Company Quick10K Filing
Quick10K
QAD
10-Q 2019-07-31 Quarter: 2019-07-31
10-Q 2019-04-30 Quarter: 2019-04-30
10-K 2019-01-31 Annual: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-K 2018-01-31 Annual: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-K 2017-01-31 Annual: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-31 Annual: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-K 2014-01-31 Annual: 2014-01-31
8-K 2019-08-21 Earnings, Exhibits
8-K 2019-06-23 Officers, Shareholder Vote, Exhibits
8-K 2019-05-29 Earnings, Exhibits
8-K 2019-04-24 Officers
8-K 2019-03-20 Earnings, Exhibits
8-K 2018-12-19 Officers, Exhibits
8-K 2018-11-20 Earnings, Exhibits
8-K 2018-10-17 Other Events
8-K 2018-08-17 Earnings, Officers, Exhibits
8-K 2018-08-15 Officers
8-K 2018-06-11 Shareholder Vote
8-K 2018-05-30 Earnings, Exhibits
8-K 2018-03-21 Earnings, Exhibits
8-K 2018-02-26 Earnings, Exhibits
8-K 2018-02-02 Officers
ORCL Oracle 173,296
ADSK Autodesk 31,324
CHKP Check Point Software Technologies 16,551
GWRE Guidewire Software 7,862
TLND Talend 1,230
CISN Cision 1,010
AWRE Aware 63
TEAM Atlassian 0
ZUO Zuora 0
MDB Mongodb 0
QADA 2019-07-31
Part I
Item 1 - Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_156919.htm
EX-31.2 ex_156920.htm
EX-32.1 ex_156921.htm

QAD Earnings 2019-07-31

QADA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 qada20190731_10q.htm FORM 10-Q qada20190731_10q.htm
 

  

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, 2019

 

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, 2019, there were 17,024,858 shares of the Registrant’s Class A common stock outstanding and 3,321,002 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, 2019 and January 31, 2019

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Six Months Ended July 31, 2019 and 2018

2

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders' Equity for the Six Months Ended July 31, 2019 and 2018

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2019 and 2018

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

 

 

ITEM 4.

Controls and Procedures

36

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

36

 

 

 

 

 

ITEM 1A.

Risk Factors

36

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

36

 

 

 

 

 

ITEM 4.

Mine Safety Disclosure

36

 

 

 

 

 

ITEM 5.

Other Information

36

 

 

 

 

 

ITEM 6

Exhibits

37

 

 

 

 

 

SIGNATURES

38

 

 

 

 

PART I

 

ITEM 1 – FINANCIAL STATEMENTS

 

 

QAD INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

   

July 31,

2019

   

January 31,

2019

 

Assets

               
                 

Current assets:

               

Cash and equivalents

  $ 141,768     $ 139,413  

Short-term investments

    1,200       1,200  

Accounts receivable, net of allowances of $2,837 and $2,901 at July 31, 2019 and January 31, 2019, respectively

    41,495       81,577  

Prepaid expenses and other current assets, net

    23,411       22,150  

Total current assets

    207,874       244,340  

Property and equipment, net of accumulated depreciation and amortization of $40.1 million and $39.2 million at July 31, 2019 and January 31, 2019, respectively

    29,446       29,621  

Lease right-of-use assets

    18,195        

Capitalized software costs, net

    1,720       1,598  

Goodwill

    12,379       12,423  

Deferred tax assets, net

    6,571       16,172  

Other assets, net

    12,202       13,020  

Total assets

  $ 288,387     $ 317,174  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Current portion of long-term debt

  $ 492     $ 487  

Lease liabilities

    4,855        

Accounts payable

    7,808       9,902  

Deferred revenue

    94,399       115,253  

Other current liabilities

    32,510       40,348  

Total current liabilities

    140,064       165,990  

Long-term debt

    12,589       12,836  

Long-term lease liabilities

    14,059        

Other liabilities

    5,815       5,101  

Commitments and contingencies

               

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 16,605,215 shares at both July 31, 2019 and January 31, 2019

    16       16  

Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares at both July 31, 2019 and January 31, 2019

    4       4  

Additional paid-in capital

    196,312       196,723  

Treasury stock, at cost (59,309 Class A shares and 273,474 Class B shares at July 31, 2019 and 241,667 Class A shares and 273,474 Class B shares at January 31, 2019)

    (4,943

)

    (7,350

)

Accumulated deficit

    (67,903

)

    (48,485

)

Accumulated other comprehensive loss

    (7,626

)

    (7,661

)

Total stockholders’ equity

    115,860       133,247  

Total liabilities and stockholders’ equity

  $ 288,387     $ 317,174  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

1

 

 

 

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share data)

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Revenue:

                               

