NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands, except per share data)
1. Nature of Operations and Financial Statement Presentation
Nature of Operations
Agilysys has been a leader in hospitality software for more than 40 years, delivering innovative guest-centric technology solutions for gaming, hotels, resorts and cruise, corporate foodservice management, restaurants, universities, stadia and healthcare. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), property management systems (PMS), inventory and procurement, payments, and related applications, to manage the entire guest journey. Agilysys is known for its leadership in hospitality, its broad product offerings and its customer-centric service. Some of the largest hospitality companies around the world use Agilysys solutions to help improve guest loyalty, drive revenue growth and 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 and Healthcare. A significant portion of our consolidated revenue is derived from contract support, maintenance and subscription services.
Agilysys operates across North America, Europe, Asia-Pacific, and India with headquarters located in Alpharetta, GA. For more information, visit www.agilysys.com.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include our accounts consolidated with our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our fiscal year ends on March 31st. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal 2020 refers to the fiscal year ending March 31, 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 Sheet as of
June 30, 2019
, as well as the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss, Condensed Consolidated Statements of Cash Flows, and the Condensed Consolidated Statements of Shareholders' Equity for the
three months ended June 30, 2019 and 2018
, are unaudited. However, these financial statements have been prepared on the same basis as those in the audited annual financial statements, except for the recently adopted accounting pronouncements described below. In the opinion of management, all adjustments of a recurring nature necessary to fairly state the results of operations, financial position, and cash flows have been made.
These unaudited interim financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended
March 31, 2019
, filed with the Securities and Exchange Commission (SEC) on 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, 2019
, included in our Annual Report on Form 10-K. Our accounting policy for leases changed with
the adoption of Accounting Standards Update ("ASU") No. 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.
Adopted and Recently Issued Accounting Pronouncements
In April 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-04,
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.
ASU 2019-04 provides corrections, updates and clarifications to the previously issued updates ASU 2016-13, ASU 2017-12 and ASU 2016-01. Various areas of the codification were impacted from the update. The standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. Consistent with the documentation below, we are still assessing the impact of the adoption of ASU 2016-13, and the other two ASUs affected by ASU 2019-04 are not applicable to us. We are currently reviewing this standard to assess the impact on our future consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-1
5, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
ASU 2018-15 addresses the treatment of implementation costs incurred in a hosting arrangement that is a service contract. The update does not impact the accounting for the service element of a hosting arrangement that is a service contract. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In August 2018, 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. 2017-04 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 June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326)
. This new standard changes the impairment model for most financial assets and certain other instruments. Entities will be required to use a model that will result in the earlier recognition of allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. The new standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. We are currently reviewing this standard to assess the impact on our future consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which requires lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Unlike Accounting Standard Codification Topic 840 ("Topic 840"), which requires only capital leases to be recognized on the balance sheet, the new guidance requires both types of leases to be recognized on the balance sheet. The most prominent change for leasees is the requirement to recognize both Right-of-Use (ROU) assets and lease liabilities for leases 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.
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
$10.9 million
and
$9.1 million
, and over time (support, maintenance and subscription services and professional services) totaled
$27.5 million
and
$24.9 million
for the
three months ended June 30, 2019 and 2018
, respectively. See Nature of Goods and Services section below for additional information regarding revenue recognition procedures for our revenue streams.
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. A majority of our hardware sales involve shipment directly from its suppliers to the end-user customers. In these transactions, we are the primary obligor as we are responsible for negotiating price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and we bear the credit risk if the customer does not pay for the goods. As the principal contact with the customer, we recognize revenue and cost of goods sold when we are notified by the supplier that the product has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of destination or upon installation at the customer site.
Support and maintenance revenue is derived from providing telephone and on-line technical support services, bug fixes, and unspecified software updates and upgrades to customers on a when-and-if-available basis. Each of these performance
obligations provide benefit to the customer on a standalone basis and are distinct in the context of the contract. Each of these distinct performance obligations represent a stand ready obligation to provide service to a customer, which is concurrently delivered and has the same pattern of transfer to the customer, which is why we account for these support services as a single performance obligation, recognized over the term of the maintenance agreement.
Our subscription service revenue is comprised of fees for contracts that provide customers a right to access our software for a subscribed period. We do not provide the customer the contractual right to license the software at any time outside of the subscription period under these contracts. The customer can only benefit from the software and software maintenance when provided the right to access the software. Accordingly, each of the rights to access the software, the maintenance services, and any hosting services is not considered a distinct performance obligation in the context of the contract and should be combined into a single performance obligation to be recognized over the contract period. Typically, we invoice fees monthly and either party has the ability to cancel the agreement at each invoiced period. As a result, the contractual period for revenue recognition purposes is considered to be one month with monthly renewals for the term of the customer agreement.
