UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2017~~September 30, 2018


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

Commission file number 0-5734

AGILYSYS, INC.

(Exact name of registrant as specified in its charter)



Ohio			34-0907152
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1000 ~~Winward~~Windward Concourse, Suite 250, Alpharetta, Georgia			30005
(Address of principal executive offices)			(ZIP Code)

(770) 810-7800
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨		Accelerated filer	x

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of Common Shares of the registrant outstanding as of ~~January 22,~~October 24, 2018 was ~~23,313,156.~~23,528,311.

AGILYSYS, INC.

Index




Part I. Financial Information
	Item 1	Financial Statements	3

		Condensed Consolidated Balance Sheets (Unaudited) - ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017~~2018	3

		Condensed Consolidated Statements of Operations (Unaudited) - Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and September 30, 2017 ~~and December 31, 2016~~	4

		Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and September 30, 2017 ~~and December 31, 2016~~	5

		Condensed Consolidated Statements of Cash Flows (Unaudited) - ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and September 30, 2017 ~~and December 31, 2016~~	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	7
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1922

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	2932

	Item 4	Controls and Procedures	2932

Part II. Other Information

	Item 1	Legal Proceedings	3032

	Item 1A	Risk Factors	3032

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3032

	Item 3	Defaults Upon Senior Securities	3032

	Item 4	Mine Safety Disclosures	3032

	Item 5	Other Information	3032

	Item 6	Exhibits	3032

Signatures

AGILYSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	December 31, 2017			March 31, 2017			September 30, 2018			March 31, 2018
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	37,615		$	49,255		$	32,904		$	39,943
Accounts receivable, net of allowance for doubtful accounts of $751 and $509, respectively	14,746			15,598
Accounts receivable, net of allowance for doubtful accounts of $830 and $900, respectively							18,963			16,389
Contract assets							4,696			—
Inventories	2,131			2,211			1,678			1,999
Prepaid expenses and other current assets	6,849			6,456			5,089			5,593
Total current assets	61,341			73,520			63,330			63,924
Property and equipment, net	17,760			16,000			16,355			17,512
Goodwill	19,622			19,622			19,622			19,622
Intangible assets, net	8,496			8,530			8,461			8,484
Software development costs, net	46,086			46,999			41,159			45,181
Other non-current assets	2,613			2,634			4,699			2,484
Total assets	$	155,918		$	167,305		$	153,626		$	157,207
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,175		$	8,702		$	7,381		$	8,400
Deferred revenue	23,433			29,183
Contract liabilities							25,789			26,820
Accrued liabilities	9,843			8,331			9,459			9,241
Capital lease obligations, current	113			121			72			120
Total current liabilities	41,564			46,337			42,701			44,581
Deferred income taxes, non-current	2,105			3,181			274			227
Capital lease obligations, non-current	50			116			45			57
Other non-current liabilities	3,985			4,002			3,632			3,911
Commitments and contingencies (see Note 6)
Commitments and contingencies (see Note 8)
Shareholders' equity:
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 23,402,512 and 23,210,682 shares outstanding at December 31, 2017 and March 31, 2017, respectively	9,482			9,482
Treasury shares, 8,204,319 and 8,396,149 at December 31, 2017 and March 31, 2017, respectively	(2,463		)	(2,519		)
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 23,530,629 and 23,324,679 shares outstanding at September 30, 2018 and March 31, 2018, respectively							9,482			9,482
Treasury shares, 8,076,202 and 8,282,152 at September 30, 2018 and March 31, 2018, respectively							(2,424		)	(2,486		)
Capital in excess of stated value	(2,418		)	(5,782		)	(451		)	(1,911		)
Retained earnings	103,812			112,692			100,687			103,601
Accumulated other comprehensive loss	(199		)	(204		)	(320		)	(255		)
Total shareholders' equity	108,214			113,669			106,974			108,431
Total liabilities and shareholders' equity	$	155,918		$	167,305		$	153,626		$	157,207

See accompanying notes to condensed consolidated financial statements.

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended						Nine months ended						Three months ended						Six months ended
	December 31,						December 31,						September 30,						September 30,
(In thousands, except share data)	2017			2016			2017			2016			2018			2017			2018			2017
Net revenue:
Products	$	8,156		$	10,006		$	25,758		$	30,257		$	8,769		$	7,318		$	17,849		$	17,601
Support, maintenance and subscription services	17,215			16,234			50,990			47,087			18,856			17,108			36,785			33,775
Professional services	5,939			7,208			18,557			19,732			6,578			5,703			13,576			12,618
Total net revenue	31,310			33,448			95,305			97,076			34,203			30,129			68,210			63,994
Cost of goods sold:
Products (inclusive of developed technology amortization)	6,820			7,530			19,862			22,217			7,703			5,419			14,833			13,042
Support, maintenance and subscription services	4,132			4,464			12,610			12,714			3,977			4,446			8,051			8,478
Professional services	4,730			5,213			15,160			13,835			4,774			4,894			9,688			10,430
Total cost of goods sold	15,682			17,207			47,632			48,766			16,454			14,759			32,572			31,950
Gross profit	15,628			16,241			47,673			48,310			17,749			15,370			35,638			32,044
	49.9		%	48.6		%	50.0		%	49.8		%	51.9		%	51.0		%	52.2		%	50.1		%
Operating expenses:
Product development	7,269			6,847			20,708			20,647			10,151			6,812			17,240			13,438
Sales and marketing	4,278			5,000			13,616			15,746			4,393			4,207			9,146			9,337
General and administrative	6,114			3,678			18,475			13,692			5,176			5,561			11,181			12,361
Depreciation of fixed assets	581			598			1,892			1,791			676			700			1,282			1,312
Amortization of intangibles	471			353			1,421			1,031			674			465			1,217			950
Restructuring, severance and other charges	378			1,394			1,241			1,484			448			826			889			863
Legal settlements	150			—			150			85			35			—			126			—
Total operating expense													21,553			18,571			41,081			38,261
Operating loss	(3,613		)	(1,629		)	(9,830		)	(6,166		)	(3,804		)	(3,201		)	(5,443		)	(6,217		)
Other (income) expense:
Interest income	(13		)	(86		)	(64		)	(135		)
Other expense (income):
Interest (income)													(97		)	(23		)	(152		)	(51		)
Interest expense	3			3			7			11			3			2			5			4
Other expense, net	(46		)	62			(196		)	140
Other expense (income), net													28			(37		)	228			(147		)
Loss before taxes	(3,557		)	(1,608		)	(9,577		)	(6,182		)	(3,738		)	(3,143		)	(5,524		)	(6,023		)
Income tax (benefit) expense	(1,623		)	129			(1,439		)	252
Income tax expense													53			105			4			183
Net loss	$	(1,934	)	$	(1,737	)	$	(8,138	)	$	(6,434	)	$	(3,791	)	$	(3,248	)	$	(5,528	)	$	(6,206	)

Weighted average shares outstanding	22,851			22,611			22,777			22,605			23,131			22,760			23,113			22,740
Loss per share - basic and diluted:
Loss per share	$	(0.08	)	$	(0.08	)	$	(0.36	)	$	(0.28	)	$	(0.16	)	$	(0.14	)	$	(0.24	)	$	(0.27	)

See accompanying notes to condensed consolidated financial statements.

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


	Three months ended						Nine months ended						Three months ended						Six months ended
	December 31,						December 31,						September 30,						September 30,
(In thousands)	2017			2016			2017			2016			2018			2017			2018			2017
Net loss	$	(1,934	)	$	(1,737	)	$	(8,138	)	$	(6,434	)	$	(3,791	)	$	(3,248	)	$	(5,528	)	$	(6,206	)
Other comprehensive gain/(loss), net of tax:
Other comprehensive (loss)/gain, net of tax:
Unrealized foreign currency translation adjustments	(17		)	(5		)	5			(12		)	(58		)	(22		)	(66		)	22
Total comprehensive loss	$	(1,951	)	$	(1,742	)	$	(8,133	)	$	(6,446	)	$	(3,849	)	$	(3,270	)	$	(5,594	)	$	(6,184	)

See accompanying notes to condensed consolidated financial statements.

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended						Six months ended
	December 31,						September 30,
(In thousands)	2017			2016			2018			2017
Operating activities
Net loss	$	(8,138	)	$	(6,434	)	$	(5,528	)	$	(6,206	)

Adjustments to reconcile net loss to net cash used in operating activities
Net restructuring, severance and other charges	262			819			(126		)	19
Net legal settlements	150			(100		)	126			—
Loss on disposal of property & equipment	—			5
Depreciation	1,892			1,791			1,282			1,312
Amortization	1,421			1,031			1,217			950
Amortization of developed technology	7,371			5,705			6,010			4,727
Deferred income taxes	(1,214		)	105			54			87
Share-based compensation	3,776			782			1,674			2,318
Change in cash surrender value of company owned life insurance policies	11			—			(8		)	(6		)
Changes in operating assets and liabilities:
Accounts receivable	903			6,668
Inventories	87			597
Prepaid expense and other current assets	460			1,306
Accounts payable	5			714
Deferred revenue	(5,787		)	(4,601		)
Accrued liabilities	1,681			(2,558		)
Income taxes payable	(503		)	104
Other changes, net	(279		)	(541		)
Net cash provided by operating activities	2,098			5,393
Changes in operating assets and liabilities							(7,449		)	(4,849		)
Net cash used in operating activities							(2,748		)	(1,648		)
Investing activities
Capital expenditures	(5,289		)	(3,327		)	(1,333		)	(3,106		)
Capitalized software development costs	(7,272		)	(9,174		)	(2,189		)	(5,477		)
Investments in corporate-owned life insurance policies	(27		)	(1		)	(2		)	(2		)
Net cash used in investing activities	(12,588		)	(12,502		)	(3,524		)	(8,585		)
Financing activities
Payments to settle contingent consideration arising from business acquisition	—			(197		)
Repurchase of common shares to satisfy employee tax withholding	(1,190		)	(404		)	(557		)	(519		)
Principal payments under long-term obligations	(92		)	(86		)	(59		)	(61		)
Net cash used in financing activities	(1,282		)	(687		)	(616		)	(580		)
Effect of exchange rate changes on cash	132			(99		)	(151		)	90
Net decrease in cash and cash equivalents	(11,640		)	(7,895		)	(7,039		)	(10,723		)
Cash and cash equivalents at beginning of period	$	49,255		$	60,608		$	39,943		$	49,255
Cash and cash equivalents at end of period	$	37,615		$	52,713		$	32,904		$	38,532

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Accrued capital expenditures	$	81		$	293		$	74		$	385
Accrued capitalized software development costs	107			684			—			357

See accompanying notes to condensed consolidated financial statements.

AGILYSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Table amounts in thousands, except per share data)

1. Nature of Operations and Financial Statement Presentation

Nature of Operations

Agilysys is a leading technology company that provides innovative software and services for point-of-sale (POS), payment gateway, reservation and table management, property management (PMS), inventory and procurement, ~~workforce~~business analytics, document management, ~~analytics, document~~guest offers management, and mobile and wireless solutions exclusively to the hospitality industry. Our products and services allow operators to streamline operations, improve efficiency and understand customer needs across their properties to deliver a superior overall guest experience. The result is improved guest loyalty, growth in wallet share and increased revenue as they connect and transact with their guests based upon a single integrated view of individual preferences and interactions. We serve four major market sectors: Gaming, both corporate and tribal; Hotels, Resorts and Cruise; Corporate Foodservice Management; and Restaurants, Universities, Stadia and Healthcare. A significant portion of our consolidated revenue is derived from contract support, maintenance and subscription services.

