# Agilysys Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Agilysys Inc](/companies/agys.md) (CIK 78749)
- Form: 10-Q
- Filed: 2023-10-26
- Accepted by EDGAR: Oct 26, 2023, 16:05 ET
- Period: 2023-09-30
- Accession: 0000950170-23-055601
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/78749/000095017023055601/agys-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/78749/000095017023055601/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $58.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-04-01 to 2023-09-30 | $114.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $23.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-04-01 to 2023-09-30 | $46.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $35.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-04-01 to 2023-09-30 | $68.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $14.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-04-01 to 2023-09-30 | $27.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $31.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-04-01 to 2023-09-30 | $63.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $3.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-04-01 to 2023-09-30 | $4.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $0 | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-04-01 to 2023-09-30 | $0 | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $295.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-04-01 to 2023-09-30 | $647.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $4.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-04-01 to 2023-09-30 | $6.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.16 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-04-01 to 2023-09-30 | $0.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-04-01 to 2023-09-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 26,117,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-04-01 to 2023-09-30 | 26,148,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-04-01 to 2023-09-30 | $5.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-04-01 to 2023-09-30 | $6.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2023-09-30 | $107.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $153.4m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $255.2m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $72.7m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-09-30 | $116.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 28,495 characters.

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

- *what factors affect our business;*
- *what our earnings and costs were;*
- *why those earnings and costs were different from the year before;*
- *where the earnings came from;*
- *how our financial condition was affected; and*
- *where the cash will come from to fund future operations.*

*The MD&A analyzes changes in specific line items in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding our consolidated financial condition and results of operations. This Quarterly Report on Form 10-Q updates information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, 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, 2023. 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 24 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, 2023 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 three and six months ended September 30, 2023, global macroeconomic conditions were, and continue to be, impacted by a number of circumstances, including, but not limited to, the Israel-Hamas and Russia-Ukraine wars, labor shortages, supply chain inconsistencies, inflation, and the volatility of foreign currency exchange rates against the U.S. dollar. We believe such conditions continue to influence 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 exclusively delivers state-of-the-art software solutions and services that help organizations achieve High Return Hospitality™ by maximizing Return on Experience (ROE) through interactions that make ‘personal’ profitable. Customers around the world use Agilysys Property Management Systems (PMS), Point-of-Sale (POS) solutions and Inventory and Procurement (I&P) systems to consistently delight guests, retain staff and grow margins. Agilysys’ 100 percent hospitality customer base includes branded and independent hotels; multi-amenity resorts; 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.

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 will continue enhancing existing software products while developing and marketing new software products and expanding 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
- 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 condensed consolidated statements of operations. In addition to the SEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:

- Revenue – We present revenue net of sales returns and allowances.
- Products revenue – Revenue earned from the sales of software licenses, third party hardware and operating systems.
- 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.

### Results of Operations

### Second Fiscal Quarter 2024 Compared to Second Fiscal Quarter 2023

#### Net Revenue and Operating Income

The following table presents our consolidated revenue and operating results for the three months ended September 30, 2023 and 2022:

*(Dollars in thousands)*

| Net revenue: | Three Months Ended September 30, 2023 | 2022 | Increase (decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Products | **$12,640** | $10,548 | $2,092 | 19.8% |
| Subscription and maintenance | **34,248** | 29,036 | 5,212 | 18.0% |
| Professional services | **11,728** | 8,158 | 3,570 | 43.8% |
| Total net revenue | **58,616** | 47,742 | 10,874 | 22.8% |
| **Cost of goods sold:** |  |  |  |  |
| Products | **6,751** | 5,434 | 1,317 | 24.2% |
| Subscription and maintenance | **7,804** | 6,170 | 1,634 | 26.5% |
| Professional services | **8,965** | 6,773 | 2,192 | 32.4% |
| Total cost of goods sold | **23,520** | 18,377 | 5,143 | 28.0% |
| **Gross profit** | **$35,096** | $29,365 | $5,731 | 19.5% |
| **Gross profit margin** | **59.9%** | 61.5% |  |  |
| **Operating expenses:** |  |  |  |  |
| Product development | **$14,583** | $12,577 | $2,006 | 15.9% |
| Sales and marketing | **6,400** | 5,320 | 1,080 | 20.3% |
| General and administrative | **8,785** | 7,570 | 1,215 | 16.1% |
| Depreciation of fixed assets | **1,209** | 461 | 748 | 162.3% |
| Amortization of internal-use software and intangibles | **347** | 443 | (96) | (21.7)% |
| Other charges | **210** | 67 | 143 | nm |
| Operating income | **$3,562** | $2,927 | $635 | 21.7% |
| Operating income percentage | **6.1%** | 6.1% |  |  |

