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

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2019			March 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	38,915		$	40,771
Accounts receivable, net of allowance for doubtful accounts of $632 and $788, respectively		23,117			27,000
Contract assets		3,906			2,921
Inventories		954			2,044
Prepaid expenses and other current assets		5,501			6,272
Total current assets		72,393			79,008
Property and equipment, net		15,290			15,838
Operating lease right-of-use assets		12,717			—
Goodwill		19,622			19,622
Intangible assets, net		8,415			8,438
Software development costs, net		28,264			34,567
Deferred income taxes, non-current		678			443
Other non-current assets		6,416			5,675
Total assets	$	163,795		$	163,591
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,836		$	4,718
Contract liabilities		29,541			38,669
Accrued liabilities		9,984			14,892
Operating lease liabilities, current		4,201			—
Finance lease obligations, current		23			22
Total current liabilities		52,585			58,301
Deferred income taxes, non-current		870			861
Operating lease liabilities, non-current		10,609			—
Finance lease obligations, non-current		28			35
Other non-current liabilities		1,338			3,772
Commitments and contingencies (see Note 8)
Shareholders' equity:
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 23,658,529 and 23,501,193 shares outstanding at September 30, 2019 and March 31, 2019, respectively		9,482			9,482
Treasury shares, 7,948,302 and 8,105,638 at September 30, 2019 and March 31, 2019, respectively		(2,386	)		(2,433	)
Capital in excess of stated value		2,909			781
Retained earnings		88,558			93,051
Accumulated other comprehensive loss		(198	)		(259	)
Total shareholders' equity		98,365			100,622
Total liabilities and shareholders' equity	$	163,795		$	163,591

~~(Unaudited)~~

December 31,
2017 March 31,
2017
(In thousands, except share data)

ASSETS
Current assets:
Cash and cash equivalents $ 37,615
$ 49,255
Accounts receivable, net of allowance for doubtful accounts of $751 and $509, respectively 14,746
15,598
Inventories 2,131
2,211
Prepaid expenses and other current assets 6,849
6,456
Total current assets 61,341
73,520
Property and equipment, net 17,760
16,000
Goodwill 19,622
19,622
Intangible assets, net 8,496
8,530
Software development costs, net 46,086
46,999
Other non-current assets 2,613
2,634
Total assets $ 155,918
$ 167,305
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,175
$ 8,702
Deferred revenue 23,433
29,183
Accrued liabilities 9,843
8,331
Capital lease obligations, current 113
121
Total current liabilities 41,564
46,337
Deferred income taxes, non-current 2,105
3,181
Capital lease obligations, non-current 50
116
Other non-current liabilities 3,985
4,002
Commitments and contingencies (see Note 6)

Shareholders' equity:
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 23,402,512 and 23,210,682 shares outstanding at December 31, 2017 and March 31, 2017, respectively 9,482
9,482
Treasury shares, 8,204,319 and 8,396,149 at December 31, 2017 and March 31, 2017, respectively (2,463 ) (2,519 )
Capital in excess of stated value (2,418 ) (5,782 )
Retained earnings 103,812
112,692
Accumulated other comprehensive loss (199 ) (204 )
Total shareholders' equity 108,214
113,669
Total liabilities and shareholders' equity $ 155,918
$ 167,305

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,						Six Months Ended September 30,
	2019			2018			2019			2018
Net revenue:
Products	$	11,873		$	8,769		$	22,742		$	17,849
Support, maintenance and subscription services		20,329			18,856			40,411			36,785
Professional services		8,520			6,578			15,958			13,576
Total net revenue		40,722			34,203			79,111			68,210
Cost of goods sold:
Products (inclusive of developed technology amortization)		9,794			7,703			18,417			14,833
Support, maintenance and subscription services		4,654			3,977			8,834			8,051
Professional services		6,057			4,774			11,628			9,688
Total cost of goods sold		20,505			16,454			38,879			32,572
Gross profit		20,217			17,749			40,232			35,638
Gross profit margin		49.6	%		51.9	%		50.9	%		52.2	%
Operating expenses:
Product development		10,778			10,151			20,842			17,240
Sales and marketing		4,890			4,393			9,389			9,146
General and administrative		6,038			5,176			11,911			11,181
Depreciation of fixed assets		707			676			920			1,282
Amortization of intangibles		614			674			1,292			1,217
Restructuring, severance and other charges		190			448			421			889
Legal settlements, net		(119	)		35			(119	)		126
Total operating expense		23,098			21,553			44,656			41,081
Operating loss		(2,881	)		(3,804	)		(4,424	)		(5,443	)
Other (income) expense:
Interest income		(114	)		(97	)		(194	)		(152	)
Interest expense		2			3			3			5
Other expense, net		108			28			193			228
Loss before taxes		(2,877	)		(3,738	)		(4,426	)		(5,524	)
Income tax expense		41			53			67			4
Net loss	$	(2,918	)	$	(3,791	)	$	(4,493	)	$	(5,528	)

Weighted average shares outstanding		23,238			23,131			23,225			23,113
Loss per share - basic and diluted:
Loss per share	$	(0.13	)	$	(0.16	)	$	(0.19	)	$	(0.24	)

~~(Unaudited)~~

Three months ended Nine months ended
December 31, December 31,
(In thousands, except share data) 2017 2016 2017 2016
Net revenue:
Products $ 8,156
$ 10,006
$ 25,758
$ 30,257
Support, maintenance and subscription services 17,215
16,234
50,990
47,087
Professional services 5,939
7,208
18,557
19,732
Total net revenue 31,310
33,448
95,305
97,076
Cost of goods sold:
Products (inclusive of developed technology amortization) 6,820
7,530
19,862
22,217
Support, maintenance and subscription services 4,132
4,464
12,610
12,714
Professional services 4,730
5,213
15,160
13,835
Total cost of goods sold 15,682
17,207
47,632
48,766
Gross profit 15,628
16,241
47,673
48,310
49.9 % 48.6 % 50.0 % 49.8 %
Operating expenses:
Product development 7,269
6,847
20,708
20,647
Sales and marketing 4,278
5,000
13,616
15,746
General and administrative 6,114
3,678
18,475
13,692
Depreciation of fixed assets 581
598
1,892
1,791
Amortization of intangibles 471
353
1,421
1,031
Restructuring, severance and other charges 378
1,394
1,241
1,484
Legal settlements 150
—
150
85
Operating loss (3,613 ) (1,629 ) (9,830 ) (6,166 )
Other (income) expense:
Interest income (13 ) (86 ) (64 ) (135 )
Interest expense 3
3
7
11
Other expense, net (46 ) 62
(196 ) 140
Loss before taxes (3,557 ) (1,608 ) (9,577 ) (6,182 )
Income tax (benefit) expense (1,623 ) 129
(1,439 ) 252
Net loss $ (1,934 ) $ (1,737 ) $ (8,138 ) $ (6,434 )

Weighted average shares outstanding 22,851
22,611
22,777
22,605
Loss per share - basic and diluted:
Loss per share $ (0.08 ) $ (0.08 ) $ (0.36 ) $ (0.28 )

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(2,918	)	$	(3,791	)	$	(4,493	)	$	(5,528	)
Other comprehensive loss, net of tax:
Unrealized foreign currency translation adjustments		156			(58	)		61			(66	)
Total comprehensive loss	$	(2,762	)	$	(3,849	)	$	(4,432	)	$	(5,594	)

~~(Unaudited)~~

Three months ended Nine months ended
December 31, December 31,
(In thousands) 2017 2016 2017 2016
Net loss $ (1,934 ) $ (1,737 ) $ (8,138 ) $ (6,434 )
Other comprehensive gain/(loss), net of tax:
Unrealized foreign currency translation adjustments (17 ) (5 ) 5
(12 )
Total comprehensive loss $ (1,951 ) $ (1,742 ) $ (8,133 ) $ (6,446 )

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended September 30,
	2019			2018
Operating activities
Net loss	$	(4,493	)	$	(5,528	)
Adjustments to reconcile loss from operations to net cash provided by (used in) operating activities
Net restructuring, severance and other charges		85			(126	)
Net legal settlements		(15	)		126
Loss on disposal of property & equipment		4			—
Depreciation		920			1,282
Amortization		1,292			1,217
Amortization of developed technology		6,303			6,010
Deferred income taxes		(239	)		54
Share-based compensation		1,827			1,674
Change in cash surrender value of company owned life insurance policies		(7	)		(8	)
Changes in operating assets and liabilities:		(4,443	)		(7,449	)
Net cash provided by (used in) operating activities		1,234			(2,748	)
Investing activities
Capital expenditures		(1,940	)		(1,333	)
Capitalized software development costs		—			(2,189	)
Investments in corporate-owned life insurance policies		(2	)		(2	)
Net cash used in investing activities		(1,942	)		(3,524	)
Financing activities
Repurchase of common shares to satisfy employee tax withholding		(1,053	)		(557	)
Principal payments under long-term obligations		(12	)		(59	)
Net cash used in financing activities		(1,065	)		(616	)
Effect of exchange rate changes on cash		(83	)		(151	)
Net decrease in cash and cash equivalents		(1,856	)		(7,039	)
Cash and cash equivalents at beginning of period	$	40,771		$	39,943
Cash and cash equivalents at end of period	$	38,915		$	32,904

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Accrued capital expenditures	$	125		$	74

~~(Unaudited)~~

Nine months ended
December 31,
(In thousands) 2017 2016
Operating activities
Net loss $ (8,138 ) $ (6,434 )
Adjustments to reconcile net loss to net cash used in operating activities
Net restructuring, severance and other charges 262
819
Net legal settlements 150
(100 )
Loss on disposal of property & equipment —
5
Depreciation 1,892
1,791
Amortization 1,421
1,031
Amortization of developed technology 7,371
5,705
Deferred income taxes (1,214 ) 105
Share-based compensation 3,776
782
Change in cash surrender value of company owned life insurance policies 11
—
Changes in operating assets and liabilities:
Accounts receivable 903
6,668
Inventories 87
597
Prepaid expense and other current assets 460
1,306
Accounts payable 5
714
Deferred revenue (5,787 ) (4,601 )
Accrued liabilities 1,681
(2,558 )
Income taxes payable (503 ) 104
Other changes, net (279 ) (541 )
Net cash provided by operating activities 2,098
5,393
Investing activities
Capital expenditures (5,289 ) (3,327 )
Capitalized software development costs (7,272 ) (9,174 )
Investments in corporate-owned life insurance policies (27 ) (1 )
Net cash used in investing activities (12,588 ) (12,502 )
Financing activities
Payments to settle contingent consideration arising from business acquisition —
(197 )
Repurchase of common shares to satisfy employee tax withholding (1,190 ) (404 )
Principal payments under long-term obligations (92 ) (86 )
Net cash used in financing activities (1,282 ) (687 )
Effect of exchange rate changes on cash 132
(99 )
Net decrease in cash and cash equivalents (11,640 ) (7,895 )
Cash and cash equivalents at beginning of period $ 49,255
$ 60,608
Cash and cash equivalents at end of period $ 37,615
$ 52,713

