Significant Accounting Policies (Policies)

12 Months Ended

Jan. 31, 2019

Business Description [Policy Text Block]

BUSINESS

QAD is a leading provider of flexible, cloud-based enterprise software and services for global manufacturing companies. QAD Enterprise Applications supports operational requirements in the areas of financials, customer management, supply chain, manufacturing, service and support, analytics, business process management and integration. QAD's portfolio includes related solutions for quality management software, supply chain management software, transportation management software and business-to-business interoperability. QAD solutions are developed for customers in the automotive, consumer products, food and beverage, high technology, industrial manufacturing and life sciences industries to help streamline their processes, improve operational performance, comply with regulatory requirements and meet industry standards. QAD was founded in

1979,

incorporated in California in

1986

and reincorporated in Delaware in

1997.

Consolidation, Policy [Policy Text Block]

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of QAD Inc. and all of its subsidiaries. All subsidiaries are wholly-owned and all significant balances and transactions among the entities have been eliminated from the consolidated financial statements.

Use of Estimates, Policy [Policy Text Block]

USE OF ESTIMATES

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles and, accordingly, include amounts based on informed estimates and judgments of management that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company’s financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

The Company considers certain accounting policies related to revenue, accounts receivable allowances for doubtful accounts, goodwill and intangible assets, income taxes, and accounting for stock-based compensation to be critical policies due to the significance of these items to its operating results and the estimation processes and management judgment involved in each.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS

The financial position and results of operations of the Company’s foreign subsidiaries are generally determined using the country’s local currency as the functional currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rates on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to other comprehensive income (loss), which is included in “Accumulated other comprehensive loss” within the Consolidated Balance Sheets.

Gains and losses resulting from foreign currency transactions and remeasurement adjustments of monetary assets and liabilities

not

held in an entity’s functional currency are included in earnings. Foreign currency transaction and remeasurement (gains) losses for fiscal

2019,

2018

and

2017

totaled $(

0.2

) million,

$2.5

million and

$0.2

million, respectively, and are included in “Other (income) expense, net” in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).

Cash and Cash Equivalents, Policy [Policy Text Block]

CASH AND EQUIVALENTS

Cash and equivalents consist of cash and short-term marketable securities with maturities of less than

days at the date of purchase. The Company considers all highly liquid investments purchased with an original maturity of

days or less to be cash equivalents. At

January 31, 2019

and

2018,

the Company’s cash and equivalents consisted of money market mutual funds invested in U.S. Treasury and government securities, deposit accounts and certificates of deposit.

Investment, Policy [Policy Text Block]

SHORT-TERM INVESTMENTS

January 31, 2019,

the Company’s short-term investments consisted of certificates of deposit with maturities greater than

days and less than

one

year. Short-term investments are classified as held-to-maturity, since the Company has the intent and the ability to hold them to maturity, and are recorded at amortized cost, which approximates fair value. The Company considers all of its short-term investments as highly liquid and therefore includes these securities within current assets on the Consolidated Balance Sheets. Interest on short-term investments is included as a component of “Interest income”.

Receivables, Policy [Policy Text Block]

ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consisted of the following as of

January 31:

	2019			2018
	(in thousands)
Accounts receivable	$	84,478		$	85,281
Less allowance for:
Doubtful accounts		(487	)		(396	)
Sales adjustments		(2,414	)		(1,367	)
Accounts receivable, net	$	81,577		$	83,518

Trade accounts receivable are recorded at the invoiced amount and do

not

bear interest. The collectability of accounts receivable is reviewed each period by analyzing balances based on age. Specific allowances are recorded for any balances that the Company determines

may

not

be fully collectible due to a customer’s inability to pay. The Company also provides a general reserve based on historical data including an analysis of write-offs and other known factors. Provisions to the allowance for bad debts are included as bad debt expense in “General and Administrative” expense. The determination to write-off specific accounts receivable balances is based on the likelihood of collection and past due status. Past due status is based on invoice date and terms specific to each customer.

The Company does

not

generally provide a contractual right of return; however, in the course of business sales adjustments related to customer dispute resolution

may

occur. A provision is recorded against revenue for estimated sales adjustments in the same period the related revenues are recorded or when current information indicates additional amounts are required. These estimates are based on historical experience, specifically identified customers and other known factors.