Agilysys operates across North America, Europe, Asia-Pacific, and India with headquarters located in Alpharetta, GA. For more information, visit www.agilysys.com.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include our accounts consolidated with our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our fiscal year ends on March 31st. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal ~~2018~~2019 refers to the fiscal year ending March 31, ~~2018.~~2019.

Our unaudited interim financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to the Quarterly Report on Form 10-Q (Quarterly Report) under the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10-01 of Regulation S-X under the Exchange Act. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

The Condensed Consolidated Balance ~~Sheets~~Sheet as of ~~December 31, 2017 and 2016,~~September 30, 2018, as well as the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss, and the Condensed Consolidated Statements of Cash ~~Flow~~Flows for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ are unaudited. However, these financial statements have been prepared on the same basis as those in the audited annual financial ~~statements.~~statements, except for the recently adopted accounting pronouncements described below. In the opinion of management, all adjustments of a recurring nature necessary to fairly state the results of operations, financial position, and cash flows have been made.

These unaudited interim financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, ~~2017~~2018, filed with the Securities and Exchange Commission (SEC) on ~~June 2, 2017.~~May 25, 2018.

2. Summary of Significant Accounting Policies

A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended March 31, ~~2017~~,2018, included in our Annual Report on Form 10-K. Our accounting policy for ~~share-based compensation~~revenue recognition changed with the adoption of Accounting Standards Update ("ASU") No. ~~2016-09,~~2014-09 ("Topic 606"), as described further below. There have been no other material changes to our significant accounting policies and estimates from those disclosed therein.

Reclassification - Certain prior year balances have been ~~reclassified~~reclassed to conform to the current year presentation. Specifically, we ~~reclassified certain software development costs~~have elected to ~~property~~present our changes in operating assets and ~~equipment during~~liabilities on the condensed consolidated statements of cash flows as a single line item. Prior year ~~ended March 31, 2017, which impacted the Condensed Consolidated Statement of Cash Flows for the nine months ended December 31, 2016 in the amount of $1.1 million.~~results have been condensed to be consistent with current year presentation.

Adopted and Recently Issued Accounting Pronouncements

In ~~January 2017,~~August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 addresses the treatment of implementation costs incurred in a hosting arrangement that is a service contract. The update does not impact the accounting for the service element of a hosting arrangement that is a service contract. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement. The disclosure requirements of the reasons for transfers between Level 1 and Level 2, the policy for timing transfers between levels, and the valuation process for Level 3 measurements has been removed. Certain modifications were made to required disclosures and additional requirements were established. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In July 2018, FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements and 2018-10, Codification Improvements to Topic 842, Leases. ASU 2018-11 provides for an additional optional adoption method of ASU 2016-02, Leases, allowing for the application of the new standard as of the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-10 provides corrections and updates to the previously issued codification regarding Topic 842. Various areas of the codification were impacted from the update. The two standards follow the effective dates of ASU 2016-02, Leases. Consistent with the documentation below, we are still assessing the impact of the adoption of ASU 2016-02, however we anticipate the adoption of the standard will materially affect our consolidated financial statements given the significance of our leases.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). ASU 2018-02 addresses the effect of the change in the U.S. federal corporate tax rate on items within accumulated other comprehensive income or loss due to the enactment of the Tax Act on December 22, 2017. The new standard is effective for annual periods, and for interim periods within those annual periods beginning after December 15, 2018, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, and ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill ~~Impairment.~~Impairment. ASU No. 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We have adopted this standard as of April 1, 2018; the adoption had no impact to our condensed consolidated financial statements. ASU No. 2017-04 eliminates Step 2 of the goodwill impairment test and requires a goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. The ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. While we are still assessing the impact of this standard, we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance is effective for annual reporting periods beginning after December 15, 2017. ~~Early adoption is permitted as of the beginning of an annual reporting period.~~ The new standard must be adopted using a modified retrospective transition method, with the cumulative effect recognized as of the date of initial adoption. We ~~do not believe that~~have adopted this standard as of April 1, 2018; the adoption ~~of this guidance will have a material~~had no impact onto our condensed consolidated financial statements.

In ~~March~~August 2016, the FASB issued ASU No. ~~2016-09, Compensation-Stock Compensation~~2016-15, Statement of Cash Flows (Topic ~~718)~~230): Classification of Certain Cash Receipts and Cash Payments, which ~~amends~~provides guidance with the ~~accounting~~intent of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for ~~stock-based compensation. The guidance requires excess tax benefits~~fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. We have adopted this standard as of April 1, 2018; the adoption had no impact to our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This new standard changes the impairment model for most financial assets and ~~deficiencies~~certain other instruments. Entities will be required to use a model that will result in the earlier recognition of allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as ~~a component of income tax expense~~allowances rather than as reductions in the amortized cost of ~~stockholders’ equity and also allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. ASU No. 2016-09~~the securities. The new standard is effective for annual ~~reporting~~periods, and for interim periods within those annual periods, beginning after December 15, ~~2016. The Company adopted~~2019, with early adoption permitted. We are currently reviewing this standard to assess the ~~ASU in the quarter ended June 30, 2017, which is the first quarter for~~impact on our ~~annual period beginning April 1, 2017. The following summarizes the effects of the adoption on the Company's unaudited condensed~~future consolidated financial ~~statements:~~

~~Income taxes~~ - In the first quarter of 2018, we did not recognize the discrete benefit related to $4.4 million of tax deductions in excess of recorded windfall tax benefits associated with stock-based compensation due to the Company’s full valuation allowance on its U.S. federal net operating losses.statements.

~~Forfeitures~~ - Prior to adoption, the Company recognized share-based compensation expense net of estimated forfeitures based on a rate management updated at least annually to reflect expected forfeitures over the vesting period. Upon adoption, the Company will no longer apply a forfeiture rate and instead will account for forfeitures as they occur. The Company applied the modified retrospective adoption approach and recorded a cumulative-

~~effect adjustment of approximately $0.7 million to opening retained earnings. Prior periods have not been adjusted.~~

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The new guidance is effective for all periods beginning after December 15, 2018 and we are currently evaluating the effects that the adoption of ASU No. 2016-02 will have on our consolidated financial statements, but we anticipate that the new guidance will materially impact our consolidated financial statements given the significance of our leases.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of the guidance is that an entity shouldrequires entities to recognize revenue ~~to depict~~when control of the ~~transfer of~~ promised goods or services is transferred to customers inat an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ~~As originally issued, this guidance was effective~~We adopted ASU No. 2014-09 as of April 1, 2018 using the modified retrospective transition method. Please refer to Note 3, "Revenue Recognition" for ~~interim and annual~~further details.

3. Revenue Recognition

On April 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts that were not completed as of the adoption date. Results for reporting periods beginning after ~~December 15, 2016,~~the adoption date are presented under Topic 606, while prior period amounts are not adjusted and ~~early adoption was not permitted. In July 2015, the FASB deferred the effective date by one year,~~continue to ~~interim and annual reporting periods beginning after December 15, 2017. The standard allows entities to apply the standard retrospectively to each~~be reported in accordance with our historic accounting under prior ~~reporting period presented (“full retrospective adoption”) or retrospectively with the cumulative effect~~guidance.

Disaggregation of initially applying the standard recognized at the date of initial application (“modified retrospective adoption”). We plan to adopt ASU No. 2014-09 on its effective date for us beginning April 1, 2018 and we are still evaluating both options and their effect on our financial statements and business.Revenue

We ~~expect~~derive and report our revenue from the sale of products (software and hardware including server, storage, and point of sale), support, maintenance and subscription services and professional services. Revenue recognized at a point in time (products) totaled $8.8 million and $17.8 million, and over time (support, maintenance and subscription services and professional services) totaled $25.4 million and $50.4 million for the three and six months ended September 30, 2018. See Nature of Goods and Services section below for additional information regarding revenue recognition procedures for our revenue streams.

Nature of Goods and Services

Our customary business practice is to ~~identify similar performance obligations under Topic 606 as compared~~enter into legally enforceable written contracts with ~~deliverables and separate units of account previously identified. As a result, we expect the timing~~our customers. The majority of our ~~revenue~~contracts are governed by a master agreement between us and the customer, which sets forth the general terms and conditions of any individual contract between the parties, which is then supplemented by a customer purchase order to ~~occur in similar periods but we are still evaluating this theory especially~~specify the different goods and services, the associated prices, and any additional terms for an individual contract. Multiple contracts with ~~respect to multiple service contracts. We are assessing the new standard’s requirement to apply~~ a single ~~method to measure progress towards satisfaction of performance obligations recognized over~~counterparty entered into at the same time ~~in our contracts that contain multiple services. We~~ are ~~evaluating our multiple service contracts~~evaluated to determine if the contracts should be combined and accounted for as a single contract.

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. Capable of being distinct means the customer can benefit from the goods or services either on its own or together with other resources that are readily available from third parties or from us. Distinct in the context of the contract means the transfer of the goods or services is separately identifiable from other promises in the contract. The transaction price is determined based on the consideration to which we will be entitled and expect to receive in exchange for transferring goods or services to the customer. Typically, our contracts do not provide our customer with any right of return or refund; we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or a refund.

Typically, our customer contracts contain one or more of the following goods or services which constitute performance obligations.

Our software licenses typically provide for a perpetual right to use our software. Generally, our contracts do not provide significant services of integration and customization and installation services are not required to be purchased directly from us. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We have concluded that the software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered or made available for download to the customer.

Revenue for hardware sales is recognized when the product is shipped to the customer and when obligations that affect the customer's final acceptance of the arrangement have been fulfilled. A majority of our hardware sales involve shipment directly from its suppliers to the end-user customers. In these transactions, we are the primary obligor as we are responsible for negotiating price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and we bear the credit risk if the customer does not pay for the goods. As the principal contact with the customer, we recognize revenue and cost of goods sold when we are notified by the supplier that the product has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of destination or upon installation at the customer site.

Support and certain maintenance revenue is derived from providing telephone and on-line technical support services, bug fixes, and unspecified software updates and upgrades to customers on a when-and-if-available basis. Each of these performance obligations provide benefit to the customer on a standalone basis and are distinct in the context of the contract. Each of these distinct performance obligations represent a stand ready obligation to provide service to a customer, which is concurrently delivered and has the same pattern of transfer to the customer, which is why we account for these support services as a single performance obligation, recognized over the term of the maintenance agreement.

Our subscription service revenue is comprised of fees for Software as a Service (“SaaS”) contracts that provide customers a right to access our software, which we maintain, and host in a data center, for a subscribed period. We do not provide the customer the contractual right to license the software outside of the data center at any time during the subscription period under ~~this new standard requiring~~these contracts. The customer can only benefit from the software and software maintenance when combined with the hosting service since the right to access is only provided to the software hosted in the data center. Accordingly, each of the rights to access the software, the maintenance services, and the hosting services is not considered a distinct performance obligation in the context of the contract and should be combined into a single performance obligation and recognized over the contract period. Typically, we invoice fees monthly.