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

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AGILYSYS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

	Three Months Ended September 30, 2019
	Common Shares										Capital in						Accumulated
	Issued				In Treasury						excess of						other
(In thousands)	Shares		Stated value		Shares			Stated value			stated value			Retained earnings			comprehensive loss			Total
Balance at June 30, 2019		31,607	$	9,482		(7,927	)	$	(2,379	)	$	1,698		$	91,476		$	(354	)	$	99,923
Share-based compensation		—		—		—			—			1,228			—			—			1,228
Restricted shares issued, net		—		—		(24	)		(8	)		8			—			—			—
Shares issued upon exercise of SSARs		—		—		3			1			(1	)		—			—			—
Shares withheld for taxes upon exercise of stock options, SSARs or vesting of restricted shares		—		—		(1	)		0			(24	)		—			—			(24	)
Net loss		—		—		—			—			—			(2,918	)		—			(2,918	)
Unrealized translation adjustments		—		—		—			—			—			—			156			156
Balance at September 30, 2019		31,607	$	9,482		(7,949	)	$	(2,386	)	$	2,909		$	88,558		$	(198	)	$	98,365
	Three Months Ended September 30, 2018
	Common Shares										Capital in						Accumulated
	Issued				In Treasury						excess of						other
	Shares		Stated value		Shares			Stated value			stated value			Retained earnings			comprehensive loss			Total
Balance at June 30, 2018		31,607	$	9,482		(8,080	)	$	(2,425	)	$	(1,524	)	$	104,478		$	(262	)	$	109,749
Share-based compensation		—		—		—			—			1,129			—			—			1,129
Restricted shares issued, net		—		—		(4	)		(1	)		1			—			—			—
Shares issued upon exercise of SSARs		—		—		10			3			(3	)		—			—			—
Shares withheld for taxes upon exercise of stock options, SSARs or vesting of restricted shares		—		—		(3	)		(1	)		(54	)		—			—			(55	)
Net loss		—		—		—			—			—			(3,791	)		—			(3,791	)
Unrealized translation adjustments		—		—		—			—			—			—			(58	)		(58	)
Balance at September 30, 2018		31,607	$	9,482		(8,077	)	$	(2,424	)	$	(451	)	$	100,687		$	(320	)	$	106,974
	Six Months Ended September 30, 2019
	Common Shares										Capital in						Accumulated
	Issued				In Treasury						excess of						other
	Shares		Stated value		Shares			Stated value			stated value			Retained earnings			comprehensive loss			Total
Balance at March 31, 2019		31,607	$	9,482		(8,105	)	$	(2,433	)	$	781		$	93,051		$	(259	)	$	100,622
Share-based compensation		—		—		—			—			2,295			—			—			2,295
Restricted shares issued, net		—		—		144			43			(43	)		—			—			—
Shares issued upon exercise of SSARs		—		—		17			5			(5	)		—			—			—
Shares withheld for taxes upon exercise of stock options, SSARs or vesting of restricted shares		—		—		(5	)		(1	)		(119	)		—			—			(120	)
Net loss		—		—		—			—			—			(4,493	)		—			(4,493	)
Unrealized translation adjustments		—		—		—			—			—			—			61			61
Balance at September 30, 2019		31,607	$	9,482		(7,949	)	$	(2,386	)	$	2,909		$	88,558		$	(198	)	$	98,365
	Six Months Ended September 30, 2018
	Common Shares										Capital in						Accumulated
	Issued				In Treasury						excess of						other
	Shares		Stated value		Shares			Stated value			stated value			Retained earnings			comprehensive loss			Total
Balance at March 31, 2018		31,607		9,482		(8,283	)		(2,486	)		(1,911	)		103,601			(255	)	$	108,431
Cumulative effect of change in accounting policy		—		—		—			—			—			2,614			—			2,614
Share-based compensation		—		—		—			—			1,721			—			—			1,721
Restricted shares issued, net		—		—		168			51			(51	)		—			—			—
Shares issued upon exercise of SSARs		—		—		51			15			(15	)		—			—			—
Shares withheld for taxes upon exercise of stock options, SSARs or vesting of restricted shares		—		—		(13	)		(4	)		(195	)		—			—			(199	)
Net loss		—		—		—			—			—			(5,528	)		—			(5,528	)
Unrealized translation adjustments		—		—		—			—			—			—			(65	)		(65	)
Balance at September 30, 2018		31,607	$	9,482		(8,077	)	$	(2,424	)	$	(451	)	$	100,687		$	(320	)	$	106,974

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AGILYSYS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Table amounts in thousands, except per share data)

1. Nature of Operations and Financial Statement Presentation

Nature of Operations

Agilysys ishas been a ~~leading~~leader in hospitality software for more than 40 years, delivering innovative guest-centric technology ~~company that provides innovative software~~solutions for gaming, hotels, resorts and ~~services for point-of-sale~~cruise, corporate foodservice management, restaurants, universities, stadia and healthcare. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), ~~reservation and table~~property management ~~property management~~systems (PMS), inventory and procurement, ~~workforce management, analytics, document management,~~payments, and ~~mobile~~related applications, to manage the entire guest journey. Agilysys is known for its leadership in hospitality, its broad product offerings and ~~wireless~~its customer-centric service. Some of the largest hospitality companies around the world use Agilysys solutions ~~exclusively~~ to ~~the hospitality industry. Our products and services allow operators to streamline operations,~~help improve ~~efficiency and understand customer needs across their properties to deliver a superior overall guest experience. The result is improved~~ guest loyalty, drive revenue growth ~~in wallet share~~ and ~~increased revenue as they connect and transact with their guests based upon a single integrated view of individual preferences and interactions.~~ increase operational efficiencies.

We serve four major market sectors: Gaming, both corporate and tribal; Hotels, Resorts and Cruise; Corporate Foodservice Management; and Restaurants, Universities, ~~Stadia~~Healthcare, and ~~Healthcare.~~Sports and Entertainment. A significant portion of our consolidated revenue is derived from contract support, maintenance and subscription services.

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

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include our accounts consolidated with our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our fiscal year ends on March 31st. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal ~~2018~~2020 refers to the fiscal year ending March 31, ~~2018.~~

2020.

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

The Condensed Consolidated Balance ~~Sheets~~Sheet as of ~~December 31, 2017 and 2016,~~September 30, 2019, as well as the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss, and the Condensed Consolidated Statements of ~~Cash Flow~~Shareholders' Equity for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, and Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2019, are unaudited. However, these financial statements have been prepared on the same basis as those in the audited annual financial ~~statements.~~statements, except for the recently adopted accounting pronouncements described below. In the opinion of management, all adjustments of a recurring nature necessary to fairly state the results of operations, financial position, and cash flows have been made.

These unaudited interim financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, ~~2017~~,2019, filed with the Securities and Exchange Commission (SEC) on ~~June 2, 2017.~~

May 24, 2019.

2. Summary of Significant Accounting Policies

A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended March 31, ~~2017~~,2019, included in our Annual Report on Form 10-K. Our accounting policy for ~~share-based compensation~~leases changed with the adoption of Accounting Standards Update ("ASU") No. ~~2016-09,~~2016-02 ("Topic 842"), as described further below. There have been no other material changes to our significant accounting policies and estimates from those disclosed therein.

~~Reclassification -~~ Certain prior year balances have been reclassified to conform to the current year presentation. Specifically, we reclassified certain software development costs to property and equipment during the year ended March 31, 2017, which impacted the Condensed Consolidated Statement

Table of ~~Cash Flows for the nine months ended December 31, 2016 in the amount of $1.1 million.~~

Contents

Adopted and Recently Issued Accounting Pronouncements

In ~~January 2017,~~April 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. ~~2017-01, Business Combinations (Topic 805)~~2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 provides corrections, updates and clarifications to the previously issued updates ASU 2016-13, ASU 2017-12 and ASU 2016-01. Various areas of the codification were impacted from the update. The standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. Consistent with the documentation below, we are still assessing the impact of the adoption of ASU 2016-13, and the other two ASUs affected by ASU 2019-04 are not applicable to us. We are currently reviewing this standard to assess the impact on our future consolidated financial statements.

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

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

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220). ASU 2018-02 addresses the effect of the change in the U.S. federal corporate tax rate on items within accumulated other comprehensive income or loss due to the enactment of the Tax Act on December 22, 2017. The new standard is effective for annual periods, and for interim periods within those annual periods beginning after December 15, 2018, with early adoption permitted. We have adopted this standard as of April 1, 2019; the adoption had 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. 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.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. The ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. While we are still assessing the impact of this standard, we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In ~~October~~June 2016, the FASB issued ASU No. ~~2016-16, Income Taxes~~2016-13, Financial Instruments - Credit Losses (Topic ~~740): Intra-Entity Transfers~~326). This new standard changes the impairment model for most financial assets and certain other instruments. Entities will be required to use a model that will result in the earlier recognition of ~~Assets Other Than Inventory, which requires entities to recognize~~allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the ~~income tax consequences~~losses will be recognized as allowances rather than as reductions in the amortized cost of ~~an intra-entity transfer of an asset other than inventory when~~ the ~~transfer occurs.~~securities. The new ~~guidance~~standard is effective for annual ~~reporting~~periods, and for interim periods within those annual periods, beginning after December 15, ~~2017. Early~~2019, with early adoption ~~is permitted as of~~permitted. We are currently reviewing this standard to assess the beginning of an annual reporting period. The new standard must be adopted using a modified retrospective transition method, with the cumulative effect recognized as of the date of initial adoption. We do not believe that the adoption of this guidance will have a material impact on our future consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), which amends the accounting for stock-based compensation. The guidance requires excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than of stockholders’ equity and also allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. ASU No. 2016-09 is effective for annual reporting periods beginning after December 15, 2016. The Company adopted the ASU in the quarter ended June 30, 2017, which is the first quarter for our annual period beginning April 1, 2017. The following summarizes the effects of the adoption on the Company's unaudited condensed consolidated financial statements:

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

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

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which ~~will require~~requires lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP,Unlike Accounting Standard Codification Topic 840 ("Topic 840"), which requires only capital leases to be recognized on the balance sheet, the new guidance ~~will require~~requires both types of leases to be recognized on the balance sheet. The ~~new guidance~~most prominent change for leasees is ~~effective~~the requirement to recognize both Right-of-Use (ROU) assets and lease liabilities for ~~all periods beginning after December 15,~~leases classified as operating leases under Topic 840. We adopted Topic 842 as of April 1, 2019 using the current period adjustment method of adoption. Please refer to Note 6, Leases for further details.

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3. Revenue Recognition

Disaggregation of Revenue

We derive and report our revenue from the sale of products (software licenses, third party hardware and operating systems), support, maintenance and subscription services and professional services. Revenue recognized at a point in time (products) totaled $11.9 million and $22.7 million, and $8.8 million and $17.8 million for the three and six months ended September 30, 2019 and 2018. Revenue recognized over time (support, maintenance and subscription services and professional services) totaled $28.8 million and $56.4 million, and $25.4 million and $50.4 million for the three and six months ended September 30, 2019 and 2018, respectively. See Nature of Goods and Services section below for additional information regarding revenue recognition procedures for our revenue streams.

