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Agilysys Inc. – ‘10-Q’ for 12/31/20

On: Wednesday, 1/27/21, at 4:22pm ET · For: 12/31/20 · Accession #: 1564590-21-2613 · File #: 0-05734

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 1/27/21  Agilysys Inc.                     10-Q       12/31/20   60:7.7M                                   ActiveDisclosure/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    833K 
 2: EX-10.1     Material Contract                                   HTML    127K 
 3: EX-10.2     Material Contract                                   HTML     54K 
 4: EX-10.3     Material Contract                                   HTML     45K 
 5: EX-10.4     Material Contract                                   HTML     49K 
 6: EX-10.5     Material Contract                                   HTML     46K 
 7: EX-10.6     Material Contract                                   HTML     40K 
 8: EX-31.1     Certification -- §302 - SOA'02                      HTML     21K 
 9: EX-31.2     Certification -- §302 - SOA'02                      HTML     21K 
10: EX-31.3     Certification -- §302 - SOA'02                      HTML     21K 
11: EX-32       Certification -- §906 - SOA'02                      HTML     21K 
18: R1          Document and Entity Information                     HTML     72K 
19: R2          Condensed Consolidated Balance Sheets               HTML    114K 
20: R3          Condensed Consolidated Balance Sheets               HTML     33K 
                (Parenthetical)                                                  
21: R4          Condensed Consolidated Statements of Operations     HTML    120K 
                (Unaudited)                                                      
22: R5          Condensed Consolidated Statements of Comprehensive  HTML     31K 
                Income (Loss) (Unaudited)                                        
23: R6          Condensed Consolidated Statements of Cash Flows     HTML     76K 
                (Unaudited)                                                      
24: R7          Condensed Consolidated Statements of Shareholders'  HTML     74K 
                Equity (Unaudited)                                               
25: R8          Nature of Operations and Financial Statement        HTML     28K 
                Presentation                                                     
26: R9          Summary of Significant Accounting Policies          HTML     26K 
27: R10         Revenue Recognition                                 HTML     35K 
28: R11         Intangible Assets and Software Development Costs    HTML    110K 
29: R12         Additional Balance Sheet Information                HTML     77K 
30: R13         Supplemental Disclosures of Cash Flow Information   HTML     42K 
31: R14         Income Taxes                                        HTML     45K 
32: R15         Commitments and Contingencies                       HTML     23K 
33: R16         Income (Loss) Per Share                             HTML    130K 
34: R17         Share-based Compensation                            HTML    154K 
35: R18         Preferred Stock                                     HTML     29K 
36: R19         Summary of Significant Accounting Policies          HTML     26K 
                (Policies)                                                       
37: R20         Intangible Assets and Software Development Costs    HTML    108K 
                (Tables)                                                         
38: R21         Additional Balance Sheet Information (Tables)       HTML     76K 
39: R22         Supplemental Disclosures of Cash Flow Information   HTML     41K 
                (Tables)                                                         
40: R23         Income Taxes (Tables)                               HTML     41K 
41: R24         Income (Loss) Per Share (Tables)                    HTML    128K 
42: R25         Share-based Compensation (Tables)                   HTML    155K 
43: R26         Revenue Recognition - Narrative (Details)           HTML     39K 
44: R27         Intangible Assets and Software Development Costs -  HTML     73K 
                Schedule of Intangible Assets (Details)                          
45: R28         Intangible Assets and Software Development Costs    HTML     21K 
                (Details Textual)                                                
46: R29         Additional Balance Sheet Information (Details)      HTML     50K 
47: R30         Supplemental Disclosures of Cash Flow Information   HTML     28K 
                (Details)                                                        
48: R31         Income Taxes (Details)                              HTML     23K 
49: R32         Income Taxes (Details Textual)                      HTML     24K 
50: R33         Income (Loss) Per Share (Details)                   HTML     62K 
51: R34         Income (Loss) Per Share (Details Textual)           HTML     19K 
52: R35         Share-based Compensation (Details Textual)          HTML     45K 
53: R36         Share-based Compensation (Details)                  HTML     30K 
54: R37         Share-based Compensation (Details 2)                HTML     65K 
55: R38         Share-based Compensation (Details 3)                HTML     39K 
56: R39         Preferred Stock - (Details Textual)                 HTML     54K 
58: XML         IDEA XML File -- Filing Summary                      XML     96K 
17: XML         XBRL Instance -- agys-10q_20201231_htm               XML   1.51M 
57: EXCEL       IDEA Workbook of Financial Reports                  XLSX     60K 
13: EX-101.CAL  XBRL Calculations -- agys-20201231_cal               XML    145K 
14: EX-101.DEF  XBRL Definitions -- agys-20201231_def                XML    341K 
15: EX-101.LAB  XBRL Labels -- agys-20201231_lab                     XML    817K 
16: EX-101.PRE  XBRL Presentations -- agys-20201231_pre              XML    561K 
12: EX-101.SCH  XBRL Schema -- agys-20201231                         XSD    120K 
59: JSON        XBRL Instance as JSON Data -- MetaLinks              244±   373K 
60: ZIP         XBRL Zipped Folder -- 0001564590-21-002613-xbrl      Zip    218K

‘10-Q’ — Quarterly Report
Document Table of Contents

Page	(sequential)	(alphabetic)	↑Top
		Alternative Formats (Word, et al.) Condensed Consolidated Balance Sheets -- December 31, 2020 (Unaudited) and March 31, 2020 Condensed Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended December 31, 2020 and December 31, 2019 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) -- Three and Nine Months Ended December 31, 2020 and December 31, 2019 Condensed Consolidated Statements of Operations (Unaudited) -- Three and Nine Months Ended December 31, 2020 and December 31, 2019 Condensed Consolidated Statements of Shareholders' Equity (Unaudited) -- Three and Nine Months Ended December 31, 2020 and December 31, 2019 Controls and Procedures December 31, 2020 (Unaudited) and March 31, 2020 Defaults Upon Senior Securities Exhibits Financial Statements (Unaudited) Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Mine Safety Disclosures Nine Months Ended December 31, 2020 and December 31, 2019 Notes to Condensed Consolidated Financial Statements (Unaudited) Other Information Part I. Financial Information Part II. Other Information Quantitative and Qualitative Disclosures About Market Risk Risk Factors Signatures Table of Contents Three and Nine Months Ended December 31, 2020 and December 31, 2019 Unregistered Sales of Equity Securities and Use of Proceeds
1	1st Page – Filing Submission
"	Table of Contents
"	Part I. Financial Information
"	Financial Statements (Unaudited)
"	Condensed Consolidated Balance Sheets -- December 31, 2020 (Unaudited) and March 31, 2020
"	Condensed Consolidated Statements of Operations (Unaudited) -- Three and Nine Months Ended December 31, 2020 and December 31, 2019
"	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) -- Three and Nine Months Ended December 31, 2020 and December 31, 2019
"	Condensed Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended December 31, 2020 and December 31, 2019
"	Condensed Consolidated Statements of Shareholders' Equity (Unaudited) -- Three and Nine Months Ended December 31, 2020 and December 31, 2019
"	Notes to Condensed Consolidated Financial Statements (Unaudited)
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Quantitative and Qualitative Disclosures About Market Risk
"	Controls and Procedures
"	Part II. Other Information
"	Legal Proceedings
"	Risk Factors
"	Unregistered Sales of Equity Securities and Use of Proceeds
"	Defaults Upon Senior Securities
"	Mine Safety Disclosures
"	Other Information
"	Exhibits
"	Signatures

This is an HTML Document rendered as filed. [ Alternative Formats ]

iX: C: C: C: C: C: C:

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM i 10-Q

(Mark One)

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

For the quarterly period ended i December 31, 2020

i ☐	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 i 0-5734

i AGILYSYS, INC.