Professional services revenues primarily consist of fees for consulting, installation, integration and training and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the professional services as the services are being performed. Professional services that are billed on a time and materials basis are recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time using an input method ~~of measurement.~~ based on labor hours expended to date relative to the total labor hours expected to be required to satisfy the related performance obligation.

We ~~are assessing the new standards requirement to allocate the transaction prices of our contracts~~estimate standalone selling price ("SSP") based on the price at which the performance obligations are sold by considering certain specific factors related to our company together with customer information. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative ~~stand-alone selling price~~SSP basis.

Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of ~~each~~goods sold. Revenue is recorded net of any applicable taxes collected and remitted to governmental agencies.

Contract Balances

Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of our ~~performance obligations.~~contract assets represent unbilled amounts related to professional services. We expect billing and collection of our contract assets to occur within the next twelve months. We receive payments from customers based upon contractual billing schedules and accounts receivable are ~~evaluating~~recorded when the ~~stand-alone selling prices for our performance obligations. We are also assessing the new standard’s requirement~~right to ~~capitalize costs associated with obtaining customer contracts, including commission payments,~~consideration becomes unconditional. Contract liabilities represent consideration received or consideration which ~~are currently expensed as incurred for all commissions earned subsequent~~is unconditionally due from customers prior to transferring goods or services to the ~~year~~customer under the terms of the contract.

Revenue recognized during the three and six months ended ~~March 31, 2016. We are evaluating~~September 30, 2018 from amounts included in contract liabilities at the beginning of the period ~~over which~~was $8.2 million and $19.8 million. During the three and six months ended September 30, 2018, we transferred $0.2 million and $3.2 million to ~~amortize these capitalized costs and~~accounts receivable from contract assets recognized at April 1, 2018 because the ~~applicability of~~right to the ~~practical expediency exception which permits the continuation of expensing these costs~~transaction consideration became unconditional.

Our arrangements are for ~~amortization periods~~a period of one year or less. ~~In addition, for~~We had approximately $28 million of remaining performance obligations as of September 30, 2018, which we expect to recognize over the next twelve months.

Assets Recognized from Costs to Obtain a Contract

We capitalize commission expenses paid to internal sales ~~transactions~~personnel as expenses that are incremental to obtaining customer contracts. We have ~~been billed, but for~~determined that these commission expenses are in fact incremental and would not have occurred absent the customer contract. Capitalized sales commissions are amortized on a straight-line basis over the period the goods or services are expected to be transferred to the customer to which the ~~recognition~~assets relate, which can range as long as five years. We have determined that certain sales incentive programs meet the requirements to be capitalized. We have capitalized $1.9 million of sales incentive costs in prior periods as part of our opening retained earnings adjustment on April 1, 2018. These balances are included in other non-current assets on our condensed consolidated balance sheet and are amortized as we satisfy the underlying performance obligations, generally based on the contract terms and anticipated renewals. During the three and six months ended September 30, 2018, we expensed $0.9 million and $1.8 million of sales commissions, which are included in operating expenses - sales and marketing in our condensed consolidated statement of operations. All other costs to obtain a contract are not considered incremental and therefore are expensed as incurred.

Financial Statement Impact of Adoption on Previously Reported Results

We adopted Topic 606 using the modified retrospective method. The cumulative impact of applying the new guidance to all contracts with customers that were not completed as of April 1, 2018 was recorded as an adjustment to retained earnings as of the adoption date. As a result of applying the modified retrospective method to adopt the new standard, the following adjustments were made to noted accounts on the condensed consolidated balance sheet as of April 1, 2018:



(In thousands)	March 31, 2018	Adjustment from Topic 606		April 1, 2018
Assets:
Accounts receivable, net	16,389	3,124		19,513
Contract assets	—	4,583		4,583
Prepaid expenses and other current assets	5,593	(496	)	5,097
Other non-current assets	2,484	2,409		4,893

Liabilities:
Contract liabilities	26,820	7,006		33,826

Shareholders' equity:
Retained earnings	103,601	2,614		106,215

The acceleration of revenue ~~has been~~that was deferred under prior guidance as of the adoption date was primarily attributable to the requirement of Topic 606 to allocate the transaction price to the performance obligations in the contract on a relative basis using SSP rather than allocating under the residual method, which allocates the entire arrangement discount to the delivered performance obligations.

Due to the Company's full valuation allowance as of the adoption date, there is no tax impact associated with the adoption of Topic 606.

We made certain presentation changes to our condensed consolidated balance sheet on April 1, 2018 to comply with Topic 606. Prior to adoption of the new standard, we offset accounts receivable and ~~the related account receivable has not been collected, we currently do not recognize~~contract liabilities (previously presented as deferred revenue ~~or the related accounts receivable~~ on our condensed consolidated balance ~~sheet.~~sheet) for unpaid deferred performance obligations included in contract liabilities. Under the new standard, we ~~will~~ record accounts receivable and related contract liabilities for non-cancelable contracts with customers when the right to consideration is ~~unconditional, which we currently expect will result~~unconditional. Upon adoption, the right to consideration in ~~increases in~~exchange for goods or services that have been transferred to a customer when that right is conditional on something other than the passage of time were reclassified from accounts receivable ~~and~~to contract ~~liabilities (currently presented as deferred revenue)~~assets.

Impact of Topic 606 on Financial Statement Line Items

The impact of adoption of Topic 606 on our condensed consolidated balance sheet ~~compared to~~as of September 30, 2018 and on our ~~current presentation. We are continuing to review~~condensed consolidated statement of operations for the ~~impacts of adopting ASU No. 2014-09 to our consolidated financial statements~~three and these preliminary assessments of the impacts to our consolidated financial statements are subject to change. We expect to conclude our assessments of the impacts of adoption sometime during our fourth quarter ending March 31, 2018.six months ended September 30, 2018 was as follows:

Management continually evaluates the potential impact, if any, of all recent accounting pronouncements on our consolidated financial statements or related disclosures and, if significant, makes the appropriate disclosures required by such new accounting pronouncements.



	September 30, 2018
	As reported	Balance without adoption of Topic 606	Effect of Change Higher (Lower)
(In thousands)	As reported	Balance without adoption of Topic 606	Effect of Change Higher (Lower)
Assets:
Accounts receivable, net	18,963	18,312	651
Contract assets	4,696	—	4,696
Prepaid expenses and other current assets	5,089	5,532	(443	)
Other non-current assets	4,699	2,183	2,516

Liabilities:
Contract liabilities	25,789	21,120	4,669

Shareholders' equity:
Retained earnings	100,687	97,936	2,751



	Three months ended September 30, 2018
	As reported		Balance without adoption of Topic 606		Effect of Change Higher (Lower)
(In thousands)	As reported		Balance without adoption of Topic 606		Effect of Change Higher (Lower)
Net revenue:
Products	8,769		8,391		378
Support, maintenance and subscription services	18,856		19,007		(151	)
Professional services	6,578		6,727		(149	)
Total net revenue:	34,203		34,125		78

Operating expenses:
Sales and marketing	4,393		4,536		(143	)

Net Loss	(3,791	)	(4,012	)	221



	Six months ended September 30, 2018
	As reported		Balance without adoption of Topic 606		Effect of Change Higher (Lower)
(In thousands)	As reported		Balance without adoption of Topic 606		Effect of Change Higher (Lower)
Net revenue:
Products	17,849		17,093		756
Support, maintenance and subscription services	36,785		37,194		(409	)
Professional services	13,576		13,894		(318	)
Total net revenue:	68,210		68,181		29

Operating expenses:
Sales and marketing	9,146		9,254		(108	)

Net Loss	(5,528	)	(5,665	)	137

The adoption of Topic 606 had no impact to cash used in operating, investing or financing activities on our condensed consolidated statement of cash flows.

4. Restructuring Charges

We recognize restructuring charges when a plan that materially changes the scope of our business or the manner in which that business is conducted is adopted and communicated to the impacted parties, and the expenses have been incurred or are reasonably estimable.

Fiscal 2018 Restructuring ~~Activity~~

Q3 - In the third quarter of fiscal 2018, we recorded $0.2 million in restructuring charges related to our ongoing efforts to better allocate resources to our crucial revenue growth areas while increasing internal efficiencies in other non-revenue generating areas.Plan

As of ~~December 31, 2017,~~September 30, 2018, we had a remaining liability of approximately ~~$0.2 million~~$20,000 recorded for the Q3 fiscal 2018 restructuring ~~activity.~~plan.

Following is a reconciliation of the beginning and ending balances of the restructuring liability:


	Balance at							Balance at		Balance at		Provisions/Adjustments		Payments			Balance at
	March 31,		Provision/					December 31,
(in thousands)	2017		Adjustments		Payments			2017
(In thousands)										March 31, 2018				Provisions/Adjustments			Payments		September 30, 2018
Fiscal 2018 Restructuring Plan:
Restructuring and other employment costs	$	—	$	1,024	$	(821	)	$	203	$	198	$	—	$	(178	)	$	20

Total restructuring costs	$	—	$	1,024	$	(821	)	$	203	$	198	$	—	$	(178	)	$	20

4.5. Intangible Assets and Software Development Costs

The following table summarizes our intangible assets and software development costs:


	December 31, 2017							March 31, 2017							September 30, 2018							March 31, 2018
	Gross					Net		Gross					Net		Gross					Net		Gross					Net
	carrying		Accumulated			carrying		carrying		Accumulated			carrying		carrying		Accumulated			carrying		carrying		Accumulated			carrying
(In thousands)	amount		amortization			amount		amount		amortization			amount		amount		amortization			amount		amount		amortization			amount
Amortized intangible assets:
Customer relationships	$	10,775	$	(10,775	)	$	—	$	10,775	$	(10,775	)	$	—	$	10,775	$	(10,775	)	$	—	$	10,775	$	(10,775	)	$	—
Non-competition agreements	2,700		(2,700		)	—		2,700		(2,700		)	—		2,700		(2,700		)	—		2,700		(2,700		)	—
Developed technology	10,055		(10,055		)	—		10,055		(10,055		)	—		10,398		(10,398		)	—		10,398		(10,398		)	—
Trade names	230		(134		)	96		230		(100		)	130		230		(169		)	61		230		(146		)	84
Patented technology	80		(80		)	—		80		(80		)	—		80		(80		)	—		80		(80		)	—
	23,840		(23,744		)	96		23,840		(23,710		)	130		24,183		(24,122		)	61		24,183		(24,099		)	84
Unamortized intangible assets:
Trade names	8,400		N/A			8,400		8,400		N/A			8,400		8,400		N/A			8,400		8,400		N/A			8,400
Total intangible assets	$	32,240	$	(23,744	)	$	8,496	$	32,240	$	(23,710	)	$	8,530	$	32,583	$	(24,122	)	$	8,461	$	32,583	$	(24,099	)	$	8,484

Software development costs	$	53,368	$	(17,727	)	$	35,641	$	46,598	$	(10,356	)	$	36,242	$	67,541	$	(26,382	)	$	41,159	$	53,368	$	(20,372	)	$	32,996
Project expenditures not yet in use	10,445		—			10,445		10,757		—			10,757		—		—			—		12,185		—			12,185
Total software development costs	$	63,813	$	(17,727	)	$	46,086	$	57,355	$	(10,356	)	$	46,999	$	67,541	$	(26,382	)	$	41,159	$	65,553	$	(20,372	)	$	45,181

The following table summarizes our remaining estimated amortization expense relating to in service intangible assets and software development costs.


