10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 31, 2020

OR

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

For the transition period from ____________________ to _________________________

Commission file number 0-22823

QAD Inc.

(Exact name of Registrant as specified in its charter)

Delaware	77-0105228
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 Innovation Place, Santa Barbara, California 93108

(Address of principal executive offices)

(805) 566-6000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.001 par value	QADA	NASDAQ Global Select Market
Class B Common Stock, $0.001 par value	QADB	NASDAQ Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑ No ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check One):

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐ 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☑.

As of August 31, 2020, there were 17,365,386 shares of the Registrant’s Class A common stock outstanding and 3,330,318 shares of the Registrant’s Class B common stock outstanding.

QAD INC.

INDEX

			Page
PART I - FINANCIAL INFORMATION
	ITEM 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of July 31, 2020 and January 31, 2020	1
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended July 31, 2020 and 2019	2
		Condensed Consolidated Statement of Stockholders' Equity for the Six Months Ended July 31, 2020 and 2019	3
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2020 and 2019	4
		Notes to Condensed Consolidated Financial Statements	5
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	32
	ITEM 4.	Controls and Procedures	33
PART II - OTHER INFORMATION
	ITEM 1.	Legal Proceedings	33
	ITEM 1A.	Risk Factors	34
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
	ITEM 3.	Defaults Upon Senior Securities	34
	ITEM 4.	Mine Safety Disclosure	34
	ITEM 5.	Other Information	34
	ITEM 6.	Exhibits	34
	SIGNATURES		35

PART I

ITEM 1 – FINANCIAL STATEMENTS

QAD INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	July 31, 2020			January 31, 2020
Assets
Current assets:
Cash and equivalents	$	140,707		$	136,717
Accounts receivable, net of allowances of $4,026 and $2,940 at July 31, 2020 and January 31, 2020, respectively		42,270			80,968
Prepaid expenses and other current assets, net		20,909			24,952
Total current assets		203,886			242,637
Property and equipment, net of accumulated depreciation and amortization of $41,371 and $38,861 at July 31, 2020 and January 31, 2020, respectively		29,085			28,687
Lease right-of-use assets		19,710			18,329
Capitalized software costs, net		1,974			1,922
Goodwill		12,351			12,388
Deferred tax assets, net		7,095			5,834
Other assets, net		11,887			13,007
Total assets	$	285,988		$	322,804
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	516		$	503
Lease liabilities		4,059			4,371
Accounts payable		5,996			9,840
Deferred revenue		95,049			118,413
Other current liabilities		31,776			39,900
Total current liabilities		137,396			173,027
Long-term debt		12,084			12,341
Long-term lease liabilities		16,640			14,612
Other liabilities		7,666			6,759
Total liabilities		173,786			206,739
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding		-			-
Common stock:
Class A, $0.001 par value. Authorized 71,000,000 shares; issued 17,364,966 and 17,108,846 shares at July 31, 2020 and January 31, 2020, respectively		17			17
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares at both July 31, 2020 and January 31, 2020		4			4
Additional paid-in capital		198,085			197,824
Treasury stock, at cost 207,062 and 216,378 Class B shares at July 31, 2020 and January 31, 2020, respectively		(3,073	)		(3,226	)
Accumulated deficit		(73,438	)		(70,209	)
Accumulated other comprehensive loss		(9,393	)		(8,345	)
Total stockholders’ equity		112,202			116,065
Total liabilities and stockholders’ equity	$	285,988		$	322,804

See Accompanying Notes to Condensed Consolidated Financial Statements.

1

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 (in thousands, except per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	July 31,						July 31,
	2020			2019			2020			2019
Revenue:
Subscription	$	31,066		$	25,888		$	61,837		$	51,194
License		3,043			3,516			4,264			7,982
Maintenance		26,486			29,586			52,894			59,485
Professional services		13,486			17,388			29,233			35,752
Total revenue		74,081			76,378			148,228			154,413
Costs of revenue:
Subscription		10,739			9,903			21,087			19,320
License		565			554			966			1,145
Maintenance		6,413			7,459			13,157			15,062
Professional services		13,106			18,116			28,038			37,439
Total cost of revenue		30,823			36,032			63,248			72,966
Gross profit		43,258			40,346			84,980			81,447
Operating expenses:
Sales and marketing		17,420			20,191			35,977			41,082
Research and development		13,161			13,870			27,178			27,857
General and administrative		10,299			10,392			20,316			19,810
Amortization of intangibles from acquisitions		65			66			129			133
Total operating expenses		40,945			44,519			83,600			88,882
Operating income (loss)		2,313			(4,173	)		1,380			(7,435	)
Other expense (income):
Interest income		(213	)		(789	)		(649	)		(1,513	)
Interest expense		155			148			305			301
Other expense (income), net		1,871			(154	)		639			(326	)
Total other expense (income), net		1,813			(795	)		295			(1,538	)
Income (loss) before income taxes		500			(3,378	)		1,085			(5,897	)
Income tax expense		440			9,872			1,435			10,587
Net income (loss)	$	60		$	(13,250	)	$	(350	)	$	(16,484	)
Basic net income (loss) per share
Class A	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Class B	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)
Diluted net income (loss) per share
Class A	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Class B	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)
Net income (loss)	$	60		$	(13,250	)	$	(350	)	$	(16,484	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		1,607			298			(1,048	)		35
Total comprehensive income (loss)	$	1,667		$	(12,952	)	$	(1,398	)	$	(16,449	)

See Accompanying Notes to Condensed Consolidated Financial Statements.

2

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

(unaudited)

	Six Months Ended July 31, 2020
	Number of Shares							Amount				Additional Paid-in			Treasury			Accumulated			Accumulated Other Comprehensive			Total Stockholders’
	Class A		Class B		Treasury			Class A		Class B		Capital			Stock			Deficit			Loss			Equity
Balance, January 31, 2020		17,109		3,537		(216	)	$	17	$	4	$	197,824		$	(3,226	)	$	(70,209	)	$	(8,345	)	$	116,065
Net loss		—		—		—			—		—		—			—			(350	)		—			(350	)
Foreign currency translation adjustments		—		—		—			—		—		—			—			—			(1,048	)		(1,048	)
Stock award exercises		73		—		9			—		—		(2,576	)		153			—			—			(2,423	)
Stock compensation expense		—		—		—			—		—		6,356			—			—			—			6,356
Dividends declared ($0.144 and $0.12 per Class A and Class B share, respectively)		—		—		—			—		—		—			—			(2,879	)		—			(2,879	)
Restricted stock		183		—		—			—		—		(3,519	)		—			—			—			(3,519	)
Balance, July 31, 2020		17,365		3,537		(207	)	$	17	$	4	$	198,085		$	(3,073	)	$	(73,438	)	$	(9,393	)	$	112,202

	Six Months Ended July 31, 2019
	Number of Shares							Amount				Additional Paid-in			Treasury			Accumulated			Accumulated Other Comprehensive			Total Stockholders’
	Class A		Class B		Treasury			Class A		Class B		Capital			Stock			Deficit			Loss			Equity
Balance, January 31, 2019		16,605		3,537		(515	)	$	16	$	4	$	196,723		$	(7,350	)	$	(48,485	)	$	(7,661	)	$	133,247
Net loss		—		—		—			—		—		—			—			(16,484	)		—			(16,484	)
Foreign currency translation adjustments		—		—		—			—		—		—			—			—			35			35
Stock award exercises		—		—		9			—		—		(357	)		202			—			—			(155	)
Stock compensation expense		—		—		—			—		—		5,492			—			—			—			5,492
Dividends declared ($0.144 and $0.12 per Class A and Class B share, respectively)		—		—		—			—		—		—			—			(2,761	)		—			(2,761	)
Restricted stock		—		—		174			—		—		(5,546	)		2,205			—			—			(3,341	)
Adoption of ASU2016-02, Leases (Topic 842)		—		—		—			—		—		—			—			(173	)		—			(173	)
Balance, July 31, 2019		16,605		3,537		(332	)	$	16	$	4	$	196,312		$	(4,943	)	$	(67,903	)	$	(7,626	)	$	115,860

See Accompanying Notes to Condensed Consolidated Financial Statements.

3

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended July 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(350	)	$	(16,484	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,495			3,070
Amortization of costs capitalized to obtain and fulfill contracts		2,391			2,161
Amortization of right-of-use assets		2,910			2,965
Net change in valuation allowance		2,112			11,527
Other deferred income taxes		(2,004	)		19
Loss on disposal of equipment		68			16
Provision for doubtful accounts and sales adjustments		1,212			127
Stock compensation expense		6,356			5,492
Change in fair value of derivative instrument		219			251
Other, net		12			69
Changes in assets and liabilities:
Accounts receivable		37,526			39,188
Costs capitalized to obtain and fulfill contracts		(2,246	)		(2,158	)
Lease liabilities		(2,721	)		(3,095	)
Prepaid expenses and other assets		2,616			(1,683	)
Accounts payable		(4,071	)		(1,910	)
Deferred revenue		(23,840	)		(18,707	)
Other liabilities		(7,661	)		(6,518	)
Net cash provided by operating activities		16,024			14,330
Cash flows from investing activities:
Purchase of property and equipment		(1,325	)		(3,707	)
Purchase of short-term investments		-			(1,200	)
Proceeds from sale of short-term investments		-			1,200
Capitalized software costs		(626	)		(534	)
Net cash used in investing activities		(1,951	)		(4,241	)
Cash flows from financing activities:
Repayments of debt		(306	)		(253	)
Tax payments related to stock awards		(5,942	)		(3,496	)
Dividends paid		(2,879	)		(2,761	)
Net cash used in financing activities		(9,127	)		(6,510	)
Effect of exchange rates on cash and equivalents		(956	)		(1,224	)
Net increase in cash and equivalents		3,990			2,355
Cash and equivalents at beginning of period		136,717			139,413
Cash and equivalents at end of period	$	140,707		$	141,768
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	293		$	294
Income taxes, net of refunds	$	2,203		$	2,368

See Accompanying Notes to Condensed Consolidated Financial Statements.

4

QAD INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements fairly present the financial information contained therein. These statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements and footnotes are unaudited.  In management’s opinion, all necessary adjustments, consisting of normal, recurring and non-recurring adjustments, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the financial position and operating results of QAD Inc. (QAD or the Company). The Condensed Consolidated Financial Statements do not include all disclosures required by GAAP annual financial statements and should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020. The Condensed Consolidated Financial Statements include the results of the Company and its wholly-owned subsidiaries. Because of seasonal and other factors, results of operations for the three and six months ended July 31, 2020 are not necessarily indicative of the results to be expected for the year ending January 31, 2021.

The Company’s accounting policies are set forth in detail in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020 filed with the Securities and Exchange Commission. Such Annual Report also contains a discussion of the Company’s critical accounting policies and estimates. The Company believes that these accounting policies and estimates affect its more significant estimates and judgments used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s accounting policies except as described below upon adoption of ASU 2016-13, Financial Instruments-Credit Losses. 

Recent Accounting Pronouncements

Except as discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (FASB) or adopted by the Company during the six months ended  July 31, 2020, that are of significance, or potential significance, to the Company.

Recent Accounting Pronouncements Adopted

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, that eliminates “Step 2” from the goodwill impairment test. QAD adopted the new standard on February 1, 2020, the first day of fiscal 2021. The new standard did not have an impact on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes the Company's accounts receivables and contract assets. QAD adopted the new standard on February 1, 2020, the first day of fiscal 2021, using the modified retrospective approach. The adoption of this standard did not have a material impact on QAD’s condensed consolidated financial statements. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, consideration of current and anticipated future economic conditions and other relevant data.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The Company adopted the new standard on February 1, 2020, the first day of fiscal 2021. The adoption of this standard did not have a material impact on QAD’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued new guidance which is intended to simplify various aspects to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation and calculating income taxes in interim periods. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in application of Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Generally, the topics must be applied prospectively upon adoption, with the exception of certain topics which are required to be applied on a retrospective or modified retrospective basis. The Company is evaluating the impact, if any, of adopting this new accounting guidance on its financial statements.

5

 

2. REVENUE

QAD offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a cloud-based subscription model. The on-premises model involves the license of software to customers who take possession of the software and install and maintain the software on their own hardware. Under the cloud-based subscription delivery model, QAD provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

The Company generates revenue through sales of licenses and maintenance provided to its on-premises customers and through subscriptions of its cloud-based software. QAD offers professional services to both its on-premises and cloud customers to assist them with the design, testing and implementation of its software.

The Company determines revenue recognition through the following steps:

- Identification of the contract, or contracts, with a customer;

- Identification of the performance obligations in the contract;

- Determination of the transaction price;

- Allocation of the transaction price to the performance obligations in the contract; and

- Recognition of revenue when, or as, the Company satisfies a performance obligation.

Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities. 

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.

The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement.  License purchases generally have multiple performance obligations as customers purchase maintenance in addition to the licenses.  The Company’s single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements. 

For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (SSP) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP. SSP is assessed annually using a historical analysis of contracts with customers executed in the most recently completed fiscal year to determine the range of selling prices applicable to a distinct good or service.

Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers. The Company rarely sells licenses on a stand-alone basis, as the majority of its license sales to customers include first year maintenance with the license purchase. The Company frequently sells subscription, maintenance and services on a stand-alone basis. 

Subscription

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the cloud environment is made available to the customer. The initial subscription period is typically 24 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice. In addition, a majority of customers renew their subscription contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

6

 

 Software Licenses

Transfer of control for software is considered to have occurred upon electronic delivery of the license key that provides immediate availability of the product to the customer. The Company’s typical payment terms tend to vary by region but its standard payment terms are within 30-90 days of invoice.

Maintenance

Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone access to technical support personnel. The Company’s customers purchase both product support and license updates via the Company’s maintenance offering when they acquire new software licenses. In addition, a majority of customers renew their maintenance contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

Professional Services

Revenue from professional services is typically comprised of implementation, development, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed.  In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project.  Management applies judgment when estimating project status and the costs necessary to complete the services projects.  A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances, and specification and testing requirement changes.  Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice. 

Indirect Sales Channels

The Company executes arrangements through indirect sales channels via sales agents and distributors who are authorized to market its software products to end users. In arrangements with sales agents, QAD contracts directly with the customer and sales agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to market and distribute the Company’s software products to end users in specified territories and the distributor bears the risk of collection from the end user customer. The Company recognizes revenue from transactions with distributors when the distributor submits a signed agreement and transfer of control has occurred to the distributor in accordance with the five revenue recognition steps noted above. Revenue from distributor transactions is recorded on a net basis (the amount actually received by the Company from the distributor). QAD does not offer rights of return, product rotation or price protection to any of its distributors.

Disaggregated Revenue

The Company disaggregates revenue from contracts with customers by geography and by the customers’ industry within manufacturing, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company’s revenue by geography is as follows:

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
North America	$	38,998	$	36,837	$	76,000	$	74,496
EMEA		21,379		22,118		43,947		44,627
Asia Pacific		9,571		11,751		19,213		23,637
Latin America		4,133		5,672		9,068		11,653
Total revenue	$	74,081	$	76,378	$	148,228	$	154,413

7

 

The Company’s revenue by industry is as follows:

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Automotive	$	22,275	$	26,962	$	46,412	$	56,034
Consumer products and food and beverage		13,476		12,128		25,290		24,107
High technology and industrial products		26,644		26,389		53,468		51,937
Life sciences and other		11,686		10,899		23,058		22,335
Total revenue	$	74,081	$	76,378	$	148,228	$	154,413

Management Judgments

Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that are separate performance obligations.  For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes. 

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

Contract Balances  

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on the Company’s Condensed Consolidated Balance Sheets. QAD records a contract asset when the Company has transferred goods or services but does not yet have the right to consideration. QAD records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer. The Company presents the contract asset and liability balance on a net basis at the contract level.

The contract assets indicated below are presented as other current and non-current assets in the Condensed Consolidated Balance Sheets. These assets primarily relate to professional services and subscription and consist of the Company’s rights to consideration for goods or services transferred but not billed as of July 31, 2020 and January 31, 2020. The contract assets are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.

The Company’s contract balances are as follows: 

	July 31, 2020		January 31, 2020
	(in thousands)
Contract assets, short-term (in “Prepaid expenses and other current assets, net”)	$	2,040	$	1,595
Contract assets, long-term (in “Other assets, net”)		155		214
Total contract assets	$	2,195	$	1,809
Deferred revenue, short-term	$	95,049	$	118,413
Deferred revenue, long-term (in “Other liabilities”)		2,424		2,811
Total deferred revenue	$	97,473	$	121,224

During the six months ended July 31, 2020, the Company recognized $83.7 million of revenue that was included in the gross deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $282.3 million as of July 31, 2020, of which the Company expects to recognize approximately $165.9 million as revenue over the next twelve months and the remainder thereafter. In instances where the timing of revenue recognition differs from the timing of invoicing, QAD has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

8

 

Deferred Revenue

The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable services starting in future periods are included in accounts receivable and deferred revenue. The portion of deferred revenue that QAD anticipates will be recognized after the succeeding twelve-month period is recorded as non-current deferred revenue, and the remaining portion is recorded as current deferred revenue.  

Deferred revenues consisted of the following:

	July 31, 2020		January 31, 2020
	(in thousands)
Deferred maintenance	$	51,768	$	69,650
Deferred subscription		41,138		45,702
Deferred professional services		2,096		2,705
Deferred license and other revenue		47		356
Deferred revenues, current		95,049		118,413
Deferred revenues, non-current (in “Other liabilities”)		2,424		2,811
Total deferred revenues	$	97,473	$	121,224

Practical Expedients and Exemptions

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of the practical expedients applied by the Company:

● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less. These costs are recorded within sales and marketing expense in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).

Costs to Obtain and Fulfill a Contract

The Company’s incremental direct costs of obtaining a contract consist of sales commissions and sales agent fees which are deferred and amortized ratably over the term of economic benefit which the Company has determined to be five years. These deferred costs are classified as current or non-current based on the timing of when the Company expects to recognize the expense. Incremental costs related to renewals are expensed as incurred because the term of economic benefit is one year or less. The current and non-current portions of deferred commissions are included in “Prepaid expenses and other current assets, net” and “Other assets, net”, respectively, in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2020 and January 31, 2020, the Company had $12.2 million and $12.3 million, respectively, of deferred commissions and sales agent fees. For the three and six months ended July 31, 2020, $1.1 million and $2.1 million, respectively, of amortization expense related to deferred commissions and sales agent fees was recorded in “Sales and marketing” expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).  For the three and six months ended July 31, 2019, $0.9 million and $1.9 million, respectively, of amortization expense related to deferred commissions and sales agent fees was recorded in “Sales and marketing” expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

9

 

Costs to fulfill a contract, which are incurred upon initiation of certain services contracts and are related to initial customer setup, are included in “Prepaid expenses and other current assets, net” and “Other assets, net” in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2020 and January 31, 2020 the Company had deferred setup costs of $1.4 million. These costs are amortized over the term of economic benefit which the Company has determined to be five years. During the three and six months ended July 31, 2020, $0.2 million and $0.3 million, respectively, of amortization expense related to deferred setup costs was recorded in “Cost of subscription” in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).  During the three and six months ended July 31, 2019, $0.1 million and $0.3 million, respectively, of amortization expense related to deferred setup costs were recorded in “Cost of subscription” in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

Recoverability of these costs is subject to various business risks. Quarterly, the Company compares the carrying value of these assets with the undiscounted future cash flows expected to be generated by them to determine if there is impairment. If impaired, these assets are reduced to an estimated fair value on a discounted cash flow basis. No impairment losses were recognized during the six months ended July 31, 2020 and 2019.

