Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the quarterly period ended December 31, 2019June 30, 2020

or

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 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)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, without par value

AGYS

The NASDAQ Stock Market LLC

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company             

 

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed be sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No

The number of Common Shares of the registrant outstanding as of January 24,July 28, 2020 was 23,656,917.23,589,518.

 

 

 


Table of Contents

AGILYSYS,AGILYSYS, INC.

Index

 

 

 

 

 

Part I. Financial Information

 

 

Item 1

Financial Statements (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – December 31, 2019June 30, 2020 (Unaudited) and March 31, 20192020

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended December 31,June 30, 2020 and June 30, 2019 and December 31, 2018

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - Three and Nine Months Ended December 31,June 30, 2020 and June 30, 2019 and December 31, 2018

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) – NineThree Months Ended December 31,June 30, 2020 and June 30, 2019 and December 31, 2018

6

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - Three and Nine Months Ended December 31,June 30, 2020 and June 30, 2019 and December 31, 2018

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

 

 

Item 2

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

2018

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

2824

 

 

 

 

 

Item 4

Controls and Procedures

2824

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

2925

 

 

 

 

 

Item 1A

Risk Factors

2925

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

2925

 

 

 

 

 

Item 3

Defaults Upon Senior Securities

2925

 

 

 

 

 

Item 4

Mine Safety Disclosures

2925

 

 

 

 

 

Item 5

Other Information

2925

 

 

 

 

 

Item 6

Exhibits

3026

 

 

 

 

Signatures

 

 

3127

 

2


Table of Contents

AGILYSYS,, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

December 31, 2019

 

 

March 31,

2019

 

 

(Unaudited)

 

 

 

 

 

 

June 30, 2020 Unaudited

 

 

March 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,905

 

 

$

40,771

 

 

$

74,604

 

 

$

46,653

 

Accounts receivable, net of allowance for doubtful accounts

of $593 and $788, respectively

 

 

29,794

 

 

 

27,000

 

Accounts receivable, net of allowance for expected credit losses

of $1,458 and for doubtful accounts of $1,634, respectively

 

 

30,494

 

 

 

35,869

 

Contract assets

 

 

3,962

 

 

 

2,921

 

 

 

2,677

 

 

 

2,125

 

Inventories

 

 

1,856

 

 

 

2,044

 

 

 

2,760

 

 

 

3,887

 

Prepaid expenses and other current assets

 

 

6,796

 

 

 

6,272

 

 

 

6,407

 

 

 

4,874

 

Total current assets

 

 

84,313

 

 

 

79,008

 

 

 

116,942

 

 

 

93,408

 

Property and equipment, net

 

 

14,849

 

 

 

15,838

 

 

 

11,113

 

 

 

12,230

 

Operating lease right-of-use assets

 

 

12,044

 

 

 

 

 

 

13,050

 

 

 

13,829

 

Goodwill

 

 

19,622

 

 

 

19,622

 

 

 

19,622

 

 

 

19,622

 

Intangible assets, net

 

 

8,404

 

 

 

8,438

 

 

 

8,400

 

 

 

8,400

 

Software development costs, net

 

 

25,135

 

 

 

34,567

 

Deferred income taxes, non-current

 

 

753

 

 

 

443

 

 

 

852

 

 

 

764

 

Other non-current assets

 

 

6,708

 

 

 

5,675

 

 

 

6,124

 

 

 

6,309

 

Total assets

 

$

171,828

 

 

$

163,591

 

 

$

176,103

 

 

$

154,562

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,454

 

 

$

4,718

 

 

$

4,439

 

 

$

13,403

 

Contract liabilities

 

 

35,374

 

 

 

38,669

 

 

 

38,149

 

 

 

42,244

 

Accrued liabilities

 

 

12,482

 

 

 

14,718

 

 

 

8,801

 

 

 

9,033

 

Operating lease liabilities, current

 

 

4,235

 

 

 

 

 

 

4,641

 

 

 

4,719

 

Finance lease obligations, current

 

 

24

 

 

 

22

 

 

 

24

 

 

 

24

 

Total current liabilities

 

 

62,569

 

 

 

58,127

 

 

 

56,054

 

 

 

69,423

 

Deferred income taxes, non-current

 

 

875

 

 

 

861

 

 

 

884

 

 

 

880

 

Operating lease liabilities, non-current

 

 

9,800

 

 

 

 

 

 

9,810

 

 

 

10,617

 

Finance lease obligations, non-current

 

 

31

 

 

 

35

 

 

 

20

 

 

 

25

 

Other non-current liabilities

 

 

1,617

 

 

 

3,946

 

 

 

2,786

 

 

 

1,860

 

Commitments and contingencies (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A convertible preferred stock, no par value

 

 

35,199

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares, without par value, at $0.30 stated value; 80,000,000

shares authorized; 31,606,831 shares issued; and 23,656,891

and 23,501,450 shares outstanding at December 31, 2019 and

March 31, 2019, respectively

 

 

9,482

 

 

 

9,482

 

Treasury shares, 7,949,940 and 8,105,381 at December 31, 2019 and

March 31, 2019, respectively

 

 

(2,387

)

 

 

(2,433

)

Common shares, without par value, at $0.30 stated value; 80,000,000

shares authorized; 31,606,831 shares issued; and 23,612,924

and 23,609,398 shares outstanding at June 30, 2020

and March 31, 2020, respectively

 

 

9,482

 

 

 

9,482

 

Treasury shares, 7,993,907 and 7,997,433 at June 30, 2020

and March 31, 2020, respectively

 

 

(2,399

)

 

 

(2,401

)

Capital in excess of stated value

 

 

4,094

 

 

 

781

 

 

 

6,760

 

 

 

5,491

 

Retained earnings

 

 

85,976

 

 

 

93,051

 

 

 

57,331

 

 

 

58,984

 

Accumulated other comprehensive loss

 

 

(229

)

 

 

(259

)

Accumulated other comprehensive income

 

 

176

 

 

 

201

 

Total shareholders' equity

 

 

96,936

 

 

 

100,622

 

 

 

71,350

 

 

 

71,757

 

Total liabilities and shareholders' equity

 

$

171,828

 

 

$

163,591

 

 

$

176,103

 

 

$

154,562

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

December 31,

 

 

Nine Months Ended

December 31,

 

 

Three Months Ended

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

12,126

 

 

$

10,232

 

 

$

34,868

 

 

$

28,081

 

 

$

5,239

 

 

$

10,869

 

Support, maintenance and subscription services

 

 

20,965

 

 

 

19,345

 

 

 

61,377

 

 

 

56,130

 

 

 

20,497

 

 

 

20,082

 

Professional services

 

 

8,896

 

 

 

6,437

 

 

 

24,854

 

 

 

20,013

 

 

 

4,071

 

 

 

7,438

 

Total net revenue

 

 

41,987

 

 

 

36,014

 

 

 

121,099

 

 

 

104,224

 

 

 

29,807

 

 

 

38,389

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products (inclusive of developed technology amortization)

 

 

9,639

 

 

 

8,371

 

 

 

28,056

 

 

 

23,204

 

 

 

3,015

 

 

 

8,623

 

Support, maintenance and subscription services

 

 

4,841

 

 

 

3,909

 

 

 

13,676

 

 

 

11,960

 

 

 

4,306

 

 

 

4,181

 

Professional services

 

 

6,443

 

 

 

5,087

 

 

 

18,071

 

 

 

14,775

 

 

 

3,936

 

 

 

5,571

 

Total cost of goods sold

 

 

20,923

 

 

 

17,367

 

 

 

59,803

 

 

 

49,939

 

 

 

11,257

 

 

 

18,375

 

Gross profit

 

 

21,064

 

 

 

18,647

 

 

 

61,296

 

 

 

54,285

 

 

 

18,550

 

 

 

20,014

 

Gross profit margin

 

 

50.2

%

 

 

51.8

%

 

 

50.6

%

 

 

52.1

%

 

 

62.2

%

 

 

52.1

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

 

11,285

 

 

 

10,059

 

 

 

32,127

 

 

 

27,299

 

 

 

8,266

 

 

 

10,064

 

Sales and marketing

 

 

4,918

 

 

 

5,217

 

 

 

14,307

 

 

 

14,363

 

 

 

2,601

 

 

 

4,498

 

General and administrative

 

 

6,084

 

 

 

5,865

 

 

 

17,998

 

 

 

17,047

 

 

 

5,719

 

 

 

5,874

 

Depreciation of fixed assets

 

 

854

 

 

 

651

 

 

 

1,774

 

 

 

1,933

 

 

 

723

 

 

 

213

 

Amortization of intangibles

 

 

608

 

 

 

675

 

 

 

1,900

 

 

 

1,892

 

 

 

461

 

 

 

678

 

Restructuring, severance and other charges

 

 

11

 

 

 

58

 

 

 

438

 

 

 

948

 

Legal settlements, net

 

 

 

 

 

 

 

 

(125

)

 

 

126

 

Severance and other charges

 

 

1,203

 

 

 

231

 

Total operating expense

 

 

23,760

 

 

 

22,525

 

 

 

68,419

 

 

 

63,608

 

 

 

18,973

 

 

 

21,558

 

Operating loss

 

 

(2,696

)

 

 

(3,878

)

 

 

(7,123

)

 

 

(9,323

)

 

 

(423

)

 

 

(1,544

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(92

)

 

 

(83

)

 

 

(287

)

 

 

(235

)

 

 

(21

)

 

 

(80

)

Interest expense

 

 

25

 

 

 

3

 

 

 

28

 

 

 

8

 

 

 

1

 

 

 

1

 

Other (income) expense, net

 

 

(142

)

 

 

68

 

 

 

50

 

 

 

293

 

Other expense, net

 

 

106

 

 

 

85

 

Loss before taxes

 

 

(2,487

)

 

 

(3,866

)

 

 

(6,914

)

 

 

(9,389

)

 

 

(509

)

 

 

(1,550

)

Income tax expense

 

 

95

 

 

 

182

 

 

 

161

 

 

 

186

 

 

 

8

 

 

 

25

 

Net loss

 

$

(2,582

)

 

$

(4,048

)

 

$

(7,075

)

 

$

(9,575

)

 

$

(517

)

 

$

(1,575

)

Series A convertible preferred stock issuance costs

 

 

(937

)

 

 

-

 

Series A convertible preferred stock dividends

 

 

(199

)

 

 

-

 

Net loss available to common shareholders

 

$

(1,653

)

 

$

(1,575

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

23,240

 

 

 

23,048

 

 

 

23,230

 

 

 

23,030

 

Loss per share - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share

 

$

(0.11

)

 

$

(0.18

)

 

$

(0.30

)

 

$

(0.42

)

Weighted average shares outstanding - basic and diluted

 

 

23,405

 

 

 

23,212

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted:

 

$

(0.07

)

 

$

(0.07

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

 

Three Months Ended

December 31,

 

 

Nine Months Ended

December 31,

 

 

Three Months Ended

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net loss

 

$

(2,582

)

 

$

(4,048

)

 

$

(7,075

)

 

$

(9,575

)

 

$

(517

)

 

$

(1,575

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation adjustments

 

 

(31

)

 

 

87

 

 

 

30

 

 

 

21

 

 

 

(25

)

 

 

(95

)

Total comprehensive loss

 

$

(2,613

)