Nature of Goods and Services

Our customary business practice is to enter into legally enforceable written contracts with our customers. The majority of our contracts are governed by a master agreement between us and the customer, which sets forth the general terms and conditions of any individual contract between the parties, which is then supplemented by a customer purchase order to specify the different goods and services, the associated prices, and any additional terms for an individual contract. Performance obligations specific to each individual contract are defined within the terms of each purchase order. Each performance obligation is identified based on the goods and services that will be transferred to our customer that are both capable of being distinct and are distinct within the context of the contract. The transaction price is determined based on the consideration to which we will be entitled and expect to receive in exchange for transferring goods or services to the customer. Typically, our contracts do not provide our customer with any right of return or refund; we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or a refund.

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

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 the primary obligor as we are responsible for negotiating price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and we bear the credit risk if the customer does not pay for the goods. As the principal contact with the customer, we recognize revenue and cost of goods sold when we are ~~currently evaluating~~notified by the ~~effects~~supplier that the ~~adoption~~product has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of ~~ASU No. 2016-02 will have~~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 ~~our consolidated financial statements, but anticipate~~a when-and-if-available basis. These services represent a stand-ready obligation that is concurrently delivered and has the ~~new guidance will materially impact our consolidated financial statements given~~same pattern of transfer to the ~~significance of our leases.~~

~~In May 2014,~~customer; we account for these support and maintenance services as a single performance obligation recognized over the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topicsterm of the Accounting Standards Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principlemaintenance 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 ~~guidance~~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 ~~an entity should recognize revenue to depict the transfer~~ of other promised goods or services ~~to customers~~ in ~~an amount that reflects~~ the consideration to which the entity expects to be entitled in exchange for those goods or services. As originally issued, this guidance was effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption was not permitted. In July 2015, the FASB deferred the effective date by one year, to interim and annual reporting periods beginning after December 15, 2017. The standard allows entities to apply the standard retrospectively to each prior reporting period presented (“full retrospective adoption”) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application (“modified retrospective adoption”). We plan to adopt ASU No. 2014-09 on its effective date for us beginning April 1, 2018 and we are still evaluating both options and their effect on our financial statements and business.

~~We expect to identify similar performance obligations under Topic 606 as compared with deliverables and separate units of account previously identified.~~contract. As a result, ~~we expect~~professional services are considered distinct in the ~~timing~~context of ~~our revenue to occur in similar periods but we~~the contract and represent a separate performance obligation. Professional services that are ~~still evaluating this theory especially with respect to multiple service contracts. We~~billed on a time and materials basis are ~~assessing the new standard’s requirement to apply a single method to measure progress towards satisfaction of performance obligations~~ recognized over time ~~in our~~as the services are performed. For contracts ~~that contain multiple services.~~ 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 ~~are evaluating our multiple service contracts~~use the market estimate approach to drive standalone selling price ("SSP") by maximizing observable data points (in the form of recently executed customer contracts) to determine if the price customers are willing to pay for the goods and services ~~are~~transferred. If the contract contains a single performance obligation, ~~under this new standard requiring a single method~~the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of ~~measurement. We are assessing the new standards requirement to allocate~~ the transaction ~~prices~~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.

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 ~~contracts~~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 onupon contractual billing schedules and accounts receivable are recorded when the relative stand-alone selling price of each our performance obligations. We are evaluating the stand-alone selling prices for our performance obligations. We are also assessing the new standard’s requirementright to ~~capitalize costs associated with obtaining customer contracts, including commission payments,~~consideration becomes unconditional. Contract liabilities represent consideration received or consideration which ~~are currently expensed as incurred for all commissions earned subsequent~~is unconditionally due from customers prior to transferring goods or services to the ~~year~~customer under the terms of the contract.

Revenue recognized from amounts included in contract liabilities at the beginning of the period was $10.5 million and $8.2 million for the three months ended September 30, 2019 and 2018, respectively, and $26.0 million and $19.8 million for the six months ended September 30, 2019 and 2018, respectively. Because the right to the transaction became unconditional, we transferred to accounts receivable from contract assets recognized at March 31, ~~2016. We~~2019, $0.4 million and $2.4 million during the three and six months ended September 30, 2019, respectively, and from contract assets recognized at April 1, 2018, $0.2 million and $3.2 million during the three and six months ended September 30, 2018, respectively.

Our arrangements are ~~evaluating the~~for a period ~~over which to amortize these capitalized costs and the applicability of the practical expediency exception which permits the continuation of expensing these costs for amortization periods~~ of one year or less. ~~In addition, for sales transactions that have been billed, but for which the recognition~~As a result, unsatisfied performance obligations as of ~~revenue has been deferred~~September 30, 2019 are expected to be satisfied and the ~~related account receivable has~~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 ~~been collected,~~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 ~~currently do not recognize deferred revenue~~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 ~~related accounts receivable~~practical expedient elected.

As of September 30, 2019, we had $3.4 million of capitalized sales incentive costs. These balances are included in other non-current assets on our condensed consolidated balance ~~sheet. Under~~sheets. During the ~~new standard,~~three and six months ended September 30, 2019 , we ~~will record accounts receivable~~expensed $1.2 million and ~~related contract liabilities for non-cancelable contracts with customers when~~$2.2 million, respectively, of sales commissions, which included amortization of capitalized amounts of $0.3 million and $0.7 million, respectively. During the right to consideration is unconditional, which we currently expect will result in increases in accounts receivable and contract liabilities (currently presented as deferred revenue) on our consolidated balance sheet, compared to our current presentation. We are continuing to review the impacts of adopting ASU No. 2014-09 to our consolidated financial statements and these preliminary assessments of the impacts to our consolidated financial statements are subject to change. We expect to conclude our assessments of the impacts of adoption sometime during our fourth quartercomparable periods ending ~~March 31, 2018.~~

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

~~3. Restructuring Charges~~

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

~~Fiscal 2018 Restructuring Activity~~

Q3 ~~- In the third quarter of fiscal~~September 30, 2018, we ~~recorded $0.2~~expensed $0.9 million and $1.8 million, respectively, of sales commissions, which included amortization of capitalized amounts of $0.3 million and $0.5 million, respectively. These expenses are included in ~~restructuring charges related~~operating expenses – sales and marketing in our condensed consolidated statement of operations. All other costs to ~~our ongoing efforts to better allocate resources to our crucial revenue growth areas while increasing internal efficiencies in other non-revenue generating areas.~~

Asobtain a contract are not considered incremental and therefore are expensed as incurred.

Table of ~~December 31, 2017, we had a remaining liability of approximately $0.2 million recorded for the Q3 fiscal 2018 restructuring activity.~~

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

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

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

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4. Intangible Assets and Software Development Costs

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

	September 30, 2019							March 31, 2019
	Gross					Net		Gross					Net
	carrying		Accumulated			carrying		carrying		Accumulated			carrying
Intangible assets (In thousands)	amount		amortization			amount		amount		amortization			amount
Amortized intangible assets:
Customer relationships	$	10,775	$	(10,775	)	$	—	$	10,775	$	(10,775	)	$	—
Non-competition agreements		2,700		(2,700	)		—		2,700		(2,700	)		—
Developed technology		10,398		(10,398	)		—		10,398		(10,398	)		—
Trade names		230		(215	)		15		230		(192	)		38
Patented technology		80		(80	)		—		80		(80	)		—
		24,183		(24,168	)		15		24,183		(24,145	)		38
Unamortized intangible assets:
Trade names		8,400	N/A				8,400		8,400	N/A				8,400
Total intangible assets	$	32,583	$	(24,168	)	$	8,415	$	32,583	$	(24,145	)	$	8,438

Software development costs (In thousands)
Total software development costs	$	67,541	$	(39,277	)	$	28,264	$	67,541	$	(32,974	)	$	34,567

December 31, 2017 March 31, 2017
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(In thousands) amount amortization amount amount amortization amount
Amortized intangible assets:
Customer relationships $ 10,775
$ (10,775 ) $ —
$ 10,775
$ (10,775 ) $ —
Non-competition agreements 2,700
(2,700 ) —
2,700
(2,700 ) —
Developed technology 10,055
(10,055 ) —
10,055
(10,055 ) —
Trade names 230
(134 ) 96
230
(100 ) 130
Patented technology 80
(80 ) —
80
(80 ) —
23,840
(23,744 ) 96
23,840
(23,710 ) 130
Unamortized intangible assets:
Trade names 8,400
N/A
8,400
8,400
N/A
8,400
Total intangible assets $ 32,240
$ (23,744 ) $ 8,496

$ 32,240
$ (23,710 ) $ 8,530

Software development costs $ 53,368
$ (17,727 ) $ 35,641
$ 46,598
$ (10,356 ) $ 36,242
Project expenditures not yet in use 10,445
—
10,445
10,757
—
10,757
Total software development costs $ 63,813
$ (17,727 ) $ 46,086
$ 57,355
$ (10,356 ) $ 46,999

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

	Remaining
	Amortization
(In thousands)	Expense
Fiscal year ending March 31,
2020	$	6,273
2021		12,515
2022		5,403
2023		3,399
2024		689
Total	$	28,279

Estimated
Amortization
(In thousands) Expense
Fiscal year ending March 31,
2018 $ 2,657
2019 10,504
2020 9,765
2021 9,680
2022 2,568
2023 563
Total $ 35,737

Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed was ~~$2.6~~$3.1 million and ~~$2.3~~$3.4 million for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, and ~~$7.3~~$6.3 million and ~~$5.7~~$6.0 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively. These charges are included as ~~Products cost~~costs of goods sold ~~within the Condensed Consolidated Statements~~- products in our condensed consolidated statements of ~~Operations.~~

operations. Amortization expense relating to other definite-lived intangible assets was $11,500 for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, and ~~$34,500~~$23,000 for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016.~~2018. These charges are classified as ~~Amortization~~operating expenses - amortization of intangibles ~~within the Condensed Consolidated Statements~~in our condensed consolidated statements of ~~Operations~~operations along with ~~Amortization~~amortization expense related to our ~~Capitalized Internal-Use Software~~capitalized internal-use software that we classify in Property and ~~Equipment,~~equipment, net within the ~~Consolidated Balance Sheets.~~

condensed consolidated balance sheets.

Capitalized software development costs for software internally developed to be sold, leased, or otherwise marketed, are carried on our balance sheet at ~~net~~ carrying value, net of accumulated amortization. The Company did not capitalize any amounts for external-use software development costs during the three and six months ended September 30, 2019. Current active projects which carry a sufficiently short amount of time between achieving technological feasibility and reaching general availability to preclude capitalization. We capitalized approximately ~~$1.6 million and $3.0~~$2.0 million during the ~~three~~six months ended ~~December 31, 2017 and 2016, and $6.5 million and $8.9 million during the nine months ended December 31, 2017 and 2016, respectively.~~

September 30, 2018.

