Company Quick10K Filing
QAD
Price1.00 EPS11,423,000
Shares-0 P/E0
MCap-0 P/FCF-0
Net Debt-121 EBIT1
TEV-121 TEV/EBIT-108
TTM 2019-10-31, in MM, except price, ratios
10-K 2020-01-31 Filed 2020-04-14
10-Q 2019-10-31 Filed 2019-12-10
10-Q 2019-07-31 Filed 2019-09-09
10-Q 2019-04-30 Filed 2019-06-10
10-K 2019-01-31 Filed 2019-04-16
10-Q 2018-10-31 Filed 2018-12-10
10-Q 2018-07-31 Filed 2018-09-10
10-Q 2018-04-30 Filed 2018-06-11
10-K 2018-01-31 Filed 2018-04-16
10-Q 2017-10-31 Filed 2017-12-08
10-Q 2017-07-31 Filed 2017-09-08
10-Q 2017-04-30 Filed 2017-06-09
10-K 2017-01-31 Filed 2017-04-07
10-Q 2016-10-31 Filed 2016-12-09
10-Q 2016-07-31 Filed 2016-09-08
10-Q 2016-04-30 Filed 2016-06-07
10-K 2016-01-31 Filed 2016-04-15
10-Q 2015-10-31 Filed 2015-12-10
10-Q 2015-07-31 Filed 2015-09-04
10-Q 2015-04-30 Filed 2015-06-08
10-K 2015-01-31 Filed 2015-04-13
10-Q 2014-10-31 Filed 2014-12-04
10-Q 2014-07-31 Filed 2014-09-09
10-Q 2014-04-30 Filed 2014-06-06
10-K 2014-01-31 Filed 2014-04-14
10-Q 2013-10-31 Filed 2013-12-09
10-Q 2013-07-31 Filed 2013-09-09
10-Q 2013-04-30 Filed 2013-06-10
10-K 2013-01-31 Filed 2013-04-15
10-Q 2012-10-31 Filed 2012-12-10
10-Q 2012-07-31 Filed 2012-09-07
10-Q 2012-04-30 Filed 2012-06-08
10-K 2012-01-31 Filed 2012-04-05
10-Q 2011-10-31 Filed 2011-12-09
10-Q 2011-07-31 Filed 2011-09-09
10-Q 2011-04-30 Filed 2011-06-09
10-K 2011-01-31 Filed 2011-04-15
10-Q 2010-10-31 Filed 2010-12-09
10-Q 2010-07-31 Filed 2010-09-09
10-Q 2010-04-30 Filed 2010-06-10
10-K 2010-01-31 Filed 2010-04-15
8-K 2020-03-18 Earnings, Exhibits
8-K 2019-11-27 Officers, Exhibits
8-K 2019-11-26 Earnings, Exhibits
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

QADA 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-4.2 ex_180455.htm
EX-21.1 ex_179744.htm
EX-23.1 ex_180456.htm
EX-31.1 ex_179746.htm
EX-31.2 ex_179745.htm
EX-32.1 ex_179748.htm

QAD Earnings 2020-01-31

Balance SheetIncome StatementCash Flow
3202561921286402012201420172020
Assets, Equity
906846242-202012201420172020
Rev, G Profit, Net Income
151050-5-102012201420172020
Ops, Inv, Fin

10-K 1 qada20200131_10k.htm FORM 10-K qada20200131_10k.htm
 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 

FORM 10-K

 

 

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

 

For the fiscal year ended January 31, 2020

 

OR

 

 

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

 

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 and zip code)

 

Registrant’s telephone number, including area code (805) 566-6000

 

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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ YES ☒ NO

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ YES ☒ NO

 

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 checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

☐ Large accelerated filer

☒ Accelerated filer

☐ Non-accelerated filer

☐ Smaller reporting company

☐ Emerging growth company

 

1

 

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 July 31, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 16,545,906 shares of the Registrant’s Class A common stock outstanding and 3,263,906 shares of the Registrant’s Class B common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ Global Market on July 31, 2019) was approximately $449 million. Shares of the Registrant’s common stock held by each executive officer and director and by each entity that owns 5% or more of the Registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of March 31, 2020, there were 17,112,899 shares of the Registrant’s Class A common stock outstanding and 3,321,002 shares of the Registrant’s Class B common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Items 10 through 14 of Part III incorporate information by reference from the Definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on June 11, 2020.

 

2

 

QAD INC.
FISCAL YEAR 20
20 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

 

 

Page

PART I

 

ITEM 1. BUSINESS

 

4

     

ITEM 1A. RISK FACTORS

 

15

     

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

27

     

ITEM 2. PROPERTIES

 

27

     

ITEM 3. LEGAL PROCEEDINGS

 

27

     

ITEM 4. MINE SAFETY DISCLOSURES

 

27

     

PART II

   

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

28

     

ITEM 6. SELECTED FINANCIAL DATA

 

30

     

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

31

     

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

48
     

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

49

     

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

49

     

ITEM 9A. CONTROLS AND PROCEDURES

 

50

     

ITEM 9B. OTHER INFORMATION

 

51

     

PART III

   

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

51

     

ITEM 11. EXECUTIVE COMPENSATION

 

52

     

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

52

     

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

52

     

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

52

     

PART IV

   

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

53

     

ITEM 16. FORM 10-K SUMMARY

 

53

     

SIGNATURES

 

89

 

3

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Annual Report on Form 10-K 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 Item 1A entitled “Risk Factors” which are incorporated herein by reference, and as may be updated in filings we make from time to time with the Securities and Exchange Commission. 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 of this Annual Report on Form 10-K 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 this Annual Report on Form 10-K and the other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in fiscal year 2021.

 

PART I

 

ITEM 1. BUSINESS

 

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

 

Global manufacturers are facing ever increasing disruption caused by technology driven innovation and changing consumer preferences. In order to survive and thrive, manufacturers must be able to innovate and change business models at unprecedented rates of speed. QAD calls these manufacturing companies Adaptive Manufacturing Enterprises.

 

QAD’s cloud solutions integrate our software, hardware and services in a cloud-based IT environment that we deploy, support, upgrade and manage for our customers. Our cloud offerings are designed to be rapidly deployable to customers, intuitive for our users, easily upgradable and seamlessly integrate with other applications. QAD cloud solutions are cost-effective, secure, standards-based, reliable, and require lower up-front customer investment.

 

Over 2,000 manufacturing companies have deployed QAD solutions to run their businesses across approximately 4,000 sites globally. Today, our solutions are used by over 300,000 active users, of which our cloud and subscription users have grown by over 23% to 53,000 from 43,000 in the prior year. We were founded in 1979 and our principal executive offices are located in Santa Barbara, California. Our principal website address is www.qad.com. Our office address is 100 Innovation Place, Santa Barbara, CA 93108. We employ 1,920 full-time employees throughout our direct operations in 24 countries across the North America, Europe, Middle East and Africa (EMEA), Asia Pacific and Latin America regions.

 

 

OUR TARGET VERTICAL MARKETS

 

We focus our efforts on delivering mission-critical software solutions to enterprise customers in six core vertical markets within global manufacturing – automotive, life sciences, consumer products, food and beverage, high technology and industrial products. Within these vertical markets, we focus on 22 sectors where many of our existing customers operate and our solutions are a strong product fit. We offer solutions designed to overcome the business challenges within each sector, based on our in-depth knowledge of the area and best practices. In addition, we participate in industry groups serving our target sectors to ensure that we address regulatory compliance issues, evaluate new manufacturing practices and leverage advanced technologies to give our customers a maximum competitive advantage.

 

4

 

Automotive: Automotive suppliers are a key focus for QAD.  Automotive suppliers must meet critical industry standards such as the Materials Management Operations Guideline/Logistics Evaluation (MMOG/LE) and International Automotive Task Force (IATF) 16949:2016 (previously ISO/TS 16949). Disruptions to the supply chain can cause significant financial impact. QAD’s automotive-specific processes and built-in industry best practices help automotive suppliers reduce costs, mitigate supply chain risk and improve supply chain planning and visibility. Our customer base includes companies serving the global automotive marketplace and we focus on two sectors: tier 1 suppliers and the automotive aftermarket. We deliver unique capabilities to support the collaboration requirements of automotive suppliers, including the strict quality requirements of Advanced Product Quality Process (APQP) and Production Part Approval Process (PPAP). Many of our customers use QAD Cloud EDI because it provides a scalable solution which standardizes Electronic Data Interchange (EDI) across their global enterprise. QAD Supplier Portal, which allows for electronic communication with other suppliers, is another product commonly used by our automotive customers. QAD solutions are in use at many of the market-leading automotive parts companies throughout the world that manufacture a broad range of components used in interiors, electrical components, safety systems, bodies and drivetrains.  

 

Life Sciences: Life sciences manufacturers are dedicated to innovation, product quality and patient safety; however, a tightening regulatory environment, increasing cost pressures and greater supply chain complexities present challenges to the industry. Emerging markets, quality initiatives, and mergers and acquisitions activity also add to the complexity of life sciences manufacturing and distribution. QAD focuses on the following four sectors in the life sciences industry: diagnostic devices; contract manufacturing; medical devices; and pharmaceutical/biotechnology manufacturers. QAD solutions help global life sciences companies manufacture products in accordance with current Good Manufacturing Practices (cGMP) regulations and standards like ISO13485:2016 that are required by regulators around the world. In addition to cGMP, QAD solutions support many business and regulatory processes specific to the life sciences industry, such as automated quality management, supply chain planning and serialization in support of requirements for Unique Device Identification (UDI), the Drug Quality and Security Act (DQSA) and the Falsified Medicines Directive (FMD). QAD Adaptive ERP for life sciences provides our customers with a qualified IT infrastructure as a key building block to help them ensure that they have a solid foundation for addressing life sciences regulatory requirements.

 

Consumer Products: Manufacturers of consumer products have the objective of delivering the right product, in the right quantities, to the right location at the right time to satisfy demand. To meet this goal, effective supply chain management is needed to synchronize critical activities and functions across the organization.  To gain market share and improve profitability, consumer products companies must anticipate and meet customer demand while managing their margins and complying with evolving safety and environmental regulations. QAD focuses on the following four sectors in the consumer products industry: household and personal packaged products; consumer electronics; assembled and discrete products; and jewelry manufacturing. The manufacturing processes for these items vary and depend on the nature of the item; however, the fulfillment and distribution requirements have significant commonality. Major retailers manage complex supply chains and are typically very demanding of their suppliers as they strive to service growing demand from consumers for speed of delivery and variety of products. QAD solutions address the complex replenishment requirements of companies supplying the retail supply chain, including promotional pricing, demand planning, quality compliance and product configuration.

 

Food and Beverage: Food and beverage manufacturing is complex and requires regular updates to product, packaging and pricing. There is a lack of uniformity in the supply chain, which challenges food and beverage manufacturers to excel at supply chain management, as seasonal demand changes cause inefficiencies and increase manufacturing costs. At the same time, manufacturers must comply with requirements like field to fork traceability and record keeping. QAD focuses on the following five sectors in the food and beverage industry: fresh foods; frozen foods; candy and confections; bottling and canning; and sprits, wine and beer. Our solutions support regulatory and quality initiatives, such as the U.S. Food Safety Modernization Act (FSMA) and Hazard Analysis and Critical Control Point (HACCP) analysis, which address the management of biological, chemical and physical hazards. Our solutions support the product cycle of the food and beverage industry from raw material production, procurement and handling to manufacturing, distribution and consumption of the finished product.

 

High Technology: The success of manufacturers in the high technology industry relies on innovation and the ability to manage change. These manufacturers are subject to constant pressure on margins, challenges with cross border shipments, strains on material availability and cost control initiatives.  They require agile and effective global supply chains. All of these challenges need to be met while complying with standards and industry regulations. QAD solutions are used by many high technology companies that manufacture a diverse range of products. QAD focuses on the following three sectors in the high technology industry: standalone devices and test equipment; batteries, power supplies and lighting; and cable, wiring and connectors. High technology companies often face the challenges of very complex product structures with a need for traceability of parts and processes throughout their entire supply chain, as well as tight control of engineering changes. Many high technology companies providing complex systems also face the challenge of managing installation and support of equipment after sale, in addition to managing field engineering resources. A high technology manufacturer can use QAD’s solutions to configure product based on customers’ preference; manufacture and assemble product according to a customized specification; and schedule, install and support equipment throughout its lifecycle.

 

5

 

Industrial Products: Today’s global customers are demanding more configure-to-order, make-to-order, and assemble-to-order products. As a result, the modern, agile industrial manufacturer must be responsive to demands while managing tight margins, operational challenges and rapid changes to product features. QAD customers manufacture products as diverse as machine tools; specialist ceramic materials used in aerospace and defense; and equipment used in the oil and gas industries. Fluctuating demand leads to significant challenges in managing the internal supply chain, coordinating the extended vendor ecosystem, controlling costs, ensuring quality, tracking production, and optimizing inventory levels. Companies in this broad vertical market have requirements to maintain many manufacturing methodologies, often within the same enterprise. QAD focuses on the following four sectors in the industrial products industry: flexible packaging; engineered materials; standalone equipment; and roll stock and wire cable. Our solutions support multiple manufacturing methodologies in parallel, including lean manufacturing. The need for traceability of materials from source through to the finished product is often important to our customers, and QAD’s capabilities in traceability and serialization support this feature.

 

Our focus on these vertical markets gives us a competitive advantage by providing a solution developed specifically for our target customers, without the complexity and distraction of functionality they don’t want and don’t need. While some vendors provide broader solutions built for many industries, our targeted vertical focus allows our customers to implement our solutions with fewer configurations and customizations than our competitors require, enabling less complex and faster implementations, along with easier upgrades. We leverage our vertical market expertise in research and development, to meet specific industry needs; in sales, to understand our customer’s unique requirements; in presales, to demonstrate how these requirements are handled in the software; and in services, to apply best practices in the optimization of business processes and the implementation of the software. Our options to sell our product in the cloud or as on-premises licenses enable customers operating in multiple locations to choose a deployment option that best meets their unique needs.

 

QAD SOLUTIONS

 

QAD’s software solution suite is called QAD Adaptive Applications with QAD Adaptive ERP the core solution in the suite.  QAD Adaptive ERP enables manufacturers to maximize the return on their ERP investment by achieving greater levels of fit today and rapidly responding to change tomorrow. It is built with industry best practices for global manufacturers based on QAD’s deep industry-specific expertise. The software runs on the QAD Enterprise Platform using QAD’s Adaptive User Experience (UX).  QAD Adaptive Applications is QAD’s portfolio of flexible solutions for global manufacturers. Though QAD Adaptive ERP is the core application in the portfolio, ERP is just one of the products that a manufacturer may require. Whether a manufacturer needs supplier relationship management, eInvoicing, EDI, trade management, supply chain planning, demand planning, transportation execution, asset management, customer self-service, quality management, data collection/label printing, IoT, cloud integration or analytics, QAD Adaptive Applications offers a proven set of solutions, all fully integrated with QAD Adaptive ERP.

 

The QAD Enterprise Platform helps manufacturers incorporate unique functionality without creating long-term rigidity in the system. Eliminating rigidity means that future enhancements and upgrades are easier and less costly to deploy. Additionally, functionality created on QAD’s Enterprise Platform can move through future upgrades without re-creation. This provides greater agility over the long term and increases the value of enhancements through greater longevity. The QAD Enterprise Platform consists of two foundational components:

 

Foundation Services provides platform services for common use during application development, platform management tools to support the development lifecycle and infrastructure management capabilities to address configuration and deployment.

 

Platform Services includes User Interface, Mobile, Security, Integration, API Management, Analytics, Data Query, Browse, Globalization, Collaboration and Event/Task Scheduling. These best-in-class services streamline development of apps by providing common frameworks for reuse. 

