20 19
ANNUAL REP ORT
Amounts in thousands, except per share data
2 0 1 9
2 0 1 8
2 0 1 7
F I N A N C I A L H I G H L I G H T S :
Total Revenue
Net Income (Loss)
Diluted Net Income (Loss) Per Share
$333,016
10,428
$305,018
(9,065)
$277,973
(15,450)
F I S C A L Y E A R S E N D E D J A N U A R Y 3 1
Class A
Class B
Cash and Equivalents
Total Debt
Cash Flow From Operations
0.50
0.44
139,413
13,323
19,007
(0.49)
(0.41)
147,023
13,779
10,418
28%
Services
7%
Licenses
REVENUE BY
CATEGORY
28%
Subscriptions
30%
EMEA
37%
Maintenance
& Other
39%
Automotive
REVENUE BY
REGION
48%
North
America
REVENUE
BY VERTICAL
MARKET
15%
Asia Pacific
7%
Latin America
16%
Consumer Products/
Food & Beverage
14%
Life Sciences
& Other
ABOUT QAD: QAD provides innovative enterprise software applications for leading global manufacturing
companies. QAD applications are designed to simplify the management and enhance the efficiency of
manufacturing resources and operations both within and beyond the enterprise, enabling companies through-
out the world to collaborate with their customers, suppliers and partners.
(0.84)
(0.70)
145,082
14,213
18,680
31%
High Tech/
Industrial
Products
DEAR SHAREHOLDERS,
We experienced significant change
customer satisfaction. We were able to
during the last fiscal year. We were
achieve a number of improvements across
extremely saddened by the passing of
our infrastructure, added system readiness
our CEO, Karl Lopker in August. Karl was
automation, and continued to enhance our
a guiding light to us all, and his leadership
already best-in-class security practices.
and drive permeated the fabric of the
While delivering an improved customer
company. Karl is sorely missed but is
experience, we were able to achieve
also warmly remembered by the entire
reductions in our per user costs both
QAD community. During his time at QAD,
on the infrastructure side as well as the
Karl helped build and develop a strong
application management functions, helping
leadership team that has and will continue
us to not only meet, but exceed our goals
his commitment to providing our customers
in subscription margin improvement.
with the best solutions for their businesses,
our employees with a great place to work,
and our shareholders with returns on their
investments.
On the product side, we announced
the availability of QAD Cloud ERP with
the Channel Islands UX and the QAD
Enterprise Platform, both for existing and
During fiscal 2019 we continued to
prospective customers in the Cloud. The
drive growth in our cloud business and
release provided significant improvements
delivered substantial improvement to
in the areas of customer management,
our subscription margins. Total revenue
financials, asset management and supply
reached a record of $333 million, and
chain. In addition, the release featured
our Subscription revenue grew by 32%
significant enhancements to Action
to $92 million. Our GAAP pre-tax income
Centers and embedded analytics. The
improved to $12 million from a GAAP
latest version of QAD’s Enterprise Platform
pre-tax loss of $4 million in the prior year.
allows users and developers to add data
Cash flow from operations improved to $19
model extensions and UI script in a no/
million from $10 million, and our balance
low code environment. The new release,
sheet remained strong, ending the year
which we are now calling QAD Adaptive
with $139 million in cash and equivalents.
ERP, provides our customers with the
Our Cloud Operations group delivered
another year of excellent experience
to our customers, exceeding 99.9%
uptime and achieving our highest level of
ability to adapt, personalize and extend
QAD solutions easily and rapidly to adapt
to changing business requirements within
their respective industries.
Our professional services business
solution in the Cloud. We strengthened
grew significantly during the year as we
the integration of QAD CEBOS Quality
increased the number implementations
Management System to QAD ERP, making
and upgrades and due to the successful
the solution more compelling to our
rollout of a large global customer across
existing customer base. QAD Precision
dozens of manufacturing sites around
expanded the solution’s import capabilities
the globe. We increased our internal
by adding a Free Trade Agreements
capabilities and utilized partner resources
module, and added several new Cloud
in order to meet the increased demand.
customers both inside and outside of
During the year, we also augmented our
QAD’s manufacturing verticals. QAD
services partner ecosystem to provide our
DynaSys continued to make impressive
customers with increased resources and
progress toward its aggressive goal of
choices.
Our customers continued to partner with
us in exploring and utilizing emerging
technologies to meet their business
challenges. We formed QAD Labs to
focus our development of solutions with
emerging technologies on practical
applications for our customer base in
support of Industry 4.0 and beyond.
During fiscal 2019 we had a focus on
connectivity to and visualization of
machines on the shop floor. We utilized
Data Lakes to collect and analyze the
increased amount of data we are now able
to collect. We applied Machine Learning
and Predictive Analytics to optimize and
automate manufacturing and operational
processes. We are continuing to explore
and develop these and other emerging
technologies in ways that bring real value
to our customers’ operations.
selling solutions only in the cloud by FY25.
QAD DynaSys not only sold a record
number of Cloud solutions, but also made
great strides toward being recognized
as one of the leading providers of
Demand and Supply Chain Solutions in
the Cloud. We are very encouraged by
the performance of our Divisions and see
increased opportunity, including inside of
our QAD ERP installed base.
LOOKING AHEAD
Emerging technologies and significant
geopolitical changes are creating
increased disruption across many
industries; leading to re-definitions of
entire categories, the emergence of new
market entrants, and the need for existing
players to re-think the way they approach
their businesses. Traditional approaches
no longer work, and companies need to
become more agile and be able to change
Our divisional products accelerated
rapidly to effectively compete in their
their transformation to the Cloud, signing
markets. Traditional approaches to ERP no
many new customers, converting existing
longer meet the requirements of today’s
ones, and continuing to expand their
fast-paced business environments.
We believe that we are uniquely positioned
We would like to thank our customers
to help manufacturing companies be
for their continued trust in us, and our
successful in this environment. QAD’s
employees and partners for enabling us to
Adaptive ERP solutions are designed to
achieve our goals.
keep pace with these business disruptors
and enable companies to rapidly adapt
to their changing environment. We are
confident that our solutions and global
Sincerely,
capabilities are perfect for the markets
Anton Chilton, CEO
we serve, and that our ongoing success
with our customers will continue to deliver
returns to our shareholders.
Pam Lopker, President and Founder
2019 QAD FORM 10-K
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, 2019
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
(State or Other Jurisdiction of Incorporation or Organization)
77-0105228
(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(g) of the Act:
Title of Each Security
Class A Common Stock, $.001 par value
Class B Common Stock, $.001 par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(b) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or an amendment to this Form 10-K. ☒
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
☐ Emerging growth company
☒ Accelerated filer
☐ Non-accelerated filer
☐ Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒ NO
As of July 31, 2018, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 16,350,124 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, 2018) was approximately $490 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, 2019, there were 16,368,719 shares of the Registrant’s Class A common stock outstanding and 3,263,906 shares of the
Registrant’s Class B common stock outstanding.
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 24, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
QAD INC.
FISCAL YEAR 2019 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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 ...........................................................................................
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES .........................................................................................
ITEM 16. FORM 10-K SUMMARY .........................................................................................................................................
SIGNATURES ...........................................................................................................................................................................
PART IV
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30
31
52
53
53
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54
54
55
55
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56
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98
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 2020.
ITEM 1. BUSINESS
PART I
QAD is a leader in cloud-based enterprise software solutions for global manufacturing companies across the automotive,
life sciences, consumer products, food and beverage, high technology and industrial products industries. We offer full-
featured, secure and flexible enterprise and supply chain solutions built for global manufacturing companies which can be
delivered in the cloud, on-premises or via a blended deployment combination of cloud and on-premises. Our mission is to
provide best-in-class software that enables our customers to operate as an effective enterprise where their business processes
are running at peak efficiency and are perfectly aligned to their strategic goals. Our solutions, called QAD Enterprise
Applications, enable measurement and control of key business processes that support operational requirements, including
financials, manufacturing, demand and supply chain planning, customer management, business intelligence and business
process management. Our architecture, called the QAD Enterprise Platform, provides manufacturers with the flexibility they
need to achieve a greater fit between their optimal business processes and systems, which enables them to adjust to change
in the markets they serve.
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 to 43,000 from 33,000 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 1,970 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 26 segments 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
segment, based on our in-depth knowledge of the segment and best practices. In addition, we participate in industry groups
serving our target segments to ensure that we address regulatory compliance issues, evaluate new manufacturing practices
and leverage advanced technologies to give our customers a maximum competitive advantage.
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, especially the tier-1 suppliers in the supply chains of automotive original equipment
1
manufacturers. We deliver unique capabilities to support the collaboration requirements of the 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 five segments in the life sciences industry: contract
manufacturing; surgical devices; orthopedic devices; diagnostic 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
Cloud 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 segments 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 six segments in the food and beverage industry: shelf-stable bottling, canning and packaging; distilleries, wineries
and brewing; frozen foods; creameries and fresh foods; candy and confections; and meat and fish processing. 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 four segments in the high
technology industry: standalone devices and test equipment; batteries, power supplies and lighting; cable, wiring and
connectors; and industrial and high technology contract manufacturing. High-tech 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-tech 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.
2
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 six segments in the industrial products industry: flexible packaging; engineered materials; contract
manufacturing; standalone equipment; remanufacturing; 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 six 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. 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 products and services support the business processes of global manufacturing companies in our target industries.
We continually monitor emerging business requirements and practices as well as regulatory changes and incorporate them
into our product and solutions strategies. Our development focus emphasizes user experience. We strive to deliver solutions
that offer comprehensive capabilities while being easy to access, learn and use.
The Channel Islands program was designed to transform the architecture and user experience of QAD solutions. Channel
Islands has two key components: Channel Islands User Experience (“UX”) and the QAD Enterprise Platform.
The Channel Islands User Experience (“UX”) provides access to QAD Enterprise Applications on any device with a
modern web browser. It includes a new user interface (“UI”) written in HTML5 which seamless access across desktops and
mobile devices and has the ability to co-exist with our current .NET UI. Mobile devices continue to play an ever-increasing
role in our day-to-day lives, and our customers are using mobile computing to support their businesses. Channel Islands
leverages a responsive HTML5 user interface that displays appropriately across screen sizes. As such, Channel Islands is
available on any device with a modern web browser, including tablets and smartphones. In addition, QAD provides some
mobile specific applications purpose-built for the actions users are likely to take on their mobile devices. These include a
requisition approval solution, a mobile business intelligence solution, mobile browse capability and mobile application
monitoring tools to support system administrators.
The QAD Enterprise Platform is the architecture behind the Channel Islands project. The benefits it provides to customers
make it the most significant part of the solution. Manufacturers need an Enterprise Resource Planning (“ERP”) system that
will allow them to easily change their business processes to meet the demands of their changing market. The QAD Enterprise
Platform provides five rapid response capabilities: Personalization; Embedded Analytics; Modularization; Extensibility; and
New Apps. Most critically, these capabilities include the ability to extend current applications, to connect with external
systems through micro services, and to develop entirely new applications on the QAD Enterprise Platform without the need
to write or modify code in QAD Enterprise Applications. Extensions and new apps are non-intrusive to the enterprise
applications and do not hinder future upgrades. Modularity provides the ability to upgrade the solution by components, rather
than upgrading the entire solution at one time. This makes upgrades smaller, faster and easier; helping customers stay on the
most current version of our software which reduces the gap between their business needs and what our enterprise applications
provide. Modularity also allows us to improve the efficiency of our cloud operations using a simplified upgrade process. The
architecture eases the adoption of new advanced technologies into the solution.
In support of our focus on business process efficiency, we have integrated the ability to generate business process maps
for common business processes into our software using the QAD Process Editor tool. This tool simplifies implementations,
maps common business processes and facilitates navigation throughout the entire product suite. Within our suite, we have
3
embedded business process management (“QAD BPM”). QAD BPM allows customers to visualize their business processes;
monitor transactional throughput by user, role or stage; and modify those processes to make them more efficient. Using QAD
BPM, companies can create business process models, assign task responsibilities, and monitor and re-direct workflow; all of
which reduce process execution time, improve visibility of active processes, identify bottlenecks and support process
improvement. QAD developed its solutions to allow simple integration with other systems our customers use within their
organizations. For example, we enable seamless integration between QAD Enterprise Applications, common browser
applications and spreadsheets. QAD solutions also integrate easily with other web applications and web services. Using our
Q-Xtend toolset, customers can connect to different software, even when remote, and they can use industry-standard
middleware products such as the IBM MQ™ series or standard connectors built on the Dell Boomi AtomSphere integration
platform. Robust Application Program Interfaces (“APIs”) along with QAD Automation Solutions provide additional
capabilities for integration.
QAD Cloud ERP and QAD Enterprise Applications
QAD Cloud ERP (delivered in the cloud) and QAD Enterprise Applications (delivered on-premises) are an integrated
suite of software applications, which supports the core business processes of global manufacturing companies and provides
specific functionality to support the requirements of our targeted industries and the geographies in which our customers
conduct business. Both QAD Cloud ERP and QAD Enterprise Applications utilize the same underlying technology and
therefore provide customers with the same functionality. QAD Cloud ERP and QAD Enterprise Applications allow customers
to monitor, control and support their operations, whether operating a single plant or multiple sites located around the world.
QAD Cloud ERP provides customers with additional value and better experience than an on premises
implementation. QAD Cloud ERP allows customers to rapidly deploy, scale and extend their solutions in a highly-available,
highly-secure environment. QAD’s Cloud Operations group 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.
QAD Cloud ERP and QAD Enterprise Applications are available in a blended model combining both deployment
alternatives. Blended deployment enables users to transact more easily across business entities with a consistent interface and
consistent functionality since our cloud and on-premises technology is the same. Companies that have chosen the cloud as a
strategic direction but who cannot, or do not want to, move all locations at one time, find the blended deployment model
allows them to transition to the cloud with less risk. The finance function can view individual business unit results and run
consolidations that cross both cloud and on-premises sites seamlessly, while other users can transact and view inventory in
multiple locations irrespective of whether any specific business entity is operating in the cloud or on-premises.
QAD Cloud ERP and QAD Enterprise Applications are comprised of the following software solutions:
QAD Financials
QAD Financials provides comprehensive capabilities to manage and control finance and accounting processes at a local,
regional and global level. The suite 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.
QAD Customer Management
QAD Customer Management enables global manufacturing companies to acquire new customers efficiently, grow
revenue through multiple channels and retain customers through superior service and support. QAD Customer Management
helps our customers measure marketing campaign effectiveness, manage the sales opportunity lifecycle and optimize order
and fulfillment processes. QAD 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. QAD
Customer Self Service provides a web storefront for our customers to transact sales, which is fully and securely integrated
with the rest of QAD Enterprise Applications.
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QAD Manufacturing
QAD Manufacturing delivers comprehensive capabilities to support manufacturing business processes, from planning
through execution, and provides visibility and control of materials and labor. The suite has capabilities in the areas of planning
and scheduling, 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
Manufacturing supports 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.
QAD Automation Solutions
QAD Automation Solutions improves manufacturers’ material transaction processing accuracy and efficiency by
aligning QAD Enterprise Applications with material and production processes. There are two primary components to QAD
Automation Solutions:
• Data Collection captures material and production data through simplified transactions using mobile devices such
as a radio frequency (“RF”) scanner, tablet or shop floor computer or other machine.
• Label Printing Services routs and prints labels associated with material and production transactions based on
manufacturer, supplier, customer and industry specified formats and rules.
These capabilities help manufacturers better align their material logistics processes in a timely fashion while ensuring
inventory accuracy through process compliance.
QAD Demand and Supply Chain Planning
QAD Demand and Supply Chain Planning (“QAD DSCP”) is a comprehensive group of applications built on a single
unified model to fulfill the materials planning and logistics requirements of global companies. QAD DSCP is supported and
developed by our DynaSys operating division. This solution set delivers functionality and capabilities that help enterprises
optimize their supply chains to enhance customer satisfaction through timely deliveries. Enterprises can align supply and
demand to support the delivery of the right product, to the right place, at the right time and at the most efficient cost. The
suite utilizes the DynaSys Single Click Collaborative platform, with the entire planning model running in a memory-resident
database supporting real-time planning. The suite supports planning for demand, production, procurement, distribution and
global sales and operations. Customers have used this solution with data sets that exceed a million SKUs. QAD Demand and
Supply Chain Planning addresses both simple and complex networks, giving customers the ability to add more advanced
functionality as their enterprise grows. Collaborative portals are available for both demand and supply sides to help ensure
rapid communication of demand or supply fluctuations and to enable collaborative planning.
QAD Supply Chain Execution
QAD's Supply Chain Execution 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, Supply Chain Execution 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 also offers QAD Supplier Portal, 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.
QAD Transportation Management
QAD markets transportation solutions directly to our existing customers as part of QAD Enterprise Applications, and to
the general market through our Precision division. QAD Transportation Management facilitates correct documentation and
control for moving shipments across borders. Transportation Management allows companies to manage and optimize outside
carriers for shipments including parcel, less than truckload, full truckload and container shipments whether using land, sea or
air carriers. Compliance and risk management enables companies to comply with regulations concerning denied parties and
control of dangerous substances.
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QAD Service and Support
QAD Service and Support enables exceptional after-sale customer service and support for companies who commission
and support complex systems. The integration from customer demand through manufacturing to installation and support
provides companies with great efficiencies when managing their business processes. QAD Service and Support handles
service calls, manages service queues and organizes mobile field resources. It also provides extensive project management
support, helping organizations track materials and labor against warranty and service work; compares actual costs to budget;
and generates appropriate invoicing.
QAD Enterprise Asset Management
QAD 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. EAM includes functionality to manage rotable (renewable) inventory.
EAM helps manufacturers achieve a balance between having the right equipment available and minimizing their equipment
investment. It ensures critical spare parts are on hand as needed and monitors company expense and approval policies with
regard to capital plant and equipment.
Action Centers with Embedded Analytics
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.
QAD Analytics
QAD Enterprise Applications provides decision makers and company stakeholders with key data to measure performance
against company and strategic goals. QAD Analytics 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 QAD 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 QAD 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 QAD Business Intelligence, which allows for dynamic analysis and trend reporting across multiple data
sources. Customers can also access QAD Business Intelligence using mobile devices, which allows users to view, filter and
sort all data accessible to QAD Browses using mobile devices.
QAD Enterprise Quality Management System
QAD provides enterprise quality management and regulatory compliance solutions to global companies in many market
segments, including QAD’s target markets. The suite supports customers’ compliance with industry-specific quality
standards. In the automotive vertical, QAD’s solution 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. The suite also features manufacturing quality solutions for audit, risk management, document control, gage
calibration, inspection and statistical process control. Our CEBOS division supports and develops QAD’s Enterprise Quality
Management suite.
QAD Interoperability
QAD Cloud ERP and QAD Enterprise Applications use a service-oriented architecture, allowing customers to easily
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
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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 manufacturing meet growing digital tax compliance requirements.
QAD 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 60 different countries with its internationalization
capabilities.
QAD Divisions
Over time QAD has acquired certain companies to enhance our product capabilities. We have chosen to keep some of
our acquired companies operating as divisions because they may market their software outside of the industries our core QAD
customers are in. Although the products marketed by these divisions have all been incorporated into QAD Enterprise
Applications, these divisions also maintain their own websites, operate under their own names and may sell their products
under their own names.
The following divisions operate as part of QAD Inc.:
Precision Software
Precision markets our transportation management solutions and is a trusted source for global trade and transportation
execution. Precision Transportation Management facilitates documentation and control for moving shipments across borders,
including regulatory compliance, and allows companies to optimize outside carriers for shipments. From a single,
comprehensive open architecture that is adaptable and extensible, the solution controls both domestic and international
movement of inbound and outbound goods, regulatory compliance, documentation, carrier and delivery management. This
enterprise-class solution can be found in the world's largest and most complex organizations that demand speed and
centralized control of trade and shipping.
DynaSys
DynaSys markets our Demand and Supply Chain Planning (“DSCP”) solution. The DynaSys DSCP technology provides
a comprehensive end-to-end solution that enables optimization, analysis, simulation, collaboration, and the ability to
understand and efficiently plan supply chain activities. This solution helps enterprises improve customer satisfaction while
reducing inventory levels and costs and provide instant visibility and intuitive decision support enabling companies to become
more agile to make their supply chain a competitive business differentiation. The solution suite supports demand planning,
inventory optimization, supply planning, manufacturing planning, financial planning, sales & operations planning, integrated
business planning and Demand Driven Material Requirements Planning (“DDMRP”).
CEBOS
CEBOS provides our enterprise quality management and regulatory compliance solutions. This application suite features
manufacturing quality solutions for audit, risk management, document control, gage calibration, inspection and statistical
process control.
CEBOS provides a fully integrated end-to-end enterprise quality management solution (“EQMS”). The solution targets
are manufacturing organizations that will utilize quality as a means to increase competitiveness as well as optimize the
manufacturing operating margins. By reducing the cost of quality as well as optimizing throughput and reducing
manufacturing interruption resulting from poor quality, significant margin impacts can be realized. In addition, the solution
will target the cost of good quality by increasing the effectiveness of quality management and moving organizations from a
containment approach to a preventative operating strategy. The CEBOS solution places intense focus on the early stages of
new product introduction and expansion into the supplier ecosystem to insure quality issues are addressed in a proactive
manner. The solution readily interoperates with all versions of the QAD ERP solution as well as non-QAD ERP solutions.
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Customer Support and Product Updates Provided via Our Cloud and Maintenance Offerings
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 Enterprise Applications. Customers active on
maintenance or the cloud are also entitled to receive product upgrades and enhancements on a when-and-if available basis.
As part of our maintenance and cloud offerings, our online support site also 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. In addition,
we provide other products, including operational metrics, workbenches and monitoring tools. Customers have access to these
products at no additional fee, provided they have a current maintenance or cloud agreement in place with QAD.
Our cloud environment is managed by our Cloud Operations group with infrastructure operated by us, but located within
third-party data center facilities or from cloud computing platform providers. The cloud operations group is dedicated to
supporting our cloud solutions. Located primarily in the U.S. and India, they manage the day-to-day operations of our cloud
computing solutions, act as the control point for activities related to elements of the cloud and maintain our cloud
environment, conversions and upgrades to QAD Enterprise Applications.
Generally, our on-premises customers purchase maintenance when they acquire new licenses and our maintenance
retention rate is more than 90%. Our maintenance and other revenue represented 37%, 42% and 47% of our total revenues in
fiscal 2019, 2018 and 2017, respectively. Our maintenance revenue is negatively impacted by customers on maintenance
converting to our cloud solutions. When maintenance customers convert to the cloud, they no longer contract for maintenance
as those support services and unspecified updates are included as a component of the subscription offering. Our subscription
revenue represented approximately 28%, 23% and 19% of our total revenue in fiscal 2019, 2018 and 2017, respectively, and
our cloud customer retention rate is also in excess of 90%. We track our retention rate of cloud and maintenance by calculating
the annualized revenue of customer sites with contracts up for renewal during 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 the maintenance retention
rate calculation. Additional users and additional modules are not included in the annualized revenue for purposes of this
calculation.
QAD Global Services
QAD offers professional services including consulting, deployment, training, technical, development and integration to
facilitate adoption of our cloud Enterprise Applications solution and enable customer success. Through our agile “Easy On
Boarding” (“EOB”) approach we can help customers response to business challenges in a rapid, agile and effective manner.
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 its ecosystem of partners, QAD can offer our customers augmented resources to assist on typical site-
based implementation activities such as data cleansing, functional support, training and user acceptance testing.
QAD Global Services comprises over 450 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.
In support of QAD’s vision of all customers becoming Agile Effective 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.
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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 and Migrations – QAD Global Services supports customers with the initial implementation of QAD
Enterprise 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 Enterprise 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.
Business Process Improvement – QAD has developed a range of predefined diagnostic offerings called Q-Scans. QAD
Global Services utilizes Q-Scans to engage in highly efficient diagnosis of key business processes and functional areas to
provide recommendations to customers for continuous improvement.
Pre-Defined Consulting Engagements – QAD Global Services performs diagnostic and prescriptive consultations that
cover many areas including customization, analytics and various areas of compliance such as MMOG/LE and FDA
requirements.
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 Enterprise Applications.
These QAD experts offer what outside consultants cannot - a combination of a deep understanding of the industries in which
our customers operate, in-depth knowledge of functionality of the QAD solution portfolio and the proven experience of
helping customers leverage our software to become more Effective Enterprises. QAD Global Services offers a full range of
program management, project management, industry consulting and technical services certified in our products and
methodologies.
QAD GLOBAL PARTNER NETWORK
QAD establishes strategic relationships with our partners to expand our sales reach, improve our market impact, provide
technological advantages and strengthen our strategic position in the industries that we serve. QAD and our partners are
constantly evolving, broadening our expertise and our footprint in order to meet the diverse needs of our customers around
the world. Today we have approximately 120 companies partnering with us to deliver innovative solutions, services and
technology that help our customers build their Effective Enterprise.
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OUR GROWTH STRATEGY
QAD believes there are substantial growth opportunities in its cloud business over the coming years. Global
manufacturers are facing unprecedented levels of disruption driven by advances in digital technologies. Responding to these
changes requires a level of agility that legacy ERP solutions fail to deliver. QAD's Cloud ERP offers unparalleled speed of
deployment and the ongoing ability to easily adapt and extend business models 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 a
continuing conversion of our on premises customers to QAD's Cloud ERP.
Our strategy is to enhance our position as a leading provider of cloud-based enterprise applications for global
manufacturing companies. The key elements of our strategy, which we believe will drive continued growth, are as follows:
Leverage 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 simply 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
segments 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 focus on new customer acquisitions. Three areas of disruption that
we are targeting are: Anything as a Service (“XaaS”), make to order at scale, and the digital transformation of manufacturing
(also known as Industry 4.0).
Grow our cloud business and expand our footprint within existing customers. We believe there is substantial
opportunity to win new customers in the core vertical markets we serve and 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 43,000 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 and
selling additional modules and users to our existing cloud customers
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 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 staff with specific knowledge and experience in the industries in which
our customers operate. We provide our solutions to 26 segments 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.
Enhance customer experience to deliver continuous value and maximize customer retention. Our goal is to renew the
subscription or maintenance agreements of our customers every year. We deliver a continuous improvement process to
ensure our customers are maximizing their investment in QAD products and using our software to operate their business at
peak efficiency. We strive to deliver excellent customer support via our maintenance and cloud offerings. We also engage
with every customer every year, frequently conducting reviews of their business processes and presenting opportunities for
improvement. Our deep vertical segment focus and strong, ongoing customer relationships drive continuous development of
industry-specific functionality. As a result, we have maintained retention rates in excess of 90% annually.
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TECHNOLOGY
QAD Enterprise Applications was designed to achieve our vision for global manufacturing companies to effectively run
their business processes at peak efficiency, in alignment with their strategic goals. 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 Enterprise Applications is built on a service based architecture,
which allows QAD Enterprise Applications’ components to communicate with one another through industry-standard
messaging techniques like Representation State Transfer services. This allows customers to exploit the full benefit of QAD’s
open architecture for their businesses.
QAD Enterprise 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
like 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.
QAD’s enterprise architecture provides significant flexibility for global companies in deploying QAD Enterprise
Applications. Our enterprise 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 enterprise 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 Information Technology Infrastructure Library (“ITIL”) standards.
QAD’s cloud infrastructure operates on a Cloud Management Platform. This 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 9001:2008 standard for quality management, the ISO 20000:2011 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 16 (SOC I-Type II) requirements for reporting and
compliance controls.
Cloud deployments 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 virtual 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 to address legacy or emerging
challenges. 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 initiatives like Industry 4.0 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 machine learning,
assisted planning and IoT integrated shop floor connectivity.
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PRODUCT DEVELOPMENT
We continued to see our manufacturing customers’ businesses evolve during fiscal 2019 with a focus on connectivity to
machines on the shop floor and data lakes to collect and analyze the rich information obtained from those machines. The
products that our customers produce are becoming smarter and are now connected and participating in the IoT revolution.
We are using Machine Learning and Predictive Analytics to streamline and make customers’ manufacturing processes
smarter. We continue to maintain a global research and development organization that provides new product enhancements
to the market on a semiannual basis in order to be responsive to industry and regulatory changes. We continue to support our
customers as their operations move across the globe through our internationalization effort.
The enterprise software industry is continuing its transition from selling on-premises licenses to selling cloud-based
solutions, which include flexible and adaptive integration, social media interaction, mobile computing and platform services
capabilities. In fiscal 2019, we released a major upgrade to the Enterprise Edition software suite that was focused on supply
chain efficiencies and flexible manufacturing. Our latest agile manufacturing module moved to general availability and gives
our customers the ability to mix and match their manufacturing styles in one easy to use production process.