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5. Additional Balance Sheet Information

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

	September 30, 2019		March 31, 2019
Accrued liabilities:
Salaries, wages, and related benefits	$	8,269	$	12,929
Other taxes payable		957		1,041
Accrued legal settlements		—		15
Severance liabilities		146		46
Professional fees		131		67
Deferred rent		—		273
Other		481		521
Total	$	9,984	$	14,892
Other non-current liabilities:
Uncertain tax positions	$	1,096	$	1,083
Deferred rent and asset retirement obligations		165		2,613
Other		77		76
Total	$	1,338	$	3,772

(In thousands) December 31,
2017 March 31,
2017
Accrued liabilities:
Salaries, wages, and related benefits $ 7,352
$ 6,473
Other taxes payable 819
750
Accrued legal settlements 150
—
Restructuring liabilities 203
—
Severance liabilities 16
11
Professional fees 510
221
Deferred rent 420
433
Other 373
443
Total $ 9,843
$ 8,331
Other non-current liabilities:
Uncertain tax positions $ 1,508
$ 1,479
Deferred rent 2,399
2,444
Other 78
79
Total $ 3,985
$ 4,002

~~Accounts Receivable, net~~

~~Accounts receivable, net~~

6. Leases

We adopted Topic 842 on April 1, 2019 using the current period adjustment method of ~~allowance for doubtful accounts~~adoption to recognize leases with a duration greater than 12 months on the balance sheet. The impact of adoption on April 1, 2019 was ~~$14.7~~recognition of operating lease liabilities of $16.3 million and ~~$15.6 million~~related Right-of-Use ("ROU") assets of $13.8 million. Prior period financial statements have not been restated and therefore the comparative amounts are not presented below or on the condensed consolidated balance sheet as of ~~December 31, 2017 and~~ March 31, ~~2017, respectively.~~2019. For operating leases with a term greater than 12 months, we have recorded the lease liability at the present value of lease payments over the remaining lease term and the related ROU asset. The remaining lease term has been determined for each lease considering factors such as renewal options, termination options, our Company's historical practices in exercising such options, and current business knowledge which may impact lease related ~~allowance~~decisions. The majority of our leases are comprised of real estate leases for ~~doubtful accounts~~our respective offices around the globe. Our finance leases consist of office equipment. We have no residual value guarantees or restrictions or covenants imposed by, or associated with our active leases. Since our current leases do not provide an implicit rate of return, our incremental borrowing rates used to determine the value of lease payments in implementation are estimated at April 1, 2019, based on collateralized rates for a term similar to each remaining lease term.

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

As of September 30, 2019, we have no leases which have not yet commenced. In addition, we do not have any related party leases or sublease arrangements. We have variable payments for expenses such as common area maintenance and taxes. We do not have variable payments that are based on an index or rate. As a result, we do not include variable payments in the calculation of the lease liability. Any variable lease costs are expensed as incurred.

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The components of lease expenses for the three and six months ended September 30, 2019 were as follows:

	Three Months Ended		Six Months Ended
(in thousands)	September 30, 2019
Operating leases expense	$	1,003	$	2,016
Finance lease expense:
Amortization of ROU assets		5		11
Interest on lease liabilities		1		3
Total finance lease expense		6		14
Variable lease costs		69		137
Short term lease expense		36		50
Total lease expense	$	1,114	$	2,217

Other information related to leases for the six months ended September 30, 2019 was ~~$0.8 million~~as follows:

	Six Months Ended
Supplemental cash flow information	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
Operating cash flows for operating leases	$	2,210
Operating cash flows for finance leases		6
Financing cash flows for finance leases		12
ROU assets obtained in exchange for lease obligations (in thousands):
Operating leases	$	185
Finance leases		6
Weighted average remaining lease terms
Operating leases		5.40
Finance leases		2.22
Weighted average discount rates
Operating leases		9.93	%
Finance leases		4.30	%

The table below reconciles the undiscounted future minimum lease payments (displayed by year and ~~$0.5 million~~in the aggregate) under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheet as of ~~December 31, 2017 and~~September 30, 2019:

(in thousands)	Operating leases			Finance leases
2020 (excluding the six months ended September 30, 2019)	$	2,163		$	14
2021		4,391			25
2022		3,630			17
2023		2,252			1
2024		2,057			—
Thereafter		5,763			—
Total undiscounted future minimum lease payments		20,256			57
Less: difference between undiscounted lease payments and discounted lease liabilities		(5,446	)		(6	)
Total lease liabilities	$	14,810		$	51

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As previously disclosed on our March 31, ~~2017, respectively.~~

~~In January~~2019 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable leases as of 2015, Caesars Entertainment Operating Company, Inc. and certain of its affiliates (Caesars) entered bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. We filed a proof of claim with the Bankruptcy Court identifying approximately $0.7 million of pre-petition claims. Caesars emerged from bankruptcy in October 2017. As of DecemberMarch 31, ~~2017, we have collected on all of the $0.7 million of pre-petition claims that~~2019 were ~~outstanding.~~as follows:

Year ending (in thousands)	Operating leases		Finance leases
2020	$	4,143	$	27
2021		3,945		23
2022		3,166		15
2023		1,916		—
2024		1,770		—
Thereafter		4,497		—
Total lease payments		19,437		65
Less: Amounts representing interest		—		(8	)
Present value of lease liabilities	$	19,437	$	57

7. Income Taxes

The following table compares our income tax ~~(benefit)~~ expense and effective tax rates for the three and six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016:~~2018:

	Three Months Ended September 30,						Six Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018
Income tax expense	$	41		$	53		$	67		$	4
Effective tax rate		(1.4	)%		(1.4	)%		(1.5	)%		(0.1	)%

Three months ended Nine months ended
December 31, December 31,
(Dollars in thousands) 2017 2016 2017 2016
Income tax (benefit) expense $ (1,623 )
$ 129
$ (1,439 ) $ 252
Effective tax rate 45.6 %
(8.0 )% 15.0 % (4.1 )%

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

~~recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign~~September 30, 2019 and ~~state tax effects including a benefit of $0.4 million related to a settlement with the California Franchise Tax Board and other U.S. permanent book to tax differences.~~

~~For the three and nine months ended December 31, 2016,~~2018, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets in the U.S. and certain foreign jurisdictions, which were offset by increases in the valuation allowance, certain foreign and state tax effects and other U.S. permanent book to tax differences.

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

On December 22, 2017, the President of the United States of America signed into law the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act contains significant changes to corporate taxes, including a permanent reduction of the corporate tax rate from 35% to 21% effective January 1, 2018. The reduction in the corporate rate requires a one-time revaluation of certain tax-related assets and liabilities. As a result of the revaluation of our deferred tax assets and liabilities at December 31, 2017, we recorded a one-time tax benefit of approximately $1.3 million. This tax benefit was primarily the result of applying new lower income tax rates to the Company’s net long term deferred tax liabilities recorded on its condensed consolidated balance sheet, which are not netted with deferred tax assets or subject to the valuation allowance.

8. Commitments and Contingencies

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

On April 6, 2012, Ameranth, Inc. filed a complaint against us ~~for patent infringement~~ in the ~~United States~~U.S. District Court ~~for the~~of Southern District of ~~California. The complaint alleges, among other things,~~California alleging that ~~point-of-sale and property management and other hospitality information technology~~certain of our products ~~software, components and/or systems sold by us~~ infringe patents owned by Ameranth ~~purporting~~directed to ~~cover generation~~configuring and ~~synchronization~~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. Most of ~~menus, including restaurant menus, event tickets,~~the patents at issue in the case were invalidated by the U.S. Court of Appeals for the Federal Circuit in 2016. Cases against us and ~~other products across fixed, wireless and/~~our co-defendants remained pending in the District Court with respect to one surviving Ameranth patent. In September 2018, the District Court found that patent invalid, and granted summary judgment in favor of the movant co-defendants. In early 2019, Ameranth appealed the District Court's summary judgment ruling to the U.S. Court of Appeals for the Federal Circuit. We are not a party to the appeal, and it is currently unclear what impact the summary judgment ruling or ~~internet platforms as well as synchronization of hospitality information and hospitality software applications across fixed, wireless and internet platforms. The complaint~~appeal may have on our case. Ameranth seeks monetary damages, injunctive relief, costs and attorneys' ~~fees.~~fees from us. At this time, we are not able to predict the outcome of this ~~lawsuit, or any possible monetary exposure associated with the~~ lawsuit. However, we dispute the allegations of wrongdoing and are vigorously defending ourselves in this matter.

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8.9. Loss per Share

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

	Three Months Ended September 30,						Six Months Ended September 30,
(In thousands, except per share data)	2019			2018			2019			2018
Numerator:
Net loss	$	(2,918	)	$	(3,791	)	$	(4,493	)	$	(5,528	)

Denominator:
Weighted average shares outstanding		23,238			23,131			23,225			23,113

Loss per share - basic and diluted:
Loss per share	$	(0.13	)	$	(0.16	)	$	(0.19	)	$	(0.24	)

Anti-dilutive stock options, SSARs, restricted shares and performance shares		1,494			1,481			1,386			1,419

Three months ended Nine months ended
December 31, December 31,
(In thousands, except per share data) 2017 2016 2017 2016
Numerator:
Net loss $ (1,934 ) $ (1,737 ) $ (8,138 ) $ (6,434 )

Denominator:
Weighted average shares outstanding 22,851
22,611
22,777
22,605

Loss per share - basic and diluted:
Loss per share $ (0.08 ) $ (0.08 ) $ (0.36 ) $ (0.28 )

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

Basic ~~earnings (loss)~~loss per share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. The outstanding shares used to calculate the weighted average basic shares excludes ~~530,138~~418,854 and ~~595,625~~486,701 of restricted shares at ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, respectively, as these shares were issued but were not vested and therefore, not considered outstanding for purposes of computing basic ~~(loss) earnings~~loss per share at the balance sheet dates.

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

10. Share-based Compensation

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

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

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

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

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

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

	Three Months Ended September 30,				Six Months Ended September 30,
(In thousands)	2019		2018		2019		2018
Product development	$	672	$	514	$	940	$	429
Sales and marketing		51		134		113		199
General and administrative		622		617		774		1,046
Total share-based compensation expense	$	1,345	$	1,265	$	1,827	$	1,674

Three months ended Nine months ended
December 31, December 31,
(In thousands) 2017 2016 2017 2016
Product development $ 456
$ 498
$ 982
$ 826
Sales and marketing 173
124
529
177
General and administrative 829
(680 ) 2,265
(221 )
Total share-based compensation expense 1,458
(58 ) 3,776
782

Stock-Settled ~~Stock~~ Appreciation Rights

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

Agilysys, Inc.