	Estimated		Estimated
	Amortization		Amortization
(In thousands)	Expense		Expense
Fiscal year ending March 31,
2018	$	2,657
2019	10,504		$	6,615
2020	9,765		12,599
2021	9,680		12,515
2022	2,568		5,403
2023	563		3,399
2024			689
Total	$	35,737	$	41,220

Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed was ~~$2.6~~$3.4 million and ~~$2.3~~$2.4 million for the three months ended ~~December 31,~~September 30, 2018 and 2017, and ~~2016, and $7.3~~$6.0 million and ~~$5.7~~$4.7 million for the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively. These charges are included as Products cost of goods sold within the ~~Condensed Consolidated Statements~~condensed consolidated statements of ~~Operations.~~

operations. Amortization expense relating to other definite-lived intangible assets was $11,500 for the three months ended ~~December 31,~~September 30, 2018 and 2017, and ~~2016, and $34,500~~$23,000 for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 and ~~2016.~~2017. These charges are classified as Amortization of intangibles within the ~~Condensed Consolidated Statements~~condensed consolidated statements of ~~Operations~~operations along with Amortization expense related to our Capitalized Internal-Use Software that we classify in Property and Equipment, net within the ~~Consolidated Balance Sheets.~~

condensed consolidated balance sheets.

Capitalized software development costs for software internally developed to be sold, leased, or otherwise marketed, are carried on our balance sheet at ~~net~~ carrying value, net of accumulated amortization. The Company did not capitalize any amounts for external-use software development costs during the three months ended September 30, 2018 due to the current active projects which carry a sufficiently short amount of time between achieving technological feasibility and

reaching general availability to preclude capitalization. We capitalized approximately ~~$1.6 million and $3.0~~$2.2 million during the three months ended ~~December 31,~~September 30, 2017, and ~~2016, and $6.5~~$2.0 million and ~~$8.9~~$4.9 million during the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively.

5.6. Additional Balance Sheet Information

Additional information related to the ~~Condensed Consolidated Balance Sheets~~condensed consolidated balance sheets is as follows:


(In thousands)	December 31, 2017		March 31, 2017		September 30, 2018		March 31, 2018
Accrued liabilities:
Salaries, wages, and related benefits	$	7,352	$	6,473	$	6,794	$	6,793
Other taxes payable	819		750		836		769
Restructuring liabilities					20		198
Accrued legal settlements	150		—		126		—
Restructuring liabilities	203		—
Severance liabilities	16		11		169		—
Professional fees	510		221		228		288
Deferred rent	420		433		420		407
Other	373		443		866		786
Total	$	9,843	$	8,331	$	9,459	$	9,241
Other non-current liabilities:
Uncertain tax positions	$	1,508	$	1,479	$	1,442	$	1,519
Deferred rent	2,399		2,444		2,115		2,313
Other	78		79		75		79
Total	$	3,985	$	4,002	$	3,632	$	3,911

Accounts Receivable, net

Accounts receivable, net of allowance for doubtful accounts was $~~14.7~~19.0 million and $~~15.6~~16.4 million as of ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, respectively. The related allowance for doubtful accounts was $0.8 million and $~~0.5~~0.9 million as of ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, respectively.

In January of 2015, Caesars Entertainment Operating Company, Inc. and certain of its affiliates (Caesars) entered bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. We filed a proof of claim with the Bankruptcy Court identifying approximately $0.7 million of pre-petition claims. Caesars emerged from bankruptcy in October 2017. As of December 31, 2017, we have collected on all of the $0.7 million of pre-petition claims that were outstanding.

6.7. Income Taxes

The following table compares our income tax (benefit) expense and effective tax rates for the three and six months ended ~~December 31, 2017~~September 30, 2018 and ~~2016:~~2017:


	Three months ended						Nine months ended						Three months ended						Six months ended
	December 31,						December 31,						September 30,						September 30,
(Dollars in thousands)	2017			2016			2017			2016			2018			2017			2018			2017
Income tax (benefit) expense	$	(1,623	)	$	129		$	(1,439	)	$	252
Income tax expense													$	53		$	105		$	4		$	183
Effective tax rate	45.6		%	(8.0		)%	15.0		%	(4.1		)%	(1.4		)%	(3.3		)%	(0.1		)%	(3.0		)%

For the three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, the effective tax rate was different than the statutory rate due primarily to ~~a $1.3 million benefit resulting from~~ the ~~effect of a reduction in the deferred rate due to federal tax reform,~~

recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, an adjustment to true-up uncertain tax positions, certain foreign and state tax effects, ~~including a benefit of $0.4 million related to a settlement with the California Franchise Tax Board~~ and other U.S. permanent book to tax differences.

For the three and ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2017, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects, and other U.S. permanent book to tax differences.

We have recorded a valuation allowance offsetting substantially all of our deferred tax assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Because of our losses in prior periods, management believes that it is more-likely-than-not that we will not realize the benefits of these deductible differences.

On December 22, 2017, the ~~President~~staff of the ~~United States~~Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 118, which provides guidance on accounting for the tax effects of ~~America signed into law~~ the Tax ~~Cuts and Jobs Act (the "Tax Act"). The~~Act. SAB No. 118 allows registrants to record provisional amounts for a period up to one year from the date of enactment of the Tax Act ~~contains significant changes~~when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to ~~corporate taxes, including a permanent reduction~~complete the accounting for certain income tax effects of the ~~corporate tax rate from 35%~~Tax Act. It is uncertain if and to ~~21% effective January 1, 2018. The reduction~~what extent various states will enact legislation to conform to the Tax Act. Because legislative guidance and accounting interpretations are expected in the ~~corporate rate requires a one-time revaluation of certain tax-related assets and liabilities. As a result~~future, we consider the accounting of the ~~revaluation of our~~deferred tax remeasurement including the ability to offset indefinite lived deferred tax liabilities with certain deferred tax assets to be incomplete and ~~liabilities at December~~therefore only consider amounts related to these items to be reasonably estimated as of March 31, ~~2017,~~2018 and September 30, 2018. We expect to refine and complete the accounting for the Tax Act during fiscal 2019 as we recorded a one-time tax benefit of approximately $1.3 million. This tax benefit was primarily the result of applying new lower income tax rates to the Company’s net long term deferred tax liabilities recorded on its condensed consolidated balance sheet, which are not netted with deferred tax assets or subject to the valuation allowance.

obtain, prepare and analyze additional information and as additional legislative, regulatory and accounting guidance and interpretations become available.

7.8. Commitments and Contingencies

Agilysys is the subject of various threatened or pending legal actions and contingencies in the normal course of conducting its business. We provide for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such individual or aggregated matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

On April 6, 2012, Ameranth, Inc. filed a complaint against us for patent infringement in the United States District Court for the Southern District of California. ~~The complaint~~Ameranth alleges, among other things, that point-of-sale and property management and other hospitality information technology products, software, components and/or systems sold by us infringe ~~patents~~a patent owned by Ameranth purporting to cover generation and synchronization of menus, including restaurant menus, event tickets, and other products across fixed, wireless and/or internet platforms as well as synchronization of hospitality information and hospitality software applications across fixed, wireless and internet platforms. The complaint seeks monetary damages, injunctive relief, costs and attorneys' fees. At this time, we are not able to predict the outcome of this lawsuit, or any possible monetary exposure associated with the lawsuit. However, we dispute the allegations of wrongdoing and are vigorously defending ourselves in this matter.

~~8. Loss~~9. (Loss) per Share

The following data shows the amounts used in computing ~~loss~~(loss) per share and the effect on earnings and the weighted average number of shares of dilutive potential common shares.


	Three months ended						Nine months ended						Three months ended						Six months ended
	December 31,						December 31,						September 30,						September 30,
(In thousands, except per share data)	2017			2016			2017			2016			2018			2017			2018			2017
Numerator:
Net loss	$	(1,934	)	$	(1,737	)	$	(8,138	)	$	(6,434	)	$	(3,791	)	$	(3,248	)	$	(5,528	)	$	(6,206	)

Denominator:
Weighted average shares outstanding	22,851			22,611			22,777			22,605			23,131			22,760			23,113			22,740

Loss per share - basic and diluted:
Loss per share	$	(0.08	)	$	(0.08	)	$	(0.36	)	$	(0.28	)	$	(0.16	)	$	(0.14	)	$	(0.24	)	$	(0.27	)

Anti-dilutive stock options, SSARs, restricted shares and performance shares	1,658			1,471			1,705			1,399			1,481			1,788			1,419			1,728

Basic ~~earnings (loss)~~loss per share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. The outstanding shares used to calculate the weighted average basic shares excludes ~~530,138~~486,701 and ~~595,625~~535,772 of restricted shares at ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively, as these shares were issued but were not vested and therefore, not considered outstanding for purposes of computing basic ~~(loss) earnings~~loss per share at the balance sheet dates.

Diluted ~~earnings (loss)~~loss per share includes the effect of all potentially dilutive securities on earnings per share. We have stock options, stock-settled appreciation rights ("SSARs"), unvested restricted shares and unvested performance shares that are potentially dilutive securities. When a loss is reported, the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of share-based compensation awards because doing so would be anti-dilutive. Therefore, for all periods presented, basic weighted-average shares outstanding were used in calculating the diluted net loss per share.

9.10. Share-based Compensation

We may grant non-qualified stock options, incentive stock options, SSARs, restricted shares, and restricted share units under our shareholder-approved 2016 Stock Incentive Plan ~~(the~~ ("2016 ~~Plan)~~Plan") for up to 2.0 million common shares, plus 957,575 common shares, the number of shares that were remaining for grant under the 2011 Stock Incentive Plan ~~(the~~ ("2011 ~~Plan)~~Plan") as of the effective date of the 2016 Plan, plus the number of shares remaining for grant under the 2011 Plan that are forfeited, settled in cash, canceled or expired. The maximum aggregate number of restricted shares or restricted share units that may be granted under the 2016 Plan is 1.25 million. With respect to awards that are intended to qualify for the performance-based exception to the deductibility limitations of Section 162(m) of the Internal Revenue Code, the maximum number of shares subject to stock options or SSARs that may be granted to an individual in a calendar year is 800,000 shares, and the maximum number of shares subject to restricted shares or restricted share units that may be granted to an individual in a calendar year is 400,000 shares.

We ~~have a shareholder-approved 2006 Stock Incentive Plan (the 2006 Plan) that still has vested awards outstanding. Awards are no longer being granted from this incentive plan.~~

We may distribute authorized but unissued shares or treasury shares to satisfy share option and appreciation right exercises or restricted share and performance share awards.