Financial Instruments and Concentration of Credit Risk [Policy Text Block]

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The carrying amounts of cash and equivalents, short-term investments, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company’s note payable bears a variable market interest rate, subject to certain minimum interest rates. Therefore, the carrying amount outstanding under the note payable reasonably approximates fair value.

Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising our customer base, and their dispersion across many different industries and locations throughout the world. During the fiscal year ended

January 31, 2019

one

customer accounted for

10%

of total revenue and

other customer accounted for

10%

or more of total revenue.

single customer accounted for

10%

or more of the Company’s total revenue during the fiscal years ended

January 31, 2018

and

2017.

In addition,

single customer accounted for

10%

or more of accounts receivable at

January 31, 2019

2018.

Property, Plant and Equipment, Policy [Policy Text Block]

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Additions and significant improvements to property and equipment are capitalized, while maintenance and repairs are expensed as incurred. For financial reporting purposes, depreciation is generally expensed via the straight-line method over the useful life of

three

years for computer equipment and software,

five

years for furniture and office equipment,

years for building improvements, and

years for buildings. Leasehold improvements are depreciated over the shorter of the lease term or the useful life of

five

years.

Certain costs associated with software developed for internal use, including payroll costs for employees, are capitalized once the project has reached the application development stage and are included in property and equipment classified as software. These costs are amortized using the straight-line method over the expected useful life of the software, beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, maintenance, training and research and development costs are expensed as incurred.

Property and equipment, net consisted of the following as of

January 31:

	2019			2018
	(in thousands)
Buildings and building improvements	$	32,238		$	32,444
Computer equipment and software		17,671			17,312
Furniture and office equipment		7,672			7,632
Leasehold improvements		7,309			6,677
Land		3,850			3,850
Automobiles		54			54
		68,794			67,969
Less accumulated depreciation and amortization		(39,173	)		(37,561	)
	$	29,621		$	30,408

The changes in property and equipment, net, for the fiscal years ended

January 31

were as follows:

	2019			2018
	(in thousands)
Cost
Balance at February 1	$	67,969		$	64,642
Additions		4,340			3,720
Disposals		(2,512	)		(1,874	)
Impact of foreign currency translation		(1,003	)		1,481
Balance at January 31		68,794			67,969

Accumulated depreciation
Balance at February 1		(37,561	)		(33,770	)
Depreciation		(4,734	)		(4,562	)
Disposals		2,474			1,719
Impact of foreign currency translation		648			(948	)
Balance at January 31		(39,173	)		(37,561	)
Property and equipment, net at January 31	$	29,621		$	30,408

Depreciation and amortization expense of property and equipment for fiscal

2019,

2018

and

2017

was

$4.7

million,

$4.6

million and

$4.3

million, respectively. There was

impairment of property and equipment assets during fiscal

2019,

2018

and

2017.

Capitalization of Software Costs, Policy [Policy Text Block]

CAPITALIZED SOFTWARE COSTS

The Company capitalizes software development costs incurred in connection with the localization and translation of its products once technological feasibility has been achieved based on a working model. A working model is defined as an operative version of the computer software product that is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product and is ready for initial customer testing (usually identified as beta testing). In addition, the Company capitalizes software purchased from

third

parties or through business combinations as acquired software technology, if the related software under development has reached technological feasibility.

The amortization of capitalized software costs is the greater of the straight-line basis over

three

years, the expected useful life, or a computation using a ratio of current revenue for a product compared to the estimated total of current and future revenues for that product. The Company periodically compares the unamortized capitalized software costs to the estimated net realizable value of the associated product. The amount by which the unamortized capitalized software costs of a particular software product exceeds the estimated net realizable value of that asset would be reported as a charge to the Consolidated Statements of Operations and Comprehensive Income (Loss).

Capitalized software costs and accumulated amortization at

January 31

were as follows:

	2019			2018
	(in thousands)
Capitalized software costs:
Capitalized software development costs	$	2,314		$	1,516
Acquired software technology		135			—
		2,449			1,516
Less accumulated amortization		(851	)		(526	)
Capitalized software costs, net	$	1,598		$	990

The Company‘s capitalized software development costs relate to translations and localizations of QAD Enterprise Applications. Acquired software technology costs relate to technology purchased during the

second

quarter of fiscal

2019.