(Exact name of registrant as specified in its charter)

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

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

( i 770) i 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
i Common Shares, without par value	i AGYS	i NASDAQ

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. i 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). i 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	☐	i Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	i ☐

Emerging growth company i ☐

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 i ☐ 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 22, 2021 was i 23,637,552.

Table of Contents

AGILYSYS, INC.

Index


Part I. Financial Information
	Item 1	Financial Statements (Unaudited)	3

		Condensed Consolidated Balance Sheets – December 31, 2020 (Unaudited) and March 31, 2020	3

		Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended December 31, 2020 and December 31, 2019	4

		Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - Three and Nine Months Ended December 31, 2020 and December 31, 2019	5

		Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended December 31, 2020 and December 31, 2019	6

		Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - Three and Nine Months Ended December 31, 2020 and December 31, 2019	7

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	28

	Item 4	Controls and Procedures	28

Part II. Other Information

	Item 1	Legal Proceedings	29

	Item 1A	Risk Factors	29

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29

	Item 3	Defaults Upon Senior Securities	29

	Item 4	Mine Safety Disclosures	29

	Item 5	Other Information	29

	Item 6	Exhibits	30

Signatures			31

Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)	December 31, 2020 Unaudited			March 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	i 92,608		$	i 46,653
Accounts receivable, net of allowance for expected credit losses of $ i 1,334 and for doubtful accounts of $ i 1,634, respectively		i 30,940			i 35,869
Contract assets		i 2,744			i 2,125
Inventories		i 1,322			i 3,887
Prepaid expenses and other current assets		i 4,338			i 4,874
Total current assets		i 131,952			i 93,408
Property and equipment, net		i 9,519			i 12,230
Operating lease right-of-use assets		i 12,600			i 13,829
Goodwill		i 19,622			i 19,622
Intangible assets, net		i 8,400			i 8,400
Deferred income taxes, non-current		i 1,234			i 764
Other non-current assets		i 5,874			i 6,309
Total assets	$	i 189,201		$	i 154,562
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	i 5,435		$	i 13,403
Contract liabilities		i 39,360			i 42,244
Accrued liabilities		i 8,853			i 9,033
Operating lease liabilities, current		i 4,755			i 4,719
Finance lease obligations, current		i 22			i 24
Total current liabilities		i 58,425			i 69,423
Deferred income taxes, non-current		i 894			i 880
Operating lease liabilities, non-current		i 9,353			i 10,617
Finance lease obligations, non-current		i 10			i 25
Other non-current liabilities		i 3,740			i 1,860
Commitments and contingencies (see Note 8)
Series A convertible preferred stock, no par value		i 35,000			—
Shareholders' equity:
Common shares, without par value, at $ i i 0.30 / stated value; i i 80,000,000 / shares authorized; i i 31,606,831 / shares issued; and i 23,637,552 and i 23,609,398 shares outstanding at December 31, 2020 and March 31, 2020, respectively		i 9,482			i 9,482
Treasury shares, i 7,969,279 and i 7,997,433 at December 31, 2020 and March 31, 2020, respectively		( i 2,391	)		( i 2,401	)
Capital in excess of stated value		i 14,584			i 5,491
Retained earnings		i 60,116			i 58,984
Accumulated other comprehensive (loss) income		( i 12	)		i 201
Total shareholders' equity		i 81,779			i 71,757
Total liabilities and shareholders' equity	$	i 189,201		$	i 154,562

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended

December 31,

Nine Months Ended

December 31,

(In thousands, except share data)

2020

2019

2020

2019

Net revenue:

Products

i 7,599

i 12,126

i 19,396

i 34,868

Support, maintenance and subscription services

i 22,846

i 20,965

i 65,647

i 61,377

Professional services

i 6,230

i 8,896

i 15,797

i 24,854

Total net revenue

i 36,675

i 41,987

i 100,840

i 121,099

Cost of goods sold:

Products (inclusive of developed technology amortization)

i 3,660

i 9,639

i 9,625

i 28,056

Support, maintenance and subscription services

i 4,655

i 4,841

i 13,515

i 13,676

Professional services

i 4,164

i 6,443

i 11,802

i 18,071

Total cost of goods sold

i 12,479

i 20,923

i 34,942

i 59,803

Gross profit

i 24,196

i 21,064

i 65,898

i 61,296

Gross profit margin

i 66.0

i 50.2

i 65.3

i 50.6

Operating expenses:

Product development

i 12,376

i 11,285

i 28,900

i 32,127

Sales and marketing

i 3,327

i 4,918

i 8,278

i 14,307

General and administrative

i 7,509

i 6,084

i 18,446

i 17,998

Depreciation of fixed assets

i 722

i 854

i 2,160

i 1,774

Amortization of intangibles

i 521

i 608

i 1,490

i 1,900

Severance and other charges

i 1,552

i 11

i 2,762

i 438

Legal settlements, net

i 50

( i 125

)

Total operating expense

i 26,007

i 23,760

i 62,086

i 68,419

Operating (loss) income

( i 1,811

)

( i 2,696

)

i 3,812

( i 7,123

)

Other (income) expense:

Interest income

( i 27

)

( i 92

)

( i 76

)

( i 287

)

Interest expense

i 9

i 25

i 13

i 28

Other expense (income), net

i 95

( i 142

)

i 284

i 50

(Loss) income before taxes

( i 1,888

)

( i 2,487

)

i 3,591

( i 6,914

)

Income tax expense

i 182

i 95

i 311

i 161

Net (loss) income

( i 2,070

)

( i 2,582

)

i 3,280

( i 7,075

)

Series A convertible preferred stock issuance costs

( i 1,031

)

Series A convertible preferred stock dividends

( i 459

)

( i 1,117

)

Net (loss) income attributable to common shareholders

( i 2,529

)

( i 2,582

)

i 1,132

( i 7,075

)

Weighted average shares outstanding - basic

i 23,429

i 23,240

i 23,419

i 23,230

Net (loss) income per share - basic:

( i 0.11

)

( i 0.11

)

i 0.05

( i 0.30

)

Weighted average shares outstanding - diluted

i 23,429

i 23,240

i 23,903

i 23,230

Net (loss) income per share - diluted:

( i 0.11

)

( i 0.11

)

i 0.05

( i 0.30

)