We record compensation expense related to stock options, SSARs, restricted shares, and performance shares granted to certain employees and non-employee directors based on the fair value of the awards on the grant date. The fair value of restricted share and performance share awards is based on the closing price of our common shares on the grant date. The fair value of stock option and SSARs awards is estimated on the grant date using the Black-Scholes-Merton option pricing

model, which includes assumptions regarding the risk-free interest rate, dividend yield, life of the award, and the volatility of our common shares.

The following table summarizes the share-based compensation expense for options, SSARs, restricted and performance awards included in the Condensed Consolidated Statements of Operations:


	Three months ended					Nine months ended					Three months ended				Six months ended
	December 31,					December 31,					September 30,				September 30,
(In thousands)	2017		2016			2017		2016			2018		2017		2018		2017
Product development	$	456	$	498		$	982	$	826		$	514	$	105	$	429	$	526
Sales and marketing	173		124			529		177			134		187		199		356
General and administrative	829		(680		)	2,265		(221		)	617		808		1,046		1,436
Total share-based compensation expense	1,458		(58		)	3,776		782			1,265		1,100		1,674		2,318

Stock-Settled ~~Stock~~ Appreciation Rights

SSARs are rights granted to an employee to receive value equal to the difference in the price of our common shares on the date of the grant and on the date of exercise. This value is settled in common shares of ~~Agilysys.~~Agilysys, Inc.

The following table summarizes the activity during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 for SSARs awarded under the 2011 and 2016 Plans:


	Number of Rights		Weighted- Average Exercise Price		Remaining Contractual Term	Aggregate Intrinsic Value		Number of Rights		Weighted-Average Exercise Price		Remaining Contractual Term	Aggregate Intrinsic Value
(In thousands, except share and per share data)			(per right)		(in years)					(per right)		(in years)
Outstanding at April 1, 2017	1,094,978		$	10.44
Outstanding at April 1, 2018								1,103,160		$	10.60
Granted	204,213		10.56					158,244		14.22
Exercised	(41,691	)	9.14					(176,181	)	10.32
Forfeited	(55,530	)	9.98					(43,417	)	10.80
Cancelled/expired	(54,679	)	9.56					(3,492	)	9.60
Outstanding at December 31, 2017	1,147,291		$	10.58	5.4	$	2,038
Exercisable at December 31, 2017	245,064		$	10.26	3.4	$	574
Outstanding at September 30, 2018								1,038,314		$	11.19	5.4	$	3,035
Exercisable at September 30, 2018								529,923		$	10.57	4.8	$	3,035

As of ~~December 31, 2017,~~September 30, 2018, total unrecognized stock based compensation expense related to non-vested SSARs was ~~$1.2~~$0.9 million,, which is expected to be recognized over a weighted-average vesting period of ~~2.0~~3.0 years.

Restricted Shares

We granted shares to certain of our Directors, executives and key employees, the vesting of which is service-based. The following table summarizes the activity during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 for restricted shares awarded under the ~~2016~~2011 and ~~2011~~2016 Plans:


	Number of Shares		Weighted- Average Grant- Date Fair Value		Number of Shares		Weighted-Average Grant-Date Fair Value
(In thousands, except share and per share data)			(per share)				(per share)
Outstanding at April 1, 2017	490,355		$	10.72
Outstanding at April 1, 2018					243,354		$	10.78
Granted	251,010		11.02		238,703		14.25
Vested	(221,897	)	11.29		—		—
Forfeited	(80,793	)	10.72		(58,647	)	10.54
Outstanding at December 31, 2017	438,675		$	10.60
Outstanding at September 30, 2018					423,410		$	12.77

The weighted-average grant date fair value of the restricted shares is determined based upon the closing price of our common shares on the grant date. As of ~~December 31, 2017,~~September 30, 2018, total unrecognized stock based compensation expense related to non-vested restricted stock was ~~$2.7~~$3.4 million,, which is expected to be recognized over a weighted-average vesting period of ~~1.9~~2.1 years.

Performance Shares

We awarded certain restricted shares to our Chief Executive Officer, the vesting of which is performance based. The number of shares that vest will be based on ~~the stock price and~~ relative attainment of a performance metric and any unvested shares will forfeit upon settlement of the bonus.

The following table summarizes the activity during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 for the performance shares awarded under the 2016 Plan:



	Number of Shares
	(In thousands, except share and per share data)
Outstanding at April 1, ~~2017~~2018	—91,463
Granted	~~91,463~~63,291
Forfeited	(75,641	)
Vested	—(15,822		)
Outstanding at ~~December 31, 2017~~September 30, 2018	~~91,463~~63,291

Based on the performance goals, management estimates a liability of ~~$225,000~~$450,000 to be settled through the vesting of a variable number of the performance shares subsequent to March 31, ~~2018.~~2019. As of ~~December 31, 2017,~~September 30, 2018, total unrecognized stock based compensation expense related to non-vested performance shares was ~~$67,500,~~$270,000, which is expected to be recognized over the remaining vesting period of 36 months.

~~10.~~11. Fair Value Measurements

We estimate the fair value of financial instruments using available market information and generally accepted valuation methodologies. We assess the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which pricing inputs used in measuring fair value are observable in the market. Level 1 inputs include unadjusted quoted prices for identical assets or liabilities and are the most observable. Level 2 inputs include unadjusted quoted prices for similar assets and liabilities that are either directly or indirectly observable, or other observable inputs such as interest rates, foreign currency exchange rates, commodity rates, and yield curves. Level 3 inputs are not observable in the market and include our own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the tables below.

There were no significant transfers between Levels 1, 2, and 3 during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 and ~~2016.~~2017.

The following tables present information about our financial assets ~~and liabilities~~ measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Fair value measurement used

Recorded
value
as of

Active
markets
for
identical
assets or
liabilities

Quoted
prices in
similar
instruments
and
observable
inputs

Active
markets for
unobservable
inputs

Recorded value as of

Active markets for identical assets or liabilities

Quoted prices in similar instruments and observable inputs

Active markets for unobservable inputs

(In thousands)

December 31, 2017

(Level 1)

(Level 2)

(Level 3)

September 30, 2018

(Level 1)

(Level 2)

(Level 3)

Assets:

Corporate-owned life insurance — non-current

825

—

825

863

—

863

Fair value measurement used

Recorded
value
as of

Active
markets
for
identical
assets or
liabilities

Quoted
prices in
similar
instruments
and
observable
inputs

Active
markets for
unobservable
inputs

Recorded value as of

Active markets for identical assets or liabilities

Quoted prices in similar instruments and observable inputs

Active markets for unobservable inputs

(In thousands)

March 31, 2017

(Level 1)

(Level 2)

(Level 3)

March 31, 2018

(Level 1)

(Level 2)

(Level 3)

Assets:

Corporate-owned life insurance — non-current

809

—

809

853

—

853

The recorded value of the corporate-owned life insurance policies is adjusted to the cash surrender value of the policies obtained from the third party life insurance providers, which are not observable in the market, and therefore, are classified within Level 3 of the fair value hierarchy. Changes in the cash surrender value of these policies are recorded within “Other (income) expenses, ~~(income),~~ net” in the Condensed Consolidated Statements of Operations.

The following table presents a summary of changes in the fair value of the Level 3 assets:

Nine months ended
December 31,
(In thousands) 2017 2016
Corporate-owned life insurance:
Balance on April 1 $ 809
$ 3,122
Unrealized gain relating to instruments held at reporting date (11 ) 16
Purchases, sales, issuances and settlements, net 27
1
Balance on December 31 $ 825
$ 3,139

~~The following tables present a summary of changes in the fair value of the Level 3 liabilities:~~

Nine months ended
December 31,
(In thousands) 2017 2016
Contingent consideration
Balance on April 1 $ —
$ 197
Activity, payments and other charges (net) —
(197 )
Balance on December 31 $ —
$ —



	Six months ended
	September 30,
(In thousands)	2018		2017
Corporate-owned life insurance:
Balance on April 1	$	853	$	809
Unrealized gain relating to instruments held at reporting date	8		4
Purchases, sales, issuances and settlements, net	2		2
Balance on September 30	$	863	$	815

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), management explains the general financial condition and results of operations for Agilysys and subsidiaries including:

— what factors affect our business;

— what our earnings and costs were;

— why those earnings and costs were different from the year before;

— where the earnings came from;

— how our financial condition was affected; and

— where the cash will come from to fund future operations.

The MD&A analyzes changes in specific line items in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding our consolidated financial condition and results of operations. This Quarterly Report on Form 10-Q updates information included in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017,~~2018, filed with the Securities and Exchange Commission (SEC). This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes that appear in Item 1 of this Quarterly Report as well as our Annual Report for the year ended March 31, ~~2017.~~2018. Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from those contained in the forward-looking statements. See “Forward-Looking Information” on page 3027 of this Quarterly Report, Item 1A "Risk Factors" in Part II of this Quarterly Report, and Item 1A “Risk Factors” in Part I of our Annual Report for the fiscal year ended March 31, ~~2017~~2018 for additional information concerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Agilysys operates across North America, Europe, Asia-Pacific, and India with headquarters located in Alpharetta, GA. For more information, visit www.agilysys.com.

Our top priority is to increase shareholder value by improving operating and financial performance and profitably growing the business through superior products and services. To that end, we expect to invest a certain portion of our cash on hand to fund enhancements to existing software products, to develop and market new software products, and to expand our customer breadth, both vertically and geographically.

Our strategic plan specifically focuses on:

Putting the customer first

Accelerating our product development

Improving organizational efficiency and teamwork

Developing our employees and leaders

Growing revenue by improving the breadth and depth of our product set across both our well established products and our newer rGuest platform

Growing revenue through international expansion

The primary objective of our ongoing strategic planning process is to create shareholder value by capitalizing on growth opportunities, turning profitable and strengthening our competitive position within the specific technology solutions and end markets we serve. Profitability and industry leading growth will be achieved through tighter management of operating expenses and sharpening the focus of our investments to concentrate on growth opportunities that offer the highest returns.

Revenue - Defined

On April 1, 2018 we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to the contracts that were not completed as of the adoption date. Results for operating periods beginning after the adoption date are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under prior guidance in effect at that time. For additional information regarding the adoption of this accounting standard, please refer to Note 3, "Revenue Recognition" in our condensed consolidated financial statement in Part I, Item I of this report for further details.

As required by the SEC, we separately present revenue earned as products revenue, support, maintenance and subscription services revenue or professional services revenue in our ~~Condensed Consolidated Statements~~condensed consolidated statements of ~~Operations.~~operations. In addition to the SEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:

~~• Revenue – We present revenue net of sales returns and allowances.~~

Products revenue – Revenue earned from the sales of hardware equipment and proprietary and remarketed software.

Support, maintenance and subscription services revenue – Revenue earned from the sale of proprietary and remarketed ongoing support, maintenance and subscription or hosting services.

Professional services revenue – Revenue earned from the delivery of implementation, integration and installation services for proprietary and remarketed products.