Professional services revenues primarily consist of fees for consulting, installation, integration and training and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the professional services as the services are being performed. Professional services can be provided by internal or external providers, do not significantly affect the customer's ability to access or use other provided goods or services, and provide a measure of benefit beyond that of other promised goods or services in the contract. As a result, professional services are considered distinct in the context of the contract and represent a separate performance obligation. Professional services that are billed on a time and materials basis are recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time using an input method based on labor hours expended to date relative to the total labor hours expected to be required to satisfy the related performance obligation. These contracts are reviewed quarterly for loss contract accounting treatment.
We use the market estimate approach to drive standalone selling price ("SSP") by maximizing observable data points (in the form of recently executed customer contracts) to determine the price customers are willing to pay for the goods and services transferred. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative SSP basis.
Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of goods sold. Revenue is recorded net of any applicable taxes collected and remitted to governmental agencies.
Contract Balances
Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of our contract assets represent unbilled amounts related to professional services. We expect billing and collection of our contract assets to occur within the next twelve months. We receive payments from customers based upon contractual billing schedules and accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract.
Revenue recognized during the
three months ended June 30, 2019 and 2018
from amounts included in contract liabilities at the beginning of the period was $
15.6 million
and $
11.6 million
, respectively. During the
three months ended June 30, 2019 and 2018
, we transferred $
2.0 million
and $
3.0 million
to accounts receivable from contract assets recognized at March 31, 2019 and April 1, 2018, respectively, because the right to the transaction consideration became unconditional.
Our arrangements are for a period of one year or less. As a result, unsatisfied performance obligations as of
June 30, 2019
are expected to be satisfied and the allocated transaction price recognized in revenue within a period of 12 months or less.
Assets Recognized from Costs to Obtain a Contract
Sales commission expenses that would not have occurred absent the customer contracts are considered incremental costs to obtain a contract. We have elected to take the practical expedient available to expense the incremental costs to obtain a contract as incurred when the expected benefit and amortization period is one year or less. For subscription contracts that are renewed monthly based on an agreement term, we capitalize commission expenses and amortize as we satisfy the underlying performance obligations, generally based on the contract terms and anticipated renewals. Other sales commission expenses have a period of benefit of one year or less, and are therefore expensed as incurred in line with the practical expedient elected.
As of
June 30, 2019
, we had $
3.3 million
of capitalized sales incentive costs. These balances are included in other non-current assets on our condensed consolidated balance sheets. During the
three months ended June 30, 2019 and 2018
, we expensed
$1.0 million
and
$0.9 million
, respectively, of sales commissions, including amortization of capitalized amounts of $
0.3 million
and $
0.3 million
, respectively, which is included in operating expenses - sales and marketing in our condensed consolidated statement of operations. All other costs to obtain a contract are not considered incremental and therefore are expensed as incurred.
4. Intangible Assets and Software Development Costs
The following table summarizes our intangible assets and software development costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
March 31, 2019
|
|
|
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
|
10,398
|
|
(10,398
|
)
|
—
|
|
|
10,398
|
|
(10,398
|
)
|
—
|
|
|
Trade names
|
230
|
|
(203
|
)
|
27
|
|
|
230
|
|
(192
|
)
|
38
|
|
|
Patented technology
|
80
|
|
(80
|
)
|
—
|
|
|
80
|
|
(80
|
)
|
—
|
|
|
|
24,183
|
|
(24,156
|
)
|
27
|
|
|
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
|
|
$
|
(24,156
|
)
|
$
|
8,427
|
|
|
$
|
32,583
|
|
$
|
(24,145
|
)
|
$
|
8,438
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs
|
$
|
67,541
|
|
$
|
(36,149
|
)
|
$
|
31,392
|
|
|
$
|
67,541
|
|
$
|
(32,974
|
)
|
$
|
34,567
|
|
The following table summarizes our remaining amortization expense relating to in service intangible assets and software development costs.
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Amortization
|
|
(In thousands)
|
Expense
|
|
Fiscal year ending March 31,
|
|
|
2020
|
$
|
9,413
|
|
|
2021
|
12,515
|
|
|
2022
|
5,403
|
|
|
2023
|
3,399
|
|
|
2024
|
689
|
|
|
Total
|
$
|
31,419
|
|
Amortization expense for software development costs related to assets to be sold, leased, or otherwise marketed was
$3.2 million
and
$2.7 million
for the
three months ended
June 30, 2019
and
2018
, respectively. These charges are included as costs of goods sold - products in our condensed consolidated statements of operations. Amortization expense relating to other definite-lived intangible assets was
$11,500
for the
three months ended June 30, 2019 and 2018
. These charges are classified as operating expenses - amortization of intangibles in our condensed consolidated statements of operations along with amortization expense related to our capitalized internal-use software that we classify in Property and Equipment, net within the condensed consolidated balance sheets.