 

QAD’s Adaptive UX provides manufacturers an adaptable and device-independent user experience that supports personalization for each role, activity and user. Users of QAD Adaptive ERP and other QAD Cloud apps use the Adaptive UX to simplify and speed-up task completion and to give decision-makers access to analytics-based insight to make smart decisions and track and prevent exceptions. The Adaptive UX also includes select native mobile applications for QAD Adaptive ERP and the flexibility to meet new user interface requirements as they emerge. Users can easily personalize their experience, in terms of menus, fields and other UX attributes. 

 

QAD Cloud

 

QAD Adaptive Applications are deployed via the reliable and proven QAD Cloud that offers 24x7, follow-the-sun, around-the-world support. QAD works with customers to achieve fast, dependable implementations and offers related professional services to help ensure business outcomes are properly defined and measured; and staff is fully trained.

 

QAD Cloud allows customers to rapidly deploy, scale and extend their solutions in a highly-available, highly-secure environment.  QAD manages the end-to-end process of the deployment of the enterprise system, including the provisioning of the customer’s environments, performing continuous system performance tuning and monitoring to avoid disruptions, ensuring backup and disaster recovery processes are in place, applying software upgrades and patches, and ensuring industry best practice security processes are deployed.  Customer’s internal organizations can then focus on strategic initiatives while relying on QAD to provide their users with highly-secured and highly-reliable systems that support their ability to navigate through complexity and increasing disruption in their markets.  

 

6

 

QAD Adaptive Applications are comprised of the following software solutions:

 

Customer and Service Management

 

QAD’s customer and service management solutions enable global manufacturing companies to acquire new customers efficiently, grow revenue through multiple channels and retain customers through superior service and support. Customer and service management helps our customers measure marketing campaign effectiveness, manage the sales opportunity lifecycle and optimize order and fulfillment processes. QAD’s Configurator has the ability to create unique products specified to customer requirements, enabling simple and cost-effective controls for mass customization of products. The suite includes the ability to centralize sales order entry, including orders for configured items, and to ship the items from any facility or business entity. Customer Self Service provides a web storefront for our customers to transact sales, which is fully and securely integrated with the rest of QAD Adaptive Applications.

 

Manufacturing

 

QAD’s manufacturing solutions deliver comprehensive capabilities to support manufacturing business processes, from planning through execution, and provide visibility and control of materials and labor. The suite has capabilities in the areas of planning and scheduling, data collection, label printing, cost management, material control, shop floor control, quality management and reporting in various mixed-mode manufacturing environments. The manufacturing models supported include Discrete, Repetitive, Kanban (particularly relevant in lean manufacturing practices), Flow, Batch/Formula, Process, Co-products/By-products and Configured Products. The system also includes flexible item attributes that customers can use to track lot characteristics or test results. The Lot Trace Workbench provides insight into any products’ component genealogy and greatly simplifies product recalls. QAD’s manufacturing solutions support companies’ deployment of business processes consistent with their industry’s best practices. The integration between scheduling, planning, execution, quality and materials allows tight control and simple management of processes.

 

Enterprise Asset Management (EAM) helps companies manage maintenance and installation of capital equipment. The solution supports both planned and unplanned equipment maintenance based on elapsed time or completed quantities. It includes the ability to track calibrations, labor and required parts used for maintenance. In addition, it has project accounting capabilities to plan, track and control detailed project budget and spending data for capital expense projects such as refits or building and commissioning new plants.

 

QAD provides enterprise quality management and regulatory compliance solutions as part of our manufacturing solution. The capabilities support customers’ compliance with industry-specific quality standards. In the automotive vertical, QAD delivers automation of Advanced Product Quality Planning (APQP) methodologies, including Production Part Approval Process (PPAP), process flow and approvals. In the life sciences vertical, customers benefit from critical functionality supporting corrective and preventative action and non-conformance reporting. General manufacturing quality solutions are provided for audit, risk management, document control, gauge calibration, inspection and statistical process control.

 

Supply Chain Execution

 

QAD's supply chain capabilities provide the tools required to make requisitions and procure and purchase materials and parts needed for manufacturing. Purchasing readily integrates with inventory and warehouse management capabilities. Additionally, QAD’s supply chain solution manages consignment inventory for consignors and consignees, and distribution requirements planning to optimize and balance inventories at multiple distribution centers, enabling fast and cost-effective demand fulfillment. QAD Supplier Portal provides a cloud-based, subscription supply chain insight and performance management solution that provides digital collaboration between suppliers and buyers to help optimize supply chains operations.

 

Financials

 

QAD’s financials solution provides comprehensive capabilities to manage and control finance and accounting processes at a local, regional and global level. The software supports multi-company, multi-currency, multi-language and multi-tax jurisdictions, as well as consolidated reporting and budgeting controls. These capabilities give cross-functional stakeholders access to financial results; enabling faster, more informed decision making while providing robust internal controls. Enterprise Financials includes multi-GAAP support, such as International Financial Reporting Standards (IFRS), as well as extensive local tax, reporting and segregation of duties controls.

 

7

 

QAD DynaSys Demand and Supply Chain Planning

 

Our division QAD DynaSys develops, markets and supports our Demand and Supply Chain Planning (DSCP) solution. The QAD DynaSys DSCP technology is a comprehensive end-to-end digital supply chain planning solution that holistically optimizes all material and data flows across the supply chain. This supports global manufacturers to manage all procurement, manufacturing, inventory, distribution, and sales activities in a single in-memory data model (“DynaSys Single Click Collaborative” platform) that provides rapid business simulation.

 

QAD DynaSys customers use DSCP to improve and protect market share by synchronizing demand & supply plans ensuring optimal product availability. This improves revenue by minimizing lost sales and reducing working capital by eliminating slow & obsolete inventory. QAD DynaSys customers benefit from increased supply chain visibility and a rapid response to unforeseen events that enables supply chain resiliency.

 

QAD DynaSys uses artificial intelligence to perform a range of digital planning operations including automated data cleansing, intelligent demand clustering, and forecasting products with complex sales behavior.  Combining machine learning with advanced analytics and real-time data connectivity in a single collaborative cloud-based solution with a digital user-experience provides strong market differentiation.

 

QAD DynaSys DSCP solutions are used by organizations across many industries including food and beverage, life sciences, consumer products, automotive, industrial, distribution & wholesale and are sold to our existing customers and to the general market through our DynaSys division.   

 

QAD Precision Global Trade and Transportation Management

 

QAD develops and markets global trade and transportation solutions directly to our existing customers and to the general market through our Precision division.  QAD Precision Global Trade and Transportation Management (GTM&TMS) provides automated rating, routing, auditing and complete management of multi-modal shipping. It also automates the generation and filing of complex customs documentation, qualifies products for potential duty programs, and includes license management and restricted party screening to mitigate the risk of trade regulation violations. The solution allows companies to manage and optimize a network of carriers for shipments including parcel, less than truckload, full truckload and container shipments whether using land, sea or air carriers.

 

Analytics

 

QAD’s embedded analytics and business intelligence provide decision makers and company stakeholders with key data to measure performance against company and strategic goals. QAD’s analytics solution helps customers perform complex analyses, make informed decisions and improve performance management by highlighting areas that need improvement and enabling drill down to source data. The analytics suite consists of multiple analysis and data extraction tools all working in harmony to provide user-defined analysis such as consolidated reporting or reporting by geography, product line or cost center.

 

The solution consists of Reporting Framework, which provides powerful, yet simple, reporting and real-time visibility with ad hoc inquiries; Operational Metrics, which enables companies to define and monitor key performance indicators; and Business Intelligence, which allows for dynamic analysis and trend reporting across multiple data sources. Customers can also access Business Intelligence using mobile devices, which allows users to view, filter and sort all data accessible to browses using mobile devices.

 

Action Centers are designed to provide data and information users need in order to work efficiently in a straightforward visual format. Users can drill down into more detail or take quick action based on the insight the solution provides. Action Centers provide built-in analytics and operational metrics as well as more than 400 browses and nearly 450 reports. All information can be accessed from a mobile device to support users who are not at their desk or in the office.

 

Integration

 

QAD Adaptive Application uses a service-oriented architecture, allowing customers to integrate with non-QAD business applications. Through the Q-Xtend integration toolset, QAD supports application interoperability using open standards, comprehensive APIs and event management. QAD Boomi AtomSphere, based on Dell Boomi, provides an integration platform for cloud and on-premises application, data and process integration. QAD Cloud EDI provides “as a service” EDI translation and communication services, ensuring manufacturers have a scalable solution that can be implemented rapidly and that standardizes EDI across the enterprise. QAD EDI eCommerce offers a complete on-premises EDI solution that simplifies electronic data interchange with trading partners across the value chain. Cloud-based QAD eInvoicing supports the exchange of digital invoices between supplier and customer, providing for paperless invoicing in 54 countries and helping manufacturers meet growing digital tax compliance requirements.

 

Internationalization

 

QAD supports companies that manufacture and distribute their products around the world. When a global company expands its operations, it often needs to accommodate local languages, local accounting standards and local business practices. Operating in different countries also requires access to specific local software, such as that used to interface to banks in their country of operation. QAD supports the requirements of over 60 different countries with its internationalization capabilities.

 

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Customer Support and Product Updates

 

Customer support services and product enhancements are provided to our cloud customers as part of their monthly subscription fee and to on-premises customers via our maintenance offering. Customer support services include Internet and telephone access to technical support personnel located in our global support centers. Through our support services, we provide the resources, tools and expertise needed to maximize the use of QAD Adaptive Applications. Our cloud customers and on-premises customers who are current on maintenance are also entitled to receive product upgrades and enhancements on a when-and-if available basis.

 

Our online support site provides access to an extensive knowledge database, online training materials, a virtual training environment, remote diagnostics and our software download center, called QAD Store. Our support professionals in our global support centers focus on quickly resolving customers’ issues, maintaining optimal system performance and providing uninterrupted service for complete customer satisfaction.

 

Our cloud environment is managed by QAD with infrastructure operated by us, but located within third-party data center facilities or from cloud computing platform providers. QAD monitors security and maintains the operational infrastructure of the customer environments located within the third party cloud computing platform providers. QAD resources, located primarily in the U.S. and India, manage the day-to-day operations of our cloud computing solutions and act as the control point for all activities including monitoring system performance, application management, service level management, disaster recovery, technical upgrades and customer engagement. Each of these managed processes are based on Information Technology Infrastructure Library (ITIL) standards and governed by ISO compliance.

 

QAD Global Services

 

QAD offers professional services including consulting, deployment, training, technical, development and integration to facilitate adoption of our Adaptive Applications solution and enable customer success.

 

QAD Global Services comprises approximately 350 consultants located throughout the world, augmented by a growing global network of certified partners. Our consulting ecosystem spans 60 countries. QAD consultants and partners are trained on our best practice implementation methodologies and have obtained certifications of proficiency in many areas. We offer a complete portfolio of services, delivered to consistent standards across the globe. Working in tandem with our partners, we support national and global projects on behalf of QAD customers.

 

QAD Global Services engages with our customers across the entire enterprise application life cycle through planning, design, implementation and post go-live support. Whether in the cloud or on-premises, our Global Services group assists our customers with initial deployments, upgrades to more current product versions, migration of on-premises deployments to the cloud, conversion and transfer of historical data, ongoing system and process optimization, and user training and education. In addition, through our ecosystem of certified partners, QAD can offer our customers these activities at scale. We also offer augmented resources through our ecosystem to assist with typical site-based implementation activities such as data cleansing, functional support, training and user acceptance testing.

 

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In support of QAD’s vision of all customers becoming Adaptive Manufacturing Enterprises, QAD has developed a framework of Key Performance Indicators (KPIs) used by QAD Global Services to measure pre- and post-implementation performance of business processes and aid in the diagnosis of opportunities for continuous improvement. The QAD KPI framework is available to all customers and is monitored using the QAD analytics suite.

 

QAD’s principal methodology for deployment of solutions is called QAD Easy On Boarding (EOB). EOB has been designed to make deployment of QAD solutions on-premises or in the cloud standardized and efficient. EOB features predefined industry process models and work instructions built into the products themselves as well as implementation guides and scripts, all based on our experience with best practice standards, resulting in greater out of the box fit. With EOB, implementation can be faster than more traditional approaches.

   

QAD Global Services focuses on assisting customers with the following activities:

 

Implementations – QAD Global Services supports customers with the initial implementation of QAD Adaptive Applications. QAD Global Services has expertise in global implementations, harnessing the entire QAD Global Services ecosystem to provide local or remote support to meet customer requirements. QAD Global Services deploys our applications both on-premises and in the cloud. In addition, QAD Global Services has the experience to assist new customers with migration from other enterprise application systems. This service includes data conversions as well as process design change management.

 

Upgrades – QAD Global Services assists customers in the process of upgrading their QAD Adaptive Applications to the latest version, accelerating time to benefit, increasing new functionality and applying usability best practices.

 

Conversions – QAD Global Services employs a standardized process for converting from on-premises solutions to the cloud.

 

Integration – QAD Global Services has the expertise and experience to quickly integrate QAD solutions with other systems.

 

Systems Management – QAD Global Services delivers a range of services to support the technical management of systems and performance monitoring for those customers who choose on-premises deployment.

 

Training and Education – QAD Global Services offers a full range of services leveraging QAD’s learning management system. Users can access multimedia training on all QAD offerings and take advantage of pre-defined learning plans for all of the roles that QAD users typically perform. Global Services also provides customized courses that are taught on-site to meet specific customer needs and are available to end users, IT professionals, department managers, partners and consultants.

 

Extended Solution Support – QAD Global Services is available to support interfaces, Automation Solutions, any customer specific requests to tailor applications and EDI solutions through our Extended Solution Support Services.

 

Quality Assurance – QAD Global Services offers Quality Assurance services to review our customers’ independent or third- party managed upgrades and implementations.

 

QAD Global Services’ network of employees, consultants and partners knows QAD software best. They diagnose issues preventing businesses from running efficiently and prescribe steps to maximize the benefits of QAD Adaptive ERP. These QAD experts offer what outside consultants cannot - a deep understanding of the industries in which our customers operate and proven experience helping customers leverage our software to become Adaptive Manufacturing Enterprises. QAD Global Services and its certified ecosystem of partners offer a full range of program management, project management, industry consulting and technical services certified in our products and methodologies.

 

OUR GROWTH STRATEGY

 

QAD believes there are substantial growth opportunities in its cloud business. Global manufacturers are facing unprecedented levels of disruption and turbulence. Responding to these changes requires a level of agility that legacy ERP solutions fail to deliver. QAD's Adaptive ERP offers greater fit out of the box, unparalleled speed of deployment, and the ongoing ability to easily adapt and extend systems to meet the challenge of accelerating change. As a market leading solution for agile ERP, we expect to see a growing number of manufacturers moving from their legacy providers and turning to QAD to help them thrive in the digital manufacturing era. Additionally, we also expect to see continued conversions of our on-premises customers to the cloud. 

 

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We invest for future growth by focusing on the following key priorities:

 

Dominate disrupted markets for new cloud customer acquisitions. The accelerating pace of change in our customers’ markets has created a disconnect between their business requirements and what their systems are able to support. Legacy ERP systems were not designed to support today’s rapid pace of change. The QAD Enterprise Platform was designed to provide greater fit and flexibility to easily meet tomorrow’s requirements. As such, disruption in our customers’ markets becomes a compelling reason for changing their ERP systems and one that we are well positioned to address. We are targeting sectors within our primary verticals with the greatest disruption and actively pursuing new customers where we can provide the best fit.  We are investing in sales and marketing to increase new customer acquisitions. 

 

Grow our cloud business and expand our footprint within existing customers. We believe there is substantial opportunity to grow our cloud-based enterprise solutions within our global manufacturing customer base. Our cloud solutions allow our customers to focus on their products and services without the distraction of administering their enterprise applications or maintaining their infrastructure. With over 300,000 active users of our on-premises and cloud solutions, of which 53,000 are cloud users, we have many opportunities to increase cloud revenue across our existing installed base by converting our on-premises customers to our cloud-based solution, selling additional modules and users to our existing cloud customers, extending our existing offerings and reducing customer attrition by delivering an excellent customer experience.

