performance period of the award based on the grant date fair value determined using a Monte Carlo simulation model, which included the following assumptions:

	Six Months Ended March 31,
	2020		2019
Dividend yield	0.0	%	0.0	%
Expected volatility	27.73% - 28.24%		27.86% - 30.85%
Risk-free interest rate	1.40% - 1.62%		2.53% - 3.02%
Expected term (in years)	2.72 - 3		1 - 3