3. COMPUTATION OF NET INCOME (LOSS) PER SHARE

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

	Three Months Ended						Six Months Ended
	July 31,						July 31,
	2020			2019			2020			2019
	(in thousands, except per share data)						(in thousands, except per share data)
Net income (loss)	$	60		$	(13,250	)	$	(350	)	$	(16,484	)
Less: Dividends declared		(1,448	)		(1,387	)		(2,879	)		(2,761	)
Undistributed net loss	$	(1,388	)	$	(14,637	)	$	(3,229	)	$	(19,245	)
Net income (loss) per share – Class A Common Stock
Dividends declared	$	1,249		$	1,191		$	2,481		$	2,370
Allocation of undistributed net loss		(1,197	)		(12,570	)		(2,782	)		(16,522	)
Net income (loss) attributable to Class A common stock	$	52		$	(11,379	)	$	(301	)	$	(14,152	)
Weighted average shares of Class A common stock outstanding— basic		17,245			16,465			17,179			16,417
Weighted average potential shares of Class A common stock		568			—			—			—
Weighted average shares of Class A common stock and potential common shares outstanding— diluted		17,813			16,465			17,179			16,417
Basic net income (loss) per Class A common share	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Diluted net income (loss) per Class A common share	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Net income (loss) per share – Class B Common Stock
Dividends declared	$	199		$	196		$	398		$	391
Allocation of undistributed net loss		(191	)		(2,067	)		(447	)		(2,723	)
Net income (loss) attributable to Class B common stock	$	8		$	(1,871	)	$	(49	)	$	(2,332	)
Weighted average shares of Class B common stock outstanding— basic		3,321			3,264			3,321			3,264
Weighted average potential shares of Class B common stock		68			—			—			—
Weighted average shares of Class B common stock and potential common shares outstanding— diluted		3,389			3,264			3,321			3,264
Basic net income (loss) per Class B common share	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)
Diluted net income (loss) per Class B common share	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)

Potential common shares consist of the shares issuable upon the release of restricted stock units (RSUs) and performance stock units (PSUs) and the exercise of stock appreciation rights (SARs). The Company’s unvested RSUs and PSUs, and unexercised SARs are not considered participating securities as they do not have rights to dividends or dividend equivalents prior to release or exercise.

10

 

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:

	Three Months Ended				Six Months Ended
	July 31,				July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Class A		340		2,897		1,822		2,898
Class B		—		278		150		278

4. FAIR VALUE MEASUREMENTS

When determining fair value, the Company uses a three-tier value hierarchy which prioritizes the inputs used in measuring fair value. Whenever possible, the Company uses observable market data. The Company relies on unobservable inputs only when observable market data is not available. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

•  Level 1 – The assets are recorded at fair value based upon quoted market prices.

•  Level 2 - The asset or liability related to the interest rate swap is recorded at fair value based upon a valuation model that uses relevant observable market inputs at quoted intervals, such as forward yield curves.

•  Level 3 - The asset or liability is recorded at fair value based upon significant unobservable inputs.

The following table sets forth the financial assets and liability, measured at fair value, as of July 31, 2020 and January 31, 2020:

	Fair value measurement at reporting date using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in thousands)
As of July 31, 2020
Money market mutual funds	$	113,363
Certificates of deposit	$	8,882
Liability related to the interest rate swap			$	(451	)
As of January 31, 2020
Money market mutual funds	$	107,319
Certificates of deposit	$	14,917
Liability related to the interest rate swap			$	(232	)

Money market mutual funds and certificates of deposit are classified as part of “Cash and equivalents” in the accompanying Condensed Consolidated Balance Sheets. The amount of cash and equivalents deposited with commercial banks was $18.5 million and $14.5 million at July 31, 2020 and January 31, 2020, respectively.

The Company’s note payable bears a variable market interest rate commensurate with the Company’s credit standing. Therefore, the carrying amount outstanding under the note payable reasonably approximates fair value based on Level 2 inputs.

There have been no transfers between fair value measurement levels during the six months ended July 31, 2020.

Derivative Instruments

The Company entered into an interest rate swap in May 2012 to mitigate the exposure to the variability of one month LIBOR for its floating rate debt described in Note 7 “Debt” within these Notes to Condensed Consolidated Financial Statements. The fair value of the interest rate swap is reflected as an asset or liability in the Condensed Consolidated Balance Sheets and the change in fair value is reported in “Other expense (income), net” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the interest rate swap is estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date.

11

 

The fair values of the derivative instrument at July 31, 2020 and January 31, 2020 were as follows (in thousands):

	Liability
		Fair Value
	Balance Sheet Location	July 31, 2020			January 31, 2020
Derivative instrument:
Interest rate swap	Other liabilities	$	(451	)	$	(232	)
Total		$	(451	)	$	(232	)

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) was $32,000 and $(219,000) for the three and six months ended July 31, 2020, respectively; compared to $(160,000) and $(251,000) for the three and six months ended July 31, 2019, respectively.

5. CAPITALIZED SOFTWARE COSTS

Capitalized software costs and accumulated amortization at July 31, 2020 and January 31, 2020 were as follows:

	July 31, 2020			January 31, 2020
	(in thousands)
Capitalized software costs:
Capitalized software development costs	$	3,680		$	3,356
Acquired software technology		135			135
		3,815			3,491
Less accumulated amortization		(1,841	)		(1,569	)
Capitalized software costs, net	$	1,974		$	1,922

The Company’s capitalized software development costs relate to translations and localizations of QAD Adaptive Applications. Acquired software technology costs relate to intellectual property purchased during the second quarter fiscal 2019.

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during the first six months of fiscal 2021, approximately $0.3 million of costs and accumulated amortization were removed from the Condensed Consolidated Balance Sheet, related to capitalized software development costs which were fully amortized during the first six months of fiscal 2021.

Amortization of capitalized software costs was $0.3 million and $0.6 million for the three and six months ended July 31, 2020, respectively; compared to $0.2 million and $0.4 million for the three and six months ended July 31, 2019, respectively. Amortization of capitalized software costs is included in “Cost of license” in the accompanying Condensed 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 July 31, 2020:

Fiscal Years	(in thousands)
2021 remaining	$	543
2022		851
2023		488
2024		92
Thereafter		-
	$	1,974

12

 

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the six months ended July 31, 2020 were as follows:

	Gross Carrying Amount			Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2020	$	27,996		$	(15,608	)	$	12,388
Impact of foreign currency translation		(37	)		-			(37	)
Balance at July 31, 2020	$	27,959		$	(15,608	)	$	12,351

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2020. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2019. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2020. The Company monitors the indicators for goodwill impairment testing between annual tests. As a result of the decline in the global economy due to the global coronavirus (COVID-19) pandemic, the Company reviewed goodwill for impairment in the second quarter and given the Company's market capitalization has remained unchanged, goodwill is not impaired.

Intangible Assets

	July 31, 2020			January 31, 2020
	(in thousands)
Amortizable intangible assets:
Customer relationships	$	1,299		$	1,379
Less accumulated amortization		(501	)		(394	)
Amortizable intangible assets, net	$	798		$	985

The Company’s intangible assets 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 Condensed Consolidated Balance Sheets, and are amortized over an estimated five-year useful life.

Amortization of intangible assets from acquisitions was $0.1 million for both the three and six months ended July 31, 2020 and 2019. The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of July 31, 2020:

Fiscal Years	(in thousands)
2021 remaining	$	130
2022		260
2023		260
2024		148
Thereafter		-
	$	798

7. DEBT

	July 31, 2020			January 31, 2020
	(in thousands)
Note payable	$	12,619		$	12,868
Less current maturities		(516	)		(503	)
Less loan origination costs, net		(19	)		(24	)
Long-term debt	$	12,084		$	12,341

Effective May 30, 2012, QAD Ortega Hill, LLC, a consolidated entity of QAD Inc., entered into a variable rate credit agreement (the 2012 Mortgage) with Mechanics Bank (formerly Rabobank, N.A.), to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 0.17% at July 31, 2020. The 2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Mechanics Bank. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million when the loan matures on June 1, 2022. The unpaid balance as of July 31, 2020 was $12.6 million.

13

 

8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of taxes, were as follows:

	Foreign Currency Translation Adjustments
	(in thousands)
Balance as of January 31, 2020	$	(8,345	)
Other comprehensive loss before reclassifications		(1,048	)
Amounts reclassified from accumulated other comprehensive loss		-
Net current period other comprehensive loss		(1,048	)
Balance as of July 31, 2020	$	(9,393	)

During the six months ended July 31, 2020 there were no reclassifications from accumulated other comprehensive loss.

9. INCOME TAXES

In determining the quarterly provision for income taxes, the Company calculated income tax expense based on actual quarterly results in each of the second quarters of fiscal years 2021 and 2020. These results were adjusted for discrete items recorded during the period. Actual quarterly results were used in fiscal 2021 and 2020 since they provided a more reliable estimate of quarterly tax expense.

The Company recorded income tax expense of $0.4 million and $9.9 million in the second quarter of fiscal 2021 and 2020, respectively. The Company’s effective tax rate was 88% during the second quarter of fiscal 2021 compared to (292%) for the same period in the prior year. The change in the effective tax rate was primarily due to a pre-tax profit of $0.5 million in the second quarter of fiscal 2021 as compared to a pre-tax loss of $3.4 million in addition to a $10 million valuation allowance that was placed on the net deferred tax assets of the Company’s wholly-owned Irish subsidiary in the second quarter of fiscal 2020. The placement of a valuation allowance resulted in an accounting adjustment of $10 million to income tax expense.

The Company recorded income tax expense of $1.4 million and $10.6 million for the first six months of fiscal 2021 and 2020, respectively. The Company’s effective tax rate was 132% during the first six months of fiscal 2021 compared to (180%) for the same period in the prior year. The change in the effective tax rate was primarily due to a pre-tax profit of $1.1 million in the first six months of fiscal 2021 compared to a $5.9 million pre-tax loss in addition to a $10 million valuation allowance that was placed on the Company’s wholly-owned Irish subsidiary’s net deferred tax assets in fiscal 2020.

 

On March 27, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides additional economic stimulus to address the impact of the COVID-19 pandemic. In the first six months of fiscal year 2021, the Company’s income tax provision was not significantly impacted by the CARES Act. The Company will continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects that may result from future legislation.

In July 2020, the U.S. Department of Treasury issued final tax regulations related to foreign-derived intangible income and global intangible low-taxed income (GILTI) provisions. Also in  July 2020, the U.S. Department of Treasury released final tax regulations that provide certain U.S. taxpayers with an annual election to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions. The Company is currently assessing the impact of these new regulations to its condensed consolidated financial statements.

When calculating QAD’s income tax expense for the first six months of fiscal 2021, the Company considered the U.S. Tax Cuts and Job Act that was signed into law in December 2017. The Company calculated an estimate for GILTI in the Company’s tax expense based on the final GILTI regulations released on June 14, 2019 by the U.S. Department of Treasury. These regulations provide computational, definitional, and anti-avoidance rule guidance relating to the determination of a U.S. shareholder’s GILTI inclusion. In addition, the technical change in depreciation on qualified improvement property enacted in the CARES Act was also considered in the GILTI calculation. In the first six months of fiscal 2021, cash taxes were not impacted by GILTI since the Company has experienced losses in foreign jurisdictions.

The Company has elected to treat the deferred taxes related to GILTI provisions as a current-period expense when incurred (the period cost method).

At July 31, 2020 and 2019, the gross amount of unrecognized tax benefits was $1.3 million including interest and penalties. The unrecognized tax benefits for the first six months of fiscal 2021 and fiscal 2020 were reduced by $1 million with an accompanying reduction of deferred tax assets, as a result of the netting required under ASU 2013-11. The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within twelve months of the reporting date.

14

 

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of July 31, 2020 and 2019, the Company accrued approximately $0.1 million of interest and penalty expense relating to unrecognized tax benefits.

The Company reviews its net deferred tax assets by entity at each balance sheet date to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. During the first six months of fiscal year 2021 management considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance was needed. Management assessed the transfer pricing methodology, the historical profits, the economics of the country including the impact of COVID-19 in which the entity operates, the current and future customer base, the type and character of the deferred tax asset and any other current and relevant information by entity to draw its conclusion.

A valuation allowance has been established for select foreign jurisdictions along with U.S. federal and state net deferred tax assets. The following table discloses the Company’s valuation allowance by entity (in millions): 

Jurisdiction	July 31, 2020		January 31, 2020
U.S. federal and state	$	32.1	$	30.3
Ireland		11.9		11.6
Brazil		6.2		5.7
Germany		2.8		2.6
Hong Kong		0.6		0.6
South Africa		0.2		0.2
Total valuation allowance	$	53.8	$	51.0

At July 31, 2020 and  January 31, 2020, the worldwide valuation allowance attributable to deferred tax assets was $53.8 million and $51.0 million, respectively.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

● India for fiscal years ended March 31, 2010, 2013 and 2018

● Thailand for fiscal year ended January 31, 2018

● Mexico for calendar years ended December 31, 2015, 2016, 2017 and 2018

During the fiscal year 2021, the Company closed the following audits with no adjustment:

● Germany for fiscal years ended January 31, 2015, 2016 and 2017

10. STOCKHOLDERS’ EQUITY

Dividends

The following table sets forth the dividends that were declared by the Company during the first six months of fiscal 2021:

Declaration Date	Record Date	Payable	Dividend Class A		Dividend Class B		Amount (in thousands)
6/11/2020	6/25/2020	7/7/2020	$	0.072	$	0.06	$	1,448
4/7/2020	4/22/2020	4/29/2020	$	0.072	$	0.06	$	1,431

11. STOCK-BASED COMPENSATION

The Company’s equity awards consist of RSUs, PSUs and SARs. For a description of the Company’s stock-based compensation plans, see Note 6 “Stock-Based Compensation” in Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 31, 2020.

15

 

Stock-Based Compensation

The following table sets forth reported stock-based compensation expense for the three and six months ended July 31, 2020 and 2019:

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Cost of subscription	$	139	$	72	$	246	$	142
Cost of maintenance		120		132		229		253
Cost of professional services		412		359		749		681
Sales and marketing		720		575		1,228		955
Research and development		560		441		1,011		868
General and administrative		2,000		1,609		2,893		2,593
Total stock-based compensation expense	$	3,951	$	3,188	$	6,356	$	5,492

RSU Information

The estimated fair value of RSUs was calculated based on the closing price of the Company’s common stock on the date of grant, reduced by the present value of dividends foregone during the vesting period.

The following table summarizes the activity for RSUs for the six months ended July 31, 2020: 

	RSUs (in thousands)			Weighted Average Grant Date Fair Value
Restricted stock at January 31, 2020		627		$	39.86
Granted		342			40.27
Released (1)		(246	)		35.75
Forfeited		(10	)		40.64
Restricted stock at July 31, 2020		713		$	41.46

(1) The number of RSUs released includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three months ended July 31, 2020, the Company withheld 74,000 shares for payment of these taxes at a value of $3.1 million. During the six months ended July 31, 2020, the Company withheld 76,000 shares for payment of these taxes at a value of $3.2 million.

Total unrecognized compensation cost related to RSUs was approximately $27.8 million as of July 31, 2020. This cost is expected to be recognized over a weighted-average period of approximately 3.0 years. 

16

 

PSU Information

The following table summarizes the activity for PSUs for the six months ended July 31, 2020:

	PSUs (in thousands)			Weighted Average Grant Date Fair Value
Performance stock units at January 31, 2020		90		$	39.82
Granted		93			40.54
Released (1)		(21	)		39.82
Forfeited		(9	)		39.82
Performance stock units at July 31, 2020		153		$	40.26

(1) The number of PSUs released includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three and six months ended July 31, 2020, the Company withheld 8,000 shares for payment of these taxes at a value of $0.3 million.

Total unrecognized compensation cost related to PSUs was approximately $3.4 million as of July 31, 2020. This cost is expected to be recognized over a period of approximately 1.4 years.

SAR Information

The following table summarizes the activity for outstanding SARs for the six months ended July 31, 2020:

	SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2020		1,349		$	24.86
Granted		-			-
Exercised		(201	)		12.92
Expired		-			-
Forfeited		-			-
Outstanding at July 31, 2020		1,148		$	26.96		3.3	$	15,697
Vested and exercisable at July 31, 2020		1,005		$	24.23		3.1	$	15,323

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock based on the last trading day as of July 31, 2020, and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on July 31, 2020. The total intrinsic value of SARs exercised in the six months ended July 31, 2020 was $6.0 million.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.  During the three months ended July 31, 2020, the Company withheld 56,000 shares for payment of these taxes at a value of $2.4 million. During the six months ended July 31, 2020, the Company withheld 57,000 shares for payment of these taxes at a value of $2.4 million.

At July 31, 2020, there was approximately $1.9 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 1.7 years.

12. COMMITMENTS AND CONTINGENCIES

Indemnifications

The Company sells software licenses and services to its customers under written agreements. Each agreement contains the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that may be awarded against the customer in the event the Company’s software is found to infringe upon certain intellectual property rights of a third party. The agreements generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects.

17

 

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the agreements. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the agreements, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

Legal Actions

The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. 

13. BUSINESS SEGMENT INFORMATION

The Company markets its products and services worldwide, primarily to companies in the manufacturing industry, including automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries. The Company sells products and services through its direct sales force in four geographic regions: North America; Europe, the Middle East and Africa (EMEA); Asia Pacific; and Latin America and through distributors where third parties can extend sales reach more effectively or efficiently. The North America region includes the United States and Canada. The EMEA region includes Europe, the Middle East and Africa. The Asia Pacific region includes Asia and Australia. The Latin America region includes South America, Central America and Mexico. In accordance with Topic 606, the Company reports disaggregated revenue by geography and by industry as the Company believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.  The Company does not consider reporting by industry an operating segment in accordance with ASC 280, Segment Reporting, because discrete financial information by industry is not available. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, reviews the consolidated results within one operating segment.

Subscription, license and maintenance revenues are generally assigned to the region where a majority of end users are located. Professional services revenue is assigned based on the region where the services are delivered.

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Revenue:
North America (1)	$	38,998	$	36,837	$	76,000	$	74,496
EMEA		21,379		22,118		43,947		44,627
Asia Pacific		9,571		11,751		19,213		23,637
Latin America		4,133		5,672		9,068		11,653
	$	74,081	$	76,378	$	148,228	$	154,413

(1) Sales into Canada accounted for 2% of North America total revenue in the three and six months ended July 31, 2020 and for 2% and 3% of North America total revenue in the three and six months ended July 31, 2019, respectively.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact should be construed as forward looking statements, including statements that are preceded or accompanied by such words as “may,” “believe,” “could,” “anticipate,” “projects,” “estimates,” “will likely result,” “should,” “would,” “might,” “plan,” “expect,” “intend” and words of similar meaning or the negative of these terms or other comparable terminology. Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, the economy and future conditions. A number of risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1A entitled “Risk Factors” within our Annual Report on Form 10-K for the year ended January 31, 2020. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions, expectations and projections only as of the date hereof and are subject to risks, uncertainties and assumptions about our business. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements except as required by applicable securities laws. Readers should carefully review the risk factors and other information described in other documents we file from time to time with the Securities and Exchange Commission (SEC).

18

INTRODUCTION

The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended January 31, 2020, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES

Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical, including a) revenue and b) income taxes, are further discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, except as described in Note 1 “Basis of Presentation and Recent Accounting Pronouncements” within the Notes to Condensed Consolidated Financial Statements.

BUSINESS OVERVIEW

QAD (QAD, the Company, we or us) is a leader in cloud-based enterprise software solutions for global manufacturing companies. Our solutions, called QAD Adaptive Applications, are designed specifically for automotive, life sciences, consumer products, food and beverage, high technology and industrial products manufacturers. QAD software offers a full set of core manufacturing enterprise resource planning and supply chain planning capabilities. Our architecture, called the QAD Enterprise Platform, allows manufacturers to upgrade existing functionality by module, and extend or create new applications, providing manufacturers with the flexibility they need to innovate and rapidly adapt to change. 

We have four principal sources of revenue:

• Subscription of QAD Adaptive Applications through our cloud offering in a Software as a Service (SaaS) model as well as other hosted applications;

• License purchases of QAD Adaptive Applications;

• Maintenance and support, including technical support, training materials, product enhancements and upgrades; and

• Professional services, including implementations, technical and application consulting, training, migrations and upgrades.

We operate primarily in the following four geographic regions: North America, Latin America, EMEA and Asia Pacific. In the first six months of fiscal 2021, approximately 51% of our total revenue was generated in North America, 30% in EMEA, 13% in Asia Pacific and 6% in Latin America. The majority of our revenue is generated from global customers who have operations in multiple countries throughout the world. A significant portion of our revenue and expenses are derived from international operations which are primarily conducted in foreign currencies. As a result, changes in the value of foreign currencies relative to the U.S. dollar have impacted our results of operations and may impact our future results of operations. At July 31, 2020, we employed approximately 1,931 employees worldwide, of which 628 employees were based in North America, 605 employees in EMEA, 584 employees in Asia Pacific and 114 employees in Latin America.