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended December 31,						Nine Months Ended December 31,
(In thousands)	2020			2019			2020			2019
Net (loss) income	$	( i 2,070	)	$	( i 2,582	)	$	i 3,280		$	( i 7,075	)
Other comprehensive (loss) income, net of tax:
Unrealized foreign currency translation adjustments		( i 64	)		( i 31	)		( i 213	)		i 30
Total comprehensive (loss) income	$	( i 2,134	)	$	( i 2,613	)	$	i 3,067		$	( i 7,045	)

See accompanying notes to unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended December 31,
(In thousands)	2020			2019
Operating activities
Net income (loss)	$	i 3,280		$	( i 7,075	)
Adjustments to reconcile income (loss) from operations to net cash provided by operating activities
Depreciation		i 2,160			i 1,774
Amortization of intangibles		i 1,490			i 1,900
Amortization of developed technology		—			i 9,432
Deferred income taxes		( i 499	)		( i 313	)
Share-based compensation		i 9,312			i 3,156
Changes in operating assets and liabilities		( i 659	)		( i 3,601	)
Net cash provided by operating activities		i 15,084			i 5,273
Investing activities
Capital expenditures		( i 1,076	)		( i 3,009	)
Additional investments in corporate-owned life insurance policies		( i 2	)		( i 26	)
Net cash used in investing activities		( i 1,078	)		( i 3,035	)
Financing activities
Repurchase of common shares to satisfy employee tax withholding		( i 1,069	)		( i 1,053	)
Series A convertible preferred stock issuance proceeds, net of issuance costs		i 33,969			—
Payment of preferred stock dividends		( i 1,117	)		—
Principal payments under long-term obligations		( i 18	)		( i 18	)
Net cash provided by (used in) financing activities		i 31,765			( i 1,071	)
Effect of exchange rate changes on cash		i 184			( i 33	)
Net increase in cash and cash equivalents		i 45,955			i 1,134
Cash and cash equivalents at beginning of period		i 46,653			i 40,771
Cash and cash equivalents at end of period	$	i 92,608		$	i 41,905

See accompanying notes to unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

Three Months Ended December 31, 2020

Common Shares

Capital in

Accumulated

Issued

In Treasury

excess of

other

(In thousands)

Stated

value

Stated

value

stated

value

Retained

earnings

comprehensive

income (loss)

Total

Balance at September 30, 2020

i 31,607

i 9,482

( i 8,019

)

( i 2,406

)

i 8,151

i 62,645

i 52

i 77,924

Share-based compensation

—

i 6,558

—

i 6,558

Restricted shares issued, net

—

i 43

i 13

( i 13

)

—

Shares issued upon exercise of SSARs

—

i 10

i 3

( i 3

)

—

Shares withheld for taxes upon exercise of stock options, SSARs or vesting of restricted shares

—

( i 3

)

( i 1

)

( i 109

)

—

( i 110

)

Net loss

—

( i 2,070

)

—

( i 2,070

)

Series A convertible preferred stock dividends

—

( i 459

)

—

( i 459

)

Unrealized translation adjustments

—

( i 64

)

( i 64

)

Balance at December 31, 2020

i 31,607

i 9,482

( i 7,969

)

( i 2,391

)

i 14,584

i 60,116

( i 12

)

i 81,779

Three Months Ended December 31, 2019

Common Shares

Capital in

Accumulated

Issued

In Treasury

excess of

other

(In thousands)

Stated

value

Stated

value

stated

value

Retained

earnings

comprehensive

income (loss)

Total

Balance at September 30, 2019

i 31,607

i 9,482

( i 7,949

)

( i 2,386

)

i 2,909

i 88,558

( i 198

)

i 98,365

Share-based compensation

—

i 1,184

—

i 1,184

Restricted shares issued, net

—

( i 1

)

( i 1

)

i 1

—

Net loss

—

( i 2,582

)

—

( i 2,582

)

Unrealized translation adjustments

—

( i 31

)

( i 31

)

Balance at December 31, 2019

i 31,607

i 9,482

( i 7,950

)

( i 2,387

)

i 4,094

i 85,976

( i 229

)

i 96,936

Nine Months Ended December 31, 2020

Common Shares

Capital in

Accumulated

Issued

In Treasury

excess of

other

(In thousands)

Stated

value

Stated

value

stated

value

Retained

earnings

comprehensive

income (loss)

Total

Balance at March 31, 2020

i 31,607

i 9,482

( i 7,997

)

( i 2,401

)

i 5,491

i 58,984

i 201

i 71,757

Share-based compensation

—

i 9,393

—

i 9,393

Restricted shares issued, net

—

i 2

i 1

( i 1

)

—

Shares issued upon exercise of SSARs

—

i 38

i 12

( i 12

)

—

Shares withheld for taxes upon exercise of stock options, SSARs or vesting of restricted shares

—

( i 12

)

( i 3

)

( i 287

)

—

( i 290

)

Net income

—

i 3,280

—

i 3,280

Series A convertible preferred stock issuance costs

—

( i 1,031

)

—

( i 1,031

)

Series A convertible preferred stock dividends

—

( i 1,117

)

—

( i 1,117

)

Unrealized translation adjustments

—

( i 213

)

( i 213

)

Balance at December 31, 2020

i 31,607

i 9,482

( i 7,969

)

( i 2,391

)

i 14,584

i 60,116

( i 12

)

i 81,779

Nine Months Ended December 31, 2019

Common Shares

Capital in

Accumulated

Issued

In Treasury

excess of

other

(In thousands)

Stated

value

Stated

value

stated

value

Retained

earnings

comprehensive

income (loss)

Total

Balance at March 31, 2019

i 31,607

i 9,482

( i 8,105

)

( i 2,433

)

i 781

i 93,051

( i 259

)

i 100,622

Share-based compensation

—

i 3,479

—

i 3,479

Restricted shares issued, net

—

i 143

i 42

( i 42

)

—

Shares issued upon exercise of SSARs

—

i 17

i 5

( i 5

)

—

Shares withheld for taxes upon exercise of stock options, SSARs or vesting of restricted shares

—

( i 5

)

( i 1

)

( i 119

)

—

( i 120

)

Net loss

—

( i 7,075

)

—

( i 7,075

)

Unrealized translation adjustments

—

i 30

Balance at December 31, 2019

i 31,607

i 9,482

( i 7,950

)

( i 2,387

)

i 4,094

i 85,976

( i 229

)

i 96,936

See accompanying notes to unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Table amounts in thousands, except per share data)

1. Nature of Operations and Financial Statement Presentation

Nature of Operations

Agilysys 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 healthcare. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), property management systems (PMS), inventory and procurement, payments, and 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, Europe, the Middle East, Africa, Asia-Pacific, and India with headquarters located in Alpharetta, GA.

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 top 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 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 2021 refers to the fiscal year ending March 31, 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, 2020, as well as the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss), Condensed Consolidated Statements of Shareholders’ Equity for the three months and nine months ended December 31, 2020 and 2019, and Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 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, 2020, filed with the Securities and Exchange Commission (SEC) on May 22, 2020.

