# AGILYSYS INC (AGYS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AGILYSYS INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/78749/000095017023023196/agys-20230331.htm
Accession: 0000950170-23-023196
Filing date: 2023-05-19
Report date: 2023-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/AGYS/
All MD&A years: /company/AGYS/mda/
Previous year: /company/AGYS/mda/fy2022/ (FY 2022)
Next year: /company/AGYS/mda/fy2024/ (FY 2024)

Item 7. Managements’ 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 Consolidated Statements of Operations and Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding our consolidated financial condition and results of operations. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes that appear in Item 8 of this Annual Report titled, “Financial Statements and Supplementary Data.” Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from those contained in the forward-looking statements. See “Forward-Looking Information” on page 3 of this Annual Report and Item 1A “Risk Factors” in Part I of this Annual Report for additional information concerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Recent Developments

Macroeconomic Conditions

During the year ended March 31, 2023, global macroeconomic conditions were, and continue to be, influenced by a number of factors, including, but not limited to, the COVID-19 pandemic, the Russia-Ukraine war, labor shortages, supply chain disruptions, inflation, and the erosion of foreign currencies relative to the U.S. dollar. We believe such conditions are impacting customer spending and provider pricing decisions resulting in decreased demand, increased costs, and reduced margins particularly in areas outside of the United States.

Our Business

Agilysys has been a leader in hospitality software for more than 40 years, delivering innovative state-of-the-art cloud-native SaaS and on-premise guest-centric technology solutions. Customers around the world include: branded and independent hotels; multi-amenity resort properties; casinos; property, hotel and resort management companies; cruise lines; corporate dining providers; higher education campus dining providers; food service management companies; hospitals; lifestyle communities; senior living facilities; stadiums; and theme parks. Agilysys offers the most comprehensive software solutions in the industry, including point-of-sale (POS), property management (PMS), inventory and procurement, payments, and related applications, to manage the entire guest journey. Agilysys is also known for its world class 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.

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

Our top priority is increasing 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

•
Focusing on product innovation and development

•
Improving our liquidity

•
Increasing organizational efficiency and teamwork

•
Developing our employees and leaders

24

•
Growing revenue by improving the breadth and depth of our product set across both point-of-sale and property management applications

•
Growing revenue through international expansion

The primary objective of our ongoing strategic planning process is to create shareholder value by capitalizing on growth opportunities, increasing profitability 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 separately present revenue earned as products revenue, subscription and maintenance revenue or professional services revenue in our Consolidated Statements of Operations. In addition to the SEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:

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

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

•
Subscription and maintenance revenue – Revenue earned from the ongoing delivery of software updates, upgrades, bug fixes, technical support, and transaction-based fees over the period covered by subscription or maintenance agreements with our customers for both proprietary and remarketed solutions.

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

25

Results of Operations

Fiscal 2023 Compared to Fiscal 2022

Net Revenue and Operating Income

The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","","Year ended March 31,","","","Increase (decrease)"],["(Dollars in thousands)","","2023","","","2022","","","$","","","%"],["Net revenue:"],["Products","","$","43,638","","","$","35,956","","","$","7,682","","","","21.4","%"],["Subscription and maintenance","","","118,285","","","","98,958","","","","19,327","","","","19.5","%"],["Professional services","","","36,142","","","","27,722","","","","8,420","","","","30.4","%"],["Total net revenue","","","198,065","","","","162,636","","","","35,429","","","","21.8","%"],["Cost of goods sold:"],["Products","","","22,994","","","","19,251","","","","3,743","","","","19.4","%"],["Subscription and maintenance","","","26,262","","","","21,141","","","","5,121","","","","24.2","%"],["Professional services","","","27,990","","","","20,712","","","","7,278","","","","35.1","%"],["Total cost of goods sold","","","77,246","","","","61,104","","","","16,142","","","","26.4","%"],["Gross profit","","$","120,819","","","$","101,532","","","$","19,287","","","","19.0","%"],["Gross profit margin","","","61.0","%","","","62.4","%"],["Operating expenses:"],["Product development","","$","50,260","","","$","46,332","","","$","3,928","","","","8.5","%"],["Sales and marketing","","","22,716","","","","14,730","","","","7,986","","","","54.2","%"],["General and administrative","","","30,669","","","","27,734","","","","2,935","","","","10.6","%"],["Depreciation of fixed assets","","","1,769","","","","2,210","","","","(441",")","","","(20.0",")%"],["Amortization of internal-use software and intangibles","","","1,743","","","","1,654","","","","89","","","","5.4","%"],["Other charges","","","435","","","","1,584","","","","(1,149",")","","","(72.5",")%"],["Legal settlements","","","352","","","","969","","","","(617",")","","nm"],["Operating income","","$","12,875","","","$","6,319","","","$","6,556","","","nm"],["Operating income percentage","","","6.5","%","","","3.9","%"]]
[[/GREPCENT_TABLE]]