We continued the transition of our business model and product suite to cloud-based offerings as we moved our latest
user experience and QAD Enterprise Platform to general availability for our cloud customers. We started an Early Adopter
program for our on-premises customers. Our latest release supports mobile applications for decision making and provides
insights into the health of our customers’ businesses through an Actionable Insights application. This offering is designed to
give our customers even more value and flexibility when using our product suite with a secure browser from anywhere the
user has connectivity. We continue to see more attempts of outside penetration or hacking with Internet facing applications
which we take very seriously. We continue to have our software verified through an outside firm by scanning all the source
code and performing penetration testing to preemptively identify and remove security flaws. With our web services, rich set
of API’s and the QAD Enterprise Platform, our customers can more easily connect our product suite to other applications and
extend our solution without customizing or writing code.
We dedicate considerable technical and financial resources to research and development to continually enhance and
expand our product suite. For example, in fiscal 2019, we continued our internationalization program in support of our global
customers. As we ended fiscal 2019, we were supporting our customers in over 70 countries with a single solution managed
and maintained by QAD’s research and development organization. We continue to see a trend toward electronic invoicing
and registration of shipments and invoices with government agencies to prevent falsification and tax avoidance. Spain,
Mexico and Italy all introduced legislation in 2018 that requires all invoices to be registered with the government. We also
see a continued tightening of tax legislation. India introduced a new Value Added Tax (“VAT”) process during 2018. We
continue to support our customers through these changes without interruption to their business. 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.
We operate a global research and development (“R&D”) organization comprised of 430 R&D employees located in
offices in the United States, India, China, Ireland, Australia, France, Belgium, Spain, Brazil, Great Britain and Poland. Our
R&D expenses totaled $54.0 million, $47.7 million and $43.6 million in fiscal years 2019, 2018 and 2017, 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 over 70 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.
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.
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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 strategic accounts team, which is responsible for
managing QAD’s largest global customers across regions.
Our direct sales organization includes approximately 65 commissioned sales people. 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 40 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 providing value by helping our customers
achieve the vision of the Agile, Rapid and Effective Enterprise. We are targeting segments within our primary verticals with
the greatest disruption and where we can provide the best fit.
Our main marketing objectives are to leverage the measurable success in business outcomes our customers have achieved
and highlight hidden costs prospects may face to increase awareness and drive leads in these target segments. 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, buying intent, and display advertising;
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 and gamification to engage and educate prospects and
generate interest through product information and demonstrations; 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.
COMPETITION
Every aspect of our business is affected by strong competition from both enterprise software application vendors and
cloud computing application services providers. The markets for our on-premises and cloud offerings are rapidly evolving;
highly competitive; and subject to changing technology, shifting customer needs and frequent introductions of new
applications. Our customers demand greater performance and reliability with lower complexity. Cost of implementation or
conversion to the cloud and cost of ongoing maintenance and subscription are constant concerns when our customers make
decisions about how best to deploy their resources.
We compete with large, well-established enterprise application vendors, such as SAP, Oracle and Infor, 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
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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:
Performance and reliability
Speed and ease of deployment and use of applications
• Customer satisfaction
•
• Total cost of ownership
•
• Capability for configuration, integration, security and scalability
•
• Technological innovation and ability to respond to customer needs rapidly
•
Financial resources and
• Reputation of the vendor.
Solution breadth and functionality
We believe that we compete favorably on the basis of these factors. 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.
EMPLOYEES
As of January 31, 2019, we had approximately 1,970 full-time employees, including 965 in support, subscription and
professional services, 430 in research and development, 345 in sales and marketing and 230 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 2019, 2018 and 2017 is
presented in Note 12 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 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.
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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.
Risks associated with our cloud 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 delay the deployment of additional users and sites, 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 significant additional investments
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.
Our cloud retention rate is 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 12 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 at a lower subscription
level. 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. We cannot provide assurance
that our subscriptions will be renewed at the same or higher levels of service, 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 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.
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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 operation of any of these facilities, and they may be subject to damage or interruption
from earthquakes, floods, fires, power loss, telecommunications failures 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 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 user names, 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.
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, in 2016, the European Union adopted the General Data
Protection Regulation (“GDPR”), which establishes new requirements regarding the handling of personal data and which
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became effective in May 2018. Non-compliance with the GDPR may result in monetary penalties of up to 4% of worldwide
revenue. In addition, domestic data privacy laws, such as the California Consumer Privacy Act (“CCPA”) which will take
effect in January 2020, 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 software 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 related to the Internet 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 relating to Internet usage. Changes in these laws or regulations could require us to modify our applications in
order to comply with these laws or regulations. In addition, government agencies or private organizations may begin to impose
taxes, fees or other charges for accessing the Internet or for commerce conducted via the Internet. These laws or charges
could negatively impact our business.
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, with the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts
with Customers (“Topic 606”) in fiscal 2019, revenue recognition has much greater reliance on management estimations.
Our financial forecasts are subject to uncertainty to the extent they are based on estimated sales forecasts.
Our revenues, and particularly our new software license 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. We may hire additional services staff in anticipation of customer orders and if we are unable to keep the
services staff engaged on billable matters then our profit margins may suffer. In addition, certain engagements may involve
fixed price arrangements and significant staffing 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 terms 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 in any quarter may be derived from a limited number of large, non-recurring license
sales.
We may experience large individual license sales, which may cause significant variations in license fees being reported
on a quarterly basis. We also believe that the purchase of our products is discretionary and may involve a significant
commitment of a customer’s capital resources. Therefore, a downturn in any significant customer’s business could have a
significant adverse impact on our revenue and profit. Further, we have historically recognized a substantial portion of our
license revenue from sales booked and shipped in the last month of a quarter and, as a result, the magnitude of quarterly
fluctuations in license fees may not become evident until the end of a particular quarter. Our revenue from license fees in any
quarter is substantially dependent on orders booked and shipped in that quarter. We are unlikely to be able to generate revenue
from alternative sources if we discover a shortfall near the end of a quarter.
A significant portion of our revenue is derived from maintenance renewals with our existing installed base of customers.
Maintenance renewals are at the customer’s discretion, and customers may elect not to renew. Further, it is our strategy
to convert existing customers to our cloud services offering, which, if successful, will reduce maintenance renewals. If our
existing customers discontinue maintenance to a significant degree, our revenues and results of operations will be adversely
affected.
Our 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 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 maintenance retention rate decreases, our revenue
and results of operations would be adversely affected.
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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. 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.
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 Internet 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.
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. 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 quarterly and annual operating results.
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Risks associated with our solutions
We may experience defects in 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.
Dependence on third-party suppliers
We are dependent on Progress Software Corporation.
The majority of QAD Enterprise Applications are written in a programming language that is proprietary to Progress
Software Corporation, or “Progress.” These QAD Enterprise Applications do not run within programming environments
other than Progress and therefore our customers must acquire rights to Progress software in order to use these QAD Enterprise
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, provide adequate functionality in our products on terms that adequately protect our proprietary
rights or are commercially favorable to us.
Certain QAD Enterprise 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.
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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 licensing agreements with each of our on-premises customers and these
agreements provide for the non-exclusive use of QAD Enterprise Applications. Our license contracts contain confidentiality
and non-disclosure provisions, a limited warranty covering our applications and indemnification for the customer from
infringement actions related to our applications. In addition, we generally license our software to end-users 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, the laws of
certain countries do not protect our proprietary rights to the same extent as the laws of 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.
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.
21
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 industry segments: 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 segments and geographies. The failure of our products to achieve or maintain substantial market acceptance in one or
more of these segments or geographies could have an adverse effect on us. If any of these targeted industry segments or
geographies experience a material slowdown or reduced growth, those conditions could adversely affect the demand for our
products.
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 and political turmoil. 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
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. Our services providers generally do not receive fees for the sale of our software products
unless they participate actively in a sale as a sales agent or a distributor. 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.
22
Risks associated with acquisitions we may make
We may make acquisitions or investments in new businesses, products or technologies that involve additional risks.
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; and
• Acquisitions may distract management from our existing businesses.
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-vote 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;
23
• Uncertainty regarding regulation, currency, tax, and operations resulting from the Brexit vote 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; and
• 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.
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 Mexican peso, 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.
The U.S.-based Financial Accounting Standards Board (“FASB”) is currently working together with the International
Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more
comparable financial reporting between companies who are required to follow GAAP under SEC regulations and those who
are required to follow International Financial Reporting Standards outside of the United States. These efforts by the FASB
and IASB may result in different accounting principles under GAAP that may result in materially different financial results
for us. Additionally, significant changes to GAAP resulting from the FASB’s and IASB’s efforts may require that we change
how we process, analyze and report financial information and that we change financial reporting 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.
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;
24
• 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 and changes in political or market conditions.
The dual class structure of our common stock as contained 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 2019 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.
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.
25
Our common stock ownership is concentrated
The dual class structure of our common stock as contained 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, 2019. As of January 31, 2019, Pamela Lopker beneficially owned approximately 40% of the
outstanding shares of our Class A and 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, the holders of our Class B common
stock collectively will continue to control a majority of the combined voting power of our common stock even when the
shares of Class B common stock represent as little as 5% of all outstanding shares of our 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 a small group of stockholders 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
26
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.
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 Chairman of the Board and
President, Pamela Lopker, and Chief Executive Officer, Anton Chilton, are critical to 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. This could result in system interruptions, loss of intellectual
property, delays in our product development, interruptions in our customer services, breaches of data security and loss of
critical data, 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 2028. 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 2019:
Fourth quarter ........................................................................... $
Third quarter .............................................................................
Second quarter ..........................................................................
First quarter ...............................................................................
38.39 $
40.91
44.45
39.33
48.04 $
61.80
55.35
50.35
29.50 $
28.35
32.07
27.00
35.00
49.40
44.24
36.75
Fiscal 2018:
Fourth quarter ........................................................................... $
Third quarter .............................................................................
Second quarter ..........................................................................
First quarter ...............................................................................
34.90 $
30.25
29.40
26.04
43.40 $
38.10
33.40
30.95
26.72 $
21.58
24.21
21.38
34.00
30.80
27.13
26.09
QADA
QADB
Low Price High Price Low Price High Price
Holders
As of March 31, 2019, there were approximately 144 shareholders of record of our Class A common stock and
approximately 129 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.
Dividends
We declared four quarterly cash dividends in fiscal 2019 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, 2014 and ending January 31, 2019.
The graph assumes that $100 was invested in QAD common stock on January 31, 2014 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 2014 through
Fiscal Year 2019)
01/31/14 ..............................................................
01/31/15 ..............................................................
01/31/16 ..............................................................
01/31/17 ..............................................................
01/31/18 ..............................................................
01/31/19 ..............................................................
QADA
QADB
NASDAQ
Composite
Total Return
Index
NASDAQ
Computer
Index
100.00
107.90
104.51
165.27
248.58
244.65
100.00
109.70
102.68
162.47
217.58
205.23
100.00
112.95
112.43
136.82
180.60
177.44
100.00
118.31
123.63
152.88
216.12
211.53
29
ITEM 6. SELECTED FINANCIAL DATA
Years Ended January 31,
2019 (1) 2018 (2)
2016 (4)
(in thousands, except per share data)
2017 (3)
2015 (5)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Subscription Fees ............................................... $
License fees ........................................................
Maintenance and other .......................................
Professional services ..........................................
Total revenue ......................................................
Operating income (loss) .....................................
Net income (loss) ............................................... $
Basic net income (loss) per share:
Class A ............................................................... $
Class B ............................................................... $
Diluted net income (loss) per share:
Class A ............................................................... $
Class B ............................................................... $
Dividends declared per common share:
Class A ............................................................... $
Class B ............................................................... $
BALANCE SHEET AND CASH FLOW
DATA:
91,861 $
25,568
122,936
92,651
333,016
9,573
10,428 $
69,615 $
25,807
128,142
81,454
305,018
(3,074)
(9,065) $
52,167 $
23,633
130,406
71,767
277,973
3,364
(15,450) $
38,806 $
29,891
132,962
76,193
277,852
10,171
8,912 $
28,217
40,917
141,295
84,672
295,101
15,985
12,946
0.55 $
0.46 $
(0.49) $
(0.41) $
(0.84) $
(0.70) $
0.50 $
0.44 $
(0.49) $
(0.41) $
(0.84) $
(0.70) $
0.29 $
0.24 $
0.29 $
0.24 $
0.29 $
0.24 $
0.49 $
0.41 $
0.47 $
0.40 $
0.29 $
0.24 $
0.84
0.70
0.79
0.68
0.29
0.24
Cash and equivalents ..........................................
Working capital ..................................................
Total assets .........................................................
Current portion of long-term debt ......................
Long-term debt ...................................................
Total stockholders’ equity ..................................
Cash provided by operations ..............................
139,413
78,350
317,174
487
12,836
133,247
19,007
147,023
70,960
299,817
466
13,313
105,628
10,418
145,082
80,351
280,890
446
13,767
112,686
18,680
137,731
86,791
287,341
422
14,191
128,006
24,057
120,526
69,757
282,151
406
14,603
110,565
23,963
(1) 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.
(2) 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.
(3) Fiscal year 2017 includes placement of a valuation allowance of $16.3 million against U.S. federal and state net
deferred tax assets.
(4) Fiscal year 2016 includes an 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 stock issuance described in note (5) below.
(5) Fiscal year 2015 includes an issuance of 2,000,000 shares of Class A common stock at $20.00 per share for net
proceeds to the Company of $37.0 million after deducting offering expenses.
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 leading provider of flexible, cloud-based enterprise software and
services for global manufacturing companies. QAD Enterprise Applications support operational requirements in the areas of
financials, customer management, supply chain, manufacturing, service and support, analytics, business process management
and integration. QAD's portfolio also includes related solutions for quality management software, supply chain management
software, transportation management software and business-to-business interoperability. QAD solutions support customers
in the automotive, consumer products, food and beverage, high technology, industrial manufacturing and life sciences
industries to streamline processes, improve operational performance, comply with regulatory requirements and meet industry
standards.
We have four principal sources of revenue:
• Subscription of Enterprise Applications through our cloud offering in a Software as a Service (“SaaS”) model as well as
other hosted applications;
• License purchases of Enterprise 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 2019, approximately 48% of our total revenue was generated in North America, 30% 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, 2019, we
employed approximately 1,970 employees worldwide, of which 650 employees were based in North America, 610 employees
in EMEA, 600 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 2019, we closed most of our new customer deals in the cloud.
In addition, we converted many of our existing customers from on-premises licenses to our cloud based solution. Recurring
revenue, which we define as subscription revenue plus maintenance revenue, accounted for 65% of total revenue for fiscal
2019. By reducing our customers’ up-front costs and providing continuous application and infrastructure support, 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.
31
RESULTS OF OPERATIONS
We operate in several geographical regions as described in Note 12 “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
(in thousands)
Revenue
Subscription fees ...................... $
Percentage of total revenue ......
License fees ..............................
Percentage of total revenue ......
Maintenance and other .............
Percentage of total revenue ......
Professional services ................
Percentage of total revenue ......
Total revenue ............................ $
(in thousands)
Revenue
Subscription fees ...................... $
Percentage of total revenue ......
License fees ..............................
Percentage of total revenue ......
Maintenance and other .............
Percentage of total revenue ......
Professional services ................
Percentage of total revenue ......
Total revenue ............................ $
Year Ended
January 31,
Year Ended
January 31,
2019
2018
Change in
Constant
Change due
to Currency
Currency Fluctuations
Total Change
as Reported
$
%
91,861 $
28%
25,568
7%
122,936
37%
92,651
28%
333,016 $
69,615 $
23%
25,807
8%
128,142
42%
81,454
27%
305,018 $
22,398 $
(152) $
22,246
(293)
54
(239)
(5,914)
708
(5,206)
11,349
(152)
11,197
27,540 $
458 $
27,998
Year Ended
January 31,
Year Ended
January 31,
2018
2017
Change in
Constant
Change due
to Currency
Currency Fluctuations
Total Change
as Reported
$
%
69,615 $
23%
25,807
8%
128,142
42%
81,454
27%
305,018 $
52,167 $
19%
23,633
8%
130,406
47%
71,767
26%
277,973 $
17,060 $
388 $
17,448
1,746
428
2,174
(3,615)
1,351
(2,264)
8,927
760
9,687
24,118 $
2,927 $
27,045
32%
-1%
-4%
14%
9%
33%
9%
-2%
13%
10%
Total Revenue. 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 and other revenue. In fiscal 2019, one customer accounted for 10% of total revenue and
no other customer accounted for 10% or more of total revenue. In fiscal 2018 and 2017, no single customer accounted for
more than 10% of total 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 the prior year. Our products are sold to manufacturing companies that operate mainly in the
following six industries: automotive, consumer products, food and beverage, high technology, industrial products and life
sciences. Given the similarities between consumer products and food and beverage as well as between high technology and
industrial products, we aggregate them for management review. The following table presents revenue by industry for fiscal
2019, 2018 and 2017:
Automotive ........................................................................................
Consumer products and food and beverage .......................................
High technology and industrial products ...........................................
Life sciences and other ......................................................................
Total revenue .....................................................................................
39%
16%
31%
14%
100%
37 %
16 %
33 %
14 %
100 %
35 %
16 %
33 %
16 %
100 %
Years Ended January 31,
2018
2017
2019
32
On a constant currency basis, total revenue was $305.0 million for fiscal 2018, representing a $24.1 million, or 9%,
increase from $280.9 million for fiscal 2017. When comparing categories within total revenue at constant rates, our results
for fiscal 2018 included increases in subscription, license and professional services revenue partially offset by a decrease in
maintenance and other revenue. Revenue outside the North America region as a percentage of total revenue was 54% and
53% for fiscal 2018 and 2017, respectively. On a constant currency basis, total revenue increased across all regions during
fiscal 2018 when compared to fiscal 2017.
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 $91.9 million for fiscal 2019, representing a $22.4 million, or
32%, increase from $69.5 million for fiscal 2018. Our subscription revenue represented 28% and 23% of our total revenue in
fiscal 2019 and 2018, respectively. On a constant currency basis, subscription revenue increased across all regions during
fiscal 2019 when compared to 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 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. The increase in subscription revenue consists of new
customer sites; existing Enterprise Applications users converting from on-premises; and additional users and modules
purchased by our existing cloud customers.
The following table presents subscription revenue by region for fiscal 2019, 2018 and 2017:
Years Ended January 31,
2018
2017
2019
North America ...................................................................................
EMEA ...............................................................................................
Asia Pacific .......................................................................................
Latin America ....................................................................................
Total subscription revenue ................................................................
56%
27%
12%
5%
100%
54 %
24 %
14 %
8 %
100 %
The following table presents subscription revenue by industry for fiscal 2019, 2018 and 2017:
Automotive ........................................................................................
Consumer products and food and beverage .......................................
High technology and industrial products ...........................................
Life sciences and other ......................................................................
Total subscription revenue ................................................................
33%
18%
24%
25%
100%
35 %
15 %
23 %
27 %
100 %
Years Ended January 31,
2018
2017
2019
60 %
17 %
15 %
8 %
100 %
39 %
15 %
18 %
28 %
100 %
On a constant currency basis, subscription revenue was $69.6 million for fiscal 2018, representing a $17.0 million, or
32%, increase from $52.6 million for fiscal 2017. On a constant currency basis, subscription revenue increased in our North
America, EMEA and Asia Pacific regions and remained relatively flat in our Latin America region during fiscal 2018 when
compared to the prior year.
We track our retention rate of subscription and maintenance by calculating the annualized revenue of customer sites with
contracts up for renewal during 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 2019, 2018 and 2017.
33
License Revenue. License revenue is derived from software license fees that customers pay for our core product, QAD
Enterprise Applications, and any add-on modules they purchase. Our revenue mix has continued to shift from license to
subscription revenue as a result of our business model transition as more new customers subscribe to our cloud based offerings
rather than purchase perpetual licenses. While we expect license revenue to decline over time, we do continue to experience
quarterly fluctuations.
On a constant currency basis, license revenue was $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 the
prior year. 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. The majority of our license revenue has come from additional users and module purchases
from our existing customers, which we believe is a result of a strong global manufacturing environment.
On a constant currency basis, license revenue was $25.8 million for fiscal 2018, representing a $1.7 million, or 7%,
increase from $24.1 million for fiscal 2017. On a constant currency basis, license revenue increased in our North America
and Asia Pacific regions, and decreased in our EMEA and Latin America regions during fiscal 2018 when compared to fiscal
2017. During fiscal 2018, 15 customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0
million. This compared to fiscal 2017 in which 15 customers placed license orders totaling more than $0.3 million, two of
which exceeded $1.0 million.
Maintenance and Other Revenue. We offer support services 24 hours a day, seven days a week in addition to providing
software upgrades, which include additional or improved functionality, when and if available.
On a constant currency basis, maintenance and other 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 and other revenue
decreased across all regions during fiscal 2019 when compared to the prior year. The decrease in maintenance and other
revenue was primarily due to continued conversions of existing customers’ perpetual 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.
On a constant currency basis, maintenance and other revenue was $128.1 million for fiscal 2018, representing a $3.7
million, or 3%, decrease from $131.8 million for fiscal 2017. On a constant currency basis, maintenance and other revenue
decreased in our North America, EMEA and Asia Pacific regions and increased in our Latin America region during fiscal
2018 when compared to the prior year.
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.
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 performed 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.
34
On a constant currency basis, professional services revenue was $81.5 million for fiscal 2018, representing a $9.0 million,
or 12%, increase from $72.5 million for fiscal 2017. On a constant currency basis, professional services revenue increased
across all regions during fiscal 2018 when compared to the prior year. The increase in professional services revenue period
over period can be attributed to a higher amount of professional services revenue per customer.
Total Cost of Revenue
Year
Ended
Year
Ended
(in thousands)
Cost of revenue
Cost of subscription ......................... $
Cost of license .................................
Cost of maintenance and other ........
Cost of professional services ...........
Total cost of revenue ....................... $
Percentage of revenue .....................
January 31,
January 31,
2019
2018
Change in
Constant
Change due
to Currency
Currency Fluctuations
Total Change
as Reported
$
%
34,128 $
2,714
31,307
87,735
155,884 $
47%
30,563 $
2,946
31,246
84,670
149,425 $
49%
(3,594) $
230
(173)
(3,280)
(6,817) $
29 $
2
112
215
358 $
(3,565)
232
(61)
(3,065)
(6,459)
-12%
8%
0%
-4%
-4%
(in thousands)
Cost of revenue
Cost of subscription ......................... $
Cost of license .................................
Cost of maintenance and other ........
Cost of professional services ...........
Total cost of revenue ....................... $
Percentage of revenue .....................
Year
Ended
Year
Ended
January 31,
January 31,
2018
2017
Change in
Constant
Change due
to Currency
Currency Fluctuations
Total Change
as Reported
$
%
30,563 $
2,946
31,246
84,670
149,425 $
49%
27,027 $
2,990
30,517
70,317
130,851 $
47%
(3,449) $
45
(452)
(13,500)
(17,356) $
(87 ) $
(1 )
(277 )
(853 )
(1,218 ) $
(3,536)
44
(729)
(14,353)
(18,574)
-13%
1%
-2%
-20%
-14%
Total cost of revenue consists of cost of subscription, cost of license, cost of maintenance and other 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; third-party contractor expense, third-party hosting
and hardware costs; 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 and other
includes salaries, benefits, bonuses and other personnel expenses of our support group, stock-based compensation for those
employees, travel expense, professional fees and an allocation of information technology and facilities costs. Cost of
professional services includes salaries, benefits, bonuses and other personnel expenses of our services employees, stock-
based compensation for those employees, third-party contractor expense, travel expense and an allocation of information
technology and facilities costs.
Total Cost of Revenue. On a constant currency basis, total cost of revenue was $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 costs, travel and personnel costs, associated with increased professional services revenue.
On a constant currency basis, total cost of revenue was $149.4 million and $132.1 million for fiscal 2018 and 2017,
respectively and as a percentage of total revenue was 49% for fiscal 2018 and 47% for fiscal 2017. The increase in total cost
of revenue as a percentage of total revenue was mainly due to lower professional services margins and the shift of our revenue
mix from maintenance to subscription. The non-currency related increase in cost of revenue of $17.3 million, or 13%, in
fiscal 2018 compared to fiscal 2017 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 $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
35
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. 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 $30.6 million for fiscal 2018, representing a $3.5 million, or 13%,
increase from $27.1 million for fiscal 2017. The non-currency related increase in cost of subscription of $3.5 million in fiscal
2018 compared to fiscal 2017 was primarily due to higher hosting costs of $2.5 million, higher salaries and related costs of
$0.8 million as a result of higher headcount of approximately 9 people and higher third-party contractor costs of $0.4 million.
These costs were partially offset by $0.8 million of personnel costs cross charged to our services department to support
conversion and upgrade projects. Cost of subscription as a percentage of subscription revenue was 44% and 52% in fiscal
2018 and 2017, respectively.
Cost of License. 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.
On a constant currency basis, cost of license was $2.9 million for fiscal 2018, representing a $0.1 million, or 3%, decrease
from $3.0 million for fiscal 2017. 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 and Other. On a constant currency basis, cost of maintenance and other 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 and other of $0.2 million in fiscal 2019 compared to fiscal 2018 was primarily due to personnel costs.
Cost of maintenance and other as a percentage of maintenance and other revenue was 25% and 24% in fiscal 2019 and 2018,
respectively.
On a constant currency basis, cost of maintenance and other was $31.2 million for fiscal 2018, representing a $0.4 million,
or 1%, increase from $30.8 million for fiscal 2017. The non-currency related increase in cost of maintenance and other of
$0.4 million in fiscal 2018 compared to fiscal 2017 was due to higher personnel costs of $0.4 million. Cost of maintenance
and other as a percentage of maintenance and other revenue was 24% and 23% in fiscal 2018 and 2017, respectively.
Cost of Professional Services. 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. We increased our services capacity by adding headcount and partners in fiscal 2018 in order to fulfill additional
projects. The investment in hiring and training additional services personnel negatively impacted our professional services
margins in fiscal 2018, but as utilization of those additional resources has increased, our professional services margins has
improved. Our professional services margins have historically ranged from about breakeven to 10%. We believe we offer
competitive rates and view our professional services organization as a department supporting the implementation and
deployment of our products which improves the overall customer experience.
On a constant currency basis, cost of professional services was $84.7 million for fiscal 2018, representing a $13.5 million,
or 19%, increase from $71.2 million for fiscal 2017. The non-currency related increase in cost of professional services of
$13.5 million was primarily due to higher salaries and related costs of $4.4 million, as a result of higher headcount of
approximately 87 people, higher third-party contractor costs of $3.6 million, higher bonuses of $1.3 million, higher travel of
$1.5 million and higher information technology and facilities allocated costs of $0.7 million. In addition, cost of professional
services included higher personnel costs from other departments of $1.2 million related to employees who worked on services
engagements. Cost of professional services as a percentage of professional services revenue was 104% for fiscal 2018 and
98% for fiscal 2017.
36
Sales and Marketing
Year
Ended
Year
Ended
(in thousands)
Sales and marketing ........................ $
Percentage of revenue .....................
January 31,
January 31,
2019
2018
Change in
Constant
Change due
to Currency
Currency Fluctuations
78,207 $
23%
75,368 $
25%
(2,709) $
(130 ) $
(in thousands)
Sales and marketing ........................ $
Percentage of revenue .....................
Year
Ended
Year
Ended
January 31,
January 31,
2018
2017
Change in
Constant
Change due
to Currency
Currency Fluctuations
75,368 $
25%
67,194 $
24%
(7,571) $
(603 ) $
Total Change
as Reported
$
(2,839)
%
-4%
Total Change
as Reported
$
(8,174)
%
-12%
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 personnel costs of order processing, sales agent fees and an allocation of
information technology and facilities costs.
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 was
driven by stronger than anticipated new cloud business bookings in the fourth quarter and was 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.
On a constant currency basis, sales and marketing expense was $75.4 million for fiscal 2018, representing a $7.6 million,
or 11%, increase from $67.8 million for fiscal 2017. The non-currency related increase in sales and marketing expense of
$7.6 million in fiscal 2018 compared to fiscal 2017 was primarily due to higher commissions of $3.2 million, higher salaries
and related costs of $2.1 million as a result of higher headcount of approximately 16 people, higher bonuses of $1.6 million
and higher travel of $0.5 million. Stronger than anticipated new cloud business closed in the fiscal 2018 fourth quarter resulted
in higher bonuses and commissions without the associated revenue, as we recognized these expenses up front, while the
revenue is recognized ratably over the contract period.
Research and Development
Year
Ended
Year
Ended
(in thousands)
Research and development .............. $
Percentage of revenue .....................
January 31,
January 31,
2019
2018
Change in
Constant
Change due
to Currency
Currency Fluctuations
53,993 $
16%
47,661 $
16%
(6,265) $
(67 ) $
(in thousands)
Research and development .............. $
Percentage of revenue .....................
Year
Ended
Year
Ended
January 31,
January 31,
2018
2017
Change in
Constant
Change due
to Currency
Currency Fluctuations
47,661 $
16%
43,587 $
16%
(3,700) $
(374 ) $
Total Change
as Reported
$
(6,332)
%
-13%
Total Change
as Reported
$
(4,074)
%
-9%
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
37
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 $54.0 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. We continue to invest
in our new platform and user interface in addition to developing other advanced technologies such as our automated solutions
product.