 

Continuous product development and rapid response to change.  Manufacturers are facing a swiftly changing business environment fueled by exponential growth in underlying Industry 4.0 technologies such as Internet of Things (IoT), Machine Learning (ML), Artificial Intelligence (AI), Additive Manufacturing (3D Printing), Blockchain, Augmented Reality, and Predictive Analytics. We believe delivering a focused, flexible ERP system will be increasingly attractive to pragmatic manufacturers seeking a long-term fit of their business systems in support of their strategy in changing markets. We are committed to continuous investment in product development, our platform and advanced technologies to ensure our products have the necessary capabilities to meet the needs of our global customers and enhance our competitive position in the vertical markets we serve.

 

Focus on global manufacturing and leverage expertise within key vertical markets. Many manufacturers operate globally, requiring a provider that can tailor solutions to the unique needs of their markets, deliver local and global services resources and support local languages. Solutions must be cost effective and easy to implement and use. Our solutions offer many benefits to customers with global operations, including capabilities that support operations in multiple geographies with a variety of languages and currencies, as well as compliance with complex local regulations and business practices. Our existing global footprint is a key leverage point for meeting these needs by utilizing offices, personnel and partnerships in many countries around the world. We also employ people with specific knowledge and experience in the industries in which our customers operate. We provide our solutions to 22 sectors across six vertical manufacturing markets; and we actively participate in several leading industry associations. Our industry knowledge continues to deepen through regular interaction with our customers. This collective experience allows QAD to develop solutions with specific capabilities that address our customers’ needs in the industries they serve.

 

Expand our global partner ecosystem. We currently sell a majority of our software solutions and services directly. We also sell our software solutions and services indirectly via sales agents, distributors and services partners. We are focused on expanding our indirect sales channels to accelerate our reach into new markets and drive new customer growth. We are focused on expanding our services partner network to strengthen our ability to support our customers globally and to have the ability to quickly expand or contract as demand for services fluctuates.

 

TECHNOLOGY

 

QAD Adaptive Applications are designed to achieve our vision for global manufacturing companies to effectively run their business in a rapid, agile and effective manner.  This is achieved by providing an agile platform to meet new and developing requirements by combining advanced digital technologies and proven industry best practices that emerge from business disruptors.  We have chosen the best technologies to achieve our vision, focusing on user experience, integration, business services, analytics, databases and deployment flexibility. We embrace ‘openness’ as a core principle of our designs, aiming to allow customers freedom of choice of devices and open connectivity with other systems. The core of QAD’s Adaptive Applications is built upon a service based architecture, which allows application components to communicate with one another through industry-standard messaging techniques such as Representation State Transfer (REST) services. This allows customers to exploit the full benefit of QAD’s open architecture for their businesses.

 

QAD Adaptive Applications core systems are built upon the QAD Enterprise Platform. The QAD Enterprise Platform is a micro-services architecture with the technologies and development tools needed to build a world class user experience (UX) with comprehensive functionality for global manufacturing companies.  This functionality is encapsulated into Apps that can be upgraded independently of each other as well as extended by customers.  Apps can be accessed securely over the Internet via a web browser or mobile devices (iOS and Android). The platform provides many advanced services to Apps including an App builder, security, integration, cloud support, analytics, mobile, collaboration and a world-class UX.  The platform supports UX, code, data and cloud flexibility to adapt readily to the ever-changing world of technology.  The UX is built using the latest open web technologies to support a rich HTML5 user interface. Business logic can be implemented in JavaScript via the more structured Type Script, Oracle’s Java or Progress Software Corporation’s OpenEdge language. Databases include MySQL, Progress OpenEdge and Cassandra data lake.

 

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QAD’s adaptive architecture provides significant flexibility for global companies in deploying QAD Adaptive Applications. Our adaptive architecture allows companies to separate the legal structure of their business from physical operating locations or to separate both of these from the software instances and computer hardware that support them. With QAD adaptive architecture, customers can choose which sites are a part of which companies, which sites are supported on any instance of the application, or which sites operate as one instance. Customers can also choose centralized, decentralized or hybrid computing architectures with parts of their enterprise running from both central resources and local resources.

 

QAD combines our technologies to provide a comprehensive cloud solution for our customers. Our cloud architecture encompasses infrastructure provisioning and application deployment, management, monitoring and security; providing a world-class development operations practice built around ITIL standards. QAD’s cloud infrastructure operates on a platform that enables QAD to seamlessly deploy customer systems to one of a number of global cloud infrastructure providers as part of the QAD Cloud offering.  Our cloud delivery centers are certified under the ISO 9001:2015 standard for quality management, the ISO 20000:2018 standard for service management (SMS), the ISO 27001:2013 standard for information security management (ISMS), the FDA 21 CFR Part 11 requirements for electronic records and signatures, and the SSAE 18 (SOC I-Type II) requirements for reporting and compliance controls.

 

Cloud deployments for QAD Adaptive ERP are designed to be delivered as single tenant deployments. This decision was made based on our customers’ requirements for a mission critical system that they control. Providing customers with control over when to apply patches and upgrades reduces downtime and aligns to their business cycles. It also reduces the substantial costs associated with validation requirements in Life Sciences.

 

QAD takes a pragmatic approach to technology that is use case focused. We engage with our customers through experimentation in the QAD Labs. QAD Labs is a combination of people, technology and passion for addressing the challenges of manufacturing planning and operations. The guiding force behind QAD Labs is the collaboration between QAD and our customers. This collaboration involves experimenting with advanced technologies and new processes to address legacy or emerging challenges as well as industry disruption. The experimentation is not hindered by the large budgeting cycles of major projects. By design, the QAD Labs approach allows for rapid application, rapid evaluation and strategic pivots to build on success or investigate alternatives.

 

This experimentation can be aligned with typical Digital Transformation activities and associated technologies such as IoT, Machine Learning, Robotic Process Automation and Data Lakes. Alternatively, the initiative can be associated with innovation to solve long-term problems with the explosion of emerging new technologies. The pilot projects include integrated shop floor connectivity, traceability and robotic process automation.

 

PRODUCT DEVELOPMENT

 

We continued to see our customers’ businesses evolve during fiscal 2020 as they work through the geopolitical uncertainty facing global manufacturing. With continued pressure on supply chains caused by disruptive import tariffs, our customers have had to adapt their business models to deal with supply shortages and increased costs. We maintain a global research and development (R&D) organization that provides new product functionality to the market on a semiannual basis, which enables us to respond to industry disruptions and regulatory changes.

 

The transition from selling on-premises licenses to selling cloud solutions has continued within the enterprise software industry. With cloud solutions, customers are expecting that their software is kept up to date as part of the offering and that security is continuously being verified and updated to guard against security breaches. In fiscal 2020, we released a major upgrade to our software suite that delivered supply chain efficiencies, deeper integration into shop floor operations and deeper reporting of manufacturing activities. Our latest agile manufacturing module and production planning and scheduling functions are now integrated deeply into the shop floor execution and reporting processes.

 

During fiscal 2020, we introduced our latest release of QAD Adaptive Applications and its core ERP solution, which runs on the QAD Enterprise Platform using the Adaptive User Experience (UX).  This latest release further enhances our customers’ ability to intelligently adopt and boost adaptive manufacturing capabilities. Adaptive Manufacturing Enterprises can effectively address the increasing pace of change and disruption companies face today. QAD’s R&D team has taken great pride in delivering new capabilities that allow manufacturers to better address tomorrow’s challenges and rapidly respond to disruption in the marketplace. The Adaptive User Experience has also been implemented in the QAD Supplier Portal, QAD Dynasys Demand Supply Chain Planning and QAD Precision Global Trade & Transportation Execution solutions. The QAD Enterprise Platform has added capabilities that allow users and developers to securely create extensions or applications with little or no coding. We have improved the developer life cycle when creating new applications with added capabilities around type scripting and formula processing. Additionally, we have improved error handling to better address data retrieval issues, enhance data access and usage of the built in REST API’s.

 

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We dedicate considerable technical and financial resources to R&D to continually enhance and expand our product suite, including through our internationalization program focused on legal compliance for our global customers operating across borders. As we ended fiscal 2020, we were supporting our customers in 68 countries with a single software solution. We continue to see a global trend toward electronic invoicing and registration of shipments and invoices with government agencies to prevent falsification and tax evasion. Spain, Mexico and Italy all introduced legislation that required all invoices to be registered with the government. All of our customers in these countries installed our Electronic Invoicing solution in fiscal 2020 in order to meet the new government regulations. We also see a continued tightening of tax legislation around the world. India introduced a new Value Added Tax (VAT) process that required all companies to file VAT during fiscal 2020. In fiscal 2020, the Indian government added electronic invoicing in their requirements. We continue to support our customers through these changes without interruption to their businesses. We see government regulations changing continuously across the globe. Our goal is to continue to provide our customers with software that assists them in meeting the legal requirements of the countries in which they do business.

 

Our R&D organization is comprised of 455 employees located in offices in the United States, India, China, Ireland, Australia, France, Belgium, Spain, Brazil, Great Britain, Indonesia and Poland. Our R&D expenses totaled $54.7 million, $54.0 million and $47.7 million in fiscal years 2020, 2019 and 2018, respectively. Our software is primarily developed internally; however, we also use independent firms and contractors to perform some of our product development activities when we require additional resources or specific skills or knowledge. All outside development is managed by our internal R&D organization. As needed, we acquire products or technology developed by others by purchasing or licensing products and technology from third parties. We continually review these investments in an effort to ensure that we are generating sufficient revenue or gaining enough competitive advantage to justify their costs. We routinely translate our product suite into fourteen languages and through our internationalization program we support mandatory governmental regulations and reporting requirements for 68 countries. This is accomplished through a single offering for our customers in the cloud or on-premises, allowing them to run their businesses using a consistent core business model with the deployment model of their choice. Our development focus is on cloud deployments first. Hence, some functionality that is available to our cloud customers may not be available to our on-premises customers or may have an additional fee associated with it.  

 

We plan to continue to manage significant product development operations globally over the next several years. We believe that our ability to conduct research and development at various locations throughout the world allows us to optimize product development at lower costs and integrate local market knowledge into our development activities. We continually assess the significant costs and challenges, including intellectual property protection, against the benefits of our international development activities. 

 

DIRECT AND INDIRECT SALES

 

QAD sells its products and services through direct and indirect sales channels located throughout the regions of North America, Latin America, EMEA and Asia Pacific. Each region leverages global standards and systems to enhance consistency when interacting with global customers. Additionally, we have a global account team, and strategic business  teams focused on sectors facing the greatest level of disruption where we can provide the greatest product fit.

 

Our direct sales organization includes approximately 65 commissioned sales people. Supporting our commissioned sales people are vertical experts, business development representatives, business consultants, pre-sales employees responsible for leading demonstrations of our software solutions and customer service representatives supporting our existing customers. Incentive pay is a significant portion of the total compensation package for our sales staff. We continually align our sales organization and business strategies with market conditions to maintain an effective sales process. We cultivate the industries we serve within each territory through marketing, local product development and sales training.

 

Our indirect sales channel consists of approximately 50 distributors and sales agents worldwide. We do not grant exclusive rights to any of our distributors or sales agents. Our distributors and sales agents primarily sell independently to companies within their geographic territory but may also work in conjunction with our direct sales organization. We also identify global sales opportunities through our relationships with implementation service providers, hardware vendors and other third parties.

 

MARKETING

 

Our marketing strategy is to differentiate our offering by focusing on our role in enabling manufacturers to overcome the greatest challenges they face (change and uncertainty) and to support them in achieving the vision of the Adaptive Manufacturing Enterprise. We do this by highlighting QAD’s Next Generation Adaptive ERP and its five rapid response technologies that deliver greater fit for today and the flexibility to meet tomorrow’s business requirements.

 

We are targeting sectors within our primary verticals with the greatest disruption and where we can provide the best fit; those companies with the greatest need whom we can help the most.

 

Our main marketing objectives are to leverage the measurable success in business outcomes our customers have achieved and highlight hidden costs prospects may face with legacy ERP to increase awareness and drive leads in these target sectors. We do this by openly and consistently communicating with QAD customers, prospects, partners, investors and other key audiences. Our primary marketing activities include:

 

 

Account based marketing (ABM) for targeting, assessing buying intent, and display advertising;

 

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Press and industry analyst relations to garner third-party validation and generate positive coverage for our company offerings and value proposition;

 

User conferences and events, such as Explore, as well as participation in other industry events, to create customer and prospect awareness;

 

Content marketing and engagement on social channels like Facebook, Twitter, LinkedIn and YouTube;

 

Search engine optimization;

 

Web site development to engage and educate prospects and generate interest through a deep understanding of the challenges manufactures face and how our solutions can help to overcome them;

 

Case studies, white papers, and marketing collateral;

 

Customer testimonials, references, and referrals; and

 

Sales tools and field marketing events to enable our sales organization to more effectively convert leads into customers.

 

We recognize the changing buying dynamics and are focused on engaging with prospects early in the sales cycle in order to help set the buying criteria and specifications in a way that uniquely leads to QAD. We seek to accelerate prospects through the buying journey by demonstrating the value of our products, answering questions, and removing roadblocks.

 

Corporate Marketing supports our regional and strategic business marketing teams, working closely with their respective business development and sales teams.

 

COMPETITION

 

Our business is affected by strong competition from both enterprise software application vendors and cloud computing application services providers. The markets for our offerings are rapidly evolving, highly competitive and are subject to changing technology, shifting customer needs and frequent introductions of new applications. Our customers demand greater performance and reliability with lower complexity. Fit, cost, speed, and flexibility are primary criteria in our customers’ decision-making processes.

 

We compete with large, well-established enterprise application vendors, such as SAP, Oracle and Infor, among others, who hold significant market share in the traditional ERP marketplace. These companies have considerable financial resources and name recognition; and have established broad market solutions by developing applications targeted at many industries, not just manufacturing. Internationally, we face competition from local companies, as well as the large enterprise application competitors, many of which have products tailored for those local markets.

 

Most enterprise application vendors today have some focus on cloud solutions, in addition to on-premises sales, which creates an environment in which we face competition from a variety of vendors that address one or more of our applications. As a result, our cloud solutions compete with both large enterprise software vendors and cloud computing application service providers. In addition, other vendors that provide services in different markets may develop solutions in our target markets and some potential customers may elect to develop their own internal solutions.

 

We believe the key competitive factors in our markets are:

 

 

Solution fit, breadth and functionality

 

Flexibility, integration, security and scalability

 

Customer satisfaction

 

Speed and ease of deployment and use of applications

  Minimal customizations needed
 

Total cost of ownership

 

Performance and reliability

  Speed and ease of time version upgrades
 

Technological innovation and ability to respond to customer needs rapidly

 

Financial resources and

 

Reputation of the vendor

 

We believe that we compete favorably on the basis of these factors. Our Adaptive ERP and Enterprise Platform architecture facilitate rapid deployment, ease of upgrades and eliminate the need for majority significant amount of customizations. To further our market success, we must continue to respond promptly and effectively to technological change and competitors’ innovations. Our ability to remain competitive will depend on our efforts in the areas of product development and sales, services and support operations.

 

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EMPLOYEES

 

As of January 31, 2020, we had approximately 1,920 full-time employees, including 845 in support, subscription and professional services, 445 in research and development, 360 in sales and marketing and 270 in administration. Generally, our employees are not represented by collective bargaining agreements. However, certain employees in our Netherlands, France and Italy subsidiaries are represented by statutory works councils as required under local law. Employees of our Brazilian subsidiary are represented by a collective bargaining agreement with the Data Processing Union.

 

INTELLECTUAL PROPERTY

 

We rely on a combination of trademark, copyright, trade secret and patent laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brands and we maintain programs to protect and grow our rights. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, services, documentation and other proprietary information.

 

SEASONALITY

 

Our fourth quarter has historically been our strongest quarter for new business and maintenance renewals. For a more detailed discussion, see the “Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow” discussion in Management’s Discussion and Analysis.