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

| Net revenue: | Three Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Products | **21.6%** | 22.1% |
| Subscription and maintenance | **58.4** | 60.8 |
| Professional services | **20.0** | 17.1 |
| Total net revenue | **100.0%** | 100.0% |
| **Cost of goods sold:** |  |  |
| Products | **11.5%** | 11.4% |
| Subscription and maintenance | **13.3** | 12.9 |
| Professional services | **15.3** | 14.2 |
| Total net cost of goods sold | **40.1%** | 38.5% |
| **Gross profit** | **59.9%** | 61.5% |
| **Operating expenses:** |  |  |
| Product development | **24.9%** | 26.3% |
| Sales and marketing | **10.9** | 11.2 |
| General and administrative | **15.0** | 15.9 |
| Depreciation of fixed assets | **2.1** | 1.0 |
| Amortization of internal-use software and intangibles | **0.6** | 0.9 |
| Other charges | **0.3** | 0.1 |
| Operating income | **6.1%** | 6.1% |

*Net revenue.* Total net revenue increased $10.9 million, or 22.8%, during the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023. Products revenue increased $2.1 million, or 19.8%, due to higher sales and deliveries to new customers and expansion with existing customers. Subscription and maintenance revenue increased $5.2 million, or 18.0%, compared to the second quarter of fiscal 2023 driven by continued growth in subscription-based service revenue, which increased 29.1% during the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023. Professional services revenue increased $3.6 million, or 43.8%, 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 $5.7 million, or 19.5%, during the second quarter of fiscal 2024 and total gross profit margin decreased from 61.5% to 59.9% compared to the second quarter of fiscal 2023 driven by changes in the composition of revenue by category. Products gross profit increased $0.8 million, or 15.2%, and products gross profit margin decreased from 48.5% to 46.6% due to the composition of hardware products delivered. Subscription and maintenance gross profit increased $3.6 million, or 15.6%, and gross profit margin decreased from 78.8% to 77.2% as certain variable costs increased ahead of related revenue. Professional services gross profit increased $1.4 million, or 99.5%, and gross profit margin increased from 17.0% to 23.6% reflecting improved utilization rates from efficiency gains on multi-solution implementations.

#### Operating Expenses

Operating expenses, excluding other charges, increased $5.0 million, or 18.8%, during the second quarter of fiscal 2024 compared with the second quarter of fiscal 2023.

*Product development.* Product development increased $2.0 million, or 15.9%, in the second quarter of fiscal 2024 compared with the second quarter of fiscal 2023 due to hiring and increased salary, incentive and employee benefits rates across our development teams, and higher rent.

*Sales and marketing.* Sales and marketing increased $1.1 million, or 20.3%, in the second quarter of fiscal 2024 compared with the second quarter of fiscal 2023 due to hiring and increased salary, incentive and employee benefits rates across our sales and marketing teams, higher levels of marketing event and trade show activity and increased commission expense on higher sales activity.

*General and administrative.* General and administrative increased $1.2 million, or 16.1%, in the second quarter of fiscal 2024 compared with the second quarter of fiscal 2023 due to hiring and increased salary, incentive and employee benefits rates across our administrative teams.

*Other charges.* Other charges consist of severance costs, infrequent settlements of customer disputes and acquisition costs related to business combinations.

#### Other Income (Expense)

*(Dollars in thousands)*

| Other income (expense): | Three Months Ended September 30, 2023 | 2022 | (Unfavorable) favorable $% |  |
| --- | ---: | ---: | ---: | --- |
| Interest income | **$1,227** | $380 | $(847) | nm |
| Interest expense | **—** | (1) | (1) | nm |
| Other income (expense), net | **51** | 112 | 61 | nm |
| Total other income (expense), net | **$1,278** | $491 | $(787) | nm |

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

#### Income Taxes

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | (Unfavorable) favorable $% |  |
| --- | ---: | ---: | ---: | --- |
| Income tax provision (benefit) | **$295** | $(158) | $(453) | nm |
| Effective tax rate | **6.1%** | (4.6)% |  |  |

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For the three months ended September 30, 2023 and 2022, respectively, the effective tax rate was different than the statutory rate due primarily to adjustments to deferred tax assets and to 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.

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 year ending March 31, 2024.

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 future taxable income during the periods in which the underlying temporary differences are deductible. 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 during the fiscal year ending March 31, 2024, 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.