On a constant currency basis, research and development expense was $47.7 million fiscal 2018, representing a $3.7
million, or 8%, increase from $44.0 million for fiscal 2017. The non-currency related increase in research and development
expense of $3.7 million in fiscal 2018 compared to fiscal 2017 was primarily due to higher salaries and related costs of $2.2
million, as a result of higher headcount of approximately 35 people, higher bonuses of $0.9 million and higher contractor
costs of $0.6 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
Year
Ended
(in thousands)
General and Administrative ............. $
Percentage of revenue .....................
January 31,
January 31,
2019
2018
35,248 $
11%
35,222 $
11%
Change in
Constant
Change due
to Currency
Currency Fluctuations
121 $
(147 ) $
(in thousands)
General and Administrative ............. $
Percentage of revenue .....................
Year
Ended
Year
Ended
January 31,
January 31,
2018
2017
Change in
Constant
Change due
to Currency
Currency Fluctuations
35,222 $
11%
32,318 $
12%
(2,863) $
(41 ) $
Total Change
as Reported
$
%
(26)
0%
Total Change
as Reported
$
(2,904)
%
-9%
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, as well as 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 $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.
On a constant currency basis, general and administrative expense was $35.2 million for fiscal 2018, representing a $2.8
million, or 9%, increase from $32.4 million for fiscal 2017. The non-currency related increase in general and administrative
expense of $2.8 million in fiscal 2018 compared to fiscal 2017 was primarily due to higher bonuses of $1.0 million, higher
stock compensation of $0.8 million and higher legal and accounting fees of $0.8 million.
Amortization of Intangibles from Acquisitions
Amortization of intangibles from acquisitions totaled $0.1 million, $0.4 million and $0.7 million for fiscal 2019, 2018
and 2017, respectively. Amortization expense for fiscal 2019 was due to intangible assets acquired during fiscal 2019.
Amortization expense for fiscal 2018 and 2017 was due to intangible assets acquired from our fiscal 2013 acquisitions of
DynaSys and CEBOS.
38
Total Other (Income) Expense
Year
Ended
January
31, 2019
Increase (Decrease)
Compared
to Prior Period
%
Year
Ended
January
31, 2018
$
Increase (Decrease)
Compared
to Prior Period
%
$
Year
Ended
January
31, 2017
(in thousands)
Other (income) expense
Interest income ................................. $ (2,600) $ (1,053)
(26)
Interest expense ................................
Other (income) expense, net .............
(2,399)
Total other (income) expense, net .... $ (2,344) $ (3,478)
Percentage of revenue ......................
643
(387)
1%
-68% $ (1,547) $
669
-4%
-119%
2,012
-307% $ 1,134 $
0%
(851 )
(1 )
2,448
1,596
-122% $
0%
561%
345% $
(696)
670
(436)
(462)
0%
Total other (income) expense, net was $(2.3) million, $1.1 million and $(0.5) million for fiscal 2019, 2018 and 2017,
respectively. 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. When comparing fiscal 2018 to fiscal 2017, the unfavorable change is primarily
related to higher foreign exchange losses of $2.3 million, as the U.S. dollar declined approximately 10% against the euro and
Mexican peso, partially offset by higher interest income of $0.9 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)
Income tax expense ............ $
Percentage of revenue ........
Effective tax rate ................
1,489 $
1%
12%
Year
Ended
January
31, 2019
Increase (Decrease)
Compared
to Prior Period
%
$
(3,368 )
-69% $
Year
Ended
January
31, 2018
Increase (Decrease)
Compared
to Prior Period
%
$
Year
Ended
January
31, 2017
-75% $ 19,276
4,857 $ (14,419)
2%
-115%
7%
504%
We recorded income tax expense of $1.5 million, $4.9 million and $19.3 million for fiscal 2019, 2018, and 2017
respectively. QAD’s effective tax rate was 12%, -115%, and 504% for fiscal 2019, 2018, and 2017, respectively. We
generated pre-tax income of $11.9 million in fiscal 2019 versus incurring a pre-tax loss of $(4.2) million in fiscal 2018.
Income tax expense in fiscal 2018 included an accrual of $2.0 million to estimate a one-time mandatory repatriation tax owed
related to the Tax Act. The calculation was further refined during fiscal 2019 and the final amount owed was $0.7 million.
As a result, we recorded a tax benefit of $1.3 million in the fourth quarter of fiscal 2019. In addition, in fiscal 2019 we
recorded increased deductions overseas from our equity compensation which lowered our tax expense.
In 2018, our effective tax rate was significantly impacted by the provisional effects of the Tax Act, our jurisdictional mix
of income and equity compensation windfalls. In fiscal 2018, we recorded an accrual of $2.0 million to estimate a one-time
mandatory repatriation tax related to the Tax Act. Our effective tax rate in fiscal 2017 was extraordinarily high due to a $16.3
million valuation allowance placed on U.S. federal and state deferred tax assets.
Our foreign earnings are primarily generated from China, India and Mexico. These countries have higher statutory tax
rates and effective tax rates than the U.S. However, we benefit from operating in Ireland which has a lower statutory income
tax rate and effective tax rate than the U.S.
For further information regarding income taxes, see Note 4 “Income Taxes” within the Notes to Consolidated Financial
Statements included in Item 15 of this Annual Report on Form 10-K.
39
Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the
conditions for use of non-GAAP financial information. Our measures of non-GAAP adjusted EBITDA, non-GAAP adjusted
EBITDA margins, non-GAAP pre-tax income and estimated cash taxes on GAAP earnings each meet the definition of a non-
GAAP financial measure. We define the non-GAAP measures as follows:
• Non-GAAP adjusted EBITDA - EBITDA is GAAP net income before net interest expense, income tax expense,
depreciation and amortization. Non-GAAP adjusted EBITDA is EBITDA less stock-based compensation expense and the
change in the fair value of our interest rate swap.
• Non-GAAP adjusted EBITDA margins - Calculated by dividing non-GAAP adjusted EBITDA by total revenue.
• Non-GAAP pre-tax income - GAAP income before income taxes not including the effects of stock-based compensation
expense, amortization of purchased intangible assets and the change in fair value of our interest rate swap.
• Estimated cash taxes on GAAP earnings – Defined as GAAP total tax expense excluding changes in reserves for
unrecognized tax benefits.
QAD’s management uses non-GAAP measures internally to evaluate the business and believes that presenting non-
GAAP measures provides useful information to investors regarding the underlying business trends and performance of our
ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The
non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in
accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly
encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial
measure in evaluating the company.
QAD non-GAAP measures reflect adjustments based on the following items:
Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from our non-
GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. Although stock-based compensation expense is
calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded
from non-GAAP results because it is not an expense which generally requires cash settlement by QAD, and therefore is not
used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense
provides a more useful comparison of our operating results to the operating results of our peers.
Amortization of purchased intangible assets: We amortize purchased intangible assets in connection with our
acquisitions. We have excluded the effect of amortization of purchased intangible assets, which include purchased
technology, customer relationships, trade names and other intangible assets, from our non-GAAP pre-tax income calculation,
because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe
excluding amortization of purchased intangible assets provides a more useful comparison of our operating results to the
operating results of our peers.
Change in fair value of the interest rate swap: We entered into an interest rate swap to mitigate our exposure to the
variability of one-month LIBOR for our floating rate debt related to the mortgage of our headquarters. We have excluded the
gain/loss adjustments to record the interest rate swap at fair value from our non-GAAP adjusted EBITDA and non-GAAP
pre-tax income calculations. We believe that these fluctuations are not indicative of our operational costs or meaningful in
evaluating comparative period results because we currently have no intention of exiting the debt agreement early; and
therefore over the life of the debt the sum of the fair value adjustments will be zero.
40
The following table sets forth the reconciliation of the non-GAAP financial measures of adjusted EBITDA, adjusted
EBITDA margins and non-GAAP pre-tax income to the most comparable GAAP measures for fiscal years 2019, 2018 and
2017 (in thousands):
Years Ended January 31,
2018
2019
2017
Total revenue ..................................................................................... $
333,016 $
305,018 $
277,973
Net income (loss) ..............................................................................
Add back:
Net interest (income) expense .............................................
Depreciation ........................................................................
Amortization .......................................................................
Income tax expense .............................................................
EBITDA ............................................................................................ $
Add back:
Stock based compensation expense.....................................
Change in fair value of interest rate swap ...........................
Adjusted EBITDA ............................................................................. $
Adjusted EBITDA margin .................................................................
Non-GAAP pre-tax income reconciliation
Income (loss) before income tax expense .......................................... $
Add back
Stock-based compensation expense ....................................
Amortization of purchased intangible assets .......................
Change in fair value of interest rate swap ...........................
Non-GAAP income before income taxes .......................................... $
10,428
(9,065)
(15,450)
(1,957)
4,734
772
1,489
15,466 $
10,122
51
25,639 $
8%
(878)
4,562
1,199
4,857
675 $
8,924
(377)
9,222 $
3%
(26)
4,326
1,710
19,276
9,836
7,323
(485)
16,674
6%
11,917 $
(4,208) $
3,826
10,122
125
51
22,215 $
8,924
842
(377)
5,181 $
7,323
1,377
(485)
12,041
Estimated cash taxes on GAAP earnings .......................................... $
3,270 $
2,812 $
2,688
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash is from the sale of subscription, licenses, maintenance and professional services to our
customers. Our primary use of cash is payment of our operating expenses which mainly consist of employee-related expenses,
such as compensation and benefits, as well as general operating expenses for facilities, third-party hosting providers, third
party contractors and other overhead costs. In addition to operating expenses, we may also use cash for capital
expenditures; payment of dividends, taxes on equity award exercises and stock repurchases; and to invest in our growth
initiatives, which may include acquisitions of products, technologies and businesses.
At January 31, 2019, our principal sources of liquidity were cash and equivalents totaling $139.4 million, short-term
investments of $1.2 million and net accounts receivable of $81.6 million. Our cash and equivalents consisted of current bank
accounts, registered money market funds and time delineated deposits. Approximately 85% of our cash and equivalents were
held in U.S. dollar denominated accounts as of January 31, 2019.
Our primary commercial banking relationship is with Bank of America and its global affiliates. Our largest cash
concentrations are in the United States and Ireland. The percentage of cash and equivalents held by foreign subsidiaries was
74% and 69% as of January 31, 2019 and January 31, 2018, respectively. The majority of our cash and equivalents are held
in investment accounts which are predominantly placed in money market mutual funds, U.S. Treasury and government
securities funds. The remaining cash and equivalents and short-term investments are held in deposit accounts and certificates
of deposit.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. In addition to
providing for U.S. income taxes on earnings from the United States, we provide for U.S. income taxes on the earnings of
foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. We do
not anticipate changing our intention regarding permanently reinvested earnings as of the balance sheet date.
41
In December 2017, the Tax Act was signed into law. The Tax Act includes a mandatory one-time tax on accumulated
earnings of our foreign subsidiaries which resulted in $0.7 million of additional U.S. tax and will be paid in equal installments
over eight years beginning in fiscal 2019. In spite of the U.S. taxation on these earnings, we intend to permanently reinvest
the earnings in our foreign subsidiaries. Should we decide to repatriate these earnings in the future, we would not expect to
incur significant additional taxes; however, foreign withholding taxes, currency translation, state taxes and currency control
laws must always be considered.
The following table summarizes our cash flows for the fiscal years ended January 31, 2019, 2018 and 2017, respectively.
(in thousands)
Net cash provided by operating activities ........................................... $
Net cash used in investing activities ...................................................
Net cash used in financing activities ..................................................
Effect of foreign exchange rates on cash and equivalents ..................
Net (decrease) increase in cash and equivalents ................................. $
Years Ended January 31,
2018
2019
2017
19,007 $
(9,258)
(14,691)
(2,668)
(7,610) $
10,418 $
(4,669)
(9,165)
5,357
1,941 $
18,680
(3,406 )
(7,814 )
(109 )
7,351
Typical factors affecting our cash provided by operating activities include our level of revenue and earnings for the
period; the timing and amount of employee related compensation payments, vendor payments and tax payments; and the
timing and amount of billings and cash collections from our customers, which is our largest source of operating cash flow.
Net cash flows provided by operating activities were $19.0 million and $10.4 million for fiscal 2019 and 2018, respectively.
The increase in cash flows from operating activities was due primarily to an increase in net income of $19.5 million and the
positive cash flow effect of changes in accounts receivable of $11.0 million partially offset by the negative cash flow effect
of changes in accounts payable and other liabilities of $(17.4) million.
Net cash flows provided by operating activities were $10.4 million and $18.7 million for fiscal 2018 and 2017,
respectively. The decrease in cash flow provided by operating activities from fiscal 2017 to fiscal 2018 was due to a decrease
in pre-tax income of $8 million. Although our revenue increased 10% year over year, our personnel expenses were
significantly higher as a result of hiring 160 additional employees to support the growth in our subscription and services
offerings.
Net cash used in investing activities consisted primarily of capital expenditures of $4.3 million, $3.7 million and $3.3
million for fiscal 2019, 2018 and 2017, respectively. We continue to monitor our capital spending and do not believe we are
delaying critical capital expenditures required to run our business. During fiscal 2019, we made two acquisitions. We acquired
the assets of one of our Indonesian software distributors and made another acquisition to add functionality to our product
suite. The total purchase price of the two acquisitions was $2.7 million and funded entirely with cash on hand.
Net cash used in financing activities consisted primarily of payments of withholding taxes on settlement of stock-based
compensation and payment of dividends. We paid withholding taxes of $8.7 million, $3.4 million and $2.1 million in fiscal
2019, 2018 and 2017, respectively, on vested restricted stock units and exercised stock appreciation rights. We made dividend
payments of $5.5 million, $5.4 million and $5.3 million in fiscal 2019, 2018 and 2017, respectively. On a regular basis the
Board of Directors evaluates our ability to continue to pay dividends as well as the structure of any potential dividend
payments.
We have historically calculated accounts receivable days’ sales outstanding (“DSO”), using the countback, or last-in
first-out, method. This method calculates the number of days of billed revenue represented by the accounts receivable balance
as of period end. When reviewing the performance of our entities, DSO under the countback method is used by management.
It is management’s belief that the countback method best reflects the relative health of our accounts receivable as of a given
quarter-end or year-end because of the cyclical nature of our billings. Our billing cycle includes high annual maintenance
renewal billings at year-end that will not be recognized as earned revenue until future periods.
DSO under the countback method was relatively consistent at 48 days and 51 days as of January 31, 2019 and 2018,
respectively. DSO using the average method, which is calculated utilizing the accounts receivable balance and earned revenue
for the most recent quarter, was 89 days and 93 days as of January 31, 2019 and 2018, respectively. The aging of our accounts
receivable remained consistent when compared with the same period last year. We believe our reserve methodology is
adequate, our reserves are properly stated as of January 31, 2019 and the quality of our receivables remains good.
42
There have been no material changes in our contractual obligations or commercial commitments outside the ordinary
course of business. Cash requirements for items other than normal operating expenses are anticipated for capital expenditures,
dividend payments and other equity transactions. We may require cash for acquisitions of new businesses, software products
or technologies complementary to our business.
We believe that our cash on hand and net cash provided by operating activities will provide us with sufficient resources
to meet our current and long-term working capital requirements, debt service, dividend payments and other cash needs for at
least the next twelve months.
Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign
currency exchange rates. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” for further
discussion.
Seasonal Nature of Deferred Revenue, Accounts Receivable and Operating Cash Flow. Deferred revenue primarily
consists of billings to customers for maintenance and subscription. When renewing maintenance we generally invoice our
customers in annual cycles and when renewing subscription we generally invoice our customers quarterly or annually. We
typically issue renewal invoices in advance of the renewal period. The invoice for initial maintenance and subsequent invoices
for maintenance renewal may occur in different quarters of the relevant year. This may result in quarterly fluctuations in
deferred revenue and accounts receivable. There is a disproportionate weighting towards annual billings in the fourth quarter,
primarily as a result of large enterprise account buying patterns. Our fourth quarter has historically been our strongest quarter
for new business and renewals. The year on year compounding effect of this seasonality in both billing patterns and overall
new and renewal business causes the value of invoices that we generate in the fourth quarter for both new business and
renewals to increase as a proportion of our total annual billings.
The sequential quarterly changes in accounts receivable, related deferred revenue and operating cash flow during the
first three quarters of our fiscal year are not necessarily indicative of the billing activity that occurs in the fourth quarter as
displayed below (in thousands):
Fiscal 2019
Accounts receivable, net ................................................ $
Deferred revenue, current ..............................................
Operating cash flow (1) .................................................
81,577 $
115,253
3,890
46,420 $
80,537
5,971
54,258 $
91,195
5,361
56,909
103,369
3,785
January 31,
2019
October 31,
2018
July 31,
2018
April 30,
2018
Fiscal 2018
Accounts receivable, net ................................................ $
Deferred revenue, current ..............................................
Operating cash flow (1) .................................................
83,518 $
116,693
7,574
50,753 $
83,117
(4,794)
42,397 $
89,661
(244)
46,381
97,235
7,882
January 31,
2018
October 31,
2017
July 31,
2017
April 30,
2017
Fiscal 2017
Accounts receivable, net ................................................ $
Deferred revenue, current ..............................................
Operating cash flow (1) .................................................
69,441 $
104,125
13,209
39,100 $
73,982
3,451
45,468 $
85,268
663
44,829
92,640
1,357
January 31,
2017
October 31,
2016
July 31,
2016
April 30,
2016
(1) Operating cash flow represents net cash provided by (used in) operating activities for the three months ended in the
periods stated above.
43
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations at January 31, 2019 and the effect these
contractual obligations are expected to have on our liquidity and cash flows in future periods.
Notes payable ................................... $
Notes payable interest payments ......
Lease obligations ..............................
Purchase obligations .........................
Total ................................................. $
0.5 $
0.6
5.6
9.0
15.7 $
2020
2021
2024
Thereafter Total
2022
Years Ended January 31,
2023
(In millions)
11.8 $
0.2
1.8
0.1
13.9 $
0.5 $
0.6
4.6
6.8
12.5 $
0.5 $
0.5
2.8
3.0
6.8 $
— $
—
1.5
—
1.5 $
— $
—
2.8
—
2.8 $
13.3
1.9
19.1
18.9
53.2
Purchase obligations are contractual obligations for the purchase of goods or services. They are defined as agreements
that are enforceable and legally binding for QAD which specify all significant terms, including fixed or minimum quantities
to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase
obligations relate primarily to information technology infrastructure costs, hosting services agreements and costs associated
with our sales and marketing events.
We have omitted unrecognized tax benefits from this table due to the inherent uncertainty regarding the timing of
potential issue resolution. Specifically, either (a) the underlying positions have not been fully enough developed under audit
to quantify at this time, or (b) the years relating to the issues for certain jurisdictions are not currently under audit. As of
January 31, 2019, we had $1.2 million of unrecognized tax benefits. This is before the netting required by ASU 2013-11
which requires the netting of unrecognized tax benefits against deferred tax assets for a loss or credit that would apply in
settlement of the uncertain tax position. For further information regarding the unrecognized tax benefits see Note 4 “Income
Taxes” within Notes to Consolidated Financial Statements.
Purchase orders or contracts for the purchase of supplies and other goods and services are not included in the table above.
We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase
orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current
procurement or development needs and are fulfilled by our vendors within short time frames. We do not have significant
agreements for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our expected
requirements for three months.
We have certain royalty commitments associated with the licensing of certain products. Royalty expense is generally
based on the number of licenses delivered or being used in the cloud environment; or a percentage of the underlying revenue.
Royalty expense, included in cost of subscription, license and maintenance and other revenue, was $18.6 million, $17.1
million and $16.2 million in fiscal 2019, 2018 and 2017, respectively.
Note Payable
Effective May 30, 2012, QAD Ortega Hill, LLC entered into a variable rate credit agreement (the “2012 Mortgage”)
with Rabobank, N.A., to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1
million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 2.51% at January 31, 2019. The
2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In
conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Rabobank, N.A. The
swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that
synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012
Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest
and one final payment of $11.7 million. The unpaid balance as of January 31, 2019 was $13.4 million.
Lease Obligations
We lease certain office facilities, office equipment and automobiles under operating lease agreements. Although our
office lease agreements end on various dates through fiscal year 2028, they typically include termination options at earlier
dates. The contractual obligations table reflects future minimum rental payments under non-cancellable operating lease
commitments with terms of more than one year. For further discussion of our leased office facilities, see Item 2 entitled
“Properties” included elsewhere in this Annual Report on Form 10-K.
44
Off-Balance Sheet Arrangements
As of January 31, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
CRITICAL ACCOUNTING POLICIES
The SEC defines “critical accounting policies” as those that require application of management’s most difficult,
subjective, or complex judgments. These policies often require us to make estimates about the effects of matters that are
inherently uncertain and are subject to change in subsequent periods.
We consider the following policies to be critical because of the significance of these items to our operating results and
the estimation processes and management judgment involved in each:
• Revenue
• Accounts receivable allowances for doubtful accounts
• Goodwill and intangible assets – impairment assessments
•
•
Income taxes
Stock-based compensation
Our senior management has reviewed these critical accounting policies and related disclosures. Historically, estimates
described in our critical accounting policies that have required significant judgment and estimation on the part of management
have been reasonably accurate.
Revenue. We offer our software using the same underlying technology via two models: a traditional on-premises
licensing model and a cloud-based subscription model. The on-premises model involves the sale or license of software on a
perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware.
Under the cloud-based subscription delivery model, we provide access to our software on a hosted basis as a service and
customers generally do not have the contractual right to take possession of the software.
We generate revenue through sales of licenses and maintenance provided to our on-premises customers and through
subscriptions of our cloud-based software. We offer professional services to both our on-premises and cloud customers to
assist them with the design, testing and implementation of our software.
We determine revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
-
-
- Determination of the transaction price;
- Allocation of the transaction price to the performance obligations in the contract; and
- Recognition of revenue when, or as, we satisfy a performance obligation.
Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government
authorities.
45
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit
of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as
revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. We
identify and track the performance obligations at contract inception so that we can monitor and account for the performance
obligations over the life of the contract.
Our contracts which contain multiple performance obligations generally consist of the initial purchase of subscription
or licenses and a professional services engagement. License purchases generally have multiple performance obligations as
customers purchase maintenance in addition to the licenses. Our single performance obligation arrangements are typically
maintenance renewals, subscription renewals and services engagements.
For contracts with multiple performance obligations where the contracted price differs from the standalone selling
price ("SSP") for any distinct good or service, we may be required to allocate the contract’s transaction price to each
performance obligation using our best estimate for the SSP. SSP is assessed annually using a historical analysis of contracts
with customers executed in the most recently completed fiscal year to determine the range of selling prices applicable to a
distinct good or service.
Judgment is required to determine the SSP for each distinct performance obligation. We rarely license or sell our
software products on a stand-alone basis, so we are required to estimate the range of SSPs for each performance obligation.
In instances where SSP is not directly observable because we do not sell the license, product or service separately, we
determine the SSP using information that may include market conditions and other observable inputs. In making these
judgments, we analyze various factors, including our pricing methodology and consistency, size of the arrangement, length
of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is
set for each distinct product or service delivered to customers.
Subscription
Subscription revenue is recognized ratably over the initial subscription period committed to by the customer
commencing when the cloud environment is made available to the customer. The initial subscription period is typically 12 to
60 months. We generally invoice our customers in advance in quarterly or annual installments and typical payment terms
provide that customers make payment within 30 days of invoice.
Software Licenses
Transfer of control for software is considered to have occurred upon electronic delivery of the license key that provides
immediate availability of the product to the customer. Our typical payment terms tend to vary by region but our standard
payment terms are within 30-90 days of invoice.
Maintenance
Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over
the term of the maintenance period, which in most instances is one year. Software license updates provide customers with
rights to unspecified software product updates, maintenance releases and patches released during the term of the support
period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and
telephone access to technical support personnel. Our customers purchase both product support and license updates when they
acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical
payment terms provide that customers make payment within 30 days of invoice.
Professional Services
Revenue from professional services is typically comprised of implementation, development, training or other
consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services
ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate
in integrated environments. We recognize revenue for time-and-materials arrangements as the services are performed. In
fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to
total estimated costs to complete the services project. Management applies judgment when estimating project status and the
costs necessary to complete the services projects. A number of internal and external factors can affect these estimates,
46
including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are
generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically
due 30 days after invoice.
Indirect Sales Channels
We execute arrangements through indirect sales channels via sales agents and distributors who are authorized to market
our software products to end users. In arrangements with sales agents, QAD contracts directly with the customer and the sales
agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to
market and distribute our software products to end users in specified territories and the distributor bears the risk of collection
from the end user customer. We recognize revenue from transactions with distributors when the distributor submits a signed
agreement and transfer of control has occurred to the distributor, in accordance with the five revenue recognition steps noted
above. Revenue from distributor transactions is recorded on a net basis (the amount actually received by us from the
distributor). We do not offer rights of return, product rotation or price protection to any of our distributors.
Disaggregated Revenue
We disaggregate revenue from contracts with customers by geography and by the customers’ industry within
manufacturing, as we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are
affected by economic factors.
Our revenue by geography is as follows:
2019
Years Ended January 31,
2018
(in thousands)
2017
North America .................................................................................... $
EMEA ................................................................................................
Asia Pacific ........................................................................................
Latin America .....................................................................................
Total revenue ...................................................................................... $
162,307 $
96,989
51,628
22,092
333,016 $
141,614 $
89,693
50,689
23,022
305,018 $
129,436
81,765
47,742
19,030
277,973
Our revenue by industry is as follows:
2019
Years Ended January 31,
2018
(in thousands)
2017
Automotive ......................................................................................... $
Consumer products and food and beverage ........................................
High technology and industrial products ............................................
Life sciences and other .......................................................................
Total revenue ...................................................................................... $
128,249 $
53,637
106,658
44,472
333,016 $
113,579 $
47,273
99,990
44,176
305,018 $
96,794
47,796
91,652
41,731
277,973
Management Judgments
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the
complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for our arrangements may
be dependent on contract-specific terms and may vary in some instances.
Revenue is recognized over time for our subscription, maintenance and fixed fee professional services that are separate
performance obligations. For professional services, revenue is recognized over time, generally using costs incurred or hours
expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects.
A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances
and testing requirement changes.
If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a
single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. We
exercise judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted
for separately or as a single arrangement. Our judgments about whether a group of contracts comprise a single arrangement
47
can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of
operations for the periods involved.
If a contract includes variable consideration, we exercise judgment in estimating the amount of consideration to which
the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable
considerations, we will consider all relevant facts and circumstances. Variable consideration will be estimated and included
in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.
Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue
recognition and our disclosures. Below is a list of practical expedients we applied in the adoption and application of Topic
606:
Application
• We do not evaluate a contract for a significant financing component if payment is expected within one year or less
from the transfer of the promised items to the customer.
• We generally expense sales commissions and sales agent fees when incurred when the amortization period would
have been one year or less. These costs are recorded within sales and marketing expense in the Consolidated
Statement of Operations and Comprehensive Income (Loss).
• We also used the practical expedient to calculate contract acquisition costs based on a portfolio of contracts with
similar characteristics instead of a contract by contract analysis.
• We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue
at the amount to which we have the right to invoice for services performed (applies to time-and-material
engagements).
Modified Retrospective Transition Adjustments
•
For contract modifications, we reflected the aggregate effect of all modifications that occurred prior to the adoption
date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and
allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at
transition.
Costs to Obtain and Fulfill a Contract
Our incremental direct costs of obtaining a contract consist of sales commissions and sales agent fees which are
deferred and amortized ratably over the term of economic benefit which we have determined to be five years. These deferred
costs are classified as current or non-current based on the timing of when we expect to recognize the expense. Incremental
costs related to renewals are expensed as incurred because the term of economic benefit is one year or less. The current and
non-current portions of deferred commissions are included in other current assets and other long-term assets, respectively, in
our Consolidated Balance Sheets.
Costs to fulfill a contract, which are incurred upon initiation of certain services contracts and are related to initial
customer setup, are included in other current assets and long-term assets in the Company’s Consolidated Balance Sheets.
These costs are amortized over the term of economic benefit which we have determined to be five years.
Recoverability of these costs is subject to various business risks. Quarterly, we compare the carrying value of these assets
with the undiscounted future cash flows expected to be generated by them to determine if there is impairment. If impaired,
these assets are reduced to an estimated fair value on a discounted cash flow basis. No impairment losses were recognized
during the twelve months ended January 31, 2019.
Accounts Receivable Allowance for Doubtful Accounts. The accounts receivable allowance for doubtful accounts is
comprised of the allowance for bad debt and the allowance for sales adjustments.
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Allowance for Bad Debt
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We review the collectability of
our accounts receivable each period by analyzing balances based on age and record specific allowances for any balances that
we determine may not be fully collectible due to inability of the customers to pay. We also provide for a general reserve
based on historical data including analysis of write-offs and other known factors. Provisions to the allowance for bad debt
are included as bad debt expense in “General and Administrative” expense. Judgment is required in adjusting our receivables
to amounts we believe are realizable, especially when a customer is experiencing financial difficulty or is in bankruptcy.
