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

We derive and report our revenue from the sale of products (software licenses, third party hardware and operating systems), support, maintenance and subscription services and professional services. Revenue recognized at a point in time (products) totaled $10.9 million and $9.1 million, and over time (support, maintenance and subscription services and professional services) totaled $27.5 million and $24.9 million for the three months ended June 30, 2019 and 2018, respectively. See Nature of Goods and Services section below for additional information regarding revenue recognition procedures for our revenue streams.

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 currently evaluatingnotified by the effectssupplier that the adoptionproduct has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of ASU No. 2016-02 will have on our consolidated financial statements, but anticipate thatdestination or upon installation at the new guidance will materially impact our consolidated financial statements given the significance of our leases.customer site.

obligations provide benefit to the FASB issued ASU No. 2014-09, Revenuecustomer 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 contracts that provide customers a right to access our software for a subscribed period. We do not provide the customer the contractual right to license the software at any time outside of the subscription period under these contracts. The customer can only benefit from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the software and software maintenance when provided the right to access the software. Accordingly, each of the rights to access the software, the maintenance services, and any hosting services is not considered a distinct performance obligation in the context of the contract and should be combined into a single performance obligation to be recognized over the contract period. Typically, we invoice fees monthly and either party has the ability to cancel the agreement at each invoiced period. As a result, the contractual period for revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughoutpurposes is considered to be one month with monthly renewals for the Industry Topicsterm of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Typecustomer agreement.

Professional services revenues primarily consist of fees for consulting, installation, integration and Production-Type Contracts. The core principletraining and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the guidance isprofessional services as the services are being performed. Professional services can be provided by internal or external providers, do not significantly affect the customer's ability to access or use other provided goods or services, and provide a measure of benefit beyond that an entity should recognize revenue to depict the transfer of other promised goods or services in the contract. As a result, professional services are considered distinct in the context of the contract and represent a separate performance obligation. 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 based on labor hours expended to customers in an amount that reflectsdate relative to the consideration to which the entity expectstotal labor hours expected to be entitled in exchangerequired to satisfy the related performance obligation. These contracts are reviewed quarterly for those goods or services. As originally issued, this guidance was effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In July 2015, the FASB deferred the effective date by one year, to interim and annual reporting periods beginning after December 15, 2017. The standard allows entities to apply the standard retrospectively to each prior reporting period presented (“full retrospective adoption”) or retrospectively with the cumulative effect 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.loss contract accounting treatment.

We expectuse the market estimate approach to identify similar performance obligations under Topic 606 as compared with deliverables and separate unitsdrive standalone selling price ("SSP") by maximizing observable data points (in the form of account previously identified. As a result, we expect the timing of our revenue to occur in similar periods but we are still evaluating this theory especially 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 time in our contracts that contain multiple services. We are evaluating our multiple service contractsrecently executed customer contracts) to determine if the price customers are willing to pay for the goods and services aretransferred. If the contract contains a single performance obligation, under this new standard requiring a single methodthe entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of measurement. We are assessing the new standards requirement to allocate the transaction pricesprice to each performance obligation based on a relative SSP basis.

Revenue recognized during the three months ended June 30, 2019 and 2018 from amounts included in contract liabilities at the beginning of the period was $15.6 million and $11.6 million, respectively. During the three months ended June 30, 2019 and 2018, we transferred $2.0 million and $3.0 million to accounts receivable from contract assets recognized at March 31, 2016. We2019 and April 1, 2018, respectively, because the right to the transaction consideration became unconditional.

Our arrangements are evaluating thefor a period over which to amortize these capitalized costs and the applicability of the practical expediency exception which permits the continuation of expensing these costs for amortization periods of one year or less. In addition, for sales transactions that have been billed, but for which the recognitionAs a result, unsatisfied performance obligations as of revenue has been deferredJune 30, 2019 are expected to be satisfied and the related account receivable has not been collected, we currently do not recognize deferredallocated transaction price recognized in revenue within a period of 12 months or the related accounts receivable on our consolidated balance sheet. 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 in increases in accounts receivable and contract liabilities (currently presented as deferred revenue) on our consolidated balance sheet, compared to our current presentation. We are continuing to review the impacts of adopting ASU No. 2014-09 to our consolidated financial statements 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.

Sales commission expenses that would not have occurred absent the customer contracts are considered incremental costs to obtain a contract. We recognize restructuring chargeshave elected to take the practical expedient available to expense the incremental costs to obtain a contract as incurred when a planthe expected benefit and amortization period is one year or less. For subscription contracts that materially changesare renewed monthly based on an agreement term, we capitalize commission expenses and amortize as we satisfy the scope of our business orunderlying performance obligations, generally based on the manner in which that business is conducted is adoptedcontract terms and communicated to the impacted parties, and theanticipated renewals. Other sales commission expenses have beena period of benefit of one year or less, and are therefore expensed as incurred or are reasonably estimable.

As of December 31, 2017,June 30, 2019, we had $3.3 million of capitalized sales incentive costs. These balances are included in other non-current assets on our condensed consolidated balance sheets. During the three months ended June 30, 2019 and 2018, we expensed $1.0 million and $0.9 million, respectively, of sales commissions, including amortization of capitalized amounts of $0.3 million and $0.3 million, respectively, which is included in operating expenses - sales and marketing in our condensed consolidated statement of operations. All other costs to obtain a remaining liability of approximately $0.2 million recorded for the Q3 fiscal 2018 restructuring activity.contract are not considered incremental and therefore are expensed as incurred.

Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed was $2.6$3.2 million and $2.3$2.7 million for the three months ended December 31, 2017June 30, 2019 and 2016, and $7.3 million and $5.7 million for the nine months ended December 31, 2017 and 2016,2018, respectively. These charges are included as Products costcosts of goods sold within the Condensed Consolidated Statements- products in our condensed consolidated statements of Operations.

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 June 30, 2019 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$2.0 million during the three months ended December 31, 2017 and 2016, and $6.5 million and $8.9 million during the nine months ended December 31, 2017 and 2016, respectively.

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.

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 530,138445,829 and 595,625490,117 of restricted shares at December 31, 2017June 30, 2019 and 2016,2018, respectively, as these shares were issued but were not vested and therefore, not considered outstanding for purposes of computing basic (loss) earningsloss per share at the balance sheet dates.

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, 2018.2020. As of December 31, 2017,June 30, 2019, total unrecognized stock basedshare-based compensation expense related to non-vested performance shares was $67,500,$405,000, which is expected to be recognized over the remaining vesting period of 39 months.

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.

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:

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 Statementscondensed consolidated statements of Operations.

Agilysys ishas been a leadingleader in hospitality software for more than 40 years, delivering innovative guest-centric technology company that provides innovative softwaresolutions for gaming, hotels, resorts and services for point-of-salecruise, corporate foodservice management, restaurants, universities, stadia and healthcare. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), reservation and tableproperty management property managementsystems (PMS), inventory and procurement, workforce management, analytics, document management,payments, and mobilerelated applications, to manage the entire guest journey. Agilysys is known for its leadership in hospitality, its broad product offerings and wirelessits customer-centric service. Some of the largest hospitality companies around the world use Agilysys solutions exclusively to the hospitality industry.  Our products and services allow operators to streamline operations,help improve efficiency and understand customer needs across their properties to deliver a superior overall guest experience. The result is improved guest loyalty, drive revenue 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.increase operational efficiencies.

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$2.3 million, or 13.6%12.3%, during the thirdfirst quarter of fiscal 20182020 compared with the thirdfirst quarter of fiscal 2017.2019.