0001036188 QAD INC false --01-31 Q1 2022 3,427 3,340 43,413 42,596 0.001 0.001 5,000,000 5,000,000 0 0 0 0 0.001 0.001 71,000,000 71,000,000 17,380,897 17,375,453 0.001 0.001 4,000,000 4,000,000 3,537,380 3,537,380 207,062 207,062 0.072 0.06 0.072 0.06 12 5 5 0.1 0 0 4 1.3 1.0 0.1 2010 2013 2018 2018 2019 2020 April 28, 2021 May 05, 2021 0 4 1 Sales into Canada accounted for 3% and 2% of North America total revenue in the three months ended April 30, 2021 and 2020, respectively. The number of RSUs released includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. 00010361882021-02-012021-04-30 0001036188us-gaap:CommonClassAMember2021-02-012021-04-30 0001036188us-gaap:CommonClassBMember2021-02-012021-04-30 xbrli:shares 0001036188us-gaap:CommonClassAMember2021-05-31 0001036188us-gaap:CommonClassBMember2021-05-31 thunderdome:item iso4217:USD 00010361882021-04-30 00010361882021-01-31 iso4217:USDxbrli:shares 0001036188us-gaap:CommonClassAMember2021-04-30 0001036188us-gaap:CommonClassAMember2021-01-31 0001036188us-gaap:CommonClassBMember2021-04-30 0001036188us-gaap:CommonClassBMember2021-01-31 0001036188us-gaap:SubscriptionAndCirculationMember2021-02-012021-04-30 0001036188us-gaap:SubscriptionAndCirculationMember2020-02-012020-04-30 0001036188us-gaap:LicenseMember2021-02-012021-04-30 0001036188us-gaap:LicenseMember2020-02-012020-04-30 0001036188us-gaap:MaintenanceMember2021-02-012021-04-30 0001036188us-gaap:MaintenanceMember2020-02-012020-04-30 0001036188qada:ProfessionalServicesMember2021-02-012021-04-30 0001036188qada:ProfessionalServicesMember2020-02-012020-04-30 00010361882020-02-012020-04-30 0001036188us-gaap:CommonClassAMember2020-02-012020-04-30 0001036188us-gaap:CommonClassBMember2020-02-012020-04-30 0001036188us-gaap:CommonClassAMemberus-gaap:CommonStockMember2021-01-31 0001036188us-gaap:CommonClassBMemberus-gaap:CommonStockMember2021-01-31 0001036188us-gaap:TreasuryStockMember2021-01-31 0001036188us-gaap:AdditionalPaidInCapitalMember2021-01-31 0001036188us-gaap:RetainedEarningsMember2021-01-31 0001036188us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-31 0001036188us-gaap:CommonClassAMemberus-gaap:CommonStockMember2021-02-012021-04-30 0001036188us-gaap:CommonClassBMemberus-gaap:CommonStockMember2021-02-012021-04-30 0001036188us-gaap:AdditionalPaidInCapitalMember2021-02-012021-04-30 0001036188us-gaap:TreasuryStockMember2021-02-012021-04-30 0001036188us-gaap:RetainedEarningsMember2021-02-012021-04-30 0001036188us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-02-012021-04-30 0001036188us-gaap:CommonClassAMemberus-gaap:CommonStockMember2021-04-30 0001036188us-gaap:CommonClassBMemberus-gaap:CommonStockMember2021-04-30 0001036188us-gaap:TreasuryStockMember2021-04-30 0001036188us-gaap:AdditionalPaidInCapitalMember2021-04-30 0001036188us-gaap:RetainedEarningsMember2021-04-30 0001036188us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-30 0001036188us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-01-31 0001036188us-gaap:CommonClassBMemberus-gaap:CommonStockMember2020-01-31 0001036188us-gaap:TreasuryStockMember2020-01-31 0001036188us-gaap:AdditionalPaidInCapitalMember2020-01-31 0001036188us-gaap:RetainedEarningsMember2020-01-31 0001036188us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-31 00010361882020-01-31 