Our customer base and our target markets are primarily global manufacturing companies. Therefore, our results are heavily influenced by the state of the global manufacturing economy. As a result, our management team monitors several economic indicators, with particular attention to the Global and Country Purchasing Managers’ Indexes (PMI). The PMI is a survey conducted on a monthly basis by polling businesses that represent the makeup of respective sectors. Since most of our customers are manufacturers, our revenue has historically correlated with fluctuations in the manufacturing PMI. Global macro-economic trends and manufacturing spending are important barometers for our business, and the health of the U.S., Western European and Asian economies have a meaningful impact on our financial results.

19

We are transitioning our business model from traditional on-premises licensing to cloud-based subscriptions. During fiscal 2020 and the first six months of fiscal 2021, we closed most of our new customer deals in the cloud. On a rolling 12-month basis, subscription billings grew by 17% with a three-year compound annual growth rate (CAGR) of 25%. To date we have converted approximately 20% of our existing customers from on-premises licenses to our cloud-based solution. Recurring revenue, which we define as subscription revenue plus maintenance revenue, equaled 78% of total revenue for the fiscal 2021 second quarter, a five-percentage point increase over 73% of total revenue for the same period last year. By reducing our customers’ up-front costs and providing QAD Adaptive Applications with continuous application and infrastructure support in secure and resilient environments, we expect our cloud business model will be more attractive than on-premises licenses. We expect recurring revenue to remain a majority of total revenue as our subscription revenue continues to grow.  

The COVID-19 global pandemic has impacted our operations during the first six months of fiscal 2021.  Our priorities are the health and well-being of our employees, our customers and their respective families and communities in addition to ensuring complete continuity of service for our cloud customers and those customers with implementation or upgrade projects in process.  For the first half of fiscal 2021 subscription and maintenance revenue performed as expected given the revenue is recurring in nature. License fees and professional services revenue have been negatively impacted by the global pandemic as our existing customers are not adding users and some of our customers have postponed or extended their services projects and go live dates. We implemented prudent expense management measures during the first half of the year to offset the negative impact of lower license fees and professional services revenue.  The increasing contribution from higher margin subscription revenue and the expense control actions we have implemented helped drive an improvement in our profitability in the first half of fiscal 2021 compared to the same period in the prior year. As a result, we reported a pre-tax profit of $1.1 million for the first six months of the year. These expense management measures allow us to maintain a solid financial position which gives us the ability to continue to adapt to changes due to COVID-19.

Our customers are global manufacturers and the closure of manufacturing sites, country borders and the increase in unemployment due to the COVID-19 global pandemic are having and will continue to have negative implications on demand for goods, the supply chain, production of goods and transportation.  Furthermore, the future impact to our manufacturing customers depends on the duration and spread of the virus.  The negative impact on our manufacturing customers has caused many of them to delay purchasing decisions, postpone services projects, reduce users, request extended payment terms, or request higher discounts.  We expect COVID-19 will have a negative impact on our financial results and liquidity in fiscal 2021.  While the effects of the pandemic in the short to medium term remain uncertain, our business has a strong cash position with little debt and cash flow remains positive.  For these reasons we believe our financial position is solid and our long term strategy is sound. 

RESULTS OF OPERATIONS 

We operate in several geographical regions as described in Note 13 “Business Segment Information” within the Notes to Condensed Consolidated Financial Statements. In order to present our results of operations without the effects of changes in foreign currency exchange rates, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented in the following tables. In order to calculate our constant currency results, we apply the current foreign currency exchange rates to the prior period results.

Revenue

	Three Months Ended			Three Months Ended			Change in Constant			Change due to Currency			Total Change as Reported
	July 31, 2020			July 31, 2019			Currency			Fluctuations			$			%
(in thousands)
Revenue
Subscription	$	31,066		$	25,888		$	5,578		$	(400	)	$	5,178			20	%
Percentage of total revenue		42	%		34	%
License		3,043			3,516			(416	)		(57	)		(473	)		-13	%
Percentage of total revenue		4	%		4	%
Maintenance		26,486			29,586			(2,614	)		(486	)		(3,100	)		-10	%
Percentage of total revenue		36	%		39	%
Professional services		13,486			17,388			(3,449	)		(453	)		(3,902	)		-22	%
Percentage of total revenue		18	%		23	%
Total revenue	$	74,081		$	76,378		$	(901	)	$	(1,396	)	$	(2,297	)		-3	%

20

	Six Months Ended			Six Months Ended			Change in Constant			Change due to Currency			Total Change as Reported
	July 31, 2020			July 31, 2019			Currency			Fluctuations			$			%
(in thousands)
Revenue
Subscription	$	61,837		$	51,194		$	11,578		$	(935	)	$	10,643			21	%
Percentage of total revenue		42	%		33	%
License		4,264			7,982			(3,527	)		(191	)		(3,718	)		-47	%
Percentage of total revenue		3	%		5	%
Maintenance		52,894			59,485			(5,352	)		(1,239	)		(6,591	)		-11	%
Percentage of total revenue		36	%		39	%
Professional services		29,233			35,752			(5,488	)		(1,031	)		(6,519	)		-18	%
Percentage of total revenue		19	%		23	%
Total revenue	$	148,228		$	154,413		$	(2,789	)	$	(3,396	)	$	(6,185	)		-4	%

Total Revenue. On a constant currency basis, total revenue was $74.1 million for the second quarter of fiscal 2021, representing a $0.9 million, or 1%, decrease from $75.0 million for the same period last year. When comparing categories within total revenue at constant rates, our results for the second quarter of fiscal 2021 included decreases in professional services, license and maintenance partially offset by an increase in subscription. Revenue outside the North America region as a percentage of total revenue was 47% and 52% for the second quarter of fiscal 2021 and 2020, respectively. On a constant currency basis, total revenue decreased in our Latin America, EMEA, and Asia Pacific regions and increased in our North America region during the second quarter of fiscal 2021 when compared to the same period in the prior year.

On a constant currency basis, total revenue was $148.2 million for the first six months of fiscal 2021, representing a $2.8 million, or 2%, decrease from $151.0 million for the same period last year. When comparing categories within total revenue at constant currency rates, our results for the first six months of fiscal 2021 when compared to the prior year included decreases in professional services, license and maintenance partially offset by an increase in subscription. Revenue outside the North America region as a percentage of total revenue was 49% and 52% for the first six months of fiscal 2021 and 2020, respectively. On a constant currency basis, total revenue decreased in our Asia Pacific region, remained consistent in our Latin America region, and increased in our North America and EMEA regions during the first six months of fiscal 2021 when compared to the prior year.

Our products are sold to manufacturing companies that operate mainly in the following six industries: automotive, consumer products, food and beverage, high technology, industrial products and life sciences. Given the similarities between consumer products and food and beverage as well as between high technology and industrial products, we aggregate them for management review. The following table presents revenue by industry for the three and six months ended July 31, 2020 and 2019: 

	Three months ended July 31,						Six months ended July 31,
	2020			2019			2020			2019
Automotive		30	%		35	%		31	%		36	%
Consumer products and food and beverage		18	%		16	%		17	%		16	%
High technology and industrial products		36	%		35	%		36	%		34	%
Life sciences and other		16	%		14	%		16	%		14	%
Total revenue		100	%		100	%		100	%		100	%

The decrease in percentage of revenue by industry for automotive in the second quarter and the first half of fiscal 2021 compared to the same periods last year primarily relates to lower professional services revenue.  The prior year periods included several large services implementation projects in the automotive industry. Conversely, the percentage increase for high technology and industrial products primarily related to an increase in professional services revenue due to an on-going large, multisite global implementation project for an industrial products customer.

Subscription Revenue. Subscription revenue consists of recurring fees from customers to access our products via the cloud and other subscription offerings. Our cloud offerings typically include access to QAD software, hosting, application support, maintenance support and product updates, if and when available. Included in subscription revenue are one-time set up fees for technical services such as configuration of the database and access to the environment.

21

On a constant currency basis, subscription revenue was $31.1 million for the second quarter of fiscal 2021, representing a $5.6 million, or 22%, increase from $25.5 million for the same period last year. On a constant currency basis, subscription revenue increased across all regions during the second quarter of fiscal 2021 when compared to the same period last year. One of the metrics that management uses to monitor subscription performance is the number of new cloud deals that have been signed in the period. In the second quarter of fiscal 2021 we closed 22 new cloud deals, including 11 new cloud customers and 11 conversions from existing customers who previously purchased on-premises licenses. This compared to the second quarter of fiscal 2020 when we closed 24 new cloud deals, including 13 new cloud customers and 11 conversions from existing customers who previously were running our solutions on-premises. The increase in subscription revenue consists of new customer sites, existing customers converting from on-premises, and additional users and modules purchased by our existing cloud customers.

On a constant currency basis, subscription revenue was $61.8 million for the first six months of fiscal 2021, representing an $11.5 million, or 23%, increase from $50.3 million for the same period last year. On a constant currency basis, subscription revenue increased across all regions during the first six months of fiscal 2021 when compared to the prior year. In the first six months of fiscal 2021 we closed 35 new cloud deals, including 19 new cloud customers and 16 conversions from existing customers who previously purchased on-premises licenses. This compared to the first six months of fiscal 2020 when we closed 39 new cloud deals, including 18 new cloud customers and 21 conversions from existing customers who previously purchased on-premises licenses.

We track our retention rate of subscription by calculating the annualized revenue of customer sites with contracts up for renewal at the beginning of the period compared to the annualized revenue associated with the customer sites that have canceled during the period. The percentage of revenue not canceled is our retention rate. Our subscription customer retention rate is in excess of 90%.

The following table presents subscription revenue by region for the three and six months ended July 31, 2020 and 2019:

	Three months ended July 31,						Six months ended July 31,
	2020			2019			2020			2019
North America		58	%		57	%		58	%		56	%
EMEA		27	%		25	%		27	%		26	%
Asia Pacific		9	%		11	%		9	%		12	%
Latin America		6	%		7	%		6	%		6	%
Total subscription revenue		100	%		100	%		100	%		100	%

The following table presents subscription revenue by industry for the three and six months ended July 31, 2020 and 2019: 

	Three months ended July 31,						Six months ended July 31,
	2020			2019			2020			2019
Automotive		34	%		38	%		35	%		36	%
Consumer products and food and beverage		15	%		15	%		15	%		16	%
High technology and industrial products		28	%		27	%		28	%		26	%
Life sciences and other		23	%		20	%		22	%		22	%
Total subscription revenue		100	%		100	%		100	%		100	%

License Revenue. License revenue is derived from software license fees that customers pay for our core product, QAD Adaptive Applications, and any add-on modules they purchase. Our revenue mix has continued to shift from license to subscription revenue as a result of our business model transition as more new customers subscribe to our cloud-based offerings rather than purchase traditional on-premises licenses. While we expect license revenue to decline over time, we do continue to experience quarterly fluctuations.

On a constant currency basis, license revenue was $3.0 million for the second quarter of fiscal 2021, representing a $0.5 million, or 14%, decrease from $3.5 million for the same period last year. On a constant currency basis, license revenue decreased in our Latin America, EMEA and Asia Pacific regions and increased in our North America region during the second quarter of fiscal 2021 when compared to the same period last year. During the second quarter of fiscal 2021, two customers placed license orders totaling more than $0.1 million, one of which exceeded $1.0 million. This compared to the second quarter of fiscal 2020 in which four customers placed license orders totaling more than $0.1 million, one of which exceeded $0.5 million. The majority of our license revenue has come from additional users and module purchases from our existing customers.

22

On a constant currency basis, license revenue was $4.3 million for the first six months of fiscal 2021, representing a $3.5 million, or 45%, decrease from $7.8 million for the same period last year. On a constant currency basis, license revenue decreased in all our regions during the first six months of fiscal 2021 when compared to the same period last year. During the first six months of fiscal 2021, one customer placed a license order totaling more than $1.0 million and no other customer orders exceeded $0.3 million. This compared to the first six months of fiscal 2020 in which two customers placed license orders totaling more than $0.3 million, one of which exceeded $1.0 million.

Maintenance. We offer support services 24 hours a day, seven days a week in addition to providing software upgrades, which include additional or improved functionality, when and if available.

On a constant currency basis, maintenance revenue was $26.5 million for the second quarter of fiscal 2021, representing a $2.6 million, or 9%, decrease from $29.1 million for the same period last year. On a constant currency basis, maintenance revenue decreased in our North America, EMEA, and Asia Pacific regions and increased in our Latin America region during the second quarter of fiscal 2021 when compared to the same period last year.  The decrease in maintenance revenue period over period is primarily due to continued conversions of existing customers’ on-premises licenses to cloud subscriptions, in addition to our historical attrition rates. When customers convert to the cloud they no longer pay for maintenance as those support services are included as a component of the subscription offering. Though we continue to see renewal rates above 90%, conversions from on-premises licenses to cloud-based solutions have resulted in decreases in maintenance revenue and we expect this trend to continue in the future.

We track our maintenance retention rate by calculating the annualized revenue of customer sites with contracts up for renewal at the beginning of the period compared to the annualized revenue associated with the customer sites that have canceled during the period. The percentage of revenue not canceled is our retention rate. Conversions to the cloud are not considered cancellations for purposes of this calculation. Our maintenance retention rate has remained in excess of 90%.

On a constant currency basis, maintenance revenue was $52.9 million for the first six months of fiscal 2021, representing a $5.3 million, or 9%, decrease from $58.2 million for the same period last year. On a constant currency basis, maintenance revenue decreased in our North America, EMEA, and Asia Pacific regions, and increased in our Latin America region during the first six months of fiscal 2021 when compared to the prior year. The decrease in maintenance and other revenue period over period is primarily due to conversions to the cloud, in addition to our historical attrition rates.

Professional Services Revenue. Our professional services business includes technical and application consulting in addition to training, implementations, migrations and upgrades related to our solutions. Although our professional services are optional, our customers use these services when planning, implementing or upgrading our solutions whether in the cloud or on-premises. Professional services revenue growth is contingent upon subscription revenue growth and customer upgrade cycles, which are influenced by the strength of general economic and business conditions.

On a constant currency basis, professional services revenue was $13.5 million for the second quarter of fiscal 2021, representing a $3.4 million, or 20%, decrease from $16.9 million for the same period last year. On a constant currency basis, professional services revenue decreased across all regions during the second quarter of fiscal 2021 when compared to the same period last year. The decrease primarily related to a reduction in professional services revenue following the completion of a large, multisite global implementation project in fiscal 2020. In addition, the decrease in professional services revenue can be attributed to fewer engagements and a lower amount of professional services revenue per customer. We continue to see delays or elongation of projects due to the global pandemic COVID-19. In addition, our strategy is to outsource more professional services to our partners. We expect our professional services strategy to result in outsourcing or referring services projects to our partners, which may negatively impact our professional services revenue.

On a constant currency basis, professional services revenue was $29.2 million for the first six months of fiscal 2021, representing a $5.5 million, or 16%, decrease from $34.7 million for the same period last year. On a constant currency basis, professional services revenue decreased in all regions during the first six months of fiscal 2021 when compared to the prior year. The decrease primarily related to a reduction in professional services revenue following the completion of a large, multisite global implementation project in fiscal 2020. In addition, the decrease related to fewer engagements and a lower amount of professional services revenue per customer. 

Total Cost of Revenue

	Three Months Ended			Three Months Ended			Change in			Change due		Total Change as Reported
	July 31,  2020			July 31,  2019			Constant Currency			to Currency Fluctuations		$			%
(in thousands)
Cost of revenue
Cost of subscription	$	10,739		$	9,903		$	(900	)	$	64	$	(836	)		-8	%
Cost of license		565			554			(17	)		6		(11	)		-2	%
Cost of maintenance		6,413			7,459			892			154		1,046			14	%
Cost of professional services		13,106			18,116			4,586			424		5,010			28	%
Total cost of revenue	$	30,823		$	36,032		$	4,561		$	648	$	5,209			14	%
Percentage of revenue		42	%		47	%

23

	Six Months Ended			Six Months Ended			Change in			Change due		Total Change as Reported
	July 31, 2020			July 31, 2019			Constant Currency			to Currency Fluctuations		$			%
(in thousands)
Cost of revenue
Cost of subscription	$	21,087		$	19,320		$	(1,890	)	$	123	$	(1,767	)		-9	%
Cost of license		966			1,145			172			7		179			16	%
Cost of maintenance		13,157			15,062			1,591			314		1,905			13	%
Cost of professional services		28,038			37,439			8,406			995		9,401			25	%
Total cost of revenue	$	63, 248		$	72,966		$	8,279		$	1,439	$	9,718			13	%
Percentage of revenue		43	%		47	%

Total cost of revenue consists of cost of subscription, cost of license, cost of maintenance and cost of professional services. Cost of subscription includes salaries, benefits, bonuses and other personnel expenses of our cloud operations employees; stock-based compensation for those employees; hosting and hardware costs; third-party contractor expense; royalties; professional fees; travel expense; and an allocation of information technology and facilities costs. Cost of license includes license royalties and amortization of capitalized software costs. Cost of maintenance includes salaries, benefits, bonuses and other personnel expenses of our support group, stock-based compensation for those employees, travel expense, professional fees and an allocation of information technology and facilities costs. Cost of professional services includes salaries, benefits, bonuses and other personnel expenses of our services employees, stock-based compensation for those employees, third-party contractor expense, travel expense and an allocation of information technology and facilities costs.

Total Cost of Revenue. On a constant currency basis, total cost of revenue was $30.8 million and $35.4 million for the second quarter of fiscal 2021 and 2020, respectively, and as a percentage of total revenue was 42% and 47% in the second quarter of fiscal 2021 and 2020, respectively. The non-currency related decrease in cost of revenue of $4.6 million, or 13%, in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 was primarily due to lower professional services salaries and related costs resulting from a decrease in headcount of 96 people within services and lower travel costs associated with decreased professional service revenue partially offset by higher hosting costs associated with the increase in subscription revenue and higher subscription salaries and related costs resulting from an increase in headcount of 34 people within cloud support.

On a constant currency basis, total cost of revenue was $63.2 million and $71.5 million for the first six months of fiscal 2021 and 2020, respectively, and as a percentage of total revenue was 43% and 47% for the first six months of fiscal 2021 and 2020, respectively. The non-currency related decrease in cost of revenue of $8.3 million, or 12%, for the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was primarily due to lower professional services salaries and related costs resulting from a decrease in headcount of 96 people within services and lower travel costs associated with decreased professional service revenue partially offset by higher hosting costs associated with the increase in subscription revenue and higher subscription salaries and related costs resulting from an increase in headcount of 34 people within cloud support.  

Cost of Subscription. On a constant currency basis, cost of subscription was $10.7 million for the second quarter of fiscal 2021, representing a $0.9 million, or 9%, increase from $9.8 million for the same period last year. The non-currency related increase in cost of subscription of $0.9 million in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 was primarily due to higher salaries and related costs of $0.4 million, as a result of additional headcount of 34 people, and higher hosting costs of $0.3 million. Cost of subscription as a percentage of subscription revenue was 35% and 38% in the second quarter of fiscal 2021 and 2020, respectively. We continue to focus on improving our subscription margins over time due to leveraging ongoing economies of scale and implementing operational efficiencies. We have experienced and may experience in the future quarterly fluctuations in our subscription margins as we make investments in our data centers and cloud operations to support future growth. Our strategic investments in cloud growth may not match the timing of revenue increases.

On a constant currency basis, cost of subscription was $21.1 million for the first six months of fiscal 2021, representing a $1.9 million, or 10%, increase from $19.2 million for the same period last year. The non-currency related increase in cost of subscription of $1.9 million for the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was primarily due to higher hosting costs of $1.0 million and higher salaries and related costs of $0.7 million, as a result of additional headcount of 34 people. Cost of subscription as a percentage of subscription revenue was 34% and 38% for the first six months of fiscal 2021 and 2020, respectively.

24

Cost of License. On a constant currency basis, cost of license was $0.6 million for the second quarter of both fiscal 2021 and 2020. The changes in cost of license in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 consisted of lower license royalty expense of $0.1 million offset by higher amortization of capitalized software costs of $0.1 million. License royalty expense as a percent of license revenue remained relatively consistent year over year.

On a constant currency basis, cost of license was $1.0 million for the first six months of fiscal 2021, representing a $0.1 million, or 9% decrease from $1.1 million for the same period last year. The non-currency related decrease in cost of license of $0.1 million in the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was due to lower license royalty expense of $0.3 million partially offset by higher amortization of capitalized software costs of $0.2 million. License royalty expense as a percent of license revenue remained relatively consistent year over year.