 

$

(3,961

)

 

$

(7,045

)

 

$

(9,554

)

 

$

(542

)

 

$

(1,670

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Nine Months Ended

December 31,

 

 

Three Months Ended

June 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,075

)

 

$

(9,575

)

 

$

(517

)

 

$

(1,575

)

Adjustments to reconcile loss from operations to net cash provided by operating activities

 

 

 

 

 

 

 

 

Net restructuring, severance and other charges

 

 

40

 

 

 

(268

)

Net legal settlements

 

 

(15

)

 

 

 

Loss on disposal of property & equipment

 

 

(5

)

 

 

 

Adjustments to reconcile loss from operations to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

1,774

 

 

 

1,933

 

 

 

723

 

 

 

213

 

Amortization of intangibles

 

 

1,900

 

 

 

1,892

 

 

 

461

 

 

 

678

 

Amortization of developed technology

 

 

9,432

 

 

 

9,357

 

 

 

 

 

 

3,175

 

Deferred income taxes

 

 

(313

)

 

 

44

 

 

 

(84

)

 

 

5

 

Share-based compensation

 

 

3,156

 

 

 

2,956

 

 

 

1,426

 

 

 

482

 

Change in cash surrender value of company owned life insurance policies

 

 

11

 

 

 

12

 

Changes in operating assets and liabilities:

 

 

(3,632

)

 

 

(4,632

)

Net cash provided by operating activities

 

 

5,273

 

 

 

1,719

 

Changes in operating assets and liabilities

 

 

(6,938

)

 

 

(4,891

)

Net cash used in operating activities

 

 

(4,929

)

 

 

(1,913

)

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,009

)

 

 

(1,610

)

 

 

(243

)

 

 

(571

)

Capitalized software development costs

 

 

 

 

 

(2,189

)

Investments in corporate-owned life insurance policies

 

 

(26

)

 

 

(27

)

Additional investments in corporate-owned life insurance policies

 

 

(2

)

 

 

(2

)

Net cash used in investing activities

 

 

(3,035

)

 

 

(3,826

)

 

 

(245

)

 

 

(573

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common shares to satisfy employee tax withholding

 

 

(1,053

)

 

 

(612

)

 

 

(934

)

 

 

(1,026

)

Series A convertible preferred stock issuance proceeds, net of issuance costs

 

 

34,063

 

 

 

 

Principal payments under long-term obligations

 

 

(18

)

 

 

(90

)

 

 

(6

)

 

 

(2

)

Net cash used in financing activities

 

 

(1,071

)

 

 

(702

)

Net cash provided by (used in) financing activities

 

 

33,123

 

 

 

(1,028

)

Effect of exchange rate changes on cash

 

 

(33

)

 

 

(139

)

 

 

2

 

 

 

(24

)

Net increase (decrease) in cash and cash equivalents

 

 

1,134

 

 

 

(2,948

)

 

 

27,951

 

 

 

(3,538

)

Cash and cash equivalents at beginning of period

 

$

40,771

 

 

$

39,943

 

 

 

46,653

 

 

 

40,771

 

Cash and cash equivalents at end of period

 

$

41,905

 

 

$

36,995

 

 

$

74,604

 

 

$

37,233

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

48

 

 

$

31

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

 

Three Months Ended December 31, 2019

 

 

 

 

 

Common Shares

 

 

Capital in

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Shares

 

 

Capital in

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Issued

 

 

In Treasury

 

 

excess of

 

 

 

 

 

 

other

 

 

 

 

 

 

Issued

 

 

In Treasury

 

 

excess of

 

 

 

 

 

 

other

 

 

 

 

 

(In thousands)

 

Shares

 

 

Stated

value

 

 

Shares

 

 

Stated

value

 

 

stated

value

 

 

Retained

earnings

 

 

comprehensive

loss

 

 

Total

 

 

Shares

 

 

Stated

value

 

 

Shares

 

 

Stated

value

 

 

stated

value

 

 

Retained

earnings

 

 

comprehensive

loss

 

 

Total

 

Balance at September 30, 2019

 

 

31,607

 

 

$

9,482

 

 

 

(7,949

)

 

$

(2,386

)

 

$

2,909

 

 

$

88,558

 

 

$

(198

)

 

$

98,365

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,184

 

 

 

 

 

 

 

 

 

1,184

 

Restricted shares issued, net

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

 

Shares issued upon exercise of SSARs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for taxes upon exercise of stock

options, SSARs or vesting of restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,582

)

 

 

 

 

 

(2,582

)

Unrealized translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31

)

 

 

(31

)

Balance at December 31, 2019

 

 

31,607

 

 

$

9,482

 

 

 

(7,950

)

 

$

(2,387

)

 

$

4,094

 

 

$

85,976

 

 

$

(229

)

 

$

96,936

 

 

Three Months Ended December 31, 2018

 

 

Common Shares

 

 

Capital in

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Issued

 

 

In Treasury

 

 

excess of

 

 

 

 

 

 

other

 

 

 

 

 

 

Shares

 

 

Stated

value

 

 

Shares

 

 

Stated

value

 

 

stated

value

 

 

Retained

earnings

 

 

comprehensive

loss

 

 

Total

 

Balance at September 30, 2018

 

 

31,607

 

 

$

9,482

 

 

 

(8,077

)

 

$

(2,424

)

 

$

(451

)

 

$

100,688

 

 

$

(321

)

 

$

106,974

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,147

 

 

 

 

 

 

 

 

 

1,147

 

Restricted shares issued, net

 

 

 

 

 

 

 

 

7

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Shares issued upon exercise of SSARs

 

 

 

 

 

 

 

 

2

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Shares withheld for taxes upon exercise of stock

options, SSARs or vesting of restricted shares

 

 

 

 

 

 

 

 

(3

)

 

 

(1

)

 

 

(54

)

 

 

 

 

 

 

 

 

(55

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,048

)

 

 

 

 

 

(4,048

)

Unrealized translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87

 

 

 

87

 

Balance at December 31, 2018

 

 

31,607

 

 

$

9,482

 

 

 

(8,071

)

 

$

(2,422

)

 

$

639

 

 

$

96,640

 

 

$

(234

)

 

$

104,105

 

 

Nine Months Ended December 31, 2019

 

 

Common Shares

 

 

Capital in

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Issued

 

 

In Treasury

 

 

excess of

 

 

 

 

 

 

other

 

 

 

 

 

 

Shares

 

 

Stated

value

 

 

Shares

 

 

Stated

value

 

 

stated

value

 

 

Retained

earnings

 

 

comprehensive

loss

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

 

31,607

 

 

$

9,482

 

 

 

(8,105

)

 

$

(2,433

)

 

$

781

 

 

$

93,051

 

 

$

(259

)

 

$

100,622

 

 

 

31,607

 

 

$

9,482

 

 

 

(8,105

)

 

$

(2,433

)

 

$

781

 

 

$

93,051

 

 

$

(259

)

 

$

100,622

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,479

 

 

 

 

 

 

 

 

 

3,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,067

 

 

 

 

 

 

 

 

 

1,067

 

Restricted shares issued, net

 

 

 

 

 

 

 

 

143

 

 

 

42

 

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

168

 

 

 

51

 

 

 

(51

)

 

 

 

 

 

 

 

 

 

Shares issued upon exercise of SSARs

 

 

 

 

 

 

 

 

17

 

 

 

5

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Shares withheld for taxes upon exercise of stock

options, SSARs or vesting of restricted shares

 

 

 

 

 

 

 

 

(5

)

 

 

(1

)

 

 

(119

)

 

 

 

 

 

 

 

 

(120

)

 

 

 

 

 

 

 

 

(4

)

 

 

(1

)

 

 

(95

)

 

 

 

 

 

 

 

 

(96

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,075

)

 

 

 

 

 

(7,075

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,575

)

 

 

 

 

 

(1,575

)

Unrealized translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(95

)

 

 

(95

)

Balance at December 31, 2019

 

 

31,607

 

 

$

9,482

 

 

 

(7,950

)

 

$

(2,387

)

 

$

4,094

 

 

$

85,976

 

 

$

(229

)

 

$

96,936

 

Balance at June 30, 2019

 

 

31,607

 

 

$

9,482

 

 

 

(7,927

)

 

$

(2,379

)

 

$

1,698

 

 

$

91,476

 

 

$

(354

)

 

$

99,923

 

 

Nine Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

 

Capital in

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Issued

 

 

In Treasury

 

 

excess of

 

 

 

 

 

 

other

 

 

 

 

 

 

Shares

 

 

Stated

value

 

 

Shares

 

 

Stated

value

 

 

stated

value

 

 

Retained

earnings

 

 

comprehensive

loss

 

 

Total

 

Balance at March 31, 2018

 

 

31,607

 

 

$

9,482

 

 

 

(8,283

)

 

$

(2,486

)

 

$

(1,911

)

 

$

103,601

 

 

$

(255

)

 

$

108,431

 

Cumulative effect of change in accounting policy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,614

 

 

 

 

 

 

2,614

 

Balance at March 31, 2020

 

 

31,607

 

 

$

9,482

 

 

 

(7,997

)

 

$

(2,401

)

 

$

5,491

 

 

$

58,984

 

 

$

201

 

 

$

71,757

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,868

 

 

 

 

 

 

 

 

 

2,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,426

 

 

 

 

 

 

 

 

 

1,426

 

Restricted shares issued, net

 

 

 

 

 

 

 

 

175

 

 

 

52

 

 

 

(52

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

(4

)

 

 

4

 

 

 

 

 

 

 

 

 

 

Shares issued upon exercise of SSARs

 

 

 

 

 

 

 

 

53

 

 

 

16

 

 

 

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

8

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

Shares withheld for taxes upon exercise of stock

options, SSARs or vesting of restricted shares

 

 

 

 

 

 

 

 

(16

)

 

 

(4

)

 

 

(250

)

 

 

 

 

 

 

 

 

(254

)

 

 

 

 

 

 

 

 

(8

)

 

 

(2

)

 

 

(153

)

 

 

 

 

 

 

 

 

(155

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,575

)

 

 

 

 

 

(9,575

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(517

)

 

 

 

 

 

(517

)

Series A convertible preferred stock issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(937

)

 

 

 

 

 

(937

)

Series A convertible preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(199

)

 

 

 

 

 

(199

)

Unrealized translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

(25

)

Balance at December 31, 2018

 

 

31,607

 

 

$

9,482

 

 

 

(8,071

)

 

$

(2,422

)

 

$

639

 

 

$

96,640

 

 

$

(234

)

 

$

104,105

 

Balance at June 30, 2020

 

 

31,607

 

 

$

9,482

 

 

 

(7,994

)

 

$

(2,399

)

 

$

6,760

 

 

$

57,331

 

 

$

176

 

 

$

71,350

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


Table of Contents

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

We serve five major market sectors: Gaming, bothAgilysys has been a leader in hospitality software for more than 40 years, delivering innovative guest-centric technology solutions for gaming, hotels, resorts and cruise, corporate foodservice management, restaurants, universities, stadia, airport foodservice and tribal; Hotelshealthcare. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), property management systems (PMS), inventory and Resorts; Cruise; Managed Foodservice,procurement, payments, and Sports and Entertainment. A significant portion of our consolidated revenue is derived from contract support, maintenance and subscription services.related applications, to manage the entire guest journey.