Subscription

  $ 25,888     $ 22,439     $ 51,194     $ 43,950  

License

    3,516       5,561       7,982       11,827  

Maintenance and other

    29,586       30,574       59,485       62,057  

Professional services

    17,388       25,969       35,752       52,899  

Total revenue

    76,378       84,543       154,413       170,733  
                                 

Costs of revenue:

                               

Subscription

    9,903       8,334       19,320       16,562  

License

    554       574       1,145       1,238  

Maintenance and other

    7,459       7,774       15,062       15,639  

Professional services

    18,116       23,754       37,439       48,064  

Total cost of revenue

    36,032       40,436       72,966       81,503  
                                 

Gross profit

    40,346       44,107       81,447       89,230  
                                 

Operating expenses:

                               

Sales and marketing

    20,191       19,502       41,082       39,448  

Research and development

    13,870       13,513       27,857       27,519  

General and administrative

    10,392       9,366       19,810       18,728  

Amortization of intangibles from acquisitions

    66             133        

Total operating expenses

    44,519       42,381       88,882       85,695  
                                 

Operating (loss) income

    (4,173

)

    1,726       (7,435

)

    3,535  
                                 

Other (income) expense:

                               

Interest income

    (789

)

    (743

)

    (1,513

)

    (1,267

)

Interest expense

    148       154       301       311  

Other (income), net

    (154

)

    (269

)

    (326

)

    (673

)

Total other (income), net

    (795

)

    (858

)

    (1,538

)

    (1,629

)

                                 

(Loss) income before income taxes

    (3,378 )     2,584       (5,897

)

    5,164  

Income tax expense

    9,872       1,471       10,587       2,654  
                                 

Net (loss) income

  $ (13,250

)

  $ 1,113     $ (16,484

)

  $ 2,510  
                                 

Basic net (loss) income per share

                               

Class A

  $ (0.69

)

  $ 0.06     $ (0.86

)

  $ 0.13  

Class B

  $ (0.57

)

  $ 0.05     $ (0.71

)

  $ 0.11  

Diluted net (loss) income per share

                               

Class A

  $ (0.69

)

  $ 0.05     $ (0.86

)

  $ 0.12  

Class B

  $ (0.57 )   $ 0.05     $ (0.71

)

  $ 0.11  
                                 

Net (loss) income

  $ (13,250

)

  $ 1,113     $ (16,484

)

  $ 2,510  

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustment

    298       (326

)

    35       (836

)

Total comprehensive (loss) income

  $ (12,952

)

  $ 787     $ (16,449

)

  $ 1,674  

 

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, 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  

 

 

   

Six Months Ended July 31, 2018

 
   

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, 2018

    16,605       3,537       (892

)

  $ 16     $ 4     $ 200,456     $ (12,461

)

  $ (75,559

)

  $ (6,828

)

  $ 105,628  

Cumulative effect of the adoption of ASC606 and ASU2016-16

                                              22,125             22,125  

Adjusted balance at February 1, 2018

    16,605       3,537       (892

)

  $ 16     $ 4     $ 200,456     $ (12,461

)

  $ (53,434

)

  $ (6,828

)

  $ 127,753  

Net income

                                              2,510             2,510  

Foreign currency translation adjustments

                                                    (836

)

    (836

)

Stock award exercises

                192                   (7,722

)

    3,349                   (4,373

)

Stock compensation expense

                                  5,470                         5,470  

Dividends declared ($0.144 and $0.12 per Class A and Class B share, respectively)

                   

                        (2,731

)

          (2,731

)

Restricted stock

                171                   (5,783

)

    1,580                   (4,203

)

Balance, July 31, 2018

    16,605       3,537       (529

)

  $ 16     $ 4     $ 192,421     $ (7,532

)

  $ (53,655

)

  $ (7,664

)

  $ 123,590  

 

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,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net (loss) income

  $ (16,484

)

  $ 2,510  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

               

Depreciation and amortization

    3,070       2,699  

Amortization of costs capitalized to obtain revenue contracts, net

    2,161       2,051  

Non-cash lease expense

    2,965       -  

Net change in valuation allowance for deferred tax assets

    11,527       4,553  

Other deferred income taxes

    19       (1,649

)

Loss on disposal of equipment

    16       4  

Provision for doubtful accounts and sales adjustments

    127       498  

Stock compensation expense

    5,492       5,470  

Change in fair value of derivative instrument

    251       (152 )

Other, net

    69       -  

Changes in assets and liabilities:

               

Accounts receivable

    39,188       27,033  

Costs capitalized to obtain revenue contracts, net

    (2,158

)

    (1,692

)

Lease liabilities

    (3,095

)

    -  

Prepaid expenses and other assets

    (1,683

)