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during fiscal

2019,

$0.3

million of costs and accumulated amortization was removed from the Consolidated Balance Sheet and was primarily related to acquired software technology which was fully amortized during fiscal

2019.

Amortization of capitalized software costs for fiscal

2019,

2018

and

2017

was

$0.6

million,

$0.8

million and

$1.0

million, respectively. Amortization of capitalized software costs is included in “Cost of license fees” in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).

The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of

January 31, 2019:

Fiscal Years	(in thousands)
2020	$	759
2021		572
2022		226
2023		27
Thereafter		14
	$	1,598

Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block]

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is

not

amortized, but instead is subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill

may

be impaired. The Company tests goodwill for impairment in the

fourth

quarter of each fiscal year. The Company performs a

two

-step impairment test. Under the

first

step of the goodwill impairment test, the Company is required to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is

not

considered impaired and the

second

step is

not

performed. If the results of the

first

step of the impairment test indicate that the fair value of a reporting unit does

not

exceed its carrying amount, then the

second

step of the goodwill impairment test is required. The

second

step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.

Management evaluates the Company as a single reporting unit for business and operating purposes as almost all of the Company’s revenue streams are generated by the same underlying technology whether acquired, purchased or developed. In addition, the majority of the Company’s costs are, by their nature, shared costs that are

not

specifically identifiable to a geography or product line but relate to almost all products. As a result, there is a high degree of interdependency among the Company’s revenues and cash flows for levels below the consolidated entity and identifiable cash flows for a component separate from the consolidated entity are

not

meaningful. Therefore, the Company’s impairment test considers the consolidated entity as a single reporting unit.

Judgments about the recoverability of purchased finite lived intangible assets are made whenever events or changes in circumstances indicate that an impairment

may

exist. Each fiscal year the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of finite-lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate.

Assumptions and estimates about future values and remaining useful lives of intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in the Company’s business strategy or internal forecasts.

The changes in the carrying amount of goodwill for the fiscal years ended

January 31, 2018

and

2019

were as follows:

	Gross Carrying Amount			Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2017	$	26,166		$	(15,608	)	$	10,558
Impact of foreign currency translation		465			—			465
Balance at January 31, 2018		26,631			(15,608	)		11,023
Additions		1,510			—			1,510
Impact of foreign currency translation		(110	)		—			(110	)
Balance at January 31, 2019	$	28,031		$	(15,608	)	$	12,423

Additions to goodwill were a result of immaterial acquisitions where the purchase price exceeded the estimated fair value of the acquired net assets. Pro forma financial information for the acquisitions has

not

been presented, as the effects were

not

material to the Company’s historical consolidated financial statements.

During each of the

fourth

quarters of fiscal

2019,

2018

and

2017,

an impairment analysis was performed at the enterprise level which compared the Company’s market capitalization to its net assets as of the test date,

November 30.

As the market capitalization substantially exceeded the Company’s net assets, there was

indication of goodwill impairment for fiscal

2019,

2018

and

2017.

Intangible Assets

	January 31, 201 9
	(in thousands)
Amortizable intangible assets
Customer relationships	$	1,348
Less: accumulated amortization		(115	)
Net amortizable intangible assets	$	1,233

The Company’s intangible assets as of

January 31, 2019

are related to the acquisitions completed in the

second

and

third

quarters of fiscal

2019.

Intangible assets are included in “Other assets, net” in the accompanying Consolidated Balance Sheets, and are amortized over an estimated

year useful life.

The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of

January 31, 2019:

Fiscal Years	(in thousands)
2020	$	270
2021		270
2022		270
2023		270
Thereafter		153
	$	1,233

Income Tax, Policy [Policy Text Block]

INCOME TAXES

Income tax expense includes U.S. (federal and state) and foreign income taxes. Tax legislation commonly known as the Tax Cuts and Jobs Act of

2017

(the “Tax Act”) includes a mandatory

one

-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which

U.S. deferred tax liability had been accrued have now become subject to U.S. federal income tax. The Company has completed the accounting associated with the Tax Act. The U.S. Securities and Exchange Commission (“SEC”) provided accounting and reporting guidance that allowed the Company to report provisional amounts within a measurement period up to

one

year from the enactment date. Complexities inherent in adopting the changes included additional guidance, interpretations of the law, and further analysis of data and tax positions. During fiscal

2019,

as part of completing its accounting, the Company recognized approximately

$1.3

million reduction to its final tax liability related to the Tax Act due to the ability to utilize additional foreign tax credits. The Company intends to continue to invest most or all of these earnings, as well as its capital in these subsidiaries, indefinitely outside of the U.S. and does

not

expect to incur any significant, additional taxes related to such amounts.