0001036188us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-02-012020-04-30 0001036188us-gaap:CommonClassBMemberus-gaap:CommonStockMember2020-02-012020-04-30 0001036188us-gaap:AdditionalPaidInCapitalMember2020-02-012020-04-30 0001036188us-gaap:TreasuryStockMember2020-02-012020-04-30 0001036188us-gaap:RetainedEarningsMember2020-02-012020-04-30 0001036188us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-02-012020-04-30 0001036188us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-04-30 0001036188us-gaap:CommonClassBMemberus-gaap:CommonStockMember2020-04-30 0001036188us-gaap:TreasuryStockMember2020-04-30 0001036188us-gaap:AdditionalPaidInCapitalMember2020-04-30 0001036188us-gaap:RetainedEarningsMember2020-04-30 0001036188us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-30 00010361882020-04-30 0001036188srt:NorthAmericaMember2021-02-012021-04-30 0001036188srt:NorthAmericaMember2020-02-012020-04-30 0001036188us-gaap:EMEAMember2021-02-012021-04-30 0001036188us-gaap:EMEAMember2020-02-012020-04-30 0001036188srt:AsiaPacificMember2021-02-012021-04-30 0001036188srt:AsiaPacificMember2020-02-012020-04-30 0001036188srt:LatinAmericaMember2021-02-012021-04-30 0001036188srt:LatinAmericaMember2020-02-012020-04-30 0001036188qada:HighTechnologyAndIndustrialProductsMember2021-02-012021-04-30 0001036188qada:HighTechnologyAndIndustrialProductsMember2020-02-012020-04-30 0001036188qada:AutomotiveMember2021-02-012021-04-30 0001036188qada:AutomotiveMember2020-02-012020-04-30 0001036188qada:LifeSciencesAndOtherMember2021-02-012021-04-30 0001036188qada:LifeSciencesAndOtherMember2020-02-012020-04-30 0001036188qada:ConsumerProductsAndFoodAndBeverageMember2021-02-012021-04-30 0001036188qada:ConsumerProductsAndFoodAndBeverageMember2020-02-012020-04-30 00010361882021-05-012021-04-30 utr:M 0001036188us-gaap:MaintenanceMember2021-04-30 0001036188us-gaap:MaintenanceMember2021-01-31 0001036188us-gaap:SubscriptionAndCirculationMember2021-04-30 0001036188us-gaap:SubscriptionAndCirculationMember2021-01-31 0001036188qada:ProfessionalServicesMember2021-04-30 0001036188qada:ProfessionalServicesMember2021-01-31 0001036188qada:LicenseAndOtherMember2021-04-30 0001036188qada:LicenseAndOtherMember2021-01-31 utr:Y 0001036188qada:DirectCostsOfObtainingContractMember2021-04-30 0001036188qada:DirectCostsOfObtainingContractMember2021-01-31 0001036188qada:DirectCostsOfObtainingContractMemberus-gaap:SellingAndMarketingExpenseMember2021-02-012021-04-30 0001036188qada:DirectCostsOfObtainingContractMemberus-gaap:SellingAndMarketingExpenseMember2020-02-012020-04-30 0001036188qada:CostsToFulfillContractMember2020-04-30 0001036188qada:CostsToFulfillContractMemberus-gaap:CostOfSalesMember2021-02-012021-04-30 0001036188qada:CostsToFulfillContractMemberus-gaap:CostOfSalesMember2020-02-012020-04-30 0001036188us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-04-30 0001036188us-gaap:CertificatesOfDepositMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-04-30 0001036188us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-04-30 0001036188us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2021-04-30 0001036188us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-01-31 0001036188us-gaap:CertificatesOfDepositMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-01-31 