    (894

)

Accounts payable

    (1,910

)

    (3,480

)

Deferred revenue

    (18,707

)

    (21,683

)

Other liabilities

    (6,670

)

    (6,122

)

Net cash provided by operating activities

    14,178       9,146  

Cash flows from investing activities:

               

Purchase of property and equipment

    (3,707

)

    (2,004

)

Acquisition of business, net of cash acquired

    -       (450

)

Purchase of short-term investments

    (1,200

)

    -  

Proceeds from sale of short-term investments

    1,200       -  

Capitalized software costs

    (534

)

    (536

)

Net cash used in investing activities

    (4,241

)

    (2,990

)

Cash flows from financing activities:

               

Repayments of debt

    (253

)

    (234

)

Tax payments related to stock awards

    (3,496

)

    (8,576

)

Cash dividends paid

    (2,761

)

    (2,731

)

Net cash used in financing activities

    (6,510

)

    (11,541

)

                 

Effect of exchange rates on cash and equivalents

    (1,072

)

    (2,110

)

                 

Net increase (decrease) in cash and equivalents

    2,355       (7,495

)

                 

Cash and equivalents at beginning of period

    139,413       147,023  
                 

Cash and equivalents at end of period

  $ 141,768     $ 139,528  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 294     $ 305  

Income taxes, net of refunds

  $ 2,368     $ 1,632  

 

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 accounting principles for 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, 2019. 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 six months ended July 31, 2019 are not necessarily indicative of the results to be expected for the year ending January 31, 2020.

 

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, 2019 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.

 

Assets Held for Sale

 

During the second quarter of fiscal 2020, the Company vacated its building located in Dublin, Ireland, and moved operations into leased office space. The Company entered into an agreement to sell the building and expects to complete the sale within the next 12 months. The net book value of the building of $1.7 million was classified as assets held for sale, and is included in “Prepaid expenses and other current assets, net” in the accompanying Condensed Consolidated Balance Sheet as of July 31, 2019.

 

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, 2019, that are of significance, or potential significance, to the Company.

 

Recent Accounting Pronouncements Adopted

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use (“ROU”) asset on the balance sheet. The Company adopted ASU 2016-02, along with related clarifications and improvements, as of February 1, 2019, using the modified retrospective approach, which allows the Company to apply Accounting Standards Codification (“ASC”) 840, Leases, in the comparative periods presented in the year of adoption. Accordingly, the comparative periods and disclosures have not been restated. The cumulative effect of adoption was recorded as an adjustment to the opening balance sheet in the period of adoption.

 

5

 

 

The Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for certain assets. Additionally, the Company adopted the policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes.

 

Adoption of the new standard resulted in the recording of a non-cash transitional adjustment to ROU lease assets and lease liabilities of approximately $13.1 million and $13.9 million, respectively, as of February 1, 2019. The difference between the ROU lease assets and lease liabilities represented existing deferred rent expense and prepaid rent that were derecognized and recorded to retained earnings in the Condensed Consolidated Balance Sheets. The adoption of ASU 2016-02 did not materially impact results of operations or cash flows.

 

Recent Accounting Pronouncements Not Yet Adopted

  

In August 2018, the FASB issued ASU No. 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. ASU No. 2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill to eliminate Step 2 from the goodwill impairment test. In addition, it eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if that fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. The amendments will be effective for the Company’s fiscal year beginning February 1, 2020. Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The Company does not believe adoption of ASU 2017-04 will have a material impact on its 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, certain financial instruments and contract assets. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will generally result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements in order to adopt the new standard in the first quarter of fiscal 2021.

 

 

 
 

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 sale or license of software on a perpetual basis 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.

 

6

 

 

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 12 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.

 

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.

 

7

 

 

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,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

   

(in thousands)

 

North America

  $ 36,837     $ 39,288     $ 74,496     $ 79,313  

EMEA

    22,118       26,906       44,627       51,993  

Asia Pacific

    11,751       12,866       23,637       25,425  

Latin America

    5,672       5,483       11,653       14,002  

Total revenue

  $ 76,378     $ 84,543     $ 154,413     $ 170,733  

 

 

The Company’s revenue by industry is as follows:

 

  

   

Three Months Ended

July 31,

   

Six Months Ended

July 31,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

   

(in thousands)

 

Automotive

  $ 26,962     $ 34,663     $ 56,034     $ 71,725  

Consumer products and food and beverage

    12,128       13,527       24,107       27,317  

High technology and industrial products

    26,389       25,363       51,937       50,358  

Life sciences

    10,899       10,990       22,335       21,333  

Total revenue

  $ 76,378     $ 84,543     $ 154,413     $ 170,733  

 

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.