Deferred tax assets and liabilities reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates under current enacted tax law that would apply when the temporary differences are expected to reverse. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent the Company believes they will

not

be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including recent cumulative loss experience and expectations of future earnings, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.

The Company utilizes a

two

-step approach to recognizing and measuring uncertain income tax positions (tax contingencies). The

first

step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than

not

that the position will be sustained on audit, including resolution of related appeals or litigation processes. The

second

step is to measure the tax benefit as the largest amount which is more than

50%

likely of being realized upon ultimate settlement. The Company considers many factors when evaluating its tax positions and estimating its tax benefits, which

may

require periodic adjustments and which

may

not

accurately forecast actual outcomes. The Company includes interest and penalties related to its tax contingencies in income tax expense.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

STOCK-BASED COMPENSATION

The Company accounts for share-based payments (“equity awards”) to employees in accordance with ASC

718,

Compensation—Stock Compensation

(“ASC

718”

), which requires that share-based payments (to the extent they are compensatory) be recognized in the Consolidated Statements of Income and Comprehensive Income based on the fair values of the equity awards as measured at the grant date. The fair value of an equity award is recognized as stock-based compensation expense ratably over the vesting period of the equity award. Determining the fair value of equity awards at the grant date requires judgment.

Fair Value of RSUs

The fair value of restricted stock units (“RSUs”) is determined on the grant date of the award as the market price of the Company’s common stock on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period. Judgment is required in determining the present value of estimated dividends foregone during the vesting period. The Company estimates the dividends for purposes of this calculation based on the Company’s historical dividend payments per share, which has remained consistent over the last

three

years.

Fair Value of SARs

The fair value of stock-settled stock appreciation rights (“SARs”) is determined on the grant date of the award using the Black-Scholes-Merton valuation model. One of the inputs to the Black-Scholes-Merton valuation model is the fair market value of the Company’s stock on the date of grant. Judgment is required in determining the remaining inputs to the Black-Scholes-Merton valuation model. These inputs include the expected life, volatility, the risk-free interest rate and the dividend rate. The following describes the Company’s policies with respect to determining these valuation inputs:

Expected Life -

The expected life valuation input includes a computation that is based on historical vested SAR exercises and post-vest expiration patterns and an estimate of the expected life for SARs that were fully vested and outstanding. Furthermore, based on the Company’s historical pattern of SAR exercises and post-vest expiration patterns the Company determined that there are

two

discernible populations which include the Company’s directors and officers (“D&O”) and all other QAD employees. The estimate of the expected life for SARs that were fully vested and outstanding is determined as the midpoint of a range as follows: the low end of the range assumes the fully vested and outstanding SARs are exercised or expire unexercised on the evaluation date and the high end of the range assumes that these SARs are exercised or expire unexercised upon contractual term.

Volatility -

The volatility valuation input is based on the historical volatility of the Company’s common stock, which the Company believes is representative of the expected volatility over the expected life of SARs.

Risk-Free Interest Rate -

The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the SARs.

Dividend Rate -

The dividend rate is based on the Company’s historical dividend payments per share.

The Company records deferred tax assets for equity awards that result in deductions on its income tax returns, based on the amount of stock-based compensation recognized and the fair values attributable to the vested portion of those equity awards. Because the deferred tax assets the Company records are based upon the stock-based compensation expenses in a particular jurisdiction, the aforementioned inputs that affect the fair values of equity awards

may

also indirectly affect the income tax expense. If the tax deduction is less than the deferred tax asset, the calculated shortfall would increase income tax expense. If the tax deduction is more than the deferred tax asset, the calculated windfall would decrease income tax expense.