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26

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

[[GREPCENT_TABLE]]
[["","","Year ended March 31,"],["","","2023","","","2022"],["Net revenue:"],["Products","","","22.1","%","","","22.1","%"],["Subscription and maintenance","","","59.7","","","","60.8"],["Professional services","","","18.2","","","","17.1"],["Total net revenue","","","100.0","%","","","100.0","%"],["Cost of goods sold:"],["Products","","","11.6","%","","","11.8","%"],["Subscription and maintenance","","","13.3","","","","13.0"],["Professional services","","","14.1","","","","12.8"],["Total cost of goods sold","","","39.0","%","","","37.6","%"],["Gross profit","","","61.0","%","","","62.4","%"],["Operating expenses:"],["Product development","","","25.3","%","","","28.4","%"],["Sales and marketing","","","11.5","","","","9.1"],["General and administrative","","","15.5","","","","17.1"],["Depreciation of fixed assets","","","0.9","","","","1.4"],["Amortization of internal-use software and intangibles","","","0.9","","","","1.0"],["Other charges","","","0.2","","","","1.0"],["Legal settlements","","","0.2","","","","0.5"],["Operating income","","","6.5","%","","","3.9","%"]]
[[/GREPCENT_TABLE]]

Net revenue. Total revenue increased $35.4 million, or 21.8%, in fiscal 2023 compared to fiscal 2022. Products revenue increased $7.7 million, or 21.4%, due to higher sales and deliveries to new customers and expansion with existing customers. Subscription and maintenance revenue increased $19.3 million, or 19.5%, driven by continued growth in subscription-based revenue, which increased 27.5% in fiscal 2023 compared to fiscal 2022. Professional services revenue increased $8.4 million, or 30.4%, due to higher sales and service activity as our new and existing customers continue implementing technology to improve their operations.

Gross profit and gross profit margin. Our total gross profit increased $19.3 million, or 19.0%, in fiscal 2023 and total gross profit margin decreased from 62.4% to 61.0%. Products gross profit increased $3.9 million and gross profit margin increased from 46.5% to 47.3% due to a higher proportion of proprietary software revenue over third-party products. Subscription and maintenance gross profit increased $14.2 million and gross profit margin decreased from 78.6% to 77.8% as certain variable costs increased ahead of related revenue. Professional services gross profit increased $1.1 million and gross profit margin decreased from 25.3% to 22.6% reflecting lower utilization rates due to higher non-billable hours on new, more complex solution implementations over the comparable annual periods.

Operating expenses

Operating expenses, excluding the charges for legal settlements and other charges, increased $14.5 million, or 15.6%, in fiscal 2023 compared with fiscal 2022. As a percent of total revenue, operating expenses have decreased 2.9% in fiscal 2023 compared with fiscal 2022.

Product development. Product development includes all expenses associated with research and development. Product development increased $3.9 million, or 8.5%, during fiscal 2023 as compared to fiscal 2022 due to hiring and higher salary and incentive rates across our development teams, increased travel, and higher subscription charges for cloud computing arrangements.