### Results of Operations

### First Half Fiscal 2024 Compared to First Half Fiscal 2023

#### Net Revenue and Operating Income

The following table presents our consolidated revenue and operating results for the six months ended September 30, 2023 and 2022:

*(Dollars in thousands)*

| Net revenue: | Six Months Ended September 30, 2023 | 2022 | Increase (decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Products | **$25,422** | $21,594 | $3,828 | 17.7% |
| Subscription and maintenance | **66,373** | 56,763 | 9,610 | 16.9% |
| Professional services | **22,881** | 16,891 | 5,990 | 35.5% |
| Total net revenue | **114,676** | 95,248 | 19,428 | 20.4% |
| **Cost of goods sold:** |  |  |  |  |
| Products | **13,317** | 11,314 | 2,003 | 17.7% |
| Subscription and maintenance | **15,441** | 12,456 | 2,985 | 24.0% |
| Professional services | **17,764** | 13,618 | 4,146 | 30.4% |
| Total cost of goods sold | **46,522** | 37,388 | 9,134 | 24.4% |
| **Gross profit** | **$68,154** | $57,860 | $10,294 | 17.8% |
| **Gross profit margin** | **59.4%** | 60.7% |  |  |
| **Operating expenses:** |  |  |  |  |
| Product development | **$27,904** | $24,134 | $3,770 | 15.6% |
| Sales and marketing | **13,701** | 10,733 | 2,968 | 27.7% |
| General and administrative | **18,150** | 14,922 | 3,228 | 21.6% |
| Depreciation of fixed assets | **2,133** | 934 | 1,199 | 128.4% |
| Amortization of internal-use software and intangibles | **776** | 896 | (120) | (13.4)% |
| Other charges | **969** | 281 | 688 | 244.8% |
| Operating income | **$4,521** | $5,960 | $(1,439) | (24.1)% |
| Operating income percentage | **3.9%** | 6.3% |  |  |

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

| Net revenue: | Six Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Products | **22.1%** | 22.7% |
| Subscription and maintenance | **57.9** | 59.6 |
| Professional services | **20.0** | 17.7 |
| Total net revenue | **100.0%** | 100.0% |
| **Cost of goods sold:** |  |  |
| Products | **11.6%** | 11.9% |
| Subscription and maintenance | **13.5** | 13.1 |
| Professional services | **15.5** | 14.3 |
| Total net cost of goods sold | **40.6%** | 39.3% |
| **Gross profit** | **59.4%** | 60.7% |
| **Operating expenses:** |  |  |
| Product development | **24.3%** | 25.3% |
| Sales and marketing | **11.9** | 11.2 |
| General and administrative | **15.8** | 15.7 |
| Depreciation of fixed assets | **1.9** | 1.0 |
| Amortization of internal-use software and intangibles | **0.7** | 0.9 |
| Other charges | **0.9** | 0.3 |
| Operating income | **3.9%** | 6.3% |

*Net revenue.* Total net revenue increased $19.4 million, or 20.4%, during the first half of fiscal 2024 compared to the first half of fiscal 2023. Products revenue increased $3.8 million, or 17.7%, due to higher sales and deliveries to new customers and expansion with existing customers. Subscription and maintenance revenue increased $9.6 million, or 16.9%, compared to the first half of fiscal 2023 driven by continued growth in subscription-based service revenue, which increased 28.3% during the first half of fiscal 2024 compared to the first half of fiscal 2023. Professional services revenue increased $6.0 million, or 35.5%, 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 $10.3 million, or 17.8%, during the first half of fiscal 2024 and total gross profit margin decreased from 60.7% to 59.4% compared to the first half of fiscal 2023 driven by changes in the composition of revenue by category. Products gross profit increased $1.8 million, or 17.8%, and products gross profit margin stayed consistent at 47.6%. Subscription and maintenance gross profit increased $6.6 million, or 15.0%, and gross profit margin decreased from 78.1% to 76.7% as certain variable costs increased ahead of related revenue. Professional services gross profit margin increased from 19.4% to 22.4% reflecting improved utilization rates from efficiency gains on multi-solution implementations.

#### Operating expenses

Operating expenses, excluding other charges, increased $11.0 million, or 21.4%, during the first half of fiscal 2024 compared with the first half of fiscal 2023.

*Product development.* Product development increased $3.8 million, or 15.6%, in the first half of fiscal 2024 compared with the first half of fiscal 2023 due to hiring and increased salary rates across our development teams, and higher rent.