Although we use the best information available in making our estimates, we may incur additional bad debt expense in future
periods which could have a material effect on earnings in any given quarter should additional allowances for doubtful
accounts be necessary. The determination to write-off specific accounts receivable balances is made based on likelihood of
collection and past due status. Past due status is based on invoice date and terms specific to each customer.
Allowance for Sales Adjustments
We do not generally provide a contractual right of return; however, in the course of business we have occasionally
allowed sales adjustments related to customer dispute resolution. We record a provision against revenue for estimated sales
adjustments in the same period the related revenues are recorded or when current information indicates additional amounts
are required. These estimates are based on historical experience, specifically identified customers and other known factors.
Although we use the best information available in making our estimates, we may incur additional provisions against revenue
in future periods which could have a material effect on earnings in any given quarter should additional allowances for sales
returns be necessary.
Goodwill and Intangible Assets – Impairment Assessments. When we acquire a business, a portion of the purchase
consideration is typically allocated to acquired technology and other identifiable intangible assets, such as customer
relationships and developed technology. The excess of the purchase consideration over the net of the acquisition-date fair
value of identifiable assets acquired and liabilities assumed is recorded as goodwill. The amounts allocated to acquired
technology and other intangible assets represent our estimates of their fair values at the acquisition date. We amortize the
acquired technology and other intangible assets with finite lives over their estimated useful lives. The estimation of
acquisition-date fair values of intangible assets and their useful lives requires us to make assumptions and judgments,
including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market
trends, projections of future cash flows and appropriate discount rates.
We review the carrying value of goodwill using the methodology prescribed in FASB Accounting Standards Codification
350 Intangibles—Goodwill and Other (“ASC 350”). We test goodwill for impairment annually in our fourth fiscal quarter or
sooner should events or changes in circumstances indicate potential impairment as required under Accounting Standard
Update No. 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 provides for an optional
assessment of qualitative factors of impairment (“optional assessment”) prior to necessitating a two-step quantitative
impairment test. Should the optional assessment be utilized for any given fiscal year, qualitative factors to consider include
cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors;
industry and market considerations; macroeconomic conditions; and other relevant events and factors affecting the reporting
unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting
unit is greater than its carrying value, then performing the two-step impairment test is unnecessary.
Under the two-step quantitative impairment test, we use discounted cash flow models which include assumptions
regarding projected cash flows. Variances in these assumptions could have a significant impact on our conclusion as to
whether goodwill is impaired, or the amount of any impairment charge. Impairment charges, if any, result from instances
where the fair values of net assets associated with goodwill are less than their carrying values. As changes in business
conditions and our assumptions occur, we may be required to record impairment charges.
Management evaluates the Company as a single reporting unit for business and operating purposes as almost all of our
revenue streams are generated by the same underlying technology whether acquired, purchased or developed. In addition, the
majority of our costs are, by their nature, shared costs that are not specifically identifiable to a geography or product line but
relate to almost all products. As a result, there is a high degree of interdependency among our revenues and cash flows for
levels below the consolidated entity and identifiable cash flows for a reporting unit separate from the consolidated entity are
not meaningful.
For our annual impairment assessments in fiscal 2019, 2018 and 2017 we did not utilize the optional assessment. An
impairment analysis was performed at the enterprise level which compared our market capitalization to our net assets as of
49
the test date, November 30. As our market capitalization substantially exceeded our net assets, there was no indication of
goodwill impairment for fiscal 2019, 2018 and 2017.
We make judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in
circumstances indicate that an impairment may exist. Each fiscal year we evaluate the estimated remaining useful lives of
purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of
amortization. Recoverability of finite lived intangible assets is measured by comparison of the carrying amount of the asset
to the future undiscounted cash flows the asset is expected to generate.
Assumptions and estimates about future values and remaining useful lives of our intangible assets are complex and
subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and
internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical
assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could
materially impact our reported financial results. We did not recognize any intangible asset impairment charges in fiscal 2019,
2018 and 2017.
Income Taxes. We are a U.S. based multinational company subject to tax in the U.S. (federal and state) and numerous
foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant
change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in
evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the
ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rate could be affected by
numerous factors, such as intercompany transactions, the relative amount of foreign earnings, including earnings being lower
than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we
have higher statutory tax rates, the applicability of special tax regimes, losses incurred in jurisdictions for which we are not
able to realize the related tax benefit, changes in our deferred tax assets and liabilities and their valuation, and changes in the
relevant tax law, accounting, and other laws, regulations, administrative practices, principles and interpretations.
In December 2017, the Tax Act was signed into law. The Tax Act significantly changes how the U.S. taxes corporations.
The Tax Act requires complex computations to be performed that were not previously required; significant judgments to be
made in interpretation of the provisions and significant estimates in calculations. The U.S. Treasury Department, the Internal
Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will
be applied or otherwise administered that is different from our interpretation.
The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which
sometimes results in proposed assessments. Our estimate of the potential outcome for any uncertain tax position requires
judgment. For tax related contingencies, we account for uncertain tax positions based on a two-step approach: recognition
and measurement. We recognize a tax position when we determine that it is more likely than not that the position will be
sustained upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those
positions that do not meet the recognition threshold, no tax benefit is recognized in the financial statements. For those tax
positions that meet the recognition threshold, we measure the tax position as the largest amount of benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement. We record interest and penalties related to income tax
liabilities as income tax expense. We have reserves to address tax positions that could be challenged by taxing authorities,
even though we believe that the positions taken are appropriate. Our tax reserves are reviewed on a quarterly basis and
adjusted as events occur that could affect our liability.
The carrying value of our deferred tax assets reflects an amount that is more likely than not to be realized with taxable
income generated by results of future operations. At January 31, 2019, we had $20.4 million of deferred tax assets, net of
valuation allowances and uncertain tax positions, consisting of $56.1 million of gross deferred tax assets offset by valuation
allowances of $34.8 million and uncertain tax positions of $0.9 million. In assessing the likelihood of realizing tax benefits
associated with deferred tax assets and the need for a valuation allowance we consider the weight of all available evidence
both positive and negative including expected future taxable income and tax planning strategies that are both prudent and
feasible. For the year ended January 31, 2019, management continued to maintain a full valuation allowance on its U.S.
federal and state deferred tax assets. The valuation allowance increased by $1.2 million primarily due to increased foreign
tax credits and net operating losses and the tax impact of the adoption of Topic 606.
Stock-Based Compensation. We account for share-based payments (“equity awards”) to employees in accordance with
ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires that share-based payments (to the extent they
are compensatory) be recognized in our Consolidated Statements of Operations and Comprehensive Income (Loss) based on
their fair values as measured at the grant date. The fair value of an equity award is recognized as stock-based compensation
50
expense ratably over the vesting period of the equity award. Determining the fair value of stock-based awards at the grant
date requires judgment and the fair value per share of historical grants of equity awards may not be indicative of the fair value
per share for future grants of equity awards.
Fair Value of RSUs
The fair value of restricted stock units (“RSUs”) is determined on the grant date of the award as the market price of our
common stock on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period.
As our stock price fluctuates, so does the fair value of our future RSU grants. Judgment is required in determining the present
value of estimated dividends foregone during the vesting period. We estimate the dividends for purposes of this calculation
based on our historical dividend payments per share, which has remained consistent over the last three years.
Fair Value of SARs
The fair value of stock-settled stock appreciation rights (“SARs”) is determined on the grant date of the award using the
Black-Scholes-Merton valuation model. One of the inputs to the Black-Scholes-Merton valuation model is the fair market
value on the date of the grant. As our stock price fluctuates, so does the fair value of our future SAR grants. Judgment is
required in determining the remaining inputs to the Black-Scholes-Merton valuation model. Furthermore, the values
underlying these inputs fluctuate, which impacts the fair value of our future SAR grants. These inputs include the expected
life, volatility, the risk-free interest rate and the dividend rate. The following describes our policies with respect to determining
these valuation inputs:
Expected Life – The expected life valuation input includes a computation that is based on historical vested SAR exercises
and post-vest expiration patterns and an estimate of the expected life for SARs that were fully vested and outstanding.
Furthermore, based on our historical pattern of SAR exercises and post-vest expiration patterns we determined that there are
two discernible populations, which include QAD’s directors and officers and all other QAD employees. The estimate of the
expected life for SARs that were fully vested and outstanding was determined as the midpoint of a range as follows: the low
end of the range assumes the fully vested and outstanding SARs are exercised or expire unexercised on the evaluation date
and the high end of the range assumes that these SARs are exercised or expire unexercised upon contractual term.
Volatility – The volatility valuation input is based on the historical volatility of our common stock, which we believe is
representative of the expected volatility over the expected life of options and SARs.
Risk Free Interest Rate– The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time
of grant for the expected term of the SAR.
Dividend Rate – The dividend rate is based on our historical dividend payments per share. Historically, have we paid
quarterly dividends at a rate of $0.072 per share of Class A common stock and $0.060 per share of Class B common stock.
We record deferred tax assets for equity awards that result in deductions on our income tax returns, based on the amount
of stock-based compensation recognized and the fair values attributable to the vested portion of those equity awards. Because
the deferred tax assets we record are based upon the stock-based compensation expenses in a particular jurisdiction, the
aforementioned inputs that affect the fair values of our equity awards may also indirectly affect our income tax expense. If
the tax deduction is less than the deferred tax asset, the calculated shortfall would increase our income tax expense. If the tax
deduction is more than the deferred tax asset, the calculated windfall would decrease our income tax expense.
To the extent we change the terms of our employee stock-based compensation programs or experience fluctuations in
the underlying criteria used to determine our equity award valuations, among other potential impacts, the stock-based
compensation expense that we record in future periods and the tax benefits that we realize may differ significantly from what
we have recorded in previous reporting periods.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Rates. We have operations in foreign locations around the world and we are exposed to risk resulting
from fluctuations in foreign currency exchange rates. We have experienced significant foreign currency fluctuations in fiscal
2019 due primarily to the volatility of the euro and Mexican peso in relation to the U.S. dollar. However, while strengthening
of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing revenues it also has the
effect of reducing expenses denominated in currencies other than the U.S. dollar. These foreign currency exchange rate
movements could create a foreign currency gain or loss that could be realized or unrealized for us. Unfavorable movements
in foreign currency exchange rates between the U.S. dollar and other foreign currencies may have an adverse impact on our
operations. We did not have any foreign currency forward or option contracts, other foreign currency denominated derivatives
or other financial instruments open as of January 31, 2019.
We face two risks related to foreign currency exchange rates—translation risk and transaction risk. Amounts invested in
our foreign operations are translated into U.S. dollars using period-end exchange rates. The resulting translation adjustments
are recorded as a component of accumulated other comprehensive loss in the Consolidated Balance Sheets. Revenues and
expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as the U.S. dollar weakens
or strengthens against other currencies. Our international subsidiaries also hold U.S. dollar and euro-based net monetary
accounts subject to revaluation that results in realized or unrealized foreign currency gains or losses. Furthermore, we have
exposure to foreign exchange fluctuations arising from the remeasurement of non-functional currency assets, liabilities and
intercompany balances into U.S. dollars for financial reporting purposes.
For fiscal 2019, 2018 and 2017, approximately 51% of our revenue was denominated in foreign currencies. We also
incurred a significant portion of our expenses in currencies other than the U.S. dollar, approximately 41% for both fiscal 2019
and 2018 and 40% for fiscal 2017. Based on a hypothetical 10% adverse movement in all foreign currency exchange rates,
our revenue would be adversely affected by approximately 5% partially offset by a positive effect on our expenses of
approximately 4%, and our operating income would be adversely affected by approximately 37%.
For fiscal 2019, 2018 and 2017, foreign currency transaction and remeasurement (gains) losses totaled $(0.2) million,
$2.5 million and $0.2 million, respectively, and are included in “Other (income) expense, net” in our Consolidated Statements
of Operations and Comprehensive Income (Loss). We performed a sensitivity analysis on the net U.S. dollar and euro-based
monetary accounts subject to revaluation that are held by our international subsidiaries and on the non-functional currency
assets, liabilities and intercompany balances that are remeasured into U.S. dollars. A hypothetical 10% adverse movement in
all foreign currency exchange rates would result in foreign currency transaction and remeasurement losses of approximately
$3.9 million.
These estimates assume an adverse shift in all foreign currency exchange rates against the U.S. dollar, which do not
always move in the same direction or in the same degrees, and actual results may differ materially from the hypothetical
analysis.
Interest Rates. We invest our surplus cash in a variety of financial instruments, consisting principally of short-term
marketable securities with maturities of less than 90 days at the date of purchase. Our investment securities are held for
purposes other than trading. Cash balances held by subsidiaries are invested primarily in registered money market funds with
local operating banks. Based on an interest rate sensitivity analysis of our cash and equivalents, we estimate a 10% adverse
change in interest rates from the 2019 fiscal year-end rates would not have a material adverse effect on our cash flows or
financial condition for the next fiscal year.
Our debt is comprised of a loan agreement, secured by real property, which bears interest at the one-month LIBOR rate
plus 2.25%. In conjunction with the loan agreement we entered into an interest rate swap. The swap agreement has an initial
notional amount and schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at
4.31%.
Our interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the
swap each reporting period are adjusted through earnings, subjecting us to non-cash volatility in our results of operations.
We prepared a sensitivity analysis using a modeling technique that measures the change in the fair values arising from a
hypothetical 10% adverse movement in levels of interest rates across the entire yield curve, with all other variables held
constant. Based upon the results of this analysis a 10% adverse change in interest rates from the January 31, 2019 rates would
cause a $0.1 million reduction in our results of operations. We believe it is prudent to hedge the expected volatility of the
variable rate mortgage on our corporate headquarters. The swap fixes the interest rate on our mortgage to 4.31% over the
entire term of the mortgage. Although the agreement allows us to prepay the loan and exit the agreement early, we have no
52
intention of doing so. As a result, we will have non-cash adjustments through earnings each reporting period. However, over
the term of the mortgage, the net impact of these mark-to-market adjustments on earnings will be zero.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 15 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
QAD maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed
in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief
Financial Officer, to allow timely decisions regarding required disclosure. QAD’s management, under the supervision and
with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of QAD’s
disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this
evaluation, QAD’s Chief Executive Officer and Chief Financial Officer have concluded that QAD’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at a reasonable assurance
level.
(b) Management’s Report on Internal Control Over Financial Reporting
QAD’s management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. QAD’s system of internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles. QAD’s internal control over financial reporting includes those policies and procedures that: (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
QAD’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that QAD’s receipts and expenditures are being
made only in accordance with authorizations of QAD’s management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of QAD’s assets that could have a
material effect on the financial statements.
Management has assessed the effectiveness of QAD’s internal control over financial reporting as of January 31, 2019
based on the criteria described in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on management’s assessment, management has concluded
that QAD’s internal control over financial reporting was effective at the reasonable assurance level as of January 31, 2019.
We reviewed the results of management’s assessment with our Audit Committee.
Our independent registered public accounting firm, KPMG LLP, has audited our internal control over financial reporting
as of January 31, 2019, as stated in their report included in this Annual Report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
53
(d) Limitations on the Effectiveness of Controls
QAD’s management does not expect that its disclosure controls and procedures or its internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if
any, within QAD have been detected. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the
degree of compliance with policies or procedures may deteriorate.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding QAD directors is set forth in the section entitled “Election of Directors” appearing in our
Definitive Proxy Statement for the Annual Meeting of Stockholders (“Proxy Statement”) to be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal year ended January 31, 2019, which information is
incorporated herein by reference.
In addition, the other information required by Item 10 is incorporated by reference from the Proxy Statement.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning our executive officers. All ages are as of March 31, 2019.
NAME
Pamela M. Lopker ............................
Anton Chilton ...................................
Daniel Lender ...................................
Kara Bellamy....................................
AGE
64
51
52
43
POSITION(S)
President and Director
Chief Executive Officer and Director
Chief Financial Officer and Executive Vice President
Chief Accounting Officer, Corporate Controller and Senior Vice President
Pamela M. Lopker founded QAD in 1979 and has been President since QAD Inc.’s incorporation in 1986. Ms. Lopker
also served as Chairman of the Board from its incorporation until August 2018. Prior to founding QAD, Ms. Lopker served
as Senior Systems Analyst for Comtek Research from 1977 to 1979. She is certified in Production and Inventory Management
by the American Production and Inventory Control Society. Ms. Lopker earned a Bachelor of Arts degree in Mathematics
from the University of California, Santa Barbara. The Board nominated Ms. Lopker to serve as a director because she is the
founder and visionary for the Company, with over forty years of enterprise software company experience, extensive software
industry expertise and a deep understanding of the Company’s products, customers, industry and global operational issues.
Her history with and knowledge of QAD, combined with her unique skills, is important to the Board’s oversight of long-term
strategy and provides the Board with a deep understanding of the Company’s business and operations.
Anton Chilton was appointed Chief Executive Officer and a member of QAD’s Board of Directors in December 2018.
Before that, he served as Chief, Global Field Operations and Executive Vice President commencing in March 2017.
Previously, he served as Executive Vice President, Global Services beginning in June 2015. Mr. Chilton joined QAD in 2004
as Services Director of the Company’s Asia-Pacific region, based in Australia. He subsequently served as Managing Director
of QAD Australia and New Zealand from 2006 to 2009. Mr. Chilton transferred to QAD's headquarters in 2009, serving as
Senior Vice President – Strategic Global Accounts until 2011, when he became Senior Vice President - Professional Services.
Prior to joining QAD, Mr. Chilton held senior roles in global systems integration at Atos Origin and Cap Gemini. Mr. Chilton
began his career at British Steel designing software and infrastructure solutions and received his education in the Submarine
Service, British Royal Navy. Mr. Chilton has an Executive MBA from INSEAD.
Daniel Lender was first appointed Chief Financial Officer and Executive Vice President in July 2003. Previously, he
served as QAD’s Vice President of Global Sales Operations and Vice President of Latin America. Mr. Lender joined QAD
in 1998 as Treasurer following a nine-year tenure with the former Republic National Bank of New York, last serving as Vice
54
President and Treasurer of the Bank’s Delaware subsidiary. He earned a Master of Business Administration degree from the
Wharton School of the University of Pennsylvania and a Bachelor of Science degree in applied economics and business
management from Cornell University.
Kara Bellamy has served as Chief Accounting Officer, Corporate Controller and Senior Vice President since January
2008. Previously, she served as QAD’s Director of Finance, Americas beginning in 2006 and joined QAD as Assistant
Corporate Controller in 2004. Prior to joining QAD, Ms. Bellamy served as Corporate Controller for Somera
Communications, Inc. from 2002 through 2004. Prior to that, she was an audit manager with Ernst & Young. Ms. Bellamy is
a Certified Public Accountant (inactive) and received a Bachelor of Arts degree in business economics with an accounting
emphasis from the University of California, Santa Barbara.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth under the caption “Executive Compensation” in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is set forth under the caption
“Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners” in the Proxy Statement, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions is set forth under the caption “Certain Relationships
and Related Party Transactions” in the Proxy Statement, which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding services performed by, and fees paid to, our independent auditors is set forth under the caption
“Principal Accountant Fees and Services” in the Proxy Statement, which information is incorporated herein by reference.
55
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART IV
Page
Report of Independent Registered Public Accounting Firm ............................................................................................ 57
Consolidated Balance Sheets as of January 31, 2019 and 2018 ...................................................................................... 59
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended January 31, 2019,
2018 and 2017 ............................................................................................................................................................. 60
Consolidated Statements of Stockholders’ Equity for the years ended January 31, 2019, 2018 and 2017 ..................... 61
Consolidated Statements of Cash Flows for the years ended January 31, 2019, 2018 and 2017 .................................... 62
Notes to Consolidated Financial Statements ................................................................................................................... 63
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this Annual Report on Form 10-K:
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS ......................................................................
Page
95
All other schedules are omitted because they are not required or the required information is presented in the financial
statements or notes thereto.
3. INDEX OF EXHIBITS
See the Index of Exhibits at page 96.
ITEM 16. FORM 10-K SUMMARY
None.
56
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
QAD Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of QAD Inc. and subsidiaries (the Company) as of
January 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), stockholders’
equity, and cash flows for each of the years in the three-year period ended January 31, 2019, and the related notes and financial
statement schedule II (collectively, the consolidated financial statements). We also have audited the Company’s internal
control over financial reporting as of January 31, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of January 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
years in the three-year period ended January 31, 2019, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of January 31, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue
recognition effective February 1, 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from
Contracts with Customers.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained
in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
57
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1990.
Los Angeles, California
April 16, 2019
58
QAD INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
January 31,
2019
2018
Current assets:
Assets
Cash and equivalents ................................................................................................... $
Short-term investments ................................................................................................
Accounts receivable, net of allowances of $2,901 and $1,763 at January 31, 2019
and 2018, respectively ..............................................................................................
Other current assets ......................................................................................................
Total current assets ...................................................................................................
Property and equipment, net ............................................................................................
Capitalized software costs, net ........................................................................................
Goodwill ..........................................................................................................................
Deferred tax assets, net ....................................................................................................
Other assets, net ...............................................................................................................
Total assets ............................................................................................................... $
Current liabilities:
Liabilities and Stockholders’ Equity
Current portion of long-term debt ................................................................................ $
Accounts payable .........................................................................................................
Deferred revenue .........................................................................................................
Other current liabilities ................................................................................................
Total current liabilities .............................................................................................
Long-term debt ................................................................................................................
Other liabilities ................................................................................................................
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or
139,413 $
1,200
81,577
22,150
244,340
29,621
1,598
12,423
16,172
13,020
317,174 $
487 $
9,902
115,253
40,348
165,990
12,836
5,101
outstanding ...............................................................................................................
—
Common stock:
Class A, $0.001 par value. Authorized 71,000,000 shares; issued 16,605,215
shares at both January 31, 2019 and 2018 ............................................................
16
147,023
—
83,518
15,856
246,397
30,408
990
11,023
7,944
3,055
299,817
466
14,818
116,693
43,460
175,437
13,313
5,439
—
16
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares
at both January 31, 2019 and 2018 .......................................................................
Additional paid-in capital ............................................................................................
Treasury stock, at cost (241,667 Class A shares and 273,474 Class B shares at
January 31, 2019 and 572,983 Class A shares and 319,717 Class B shares at
January 31, 2018) .....................................................................................................
Accumulated deficit .....................................................................................................
Accumulated other comprehensive loss .......................................................................
Total stockholders’ equity ........................................................................................
Total liabilities and stockholders’ equity ................................................................. $
4
196,723
4
200,456
(7,350 )
(48,485 )
(7,661 )
133,247
317,174 $
(12,461)
(75,559)
(6,828)
105,628
299,817
See accompanying notes to consolidated financial statements.
59
QAD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Revenue:
Subscription fees ............................................................................. $
License fees ....................................................................................
Maintenance and other ....................................................................
Professional services .......................................................................
Total revenue ...............................................................................
Costs of revenue:
Subscription fees .............................................................................
License fees ....................................................................................
Maintenance and other ....................................................................
Professional services .......................................................................
Total cost of revenue ...................................................................
Years Ended January 31,
2018
2017
2019
91,861 $
25,568
122,936
92,651
333,016
34,128
2,714
31,307
87,735
155,884
69,615 $
25,807
128,142
81,454
305,018
30,563
2,946
31,246
84,670
149,425
52,167
23,633
130,406
71,767
277,973
27,027
2,990
30,517
70,317
130,851
Gross profit .........................................................................................
177,132
155,593
147,122
Operating expenses
Sales and marketing ........................................................................
Research and development .............................................................
General and administrative .............................................................
Amortization of intangible assets from acquisitions .......................
Total operating expenses .............................................................
78,207
53,993
35,248
111
167,559
75,368
47,661
35,222
416
158,667
67,194
43,587
32,318
659
143,758
Operating income (loss) .....................................................................
9,573
(3,074)
3,364
Other (income) expense:
Interest income................................................................................
Interest expense ..............................................................................
Other (income) expense, net ...........................................................
Total other (income) expense, net ...............................................
Income (loss) before income taxes .....................................................
Income tax expense ............................................................................
(2,600)
643
(387)
(2,344)
11,917
1,489
(1,547)
669
2,012
1,134
(4,208)
4,857
(696 )
670
(436 )
(462 )
3,826
19,276
Net income (loss) ............................................................................... $
10,428 $
(9,065) $
(15,450 )
Basic net income (loss) per share:
Class A ............................................................................................ $
Class B ............................................................................................ $
Diluted net income (loss) per share:
Class A ............................................................................................ $
Class B ............................................................................................ $
0.55 $
0.46 $
0.50 $
0.44 $
(0.49) $
(0.41) $
(0.49) $
(0.41) $
(0.84 )
(0.70 )
(0.84 )
(0.70 )
Net income (loss) ............................................................................... $
10,428 $
(9,065) $
(15,450 )
Other comprehensive (loss) income
Foreign currency translation adjustment .........................................
Total comprehensive income (loss) .................................................... $
(833)
9,595 $
1,803
(7,262) $
98
(15,352 )
See accompanying notes to consolidated financial statements.
60
QAD INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Number of Shares
Class
B
Class
A
Treasury
Amount
Class
A
Class
B
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
Accumulated
Deficit
Balance, January 31, 2016 .......... 16,604 3,537
Cumulative effect of the adoption
(1,366) $ 16 $
4 $ 195,420 $ (18,717) $
(40,983) $
(8,729) $
127,011
of ASU 2016-09 ........................ — —
— — —
388
—
607
—
995
Adjusted balance at February 1,
2016 ........................................... 16,604 3,537
Net loss .......................................... — —
Foreign currency translation
adjustments ................................ — —
Stock award exercises.................... — —
Stock-based compensation income
tax benefits ................................ — —
Stock compensation expense ......... — —
Dividends declared ($0.288 and
$0.24 per Class A and Class B
share, respectively) ................... — —
1 —
Restricted stock..............................
Balance, January 31, 2017 .......... 16,605 3,537
Net loss .......................................... — —
Foreign currency translation
adjustments ................................ — —
Stock award exercises.................... — —
Stock compensation expense ......... — —
Dividends declared ($0.288 and
$0.24 per Class A and Class B
share, respectively) ................... — —
Restricted stock.............................. — —
Balance, January 31, 2018 .......... 16,605 3,537
Cumulative effect of the adoption
(1,366) $ 16 $
— — —
4 $ 195,808 $ (18,717) $
—
—
— — —
59 — —
—
(1,406)
— — —
— — —
89
7,323
—
795
—
—
— — —
182 — —
(1,125) $ 16 $
— — —
—
(4,220)
—
2,752
4 $ 197,594 $ (15,170) $
—
—
— — —
63 — —
— — —
—
(2,118)
8,924
—
1,129
—
— — —
170 — —
(892) $ 16 $
—
(3,944)
—
1,580
4 $ 200,456 $ (12,461) $
(40,376) $
(15,450)
(8,729) $
—
128,006
(15,450)
—
—
—
—
(5,301)
—
(61,127) $
(9,065)
—
—
—
98
—
—
—
—
—
(8,631) $
—
1,803
—
—
98
(611)
89
7,323
(5,301)
(1,468)
112,686
(9,065)
1,803
(989)
8,924
(5,367)
—
(75,559) $
—
—
(6,828) $
(5,367)
(2,364)
105,628
of Topic 606 and ASU2016-16 . — —
— — —
—
—
22,125
—
22,125
Adjusted balance at February 1,
2018 ........................................... 16,605 3,537
Net income ..................................... — —
Foreign currency translation
adjustments ................................ — —
Stock award exercises.................... — —
Stock compensation expense ......... — —
Dividends declared ($0.288 and
$0.24 per Class A and Class B
share, respectively) ................... — —
Restricted stock.............................. — —
Balance, January 31, 2019 .......... 16,605 3,537
(892) $ 16 $
— — —
4 $ 200,456 $ (12,461) $
—
—
(53,434) $
10,428
(6,828) $
—
127,753
10,428
— — —
196 — —
— — —
—
(7,878)
10,122
—
3,430
—
—
—
—
(833)
—
—
(833)
(4,448)
10,122
—
—
— —
181 — —
(515) $ 16 $
—
(5,977)
4 $ 196,723 $
—
1,681
(7,350) $
(5,479)
—
(48,485) $
—
—
(7,661) $
(5,479)
(4,296)
133,247
61
QAD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss) ............................................................................ $
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ....................................................
Amortization of costs capitalized to obtain and fulfill contracts .
Provision for doubtful accounts and sales adjustments ...............
Loss on disposal of property and equipment ...............................
Net change in valuation allowance ..............................................
Other deferred income taxes .......................................................
Change in fair value of a derivative instrument ..........................
Stock compensation expense .......................................................
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable ....................................................................
Costs capitalized to obtain and fulfill contracts ..........................
Other assets .................................................................................
Accounts payable ........................................................................
Deferred revenue .........................................................................
Other liabilities ............................................................................
Net cash provided by operating activities ................................