27

Sales and marketing. Sales and marketing increased $8.0 million, or 54.2%, in fiscal 2023 compared with fiscal 2022 due to various sales and marketing investments including several key hires, significantly higher levels of marketing event and trade show activity and increased commission expense on higher sales levels.

General and administrative. General and administrative increased $2.9 million, or 10.6%, in fiscal 2023 compared to fiscal 2022 due to investments in our information security and information technology infrastructure along with hiring and increased salary and incentive rates across our administrative teams, higher rent, increased travel, and higher subscription charges for cloud computing arrangements.

Depreciation of fixed assets. Depreciation of fixed assets decreased $0.4 million or 20.0% in fiscal 2023 as compared to fiscal 2022 due to an increased level of assets with shorter useful lives.

Amortization of internal-use software and intangibles. Amortization of internal-use software and intangibles increased $0.1 million or 5.4% in fiscal 2023 as compared to fiscal 2022 due to the addition of certain intangible assets that began amortizing in January 2022 subsequent to the acquisition of ResortSuite Inc. (ResortSuite) as described in Note 15, Business Combination, to our Consolidated Financial Statements under Item 8 of this Annual Report.

Other charges. Other charges decreased $1.1 million due to a significant reduction in non-recurring charges including ResortSuite acquisition costs during fiscal 2023 compared to fiscal 2022.

Legal settlements. Legal settlements decreased $0.6 million during fiscal 2023 compared to fiscal 2022 due to an decrease in settlements of employment and other business-related matters.

Other Income (Expenses)

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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

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

Other income, net. Other income, net mainly consists of movement of foreign currencies against the U.S. dollar.

Income Taxes

[[GREPCENT_TABLE]]
[["","","Year ended March 31,","","","(Unfavorable) favorable"],["(Dollars in thousands)","","2023","","","2022","","","$","","","%"],["Income tax expense","","$","1,182","","","$","33","","","$","(1,149",")","","nm"],["Effective tax rate","","","7.5","%","","","0.5","%"]]
[[/GREPCENT_TABLE]]

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For fiscal 2023, the effective tax rate was different than the statutory rate due primarily to adjustments to deferred tax assets including decreases in valuation allowances that reduce deferred tax assets.

We are consistently subject to tax audits. Due to the nature of examinations in multiple jurisdictions, changes could occur in the amount of gross unrecognized tax benefits during the next 12 months that we cannot anticipate. Although the timing and outcome of tax settlements remain uncertain, we expect that, as a result of the expiration of various statutes of limitations, a reduction in unrecognized tax benefits including related penalties and interest is more likely than not to occur during the next 12 months.

28

Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of the Company's deferred tax assets. The ultimate realization of deferred tax assets depends on various factors including the generation of taxable income during the future periods in which the underlying temporary differences are deductible. As of March 31, 2023, we had $132.0 million of federal net operating loss carryforwards that expire, if unused, in fiscal years 2033 to 2039, and $43.8 million of federal net operating loss carryforwards that can be carried forward indefinitely. We also had $133.9 million of state net operating loss carryforwards that expire, if unused, in fiscal years 2024 through 2042. We maintain valuation allowances for deferred tax assets until we have sufficient evidence to support the reversal of all or some portion of the allowances. Based on recent earnings and anticipated future earnings, we believe it is reasonably possible that within the next 12 months we will have sufficient positive evidence to conclude that a significant portion of our valuation allowances will no longer be needed. Releasing the valuation allowances would result in the recognition of certain deferred tax assets and significant income tax benefits.