The Company has just one reportable segment serving the global hospitality industry. Agilysys operates across the Americas,North America, Europe, the Middle East, Africa, Asia-Pacific, and India with headquarters located in Alpharetta, GA. For

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The outbreak has reached all geographic regions in which we do business, and government authorities around the world have implemented extensive measures attempting to contain the spread and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, closures of non-essential businesses, and social distancing requirements. The global spread of COVID-19 and the actions taken in response have negatively impacted us, our customers, our suppliers and the many communities in which we do business. The overall extent and duration of economic and business disruption is not currently known. In response to these challenges, we quickly adjusted our business policies and practices for employees to work from home and have taken other measures to continue our operations with safety as our priority.

We continuously monitor and assess the impact of the COVID-19 pandemic, including recommendations and orders from government and public health authorities. We are working to help our customers maintain their operations during this difficult time while managing our teams to be prepared for continuously changing demand for our products and services.

See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview— Recent Developments” of this report for a more information, visit www.agilysys.com.detailed discussion of the impact of COVID-19 on our business.

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 20202021 refers to the fiscal year ending March 31, 2020.2021.

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 Sheet as of December 31, 2019,June 30, 2020, as well as the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss, and the Condensed Consolidated Statements of Shareholders' Equity for the three and nine months ended December 31, 2019 and 2018, and Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Shareholders’ Equity for the ninethree months ended December 31,June 30, 2020 and 2019, are unaudited. However, these financial statements have been prepared on the same basis as those in the audited annual financial 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, 2019,2020, filed with the Securities and Exchange Commission (SEC) on May 24, 2019.22, 2020.

Use of estimates

8


Table of Contents

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

Considering the currently unknown extent and duration of the COVID-19 pandemic, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply to certain of our significant accounting policies. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts COVID-19 as of June 30, 2020 and through the date of this report. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

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, 2019,2020, included in our Annual Report on Form 10-K. OurWe describe our accounting policy for leases changed with the adoption of Accounting Standards Update ("ASU") No. 2016-02 ("Topic 842"), as describedSeries A convertible preferred stock 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 reclassed to conform to the current year presentation. Specifically, we reclassed certain employee benefit obligations from current to non-current liabilities.

8


Table of Contents

Adopted and Recently Issued Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions previously allowed in the standard and simplifies the accounting for income taxes by providing additional guidance for certain tax situations. The update is effective for annual periods beginning after December 15, 2020, 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 April 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 provides corrections, updates and clarifications to the previously issued updates ASU 2016-13, ASU 2017-12 and ASU 2016-01. Various areas of the codification were impacted from the update. The standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. Consistent with the documentation below, we are still assessing the impact of the adoption of ASU 2016-13, and the other two ASUs affected by ASU 2019-04 are not applicable to us. We are currently reviewing this standard to assess the impact on our future consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 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,We adopted ASU 2018-15 as of April 1, 2020 with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a materialno impact on our condensed consolidated financial statements.

In August 2018, the 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 have 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 February 2018, the FASB issuedadopted 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 have adopted this standard2018-13 as of April 1, 2019; the adoption had2020 with no impact on our condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. 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. TheWe adopted 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 impact2017-04 as of this standard, we do not believe that the adoption of this guidance will have a materialApril 1, 2020 with no impact on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. This new standard changes the impairment modelrequires entities to measure expected credit losses for mostcertain financial assets held at the reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and certain other instruments. Entities will be required to use a model that will result inreasonable and supportable forecasts. The Company’s financial instruments within the earlier recognitionscope of allowances for losses for tradethis guidance primarily includes accounts receivable 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 allowances rather than as reductions in the amortized cost of the securities. The new standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. We are currently reviewing this standard to assess the impact on our future consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Unlike Accounting Standard Codification Topic 840 ("Topic 840"), which requires only capital leases to be recognized on the balance sheet, the new guidance requires both types of leases to be recognized on the balance sheet. The most prominent change for leasees is the requirement to recognize both Right-of-Use (ROU) assets and lease liabilities for leases

9


Table of Contents

classified as operating leases under Topic 840.contract assets. We adopted Topic 842ASU 2016-13 as of April 1, 2019 using2020 under the current period adjustment methodmodified retrospective approach. As a result, comparative information has not been restated and continues to be reported under accounting standards applicable for those periods. The adoption of adoption. Please refer to Note 6, Leases for further details.ASU 2016-13 did not have a material impact on our condensed consolidated financial statements, including accounting policies, given our limited historical write-off activity.

3. Revenue Recognition

Disaggregation of Revenue

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 $12.1 million and $34.9 million, and $10.2 million and $28.1 million for the three and nine months ended December 31, 2019 and 2018. Revenue recognized over time (support, maintenance and subscription services and professional services) totaled $29.9 million and $86.2 million, and $25.8 million and $76.1 million for the three and nine months ended December 31, 2019 and 2018, respectively. 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 enter into legally enforceable written contracts with our customers. The majority of our 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 specify the different goods and services, the associated prices, and any additional terms for an individual contract. Performance obligations specific to each individual contract are defined within the terms of each purchase order. Each performance obligation is identified based on the goods and services that will be transferred to our customer that are both capable of being distinct and are distinct within the context of 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.

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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. Hardware is purchased from suppliers and provided to the end-user customers via drop-ship or from inventory. 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 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. These services represent a stand-ready obligation that is concurrently delivered and has the same pattern of transfer to the customer; we account for these support and maintenance 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 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. The Company recognizes subscription revenue over a one-month period based on the typical monthly invoicing and renewal cycle in accordance with our customer agreement terms.

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 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 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 date relative to the total labor hours expected to be required to satisfy the related performance obligation.

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We use the market estimate approach to drive standalone selling price ("SSP") by maximizing observable data points (in the form of recently executed customer contracts) to determine the price customers are willing to pay for the goods and services transferred. 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 SSP basis.

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

Disaggregation of Revenue

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 $5.2 million and $10.9 million, and over time (support, maintenance and subscription services and professional services) totaled $24.6 million and $27.5 million for the three months ended June 30, 2020 and 2019, respectively.

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 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 recorded when the right to consideration becomes unconditional. Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract.

Revenue recognized from amounts included in contract liabilities at the beginning of the period was $8.6$17.5 million and $7.6$15.6 million for the three months ended December 31,June 30, 2020 and 2019, and 2018, respectively, and $34.6 million and $28.1 million for the nine months ended December 31, 2019 and 2018, respectively. Because the right to the transaction became unconditional, we transferred

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to accounts receivable from contract assets at the beginning of the period, $0.2$1.4 million and $0.4$2.0 million for the three months ended December 31,June 30, 2020 and 2019, and 2018, respectively, and $2.7 million and $3.8 million during the nine months ended December 31, 2019 and 2018, respectively.

Our arrangements are for a period of one year or less. As a result, unsatisfied performance obligations as of December 31, 2019June 30, 2020 are expected to be satisfied and the allocated transaction price recognized in revenue within a period of 12 months or less.

Assets Recognized from Costs to Obtain a Contract

Sales commission expenses that would not have occurred absent the customer contracts are considered incremental costs to obtain a contract. We have elected to take the practical expedient available to expense the incremental costs to obtain a contract as incurred when the expected benefit and amortization period is one year or less. For subscription contracts that are renewed monthly based on an agreement term, we capitalize commission expenses and amortize as we satisfy the underlying performance obligations, generally based on the contract terms and anticipated renewals. Other sales commission expenses have a period of benefit of one year or less and are therefore expensed as incurred in line with the practical expedient elected.

As of December 31, 2019, weWe had $3.2 million and $3.3 million of capitalized sales incentive costs.costs as of June 30, 2020 and 2019, respectively. These balances are included in other non-current assets on our condensed consolidated balance sheets. During the three and nine months ended December 31,June 30, 2020 and 2019, we expensed $1.3$0.6 million and $3.5$1.0 million, respectively, of sales commissions, which included amortization of capitalized amounts of $0.3$0.4 million and $1.0 million, respectively. During the comparable periods ending December 31, 2018, we expensed $1.3 million and $3.1 million, respectively, of sales commissions, which included amortization of capitalized amounts of $0.3 million and $0.8 million, respectively. These expenses 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.

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4. Intangible Assets and Software Development Costs

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

 

 

December 31, 2019

 

 

March 31, 2019

 

 

June 30 and March 31, 2020

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Net

 

 

carrying

 

 

Accumulated

 

 

carrying

 

 

carrying

 

 

Accumulated

 

 

carrying

 

 

carrying

 

 

Accumulated

 

 

 

 

 

 

carrying

 

Intangible assets (In thousands)

 

amount

 

 

amortization

 

 

amount

 

 

amount

 

 

amortization

 

 

amount

 

(In thousands)

 

amount

 

 

amortization

 

 

Impairment

 

 

amount

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

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

)

 

 

 

 

 

 

Developed technology

 

 

10,398

 

 

 

(10,398

)

 

 

 

 

 

10,398

 

 

 

(10,398

)

 

 

 

 

 

10,398

 

 

 

(10,398

)

 

 

 

 

 

 

Trade names

 

 

230

 

 

 

(226

)

 

 

4

 

 

 

230

 

 

 

(192

)

 

 

38

 

 

 

230

 

 

 

(230

)

 

 

 

 

 

 

Patented technology

 

 

80

 

 

 

(80

)

 

 

 

 

 

80

 

 

 

(80

)

 

 

 

 

 

80

 

 

 

(80

)

 

 

 

 

 

 

 

 

24,183

 

 

 

(24,179

)

 

 

4

 

 

 

24,183

 

 

 

(24,145

)

 

 

38

 

 

 

24,183

 

 

 

(24,183

)

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

8,400

 

 

N/A

 

 

 

8,400

 

 

 

8,400

 

 

N/A

 

 

 

8,400

 

 

 

8,400

 

 

N/A

 

 

 

 

 

 

8,400

 

Total intangible assets

 

$

32,583

 

 

$

(24,179

)

 

$

8,404

 

 

$

32,583

 

 

$

(24,145

)

 

$

8,438

 

 

$

32,583

 

 

$

(24,183

)

 

$

 

 

$

8,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software development costs (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total software development costs

 

$

67,541

 

 

$

(42,406

)

 

$

25,135

 

 

$

67,541

 

 

$

(32,974

)

 

$

34,567

 

 

$

67,541

 

 

$

(45,535

)

 

$

(22,006

)

 

$

 

 

As of March 31, 2020, management determined the net realizable value of the remaining capitalized software development costs for certain solutions within out rGuest suite of products no longer exceeded their carrying value, and as a result, recorded non-cash impairment charges of $22.0 million for the year ended March 31, 2020. The following table summarizes ourimpact of the COVID-19 pandemic on the hospitality industry resulted in economic conditions that made it difficult to project future sales and revenue accurately for the related rGuest solutions. After evaluating the Company’s strategy for market development and continued costs to support the software, an impairment charge was required. The amount of impairment recognized during the year ended March 31, 2020 reduced the carry value of capitalized software development costs to zero with no remaining amortization expense relating to be recognized in service intangible assets and software development costs.future periods.