Capitalized software development costs for software internally developed to be sold, leased, or otherwise marketed, are carried on our balance sheet at carrying value, net of accumulated amortization. The Company did not capitalize any amounts for external-use software development costs during the
three months ended June 30, 2019
due to the current active projects which carry a sufficiently short amount of time between achieving technological feasibility and reaching general availability to preclude capitalization. We capitalized approximately
$2.0 million
during the
three months ended June 30, 2018
.
5. Additional Balance Sheet Information
Additional information related to the condensed consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30,
2019
|
|
March 31,
2019
|
|
Accrued liabilities:
|
|
|
|
|
Salaries, wages, and related benefits
|
$
|
7,585
|
|
|
$
|
12,929
|
|
|
Other taxes payable
|
1,319
|
|
|
1,041
|
|
|
Accrued legal settlements
|
15
|
|
|
15
|
|
|
Severance liabilities
|
34
|
|
|
46
|
|
|
Professional fees
|
189
|
|
|
67
|
|
|
Deferred rent
|
—
|
|
|
273
|
|
|
Other
|
332
|
|
|
521
|
|
|
Total
|
$
|
9,474
|
|
|
$
|
14,892
|
|
|
Other non-current liabilities:
|
|
|
|
|
Uncertain tax positions
|
$
|
1,090
|
|
|
$
|
1,083
|
|
|
Deferred rent and asset retirement obligations
|
165
|
|
|
2,613
|
|
|
Other
|
76
|
|
|
76
|
|
|
Total
|
$
|
1,331
|
|
|
$
|
3,772
|
|
6. Leases
We adopted Topic 842 on April 1, 2019 using the current period adjustment method of adoption to recognize leases with a duration greater than 12 months on the balance sheet. The impact of adoption on April 1, 2019 was recognition of operating lease liabilities of $16.3 million and related Right-of-Use ("ROU") assets of $13.8 million. Prior period financial statements have not been restated and therefore the comparative amounts are not presented below or on the condensed consolidated balance sheet as of
March 31, 2019
. For operating leases with a term greater than 12 months, we have recorded the lease liability at the present value of lease payments over the remaining lease term and the related ROU asset. The remaining lease term has been determined for each lease considering factors such as renewal options, termination options, our company's historical practices in exercising such options, and current business knowledge which may impact lease related decisions. The majority of our leases are comprised of real estate leases for our respective offices around the globe. Our finance leases consist of office equipment. We have no residual value guarantees or restrictions or covenants imposed by, or associated with our active leases. Since our current leases do not provide an implicit rate of return, our incremental borrowing rates used to determine the value of lease payments in implementation are estimated at April 1, 2019, based on collateralized rates for a term similar to each 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
June 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.
The components of lease expenses for the three months ended
June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended June 30, 2019
|
|
Operating leases expense
|
$
|
1,013
|
|
|
Finance lease expense:
|
|
|
Amortization of ROU assets
|
6
|
|
|
Interest on lease liabilities
|
2
|
|
|
Total finance lease expense
|
8
|
|
|
Variable lease costs
|
68
|
|
|
Short term lease expense
|
14
|
|
|
Total lease expense
|
$
|
1,103
|
|
Other information related to leases was as follows:
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
Supplemental cash flow information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
|
|
|
Operating cash flows for operating leases
|
$
|
1,014
|
|
|
Operating cash flows for finance leases
|
6
|
|
|
Financing cash flows for finance leases
|
2
|
|
|
ROU assets obtained in exchange for lease obligations (in thousands):
|
|
|
Operating leases
|
$
|
185
|
|
|
Finance leases
|
—
|
|
|
Weighted average remaining lease terms
|
|
|
Operating leases
|
5.57
|
|
|
Finance leases
|
2.35
|
|
|
Weighted average discount rates
|
|
|
Operating leases
|
9.85
|
%
|
|
Finance leases
|
4.25
|
%
|
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheet as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating leases
|
Finance leases
|
|
2020 (excluding the three months ended June 30, 2019)
|
$
|
3,260
|
|
$
|
22
|
|
|
2021
|
4,432
|
|
23
|
|
|
2022
|
3,669
|
|
15
|
|
|
2023
|
2,291
|
|
—
|
|
|
2024
|
2,099
|
|
—
|
|
|
Thereafter
|
5,913
|
|
—
|
|
|
Total undiscounted future minimum lease payments
|
21,664
|
|
60
|
|
|
Less: difference between undiscounted lease payments and discounted operating lease liabilities
|
(5,923
|
)
|
(5
|
)
|
|
Total operating lease liabilities
|
$
|
15,741
|
|
$
|
55
|
|
As previously disclosed on our March 31, 2019 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable operating leases as of March 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ending (in thousands)