The following table summarizes the activity during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 for SSARs awarded under the 2011 and 2016 Plans:

	Number of Rights			Weighted-Average Exercise Price		Remaining Contractual Term		Aggregate Intrinsic Value
(In thousands, except share and per share data)				(per right)		(in years)
Outstanding at April 1, 2019		1,016,643		$	11.22
Granted		91,364			22.41
Exercised		(30,430	)		9.47
Forfeited		(14,706	)		18.39
Expired		(8,937	)		10.27
Outstanding at September 30, 2019		1,053,934		$	12.15		4.5	$	14,183
Exercisable at September 30, 2019		773,583		$	10.98		4.2	$	11,321

Number
of Rights Weighted-
Average
Exercise
Price Remaining
Contractual
Term Aggregate
Intrinsic
Value
(In thousands, except share and per share data) (per right) (in years)
Outstanding at April 1, 2017 1,094,978
$ 10.44

Granted 204,213
10.56

Exercised (41,691 ) 9.14

Forfeited (55,530 ) 9.98

Cancelled/expired (54,679 ) 9.56

Outstanding at December 31, 2017 1,147,291
$ 10.58
5.4 $ 2,038
Exercisable at December 31, 2017 245,064
$ 10.26
3.4 $ 574

As of ~~December 31, 2017,~~September 30, 2019, total unrecognized ~~stock based~~share-based compensation expense related to non-vested SSARs was ~~$1.2~~$0.7 million,, which is expected to be recognized over a weighted-average vesting period of ~~2.0~~2.7 years.

Restricted Shares

We granted shares to certain of our Directors, executives and key employees, the vesting of which is service-based. The following table summarizes the activity during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 for restricted shares awarded under the 2011 and 2016 ~~and 2011~~ Plans:

	Number of Shares			Weighted-Average Grant-Date Fair Value
(In thousands, except share and per share data)				(per share)
Outstanding at April 1, 2019		237,146		$	13.46
Granted		190,042			22.49
Vested		(2,757	)		22.67
Forfeited		(35,696	)		16.81
Outstanding at September 30, 2019		388,735		$	17.49

Number
of Shares Weighted-
Average
Grant-
Date Fair
Value
(In thousands, except share and per share data) (per share)
Outstanding at April 1, 2017 490,355
$ 10.72
Granted 251,010
11.02
Vested (221,897 ) 11.29
Forfeited (80,793 ) 10.72
Outstanding at December 31, 2017 438,675
$ 10.60

The weighted-average grant date fair value of the restricted shares is determined based upon the closing price of our common shares on the grant date. As of ~~December 31, 2017,~~September 30, 2019, total unrecognized ~~stock based~~share-based compensation expense related to non-vested restricted stock was ~~$2.7~~$4.1 million,, which is expected to be recognized over a weighted-average vesting period of 2.1 years.

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~~1.9~~ ~~years.~~

Performance Shares

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

The following table summarizes the activity during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 for the performance shares awarded under the 2016 Plan:

(In thousands, except share and per share data)		Number of Shares

	~~Number~~ of ~~Shares~~

Outstanding at April 1, ~~2017~~2019	—		63,291
Granted	~~91,463~~		30,120
Vested	—		(23,526	)
Forfeited			(39,765	)
Outstanding at ~~December 31, 2017~~September 30, 2019	~~91,463~~		30,120

Based on the performance goals, management estimates a liability of ~~$225,000~~$450,000 to be settled through the vesting of a variable number of the performance shares subsequent to March 31, ~~2018.~~2020. As of ~~December 31, 2017,~~September 30, 2019, total unrecognized ~~stock based~~share-based compensation expense related to non-vested performance shares was ~~$67,500,~~$0.3 million, which is expected to be recognized over the remaining vesting period of 36 months.

~~10.~~

11. Fair Value Measurements

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

There were no ~~significant~~ transfers between Levels 1, 2, and 3 during the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016.~~

2018.

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

(In thousands)

Recorded value as of

September 30, 2019

Active markets for identical asset or liabilities

(Level 1)

Quoted prices in similar instruments and observable inputs

(Level 2)

Active markets for unobservable inputs

(Level 3)

Assets:

Corporate-owned life insurance — non-current

904

(In thousands)

Recorded value as of

March 31, 2019

Active markets for identical asset or liabilities

(Level 1)

Quoted prices in similar instruments and observable inputs

(Level 2)

Active markets for unobservable inputs

(Level 3)

Assets:

Corporate-owned life insurance — non-current

895

Fair value measurement used
Recorded
value
as of Active
markets
for
identical
assets or
liabilities Quoted
prices in
similar
instruments
and
observable
inputs Active
markets for
unobservable
inputs
(In thousands) December 31, 2017 (Level 1) (Level 2) (Level 3)
Assets:
Corporate-owned life insurance — non-current $ 825
—
—
$ 825

Fair value measurement used
Recorded
value
as of Active
markets
for
identical
assets or
liabilities Quoted
prices in
similar
instruments
and
observable
inputs Active
markets for
unobservable
inputs
(In thousands) March 31, 2017 (Level 1) (Level 2) (Level 3)
Assets:
Corporate-owned life insurance — non-current $ 809
—
—
$ 809

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

operations.

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

	Six Months Ended September 30,
(In thousands)	2019		2018
Corporate-owned life insurance:
Balance on April 1	$	895	$	853
Unrealized (loss) gain relating to instruments held at reporting date		7		8
Purchases, sales, issuances and settlements, net		2		2
Balance on September 30	$	904	$	863

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

~~The following tables present a summary~~

Table of ~~changes in the fair value of the Level 3 liabilities:~~

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

Contents

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

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

— what factors affect our business;

— what our earnings and costs were;

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

— where the earnings came from;

— how our financial condition was affected; and

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

The MD&A analyzes changes in specific line items in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows and provides information that managementbelieves is important to assessing and understanding our consolidated financial condition and results of operations. This Quarterly Report on Form 10-Q updates information included in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017,~~2019, filed with the Securities and Exchange Commission (SEC). This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes that appear in Item 1 of this Quarterly Report as well as our Annual Report for the year ended March 31, ~~2017.~~2019. Information provided in the MD&A may includeforward-looking statements that involve risks and uncertainties. Many factors couldcause actual results to be materially different from those contained in the forward-lookingstatements. See “Forward-Looking Information” on page 3027 of this Quarterly Report, Item 1A "Risk Factors" in Part II of this Quarterly Report, and Item 1A “Risk Factors”in Part I of our Annual Report for the fiscal year ended March 31, ~~2017~~2019 for additional informationconcerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Agilysys ishas been a ~~leading~~leader in hospitality software for more than 40 years, delivering innovative guest-centric technology ~~company that provides innovative software~~solutions for gaming, hotels, resorts and ~~services for point-of-sale~~cruise, corporate foodservice management and restaurants, universities, healthcare, and sports and entertainment. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), ~~reservation and table~~property management ~~property management~~systems (PMS), inventory and procurement, ~~workforce management, analytics, document management,~~payments, and ~~mobile~~related applications, to manage the entire guest journey. Agilysys is known for its leadership in hospitality, its broad product offerings and ~~wireless~~its customer-centric service. Some of the largest hospitality companies around the world use Agilysys solutions ~~exclusively~~ to ~~the hospitality industry. Our products and services allow operators to streamline operations,~~help improve ~~efficiency and understand customer needs across their properties to deliver a superior overall guest experience. The result is improved~~ guest loyalty, drive revenue growth ~~in wallet share~~ and increased revenue as they connect and transact with their guests based upon a single integrated view of individual preferences and interactions. We serve four major market sectors: Gaming, both corporate and tribal; Hotels, Resorts and Cruise; Corporate Foodservice Management; and Restaurants, Universities, Stadia and Healthcare. A significant portion of our consolidated revenue is derived from contract support, maintenance and subscription services.

increase operational efficiencies.

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

Our strategic plan specifically focuses on:

Putting the customer first

Accelerating our product development

Improving organizational efficiency and teamwork

Developing our employees and leaders

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

Growing revenue through international expansion

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

Revenue - Defined

~~As required by the SEC, we~~

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

•

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

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

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•

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

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

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

Results of Operations

~~Third~~

Second Fiscal Quarter ~~2018~~2020 Compared to ~~Third~~Second Fiscal Quarter ~~2017~~

2019

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016:~~2018:

	Three months ended
	September 30,						Increase (decrease)
	2019			2018			$			%
Net revenue:
Products	$	11,873		$	8,769		$	3,104			35.4	%
Support, maintenance and subscription services		20,329			18,856			1,473			7.8
Professional services		8,520			6,578			1,942			29.5
Total net revenue		40,722			34,203			6,519			19.1
Cost of goods sold:
Products (inclusive of developed technology amortization)		9,794			7,703			2,091			27.1
Support, maintenance and subscription services		4,654			3,977			677			17.0
Professional services		6,057			4,774			1,283			26.9
Total cost of goods sold		20,505			16,454			4,051			24.6
Gross profit	$	20,217		$	17,749		$	2,468			13.9	%
Gross profit margin		49.6	%		51.9	%
Operating expenses:
Product development	$	10,778		$	10,151		$	627			6.2	%
Sales and marketing		4,890			4,393			497			11.3
General and administrative		6,038			5,176			862			16.7
Depreciation of fixed assets		707			676			31			4.6
Amortization of intangibles		614			674			(60	)		(8.9	)
Restructuring, severance and other charges		190			448			(258	)		(57.6	)
Legal settlements, net		(119	)		35			(154	)	nm
Operating loss	$	(2,881	)	$	(3,804	)	$	923			(24.3	)%
Operating loss percentage		(7.1	)%		(11.1	)%

Three months ended
December 31,   Increase (decrease)
(Dollars in thousands) 2017 2016 $ %
Net revenue:
Products $ 8,156
$ 10,006
$ (1,850 ) (18.5 )%
Support, maintenance and subscription services 17,215
16,234
981
6.0
Professional services 5,939
7,208
(1,269 ) (17.6 )
Total net revenue 31,310
33,448
(2,138 ) (6.4 )
Cost of goods sold:
Products (inclusive of developed technology amortization) 6,820
7,530
(710 ) (9.4 )
Support, maintenance and subscription services 4,132
4,464
(332 ) (7.4 )
Professional services 4,730
5,213
(483 ) (9.3 )
Total cost of goods sold 15,682
17,207
(1,525 ) (8.9 )
Gross profit 15,628
16,241
(613 ) (3.8 )
Gross profit margin 49.9 % 48.6 %
Operating expenses:
Product development 7,269
6,847
422
6.2
Sales and marketing 4,278
5,000
(722 ) (14.4 )
General and administrative 6,114
3,678
2,436
66.2
Depreciation of fixed assets 581
598
(17 ) (2.8 )
Amortization of intangibles 471
353
118
33.4
Restructuring, severance and other charges 378
1,394
(1,016 )           nm
Legal settlements 150
—
150
          nm
Operating loss $ (3,613 ) $ (1,629 ) $ (1,984 ) 121.8 %
Operating loss percentage (11.5 )% (4.9 )%

nm - not meaningful

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

	Three months ended
	September 30,
	2019			2018
Net revenue:	��
Products		29.2	%		25.6	%
Support, maintenance and subscription services		49.9			55.1
Professional services		20.9			19.3
Total net revenue		100.0	%		100.0	%
Cost of goods sold:
Products		24.1	%		22.5	%
Support, maintenance and subscription services		11.4			11.6
Professional services		14.9			14.0
Total cost of goods sold		50.4	%		48.1	%
Gross profit		49.6	%		51.9	%
Operating expenses:
Product development		26.5	%		29.7	%
Sales and marketing		12.0			12.8
General and administrative		14.8			15.1
Depreciation of fixed assets		1.7			2.0
Amortization of intangibles		1.5			2.0
Restructuring, severance and other charges		0.5			1.3
Legal settlements, net		(0.3	)		0.1
Operating loss		(7.1	)%		(11.1	)%