Fiscal 2022 Compared to Fiscal 2021

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","Year ended March 31,","","","Increase (decrease)"],["(Dollars in thousands)","","2022","","","2021","","","$","","","%"],["Net revenue:"],["Products","","$","35,956","","","$","26,714","","","$","9,242","","","","34.6","%"],["Subscription and maintenance","","","98,958","","","","88,565","","","","10,393","","","","11.7","%"],["Professional services","","","27,722","","","","21,897","","","","5,825","","","","26.6","%"],["Total net revenue","","","162,636","","","","137,176","","","","25,460","","","","18.6","%"],["Cost of goods sold:"],["Products, inclusive of developed technology amortization","","","19,251","","","","13,506","","","","5,745","","","","42.5","%"],["Subscription and maintenance","","","21,141","","","","17,985","","","","3,156","","","","17.5","%"],["Professional services","","","20,712","","","","16,309","","","","4,403","","","","27.0","%"],["Total cost of goods sold","","","61,104","","","","47,800","","","","13,304","","","","27.8","%"],["Gross profit","","$","101,532","","","$","89,376","","","$","12,156","","","","13.6","%"],["Gross profit margin","","","62.4","%","","","65.2","%"],["Operating expenses:"],["Product development","","$","46,332","","","$","55,345","","","$","(9,013",")","","","(16.3",")%"],["Sales and marketing","","","14,730","","","","14,196","","","","534","","","","3.8","%"],["General and administrative","","","27,734","","","","33,273","","","","(5,539",")","","","(16.6",")%"],["Depreciation of fixed assets","","","2,210","","","","2,832","","","","(622",")","","","(22.0",")%"],["Amortization of internal-use software and intangibles","","","1,654","","","","1,959","","","","(305",")","","","(15.6",")%"],["Other charges","","","1,584","","","","2,529","","","","(945",")","","","(37.4",")%"],["Legal settlements","","","969","","","","200","","","","769","","","","384.5","%"],["Operating income (loss)","","$","6,319","","","$","(20,958",")","","$","27,277","","","","(130.2",")%"],["Operating income (loss) percentage","","","3.9","%","","","(15.3",")%"]]
[[/GREPCENT_TABLE]]

29

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

[[GREPCENT_TABLE]]
[["","","Year ended March 31,"],["","","2022","","","2021"],["Net revenue:"],["Products","","","22.1","%","","","19.5","%"],["Subscription and maintenance","","","60.8","","","","64.6"],["Professional services","","","17.1","","","","15.9"],["Total net revenue","","","100.0","%","","","100.0","%"],["Cost of goods sold:"],["Products, inclusive of developed technology amortization","","","11.8","%","","","9.8","%"],["Subscription and maintenance","","","13.0","","","","13.1"],["Professional services","","","12.8","","","","11.9"],["Total cost of goods sold","","","37.6","%","","","34.8","%"],["Gross profit","","","62.4","%","","","65.2","%"],["Operating expenses:"],["Product development","","","28.4","%","","","40.4","%"],["Sales and marketing","","","9.1","","","","10.3"],["General and administrative","","","17.1","","","","24.4"],["Depreciation of fixed assets","","","1.4","","","","2.1"],["Amortization of internal-use software and intangibles","","","1.0","","","","1.4"],["Other charges","","","1.0","","","","1.8"],["Legal settlements","","","0.5","","","","0.1"],["Operating income (loss)","","","3.9","%","","","(15.3",")%"]]
[[/GREPCENT_TABLE]]

Net revenue. Total revenue increased $25.5 million, or 18.6%, in fiscal 2022 compared to fiscal 2021. Products revenue increased $9.2 million, or 34.6%, due to higher sales and deliveries as our customers re-open their locations for business. Subscription and maintenance revenue increased $10.4 million, or 11.7%, driven by continued growth in subscription-based revenue, which increased 28.0% in fiscal 2022 compared to fiscal 2021. Professional services revenue increased $5.8 million, or 26.6%, due to higher sales and service activity as our customers shift their focus to implementing technology to improve their operations.

Gross profit and gross profit margin. Our total gross profit increased $12.2 million, or 13.6%, in fiscal 2022 and total gross profit margin decreased from 65.2% to 62.4%. Products gross profit increased $3.5 million and gross profit margin decreased from 49.4% to 46.5% due to a higher proportion of third-party products over proprietary software revenue. Subscription and maintenance gross profit increased $7.2 million and gross profit margin decreased from 79.7% to 78.6% as certain variable costs increased ahead of related revenue. Professional services gross profit increased $1.4 million and gross profit margin decreased slightly from 25.5% to 25.3% due to continued hiring and training of new staff to meet increasing project backlogs from ongoing sales activity and certain project delays.