Results of Operations

~~Third~~Second Fiscal Quarter ~~2018~~2019 Compared to ~~Third~~Second Fiscal Quarter ~~2017~~2018

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the three months ended ~~December 31, 2017~~September 30, 2018 and ~~2016:~~2017:


	Three months ended											Three months ended
	December 31,						Increase (decrease)					September 30,						Increase (decrease)
(Dollars in thousands)	2017			2016			$			%		2018			2017			$			%
Net revenue:
Products	$	8,156		$	10,006		$	(1,850	)	(18.5	)%	$	8,769		$	7,318		$	1,451		19.8	%
Support, maintenance and subscription services	17,215			16,234			981			6.0		18,856			17,108			1,748			10.2
Professional services	5,939			7,208			(1,269		)	(17.6	)	6,578			5,703			875			15.3
Total net revenue	31,310			33,448			(2,138		)	(6.4	)	34,203			30,129			4,074			13.5
Cost of goods sold:
Products (inclusive of developed technology amortization)	6,820			7,530			(710		)	(9.4	)	7,703			5,419			2,284			42.1
Support, maintenance and subscription services	4,132			4,464			(332		)	(7.4	)	3,977			4,446			(469		)	(10.5	)
Professional services	4,730			5,213			(483		)	(9.3	)	4,774			4,894			(120		)	(2.5	)
Total cost of goods sold	15,682			17,207			(1,525		)	(8.9	)	16,454			14,759			1,695			11.5
Gross profit	15,628			16,241			(613		)	(3.8	)	$	17,749		$	15,370		$	2,379		15.5	%
Gross profit margin	49.9		%	48.6		%						51.9		%	51.0		%
Operating expenses:
Product development	7,269			6,847			422			6.2		$	10,151		$	6,812		$	3,339		49.0	%
Sales and marketing	4,278			5,000			(722		)	(14.4	)	4,393			4,207			186			4.4
General and administrative	6,114			3,678			2,436			66.2		5,176			5,561			(385		)	(6.9	)
Depreciation of fixed assets	581			598			(17		)	(2.8	)	676			700			(24		)	(3.4	)
Amortization of intangibles	471			353			118			33.4		674			465			209			44.9
Restructuring, severance and other charges	378			1,394			(1,016		)	nm		448			826			(378		)	nm
Legal settlements	150			—			150			nm		35			—			35			nm
Operating loss	$	(3,613	)	$	(1,629	)	$	(1,984	)	121.8	%	$	(3,804	)	$	(3,201	)	$	(603	)	18.8	%
Operating loss percentage	(11.5		)%	(4.9		)%						(11.1		)%	(10.6		)%

nm - not meaningful

The following table presents the percentage relationship of our Condensed Consolidated Statement of Operations line items to our consolidated net revenues for the periods presented:


	Three months ended				Three months ended
	December 31,				September 30,
	2017		2016		2018		2017
Net revenue:
Products	26.0	%	30.0	%	25.6	%	24.3	%
Support, maintenance and subscription services	55.0		48.5		55.1		56.8
Professional services	19.0		21.5		19.3		18.9
Total	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold:
Products (inclusive of developed technology amortization)	21.8	%	22.5	%	22.5	%	18.0	%
Support, maintenance and subscription services	13.2		13.3		11.6		14.8
Professional services	15.1		15.6		14.0		16.2
Total	50.1	%	51.4	%	48.1	%	49.0	%
Gross profit	49.9	%	48.6	%	51.9	%	51.0	%
Operating expenses:
Product development	23.2	%	20.5	%	29.7	%	22.6	%
Sales and marketing	13.7		14.9		12.8		14.0
General and administrative	19.5		11.0		15.1		18.5
Depreciation of fixed assets	1.9		1.8		2.0		2.3
Amortization of intangibles	1.5		1.1		2.0		1.5
Restructuring, severance and other charges	1.2		4.2		1.3		2.7
Legal settlements	0.5		—		0.1		—
Operating loss	(11.5	)%	(4.9	)%	(11.1	)%	(10.6	)%

Net revenue. Total net revenue ~~decreased $2.1~~increased $4.1 million, or ~~6.4%~~13.5%, during the ~~third~~second quarter of fiscal ~~2018~~2019 compared to the ~~third~~second quarter of fiscal ~~2017.~~2018. Products revenue ~~decreased $1.9~~increased $1.5 million, or ~~18.5%~~19.8%, due primarily to ~~decreased hardware sales.~~increased number of sales of third party hardware. Support, maintenance and subscription services revenue increased ~~$1.0~~$1.7 million, or ~~6.0%~~10.2%, compared to the ~~third~~second quarter of fiscal ~~2017~~2018 driven ~~mostly~~ by growth in customers using our on premise software products which require the payment of support and maintenance along with continued increases in subscription based service revenue, which increased approximately ~~26.2%~~26.8% during the ~~third~~second quarter of fiscal ~~2018~~2019 compared to the ~~third~~second quarter of fiscal ~~2017.~~2018. Professional services revenue ~~decreased $1.3~~increased $0.9 million, or ~~17.6%~~15.3%, as a result of ~~$1.1 million~~growth in our customer base including installations of our traditional on premise and subscription based software solutions and increased use of our technical services ~~revenue recognized in Q3 of fiscal 2017~~team for ~~services provided in quarters prior to that, where contractual commitments precluded revenue recognition until that quarter and $0.2 million due to timing of~~ customer ~~installation and implementation~~specific software development projects.

Gross profit and gross profit margin. Our total gross profit ~~decreased $0.6~~increased $2.4 million, or ~~3.8%~~15.5%, for the ~~third~~second quarter of fiscal ~~2018~~2019 and total gross profit margin increased ~~1.3%~~approximately 0.9% to ~~49.9%~~51.9% from ~~48.6%~~51.0%. Products gross profit decreased ~~$1.1~~$0.8 million and gross profit margin decreased ~~8.3%~~approximately 13.7% to ~~16.4%~~12.2% primarily as a result of ~~lower product revenue coupled with higher amortization of~~increased developed technology by $0.3 million, related to the previously announced general availability of the latest version of our rGuest Buy point of sale solution and the $6.8 million of related software development costs that was placed into service in September of 2017.amortization. Support, maintenance and subscription services gross profit increased ~~$1.3~~$2.2 million and gross margin increased ~~3.5%~~4.9% to ~~76.0%~~78.9% due to the scalable nature of our infrastructure supporting and hosting customers. Professional services gross profit ~~decreased $0.8~~increased $1.0 million and gross profit margin ~~decreased 7.3%~~increased 13.2% to ~~20.4%~~27.4% due to ~~lower quarterly professional services revenues on a higher cost structure following a recent alignment toward enabling the Company to provide more customer-centric services going forward.~~increased revenue with relatively consistent cost.

Operating expenses

Operating expenses, excluding the charges for ~~asset write-offs and other fair value adjustments,~~ legal settlements, ~~and~~ restructuring, severance and other charges, increased ~~$2.2~~$3.3 million, or ~~13.6%~~18.7%, during the ~~third~~second quarter of fiscal ~~2018~~2019 compared with the ~~third~~second quarter of fiscal ~~2017.~~

2018.

Product development. Product development increased ~~$0.4~~$3.3 million, or ~~6.2%~~49.0%, in the ~~third~~second quarter of fiscal ~~2018~~2019 due primarily ~~related~~ to ~~an increase~~the absence of ~~internal R&D headcount offset~~cost capitalization. The products in our rGuest platform for which we had capitalized costs

reached general availability by the beginning of the second quarter of fiscal 2019. These products join our well established products with the application of agile development methodologies in a ~~decrease in contract labor.~~more dynamic development process that involves higher frequency releases of product features and functions. The Company did not capitalize any amounts for external-use software development costs during the second quarter of fiscal 2019 due to the relatively short development cycle associated with the agile development of our current active products. We capitalized approximately ~~$2.1 million and $3.6~~$2.7 million in total development costs during the three months ended ~~December 31, 2017~~September 30, 2017. Total product development costs, including operating expenses and ~~2016, respectively.~~capitalized amounts, were $10.2 million in the second quarter of fiscal 2019 compared to $9.5 million in the second quarter of fiscal 2018. The $0.7 million increase is mostly due to the continued expansion of the India Development Center.

Sales and marketing. Sales and marketing ~~decreased $0.7~~increased slightly by $0.2 million, or ~~14.4%~~4.4%, in the ~~third~~second quarter of fiscal ~~2018~~2019 compared with the ~~third~~second quarter of fiscal ~~2017. The change is due primarily to a decrease of $0.3 million in payroll related expenses and $0.3 million in advertising and promotion related expenses.~~2018.

General and administrative. General and administrative ~~increased $2.4~~decreased $0.4 million, or ~~66.2%~~6.9%, in the ~~third~~second quarter of fiscal 2019 compared with the second quarter of fiscal 2018 ~~compared with the third quarter of fiscal 2017~~mostly due ~~primarily~~ to ~~increases of $1.5~~a $0.2 million reduction in stock compensation ~~expense related to~~for executive stock grants and the impact of removing forfeiture rates as a result of adopting ASU No. 2016-09 in the current year, coupled with forfeitures in the prior year due to the departure of former executives. Furthermore, during the third quarter of fiscal 2018 there was an increase of $0.5 million in professional fees related to legal, accounting and tax fees and other ongoing initiatives, and $0.3 million in increased bonus expense related to the forfeitures in the prior year due to the departure of former executives.grants.

Restructuring, severance, and other charges. Restructuring, severance, and other charges decreased ~~$1.0~~$0.4 million during the ~~third~~second quarter of fiscal 2019 compared to the second quarter of fiscal 2018 ~~compared~~due to ~~the third quarter of fiscal 2017. In the third quarter of fiscal 2018 we had $0.2 million in~~decreased restructuring expense and $0.2 million in severance costs related to our ongoing efforts to better allocate resources to our crucial revenue growth areas while increasing internal efficiencies in other non-revenue generating areas. In the third quarter of fiscal 2017 we had $1.4 million in one-time charges related to the severance of our former CEO.charges.

~~Legal Settlements.~~ ~~During the third quarter of fiscal 2018, we recorded $0.2 million in legal settlements.~~

Other Expenses (Income)

Three months ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2017 2016 $ %
Other (income) expense:
Interest income $ (13 ) $ (86 ) $ (73 ) (84.9 )%
Interest expense 3
3
—
— %
Other (income) expense, net (46 ) 62
108
nm
Total other (income) expense, net $ (56 ) $ (21 ) $ 35
nm



	Three months ended
	September 30,						(Unfavorable) favorable
(Dollars in thousands)	2018			2017			$			%
Other expense (income):
Interest (income)	$	(97	)	$	(23	)	$	74		nm
Interest expense	3			2			(1		)	(50.0	)%
Other expense (income), net	28			(37		)	(65		)	nm
Total other expense, net	$	(66	)	$	(58	)	$	8		nm

nm - not meaningful

Interest income. Interest income consists of interest earned on investments in certificates of deposit, commercial paper, corporate bonds, and corporate-owned life insurance policies.

Interest expense. Interest expense consists of costs associated with capital leases.

Other expense (income) ~~expense.~~. Other expense (income) ~~expense~~ consists mainly of the impact of foreign currency due to movement of European ~~Indian~~ and Asian currencies against the US dollar.