Comprehensive Income, Policy [Policy Text Block]

COMPREHENSIVE INCOME

(LOSS)

Comprehensive income (loss) includes changes in the balances of items that are reported directly as a separate component of Stockholders’ Equity on the Consolidated Balance Sheets. The components of comprehensive income (loss) are net income (loss) and foreign currency translation adjustments. The Company does

not

provide for income taxes on foreign currency translation adjustments since it does

not

provide for taxes on the unremitted earnings of its foreign subsidiaries. The changes in “Accumulated other comprehensive loss” are included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

Advertising Costs, Policy [Policy Text Block]

ADVERTISING EXPENSES

Advertising costs are expensed as incurred. Advertising expenses were

$0.7

million,

$0.7

million and

$1.1

million for fiscal years

2019,

2018

and

2017.

Research, Development, and Computer Software, Policy [Policy Text Block]

RESEARCH AND DEVELOPMENT

All costs incurred to establish the technological feasibility of the Company’s software products are expensed to research and development (“R&D”) as incurred. R&D expenses totaled

$54.0

million,

$47.7

million and

$43.6

million in fiscal years

2019,

2018

and

2017,

respectively.

Non-operating Expense, Net [Policy Text Block]

OTHER (INCOME) EXPENSE, NET

The components of other (income) expense, net for fiscal

2019,

2018

and

2017

were as follows:

	Years Ended January 31,
	2019			2018			2017
	(in thousands)
Interest income	$	(2,600	)	$	(1,547	)	$	(696	)
Interest expense		643			669			670
Foreign exchange (gains) losses		(229	)		2,466			180
Change in fair value of interest rate swap		51			(377	)		(485	)
Other income, net		(209	)		(77	)		(131	)
Total other (income) expense, net	$	(2,344	)	$	1,134		$	(462	)

Earnings Per Share, Policy [Policy Text Block]

COMPUTATION OF NET INCOME

(LOSS)

PER SHARE

Net income (loss) per share of Class A common stock and Class B common stock is computed using the

two

-class method. Holders of Class A common stock are entitled to cash or stock dividends equal to

120%

of the amount of such dividend payable with respect to a share of Class B common stock.

The following table sets forth the computation of basic and diluted net income (loss) per share:

	Years Ended January 31,
	2019			2018			2017
	(in thousands, except per share data)
Net income (loss)	$	10,428		$	(9,065	)	$	(15,450	)
Less: dividends declared		(5,479	)		(5,367	)		(5,301	)
Undistributed net income (loss)	$	4,949		$	(14,432	)	$	(20,751	)

Net income (loss) per share – Class A Common Stock
Dividends declared	$	4,696		$	4,596		$	4,531
Allocation of undistributed net income (loss)		4,243			(12,358	)		(17,742	)

Net income (loss) attributable to Class A common stock	$	8,939		$	(7,762	)	$	(13,211	)

Weighted average shares of Class A common stock outstanding— basic		16,267			15,942			15,715
Weighted average potential shares of Class A common stock		1,585			—			—
Weighted average shares of Class A common stock and potential common shares outstanding— diluted		17,852			15,942			15,715

Basic net income (loss) per Class A common share	$	0.55		$	(0.49	)	$	(0.84	)
Diluted net income (loss) per Class A common share	$	0.50		$	(0.49	)	$	(0.84	)

Net income (loss) per share – Class B Common Stock
Dividends declared	$	783		$	771		$	770
Allocation of undistributed net income (loss)		706			(2,074	)		(3,009	)
Net income (loss) attributable to Class B common stock	$	1,489		$	(1,303	)	$	(2,239	)

Weighted average shares of Class B common stock outstanding— basic		3,256			3,213			3,206
Weighted average potential shares of Class B common stock		166			—			—
Weighted average shares of Class B common stock and potential common shares outstanding— diluted		3,422			3,213			3,206

Basic net income (loss) per Class B common share	$	0.46		$	(0.41	)	$	(0.70	)
Diluted net income (loss) per Class B common share	$	0.44		$	(0.41	)	$	(0.70	)

Potential common shares consist of the shares issuable upon the release of restricted stock units (“RSUs”) and the exercise of stock options and stock appreciation rights (“SARs”). The Company’s unvested RSUs, unexercised stock options and unexercised SARs are

not

considered participating securities as they do

not

have rights to dividends or dividend equivalents prior to release or exercise.