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Use of estimates

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 December 31, 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, 2020, included in our Annual Report on Form 10-K. We describe our accounting policy for Series A convertible preferred stock further below. There have been no other material changes to our significant accounting policies from those disclosed therein.

Adopted and Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. The new standard will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. We are currently assessing the impact of adopting this standard on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which affects general principles within Topic 740, Income Taxes, and is meant to simplify and reduce the cost of accounting for income taxes. The new standard will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently reviewing this standard but do not expect it will have a material impact on our 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. We adopted ASU 2018-15 as of April 1, 2020 with no 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. We adopted ASU 2018-13 as of April 1, 2020 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. We adopted ASU 2017-04 as of April 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 requires entities to measure expected credit losses for certain financial assets held at the

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reporting date using a current expected credit loss model, which is based on historical experience, adjusted for current conditions and reasonable and supportable forecasts. The Company’s financial instruments within the scope of this guidance primarily includes accounts receivable and contract assets. We adopted ASU 2016-13 as of April 1, 2020 under the modified 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 ASU 2016-13 did not have a material impact on our condensed consolidated financial statements.

3. Revenue Recognition

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 refund.

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

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

Revenue for hardware sales is recognized when the product is shipped to the customer and when obligations that affect the customer's final acceptance of the arrangement have been fulfilled. 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 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 $ i 7.6 million and $ i 19.4 million, and $ i 12.1 million and $ i 34.9 million for the first three and nine months ended December 31, 2020 and 2019, respectively. Revenue recognized over time (support, maintenance and subscription services and professional services) totaled $ i 29.1 million and $ i 81.4 million, and $ i 29.9 million and $ i 86.2 million for the three and nine months ended December 31, 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 $ i 9.1 million and $ i 8.6 million for the three months ended December 31, 2020 and 2019, respectively, and $ i 38.1 million and $ i 34.6 million for the nine months ended December 31, 2020 and 2019, respectively. Because the right to the transaction became unconditional, we transferred to accounts receivable from contract assets at the beginning of the period, $ i 0.1 million and $ i 0.2 million for the three months ended December 31, 2020 and 2019, respectively, and $ i 1.8 million and $ i 2.7 million for the nine months ended December 31, 2020 and 2019, respectively.

Our arrangements are for a period of one year or less. As a result, unsatisfied performance obligations as of December 31, 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.

We had $ i 3.0 million and $ i 3.3 million of capitalized sales incentive costs as of December 31, 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, 2020, we expensed $ i 0.7 million and $ i 2.0 million, respectively, of sales commissions, which included amortization of capitalized amounts of $ i 0.3 million and $ i 1.1 million, respectively. During the comparable periods ending December 31, 2019, we expensed $ i 1.3 million and $ i 3.5 million, respectively, of sales commissions, which included amortization of capitalized amounts of $ i 0.3 million and $ i 1.0 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 and March 31, 2020

Gross

Net

carrying

Accumulated

carrying

(In thousands)

amount

amortization

Impairment

amount

Amortized intangible assets:

Customer relationships

i 10,775

( i 10,775

)

i —

Non-competition agreements

i 2,700

( i 2,700

)

i —

Developed technology

i 10,398

( i 10,398

)

i —

Trade names

i 230

( i 230

)

i —

Patented technology

i 80

( i 80

)

i —

i 24,183

( i 24,183

)

i —

Trade names

i 8,400

N/A

i —

i 8,400

Total intangible assets

i 32,583

( i 24,183

)

i —

i 8,400

(In thousands)

Software development costs

i 67,541

( i 45,535

)

( i 22,006

)

i —

As of March 31, 2020, management determined the net realizable value of the remaining capitalized software development costs for certain solutions within our rGuest suite of products no longer exceeded their carrying value, and as a result, recorded non-cash impairment charges of $ i 22.0 million for the year ended March 31, 2020. The impact 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 carrying value of capitalized software development costs to zero with no remaining amortization expense to be recognized in future periods.

Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed was $ i 3.1 million and $ i 9.4 million for the three and nine months ended December 31, 2019. These charges are included as costs of goods sold - products in our condensed consolidated statements of operations.

/ i

5. Additional Balance Sheet Information

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

(In thousands)	December 31, 2020		March 31, 2020
Accrued liabilities:
Salaries, wages, and related benefits	$	i 5,053	$	i 6,945
Payroll taxes deferred under CARES Act		i 911		—
Other taxes payable		i 2,084		i 1,649
Accrued legal settlements		i 50		—
Severance liabilities		i 329		i 32
Professional fees		i 55		i 50
Other		i 371		i 357
Total	$	i 8,853	$	i 9,033
Other non-current liabilities:
Uncertain tax positions	$	i 1,123	$	i 1,103
Asset retirement obligations		i 170		i 170
Payroll taxes deferred under CARES Act		i 911		—
Employee benefit obligations		i 1,466		i 511
Other		i 70		i 76
Total	$	i 3,740	$	i 1,860

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6. Supplemental Disclosures of Cash Flow Information

Additional information related to the condensed consolidated statements of cash flows is as follows:

	Nine Months Ended December 31,
(In thousands)		2020			2019
Cash (receipts) for interest, net	$	( i 63	)	$	( i 259	)
Cash payments for income taxes, net		i 195			i 252
Cash payments for operating leases		i 4,039			i 3,560
Cash payments for finance leases		i 21			i 27
Accrued capital expenditures		i 64			i 48

/ i

7. Income Taxes

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

	Three Months Ended December 31,						Nine Months Ended December 31,
(Dollars in thousands)	2020			2019			2020			2019
Income tax expense	$	i 182		$	i 95		$	i 311		$	i 161
Effective tax rate		( i 9.6	)%		( i 3.8	)%		i 8.7	%		( i 2.3	)%

For the three months ended December 31, 2020, the effective tax rate was different than the statutory tax rate due primarily to the recognition of net operating losses that were offset by increased valuation allowance in the U.S, certain foreign and state tax effects and other U.S. permanent book to tax differences. For the nine months ended December 31, 2020, the effective tax rate was different than the statutory tax rate due primarily to the utilization of net operating losses that were offset by decreased valuation allowance in the U.S, certain foreign and state tax effects and other U.S. permanent book to tax differences. For the three and nine months ended December 31, 2019, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses in the U.S. and certain foreign jurisdictions that were offset by increased 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 and maintain 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.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). i The CARES Act provides, among other provisions, for the deferral of the employer-paid portion of social security taxes through the end of 2020, with i 50% of the deferred amount due December 31, 2021 and the remaining i 50% due December 31, 2022 / .

/ i

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 U.S. Court of Appeals for the Federal Circuit affirmed the lower court’s summary judgement with respect to all claims except for two, which were not asserted against Agilysys. Ameranth’s writ of certiorari to the United States Supreme Court was denied in October

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2020. Subsequently, Ameranth filed further pleading amendments and discovery requests with the District Court, which were opposed by the defendants.

We were not a party to the appeal, and it is currently unclear what impact the summary judgement ruling 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.