0001036188us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-01-31 0001036188us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2020-01-31 0001036188us-gaap:CarryingReportedAmountFairValueDisclosureMember2021-04-30 0001036188us-gaap:CarryingReportedAmountFairValueDisclosureMember2021-01-31 0001036188us-gaap:OtherNoncurrentLiabilitiesMemberus-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-04-30 0001036188us-gaap:OtherNoncurrentLiabilitiesMemberus-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-01-30 0001036188us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-01-30 0001036188us-gaap:InterestRateSwapMember2021-02-012021-04-30 0001036188us-gaap:InterestRateSwapMember2020-02-012020-04-30 0001036188us-gaap:LicenseMember2021-04-30 0001036188qada:ForeigntradeZoneCorporationMember2021-04-052021-04-05 0001036188qada:ForeigntradeZoneCorporationMember2021-04-05 0001036188qada:ForeigntradeZoneCorporationMemberqada:PromissoryNoteIssuedForAcquisitionMember2021-04-05 0001036188qada:ForeigntradeZoneCorporationMemberqada:SoftwareTechnologyMember2021-04-052021-04-05 0001036188qada:ForeigntradeZoneCorporationMemberus-gaap:CustomerRelationshipsMember2021-04-052021-04-05 0001036188qada:ForeigntradeZoneCorporationMemberus-gaap:TradeNamesMember2021-04-052021-04-05 0001036188qada:AllocationNetworkGmbHMember2020-12-312020-12-31 0001036188qada:AllocationNetworkGmbHMember2020-12-31 0001036188qada:AllocationNetworkGmbHMemberqada:SoftwareTechnologyMember2020-12-312020-12-31 0001036188qada:AllocationNetworkGmbHMemberus-gaap:CustomerRelationshipsMember2020-12-312020-12-31 0001036188us-gaap:CustomerRelationshipsMember2021-04-30 0001036188us-gaap:CustomerRelationshipsMember2021-01-31 0001036188us-gaap:TradeNamesMember2021-04-30 0001036188us-gaap:TradeNamesMember2021-01-31 00010361882020-02-012021-01-31 0001036188qada:Mortgage2012Member2021-04-30 0001036188qada:Mortgage2012Member2021-01-31 0001036188qada:PromissoryNoteIssuedForAcquisitionMember2021-04-30 0001036188qada:PromissoryNoteIssuedForAcquisitionMember2021-01-31 0001036188qada:Mortgage2012Memberqada:QuadOrtegaHillLlcMemberqada:RabobankNaMember2012-05-30 xbrli:pure 0001036188qada:Mortgage2012Memberqada:QuadOrtegaHillLlcMemberqada:RabobankNaMemberus-gaap:LondonInterbankOfferedRateLIBORMember2012-05-302012-05-30 0001036188qada:Mortgage2012Memberqada:QuadOrtegaHillLlcMemberqada:RabobankNaMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-02-012021-04-30 0001036188qada:Mortgage2012Memberus-gaap:SwapMemberqada:QuadOrtegaHillLlcMemberqada:RabobankNaMember2012-05-30 0001036188qada:Mortgage2012Memberqada:QuadOrtegaHillLlcMemberqada:RabobankNaMember2012-05-302012-05-30 0001036188qada:Mortgage2012Memberqada:QuadOrtegaHillLlcMemberqada:RabobankNaMember2021-04-30 0001036188qada:PromissoryNoteIssuedForAcquisitionMember2021-04-05 0001036188qada:PromissoryNoteIssuedForAcquisitionMember2021-04-052021-04-05 0001036188us-gaap:AccumulatedTranslationAdjustmentMember2021-01-31 0001036188us-gaap:AccumulatedTranslationAdjustmentMember2021-02-012021-04-30 0001036188us-gaap:AccumulatedTranslationAdjustmentMember2021-04-30 0001036188qada:FederalAndStateTaxAuthorityMember2021-04-30 0001036188qada:FederalAndStateTaxAuthorityMember2021-01-31 0001036188us-gaap:ForeignCountryMemberus-gaap:RevenueCommissionersIrelandMember2021-04-30 