Cash flows from investing activities:
Purchase of property and equipment ...........................................
Acquisition of businesses, net of cash acquired ..........................
Capitalized software costs ...........................................................
Purchase of short-term investments ............................................
Other, net .....................................................................................
Net cash used in investing activities ........................................
Cash flows from financing activities:
Repayments of debt .....................................................................
Dividends paid ............................................................................
Tax payments related to stock awards .........................................
Net cash used in financing activities ........................................
Effect of exchange rates on cash and equivalents .......................
Net (decrease) increase in cash and equivalents ..........................
Cash and equivalents at beginning of year ..................................
Cash and equivalents at end of year ............................................ $
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ......................................................................................... $
Income taxes, net of refunds .......................................................
Years Ended January 31,
2018
2019
2017
10,428 $
(9,065) $
(15,450 )
5,517
4,176
1,752
34
3,224
(4,677)
51
10,122
(1,515)
(4,130)
(2,890)
(4,369)
3,031
(1,747)
19,007
(4,340)
(2,655)
(1,067)
(1,200)
4
(9,258)
(468)
(5,479)
(8,744)
(14,691)
(2,668)
(7,610)
147,023
139,413 $
5,772
—
1,021
85
1,695
(2,171)
(377)
8,924
(12,562)
—
(1,204)
2,821
7,001
8,478
10,418
(3,720)
—
(1,019)
—
70
(4,669)
(445)
(5,367)
(3,353)
(9,165)
5,357
1,941
145,082
147,023 $
6,046
—
237
41
16,861
(2,035 )
(485 )
7,323
(4,141 )
—
(90 )
646
7,245
2,482
18,680
(3,267 )
—
(146 )
—
7
(3,406 )
(434 )
(5,301 )
(2,079 )
(7,814 )
(109 )
7,351
137,731
145,082
608 $
3,475
651 $
3,961
655
3,396
See accompanying notes to consolidated financial statements.
62
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
QAD is a leading provider of flexible, cloud-based enterprise software and services for global manufacturing companies.
QAD Enterprise Applications supports operational requirements in the areas of financials, customer management, supply
chain, manufacturing, service and support, analytics, business process management and integration. QAD's portfolio includes
related solutions for quality management software, supply chain management software, transportation management software
and business-to-business interoperability. QAD solutions are developed for customers in the automotive, consumer products,
food and beverage, high technology, industrial manufacturing and life sciences industries to help streamline their processes,
improve operational performance, comply with regulatory requirements and meet industry standards. QAD was founded in
1979, incorporated in California in 1986 and reincorporated in Delaware in 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of QAD Inc. and all of its subsidiaries. All subsidiaries are
wholly-owned and all significant balances and transactions among the entities have been eliminated from the consolidated
financial statements.
USE OF ESTIMATES
The financial statements have been prepared in conformity with U.S. generally accepted accounting principles and,
accordingly, include amounts based on informed estimates and judgments of management that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company’s financial statements, and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial
statements in future periods.
The Company considers certain accounting policies related to revenue, accounts receivable allowances for doubtful
accounts, goodwill and intangible assets, income taxes, and accounting for stock-based compensation to be critical policies
due to the significance of these items to its operating results and the estimation processes and management judgment involved
in each.
FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS
The financial position and results of operations of the Company’s foreign subsidiaries are generally determined using
the country’s local currency as the functional currency. Assets and liabilities recorded in foreign currencies are translated at
the exchange rates on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing
during the year. Translation adjustments resulting from this process are charged or credited to other comprehensive income
(loss), which is included in “Accumulated other comprehensive loss” within the Consolidated Balance Sheets.
Gains and losses resulting from foreign currency transactions and remeasurement adjustments of monetary assets and
liabilities not held in an entity’s functional currency are included in earnings. Foreign currency transaction and remeasurement
(gains) losses for fiscal 2019, 2018 and 2017 totaled $(0.2) million, $2.5 million and $0.2 million, respectively, and are
included in “Other (income) expense, net” in the accompanying Consolidated Statements of Operations and Comprehensive
Income (Loss).
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and short-term marketable securities with maturities of less than 90 days at the date
of purchase. The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to
be cash equivalents. At January 31, 2019 and 2018, the Company’s cash and equivalents consisted of money market mutual
funds invested in U.S. Treasury and government securities, deposit accounts and certificates of deposit.
63
SHORT-TERM INVESTMENTS
At January 31, 2019, the Company’s short-term investments consisted of certificates of deposit with maturities greater
than 90 days and less than one year. Short-term investments are classified as held-to-maturity, since the Company has the
intent and the ability to hold them to maturity, and are recorded at amortized cost, which approximates fair value. The
Company considers all of its short-term investments as highly liquid and therefore includes these securities within current
assets on the Consolidated Balance Sheets. Interest on short-term investments is included as a component of “Interest
income”.
ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consisted of the following as of January 31:
Accounts receivable ........................................................................................................ $
Less allowance for:
Doubtful accounts ...........................................................................................................
Sales adjustments ............................................................................................................
Accounts receivable, net .............................................................................................. $
2019
2018
(in thousands)
84,478 $
(487 )
(2,414 )
81,577 $
85,281
(396)
(1,367)
83,518
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The collectability of accounts
receivable is reviewed each period by analyzing balances based on age. Specific allowances are recorded for any balances
that the Company determines may not be fully collectible due to a customer’s inability to pay. The Company also provides a
general reserve based on historical data including an analysis of write-offs and other known factors. Provisions to the
allowance for bad debts are included as bad debt expense in “General and Administrative” expense. The determination to
write-off specific accounts receivable balances is based on the likelihood of collection and past due status. Past due status is
based on invoice date and terms specific to each customer.
The Company does not generally provide a contractual right of return; however, in the course of business sales
adjustments related to customer dispute resolution may occur. A provision is recorded against revenue for estimated sales
adjustments in the same period the related revenues are recorded or when current information indicates additional amounts
are required. These estimates are based on historical experience, specifically identified customers and other known factors.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying amounts of cash and equivalents, short-term investments, accounts receivable and accounts payable
approximate fair value due to the short-term maturities of these instruments. The Company’s note payable bears a variable
market interest rate, subject to certain minimum interest rates. Therefore, the carrying amount outstanding under the note
payable reasonably approximates fair value.
Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising
our customer base, and their dispersion across many different industries and locations throughout the world. During the fiscal
year ended January 31, 2019 one customer accounted for 10% of total revenue and no other customer accounted for 10% or
more of total revenue. No single customer accounted for 10% or more of the Company’s total revenue during the fiscal years
ended January 31, 2018 and 2017. In addition, no single customer accounted for 10% or more of accounts receivable at
January 31, 2019 or 2018.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions and significant improvements to property and equipment are
capitalized, while maintenance and repairs are expensed as incurred. For financial reporting purposes, depreciation is
generally expensed via the straight-line method over the useful life of three years for computer equipment and software, five
years for furniture and office equipment, 10 years for building improvements, and 39 years for buildings. Leasehold
improvements are depreciated over the shorter of the lease term or the useful life of five years.
Certain costs associated with software developed for internal use, including payroll costs for employees, are capitalized
once the project has reached the application development stage and are included in property and equipment classified as
software. These costs are amortized using the straight-line method over the expected useful life of the software, beginning
64
when the asset is substantially ready for use. Costs incurred during the preliminary project stage, maintenance, training and
research and development costs are expensed as incurred.
Property and equipment, net consisted of the following as of January 31:
Buildings and building improvements ............................................................................. $
Computer equipment and software ..................................................................................
Furniture and office equipment .......................................................................................
Leasehold improvements .................................................................................................
Land.................................................................................................................................
Automobiles ....................................................................................................................
Less accumulated depreciation and amortization ............................................................
$
2019
2018
(in thousands)
32,238 $
17,671
7,672
7,309
3,850
54
68,794
(39,173 )
29,621 $
32,444
17,312
7,632
6,677
3,850
54
67,969
(37,561)
30,408
The changes in property and equipment, net, for the fiscal years ended January 31 were as follows:
Cost
Balance at February 1 ...................................................................................................... $
Additions .........................................................................................................................
Disposals .........................................................................................................................
Impact of foreign currency translation ............................................................................
Balance at January 31 ......................................................................................................
Accumulated depreciation
Balance at February 1 ......................................................................................................
Depreciation ....................................................................................................................
Disposals .........................................................................................................................
Impact of foreign currency translation ............................................................................
Balance at January 31 ......................................................................................................
Property and equipment, net at January 31 ...................................................................... $
2019
2018
(in thousands)
67,969 $
4,340
(2,512 )
(1,003 )
68,794
(37,561 )
(4,734 )
2,474
648
(39,173 )
29,621 $
64,642
3,720
(1,874)
1,481
67,969
(33,770)
(4,562)
1,719
(948)
(37,561)
30,408
Depreciation and amortization expense of property and equipment for fiscal 2019, 2018 and 2017 was $4.7 million, $4.6
million and $4.3 million, respectively. There was no impairment of property and equipment assets during fiscal 2019, 2018
and 2017.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes software development costs incurred in connection with the localization and translation of its
products once technological feasibility has been achieved based on a working model. A working model is defined as an
operative version of the computer software product that is completed in the same software language as the product to be
ultimately marketed, performs all the major functions planned for the product and is ready for initial customer testing (usually
identified as beta testing). In addition, the Company capitalizes software purchased from third parties or through business
combinations as acquired software technology, if the related software under development has reached technological
feasibility.
The amortization of capitalized software costs is the greater of the straight-line basis over three years, the expected useful
life, or a computation using a ratio of current revenue for a product compared to the estimated total of current and future
revenues for that product. The Company periodically compares the unamortized capitalized software costs to the estimated
net realizable value of the associated product. The amount by which the unamortized capitalized software costs of a particular
software product exceeds the estimated net realizable value of that asset would be reported as a charge to the Consolidated
Statements of Operations and Comprehensive Income (Loss).
65
Capitalized software costs and accumulated amortization at January 31 were as follows:
Capitalized software costs:
Capitalized software development costs ...................................................................... $
Acquired software technology .....................................................................................
Less accumulated amortization ...................................................................................
Capitalized software costs, net .................................................................................... $
2019
2018
(in thousands)
2,314 $
135
2,449
(851)
1,598 $
1,516
—
1,516
(526)
990
The Company‘s capitalized software development costs relate to translations and localizations of QAD Enterprise
Applications. Acquired software technology costs relate to technology purchased during the second quarter of fiscal 2019.
It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during
fiscal 2019, $0.3 million of costs and accumulated amortization was removed from the Consolidated Balance Sheet and was
primarily related to acquired software technology which was fully amortized during fiscal 2019.
Amortization of capitalized software costs for fiscal 2019, 2018 and 2017 was $0.6 million, $0.8 million and $1.0 million,
respectively. Amortization of capitalized software costs is included in “Cost of license fees” in the accompanying
Consolidated Statements of Operations and Comprehensive Income (Loss).
The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs
as of January 31, 2019:
Fiscal Years
2020 ............................................................................................................................................................. $
2021 .............................................................................................................................................................
2022 .............................................................................................................................................................
2023 .............................................................................................................................................................
Thereafter ....................................................................................................................................................
$
(in thousands)
759
572
226
27
14
1,598
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill
is not amortized, but instead is subject to impairment tests on at least an annual basis and whenever circumstances suggest
that goodwill may be impaired. The Company tests goodwill for impairment in the fourth quarter of each fiscal year. The
Company performs a two-step impairment test. Under the first step of the goodwill impairment test, the Company is required
to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step is not performed.
If the results of the first step of the impairment test indicate that the fair value of a reporting unit does not exceed its carrying
amount, then the second step of the goodwill impairment test is required. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The impairment
loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that
goodwill.
Management evaluates the Company as a single reporting unit for business and operating purposes as almost all of the
Company’s revenue streams are generated by the same underlying technology whether acquired, purchased or developed. In
addition, the majority of the Company’s costs are, by their nature, shared costs that are not specifically identifiable to a
geography or product line but relate to almost all products. As a result, there is a high degree of interdependency among the
Company’s revenues and cash flows for levels below the consolidated entity and identifiable cash flows for a component
separate from the consolidated entity are not meaningful. Therefore, the Company’s impairment test considers the
consolidated entity as a single reporting unit.
Judgments about the recoverability of purchased finite lived intangible assets are made whenever events or changes in
circumstances indicate that an impairment may exist. Each fiscal year the Company evaluates the estimated remaining useful
lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining
66
periods of amortization. Recoverability of finite-lived intangible assets is measured by comparison of the carrying amount of
the asset to the future undiscounted cash flows the asset is expected to generate.
Assumptions and estimates about future values and remaining useful lives of intangible assets are complex and
subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and
internal factors such as changes in the Company’s business strategy or internal forecasts.
The changes in the carrying amount of goodwill for the fiscal years ended January 31, 2018 and 2019 were as follows:
Gross
Carrying
Amount
Accumulated
Impairment
(in thousands)
Goodwill,
Net
Balance at January 31, 2017 ......................................................... $
Impact of foreign currency translation .........................................
Balance at January 31, 2018 .........................................................
Additions ......................................................................................
Impact of foreign currency translation .........................................
Balance at January 31, 2019 ......................................................... $
26,166 $
465
26,631
1,510
(110)
28,031 $
(15,608) $
—
(15,608)
—
—
(15,608) $
10,558
465
11,023
1,510
(110)
12,423
Additions to goodwill were a result of immaterial acquisitions where the purchase price exceeded the estimated fair value
of the acquired net assets. Pro forma financial information for the acquisitions has not been presented, as the effects were not
material to the Company’s historical consolidated financial statements.
During each of the fourth quarters of fiscal 2019, 2018 and 2017, an impairment analysis was performed at the enterprise
level which compared the Company’s market capitalization to its net assets as of the test date, November 30. As the market
capitalization substantially exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal
2019, 2018 and 2017.
Intangible Assets
January 31,
2019
(in thousands)
Amortizable intangible assets ....................................................................................................................
Customer relationships .............................................................................................................................. $
Less: accumulated amortization ................................................................................................................
Net amortizable intangible assets .............................................................................................................. $
1,348
(115)
1,233
The Company’s intangible assets as of January 31, 2019 are related to the acquisitions completed in the second and third
quarters of fiscal 2019. Intangible assets are included in “Other assets, net” in the accompanying Consolidated Balance Sheets,
and are amortized over an estimated 5 year useful life.
The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of
January 31, 2019:
Fiscal Years
2020 ............................................................................................................................................................. $
2021 .............................................................................................................................................................
2022 .............................................................................................................................................................
2023 .............................................................................................................................................................
Thereafter ....................................................................................................................................................
$
(in thousands)
270
270
270
270
153
1,233
67
INCOME TAXES
Income tax expense includes U.S. (federal and state) and foreign income taxes. Tax legislation commonly known as the
Tax Cuts and Jobs Act of 2017 (the “Tax Act”) includes a mandatory one-time tax on accumulated earnings of foreign
subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have
now become subject to U.S. federal income tax. The Company has completed the accounting associated with the Tax Act.
The U.S. Securities and Exchange Commission (“SEC”) provided accounting and reporting guidance that allowed the
Company to report provisional amounts within a measurement period up to one year from the enactment date. Complexities
inherent in adopting the changes included additional guidance, interpretations of the law, and further analysis of data and tax
positions. During fiscal 2019, as part of completing its accounting, the Company recognized approximately $1.3
million reduction to its final tax liability related to the Tax Act due to the ability to utilize additional foreign tax credits. The
Company intends to continue to invest most or all of these earnings, as well as its capital in these subsidiaries, indefinitely
outside of the U.S. and does not expect to incur any significant, additional taxes related to such amounts.
Deferred tax assets and liabilities reflect the effects of temporary differences between the carrying amounts of assets and
liabilities and their tax bases and are stated at enacted tax rates under current enacted tax law that would apply when the
temporary differences are expected to reverse. Deferred tax assets are evaluated for future realization and reduced by a
valuation allowance to the extent the Company believes they will not be realized. The Company considers many factors when
assessing the likelihood of future realization of its deferred tax assets, including recent cumulative loss experience and
expectations of future earnings, the carry-forward periods available to the Company for tax reporting purposes, and other
relevant factors.
The Company utilizes a two-step approach to recognizing and measuring uncertain income tax positions (tax
contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or
litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of
being realized upon ultimate settlement. The Company considers many factors when evaluating its tax positions and
estimating its tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes.
The Company includes interest and penalties related to its tax contingencies in income tax expense.
STOCK-BASED COMPENSATION
The Company accounts for share-based payments (“equity awards”) to employees in accordance with ASC
718, Compensation—Stock Compensation (“ASC 718”), which requires that share-based payments (to the extent they are
compensatory) be recognized in the Consolidated Statements of Income and Comprehensive Income based on the fair values
of the equity awards as measured at the grant date. The fair value of an equity award is recognized as stock-based
compensation expense ratably over the vesting period of the equity award. Determining the fair value of equity awards at the
grant date requires judgment.
Fair Value of RSUs
The fair value of restricted stock units (“RSUs”) is determined on the grant date of the award as the market price of the
Company’s common stock on the date of grant, reduced by the present value of estimated dividends foregone during the
vesting period. Judgment is required in determining the present value of estimated dividends foregone during the vesting
period. The Company estimates the dividends for purposes of this calculation based on the Company’s historical dividend
payments per share, which has remained consistent over the last three years.
Fair Value of SARs
The fair value of stock-settled stock appreciation rights (“SARs”) is determined on the grant date of the award using the
Black-Scholes-Merton valuation model. One of the inputs to the Black-Scholes-Merton valuation model is the fair market
value of the Company’s stock on the date of grant. Judgment is required in determining the remaining inputs to the Black-
Scholes-Merton valuation model. These inputs include the expected life, volatility, the risk-free interest rate and the dividend
rate. The following describes the Company’s policies with respect to determining these valuation inputs:
Expected Life - The expected life valuation input includes a computation that is based on historical vested SAR exercises
and post-vest expiration patterns and an estimate of the expected life for SARs that were fully vested and outstanding.
Furthermore, based on the Company’s historical pattern of SAR exercises and post-vest expiration patterns the Company
determined that there are two discernible populations which include the Company’s directors and officers (“D&O”) and all
68
other QAD employees. The estimate of the expected life for SARs that were fully vested and outstanding is determined as
the midpoint of a range as follows: the low end of the range assumes the fully vested and outstanding SARs are exercised or
expire unexercised on the evaluation date and the high end of the range assumes that these SARs are exercised or expire
unexercised upon contractual term.
Volatility - The volatility valuation input is based on the historical volatility of the Company’s common stock, which the
Company believes is representative of the expected volatility over the expected life of SARs.
Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time
of grant for the expected term of the SARs.
Dividend Rate - The dividend rate is based on the Company’s historical dividend payments per share.
The Company records deferred tax assets for equity awards that result in deductions on its income tax returns, based on
the amount of stock-based compensation recognized and the fair values attributable to the vested portion of those equity
awards. Because the deferred tax assets the Company records are based upon the stock-based compensation expenses in a
particular jurisdiction, the aforementioned inputs that affect the fair values of equity awards may also indirectly affect the
income tax expense. If the tax deduction is less than the deferred tax asset, the calculated shortfall would increase income tax
expense. If the tax deduction is more than the deferred tax asset, the calculated windfall would decrease income tax expense.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in the balances of items that are reported directly as a separate component
of Stockholders’ Equity on the Consolidated Balance Sheets. The components of comprehensive income (loss) are net income
(loss) and foreign currency translation adjustments. The Company does not provide for income taxes on foreign currency
translation adjustments since it does not provide for taxes on the unremitted earnings of its foreign subsidiaries. The changes
in “Accumulated other comprehensive loss” are included in the Company’s Consolidated Statements of Operations and
Comprehensive Income (Loss).
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expenses were $0.7 million, $0.7 million and $1.1 million for
fiscal years 2019, 2018 and 2017.
RESEARCH AND DEVELOPMENT
All costs incurred to establish the technological feasibility of the Company’s software products are expensed to research
and development (“R&D”) as incurred. R&D expenses totaled $54.0 million, $47.7 million and $43.6 million in fiscal years
2019, 2018 and 2017, respectively.
OTHER (INCOME) EXPENSE, NET
The components of other (income) expense, net for fiscal 2019, 2018 and 2017 were as follows:
2019
Years Ended January 31,
2018
(in thousands)
2017
Interest income ............................................................................... $
Interest expense ..............................................................................
Foreign exchange (gains) losses .....................................................
Change in fair value of interest rate swap ......................................
Other income, net ...........................................................................
Total other (income) expense, net .................................................. $
(2,600 ) $
643
(229 )
51
(209 )
(2,344 ) $
(1,547 ) $
669
2,466
(377 )
(77 )
1,134 $
(696 )
670
180
(485 )
(131 )
(462 )
69
COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share of Class A common stock and Class B common stock is computed using the two-class
method. Holders of Class A common stock are entitled to cash or stock dividends equal to 120% of the amount of such
dividend payable with respect to a share of Class B common stock.
The following table sets forth the computation of basic and diluted net income (loss) per share:
Years Ended January 31,
Net income (loss) ........................................................................... $
Less: dividends declared ................................................................
Undistributed net income (loss) ..................................................... $
2019
2017
2018
(in thousands, except per share data)
10,428 $
(5,479 )
4,949 $
(9,065 ) $
(5,367 )
(14,432 ) $
(15,450 )
(5,301 )
(20,751 )
Net income (loss) per share – Class A Common Stock
Dividends declared ......................................................................... $
Allocation of undistributed net income (loss) ................................
4,696 $
4,243
4,596 $
(12,358 )
4,531
(17,742 )
Net income (loss) attributable to Class A common stock .............. $
8,939 $
(7,762 ) $
(13,211 )
Weighted average shares of Class A common stock
outstanding—basic ........................................................................
Weighted average potential shares of Class A common stock .......
Weighted average shares of Class A common stock and potential
16,267
1,585
15,942
—
15,715
—
common shares outstanding—diluted ........................................
17,852
15,942
15,715
Basic net income (loss) per Class A common share ...................... $
Diluted net income (loss) per Class A common share ................... $
0.55 $
0.50 $
(0.49 ) $
(0.49 ) $
(0.84 )
(0.84 )
Net income (loss) per share – Class B Common Stock
Dividends declared ......................................................................... $
Allocation of undistributed net income (loss) ................................
Net income (loss) attributable to Class B common stock............... $
783 $
706
1,489 $
771 $
(2,074 )
(1,303 ) $
Weighted average shares of Class B common stock
outstanding—basic ........................................................................
Weighted average potential shares of Class B common stock .......
Weighted average shares of Class B common stock and potential
3,256
166
3,213
—
common shares outstanding—diluted ........................................
3,422
3,213
Basic net income (loss) per Class B common share ....................... $
Diluted net income (loss) per Class B common share .................... $
0.46 $
0.44 $
(0.41 ) $
(0.41 ) $
770
(3,009 )
(2,239 )
3,206
—
3,206
(0.70 )
(0.70 )
Potential common shares consist of the shares issuable upon the release of restricted stock units (“RSUs”) and the
exercise of stock options and stock appreciation rights (“SARs”). The Company’s unvested RSUs, unexercised stock options
and unexercised SARs are not considered participating securities as they do not have rights to dividends or dividend
equivalents prior to release or exercise.
70
The following table sets forth the number of potential common shares not included in the calculation of diluted earnings
per share because their effects were anti-dilutive:
2019
Years Ended January 31,
2018
(in thousands)
2017
Class A ...............................................................................................
Class B ...............................................................................................
325
—
3,236
380
2,985
378
RECENT ACCOUNTING PRONOUNCEMENTS
With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued
by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the fiscal year ended January 31,
2019, that are of significance, or potential significance, to the Company.
Recent Accounting Pronouncements Adopted
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which removes
the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers other
than inventory. The guidance is effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2017 with early adoption permitted as of the beginning of the annual reporting period in which the ASU
was issued. ASU 2016-16 was adopted by the Company effective February 1, 2018 on a modified retrospective basis,
resulting in a $9.6 million decrease to accumulated deficit and a corresponding increase to deferred tax assets.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash
Receipts and Cash Payments, that modifies how certain cash receipts and cash payments are presented and classified in the
statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods
within those fiscal years, with earlier adoption permitted. ASU 2016-15 was adopted by the Company effective February 1,
2018 on a retrospective basis, with no material changes reflected in the Consolidated Statement of Cash Flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes
the revenue recognition requirements in Revenue Recognition (Topic 605) and Subtopic 985-605 Software - Revenue
Recognition. Topic 605 and Subtopic 985-605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606,
revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires
enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers.
The Company adopted Topic 606 on the first day of fiscal 2019 using the modified retrospective transition method.
Under this method, QAD evaluated contracts that were in effect at the beginning of fiscal 2019 as if those contracts had been
accounted for under Topic 606. The Company did not evaluate individual modifications for those periods prior to the adoption
date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the
modified retrospective transition method, periods prior to the adoption date were not adjusted and continue to be reported in
accordance with historical, pre-Topic 606 accounting. A cumulative catch-up adjustment was recorded to beginning
accumulated deficit to reflect the impact of all existing arrangements under Topic 606.
71
The most significant impacts of the adoption of Topic 606 were as follows:
• Removal of vendor specific objective evidence (“VSOE”) under prior GAAP resulted in earlier recognition of
license and services revenues in those instances where the Company sold a multi-element deal where services did
not have VSOE. At adoption, QAD decreased accumulated deficit and deferred revenue by $2.0 million as this
revenue would otherwise have been recognized in future periods according to prior GAAP;
• Removal of the limitation on contingent revenue resulted in revenue being recognized earlier for certain contracts.
At adoption, QAD decreased accumulated deficit and increased contract assets by $0.8 million as this revenue would
otherwise have been recognized in future periods as invoiced according to prior GAAP;
• Contracts containing a future option to the customer represented a material right which resulted in deferral of
revenue. At adoption, QAD increased accumulated deficit and deferred revenue by $0.3 million as this revenue
would have been otherwise earned in previous periods according to prior GAAP;
• Commission expenses related to new cloud and maintenance contracts are no longer expensed as incurred; rather
these incremental commission costs and other associated fringe benefits are capitalized and amortized over the
associated term of economic benefit which the Company has determined to be five years. As a result, QAD decreased
accumulated deficit and increased other current and non-current assets by $9.1 million at the adoption date;
•
Sales agent fees to obtain new cloud and maintenance contracts are no longer be expensed as incurred; rather these
costs will be capitalized and amortized over the associated term of economic benefit which the Company has
determined to be five years. As a result, QAD decreased accumulated deficit and increased other current and non-
current assets by $1.0 million at the adoption date; and
• Cloud environment setup costs incurred to fulfill new cloud customer contracts are no longer expensed as incurred;
rather these costs are capitalized and amortized over the associated term of economic benefit which the Company
has determined to be five years. As a result, QAD decreased accumulated deficit and increased other current and
non-current assets by $1.5 million at the adoption date.
The tax impact of the above adjustments was assessed and, at adoption, QAD increased accumulated deficit and
decreased net deferred tax assets by $1.6 million.
72
Adjustments to beginning consolidated balance sheet accounts
The following table presents the cumulative effect adjustments, net of income tax effects, to beginning consolidated
balance sheet accounts for the new accounting standards adopted by the Company on the first day of fiscal 2019:
Jan. 31, 2018 Topic 606
ASU2016-16
(1)
Feb. 1, 2018
(in thousands)
Assets
Current assets:
Cash and equivalents ...................................... $
Accounts receivable, net .................................
Other current assets, net .................................
Total current assets .........................................
Property and equipment, net ...........................
Capitalized software costs, net .......................
Goodwill .........................................................
Deferred tax assets, net ...................................
Other assets, net ..............................................
Total assets ..................................................... $
Liabilities and stockholders’ equity
Current portion of long-term debt .................. $
Accounts payable ...........................................
Deferred revenue ............................................
Other current liabilities ...................................
Total current liabilities ...................................
Long-term debt ...............................................
Other liabilities ...............................................
Stockholders’ equity .......................................
Common stock - Class A ................................
Common stock - Class B ................................
Additional paid-in capital ...............................
Treasury stock ................................................
Accumulated deficit .......................................
Accumulated other comprehensive loss .........
Total stockholders’ equity ..............................
Total liabilities and stockholders’ equity........ $
147,023 $
83,518
15,856
246,397
30,408
990
11,023
7,944
3,055
299,817 $
466 $
14,818
116,693
43,460
175,437
13,313
5,439
16
4
200,456
(12,461)
(75,559)
(6,828)
105,628
299,817 $
- $
-
4,013
4,013
-
-
-
(1,643)
8,421
10,791 $
- $
-
(1,239)
-
(1,239)
-
(511)
-
-
-
-
12,541
-
12,541
10,791 $
- $
-
-
-
-
-
-
9,584
-
9,584 $
- $
-
-
-
-
-
-
-
-
-
-
9,584
-
9,584
9,584 $
147,023
83,518
19,869
250,410
30,408
990
11,023
15,885
11,476
320,192
466
14,818
115,454
43,460
174,198
13,313
4,928
16
4
200,456
(12,461)
(53,434)
(6,828)
127,753
320,192
(1) For further information about the adoption of ASU2016-16 Intra-entity Transfers of Assets Other Than
Inventory see Note 4 “Income Taxes.”