9. Income (Loss) per Share

The following data shows the amounts used in computing income (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,
(In thousands, except per share data)	2020			2019			2020			2019
Numerator:
Net income (loss)	$	( i 2,070	)	$	( i 2,582	)	$	i 3,280		$	( i 7,075	)
Series A convertible preferred stock issuance costs		—			—			( i 1,031	)		—
Series A convertible preferred stock dividends		( i 459	)		—			( i 1,117	)		—
Net income (loss) attributable to common shareholders	$	( i 2,529	)	$	( i 2,582	)	$	i 1,132		$	( i 7,075	)

Denominator:
Weighted average shares outstanding - basic		i 23,429			i 23,240			i 23,419			i 23,230
Dilutive SSARs		—			—			i 377			—
Dilutive unvested restricted shares		—			—			i 107			—
Weighted average shares outstanding - diluted		i 23,429			i 23,240			i 23,903			i 23,230

Income (loss) per share - basic:	$	( i 0.11	)	$	( i 0.11	)	$	i 0.05		$	( i 0.30	)
Income (loss) per share - diluted:	$	( i 0.11	)	$	( i 0.11	)	$	i 0.05		$	( i 0.30	)

Anti-dilutive stock options, SSARs, restricted shares, performance shares and preferred shares		i 3,389			i 1,469			i 2,692			i 1,414

Basic income (loss) per share is computed as net income (loss) attributable to common shareholders divided by the weighted average basic shares outstanding. The outstanding shares used to calculate the weighted average basic shares excludes i 204,009 and i 416,960 of restricted shares at December 31, 2020 and 2019, respectively, as these shares were issued but were not vested and therefore, not considered outstanding for purposes of computing basic income (loss) per share at the balance sheet dates.

Diluted income (loss) per share includes the effect of all potentially dilutive securities on earnings per share. We have stock-settled appreciation rights ("SSARs"), unvested restricted shares, and preferred 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 grants because doing so would be anti-dilutive.

/ i

10. Share-based Compensation

We may grant incentive stock options, non-qualified stock options, SSARs, restricted shares, and performance shares under our shareholder-approved 2020 Equity Incentive Plan ("2020 Plan") for up to i 2.25 million common shares, plus i 868,864 common shares, the number of shares that were remaining for grant under the 2016 Stock Incentive Plan ("2016 Plan") as of the effective date of the 2020 Plan, plus the number of shares remaining for grant under the 2016 Plan that are forfeited, settled in cash, canceled or expired. The aggregate number of shares that may be granted under the 2020 Plan is i 3,118,864.

We may distribute authorized but unissued shares or treasury shares to satisfy share option and SSAR exercises or restricted share and performance share grants.

The fair value of restricted share and performance share grants is based on the closing price of our common shares on the grant date. For stock option and SSAR grants subject to a service condition, we estimate the fair value on the grant date using the Black-Scholes-Merton option pricing model with inputs including the closing market price at grant date, exercise price and

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assumptions regarding the risk-free interest rate, expected volatility of our common shares based on historical volatility, and expected term as estimated using the simplified method. We record compensation expense for restricted shares and SSAR grants subject to a service condition utilizing the graded vesting method. For SSAR grants subject to a market condition, we estimate the fair value on the grant date through a lattice option pricing model that utilizes a Monte Carlo analysis with inputs including the closing market price at grant date, exercise price, share price threshold, remaining contractual term and assumptions regarding the risk-free interest rate, suboptimal exercise factor, and expected volatility of our common shares based on historical volatility. We record compensation expense for SSAR grants subject to a market condition over the derived service period, which is an output of the lattice option pricing model.

The grant date is defined as the date all necessary approvals are obtained. All grants during the nine months ended December 31, 2020 were made under the 2020 Plan, which was approved by our shareholders on November 19, 2020. The Compensation Committee of our Board of Directors approved substantially all grants under the 2020 Plan for the nine months ended December 31, 2020 on June 2, 2020. The closing market price of our common stock was $ i 39.65 and $ i 20.02 on November 19, 2020 and June 2, 2020, respectively.

The following table summarizes the share-based compensation expense for SSARs, restricted and performance grants included in the condensed consolidated statements of operations:

Three Months Ended

December 31,

Nine Months Ended

December 31,

(In thousands)

2020

2019

2020

2019

Product development

i 3,362

i 639

i 3,773

i 1,579

Sales and marketing

i 666

i 104

i 735

i 217

General and administrative

i 2,602

i 586

i 4,804

i 1,360

Total share-based compensation expense

i 6,630

i 1,329

i 9,312

i 3,156

Stock-Settled Appreciation Rights

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

The following table summarizes the activity during the nine months ended December 31, 2020 for SSARs awarded under the 2020 and 2016 Plans:

Number of

Rights

Weighted-Average Exercise Price

Remaining

Contractual Term

Aggregate

Intrinsic Value

(per right)

(in years)

Outstanding at April 1, 2020

i 1,644,888

i 21.07

Granted

i 2,234,858

i 20.02

Exercised

( i 80,255

)

i 11.93

Forfeited

( i 68,201

)

i 19.79

Expired

( i 2,118

)

i 14.22

Outstanding at December 31, 2020

i 3,729,172

i 20.66

5.5

i 66,069

Exercisable at December 31, 2020

i 995,713

i 14.73

3.5

i 23,544

Vested and expected to vest at December 31, 2020

i 3,729,172

i 20.66

5.5

i 66,069

As of December 31, 2020, total unrecognized share-based compensation expense related to unvested service condition SSARs was $ i 21.1 million, which is expected to be recognized over a weighted-average vesting period of i 2.2 years.

As of December 31, 2020, total unrecognized share-based compensation expense related to unvested market condition SSARs was $ i 21.9 million, which is expected to be recognized over a weighted-average vesting period of i 1.0 years. If the market condition for any SSARs is met prior to the end of their expected vesting period, all remaining unrecognized compensation expense for those SSARs will be recognized at that time.

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Restricted Shares

We granted shares to certain of our Directors, executives and key employees, the vesting of which is service-based. i The following table summarizes the activity during the nine months ended December 31, 2020 for restricted shares awarded under the 2020 and 2016 Plans:

	Number of Shares			Weighted-Average Grant-Date Fair Value
				(per share)
Outstanding at April 1, 2020		i 178,462		$	i 19.89
Granted		i 56,527			i 39.63
Forfeited		( i 30,980	)		i 20.65
Outstanding at December 31, 2020		i 204,009		$	i 25.24

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, 2020, total unrecognized share-based compensation expense related to unvested restricted stock was $ i 2.4 million, which is expected to be recognized over a weighted-average vesting period of i 1.3 years.

Performance Shares

We awarded certain restricted shares to our Chief Executive Officer, the vesting of which is performance based. The number of shares that vested were based on relative attainment of a performance metric and any unvested shares were forfeited upon settlement of the bonus.