Operating expenses

Operating expenses, excluding the charges for legal settlements and other charges, decreased $14.9 million, or 13.9%, in fiscal 2022 compared with fiscal 2021. As a percent of total revenue, operating expenses have decreased 21.5% in fiscal 2022 compared with fiscal 2021.

Product development. Product development includes all expenses associated with research and development. Product development decreased $9.0 million, or 16.3%, during fiscal 2022 as compared to fiscal 2021 due to an increase of $4.4 million in payroll and other operating expenses as we continue to manage market compensation pressures offset by a decrease in share-based compensation expense of $13.4 million due to significant charges resulting from accelerated vesting of stock-settled appreciation rights (SSARs) upon their market condition satisfaction in February 2021.

30

Sales and marketing. Sales and marketing increased $0.5 million, or 3.8%, in fiscal 2022 compared with fiscal 2021 due to an increase of $3.4 million in payroll, travel, advertising, promotion and other operating expenses as we invest in our sales and marketing teams and return to travel for in-person selling and increased marketing event and trade show activity offset by a decrease in share-based compensation expense of $2.9 million due to significant charges resulting from the accelerated vesting of SSARs upon their market condition satisfaction in February 2021.

General and administrative. General and administrative decreased $5.5 million, or 16.6%, in fiscal 2022 compared to fiscal 2021 due to an increase of $3.7 million in payroll and other expenses after restoring base pay, employee benefits and various operational activities offset by a decrease in share-based compensation expense of $9.2 million due to significant charges resulting from the accelerated vesting of SSARs upon their market condition satisfaction in February 2021.

Depreciation of fixed assets. Depreciation of fixed assets decreased $0.6 million or 22.0% in fiscal 2022 as compared to fiscal 2021 due to an increased level of assets with shorter useful lives.

Amortization of internal-use software and intangibles. Amortization of internal-use software and intangibles decreased $0.3 million or 15.6% in fiscal 2022 as compared to fiscal 2021 due to a lower unamortized cost base following the impairment of intangibles in fiscal 2020.

Other charges. Other charges decreased $0.9 million due to a significant reduction in employee terminations during fiscal 2022 compared to fiscal 2021.

Legal settlements. Legal settlements increased $0.8 million during fiscal 2022 compared to fiscal 2021 due to an increase in settlements of employment and other business-related matters.

Other Income (Expenses)

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

nm – not meaningful

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

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

Other income (expense), net. Other income (expense), net mainly consists of movement of foreign currencies against the U.S. dollar.

Income Taxes

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

nm – not meaningful

For fiscal 2022, the effective tax rate was different than the statutory rate due primarily to adjustments to deferred tax assets including increases in valuation allowances that reduce deferred tax assets and to the recording of net operating losses in a number of foreign jurisdictions offset by current year expense in other foreign jurisdictions.

31

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months an immaterial reduction in unrecognized tax benefits may occur as a result of the expiration of various statutes of limitations. We are consistently subject to tax audits; due to the nature of examinations in multiple jurisdictions, changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.

Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all the Company’s deferred tax assets. The ultimate realization of deferred tax assets depends on various factors including the generation of taxable income during the future periods in which the underlying temporary differences are deductible. At March 31, 2022, we had $196.3 million of federal net operating loss carryforwards that expire, if unused, in fiscal years 2031 to 2038, and $42.8 million of federal net operating loss carryforwards that can be carried forward indefinitely. We also had $166.8 million of state net operating loss carryforwards that expire, if unused, in fiscal years 2023 through 2041.

Liquidity and Capital Resources

Overview

Our cash requirements consist primarily of working capital needs, capital expenditures, and payments of contractual obligations. Our contractual obligations consist primarily of operating leases for office space and preferred stock dividends. We disclose our lease obligations in Note 6, Leases, and preferred stock dividends in Note 14, Preferred Stock, to our Consolidated Financial Statements included under Item 8 of this Annual Report.