 

If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

 

8

 

 

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 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, 2019. 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,

2019

   

January 31,

2019

 
   

(In thousands)

 

Contract assets, short-term (in Prepaid expenses and other current assets, net)

  $ 2,391     $ 2,058  

Contract assets, long-term (in Other assets, net)

    67       -  

Total contract assets

  $ 2,458     $ 2,058  

Deferred revenue, short-term

  $ 94,399     $ 115,253  

Deferred revenue, long-term (in Other liabilities)

    1,893       1,465  

Total deferred revenue

  $ 96,292     $ 116,718  

 

During the six months ended July 31, 2019, the Company recognized $82.8 million of revenue that was included in the 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 $250.5 million as of July 31, 2019, of which the Company expects to recognize approximately $156.0 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,

2019

   

January 31,

2019

 
   

(in thousands)

 

Deferred maintenance

  $ 59,636     $ 77,037  

Deferred subscription

    32,791       34,020  

Deferred professional services

    1,849       2,146  

Deferred license

    89       1,713  

Deferred other revenue

    34       337  

Deferred revenues, current

    94,399       115,253  

Deferred revenues, non-current (in Other liabilities)

    1,893       1,465  

Total deferred revenues

  $ 96,292     $ 116,718  

 

9

 

 

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 (Loss) Income.

 

 

The Company calculates contract acquisition costs based on a portfolio of contracts with similar characteristics instead of a contract by contract analysis.

  

 

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 other current assets and other long-term assets, respectively, in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2019 and January 31, 2019, the Company had $11.0 million of deferred commissions and sales agent fees. 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 were recorded in sales and marketing expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income. For the three and six months ended July 31, 2018, $0.9 million and $1.8 million, respectively, of amortization expense related to deferred commissions and sales agent fees were recorded in sales and marketing expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income.

 

Costs to fulfill a contract, which are incurred upon initiation of certain services contracts and are related to initial customer setup, are included in other current assets and long-term assets in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2019 and January 31, 2019 the Company had deferred setup costs of $1.4 million and $1.5 million, respectively. 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, 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 (Loss) Income. During the three and six months ended July 31, 2018, $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 (Loss) Income.

 

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, 2019.

 

10

 

 

 
 

3.

COMPUTATION OF NET (LOSS) INCOME PER SHARE

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands, except per share data)

   

(in thousands, except per share data)

 

Net (loss) income

  $ (13,250

)

  $ 1,113     $ (16,484

)

  $ 2,510  

Less: Dividends declared

    (1,387

)

    (1,372

)

    (2,761

)

    (2,731

)

Undistributed net loss

  $ (14,637

)

  $ (259

)

  $ (19,245

)

  $ (221

)

                                 

Net (loss) income per share – Class A Common Stock

                               

Dividends declared

  $ 1,191     $ 1,176     $ 2,370     $ 2,340  

Allocation of undistributed net loss

    (12,570

)

    (222

)

    (16,522

)

    (190

)

Net (loss) income attributable to Class A common stock

  $ (11,379

)

  $ 954     $ (14,152

)

  $ 2,150  
                                 

Weighted average shares of Class A common stock outstanding— basic

    16,465       16,266       16,417       16,173  

Weighted average potential shares of Class A common stock

          1,661             1,713  

Weighted average shares of Class A common stock and potential common shares outstanding— diluted

    16,465       17,927       16,417       17,886  
                                 

Basic net (loss) income per Class A common share

  $ (0.69

)

  $ 0.06     $ (0.86

)

  $ 0.13  

Diluted net (loss) income per Class A common share

  $ (0.69

)

  $ 0.05     $ (0.86

)

  $ 0.12  
                                 

Net (loss) income per share – Class B Common Stock

                               

Dividends declared

  $ 196     $ 196     $ 391     $ 391  

Allocation of undistributed net loss

    (2,067

)

    (37

)

    (2,723

)

    (31

)

Net (loss) income attributable to Class B common stock

  $ (1,871

)

  $ 159     $ (2,332

)

  $ 360  
                                 

Weighted average shares of Class B common stock outstanding— basic

    3,264       3,263       3,264       3,248  

Weighted average potential shares of Class B common stock

          171             177  

Weighted average shares of Class B common stock and potential common shares outstanding— diluted

    3,264       3,434       3,264       3,425  
                                 

Basic net (loss) income per Class B common share

  $ (0.57

)

  $ 0.05     $ (0.71

)

  $ 0.11  

Diluted net (loss) income per Class B common share

  $ (0.57

)

  $ 0.05     $ (0.71

)

  $ 0.11  

 

Potential common shares consist of the shares issuable upon the release of restricted stock units (“RSUs”) and (“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,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

   

(in thousands)

 

Class A

    2,897       351       2,898       179  

Class B

    278             278        

 

11

 

 

 
 

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 - Money market mutual funds and short-term investments 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.