|
Operating leases
|
Finance leases
|
|
2020
|
$
|
4,143
|
|
$
|
27
|
|
|
2021
|
3,945
|
|
23
|
|
|
2022
|
3,166
|
|
15
|
|
|
2023
|
1,916
|
|
—
|
|
|
2024
|
1,770
|
|
—
|
|
|
Thereafter
|
4,497
|
|
—
|
|
|
Total lease payments
|
19,437
|
|
65
|
|
|
Less: Amounts representing interest
|
—
|
|
(8
|
)
|
|
Present value of lease liabilities
|
$
|
19,437
|
|
$
|
57
|
|
7. Income Taxes
The following table compares our income tax expense (benefit) and effective tax rates for the
three months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 30,
|
|
(Dollars in thousands)
|
2019
|
|
2018
|
|
Income tax expense (benefit)
|
$
|
25
|
|
|
$
|
(49
|
)
|
|
Effective tax rate
|
(1.6
|
)%
|
|
2.7
|
%
|
For the
three months ended June 30, 2019 and 2018
, the effective tax rate was different than the statutory rate due primarily to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects and other U.S. permanent book to tax differences.
We have recorded a valuation allowance offsetting substantially all of our deferred tax assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Because of our losses in prior periods, management believes that it is more-likely-than-not that we will not realize the benefits of these deductible differences.
8. Commitments and Contingencies
Agilysys is the subject of various threatened or pending legal actions and contingencies in the normal course of conducting its business. We provide for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such individual or aggregated matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
On April 6, 2012, Ameranth, Inc. filed a complaint against us in the U.S. District Court of Southern District of California alleging that certain of our products infringe patents owned by Ameranth directed to configuring and transmitting hospitality menus (e.g. restaurant menus) for display on electronic devices, and synchronizing the menu content between the devices. The case against us was consolidated with similar cases brought by Ameranth against more than 30 other defendants. Most of 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 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 appeal may have on our case. Ameranth seeks monetary damages, injunctive relief, costs and attorneys' fees from us. At this time, we are not able to predict the outcome of this lawsuit. However, we dispute the allegations of wrongdoing and are vigorously defending ourselves in this matter.
9. Loss per Share
The following data shows the amounts used in computing (loss) per share and the effect on earnings and the weighted average number of shares of dilutive potential common shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 30,
|
|
(In thousands, except per share data)
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
Net loss
|
$
|
(1,575
|
)
|
|
$
|
(1,736
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average shares outstanding
|
23,212
|
|
|
23,095
|
|
|
|
|
|
|
|
Loss per share - basic and diluted:
|
|
|
|
|
Loss per share
|
$
|
(0.07
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
Anti-dilutive stock options, SSARs, restricted shares and performance shares
|
1,273
|
|
|
1,356
|
|
Basic loss per share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. The outstanding shares used to calculate the weighted average basic shares excludes
445,829
and
490,117
of restricted shares at
June 30, 2019
and
2018
, respectively, as these shares were issued but were not vested and therefore, not considered outstanding for purposes of computing basic loss per share at the balance sheet dates.
Diluted loss per share includes the effect of all potentially dilutive securities on earnings per share. We have stock options, stock-settled appreciation rights ("SSARs"), unvested restricted shares and unvested performance shares that are potentially dilutive securities. When a loss is reported, the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of share-based compensation awards because doing so would be anti-dilutive. Therefore, for all periods presented, basic weighted-average shares outstanding were used in calculating the diluted net loss per share.
10. Share-based Compensation
We may grant non-qualified stock options, incentive stock options, SSARs, restricted shares, and restricted share units under our shareholder-approved 2016 Stock Incentive Plan ("2016 Plan") for up to
2.0 million
common shares, plus
957,575
common shares, the number of shares that were remaining for grant under the 2011 Stock Incentive Plan ("2011 Plan") as of the effective date of the 2016 Plan, plus the number of shares remaining for grant under the 2011 Plan that are forfeited, settled in cash, canceled or expired. The maximum aggregate number of restricted shares or restricted share units that may be granted under the 2016 Plan is
1.25 million
.