 

SEGMENT REPORTING

 

We operate in a single reporting segment. Geographical financial information for fiscal years 2020, 2019 and 2018 is presented in Note 13 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. 

 

AVAILABLE INFORMATION

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.qad.com, as soon as reasonably practicable after such reports have been electronically filed or otherwise furnished to the Securities and Exchange Commission. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the ‘Investor Relations’ sections. Accordingly, investors should monitor such portions of our website and subscribe to our RSS feeds and email alerts per the “Investor Tools” instructions, in addition to following our press releases, SEC filings and public conference calls and webcasts. We are not including the information contained on our website as part of, or incorporating it by reference into, this annual report on Form 10-K.

 

ITEM 1A. RISK FACTORS

 

The environment in which we operate involves significant risks and is subject to factors beyond our control. You should consider the risk factors described below before investing in our stock as such risks may have a material adverse effect on our business, results of operations and financial condition and could cause the price of our stock to decline. Please note that the risk factors described below are not exhaustive.

 

COVID-19 will adversely affect our business and results of operations.

 

We expect that the global emergence of COVID-19 (novel coronavirus) will negatively impact our business and financial results in fiscal 2021 and possibly in future years depending on the length of the pandemic and its economic repercussions. As the virus has spread, it has significantly impacted the health and economic environment around the world. Our customers are global manufacturers and the closure of manufacturing sites and country borders, and the increase in unemployment are having and will continue to have negative implications on demand for goods, the supply chain, production of goods and transportation.

 

In the first quarter of fiscal 2021, we have seen professional services projects delayed as customers put projects on hold or slowed projects by extending go-lives to later dates. While we have the ability to deliver most of our professional services remotely, some of our professional services are more effective when performed directly with the customer onsite. In addition, some professional services relate to training and require the availability of the customer. We expect a negative impact on our professional services revenue and margins in the first quarter of fiscal 2021 and throughout the fiscal 2021 year. The impact to our manufacturing customers depends upon many factors. Some manufacturing customers are extremely busy producing record amounts; other customers are unaffected, are adjusting the products they make to those in high demand or are protected by government subsidies; and some customers are negatively impacted because demand for their goods has declined, transportation and supply chain problems exist or they are not able to keep their manufacturing facility open for production. Our customers who are negatively impacted by the virus have requested and may continue to request changes to payment terms.  They may also be unable to pay their receivables, not renew cloud services or maintenance at the same amounts, defer new purchases of cloud services, professional services and licenses or go out of business. Any of these negative impacts to our customers will negatively impact our business, results of operations, overall financial performance and liquidity.  While our revenue and earnings are relatively predictable as a result of our subscription and maintenance revenue which is recurring in nature, the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. 

 

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We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications.  We deliver our products under a SaaS subscription model that allows us to deliver our cloud services remotely and support our customers at all times and around the globe, so they receive uninterrupted cloud services and support from QAD during these challenging times.  In the first quarter of fiscal 2021, we have demonstrated the ability to support our customers remotely while maintaining our service level agreements.  We do not anticipate significant issues due to the ability of our employees to work effectively from remote locations but future disruptions in our ability to deliver our cloud services to our customers could arise and impact our ability to meet our service level agreements.  Such disruptions would negatively impact our customer’s business, may trigger fees owed to customers and ultimately negatively impact our revenue, customer satisfaction and ultimately customer retention.

       

Our sales organization is meeting with customers and prospects virtually and performing demonstrations of our software services virtually. The virus may have an impact on our ability to close new cloud business and generate license revenue if customers delay purchasing decisions, don’t have time to meet with us or go out of business altogether.

 

The extent of the impact of the COVID-19 pandemic on our future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our customer, employee and industry events, and effect on our vendors.

 

Risks associated with our cloud and subscription service offerings

 

Defects and disruptions in our services could diminish demand for our services and subject us to liability.

 

Our cloud service offerings are complex and incorporate a variety of hardware, network infrastructure and proprietary and third-party software, and may have errors or defects that could result in unanticipated downtime and disruptions for our customers and harm to our reputation and our business. We have from time to time found defects in our services and new defects may be discovered in the future, especially in connection with the integration of new technologies and the introduction of new services. As a result, we could lose future sales and existing customers could elect to cancel or make warranty or other claims against us and potentially expose us to the expense and risk of litigation.

 

Our revenue and profitability will be adversely affected if we do not properly manage our cloud service offerings.

 

We expend significant resources to improve the reliability and security of our cloud offerings and the cost of these investments could reduce our revenue and profitability. The pricing and other terms of some of our cloud agreements require us to make estimates and assumptions at the time we enter into these contracts that could differ from actual results. Early termination, increased costs or unanticipated delays could have an adverse effect on our profit margin and generate negative cash flow. Further, if we experience delays in implementing new cloud customers (whether due to product defects, system complexities or other factors) then customers may request discounts or other concessions, delay the deployment of additional users and sites, or decide to not go live and cancel their subscription after the initial term; all of which could adversely affect our revenue growth. If we fail to meet our system availability commitments or other customer obligations then we may be required to give credits or refund fees, and we may be subject to litigation and loss of customer business. For example, if we were to miss our system availability commitments then we are obligated under our standard customer contracts to issue one day’s credit against future fees for each hour of system unavailability.

 

Continued growth could strain our personnel resources and infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.

 

We continue to experience significant growth in our customer base and personnel, which has placed a strain on our management, administrative, operational and financial infrastructure. We anticipate that additional investments or modifications and enhancements to our existing infrastructures will be required to scale our operations and increase productivity, to address the needs of our customers, to further develop and enhance our services, and to scale with our overall growth. Our success will depend in part upon our ability to manage our projected growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed, and continue to improve our operational, financial and management controls, our reporting systems and procedures. We may also experience a decline in our revenue growth rate as our revenues increase to higher levels. If we fail to successfully scale our operations and increase productivity, we may be unable to execute our business plan.   

 

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Our subscription retention and net dollar retention rates are dependent upon a number of factors that may impact our ability to accurately predict growth in our cloud business.

 

Our cloud customers typically enter into subscription agreements with an initial term of 24 to 60 months. Our customers have no obligation to renew their subscriptions after the expiration of their initial subscription period, and some customers may elect (for a variety of reasons, including a business downturn) not to renew, or may elect to renew a lower number of users or modules. Growth in our cloud business may be affected by our inability to maintain high retention rates and sell additional features and services to our current customers, which could depend on a number of factors, including customers’ satisfaction with our products and services, the prices of our offerings and general economic conditions. Growth of our cloud business is also contingent on the growth in our customers’ businesses and downturns in our customers’ businesses will negatively impact our revenue as customers lower the number of users.  Specifically, with the COVID-19 pandemic, customers may renew their cloud agreements with a lower number of users or choose to cancel some of the functionality they are using. We cannot provide assurance that our subscriptions will be renewed at the same or higher levels of service and functionality, for the same number of users or for the same duration of time, if at all, or that we will be able to accurately predict future customer retention and net dollar retention rates. If our customers do not renew their subscriptions or if they renew on terms less favorable to us, the rate at which our cloud business grows may decline and our revenue may be reduced.

  

We rely on third-party hosting and other service providers.

 

We currently serve our cloud customers from third-party data center hosting facilities located in the United States and other countries. We do not control the operations of any of these facilities, and they may be subject to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures, public health issues such as the COVID-19 pandemic and similar events. They may also be subject to breaches of computer hardware and software security, break-ins, sabotage, intentional acts of vandalism and similar misconduct. And while we rely on service level agreements with these vendors, if they do not properly maintain their infrastructure or if they incur unplanned outages, our customers may experience performance issues or unexpected interruptions and we will not meet our service level agreement terms with our customers. Despite precautions taken at these facilities, the occurrence of a natural disaster or pandemic or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with our disaster recovery precautions, our services could be interrupted. Any loss or interruption of these services could result in us not meeting our service level agreements with our customers which would significantly increase our expenses, reduce our ability to generate revenue and/or result in errors or a failure of our services which could adversely affect our business. These vendor services may not continue to be available at reasonable prices or on commercially reasonable terms, or at all. Additionally, our service level agreements with our customers are not the same terms as our service level agreements with our hosting vendors. Our agreements with our customers are generally more restrictive and result in higher fees paid to customers for unplanned outages than credits we may receive from our hosting vendors.

 

We may be exposed to liability and loss from cyber security breaches.

 

Our cloud services involve the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, resulting in litigation and possible liability. Security breaches may also include “denial-of-service” attacks, which can potentially disrupt our operations and our customers’ operations. Security measures may be breached in numerous ways, such as remote or on-site break-ins by computer hackers, disgruntled employees or employee error during transfer of data to additional data centers or at any time, and result in unauthorized access to our own and our customers’ data, intellectual property and other confidential business information. Additionally, third parties may attempt to induce employees or customers into disclosing sensitive information such as usernames, passwords or other information in order to gain access to our own and our customers’ data, intellectual property and other confidential business information. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A security breach could cause a loss of confidence in the security of our services, damage our reputation, disrupt our business, create legal liability and cause severe and potentially irreparable impact to our business. In the normal course of business, we are and have been the target of malicious cyber-attack attempts and have experienced other security incidents. To date, such identified security events have not had a material impact on our business operations or financial results, but there can be no assurance that future cyber-attacks will not have a material adverse impact.

 

Our solutions can be used to collect and store personal information of our customers’ employees or customers, and therefore privacy concerns and governmental regulations could result in additional cost and liability to us or inhibit sales of our solutions.

 

Regulatory focus on privacy issues continues to increase and worldwide laws and regulations concerning the handling of personal information are expanding and becoming more complex. Many federal, state and foreign government bodies and agencies have adopted, or are considering adopting, laws and regulations regarding the collection, use, disclosure and retention of personal information. The European Union (EU) and the United States entered into a new framework (known as the Privacy Shield) in July 2016 to provide a mechanism for companies to transfer data from EU member states to the U.S. The Privacy Shield and other data transfer mechanisms are subject to legal challenge, which generates uncertainty about the legal basis for data transfers to the U.S. or interruption of such transfers. In the event a court blocks transfers to or from a particular jurisdiction on the basis that transfer mechanisms are not legally adequate, this could cause operational interruptions, liabilities and reputational harm. These and other requirements could increase the cost of compliance for us and our customers, restrict our and our customers’ ability to store and process data, negatively impact our ability to offer our solutions in certain locations and limit our customers' ability to deploy our solutions globally. These consequences may be more significant in countries with legislation that requires data to remain localized “in country”, as this could require us or our customers to establish data storage in other jurisdictions or apply local operational processes that are difficult and costly to integrate with global processes.

 

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If we fail to comply with such laws and regulations, we may be subject to significant fines, penalties or liabilities for noncompliance, thereby harming our business.  For example, the European Union’s General Data Protection Regulation (GDPR), establishes requirements regarding the handling of personal data. Non-compliance with the GDPR may result in monetary penalties of up to 4% of worldwide revenue. Further, the United Kingdom’s departure from the European Union has created uncertainty with regard to the requirements for data transfers between the United Kingdom and the EU and other jurisdictions. In addition, domestic data privacy laws, such as the California Consumer Privacy Act (CCPA), continue to evolve and could expose us to further regulatory burdens.

 

Risks associated with rapid technological change and complexity

 

The market for our products and services is characterized by rapid technological change.

 

Customer requirements for products can change rapidly as a result of innovation or change within the computer hardware and software industries, the introduction of new products and technologies and changes to industry standards. Our future success, including our cloud service offerings, will depend upon our ability to continue to enhance our current product line and to develop and introduce new products and services that keep pace with technological developments, satisfy increasingly sophisticated customer requirements, keep pace with industry and compliance standards and achieve market acceptance. Our failure to successfully develop or acquire, and market, product enhancements or new products could have a material adverse effect on our business. Despite our significant investments in research and development, we may not realize significant new revenue from these investments for several years, if at all.

 

New software releases and enhancements may adversely affect our subscription and license sales.

 

The actual or anticipated introduction of new products, technologies and industry standards can render existing products obsolete or unmarketable or result in delays in the purchase of those products. Significant delays in launching new products may also jeopardize our ability to compete. If we fail to anticipate or respond to developments in technology or customer requirements, have significant delays in the introduction of new products or fail to maintain overall customer satisfaction, this could have a material adverse effect on our business.

 

Services engagements are complex and pose material risks.

 

Services engagements may involve complex technological challenges, including those related to customer customization requests and our cloud environments, and such challenges demand a significant number of specialized technical resources. Our failure to successfully address these issues could have a material adverse effect on our business.

 

Changes in laws and regulations may negatively impact our business.

 

Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations that affect our business and the industries that we serve, including life sciences. Changes in these laws or regulations could require us to modify our offerings, increase the cost of supporting those offerings, limit our customers’ adoption of those offerings, and increase the length and cost of sales cycles. Such events can have an adverse effect on our business and results.

 

We do not collect sales and use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert or may adopt laws that such taxes are applicable or that our presence in such jurisdictions is sufficient to require us to collect taxes, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our financial results.

 

On March 27, 2020, the U.S. government enacted the “Coronavirus Aid, Relief and Economic Security Act (CARES Act).  The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.  We continue to examine the impacts the CARES Act may have on our business.  Furthermore, other governments have and may continue to offer support to companies who operate in those countries.  We are examining the impact of government subsidies, tax credits or other support in countries where QAD has operations. 

 

Risks associated with our revenue, expenses and pricing

 

Our revenue and profits may fluctuate significantly.

 

Our quarterly and annual operating results have fluctuated in the past and may do so in the future. Such fluctuations have resulted from the seasonality of our customers’ manufacturing businesses and budget cycles and other factors. Moreover, there can be no assurance that our revenue will grow in future periods. As a result of fluctuating revenue or due to accelerated costs and deferred revenue resulting from cloud bookings there can be no assurance that we will be profitable on a quarterly or annual basis.   Furthermore, the COVID-19 pandemic will negatively impact many manufacturing businesses which we expect will result in a decrease of our revenue, profits and liquidity.   

 

Our financial forecasts are subject to uncertainty to the extent they are based on estimated sales forecasts.

 

Our revenues, and particularly our new cloud bookings business, software license revenue and services revenue, are difficult to forecast, and, as a result, our financial forecasts are subject to uncertainty. Specifically, our sales forecasts are based on estimates that our sales personnel make regarding the likelihood of potential sales, including their expected closing date and fee amounts. If these estimates are inaccurate then our financial forecasts may also be inaccurate.

 

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The margins in our services business may fluctuate.

 

Services revenue is dependent upon the timing and size of customer orders, as well as upon our related license and subscription sales. If we are unable to keep our services employees engaged on billable matters then our profit margins may suffer. In addition, certain engagements may involve fixed price arrangements and significant staffing and subcontracting which require us to make estimates and assumptions at the time we enter into these contracts as well as throughout the contract to determine percent completion and revenue recognition. Variances between these estimates and assumptions and actual results could have an adverse effect on our profit margin and generate negative cash flow and negative services margins. To the extent that we are not successful in securing orders from customers to provide services, or to the extent we are not successful in achieving the expected margin on such services, our results of operations may be adversely affected.

 

The margins in our cloud service offerings may fluctuate.

 

Our cloud service offerings may involve fixed price arrangements, fixed and up-front costs and significant staffing which require us to make estimates and assumptions at the time we enter into these contracts. Variances between these estimates and assumptions and actual results could have an adverse effect on our profit margin and/or generate negative cash flow. To the extent that we are not successful in securing orders from customers to provide cloud services, or to the extent we are not successful in achieving the expected margin on such solutions, our results may be adversely affected.

 

Because we recognize revenue from cloud services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.

 

We generally recognize subscription revenue from customers ratably over the term of their subscription agreements. As a result, most of the subscription revenue we report in each quarter is the result of subscription agreements entered into during prior quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our cloud services, and potential changes in our attrition rate, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our subscription revenue through additional sales in any period, as subscription revenue from new customers must be recognized over the applicable subscription term.

 

A significant portion of our revenue is derived from subscription and maintenance renewals with our existing installed base of customers.