The following table summarizes the activity during the nine months ended December 31, 2020 for the performance shares awarded under the 2016 Plan:

	Number of Shares
Outstanding at April 1, 2020		i 30,120
Granted		—
Vested		( i 6,714	)
Forfeited		( i 23,406	)
Outstanding at December 31, 2020		—

/ i

11. Preferred Stock

Series A Convertible Preferred Stock

On May 22, 2020, we completed the sale of i 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 $ i 35 million. We incurred issuance costs of $ i 1.0 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, Michael Kaufman, the Chairman of the Company’s Board of Directors, is the Chief Executive Officer of MAK Capital One LLC.

Accounting Policy

We classify convertible preferred stock as temporary equity in the condensed consolidated balance sheets due to certain contingent redemption clauses that are at the election of the Holders. We increase the carrying value of the convertible preferred stock to its redemption value (described below) for all undeclared dividends using the interest method.

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):

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Voting

i 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.

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 $ i 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 i November 22, 2023, the daily volume-weighted average price of the Company’s common stock is at least i 150% of the conversion price for at least i 20 trading days during the i 30 consecutive trading days immediately preceding the date the Company notifies the Holders of the election to convert.

Dividends

i The Holders are entitled to dividends on the Liquidation Preference at the rate of i 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

i 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 i 25% of the outstanding shares of common stock of the Company until the later of the third anniversary of the date the Convertible Preferred

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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 i 10% of the outstanding common stock.

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

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

— what factors affect our business;

— what our earnings and costs were;

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

— where the earnings came from;

— how our financial condition was affected; and

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

The MD&A analyzes changes in specific line items in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding our consolidated financial condition and results of operations. This Quarterly Report on Form 10-Q updates information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 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 ended March 31, 2020. Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from those contained in the forward-looking statements. See “Forward-Looking Information” on page 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 ended March 31, 2020 for additional information concerning 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

During the first nine months of our fiscal 2021, 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 seen a significant reduction in face-to-face meetings with existing or prospective customers, in-person demonstrations of our solutions, and have been unable to 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 nine months of the fiscal year. We also have an expanded product base that includes new products which allow for contactless capabilities and other features which help promote social distancing and guest safety. Despite our strong first nine months of recurring renewal rates and new solution offerings, we cannot predict how the pandemic will impact our results in the short-term future, 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 likewise cannot predict our results in the long-term future as our customers adapt to the lingering and perhaps more permanent impact of the pandemic on the hospitality industry.

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We continue to conduct business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and mostly 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 nine months of our fiscal 2021, we reduced discretionary costs, implemented a hiring freeze on non-essential positions and reduced payroll and related costs through layoffs, employee furloughs, employee retirement benefit limitations, and temporary salary decreases for executive team members and certain other employees of the Company. Such actions may have an adverse impact on us, particularly those actions that remain in place for an extended period as we continue to manage through the uncertainties around the timing and extent of the pandemic’s impact.

We may take further actions or retract previous actions that alter our business operations as the situation continues to evolve. 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. We deferred $1.8 million in employer payroll tax payments under the CARES Act as of December 31, 2020. The CARES Act did not have a material impact on our consolidated results of operations as of and for the nine months ended December 31, 2020.

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 $1.0 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 cloud-native subscription and on-premise guest-centric technology solutions for gaming, hotels, resorts and cruise, corporate foodservice management, restaurants, universities, stadia, airport foodservice and healthcare. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), property management systems (PMS), inventory and procurement, payments, and related 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, increase operational efficiencies and support social distancing. The Company has just one reportable segment serving the global hospitality industry. Agilysys operates across the Americas, Europe, the Middle East, Africa, Asia-Pacific, and India with headquarters located in Alpharetta, Georgia.

We 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 with world class support and services

•

Accelerating our product development

•

Improving organizational efficiency and teamwork

•

Developing our employees and leaders

•

Growing revenue by improving the breadth and depth of our product set

•

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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Revenue - Defined

As required by the SEC, we separately present revenue earned as products revenue, support, maintenance and subscription services revenue or professional services revenue in our condensed consolidated statements 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.

•

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.

Results of Operations

Third Fiscal Quarter 2021 Compared to Third Fiscal Quarter 2020

Net Revenue and Operating (Loss)

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

	Three months ended
	December 31,						Increase (decrease)
(In thousands)	2020			2019			$			%
Net revenue:
Products	$	7,599		$	12,126		$	(4,527	)		(37.3	)%
Support, maintenance and subscription services		22,846			20,965			1,881			9.0
Professional services		6,230			8,896			(2,666	)		(30.0	)
Total net revenue		36,675			41,987			(5,312	)		(12.7	)
Cost of goods sold:
Products (inclusive of developed technology amortization)		3,660			9,639			(5,979	)		(62.0	)
Support, maintenance and subscription services		4,655			4,841			(186	)		(3.8	)
Professional services		4,164			6,443			(2,279	)		(35.4	)
Total cost of goods sold		12,479			20,923			(8,444	)		(40.4	)
Gross profit	$	24,196		$	21,064		$	3,132			14.9	%
Gross profit margin		66.0	%		50.2	%
Operating expenses:
Product development	$	12,376		$	11,285		$	1,091			9.7	%
Sales and marketing		3,327			4,918			(1,591	)		(32.4	)
General and administrative		7,509			6,084			1,425			23.4
Depreciation of fixed assets		722			854			(132	)		(15.5	)
Amortization of intangibles		521			608			(87	)		(14.3	)
Severance and other charges		1,552			11			1,541		nm
Operating loss	$	(1,811	)	$	(2,696	)	$	885			32.8	%
Operating (loss) percentage		(4.9	)%		(6.4	)%

nm - not meaningful

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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
	December 31,
	2020			2019
Net revenue:
Products		20.7	%		28.9	%
Support, maintenance and subscription services		62.3			49.9
Professional services		17.0			21.2
Total net revenue		100.0	%		100.0	%
Cost of goods sold:
Products (inclusive of developed technology amortization)		10.0	%		23.0	%
Support, maintenance and subscription services		12.7			11.5
Professional services		11.3			15.3
Total cost of goods sold		34.0	%		49.8	%
Gross profit		66.0	%		50.2	%
Operating expenses:
Product development		33.7	%		26.9	%
Sales and marketing		9.1			11.7
General and administrative		20.5			14.5
Depreciation of fixed assets		2.0			2.0
Amortization of intangibles		1.4			1.5
Severance and other charges		4.2			0.0
Operating loss		(4.9	)%		(6.4	)%

Net revenue. Total net revenue decreased $5.3 million, or 12.7%, during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. Products revenue decreased $4.5 million, or 37.3%, due to lower sales due to delayed customer purchasing decisions as the timing of the hospitality recovery from the COVID-19 pandemic remains unclear. Support, maintenance and subscription services revenue increased $1.9 million, or 9.0%, compared to the third quarter of fiscal 2020 driven by continued growth in subscription-based service revenue that increased 18.1% during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. Professional services revenue decreased $2.7 million, or 30.0%, due to lower sales due to delayed customer purchasing decisions as the timing of the hospitality recovery from the COVID-19 pandemic remains unclear.