The following table sets forth the number of potential common shares

not

included in the calculation of diluted earnings per share because their effects were anti-dilutive:

	Years Ended January 31,
	2019		2018		2017
	(in thousands)
Class A		325		3,236		2,985
Class B		—		380		378

New Accounting Pronouncements, Policy [Policy Text Block]

RECENT ACCOUNTING PRONOUNCEMENTS

With the exception of those discussed below, there have been

recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the fiscal year ended

January 31, 2019,

that are of significance, or potential significance, to the Company.

Recent Accounting Pronouncements Adopted

October 2016,

the FASB issued ASU

2016

16,

Intra-Entity Transfers of Assets Other Than Inventory

, which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers other than inventory. The guidance is effective for annual periods, including interim periods within those annual periods, beginning after

December 15, 2017

with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. ASU

2016

was adopted by the Company effective

February 1, 2018

on a modified retrospective basis, resulting in a

$9.6

million decrease to accumulated deficit and a corresponding increase to deferred tax assets.

August 2016,

the FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230

) Classification of Certain Cash Receipts and Cash Payments

, that modifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after

December 15, 2017

and interim periods within those fiscal years, with earlier adoption permitted. ASU

2016

was adopted by the Company effective

February 1, 2018

on a retrospective basis, with

material changes reflected in the Consolidated Statement of Cash Flows.

May 2014,

the FASB issued ASU

2014

09,

Revenue from Contracts with Customers

(Topic

606

), which supersedes the revenue recognition requirements in

Revenue Recognition

(Topic

605

) and Subtopic

985

605

Software - Revenue Recognition

. Topic

605

and Subtopic

985

605

are collectively referred to as “Topic

605”

or “prior GAAP.” Under Topic

606,

revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic

606

requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted Topic

606

on the

first

day of fiscal

2019

using the modified retrospective transition method. Under this method, QAD evaluated contracts that were in effect at the beginning of fiscal

2019

as if those contracts had been accounted for under Topic

606.

The Company did

not

evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition method, periods prior to the adoption date were

not

adjusted and continue to be reported in accordance with historical, pre-Topic

606

accounting. A cumulative catch-up adjustment was recorded to beginning accumulated deficit to reflect the impact of all existing arrangements under Topic

606.

The most significant impacts of the adoption of Topic

606

were as follows:

●

Removal of vendor specific objective evidence (“VSOE”) under prior GAAP resulted in earlier recognition of license and services revenues in those instances where the Company sold a multi-element deal where services did

not

have VSOE. At adoption, QAD decreased accumulated deficit and deferred revenue by

$2.0

million as this revenue would otherwise have been recognized in future periods according to prior GAAP;

●

Removal of the limitation on contingent revenue resulted in revenue being recognized earlier for certain contracts. At adoption, QAD decreased accumulated deficit and increased contract assets by

$0.8

million as this revenue would otherwise have been recognized in future periods as invoiced according to prior GAAP;

●

Contracts containing a future option to the customer represented a material right which resulted in deferral of revenue. At adoption, QAD increased accumulated deficit and deferred revenue by

$0.3

million as this revenue would have been otherwise earned in previous periods according to prior GAAP;

●

Commission expenses related to new cloud and maintenance contracts are

longer expensed as incurred; rather these incremental commission costs and other associated fringe benefits are capitalized and amortized over the associated term of economic benefit which the Company has determined to be

five

years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by

$9.1

million at the adoption date;

●

Sales agent fees to obtain new cloud and maintenance contracts are

longer be expensed as incurred; rather these costs will be capitalized and amortized over the associated term of economic benefit which the Company has determined to be

five

years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by

$1.0

million at the adoption date; and

●

Cloud environment setup costs incurred to fulfill new cloud customer contracts are

longer expensed as incurred; rather these costs are capitalized and amortized over the associated term of economic benefit which the Company has determined to be

five

years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by

$1.5

million at the adoption date.

The tax impact of the above adjustments was assessed and, at adoption, QAD increased accumulated deficit and decreased net deferred tax assets by

$1.6

million.