 

 

Remaining

 

 

 

Amortization

 

(In thousands)

 

Expense

 

Fiscal year ending March 31,

 

 

 

 

2020

 

$

3,132

 

2021

 

 

12,515

 

2022

 

 

5,403

 

2023

 

 

3,399

 

2024

 

 

690

 

Total

 

$

25,139

 

 

Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed was $3.1 million and $3.4$3.2 million for the three months ended December 31, 2019 and 2018, and $9.4 million and $9.4 million for the nine months ended December 31, 2019 and 2018, respectively.June 30, 2019. These charges are included as costs of goods sold - products in our condensed consolidated statements of operations. Amortization expense relating to other definite-lived intangible assets was $11,500 for the three months ended December 31, 2019 and 2018, and $34,500 for the nine months ended December 31, 2019 and 2018. These charges are classified as operating expenses - amortization of intangibles in our condensed consolidated statements of operations along with amortization expense related to our capitalized internal-use software that we classify in Property and equipment, net within the 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 carrying value, net of accumulated amortization. The Company did not capitalize any amounts for external-use software development costs during the three and nine months ended December 31, 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 $2.0 million during the nine months ended December 31, 2018.

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5. Additional Balance Sheet Information

Additional information related to the condensed consolidated balance sheets is as follows:

 

 

December 31,

2019

 

 

March 31,

2019

 

 

June 30,

2020

 

 

March 31,

2020

 

Accrued liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages, and related benefits

 

$

10,438

 

 

$

12,755

 

 

$

6,811

 

 

$

6,945

 

Other taxes payable

 

 

1,231

 

 

 

1,041

 

 

 

1,512

 

 

 

1,649

 

Accrued legal settlements

 

 

 

 

 

15

 

Severance liabilities

 

 

86

 

 

 

46

 

 

 

103

 

 

 

32

 

Professional fees

 

 

127

 

 

 

67

 

 

 

104

 

 

 

50

 

Deferred rent

 

 

 

 

 

273

 

Other

 

 

600

 

 

 

521

 

 

 

271

 

 

 

357

 

Total

 

$

12,482

 

 

$

14,718

 

 

$

8,801

 

 

$

9,033

 

Other non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncertain tax positions

 

$

1,097

 

 

$

1,083

 

 

$

1,110

 

 

$

1,103

 

Deferred rent and asset retirement obligations

 

 

165

 

 

 

2,613

 

Asset retirement obligations

 

 

170

 

 

 

170

 

Employee benefit obligations

 

 

279

 

 

 

174

 

 

 

1,429

 

 

 

511

 

Other

 

 

76

 

 

 

76

 

 

 

77

 

 

 

76

 

Total

 

$

1,617

 

 

$

3,946

 

 

$

2,786

 

 

$

1,860

 

 

6. Leases

We adopted Topic 842 on April 1, 2019 using the current period adjustment method of adoption to recognize leases with a duration greater than 12 months on the balance sheet. The impact of adoption on April 1, 2019 was recognition of operating lease liabilities of $16.3 million and related Right-of-Use ("ROU") assets of $13.8 million. Prior period financial statements have not been restated and therefore the comparative amounts are not presented below or on the condensed consolidated balance sheet as of March 31, 2019. For operating leases with a term greater than 12 months, we have recorded the lease liability at the present value of lease payments over the remaining lease term and the related ROU asset. The remaining lease term has been determined for each lease considering factors such as renewal options, termination options, our Company's historical practices in exercising such options, and current business knowledge which may impact lease related decisions. The majority of our leases are comprised of real estate leases for our respective offices around the globe. Our finance leases consist of office equipment. We have no residual value guarantees or restrictions or covenants imposed by, or associated with our active leases. Since our current leases do not provide an implicit rate of return, our incremental borrowing rates used to determine the value of lease payments in implementation are estimated at April 1, 2019, based on collateralized rates for a term similar to each remaining lease term.

We have elected the package of practical expedients permitted under the transition guidance which includes the ability to carryforward the previously determined lease classification (operating or financing), forgo the assessment whether active contracts contain a lease, and whether capitalized costs associated with a lease meet the definition of "initial direct costs" as defined within Topic 842. In the event that any of our leases contain nonlease components, we have elected the practical expedient to account for each separate lease component and the associated nonlease component(s) as a single lease component. We have also elected the accounting policy to forgo applying the guidance of Topic 842 to short term leases (defined as a term of 12 month or less, without a purchase option which we are reasonably certain to exercise).

As of December 31, 2019, we have one additional operating lease for the extension of the office space at our India Development Center which has not yet commenced. In relation to this lease, we anticipate approximately $2.5 million and $2.5 million of ROU assets and lease liabilities, respectively. The operating lease commences during January 2020. We do not have any related party leases or sublease arrangements. We have variable payments for expenses such as common area maintenance and taxes. We do not have variable payments that are based on an index or rate. As a result, we do not include variable payments in the calculation of the lease liability. Any variable lease costs are expensed as incurred.

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Table of Contents

The components6. Supplemental Disclosures of lease expenses for the three and nine months ended December 31, 2019 were as follows:Cash Flow Information

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in thousands)

 

December 31, 2019

 

Operating leases expense

 

$

1,001

 

 

$

3,017

 

Finance lease expense:

 

 

 

 

 

 

 

 

Amortization of ROU assets

 

 

6

 

 

 

17

 

Interest on lease liabilities

 

 

2

 

 

 

4

 

Total finance lease expense

 

 

8

 

 

 

21

 

Variable lease costs

 

 

60

 

 

 

197

 

Short term lease expense

 

 

22

 

 

 

72

 

Total lease expense

 

$

1,091

 

 

$

3,307

 

OtherAdditional information related to leases for the nine months ended December 31, 2019 wasconsolidated statements of cash flows is as follows:follows:

 

 

 

Nine Months Ended

 

Supplemental cash flow information

 

December 31, 2019

 

Cash paid for amounts included in the measurement of lease

   liabilities (in thousands):

 

 

 

 

Operating cash flows for operating leases

 

$

3,560

 

Operating cash flows for finance leases

 

 

9

 

Financing cash flows for finance leases

 

 

18

 

ROU assets obtained in exchange for lease obligations (in thousands):

 

 

 

 

Operating leases

 

$

185

 

Finance leases

 

 

11

 

Weighted average remaining lease terms

 

 

 

 

Operating leases

 

 

5.26

 

Finance leases

 

 

2.37

 

Weighted average discount rates

 

 

 

 

Operating leases

 

 

10.04

%

Finance leases

 

 

4.37

%

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheet as of December 31, 2019:

(in thousands)

 

Operating leases

 

 

Finance leases

 

2020 (excluding the nine months ended December 31, 2019)

 

$

1,086

 

 

$

7

 

2021

 

 

4,390

 

 

 

29

 

2022

 

 

3,623

 

 

 

21

 

2023

 

 

2,244

 

 

 

5

 

2024

 

 

2,049

 

 

 

3

 

Thereafter

 

 

5,719

 

 

 

 

Total undiscounted future minimum lease payments

 

 

19,111

 

 

 

65

 

Less: difference between undiscounted lease payments and discounted lease liabilities

 

 

(5,076

)

 

 

(10

)

Total lease liabilities

 

$

14,035

 

 

$

55

 

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As previously disclosed on our March 31, 2019 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable leases as of March 31, 2019 were as follows:

Year ending (in thousands)

 

Operating leases

 

 

Finance leases

 

2020

 

$

4,143

 

 

$

27

 

2021

 

 

3,945

 

 

 

23

 

2022

 

 

3,166

 

 

 

15

 

2023

 

 

1,916

 

 

 

 

2024

 

 

1,770

 

 

 

 

Thereafter

 

 

4,497

 

 

 

 

Total lease payments

 

 

19,437

 

 

 

65

 

Less: Amounts representing interest

 

 

 

 

 

(8

)

Present value of lease liabilities

 

$

19,437

 

 

$

57

 

 

 

Three Months Ended June 30,

 

(In thousands)

 

 

2020

 

 

 

2019

 

Cash (receipts) for interest, net

 

 

(20

)

 

 

(79

)

Cash payments for income tax, net

 

 

134

 

 

 

73

 

Cash payments for operating leases

 

 

1,642

 

 

 

1,014

 

Cash payments for finance leases

 

 

8

 

 

 

8

 

Accrued capital expenditures

 

 

19

 

 

 

51

 

 

7. Income Taxes

The following table compares our income tax expense and effective tax rates for the three and nine months ended December 31, 2019June 30, 2020 and 2018:2019:

 

Three Months Ended

December 31,

 

 

Nine Months Ended

December 31,

 

 

Three Months Ended

June 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Income tax expense

 

$

95

 

 

$

182

 

 

$

161

 

 

$

186

 

 

$

8

 

 

$

25

 

Effective tax rate

 

 

(3.8

)%

 

 

(4.7

)%

 

 

(2.3

)%

 

 

(2.0

)%

 

 

(1.6

)%

 

 

(1.6

)%

 

For the three and nine months ended December 31,June 30, 2020 and 2019, and 2018, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets in the U.S. and certain foreign jurisdictions, which were offset by increases in the valuation allowance, certain foreign and state tax effects and other U.S. permanent book to tax differences.

Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets in the U.S. and certain foreign jurisdictions, as management believes that it is more likely than not that we will not realize the benefits of these deductible differences. 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.

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 in the U.S. District Court of Southern District of California alleging that certain of our products infringe patents owned by Ameranth directed to configuring and transmitting hospitality menus (e.g. restaurant menus) for display on electronic devices and synchronizing the menu content between the devices. The case against us was consolidated with similar cases brought by Ameranth against more than 30 other defendants. All but one of the patents at issue in the case were invalidated by the U.S. Court of Appeals for the Federal Circuit in 2016. In September 2018, the District Court found the one surviving Ameranth patent invalid and granted summary judgment in favor of the movant co-defendants. In November 2019, the District Court's ruling was upheld on appeal by theU.S. Court of Appeals for the Federal Circuit.Circuit affirmed the lower court’s summary judgement with respect to all claims except for two, which were not asserted against Agilysys. In early 2020, the Court of Appeals also denied Ameranth’s request for rehearing. ItFinally, Ameranth filed for writ of certiorari to the United States Supreme Court. The Supreme Court has not yet responded to the writ.

We were not a party to the appeal, and it is currently unclear what impact the summary judgmentjudgement ruling or the denialwrit of Ameranth’s appealcertiorari may have on our case. Ameranth seeks monetary damages, injunctive relief, costs and attorneys' fees from us. At this time, we are not able to predict the outcome of this lawsuit. However, we dispute the allegations of wrongdoing and are vigorously defending ourselves in this matter.

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9. Loss per Share

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

 

Three Months Ended

December 31,

 

 

Nine Months Ended

December 31,

 

Three Months Ended

June 30,

 

(In thousands, except per share data)

2019

 

 

2018

 

 

2019

 

 

2018

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(2,582

)

 

$

(4,048

)

 

$

(7,075

)

 

$

(9,575

)

$

(517

)

 

$

(1,575

)

Series A convertible preferred stock issuance costs

 

(937

)

 

 

 

Series A convertible preferred stock dividends

 

(199

)

 

 

 

Net loss available to common shareholders

$

(1,653

)

 

$

(1,575

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

23,240

 

 

 

23,048

 

 

 

23,230

 

 

 

23,030

 

Weighted average shares outstanding - basic and diluted

 

23,405

 

 

 

23,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share

$

(0.11

)

 

$

(0.18

)

 

$

(0.30

)

 

$

(0.42

)

$

(0.07

)

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive stock options, SSARs, restricted shares and

performance shares

 

1,469

 

 

 

1,471

 

 

 

1,414

 

 

 

1,443

 

Anti-dilutive stock options, SSARs, restricted shares,

performance shares and preferred shares

 

3,560

 

 

 

1,273

 

 

Basic 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 416,960194,587 and 482,846445,829 of restricted shares at December 31,June 30, 2020 and 2019, and 2018, respectively, as these shares were issued but were not vested and therefore, not considered outstanding for purposes of computing basic loss per share at the balance sheet dates.