73
The following table summarizes the effects of adopting Topic 606 on the Company’s Consolidated Balance Sheet as of
January 31, 2019:
As reported
under Topic
606
Adjustments
(in thousands)
Balances
under
Prior GAAP
Assets
Current assets:
Cash and equivalents .......................................................................... $
Short-term investments.......................................................................
Accounts receivable, net .....................................................................
Other current assets, net .....................................................................
Total current assets .............................................................................
Property and equipment, net ...............................................................
Capitalized software costs, net ...........................................................
Goodwill .............................................................................................
Deferred tax assets, net .......................................................................
Other assets, net ..................................................................................
Total assets ......................................................................................... $
Liabilities and stockholders’ equity
Current portion of long-term debt ...................................................... $
Accounts payable ...............................................................................
Deferred revenue ................................................................................
Other current liabilities .......................................................................
Total current liabilities .......................................................................
Long-term debt ...................................................................................
Other liabilities ...................................................................................
Stockholders’ equity ...........................................................................
Common stock - Class A ....................................................................
Common stock - Class B ....................................................................
Additional paid-in capital ...................................................................
Treasury stock ....................................................................................
Accumulated deficit ...........................................................................
Accumulated other comprehensive loss .............................................
Total stockholders’ equity ..................................................................
Total liabilities and stockholders’ equity............................................ $
139,413 $
1,200
81,577
22,150
244,340
29,621
1,598
12,423
16,172
13,020
317,174 $
487 $
9,902
115,253
40,348
165,990
12,836
5,101
16
4
196,723
(7,350 )
(48,485 )
(7,661 )
133,247
317,174 $
- $
-
-
(3,738)
(3,738)
-
-
-
206
(7,989)
(11,521) $
- $
-
5,811
-
5,811
-
422
-
-
-
-
(17,757)
3
(17,754)
(11,521) $
139,413
1,200
81,577
18,412
240,602
29,621
1,598
12,423
16,378
5,031
305,653
487
9,902
121,064
40,348
171,801
12,836
5,523
16
4
196,723
(7,350 )
(66,242 )
(7,658 )
115,493
305,653
74
The following table summarizes the effects of adopting Topic 606 on the Company’s Consolidated Statement of Income
for the twelve months ended January 31, 2019:
As reported
under Topic
606
Adjustments
(in thousands, except per share amounts)
Balances
under
Prior GAAP
Revenue
Subscription fees ................................................................................ $
License fees ........................................................................................
Maintenance and other .......................................................................
Professional services ..........................................................................
Total revenue ......................................................................................
Cost of revenue:
Subscription fees ................................................................................
License fees ........................................................................................
Maintenance and other .......................................................................
Professional services ..........................................................................
Total cost of revenue ..........................................................................
Gross profit .........................................................................................
Operating expenses:
Sales and marketing ...........................................................................
Research and development .................................................................
General and administrative .................................................................
Amortization of intangible assets from acquisitions ..........................
Total operating expenses ....................................................................
Operating income ...............................................................................
Other (income) expense ......................................................................
Interest income ...................................................................................
Interest expense ..................................................................................
Other income ......................................................................................
Total other income, net .......................................................................
Income before income taxes ...............................................................
Income tax expense ............................................................................
Net income ......................................................................................... $
Basic income per share
Class A ............................................................................................... $
Class B ............................................................................................... $
Diluted income per share
Class A ............................................................................................... $
Class B ............................................................................................... $
91,861 $
25,568
122,936
92,651
333,016
34,128
2,714
31,307
87,735
155,884
177,132
78,207
53,993
35,248
111
167,559
9,573
(2,600 )
643
(387 )
(2,344 )
11,917
1,489
10,428 $
0.55 $
0.46 $
0.50 $
0.44 $
(1,628) $
(2,538)
298
(1,969)
(5,837)
(88)
-
-
-
(88)
(5,749)
96
(236)
-
-
(140)
(5,609)
-
-
-
-
(5,609)
(393)
(5,216) $
(0.28) $
(0.23) $
(0.25) $
(0.22) $
90,233
23,030
123,234
90,682
327,179
34,040
2,714
31,307
87,735
155,796
171,383
78,303
53,757
35,248
111
167,419
3,964
(2,600 )
643
(387 )
(2,344 )
6,308
1,096
5,212
0.27
0.23
0.25
0.22
The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s
Consolidated Statement of Cash Flows for the twelve months ended January 31, 2019:
As reported
under Topic
606
Adjustments
(in thousands)
Balances
under
Prior GAAP
Net income ......................................................................................... $
Amortization of costs capitalized to obtain and fulfill contracts ....
Net change in valuation allowance .................................................
Changes in operating assets and liabilities:
Costs capitalized to obtain and fulfill contracts ..............................
Other assets .....................................................................................
Deferred revenue ............................................................................
Net cash provided by operating activities .......................................
Effect of exchange rates on cash and equivalents ...........................
10,428 $
4,176
3,224
(4,130 )
(2,890 )
3,031
19,007
(2,668 )
(5,216) $
(3,348)
648
3,354
76
4,483
(3)
3
5,212
828
3,872
(776 )
(2,814 )
7,514
19,004
(2,665 )
75
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-
02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements.
Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842;
ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The
new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize an ROU asset and lease liability
on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with
classification affecting the pattern and classification of expense recognition in the income statement. The new standard is
effective for QAD on February 1, 2019. QAD will adopt the new standard on its effective date.
A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of
initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative
period presented in the financial statements as its date of initial application. If an entity chooses the second option, the
transition requirements for existing leases also apply to leases entered into between the date of initial application and the
effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by
the new standard for the comparative periods. QAD plans to elect to use the effective date as the date of initial application.
Consequently, financial information will not be updated and the disclosures required under the new standard will not be
provided for dates and periods before January 31, 2019.
The new standard provides a number of optional practical expedients in transition. QAD plans to elect the ‘package of
practical expedients’, which permits the Company not to reassess under the new standard prior conclusions about lease
identification, lease classification and initial direct costs. QAD also plans to elect the use-of-hindsight practical expedient.
QAD expects that this standard will have a material effect on its financial statements. While the effects of adoption are
still being assessed, the Company currently believes the most significant effects relate to the recognition of new ROU assets
and lease liabilities on the balance sheet for its office facilities leases and new disclosures about leasing activities. The
Company does not expect ASC 2016-02 will have a material impact to the Company’s consolidated statement of operations
or net cash provided by operating activities. In addition, the Company does not expect a significant change in its leasing
activities between now and adoption.
On adoption, the Company currently expects to recognize additional operating liabilities and corresponding ROU assets
in the range of $11.0 million to $16.0 million based on the present value of the remaining minimum rental payments under
current leasing standards for existing leases.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects
to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the
Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities
for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient
to not separate lease and non-lease components for all of its leases.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment, which simplifies the subsequent measurement of goodwill to eliminate Step 2 from the goodwill
impairment test. In addition, it eliminates the requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if that fails that qualitative test, to perform Step 2 of the goodwill impairment test.
Therefore, the same impairment assessment applies to all reporting units. The amendments will be effective for the
Company’s fiscal year beginning February 1, 2020. Early adoption is permitted. The new guidance is required to be applied
on a prospective basis. The Company does not believe adoption of ASU 2017-04 will have a material impact on its
consolidated financial statements.
2. REVENUE
QAD offers its software using the same underlying technology via two models: a traditional on-premises licensing model
and a cloud-based subscription model. The on-premises model involves the sale or license of software on a perpetual basis
to customers who take possession of the software and install and maintain the software on their own hardware. Under the
cloud-based subscription delivery model, QAD provides access to its software on a hosted basis as a service and customers
generally do not have the contractual right to take possession of the software.
76
The Company generates revenue through sales of licenses and maintenance provided to its on-premises customers and
through subscriptions of its cloud-based software. QAD offers professional services to both its on-premises and cloud
customers to assist them with the design, testing and implementation of its software.
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
The Company determines revenue recognition through the following steps:
-
-
- Determination of the transaction price;
- Allocation of the transaction price to the performance obligations in the contract; and
- Recognition of revenue when, or as, the Company satisfies a performance obligation.
Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government
authorities.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit
of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as
revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The
Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account
for the performance obligations over the life of the contract.
The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of
subscription or licenses and a professional services engagement. License purchases generally have multiple performance
obligations as customers purchase maintenance in addition to the licenses. The Company’s single performance obligation
arrangements are typically maintenance renewals, subscription renewals and services engagements.
For contracts with multiple performance obligations where the contracted price differs from the standalone selling price
("SSP") for any distinct good or service, the Company may be required to allocate the contract’s transaction price to each
performance obligation using its best estimate for the SSP. SSP is assessed annually using a historical analysis of contracts
with customers executed in the most recently completed fiscal year to determine the range of selling prices applicable to a
distinct good or service.
Judgment is required to determine the SSP for each distinct performance obligation. The Company rarely licenses or
sells its software products on a stand-alone basis, so the Company is required to estimate the range of SSPs for each
performance obligation. In instances where SSP is not directly observable because the Company does not sell the license,
product or service separately, the Company determines the SSP using information that may include market conditions and
other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology
and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions.
Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.
Subscription
Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing
when the cloud environment is made available to the customer. The initial subscription period is typically 12 to 60 months.
The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms
provide that customers make payment within 30 days of invoice.
Software Licenses
Transfer of control for software is considered to have occurred upon electronic delivery of the license key that provides
immediate availability of the product to the customer. The Company’s typical payment terms tend to vary by region but its
standard payment terms are within 30-90 days of invoice.
Maintenance
Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the
term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights
77
to unspecified software product updates, maintenance releases and patches released during the term of the support period on
a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone
access to technical support personnel. The Company’s customers purchase both product support and license updates when
they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and
typical payment terms provide that customers make payment within 30 days of invoice.
Professional Services
Revenue from professional services is typically comprised of implementation, development, training or other consulting
services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging
from software installation to data conversion and building non-complex interfaces to allow the software to operate in
integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are
performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date,
compared to total estimated costs to complete the services project. Management applies judgment when estimating project
status and the costs necessary to complete the services projects. A number of internal and external factors can affect these
estimates, including labor rates, utilization and efficiency variances and specification and testing requirement
changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and
payments are typically due 30 days after invoice.
Indirect Sales Channels
The Company executes arrangements through indirect sales channels via sales agents and distributors who are authorized
to market its software products to end users. In arrangements with sales agents, QAD contracts directly with the customer
and sales agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are
authorized to market and distribute the Company’s software products to end users in specified territories and the distributor
bears the risk of collection from the end user customer. The Company recognizes revenue from transactions with distributors
when the distributor submits a signed agreement and transfer of control has occurred to the distributor in accordance with the
five revenue recognition steps noted above. Revenue from distributor transactions is recorded on a net basis (the amount
actually received by the Company from the distributor). QAD does not offer rights of return, product rotation or price
protection to any of its distributors.
Disaggregated Revenue
The Company disaggregates revenue from contracts with customers by geography and by the customers’ industry within
manufacturing, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are
affected by economic factors.
The Company’s revenue by geography is as follows:
2019
Years Ended January 31,
2018
(in thousands)
2017
North America .................................................................................... $
EMEA ................................................................................................
Asia Pacific ........................................................................................
Latin America .....................................................................................
Total revenue ...................................................................................... $
162,307 $
96,989
51,628
22,092
333,016 $
141,614 $
89,693
50,689
23,022
305,018 $
129,436
81,765
47,742
19,030
277,973
The Company’s revenue by industry is as follows:
Automotive ......................................................................................... $
Consumer products and food and beverage ........................................
High technology and industrial products ............................................
Life sciences and other .......................................................................
Total revenue ...................................................................................... $
128,249 $
53,637
106,658
44,472
333,016 $
113,579 $
47,273
99,990
44,176
305,018 $
96,794
47,796
91,652
41,731
277,973
2019
Years Ended January 31,
2018
(in thousands)
2017
78
Management Judgments
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity
of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may
be dependent on contract-specific terms and may vary in some instances.
Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that
are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally
using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs
necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates,
utilization, specification variances and testing requirement changes.
If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single
arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The
Company exercises judgment to evaluate the relevant facts and circumstances in determining whether agreements should be
accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise
a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an
effect on results of operations for the periods involved.
If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration
to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating
variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be
estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue
recognized will not occur.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences
result in receivables, contract assets, or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheets.
QAD records a contract asset when the Company has transferred goods or services but does not yet have the right to
consideration. QAD records deferred revenue when the Company has received or has the right to receive consideration but
has not yet transferred goods or services to the customer.
The contract assets indicated below are presented as other current and non-current assets in the Consolidated Balance
Sheets. These assets primarily relate to professional services and subscription and consist of the Company’s rights to
consideration for goods or services transferred but not billed as of January 31, 2019. The contract assets are transferred to
receivables when the rights to consideration become unconditional, usually upon completion of a milestone.
The Company’s contract balances are as follows:
Contract assets, short-term (in Other current assets, net) ................................................ $
Contract assets, long-term (in Other assets, net) .............................................................
Total contract assets ..................................................................................................... $
Deferred revenue, short-term .......................................................................................... $
Deferred revenue, long-term (in Other labilities) ............................................................
Total deferred revenue ................................................................................................. $
As of
January 31,
2019
February 1,
2018
(In thousands)
2,058 $
—
2,058 $
115,253 $
1,465
116,718 $
890
110
1,000
115,454
1,644
117,098
During the fiscal year ended January 31, 2019, the Company recognized $112.1 million of revenue that was included in
the deferred revenue balance, as adjusted for Topic 606, at the beginning of the period. All other activity in deferred revenue
is due to the timing of invoicing in relation to the timing of revenue recognition.
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance
obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced
and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $262.4
million as of January 31, 2019, of which the Company expects to recognize approximately $166.5 million as revenue over
79
the next 12 months and the remainder thereafter. In instances where the timing of revenue recognition differs from the timing
of invoicing, QAD has determined that its contracts generally do not include a significant financing component. The primary
purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s
products and services, and not to facilitate financing arrangements.
Deferred Revenue
The Company typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis,
with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable services starting
in future periods are included in accounts receivable and deferred revenue. The portion of deferred revenue that QAD
anticipates will be recognized after the succeeding twelve-month period is recorded as non-current deferred revenue, and the
remaining portion is recorded as current deferred revenue.
Deferred revenues consisted of the following:
Deferred maintenance...................................................................................................... $
Deferred subscription ......................................................................................................
Deferred professional services ........................................................................................
Deferred license ...............................................................................................................
Deferred other revenue ....................................................................................................
Deferred revenues, current ..............................................................................................
Deferred revenues, non-current (in Other liabilities) ......................................................
Total deferred revenues ................................................................................................... $
Practical Expedients and Exemptions
As of
January 31,
2019
January 31,
2018
(in thousands)
77,037 $
34,020
2,146
1,713
337
115,253
1,465
116,718 $
80,811
31,034
3,523
756
569
116,693
2,156
118,849
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition
and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application
of Topic 606:
Application
• The Company does not evaluate a contract for a significant financing component if payment is expected within one
year or less from the transfer of the promised items to the customer.
• The Company generally expenses sales commissions and sales agent fees when incurred when the amortization
period would have been one year or less. These costs are recorded within sales and marketing expense in the
Consolidated Statement of Operations and Comprehensive Income (Loss).
• The Company also used the practical expedient to calculate contract acquisition costs based on a portfolio of
contracts with similar characteristics instead of a contract by contract analysis.
• The Company does not disclose the value of unsatisfied performance obligations for contracts for which the
Company recognizes revenue at the amount to which it has the right to invoice for services performed (applies to
time-and-material engagements).
Modified Retrospective Transition Adjustments
•
For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to
the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction
price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified
contract at transition.
80
Costs to Obtain and Fulfill a Contract
The Company’s incremental direct costs of obtaining a contract consist of sales commissions and sales agent fees which
are deferred and amortized ratably over the term of economic benefit which the Company has determined to be five years.
These deferred costs are classified as current or non-current based on the timing of when the Company expects to recognize
the expense. Incremental costs related to renewals are expensed as incurred because the term of economic benefit is one year
or less. The current and non-current portions of deferred commissions are included in other current assets and other long-
term assets, respectively, in the Company’s Consolidated Balance Sheets. At January 31, 2019 and February1, 2018, the
Company had $11.0 million and $10.1 million, respectively, of deferred commissions and sales agent fees. For the fiscal year
ended January 31, 2019, $3.6 million of amortization expense related to deferred commissions and sales agent fees was
recorded in sales and marketing expense in the Company’s Consolidated Statement of Operations and Comprehensive Income
(Loss).
Costs to fulfill a contract, which are incurred upon initiation of certain services contracts and are related to initial
customer setup, are included in other current assets and long-term assets in the Company’s Consolidated Balance Sheets. At
January 31, 2019 and February1, 2018 the Company had deferred setup costs of $1.5 million. These costs are amortized over
the term of economic benefit which the Company has determined to be five years. During the fiscal year ended January 31,
2019, $0.5 million of amortization expense related to deferred setup costs was recorded in cost of subscription in the
Company’s Consolidated Statement of Operations and Comprehensive Income (Loss).
Recoverability of these costs is subject to various business risks. Quarterly, the Company compares the carrying value
of these assets with the undiscounted future cash flows expected to be generated by them to determine if there is impairment.
If impaired, these assets are reduced to an estimated fair value on a discounted cash flow basis. No impairment losses were
recognized during the twelve months ended January 31, 2019.
3. FAIR VALUE MEASUREMENTS
When determining fair value, the Company uses a three-tier value hierarchy which prioritizes the inputs used in
measuring fair value. Whenever possible, the Company uses observable market data. The Company relies on unobservable
inputs only when observable market data is not available. Classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular item to
the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or
liability.
• Level 1 - Money market mutual funds and short-term investments are recorded at fair value based upon quoted market
prices.
• Level 2 - The asset or liability related to the interest rate swap is recorded at fair value based upon a valuation model that
uses relevant observable market inputs at quoted intervals, such as forward yield curves.
The following table sets forth the financial assets, measured at fair value, as of January 31, 2019 and January 31, 2018:
Fair value measurement at reporting date using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in thousands)
Significant
Unobservable
Inputs
(Level 3)
Money market mutual funds as of January 31, 2019 .......................... $
Money market mutual funds as of January 31, 2018 .......................... $
Short-term investments as of January 31, 2019 .................................. $
Short-term investments as of January 31, 2018 .................................. $
Asset related to the interest rate swap as of January 31, 2019 ............
Asset related to the interest rate swap as of January 31, 2018 ............
107,855
115,416
1,200
—
$
$
136
187
81
Money market mutual funds are classified as part of “Cash and equivalents” in the accompanying Consolidated Balance
Sheets. The amount of cash and equivalents deposited with commercial banks was $31.6 million and $32 million at January
31, 2019 and January 31, 2018, respectively.
The Company’s note payable bears a variable market interest rate commensurate with the Company’s credit standing.
Therefore, the carrying amount outstanding under the note payable reasonably approximates fair value based on Level 2
inputs.
There have been no transfers between fair value measurements levels during the twelve months ended January 31, 2019.
Derivative Instruments
The Company entered into an interest rate swap in May 2012 to mitigate the exposure to the variability of one month
LIBOR for its floating rate debt described in Note 8 “Debt” within these Notes to Consolidated Financial Statements. The
fair value of the interest rate swap is reflected as an asset or liability in the Consolidated Balance Sheets and the change in
fair value is reported in “Other (income) expense, net” in the Consolidated Statements of Operations and Comprehensive
Income (Loss). The fair value of the interest rate swap is estimated as the net present value of projected cash flows based
upon forward interest rates at the balance sheet date.
The fair values of the derivative instrument at January 31, 2019 and January 31, 2018 were as follows (in thousands):
Asset
Fair Value
Balance Sheet
Location
January 31,
2019
January 31,
2018
Derivative instrument:
Interest rate swap ........................................................................... Other assets, net $
$
Total ...........................................................................................
136 $
136 $
187
187
The change in fair value of the interest rate swap recognized in the Consolidated Statement of Operations and
Comprehensive Income (Loss) for the twelve months ended January 31, 2019, 2018 and 2017 was $(51,000), $377,000 and
$485,000, respectively.
4. INCOME TAXES
On December 22, 2017, the United States signed into law the Tax Cuts and Job Act, (the “Tax Act”), which imposes a
repatriation tax on accumulated earnings of foreign subsidiaries, implements a territorial tax system together with a current
tax on accumulated foreign earnings and lowers the general corporate income tax rate to 21%. The Tax Act requires the
Company to pay a one-time deemed repatriation income tax on the net accumulated earnings of its foreign subsidiaries at a
tax rate of 15.5%.
The Tax Act significantly changes how the U.S. taxes corporations. The Tax Act requires complex computations to be
performed that were not previously required, significant judgments to be made and significant estimates in calculations. The
U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance
on how provisions of the Tax Act will be applied or otherwise administered that is different from the Company’s
interpretation. The Securities and Exchange Commission staff issued Staff Accounting Bulletin No.118 Income Tax
Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). SAB118 allowed companies to record provisional
amounts during a measurement period not to extend beyond one year of the enactment date. The Company's accounting for
the Tax Act was completed within the measurement period provided by SAB 118.
The Company completed its calculations of the one-time deemed repatriation tax and finalized its U.S. federal income
tax return in the fourth quarter of fiscal 2019. The provisional tax expense for the one-time deemed repatriation tax was
reduced from $2.0 million estimated in fiscal 2018 to $0.7 million, primarily due to the Company’s ability to use more foreign
tax credits to reduce the transition tax liability. In the fourth quarter of fiscal 2019, the Company recorded a tax benefit of
$1.3 million to reduce the initial accrual of $2.0 million to $0.7 million. The Company elected to pay the repatriation tax
liability over a period of eight years as permitted by the Tax Act.
82
The Tax Act made broad fundamental changes to the U.S. international tax system with the enactment of Section 951A,
global intangible low-tax income ("GILTI"). GILTI applies to the Company’s foreign businesses that operate in corporate
form and may cause the foreign income to be reported on its U.S. federal income tax return beginning in fiscal 2019. As a
result, the Company’s foreign earnings may be subject to U.S. taxes. The Company calculated the GILTI provision based on
the proposed regulations released on September 13, 2018. These regulations provide computational, definitional, and anti-
avoidance rule guidance relating to the determination of a U.S. shareholder’s GILTI inclusion. For fiscal 2019, the Company
does not have a GILTI inclusion due to a loss in Ireland.
The Company has elected to treat the deferred taxes related to GILTI provisions as a current-period expense when
incurred (the “period cost method”).
Consolidated net income (loss) before income taxes is summarized as follows:
Domestic net income (loss) before income taxes ............................... $
Foreign net income before income taxes ............................................
Consolidated net income (loss) before income taxes ......................... $
6,562 $
5,355
11,917 $
(4,793) $
585
(4,208) $
(3,774 )
7,600
3,826
2019
Years Ended January 31,
2018
(in thousands)
2017
Income tax expense is summarized as follows:
Current:
U.S. federal ..................................................................................... $
State ................................................................................................
Foreign ............................................................................................
Subtotal .......................................................................................
Deferred:
U.S. federal .....................................................................................
State ................................................................................................
Foreign ............................................................................................
Subtotal .......................................................................................
Equity adjustment ...............................................................................
Total ............................................................................................ $
2019
Years Ended January 31,
2018
(in thousands)
2017
(829) $
(13)
3,784
2,942
79
(30)
(1,502)
(1,453)
—
1,489 $
2,862 $
38
2,433
5,333
(519)
19
24
(476)
—
4,857 $
437
30
3,894
4,361
11,564
3,610
(348 )
14,826
89
19,276
Actual income tax expense differs from that obtained by applying the statutory federal income tax rate to income before
income taxes as follows:
Computed expected tax expense (benefit) .......................................... $
State income taxes, net of federal income tax expense ......................
Incremental tax expense from foreign operations ..............................
Equity compensation ..........................................................................
Foreign withholding taxes ..................................................................
Net change in valuation allowance .....................................................
Net change in contingency reserve .....................................................
Non-deductible expenses ....................................................................
Benefit of tax credits ..........................................................................
Subpart F income ...............................................................................
U.S. Tax Reform (the “Tax Act”) ......................................................
Other ...................................................................................................
Total ............................................................................................ $
83
2019
Years Ended January 31,
2018
(in thousands)
2017
2,503 $
96
715
(2,916)
1,089
3,224
(71)
1,149
(3,483)
101
(1,312)
394
1,489 $
(1,431) $
(157)
923
(1,004)
794
5,448
(81)
(407)
(1,766)
302
1,951
285
4,857 $
1,301
(54 )
137
(29 )
676
16,861
198
660
(1,243 )
345
—
424
19,276
The Company’s foreign earnings were primarily from the following countries: China, India and Mexico. These countries
have higher statutory tax rates and effective tax rates than the U.S. However, the Company benefits from operating in Ireland
which has a lower statutory income tax rate and effective tax rate than the U.S.
The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The
Company is currently under audit in:
India for fiscal years ended March 31, 2010, 2013, and 2014
•
• Netherlands for fiscal year ended January 31, 2016
• Germany for fiscal years ended January 31, 2015, 2016 and 2017
•
• Tennessee for fiscal years ended January 31, 2014, 2015, 2016, 2017 and 2018
Switzerland for fiscal years ended January 31, 2014, 2015, 2016, 2017 and 2018
During fiscal 2019, the Company closed the following audits with small or no adjustment:
•
Iowa for fiscal year ended January 31, 2014
• Kentucky for fiscal year ended January 31, 2016
•
South Africa for fiscal years ended January 31, 2016 and 2017
As of January 31, 2019, the Company continues to maintain its permanent reinvestment assertion under APB 23 for all
of its foreign subsidiaries as it relates to withholding taxes, state taxes and currency translation. These permanently reinvested
earnings are approximately $89 million at January 31, 2019. It is not practicable for the Company to determine the amount
of the related unrecognized deferred income tax liability.
Deferred income taxes reflect the net effects of the temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The Tax Act reduces the U.S.
statutory tax rate from 35% to 21% for years after 2017. Accordingly, the Company has remeasured its deferred taxes as of
January 31, 2019 to reflect the reduced rate.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments .............................................. $
Accrued vacation .........................................................................................................
Tax credits ...................................................................................................................
Deferred revenue .........................................................................................................
Net operating loss carry forwards ................................................................................
Accrued expenses – other ............................................................................................
Other comprehensive income ......................................................................................
Section 263(a) interest capitalization ...........................................................................
Intellectual property .....................................................................................................
Equity compensation ...................................................................................................
Carryforward of Irish amortization ..............................................................................
Other ............................................................................................................................
Total deferred tax assets ...........................................................................................
Less valuation allowance .........................................................................................
Less netting of unrecognized tax benefits against deferred tax assets ......................
Deferred tax assets, net of valuation allowance ....................................................... $
Deferred tax liabilities:
Depreciation and amortization .....................................................................................
Topic 606: capitalized commissions and cloud costs ..................................................
Other ............................................................................................................................
Total deferred tax liabilities .....................................................................................
Total net deferred tax assets ................................................................................. $
84
January 31,
2019
2018
(in thousands)
520 $
1,568
20,908
2,849
10,597
1,802
1,189
198
7,917
4,626
1,630
2,345
56,149
(34,898 )
(886 )
20,365 $
(804 )
(2,891 )
(498 )
(4,193 )
16,172 $
367
1,590
18,583
3,493
10,337
1,849
1,164
206
—
4,380
—
1,243
43,212
(33,665)
(930)
8,617
(442)
—
(231)
(673)
7,944
The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation
allowance is necessary based on the more-likely-than-not standard. Management assessed historic, current and future
financial projections by jurisdiction to draw its conclusion. In fiscal year 2019, the Company continued to apply a valuation
allowance against its U.S. federal and state deferred income tax assets due to a U.S. three-year cumulative loss, future
earmarked investment in research and development, and hiring due to the Company’s business transition to the cloud. When
the Company’s operating performance improves on a sustained basis, the conclusion regarding the need for a valuation
allowance is likely to change, resulting in the reversal of some or all of the valuation allowance in the future. At January 31,
2019 and 2018, the worldwide valuation allowance attributable to deferred tax assets was $34.9 million and $33.7 million,
respectively.
In the fourth quarter of fiscal 2018, the Company had an intra-entity sale of intellectual property that resulted in $10
million of additional tax basis. Upon adoption of ASU 2016-16 in the first quarter of fiscal 2019, the Company established a
deferred tax asset of $9.6 million that will be amortized over six years for tax purposes. This benefit was recorded to retained
earnings on February 1, 2018 under the transition rules.