*Sales and marketing.* Sales and marketing increased $3.0 million, or 27.7%, in the first half of fiscal 2024 compared with the first half of fiscal 2023 due to hiring and increased salary, incentive and employee benefits rates across our sales and marketing teams, higher levels of marketing event and trade show activity and increased commission expense on higher sales activity.

*General and administrative.* General and administrative increased $3.2 million, or 21.6%, in the first half of fiscal 2024 compared with the first half of fiscal 2023 due to investments in our information security infrastructure along with hiring and increased salary, incentive, and employee benefits rates across our administrative teams, and higher subscription charges for cloud computing arrangements.

*Other charges.* Other charges consist of severance costs, infrequent settlements of customer disputes and acquisition costs related to business combinations.

#### Other Income (Expenses)

*(Dollars in thousands)*

| Other income (expense): | Six Months Ended September 30, 2023 | 2022 | (Unfavorable) favorable $% |  |
| --- | ---: | ---: | ---: | --- |
| Interest income | **$2,328** | $482 | $(1,846) | nm |
| Interest expense | **—** | (1) | (1) | nm |
| Other income (expense), net | **(109)** | 414 | 523 | nm |
| Total other income (expense), net | **$2,219** | $895 | $(1,324) | nm |

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

#### Income Taxes

*(Dollars in thousands)*

|  | Six Months Ended September 30, 2023 | 2022 | (Unfavorable) favorable $% |  |
| --- | ---: | ---: | ---: | --- |
| Income tax provision | **$647** | $240 | $(407) | nm |
| Effective tax rate | **9.6%** | 3.5% |  |  |

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For the six months ended September 30, 2023, respectively, the effective tax rate was different than the statutory rate due primarily to adjustments to deferred tax assets and to 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.

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 year ending March 31, 2024.

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 future taxable income during the periods in which the underlying temporary differences are deductible. 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 during the fiscal year ending March 31, 2024, 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.

### 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.

At September 30, 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 $107.4 million as of September 30, 2023, and access to capital markets will provide adequate funds to meet our short- and long-term liquidity requirements.

#### Cash Flow

*(In thousands)*

| Net cash provided by (used in): | Six Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | **$5,470** | $3,117 |
| Investing activities | **(6,004)** | (799) |
| Financing activities | **(4,788)** | (2,375) |
| Effect of exchange rate changes on cash | **(107)** | (718) |
| (Decrease) increase in cash | **$(5,429)** | $(775) |

*Cash flow provided by operating activities.* Cash flow provided by operating activities was $5.5 million in the first six months of fiscal 2024. The provision of cash was due to cash-based earnings of $14.5 million and a decrease of $9.0 million due to changes in net operating assets and liabilities. Cash-based earnings is net income of $6.1 million plus $8.4 million of non-cash expenses including depreciation, amortization, and share-based compensation.

*Cash flow used in investing activities.* Consists primarily of property and equipment purchases, which increased significantly during the six months ended September 30, 2023 compared to the six months ended September 30, 2022 due to leasehold improvements and equipment purchases for our new office lease at our development center in Chennai, India.

*Cash flow used in financing activities.* During the first six months of fiscal 2024, the $4.8 million used in financing activities consisted of $3.9 million related to the repurchase of shares to satisfy employee tax withholding on share-based compensation and $0.9 million in preferred stock dividends.

### Contractual Obligations

As of September 30, 2023, there were no significant changes to our contractual obligations as presented in our Annual Report for the year ended March 31, 2023.

### Off-Balance Sheet Arrangements

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

### Critical Accounting Policies

A detailed description of our significant accounting policies is included in our Annual Report for the year ended March 31, 2023. There have been no material changes in our significant accounting policies and estimates since March 31, 2023.

### Forward-Looking Information

This Quarterly Report and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. These statements are based on management’s current expectations, intentions, or beliefs and are subject to a number of factors, assumptions, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A in Part II of this Quarterly Report and Item IA of our Annual Report for the fiscal year ended March 31, 2023. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events, or otherwise.

## Market risk

As filed, 311 characters.

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, 2023. There have been no material changes in our market risk exposures since March 31, 2023.

## Controls and procedures

As filed, 2,724 characters.

#### 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, as Principal Accounting Officer (“PAO”), 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 PAO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.

#### Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the six months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

#### Inherent Limitations on Effectiveness of Controls

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

## Risk factors

As filed, 214 characters.

There have been no material changes in the risk factors included in our Annual Report for the fiscal year ended March 31, 2023 that may materially affect our business, results of operations, or financial condition.

Filed Oct 26, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-055601. Last ingested by Listed: Nov 2, 2026, 12:28 ET. No prices; not investment advice.