 

 The following table sets forth the financial assets and liability, measured at fair value, as of July 31, 2019 and January 31, 2019:

 

   

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)

 

Money market mutual funds as of July 31, 2019

  $ 106,774                  

Money market mutual funds as of January 31, 2019

  $ 107,855                  

Short-term investments as of July 31, 2019

  $ 1,200                  

Short-term investments as of January 31, 2019

  $ 1,200                  

Liability related to the interest rate swap as of July 31, 2019

          $ (115

)

       

Asset related to the interest rate swap as of January 31, 2019

          $ 136          

 

Money market mutual funds 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 $35.0 million and $31.6 million at July 31, 2019 and January 31, 2019, 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 measurements levels during the six months ended July 31, 2019.

 

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 (income) expense, net” in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. 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, 2019 and January 31, 2019 were as follows (in thousands):

 

 

Liability / Asset

 
     

Fair Value

 
 

Balance Sheet
Location

 

July 31,
2019

   

January 31,
2019

 

Derivative instrument:

                 

Interest rate swap

Other liabilities / Other assets, net

  $ (115

)

  $ 136  

Total

  $ (115

)

  $ 136  

 

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income was $(160,000) and $(251,000) for the three and six months ended July 31, 2019, respectively; compared to $35,000 and $152,000 for the three and six months ended July 31, 2018, respectively.

 

12

 

 

 
 

5.

CAPITALIZED SOFTWARE COSTS

 

Capitalized software costs and accumulated amortization at July 31, 2019 and January 31, 2019 were as follows:

 

   

July 31,

2019

   

January 31,

2019

 
   

(in thousands)

 

Capitalized software costs:

               

Capitalized software development costs

  $ 2,737     $ 2,314  

Acquired software technology

    135       135  
      2,872       2,449  

Less accumulated amortization

    (1,152

)

    (851

)

Capitalized software costs, net

  $ 1,720     $ 1,598  

 

The Company’s capitalized software development costs relate to translations and localizations of QAD Adaptive Applications. Acquired software technology costs relate to acquired technology 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 2020, approximately $0.1 million of costs and accumulated amortization were removed from the balance sheet.

 

Amortization of capitalized software costs was $0.2 million and $0.4 million for the three and six months ended July 31, 2019, respectively; compared to $0.1 million and $0.3 million for the three and six months ended July 31, 2018, respectively. Amortization of capitalized software costs is included in “Cost of license” in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

 

 The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of July 31, 2019:

 

Fiscal Years

 

(in thousands)

 

2020 remaining

  $ 458  

2021

    750  

2022

    407  

2023

    92  

Thereafter

    13  
    $ 1,720  

 

 
 

6.

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill for the six months ended July 31, 2019 were as follows:

 

   

Gross Carrying

Amount

   

Accumulated

Impairment

   

Goodwill, Net

 
   

(in thousands)

 

Balance at January 31, 2019

  $ 28,031     $ (15,608

)

  $ 12,423  

Impact of foreign currency translation

    (44

)

    -       (44

)

Balance at July 31, 2019

  $ 27,987     $ (15,608

)

  $ 12,379  

 

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2019. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2018. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2019. The Company monitors the indicators for goodwill impairment testing between annual tests. No adverse events occurred during the six months ended July 31, 2019 that would cause the Company to test goodwill for impairment.

 

13

 

 

Intangible Assets

 

   

July 31,

2019

   

January 31,

2019

 
   

(in thousands)

 

Amortizable intangible assets:

               

Customer relationships

  $ 1,349     $ 1,348  

Less accumulated amortization

    (250

)

    (115

)

Amortizable intangible assets, net

  $ 1,099     $ 1,233  

 

The Company’s intangible assets as of July 31, 2019 are related to the acquisitions completed in the second and third quarters of fiscal 2019. Intangible assets are included in “Other assets, net” in the accompanying Condensed Consolidated Balance Sheets, and are amortized over an estimated five year useful life.

 

Amortization of intangibles from acquisitions was $66,000 and $133,000 for the second quarter and first six months of fiscal 2020, respectively. No amortization expense was recorded in the first half of fiscal 2019. The following table summarizes the future amortization expense relating to the Company’s intangible assets as of July 31, 2019:

 

Fiscal Years

 

(in thousands)

 

2020 remaining

  $ 135  

2021

    270  

2022

    270  

2023

    270  

Thereafter

    154  
    $ 1,099  
 
 

7.