Cost of Maintenance. On a constant currency basis, cost of maintenance was $6.4 million for the second quarter of fiscal 2021, representing a $0.9 million, or 12%, decrease from $7.3 million for the same period last year. The non-currency related decrease in cost of maintenance of $0.9 million in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 was primarily due to lower salaries and related costs of $0.5 million, as a result of lower headcount of 16 people, lower maintenance royalties of $0.2 million and a lower allocation of information technology and facilities costs of $0.2 million. Cost of maintenance as a percentage of maintenance revenue was 24% and 25% in the second quarter of fiscal 2021 and 2020, respectively.

On a constant currency basis, cost of maintenance was $13.2 million for the first six months of fiscal 2021, representing a $1.5 million, or 10%, decrease from $14.7 million for the same period last year. The non-currency related decrease in cost of maintenance of $1.5 million in the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was primarily due to lower salaries and related costs of $0.9 million, as a result of lower headcount of 16 people, lower maintenance royalties of $0.3 million and a lower allocation of information technology and facilities costs of $0.2 million. Cost of maintenance as a percentage of maintenance revenue was 25% for the first six months of fiscal 2021 and 2020.

Cost of Professional Services. On a constant currency basis, cost of professional services was $13.1 million for the second quarter of fiscal 2021, representing a $4.6 million, or 26%, decrease from $17.7 million for the same period last year. The non-currency related decrease in cost of professional services of $4.6 million in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 was primarily due to lower salaries and related costs of $2.0 million, as a result of lower headcount of 96 people, lower travel expenses of $1.3 million, a lower allocation of information technology and facilities costs of $0.5 million, lower bonuses of $0.3 million, lower severance of $0.3 million and lower third-party contractor costs of $0.3 million. Cost of professional services as a percentage of professional services revenues was 97% and 104% for the second quarter of fiscal 2021 and 2020, respectively.  Our professional services strategy has been to grow our partner network, perform more services via third party consulting and perform more services remotely.  As a result, we have reduced headcount year over year.

On a constant currency basis, cost of professional services was $28.0 million for the first six months of fiscal 2021, representing an $8.4 million, or 23%, decrease from $36.4 million for the same period last year. The non-currency related decrease in cost of professional services of $8.4 million for the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was primarily due to lower salaries and related costs of $4.1 million, as a result of lower headcount of 96 people, lower travel expenses of $2.1 million, lower bonuses of $0.8 million, a lower allocation of information technology and facilities costs of $0.7 million, lower severance of $0.5 million and lower third-party contractor costs of $0.2 million. Cost of professional services as a percentage of professional services revenues was 96% and 105% for the first six months of fiscal 2021 and 2020, respectively. Our professional services strategy has been to grow our partner network, perform more services via third party consulting and perform more services remotely.  As a result, we have reduced headcount year over year.

Sales and Marketing 

	Three Months Ended			Three Months Ended			Change in		Change due		Total Change as Reported
	July 31, 2020			July 31, 2019			Constant Currency		to Currency Fluctuations		$		%
(in thousands)
Sales and marketing	$	17,420		$	20,191		$	2,531	$	240	$	2,771		14	%
Percentage of revenue		23	%		26	%

	Six Months Ended			Six Months Ended			Change in		Change due		Total Change as Reported
	July 31, 2020			July 31, 2019			Constant Currency		to Currency Fluctuations		$		%
(in thousands)
Sales and marketing	$	35,977		$	41,082		$	4,472	$	633	$	5,105		12	%
Percentage of revenue		24	%		27	%

25

Sales and marketing expense includes salaries, benefits, commissions, bonuses, stock-based compensation, travel expense and other personnel costs of our sales and marketing employees in addition to costs of programs aimed at increasing revenue, such as trade shows, user group events, lead generation, advertising and various sales and promotional programs. Sales and marketing expense also includes sales agent fees and an allocation of information technology and facilities costs.

On a constant currency basis, sales and marketing expense was $17.4 million for the second quarter of fiscal 2021, representing a $2.6 million, or 13%, decrease from $20.0 million for the same period last year. The non-currency related decrease in sales and marketing expense of $2.6 million in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 was primarily due to lower travel expenses of $1.5 million, lower customer conference costs of $0.7 million, lower sales agent fees of $0.3 million, lower professional fees of $0.2 million and lower marketing costs of $0.2 million. The global pandemic resulted in savings from a significant reduction in travel and the cancellation of QAD’s Explore annual customer conference in the second quarter of fiscal year 2021. 

On a constant currency basis, sales and marketing expense was $36.0 million for the first six months of fiscal 2021, representing a $4.4 million, or 11%, decrease from $40.4 million for the same period last year. The non-currency related decrease in sales and marketing expense of $4.4 million for the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was primarily due to lower travel expenses of $2.5 million, lower customer conference costs of $0.7 million, lower severance of $0.7 million, lower bonuses of $0.5 million, lower commissions of $0.3 million, lower professional fees of $0.3 million and lower marketing costs of $0.3 million partially offset by higher salaries and related costs of $0.4 million, higher stock-based compensation of $0.3 million and a higher allocation of information technology and facilities costs of $0.2 million. The global pandemic resulted in savings from a significant reduction in travel and the cancellation of QAD’s Explore annual customer conference in the second quarter of fiscal year 2021.

Research and Development 

	Three Months Ended			Three Months Ended			Change in		Change due		Total Change as Reported
	July 31, 2020			July 31, 2019			Constant Currency		to Currency Fluctuations		$		%
(in thousands)
Research and development	$	13,161		$	13,870		$	575	$	134	$	709		5	%
Percentage of revenue		18	%		18	%

	Six Months Ended			Six Months Ended			Change in		Change due		Total Change as Reported
	July 31, 2020			July 31, 2019			Constant Currency		to Currency Fluctuations		$		%
(in thousands)
Research and development	$	27,178		$	27,857		$	280	$	399	$	679		2	%
Percentage of revenue		18	%		18	%

Research and development is expensed as incurred and consists primarily of salaries, benefits, bonuses, stock-based compensation, travel expense and other personnel costs for research and development employees in addition to professional services, such as fees paid to software development firms and independent contractors. Research and development expense includes an allocation of information technology and facilities costs, and is reduced by capitalized localization and translation costs.

On a constant currency basis, research and development expense was $13.2 million for the second quarter of fiscal 2021, representing a $0.5 million, or 4%, decrease from $13.7 million for the same period last year. The non-currency related decrease in research and development expense of $0.5 million in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 was primarily due to a payroll tax credit of $0.5 million, lower cross-charges from other departments of $0.2 million and lower travel expenses of $0.2 million partially offset by higher bonuses of $0.2 million.

On a constant currency basis, research and development expense was $27.2 million for the first six months of fiscal 2021, representing a $0.3 million, or 1%, decrease from $27.5 million for the same period last year. The non-currency related decrease in research and development expense of $0.3 million in the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was primarily due to a payroll tax credit of $0.5 million, lower travel expenses of $0.3 million and lower third-party contractor costs of $0.2 million partially offset by higher salaries and related costs of $0.5 million as a result of higher headcount of 30 people and a higher allocation of information technology and facilities costs of $0.2 million.

26

General and Administrative 

	Three Months Ended			Three Months Ended			Change in			Change due		Total Change as Reported
	July 31, 2020			July 31, 2019			Constant Currency			to Currency Fluctuations		$		%
(in thousands)
General and administrative	$	10,299		$	10,392		$	(11	)	$	104	$	93		1	%
Percentage of revenue		14	%		14	%

	Six Months Ended			Six Months Ended			Change in			Change due		Total Change as Reported
	July 31, 2020			July 31, 2019			Constant Currency			to Currency Fluctuations		$			%
(in thousands)
General and administrative	$	20,316		$	19,810		$	(756	)	$	250	$	(506	)		-3	%
Percentage of revenue		14	%		13	%

General and administrative expense includes salaries, benefits, bonuses, stock-based compensation, travel expense and other personnel costs related to our finance, human resources, legal and executive personnel. General and administrative expense also includes personnel costs of order processing, professional fees for accounting and legal services, bad debt expense and an allocation of information technology and facilities costs.

On a constant currency basis, general and administrative expense was $10.3 million for both the second quarter of fiscal 2021 and fiscal 2020. The non-currency related changes in general and administrative expense in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 were primarily due to lower severance of $0.1 million, lower travel expenses of $0.1 million, lower professional fees of $0.1 million and lower bad debt expense of $0.1 million offset by higher stock-based compensation of $0.4 million due to equity awards issued at higher stock prices.

On a constant currency basis, general and administrative expense was $20.3 million for the first six months of fiscal 2021, representing a $0.7 million, or 4% increase from $19.6 million for the same period last year. The non-currency related increase in general and administrative expense of $0.7 million in the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was primarily due to higher bad debt expense of $0.4 million, higher stock-based compensation of $0.3 million and a higher allocation of information technology and facilities costs of $0.2 million partially offset by lower travel expenses of $0.3 million.  The Company increased its bad debt reserve to provide for the global economic downturn associated with COVID-19.

Amortization of Intangibles from Acquisitions 

Amortization of intangibles from acquisitions was $65,000 and $129,000 in the second quarter and first six months of fiscal 2021, respectively; compared to $66,000 and $133,000 in the second quarter and first six months of fiscal 2020, respectively. Amortization expense for fiscal 2021 and 2020 was due to the intangible assets acquired during fiscal 2019.

Total Other Expense (Income)

	Three Months Ended			Increase (Decrease) Compared to Prior Period					Three Months Ended
	July 31, 2020			$		%			July 31, 2019
(in thousands)
Interest income	$	(213	)	$	576		73	%	$	(789	)
Interest expense		155			7		5	%		148
Other expense (income), net		1,871			2,025		1,315	%		(154	)
Total other expense (income), net	$	1,813		$	2,608		328	%	$	(795	)
Percentage of revenue		2	%							-1	%

27

	Six Months Ended			Increase (Decrease) Compared to Prior Period					Six Months Ended
	July 31, 2020			$		%			July 31, 2019
(in thousands)
Interest income	$	(649	)	$	864		57	%	$	(1,513	)
Interest expense		305			4		1	%		301
Other expense (income), net		639			965		296	%		(326	)
Total other expense (income), net	$	295		$	1,833		119	%	$	(1,538	)
Percentage of revenue		0	%							-1	%

Total other expense (income), net was $1.8 million and $(0.8) million for the second quarter of fiscal 2021 and fiscal 2020, respectively. The change in net other expense (income) was primarily related to higher foreign exchange losses of $2.1 million and lower interest income of $0.6 million partially offset by the favorable change in fair value of the credit swap of $0.2 million.  The U.S. dollar versus foreign currencies exchange rates in the countries where we conduct business have fluctuated significantly since the onset of the global pandemic COVID-19, most notably versus the euro and Mexican peso. Interest rates have also declined substantially resulting in lower interest income earned on our cash and equivalents.

Total other expense (income), net was $0.3 million and $(1.5) million for the first six months of fiscal 2021 and fiscal 2020, respectively. The change in net other expense (income) was primarily related to higher foreign exchange losses of $0.9 million and lower interest income of $0.9 million.

Interest rate swap valuations and foreign exchange gains and losses are subject to changes which are inherently unpredictable. Our interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, subjecting us to non-cash volatility in our results of operations. The swap fixes the interest rate on our mortgage to 4.31% over the entire term of the mortgage and effectively lowered our interest rate from the previous mortgage rate of 6.5%. Although the agreement allows us to prepay the loan and exit the agreement early, we have no intention of doing so. As a result, we will have non-cash adjustments through earnings each reporting period. Over the term of the mortgage, however, the net impact of these mark-to-market adjustments on earnings will be zero.

Income Tax Expense  

	Three Months Ended			Increase (Decrease) Compared to Prior Period						Three Months Ended
	July 31, 2020			$			%			July 31, 2019
(in thousands)
Income tax expense	$	440		$	(9,432	)		-96	%	$	9,872
Percentage of revenue		1	%								13	%
Effective tax rate		88	%								-292	%

	Six Months Ended			Increase (Decrease) Compared to Prior Period						Six Months Ended
	July 31, 2020			$			%			July 31, 2019
(in thousands)
Income tax expense	$	1,435		$	(9,152	)		-86	%	$	10,587
Percentage of revenue		1	%								7	%
Effective tax rate		132	%								-180	%

In determining the quarterly provision for income taxes, we calculated income tax expense based on actual quarterly results in the second quarters of fiscal years 2021 and 2020, respectively. These results were adjusted for discrete items recorded during the period. Actual quarterly results were used in fiscal 2021 and 2020 since they provided a more reliable estimate of quarterly tax expense.

We recorded income tax expense of $0.4 million and $9.9 million in the second quarter of fiscal 2021 and 2020, respectively. Our effective tax rate was 88% for the second quarter of fiscal 2021 compared to (292%) for the same period in the prior year. The change in the effective tax rate was primarily due to a pre-tax profit of $0.5 million in the second quarter of fiscal 2021 as compared to a pre-tax loss of $3.4 million and a $10 million valuation allowance that was placed on the net deferred tax assets of our wholly-owned Irish subsidiary in the second quarter of fiscal 2020. The placement of a valuation allowance resulted in an accounting adjustment of $10 million to income tax expense.

28

We recorded income tax expense of $1.4 million and $10.6 million for the first six months of fiscal 2021 and 2020, respectively. Our effective tax rate was 132% during the first six months of fiscal 2021 compared to (180%) for the same period in the prior year. The change in the effective tax rate was primarily due to a pre-tax profit of $1.1 million in the first six months of fiscal 2021 compared to a $5.9 million pre-tax loss and a $10 million valuation allowance placed on the Company’s wholly-owned Irish subsidiary’s net deferred tax assets for the same period of fiscal 2020.

Non-GAAP Financial Measures 

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margins and non-GAAP pre-tax income each meet the definition of a non-GAAP financial measure. We define the non-GAAP measures as follows: 

● Non-GAAP adjusted EBITDA - EBITDA is GAAP net income before net interest expense, income tax expense, depreciation and amortization. Non-GAAP adjusted EBITDA is EBITDA less stock-based compensation expense and the change in the fair value of the interest rate swap.

● Non-GAAP adjusted EBITDA margins - Calculated by dividing non-GAAP adjusted EBITDA by total revenue.

● Non-GAAP pre-tax income - GAAP income before income taxes not including the effects of stock-based compensation expense, amortization of purchased intangible assets and the change in fair value of the interest rate swap.

QAD’s management uses non-GAAP measures internally to evaluate the business and believes that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure in evaluating the company.

QAD non-GAAP measures reflect adjustments based on the following items:

Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from our non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by QAD, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.

Amortization of purchased intangible assets: We amortize purchased intangible assets in connection with our acquisitions. We have excluded the effect of amortization of purchased intangible assets, which include purchased technology, customer relationships, trade names and other intangible assets, from our non-GAAP pre-tax income calculation, because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe excluding amortization of purchased intangible assets provides a more useful comparison of our operating results to the operating results of our peers.

Change in fair value of the interest rate swap: We entered into an interest rate swap to mitigate our exposure to the variability of one-month LIBOR for our floating rate debt related to the mortgage of our headquarters. We have excluded the gain/loss adjustments to record the interest rate swap at fair value from our non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. We believe that these fluctuations are not indicative of our operational costs or meaningful in evaluating comparative period results because we currently have no intention of exiting the debt agreement early. Therefore, over the life of the debt the sum of the fair value adjustments will be zero.

29

The following table sets forth the reconciliation of the non-GAAP financial measures of adjusted EBITDA, adjusted EBITDA margins and non-GAAP pre-tax income to the most comparable GAAP measures for the three and six months ended July 31, 2020 and 2019: 

	Three Months Ended July 31,						Six Months Ended July 31,
	2020			2019			2020			2019
(in thousands)
Total revenue	$	74,081		$	76,378		$	148,228		$	154,413
Net income (loss)		60			(13,250	)		(350	)		(16,484	)
Net interest expense		(58	)		(641	)		(344	)		(1,212	)
Depreciation		1,474			1,276			2,770			2,603
Amortization		366			300			720			574
Income tax expense		440			9,872			1,435			10,587
EBITDA	$	2,282		$	(2,443	)	$	4,231		$	(3,932	)
Add back:
Stock-based compensation expense		3,951			3,188			6,356			5,492
Change in fair value of interest rate swap		(32	)		160			219			251
Adjusted EBITDA	$	6,201		$	905		$	10,806		$	1,811
Adjusted EBITDA margin		8	%		1	%		7	%		1	%
Non-GAAP pre-tax income (loss) reconciliation
Income (loss) before income taxes	$	500		$	(3,378	)	$	1,085		$	(5,897	)
Stock-based compensation expense		3,951			3,188			6,356			5,492
Amortization of purchased intangible assets		72			73			143			147
Change in fair value of interest rate swap		(32	)		160			219			251
Non-GAAP income (loss) before income taxes	$	4,491		$	43		$	7,803		$	(7	)

LIQUIDITY AND CAPITAL RESOURCES 

Our primary source of cash is from the sale of subscriptions, licenses, maintenance and professional services to our customers. Our primary use of cash is payment of our operating expenses which mainly consist of employee-related expenses, such as compensation and benefits, as well as general operating expenses for facilities, third-party hosting providers, third party contractors and other overhead costs. In addition to operating expenses, we may also use cash for capital expenditures; payment of dividends, payment of our mortgage, withholding taxes on settlement of stock-based compensation and stock repurchases; and to invest in our growth initiatives, which may include acquisitions of products, technologies and businesses. 

At July 31, 2020, our principal sources of liquidity were cash and equivalents totaling $140.7 million and net accounts receivable of $42.3 million. Our cash and equivalents consisted of current bank accounts, registered money market funds and time delineated deposits. Approximately 85% of our cash and equivalents were held in U.S. dollar denominated accounts as of July 31, 2020.

Our primary commercial banking relationship is with Bank of America and its global affiliates. Our largest cash concentrations are in the United States and Ireland. The percentage of cash and equivalents held outside of the United States was 65% and 69% as of July 31, 2020 and January 31, 2020, respectively. The majority of our cash and equivalents are held in investment accounts which are predominantly placed in money market mutual funds, U.S. Treasury and government securities funds. The remaining cash and equivalents are held in deposit accounts and certificates of deposit. 

We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions.  In addition to providing for U.S. income taxes on earnings from the United States, we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. 

In the second quarter of fiscal 2021, due to the lack of growth opportunities and the capital requirement to fund ordinary business operations, QAD Thailand paid a one-time $3.8 million dividend to its parent QAD Inc.  The Company has no intention or plans to repatriate any additional funds from Thailand and believes it is still appropriate to maintain the permanent reinvestment position for all its subsidiaries. Should we decide to repatriate earnings from other foreign subsidiaries in the future, we would not expect to incur significant additional taxes; however, foreign withholding taxes, currency translation, state taxes and currency control laws must always be considered.  

On March 27, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides additional economic stimulus to address the impact of the COVID-19 pandemic. We do not expect there to be any significant benefit to our income tax provision as a result of the CARES Act, and we continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects that may result from the CARES Act or future legislation.

30

The following table summarizes our cash flows for the six months ended July 31, 2020 and 2019: 

	Six Months Ended July 31,
(in thousands)	2020			2019
Net cash provided by operating activities	$	16,024		$	14,330
Net cash used in investing activities		(1,951	)		(4,241	)
Net cash used in financing activities		(9,127	)		(6,510	)
Effect of foreign exchange rates on cash and equivalents		(956	)		(1,224	)
Net increase in cash and equivalents	$	3,990		$	2,355

Typical factors affecting our cash provided by operating activities include our level of revenue and earnings for the period; the timing and amount of employee-related compensation payments, vendor payments and tax payments; and the timing and amount of billings and cash collections from our customers, which is our largest source of operating cash flow. Net cash flows provided by operating activities were $16.0 million and $14.3 million for the first six months of fiscal 2021 and 2020, respectively. The increase in cash flows from operating activities was due primarily to lower net loss of $16.1 million partially offset by lower changes in non-cash items (including depreciation and amortization, stock-based compensation, amortization of right-of-use assets, change in fair value of interest rate swap, provision for doubtful accounts/sales adjustments and net change in valuation allowance) of $(8.9) million, and the negative cash flow effect of changes in deferred revenue of $(5.1) million. While our revenue has declined due to the global pandemic, we have implemented cost control initiatives such as reduced travel and discretionary spending. This has lowered expenses and preserved cash.  