At March 31, 2023, 100% of our cash and cash equivalents, of which 93% were located in the United States, were deposited in bank accounts or invested in highly liquid investments including commercial paper and treasury bills with original maturity from the date of acquisition of three months or less and money market funds. We determine the fair value of commercial paper using significant other observable inputs based on pricing from independent sources that use quoted prices in active markets for identical assets or other observable inputs including benchmark yields and interest rates. We believe credit risk is limited with respect to our cash and cash equivalents.

We believe that cash flow from operating activities, cash on hand of $112.8 million as of March 31, 2023, and access to capital markets will provide adequate funds to meet our short-and long-term liquidity requirements.

Cash Flow

[[GREPCENT_TABLE]]
[["","","Year ended March 31,"],["(In thousands)","","","2023","","","","2022","","","","2021"],["Net cash provided by (used in):"],["Operating activities","","$","34,463","","","$","28,475","","","$","28,407"],["Investing activities","","","(6,870",")","","","(25,679",")","","","(1,391",")"],["Financing activities","","","(11,094",")","","","(4,901",")","","","25,316"],["Effect of exchange rate changes on cash","","","(628",")","","","(104",")","","","195"],["(Decrease) increase in cash","","$","15,871","","","$","(2,209",")","","$","52,527"]]
[[/GREPCENT_TABLE]]

Cash flow provided by operating activities. Cash flows provided by operating activities were $34.5 million in fiscal 2023. The provision of cash was due primarily to our net income of $14.6 million adjusted for $16.4 million in non-cash expense including depreciation, amortization, and share-based compensation and an increase of $3.5 million from the changes in operating assets and liabilities.

Cash flows provided by operating activities were $28.5 million in fiscal 2022. The provision of cash was due primarily to our net income of $6.5 million adjusted for $17.7 million in non-cash expense including depreciation, amortization, and share-based compensation and an increase of $4.3 million from the changes in operating assets and liabilities.

Cash flows provided by operating activities were $28.4 million in fiscal 2021. The provision of cash was due primarily to our operating loss of $21.0 million adjusted for $44.0 million in non-cash expense including depreciation, amortization, and share-based compensation and an increase of approximately $5.4 million from the changes in operating assets and liabilities.

Cash flow used in investing activities. Cash flows used in investing activities in fiscal 2023 were $6.9 million due to $7.3 million in purchases of property and equipment, including internal use software and $0.4 million in cash received from final working capital adjustments related to the ResortSuite acquisition.

32

Cash flows used in investing activities in fiscal 2022 were $25.7 million due to $24.5 million in cash paid for business combinations, net of cash acquired, and $1.2 million in purchases of property and equipment, including internal use software.

Cash flows used in investing activities in fiscal 2021 were $1.4 million due primarily to the purchase of property and equipment, including internal use software.

Cash flow (used in) provided by financing activities. Cash flows used in financing activities in fiscal 2023 were $11.1 million due to share repurchases of $9.3 million to satisfy employee tax withholding on share-based compensation and $1.8 million in preferred stock dividends.

Cash flows used in financing activities in fiscal 2022 were $4.9 million and primarily comprised of share repurchases of $3.0 million to satisfy employee tax withholding on share-based compensation and $1.8 million in preferred stock dividends.

During fiscal 2021, the $25.3 million provided by financing activities consisted primarily of $34.0 million in preferred stock issuance proceeds from the MAK Capital investment, net of issuance costs, offset by $7.5 million for the repurchase of shares to satisfy employee tax withholding on share-based compensation and $1.1 million in preferred stock dividends.