 

Subscription and maintenance renewals are at the customer’s discretion, and customers may elect not to renew or renew at a lower annual renewal value than the prior year. Further, it is our strategy to convert existing customers to our cloud services offering, which, if successful, will reduce maintenance revenue. If our existing customers discontinue maintenance or subscription to a significant degree, our revenues and results of operations will be adversely affected. Our cloud customers have the option to renew a lower number of users and/or a reduced number of modules which would also have a negative impact on revenue and results of operations.

 

Our subscription and maintenance retention rate is dependent upon a number of factors such as our ability to continue to develop and maintain our products, continue to recruit and retain qualified personnel to assist our customers, and promote the value of maintenance for our products to our customers.

 

Our subscription and maintenance retention rate is also dependent upon factors beyond our control such as technology changes and their adoption by our customers, budgeting decisions by our customers, changes in our customers’ strategy or ownership and plans by our customers to replace our products with competing products. If our subscription or maintenance retention rate decreases, our revenue and results of operations would be adversely affected.

 

We have risks regarding our pricing and pricing models.

 

We are occasionally obliged to offer deep discounts and other favorable terms in order to match or exceed the product and service offerings of our competitors. Furthermore, we may be faced with general downward pricing pressure from competitors and the market in the future.  For example, the COVID-19 pandemic could cause downward pricing pressure from customers requesting additional discounts or other pricing concessions.  If we do not adapt our pricing models to reflect changes in customer demand resulting from rapid technological advances, such as those leading to alternative hosting and cloud service delivery offerings, our revenues could decrease. For example, if customer software usage evolves in ways that maintain or increase the value they derive from our products while decreasing traditional licensing metrics such as individual users, then if we do not adjust our pricing models accordingly then our revenues could decrease. Further, broad-based changes to our pricing models could adversely affect our revenues and operating results as our sales force implements, and our customers and accounting practices adjust to, the new pricing models.

 

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We may have exposure to additional tax liabilities.

 

As a multinational organization, we are subject to income taxes as well as non-income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and other tax liabilities. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes may differ from what is reflected in our historical income tax provisions and accruals.   

 

Our tax rate could be adversely affected by several factors, many of which are outside of our control, including:

  

 

Changes in jurisdictional revenue mix;

 

 

Changing tax laws, regulations and interpretations thereof, including the changing landscape around digital taxation and the new US Tax Reform laws;

 

 

Changes in tax rates;

 

 

Changes to the valuation allowance on deferred tax assets; and

 

 

Assessments and any related tax, interest or penalties.

 

If we are deemed to owe additional taxes, our results of operations may be adversely affected.

 

We report our results based on our calculations of the amount of taxes owed in the various tax jurisdictions in which we operate but taxing authorities may believe we owe a greater amount of income tax than we have reported.

 

Periodically, we may receive notices that a tax authority in a particular jurisdiction believes that we owe a greater amount of income tax than we have reported, in which case we may engage in discussions or possible dispute resolutions with these tax authorities. If the ultimate determination of our income taxes owed in any of these jurisdictions is for an amount in excess of the tax provision we have recorded or reserved for, our operating results, cash flows, and financial condition could be adversely affected. We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in the United States and in various foreign jurisdictions. Audits or disputes relating to non-income taxes may result in additional liabilities that could negatively affect our operating results, cash flows and financial condition.

 

Risks associated with our sales cycle

 

Our products involve a long sales cycle and the timing of sales is difficult to predict. Because the licensing or subscription of our primary products generally involves a significant commitment of capital or a long-term commitment by our customers, the sales cycle associated with a purchase of our products is generally lengthy.

 

This cycle varies from customer to customer and is subject to a number of significant risks over which we have little or no control, for example the COVID-19 (novel coronavirus) pandemic. The evaluation process that our customers follow generally involves many of their personnel and requires complex demonstrations and presentations to satisfy their needs. Significant effort is required by us to support this process, whether we are ultimately successful or not. If sales forecasted for a particular quarter are not realized in that quarter, then we are unlikely to be able to generate revenue from alternative sources in time to compensate for the shortfall. As a result, a lost or delayed sale could have a material adverse effect on our revenue and operating results.

 

Risks associated with our solutions

 

Our solutions, including licensed software, cloud services and other services, may contain defects, including security flaws, especially when first introduced or when new versions are released. The detection and correction of defects can be time consuming and costly. Defects in our solutions, including licensed third-party software, could affect the ability of our products to work with other hardware or software products. Defects could delay the development or release of new products or new versions of products and could adversely affect market acceptance of our products and our ability to conduct our cloud operations. Defects may also impair our ability to complete services implementations on time and within budget. Customers who rely on our solutions for applications that are critical to their businesses may have a greater sensitivity to such defects than customers for software products generally. Defects could expose us to product liability, performance and warranty claims as well as harm our reputation, which could adversely impact our future sales and operating results.

 

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Dependence on third-party suppliers

 

We are dependent on Progress Software Corporation.

 

The majority of QAD Adaptive Applications are written in a programming language that is proprietary to Progress Software Corporation (or Progress). QAD Adaptive Applications do not run within programming environments other than Progress and therefore our customers must acquire rights to Progress software in order to use QAD Adaptive Applications. We have an agreement with Progress under which Progress licenses us to distribute and use Progress software related to our products. This agreement remains in effect unless terminated either by a written ten-year advance notice or due to a material breach that is not remedied. If Progress were to provide notice that it was terminating its agreement with us, this could have a material adverse effect on our business and prospects.

 

Our success is also dependent upon Progress continuing to develop, support and enhance its programming language, its toolset and its database, as well as the continued market acceptance of Progress products. A change in Progress’ control, management or direction may adversely impact our relationship with Progress and our ability to rely on Progress products in our business. We have in the past, and may in the future, experience product release delays because of delays in the release of Progress products or product enhancements. Any of these delays could have a material adverse effect on our business.

 

We are dependent on other third-party suppliers.

 

We resell certain software which we license from third parties other than Progress. There can be no assurance that these third-party software arrangements and licenses will continue to be available to us on terms that provide us with the third-party software we require or provide adequate functionality with our products on terms that adequately protect our proprietary rights or are commercially favorable to us.

 

Certain QAD Adaptive Applications are developed using embedded programming tools from Microsoft and Sun Microsystems (owned by our competitor Oracle) for the Microsoft .NET framework and Java Programming environments, respectively. We rely on these environments’ continued compatibility with customers’ desktop and server operating systems. In the event that this compatibility is limited, some of our customers may not be able to easily upgrade their QAD software. If the present method of licensing the .NET framework as part of Microsoft’s Desktop Operating systems is changed and a separate price were applied to the .NET framework, our expenses could increase substantially. Similarly, if Oracle decided to charge fees or otherwise change the historical licensing terms for Java technology, our expenses could increase substantially. For both of the .Net and Java elements, we rely on market acceptance and maintenance of these environments and we may be adversely affected if these were withdrawn or superseded in the market.

 

Our partner agreements, including development, product acquisition and reseller agreements, contain confidentiality, indemnity and non-disclosure provisions for the third party and end user. Failure to establish or maintain successful relationships with these third parties or failure of these parties to develop and support their software, provide appropriate services and fulfill confidentiality, indemnity and non-disclosure obligations could have an adverse effect on us. We have been in the past, and expect to be in the future, party to disputes about ownership, license scope and royalty or fee terms with respect to intellectual property. Failure to prevail in any such dispute could have a material adverse effect on our business.

   

Risks associated with our proprietary rights and customer contracts

 

Our intellectual property may be at risk as a result of a variety of different factors.

 

We rely on a combination of protections provided by applicable copyright, trademark, patent and trade secret laws, as well as on confidentiality procedures and licensing arrangements, to establish and protect our rights in our software and related materials and information. We enter into agreements with each of our customers and partners to whom we grant access to QAD Adaptive Applications. These agreements contain confidentiality and non-disclosure provisions, a limited warranty covering our applications and indemnification from infringement actions related to our applications. In addition, we have in certain circumstances licensed our software to end-users and partners in both object code (machine-readable) and source code (human-readable) formats. While this practice facilitates customization, making software available in source code also makes it possible for others to copy or modify our software for impermissible purposes.

 

Despite our efforts, it may be possible for others to copy portions of our products, reverse engineer them or obtain and use information that we regard as proprietary, all of which could adversely affect our competitive position. Furthermore, there can be no assurance that our competitors will not independently develop technology similar to ours. In addition, we maintain significant intellectual property assets outside the United States, including in countries where the laws may not protect our proprietary rights to the same extent as in the United States.

 

The unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our revenues. We may initiate, or be subject to, claims or litigation for infringement of proprietary rights or to establish the validity of our proprietary rights, which could result in significant expense to us, cause product shipment delays, require us to enter royalty or licensing agreements and divert the efforts of our technical and management personnel from productive tasks, whether or not such litigation were determined in our favor.

 

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We may be exposed to claims for infringement of intellectual property rights and breach of contract, and we may experience impairment of our own intellectual property rights.

 

Third parties may initiate proceedings against us claiming infringement or other misuse of their intellectual property rights and/or breach of our agreements with them. Further, while we actively monitor the adoption of open source software in our software development process, it is possible that our use of open source software may inadvertently subject our proprietary software to public disclosure and impairment of our intellectual property rights. The likelihood of such instances may increase as the use of open source and other third-party code becomes more prevalent in the industry. Any such instances, regardless of validity, may cause us to:

 

 

Pay license fees or monetary damages;

     
 

Incur high legal fees in defense of such claims;

     
 

Alter or stop selling our products;

     
 

Satisfy indemnification obligations to our customers;

     
 

Release source code to third parties, possibly under open source license terms; and

     
 

Divert management’s time and attention from operating our business.

 

We may be exposed to product liability claims and other liabilities.

 

While our customer agreements typically contain provisions designed to limit our exposure to product liability claims and other liability, we may still be exposed to liability in the event such provisions may not apply.

 

We have an errors and omissions insurance policy which may not totally protect us.

 

The Company has an errors and omissions insurance policy. However, this insurance may not continue to be available to us on commercially reasonable terms or at all, or a claim otherwise covered by our insurance may exceed our coverage limits, or a claim may not be covered at all. We may be subject to product liability claims or errors or omissions claims that could have an adverse effect on us. Moreover, defending a suit, regardless of its merits, could entail substantial expense and require the time and attention of key management personnel.

  

Risks associated with our market and the economy

 

The market in which we participate is highly competitive and if we do not compete effectively our operating results could be harmed.

 

The market for enterprise software solutions is highly competitive and subject to changing technology, shifting customer needs and introductions of new products and services. Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, larger marketing budgets and substantially greater financial, technical and other resources. In addition, many of our current and potential competitors have established marketing relationships and access to larger customer bases. A number of companies offer products that are similar to our products and target the same markets. Any of these competitors may be able to respond more quickly to new or changing opportunities, technologies and market trends, and devote greater resources to the development, promotion and sale of their products. Our competitors may also offer extended payment terms or price reductions for their products and services, either of which could materially and adversely affect our ability to compete successfully. There can be no assurance that we will be able to compete successfully against current and future competitors or that the competitive pressures that we may face will not materially adversely affect our business, revenue and results of operations.

 

We are dependent upon achieving success in certain concentrated markets.

 

We have made a strategic decision to concentrate our product development, as well as our sales and marketing efforts, in certain vertical manufacturing sectors: automotive, life sciences, consumer products, food and beverage, high technology and industrial products. We also concentrate our efforts on certain geographies, where costs to expand our market or stay in compliance with local requirements could be extensive and require a large amount of resources. An important element of our strategy is the achievement of technological and market leadership recognition for our software products in these vertical sectors and geographies. The failure of our products to achieve or maintain substantial market acceptance in one or more of these vertical sectors or geographies could have an adverse effect on us. If any of these targeted vertical sectors or geographies experience a material slowdown or reduced growth, those conditions could adversely affect the demand for our products and revenue.

 

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Unfavorable economic conditions may adversely impact our business, operating results and financial condition.

 

Our operations and performance are subject to the risks arising from worldwide economic conditions, which are themselves impacted by other events, such as financial crises, natural disasters, epidemics and political turmoil. These include adverse economic conditions associated with the COVID-19 (novel coronavirus) pandemic or other catastrophic events that may disrupt our business. In particular, the negative impact of economic conditions on manufacturing companies could have a substantial adverse effect on our sales, because our products are focused on supporting manufacturing companies. Uncertainty about global economic conditions may result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition as manufacturing companies may delay, reduce or forego spending in response to declining asset values, tight credit, high unemployment, natural disasters, political unrest and negative financial news. Such economic conditions may also result in our customers extending their payment periods or experiencing reduced ability to pay amounts owed to us. Uncertainty about global economic conditions could also increase the volatility of our stock price. If any of the foregoing occurs, our results of operations may be adversely affected.

 

Risks associated with our third-party relationships

 

We are dependent upon the development and maintenance of sales, services and marketing channels.

 

We sell and support our products through direct and indirect sales, services and support organizations throughout the world. We also maintain relationships with a number of consulting and systems integration organizations that we believe are important to our worldwide sales, marketing, service and support activities and to the implementation of our products.  We also intend to actively increase and deepen such relationships to support growth in our business. We believe this strategy allows for additional flexibility in ensuring our customers’ needs for services are met in a cost effective, timely and high-quality manner. We are aware that these third-party service providers do not work exclusively with our products and in many instances have similar, and often more established, relationships with our principal competitors. If these third parties exclusively pursue products or technology other than QAD software products or technology, or if these third parties fail to adequately support QAD software products and technology or increase support for competitive products or technology, we could be adversely affected.

 

Risks associated with acquisitions we may make

 

As part of our business strategy, we have made, and expect to continue to make, acquisitions of businesses or investments in companies that offer complementary products, services and technologies or expand our geographical presence. Such acquisitions or investments involve a number of risks which could adversely affect our business or operating results, including:

 

 

Our business strategy may not be furthered by an acquisition as we planned;

  

 

We may be unable to retain customers, vendors, distributors, business partners or other relationships associated with the acquired business;

 

 

Our due diligence may not identify significant liabilities or deficiencies associated with the business, assets, products, financial condition or accounting practices of an acquired company;

 

 

We may have difficulty integrating an acquired business due to incompatible business cultures;

 

 

We may incur significant integration costs related to assimilating the operations and personnel of acquired companies;

 

 

Acquisition costs may result in charges in a particular quarter, increasing variability in our quarterly earnings;

 

 

We may not realize the anticipated revenue increase from an acquisition;

 

 

We may be unable to realize the value of the acquired assets relative to the acquisition cost;

     
 

If we fail to complete an announced acquisition, our stock price could fall to the extent the price reflects an assumption that such acquisition will be completed, and we may experience negative publicity adversely impacting our relationships with our customers, vendors and employees; and

 

 

Acquisitions may distract management from our existing businesses.

 

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These factors could have a material adverse effect on our business, financial condition and operating results. In addition such acquisitions may cause our future quarterly financial results to fluctuate due to costs related to an acquisition, such as the elimination of redundant expenses or write-offs of impaired assets recorded in connection with acquisitions. Also, consideration paid for any future acquisitions could include our stock. As a result, future acquisitions could cause dilution to existing stockholders and to earnings per share, though the likelihood of voting dilution is limited by the ability of the Company to use low-voting Class A common stock as consideration for potential acquisitions. Furthermore, we may incur significant debt to pay for future acquisitions or investments or our use of cash to pay for acquisitions may limit other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness.

 

Risks associated with our international operations

 

Our operations are international in scope, exposing us to additional risk.