0001036188us-gaap:ForeignCountryMemberus-gaap:RevenueCommissionersIrelandMember2021-01-31 0001036188us-gaap:ForeignCountryMemberus-gaap:SecretariatOfTheFederalRevenueBureauOfBrazilMember2021-04-30 0001036188us-gaap:ForeignCountryMemberus-gaap:SecretariatOfTheFederalRevenueBureauOfBrazilMember2021-01-31 0001036188us-gaap:ForeignCountryMemberqada:IncomeTaxAuthoritySouthAfricaMember2021-04-30 0001036188us-gaap:ForeignCountryMemberqada:IncomeTaxAuthoritySouthAfricaMember2021-01-31 0001036188us-gaap:ForeignCountryMemberus-gaap:MinistryOfFinanceIndiaMember2021-02-012021-04-30 0001036188us-gaap:ForeignCountryMemberus-gaap:MinistryOfTheEconomyFinanceAndIndustryFranceMember2021-02-012021-04-30 00010361882021-04-142021-04-14 0001036188us-gaap:CommonClassAMember2021-04-14 0001036188us-gaap:CommonClassBMember2021-04-14 0001036188qada:CostOfSubscriptionMember2021-02-012021-04-30 0001036188qada:CostOfSubscriptionMember2020-02-012020-04-30 0001036188qada:CostOfMaintenanceAndOtherRevenueMember2021-02-012021-04-30 0001036188qada:CostOfMaintenanceAndOtherRevenueMember2020-02-012020-04-30 0001036188qada:CostOfProfessionalServicesMember2021-02-012021-04-30 0001036188qada:CostOfProfessionalServicesMember2020-02-012020-04-30 0001036188us-gaap:SellingAndMarketingExpenseMember2021-02-012021-04-30 0001036188us-gaap:SellingAndMarketingExpenseMember2020-02-012020-04-30 0001036188us-gaap:ResearchAndDevelopmentExpenseMember2021-02-012021-04-30 0001036188us-gaap:ResearchAndDevelopmentExpenseMember2020-02-012020-04-30 0001036188us-gaap:GeneralAndAdministrativeExpenseMember2021-02-012021-04-30 0001036188us-gaap:GeneralAndAdministrativeExpenseMember2020-02-012020-04-30 0001036188us-gaap:RestrictedStockUnitsRSUMember2021-01-31 0001036188us-gaap:RestrictedStockUnitsRSUMember2021-02-012021-04-30 0001036188us-gaap:RestrictedStockUnitsRSUMember2021-04-30 0001036188us-gaap:PerformanceSharesMember2021-01-31 0001036188us-gaap:PerformanceSharesMember2021-02-012021-04-30 0001036188us-gaap:PerformanceSharesMember2021-04-30 0001036188us-gaap:StockAppreciationRightsSARSMember2021-01-31 0001036188us-gaap:StockAppreciationRightsSARSMember2021-02-012021-04-30 0001036188us-gaap:StockAppreciationRightsSARSMember2021-04-30 0001036188srt:ReportableGeographicalComponentsMembersrt:NorthAmericaMember2021-02-012021-04-30 0001036188srt:ReportableGeographicalComponentsMembersrt:NorthAmericaMember2020-02-012020-04-30 0001036188srt:ReportableGeographicalComponentsMemberus-gaap:EMEAMember2021-02-012021-04-30 0001036188srt:ReportableGeographicalComponentsMemberus-gaap:EMEAMember2020-02-012020-04-30 0001036188srt:ReportableGeographicalComponentsMembersrt:AsiaPacificMember2021-02-012021-04-30 0001036188srt:ReportableGeographicalComponentsMembersrt:AsiaPacificMember2020-02-012020-04-30 0001036188srt:ReportableGeographicalComponentsMembersrt:LatinAmericaMember2021-02-012021-04-30 0001036188srt:ReportableGeographicalComponentsMembersrt:LatinAmericaMember2020-02-012020-04-30 0001036188qada:NorthAmericaRevenueMemberus-gaap:GeographicConcentrationRiskMembercountry:CA2021-02-012021-04-30 0001036188qada:NorthAmericaRevenueMemberus-gaap:GeographicConcentrationRiskMembercountry:CA2020-02-012020-04-30
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended April 30, 2021