Diluted 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.

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 ("2016 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 ("2011 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.

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. During fiscal year 2020, we issued 125,000 SSAR awards which are subject to a market condition. The fair value of these awards is estimated using the Lattice option pricing model which utilizes a binary tree and includes multiple assumptions which include volatility and life of the award to determine an appropriate fair value based on the award grant date.

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Table of Contents

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

December 31,

 

 

Nine Months Ended

December 31,

 

 

Three Months Ended

June 30,

 

(In thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Product development

 

$

639

 

 

$

509

 

 

$

1,579

 

 

$

938

 

 

$

172

 

 

$

268

 

Sales and marketing

 

 

104

 

 

 

136

 

 

 

217

 

 

 

335

 

 

 

36

 

 

 

62

 

General and administrative

 

 

586

 

 

 

637

 

 

 

1,360

 

 

 

1,683

 

 

 

1,218

 

 

 

152

 

Total share-based compensation expense

 

$

1,329

 

 

$

1,282

 

 

$

3,156

 

 

$

2,956

 

 

$

1,426

 

 

$

482

 

 

Stock-Settled 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, Inc.

The following table summarizes the activity during the ninethree months ended December 31, 2019June 30, 2020 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, 2019

 

 

1,016,643

 

 

$

11.22

 

 

 

 

 

 

 

 

 

Granted

 

 

91,364

 

 

 

22.41

 

 

 

 

 

 

 

 

 

Outstanding at April 1, 2020

 

 

1,644,888

 

 

$

21.07

 

 

 

 

 

 

 

 

 

Exercised

 

 

(30,430

)

 

 

9.47

 

 

 

 

 

 

 

 

 

 

 

(56,226

)

 

 

11.16

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(15,704

)

 

 

18.13

 

 

 

 

 

 

 

 

 

 

 

(11,276

)

 

 

18.71

 

 

 

 

 

 

 

 

 

Expired

 

 

(9,112

)

 

 

10.35

 

 

 

 

 

 

 

 

 

 

 

(88

)

 

 

14.22

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2019

 

 

1,052,761

 

 

$

12.15

 

 

 

4.3

 

 

$

13,959

 

Exercisable at December 31, 2019

 

 

825,908

 

 

$

10.96

 

 

 

3.9

 

 

$

11,931

 

Outstanding at June 30, 2020

 

 

1,577,298

 

 

$

21.44

 

 

 

4.7

 

 

$

6,028

 

Exercisable at June 30, 2020

 

 

942,608

 

 

$

12.87

 

 

 

3.8

 

 

$

5,887

 

Vested and expected to vest at June 30, 2020

 

 

1,577,298

 

 

$

21.44

 

 

 

4.7

 

 

$

6,028

 

 

As of December 31, 2019,June 30, 2020, total unrecognized share-based compensation expense related to non-vested SSARs was $0.5$4.3 million, which is expected to be recognized over a weighted-average vesting period of 2.62.1 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 ninethree months ended December 31, 2019June 30, 2020 for restricted shares awarded under the 2011 and 2016 Plans:

 

 

 

Number of Shares

 

 

Weighted-Average Grant-Date Fair Value

 

(In thousands, except share and per share data)

 

 

 

 

 

(per share)

 

Outstanding at April 1, 2019

 

 

237,146

 

 

$

13.46

 

Granted

 

 

197,460

 

 

 

22.57

 

Vested

 

 

(2,757

)

 

 

22.67

 

Forfeited

 

 

(45,009

)

 

 

17.01

 

Outstanding at December 31, 2019

 

 

386,840

 

 

$

17.63

 

 

 

Number of Shares

 

 

Weighted-Average Grant-Date Fair Value

 

(In thousands, except share and per share data)

 

 

 

 

 

(per share)

 

Outstanding at April 1, 2020

 

 

178,462

 

 

$

19.89

 

Forfeited

 

 

(13,995

)

 

 

18.84

 

Outstanding at June 30, 2020

 

 

164,467

 

 

$

19.98

 

 

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, 2019,June 30, 2020, total unrecognized share-based compensation expense related tonon-vested restricted stock was $3.1$1.6 million, which is expected to be recognized over a weighted-average vesting period of 2.01.7 years.

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Table of Contents

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 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 ninethree months ended December 31, 2019June 30, 2020 for the performance shares awarded under the 2016 Plan:

 

(In(In thousands, except share and per share data)

 

Number of Shares

 

Outstanding at April 1, 20192020

 

 

63,29130,120

 

Granted

 

 

30,120

 

Vested

 

 

(23,526

)

Forfeited

 

 

(39,765

)

Outstanding at December 31, 2019June 30, 2020

 

 

30,120

 

 

Based on the performance goals, management estimates a liability of approximately $450,000 to be settled through the vesting of a variable numberCompensation Committee of the performanceboard of directors awarded 6,714 of the original 30,120 shares subsequenthaving a value of $0.1 million based on the closing price of the Company’s common stock on July 16, 2020, the date that the Committee made its determination. The remaining 23,406 shares subject to the original annual incentive grant were forfeited and can never be earned by our Chief Executive Officer.

11. Preferred Stock

Series A Convertible Preferred Stock

On May 22, 2020, we completed the sale of 1,735,457 shares of our preferred stock, without par value, designated as “Series A Convertible Preferred Stock” (the “Convertible Preferred Stock”) to MAK Capital Fund L.P. and MAK Capital Distressed Debt Fund I, LP (the “Holders”) each, in its capacity as a designee of MAK Capital One LLC (the “Purchaser”), pursuant to the terms of the Investment Agreement, dated as of May 11, 2020, between the Company and the Purchaser, for an aggregate purchase price of $35 million. We incurred issuance costs of $0.9 million. We added all issuance costs that were netted against the proceeds upon issuance of the Convertible Preferred Stock to its redemption value. As disclosed in our Annual Report for the fiscal year ended March 31, 2020. As2020, Michael Kaufman, the Chairman of December 31, 2019, total unrecognized share-based compensation expense related to non-vested performance shares was $0.1 million, whichthe Company’s Board of Directors, is expected to be recognized over the remaining vesting periodChief Executive Officer of 3 months.MAK Capital One LLC.

11. Fair Value MeasurementsAccounting Policy

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 suchclassify convertible preferred stock 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 transfers between Levels 1, 2, and 3 during the nine months ended December 31, 2019 and 2018.

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

(In thousands)

 

Recorded value as of

December 31, 2019

 

 

Active markets for identical asset or liabilities

(Level 1)

 

 

Quoted prices in similar instruments and observable inputs

(Level 2)

 

 

Active markets for unobservable inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate-owned life insurance — non-current

 

$

910

 

 

 

-

 

 

 

-

 

 

$

910

 

(In thousands)

 

Recorded value as of

March 31, 2019

 

 

Active markets for identical asset or liabilities

(Level 1)

 

 

Quoted prices in similar instruments and observable inputs

(Level 2)

 

 

Active markets for unobservable inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate-owned life insurance — non-current

 

$

895

 

 

 

-

 

 

 

-

 

 

$

895

 

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Table of Contents

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, net”temporary equity in the condensed consolidated statementsbalance sheets due to certain contingent redemption clauses that are at the election of operations.

The following table presents a summary of changes in the fairHolders. We increase the carrying value of the Level 3 assets:convertible preferred stock to its redemption value (described below) for all undeclared dividends using the interest method.

 

 

Nine Months Ended

December 31,

 

(In thousands)

 

2019

 

 

2018

 

Corporate-owned life insurance:

 

 

 

 

 

 

 

 

Balance on April 1

 

$

895

 

 

$

853

 

Unrealized loss relating to instruments held at reporting date

 

 

(11

)

 

 

(12

)

Purchases, sales, issuances and settlements, net

 

 

26

 

 

 

27

 

Balance on December 31

 

$

910

 

 

$

868

 

The Convertible Preferred Stock has the following rights, preferences and restrictions (the Certificate of Amendment included as Exhibit 3.1 to our Current Report on Form 8-K, filed on May 26, 2020, defines all terms not otherwise defined below):

19Voting

The Holders will be entitled to one vote for each share of Convertible Preferred Stock upon all matters presented to the common shareholders of the Company, and except as otherwise provided by the Amended Articles of Incorporation of the Company or required by law, the Holders and common shareholders will vote together as one class on all matters. Additionally, certain matters specific to the Convertible Preferred Stock will require the approval of two-thirds of the outstanding Convertible Preferred Stock, voting as a separate class.

Liquidation Preference

Upon a liquidation, dissolution or winding up of the Company, each share of Convertible Preferred Stock will be entitled to receive an amount per share equal to the greater of (i) the purchase price paid by the Purchaser, plus all accrued and unpaid dividends (the “Liquidation Preference”) and (ii) the amount that the Holder would have been entitled to receive at such time if the Convertible Preferred Stock were converted into common stock.


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Table of Contents

Redemption

On and after the fifth anniversary of the date the Convertible Preferred Stock is initially issued, the Company will have the right, and the Holders will have the right to require the Company, in each case, at the initiating party’s election, to redeem all, but not less than all, of the then-outstanding Convertible Preferred Stock for an amount equal to the Liquidation Preference.

Conversion

Each Holder will have the right, at its option, to convert its Convertible Preferred Stock, in whole or in part, into fully paid and non-assessable shares of common stock at a conversion price equal to $20.1676 per share (as may be adjusted from time to time, as described in the Certificate of Amendment).

Subject to certain conditions, the Company may, at its option, require conversion of all of the outstanding shares of Convertible Preferred Stock to common stock if, at any time after November 22, 2023, the daily volume-weighted average price of the Company’s common stock is at least 150% of the conversion price for at least 20 trading days during the 30 consecutive trading days immediately preceding the date the Company notifies the Holders of the election to convert.

Dividends

The Holders are entitled to dividends on the Liquidation Preference at the rate of 5.25% per annum, payable semi-annually either (i) 50% in cash and 50% in kind as an increase in the then-current Liquidation Preference or (ii) 100% in cash, at the option of the Company. The Holders are not entitled to participate in dividends declared or paid on the common stock on an as-converted basis; however, certain anti-dilution adjustments to the Convertible Preferred Stock may be made in the event of such dividends.

The Convertible Preferred Stock ranks senior to the Company’s common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Upon a liquidation, dissolution or winding up of the Company, each share of Convertible Preferred Stock will be entitled to receive an amount per share equal to the greater of (i) the Liquidation Preference and (ii) the amount that the Holder would have been entitled to receive at such time if the Convertible Preferred Stock were converted into common stock.