Net cash used in investing activities included capital expenditures of $1.3 million and $3.7 million for the first six months of fiscal 2021 and 2020, respectively. The decrease in capital expenditures primarily relates to lower leasehold improvements in fiscal 2021 compared to the prior year. We continue to monitor our capital spending and do not believe we are delaying critical capital expenditures required to run our business.

Net cash used in financing activities consisted primarily of payments of withholding taxes on settlement of stock-based compensation and payment of dividends. In the first six months of fiscal 2021 and 2020, we paid employee payroll taxes of $5.9 million and $3.5 million, respectively, on vested restricted stock units, vested performance stock units and exercised stock appreciation rights. In the first six months of fiscal 2021 and 2020, we made dividend payments of $2.9 million and $2.8 million, respectively. On a regular basis the Board of Directors evaluates our ability to continue to pay dividends and the structure of potential future dividend payments.

We have historically calculated accounts receivable days’ sales outstanding (DSO), using the countback, or last-in first-out, method. This method calculates the number of days of billed revenue represented by the accounts receivable balance as of period end. When reviewing the performance of our entities, DSO under the countback method is used by management. It is management’s belief that the countback method best reflects the relative health of our accounts receivable as of a given quarter-end or year-end because of the cyclical nature of our billings. Our billing cycle includes high annual maintenance renewal billings at year-end that will not be recognized as earned revenue until future periods.

DSO under the countback method was 49 days at both July 31, 2020 and 2019. DSO using the average method, which is calculated utilizing the accounts receivable balance and earned revenue for the most recent quarter, was 51 days and 49 days as of July 31, 2020 and 2019, respectively.

Some of our customers who have been negatively impacted by the COVID-19 pandemic have requested and may continue to request changes to payment terms. Some may also be unable to pay their receivables as they become due. We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on February 1, 2020, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes our accounts receivables and contract assets. Our expected loss allowance methodology for accounts receivable is developed using historical collection experience, consideration of current and anticipated future economic conditions and other relevant data. For the first six months of fiscal 2021, our expected loss allowance included consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic. We recorded an increase of $0.7 million in estimated credit losses related to the impact of COVID-19 on our customers.  We have not experienced any significant impact to credit quality or terms and the aging of our accounts receivable remained similar to the same period last year. We believe our reserve methodology is adequate, our reserves are properly stated as of July 31, 2020 and the quality of our receivables remains good.

There have been no material changes in our contractual obligations or commercial commitments outside the ordinary course of business. Cash requirements for items other than normal operating expenses are anticipated for capital expenditures, dividend payments and other equity transactions. We may require cash for acquisitions of new businesses, software products or technologies complementary to our business.

31

We are continuing to monitor the impact of COVID-19 on our operating results and liquidity and believe the global pandemic will negatively impact operating results and liquidity throughout fiscal 2021.  We have implemented cost savings measures in the areas of travel, personnel expense and discretionary spending.  We will monitor our costs and if needed, we will reduce costs further throughout fiscal 2021.  Because we have $140.7 million of cash and our only debt is the mortgage of our corporate headquarters of $12.6 million, we believe we are in a solid position to withstand the negative impacts to our revenue, operating income and liquidity in fiscal 2021.  We believe that our cash on hand and net cash provided by operating activities will provide us with sufficient resources to meet our current and long-term working capital requirements, debt service, dividend payments and other cash needs for at least the next twelve months.

Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates. See Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk” for further discussion.   

CONTRACTUAL OBLIGATIONS

A summary of future obligations under our various contractual obligations and commitments as of January 31, 2020 was disclosed in our Annual Report on Form 10-K for the year ended January 31, 2020. During the three and six months ended July 31, 2020 there have been no material changes in our contractual obligations or commercial commitments outside the ordinary course of business.

Note Payable

Effective May 30, 2012, QAD Ortega Hill, LLC, a consolidated entity of QAD Inc., entered into a variable rate credit agreement (the 2012 Mortgage) with Mechanics Bank (formerly Rabobank, N.A.), to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 0.17% at July 31, 2020. The 2012 Mortgage matures in June 2022 and is secured by our headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Mechanics Bank. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million when the loan matures on June 1, 2022. The unpaid balance as of July 31, 2020 was $12.6 million.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Rates. We have operations in foreign locations around the world and we are exposed to risk resulting from fluctuations in foreign currency exchange rates. We have experienced significant foreign currency fluctuations during fiscal 2020 and the first six months of fiscal 2021 due primarily to the volatility of the euro and Mexican peso in relation to the U.S. dollar. However, while strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing revenues it also has the effect of reducing expenses denominated in currencies other than the U.S. dollar. These foreign currency exchange rate movements could create a foreign currency gain or loss that could be realized or unrealized for us. Unfavorable movements in foreign currency exchange rates between the U.S. dollar and other foreign currencies may have an adverse impact on our operations. We did not have any foreign currency forward or option contracts or other foreign currency denominated derivatives or other financial instruments open as of July 31, 2020.

We face two risks related to foreign currency exchange rates—translation risk and transaction risk. Translation risk relates to amounts invested in our foreign operations that are translated into U.S. dollars using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as the U.S. dollar weakens or strengthens against other currencies. Furthermore, we have exposure to foreign exchange fluctuations arising from the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes. Transaction risk is related to our international subsidiaries holding non-local currency net monetary accounts subject to revaluation into their local currency, which results in realized or unrealized foreign currency gains or losses.

For the six months ended July 31, 2020 and 2019, approximately 48% and 50%, respectively, of our revenue was generated in foreign currencies. We also incurred a significant portion of our expenses in currencies other than the U.S. dollar, approximately 34% and 40% for the six months ended July 31, 2020 and 2019, respectively. Based on a hypothetical 10% strengthening of the U.S. dollar against all foreign currencies, our revenue would be adversely affected by approximately 4% partially offset by a positive effect on our expenses of approximately 3%, and our operating income would be adversely affected by approximately 131%.

For the six months ended July 31, 2020 and 2019, foreign currency transaction and remeasurement losses (gains) totaled $0.6 million and $(0.3) million, respectively, and are included in “Other expense (income), net” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We performed a sensitivity analysis on the net U.S. dollar and euro-based monetary accounts subject to revaluation that are held by our international subsidiaries and on the non-functional currency assets, liabilities and intercompany balances that are remeasured into U.S. dollars. A hypothetical 10% adverse movement in all foreign currency exchange rates would result in foreign currency transaction and remeasurement losses of approximately $2.6 million.

32

These estimates assume adverse shifts in all foreign currency exchange rates against the U.S. dollar, which do not always move in the same direction or in the same degrees. Actual results may differ materially from the hypothetical analysis.

Interest Rates. We invest our surplus cash in a variety of financial instruments, consisting principally of short-term marketable securities with maturities of less than 90 days at the date of purchase. Our investment securities are held for purposes other than trading. Cash balances held by subsidiaries are invested primarily in registered money market funds with local operating banks. Based on an interest rate sensitivity analysis of our cash and equivalents we estimate that a 10% adverse change in interest rates from the 2020 fiscal year-end rates would not have a material adverse effect on our cash flows or financial condition for the next fiscal year.

Our long-term debt is comprised of a loan agreement, secured by real property, which bears interest at the one month LIBOR rate plus 2.25%. In conjunction with the loan agreement, we entered into an interest rate swap. The swap agreement has an initial notional amount and schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31%.

Our interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, subjecting us to non-cash volatility in our results of operations. We prepared a sensitivity analysis using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in levels of interest rates across the entire yield curve, with all other variables held constant. Based upon the results of this analysis a 10% adverse change in interest rates from the July 31, 2020 rates would cause less than a $0.1 million reduction in our results of operations. We believe it is prudent to hedge the expected volatility of the variable rate mortgage on our corporate headquarters. The swap fixes the interest rate on our mortgage to 4.31% over the entire term of the mortgage. Although the agreement allows us to prepay the loan and exit the agreement early, we have no intention of doing so. As a result, we will have non-cash adjustments through earnings each reporting period. However, over the term of the mortgage, the net impact of these mark-to-market adjustments on earnings will be zero.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness 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. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting.  There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the our internal control over financial reporting.

Inherent limitations of internal controls. QAD’s management does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent 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 are met. 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, within QAD have been detected. 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 potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.

PART II

ITEM 1. LEGAL PROCEEDINGS

The Company is not party to any material legal proceedings. From time to time, QAD is party, either as plaintiff or defendant, to various legal proceedings and claims which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

33

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors reported in Item 1A within the Company’s Annual Report on Form 10-K for the year ended January 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits
31.1	Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

34

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

QAD Inc.

(Registrant)

Date: September 8, 2020	By:	/s/ DANIEL LENDER
		Daniel Lender
		Executive Vice President, Chief Financial Officer
		(Chief Financial Officer)
	By:	/s/ KARA BELLAMY
		Kara Bellamy
		Senior Vice President, Corporate Controller
		(Chief Accounting Officer)

35

EX-31.1

Exhibit 31.1

CERTIFICATIONS UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Anton Chilton, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of QAD Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.	The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)		disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.	The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: September 8, 2020 

/s/ ANTON CHILTON                      

Anton Chilton

Chief Executive Officer

QAD Inc.

EX-31.2

Exhibit 31.2

CERTIFICATIONS UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel Lender, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of QAD Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.	The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)		disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.	The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: September 8, 2020 

/s/ DANIEL LENDER                            

Daniel Lender

Chief Financial Officer

QAD Inc.

EX-32.1

 Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

FURNISHED PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of QAD Inc. (the "Company") on Form 10-Q for the period ending July 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anton Chilton, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: September 8, 2020
	/s/ ANTON CHILTON
	Anton Chilton
	Chief Executive Officer
	QAD Inc.

In connection with the Quarterly Report of QAD Inc. (the "Company") on Form 10-Q for the period ending July 31, 2020 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel Lender, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: September 8, 2020
	/s/ DANIEL LENDER
	Daniel Lender
	Chief Financial Officer
	QAD Inc.

XML

Document And Entity Information - shares	6 Months Ended
	Jul. 31, 2020	Aug. 31, 2020
Document Information [Line Items]
Entity Central Index Key	0001036188
Entity Registrant Name	QAD INC
Amendment Flag	false
Current Fiscal Year End Date	--01-31
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2021
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Jul. 31, 2020
Document Transition Report	false
Entity File Number	0-22823
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	77-0105228
Entity Address, Address Line One	100 Innovation Place
Entity Address, City or Town	Santa Barbara
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	93108
City Area Code	805
Local Phone Number	566-6000
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Common Class B [Member]
Document Information [Line Items]
Title of 12(b) Security	Class B Common Stock, $0.001 par value
Trading Symbol	QADB
Security Exchange Name	NASDAQ
Entity Common Stock, Shares Outstanding		3,330,318
Common Class A [Member]
Document Information [Line Items]
Title of 12(b) Security	Class A Common Stock, $0.001 par value
Trading Symbol	QADA
Security Exchange Name	NASDAQ
Entity Common Stock, Shares Outstanding		17,365,386

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Assets
Cash and equivalents	$ 140,707	$ 136,717
Accounts receivable, net of allowances of $4,026 and $2,940 at July 31, 2020 and January 31, 2020, respectively	42,270	80,968
Prepaid expenses and other current assets, net	20,909	24,952
Total current assets	203,886	242,637
Property and equipment, net of accumulated depreciation and amortization of $41,371 and $38,861 at July 31, 2020 and January 31, 2020, respectively	29,085	28,687
Lease right-of-use assets	19,710	18,329
Capitalized software costs, net	1,974	1,922
Goodwill	12,351	12,388
Deferred tax assets, net	7,095	5,834
Other assets, net	11,887	13,007
Total assets	285,988	322,804
Liabilities and Stockholders’ Equity
Current portion of long-term debt	516	503
Lease liabilities	4,059	4,371
Accounts payable	5,996	9,840
Deferred revenue	95,049	118,413
Other current liabilities	31,776	39,900
Total current liabilities	137,396	173,027
Long-term debt	12,084	12,341
Long-term lease liabilities	16,640	14,612
Other liabilities	7,666	6,759
Total liabilities	173,786	206,739
Stockholders’ equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding	0	0
Additional paid-in capital	198,085	197,824
Treasury stock, at cost 207,062 and 216,378 Class B shares at July 31, 2020 and January 31, 2020, respectively	(3,073)	(3,226)
Accumulated deficit	(73,438)	(70,209)
Accumulated other comprehensive loss	(9,393)	(8,345)
Total stockholders’ equity	112,202	116,065
Total liabilities and stockholders’ equity	285,988	322,804
Common Class A [Member]
Stockholders’ equity:
Common stock	17	17
Common Class B [Member]
Stockholders’ equity:
Common stock	$ 4	$ 4

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Accounts receivable, allowance	$ 4,026	$ 2,940
Accumulated depreciation and amortization	$ 41,371	$ 38,861
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common Class A [Member]
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	71,000,000	71,000,000
Common stock, shares issued (in shares)	17,364,966	17,108,846
Common Class B [Member]
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	4,000,000	4,000,000
Common stock, shares issued (in shares)	3,537,380	3,537,380
Treasury stock, shares (in shares)	207,062	216,378

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Revenue:
Revenues	$ 74,081	$ 76,378	$ 148,228	$ 154,413
Costs of revenue:
Costs of revenues	30,823	36,032	63,248	72,966
Gross profit	43,258	40,346	84,980	81,447
Operating expenses:
Sales and marketing	17,420	20,191	35,977	41,082
Research and development	13,161	13,870	27,178	27,857
General and administrative	10,299	10,392	20,316	19,810
Amortization of intangibles from acquisitions	65	66	129	133
Total operating expenses	40,945	44,519	83,600	88,882
Operating income (loss)	2,313	(4,173)	1,380	(7,435)
Other expense (income):
Interest income	(213)	(789)	(649)	(1,513)
Interest expense	155	148	305	301
Other expense (income), net	1,871	(154)	639	(326)
Total other expense (income), net	1,813	(795)	295	(1,538)
Income (loss) before income taxes	500	(3,378)	1,085	(5,897)
Income tax expense	440	9,872	1,435	10,587
Net income (loss)	60	(13,250)	(350)	(16,484)
Diluted net income (loss) per share
Net income (loss)	60	(13,250)	(350)	(16,484)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	1,607	298	(1,048)	35
Total comprehensive income (loss)	1,667	(12,952)	(1,398)	(16,449)
Common Class A [Member]
Other expense (income):
Net income (loss)	$ 52	$ (11,379)	$ (301)	$ (14,152)
Basic net income (loss) per share
Basic net (loss) income per share (in dollars per share)	$ 0.00	$ (0.69)	$ (0.02)	$ (0.86)
Diluted net income (loss) per share
Diluted net (loss) income per share (in dollars per share)	$ 0.00	$ (0.69)	$ (0.02)	$ (0.86)
Net income (loss)	$ 52	$ (11,379)	$ (301)	$ (14,152)
Common Class B [Member]
Other expense (income):
Net income (loss)	$ 8	$ (1,871)	$ (49)	$ (2,332)
Basic net income (loss) per share
Basic net (loss) income per share (in dollars per share)	$ 0.00	$ (0.57)	$ (0.01)	$ (0.71)
Diluted net income (loss) per share
Diluted net (loss) income per share (in dollars per share)	$ 0.00	$ (0.57)	$ (0.01)	$ (0.71)
Net income (loss)	$ 8	$ (1,871)	$ (49)	$ (2,332)
Subscription and Circulation [Member]
Revenue:
Revenues	31,066	25,888	61,837	51,194
Costs of revenue:
Costs of revenues	10,739	9,903	21,087	19,320
License [Member]
Revenue:
Revenues	3,043	3,516	4,264	7,982
Costs of revenue:
Costs of revenues	565	554	966	1,145
Maintenance [Member]
Revenue:
Revenues	26,486	29,586	52,894	59,485
Costs of revenue:
Costs of revenues	6,413	7,459	13,157	15,062
Professional Services [Member]
Revenue:
Revenues	13,486	17,388	29,233	35,752
Costs of revenue:
Costs of revenues	$ 13,106	$ 18,116	$ 28,038	$ 37,439

XML

Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Cumulative Effect, Period of Adoption, Adjustment [Member] Retained Earnings [Member]	Cumulative Effect, Period of Adoption, Adjustment [Member]	Common Stock [Member] Common Class A [Member]	Common Stock [Member] Common Class B [Member]	Treasury Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Common Class A [Member]	Common Class B [Member]	Total
Balance (in shares) at Jan. 31, 2019			16,605	3,537	(515)
Balance at Jan. 31, 2019	$ (173)	$ (173)	$ 16	$ 4	$ (7,350)	$ 196,723	$ (48,485)	$ (7,661)			$ 133,247
Net loss							(16,484)		$ (14,152)	$ (2,332)	(16,484)
Foreign currency translation adjustments								35			35
Stock award exercises					$ 202	(357)					(155)
Stock compensation expense						5,492					5,492
Dividends declared ($0.144 and $0.12 per Class A and Class B share, respectively)							(2,761)				(2,761)
Restricted stock (in shares)					174
Restricted stock					$ 2,205	(5,546)					(3,341)
Stock award exercises (in shares)					9
Balance (in shares) at Jul. 31, 2019			16,605	3,537	(332)
Balance at Jul. 31, 2019			$ 16	$ 4	$ (4,943)	196,312	(67,903)	(7,626)			115,860
Balance (in shares) at Jan. 31, 2020			17,109	3,537	(216)
Balance at Jan. 31, 2020			$ 17	$ 4	$ (3,226)	197,824	(70,209)	(8,345)			116,065
Net loss							(350)		$ (301)	$ (49)	(350)
Foreign currency translation adjustments								(1,048)			(1,048)
Stock award exercises						(2,576)					(2,423)
Stock compensation expense						6,356					6,356
Dividends declared ($0.144 and $0.12 per Class A and Class B share, respectively)							(2,879)				(2,879)
Restricted stock (in shares)			183
Restricted stock						(3,519)					(3,519)
Balance (in shares) at Jul. 31, 2020			17,365	3,537	(207)
Balance at Jul. 31, 2020			$ 17	$ 4	$ (3,073)	$ 198,085	$ (73,438)	$ (9,393)			$ 112,202

XML

Condensed Consolidated Statements of Stockholders' Equity (Unaudited) (Parentheticals) - $ / shares	6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019
Common Class A [Member]
Dividends declared, per share (in dollars per share)	$ 0.144	$ 0.144
Common Class B [Member]
Dividends declared, per share (in dollars per share)	$ 0.12	$ 0.12

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019
Cash flows from operating activities:
Net loss	$ (350)	$ (16,484)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	3,495	3,070
Amortization of costs capitalized to obtain and fulfill contracts	2,391	2,161
Amortization of right-of-use assets	2,910	2,965
Net change in valuation allowance	2,112	11,527
Other deferred income taxes	(2,004)	19
Loss on disposal of equipment	68	16
Provision for doubtful accounts and sales adjustments	1,212	127
Stock compensation expense	6,356	5,492
Change in fair value of derivative instrument	219	251
Other, net	12	69
Changes in assets and liabilities:
Accounts receivable	37,526	39,188
Costs capitalized to obtain and fulfill contracts	(2,246)	(2,158)
Lease liabilities	(2,721)	(3,095)
Prepaid expenses and other assets	2,616	(1,683)
Accounts payable	(4,071)	(1,910)
Deferred revenue	(23,840)	(18,707)
Other liabilities	(7,661)	(6,518)
Net cash provided by operating activities	16,024	14,330
Cash flows from investing activities:
Purchase of property and equipment	(1,325)	(3,707)
Purchase of short-term investments	0	(1,200)
Proceeds from sale of short-term investments	0	1,200
Capitalized software costs	(626)	(534)
Net cash used in investing activities	(1,951)	(4,241)
Cash flows from financing activities:
Repayments of debt	(306)	(253)
Tax payments related to stock awards	(5,942)	(3,496)
Dividends paid	(2,879)	(2,761)
Net cash used in financing activities	(9,127)	(6,510)
Effect of exchange rates on cash and equivalents	(956)	(1,224)
Net increase in cash and equivalents	3,990	2,355
Cash and equivalents at beginning of period	136,717	139,413
Cash and equivalents at end of period	140,707	141,768
Supplemental disclosure of cash flow information:
Interest	293	294
Income taxes, net of refunds	$ 2,203	$ 2,368

XML

Note 1 - Basis of Presentation and Recent Accounting Pronouncements

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

1. BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements fairly present the financial information contained therein. These statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements and footnotes are unaudited.  In management’s opinion, all necessary adjustments, consisting of normal, recurring and non-recurring adjustments, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the financial position and operating results of QAD Inc. (QAD or the Company). The Condensed Consolidated Financial Statements do not include all disclosures required by GAAP annual financial statements and should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020. The Condensed Consolidated Financial Statements include the results of the Company and its wholly-owned subsidiaries. Because of seasonal and other factors, results of operations for the three and six months ended July 31, 2020 are not necessarily indicative of the results to be expected for the year ending January 31, 2021.