 

OR

 

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

 

For the transition period from ____________________ to _________________________

 

Commission file number 0-22823

 

QAD Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

77-0105228

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

100 Innovation Place, Santa Barbara, California 93108

(Address of principal executive offices)

 

(805) 566-6000

(Registrant's telephone number, including area code)

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.001 par value

QADA

NASDAQ Global Select Market 

Class B Common Stock, $0.001 par value

QADB

NASDAQ Global Select Market 

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company

 

Emerging growth company

 

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

 

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

 

As of May 31, 2021, there were 17,381,602 shares of the Registrant’s Class A common stock outstanding and 3,330,318 shares of the Registrant’s Class B common stock outstanding.

 

 

 

 

QAD INC.

INDEX

 

 

Page

PART I - FINANCIAL INFORMATION

 
       
 

ITEM 1.

Financial Statements (unaudited)

 
       
   

Condensed Consolidated Balance Sheets as of April 30, 2021 and January 31, 2021

1
       
   

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended April 30, 2021 and 2020

2
       
   

Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended April 30, 2021 and 2020

3
       
   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2021 and 2020

4
       
   

Notes to Condensed Consolidated Financial Statements

5
       
 

ITEM 2.

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

20
       
 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

31
       
 

ITEM 4.

Controls and Procedures

32
       

PART II - OTHER INFORMATION

 
       
 

ITEM 1.

Legal Proceedings

32
       
 

ITEM 1A.

Risk Factors

32
       
 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32
       
 

ITEM 3.

Defaults Upon Senior Securities

32
       
 

ITEM 4.

Mine Safety Disclosure

32
       
 

ITEM 5.

Other Information

32
       
 

ITEM 6.

Exhibits

33
       
 

SIGNATURES

34

 

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32.2 

 

 

 

PART I

 

ITEM 1 FINANCIAL STATEMENTS

 

QAD INC.

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

  

April 30,

2021

  

January 31,

2021

 

Assets

        
         

Current assets:

        

Cash and equivalents

 $153,127  $142,501 

Accounts receivable, net of allowances of $3,427 and $3,340 at April 30, 2021 and January 31, 2021, respectively

  44,887   82,609 

Prepaid expenses and other current assets, net

  26,688   22,923 

Total current assets

  224,702   248,033 

Property and equipment, net of accumulated depreciation and amortization of $43,413 and $42,596 at April 30, 2021 and January 31, 2021, respectively

  24,508   25,598 

Lease right-of-use assets

  19,997   21,016 

Capitalized software costs, net

  10,845   7,980 

Goodwill

  32,507   25,336 

Deferred tax assets, net

  8,596   8,526 

Other assets, net

  18,896   14,298 

Total assets

 $340,051  $350,787 
         

Liabilities and Stockholders Equity

        

Current liabilities:

        

Current portion of long-term debt

 $533  $527 

Lease liabilities

  4,918   4,904 

Accounts payable

  7,689   10,898 

Deferred revenue

  116,852   125,724 

Other current liabilities

  34,481   37,431 

Total current liabilities

  164,473   179,484 

Long-term debt

  11,691   11,825 

Long-term lease liabilities

  16,496   17,510 

Other liabilities

  14,254   12,502 

Total liabilities

  206,914   221,321 

Commitments and contingencies (Note 13)

          

Stockholders’ equity:

        

Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding

        

Common stock:

        

Class A, $0.001 par value. Authorized 71,000,000 shares; issued 17,380,897 and 17,375,453 shares at April 30, 2021 and January 31, 2021, respectively

  17   17 

Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares at both April 30, 2021 and January 31, 2021

  4   4 

Additional paid-in capital

  209,084   205,630 

Treasury stock, at cost (207,062 Class B shares at both April 30, 2021 and January 31, 2021)

  (3,073

)

  (3,073

)

Accumulated deficit

  (64,546

)

  (64,924

)

Accumulated other comprehensive loss

  (8,349

)

  (8,188

)

Total stockholders’ equity

  133,137   129,466 

Total liabilities and stockholders’ equity

 $340,051  $350,787 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

1

 

 

 

QAD INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 

Revenue:

        