Change in Control Events

Upon certain change of control events involving the Company, the Company has the right, and each Holder has the right, in each case, at the initiating party’s election, to require the Company to repurchase all or a portion of its then-outstanding shares of Convertible Preferred Stock for cash consideration equal to (i) 150% of the then-current Liquidation Preference for a change of control occurring prior to the third anniversary of the date the Convertible Preferred Stock is initially issued, (ii) 125% of the then-current Liquidation Preference for a change of control occurring on or following the third anniversary and prior to the fifth anniversary of the date the Convertible Preferred Stock is initially issued and (iii) 100% of the then-current Liquidation Preference for a change of control occurring on or following the fifth anniversary of the date the Convertible Preferred Stock is initially issued.

Standstill Restrictions

The Purchaser and its affiliates are subject to certain customary standstill provisions that restrict them from, among other actions, acquiring additional securities of the Company if such acquisition would result in the Purchaser beneficially owning in excess of 25% of the outstanding shares of common stock of the Company until the later of the third anniversary of the date the Convertible Preferred Stock is initially issued and the date on which the Purchaser no longer has record or beneficial ownership of common stock and Convertible Preferred Stock that constitute at least 10% of the outstanding common stock.

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Table of Contents

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 managementbelieves 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 endedMarch 31, 2019,2020, 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 endedMarch 31, 2019.2020. Information provided in the MD&A may includeforward-looking statements that involve risks and uncertainties. Many factors couldcause actual results to be materially different from those contained in the forward-lookingstatements. See “Forward-Looking Information” on page 29 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 endedMarch 31, 2019 2020for additional informationconcerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Recent Developments

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The outbreak has reached all geographic regions in which we do business, and government authorities around the world have implemented extensive measures attempting to contain the spread and mitigate the effects of the virus, including travel bans and restrictions, border closings, quarantines, shelter-in-place orders, closures of non-essential businesses, and social distancing requirements. The global spread of COVID-19 and the actions taken in response have negatively impacted us, our customers, our suppliers and the many communities in which we do business. The overall extent and duration of economic and business disruption is not currently known. In response to these challenges, we quickly adjusted our business policies and practices for employees to work from home and have taken other measures to continue our operations with safety as our priority.

We continuously monitor and assess the impact of the COVID-19 pandemic, including recommendations and orders from government and public health authorities. We are working to help our customers maintain their operations during this difficult time while managing our teams to be prepared for continuously changing demand for our products and services.

During the first quarter, revenue was negatively impacted by delays and reduced spending attributed to the impact of the COVID-19 pandemic on our customers’ operational priorities and as a result of various one-time recurring revenue related and other concessions we have given to customers to help them during this time of need. Due to the pandemic, we have seen a reduction or delay in customer contracts and we have been unable to conduct face-to-face meetings with existing or prospective customers, present in-person demonstrations of our solutions, or host or attend in-person trade shows and conferences. Limitations on access to the facilities of our customers have also impacted our ability to deliver some of our products, complete certain implementations, and provide in-person consulting and training services, negatively impacting our ability to recognize revenue. We continued to experience high recurring revenue renewal rates during the first quarter. We have also begun to offer new software modules of our solutions designed to help our customers address challenges created by the pandemic now and into the future. Despite our strong first quarter recurring renewal rates and new solution offerings, we cannot predict how the pandemic will impact our results in future periods, including to the extent that customers delay or miss payments, customers defer, reduce, or refrain from placing orders or renewing subscriptions or maintenance arrangements, or travel restrictions and site access restrictions remain necessary.

We continue to conduct business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications. These modifications may continue to delay or reduce sales and harm productivity and collaboration. In addition, during the first quarter of our fiscal 2021, we reduced discretionary costs, implemented a hiring freeze on non-essential positions and reduced payroll and

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Table of Contents

related costs through layoffs, employee furloughs, employee retirement benefit limitations, and salary decreases for executive team members and certain other employees of the Company. These actions may have an adverse impact on us, particularly if they remain in place for an extended period.

We may take further actions that alter our business operations as the situation evolves. As a result, the ultimate impact of the COVID-19 pandemic and the effects of the operational alterations we have made in response on our business, financial condition, liquidity, and financial results cannot be predicted at this time.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on our consolidated financial condition or results of operations as of and for the quarter ended June 30, 2020. However, we plan to continue deferring the timing of employer payroll tax payments and accelerating the refund of AMT credits as permitted by the CARES Act.

MAK Capital Investment

In May 2020, we entered into an agreement to sell to MAK Capital One, LLC (“MAK Capital”) $35 million of convertible preferred stock carrying a 5.25% dividend that will be convertible into shares of the Company’s common stock. The transaction resulted in the issuance of 1,735,457 preferred shares which added $35 million in preferred stock to the Company’s balance sheet and increased our cash balance by the $35 million investment less closing costs of $0.9 million. The 5.25% dividends will accumulate and increase the liquidation preference of the preferred stock for any undeclared amounts.

Our Business

Agilysys has been a leader in hospitality software for more than 40 years, delivering innovative guest-centric technology solutions for casinos, hotels, resorts, cruise ships, managed foodservice providers, stadiums and arenas. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), property management systems (PMS), inventory and procurement, payment solutions, and related hospitality applications, to manage the entire guest journey. Agilysys is known for its leadership in hospitality, its broad product offerings and its customer-centric service. Some of the largest hospitality companies around the world use Agilysys solutions to help improve guest loyalty, drive revenue growth, and increase operational efficiencies.

efficiencies and support social distancing. The Company has just one reportable segment serving the global hospitality industry. Agilysys operates across the Americas,North America, Europe, the Middle East, Africa, Asia-Pacific, and India with headquarters located in Alpharetta, GA. For more information, visit www.agilysys.com.Georgia.

Our top priority isWe strive 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

Putting the customer first with world class support and services

Accelerating our product development

Accelerating our product development

Improving organizational efficiency and teamwork

Improving organizational efficiency and teamwork

Developing our employees and leaders

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 by improving the breadth and depth of our product set

Growing revenue through international expansion

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.

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Table of Contents

Revenue - Defined

WeAs 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 of 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

Revenue - We present revenue net of sales returns and allowances

Products revenue – Revenue earned from the sales of software licenses, third party hardware and operating systems.

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Table of Contents

 

Products revenue – Revenue earned from the sales of software licenses, third party hardware and operating systems.

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

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

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

Results of Operations

Third FirstFiscal Quarter 2020 2021Compared to Third FirstFiscal Quarter 20192020

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the three months ended December 31, 2019June 30, 2020 and 2018:2019:

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Increase (decrease)

 

 

June 30,

 

 

Increase (decrease)

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

12,126

 

 

$

10,232

 

 

$

1,894

 

 

 

18.5

%

 

$

5,239

 

 

$

10,869

 

 

$

(5,630

)

 

 

-51.8

%

Support, maintenance and subscription services

 

 

20,965

 

 

 

19,345

 

 

 

1,620

 

 

 

8.4

 

 

 

20,497

 

 

 

20,082

 

 

 

415

 

 

 

2.1

 

Professional services

 

 

8,896

 

 

 

6,437

 

 

 

2,459

 

 

 

38.2

 

 

 

4,071

 

 

 

7,438

 

 

 

(3,367

)

 

 

-45.3

 

Total net revenue

 

 

41,987

 

 

 

36,014

 

 

 

5,973

 

 

 

16.6

 

 

 

29,807

 

 

 

38,389

 

 

 

(8,582

)

 

 

-22.4

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products (inclusive of developed technology amortization)

 

 

9,639

 

 

 

8,371

 

 

 

1,268

 

 

 

15.1

 

 

 

3,015

 

 

 

8,623

 

 

 

(5,608

)

 

 

-65.0

 

Support, maintenance and subscription services

 

 

4,841

 

 

 

3,909

 

 

 

932

 

 

 

23.8

 

 

 

4,306

 

 

 

4,181

 

 

 

125

 

 

 

3.0

 

Professional services

 

 

6,443

 

 

 

5,087

 

 

 

1,356

 

 

 

26.7

 

 

 

3,936

 

 

 

5,571

 

 

 

(1,635

)

 

 

-29.3

 

Total cost of goods sold

 

 

20,923

 

 

 

17,367

 

 

 

3,556

 

 

 

20.5

 

 

 

11,257

 

 

 

18,375

 

 

 

(7,118

)

 

 

-38.7

 

Gross profit

 

$

21,064

 

 

$

18,647

 

 

$

2,417

 

 

 

13.0

%

 

$

18,550

 

 

$

20,014

 

 

$

(1,464

)

 

 

-7.3

%

Gross profit margin

 

 

50.2

%

 

 

51.8

%

 

 

 

 

 

 

 

 

 

 

62.2

%

 

 

52.1

%

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

$

11,285

 

 

$

10,059

 

 

$

1,226

 

 

 

12.2

%

 

$

8,266

 

 

$

10,064

 

 

$

(1,798

)

 

 

-17.9

%

Sales and marketing

 

 

4,918

 

 

 

5,217

 

 

 

(299

)

 

 

(5.7

)

 

 

2,601

 

 

 

4,498

 

 

 

(1,897

)

 

 

(42.2

)

General and administrative

 

 

6,084

 

 

 

5,865

 

 

 

219

 

 

 

3.7

 

 

 

5,719

 

 

 

5,874

 

 

 

(155

)

 

 

-2.6

 

Depreciation of fixed assets

 

 

854

 

 

 

651

 

 

 

203

 

 

 

31.2

 

 

 

723

 

 

 

213

 

 

 

510

 

 

 

239.4

 

Amortization of intangibles

 

 

608

 

 

 

675

 

 

 

(67

)

 

 

(9.9

)

 

 

461

 

 

 

678

 

 

 

(217

)

 

 

(32.0

)

Restructuring, severance and other charges

 

 

11

 

 

 

58

 

 

 

(47

)

 

nm

 

Severance and other charges

 

 

1,203

 

 

 

231

 

 

 

972

 

 

 

420.8

 

Operating loss

 

$

(2,696

)

 

$

(3,878

)

 

$

1,182

 

 

 

(30.5

)%

 

$

(423

)

 

$

(1,544

)

 

$

1,121

 

 

 

(72.6

)%

Operating loss percentage

 

 

(6.4

)%

 

 

(10.8

)%

 

 

 

 

 

 

 

 

 

 

(1.4

)%

 

 

(4.0

)%

 

 

 

 

 

 

 

 

 

nm - not meaningful

2120


Table of Contents

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,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

28.9

%

 

 

28.4

%

 

 

17.6

%

 

 

28.3

%

Support, maintenance and subscription services

 

 

49.9

 

 

 

53.7

 

 

 

68.8

 

 

 

52.3

 

Professional services

 

 

21.2

 

 

 

17.9

 

 

 

13.6

 

 

 

19.4

 

Total net revenue

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

23.0

%

 

 

23.2

%

 

 

10.1

%

 

 

22.5

%

Support, maintenance and subscription services

 

 

11.5

 

 

 

10.9

 

 

 

14.4

 

 

 

10.9

 

Professional services

 

 

15.3

 

 

 

14.1

 

 

 

13.3

 

 

 

14.5

 

Total cost of goods sold

 

 

49.8

%

 

 

48.2

%

 

 

37.8

%

 

 

47.9

%

Gross profit

 

 

50.2

%

 

 

51.8

%

 

 

62.2

%

 

 

52.1

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

 

26.9

%

 

 

27.9

%

 

 