The Company’s accounting policies are set forth in detail in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020 filed with the Securities and Exchange Commission. Such Annual Report also contains a discussion of the Company’s critical accounting policies and estimates. The Company believes that these accounting policies and estimates affect its more significant estimates and judgments used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s accounting policies except as described below upon adoption of ASU 2016-13, Financial Instruments-Credit Losses. 

Recent Accounting Pronouncements

Except as discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (FASB) or adopted by the Company during the six months ended  July 31, 2020, that are of significance, or potential significance, to the Company.

Recent Accounting Pronouncements Adopted

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, that eliminates “Step 2” from the goodwill impairment test. QAD adopted the new standard on February 1, 2020, the first day of fiscal 2021. The new standard did not have an impact on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes the Company's accounts receivables and contract assets. QAD adopted the new standard on February 1, 2020, the first day of fiscal 2021, using the modified retrospective approach. The adoption of this standard did not have a material impact on QAD’s condensed consolidated financial statements. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, consideration of current and anticipated future economic conditions and other relevant data.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The Company adopted the new standard on February 1, 2020, the first day of fiscal 2021. The adoption of this standard did not have a material impact on QAD’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued new guidance which is intended to simplify various aspects to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation and calculating income taxes in interim periods. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in application of Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Generally, the topics must be applied prospectively upon adoption, with the exception of certain topics which are required to be applied on a retrospective or modified retrospective basis. The Company is evaluating the impact, if any, of adopting this new accounting guidance on its financial statements.

XML

Note 2 - Revenue

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

2. REVENUE

QAD offers its software using the same underlying technology via two models: a traditional on-premises licensing model and a cloud-based subscription model. The on-premises model involves the license of software to customers who take possession of the software and install and maintain the software on their own hardware. Under the cloud-based subscription delivery model, QAD provides access to its software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

The Company generates revenue through sales of licenses and maintenance provided to its on-premises customers and through subscriptions of its cloud-based software. QAD offers professional services to both its on-premises and cloud customers to assist them with the design, testing and implementation of its software.

The Company determines revenue recognition through the following steps:

- Identification of the contract, or contracts, with a customer;

- Identification of the performance obligations in the contract;

- Determination of the transaction price;

- Allocation of the transaction price to the performance obligations in the contract; and

- Recognition of revenue when, or as, the Company satisfies a performance obligation.

Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities. 

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.

The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement.  License purchases generally have multiple performance obligations as customers purchase maintenance in addition to the licenses.  The Company’s single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements. 

For contracts with multiple performance obligations where the contracted price differs from the standalone selling price (SSP) for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP. SSP is assessed annually using a historical analysis of contracts with customers executed in the most recently completed fiscal year to determine the range of selling prices applicable to a distinct good or service.

Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable because the Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers. The Company rarely sells licenses on a stand-alone basis, as the majority of its license sales to customers include first year maintenance with the license purchase. The Company frequently sells subscription, maintenance and services on a stand-alone basis. 

Subscription

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the cloud environment is made available to the customer. The initial subscription period is typically 24 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice. In addition, a majority of customers renew their subscription contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

 Software Licenses

Transfer of control for software is considered to have occurred upon electronic delivery of the license key that provides immediate availability of the product to the customer. The Company’s typical payment terms tend to vary by region but its standard payment terms are within 30-90 days of invoice.

Maintenance

Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone access to technical support personnel. The Company’s customers purchase both product support and license updates via the Company’s maintenance offering when they acquire new software licenses. In addition, a majority of customers renew their maintenance contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

Professional Services

Revenue from professional services is typically comprised of implementation, development, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed.  In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project.  Management applies judgment when estimating project status and the costs necessary to complete the services projects.  A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances, and specification and testing requirement changes.  Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice. 

Indirect Sales Channels

The Company executes arrangements through indirect sales channels via sales agents and distributors who are authorized to market its software products to end users. In arrangements with sales agents, QAD contracts directly with the customer and sales agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to market and distribute the Company’s software products to end users in specified territories and the distributor bears the risk of collection from the end user customer. The Company recognizes revenue from transactions with distributors when the distributor submits a signed agreement and transfer of control has occurred to the distributor in accordance with the five revenue recognition steps noted above. Revenue from distributor transactions is recorded on a net basis (the amount actually received by the Company from the distributor). QAD does not offer rights of return, product rotation or price protection to any of its distributors.

Disaggregated Revenue

The Company disaggregates revenue from contracts with customers by geography and by the customers’ industry within manufacturing, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company’s revenue by geography is as follows:

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
North America	$	38,998	$	36,837	$	76,000	$	74,496
EMEA		21,379		22,118		43,947		44,627
Asia Pacific		9,571		11,751		19,213		23,637
Latin America		4,133		5,672		9,068		11,653
Total revenue	$	74,081	$	76,378	$	148,228	$	154,413

The Company’s revenue by industry is as follows:

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Automotive	$	22,275	$	26,962	$	46,412	$	56,034
Consumer products and food and beverage		13,476		12,128		25,290		24,107
High technology and industrial products		26,644		26,389		53,468		51,937
Life sciences and other		11,686		10,899		23,058		22,335
Total revenue	$	74,081	$	76,378	$	148,228	$	154,413

Management Judgments

Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that are separate performance obligations.  For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes. 

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

Contract Balances  

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on the Company’s Condensed Consolidated Balance Sheets. QAD records a contract asset when the Company has transferred goods or services but does not yet have the right to consideration. QAD records deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer. The Company presents the contract asset and liability balance on a net basis at the contract level.

The contract assets indicated below are presented as other current and non-current assets in the Condensed Consolidated Balance Sheets. These assets primarily relate to professional services and subscription and consist of the Company’s rights to consideration for goods or services transferred but not billed as of July 31, 2020 and January 31, 2020. The contract assets are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.

The Company’s contract balances are as follows: 

	July 31, 2020		January 31, 2020
	(in thousands)
Contract assets, short-term (in “Prepaid expenses and other current assets, net”)	$	2,040	$	1,595
Contract assets, long-term (in “Other assets, net”)		155		214
Total contract assets	$	2,195	$	1,809
Deferred revenue, short-term	$	95,049	$	118,413
Deferred revenue, long-term (in “Other liabilities”)		2,424		2,811
Total deferred revenue	$	97,473	$	121,224

During the six months ended July 31, 2020, the Company recognized $83.7 million of revenue that was included in the gross deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $282.3 million as of July 31, 2020, of which the Company expects to recognize approximately $165.9 million as revenue over the next twelve months and the remainder thereafter. In instances where the timing of revenue recognition differs from the timing of invoicing, QAD has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

Deferred Revenue

The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable services starting in future periods are included in accounts receivable and deferred revenue. The portion of deferred revenue that QAD anticipates will be recognized after the succeeding twelve-month period is recorded as non-current deferred revenue, and the remaining portion is recorded as current deferred revenue.  

Deferred revenues consisted of the following:

	July 31, 2020		January 31, 2020
	(in thousands)
Deferred maintenance	$	51,768	$	69,650
Deferred subscription		41,138		45,702
Deferred professional services		2,096		2,705
Deferred license and other revenue		47		356
Deferred revenues, current		95,049		118,413
Deferred revenues, non-current (in “Other liabilities”)		2,424		2,811
Total deferred revenues	$	97,473	$	121,224

Practical Expedients and Exemptions

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of the practical expedients applied by the Company:

● The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

● The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less. These costs are recorded within sales and marketing expense in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

● The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to time-and-material engagements).

Costs to Obtain and Fulfill a Contract

The Company’s incremental direct costs of obtaining a contract consist of sales commissions and sales agent fees which are deferred and amortized ratably over the term of economic benefit which the Company has determined to be five years. These deferred costs are classified as current or non-current based on the timing of when the Company expects to recognize the expense. Incremental costs related to renewals are expensed as incurred because the term of economic benefit is one year or less. The current and non-current portions of deferred commissions are included in “Prepaid expenses and other current assets, net” and “Other assets, net”, respectively, in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2020 and January 31, 2020, the Company had $12.2 million and $12.3 million, respectively, of deferred commissions and sales agent fees. For the three and six months ended July 31, 2020, $1.1 million and $2.1 million, respectively, of amortization expense related to deferred commissions and sales agent fees was recorded in “Sales and marketing” expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).  For the three and six months ended July 31, 2019, $0.9 million and $1.9 million, respectively, of amortization expense related to deferred commissions and sales agent fees was recorded in “Sales and marketing” expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

Costs to fulfill a contract, which are incurred upon initiation of certain services contracts and are related to initial customer setup, are included in “Prepaid expenses and other current assets, net” and “Other assets, net” in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2020 and January 31, 2020 the Company had deferred setup costs of $1.4 million. These costs are amortized over the term of economic benefit which the Company has determined to be five years. During the three and six months ended July 31, 2020, $0.2 million and $0.3 million, respectively, of amortization expense related to deferred setup costs was recorded in “Cost of subscription” in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).  During the three and six months ended July 31, 2019, $0.1 million and $0.3 million, respectively, of amortization expense related to deferred setup costs were recorded in “Cost of subscription” in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

Recoverability of these costs is subject to various business risks. Quarterly, the Company compares the carrying value of these assets with the undiscounted future cash flows expected to be generated by them to determine if there is impairment. If impaired, these assets are reduced to an estimated fair value on a discounted cash flow basis. No impairment losses were recognized during the six months ended July 31, 2020 and 2019.

XML

Note 3 - Computation of Net Income (Loss) Per Share

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Earnings Per Share [Text Block]

3. COMPUTATION OF NET INCOME (LOSS) PER SHARE

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

	Three Months Ended						Six Months Ended
	July 31,						July 31,
	2020			2019			2020			2019
	(in thousands, except per share data)						(in thousands, except per share data)
Net income (loss)	$	60		$	(13,250	)	$	(350	)	$	(16,484	)
Less: Dividends declared		(1,448	)		(1,387	)		(2,879	)		(2,761	)
Undistributed net loss	$	(1,388	)	$	(14,637	)	$	(3,229	)	$	(19,245	)
Net income (loss) per share – Class A Common Stock
Dividends declared	$	1,249		$	1,191		$	2,481		$	2,370
Allocation of undistributed net loss		(1,197	)		(12,570	)		(2,782	)		(16,522	)
Net income (loss) attributable to Class A common stock	$	52		$	(11,379	)	$	(301	)	$	(14,152	)
Weighted average shares of Class A common stock outstanding— basic		17,245			16,465			17,179			16,417
Weighted average potential shares of Class A common stock		568			—			—			—
Weighted average shares of Class A common stock and potential common shares outstanding— diluted		17,813			16,465			17,179			16,417
Basic net income (loss) per Class A common share	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Diluted net income (loss) per Class A common share	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Net income (loss) per share – Class B Common Stock
Dividends declared	$	199		$	196		$	398		$	391
Allocation of undistributed net loss		(191	)		(2,067	)		(447	)		(2,723	)
Net income (loss) attributable to Class B common stock	$	8		$	(1,871	)	$	(49	)	$	(2,332	)
Weighted average shares of Class B common stock outstanding— basic		3,321			3,264			3,321			3,264
Weighted average potential shares of Class B common stock		68			—			—			—
Weighted average shares of Class B common stock and potential common shares outstanding— diluted		3,389			3,264			3,321			3,264
Basic net income (loss) per Class B common share	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)
Diluted net income (loss) per Class B common share	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)

Potential common shares consist of the shares issuable upon the release of restricted stock units (RSUs) and performance stock units (PSUs) and the exercise of stock appreciation rights (SARs). The Company’s unvested RSUs and PSUs, 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:

	Three Months Ended				Six Months Ended
	July 31,				July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Class A		340		2,897		1,822		2,898
Class B		—		278		150		278

XML

Note 4 - Fair Value Measurements

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

4. FAIR VALUE MEASUREMENTS

When determining fair value, the Company uses a three-tier value hierarchy which prioritizes the inputs used in measuring fair value. Whenever possible, the Company uses observable market data. The Company relies on unobservable inputs only when observable market data is not available. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

•  Level 1 – The assets are recorded at fair value based upon quoted market prices.

•  Level 2 - The asset or liability related to the interest rate swap is recorded at fair value based upon a valuation model that uses relevant observable market inputs at quoted intervals, such as forward yield curves.

•  Level 3 - The asset or liability is recorded at fair value based upon significant unobservable inputs.

The following table sets forth the financial assets and liability, measured at fair value, as of July 31, 2020 and January 31, 2020:

	Fair value measurement at reporting date using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in thousands)
As of July 31, 2020
Money market mutual funds	$	113,363
Certificates of deposit	$	8,882
Liability related to the interest rate swap			$	(451	)
As of January 31, 2020
Money market mutual funds	$	107,319
Certificates of deposit	$	14,917
Liability related to the interest rate swap			$	(232	)

Money market mutual funds and certificates of deposit are classified as part of “Cash and equivalents” in the accompanying Condensed Consolidated Balance Sheets. The amount of cash and equivalents deposited with commercial banks was $18.5 million and $14.5 million at July 31, 2020 and January 31, 2020, respectively.

The Company’s note payable bears a variable market interest rate commensurate with the Company’s credit standing. Therefore, the carrying amount outstanding under the note payable reasonably approximates fair value based on Level 2 inputs.

There have been no transfers between fair value measurement levels during the six months ended July 31, 2020.

Derivative Instruments

The Company entered into an interest rate swap in May 2012 to mitigate the exposure to the variability of one month LIBOR for its floating rate debt described in Note 7 “Debt” within these Notes to Condensed Consolidated Financial Statements. The fair value of the interest rate swap is reflected as an asset or liability in the Condensed Consolidated Balance Sheets and the change in fair value is reported in “Other expense (income), net” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the interest rate swap is estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date.

The fair values of the derivative instrument at July 31, 2020 and January 31, 2020 were as follows (in thousands):

	Liability
		Fair Value
	Balance Sheet Location	July 31, 2020			January 31, 2020
Derivative instrument:
Interest rate swap	Other liabilities	$	(451	)	$	(232	)
Total		$	(451	)	$	(232	)

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) was $32,000 and $(219,000) for the three and six months ended July 31, 2020, respectively; compared to $(160,000) and $(251,000) for the three and six months ended July 31, 2019, respectively.

XML

Note 5 - Capitalized Software Costs

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Capitalized Software Costs [Text Block]

5. CAPITALIZED SOFTWARE COSTS

Capitalized software costs and accumulated amortization at July 31, 2020 and January 31, 2020 were as follows:

	July 31, 2020			January 31, 2020
	(in thousands)
Capitalized software costs:
Capitalized software development costs	$	3,680		$	3,356
Acquired software technology		135			135
		3,815			3,491
Less accumulated amortization		(1,841	)		(1,569	)
Capitalized software costs, net	$	1,974		$	1,922

The Company’s capitalized software development costs relate to translations and localizations of QAD Adaptive Applications. Acquired software technology costs relate to intellectual property purchased during the second quarter fiscal 2019.

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during the first six months of fiscal 2021, approximately $0.3 million of costs and accumulated amortization were removed from the Condensed Consolidated Balance Sheet, related to capitalized software development costs which were fully amortized during the first six months of fiscal 2021.

Amortization of capitalized software costs was $0.3 million and $0.6 million for the three and six months ended July 31, 2020, respectively; compared to $0.2 million and $0.4 million for the three and six months ended July 31, 2019, respectively. Amortization of capitalized software costs is included in “Cost of license” in the accompanying Condensed 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 July 31, 2020:

Fiscal Years	(in thousands)
2021 remaining	$	543
2022		851
2023		488
2024		92
Thereafter		-
	$	1,974

XML

Note 6 - Goodwill and Intangible Assets

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the six months ended July 31, 2020 were as follows:

	Gross Carrying Amount			Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2020	$	27,996		$	(15,608	)	$	12,388
Impact of foreign currency translation		(37	)		-			(37	)
Balance at July 31, 2020	$	27,959		$	(15,608	)	$	12,351

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2020. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2019. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2020. The Company monitors the indicators for goodwill impairment testing between annual tests. As a result of the decline in the global economy due to the global coronavirus (COVID-19) pandemic, the Company reviewed goodwill for impairment in the second quarter and given the Company's market capitalization has remained unchanged, goodwill is not impaired.

Intangible Assets

	July 31, 2020			January 31, 2020
	(in thousands)
Amortizable intangible assets:
Customer relationships	$	1,299		$	1,379
Less accumulated amortization		(501	)		(394	)
Amortizable intangible assets, net	$	798		$	985

The Company’s intangible assets 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 Condensed Consolidated Balance Sheets, and are amortized over an estimated five-year useful life.

Amortization of intangible assets from acquisitions was $0.1 million for both the three and six months ended July 31, 2020 and 2019. The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of July 31, 2020:

Fiscal Years	(in thousands)
2021 remaining	$	130
2022		260
2023		260
2024		148
Thereafter		-
	$	798

XML

Note 7 - Debt

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Debt Disclosure [Text Block]

7. DEBT

	July 31, 2020			January 31, 2020
	(in thousands)
Note payable	$	12,619		$	12,868
Less current maturities		(516	)		(503	)
Less loan origination costs, net		(19	)		(24	)
Long-term debt	$	12,084		$	12,341

Effective May 30, 2012, QAD Ortega Hill, LLC, a consolidated entity of QAD Inc., entered into a variable rate credit agreement (the 2012 Mortgage) with Mechanics Bank (formerly Rabobank, N.A.), to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 0.17% at July 31, 2020. The 2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Mechanics Bank. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million when the loan matures on June 1, 2022. The unpaid balance as of July 31, 2020 was $12.6 million.

XML

Note 8 - Accumulated Other Comprehensive Loss

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Accumulated Other Comprehensive Income (Loss) [Text Block]

8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss, net of taxes, were as follows:

	Foreign Currency Translation Adjustments
	(in thousands)
Balance as of January 31, 2020	$	(8,345	)
Other comprehensive loss before reclassifications		(1,048	)
Amounts reclassified from accumulated other comprehensive loss		-
Net current period other comprehensive loss		(1,048	)
Balance as of July 31, 2020	$	(9,393	)

During the six months ended July 31, 2020 there were no reclassifications from accumulated other comprehensive loss.

XML

Note 9 - Income Taxes

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

9. INCOME TAXES

In determining the quarterly provision for income taxes, the Company calculated income tax expense based on actual quarterly results in each of the second quarters of fiscal years 2021 and 2020. These results were adjusted for discrete items recorded during the period. Actual quarterly results were used in fiscal 2021 and 2020 since they provided a more reliable estimate of quarterly tax expense.

The Company recorded income tax expense of $0.4 million and $9.9 million in the second quarter of fiscal 2021 and 2020, respectively. The Company’s effective tax rate was 88% during the second quarter of fiscal 2021 compared to (292%) for the same period in the prior year. The change in the effective tax rate was primarily due to a pre-tax profit of $0.5 million in the second quarter of fiscal 2021 as compared to a pre-tax loss of $3.4 million in addition to a $10 million valuation allowance that was placed on the net deferred tax assets of the Company’s wholly-owned Irish subsidiary in the second quarter of fiscal 2020. The placement of a valuation allowance resulted in an accounting adjustment of $10 million to income tax expense.

The Company recorded income tax expense of $1.4 million and $10.6 million for the first six months of fiscal 2021 and 2020, respectively. The Company’s effective tax rate was 132% during the first six months of fiscal 2021 compared to (180%) for the same period in the prior year. The change in the effective tax rate was primarily due to a pre-tax profit of $1.1 million in the first six months of fiscal 2021 compared to a $5.9 million pre-tax loss in addition to a $10 million valuation allowance that was placed on the Company’s wholly-owned Irish subsidiary’s net deferred tax assets in fiscal 2020.

 

On March 27, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides additional economic stimulus to address the impact of the COVID-19 pandemic. In the first six months of fiscal year 2021, the Company’s income tax provision was not significantly impacted by the CARES Act. The Company will continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects that may result from future legislation.