Income Taxes


	Three months ended									Three months ended
	December 31,						(Unfavorable) favorable			September 30,						(Unfavorable) favorable
(Dollars in thousands)	2017			2016			$		%	2018			2017			$		%
Income tax (benefit) expense	$	(1,623	)	$	129		$	1,752	nm
Income tax expense										$	53		$	105		$	52	nm
Effective tax rate	45.6		%	(8.0		)%				(1.4		)%	(3.3		)%

nm - not meaningful

For the three months ended ~~December 31, 2017,~~September 30, 2018, the effective tax rate was different than the statutory rate due primarily to ~~a $1.3 million benefit resulting from~~ the ~~effect of a reduction in the deferred rate due to passage of the Tax Act,~~ recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects, ~~including a benefit of $0.4 million related to a settlement with the California Franchise Tax Board~~ and other U.S. permanent book to tax differences.

For the three months ended ~~December 31, 2016,~~September 30, 2017, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects, and other U.S. permanent book to tax differences.

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of zero to $0.1 million of tax and zero to ~~$0.1~~$0.2 million of interest based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are routinely audited; due to the ongoing nature of current examinations in multiple jurisdictions, other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time. ~~Additionally, we recognized a tax benefit in the amount of $0.4 million during the quarter as a result of a settlement with the California Franchise Tax Board regarding disputed tax matters.~~

~~Results of Operations~~

~~First Nine Months Fiscal 2018 Compared to First Nine Months Fiscal 2017~~

~~Net Revenue and Operating Loss~~

~~The following table presents our consolidated revenue and operating results for the nine months ended December 31, 2017 and 2016:~~

Nine months ended
December 31, Increase (decrease)
(Dollars in thousands) 2017 2016 $ %
Net revenue:
Products $ 25,758
$ 30,257
$ (4,499 ) (14.9 )%
Support, maintenance and subscription services 50,990
47,087
3,903
8.3
Professional services 18,557
19,732
(1,175 ) (6.0 )
Total net revenue 95,305
97,076
(1,771 ) (1.8 )
Cost of goods sold:
Products (inclusive of developed technology amortization) 19,862
22,217
(2,355 ) (10.6 )
Support, maintenance and subscription services 12,610
12,714
(104 ) (0.8 )
Professional services 15,160
13,835
1,325
9.6
Total cost of goods sold 47,632
48,766
(1,134 ) (2.3 )
Gross profit 47,673
48,310
(637 ) (1.3 )
Gross profit margin 50.0 % 49.8 %
Operating expenses:
Product development 20,708
20,647
61
0.3
Sales and marketing 13,616
15,746
(2,130 ) (13.5 )
General and administrative 18,475
13,692
4,783
34.9
Depreciation of fixed assets 1,892
1,791
101
5.6
Amortization of intangibles 1,421
1,031
390
37.8
Restructuring, severance and other charges 1,241
1,484
(243 ) (16.4 )
Legal settlements 150
85
65
76.5
Operating loss $ (9,830 ) $ (6,166 ) $ (3,664 ) 59.4 %

~~nm - not meaningful~~

~~The following table presents the percentage relationship of our Condensed Consolidated Statement of Operations line items to our consolidated net revenues for the periods presented:~~

Nine months ended
December 31,
2017 2016
Net revenue:
Products 27.0 % 31.2 %
Support, maintenance and subscription services 53.5
48.5
Professional services 19.5
20.3
Total 100.0 % 100.0 %
Cost of goods sold:
Products (inclusive of developed technology amortization) 20.8 % 22.9 %
Support, maintenance and subscription services 13.2
13.0
Professional services 15.9
14.3
Total 50.0 % 50.2 %
Gross profit 50.0 % 49.8 %
Operating expenses:
Product development 21.7 % 21.4 %
Sales and marketing 14.3
16.2
General and administrative 19.4
14.1
Depreciation of fixed assets 2.0
1.8
Amortization of intangibles 1.5
1.1
Restructuring, severance and other charges 1.3
1.5
Legal settlements 0.2
0.1
Operating loss (10.3 )% (6.4 )%

~~Net revenue.~~ Total net revenue decreased $1.8 million, or 1.8%, during the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017. Products revenue decreased $4.5 million, or 14.9%, during the first nine months of fiscal 2018 as compared to the first nine months of fiscal 2017 due primarily to decreased hardware sales. Support, maintenance and subscription services revenue increased $3.9 million, or 8.3%, compared to the first nine months of fiscal 2017 driven primarily by continued increases in subscription based service revenue, which increased 36.0% during the first nine months of fiscal 2018. Professional services revenue decreased $1.2 million, or 6.0% as a result of decreased volume of customer installation and implementation projects related to the sale of on premise and subscription based solutions.

~~Gross profit and gross profit margin.~~ Our total gross profit decreased $0.6 million, or 1.3%, for the first nine months of fiscal 2018 and total gross profit margin increased 0.2% to 50.0%, from 49.8%. Products gross profit decreased $2.1 million and gross profit margin decreased 3.7% to 22.9% from 26.6% primarily as a result of an increase of $1.6 million of developed technology amortization related to our rGuest solutions. Support, maintenance and subscription services gross profit increased $4.0 million or 11.7% and gross profit margin increased 2.3% to 75.3% due to the scalable nature of our infrastructure supporting and hosting customers. Professional services gross profit decreased $2.5 million and gross profit margin decreased 11.6% to 18.3% as a re-deployment of internal resources that were previously not billable were converted into billable functions as a part of restructuring our professional services workforce into teams responsible for named customer accounts.

~~Operating expenses~~

Operating expenses, excluding the charges for asset write-offs and other fair value adjustments, legal settlements, and restructuring, severance and other charges, increased $3.2 million, or 6.1% during the first nine months of fiscal 2018 compared with the first nine months of fiscal 2017.

~~Product development.~~ Product development remained relatively flat in the first nine months of fiscal 2018 compared with the first nine months of fiscal 2017 which includes an increase of internal R&D headcount offset by a decrease in contract labor.

~~Sales and marketing.~~ Sales and marketing decreased $2.1 million, or 13.5%, in the first nine months of fiscal 2018 compared with the first nine months of fiscal 2017. The change is due primarily to a decrease of $1.9 million in incentive commissions related to the revision of our commission plan from total contract value to annual contract value, and $0.3 million decrease in advertising and promotion.

~~General and administrative.~~ General and administrative increased $4.8 million, or 34.9%, in the first nine months of fiscal 2018 compared with the first nine months of fiscal 2017 due primarily to increases of $2.5 million in stock compensation expense related to executive stock grants and the impact of removing forfeiture rates as a result of adopting ASU No. 2016-09, coupled with forfeitures in the prior year due to the departure of former executives. In addition, there was an increase of $0.9 million in salaries and wages as a result of additional headcount that included several key new hires, and an increase of $0.8 million in professional fees related to legal, accounting and tax fees and other ongoing initiatives.

~~Restructuring, severance, and other charges.~~ Restructuring, severance, and other charges decreased $0.2 million during the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017. In the first nine months of fiscal 2018 we had $1.0 million in restructuring expense and $0.2 million in severance costs related to our ongoing efforts to better allocate resources to our crucial revenue growth areas while increasing internal efficiencies in other non-revenue generating areas. In the first nine months of fiscal 2017 we had $1.4 million in one-time charges related primarily to the severance of our former CEO. The restructuring initiative will result in annual savings of $2.7 million across all of our operating expense categories.

~~Legal Settlements.~~ ~~During the first nine months of fiscal 2018, we recorded $0.2 million in legal settlements.~~

~~Other Expenses (Income)~~

Nine months ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2017 2016 $ %
Other (income) expense:
Interest income $ (64 ) $ (135 ) $ (71 ) (52.6 )%
Interest expense 7
11
$ 4
36.4 %
Other (income) expense, net (196 ) 140
336
240.0 %
Total other expense (income), net $ (253 ) $ 16
$ 269
nm

~~Interest income.~~ ~~Interest income consists of interest earned on investments in certificates of deposit, commercial paper, corporate bonds, and corporate-owned life insurance policies.~~

~~Interest expense.~~ ~~Interest expense consists of costs associated with capital leases.~~

~~Other (income) expense.~~ ~~Other (income) expense consists mainly of the impact of foreign currency due to movement of European, Indian and Asian currencies against the US dollar.~~

~~Income Taxes~~

Nine months ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2017 2016 $ %
Income tax (benefit) expense $ (1,439 ) $ 252
$ 1,691
nm
Effective tax rate 15.0 % (4.1 )%

~~nm - not meaningful~~

For the nine months ended December 31, 2017, the effective tax rate was different than the statutory rate due primarily to a $1.3 million benefit resulting from the effect of a reduction in the deferred rate due to passage of the Tax Act, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects including a benefit of $0.4 million related to a settlement with the California Franchise Tax Board and other U.S. permanent book to tax differences.

For the nine months ended December 31, 2016, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state taxes, and other U.S. permanent book to tax differences.

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of zero to $0.1 million of tax and zero to $0.1 million of interest based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are routinely audited; due to the ongoing nature of current examinations in multiple jurisdictions, other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time. Additionally, we recognized a tax benefit in the amount of $0.4 million during the quarter as a result of a settlement with the California Franchise Tax Board regarding disputed tax matters.

Results of Operations

First Half Fiscal 2019 Compared to First Half Fiscal 2018

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the six months ended September 30, 2018 and 2017:



	Six months ended
	September 30,						Increase (decrease)
(Dollars in thousands)	2018			2017			$			%
Net revenue:
Products	$	17,849		$	17,601		$	248		1.4	%
Support, maintenance and subscription services	36,785			33,775			3,010			8.9
Professional services	13,576			12,618			958			7.6
Total net revenue	68,210			63,994			4,216			6.6
Cost of goods sold:
Products (inclusive of developed technology amortization)	14,833			13,042			1,791			13.7
Support, maintenance and subscription services	8,051			8,478			(427		)	(5.0	)
Professional services	9,688			10,430			(742		)	(7.1	)
Total cost of goods sold	32,572			31,950			622			1.9
Gross profit	$	35,638		$	32,044		$	3,594		11.2	%
Gross profit margin	52.2		%	50.1		%
Operating expenses:
Product development	$	17,240		$	13,438		$	3,802		28.3	%
Sales and marketing	9,146			9,337			(191		)	(2.0	)
General and administrative	11,181			12,361			(1,180		)	(9.5	)
Depreciation of fixed assets	1,282			1,312			(30		)	(2.3	)
Amortization of intangibles	1,217			950			267			28.1
Restructuring, severance and other charges	889			863			26			nm
Legal settlements	126			—			126			nm
Operating loss	$	(5,443	)	$	(6,217	)	$	774		(12.4	)%
Operating loss percentage	(8.0		)%	(9.7		)%

nm - not meaningful

The following table presents the percentage relationship of our Condensed Consolidated Statement of Operations line items to our consolidated net revenues for the periods presented:



	Six months ended
	September 30,
	2018		2017
Net revenue:
Products	26.2	%	27.5	%
Support, maintenance and subscription services	53.9		52.8
Professional services	19.9		19.7
Total	100.0	%	100.0	%
Cost of goods sold:
Products (inclusive of developed technology amortization)	21.7	%	20.4	%
Support, maintenance and subscription services	11.7		13.2
Professional services	14.2		16.3
Total	47.8	%	49.9	%
Gross profit	52.2	%	50.1	%
Operating expenses:
Product development	25.4	%	21.1	%
Sales and marketing	13.4		14.6
General and administrative	16.4		19.3
Depreciation of fixed assets	1.9		2.1
Amortization of intangibles	1.8		1.5
Restructuring, severance and other charges	1.3		1.3
Legal settlements	0.2		—
Operating loss	(8.0	)%	(9.7	)%

Net revenue. Total net revenue increased $4.2 million, or 6.6%, during the first half of fiscal 2019 compared to the first half of fiscal 2018. Products revenue increased $0.2 million, or 1.4%. Support, maintenance and subscription services revenue increased $3.0 million, or 8.9%, compared to the first half of fiscal 2018 driven by growth in customers using our on premise software products which require the payment of support and maintenance along with continued increases in subscription based service revenue, which increased approximately 22.8% during the first half of fiscal 2019 compared to the first half of fiscal 2018. Professional services revenue increased $1.0 million, or 7.6%, as a result of growth in our customer base including installations of our traditional on premise and subscription based software solutions and increased use of our technical services team for customer specific software development projects.