Subscription

 $36,686  $30,771 

License

  3,115   1,221 

Maintenance

  26,563   26,408 

Professional services

  16,607   15,747 

Total revenue

  82,971   74,147 
         

Costs of revenue:

        

Subscription

  12,162   10,348 

License

  538   401 

Maintenance

  6,555   6,744 

Professional services

  14,934   14,932 

Total cost of revenue

  34,189   32,425 
         

Gross profit

  48,782   41,722 
         

Operating expenses:

        

Sales and marketing

  19,567   18,557 

Research and development

  15,638   14,017 

General and administrative

  12,576   10,017 

Amortization of intangible assets from acquisitions

  240   64 

Total operating expenses

  48,021   42,655 
         

Operating income (loss)

  761   (933

)

         

Other expense (income):

        

Interest income

  (74

)

  (436

)

Interest expense

  141   150 

Other expense (income), net

  238   (1,232

)

Total other expense (income), net

  305   (1,518

)

         

Income before income taxes

  456   585 

Income tax (benefit) expense

  (1,376

)

  995 
         

Net income (loss)

 $1,832  $(410

)

         

Basic net income (loss) per share

        

Class A

 $0.09  $(0.02

)

Class B

 $0.08  $(0.02

)

Diluted net income (loss) per share

        

Class A

 $0.09  $(0.02

)

Class B

 $0.07  $(0.02

)

         

Net income (loss)

 $1,832  $(410

)

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustment

  (161

)

  (2,655

)

Total comprehensive income (loss)

 $1,671  $(3,065

)

 

See Accompanying Notes to Condensed Consolidated Financial Statements. 

 

2

 

QAD INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except per share data)

(unaudited)

 

  

Three Months Ended April 30, 2021

 
  

Number of Shares

  

Amount

  

Additional

          

Accumulated

Other

  

Total

 
  

Class
A

  

Class
B

  

Treasury

  

Class

A

  

Class

B

  

Paid-in
Capital

  

Treasury

Stock

  

Accumulated

Deficit

  

Comprehensive

Loss

  

Stockholders
Equity

 

Balance, January 31, 2021

  17,375   3,537   (207

)

 $17  $4  $205,630  $(3,073

)

 $(64,924

)

 $(8,188

)

 $129,466 

Net income

                       1,832      1,832 

Foreign currency translation adjustments

                          (161

)

  (161)

Stock award exercises

                                

Stock compensation expense

                 3,637            3,637 

Dividends declared ($0.072 and $0.06 per Class A and Class B share, respectively)

                       (1,454

)

     (1,454)

Restricted stock

  6               (183

)

           (183)

Balance, April 30, 2021

  17,381   3,537   (207

)

 $17  $4  $209,084  $(3,073

)

 $(64,546

)

 $(8,349

)

 $133,137 

 

 

 

  

Three Months Ended April 30, 2020

 
  

Number of Shares

  

Amount

  

Additional

          

Accumulated

Other

  

Total

 
  

Class
A

  

Class
B

  

Treasury

  

Class A

  

Class B

  

Paid-in
Capital

  

Treasury

Stock

  

Accumulated

Deficit

  

Comprehensive

Loss

  

Stockholders

Equity

 

Balance, January 31, 2020

  17,109   3,537   (216

)

 $17  $4  $197,824  $(3,226

)

 $(70,209

)

 $(8,345

)

 $116,065 

Net loss

                       (410

)

     (410)

Foreign currency translation adjustments

                          (2,655

)

  (2,655)

Stock award exercises

                   (11

)

           (11)

Stock compensation expense

                 2,405            2,405 

Dividends declared ($0.072 and $0.06 per Class A and Class B share, respectively)

                       (1,431

)

     (1,431)

Restricted stock

  4               (92

)

           (92)

Balance, April 30, 2020

  17,113   3,537   (216

)

 $17  $4  $200,126  $(3,226

)

 $(72,050

)

 $(11,000

)

 $113,871 

 

See Accompanying Notes to Condensed Consolidated Financial Statements. 