Gross profit and gross profit margin. Our total gross profit increased $3.1 million, or 14.9%, for the third quarter of fiscal 2021 and total gross profit margin increased from 50.2% to 66.0% driven by changes in the composition of revenue by category and the absence of software development cost amortization during the third quarter of fiscal 2021. Products gross profit increased $1.5 million, or 58.4%, compared to the third quarter of fiscal 2020 and products gross profit margin increased from 20.5% to 51.8% due to the absence of software development cost amortization during the third quarter of fiscal 2021 and a higher proportion of proprietary software sales over third party products. Support, maintenance and subscription services gross profit increased $2.1 million and gross profit margin increased 272 basis points to 79.6%. The margin increase is the result of increased revenue on a relatively flat cost base. Professional services gross profit decreased $0.4 million due to the delay in professional service projects as customers continued to work towards re-opening their locations. Gross profit margin increased from 27.6% to 33.2% due to improved utilization rates and a slightly larger decrease in the percentage of professional services costs compared to professional services revenue as a result of employee furloughs and layoffs, lower incentive pay and employee benefits.

Operating expenses

Operating expenses, excluding legal settlements, severance and other charges, increased $0.7 million, or 3.0%, during the third quarter of fiscal 2021 compared with the third quarter of fiscal 2020.

Product development. Product development increased $1.1 million, or 9.7%, in the third quarter of fiscal 2021 due to lower cash-based incentive pay and employee benefits offset by higher share-based compensation.

Sales and marketing. Sales and marketing decreased $1.6 million, or 32.4%, in the third quarter of fiscal 2021 compared with the third quarter of fiscal 2020 due to layoffs, temporary reductions in employee benefits, and reduced commission expense due to lower sales levels. The decrease also includes the impact of significantly reduced travel, the absence of in-person trade shows and conference activity, and the ability to conduct more business remotely.

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General and administrative. General and administrative increased by $1.4 million, or 23.4%, in the third quarter of fiscal 2021 compared with the third quarter of fiscal 2020 due to higher share-based compensation offsetting lower cash-based incentive pay and employee benefits.

Severance and other charges. Severance, and other charges increased $1.5 million in the third quarter of fiscal 2021 due to layoffs and other employee terminations.

Other (Income) Expenses

	Three Months Ended
	December 31,						(Unfavorable) favorable
(Dollars in thousands)	2020			2019			$			%
Other (income) expense:
Interest income	$	(27	)	$	(92	)	$	(65	)		(70.7	)%
Interest expense		9			25			16			(64.0	)
Other expense (income), net		95			(142	)		(237	)	nm
Total other expense (income), net	$	77		$	(209	)	$	(286	)	nm

nm - not meaningful

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

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

	Three Months Ended
	December 31,						(Unfavorable) favorable
(Dollars in thousands)	2020			2019			$			%
Income tax expense	$	182		$	95		$	(87	)	nm
Effective tax rate		(9.6	)%		(3.8	)%

nm - not meaningful

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.

Results of Operations

First Nine Months Fiscal 2021 Compared to First Nine Months Fiscal 2020

Net Revenue and Operating Income (Loss)

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

	Nine months ended
	December 31,						Increase (decrease)
(In thousands)	2020			2019			$			%
Net revenue:
Products	$	19,396		$	34,868		$	(15,472	)		(44.4	)%
Support, maintenance and subscription services		65,647			61,377			4,270			7.0
Professional services		15,797			24,854			(9,057	)		(36.4	)
Total net revenue		100,840			121,099			(20,259	)		(16.7	)
Cost of goods sold:
Products (inclusive of developed technology amortization)		9,625			28,056			(18,431	)		(65.7	)
Support, maintenance and subscription services		13,515			13,676			(161	)		(1.2	)
Professional services		11,802			18,071			(6,269	)		(34.7	)
Total cost of goods sold		34,942			59,803			(24,861	)		(41.6	)
Gross profit	$	65,898		$	61,296		$	4,602			7.5	%
Gross profit margin		65.3	%		50.6	%
Operating expenses:
Product development	$	28,900		$	32,127		$	(3,227	)		(10.0	)%
Sales and marketing		8,278			14,307			(6,029	)		(42.1	)
General and administrative		18,446			17,998			448			2.5
Depreciation of fixed assets		2,160			1,774			386			21.8
Amortization of intangibles		1,490			1,900			(410	)		(21.6	)
Severance and other charges		2,762			438			2,324		nm
Legal settlements, net		50			(125	)		175		nm
Operating income (loss)	$	3,812		$	(7,123	)	$	10,935			153.5	%
Operating income (loss) percentage		3.8	%		(5.9	)%

nm - not meaningful

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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:	2020			2019
Products		19.2	%		28.8	%
Support, maintenance and subscription services		65.1			50.7
Professional services		15.7			20.5
Total net revenue		100.0	%		100.0	%
Cost of goods sold:
Products (inclusive of developed technology amortization)		9.5	%		23.2	%
Support, maintenance and subscription services		13.5			11.3
Professional services		11.7			14.9
Total cost of goods sold		34.7	%		49.4	%
Gross profit		65.3	%		50.6	%
Operating expenses:
Product development		28.7	%		26.5	%
Sales and marketing		8.2			11.8
General and administrative		18.3			14.9
Depreciation of fixed assets		2.1			1.4
Amortization of intangibles		1.5			1.6
Severance and other charges		2.7			0.4
Legal settlements, net		0.0			(0.1	)
Operating income (loss)		3.8	%		(5.9	)%

Net revenue. Total net revenue decreased $20.3 million, or 16.7%, during the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020. Products revenue decreased $15.5 million, or 44.4%, due to lower sales combined with delayed deliveries resulting from customer restrictions including temporary site closures in response to the COVID-19 pandemic. Support, maintenance and subscription services revenue increased $4.3 million, or 7.0%, compared to the first nine months of fiscal 2020 driven by continued growth in subscription-based service revenue that increased 17.0% during the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020. The growth rate in our support, maintenance and subscription services is significantly lower than we have reported in recent periods due to one-time COVID-19 related financial relief we provided to certain customers primarily during the first half of fiscal 2021 to help them as they dealt with temporary site closures. Professional services revenue decreased $9.1 million, or 36.4%, due to lower sales combined with delayed installations and integration of our software solutions resulting from travel and customer restrictions including temporary site closures in response to the COVID-19 pandemic.

Gross profit and gross profit margin. Our total gross profit increased $4.6 million, or 7.5%, for the first nine months of fiscal 2021 and total gross profit margin increased from 50.6% to 65.3% driven by changes in the composition of revenue by category and the absence of software development cost amortization. Products gross profit increased $3.0 million, or 43.4%, compared to the first nine months of fiscal 2020 and products gross profit margin increased from 19.5% to 50.4% due to the absence of software development cost amortization during the first nine months of fiscal 2021 along with a higher proportion of proprietary software sales over third party products. Support, maintenance and subscription services gross profit increased $4.4 million and gross profit margin increased 169 basis points to 79.4%. The margin increase is the result of increased revenue on a relatively flat cost base. Professional services gross profit decreased $2.8 million and gross profit margin decreased from 27.3% to 25.3% due to the drop in demand for professional services resulting from travel and customer restrictions including temporary site closures in response to the COVID-19 pandemic.