 

We derive over half of our total revenue from sales outside the United States. A significant aspect of our strategy is to focus on developing business in emerging markets. Our operating results could be negatively impacted by a variety of factors affecting our foreign operations, many of which are beyond our control. These factors include currency fluctuations, economic, political or regulatory conditions in a specific country or region, trade protection measures and other regulatory requirements. Additional risks inherent in international business activities generally include, among others:

 

 

Longer accounts receivable collection cycles;

     
 

Costs and difficulties of managing international operations and alliances;

     
 

Greater difficulty enforcing intellectual property rights;

     
 

Import or export requirements;

     
 

Uncertainty related to negotiations between the UK and EU concerning their future relationship, following the ratification of the Brexit withdrawal agreement and the upcoming end of the transition period on December 31, 2020 that could disrupt the sale of our products and services and the movement of our people between the United Kingdom and the European Union;

     
 

Compliance with multiple, conflicting, ambiguous or evolving governmental laws and regulations, including employment, tax, privacy, anti-corruption, import/export, antitrust, data transfer, storage and protection, and industry-specific laws and regulations, including rules related to compliance by our third-party resellers and our ability to identify and respond timely to compliance issues when they occur;

     
 

Operating in geographies with a higher inherent risk of corruption, which could adversely affect our ability to maintain compliance with domestic and international laws, including, but not limited to, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws; and

     
 

Other factors beyond our control, such as terrorism, war, natural disasters and pandemics, including the COVID-19 pandemic.

 

We may experience foreign currency gains and losses.

 

We conduct a portion of our business in currencies other than the United States dollar. Our revenues and operating results may be negatively affected by fluctuations in foreign currency exchange rates. Changes in the value of major foreign currencies, including the euro and British pound, relative to the United States dollar can significantly and adversely affect our revenues, expenses and operating results.

 

Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.

 

We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). A change in these principles can have a significant impact on our reported results and may even retroactively affect previously reported transactions. The adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.

 

We are exposed to fluctuations in the market values of our investments

 

Given the global nature of our business, we have investments both domestically and internationally. Credit ratings and market values of these investments can be negatively impacted by liquidity, credit deterioration or losses, financial results, foreign exchange rates, or other factors. As a result, the value or liquidity of our cash equivalents and short-term investments could decline, thus adversely affecting our financial condition and operating results.

 

24

 

The market for our Class A and Class B common stock is volatile

 

Our stock price could become more volatile and investments could lose value.

 

The market price of our common stock and the number of shares of each class traded each day has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including, but not limited to:

 

 

Shortfalls in our expected net revenue, earnings or key performance metrics;

     
 

Changes in recommendations or estimates by securities analysts;

     
 

The announcement of new products by us or our competitors;

     
 

Quarterly variations in our or our competitors’ results of operations;

     
 

A change in our dividend or stock repurchase activities;

     
 

Developments in our industry or changes in the market for technology stocks;

     
 

Changes in rules or regulations applicable to our business; and

     
 

Other factors, including economic instability, global pandemics such as COVID-19 and changes in political or market conditions.

 

The dual class structure of our common stock as set forth in our charter documents could adversely impact the market for our common stock.

 

Our dual-class stock structure could adversely impact the market for our stock. The liquidity of our common stock may be adversely impacted by our dual-class structure because each class has less of a public float than it would if we had a single class of common stock. In addition, there are fewer Class B shares than Class A shares and Class B shares may be less desirable to the public due to the 20% higher dividend on Class A shares. Also, the holding of lower voting Class A common stock may not be permitted by the investment policies of certain institutional investors or may be less attractive to managers of certain institutional investors.

  

If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.

 

The trading market for our common stock depends in part on the research and reports that research analysts publish about us and our business. If we do not maintain adequate research coverage, or if one or more analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, the price of our common stock could decline. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.

 

We are obligated to maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or this internal control may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

 

We are required, pursuant to the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on our internal controls.

 

While we were able to determine in our management’s report for fiscal 2020 that our internal control over financial reporting is effective, as well as provide an unqualified attestation report from our independent registered public accounting firm to that effect, we may not be able to complete our evaluation, testing, and any required remediation in a timely fashion or our independent registered public accounting firm may not be able to formally attest to the effectiveness of our internal control over financial reporting in the future. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting that we are unable to remediate before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest to the effectiveness of our internal controls or determine we have a material weakness in our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline.

 

25

 

If we are unable to pay quarterly dividends, our reputation and stock price may be harmed.

 

Our payment of dividends may require the use of a significant portion of our cash earnings. As a result, we may not retain a sufficient amount of cash to fund our operations or finance future growth opportunities, new product development initiatives and unanticipated capital expenditures which could adversely affect our financial performance. Additionally, our board of directors may, at its discretion, decrease or entirely discontinue the payment of dividends at any time. Our ability to pay dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Any failure to pay dividends may negatively impact our reputation and investor confidence in us and may negatively impact the price of our common stock.

 

Our common stock ownership is concentrated

 

The dual class structure of our common stock as set forth in our charter documents has the effect of concentrating voting control with certain stockholders, including Pamela Lopker, thus limiting our other stockholders’ ability to influence corporate matters.

 

Our Class B common stock has one vote per share and our Class A common stock has 1/20th vote per share. Stockholders who hold shares of our Class B common stock together held approximately 80% of the voting power of our outstanding capital stock as of January 31, 2020. As of January 31, 2020, Pamela Lopker beneficially owned approximately 32% of the outstanding shares of our Class A common stock and approximately 76% of the outstanding shares of our Class B common stock, representing approximately 67% of the voting power of our outstanding capital stock. Currently she has sufficient voting control to determine the outcome of a stockholder vote concerning:

 

 

The election and removal of all members of our board of directors;

 

 

The merger, consolidation or sale of the Company or all of our assets; and

 

 

All other matters requiring stockholder approval, regardless of how our other stockholders vote their shares.

 

In addition, the holders of our Class B common stock collectively will continue to be able to control all matters submitted to our stockholders for approval even if their stock holdings represent less than 50% of the outstanding shares of our common stock because of the 20-to-1 voting ratio between our Class B and Class A common stock. This concentrated control will limit the ability of our Class A stockholders to influence corporate matters for the foreseeable future, and, as a result, the market price of our Class A common stock could be adversely affected.

 

This concentrated control limits the ability of our other stockholders to influence corporate matters and also limits the liquidity of the shares owned by other stockholders. Should the interests of Pamela Lopker differ from those of other stockholders, the other stockholders may not be afforded the protections of having a majority of directors on the board who are independent from our principal stockholders or our management. For example, Pamela Lopker’s concentrated control could discourage others from initiating potential merger, takeover or other change of control transactions; and, transactions could be pursued that our other stockholders do not view as beneficial. As a result, the market price of our Class A and Class B common stock could be adversely affected.

 

We are not required to comply with certain corporate governance rules of NASDAQ, that would otherwise apply to us as a company listed on NASDAQ, because we are a controlled company.

 

Specifically, we are not required to have a majority of independent directors or a compensation committee comprised solely of independent directors; select, or recommend for the board’s selection, director nominees by a majority of independent directors or a nominating committee comprised solely of independent directors; determine officer compensation by a compensation committee comprised solely of independent directors or by a majority of the board upon recommendation of a compensation committee comprised solely of independent directors; and satisfy certain responsibilities of the compensation committee prior to retaining or receiving advice from a compensation consultant, legal counsel or other advisor to the compensation committee.

 

Provisions in the Company's charter documents or Delaware law could discourage a takeover that stockholders may consider favorable.

 

Our Certificate of Incorporation contains certain other provisions that may have an “anti-takeover” effect. The Certificate of Incorporation contains authority for the Board to issue up to 5,000,000 shares of preferred stock without stockholder approval. Although the Company has no present intention to issue any such shares, we could issue such shares in a manner that deters or seeks to prevent an unsolicited bid for us. The Certificate of Incorporation also does not provide for cumulative voting and, accordingly, a significant minority stockholder could not necessarily elect any designee to the board of directors. In addition, Section 203 of the Delaware Corporation Law may discourage, delay, or prevent a change in control of us by imposing certain restrictions on various business combinations. Furthermore, our dual class structure concentrates the voting power of our stock in Pamela Lopker who would have the ability to control the outcome of a stockholder vote. As a result of these provisions in the Company's Certificate of Incorporation, including our dual class structure, and Delaware law, our stockholders may be deprived of an opportunity to sell their shares at a premium over prevailing market prices and it would be more difficult to replace our directors and management.

 

26

 

We are dependent upon highly skilled personnel

 

Our performance depends on the talents and efforts of highly skilled employees, including the continued service of a relatively small number of key technical and senior management personnel. In particular, our Chief Executive Officer, Anton Chilton, and President, Pamela Lopker, are critical to the overall management of QAD, maintenance of our culture and setting our strategic direction. All of our executive officers and key employees are at-will employees and we do not have key-person insurance covering any of our employees. Our future success depends on our continuing ability to attract and retain highly skilled personnel in all areas of our organization. Competition for such personnel is intense and many of our competitors are larger and have greater financial resources for attracting skilled personnel. The loss of key technical and senior management personnel or the inability to attract and retain additional qualified personnel could have an adverse effect on our continued ability to compete effectively.

 

We have hired personnel in countries where advanced technical expertise and other expertise are available at lower costs to improve our cost structure. We may experience competition for employees in these countries, which may negatively affect our employee retention efforts and increase our expenses in an effort to offer a competitive compensation program.

 

Catastrophic events may disrupt our business

 

Our corporate headquarters, including network infrastructure, internal technology systems and certain of our research and development activities, is located in Southern California, a region susceptible to fires, mudslides and seismic activity.  Additionally, certain of our other facilities and those of our suppliers and third-party data hosting services, may be located in regions affected by natural disasters.  Our corporate headquarters has been disrupted in the past, and any of the aforementioned facilities, suppliers and hosting services may be disrupted in the future, by significant natural disasters.  Such a natural disaster, as well as a terrorist attack, cyber-attack, war or other catastrophic event, may result in power loss, telecommunications failure, loss of access to the Internet, software or hardware malfunction, or physical access restrictions that our disaster recovery plans do not adequately address.  Further, health crises such as the COVID-19 (novel coronavirus) pandemic can lead to quarantines and other disruptions impacting our ability to operate our business, and impacting our customers’, partners’ and suppliers’ ability to run their businesses. Such disruptions can result in delays or cancellations of sales cycles, reductions or cancellations of the services we currently provide our customers, delays in our product development, interruptions in our customer services, breaches of data security and loss of critical data, all of which may have a material adverse effect on our business, operating results and financial condition, and negatively impact our reputation.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

QAD’s corporate headquarters are located in Santa Barbara, California. The corporate headquarters are owned by QAD and consist of approximately 120,000 square feet situated on 28 acres of land.

 

In addition to the corporate headquarters, QAD owns a facility in Dublin, Ireland and leases over 25 offices throughout the world with lease agreements ending on various dates through fiscal year 2032. QAD’s leased properties include offices in the United States, Belgium, France, Germany, Ireland, Italy, Poland, Spain, The Netherlands, United Kingdom, Australia, China, India, Indonesia, Japan, Singapore, Thailand, Brazil and Mexico. QAD will seek to review lease commitments in the future as may be required. QAD anticipates that its current domestic and international facilities are substantially sufficient to meet its needs for at least the next twelve months.

 

ITEM 3. LEGAL PROCEEDINGS

 

We are not party to any material legal proceedings. We are from time to time 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 our consolidated financial position or results of operations.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

27

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 

 

QAD Class A Common Stock and Class B Common Stock are traded on the NASDAQ under the symbols “QADA” and “QADB”, respectively. The following table reflects the range of high and low sale prices of our Common Stock as reported by NASDAQ:

 

   

QADA

   

QADB

 
   

Low Price

   

High Price

   

Low Price

   

High Price

 

Fiscal 2020:

                               

Fourth quarter

  $ 46.55     $ 54.54     $ 33.76     $ 38.04  

Third quarter

    35.00       47.60       27.50       36.53  

Second quarter

    38.32       49.65       29.25       34.75  

First quarter

    40.50       47.54       29.89       33.89  

 

   

QADA

   

QADB

 
   

Low Price

   

High Price

   

Low Price

   

High Price

 

Fiscal 2019:

                               

Fourth quarter

  $ 38.39     $ 48.04     $ 29.50     $ 35.00  

Third quarter

    40.91       61.80       28.35       49.40  

Second quarter

    44.45       55.35       32.07       44.24  

First quarter

    39.33       50.35       27.00       36.75  

 

Holders

 

As of March 31, 2020, there were approximately 135 shareholders of record of our Class A common stock and approximately 120 shareholders of record of our Class B common stock. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

 

Equity Compensation Plan

 

For equity compensation plan information, please refer to Item 12 in Part III of this Annual Report.

 

Dividends

 

We declared four quarterly cash dividends in fiscal 2020 of $0.072 and $0.06 per share of Class A and Class B stock, respectively. Continuing quarterly cash dividends are subject to profitability measures, liquidity requirements of QAD and Board discretion.

 

Recent Sales of Unregistered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

None.

 

28

 

STOCKHOLDER RETURN PERFORMANCE GRAPH

 

The line graph below compares the annual percentage change in the cumulative total stockholder return on QAD’s common stock with the cumulative total return of the NASDAQ Composite Total Return Index and the NASDAQ Computer Index, on an annual basis, for the period beginning January 31, 2015 and ending January 31, 2020.

 

The graph assumes that $100 was invested in QAD common stock on January 31, 2015 and that all dividends were reinvested. Historic stock price performance should not be considered indicative of future stock price performance.

 

The following Share Performance Graph shall not be deemed to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG QAD INC., THE NASDAQ COMPOSITE TOTAL RETURN INDEX,
AND THE NASDAQ COMPUTER INDEX

 

 

Measurement Periods
(Annually from Fiscal
Year 2015 through
Fiscal Year 2020)

 

QADA

   

QADB

   

NASDAQ
Composite
Total Return
Index

   

NASDAQ
Computer
Index

 

01/31/15

    100.00       100.00       100.00       100.00  

01/31/16

    96.86       93.60       99.54       104.50  

01/31/17

    153.18       148.10       121.13       129.22  

01/31/18

    230.39       198.34       159.89       182.68  

01/31/19

    226.74       187.09       157.10       178.80  

01/31/20

    278.41       221.11       197.42       257.26  

 

29

 

ITEM 6.   SELECTED FINANCIAL DATA

 

The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The financial data for the fiscal years ended January 31, 2020 and 2019, are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The Consolidated Statements of Operations and the Consolidated Statements of Cash Flows data for the fiscal year ended January 31, 2018, are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The Consolidated Balance Sheet data for the fiscal year ended January 31, 2018, and the remaining financial data for the fiscal years ended January 31, 2017 and 2016, are derived from audited, consolidated financial statements which are not included in this Form 10-K.

 

The consolidated balance sheet data as of January 31, 2020 reflects the adoption of Accounting Standards Update (ASU) No. 2016-02 Leases (Topic 842). The consolidated statement of operations data for fiscal 2019 and the selected consolidated balance sheet data as of January 31, 2019 reflect the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU2016-16 Intra-entity Transfers of Assets Other Than Inventory.

 

   

Years Ended January 31,

 
    2020 (1)     2019 (2)     2018 (3)     2017 (4)     2016 (5)  
   

(in thousands, except per share data)

 

STATEMENTS OF OPERATIONS DATA:

                                       

Revenues:

                                       

Subscription Fees

  $ 107,168     $ 91,861     $ 69,615     $ 52,167     $ 38,806  

License fees

    16,570       25,568       25,807       23,633       29,891  

Maintenance and other

    117,896       122,936       128,142       130,406       132,962  

Professional services

    69,138       92,651       81,454       71,767       76,193  

Total revenue

    310,772       333,016       305,018       277,973       277,852  

Operating (loss) income

    (5,688

)

    9,573       (3,074

)

    3,364       10,171  

Net (loss) income

  $ (15,949

)

  $ 10,428     $ (9,065

)

  $ (15,450

)

  $ 8,912  

Basic net (loss) income per share:

                                       

Class A

  $ (0.82

)

  $ 0.55     $ (0.49

)

  $ (0.84

)

  $ 0.49  

Class B

  $ (0.69

)

  $ 0.46     $ (0.41

)

  $ (0.70

)

  $ 0.41  

Diluted net (loss) income per share:

                                       

Class A

  $ (0.82

)

  $ 0.50     $ (0.49

)

  $ (0.84

)

  $ 0.47  

Class B

  $ (0.69

)

  $ 0.44     $ (0.41

)

  $ (0.70 )   $ 0.40  

Dividends declared per common share:

                                       

Class A

  $ 0.29     $ 0.29     $ 0.29     $ 0.29     $ 0.29  

Class B

  $ 0.24     $ 0.24     $ 0.24     $ 0.24     $ 0.24  

BALANCE SHEET AND CASH FLOW DATA:

                                       

Cash and equivalents

    136,717       139,413       147,023       145,082       137,731  

Working capital

    69,610       78,350       70,960       80,351       86,791  

Total assets

    322,804       317,174       299,817       280,890       287,341  

Current portion of long-term debt

    503       487       466       446       422  

Long-term debt

    12,341       12,836       13,313       13,767       14,191  

Total stockholders’ equity

    116,065       133,247       105,628       112,686       128,006  

Cash provided by operations

    16,845       19,007       10,418       18,680       24,057  

 


 

 

(1)

Fiscal year 2020 includes a net  increase in valuation allowances of $16.2 million, primarily related to the placement of a valuation allowance against Ireland net deferred tax assets.