DEBT

 

   

July 31,

2019

   

January 31,

2019

 
   

(in thousands)

 

Note payable

  $ 13,111     $ 13,358  

Less current maturities

    (492

)

    (487

)

Less loan origination costs, net

    (30

)

    (35

)

Long-term debt

  $ 12,589     $ 12,836  

 

Note Payable

 

Effective May 30, 2012, QAD Ortega Hill, LLC entered into a variable rate credit agreement (the “2012 Mortgage”) with 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 2.31% at July 31, 2019. 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 Rabobank, N.A. 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. The unpaid balance as of July 31, 2019 was $13.1 million.

  

 
 

8.

LEASES

 

The Company leases certain office space, office equipment and autos with remaining lease terms of one year to twelve years under leases classified primarily as operating. QAD has options to terminate some of its leases early. The lease term represents the period up to the early termination date unless it is reasonably certain that QAD will not exercise the early termination option. For certain leases, QAD has options to extend the lease term for additional periods ranging from one year to ten years.

 

The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than 12 months.  ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company's obligation to make payments over the life of the lease. An ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally not readily determinable, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. QAD used the incremental borrowing rate on February 1, 2019 for all leases that commenced prior to that date.

 

14

 

 

QAD reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.

 

The Company has applied the practical expedient available for lessees in which lease and non-lease components are accounted for as a single lease component for all asset classes. The Company also elected the practical expedient to exclude short-term leases (leases with original terms of 12 months or less) from ROU asset and lease liability accounts.

 

A majority of the Company’s leases are operating and lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do not result in a remeasurement of lease liabilities. The Company’s variable lease payments include payments to lessors for taxes, maintenance, insurance and other operating costs as well as payments that are adjusted based on a CPI index or rate and payments in excess of fixed amounts, such as excess mileage charges on leased autos. The Company's lease agreements do not contain any significant residual value guarantees or restrictive covenants.

 

Supplemental balance sheet information related to leases was as follows (in thousands):

 

   

July 31, 2019

 
         

Assets

       

Operating

  $ 18,097  

Finance

    98  

Total lease assets, net

  $ 18,195  
         

Liabilities

       

Current

       

Operating

  $ 4,812  

Finance

    43  

Noncurrent

       

Operating

    14,017  

Finance

    42  

Total lease liabilities

  $ 18,914  

 

The components of lease cost were as follows (in thousands):

 

   

Three Months

Ended

   

Six Months

Ended

 
   

July 31, 2019

   

July 31, 2019

 
                 

Operating lease cost

  $ 1,509     $ 2,965  

Finance lease cost

    14       14  

Variable lease cost

    397       769  

Short-term lease cost

    66       140  

Net lease cost

  $ 1,986     $ 3,888  

 

Lease term and discount rate were as follows:

 

   

July 31, 2019

 
         

Weighted-average remaining lease term (in years)

       

All leases

    5.7  

Weighted-average discount rate

       

All leases

    6.14

%

  

15

 

 

Supplemental disclosures of cash flow information related to leases were as follows:

 

   

Six Months

Ended

 
   

July 31, 2019

 
         

Cash flows related to lease liabilities

       

Operating cash flows related to operating leases

  $ (3,095

)

)

Financing cash flows related to finance leases     (11 )

Total cash flows related to lease liabilities

  $ (3,106 )
         

Non-cash items

       

Leased assets obtained in exchange for new operating lease liabilities

  $ 7,696  
Leased assets obtained in exchange for new finance lease liabilities     110  

Total non-cash items

  $ 7,806  

 

Maturities of lease liabilities were as follows as of July 31, 2019 (in millions):

 

   

Operating

 
   

Leases

 
         

Within 1 year

  $ 5.9  

2 years

    4.5  

3 years

    3.0  

4 years

    2.2  

5 years

    2.0  

Thereafter

    5.0  

Total lease payments

  $ 22.6  

Less: Imputed interest

    (3.7

)

Present value of lease liabilities

  $ 18.9  

 

As of January 31, 2019 future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic 840, under non-cancelable operating leases for the following five fiscal years and thereafter were as follows (in millions):

 

2020

  $ 5.6  

2021

    4.6  

2022

    2.8  

2023

    1.8  

2024

    1.5  

Thereafter

    2.8  

Total

  $ 19.1  

 

The Company is a lessor for certain office space owned by the Company and leased to others under non-cancelable leases with initial terms ranging from six months to one year. These lease agreements provide for a fixed base rent and automatically renew for periods from six months to one year unless terminated. All leases are considered operating leases. There are no rights to purchase the premises and no residual value guarantees. For the three and six months ended July 31, 2019 the Company received $0.2 and $0.5 million, respectively, of lease income from company-owned locations.

 

 
 

9.

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, 2019

  $ (7,661

)

Other comprehensive income before reclassifications

    35  

Amounts reclassified from accumulated other comprehensive loss

     

Net current period other comprehensive income

    35  

Balance as of July 31, 2019

  $ (7,626

)

 

16

 

 

 
 

10.