Operating expenses

Operating expenses, excluding legal settlements, severance and other charges, decreased $8.8 million, or 13.0%, during the first nine months of fiscal 2021 compared with the first nine months of fiscal 2020.

Product development. Product development decreased $3.2 million, or 10.0%, in the first nine months of fiscal 2021 due to temporary salary reductions, lower incentive pay and employee benefits, lower recruiting fees, and significantly reduced travel and outside service expenses due to employees working from home.

Sales and marketing. Sales and marketing decreased $6.0 million, or 42.1%, in the first nine months of fiscal 2021 compared with the first nine months of fiscal 2020 due to temporary reductions in salaries and employee benefits, furloughs, layoffs, and reduced commission expense due to lower sales levels. The decrease also includes the impact of significantly reduced travel, the absence of in-person trade shows and conference activity, and the ability to conduct more business remotely.

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General and administrative. General and administrative increased by $0.4 million, or 2.5%, in the first nine months of fiscal 2021 compared with the first nine months of fiscal 2020 due to increased share-based compensation offsetting decreased cash-based compensation including employee furloughs and layoffs, temporary salary reductions, lower incentive pay and employee benefits.

Severance and other charges. Severance, and other charges increased $2.3 million in the first nine months of fiscal 2021 due to layoffs and other employee terminations.

Other (Income) Expenses


	Nine Months Ended December 31,						(Unfavorable) favorable
(Dollars in thousands)	2020			2019			$			%
Other (income) expense:
Interest income	$	(76	)	$	(287	)	$	(211	)		(73.5	)%
Interest expense		13			28			15		nm
Other expense, net		284			50			(234	)	nm
Total other expense (income), net	$	221		$	(209	)	$	(430	)	nm

nm - not meaningful

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)	2020			2019			$			%
Income tax expense	$	311		$	161		$	(150	)	nm
Effective tax rate		8.7	%		(2.3	)%

nm - not meaningful

For the nine months ended December 31, 2020, the effective tax rate was different than the statutory tax rate due primarily to the utilization of net operating losses that were offset by decreased valuation allowance in the U.S, certain foreign and state tax effects and other U.S. permanent book to tax differences. For the nine months ended December 31, 2019, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses in the U.S. and certain foreign jurisdictions that were offset by increased valuation allowance, certain foreign and state tax effects and other U.S. permanent book to tax differences.

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 preferred stock dividends.

At December 31, 2020, 100% of our cash and cash equivalents, of which 96% were located in the United States, were deposited in bank accounts. We believe credit risk is limited with respect to our cash and cash equivalents balances.

The MAK Capital investment increased our cash balance by $34.0 million after closing costs of $1.0 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

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COVID-19 pandemic. If we require additional funding, for operating needs, a business acquisition or otherwise, we may need access to more capital, which could involve borrowings under a credit facility.

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

We believe that cash flow from operating activities, cash on hand of $92.6 million as of December 31, 2020 and access to capital markets will provide adequate funds to meet our short- and long-term liquidity requirements.

Cash Flow

	Nine Months Ended December 31,
(In thousands)	2020			2019
Net cash provided by (used in):
Operating activities	$	15,084		$	5,273
Investing activities		(1,078	)		(3,035	)
Financing activities		31,765			(1,071	)
Effect of exchange rate changes on cash		184			(33	)
Net increase in cash and cash equivalents	$	45,955		$	1,134

Cash flow provided by operating activities. Cash flow provided by operating activities was $15.1 million in the first nine months of fiscal 2021. The provision of cash was due primarily to the addition of $12.5 million in non-cash expense including depreciation, amortization, and share-based compensation, to our operating income of $3.3 million offset by a decrease of $0.7 million in net operating assets and liabilities.

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

Cash flow provided by (used in) financing activities. During the first nine months of fiscal 2021, the $31.8 million provided by financing activities consisted primarily of $34.0 million in preferred stock issuance proceeds from the MAK Capital investment, net of issuance costs, offset by $1.1 million related to the repurchase of shares to satisfy employee tax withholding on share-based compensation and $1.1 million in preferred stock dividends.

Contractual Obligations

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

Critical Accounting Policies

A detailed description of our significant accounting policies is included in our Annual Report for the year ended March 31, 2020. 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, 2020.

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

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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, 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, 2020. There have been no material changes in our market risk exposures since March 31, 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.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the nine months ended December 31, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Due 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.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Other 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, 2020 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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Item 6. Exhibits




*10.1			Agilysys, Inc. 2020 Equity Incentive Plan

*10.2			Agilysys, Inc. Employee Stock Purchase Plan

*10.3			Form of SARs Award Agreement (Time Vesting)

*10.4			Form SARs Award Agreement (Performance Vesting)

*10.5			Form of Restricted Stock Award Agreement

*10.6			Form of Restricted Stock Award Agreement for Non-Employee Directors

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

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

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

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

101.INS			Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline 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 Inline XBRL document)

*			Denotes a management contract or compensatory plan or arrangement.

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SIGNATURE

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

AGILYSYS, INC.




Date:	January 27, 2021	/s/ *William David Wood III*
		William David Wood III
		Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Officer)

Dates Referenced Herein and Documents Incorporated by Reference

This ‘10-Q’ Filing	Date	Other Filings

	11/22/23
	12/31/22
	12/31/21	10-Q
	12/15/21
	3/31/21	10-K, 10-K/A, 4
Filed on:	1/27/21	SC 13G/A
	1/22/21
For Period end:	12/31/20
	12/15/20
	11/19/20	4, 8-K
	9/30/20	10-Q
	6/2/20
	5/26/20	4, 8-K, SC 13D/A
	5/22/20	10-K, 4, 8-K
	5/11/20	8-K
	4/1/20
	3/31/20	10-K, 10-K/A, 4
	3/27/20
	3/11/20
	12/31/19	10-Q
	9/30/19	10-Q, 8-K
	3/31/19	10-K, 4, 4/A
	4/6/12
		List all Filings

5 Subsequent Filings that Reference this Filing

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 5/19/23  Agilysys Inc.                     10-K        3/31/23   89:18M                                    Donnelley … Solutions/FA
 5/23/22  Agilysys Inc.                     10-K        3/31/22   90:14M                                    Donnelley … Solutions/FA
 7/29/21  Agilysys Inc.                     10-K/A      3/31/21    4:1M                                     ActiveDisclosure/FA
 5/21/21  Agilysys Inc.                     10-K        3/31/21   85:13M                                    ActiveDisclosure/FA
 2/12/21  Agilysys Inc.                     S-8         2/12/21    3:238K                                   ActiveDisclosure/FA

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Filing Submission 0001564590-21-002613 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Agilysys Inc. – ‘10-Q’ for 12/31/20

On: Wednesday, 1/27/21, at 4:22pm ET · For: 12/31/20 · Accession #: 1564590-21-2613 · File #: 0-05734

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Dates Referenced Herein and Documents Incorporated by Reference

5 Subsequent Filings that Reference this Filing

Quarterly Report — Form 10-Q
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‘10-Q’ — Quarterly Report
Document Table of Contents