 

3

 

 

QAD INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 
         

Cash flows from operating activities:

        

Net income (loss)

 $1,832  $(410

)

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

        

Depreciation and amortization

  2,146   1,652 

Amortization of costs capitalized to obtain and fulfill contracts

  1,320   1,175 

Amortization of right-of-use assets

  1,502   1,457 

Net change in valuation allowance

  (3,093

)

  518 

Other deferred income taxes

  978   (70

)

Provision for doubtful accounts and sales adjustments

  144   939 

Stock compensation expense

  3,637   2,405 

Change in fair value of derivative instrument

  (64

)

  251 

Loss on disposal of property and equipment

  90   58 

Other, net

  -   12 

Changes in assets and liabilities:

        

Accounts receivable

  37,987   32,458 

Costs capitalized to obtain and fulfill contracts

  (1,452

)

  (899

)

Lease liabilities

  (1,488

)

  (1,342

)

Prepaid expenses and other assets

  (3,089

)

  1,279 

Accounts payable

  (3,309

)

  (3,157

)

Deferred revenue

  (11,244

)

  (13,381

)

Other liabilities

  (5,211

)

  (12,033

)

Net cash provided by operating activities

  20,686   10,912 

Cash flows from investing activities:

        

Purchase of property and equipment

  (191

)

  (1,017

)

Acquisition, net of cash acquired

  (9,493

)

  - 

Capitalized software costs

  (316

)

  (272

)

Net cash used in investing activities

  (10,000

)

  (1,289

)

Cash flows from financing activities:

        

Repayments of debt

  (164

)

  (149

)

Dividends paid

  -   (1,431

)

Tax payments related to stock awards

  (183

)

  (103

)

Net cash used in financing activities

  (347

)

  (1,683

)

         

Effect of exchange rates on cash and equivalents

  287   (4,503

)

         

Net increase in cash and equivalents

  10,626   3,437 
         

Cash and equivalents at beginning of period

  142,501   136,717 
         

Cash and equivalents at end of period

 $153,127  $140,154 
         

Supplemental disclosure of cash flow information:

        

Cash paid during the period for:

        

Interest

 $132  $144 

Income taxes, net of refunds

 $991  $758 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4

 

QAD INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

 

1.

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements fairly present the financial information contained therein. These statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements and footnotes are unaudited.  In management’s opinion, all necessary adjustments, consisting of normal, recurring and non-recurring adjustments, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the financial position and operating results of QAD Inc. (QAD or the Company). The Condensed Consolidated Financial Statements do not include all disclosures required by GAAP annual financial statements and should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2021. The Condensed Consolidated Financial Statements include the results of the Company and its wholly-owned subsidiaries. Because of seasonal and other factors, results of operations for the three months ended April 30, 2021 are not necessarily indicative of the results to be expected for the year ending January 31, 2022.

 

The Company’s accounting policies are set forth in detail in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 31, 2021 filed with the Securities and Exchange Commission. Such Annual Report also contains a discussion of the Company’s critical accounting policies and estimates. The Company believes that these accounting policies and estimates affect its more significant estimates and judgments used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s accounting policies.

 

Recent Accounting Pronouncements

 

Except as discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (FASB) or adopted by the Company during the three months ended  April 30, 2021, that are of significance, or potential significance, to the Company.

 

Recent Accounting Pronouncements Adopted

 

In December 2019, the FASB issued new guidance which is intended to simplify various aspects to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for recognizing deferred taxes for investments, performing an intraperiod allocation and calculating income taxes in interim periods. The amendment also clarifies and amends certain areas of existing guidance to reduce complexity and improve consistency in application of Topic 740. Generally, the topics must be applied prospectively upon adoption, with the exception of certain topics which are required to be applied on a retrospective or modified retrospective basis. The Company has adopted the new standard when applying the income tax guidance to franchise taxes that are partially based on income in the first quarter of fiscal 2022. The simplification did not have a material impact on our overall financial statements. 

 

 

2.

REVENUE

 

QAD offers its software using the same underlying technology via two models: a cloud-based subscription model and a traditional on-premises licensing model. 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. 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.