The Company has gross net operating loss carryforwards of $38.5 million and tax credit carryforwards of $23.2 million
as of January 31, 2019. The majority of the Company’s net operating loss carryforwards do not expire. The Company’s
foreign tax credits will begin to expire in fiscal year 2028. The Company has $6.5 million of U.S. and $10.8 million of
California R&D credits that have been valued. The Company has $167,000 of U.S. R&D tax credit that will expire on October
2019. These credits are unlikely to be utilized before expiration. Australian and California R&D tax credits do not expire.
During the fiscal year ended January 31, 2019, the Company decreased its reserves for uncertain tax positions by $0.5
million. Interest and penalties on accrued but unpaid taxes are classified in the Consolidated Statements of Operations and
Comprehensive Income (Loss) as income tax expense. The liability for unrecognized tax benefits that may be recognized in
the next twelve months is classified as short-term in the Company’s Consolidated Balance Sheet while the remainder is
classified as long-term.
The following table reconciles the gross amounts of unrecognized tax benefits at the beginning and end of the period:
Unrecognized tax benefits at beginning of the year ........................................................ $
Decreases as a result of tax positions taken in a prior period ......................................
Increases as a result of tax positions taken in the prior period .....................................
Reduction as a result of a lapse of the statute of limitations ........................................
Decreases as a result of settlements with taxing authorities ........................................
Unrecognized tax benefit at end of year .......................................................................... $
Years Ended January 31,
2019
2018
(in thousands)
1,662 $
(26 )
—
(44 )
(424 )
1,168 $
1,743
(115)
58
(24)
—
1,662
All of the unrecognized tax benefits included in the Consolidated Balance Sheet at January 31, 2019 would impact the
effective tax rate on income from continuing operations, if recognized.
The total amount of interest recognized in the Consolidated Statement of Operations and Comprehensive Income for
unpaid taxes was $9,000 for the year ended January 31, 2019. The total amount of interest and penalties recognized in the
Consolidated Balance Sheet at January 31, 2019 was $0.1 million.
85
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statute of limitations.
The years that may be subject to examination will vary by jurisdiction. Below is a list of our material jurisdictions and the
years open for audit as of fiscal 2019:
Years Open for Audit
Jurisdiction
U.S. federal ........................................................................... Fiscal year 2016 and beyond
California .............................................................................. Fiscal year 2015 and beyond
Michigan .............................................................................. Fiscal year 2015 and beyond
New Jersey ........................................................................... Fiscal year 2015 and beyond
Australia ............................................................................... Fiscal year 2015 and beyond
France ................................................................................... Fiscal year 2016 and beyond
India...................................................................................... Fiscal years 2010, 2013 and 2014
Ireland .................................................................................. Fiscal year 2015 and beyond
United Kingdom ................................................................... Fiscal year 2018 and beyond
China .................................................................................... Calendar year 2014 and beyond
Mexico .................................................................................. Calendar year 2014 and beyond
5. STOCKHOLDERS’ EQUITY
Common Stock
The Company has two classes of common stock. Each share of Class B Common Stock entitles the holder to one vote
and each share of Class A Common Stock entitles the holder to 1/20th of one vote. On all matters, the Class A Common
Stock and the Class B Common Stock will vote as a single class, except as otherwise required by applicable law or the articles
of incorporation. Neither the Class A Common Stock nor the Class B Common Stock are convertible into the other, unless
either or both classes becomes subject to exclusion from the principal national securities exchange on which such securities
are traded, in which case all outstanding shares of Class A Common Stock may be converted into shares of Class B Common
Stock on a share-for-share basis by resolution of the Board of Directors. There are no restrictions on the transferability of
either class.
The amount of any dividend payable in cash or non-cash property of the Company (other than a dividend payable solely
in the Company’s capital stock) with respect to each share of Class A Common Stock is equal to 120% of the value of any
such dividend payable with respect to a share of Class B Common Stock, except for dividends declared for the purpose of
distributing all or some of the proceeds received by the Company from any transaction determined by the Board to be a
material transaction not in the ordinary course of business or for the purpose of effecting a spin-off of a subsidiary of the
Company (in either case, such dividend will be paid ratably, on a per share basis, to all holders of Common Stock).
Dividends
The following table sets forth the dividends declared and paid by the Company during fiscal 2019:
Record Date
Declaration Date
12/11/2018 ..................... 12/26/2018 .................. 1/8/2019 ................ $
9/11/2018 ....................... 9/25/2018 .................... 10/2/2018 .............. $
6/11/2018 ....................... 6/25/2018 .................... 7/6/2018 ................ $
4/10/2018 ....................... 4/24/2018 .................... 5/1/2018 ................ $
Payable
0.072 $
0.072 $
0.072 $
0.072 $
(in thousands)
1,374
1,374
1,372
1,359
0.06 $
0.06 $
0.06 $
0.06 $
Dividend
Class A
Dividend
Class B
6. STOCK-BASED COMPENSATION
Stock Plans
On June 14, 2016, the stockholders approved the QAD Inc. 2016 Stock Incentive Program (“2016 Program”). The 2016
Program allows for equity awards in the form of incentive stock options, non-statutory stock options, restricted shares, rights
to purchase stock, stock appreciation rights (“SARs”) and other stock rights. The stockholders authorized a maximum of
4,000,000 shares to be issued under the 2016 Program. Prior to July 1, 2016, stock awards were issued under the QAD Inc.
2006 Stock Incentive Program. As of January 31, 2019, 3,011,000 Class A Common Shares were available for issuance.
86
The Company issues restricted stock units (“RSUs”) to employees with the exception of the President of the Company.
RSUs granted to employees under the 2016 Program and 2006 Program are generally released 25% after each year of service
for four years and are contingent upon employment with the Company on the release date. Stock compensation is typically
issued out of treasury shares. At January 31, 2019, there were 480,000 RSUs of Class A Common Stock outstanding under
the 2016 Program and 183,000 RSUs of Class A Common Stock outstanding under the 2006 Program.
The Company also issues equity awards in the form of stock-settled SARs to the President of the Company. A SAR is a
contractual right to receive value tied to the post-grant appreciation of the underlying stock. Although the Company has the
ability to grant stock-settled or cash-settled SARs, the Company has only granted stock-settled SARs. Upon vesting, a holder
of a stock-settled SAR receives shares in the Company’s common stock equal to the intrinsic value of the SAR at time of
exercise. Under the 2016 Program and 2006 Program, SARs have generally been granted for a term of eight years. They
generally vest 25% after each year of service for four years and are contingent upon employment with the Company on the
vesting date. Economically, a stock-settled SAR provides the same compensation value as a stock option, but the employee
is not required to pay an exercise price upon exercise of the SAR. Stock compensation expense, as required under ASC 718,
is the same for stock-settled SARs and stock options. At January 31, 2019, there were 427,000 SARs to purchase Class A
Common Stock outstanding under the 2016 Program. At January 31, 2019, there were 1,828,000 and 278,000 SARs to
purchase Class A Common Stock and Class B Common Stock outstanding under the 2006 Program, respectively.
Equity compensation is also issued to non-employee Board members that are newly-appointed or reelected at the Annual
Meeting of Stockholders. They are granted Class A shares as stock payments that are fully vested on the date of grant. Equity
awards to non-employee Board members are limited to $250,000 per year, as determined for the Company’s financial
accounting purposes as of the date of grant.
Under the 2016 Program, officers, directors, employees, consultants and other independent contractors or agents of the
Company or subsidiaries of the Company who are responsible for or contribute to the management, growth or profitability
of its business are eligible for selection by the program administrators to participate. However, incentive stock options granted
under the 2016 Program may only be granted to a person who is an employee of the Company or one of its subsidiaries.
Stock- Based Compensation
The following table sets forth reported stock compensation expense included in the Company’s Consolidated Statements
of Operations and Comprehensive Income (Loss) for the fiscal years ended January 31, 2019, 2018 and 2017:
Stock-based compensation expense:
Cost of subscription ........................................................................ $
Cost of maintenance and other revenue ..........................................
Cost of professional services ..........................................................
Sales and marketing ........................................................................
Research and development .............................................................
General and administrative .............................................................
Total stock-based compensation expense ........................................... $
2019
Years Ended January 31,
2018
(in thousands)
2017
252 $
497
1,219
2,111
1,620
4,423
10,122 $
161 $
384
1,085
1,510
1,226
4,558
8,924 $
113
299
848
1,200
1,009
3,854
7,323
87
RSU Information
The following table summarizes the activity for RSUs for the fiscal years ended January 31, 2019, 2018 and 2017:
RSUs
(in thousands)
Restricted stock at January 31, 2016 ...............................................................................
Granted .....................................................................................................................
Released (1) ..............................................................................................................
Forfeited ...................................................................................................................
Restricted stock at January 31, 2017 ...............................................................................
Granted .....................................................................................................................
Released (1) ..............................................................................................................
Forfeited ...................................................................................................................
Restricted stock at January 31, 2018 ...............................................................................
Granted .....................................................................................................................
Released (1) ..............................................................................................................
Forfeited ...................................................................................................................
Restricted stock at January 31, 2019 ...............................................................................
617 $
307
(259 )
(42 )
623 $
295
(245 )
(20 )
653 $
300
(263 )
(27 )
663 $
Weighted
Average
Grant Date
Fair Value
20.91
18.54
18.96
20.69
20.56
30.69
20.48
22.36
25.10
51.70
25.80
30.63
36.64
(1) The number of RSUs released includes shares withheld on behalf of employees to satisfy minimum statutory tax
withholding requirements. During the fiscal years ended January 31, 2019, 2018 and 2017, the Company withheld 81,000
shares, 74,000 shares and 75,000 shares, respectively, for payment of these taxes. The value of the withheld shares for
the fiscal years ended January 31, 2019, 2018 and 2017 were $4.3 million, $2.4 million and $1.5 million, respectively.
Total unrecognized compensation cost related to RSUs was approximately $19.1 million as of January 31, 2019. This
cost is expected to be recognized over a period of approximately 2.9 years.
SAR Information
The weighted average assumptions used to value SARs are shown in the following table.
Expected life in years ........................................................................
Risk free interest rate .........................................................................
Volatility ...........................................................................................
Dividend rate .....................................................................................
5.50
2.80%
31%
0.54%
5.50
1.82 %
33 %
0.91 %
5.25
1.16 %
36 %
1.51 %
Years Ended January 31,
2018
2017
2019
88
The following table summarizes the activity for outstanding SARs for the fiscal years ended January 31, 2019, 2018 and
2017:
Outstanding at January 31, 2016 ...................................
Granted ......................................................................
Exercised ...................................................................
Expired.......................................................................
Forfeited .....................................................................
Outstanding at January 31, 2017 ...................................
Granted ......................................................................
Exercised ...................................................................
Expired.......................................................................
Outstanding at January 31, 2018 ...................................
Granted ......................................................................
Exercised ...................................................................
Expired.......................................................................
Forfeited .....................................................................
Outstanding at January 31, 2019 ...................................
Vested and exercisable at January 31, 2019 ..............
$
Options/
SARs
(in
thousands)
2,596
380
(158 )
(17 )
(8 )
2,793
380
(139 )
(10 )
3,024
380
(390 )
(5 )
(476 )
$
2,533
2,058 (1) $
$
$
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
(in
thousands)
14.74
18.64
10.94
12.56
12.09
15.51
31.65
10.52
9.74
17.78
53.50
9.43
9.17
37.14
20.81
17.04
3.5 $
2.9 $
53,155
48,873
(1) The number of SARs vested and exercisable at January 31, 2019 includes 877,500 Class A and 127,500 Class B shares
previously held by Mr. Karl Lopker which will expire on August 25, 2019 if not exercised by his estate. Exercise prices
for these SARs range from $10.50 to $31.65.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference
between the closing stock price of the Company’s common stock based on the last trading day as of January 31, 2019 and the
exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on
January 31, 2019. The total intrinsic value of SARs exercised in the years ended January 31, 2019, 2018 and 2017 was $12.4
million, $3.0 million and $2.1 million, respectively. The weighted average grant date fair value per share of SARs granted in
the years ended January 31, 2019, 2018 and 2017 was $16.99, $9.59 and $5.43, respectively.
The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax
withholding requirements. During the fiscal years ended January 31, 2019, 2018 and 2017, the Company withheld shares
104,000, 31,000 and 25,000 shares for payment of these taxes. The value of the withheld shares for the fiscal years ended
January 31, 2019, 2018 and 2017 were $4.4 million, $1.0 million and $0.6 million, respectively.
At January 31, 2019, there was approximately $4.3 million of total unrecognized compensation cost related to unvested
SARs. This cost is expected to be recognized over a weighted average period of approximately 2.9 years.
89
7. OTHER BALANCE SHEET ACCOUNTS
Other current assets
Deferred cost of revenues ........................................................................................... $
Prepaid expenses ........................................................................................................
Capitalized commissions and sales agent fees ...........................................................
Accrued revenue .........................................................................................................
Capitalized cloud setup costs .....................................................................................
Income tax receivable, net of payables .......................................................................
Other ...........................................................................................................................
$
Other assets, net
Long-term capitalized commissions and sales agent fees .......................................... $
Long-term deposits and prepaid expenses ..................................................................
Other intangible assets, net .........................................................................................
Long-term capitalized cloud setup costs ....................................................................
Fair value of interest rate swap ...................................................................................
Other long-term assets ................................................................................................
$
Accounts payable
Trade payables ............................................................................................................ $
VAT payable ..............................................................................................................
$
Other current liabilities
Accrued commissions and bonus ............................................................................... $
Accrued compensated absences .................................................................................
Other accrued payroll .................................................................................................
Accrued professional fees ..........................................................................................
Accrued travel ............................................................................................................
Accrued contract labor ...............................................................................................
Other current liabilities ...............................................................................................
$
Other liabilities
Long-term deferred revenue ....................................................................................... $
Accrued termination benefits .....................................................................................
Lease restoration obligations ......................................................................................
Long-term tax contingency reserve ............................................................................
Other ...........................................................................................................................
$
8. DEBT
January 31,
2019
2018
(in thousands)
8,007 $
6,597
3,502
2,058
521
255
1,210
22,150 $
7,520 $
3,061
1,233
934
136
136
13,020 $
6,544 $
3,358
9,902 $
15,464 $
9,130
5,251
2,729
1,696
1,975
4,103
40,348 $
1,465 $
1,946
834
282
574
5,101 $
8,330
5,847
—
106
—
213
1,360
15,856
—
2,463
—
—
187
405
3,055
9,346
5,472
14,818
18,039
9,177
6,038
1,884
1,839
2,655
3,828
43,460
2,156
1,557
859
688
179
5,439
Note payable ............................................................................................................. $
Less current maturities ..............................................................................................
Less loan origination costs, net .................................................................................
Long-term debt .......................................................................................................... $
January 31,
2019
2018
(in thousands)
13,358 $
(487 )
(35 )
12,836 $
13,825
(466 )
(46 )
13,313
90
Note Payable
Effective May 30, 2012, QAD Ortega Hill, LLC entered into a variable rate credit agreement (the “2012 Mortgage”)
with Rabobank, N.A., to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1
million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 2.51% at January 31, 2019. The
2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In
conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Rabobank, N.A. The
swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that
synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012
Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest
and one final payment of $11.7 million. The unpaid balance as of January 31, 2019 was $13.4 million.
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss were as follows:
Balance as of January 31, 2018 ................................................................................................................... $
Other comprehensive loss before reclassifications ......................................................................................
Amounts reclassified from accumulated other comprehensive loss ............................................................
Net current period other comprehensive loss ..............................................................................................
Balance as of January 31, 2019 ................................................................................................................... $
Foreign
Currency
Translation
Adjustments
(in thousands)
(6,828)
(833)
—
(833)
(7,661)
During fiscal 2019 there were no reclassifications from accumulated other comprehensive loss.
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which is available to U.S. employees after 30 days of employment.
Employees may contribute up to the maximum allowable by the Internal Revenue Code. The Company voluntarily matches
75% of the employees’ contributions up to the first four percent of the employee’s eligible compensation. In addition, the
Company can make additional contributions at the discretion of the board of directors. Participants are immediately vested
in their employee contributions. Vesting of employer contributions depends on an employee's years of service, starting with
20% at one year of service and increasing 20% for each subsequent year of service until fully vested after five years of service.
The Company’s contributions for fiscal years 2019, 2018 and 2017 were $2.2 million, $2.2 million and $2.1 million,
respectively.
Various QAD foreign subsidiaries also contribute to defined contribution pension plans. Employer contributions in these
plans are generally based on employee salary and range from 2% to 20%. These plans are funded at various times throughout
the year according to plan provisions, with aggregate employer contributions of $5.3 million for fiscal 2019, $4.4 million for
fiscal 2018 and $4.1 million for fiscal 2017.
91
11. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases certain office facilities, office equipment and automobiles under operating lease agreements. The
leases generally provide that the Company pays taxes, insurance and maintenance expenses related to the leased assets. Total
rent expense for fiscal years 2019, 2018 and 2017 was $5.0 million, $4.9 million and $4.9 million, respectively. Certain of
the Company’s lease arrangements are subject to customary renewal and base rental fee escalation clauses, rent holidays and
lessor incentives. Future minimum rental payments under non-cancelable operating lease commitments with terms of more
than one year as of January 31, 2019 are as follows (in millions):
2020 ............................................................................................................................................................... $
2021 ...............................................................................................................................................................
2022 ...............................................................................................................................................................
2023 ...............................................................................................................................................................
2024 ...............................................................................................................................................................
Thereafter ......................................................................................................................................................
$
5.6
4.6
2.8
1.8
1.5
2.8
19.1
Purchase Obligations
At January 31, 2019, the Company had $18.9 million of other non-cancelable contractual obligations, related to the
purchase of goods and services not included in the table above.
Indemnifications
The Company sells software licenses and services to its customers under written agreements. Each agreement contains
the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for
indemnifying the customer against losses, expenses and liabilities from damages that may be awarded against the customer
in the event the Company’s software is found to infringe upon certain intellectual property rights of a third party. The
agreements generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard
respects.
The Company believes its internal development processes and other policies and practices limit its exposure related to
the indemnification provisions of the agreements. For several reasons, including the lack of prior indemnification claims and
the lack of a monetary liability limit for certain infringement cases under the agreements, the Company cannot determine the
maximum amount of potential future payments, if any, related to such indemnification provisions.
Legal Actions
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary
course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that
the outcome of any of these legal matters will have a material adverse effect on the Company’s consolidated results of
operations, financial position or liquidity.
12. BUSINESS SEGMENT INFORMATION
The Company markets its products and services worldwide, primarily to companies in the manufacturing industry,
including automotive, consumer products, food and beverage, high technology, industrial products and life sciences
industries. The Company sells and licenses its products through its direct sales force in four geographic regions: North
America; Europe, the Middle East and Africa (“EMEA”); Asia Pacific; and Latin America and through distributors where
third parties can extend sales reach more effectively or efficiently. The North America region includes the United States and
Canada. The EMEA region includes Europe, the Middle East and Africa. The Asia Pacific region includes Asia and Australia.
The Latin America region includes South America, Central America and Mexico. In accordance with Topic 606, the Company
reports disaggregated revenue by geography and by industry as the Company believes it best depicts how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic factors. The Company does not consider reporting
by industry an operating segment in accordance with ASC 280, Segment Reporting, because discrete financial information
92
by industry is not available. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, reviews the
consolidated results within one operating segment.
Subscription, license and maintenance revenues are generally assigned to the region where a majority of end users are
located. Professional services revenue is assigned based on the region where the services are delivered.
Property and equipment, net are assigned by geographic region based on the location of each legal entity.
Revenue:
North America (1) .............................................................................. $
EMEA ................................................................................................
Asia Pacific ........................................................................................
Latin America .....................................................................................
$
2019
Years Ended January 31,
2018
(in thousands)
2017
162,307 $
96,989
51,628
22,092
333,016 $
141,614 $
89,693
50,689
23,022
305,018 $
129,436
81,765
47,742
19,030
277,973
Property and equipment, net:
North America ................................................................................................................. $
EMEA .............................................................................................................................
Asia Pacific .....................................................................................................................
Latin America ..................................................................................................................
$
January 31,
2019
2018
(in thousands)
24,735 $
3,090
1,408
388
29,621 $
25,546
3,444
1,141
277
30,408
(1) Sales into Canada accounted for 2% of North America total revenue for each of the fiscal years 2019, 2018 and 2017.
93
0.26
0.22
0.24
0.21
80,753
83,441
40,934
(2,688)
(5,172)
(0.28)
(0.23)
(0.28)
(0.23)
13. QUARTERLY INFORMATION (Unaudited)
Quarters Ended
April 30 July 31
Oct. 31
Jan. 31
(in thousands, except per share data)
Fiscal 2019
Total revenue ............................................................................ $
Total costs and expenses ...........................................................
Gross margin .............................................................................
Operating income ......................................................................
Net income ................................................................................
Basic net income per share
Class A .................................................................................. $
Class B ..................................................................................
Diluted net income per share
Class A .................................................................................. $
Class B ..................................................................................
86,190 $
84,381
45,123
1,809
1,397
84,543
82,817
44,107
1,726
1,113
79,577
77,103
42,216
2,474
2,982
82,706
79,142
45,686
3,564
4,936
0.07 $
0.06
0.07 $
0.06
0.06
0.05
0.05
0.05
0.16
0.13
0.14
0.12
Fiscal 2018
Total revenue ............................................................................ $
Total costs and expenses ...........................................................
Gross margin .............................................................................
Operating (loss) income ............................................................
Net loss .....................................................................................
Basic net loss per share
71,382 $
72,741
36,516
(1,359)
(2,571)
75,958 $
75,415
39,264
543
(1,161)
Class A .................................................................................. $
Class B ..................................................................................
(0.14) $
(0.12)
(0.06) $
(0.05)
Diluted net loss per share
Class A .................................................................................. $
Class B ..................................................................................
(0.14) $
(0.12)
(0.06) $
(0.05)
76,925 $
76,495
38,879
430
(161)
(0.01) $
(0.01)
(0.01) $
(0.01)
94
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
Beginning
of Period
Charged
to
Statements
of Income
Write-Offs,
Net of
Recoveries
Impact of
Foreign
Currency
Translation
Balance at
End of
Period
Year ended January 31, 2017
Allowance for bad debt ........................................ $
Allowance for sales adjustments ..........................
Total allowance for doubtful accounts ................. $
Year ended January 31, 2018
Allowance for bad debt ........................................ $
Allowance for sales adjustments ..........................
Total allowance for doubtful accounts ................. $
Year ended January 31, 2019
Allowance for bad debt ........................................ $
Allowance for sales adjustments ..........................
Total allowance for doubtful accounts ................. $
1,242 $
1,400
2,642 $
1,090 $
1,115
2,205 $
396 $
1,367
1,763 $
40 $
197
237 $
(184) $
(472)
(656) $
98 $
923
1,021 $
(834) $
(733)
(1,567) $
144 $
1,608
1,752 $
(31) $
(518)
(549) $
(8) $
(10)
(18) $
42 $
62
104 $
(22) $
(43)
(65) $
1,090
1,115
2,205
396
1,367
1,763
487
2,414
2,901
See accompanying report of independent registered public accounting firm.
95
INDEX OF EXHIBITS
EXHIBIT
NUMBER
3.1
EXHIBIT TITLE
Amended and Restated Certificate of Incorporation of the Registrant, filed with the Delaware Secretary of State on
December 15, 2010 (Incorporated by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K for the
fiscal year ended January 31, 2011)
3.2
4.1
10.1
Revised Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K filed on
December 13, 2013)
Specimen Class A and Class B Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Registrant’s
Annual Report on Form 10-K for the fiscal year ended January 31, 2011)
QAD Inc. 2006 Stock Incentive Program (Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration
Statement on Form S-8 (Commission File No. 333-137417))
10.1(a)
Forms of Agreement for QAD Inc. 2006 Stock Incentive Program (Incorporated by reference to Exhibit 10.2(a) of the
Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009)
10.2
10.3
10.4
Form of Indemnification Agreement with Directors and Executive Officers (Incorporated by reference to Exhibit 10.3
of the Registrant’s Registration Statement on Form S-1 (Commission File No. 333- 28441))†
Executive Termination Policy (Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form
10-Q for the quarter ended April 30, 2011)†
Change in Control Policy (Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-
Q for the quarter ended April 30, 2011)†
10.4(a)
Change in Control Agreement for Anton Chilton†*
10.4(b)
Change in Control Agreement for Pam Lopker (Incorporated by reference to Exhibit 10.6 of the Registrant’s Annual
Report on Form 10-K for the fiscal year ended January 31, 2009)†
10.4(c)
Change in Control Agreement for Daniel Lender (Incorporated by reference to Exhibit 10.7(a) of the Registrant’s
Annual Report on Form 10-K for the fiscal year ended January 31, 2009)†
10.5(a)
Offer letter between the Registrant and Daniel Lender dated October 10, 2008 (Incorporated by reference to Exhibit
10.72 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2008)†
10.5(b)
Offer letter between the Registrant and Anton Chilton, dated December 19, 2018 (Incorporated by reference to Exhibit
10.1 of the Registrant’s Form 8-K filed on December 21, 2018)†
10.6(a)
Acknowledgement between the Registrant and Daniel Lender dated October 10, 2008 (Incorporated by reference to
Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011)†
10.6(b)
Acknowledgement between the Registrant and Anton Chilton dated December 19, 2018†*
10.7
Credit Agreement between the Registrant and Rabobank, N.A. effective as of May 30, 2012 (Incorporated by reference
to Exhibit 10.1 of the Registrant’s Form 8-K filed on June 5, 2012)
10.7(a)
Real Estate Term Loan Note between the Registrant and Rabobank, N.A. effective as of May 30, 2012 (Incorporated
by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed on June 5, 2012)
10.7(b)
Deed of Trust between the Registrant and Rabobank, N.A. effective as of May 30, 2012 (Incorporated by reference to
Exhibit 10.3 of the Registrant’s Form 8-K filed on June 5, 2012)
96
EXHIBIT
NUMBER
10.7(c)
EXHIBIT TITLE
ISDA 2002 Master Agreement between the Registrant and Rabobank, N.A. effective as of May 30, 2012 (Incorporated
by reference to Exhibit 10.4 of the Registrant’s Form 8-K filed on June 5, 2012)
10.7(d)
ISDA Schedule to the 2002 Master Agreement between the Registrant and Rabobank, N.A. effective as of May 30,
2012 (Incorporated by reference to Exhibit 10.5 of the Registrant’s Form 8-K filed on June 5, 2012)
10.7(e)
Confirmation of a Swap Transaction between the Registrant and Rabobank, N.A. effective as of June 4, 2012
(Incorporated by reference to Exhibit 10.6 of the Registrant’s Form 8-K filed on June 5, 2012)
10.8
2016 Stock Incentive Program (Incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement
for the Registrant’s 2016 Annual Meeting of Stockholders filed on Schedule 14A on April 29, 2016)†
10.8(a)
Form of Stock Rights Agreement under the 2016 Stock Incentive Program (Incorporated by reference to Exhibit 10.2
of the Registrant’s Form 8-K filed on June 17, 2016)†
10.8(b) Form of Restricted Stock Unit Agreement under the 2016 Stock Incentive Program (Incorporated by reference to
Exhibit 10.3 of the Registrant’s Form 8-K filed on June 17, 2016)†
10.8(c) Form of Stock Appreciation Rights Agreement under the 2016 Stock Incentive Program (Incorporated by reference to
Exhibit 10.4 of the Registrant’s Form 8-K filed on June 17, 2016)†
10.9
21.1
23.1
31.1
31.2
32.1
Partner Agreement between the Registrant and Progress Software Corporation dated February 1, 2007, as amended by
First Amendment to Partner Agreement dated October 30, 2007, Second Amendment to Partner Agreement dated
January 30, 2008, SaaS Amendment to Partner Agreement dated May 6, 2008, Third Amendment to Partner Agreement
dated July 31, 2008, Savvion Amendment to Partner Agreement dated February 15, 2011, Sixth Amendment to Partner
Agreement dated May 16, 2014, Seventh Amendment to Partner Agreement dated July 29, 2014, Eighth Amendment
to Partner Agreement dated January 11, 2016, and Ninth Amendment to Partner Agreement dated January 22, 2016
(Incorporated by reference to Exhibit 10.11 of the Registrant’s Form 10-K/A filed on June 30, 2017. Filed in redacted
form as confidential treatment as to certain portions of such exhibit has been granted by the Securities and Exchange
Commission and was separately filed with the SEC.)
Subsidiaries of the Registrant*
Consent of Independent Registered Public Accounting Firm*
Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification by the Chief Executive Officer and the Chief Financial Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*
**
†
Indicates the document is filed herewith.
Indicates the document is furnished herewith.
Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit.
97
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 16, 2019.
SIGNATURES
QAD Inc.