27.7

%

 

 

26.2

%

Sales and marketing

 

 

11.7

 

 

 

14.5

 

 

 

8.7

 

 

 

11.7

 

General and administrative

 

 

14.5

 

 

 

16.3

 

 

 

19.2

 

 

 

15.3

 

Depreciation of fixed assets

 

 

2.0

 

 

 

1.8

 

 

 

2.5

 

 

 

0.5

 

Amortization of intangibles

 

 

1.5

 

 

 

1.9

 

 

 

1.5

 

 

 

1.8

 

Restructuring, severance and other charges

 

 

0.0

 

 

 

0.2

 

Severance and other charges

 

 

4.0

 

 

 

0.6

 

Operating loss

 

 

(6.4

)%

 

 

(10.8

)%

 

 

(1.4

)%

 

 

(4.0

)%

 

Net revenue. Total net revenue increased $6.0decreased $8.6 million, or 16.6%22.4%, during the thirdfirst quarter of fiscal 20202021 compared to the thirdfirst quarter of fiscal 2019.2020. Products revenue increased $1.9decreased $5.6 million, or 18.5%51.8%, due to increasedlower sales of third-party hardwarecombined with delayed deliveries resulting from customer restrictions including new customers and expansion with existing customers.temporary site closures in response to the COVID-19 pandemic. Support, maintenance and subscription services revenue increased $1.6$0.4 million, or 8.4%2.1%, compared to the thirdfirst quarter of fiscal 20192020 driven by continued growth in subscription-based service revenue, which increased 24.8%8.6% during the thirdfirst quarter of fiscal 20202021 compared to the thirdfirst quarter of fiscal 2019.2020. The growth rate in our support, maintenance and subscription services is significantly lower than we have reported in recent quarters due to one-time COVID-19 related financial relief we provided to certain customers during the first quarter of fiscal 2021 to help them as they deal with temporary site closures during the period. Professional services revenue increased $2.5decreased $3.4 million, or 38.2%45.3%, due to ongoinglower sales combined with delayed installations and integration of our software solutions for our growingresulting from travel and customer base.restrictions including temporary site closures in response to the COVID-19 pandemic.

Gross profit and gross profit margin. Our total gross profit increased $2.4decreased $1.5 million, or 13.0%7.3%, for the thirdfirst quarter of fiscal 20202021 and total gross profit margin decreasedincreased from 51.8%52.1% to 50.2%62.2%. Products gross profit increased $0.6was flat at $2.2 million for the three months ended June 30, 2021 and 2020, respectively. Products gross profit margin increased approximately 232 basis pointsfrom 20.7% to 20.5%. The improvement is primarily related42.5% due to increased product revenue on a partially fixed cost base which includesthe absence of software development cost amortization.amortization during the first quarter of fiscal 2021 following the impairment of our rGuest suite of products during the fourth quarter of fiscal 2020 (see further discussion of the impairment in Note 4 to the condensed consolidated financial statements). Support, maintenance and subscription services gross profit increased $0.7$0.3 million and gross profit margin decreased 28819 basis points to 76.9%79.0%. The margin decrease is the result of costs incurred for the expansionCOVID-19 related financial relief we provided to certain customers during the first fiscal quarter of our teams and infrastructure to continue to support and host customers.fiscal 2021. Professional services gross profit increased $1.1decreased $1.7 million and gross profit margin increased 660 basis pointsdecreased from 25.1% to 27.6%3.3% due to the increased efficiencies of implementation projects during the current quarter following the hiring and training of additional team members at the beginning of fiscal 2020 to meet growingdrop in demand for professional services.services due to travel and customer restrictions including temporary site closures in response to the COVID-19 pandemic.

Operating expenses

Operating expenses, excluding legal settlements, restructuring, severance and other charges, increased $1.3decreased $3.6 million, or 5.7%16.7%, during the thirdfirst quarter of fiscal 20202021 compared with the thirdfirst quarter of fiscal 2019.2020.

Product development. Product development increased $1.2decreased $1.8 million, or 12.2%17.9%, in the thirdfirst quarter of fiscal 2021 due to employee furloughs and layoffs, temporary salary reductions, lower incentive pay and employee benefits, a temporary hiring freeze effectively eliminating recruiting fees, and significantly reduced travel and outside service expenses due to employees working from home.

21


Table of Contents

Sales and marketing. Sales and marketing decreased $1.9 million, or 42.2%, in the first quarter of fiscal 2021 compared with the first quarter of fiscal 2020 due primarily to an increase in headcountemployee furloughs and additional rent expense related to our India Development Center.layoffs, temporary salary reductions, lower incentive pay and employee benefits, significantly reduced travel and the absence of in-person trade shows and conference activity.

22


Table of Contents

SalesGeneral and marketing. Salesadministrative. General and marketingadministrative decreased $0.3by $0.2 million, or 5.7%2.6%, in the thirdfirst quarter of fiscal 2021 compared with the first quarter of fiscal 2020 compared withdue to employee furloughs and layoffs, temporary salary reductions, lower incentive pay and employee benefits offset by an increase in share-based compensation.

Severance and other charges. Severance, and other charges increased $1.0 million in the thirdfirst quarter of fiscal 20192021 due to the overall consistency of sales and marketing team composition, compensation and activities.

General and administrative. General and administrative increased by $0.2 million, or 3.7%, in the third quarter of fiscal 2020 compared with the third quarter of fiscal 2019 due primarily to increases in headcount and improvement of our internal systems to support our growing organization and business requirements.severance charges resulting from layoffs.

Other (Income) Expenses

 

Three months ended

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

(Unfavorable) favorable

 

 

June 30,

 

 

(Unfavorable) favorable

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income)

 

$

(92

)

 

$

(83

)

 

$

9

 

 

 

10.8

%

Interest income

 

$

(21

)

 

$

(80

)

 

$

(59

)

 

 

(73.8

)%

Interest expense

 

 

25

 

 

 

3

 

 

 

(22

)

 

nm

 

 

 

1

 

 

 

1

 

 

 

0

 

 

nm

 

Other (income) expense, net

 

 

(142

)

 

 

68

 

 

 

210

 

 

nm

 

Total other (income), net

 

$

(209

)

 

$

(12

)

 

$

197

 

 

nm

 

Other expense, net

 

 

106

 

 

 

85

 

 

 

(21

)

 

nm

 

Total other (income) expense, net

 

$

86

 

 

$

6

 

 

$

(80

)

 

nm

 

nm - not meaningful

Interest income.Interest income consists of interest earned on cash equivalents including short-term investments in certificates of deposit, commercial paper, treasury bills and commercial paper.money market funds.

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

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

Income Taxes

 

Three months ended

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

December 31,

 

 

(Unfavorable) favorable

 

June 30,

 

 

(Unfavorable) favorable

(Dollars in thousands)

 

2019

 

 

2018

 

 

$

 

 

%

 

2020

 

 

2019

 

 

$

 

 

%

Income tax expense

 

$

95

 

 

$

182

 

 

$

87

 

 

nm

 

$

8

 

 

$

25

 

 

$

17

 

 

nm

Effective tax rate

 

 

(3.8

)%

 

 

(4.7

)%

 

 

 

 

 

 

 

 

(1.6

)%

 

 

(1.6

)%

 

 

 

 

 

 

nm - not meaningful

For the three months ended December 31,June 30, 2020 and 2019, and 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, 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 an immaterial reduction in unrecognized tax benefits may occur based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are consistently subject to tax audits; due to the nature of examinations in multiple jurisdictions, changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.

23


Table of Contents

Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets in the U.S. and certain foreign jurisdictions, as management believes that it is more likely than not that we will not realize the benefits of these deductible differences. 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.

Results of Operations

First Nine Months Fiscal 2020 Compared to First Nine Months Fiscal 2019

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the nine months ended December 31, 2019 and 2018:

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Increase (decrease)

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

34,868

 

 

$

28,081

 

 

$

6,787

 

 

 

24.2

%

Support, maintenance and subscription services

 

 

61,377

 

 

 

56,130

 

 

 

5,247

 

 

 

9.3

 

Professional services

 

 

24,854

 

 

 

20,013

 

 

 

4,841

 

 

 

24.2

 

Total net revenue

 

 

121,099

 

 

 

104,224

 

 

 

16,875

 

 

 

16.2

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

28,056

 

 

 

23,204

 

 

 

4,852

 

 

 

20.9

 

Support, maintenance and subscription services

 

 

13,676

 

 

 

11,960

 

 

 

1,716

 

 

 

14.3

 

Professional services

 

 

18,071

 

 

 

14,775

 

 

 

3,296

 

 

 

22.3

 

Total cost of goods sold

 

 

59,803

 

 

 

49,939

 

 

 

9,864

 

 

 

19.8

 

Gross profit

 

$

61,296

 

 

$

54,285

 

 

$

7,011

 

 

 

12.9

%

Gross profit margin

 

 

50.6

%

 

 

52.1

%

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

$

32,127

 

 

$

27,299

 

 

$

4,828

 

 

 

17.7

%

Sales and marketing

 

 

14,307

 

 

 

14,363

 

 

 

(56

)

 

 

(0.4

)

General and administrative

 

 

17,998

 

 

 

17,047

 

 

 

951

 

 

 

5.6

 

Depreciation of fixed assets

 

 

1,774

 

 

 

1,933

 

 

 

(159

)

 

 

(8.2

)

Amortization of intangibles

 

 

1,900

 

 

 

1,892

 

 

 

8

 

 

 

0.4

 

Restructuring, severance and other charges

 

 

438

 

 

 

948

 

 

 

(510

)

 

 

(53.8

)

Legal settlements, net

 

 

(125

)

 

 

126

 

 

 

(251

)

 

nm

 

Operating Loss

 

$

(7,123

)

 

$

(9,323

)

 

$

2,200

 

 

 

(23.6

)%

Operating loss percentage

 

 

(5.9

)%

 

 

(8.9

)%

 

 

 

 

 

 

 

 

24


Table of Contents

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,

 

Net revenue:

 

2019

 

 

2018

 

Products

 

 

28.8

%

 

 

26.9

%

Support, maintenance and subscription services

 

 

50.7

 

 

 

53.9

 

Professional services

 

 

20.5

 

 

 

19.2

 

Total net revenue

 

 

100.0

%

 

 

100.0

%

Cost of goods sold:

 

 

 

 

 

 

 

 

Products

 

 

23.2

%

 

 

22.3

%

Support, maintenance and subscription services

 

 

11.3

 

 

 

11.4

 

Professional services

 

 

14.9

 

 

 

14.2

 

Total cost of goods sold

 

 

49.4

%

 

 

47.9

%

Gross profit

 

 

50.6

%

 

 

52.1

%

Operating expenses:

 

 

 

 

 

 

 

 

Product development

 

 

26.5

%

 

 

26.2

%

Sales and marketing

 

 

11.8

 

 

 

13.8

 

General and administrative

 

 

14.9

 

 

 

16.3

 

Depreciation of fixed assets

 

 

1.4

 

 

 

1.9

 

Amortization of intangibles

 

 

1.6

 

 

 

1.8

 

Restructuring, severance and other charges

 

 

0.4

 

 

 

0.9

 

Legal settlements, net

 

 

(0.1

)

 

 

0.1

 

Operating loss

 

 

(5.9

)%

 

 

(8.9

)%

Net revenue. Total net revenue increased $16.9 million, or 16.2%, during the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. Products revenue increased $6.8 million, or 24.2%, due to increased sales of third-party hardware including new customers and expansion with existing customers. Support, maintenance and subscription services revenue increased $5.3 million, or 9.3%, compared to the first nine months of fiscal 2019 driven by support and maintenance for the growth in customers using our on premise software products along with continued increases in subscription-based service revenue, which increased 22.2% during the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. Professional services revenue increased $4.8 million, or 24.2%, due to ongoing installation and integration of our software solutions for our growing customer base.