We may distribute authorized but unissued shares or treasury shares to satisfy share option and appreciation right exercises or restricted share and performance share awards.
We record compensation expense related to stock options, SSARs, restricted shares, and performance shares granted to certain employees and non-employee directors based on the fair value of the awards on the grant date. The fair value of restricted share and performance share awards is based on the closing price of our common shares on the grant date. The fair value of stock option and SSARs awards is estimated on the grant date using the Black-Scholes-Merton option pricing model, which includes assumptions regarding the risk-free interest rate, dividend yield, life of the award, and the volatility of our common shares.
The following table summarizes the share-based compensation expense for options, SSARs, restricted and performance awards included in the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
Product development
|
$
|
268
|
|
|
$
|
(85
|
)
|
|
Sales and marketing
|
62
|
|
|
65
|
|
|
General and administrative
|
152
|
|
|
429
|
|
|
Total share-based compensation expense
|
$
|
482
|
|
|
$
|
409
|
|
Stock-Settled Appreciation Rights
SSARs are rights granted to an employee to receive value equal to the difference in the price of our common shares on the date of the grant and on the date of exercise. This value is settled in common shares of Agilysys, Inc.
The following table summarizes the activity during the
three months ended June 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
|
(23,545
|
)
|
|
8.47
|
|
|
|
|
|
|
Forfeited
|
(2,380
|
)
|
|
14.22
|
|
|
|
|
|
|
Cancelled/expired
|
(3,839
|
)
|
|
9.60
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
1,078,243
|
|
|
$
|
12.23
|
|
|
4.8
|
|
$
|
10,048
|
|
|
Exercisable at June 30, 2019
|
733,066
|
|
|
$
|
11.00
|
|
|
4.4
|
|
$
|
7,672
|
|
As of
June 30, 2019
, total unrecognized share-based compensation expense related to non-vested SSARs was
$0.9 million
, which is expected to be recognized over a weighted-average vesting period of
2.8
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
three months ended June 30, 2019
for restricted shares awarded under the 2011 and 2016 Plans:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value
|
|
(In thousands, except share and per share data)
|
|
|
(per share)
|
|
Outstanding at April 1, 2019
|
237,146
|
|
|
$
|
13.46
|
|
|
Granted
|
189,160
|
|
|
22.47
|
|
|
Vested
|
—
|
|
|
—
|
|
|
Forfeited
|
(10,597
|
)
|
|
13.06
|
|
|
Outstanding at June 30, 2019
|
415,709
|
|
|
$
|
17.56
|
|
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
June 30, 2019
, total unrecognized share-based compensation expense related to non-vested restricted stock was
$4.7 million
, which is expected to be recognized over a weighted-average vesting period of
2.8
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 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
three months ended June 30, 2019
for the performance shares awarded under the 2016 Plan:
|
|
|
|
|
|
|
|
Number of Shares
|
|
(In thousands, except share and per share data)
|
|
|
Outstanding at April 1, 2019
|
63,291
|
|
|
Granted
|
30,120
|
|
|
Vested
|
(23,526
|
)
|
|
Forfeited
|
(39,765
|
)
|
|
Outstanding at June 30, 2019
|
30,120
|
|
Based on the performance goals, management estimates a liability of
$450,000
to be settled through the vesting of a variable number of the performance shares subsequent to
March 31, 2020
. As of
June 30, 2019
, total unrecognized share-based compensation expense related to non-vested performance shares was
$405,000
, which is expected to be recognized over the remaining vesting period of
9 months
.
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 transfers between Levels 1, 2, and 3 during the
three months ended June 30, 2019 and 2018
.
The following tables present information about our financial assets measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
June 30, 2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance — non-current
|
$
|
901
|
|
|
—
|
|
|
—
|
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance — non-current
|
$
|
895
|
|
|
—
|
|
|
—
|
|
|
$
|
895
|
|
The recorded value of the corporate-owned life insurance policies is adjusted to the cash surrender value of the policies obtained from the third party life insurance providers, which are not observable in the market, and therefore, are classified within Level 3 of the fair value hierarchy. Changes in the cash surrender value of these policies are recorded within “Other (income) expenses, net” in the condensed consolidated statements of operations.
The following table presents a summary of changes in the fair value of the Level 3 assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
Corporate-owned life insurance:
|
|
|
|
|
Balance on April 1
|
$
|
895
|
|
|
$
|
853
|
|
|
Unrealized gain relating to instruments held at reporting date
|
4
|
|
|
4
|
|
|
Purchases, sales, issuances and settlements, net
|
2
|
|
|
2
|
|
|
Balance on June 30
|
$
|
901
|
|
|
$
|
859
|
|