Three months ended
December 31,
2017 2016
Net revenue:
Products 26.0 % 30.0 %
Support, maintenance and subscription services 55.0
48.5
Professional services 19.0
21.5
Total 100.0 % 100.0 %
Cost of goods sold:
Products (inclusive of developed technology amortization) 21.8 % 22.5 %
Support, maintenance and subscription services 13.2
13.3
Professional services 15.1
15.6
Total 50.1 % 51.4 %
Gross profit 49.9 % 48.6 %
Operating expenses:
Product development 23.2 % 20.5 %
Sales and marketing 13.7
14.9
General and administrative 19.5
11.0
Depreciation of fixed assets 1.9
1.8
Amortization of intangibles 1.5
1.1
Restructuring, severance and other charges 1.2
4.2
Legal settlements 0.5
—
Operating loss (11.5 )% (4.9 )%

Net revenue. Total net revenue ~~decreased $2.1~~increased $6.5 million, or ~~6.4%~~19.1%, during the ~~third~~second quarter of fiscal ~~2018~~2020 compared to the ~~third~~second quarter of fiscal ~~2017.~~2019. Products revenue ~~decreased $1.9~~increased $3.1 million, or ~~18.5%~~35.4%, due ~~primarily~~ to ~~decreased~~increased sales of third party hardware ~~sales.~~including new customers and expansion with existing customers. Support, maintenance and subscription services revenue increased ~~$1.0~~$1.5 million, or ~~6.0%~~7.8%, compared to the ~~third~~second quarter of fiscal ~~2017~~2019 driven ~~mostly~~ by growth in customers using our on premise software products which require the payment of support and maintenance along with continued increases in subscription based service revenue, which increased ~~approximately 26.2%~~15.7% during the ~~third~~second quarter of fiscal ~~2018~~2020 compared to the ~~third~~second quarter of fiscal ~~2017.~~2019. Professional services revenue ~~decreased $1.3~~increased $1.9 million, or ~~17.6%~~29.5%, as a result of $1.1 million in services revenue recognized in Q3 of fiscal 2017 for services provided in quarters prior to that, where contractual commitments precluded revenue recognition until that quarter and $0.2 million due to ~~timing~~continued growth in our customer base which require installations of ~~customer installation~~our traditional on premise and ~~implementation projects.~~subscription based software solutions.

Gross profit and gross profit margin. Our total gross profit ~~decreased $0.6~~increased $2.5 million, or ~~3.8%~~13.9%, for the ~~third~~second quarter of fiscal ~~2018~~2020 and total gross profit margin ~~increased 1.3%~~decreased from 51.9% to ~~49.9% from 48.6%~~49.6%. Products gross profit ~~decreased $1.1~~increased $1.0 million and gross profit margin ~~decreased 8.3%~~increased approximately 535 basis points to ~~16.4%~~17.5%. The improvement is primarily ~~as a result of lower~~related to increased product revenue coupled with higher amortization of developed technology by $0.3 million, related to the previously announced general availability of the latest version of our rGuest Buy point of sale solution and the $6.8 million of relatedon a partially fixed cost base which includes software development ~~costs that was placed into service in September of 2017.~~cost amortization. Support, maintenance and subscription services gross profit increased ~~$1.3 million and gross margin increased 3.5% to 76.0% due to the scalable nature of our infrastructure supporting and hosting customers. Professional services gross profit decreased~~ $0.8 million and gross profit margin decreased ~~7.3%~~180 basis points to ~~20.4%~~77.1%. The margin decrease is the result of costs incurred for the expansion of our teams and infrastructure to continue to support and host customers. Professional services gross profit increased $0.7 million and gross profit margin increased 148 basis points to 28.9% due to ~~lower quarterly~~the increase in implementation projects completed during the current quarter following the hiring and training of additional team members at the beginning of fiscal 2020 to meet growing demand for professional ~~services revenues on a higher cost structure following a recent alignment toward enabling the Company to provide more customer-centric services going forward.~~services.

Operating expenses

Operating expenses, excluding ~~the charges for asset write-offs and other fair value adjustments,~~ legal settlements, ~~and~~ restructuring, severance and other charges, increased ~~$2.2~~$2.0 million, or ~~13.6%~~9.3%, during the ~~third~~second quarter of fiscal ~~2018~~2020 compared with the ~~third~~second quarter of fiscal ~~2017.~~

2019.

Product development. Product development increased ~~$0.4~~$0.6 million, or 6.2%, in the ~~third~~second quarter of fiscal ~~2018~~2020 due primarily ~~related~~ to an increase in headcount and additional rent expense related to our India Development Center.

Table of internal R&D headcount offset by a decrease in contract labor. We capitalized approximately $2.1 million and $3.6 million in total development costs during the three months ended December 31, 2017 and 2016, respectively.

Contents

Sales and marketing. Sales and marketing ~~decreased $0.7~~increased $0.5 million, or ~~14.4%~~11.3%, in the ~~third~~second quarter of fiscal ~~2018~~2020 compared with the ~~third~~second quarter of fiscal ~~2017. The change is~~2019 due primarily to ~~a decrease~~the timing of ~~$0.3 million in payroll related expenses~~sales and ~~$0.3 million in advertising and promotion related expenses.~~marketing events.

General and administrative. General and administrative increased ~~$2.4~~by $0.9 million, or ~~66.2%~~16.7%, in the ~~third~~second quarter of fiscal ~~2018~~2020 compared with the ~~third~~second quarter of fiscal ~~2017~~2019 due primarily to increases in headcount and improvement of ~~$1.5 million in stock compensation expense related~~our internal systems to ~~executive stock grants~~support our growing organization and the impact of removing forfeiture rates as a result of adopting ASU No. 2016-09 in the current year, coupled with forfeitures in the prior year due to the departure of former executives. Furthermore, during the third quarter of fiscal 2018 there was an increase of $0.5 million in professional fees related to legal, accounting and tax fees and other ongoing initiatives, and $0.3 million in increased bonus expense related to the forfeitures in the prior year due to the departure of former executives.business requirements.

Restructuring, severance, and other charges.Restructuring, severance, and other charges decreased ~~$1.0~~$0.3 million during the ~~third~~second quarter of fiscal ~~2018~~2020 compared to the ~~third~~second quarter of fiscal ~~2017. In~~2019 due to a reduction in severance payments and executive search fees.

Legal settlements, net. The Company received approximately $0.1 million of settlement funds during the ~~third~~second quarter of fiscal ~~2018 we had $0.2 million in restructuring expense and $0.2 million in severance costs~~2020 due to the resolution of an outstanding lawsuit involving a former employee; no further activity is expected related to our ongoing efforts to better allocate resources to our crucial revenue growth areas while increasing internal efficiencies in other non-revenue generating areas. In the third quarter of fiscal 2017 we had $1.4 million in one-time charges related to the severance of our former CEO.this matter.

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

Other Expenses (Income)

	Three months ended
	September 30,						(Unfavorable) favorable
(Dollars in thousands)	2019			2018			$			%
Other expense (income):
Interest (income)	$	(114	)	$	(97	)	$	(17	)		17.5	%
Interest expense		2			3			(1	)	nm
Other expense, net		108			28			80		nm
Total other expense (income), net	$	(4	)	$	(66	)	$	62		nm

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

nm - not meaningful

Interest income.Interest income consists of interest earned on cash equivalents including short-term investments in ~~certificates of deposit,~~treasury bills and commercial ~~paper, corporate bonds, and corporate-owned life insurance policies.~~paper.

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

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

Income Taxes

	Three months ended
	September 30,						(Unfavorable) favorable
(Dollars in thousands)	2019			2018			$		%
Income tax expense	$	41		$	53		$	12	nm
Effective tax rate		(1.4	)%		(1.4	)%

Three months ended
December 31, (Unfavorable) favorable
(Dollars in thousands) 2017 2016 $ %
Income tax (benefit) expense $ (1,623 ) $ 129
$ 1,752
nm
Effective tax rate 45.6 % (8.0 )%

nm - not meaningful

For the three months ended December 31, 2017, the effective tax rate was different than the statutory rate due primarily to a $1.3 million benefit resulting from the effect of a reduction in the deferred rate due to passage of the Tax Act, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreignSeptember 30, 2019 and ~~state tax effects including a benefit of $0.4 million related to a settlement with the California Franchise Tax Board and other U.S. permanent book to tax differences.~~

~~For the three months ended December 31, 2016,~~2018, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects, and other U.S. permanent book to tax differences.

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

Table of Contents

Because of our losses in prior periods, we ~~recognized a tax benefit in the amount of $0.4 million during the quarter as a result of a settlement with the California Franchise Tax Board regarding disputed tax matters.~~

We have recorded a valuation allowance offsetting substantially all of our deferred tax ~~assets.~~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. ~~Because of our losses in prior periods, management believes that it is more-likely-than-not that we will not realize the benefits of these deductible differences.~~

Results of Operations

First ~~Nine Months~~Half Fiscal ~~2018~~2020 Compared to First ~~Nine Months~~Half Fiscal ~~2017~~

2019

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016:~~2018:

	Six months ended
	September 30,						Increase (decrease)
	2019			2018			$			%
Net revenue:
Products	$	22,742		$	17,849		$	4,893			27.4	%
Support, maintenance and subscription services		40,411			36,785			3,626			9.9
Professional services		15,958			13,576			2,382			17.5
Total net revenue		79,111			68,210			10,901			16.0
Cost of goods sold:
Products		18,417			14,833			3,584			24.2
Support, maintenance and subscription services		8,834			8,051			783			9.7
Professional services		11,628			9,688			1,940			20.0
Total cost of goods sold		38,879			32,572			6,307			19.4
Gross profit	$	40,232		$	35,638		$	4,594			12.9	%
Gross profit margin		50.9	%		52.2	%
Operating expenses:
Product development	$	20,842		$	17,240		$	3,602			20.9	%
Sales and marketing		9,389			9,146			243			2.7
General and administrative		11,911			11,181			730			6.5
Depreciation of fixed assets		920			1,282			(362	)		(28.2	)
Amortization of intangibles		1,292			1,217			75			6.2
Restructuring, severance and other charges		421			889			(468	)		(52.6	)
Legal settlements, net		(119	)		126			(245	)	nm
Operating Loss	$	(4,424	)	$	(5,443	)	$	1,019			(18.7	)%
Operating loss percentage		(5.6	)%		(8.0	)%