Gross profit and gross profit margin. Our total gross profit increased $3.6 million, or 11.2%, for the first half of fiscal 2019 and total gross profit margin increased approximately 2.1% to 52.2% from 50.1%. Products gross profit decreased $1.5 million and gross profit margin decreased approximately 9.0% to 16.9% primarily as a result of increased developed technology amortization. Support, maintenance and subscription services gross profit increased $3.4 million and gross margin increased 3.2% to 78.1% due to the scalable nature of our infrastructure supporting and hosting customers. Professional services gross profit increased $1.7 million and gross profit margin increased 11.3% to 28.6% due to increased revenue with lower cost from restructuring of our professional services workforce during the first quarter of 2018 into a more efficient operating structure with more limited use of contract labor.

Operating expenses

Operating expenses, excluding the charges for legal settlements, restructuring, severance and other charges, increased $2.7 million, or 7.1%, during the first half of fiscal 2019 compared with the first half of fiscal 2018.

Product development. Product development increased $3.8 million, or 28.3%, in the first half of fiscal 2019 compared to the first half of fiscal 2018 due primarily to the absence of cost capitalization. The products in our rGuest platform for

which we had capitalized costs reached general availability by the beginning of the second quarter of fiscal 2019. These products join our well established products with the application of agile development methodologies in a more dynamic development process that involves higher frequency releases of product features and functions. The Company capitalized $2.0 million in the six months ended September 30, 2018, with the full balance being captured in Q1 fiscal 2019. We capitalized approximately $4.9 million in total development costs during the six months ended September 30, 2017. Total product development costs, including operating expenses and capitalized amounts, were $19.2 million in the first half of fiscal 2019 compared to $18.3 million in the first half of fiscal 2018. The $0.9 million increase is mostly due to the continued expansion of the India Development Center.

Sales and marketing. Sales and marketing decreased $0.2 million, or 2.0%, in the first half of fiscal 2019 compared with the first half of fiscal 2018.

General and administrative. General and administrative decreased $1.2 million, or 9.5%, in the first half of fiscal 2019 compared with the first half of fiscal 2018 due to approximately $0.5 million reduction in salaries and contract labor costs, $0.4 million reduction in stock compensation for executive grants, and $0.3 million reduction in professional and outside service costs.

Restructuring, severance, and other charges. Restructuring, severance, and other charges during the first half of fiscal 2019 compared to the first half of fiscal 2018 were consistent.

Other Expenses (Income)



	Six months ended
	September 30,						(Unfavorable) favorable
(Dollars in thousands)	2018			2017			$			%
Other expense (income):
Interest (income)	$	(152	)	$	(51	)	$	101		198.0	%
Interest expense	5			4			(1		)	(25.0	)%
Other expense (income), net	228			(147		)	(375		)	nm
Total other expense (income), net	$	81		$	(194	)	$	(275	)	nm

nm - not meaningful

Interest income. Interest income consists of interest earned on investments in certificates of deposit, commercial paper, corporate bonds, and corporate-owned life insurance policies.

Interest expense. Interest expense consists of costs associated with capital leases.

Other expense (income). Other expense (income) consists mainly of the impact of foreign currency due to movement of European and Asian currencies against the US dollar.

Income Taxes



	Six months ended
	September 30,						(Unfavorable) favorable
(Dollars in thousands)	2018			2017			$		%
Income tax expense	$	4.0		$	183		$	179	nm
Effective tax rate	(0.1		)%	(3.0		)%

nm - not meaningful

For the six months ended September 30, 2018, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, an

adjustment to true-up uncertain tax positions, certain foreign and state tax effects, and other U.S. permanent book to tax differences.

For the six months ended September 30, 2017, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects, and other U.S. permanent book to tax differences.

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of zero to $0.1 million of tax and zero to $0.2 million of interest based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are routinely audited; due to the ongoing nature of current examinations in multiple jurisdictions, other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.

Liquidity and Capital Resources

Overview

Our operating cash requirements consist primarily of working capital needs, operating expenses, and capital expenditures. We believe that cash flow from operating activities, cash on hand of ~~$37.6~~$32.9 million as of ~~December 31, 2017~~September 30, 2018 and access to capital markets will provide adequate funds to meet our short- and long-term liquidity requirements in the next 12 months.

As of ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, our total debt was approximately $0.1 million and $0.2 million, comprised of capital lease obligations in both periods.

At ~~December 31, 2017,~~September 30, 2018, 100% of our cash and cash equivalents were deposited in bank accounts or invested in highly liquid investments with original maturities of three months or less. We maintain approximately ~~92%~~90% of our cash and cash equivalents in the United States. Therefore, we believe that credit risk is limited with respect to our cash and cash equivalents.

Cash Flow


	Nine months ended						Six months ended
	December 31,						September 30,
(In thousands)	2017			2016			2018			2017
Net cash provided by (used in):
Net cash (used in):
Operating activities	$	2,098		$	5,393		$	(2,748	)	$	(1,648	)
Investing activities	(12,588		)	(12,502		)	(3,524		)	(8,585		)
Financing activities	(1,282		)	(687		)	(616		)	(580		)
Effect of exchange rate changes on cash	132			(99		)	(151		)	90
Net decrease in cash and cash equivalents	$	(11,640	)	$	(7,895	)	$	(7,039	)	$	(10,723	)

Cash flow ~~provided by~~used in operating activities. Cash flow ~~provided by~~used in operating activities was ~~$2.1~~$2.7 million in the first ~~nine~~six months of fiscal ~~2018. Operating~~2019. A decrease in operating assets and liabilities ~~decreased $3.4~~of $7.4 million ~~due mainly to the timing of collections~~ and operating loss of ~~$8.1~~$5.4 million were mostly offset by ~~non-cash charges of $10.7~~$8.5 million in depreciation and amortization and ~~$3.8~~$1.7 million in share-based compensation. ~~Total share-based compensation increased $3.0 million for the nine months ended December 31, 2017 due to higher value executive stock grants and the impact of removing forfeiture rates.~~

Cash flow used in investing activities. For the first ~~nine~~six months of fiscal ~~2018,~~2019, the ~~$12.6~~$3.5 million in cash used in investing activities was primarily comprised of ~~$7.3~~$2.2 million for the development of proprietary software and ~~$5.3~~$1.3 million for purchase of property and equipment, and internal use software development.

Cash flow used in financing activities. During the first ~~nine~~six months of fiscal ~~2018,~~2019, the ~~$1.3~~$0.6 million used in financing activities was primarily comprised of ~~$1.2~~$0.6 million related to the repurchase of shares to satisfy employee tax ~~withholding.~~withholding on share based compensation.

Contractual Obligations

In December 2017, the Company entered into a new lease for an office in Singapore. The lease term commenced in December 2017 upon possession by the Company. The total commitment for this lease is approximately $1.0 million over a 36-month period.

In December 2017, the Company entered into a new lease for an inventory warehouse in Roswell, GA. The lease term commenced in January 2018 upon possession by the Company. The total commitment for this lease is approximately $0.2 million over a 62-month period.

As of ~~December 31, 2017,~~September 30, 2018, there were no ~~other~~ significant changes to our contractual obligations as presented in our Annual Report for the year ended March 31, ~~2017~~2018.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies

A detailed description of our significant accounting policies is included in our Annual Report for the year ended March 31, ~~2017~~2018. There have been no material changes in our significant accounting policies and estimates since March 31, ~~2017~~2018 except as noted in Note 2, Summary of Significant Accounting Policies.

Forward-Looking Information

This Quarterly Report and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. ~~Forward-looking~~These statements are ~~neither historical facts nor assurances~~not guarantees of future ~~performance. Instead, they are based only on our current beliefs, expectations~~performance and ~~assumptions regarding the future of our business, future plans~~involve risks, uncertainties, and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstancesassumptions that are difficult to ~~predict~~predict. These statements are based on management’s current expectations, intentions, or beliefs and ~~many~~are subject to a number of ~~which are outside of our control. Our actual results~~factors, assumptions, and ~~financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors~~uncertainties that could cause ~~our~~ actual results ~~and financial condition~~ to differ materially from those ~~indicated~~described in the forward-looking ~~statements~~statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include ~~among others, our ability to achieve operational efficiencies and meet customer demand for products and services and~~ the risk factors set forth in Item 1A in Part II of this Quarterly Report and Item IA of our Annual Report for the fiscal year ended March 31, ~~2017. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made.~~2018. We undertake no obligation to ~~publicly~~ update any such factor or to publicly announce the results of any revisions to any forward-looking ~~statement made in this Quarterly Report or any other forward-looking statement that may be made from time to time, whether written or oral,~~statements contained herein whether as a result of new information, future events, or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our Annual Report for the fiscal year ended March 31, ~~2017~~2018. There have been no material changes in our market risk exposures since March 31, ~~2017~~2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Corporate Controller and Treasurer, management evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report. Based on that evaluation, the CEO, CFO and Corporate Controller and Treasurer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.

Change in Internal Control over Financial Reporting

None.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes in the risk factors included in our Annual Report for the fiscal year ended March 31, ~~2017~~2018 that may materially affect our business, results of operations, or financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


~~31.1~~	~~Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.~~ 10.1 Form of Directors Restricted Stock Award Agreement


~~31.2~~	~~Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.~~ 10.2 Form of Restricted Stock Award Agreement


~~31.3~~	~~Rule 13a-14(a)/15d-14(a) Certification of Corporate Controller and Treasurer.~~

10.3 Form of Stock Appreciation Right Agreement

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

31.3 Rule 13a-14(a)/15d-14(a) Certification of Corporate Controller and Treasurer.

32 Certification of Chief Executive Officer, Chief Financial Officer and Corporate Controller and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101

The following materials from our quarterly report on Form 10-Q for the quarter ended ~~December 31, 2017,~~September 30, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, (ii) Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ (iv) Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, and ~~2016, and~~ (v) ~~Notes to Condensed Consolidated Financial Statements for the three and nine months ended December 31, 2017.~~

Notes to Condensed Consolidated Financial Statements for the three and six months ended September 30, 2018.

SIGNATURE

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

AGILYSYS, INC.



Date:	~~January~~October 26, 2018	/s/ Anthony S. Pritchett
		Anthony S. Pritchett
		Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Officer)

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