In July 2020, the U.S. Department of Treasury issued final tax regulations related to foreign-derived intangible income and global intangible low-taxed income (GILTI) provisions. Also in  July 2020, the U.S. Department of Treasury released final tax regulations that provide certain U.S. taxpayers with an annual election to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions. The Company is currently assessing the impact of these new regulations to its condensed consolidated financial statements.

When calculating QAD’s income tax expense for the first six months of fiscal 2021, the Company considered the U.S. Tax Cuts and Job Act that was signed into law in December 2017. The Company calculated an estimate for GILTI in the Company’s tax expense based on the final GILTI regulations released on June 14, 2019 by the U.S. Department of Treasury. These regulations provide computational, definitional, and anti-avoidance rule guidance relating to the determination of a U.S. shareholder’s GILTI inclusion. In addition, the technical change in depreciation on qualified improvement property enacted in the CARES Act was also considered in the GILTI calculation. In the first six months of fiscal 2021, cash taxes were not impacted by GILTI since the Company has experienced losses in foreign jurisdictions.

The Company has elected to treat the deferred taxes related to GILTI provisions as a current-period expense when incurred (the period cost method).

At July 31, 2020 and 2019, the gross amount of unrecognized tax benefits was $1.3 million including interest and penalties. The unrecognized tax benefits for the first six months of fiscal 2021 and fiscal 2020 were reduced by $1 million with an accompanying reduction of deferred tax assets, as a result of the netting required under ASU 2013-11. The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within twelve months of the reporting date.

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of July 31, 2020 and 2019, the Company accrued approximately $0.1 million of interest and penalty expense relating to unrecognized tax benefits.

The Company reviews its net deferred tax assets by entity at each balance sheet date to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. During the first six months of fiscal year 2021 management considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance was needed. Management assessed the transfer pricing methodology, the historical profits, the economics of the country including the impact of COVID-19 in which the entity operates, the current and future customer base, the type and character of the deferred tax asset and any other current and relevant information by entity to draw its conclusion.

A valuation allowance has been established for select foreign jurisdictions along with U.S. federal and state net deferred tax assets. The following table discloses the Company’s valuation allowance by entity (in millions): 

Jurisdiction	July 31, 2020		January 31, 2020
U.S. federal and state	$	32.1	$	30.3
Ireland		11.9		11.6
Brazil		6.2		5.7
Germany		2.8		2.6
Hong Kong		0.6		0.6
South Africa		0.2		0.2
Total valuation allowance	$	53.8	$	51.0

At July 31, 2020 and  January 31, 2020, the worldwide valuation allowance attributable to deferred tax assets was $53.8 million and $51.0 million, respectively.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in:

● India for fiscal years ended March 31, 2010, 2013 and 2018

● Thailand for fiscal year ended January 31, 2018

● Mexico for calendar years ended December 31, 2015, 2016, 2017 and 2018

During the fiscal year 2021, the Company closed the following audits with no adjustment:

● Germany for fiscal years ended January 31, 2015, 2016 and 2017

XML

Note 10 - Stockholders' Equity

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

10. STOCKHOLDERS’ EQUITY

Dividends

The following table sets forth the dividends that were declared by the Company during the first six months of fiscal 2021:

Declaration Date	Record Date	Payable	Dividend Class A		Dividend Class B		Amount (in thousands)
6/11/2020	6/25/2020	7/7/2020	$	0.072	$	0.06	$	1,448
4/7/2020	4/22/2020	4/29/2020	$	0.072	$	0.06	$	1,431

XML

Note 11 - Stock-based Compensation

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

11. STOCK-BASED COMPENSATION

The Company’s equity awards consist of RSUs, PSUs and SARs. For a description of the Company’s stock-based compensation plans, see Note 6 “Stock-Based Compensation” in Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 31, 2020.

Stock-Based Compensation

The following table sets forth reported stock-based compensation expense for the three and six months ended July 31, 2020 and 2019:

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Cost of subscription	$	139	$	72	$	246	$	142
Cost of maintenance		120		132		229		253
Cost of professional services		412		359		749		681
Sales and marketing		720		575		1,228		955
Research and development		560		441		1,011		868
General and administrative		2,000		1,609		2,893		2,593
Total stock-based compensation expense	$	3,951	$	3,188	$	6,356	$	5,492

RSU Information

The estimated fair value of RSUs was calculated based on the closing price of the Company’s common stock on the date of grant, reduced by the present value of dividends foregone during the vesting period.

The following table summarizes the activity for RSUs for the six months ended July 31, 2020: 

	RSUs (in thousands)			Weighted Average Grant Date Fair Value
Restricted stock at January 31, 2020		627		$	39.86
Granted		342			40.27
Released (1)		(246	)		35.75
Forfeited		(10	)		40.64
Restricted stock at July 31, 2020		713		$	41.46

(1) The number of RSUs released includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three months ended July 31, 2020, the Company withheld 74,000 shares for payment of these taxes at a value of $3.1 million. During the six months ended July 31, 2020, the Company withheld 76,000 shares for payment of these taxes at a value of $3.2 million.

Total unrecognized compensation cost related to RSUs was approximately $27.8 million as of July 31, 2020. This cost is expected to be recognized over a weighted-average period of approximately 3.0 years. 

PSU Information

The following table summarizes the activity for PSUs for the six months ended July 31, 2020:

	PSUs (in thousands)			Weighted Average Grant Date Fair Value
Performance stock units at January 31, 2020		90		$	39.82
Granted		93			40.54
Released (1)		(21	)		39.82
Forfeited		(9	)		39.82
Performance stock units at July 31, 2020		153		$	40.26

(1) The number of PSUs released includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three and six months ended July 31, 2020, the Company withheld 8,000 shares for payment of these taxes at a value of $0.3 million.

Total unrecognized compensation cost related to PSUs was approximately $3.4 million as of July 31, 2020. This cost is expected to be recognized over a period of approximately 1.4 years.

SAR Information

The following table summarizes the activity for outstanding SARs for the six months ended July 31, 2020:

	SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2020		1,349		$	24.86
Granted		-			-
Exercised		(201	)		12.92
Expired		-			-
Forfeited		-			-
Outstanding at July 31, 2020		1,148		$	26.96		3.3	$	15,697
Vested and exercisable at July 31, 2020		1,005		$	24.23		3.1	$	15,323

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock based on the last trading day as of July 31, 2020, and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on July 31, 2020. The total intrinsic value of SARs exercised in the six months ended July 31, 2020 was $6.0 million.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.  During the three months ended July 31, 2020, the Company withheld 56,000 shares for payment of these taxes at a value of $2.4 million. During the six months ended July 31, 2020, the Company withheld 57,000 shares for payment of these taxes at a value of $2.4 million.

At July 31, 2020, there was approximately $1.9 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 1.7 years.

XML

Note 12 - Commitments and Contingencies

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

12. COMMITMENTS AND CONTINGENCIES

Indemnifications

The Company sells software licenses and services to its customers under written agreements. Each agreement contains the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that may be awarded against the customer in the event the Company’s software is found to infringe upon certain intellectual property rights of a third party. The agreements generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects.

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the agreements. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the agreements, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

Legal Actions

The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. 

XML

Note 13 - Business Segment Information

6 Months Ended

Jul. 31, 2020

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

13. BUSINESS SEGMENT INFORMATION

The Company markets its products and services worldwide, primarily to companies in the manufacturing industry, including automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries. The Company sells products and services through its direct sales force in four geographic regions: North America; Europe, the Middle East and Africa (EMEA); Asia Pacific; and Latin America and through distributors where third parties can extend sales reach more effectively or efficiently. The North America region includes the United States and Canada. The EMEA region includes Europe, the Middle East and Africa. The Asia Pacific region includes Asia and Australia. The Latin America region includes South America, Central America and Mexico. In accordance with Topic 606, the Company reports disaggregated revenue by geography and by industry as the Company believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.  The Company does not consider reporting by industry an operating segment in accordance with ASC 280, Segment Reporting, because discrete financial information by industry is not available. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, reviews the consolidated results within one operating segment.

Subscription, license and maintenance revenues are generally assigned to the region where a majority of end users are located. Professional services revenue is assigned based on the region where the services are delivered.

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Revenue:
North America (1)	$	38,998	$	36,837	$	76,000	$	74,496
EMEA		21,379		22,118		43,947		44,627
Asia Pacific		9,571		11,751		19,213		23,637
Latin America		4,133		5,672		9,068		11,653
	$	74,081	$	76,378	$	148,228	$	154,413

(1) Sales into Canada accounted for 2% of North America total revenue in the three and six months ended July 31, 2020 and for 2% and 3% of North America total revenue in the three and six months ended July 31, 2019, respectively.

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jul. 31, 2020

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements fairly present the financial information contained therein. These statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements and footnotes are unaudited.  In management’s opinion, all necessary adjustments, consisting of normal, recurring and non-recurring adjustments, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the financial position and operating results of QAD Inc. (QAD or the Company). The Condensed Consolidated Financial Statements do not include all disclosures required by GAAP annual financial statements and should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020. The Condensed Consolidated Financial Statements include the results of the Company and its wholly-owned subsidiaries. Because of seasonal and other factors, results of operations for the three and six months ended July 31, 2020 are not necessarily indicative of the results to be expected for the year ending January 31, 2021.

The Company’s accounting policies are set forth in detail in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 31, 2020 filed with the Securities and Exchange Commission. Such Annual Report also contains a discussion of the Company’s critical accounting policies and estimates. The Company believes that these accounting policies and estimates affect its more significant estimates and judgments used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s accounting policies except as described below upon adoption of ASU 2016-13, Financial Instruments-Credit Losses. 

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

Except as discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (FASB) or adopted by the Company during the six months ended  July 31, 2020, that are of significance, or potential significance, to the Company.

Recent Accounting Pronouncements Adopted

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, that eliminates “Step 2” from the goodwill impairment test. QAD adopted the new standard on February 1, 2020, the first day of fiscal 2021. The new standard did not have an impact on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes the Company's accounts receivables and contract assets. QAD adopted the new standard on February 1, 2020, the first day of fiscal 2021, using the modified retrospective approach. The adoption of this standard did not have a material impact on QAD’s condensed consolidated financial statements. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, consideration of current and anticipated future economic conditions and other relevant data.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The Company adopted the new standard on February 1, 2020, the first day of fiscal 2021. The adoption of this standard did not have a material impact on QAD’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued new guidance which is intended to simplify various aspects to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation and calculating income taxes in interim periods. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in application of Topic 740. The new standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Generally, the topics must be applied prospectively upon adoption, with the exception of certain topics which are required to be applied on a retrospective or modified retrospective basis. The Company is evaluating the impact, if any, of adopting this new accounting guidance on its financial statements.

XML

Note 2 - Revenue (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Disaggregation of Revenue [Table Text Block]

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
North America	$	38,998	$	36,837	$	76,000	$	74,496
EMEA		21,379		22,118		43,947		44,627
Asia Pacific		9,571		11,751		19,213		23,637
Latin America		4,133		5,672		9,068		11,653
Total revenue	$	74,081	$	76,378	$	148,228	$	154,413

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Automotive	$	22,275	$	26,962	$	46,412	$	56,034
Consumer products and food and beverage		13,476		12,128		25,290		24,107
High technology and industrial products		26,644		26,389		53,468		51,937
Life sciences and other		11,686		10,899		23,058		22,335
Total revenue	$	74,081	$	76,378	$	148,228	$	154,413

Contract with Customer, Contract Asset, Contract Liability, and Receivable [Table Text Block]

	July 31, 2020		January 31, 2020
	(in thousands)
Contract assets, short-term (in “Prepaid expenses and other current assets, net”)	$	2,040	$	1,595
Contract assets, long-term (in “Other assets, net”)		155		214
Total contract assets	$	2,195	$	1,809
Deferred revenue, short-term	$	95,049	$	118,413
Deferred revenue, long-term (in “Other liabilities”)		2,424		2,811
Total deferred revenue	$	97,473	$	121,224

	July 31, 2020		January 31, 2020
	(in thousands)
Deferred maintenance	$	51,768	$	69,650
Deferred subscription		41,138		45,702
Deferred professional services		2,096		2,705
Deferred license and other revenue		47		356
Deferred revenues, current		95,049		118,413
Deferred revenues, non-current (in “Other liabilities”)		2,424		2,811
Total deferred revenues	$	97,473	$	121,224

XML

Note 3 - Computation of Net Income (Loss) Per Share (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended						Six Months Ended
	July 31,						July 31,
	2020			2019			2020			2019
	(in thousands, except per share data)						(in thousands, except per share data)
Net income (loss)	$	60		$	(13,250	)	$	(350	)	$	(16,484	)
Less: Dividends declared		(1,448	)		(1,387	)		(2,879	)		(2,761	)
Undistributed net loss	$	(1,388	)	$	(14,637	)	$	(3,229	)	$	(19,245	)
Net income (loss) per share – Class A Common Stock
Dividends declared	$	1,249		$	1,191		$	2,481		$	2,370
Allocation of undistributed net loss		(1,197	)		(12,570	)		(2,782	)		(16,522	)
Net income (loss) attributable to Class A common stock	$	52		$	(11,379	)	$	(301	)	$	(14,152	)
Weighted average shares of Class A common stock outstanding— basic		17,245			16,465			17,179			16,417
Weighted average potential shares of Class A common stock		568			—			—			—
Weighted average shares of Class A common stock and potential common shares outstanding— diluted		17,813			16,465			17,179			16,417
Basic net income (loss) per Class A common share	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Diluted net income (loss) per Class A common share	$	0.00		$	(0.69	)	$	(0.02	)	$	(0.86	)
Net income (loss) per share – Class B Common Stock
Dividends declared	$	199		$	196		$	398		$	391
Allocation of undistributed net loss		(191	)		(2,067	)		(447	)		(2,723	)
Net income (loss) attributable to Class B common stock	$	8		$	(1,871	)	$	(49	)	$	(2,332	)
Weighted average shares of Class B common stock outstanding— basic		3,321			3,264			3,321			3,264
Weighted average potential shares of Class B common stock		68			—			—			—
Weighted average shares of Class B common stock and potential common shares outstanding— diluted		3,389			3,264			3,321			3,264
Basic net income (loss) per Class B common share	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)
Diluted net income (loss) per Class B common share	$	0.00		$	(0.57	)	$	(0.01	)	$	(0.71	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Three Months Ended				Six Months Ended
	July 31,				July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Class A		340		2,897		1,822		2,898
Class B		—		278		150		278

XML

Note 4 - Fair Value Measurements (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Fair Value Measurements, Recurring and Nonrecurring [Table Text Block]

	Fair value measurement at reporting date using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in thousands)
As of July 31, 2020
Money market mutual funds	$	113,363
Certificates of deposit	$	8,882
Liability related to the interest rate swap			$	(451	)
As of January 31, 2020
Money market mutual funds	$	107,319
Certificates of deposit	$	14,917
Liability related to the interest rate swap			$	(232	)

Schedule of Derivative Instruments in Statement of Financial Position, Fair Value [Table Text Block]

	Liability
		Fair Value
	Balance Sheet Location	July 31, 2020			January 31, 2020
Derivative instrument:
Interest rate swap	Other liabilities	$	(451	)	$	(232	)
Total		$	(451	)	$	(232	)

XML

Note 5 - Capitalized Software Costs (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Schedule of Capitalized Software Costs [Table Text Block]

	July 31, 2020			January 31, 2020
	(in thousands)
Capitalized software costs:
Capitalized software development costs	$	3,680		$	3,356
Acquired software technology		135			135
		3,815			3,491
Less accumulated amortization		(1,841	)		(1,569	)
Capitalized software costs, net	$	1,974		$	1,922

Schedule of Capitalized Software Costs Amortization Expense [Table Text Block]

Fiscal Years	(in thousands)
2021 remaining	$	543
2022		851
2023		488
2024		92
Thereafter		-
	$	1,974

XML

Note 6 - Goodwill and Intangible Assets (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Schedule of Goodwill [Table Text Block]

	Gross Carrying Amount			Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2020	$	27,996		$	(15,608	)	$	12,388
Impact of foreign currency translation		(37	)		-			(37	)
Balance at July 31, 2020	$	27,959		$	(15,608	)	$	12,351

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	July 31, 2020			January 31, 2020
	(in thousands)
Amortizable intangible assets:
Customer relationships	$	1,299		$	1,379
Less accumulated amortization		(501	)		(394	)
Amortizable intangible assets, net	$	798		$	985

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

Fiscal Years	(in thousands)
2021 remaining	$	130
2022		260
2023		260
2024		148
Thereafter		-
	$	798

XML

Note 7 - Debt (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Schedule of Debt [Table Text Block]

	July 31, 2020			January 31, 2020
	(in thousands)
Note payable	$	12,619		$	12,868
Less current maturities		(516	)		(503	)
Less loan origination costs, net		(19	)		(24	)
Long-term debt	$	12,084		$	12,341

XML

Note 8 - Accumulated Other Comprehensive Loss (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block]

	Foreign Currency Translation Adjustments
	(in thousands)
Balance as of January 31, 2020	$	(8,345	)
Other comprehensive loss before reclassifications		(1,048	)
Amounts reclassified from accumulated other comprehensive loss		-
Net current period other comprehensive loss		(1,048	)
Balance as of July 31, 2020	$	(9,393	)

XML

Note 9 - Income Taxes (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Summary of Valuation Allowance [Table Text Block]

Jurisdiction	July 31, 2020		January 31, 2020
U.S. federal and state	$	32.1	$	30.3
Ireland		11.9		11.6
Brazil		6.2		5.7
Germany		2.8		2.6
Hong Kong		0.6		0.6
South Africa		0.2		0.2
Total valuation allowance	$	53.8	$	51.0

XML

Note 10 - Stockholders' Equity (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Dividends Declared [Table Text Block]

Declaration Date	Record Date	Payable	Dividend Class A		Dividend Class B		Amount (in thousands)
6/11/2020	6/25/2020	7/7/2020	$	0.072	$	0.06	$	1,448
4/7/2020	4/22/2020	4/29/2020	$	0.072	$	0.06	$	1,431

XML

Note 11 - Stock-based Compensation (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Share-based Payment Arrangement, Expensed and Capitalized, Amount [Table Text Block]

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Cost of subscription	$	139	$	72	$	246	$	142
Cost of maintenance		120		132		229		253
Cost of professional services		412		359		749		681
Sales and marketing		720		575		1,228		955
Research and development		560		441		1,011		868
General and administrative		2,000		1,609		2,893		2,593
Total stock-based compensation expense	$	3,951	$	3,188	$	6,356	$	5,492

Share-based Payment Arrangement, Restricted Stock and Restricted Stock Unit, Activity [Table Text Block]

	RSUs (in thousands)			Weighted Average Grant Date Fair Value
Restricted stock at January 31, 2020		627		$	39.86
Granted		342			40.27
Released (1)		(246	)		35.75
Forfeited		(10	)		40.64
Restricted stock at July 31, 2020		713		$	41.46

Share-based Payment Arrangement, Performance Shares, Activity [Table Text Block]

	PSUs (in thousands)			Weighted Average Grant Date Fair Value
Performance stock units at January 31, 2020		90		$	39.82
Granted		93			40.54
Released (1)		(21	)		39.82
Forfeited		(9	)		39.82
Performance stock units at July 31, 2020		153		$	40.26

Share-based Payment Arrangement, Option and Stock Appreciation Rights, Activity [Table Text Block]

	SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2020		1,349		$	24.86
Granted		-			-
Exercised		(201	)		12.92
Expired		-			-
Forfeited		-			-
Outstanding at July 31, 2020		1,148		$	26.96		3.3	$	15,697
Vested and exercisable at July 31, 2020		1,005		$	24.23		3.1	$	15,323

XML

Note 13 - Business Segment Information (Tables)

6 Months Ended

Jul. 31, 2020

Notes Tables

Schedule of Revenue from External Customers and Long-Lived Assets, by Geographical Areas [Table Text Block]

	Three Months Ended July 31,				Six Months Ended July 31,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Revenue:
North America (1)	$	38,998	$	36,837	$	76,000	$	74,496
EMEA		21,379		22,118		43,947		44,627
Asia Pacific		9,571		11,751		19,213		23,637
Latin America		4,133		5,672		9,068		11,653
	$	74,081	$	76,378	$	148,228	$	154,413