By: /s/ Daniel Lender
Daniel Lender
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the Registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ ANTON CHILTON
Anton Chilton
Chief Executive Officer, Director
(Principal Executive Officer)
/s/ PAMELA M. LOPKER
Pamela M. Lopker
President, Director
/s/ DANIEL LENDER
Daniel Lender
/s/ KARA BELLAMY
Kara Bellamy
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
Sr. Vice President, Corporate Controller
(Chief Accounting Officer)
/s/ SCOTT J. ADELSON
Scott J. Adelson
Director
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
/s/ PETER R. VAN CUYLENBURG
Peter R. van Cuylenburg
Chairman of the Board
April 16, 2019
/s/ LEE D. ROBERTS
Lee D. Roberts
/s/ LESLIE J. STRETCH
Leslie J. Stretch
Director
Director
April 16, 2019
April 16, 2019
98
CHANGE IN CONTROL AGREEMENT
Exhibit 10.4(a)
This change in control agreement (this “Agreement”), is made and entered into as of December 19, 2018 (the
“Effective Date”), by and between QAD Inc., a Delaware corporation (together with its successors and assigns permitted
under this Agreement, the “Company”), and Anton Chilton, an individual (the “Employee”).
W I T N E S S E T H:
WHEREAS the Board of Directors of the Company (the “Board”) has determined that it is in the best interests of the
Company and its stockholders to assure that the Company will have the continued dedication of the Employee,
notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company;
WHEREAS the Board believes it is imperative to diminish the inevitable distraction of the Employee by virtue of the
personal uncertainties and risks created by a pending or threatened Change in Control, to encourage the Employee’s full
attention and dedication to the Company currently and in the event of any threatened or pending Change in Control, and to
provide the Employee with compensation arrangements upon a Change in Control which provide the Employee with
individual financial security and which are competitive with those of other corporations; and
WHEREAS in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and
valuable consideration, the Company and the Employee (individually a “Party” and together the “Parties”) agree as follows.
1. TERM OF AGREEMENT. This Agreement shall commence as of the Effective Date and shall continue in effect
until June 30, 2019, PROVIDED, HOWEVER, that commencing on June 30, 2019 and on each June 30 thereafter, the term
of this Agreement shall automatically be extended for one (1) additional year (e.g., on June 30, 2019 through June 30, 2020),
unless either the Company or the Employee shall have given written notice to the other, at least one (1) year prior thereto,
that the term of this Agreement shall not be so extended; and PROVIDED, FURTHER, HOWEVER, that notwithstanding
any such notice by the Company not to extend, the term of this Agreement shall not terminate prior to the expiration of
eighteen (18) months after the occurrence of a Change in Control during the term of this Agreement.
2. DEFINITIONS.
2.1 “Base Monthly Salary” shall mean the monthly base compensation of the Employee.
2.2 “Cause” shall mean (a) the Employee is convicted of a felony involving property of the Company, or (b) the
Employee, in carrying out the Employee’s duties under this Agreement, is guilty of willful refusal to perform, or willful
neglect of, the Employee’s duties.
Page 1
2.3 “Change in Control” shall mean the first occurrence of any of the following events:
(a) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) or persons acting as a group, other than Pamela M. Lopker and Karl F. Lopker as joint holders, or either of them
(the “Lopkers”) or a living trust for their benefit over which they maintain control of the assets of the trust and the voting
rights for shares in the trust is or becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by
the Company’s then outstanding voting securities.
(b) A merger or consolidation of the Company with any other corporation, other than a merger or
consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such merger or consolidation; or
(c) The sale or other disposition by the Company of all, or substantially all, of the Company’s assets, other
than a transfer to (i) a stockholder of the Company (immediately before the asset transfer) in exchange for or with respect to
its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly,
by the Company, (iii) a person, or persons acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of
the total value or voting power represented by the Company’s then outstanding voting securities, or (iv) an entity, fifty percent
(50%) or more of the total value or voting power of which is owned, directly or indirectly, by a person described in clause
(iii).
Each of the foregoing events is intended to qualify as a change in ownership or effective control for purposes of
Section 409A(a)(2)(A)(v) of the Internal Revenue Code of 1986, as amended (the “Code”), and the provisions of this Section
2.3 shall be interpreted accordingly.
2.4 “Disability” shall mean that the Employee has been unable to perform their duties under this Agreement as a
result of the Employee’s incapacity due to physical or mental illness with or without reasonable accommodation, and such
inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician
selected by the Company, or its insurers, and acceptable to the Employee or the Employee’s legal representative (such
statement of acceptability not to be unreasonably withheld).
2.5 “Division” shall mean a business unit or other substantial business operation within the Company that is
operated as a separate profit center, but that is not maintained by the Company as a separate legal entity.
2.6 "Equity Compensation" shall mean any equity compensation granted under the QAD Inc. 2006 Stock
Incentive Program, the QAD Inc. 2016 Stock Incentive Program and any subsequent shareholder-approved QAD Inc. stock
incentive program.
Page 2
3. CHANGE IN CONTROL SEVERANCE BENEFITS. In the event there occurs a Change in Control and the Employee’s
employment with the Company is terminated on or before eighteen (18) months after the date of the Change in Control, then
the following shall apply:
3.1 Voluntary Resignation; Termination for Cause. If the Employee’s employment terminates in a voluntary
resignation, or if the Employee is terminated for Cause, or if the Employee voluntarily accepts a position at the time of a
Change in Control below the level currently held by the Employee, and such acceptance occurs at, or proximate to, the time
of a Change in Control, then the Employee shall not be entitled to receive severance benefits except for those (if any) as may
be available under the Company’s severance and benefits plans and policies existing at the time of such termination.
3.2 Constructive Termination; Termination Without Cause. If the Employee suffers Constructive Termination (as
defined below) or Termination without Cause, then the Employee shall be entitled to the following:
(a) payment, within thirty (30) days following the termination of the Employee’s employment, of a lump
sum cash amount equal to eighteen (18) months times the greater of (x) the Employee’s Base Monthly Salary at the time of
the Change in Control or (y) the Employee’s Base Monthly Salary at the time of the termination of the Employee’s
employment; and.
(b) payment, within thirty (30) days following the termination of the Employee’s employment, of a lump
sum cash amount equal to one point zero (1.5) multiplied by the greater of (x) the average annual bonus received by the
Employee during the two (2) fiscal years immediately prior to the termination of the Employee’s employment or (y) the
annual bonus that would be due for the fiscal year in progress at the time of the termination of the Employee’s employment
if the Employee and the Company met the on target goals to receive such bonus; and
(c) immediate vesting of any Equity Compensation granted to the Employee; and
(d) payment, within thirty (30) days following termination of the Employee’s employment, of a lump sum
cash amount equivalent to the present value of the projected cost (based upon the Company’s programs in effect immediately
prior to the Change in Control) of continuation of all employee benefits and perquisites, including life insurance, health
benefits, disability insurance, cars and expense reimbursement, and 401(k) matching payments for a period following such
termination of employment for eighteen (18) months plus an amount equal to the portion of the Employee’s unvested account
balance (as of the date of termination of employment) under the Company’s 401(k) plan that would vest if the Employee had
eighteen (18) additional months of service for vesting purposes under the Company’s 401(k) plan (subject to applicable taxes
and withholding); and
(e) all benefits pursuant to the Consolidated Omnibus Reconciliation Act of 1986 ("COBRA") and the
Company 401(k) Plan upon termination .
3.3 Effect on Existing Plans. This Agreement and the payments provided hereunder supersede the Company's
existing severance and benefit plans, policies and agreements existing now and at the time of termination with respect to
severance or termination benefits provided to Employee in the event of termination of employment during the eighteen (18)
month period following a Change in Control, and are not in addition thereto.
3.4 Death; Disability. If the Employee’s employment terminates due to the Employee’s Disability or death, then
such termination shall be treated as if it were a termination without Cause and severance and other benefits shall be provided
in accordance with Section 3.2 above.
Page 3
3.5 Payment to Specified Employee. If a payment obligation under this Agreement arises on account of the
Employee’s separation from service while the Employee is a “specified employee” (as defined under Section 409A of the
Code and determined in good faith by the Compensation Committee of the Board), any payment of “deferred compensation”
(as defined under Treasury Regulation Section 1.409A-1(b)(1), after giving effect to the exemptions in Treasury Regulation
Sections 1.409A-1(b)(3) through (b)(12)) that is scheduled to be paid within six (6) months after such separation from service
shall accrue with interest and shall be paid within 30 days after the end of the six-month period beginning on the date of such
separation from service or, if earlier, within 30 days after the appointment of the personal representative or executor of the
Employee’s estate following his death. For purposes of the preceding sentence, interest shall accrue at the prime rate of
interest published in the northeast edition of The Wall Street Journal on the date of Employee’s separation from service.
3.6 Termination of Employment. For all purposes under this Agreement, references to “termination of
employment,” “employment terminates” and similar terms shall mean “separation from service” as defined for purposes of
Section 409A of the Code and the regulations promulgated thereunder.
4. CONSTRUCTIVE TERMINATION OF EMPLOYMENT. “Constructive Termination” shall mean and exist if, without
the Employee’s prior written consent, one or more of the following events occurs and the Employee shall elect to terminate
the Employee’s employment with the Company:
(a) the assignment to Employee of duties which are wholly and clearly inconsistent with the position and
status of an executive of the Company, or a substantial alteration in the nature, status or prestige of Employee’s official
position resulting in a decrease in authority or responsibilities from those in effect immediately prior to a Change in Control;
(b) The Employee’s Base Monthly Salary is decreased by the Company, or the Employee’s benefits or
opportunities under any employee benefit or incentive plan or program of the Company is or are materially reduced other
than in connection with a reduction in salary or benefits generally applicable to all employees of the Company;
(c) The Employee’s own office location, as provided for in this Agreement, is relocated to a location more
than twenty-five (25) miles from the Employee’s then present location without the Employee’s written consent;
(d) The Company fails to pay the Employee any deferred payments under any bonus or incentive plans in
a timely manner;
(e) The Company fails to reimburse the Employee for business expenses in accordance with the Company’s
policies, procedures or practices;
(f) The Company fails to agree to or actually indemnify the Employee for the Employee’s actions and/or
inactions, as either a director or officer of the Company, to the fullest extent permitted by Delaware law, and the Company
fails to maintain reasonable levels of directors and officers liability insurance coverage for the Employee when such insurance
is available;
(g) The Company fails to obtain a written agreement from any successor or assign of the Company to
assume and perform Employee’s employment agreement as then in effect and this Agreement; or
(h) The Company purports to terminate the Employee’s employment for Cause and such purported
termination of employment is not effected in accordance with the procedures required by this Agreement, and for purposes
of this Agreement, such purported termination of employment shall be invalid and of no force and effect.
Page 4
5. EQUITY COMPENSATION ACCELERATION
5.1 Equity Compensation Acceleration upon Change of Control. If the Employee does not terminate employment
in the event of a Change of Control, fifty percent (50%) of the then unvested portion of any Equity Compensation held by the
Employee under the Company’s equity compensation plans and outstanding at the time of the Change in Control shall become
vested and the Employee shall automatically have the right to exercise all, or any portion, of such Equity Compensation to
the extent so vested in addition to any portion of the Equity Compensation exercisable prior to the Change in Control. Where
the Change in Control results from a merger or consolidation of the Company with any other corporation, such vesting shall
occur immediately prior to consummation of such merger or consolidation, and is contingent upon the consummation of such
merger or consolidation.
5.2 Equity Compensation Acceleration Following Change in Control. Subject to the continued employment of the
Employee, after acceleration of vesting under Section 5.1 above, the remaining unvested portion of any Equity Compensation
granted to Employee prior to the Change in Control shall become fully vested upon the first anniversary of the Change in
Control (or the vesting date of such Equity Compensation, if earlier). If, however, the Employee’s employment terminates
within the twelve (12) month period following the Change of Control, then the vesting of such Equity Compensation shall be
handled in accordance with the Change in Control Severance Benefits set forth above in Section 3.1.
6. NO MITIGATION; NO OFFSET. In the event of any termination of employment covered by this Agreement, the
Employee shall be under no obligation to seek other employment and there shall be no offset against amounts due the
Employee under this Agreement on account of any remuneration attributable to any subsequent employment that the
Employee may obtain. Any amounts due under this Agreement are in the nature of severance payments, or liquidated
damages, or both, and are not in the nature of a penalty.
7. SEVERANCE PAY AND BENEFITS. The severance pay and benefits provided for in this Agreement shall be in lieu
of any other severance or termination pay to which the Employee otherwise may be entitled as a result of termination of
employment during the eighteen (18) month period following a Change in Control under any Company severance or
termination plan, program, practice, agreement or arrangement, including any agreement relating to the Employee’s
employment with the Company. If the Employee receives severance or termination benefits or payments under this
Agreement, the Employee may not receive severance or termination benefits under any other Company policy, plan,
agreement or arrangement. The Employee's entitlement to any other compensation or benefits shall be determined in
accordance with the Company's employee benefit plans and other applicable programs, policies and practices then in effect,
provided such other compensation or benefits have not been addressed in this Agreement.
Page 5
8. CERTAIN ADDITIONAL PAYMENTS.
8.1 Gross-Up Payment Amount. Notwithstanding anything in this Agreement to the contrary, in the event it shall
be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid, payable,
distributed or distributable pursuant to this Agreement or otherwise (a “Payment”) would be subject to the excise tax imposed
by Section 4999 of the Code (or any successor provision) or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest and penalties, are collectively referred to in this Agreement as the “Excise Tax”),
then the Employee shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after
the payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including
any Excise Tax, imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Payment.
8.2 Determinations. Subject to the provisions of Section 8.3, all determinations required to be made under this
Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made by an accounting firm of national standing
reasonably selected by the Company (the “Accounting Firm”), which shall provide detailed supporting calculations to both
the Company and the Employee within fifteen (15) business days of the receipt of written notice from the Employee that
there has been a Payment, or such earlier time as is requested by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 8, shall be paid by the Company to the Employee within fifteen (15) days of the receipt of the
Accounting Firm’s determination. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any
determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the possible
uncertainty in application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments will not have been made by the Company that should have been made
(“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts
its remedies pursuant to Section 8.3 and the Employee thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Employee.
8.3 IRS Claims. The Employee shall notify the Company in writing of any claim by the Internal Revenue Service
that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten (10) business days after the Employee is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim is to be paid. The Employee shall not pay
such claim prior to the expiration of the thirty (30) -day period following the date on which the Employee gives such notice
to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the
Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the
Employee shall:
(a) give the Company any information reasonably requested by the Company relating to such claim,
(b) take such action in connection with contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an
attorney selected by the Company and reasonably acceptable to the Employee,
(c) cooperate with the Company in good faith in order effectively to contest such claim, and
Page 6
(d) permit the Company to participate in any proceedings relating to such claim; provided, however, that the
Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income
tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section, the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the
Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee
agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee
to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an
interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment
of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled in his sole discretion to settle or
contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
8.4 Refunds. If, after receipt by the Employee of an amount advanced by the Company pursuant to Section 8.3,
the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the
Company’s complying with the requirements of such Section) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable thereto). If, after receipt by the Employee of an
amount advanced by the Company pursuant to Section 8.3, a determination is made that the Employee shall not be entitled
to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest
such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven
and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-
Up Payment required to be paid.
8.5 409A Payment Deadline. In all events, the Gross-Up Payment, if any, including any Underpayment, shall not
be made later than the December 31 following Employee’s taxable year in which Employee remits the Excise Tax.
9. DIVESTITURE. Notwithstanding any other provision of this Agreement to the contrary, the termination of the
Employee’s employment with the Company in connection with the sale, divestiture or other disposition of a subsidiary or
Division shall not be deemed to be a termination of employment of the Employee for purposes of this Agreement provided
the Employee accepts employment offered by the purchaser or acquirer of such subsidiary or Division and provided the
Company obtains an agreement from such purchaser or acquirer to honor the terms of this Agreement.
Page 7
10. CONFIDENTIALITY AND NON-COMPETE.
10.1 Non-Disclosure of this Agreement. Employee agrees that the terms of this Agreement are a private matter,
which shall not be divulged in any form to others. Accordingly, Employee hereby agrees that Employee will not disclose,
disseminate and/or publicize or cause to be disclosed, disseminated and/or publicized any of the terms of this Agreement or
the discussions which have led up to this Agreement to anyone, with the exception of Employee’s attorney, any financial or
tax advisors, and immediate family members, who shall not divulge its contents to any third party.
10.2 Confidential Information. Employee acknowledges that Employee may be in receipt of confidential
information concerning the Company, agrees that any confidential information concerning the Company and its affiliates will
be maintained in strict confidence and not be disclosed to any other person, including but not limited to, and past, present or
prospective customers of the Company. The parties agree that money damages would not be a sufficient remedy for breach
of this Section 10.2 and that, in addition to all other remedies which any party hereto may have, each party will be entitled to
specific performance and injunctive or other equitable relief as a remedy for such breach. This Section 10.2 shall not supersede
any other confidentiality agreement entered into between the parties.
10.3 Non-Compete. In the event of any termination covered by Section 3.2 and in return for the payment and
benefits provided under this Agreement, the Employee agrees that, for a period of one (1) year after the last day of
employment with the Company, Employee shall not:
(a) compete with the Company, or assist any other party to compete with the Company, in any manner;
(b) attempt to solicit or recruit the Company employees or otherwise interfere with the Company’s
relationship with its employees or customers;
(c) make any comment, remark or statement that disparages the Company or portrays the Company in a
negative manner.
11. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge that the Employee’s employment is
at will and may be terminated at any time and for any reason, with or without notice. On termination of the Employee’s
employment, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as
provided by this Agreement, or as may otherwise be available in accordance with the Company’s established employee plans
and policies at the time of termination.
12. MISCELLANEOUS.
12.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California.
12.2 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit
of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
12.3 Entire Agreement: Amendment. This Agreement constitutes the full and entire understanding and agreement
between the parties with regard to the subject hereof and thereof. Neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Employee.
Page 8
12.4 Notices. Except as may be otherwise provided herein, all notices and other communications required or
permitted hereunder shall be in writing and shall be hand delivered or delivered via next day delivery, (a) if to the Employee,
to such address as the Employee, or any of the Employee’s successors or assigns, shall have furnished to the Company in
writing or (b) if to the Company, to such address as the Company shall have furnished to the Employee or the Employee’s
successors or assignees in writing. Notices via next day delivery will be effective three (3) business days after delivery to the
delivery firm, charges prepaid.
12.5 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to the Employee,
upon any breach or default of Company under this Agreement, shall impair any such right, power or remedy of the Employee,
nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or
default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of
any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.
All remedies, either under the Agreement, or by law or otherwise afforded to any holder shall be cumulative and not
alternative.
12.6 Expenses. The Company and the Employee shall each bear their own expenses and legal fees incurred on
their behalf with respect to this Agreement and the transactions contemplated hereby.
12.7 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall
constitute one instrument.
12.8 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement shall continue to be in full force and effect without said
provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement
to any party.
12.9 Survival. The provisions of the sections entitled “Excise Tax Reduction”, “Confidentiality and Non-
Compete”, “At-Will Employment” and “Miscellaneous” shall survive the expiration or termination of this Agreement.
12.10 Section 409A Compliance. This Agreement is intended not to result in the imposition of any tax, interest
charge or other assessment, penalty or addition under Section 409A of the Code. In addition to any specific references to
Section 409A of the Code in this Agreement, all terms and conditions of this Agreement are intended, and shall be interpreted
and applied to the greatest extent possible in such manner as may be necessary, to comply with the provisions of Section
409A of the Code and any rules, regulations or other regulatory guidance issued under Section 409A of the Code. If any
modification of this Agreement is necessary to comply with the provisions of Section 409A of the Code, and the making of
such modification itself does not fail to comply with any requirement of Section 409A of the Code, then the Company and
the Employee agree to modify this Agreement in the least restrictive manner necessary to accomplish such result without
causing any diminution in the value of the payments to the Employee. With respect to any reimbursement of expenses of, or
any provision of in-kind benefits to, the Employee, as specified under this Agreement, such reimbursement of expenses or
provision of in-kind benefits shall be subject to the following conditions: (1) the expenses eligible for reimbursement or the
amount of in-kind benefits provided in one taxable year shall not affect the expenses eligible for reimbursement or the amount
of in-kind benefits provided in any other taxable year, except for any medical reimbursement arrangement providing for the
reimbursement of expenses referred to in Section 105(b) of the Code; (2) the reimbursement of an eligible expense shall be
made no later than the end of the year after the year in which such expense was incurred; and (3) the right to reimbursement
or in-kind benefits shall not be subject to liquidation or exchange for another benefit. The preceding provisions, however,
shall not be construed as a guarantee by the Company of any particular tax effect to Employee under this Agreement. The
Company shall not be liable to Employee for any payment made under this Agreement that is determined to result in an
additional tax, penalty, or interest under Section 409A of the Code, nor for reporting in good faith any payment made under
this Agreement as an amount includible in gross income under Section 409A of the Code.
Page 9
12.11 Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof,
shall be settled by arbitration before one (1) arbitrator, in Santa Barbara, California, administered by the American Arbitration
Association under its Employment Dispute Resolution Rules, and judgment on the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Unless otherwise provided for by law, the Company and the Employee shall
each pay half of the costs and expenses of such arbitration.
EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH PROVIDES FOR ARBITRATION.
EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREMENT, EMPLOYEE AGREES TO SUBMIT ANY
CLAIMS ARISING OUT OF, OR RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE
INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION OF THIS
AGREEMENT TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A
WAIVER OF EMPLOYEE’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES
RELATING TO ALL ASPECTS OF THIS AGREEMENT.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
QAD INC., a Delaware corporation
By: /s/ Kaye Swanson
Kaye Swanson
Chief People Officer
EMPLOYEE:
/s/ Anton Chilton
Anton Chilton
Page 10
ACKNOWLEDGEMENT AND CLARIFICATION
Exhibit 10.6(b)
This ACKNOWLEDGEMENT AND CLARIFICATION, effective as of December 19, 2018, is between QAD Inc., a
Delaware corporation, with its principal offices located at 100 Innovation Place, Santa Barbara, California 93108 ("QAD"),
and Anton Chilton, residing at 5110 Cathedral Oaks Rd., Santa Barbara, CA 93111 ("Employee").
RECITALS
QAD and Employee hereby acknowledge and agree that severance benefits, as described in Employee's offer letter of
December 19, 2018, are provided under and are subject to the terms and conditions of the Executive Termination Policy as
approved by QAD Inc.'s Board of Directors and in effect as of December 18, 2008 (the "Policy"), but that any Benefits
provided to Employee pursuant to such Policy shall be for a period of twelve (12) months instead of six (6) months.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above
written.
EMPLOYEE
/s/ Anton Chilton
Anton Chilton
QAD Inc.,
A Delaware Corporation
By:
/s/ Kaye Swanson
Kaye Swanson
Chief People Officer
Exhibit 21.1
QAD Inc.
LIST OF REGISTRANT’S SUBSIDIARIES
(all 100% owned)
Subsidiary Name.
QAD Australia Pty. Limited
QAD Europe NV/SA
QAD (Bermuda) Ltd.
QAD Brasil Ltda.
QAD Canada ULC
Tradewind Compliance Inc.
QAD China Ltd.
QAD Europe s.r.o.
QAD Europe S.A.S.
DynaSys S.A.S.
QAD Europe GmbH
QAD Asia Limited
QAD India Private Limited
PT QAD Asia Indonesia
Precision Software Limited
QAD Ireland Limited
QAD Europe (Ireland) Limited
QAD Italy S.r.l.
QAD Korea Limited
QAD Mexicana, S.A. de C.V.
QAD Sistemas Integrados Servicios de Consultoria, S.A. de C.V.
QAD EMEA Holdings B.V.
QAD Europe B.V.
QAD Netherlands B.V.
QAD Polska Sp. z o.o.
QAD Lusitana Europe — Software e Servicos, Unipessoal, Limitada
QAD Singapore Private Limited
QAD Software South Africa (Proprietary) Limited
QAD Europe S.L.
QAD Europe SA/AG
QAD (Thailand) Ltd.
QAD Europe Limited
QAD United Kingdom Limited
QAD Brazil, Inc.
QAD Holdings Inc.
QAD Japan Inc.
QAD Ortega Hill, LLC
Country of
Organization
Australia
Belgium
Bermuda
Brazil
Canada
Canada
China
Czech Republic
France
France
Germany
Hong Kong
India
Indonesia
Ireland
Ireland
Ireland
Italy
Korea
Mexico
Mexico
Netherlands
Netherlands
Netherlands
Poland
Portugal
Singapore
South Africa
Spain
Switzerland
Thailand
United Kingdom
United Kingdom
USA
USA
USA
USA
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
QAD Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-96065 and 333-198779) on Form S-3
and (Nos. 333-35367, 333-48381, 333-66610, 333-137417, 333-160125, and 333-212435) on Form S-8 of QAD Inc. of our
report dated April 16, 2019, with respect to the consolidated balance sheets of QAD Inc. and subsidiaries as of January 31,
2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and
cash flows for each of the years in the three-year period ended January 31, 2019 and the related notes and financial statement
schedule II (collectively, the consolidated financial statements), and the effectiveness of internal control over financial
reporting as of January 31, 2019, which report appears in the January 31, 2019 annual report on Form 10-K of QAD Inc.
The audit report covering the January 31, 2019 consolidated financial statements refers to a change in the method of
accounting for the recognition of revenue effective February 1, 2018 due to the adoption of Accounting Standards
Codification Topic 606, Revenue from Contracts with Customers.
Los Angeles, California
April 16, 2019
/s/ KPMG LLP
CERTIFICATIONS UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Anton Chilton, certify that:
1. I have reviewed this Annual Report on Form 10-K of QAD Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Registrant as of,
and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e) ) and internal control over financial
reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred
during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control
over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the Registrant’s internal control over financial reporting.
Date: April 16, 2019
/s/ ANTON CHILTON
Anton Chilton
Chief Executive Officer
QAD Inc.
CERTIFICATIONS UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Daniel Lender, certify that:
1. I have reviewed this Annual Report on Form 10-K of QAD Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Registrant as of,
and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e) ) and internal control over financial
reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred
during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control
over financial reporting; and
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the Registrant’s internal control over financial reporting.
Date: April 16, 2019
/s/ DANIEL LENDER
Daniel Lender
Chief Financial Officer
QAD Inc.
CERTIFICATION FURNISHED PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of QAD Inc. (the "Company") on Form 10-K for the period ending January 31, 2019
as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anton Chilton, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: April 16, 2019
/s/ ANTON CHILTON
Anton Chilton
Chief Executive Officer
QAD Inc.
In connection with the Annual Report of QAD Inc. (the "Company") on Form 10-K for the period ending January 31, 2019
as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel Lender, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: April 16, 2019
.
/s/ DANIEL LENDER
Daniel Lender
Chief Financial Officer
QAD Inc.
COR P O RATE INFORMAT ION
E X E C U T I V E O F F I C E R S
Anton Chilton
Chief Executive Officer
Pamela M. Lopker
President
Daniel Lender
Executive Vice President,
Chief Financial Officer
Kara L. Bellamy
Senior Vice President,
Corporate Controller,
and Chief Accounting Officer
B OA R D O F D I R E C TO R S
Scott J. Adelson
Senior Managing Director,
Co-President
Houlihan Lokey
Anton Chilton
Chief Executive Officer
Peter R. van Cuylenburg
Independent advisor to
high-technology companies
Pamela M. Lopker
President
Lee D. Roberts
President and CEO,
BlueWater Consulting, LLC
Leslie J. Stretch
Chief Executive Officer,
Medallia
N O R T H A M E R I C A
LO C AT I O N S
California
Georgia
Illinois
Michigan
New Jersey
A S I A PAC I F I C
LO C AT I O N S
Australia
China
India
Indonesia
Japan
Singapore
Thailand
E U R O P E , M I D D L E
E A S T A N D A F R I C A
LO C AT I O N S
Belgium
France
Germany
Ireland
Italy
Netherlands
Poland
Spain
United Kingdom
L AT I N A M E R I C A
LO C AT I O N S
Brazil
Mexico
I N D E P E N D E N T R E G I S T E R E D
P U B L I C AC C O U N T I N G F I R M
KPMG LLP
Los Angeles, California
L E G A L C O U N S E L
Manatt, Phelps & Phillips LLP
Los Angeles, California
I N V E S TO R R E L AT I O N S
PondelWilkinson Inc.
Los Angeles, California
Tel: 310.279.5980
T R A N S F E R AG E N T / R E G I S T R A R
American Stock Transfer & Trust
Brooklyn, New York
Tel: 718.921.8124
S TO C K I N F O R M AT I O N
The company’s common stock trades
on the NASDAQ Global Select Market
under the symbols QADA and QADB.
A N N UA L R E P O R T O N F O R M 1 0 - K
A copy of the company’s annual
report to the Securities and Exchange
Commission on Form 10-K is available
without charge upon request to
the company’s Investor Relations
department or from the company’s
website at www.qad.com.
A N N UA L M E E T I N G
The annual meeting of stockholders
will be held on June 24, 2019 at 8:00
a.m. PDT at QAD Inc., 100 Innovation
Place, Santa Barbara, California 93108.
Tel: 805.566.6000.
QA D C ORPORATE
HEA DQUA RTERS
100 Innovation Place
Santa Barbara, California 93108
Tel: 805.566.6000
www.qad.com
© 2019 QAD INC. ALL RIGHTS RESERVED.