Investments

Investments in Corporate-Owned Life Insurance Policies

Agilysys invests in corporate-owned life insurance policies for certain former executives, for which some are endorsement split-dollar life insurance arrangements. We entered into agreements with each of the former executives, whereby we must maintain the life insurance policy for a specified amount and split a portion of the policy benefits with their designated beneficiary. Our investment in these corporate-owned life insurance policies were recorded at their cash surrender value, which approximates fair value at the balance sheet date. In the Consolidated Balance Sheets at the balance sheet date, the cash surrender value of $1.0 million for the remaining policies were held in “Other non-current assets,” and the present value of future proceeds owed to those executives’ designated beneficiary of $0.1 million, which approximates fair value, were recorded within “Other non-current liabilities” in the Consolidated Balance Sheets at the balance sheet date.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies

Managements’ Discussion and Analysis is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent assets and liabilities. We regularly evaluate our estimates, including those related to bad debts, inventories, investments, intangible assets, income taxes, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Our most significant accounting policies relate to the sale, purchase, and promotion of our products and services. The policies discussed below are considered by management to be critical to an understanding of our Consolidated Financial Statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs.

For all these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.

Revenue recognition. Our customary business practice is to enter into legally enforceable written contracts with our customers. The majority of our contracts are governed by a master service 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 order to specify the different

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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 order. Each performance obligation is identified based on the goods and services that will be transferred to our customer that are both capable of being distinct and are distinct within the context of the contract. The transaction price is determined based on the consideration to which we will be entitled and expect to receive in exchange for transferring goods or services to the customer. Typically, our contracts do not provide our customer with any right of return or refund; we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or refund.

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

Our proprietary 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.

We recognize revenue for hardware sales when the product is shipped to the customer and when obligations that affect the customer’s final acceptance of the arrangement have been fulfilled. Hardware is purchased from suppliers and provided to the end-user customers via drop-ship or from inventory. We are responsible for negotiating the price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and bearing 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.

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. Our subscription service revenue is primarily based on rates per location, including rates per points of sale and per room. We recognize certain subscription service revenue on a per-transaction basis. 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, any hosting services, and any transaction-based 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.

We derive maintenance service revenue from providing unspecified updates, upgrades, bug fixes, and technical support services for our proprietary software. These services represent a stand-ready obligation that is concurrently delivered and has the same pattern of transfer to the customer; we account for these maintenance services as a single performance obligation. Maintenance revenue includes the same services provided by third-parties for remarketed software. We recognize substantially all maintenance revenue over the contract period of the maintenance agreement. We also recognize certain maintenance service revenue based on the volume of payment transactions processed by third parties through access to our software.

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.

We use the market approach to drive standalone selling price (“SSP”) by maximizing observable data points (in the form of recently executed customer contracts) to determine the price customers are willing to pay for the goods and services transferred. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative SSP basis.

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

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Share-based compensation. We have an equity incentive plan under which we may grant non-qualified stock options, incentive stock options, stock-settled stock appreciation rights, restricted shares, restricted stock units and performance shares. Shares issued pursuant to awards under this plan may be made out of treasury or authorized but unissued shares.

We record compensation expense related to stock-settled stock appreciation rights, restricted shares, restricted stock units 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 restricted stock unit grants subject only to a service condition is based on the closing price of our common shares on the grant date. For stock option and stock-settled appreciation right grants subject only to a service condition, we estimate the fair value on the grant date using the Black-Scholes-Merton option pricing model with inputs including the closing market price at grant date, exercise price and assumptions regarding the risk-free interest rate, expected volatility of our common shares based on historical volatility, and expected term as estimated using the simplified method. For restricted share, restricted stock unit and SSAR grants subject to a market condition, we estimate the fair value on the grant date through a lattice option pricing model that utilizes a Monte Carlo analysis with inputs including the closing market price at grant date, share price threshold, performance period term and assumptions regarding the risk-free interest rate and expected volatility of our common shares based on historical volatility. Inputs for SSAR grants subject to a market condition also include exercise price, remaining contractual term, and suboptimal exercise factor. Forfeitures of awards are recognized as they occur. Additional information regarding the assumptions used to value share-based compensation awards is provided in Note 13, Share-Based Compensation, to our Consolidated Financial Statements included under Item 8 of this Annual Report.

Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements included under Item 8 of this Annual Report for additional information about accounting pronouncements.