Gross profit and gross profit margin. Our total gross profit increased $7.0 million, or 12.9%, for the first nine months of fiscal 2020 and total gross profit margin decreased slightly from 52.1% to 50.6%. Products gross profit increased $2.0 million and gross profit margin increased approximately 217 basis points to 19.5%. The improvement is primarily related to increased product revenue on a partially fixed cost base which includes software development cost amortization. Support, maintenance and subscription services gross profit increased $3.5 million and gross profit margin decreased 97 basis points to 77.7%. Our slight margin decrease is due to the expansion of our teams and infrastructure to continue supporting and hosting customers. Professional services gross profit increased $1.5 million and gross profit margin increased 112 basis points to 27.3% due to the increased efficiencies of implementation projects during the first nine months of fiscal 2020 following the hiring and training of additional team members at the beginning of fiscal 2020 to meet growing demand for professional services.

Operating expenses

Operating expenses, excluding legal settlements, restructuring, severance and other charges, increased $5.6 million, or 8.9%, during the first nine months of fiscal 2020 compared with the first nine months of fiscal 2019.

Product development. Product development increased $4.8 million, or 17.7%, in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. $2.5 million of this increase was due to increased employee compensation and hiring costs from our continued expansion of our product development teams. The remaining $2.3 million was due to the reduction of cost capitalization. The products in our rGuest platform for which we capitalized costs reached general availability be the beginning of the second quarter of fiscal 2019. These products join our well established products with the application of agile development practices in a more dynamic development process that involves higher frequency releases of product features and functions. The Company capitalized $2.0 million of external use software costs, and $0.3 million of internal use software development costs in first quarter of fiscal 2019. The Company capitalized no software development costs in the first nine months of fiscal 2020.

25


Table of Contents

Sales and marketing. Sales and marketing decreased slightly by $0.1 million, or 0.4%, in the first nine months of fiscal 2020 compared with the first nine months of fiscal 2019 due to the overall consistency of sales and marketing team composition, compensation and activities.

General and administrative. General and administrative increased by $1.0 million, or 5.6%, in the first nine months of fiscal 2020 compared with the first nine months of fiscal 2019 due primarily to increases in headcount and improvement of our internal systems to support our growing organization and business requirements.

Restructuring, severance, and other charges. Restructuring, severance, and other charges decreased $0.5 million during the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 due to a reduction in severance payments and executive search fees.

Legal settlements, net. The Company received approximately $0.1 million of settlement funds during the first nine months of fiscal 2020 due to the resolution of an outstanding lawsuit involving a former employee; no further activity is expected related to this matter.

Other (Income) Expenses

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

(Unfavorable) favorable

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

$

 

 

%

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (income)

 

$

(287

)

 

$

(235

)

 

$

52

 

 

 

22.1

%

Interest expense

 

 

28

 

 

 

8

 

 

 

(20

)

 

nm

 

Other expense, net

 

 

50

 

 

 

293

 

 

 

243

 

 

nm

 

Total other (income) expense, net

 

$

(209

)

 

$

66

 

 

$

275

 

 

nm

 

nm - not meaningful

Interest income. Interest income consists of interest earned on cash equivalents including short-term investments in treasury bills and commercial paper.

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

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

Income Taxes

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

December 31,

 

 

(Unfavorable) favorable

(Dollars in thousands)

 

2019

 

 

2018

 

 

$

 

 

%

Income tax expense

 

$

161

 

 

$

186

 

 

$

25

 

 

nm

Effective tax rate

 

 

(2.3

)%

 

 

(2.0

)%

 

 

 

 

 

 

nm - not meaningful

For the nine months ended December 31, 2019 and 2018, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets in the U.S. and certain foreign jurisdictions, 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 an immaterial reduction in unrecognized tax benefits may occur based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are consistently subject to tax audits; due to the nature of examinations in multiple jurisdictions, changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.

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Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets in the U.S. and certain foreign jurisdictions, as management believes that it is more likely than not that we will not realize the benefits of these deductible differences. 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.

 

Liquidity and Capital Resources

Overview

Our operating cash requirements consist primarily of working capital needs, operating expenses, capital expenditures, payments on indebtedness outstanding, which primarily consists of lease obligations and employee tax withholdings payments for share-based compensation.preferred stock dividends.

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Table of Contents

At June 30, 2020, 100% of our cash and cash equivalents, of which 96% were located in the United States, were deposited in bank accounts. We believe thatcredit risk is limited with respect to our cash flow fromand cash equivalents balances.

The MAK Capital investment increased our cash balance by $34.1 million after closing costs of $0.9 million. As described above under Recent Developments and further in Note 11 to the condensed consolidated financial statements, the transaction resulted in the issuance of 1,735,457 preferred shares with an annual dividend rate of 5.25%.

Our liquidity could be negatively impacted by a decrease in demand for our products and services, including the impact of changes in customer buying behavior due to circumstances over which we have no control, including, but not limited to, the effects of the COVID-19 pandemic. If we require additional funding, for operating activities, cash on hand of $41.9 million as of December 31, 2019 andneeds, a business acquisition or otherwise, we may need access to more capital, markets will provide adequate funds to meet our short- and long-term liquidity requirements.which could involve borrowings under a credit facility.

As of December 31, 2019June 30, 2020, and March 31, 2019, our total debt was approximately $0.1 million, comprised of finance lease obligations in both periods.

At December 31, 2019, 100% of our cash and cash equivalents of which 93% is located in the United States, were deposited in bank accounts or invested in highly liquid investments with original maturity from the date of acquisition of three months or less, including investments in treasury bills and commercial paper. We believe credit risk is limited with respectthat cash flow from operating activities, cash on hand of $74.6 million as of June 30, 2020 and access to capital markets will provide adequate funds to meet our cashshort- and cash equivalents balances.long-term liquidity requirements.

Cash Flow

 

Nine Months Ended

December 31,

 

 

 

Three Months Ended

June 30,

 

 

(In thousands)

 

2019

 

 

2018

 

 

 

2020

 

 

2019

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

5,273

 

 

$

1,719

 

 

 

$

(4,929

)

 

$

(1,913

)

 

Investing activities

 

 

(3,035

)

 

 

(3,826

)

 

 

 

(245

)

 

 

(573

)

 

Financing activities

 

 

(1,071

)

 

 

(702

)

 

 

 

33,123

 

 

 

(1,028

)

 

Effect of exchange rate changes on cash

 

 

(33

)

 

 

(139

)

 

 

 

2

 

 

 

(24

)

 

Net increase (decrease) in cash and cash equivalents

 

$

1,134

 

 

$

(2,948

)

 

 

$

27,951

 

 

$

(3,538

)

 

 

Cash flow used in operating activities. Cash flow provided byused in operating activities was $5.3$4.9 million in the first ninethree months of fiscal 2020.2021. The provisionuse of cash was due primarily to the offset of $16.3$2.6 million in non-cash expense including depreciation, amortization, and share-based compensation, against our operating loss of $7.1$0.5 million and the decrease of $3.6$6.9 million in net operating assets and liabilities.

Cash flow used in investing activities. Consists primarily of property and equipment purchases.

Cash flow provided by financing activities. During the first ninethree months of fiscal 2021, the $33.1 million provided by financing activities consisted primarily of $34.1 million in preferred stock issuance proceeds from the MAK Capital investment, net of issuance costs, offset by $0.9 million related to the repurchase of shares to satisfy employee tax withholding on share-based compensation. During the first three months of fiscal 2020, the $3.0 million used in investing activities consisted of property and equipment purchases. During the first nine months of fiscal 2019, the $3.8 million used in investing activities consisted of $1.6 million of property and equipment purchases along with $2.2 million of capitalized software development costs.

Cash flow used in financing activities. During the first nine months of fiscal 2020, the $1.1$1.0 million used in financing activities was primarily related to the repurchase of shares to satisfy employee tax withholding on share-based compensation.

Contractual Obligations

As of December 31, 2019,June 30, 2020, there were no significant changes to our contractual obligations as presented in our Annual Report for the year ended March 31, 2019.2020.

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.

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Table of Contents

Critical Accounting Policies

A detailed description of our significant accounting policies is included in our Annual Report for the year ended March 31, 2019. There2020. Other than as described in Note 2 to the condensed consolidated financial statements, there have been no material changes in our significant accounting policies and estimates since March 31, 2019 except as noted in Note 2, Summary2020.

23


Table of Significant Accounting Policies.Contents

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. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions, or beliefs and are subject to a number of factors, assumptions, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include 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, 2019.2020. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking 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, 2019.2020. There have been no material changes in our market risk exposures since March 31, 2019.2020.

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.

ChangeChanges in Internal Control over Financial Reporting

In connection with the adoption of Topic 842, we assessed the impactThere were no changes to our internal controlscontrol over financial reporting, as defined in Rules 13a-15(f) and noted no material changes15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the periodthree months ended December 31, 2019.June 30, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28Due to the COVID-19 pandemic, a significant number of our employees are now working from home. The design of our financial reporting processes, systems, and controls allows for remote execution with accessibility to secure data.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller and Treasurer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be achieved. Further, the design of a control system must reflect the impact of resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all possible future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

24


Table of Contents

PART II. OTHER INFORMATION

None.

Item 1A. Risk Factors

ThereOther than as described below, there have been no material changes in the risk factors included in our Annual Report for the fiscal year ended March 31, 20192020 that may materially affect our business, results of operations, or financial condition.

The full extent to which the COVID-19 pandemic will adversely affect our business and results of operations cannot be predicted at this time. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview— Recent Developments” of this report for a more detailed discussion of the impact of COVID-19 on our business.

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.

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Table of Contents

Item 6.    Exhibits

 

 

 

 

 

 

 

 

 

 

 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.

 

 

 

101101.INS

 

The following materials from our quarterly report on Form 10-Q forInline XBRL Instance Document – the quarter ended December 31, 2019, formattedinstance document does not appear in the Interactive Data File because XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at December 31, 2019 and March 31, 2019, (ii) Condensed Consolidated Statements of Operations fortags are embedded within the three and nine months ended December 31, 2019, (iii) Condensed Consolidated Statements of Comprehensive Loss forInline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the three and nine months ended December 31, 2019, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2019 and 2018, (v) Condensed Consolidated Statements of Shareholders' Equity for the three and nine months ended December 31, 2019 and (vi) Notes to Condensed Consolidated Financial Statements for the three and nine months ended December 31, 2019.Inline XBRL document)

 

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SIGNATURESIGNATURE

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 29,July 31, 2020

/s/ Anthony S. PritchettWilliam David Wood III

 

 

Anthony S. PritchettWilliam David Wood III

 

 

Chief Financial Officer

 

 

(Principal Financial Officer and Duly Authorized Officer)

 

 

3127