XML

Note 2 - Revenue 1 (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2019	Jan. 31, 2020
Contract with Customer, Liability, Revenue Recognized			$ 83,700
Revenue, Remaining Performance Obligation, Amount	$ 282,300		282,300
Capitalized Contract Cost, Amortization			2,391	$ 2,161
Capitalized Contract Cost, Impairment Loss			$ 0	0
Direct Costs of Obtaining Contract [Member]
Capitalized Contract Cost, Amortization Period (Year)	5 years		5 years
Capitalized Contract Cost, Net, Total	$ 12,200		$ 12,200			$ 12,300
Direct Costs of Obtaining Contract [Member] | Selling and Marketing Expense [Member]
Capitalized Contract Cost, Amortization	$ 1,100	$ 900	$ 2,100	$ 1,900
Costs to Fulfill Contract [Member]
Capitalized Contract Cost, Amortization Period (Year)	5 years		5 years			5 years
Capitalized Contract Cost, Net, Total	$ 1,400		$ 1,400			$ 1,400
Costs to Fulfill Contract [Member] | Cost of Sales [Member]
Capitalized Contract Cost, Amortization	$ 200	$ 100	$ 300		$ 300

XML

Note 2 - Revenue 2 (Details Textual) $ in Millions	Jul. 31, 2020 USD ($)
Revenue, Remaining Performance Obligation, Amount	$ 282.3
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-08-01
Revenue, Remaining Performance Obligation, Amount	$ 165.9
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period (Month)	12 months

XML

Note 2 - Revenue - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Revenues	$ 74,081	$ 76,378	$ 148,228	$ 154,413
Automotive [Member]
Revenues	22,275	26,962	46,412	56,034
Consumer Products and Food and Beverage [Member]
Revenues	13,476	12,128	25,290	24,107
High Technology and Industrial Products [Member]
Revenues	26,644	26,389	53,468	51,937
Life Sciences [Member]
Revenues	11,686	10,899	23,058	22,335
North America [Member]
Revenues	38,998	36,837	76,000	74,496
EMEA [Member]
Revenues	21,379	22,118	43,947	44,627
Asia Pacific [Member]
Revenues	9,571	11,751	19,213	23,637
Latin America [Member]
Revenues	$ 4,133	$ 5,672	$ 9,068	$ 11,653

XML

Note 2 - Revenue - Contract Balances (Details) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Contract assets, short-term (in “Prepaid expenses and other current assets, net”)	$ 2,040	$ 1,595
Contract assets, long-term (in “Other assets, net”)	155	214
Total contract assets	2,195	1,809
Deferred revenue, short-term	95,049	118,413
Deferred revenue, long-term (in “Other liabilities”)	2,424	2,811
Total deferred revenue	97,473	121,224
Maintenance [Member]
Deferred revenue, short-term	51,768	69,650
Subscription and Circulation [Member]
Deferred revenue, short-term	41,138	45,702
Professional Services [Member]
Deferred revenue, short-term	2,096	2,705
License and Other [Member]
Deferred revenue, short-term	$ 47	$ 356

XML

Note 3 - Computation of Net Incoe (Loss) Per Share - Computation of Basic and Diluted Net Loss Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Net income (loss)	$ 60	$ (13,250)	$ (350)	$ (16,484)
Dividends declared	(1,448)	(1,387)	(2,879)	(2,761)
Undistributed net loss	(1,388)	(14,637)	(3,229)	(19,245)
Dividends declared	1,448	1,387	2,879	2,761
Common Class A [Member]
Net income (loss)	52	(11,379)	(301)	(14,152)
Dividends declared	(1,249)	(1,191)	(2,481)	(2,370)
Undistributed net loss	(1,197)	(12,570)	(2,782)	(16,522)
Dividends declared	$ 1,249	$ 1,191	$ 2,481	$ 2,370
Weighted average shares of common stock outstanding—basic (in shares)	17,245	16,465	17,179	16,417
Weighted average potential shares of common stock (in shares)	568	0	0	0
Weighted average shares of common stock and potential common shares outstanding—diluted (in shares)	17,813	16,465	17,179	16,417
Basic net loss per common share (in dollars per share)	$ 0.00	$ (0.69)	$ (0.02)	$ (0.86)
Diluted net loss per common share (in dollars per share)	0.00	(0.69)	(0.02)	(0.86)
Basic net (loss) income per share (in dollars per share)	0.00	(0.69)	(0.02)	(0.86)
Diluted net (loss) income per share (in dollars per share)	$ 0.00	$ (0.69)	$ (0.02)	$ (0.86)
Common Class B [Member]
Net income (loss)	$ 8	$ (1,871)	$ (49)	$ (2,332)
Dividends declared	(199)	(196)	(398)	(391)
Undistributed net loss	(191)	(2,067)	(447)	(2,723)
Dividends declared	$ 199	$ 196	$ 398	$ 391
Weighted average shares of common stock outstanding—basic (in shares)	3,321	3,264	3,321	3,264
Weighted average potential shares of common stock (in shares)	68	0	0	0
Weighted average shares of common stock and potential common shares outstanding—diluted (in shares)	3,389	3,264	3,321	3,264
Basic net loss per common share (in dollars per share)	$ 0.00	$ (0.57)	$ (0.01)	$ (0.71)
Diluted net loss per common share (in dollars per share)	0.00	(0.57)	(0.01)	(0.71)
Basic net (loss) income per share (in dollars per share)	0.00	(0.57)	(0.01)	(0.71)
Diluted net (loss) income per share (in dollars per share)	$ 0.00	$ (0.57)	$ (0.01)	$ (0.71)

XML

Note 3 - Computation of Net Income (Loss) Per Share - Anti-dilutive Shares (Details) - shares shares in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Common Class A [Member]
Antidilutive securities excluded from computation of net income per share (in shares)	340	2,897	1,822	2,898
Common Class B [Member]
Antidilutive securities excluded from computation of net income per share (in shares)	0	278	150	278

XML

Note 4 - Fair Value Measurements (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019	Jan. 31, 2020
Cash and Cash Equivalents, at Carrying Value, Ending Balance	$ 140,707,000		$ 140,707,000		$ 136,717,000
Interest Rate Swap [Member]
Derivative, Gain (Loss) on Derivative, Net, Total	32,000	$ (160,000)	(219,000)	$ (251,000)
Reported Value Measurement [Member]
Cash and Cash Equivalents, at Carrying Value, Ending Balance	$ 18,500,000		$ 18,500,000		$ 14,500,000

XML

Note 4 - Fair Value Measurements - Financial Assets and Liabilities (Details) - Fair Value, Recurring [Member] - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Fair Value, Inputs, Level 1 [Member] | Money Market Funds [Member]
Cash and cash equivalents	$ 113,363	$ 107,319
Fair Value, Inputs, Level 1 [Member] | Certificates of Deposit [Member]
Cash and cash equivalents	8,882	14,917
Fair Value, Inputs, Level 2 [Member]
Liability related to the interest rate swap	$ (451)	$ (232)

XML

Note 4 - Fair Value Measurements - Fair Values of the Derivative Instrument (Details) - Fair Value, Inputs, Level 2 [Member] - Fair Value, Recurring [Member] - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Liability related to the interest rate swap	$ (451)	$ (232)
Interest Rate Swap [Member] | Other Noncurrent Liabilities [Member]
Liability related to the interest rate swap	$ (451)	$ (232)

XML

Note 5 - Capitalized Software Costs (Details Textual) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Capitalized Computer Software Write-Downs			$ 0.3
Capitalized Computer Software, Amortization	$ 0.3	$ 0.2	$ 0.6	$ 0.4

XML

Note 5 - Capitalized Software Costs - Capitalized Software Costs and Accumulated Amortization (Details) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Capitalized software development costs	$ 3,680	$ 3,356
Acquired software technology	135	135
Capitalized software costs, Gross	3,815	3,491
Less accumulated amortization	(1,841)	(1,569)
Total	$ 1,974	$ 1,922

XML

Note 5 - Capitalized Software Costs - Estimated Amortization Expense (Details) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
2021 remaining	$ 543
2022	851
2023	488
2024	92
Thereafter	0
Total	$ 1,974	$ 1,922

XML

Note 6 - Goodwill and Intangible Assets (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Amortization of Intangible Assets, Total	$ 65	$ 66	$ 129	$ 133

XML

Note 6 - Goodwill and Intangible Assets - Goodwill (Details) $ in Thousands	6 Months Ended
	Jul. 31, 2020 USD ($)
Beginning balance, gross	$ 27,996
Accumulated impairment	(15,608)
Beginning balance, net	12,388
Impact of foreign currency translation, gross	(37)
Impact of foreign currency translation, accumulated impairment	0
Ending balance, gross	27,959
Accumulated impairment	(15,608)
Ending balance, net	$ 12,351

XML

Note 6 - Goodwill and Intangible Assets - Intangible Assets (Details) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Intanigble assets, gross	$ 1,299	$ 1,379
Less accumulated amortization	(501)	(394)
Net amortizable intangible assets	$ 798	$ 985

XML

Note 6 - Goodwill and Intangible Assets - Future Amortization of Intangible Assets (Details) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
2021 remaining	$ 130
2022	260
2023	260
2024	148
Thereafter	0
Net amortizable intangible assets	$ 798	$ 985

XML

Note 7 - Debt (Details Textual) - 2012 Mortgage [Member] - Rabobank N.A [Member] - USD ($)	Jul. 31, 2020	May 30, 2012
Loans Payable to Bank, Total	$ 12,600,000
Quad Ortega Hill LLC [Member]
Debt Instrument, Face Amount		$ 16,100,000
Debt Instrument, Periodic Payment, Total		88,100
Final Principal Payment		11,700,000
Quad Ortega Hill LLC [Member] | Swap [Member]
Derivative Liability, Notional Amount		$ 16,100,000
Derivative, Fixed Interest Rate		4.31%
Quad Ortega Hill LLC [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate	0.17%	2.25%

XML

Note 7 - Debt - Summary of Debt (Details) - USD ($) $ in Thousands	Jul. 31, 2020	Jan. 31, 2020
Note payable	$ 12,619	$ 12,868
Less current maturities	(516)	(503)
Less loan origination costs, net	(19)	(24)
Long-term debt	$ 12,084	$ 12,341

XML

Note 8 - Accumulated Other Comprehensive Loss (Details Textual) $ in Thousands	6 Months Ended
	Jul. 31, 2020 USD ($)
Reclassification from Accumulated Other Comprehensive Income, Current Period, Net of Tax	$ 0

XML

Note 8 - Accumulated Other Comprehensive Loss - Components of Accumulated Other Comprehensive Loss (Details) $ in Thousands	6 Months Ended
	Jul. 31, 2020 USD ($)
Balance	$ 116,065
Balance	112,202
Accumulated Foreign Currency Adjustment Attributable to Parent [Member]
Balance	(8,345)
Other comprehensive loss before reclassifications	(1,048)
Amounts reclassified from accumulated other comprehensive loss	0
Net current period other comprehensive loss	(1,048)
Balance	$ (9,393)

XML

Note 9 - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019	Jan. 31, 2020
Income Tax Expense (Benefit), Total	$ 440	$ 9,872	$ 1,435	$ 10,587
Effective Income Tax Rate Reconciliation, Percent, Total	88.00%	(292.00%)	132.00%	(180.00%)
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Noncontrolling Interest, Total	$ 500	$ (3,378)	$ 1,085	$ (5,897)
Effective Income Tax Rate Reconciliation, Change in Deferred Tax Assets Valuation Allowance, Amount		$ 10,000		$ 10,000
Unrecognized Tax Benefits, Ending Balance	1,300		1,300
Unrecognized Tax Benefits, Period Increase (Decrease), Total			1,000
Unrecognized Tax Benefits, Income Tax Penalties and Interest Accrued, Total	100		100
Deferred Tax Assets, Valuation Allowance, Total	53,800		$ 53,800		$ 51,000
Foreign Tax Authority [Member] | Ministry of Finance, India [Member]
Income Tax Examination, Year under Examination			2010 2013 2018
Foreign Tax Authority [Member] | Mexican Tax Authority [Member]
Income Tax Examination, Year under Examination			2015 2016 2017 2018
Foreign Tax Authority [Member] | Federal Ministry of Finance, Germany [Member]
Deferred Tax Assets, Valuation Allowance, Total	$ 2,800		$ 2,800		$ 2,600
Income Tax Examination, Year under Examination			2015 2016 2017
Foreign Tax Authority [Member] | Income Tax Autority, Thailand [Member]
Income Tax Examination, Year under Examination			2018

XML

Note 9 - Income Taxes - Valuation Allowance (Details) - USD ($) $ in Millions	Jul. 31, 2020	Jan. 31, 2020
Valuation Allowance	$ 53.8	$ 51.0
Federal and State Tax Authority [Member]
Valuation Allowance	32.1	30.3
Foreign Tax Authority [Member] | Revenue Commissioners, Ireland [Member]
Valuation Allowance	11.9	11.6
Foreign Tax Authority [Member] | Secretariat of the Federal Revenue Bureau of Brazil [Member]
Valuation Allowance	6.2	5.7
Foreign Tax Authority [Member] | Federal Ministry of Finance, Germany [Member]
Valuation Allowance	2.8	2.6
Foreign Tax Authority [Member] | Inland Revenue, Hong Kong [Member]
Valuation Allowance	0.6	0.6
Foreign Tax Authority [Member] | Income Tax Authority, South Africa [Member]
Valuation Allowance	$ 0.2	$ 0.2

XML

Note 10 - Stockholders' Equity - Dividends (Details) - USD ($) $ / shares in Units, $ in Thousands			6 Months Ended
	Jun. 11, 2020	Apr. 07, 2020	Jul. 31, 2020	Jul. 31, 2019
Record Date	Jun. 25, 2020	Apr. 22, 2020
Payable	Jul. 07, 2020	Apr. 29, 2020
Amount	$ 1,448	$ 1,431	$ 2,879	$ 2,761
Common Class A [Member]
Dividend (in dollars per share)	$ 0.072	$ 0.072
Common Class B [Member]
Dividend (in dollars per share)	$ 0.06	$ 0.06

XML

Note 11 - Stock-based Compensation (Details Textual) $ in Millions	3 Months Ended	6 Months Ended
	Jul. 31, 2020 USD ($) shares	Jul. 31, 2020 USD ($) shares
Restricted Stock Units (RSUs) [Member]
Share-based Payment Arrangement, Shares Withheld for Tax Withholding Obligation (in shares) | shares	74,000	76,000
Share-based Payment Arrangement, Decrease for Tax Withholding Obligation	$ 3.1	$ 3.2
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 27.8	$ 27.8
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition (Year)		3 years
Performance Shares [Member]
Share-based Payment Arrangement, Shares Withheld for Tax Withholding Obligation (in shares) | shares	8,000	8,000
Share-based Payment Arrangement, Decrease for Tax Withholding Obligation	$ 0.3	$ 0.3
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 3.4	$ 3.4
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition (Year)		1 year 4 months 24 days
Stock Appreciation Rights (SARs) [Member]
Share-based Payment Arrangement, Shares Withheld for Tax Withholding Obligation (in shares) | shares	56,000	57,000
Share-based Payment Arrangement, Decrease for Tax Withholding Obligation	$ 2.4	$ 2.4
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 1.9	$ 1.9
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition (Year)		1 year 8 months 12 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value		$ 6.0

XML

Note 11 - Stock-based Compensation - Stock-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Allocated stock-based compensation expense	$ 3,951	$ 3,188	$ 6,356	$ 5,492
Cost of Subscription [Member]
Allocated stock-based compensation expense	139	72	246	142
Cost of Maintenance and Other Revenue [Member]
Allocated stock-based compensation expense	120	132	229	253
Cost of Professional Services [Member]
Allocated stock-based compensation expense	412	359	749	681
Selling and Marketing Expense [Member]
Allocated stock-based compensation expense	720	575	1,228	955
Research and Development Expense [Member]
Allocated stock-based compensation expense	560	441	1,011	868
General and Administrative Expense [Member]
Allocated stock-based compensation expense	$ 2,000	$ 1,609	$ 2,893	$ 2,593

XML

Note 11 - Stock-based Compensation - RSUs Activity (Details) - Restricted Stock Units (RSUs) [Member] shares in Thousands	6 Months Ended
	Jul. 31, 2020 $ / shares shares
Restricted stock (in shares) | shares	627
Restricted stock, weighted average grant date fair value (in dollars per share) | $ / shares	$ 39.86
Granted (in shares) | shares	342
Granted, weighted average grant date fair value (in dollars per share) | $ / shares	$ 40.27
Released (in shares) | shares	(246)	[1]
Released, weighted average grant date fair value (in dollars per share) | $ / shares	$ 35.75	[1]
Forfeited (in shares) | shares	(10)
Forfeited, weighted average grant date fair value (in dollars per share) | $ / shares	$ 40.64
Restricted stock (in shares) | shares	713
Restricted stock, weighted average grant date fair value (in dollars per share) | $ / shares	$ 41.46

[1] The number of RSUs released includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

XML

Note 11 - Stock-based Compensation - PSUs Activity (Details) - Performance Shares [Member] shares in Thousands	6 Months Ended
	Jul. 31, 2020 $ / shares shares
Restricted stock (in shares) | shares	90
Restricted stock, weighted average grant date fair value (in dollars per share) | $ / shares	$ 39.82
Granted (in shares) | shares	93
Granted, weighted average grant date fair value (in dollars per share) | $ / shares	$ 40.54
Released (in shares) | shares	(21)
Released, weighted average grant date fair value (in dollars per share) | $ / shares	$ 39.82
Forfeited (in shares) | shares	(9)
Forfeited, weighted average grant date fair value (in dollars per share) | $ / shares	$ 39.82
Restricted stock (in shares) | shares	153
Restricted stock, weighted average grant date fair value (in dollars per share) | $ / shares	$ 40.26

XML

Note 11 - Stock-based Compensation - SARs Activity (Details) - Stock Appreciation Rights (SARs) [Member] $ / shares in Units, shares in Thousands, $ in Thousands	6 Months Ended
	Jul. 31, 2020 USD ($) $ / shares shares
Outstanding (in shares) | shares	1,349
Outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 24.86
Exercised (in shares) | shares	(201)
Exercised, weighted average exercise price (in dollars per share) | $ / shares	$ 12.92
Outstanding (in shares) | shares	1,148
Outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 26.96
Outstanding, weighted average remaining contractual term (Year)	3 years 3 months 18 days
Outstanding, aggregate intrinsic value | $	$ 15,697
Vested and exercisable (in shares) | shares	1,005	[1]
Vested and exercisable, weighted average exercise price (in dollars per share) | $ / shares	$ 24.23
Vested and exercisable, weighted average remaining contractual term (Year)	3 years 1 month 6 days
Vested and exercisable, aggregate intrinsic value | $	$ 15,323

[1] The number of SARs vested and exercisable at January 31, 2019 includes 877,500 Class A and 127,500 Class B shares previously held by Mr. Karl Lopker which will expire on August 25, 2019 if not exercised by his estate. Exercise prices for these SARs range from $10.50 to $31.65.

XML

Note 13 - Business Segment Information (Details Textual)	3 Months Ended		6 Months Ended
	Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Number of Geographic Locations			4
Number of Operating Segments			1
Geographic Concentration Risk [Member] | North America Revenue [Member] | CANADA
Concentration Risk, Percentage	2.00%	2.00%	2.00%	3.00%

XML

Note 13 - Business Segment Information - Revenue by Region (Details) - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
		Jul. 31, 2020	Jul. 31, 2019	Jul. 31, 2020	Jul. 31, 2019
Revenues		$ 74,081	$ 76,378	$ 148,228	$ 154,413
North America [Member]
Revenues		38,998	36,837	76,000	74,496
EMEA [Member]
Revenues		21,379	22,118	43,947	44,627
Asia Pacific [Member]
Revenues		9,571	11,751	19,213	23,637
Latin America [Member]
Revenues		4,133	5,672	9,068	11,653
Reportable Geographical Components [Member] | North America [Member]
Revenues	[1]	38,998	36,837	76,000	74,496
Reportable Geographical Components [Member] | EMEA [Member]
Revenues		21,379	22,118	43,947	44,627
Reportable Geographical Components [Member] | Asia Pacific [Member]
Revenues		9,571	11,751	19,213	23,637
Reportable Geographical Components [Member] | Latin America [Member]
Revenues		$ 4,133	$ 5,672	$ 9,068	$ 11,653

[1] Sales into Canada accounted for 2% of North America total revenue in the three and six months ended July 31, 2020 and for 2% and 3% of North America total revenue in the three and six months ended July 31, 2019, respectively.