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

~~nm - not meaningful~~

Table of Contents

	Six months ended
	September 30,
Net revenue:	2019			2018
Products		28.7	%		26.2	%
Support, maintenance and subscription services		51.1			53.9
Professional services		20.2			19.9
Total net revenue		100.0	%		100.0	%
Cost of goods sold:
Products		23.3	%		21.7	%
Support, maintenance and subscription services		11.1			11.7
Professional services		14.7			14.2
Total cost of goods sold		49.1	%		47.8	%
Gross profit		50.9	%		52.2	%
Operating expenses:
Product development		26.4	%		25.4	%
Sales and marketing		11.9			13.4
General and administrative		15.1			16.4
Depreciation of fixed assets		1.2			1.9
Amortization of intangibles		1.6			1.8
Restructuring, severance and other charges		0.5			1.3
Legal settlements, net		(0.2	)		0.2
Operating loss		(5.6	)%		(8.0	)%

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

Net revenue. Total net revenue ~~decreased $1.8~~increased $10.9 million, or ~~1.8%~~16.0%, during the first ~~nine months~~half of fiscal ~~2018~~2020 compared to the first ~~nine months~~half of fiscal ~~2017.~~2019. Products revenue ~~decreased $4.5~~increased $4.9 million, or ~~14.9%~~27.4%, ~~during the first nine months~~due to increased sales of ~~fiscal 2018 as compared to the first nine months of fiscal 2017 due primarily to decreased~~third party hardware ~~sales.~~including new customers and expansion with existing customers. Support, maintenance and subscription services revenue increased ~~$3.9~~$3.6 million, or ~~8.3%~~9.9%, compared to the first ~~nine months~~half of fiscal ~~2017~~2019 driven ~~primarily~~ by growth in customers using our on premise software products which require the payment of support and maintenance along with continued increases in subscription based service revenue, which increased ~~36.0%~~19.4% during the first ~~nine months~~half of fiscal ~~2018.~~2020 compared to the first half of fiscal 2019. Professional services revenue ~~decreased $1.2~~increased $2.4 million, or ~~6.0% as a result~~17.5%, due to continued growth in our customer base which requires installations of ~~decreased volume of customer installation and implementation projects related to the sale of~~our traditional on premise and subscription based software solutions.

Gross profit and gross profit margin. Our total gross profit ~~decreased $0.6~~increased $4.6 million, or ~~1.3%~~12.9%, for the first ~~nine months~~half of fiscal ~~2018~~2020 and total gross profit margin ~~increased 0.2%~~decreased slightly from 52.2% to ~~50.0%, from 49.8%~~50.9%. Products gross profit ~~decreased $2.1~~increased $1.3 million and gross profit margin ~~decreased 3.7%~~increased approximately 212 basis points to ~~22.9% from 26.6%~~19.0%. The improvement is primarily ~~as a result of an increase of $1.6 million of developed technology amortization~~ related to ~~our rGuest solutions.~~increased product revenue on a partially fixed cost base which includes software development cost amortization. Support, maintenance and subscription services gross profit increased ~~$4.0~~$2.8 million ~~or 11.7%~~ and gross profit margin ~~increased 2.3% to 75.3%~~remained consistent at 78.1%. Margin steadiness is due to the ~~scalable nature~~expansion of our teams and infrastructure to continue supporting and hosting customers. Professional services gross profit ~~decreased $2.5~~increased $0.4 million and gross profit margin decreased ~~11.6%~~151 basis points to ~~18.3% as a re-deployment~~27.1% due to the hiring and training of ~~internal resources that were previously not billable were converted into billable functions as a part~~additional team members at the beginning of ~~restructuring our~~fiscal 2020 to meet growing demand for professional ~~services workforce into teams responsible for named customer accounts.~~services.

Operating expenses

Operating expenses, excluding ~~the charges for asset write-offs and other fair value adjustments,~~ legal settlements, ~~and~~ restructuring, severance and other charges, increased ~~$3.2~~$4.3 million, or ~~6.1%~~10.7%, during the first ~~nine months~~half of fiscal ~~2018~~2020 compared with the first ~~nine months~~half of fiscal ~~2017.~~

2019.

Product development. Product development ~~remained relatively flat~~increased $3.6 million, or 20.9%, in the first ~~nine months~~half of fiscal ~~2018 compared~~2020 due primarily to the reduction of cost capitalization and the continued expansion of our product development teams. The products in our rGuest platform for which we capitalized costs reached general availability be the beginning of the second quarter of fiscal 2019. These products join our well established products with the application of agile development practices in a more dynamic development process that involves higher frequency releases of product features and functions. The Company capitalized $2.0 million of external use software costs, and $0.3 million of internal use software development costs in first ~~nine months~~quarter of fiscal ~~2017 which includes an increase~~2019. The Company capitalized no software development costs in the first half of ~~internal R&D headcount offset by a decrease in contract labor.~~fiscal 2020.

Table of Contents

Sales and marketing. Sales and marketing ~~decreased $2.1~~increased slightly by $0.2 million, or ~~13.5%~~2.7%, in the first ~~nine months~~half of fiscal ~~2018~~2020 compared with the first ~~nine months~~half of fiscal ~~2017. The change is~~2019 due primarily to ~~a decrease of $1.9 million~~the increase in ~~incentive commissions~~sales incentives related to better progress through the ~~revision~~first half of ~~our commission plan from total contract value to annual contract value, and $0.3 million decrease in advertising and promotion.~~the year towards sales teams reaching established quotas.

General and administrative. General and administrative increased ~~$4.8~~by $0.7 million, or ~~34.9%~~6.5%, in the first ~~nine months~~half of fiscal ~~2018~~2020 compared with the first ~~nine months~~half of fiscal ~~2017~~2019 due primarily to increases in headcount and improvement of ~~$2.5 million in stock compensation expense related~~our internal systems to ~~executive stock grants~~support our growing organization and the impact of removing forfeiture rates as a result of adopting ASU No. 2016-09, coupled with forfeitures in the prior year due to the departure of former executives. In addition, there was an increase of $0.9 million in salaries and wages as a result of additional headcount that included several key new hires, and an increase of $0.8 million in professional fees related to legal, accounting and tax fees and other ongoing initiatives.business requirements.

Restructuring, severance, and other charges.Restructuring, severance, and other charges decreased ~~$0.2~~$0.5 million during the first ~~nine months~~half of fiscal ~~2018~~2020 compared to the first ~~nine months~~half of fiscal ~~2017. In~~2019 due to a reduction in severance payments and executive search fees.

Legal settlements, net. The Company received approximately $0.1 million of settlement funds during the first ~~nine months~~half of fiscal ~~2018 we had $1.0 million in restructuring expense and $0.2 million in severance costs~~2020 due to the resolution of an outstanding lawsuit involving a former employee; no further activity is expected related to our ongoing efforts to better allocate resources to our crucial revenue growth areas while increasing internal efficiencies in other non-revenue generating areas. In the first nine months of fiscal 2017 we had $1.4 million in one-time charges related primarily to the severance of our former CEO. The restructuring initiative will result in annual savings of $2.7 million across all of our operating expense categories.this matter.

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

Other Expenses (Income)

	Six months ended
	September 30,						(Unfavorable) favorable
(Dollars in thousands)	2019			2018			$			%
Other expense (income):
Interest (income)	$	(194	)	$	(152	)	$	(42	)		27.6	%
Interest expense		3			5			(2	)	nm
Other expense, net		193			228			(35	)		(15.4	)%
Total other expense, net	$	2		$	81		$	(79	)	nm

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

nm - not meaningful

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

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

Income Taxes

	Six months ended
	September 30,						(Unfavorable) favorable
(Dollars in thousands)	2019			2018			$			%
Income tax expense	$	67		$	4		$	(63	)	nm
Effective tax rate		(1.5	)%		(0.1	)%

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

nm - not meaningful

For the ~~nine~~six months ended December 31, 2017, the effective tax rate was different than the statutory rate due primarily to a $1.3 million benefit resulting from the effect of a reduction in the deferred rate due to passage of the Tax Act, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreignSeptember 30, 2019 and ~~state tax effects including a benefit of $0.4 million related to a settlement with the California Franchise Tax Board and other U.S. permanent book to tax differences.~~

~~For the nine months ended December 31, 2016,~~2018, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets in the U.S. and certain foreign jurisdictions, which were offset by increases in the valuation allowance, certain foreign and state ~~taxes,~~tax effects, and other U.S. permanent book to tax differences.

Table of Contents

Liquidity and Capital Resources

Overview

Our operating cash requirements consist primarily of working capital needs, operating expenses, capital expenditures, and ~~capital expenditures.~~payments of principal and interest on indebtedness outstanding, which primarily consists of finance lease and obligations at September 30, 2019. We believe that cash flow from operating activities, cash on hand of ~~$37.6~~$38.9 million as of ~~December 31, 2017~~September 30, 2019 and access to capital markets will provide adequate funds to meet our short- and long-term liquidity ~~requirements in the next 12 months.~~

requirements.

As of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017,~~2019, our total debt was approximately ~~$0.2~~$0.1 million, comprised of ~~capital~~finance lease obligations in both periods.

At ~~December 31, 2017,~~September 30, 2019, 100% of our cash and cash equivalents of which 92% is located in the United States, were deposited in bank accounts or invested in highly liquid investments with original ~~maturities~~maturity from the date of acquisition of three months or ~~less. We maintain approximately 92% of our cash~~less, including investments in treasury bills and ~~cash equivalents in the United States.~~commercial paper. Therefore, we believe that credit risk is limited with respect to our cash and cash ~~equivalents.~~

equivalents balances.

Cash Flow

	Six Months Ended September 30,
(In thousands)	2019			2018
Net cash provided by (used in):
Operating activities	$	1,234		$	(2,748	)
Investing activities		(1,942	)		(3,524	)
Financing activities		(1,065	)		(616	)
Effect of exchange rate changes on cash		(83	)		(151	)
Net decrease in cash and cash equivalents	$	(1,856	)	$	(7,039	)

Nine months ended
December 31,
(In thousands) 2017 2016
Net cash provided by (used in):
Operating activities $ 2,098
$ 5,393
Investing activities (12,588 ) (12,502 )
Financing activities (1,282 ) (687 )
Effect of exchange rate changes on cash 132
(99 )
Net decrease in cash and cash equivalents $ (11,640 ) $ (7,895 )

Cash flow ~~provided by~~used in operating activities. Cash flow provided by operating activities was ~~$2.1~~$1.2 million in the first ~~nine months~~half of fiscal ~~2018. Operating assets and liabilities decreased $3.4 million~~2020. The provision of cash was due ~~mainly~~primarily to ~~the timing of collections and~~our operating loss of ~~$8.1~~$4.5 million ~~were offset by non-cash charges~~with offsetting adjustments of ~~$10.7~~$10.3 million in non-cash expense including depreciation, ~~and~~ amortization, and ~~$3.8~~share-based compensation and a decrease of $4.6 million in ~~share-based compensation. Total share-based compensation increased $3.0 million for the nine months ended December 31, 2017 due to higher value executive stock grants~~net operating assets and ~~the impact of removing forfeiture rates.~~liabilities.