Adjustments to beginning consolidated balance sheet accounts

The following table presents the cumulative effect adjustments, net of income tax effects, to beginning consolidated balance sheet accounts for the new accounting standards adopted by the Company on the

first

day of fiscal

2019:

	Jan. 31, 2018			Topic 606			ASU2016-16 (1)		Feb. 1, 2018
	(in thousands)
Assets
Current assets:
Cash and equivalents	$	147,023		$	-		$	-	$	147,023
Accounts receivable, net		83,518			-			-		83,518
Other current assets, net		15,856			4,013			-		19,869
Total current assets		246,397			4,013			-		250,410
Property and equipment, net		30,408			-			-		30,408
Capitalized software costs, net		990			-			-		990
Goodwill		11,023			-			-		11,023
Deferred tax assets, net		7,944			(1,643	)		9,584		15,885
Other assets, net		3,055			8,421			-		11,476
Total assets	$	299,817		$	10,791		$	9,584	$	320,192

Liabilities and stockholders’ equity
Current portion of long-term debt	$	466		$	-		$	-	$	466
Accounts payable		14,818			-			-		14,818
Deferred revenue		116,693			(1,239	)		-		115,454
Other current liabilities		43,460			-			-		43,460
Total current liabilities		175,437			(1,239	)		-		174,198
Long-term debt		13,313			-			-		13,313
Other liabilities		5,439			(511	)		-		4,928
Stockholders’ equity
Common stock - Class A		16			-			-		16
Common stock - Class B		4			-			-		4
Additional paid-in capital		200,456			-			-		200,456
Treasury stock		(12,461	)		-			-		(12,461	)
Accumulated deficit		(75,559	)		12,541			9,584		(53,434	)
Accumulated other comprehensive loss		(6,828	)		-			-		(6,828	)
Total stockholders’ equity		105,628			12,541			9,584		127,753
Total liabilities and stockholders’ equity	$	299,817		$	10,791		$	9,584	$	320,192

(

)

For further information about the adoption of

ASU2016

Intra-entity Transfers of Assets Other Than Inventory

see Note

“Income Taxes.”

The following table summarizes the effects of adopting Topic

606

on the Company’s Consolidated Balance Sheet as of

January 31, 2019:

	As reported under Topic 606			Adjustments			Balances under Prior GAAP
	(in thousands)
Assets
Current assets:
Cash and equivalents	$	139,413		$	-		$	139,413
Short-term investments		1,200			-			1,200
Accounts receivable, net		81,577			-			81,577
Other current assets, net		22,150			(3,738	)		18,412
Total current assets		244,340			(3,738	)		240,602
Property and equipment, net		29,621			-			29,621
Capitalized software costs, net		1,598			-			1,598
Goodwill		12,423			-			12,423
Deferred tax assets, net		16,172			206			16,378
Other assets, net		13,020			(7,989	)		5,031
Total assets	$	317,174		$	(11,521	)	$	305,653

Liabilities and stockholders’ equity
Current portion of long-term debt	$	487		$	-		$	487
Accounts payable		9,902			-			9,902
Deferred revenue		115,253			5,811			121,064
Other current liabilities		40,348			-			40,348
Total current liabilities		165,990			5,811			171,801
Long-term debt		12,836			-			12,836
Other liabilities		5,101			422			5,523
Stockholders’ equity
Common stock - Class A		16			-			16
Common stock - Class B		4			-			4
Additional paid-in capital		196,723			-			196,723
Treasury stock		(7,350	)		-			(7,350	)
Accumulated deficit		(48,485	)		(17,757	)		(66,242	)
Accumulated other comprehensive loss		(7,661	)		3			(7,658	)
Total stockholders’ equity		133,247			(17,754	)		115,493
Total liabilities and stockholders’ equity	$	317,174		$	(11,521	)	$	305,653

The following table summarizes the effects of adopting Topic

606

on the Company’s Consolidated Statement of Income for the

twelve

months ended

January 31, 2019:

	As reported under Topic 606			Adjustments			Balances under Prior GAAP
	(in thousands, except per share amounts)
Revenue
Subscription fees	$	91,861		$	(1,628	)	$	90,233
License fees		25,568			(2,538	)		23,030
Maintenance and other		122,936			298			123,234
Professional services		92,651			(1,969	)		90,682
Total revenue		333,016			(5,837	)		327,179
Cost of revenue:
Subscription fees		34,128			(88	)		34,040
License fees		2,714			-			2,714
Maintenance and other		31,307			-			31,307
Professional services		87,735			-			87,735
Total cost of revenue		155,884			(88	)		155,796
Gross profit		177,132			(5,749	)		171,383
Operating expenses:
Sales and marketing		78,207			96			78,303
Research and development		53,993			(236	)		53,757
General and administrative		35,248			-			35,248
Amortization of intangible assets from acquisitions		111			-			111
Total operating expenses		167,559			(140	)		167,419
Operating income		9,573			(5,609	)		3,964
Other (income) expense
Interest income		(2,600	)		-			(2,600	)
Interest expense		643			-			643
Other income		(387	)		-			(387	)
Total other income, net		(2,344	)		-			(2,344	)
Income before income taxes		11,917			(5,609	)		6,308
Income tax expense		1,489			(393	)		1,096
Net income	$	10,428		$	(5,216	)	$	5,212
Basic income per share
Class A	$	0.55		$	(0.28	)	$	0.27
Class B	$	0.46		$	(0.23	)	$	0.23
Diluted income per share
Class A	$	0.50		$	(0.25	)	$	0.25
Class B	$	0.44		$	(0.22	)	$	0.22

The following table summarizes the effects of adopting Topic

606

on the financial statement line items of the Company’s Consolidated Statement of Cash Flows for the

twelve

months ended

January 31, 2019:

	As reported under Topic 606			Adjustments			Balances under Prior GAAP
	(in thousands)
Net income	$	10,428		$	(5,216	)	$	5,212
Amortization of costs capitalized to obtain and fulfill contracts		4,176			(3,348	)		828
Net change in valuation allowance		3,224			648			3,872
Changes in operating assets and liabilities:
Costs capitalized to obtain and fulfill contracts		(4,130	)		3,354			(776	)
Other assets		(2,890	)		76			(2,814	)
Deferred revenue		3,031			4,483			7,514
Net cash provided by operating activities		19,007			(3	)		19,004
Effect of exchange rates on cash and equivalents		(2,668	)		3			(2,665	)

Recent Accounting

Pronouncements

Not

Yet

Adopted

February 2016,

the FASB established Topic

842,

Leases, by issuing Accounting Standards Update (“ASU”)

No.

2016

02,

which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic

842

was subsequently amended by ASU

No.

2018

01,

Land Easement Practical Expedient for Transition to Topic

842;

ASU

No.

2018

10,

Codification Improvements to Topic

842,

Leases; and ASU

No.

2018

11,

Targeted Improvements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than

months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard is effective for QAD on

February 1, 2019.

QAD will adopt the new standard on its effective date.

A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity

may

choose to use either (

) its effective date or (

) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the

second

option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. QAD plans to elect to use the effective date as the date of initial application. Consequently, financial information will

not

be updated and the disclosures required under the new standard will

not

be provided for dates and periods before

January 31, 2019.

The new standard provides a number of optional practical expedients in transition. QAD plans to elect the ‘package of practical expedients’, which permits the Company

not

to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. QAD also plans to elect the use-of-hindsight practical expedient.

QAD expects that this standard will have a material effect on its financial statements. While the effects of adoption are still being assessed, the Company currently believes the most significant effects relate to the recognition of new ROU assets and lease liabilities on the balance sheet for its office facilities leases and new disclosures about leasing activities. The Company does

not

expect ASC

2016

will have a material impact to the Company’s consolidated statement of operations or net cash provided by operating activities. In addition, the Company does

not

expect a significant change in its leasing activities between now and adoption.

On adoption, the Company currently expects to recognize additional operating liabilities and corresponding ROU assets in the range of

$11.0

million to

$16.0

million based on the present value of the remaining minimum rental payments under current leasing standards for existing leases.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will

not

recognize ROU assets or lease liabilities, and this includes

not

recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to

not

separate lease and non-lease components for all of its leases.

January 2017,

the FASB issued ASU

2017

04,

Intangibles—Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill to eliminate Step

from the goodwill impairment test. In addition, it eliminates the requirements for any reporting unit with a

zero

or negative carrying amount to perform a qualitative assessment and, if that fails that qualitative test, to perform Step

of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. The amendments will be effective for the Company’s fiscal year beginning

February 1, 2020.

Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The Company does

not

believe adoption of ASU

2017

will have a material impact on its consolidated financial statements.