     

 

(2)

Fiscal year 2019 net income includes a $1.3 million reversal of the 2017 Tax Reform Act (the Tax Act) estimated tax liability recorded in fiscal year 2018. 

 

 

(3)

Fiscal year 2018 net loss includes a $2.0 million estimated tax liability, representing the Company’s best estimate of the impact of the Tax Act in accordance with QAD’s understanding of the Tax Act and the related guidance available.

 

 

(4)

Fiscal year 2017 includes placement of a valuation allowance of $16.3 million against U.S. federal and state net deferred tax assets.

 

 

(5)

Fiscal year 2016 includes the issuance of 450,000 shares of Class A common stock at $20.00 per share for net proceeds to the Company of $8.4 million after deduction of offering expenses as a result of an option to purchase additional shares exercised in full by the underwriters related to the fiscal year 2015 stock issuance.

 

30

 

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION

 

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

 

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 suppliers, 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 fiscal 2020, approximately 49% of our total revenue was generated in North America, 29% in EMEA, 15% in Asia Pacific and 7% 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 January 31, 2020, we employed approximately 1,920 employees worldwide, of which 630 employees were based in North America, 610 employees in EMEA, 570 employees in Asia Pacific and 110 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 manufacturing economy on a global basis. 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.

 

We are transitioning our business model from selling perpetual licenses to providing access to our software on a subscription basis as part of our cloud offering. During fiscal 2020, we closed most of our new customer deals in the cloud. Subscription revenue grew 17% in fiscal 2020 compared to fiscal 2019 and our twelve-month trailing subscription billings grew by 23%, with a three-year compound annual growth rate (CAGR) of 29%. In addition, we have converted approximately 20% of our existing customers from on-premises licenses to our cloud solutions. Recurring revenue, which we define as subscription revenue plus maintenance revenue, accounted for 73% of total revenue for fiscal 2020.  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 perpetual licenses. We expect recurring revenue to remain a majority of total revenue as our subscription revenue continues to grow.

 

In December 2019, a strain of coronavirus (COVID-19) was reported in Wuhan, China and by January 24, 2020 the Chinese government announced mandatory home confinement and the closure of all workplaces, schools and public establishments.  Given that our fiscal year end is January 31st and China represents 4% of our revenue, the coronavirus had a minimal impact on our fiscal 2020 results.  As the coronavirus has spread, it has significantly impacted the health and economic environment around the world and many governments have closed most public establishments, including restaurants, workplaces and schools. Our customers are global manufacturers and the closure of manufacturing sites, country borders and the increase in unemployment are having and will continue to have negative implications on demand for goods, the supply chain, production of goods and transportation.  A negative impact on our manufacturing customers may cause them to request extended payment terms, delayed invoicing, higher discounts, lower renewal amounts or cancelations.  Any of these actions will have a negative impact on our financial results and liquidity in fiscal 2021.  We deliver our products under a SaaS subscription model that allows us to deliver our services remotely and support our customers around the world at all times, so they receive uninterrupted services and support from QAD during these challenging times. We believe this example of proven uninterrupted services during a time of disruption will motivate new and existing customers to migrate to the cloud in the long term. 

 

31

 

In the first quarter of fiscal 2021 we have seen an impact to professional services revenue as our customers delay projects or elongate them by extending their planned go-live date.  We have also received some customer requests for payment term changes.  We expect a negative impact to professional services revenue and margins in the first quarter of fiscal 2021 and throughout the fiscal year.  The impact of changes in payment terms or delayed payments is unknown at this time.  February and March days sales outstanding (DSOs) were consistent with historical trends.  Significant delays in payments from customers would impact our DSOs and liquidity and may have an adverse impact on revenue.  The extent of the impact of the COVID-19 on our future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, the impact to our customers operations, the impact to our sales cycles; and the effect on our suppliers.

 

 

RESULTS OF OPERATIONS

 

We operate in several geographical regions as described in Note 13 “Business Segment Information” within the Notes to 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

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in

Constant
   

Change due

to Currency
   

Total Change
as Reported

 

(in thousands)

 

2020

   

2019

   

Currency

   

Fluctuations

   

$

   

%

 

Revenue

                                               

Subscription fees

  $ 107,168     $ 91,861     $ 16,473     $ (1,166 )   $ 15,307       17

%

Percentage of total revenue

    35

%

    28

%

                               

License fees

    16,570       25,568       (8,479 )     (519 )     (8,998 )     -35

%

Percentage of total revenue

    5

%

    7

%

                               

Maintenance

    117,896       122,936       (2,734 )     (2,306 )     (5,040 )     -4

%

Percentage of total revenue

    38

%

    37

%

                               

Professional services

    69,138       92,651       (21,310 )     (2,203 )     (23,513 )     -25

%

Percentage of total revenue

    22

%

    28

%

                               

Total revenue

  $ 310,772     $ 333,016     $ (16,050 )   $ (6,194 )   $ (22,244 )     -7

%

 

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2019

   

2018

   

Currency

   

Fluctuations

   

$

   

%

 

Revenue

                                               

Subscription fees

  $ 91,861     $ 69,615     $ 22,398     $ (152 )   $ 22,246       32

%

Percentage of total revenue

    28

%

    23

%

                               

License fees

    25,568       25,807       (293 )     54       (239 )     -1

%

Percentage of total revenue

    7

%

    8

%

                               

Maintenance

    122,936       128,142       (5,914

)

    708       (5,206

)

    -4

%

Percentage of total revenue

    37

%

    42

%

                               

Professional services

    92,651       81,454       11,349       (152 )     11,197       14

%

Percentage of total revenue

    28

%

    27

%

                               

Total revenue

  $ 333,016     $ 305,018     $ 27,540     $ 458     $ 27,998       9

%

 

32

 

Total Revenue. On a constant currency basis, total revenue was $310.8 million for fiscal 2020, representing a $16.0 million, or 5%, decrease from $326.8 million for fiscal 2019. The primary reason for the decrease in total revenue was due to lower professional services revenue. Our results for fiscal 2020 also included decreases in license revenue and maintenance revenue. As our existing customers convert from on-premises licenses to using our software in the cloud, we expect license revenue and maintenance revenue will continue to decline. These decreases were offset by an 18% increase in subscription revenue, on a constant currency basis, as we are focused on selling our software solutions to new customers in the cloud. Revenue outside the North America region as a percentage of total revenue was 51% and 52% for fiscal 2020 and 2019, respectively. On a constant currency basis, total revenue decreased across all regions during fiscal 2020 when compared to the prior year. 

 

In fiscal 2020 and fiscal 2018, no single customer accounted for more than 10% of total revenue. In fiscal 2019, one customer accounted for 10% of total revenue and no other customer accounted for 10% or more of total revenue.  During fiscal 2019, we performed a large implementation project with a customer which included consulting services the customer needed to help perform activities their employees were responsible for.  Without these services, the revenue from this customer would have been less than 10%. 

 

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 fiscal 2020, 2019 and 2018:

 

   

Years Ended January 31,

 
   

2020

   

2019

   

2018

 

Automotive

    36

%

    39

%

    37

%

Consumer products and food and beverage

    15

%

    16

%

    16

%

High technology and industrial products

    34

%

    31

%

    33

%

Life sciences and other

    15

%

    14

%

    14

%

Total revenue

    100

%

    100

%

    100

%

 

The decrease in percentage of revenue by industry for automotive in fiscal 2020 compared to fiscal 2019 was primarily related to a reduction in professional services revenue following the completion of a large, multisite global implementation project for a customer in the automotive industry that was substantially completed at the end of the fourth quarter of fiscal 2019.

 

On a constant currency basis, total revenue was $333.0 million for fiscal 2019, representing a $27.5 million, or 9%, increase from $305.5 million for fiscal 2018. When comparing categories within total revenue at constant rates, our results for fiscal 2019 included increases in subscription and professional services revenue partially offset by a decrease in license and maintenance revenue. Revenue outside the North America region as a percentage of total revenue was 52% and 54% for fiscal 2019 and 2018, respectively. On a constant currency basis, total revenue increased across all regions during fiscal 2019 when compared to fiscal 2018.

 

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.

 

 On a constant currency basis, subscription revenue was $107.2 million for fiscal 2020, representing a $16.5 million, or 18%, increase from $90.7 million for fiscal 2019. Our subscription revenue represented 35% and 28% of our total revenue in fiscal 2020 and 2019, respectively. On a constant currency basis, subscription revenue increased across all regions during fiscal 2020 when compared to the prior year and annual bookings grew over 70% from the prior 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 fiscal 2020 we closed 99 new cloud deals, including 50 new cloud customers and 49 conversions from existing customers who previously purchased on-premises licenses. This compared to fiscal 2019 when we closed 67 new cloud deals, including 41 new cloud customers and 26 conversions from existing customers who previously purchased on-premises licenses. Subscription billings grew 23% in fiscal 2020 from the prior year and subscription backlog as of January 31, 2020 was $150.4 million, a 31% increase from $114.7 million as of January 31, 2019. 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.

 

33

 

The following table presents subscription revenue by region for fiscal 2020, 2019 and 2018:

 

   

Years Ended January 31,

 
   

2020

   

2019

   

2018

 

North America

    56

%

    56

%

    54

%

EMEA

    26

%

    27

%

    24

%

Asia Pacific

    11

%

    12

%

    14

%

Latin America

    7

%

    5

%

    8

%

Total subscription revenue

    100

%

    100

%

    100

%

 

The following table presents subscription revenue by industry for fiscal 2020, 2019 and 2018:

 

   

Years Ended January 31,

 
   

2020

   

2019

   

2018

 

Automotive

    36

%

    33

%

    35

%

Consumer products and food and beverage

    15

%

    18

%

    15

%

High technology and industrial products

    26

%

    24

%

    23

%

Life sciences and other

    23

%

    25

%

    27

%

Total subscription revenue

    100

%

    100

%

    100

%

 

On a constant currency basis, subscription revenue was $91.9 million for fiscal 2019, representing a $22.4 million, or 32%, increase from $69.5 million for fiscal 2018. On a constant currency basis, subscription revenue increased across all regions during fiscal 2019 when compared to the prior year. In fiscal 2019 we closed 67 new cloud deals, including 41 new cloud customers and 26 conversions from existing customers who previously purchased on-premises licenses. This compared to fiscal 2018 when we closed 65 new cloud deals, including 37 new cloud customers and 28 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. Conversions to the cloud are not considered cancellations for purposes of this calculation. Our subscription customer retention rate is in excess of 90% in each of the fiscal years 2020, 2019 and 2018. We also track net dollar retention rate for our subscription revenue, which we calculate by comparing the revenue of our existing customers from a year ago to revenue of the same customers in the current year. Net dollar retention rate of our subscription revenue was 108% for fiscal 2020. The purpose of this metric is to calculate the additional subscription revenue generated from existing customers paying for additional users, functionality and price increases.

 

License Revenue. License revenue is derived from software license fees that customers pay for our core product, QAD Adaptive ERP, 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.  More new customers subscribe to our cloud-based offerings rather than purchasing traditional on-premises licenses. While we expect license revenue to decline over time, we do continue to experience quarterly fluctuations.  We expect license revenue in fiscal 2021 will be negatively impacted by the COVID-19 pandemic. 

 

On a constant currency basis, license revenue was $16.6 million for fiscal 2020, representing an $8.4 million, or 34%, decrease from $25.0 million for fiscal 2019. On a constant currency basis, license revenue decreased across all regions during fiscal 2020 when compared to the prior year. During fiscal 2020, six customers placed license orders totaling more than $0.3 million, one of which exceeded $1.0 million. This compared to fiscal 2019 in which 14 customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0 million. The majority of our license revenue is generated from our existing customers purchasing additional users and modules.

 

On a constant currency basis, license revenue was $25.6 million for fiscal 2019, representing a $0.3 million, or 1%, decrease from $25.9 million for fiscal 2018. On a constant currency basis, license revenue decreased in our North America region and increased in our Latin America, Asia Pacific and EMEA regions during fiscal 2019 when compared to fiscal 2018. During fiscal 2019, 14 customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0 million. This compared to fiscal 2018 in which 15 customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0 million. 

  

Maintenance Revenue. We offer our on-premises customers maintenance which includes 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 $117.9 million for fiscal 2020, representing a $2.7 million, or 2%, decrease from $120.6 million for fiscal 2019. 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 fiscal 2020 when compared to the prior year. The decrease in maintenance revenue period over period was primarily due to continued conversions of existing customers’ on-premises licenses to cloud subscription, 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 to cloud have resulted in decreases in maintenance revenue and we expect this trend to continue in the future.

 

34

 

On a constant currency basis, maintenance revenue was $122.9 million for fiscal 2019, representing a $6.0 million, or 5%, decrease from $128.9 million for fiscal 2018. On a constant currency basis, maintenance revenue decreased across all regions during fiscal 2019 when compared to the prior year.

 

We track our retention rate of maintenance 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. Over the last three years, our maintenance retention rate has remained in excess of 90%.

 

 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 and license revenue growth and customer upgrade cycles, which are influenced by the strength of general economic and business conditions. In the first quarter of fiscal 2021, we have seen services projects delay or elongate due to the COVID-19 pandemic. This has negatively impacted our services revenue and margins in the first quarter of fiscal 2021 and we expect it will negatively impact both services revenue and margins for the fiscal year.

 

On a constant currency basis, professional services revenue was $69.1 million for fiscal 2020, representing a $21.3 million, or 24%, decrease from $90.4 million for fiscal 2019. On a constant currency basis, professional services revenue decreased across all regions during fiscal 2020 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.

 

On a constant currency basis, professional services revenue was $92.7 million for fiscal 2019, representing an $11.4 million, or 14%, increase from $81.3 million for fiscal 2018. On a constant currency basis, professional services revenue increased in our North America, Latin America and EMEA regions and remained relatively flat in our Asia Pacific region during fiscal 2019 when compared to the prior year. The increase in professional services revenue period over period can be attributed to personnel augmentation services we performed for one of our cloud customers, mainly through third-party contractors at low margins. For fiscal 2019, personnel augmentation services revenue was $7.3 million, compared to $1.1 million for fiscal 2018. Augmentation services consists of providing our employees or third-party contractors to assist the customer with the implementation tasks the customer needs to perform by supplementing their workforce. In addition, fiscal 2019 results reflected a higher amount of revenue per customer and a higher number of engagements compared to the prior year.