Cash flow used in investing activities. ~~For~~During the first ~~nine months~~half of fiscal ~~2018,~~2020, the ~~$12.6~~$2.0 million ~~in cash~~ used in investing activities ~~was primarily comprised of $7.3 million for the development of proprietary software and $5.3 million for purchase~~consisted of property and equipment purchases. During the first half of fiscal 2019, the $3.5 million used in investing activities consisted of $1.3 million of property and ~~internal use~~equipment purchases along with $2.2 million of capitalized software ~~development.~~development costs.

Cash flow used in financing activities. During the first ~~nine months~~half of fiscal ~~2018,~~2020, the ~~$1.3~~$1.1 million used in financing activities was primarily ~~comprised of $1.2 million~~ related to the repurchase of shares to satisfy employee tax ~~withholding.~~withholding on share-based compensation.

Contractual Obligations

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

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

As of ~~December 31, 2017,~~September 30, 2019, there were no ~~other~~ significant changes to our contractual obligations as presented in our Annual Report for the year ended March 31, ~~2017~~.

2019.

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.

Table of Contents

Critical Accounting Policies

A detailed description of our significant accounting policies is included in our Annual Report for the year ended March 31, ~~2017~~.2019. There have been no material changes in our significant accounting policies and estimates since March 31, ~~2017~~2019 except as noted in Note 2, Summary of Significant Accounting Policies.

Forward-Looking Information

This Quarterly Report and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. ~~Forward-looking~~These statements are ~~neither historical facts nor assurances~~not guarantees of future ~~performance. Instead, they are based only on our current beliefs, expectations~~performance and ~~assumptions regarding the future of our business, future plans~~involve risks, uncertainties, and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstancesassumptions that are difficult to ~~predict~~predict. These statements are based on management’s current expectations, intentions, or beliefs and ~~many~~are subject to a number of ~~which are outside of our control. Our actual results~~factors, assumptions, and ~~financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors~~uncertainties that could cause ~~our~~ actual results ~~and financial condition~~ to differ materially from those ~~indicated~~described in the forward-looking ~~statements~~statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include ~~among others, our ability to achieve operational efficiencies and meet customer demand for products and services and~~ the risk factors set forth in Item 1A in Part II of this Quarterly Report and Item IA of our Annual Report for the fiscal year ended March 31, ~~2017. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made.~~2019. We undertake no obligation to ~~publicly~~ update any such factor or to publicly announce the results of any revisions to any forward-looking ~~statement made in this Quarterly Report or any other forward-looking statement that may be made from time to time, whether written or oral,~~statements contained herein whether as a result of new information, future events, or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our Annual Report for the fiscal year ended March 31, ~~2017~~.2019. There have been no material changes in our market risk exposures since March 31, ~~2017~~.

2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Change in Internal Control over Financial Reporting

~~None.~~

In connection with the adoption of Topic 842, we assessed the impact to our internal controls over financial reporting and noted no material changes during the period ended September 30, 2019.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes in the risk factors included in our Annual Report for the fiscal year ended March 31, ~~2017~~2019 that may materially affect our business, results of operations, or financial condition.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


~~31.1~~

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


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


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


32
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~~
101		The following materials from our quarterly report on Form 10-Q for the quarter ended ~~December 31, 2017,~~September 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017,~~2019, (ii) Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~December 31, 2017 and 2016,~~September 30, 2019, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and ~~nine~~six months ended ~~December 31, 2017 and 2016,~~September 30, 2019, (iv) Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016,~~2018, (v) Condensed Consolidated Statements of Shareholders' Equity for the three and ~~(v)~~six months ended September 30, 2019 and (vi) Notes to Condensed Consolidated Financial Statements for the three and ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2019.

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~~SIGNATURE~~

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 26, 2018~~
Date:	October 29, 2019	/s/ Anthony S. Pritchett
		Anthony S. Pritchett
		Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Officer)



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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, without par value	AGYS
~~(770) 810-7800~~
~~(Registrant’s telephone number, including area code)~~

~~N/A~~
~~(Former name, former address and former fiscal year, if changed since last report)~~ The NASDAQ Stock Market LLC



Large accelerated filer	¨ ☐		Accelerated filer	x ☒

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

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

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




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

		Condensed Consolidated Balance Sheets ~~(Unaudited)~~ - ~~December 31, 2017~~September 30, 2019 (Unaudited) and March 31, ~~2017~~2019	3

		Condensed Consolidated Statements of Operations (Unaudited) - Three and ~~Nine~~Six Months Ended ~~December 31, 2017~~September 30, 2019 and ~~December 31, 2016~~September 30, 2018	4

		Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - Three and ~~Nine~~Six Months Ended ~~December 31, 2017~~September 30, 2019 and ~~December 31, 2016~~September 30, 2018	5

		Condensed Consolidated Statements of Cash Flows (Unaudited) ~~- Nine~~– Six Months Ended ~~December 31, 2017~~September 30, 2019 and ~~December 31, 2016~~September 30, 2018	6

		Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - Three and Six Months Ended September 30, 2019 and September 30, 2018	7

		Notes to Condensed Consolidated Financial Statements (Unaudited)	7 8

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 20

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	29 28

	Item 4	Controls and Procedures	29 28

Part II. Other Information

	Item 1	Legal Proceedings	30 29

	Item 1A	Risk Factors	30 29

	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	30 29

	Item 3	Defaults Upon Senior Securities	30 29

	Item 4	Mine Safety Disclosures	30 29

	Item 5	Other Information	30 29

	Item 6	Exhibits	30

Signatures			31



	December 31, 2017			March 31, 2017
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	37,615		$	49,255
Accounts receivable, net of allowance for doubtful accounts of $751 and $509, respectively	14,746			15,598
Inventories	2,131			2,211
Prepaid expenses and other current assets	6,849			6,456
Total current assets	61,341			73,520
Property and equipment, net	17,760			16,000
Goodwill	19,622			19,622
Intangible assets, net	8,496			8,530
Software development costs, net	46,086			46,999
Other non-current assets	2,613			2,634
Total assets	$	155,918		$	167,305
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,175		$	8,702
Deferred revenue	23,433			29,183
Accrued liabilities	9,843			8,331
Capital lease obligations, current	113			121
Total current liabilities	41,564			46,337
Deferred income taxes, non-current	2,105			3,181
Capital lease obligations, non-current	50			116
Other non-current liabilities	3,985			4,002
Commitments and contingencies (see Note 6)
Shareholders' equity:
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 23,402,512 and 23,210,682 shares outstanding at December 31, 2017 and March 31, 2017, respectively	9,482			9,482
Treasury shares, 8,204,319 and 8,396,149 at December 31, 2017 and March 31, 2017, respectively	(2,463		)	(2,519		)
Capital in excess of stated value	(2,418		)	(5,782		)
Retained earnings	103,812			112,692
Accumulated other comprehensive loss	(199		)	(204		)
Total shareholders' equity	108,214			113,669
Total liabilities and shareholders' equity	$	155,918		$	167,305



	Three months ended						Nine months ended
	December 31,						December 31,
(In thousands, except share data)	2017			2016			2017			2016
Net revenue:
Products	$	8,156		$	10,006		$	25,758		$	30,257
Support, maintenance and subscription services	17,215			16,234			50,990			47,087
Professional services	5,939			7,208			18,557			19,732
Total net revenue	31,310			33,448			95,305			97,076
Cost of goods sold:
Products (inclusive of developed technology amortization)	6,820			7,530			19,862			22,217
Support, maintenance and subscription services	4,132			4,464			12,610			12,714
Professional services	4,730			5,213			15,160			13,835
Total cost of goods sold	15,682			17,207			47,632			48,766
Gross profit	15,628			16,241			47,673			48,310
	49.9		%	48.6		%	50.0		%	49.8		%
Operating expenses:
Product development	7,269			6,847			20,708			20,647
Sales and marketing	4,278			5,000			13,616			15,746
General and administrative	6,114			3,678			18,475			13,692
Depreciation of fixed assets	581			598			1,892			1,791
Amortization of intangibles	471			353			1,421			1,031
Restructuring, severance and other charges	378			1,394			1,241			1,484
Legal settlements	150			—			150			85
Operating loss	(3,613		)	(1,629		)	(9,830		)	(6,166		)
Other (income) expense:
Interest income	(13		)	(86		)	(64		)	(135		)
Interest expense	3			3			7			11
Other expense, net	(46		)	62			(196		)	140
Loss before taxes	(3,557		)	(1,608		)	(9,577		)	(6,182		)
Income tax (benefit) expense	(1,623		)	129			(1,439		)	252
Net loss	$	(1,934	)	$	(1,737	)	$	(8,138	)	$	(6,434	)

Weighted average shares outstanding	22,851			22,611			22,777			22,605
Loss per share - basic and diluted:
Loss per share	$	(0.08	)	$	(0.08	)	$	(0.36	)	$	(0.28	)



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

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



	December 31, 2017							March 31, 2017
	Gross					Net		Gross					Net
	carrying		Accumulated			carrying		carrying		Accumulated			carrying
(In thousands)	amount		amortization			amount		amount		amortization			amount
Amortized intangible assets:
Customer relationships	$	10,775	$	(10,775	)	$	—	$	10,775	$	(10,775	)	$	—
Non-competition agreements	2,700		(2,700		)	—		2,700		(2,700		)	—
Developed technology	10,055		(10,055		)	—		10,055		(10,055		)	—
Trade names	230		(134		)	96		230		(100		)	130
Patented technology	80		(80		)	—		80		(80		)	—
	23,840		(23,744		)	96		23,840		(23,710		)	130
Unamortized intangible assets:
Trade names	8,400		N/A			8,400		8,400		N/A			8,400
Total intangible assets	$	32,240	$	(23,744	)	$	8,496	$	32,240	$	(23,710	)	$	8,530

Software development costs	$	53,368	$	(17,727	)	$	35,641	$	46,598	$	(10,356	)	$	36,242
Project expenditures not yet in use	10,445		—			10,445		10,757		—			10,757
Total software development costs	$	63,813	$	(17,727	)	$	46,086	$	57,355	$	(10,356	)	$	46,999



	Estimated
	Amortization
(In thousands)	Expense
Fiscal year ending March 31,
2018	$	2,657
2019	10,504
2020	9,765
2021	9,680
2022	2,568
2023	563
Total	$	35,737



	Number of Rights		Weighted- Average Exercise Price		Remaining Contractual Term	Aggregate Intrinsic Value
(In thousands, except share and per share data)			(per right)		(in years)
Outstanding at April 1, 2017	1,094,978		$	10.44
Granted	204,213		10.56
Exercised	(41,691	)	9.14
Forfeited	(55,530	)	9.98
Cancelled/expired	(54,679	)	9.56
Outstanding at December 31, 2017	1,147,291		$	10.58	5.4	$	2,038
Exercisable at December 31, 2017	245,064		$	10.26	3.4	$	574



	Number of Shares		Weighted- Average Grant- Date Fair Value
(In thousands, except share and per share data)			(per share)
Outstanding at April 1, 2017	490,355		$	10.72
Granted	251,010		11.02
Vested	(221,897	)	11.29
Forfeited	(80,793	)	10.72
Outstanding at December 31, 2017	438,675		$	10.60

Ohio		34-0907152