INCOME TAXES

 

In determining the quarterly provision for income taxes, the Company calculated income tax expense based on actual quarterly results in the second quarter of fiscal year 2020, compared to the prior year where the Company calculated income tax expense based on the estimated annual tax rate. Results were adjusted for discrete items recorded during the period. Actual quarterly results are being used in fiscal 2020 since they provide a more reliable estimate of quarterly tax expense given the Company has recorded net losses during the first half of fiscal 2020 and expects to record a net loss for the full fiscal year.

 

The Company recorded income tax expense of $9.9 million and $1.5 million in the second quarter of fiscal 2020 and 2019, respectively. The Company’s effective tax rate was (292%) during the second quarter of fiscal 2020 compared to 57% for the same period in the prior year. The change in the effective tax rate was primarily due to a valuation allowance that was placed on the net deferred tax assets of the Company’s wholly-owned Irish subsidiary (the “Irish Principal”) and a taxable loss in the second quarter of fiscal 2020 compared to taxable profits for the same period of fiscal 2019. 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 $10.6 million and $2.7 million for the first six months of fiscal 2020 and 2019, respectively. The Company’s effective tax rate was (180%) during the first six months of fiscal 2020 compared to 51% for the same period in the prior year. The change in the effective tax rate was primarily due to a valuation allowance that was placed on the Company’s Irish Principal’s net deferred tax assets and a taxable loss for the first six months of fiscal 2020 compared to taxable profits for the same period of fiscal 2019. The placement of a valuation allowance resulted in an accounting adjustment of $10 million to income tax expense.

 

When calculating QAD’s income tax expense for the first six months of fiscal 2020 and fiscal 2019, the Company considered the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted December 22, 2017. The Company calculated an estimate for global intangible low-tax income (“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 the second quarter of fiscal 2020, cash taxes were not impacted by GILTI since the Company is experiencing losses overseas.

 

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

 

The gross amount of unrecognized tax benefits was $1.3 million at July 31, 2019, including interest and penalties. The unrecognized tax benefits were reduced by $1 million with an offset to 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, 2019, the Company has 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 on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. During the second quarter of fiscal year 2020 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 assesses the transfer pricing methodology, the historical profits, the economics of the country 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. 

 

 

For the Irish Principal, the positive evidence was outweighed by the Irish three-year cumulative loss, a fiscal 2020 projected loss, and future earmarked investment necessary to transition the business to cloud. Management concluded that the weight of this negative evidence warranted placing a valuation allowance on the Irish Principal’s net deferred tax assets. A full valuation allowance of $10 million was placed on the Irish Principal’s net deferred tax assets during the second quarter of fiscal 2020.  

 

 

A valuation allowance was also placed on South Africa’s net deferred tax assets. The Company plans to liquidate this entity and does not anticipate utilizing its net operating losses.

 

17

 

 

 

The valuation allowance on Belgium has been released as management concluded that it is “more likely than not” that Belgium will utilize its net deferred tax assets within the foreseeable future.

 

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

 

Jurisdiction

 

July 31,

2019

   

January 31,

2019

 

U.S. federal and state

  $ 26.8     $ 24.7  

Irish Principal

    9.9       -  

Brazil

    5.4       5.2  

Germany

    2.7       2.9  

Hong Kong

    1.2       1.2  

South Africa

    0.2       -  

Belgium

    -       0.9  

Total valuation allowance

  $ 46.2     $ 34.9  

 

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 2014

 

Netherlands for fiscal year ended January 31, 2016

 

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

 

Switzerland for fiscal years ended January 31, 2014, 2015, 2016, 2017 and 2018

 

Thailand for fiscal year ended January 31, 2017

 

During the fiscal year 2020, the Company closed the following audits with an immaterial adjustment:

 

 

Tennessee for fiscal year ended January 31, 2014, 2015, 2016 and 2017

 

 
 

11.

STOCKHOLDERS’ EQUITY

 

Dividends

 

The following table sets forth the dividends that were declared by the Company during the first six months of fiscal 2020:

 

Declaration

Date

Record Date

Payable

 

Dividend

Class A

 

 

Dividend

Class B

 

 

Amount

(in thousands)

 

6/24/2019

7/10/2019

7/17/2019

 

$

0.072

 

 

$

0.06

 

 

$

1,387

 

4/9/2019

4/23/2019

5/3/2019

 

$

0.072

 

 

$

0.06

 

 

$

1,374

 

 

 
 

12.

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, 2019.