 

Total Cost of Revenue

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2020

   

2019

   

Currency

   

Fluctuations

    $    

%

 

Cost of revenue

                                               

Cost of subscription

  $ 38,451     $ 34,128     $ (4,455 )   $ 132     $ (4,323 )     -13

%

Cost of license

    2,308       2,714       399       7       406       15

%

Cost of maintenance

    29,702       31,307       1,197       408       1,605       5

%

Cost of professional services

    69,448       87,735       16,379       1,908       18,287       21

%

Total cost of revenue

  $ 139,909     $ 155,884     $ 13,520     $ 2,455     $ 15,975       10

%

Percentage of revenue

    45

%

    47

%

                               

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2019

   

2018

   

Currency

   

Fluctuations

    $    

%

 

Cost of revenue

                                               

Cost of subscription

  $ 34,128     $ 30,563     $ (3,594

)

  $ 29     $ (3,565

)

    -12

%

Cost of license

    2,714       2,946       230       2       232       8

%

Cost of maintenance

    31,307       31,246       (173

)

    112       (61

)

    0

%

Cost of professional services

    87,735       84,670       (3,280

)

    215       (3,065

)

    -4

%

Total cost of revenue

  $ 155,884     $ 149,425     $ (6,817

)

  $ 358     $ (6,459

)

    -4

%

Percentage of revenue

    47

%

    49

%

                               

 

35

 

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, royalties, 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 $139.9 million and $153.4 million for fiscal 2020 and 2019, respectively and as a percentage of total revenue was 45% for fiscal 2020 and 47% for fiscal 2019. The decrease in total cost of revenue as a percentage of total revenue was mainly due to the shift of our revenue mix from professional services to subscription. The non-currency related decrease in cost of revenue of $13.5 million, or 9%, in fiscal 2020 compared to fiscal 2019 was primarily due to lower professional services third-party contractor costs, lower travel costs and lower salaries and related costs resulting from a decrease in headcount of 116 people associated with decreased professional services revenue, partially offset by higher hosting costs and salaries and related costs associated with the increase in subscription revenue.

 

On a constant currency basis, total cost of revenue was $155.9 million and $149.1 million for fiscal 2019 and 2018, respectively and as a percentage of total revenue was 47% for fiscal 2019 and 49% for fiscal 2018. The decrease in total cost of revenue as a percentage of total revenue was due to improved subscription and professional services margins. The non-currency related increase in cost of revenue of $6.8 million, or 5%, in fiscal 2019 compared to fiscal 2018 was primarily due to higher hosting and personnel costs associated with the increase in subscription revenue and higher third-party contractor, travel and personnel costs associated with increased professional services revenue. 

 

Cost of Subscription. On a constant currency basis, cost of subscription was $38.5 million for fiscal 2020, representing a $4.5 million, or 13%, increase from $34.0 million for fiscal 2019. The non-currency related increase in cost of subscription of $4.5 million in fiscal 2020 compared to fiscal 2019 was primarily due to higher hosting costs of $2.3 million, higher salaries and related costs of $1.0 million as a result of higher headcount of 19 people, higher cross-charges from professional services to support conversion and upgrade projects of $0.4 million and higher information technology and facilities allocated costs of $0.4 million. Cost of subscription as a percentage of subscription revenue was 36% and 37% in fiscal 2020 and 2019, respectively. We have continued to improve our subscription margins over time due to leveraging of 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 $34.1 million for fiscal 2019, representing a $3.6 million, or 12%, increase from $30.5 million for fiscal 2018. The non-currency related increase in cost of subscription of $3.6 million in fiscal 2019 compared to fiscal 2018 was primarily due to higher hosting costs of $3.1 million, and higher salaries and related costs of $0.6 million as a result of higher headcount of approximately 30 people. Cost of subscription as a percentage of subscription revenue was 37% and 44% in fiscal 2019 and 2018, respectively. 

 

Cost of License. On a constant currency basis, cost of license was $2.3 million for fiscal 2020, representing a $0.4 million, or 15%, decrease from $2.7 million for fiscal 2019. Cost of license consisted primarily of royalty expense, which as a percent of license revenue, remained relatively consistent year over year.

 

On a constant currency basis, cost of license was $2.7 million for fiscal 2019, representing a $0.2 million, or 7%, decrease from $2.9 million for fiscal 2018. A majority of cost of license was royalty expense, which as a percent of license revenue, remained relatively consistent year over year.

 

Cost of Maintenance. On a constant currency basis, cost of maintenance was $29.7 million for fiscal 2020, representing a $1.2 million, or 4%, decrease from $30.9 million for fiscal 2019. The non-currency related increase in cost of maintenance of $1.2 million in fiscal 2020 compared to fiscal 2019 was primarily due to lower royalties of $0.4 million and lower salaries and related costs of $0.4 million. Cost of maintenance as a percentage of maintenance revenue was 25% in both fiscal 2020 and 2019.

 

On a constant currency basis, cost of maintenance was $31.3 million for fiscal 2019, representing a $0.2 million, or 1%, increase from $31.1 million for fiscal 2018. The non-currency related increase in cost of maintenance of $0.2 million in fiscal 2019 compared to fiscal 2018 was primarily due to personnel costs. Cost of maintenance as a percentage of maintenance revenue was 25% and 24% in fiscal 2019 and 2018, respectively.

 

36

 

Cost of Professional Services. On a constant currency basis, cost of professional services was $69.4 million for fiscal 2020, representing a $16.4 million, or 19%, decrease from $85.8 million for fiscal 2019. The non-currency related decrease in cost of professional services of $16.4 million was primarily due to lower third-party contractor costs of $7.6 million, lower travel of $3.8 million, lower salaries and related costs of $2.5 million as a result of a decrease in headcount of approximately 116 people, lower cross-charges from other departments to support conversion and upgrade projects of $1.7 million, lower bonuses of $1.2 million and lower information technology and facilities allocated costs of $0.3 million. These lower costs were partially offset by higher severance of $0.7 million and higher stock compensation of $0.2 million. Cost of professional services as a percentage of professional services revenue was 100% for fiscal 2020 and 95% for fiscal 2019.

 

On a constant currency basis, cost of professional services was $87.7 million for fiscal 2019, representing a $3.2 million, or 4%, increase from $84.5 million for fiscal 2018. The non-currency related increase in cost of professional services of $3.2 million was primarily due to higher third-party contractor costs of $1.6 million, higher travel of $1.3 million and higher salaries and related costs of $1.1 million partially offset by lower bonuses of $0.5 million and lower severance of $0.3 million. The increase in salaries and related costs was the result of the addition of 40 services people hired in relation to the acquisition of our Indonesian distributor’s assets, partially offset by a reduction of 20 people in our existing business. Cost of professional services as a percentage of professional services revenue was 95% for fiscal 2019 and 104% for fiscal 2018. 

 

Sales and Marketing

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2020

   

2019

   

Currency

   

Fluctuations

   

$

   

%

 

Sales and marketing

  $ 82,115     $ 78,207     $ (5,041 )   $ 1,133     $ (3,908 )     -5

%

Percentage of revenue

    26

%

    23

%

                               

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in

Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2019

   

2018

   

Currency

   

Fluctuations

   

$

   

%

 

Sales and marketing

  $ 78,207     $ 75,368     $ (2,709 )   $ (130 )   $ (2,839 )     -4

%

Percentage of revenue

    23

%

    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 $82.1 million for fiscal 2020, representing a $5.0 million, or 6%, increase from $77.1 million for fiscal 2019. The non-currency related increase in sales and marketing expense of $5.0 million in fiscal 2020 compared to fiscal 2019 was primarily due to higher salaries and related costs of $1.9 million as a result of higher headcount of approximately 16 people, higher severance of $1.5 million, higher sales agent fees of $1.0 million, higher information technology and facilities allocated costs of $0.7 million, higher costs of personnel from other departments performing demonstrations of $0.6 million, higher recruiting fees of $0.6 million and higher bonuses of $0.3 million. These higher expenses were offset by lower commission expense of $2.0 million. Sales and marketing expenses benefitted $2.9 million from moving 30 order processing employees to general and administrative expense.

 

On a constant currency basis, sales and marketing expense was $78.2 million for fiscal 2019, representing a $2.7 million, or 4%, increase from $75.5 million for fiscal 2018. The non-currency related increase in sales and marketing expense of $2.7 million in fiscal 2019 compared to fiscal 2018 was primarily due to higher salaries and related costs of $3.4 million as a result of higher headcount of approximately 30 people, higher stock compensation of $0.8 million, higher severance of $0.6 million, higher information technology and facilities allocated costs of $0.4 million and higher travel of $0.3 million. These higher expenses were offset by lower commissions of $4.5 million, which is partly attributable to the capitalization of commission expense in fiscal 2019 as a result of the adoption of the new revenue standard, Topic 606. Commissions in fiscal 2018 were driven by stronger than anticipated new cloud business bookings in the fourth quarter and were expensed as incurred in fiscal 2018 whereas in fiscal 2019 commission expense related to new subscription and maintenance was capitalized and will be amortized over five years.

 

Research and Development

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2020

   

2019

   

Currency

   

Fluctuations

   

$

   

%

 

Research and development

  $ 54,726     $ 53,993     $ (1,665 )   $ 932     $ (733 )     -1

%

Percentage of revenue

    18

%

    16

%

                               

 

37

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2019

   

2018

   

Currency

   

Fluctuations

   

$

   

%

 

Research and development

  $ 53,993     $ 47,661     $ (6,265 )   $ (67 )   $ (6,332 )     -13

%

Percentage of revenue

    16

%

    16

%

                               

 

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 $54.7 million for fiscal 2020, representing a $1.6 million, or 3%, increase from $53.1 million for fiscal 2019. The non-currency related increase in research and development expense of $1.6 million in fiscal 2020 compared to fiscal 2019 was primarily due to higher salaries and related costs of $0.9 million as a result of higher headcount of approximately 16 people, higher cross-charges from other departments of $0.6 million and higher information technology and facilities allocated costs of $0.4 million. These higher costs support the development of advanced technologies in the areas of robotic process automation, machine learning and the industrial Internet of Things.

 

On a constant currency basis, research and development expense was $54.0 million for fiscal 2019, representing a $6.3 million, or 13%, increase from $47.7 million for fiscal 2018. The non-currency related increase in research and development expense of $6.3 million in fiscal 2019 compared to fiscal 2018 was primarily due to higher personnel costs of $2.7 million, due in part to higher headcount of approximately 12 people, higher contractor costs of $2.1 million, higher information technology and facilities allocated costs of $0.4 million and higher stock compensation of $0.4 million. These costs were a result of our investment in our Channel Islands project, which included the development of a new platform and user interface.

 

General and Administrative

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2020

   

2019

   

Currency

   

Fluctuations

   

$

   

%

 

General and Administrative

  $ 39,442     $ 35,248     $ (4,541 )   $ 347     $ (4,194 )     -12

%

Percentage of revenue

    13

%

    11

%

                               

 

   

Year Ended January 31,

   

Year Ended January 31,

   

Change in
Constant

   

Change due
to Currency

   

Total Change
as Reported

 

(in thousands)

 

2019

   

2018

   

Currency

   

Fluctuations

   

$

   

%

 

General and Administrative

  $ 35,248     $ 35,222     $ 121     $ (147 )   $ (26 )     0

%

Percentage of revenue

    11

%

    11

%

                               

 

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 $39.4 million for fiscal 2020, representing a $4.5 million, or 13%, increase from $34.9 million for fiscal 2019. The non-currency related increase in general and administrative expense of $4.5 million in fiscal 2020 compared to fiscal 2019 was primarily due to higher personnel and other costs of $2.9 million, as a result of moving our order processing employees from sales and marketing expense to general and administrative expense, higher salaries and related costs of $0.9 million, higher stock compensation of $0.8 million and higher information technology and facilities allocated costs of $0.4 million. These higher costs were partially offset by lower accounting fees of $0.4 million.

 

On a constant currency basis, general and administrative expense was $35.2 million for fiscal 2019, representing a $0.2 million, or 1%, decrease from $35.4 million for fiscal 2018. The non-currency related decrease in general and administrative expense of $0.2 million in fiscal 2019 compared to fiscal 2018 was primarily due to lower bonuses of $0.8 million and lower stock compensation of $0.4 million partially offset by higher accounting fees of $0.4 million and higher payroll taxes of $0.2 million. 

 

Amortization of Intangibles from Acquisitions

 

Amortization of intangibles from acquisitions totaled $0.3 million, $0.1 million and $0.4 million for fiscal 2020, 2019 and 2018, respectively. Amortization expense for fiscal 2020 and 2019 was due to intangible assets acquired during fiscal 2019. Amortization expense for fiscal 2018 was due to intangible assets acquired from our fiscal 2013 acquisitions of DynaSys and CEBOS.

 

38

 

Total Other (Income) Expense

 

(in thousands)

 

Year Ended

   

Increase (Decrease)
Compared
to Prior Period

   

Year Ended

   

Increase (Decrease)
Compared
to Prior Period

   

Year Ended

 
   

January 31, 2020

   

$

   

%

   

January 31, 2019

   

$

   

%

   

January 31, 2018

 

Other (income) expense

                                                       

Interest income

  $ (2,782 )   $ 182       7

%

  $ (2,600

)

  $ (1,053 )     -68

%

  $ (1,547

)

Interest expense

    630       13       2

%

    643       (26 )     -4

%

    669  

Other expense (income), net

    68       (455 )     -118

%

    (387

)

    (2,399 )     -119

%

    2,012  

Total other (income) expense, net

  $ (2,084 )   $ (260 )     -11

%

  $ (2,344

)

  $ (3,478 )     -307

%

  $ 1,134  

Percentage of revenue

    1

%

                    1

%

                    0

%

 

Total other (income) expense, net was $(2.1) million, $(2.3) million and $1.1 million for fiscal 2020, 2019 and 2018, respectively. When comparing fiscal 2020 to fiscal 2019, the unfavorable change is primarily related to a decrease in the fair value of our interest rate swap of $0.3 million and lower foreign exchange gains of $0.2 million partially offset by higher interest income of $0.2 million. When comparing fiscal 2019 to fiscal 2018, the favorable change is primarily related to higher foreign exchange gains of $2.7 million, as the U.S. dollar strengthened by approximately 10% against the euro, and higher interest income of $1.1 million due to interest rate increases.

 

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. 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

 

(in thousands)

 

Year Ended

   

Increase (Decrease)
Compared
to Prior Period

   

Year Ended

   

Increase (Decrease)

Compared
to Prior Period

   

Year Ended

 
   

January 31, 2020

   

$

   

%

   

January 31, 2019

   

$

   

%

   

January 31, 2018

 

Income tax expense

  $ 12,345     $ 10,856       729

%

  $ 1,489     $ (3,368 )     -69

%

  $ 4,857  

Percentage of revenue

    4

%

                    1

%

                    2

%

Effective tax rate

    -343

%

                    12

%

                    -115

%

 

We recorded income tax expense of $12.3 million, $1.5 million and $4.9 million for fiscal 2020, 2019, and 2018 respectively. QAD’s effective tax rate was -343%, 12%, and -115% for fiscal 2020, 2019, and 2018, respectively. We incurred a pre-tax loss of ($3.6) million in fiscal 2020 versus a pre-tax income of $11.9 million in fiscal 2019. The change in effective tax rate in fiscal 2020 was primarily due to a $16.2 million increase in valuation allowance. This increase is mainly comprised of a $10.3 million valuation allowance placed on the net deferred tax assets of the Company’s wholly-owned Irish subsidiary (the “Irish principal”) and a $5.2 million valuation allowance on our U. S. equity compensation. 

 

We generated pre-tax income of $11.9 million in fiscal 2019 compared to a pre-tax loss of $(4.2) million in fiscal 2018.  Income tax expense in fiscal 2018 included a $2.0 million provision to estimate the one-time mandatory repatriation tax expense from the Tax Act. The one-time mandatory repatriation tax was further refined during fiscal 2019 and the final tax expense was $0.7 million. As a result, a tax benefit of $1.3 million was recorded in fiscal 2019. Tax expense was further reduced in fiscal 2019 by equity compensation deductions overseas. In fiscal 2018, tax expense was significantly impacted by the provisional effects of the one-time mandatory repatriation and equity compensation deductions.

 

Our effective tax rate is affected by the relative amount of our foreign earnings. Our foreign earnings are primarily generated from China, India and Mexico. These countries have higher statutory and effective tax rates than the U.S. We are not able to realize related benefits from operating in Ireland due to a valuation allowance placed against our Irish principal.

 

On March 27, 2020, the U.S. government enacted the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act).  The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net