 

Performance Stock Units (“PSUs”)

 

In June 2019, the Company began issuing performance-based stock units (“PSUs”) to select employees. PSUs granted to employees under the 2016 Program are generally released 1/3 after each year of service for three years and are contingent upon employment with the Company and achievement of pre-determined performance objectives. To determine the anticipated achievement of the performance objectives, management must make assumptions regarding the likelihood of the Company meeting those targets. The number of PSUs that vest will be predicated on the Company achieving performance objectives during the measurement period subsequent to the date of grant. Depending on the financial performance levels achieved, a percentage of the PSUs (0% to 200% of the target award) will vest to the grantees of those stock units. There is no guarantee that such PSUs will vest in whole or in part.

 

18

 

 

Stock-Based Compensation

 

The following table sets forth reported stock-based compensation expense for the three and six months ended July 31, 2019 and 2018:

 

   

Three Months Ended

July 31,

   

Six Months Ended

July 31,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

   

(in thousands)

 

Cost of subscription

  $ 72     $ 68     $ 142     $ 117  

Cost of maintenance and other revenue

    132       118       253       210  

Cost of professional services

    359       327       681       553  

Sales and marketing

    575       534       955       936  

Research and development

    441       413       868       728  

General and administrative

    1,609       1,904       2,593       2,926  

Total stock-based compensation expense

  $ 3,188     $ 3,364     $ 5,492     $ 5,470  

 

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, 2019: 

   

RSUs

   

Weighted

Average

Grant Date

Fair Value

 
   

(in thousands)

         

Outstanding at January 31, 2019

    663     $ 36.64  

Granted

    261       39.74  

Released (1)

    (254

)

    32.33  

Forfeited

    (26

)

    37.56  

Outstanding at July 31, 2019

    644     $ 39.55  

 

                                        

 

(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, 2019, the Company withheld 76,000 shares for payment of these taxes at a value of $3.2 million. During the six months ended July 31, 2019, the Company withheld 80,000 shares for payment of these taxes at a value of $3.3 million.

 

Total unrecognized compensation cost related to RSUs was approximately $24.1 million as of July 31, 2019. This cost is expected to be recognized over a weighted-average period of approximately 3.1 years. 

 

PSU Information

 

The estimated fair value of PSUs 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.

 

19

 

 

The following table summarizes the activity for PSUs for the six months ended July 31, 2019: 

 

 

 

PSUs

 

 

Weighted

Average

Grant Date

Fair Value

 

 

 

(in thousands)

 

 

 

 

 

Outstanding at January 31, 2019

 

 

 

 

$

 

Granted

 

 

93

 

 

 

39.82

 

Released

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Outstanding at July 31, 2019

 

 

93

 

 

$

39.82

 

 

Total unrecognized compensation cost related to PSUs was approximately $3.5 million as of July 31, 2019. This cost is expected to be recognized over a weighted-average period of approximately 1.9 years. 

 

SAR Information

  

The following table summarizes the activity for outstanding SARs for the six months ended July 31, 2019:

 

   

SARs

(in

thousands)

   

Weighted

Average

Exercise

Price per

Share

   

Weighted

Average

Remaining

Contractual

Term

(years)

   

Aggregate

Intrinsic

Value

(in

thousands)

 

Outstanding at January 31, 2019

    2,533     $ 20.81                  

Granted

                           

Exercised

    (17

)

    11.44                  

Expired

                           

Forfeited

                           

Outstanding at July 31, 2019

    2,516     $ 20.87       3.0     $ 55,181  

Vested and exercisable at July 31, 2019

    2,231  (1)   $ 18.38       2.6     $ 53,002  

                                        

(1) The number of SARs vested and exercisable at July 31, 2019 includes 877,500 Class A and 127,500 Class B shares previously held by Mr. Karl Lopker which were exercised on August 22, 2019 by his estate, prior to their expiration date of August 25, 2019. Exercise prices for these SARs range from $10.50 to $31.65.

 

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, 2019, 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, 2019. The total intrinsic value of SARs exercised in the six months ended July 31, 2019 was $0.5 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, 2019, the Company withheld 2,000 shares for payment of these taxes at a value of $98,000.  During the six months ended July 31, 2019, the Company withheld 4,000 shares for payment of these taxes at a value of $0.2 million.

 

At July 31, 2019, there was approximately $3.4 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 2.5 years.

  

 
 

13.

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.

 

20

 

 

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. 

 

 

 
 

14.

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 and licenses its products 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 Oceania. 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,

 
   

2019

   

2018

   

2019

   

2018

 
   

(in thousands)

   

(in thousands)

 

Revenue:

                               

North America (1)

  $ 36,837     $ 39,288     $ 74,496     $ 79,313  

EMEA

    22,118       26,906       44,627       51,993  

Asia Pacific

    11,751       12,866       23,637       25,425  

Latin America

    5,672       5,483       11,653       14,002