 

We generate revenue through subscriptions of our cloud-based software and through sales of licenses and maintenance provided to our on-premises customers. We offer professional services to both our cloud and on-premises customers to assist them with the design, testing and implementation of our software.

 

The Company determines revenue recognition through the following steps:

 

-

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

 

-

Identification of the performance obligations in the contract;

 

-

Determination of the transaction price;

 

-

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

 

-

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

 

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

 

5

 

Performance Obligations

 

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

 

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

 

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

 

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

 

Subscription

 

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

 

License

 

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

 

Maintenance

 

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

 

Professional Services

 

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

 

6

 

Indirect Sales Channels

 

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

 

Disaggregated Revenue

 

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

 

The Company’s revenue by geography is as follows:

 

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 
  

(in thousands)

 

North America

 $39,240  $37,002 

EMEA

  28,713   22,568 

Asia Pacific

  10,268   9,642 

Latin America

  4,750   4,935 

Total revenue

 $82,971  $74,147 

 

The Company’s revenue by industry is as follows:

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 
  

(in thousands)

 

High technology and industrial products

 $30,069  $26,824 

Automotive

  23,568   24,137 

Life sciences and other

  15,930   11,372 

Consumer products and food and beverage

  13,404   11,814 

Total revenue

 $82,971  $74,147 

 

 

Management Judgments

 

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

 

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

 

If multiple agreements are entered into at or near the same time and so closely related that the agreements are, in effect, part of a single arrangement, such agreements are deemed to be combined as a single arrangement for revenue recognition purposes. The Company exercises judgment to evaluate the relevant facts and circumstances in determining whether multiple agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether multiple agreements 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.

 

7

 

Contract Balances  

 

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

 

The contract assets indicated below are presented as other current and non-current assets in the Condensed Consolidated Balance Sheets. These assets primarily relate to professional services and subscription and consist of the Company’s rights to consideration for goods or services transferred but not billed as of April 30, 2021 and January 31, 2021. 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: 

 

  

April 30,

2021

  

January 31,

2021

 
  

(in thousands)

 

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

 $3,747  $2,117 
         

Deferred revenue, short-term

 $116,852  $125,724 

Deferred revenue, long-term (in Other liabilities)

  1,824   2,705 

Total deferred revenue

 $118,676  $128,429 

 

 

During the three months ended April 30, 2021, the Company recognized $54.4 million of revenue that was included in the deferred revenue balance at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

 

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $294.9 million as of April 30, 2021, of which the Company expects to recognize approximately $185.4 million as revenue over the next twelve months and the remainder thereafter. In instances where the timing of revenue recognition differs from the timing of invoicing, QAD has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

Deferred Revenue

 

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

 

Deferred revenues consisted of the following:

 

  

April 30,

2021

  

January 31,

2021

 
  

(in thousands)

 

Deferred maintenance

 $59,424  $66,833 

Deferred subscription

  54,694   55,873 

Deferred professional services

  2,502   2,649 

Deferred license and other revenue

  232   369 

Deferred revenues, current

  116,852   125,724 

Deferred revenues, non-current (in Other liabilities)

  1,824   2,705 

Total deferred revenues

 $118,676  $128,429 

 

8

 

Practical Expedients and Exemptions

 

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

 

 

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

 

 

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

 

 

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

 

Costs to Obtain and Fulfill a Contract

 

The Company’s incremental direct costs of obtaining a contract consist of sales commissions and sales agent fees which are deferred and amortized ratably over the term of economic benefit which the Company has determined to be five years. These deferred costs are classified as current or non-current based on the timing of when the Company expects to recognize the expense. Incremental costs related to renewals are expensed as incurred because the term of economic benefit is one year or less. The current and non-current portions of deferred commissions are included in “Prepaid expenses and other current assets, net” and “Other assets, net”, respectively, in the Company’s Condensed Consolidated Balance Sheets. At April 30, 2021 and January 31, 2021, the Company had $13.3 million and $13.1 million, respectively, of deferred commissions and sales agent fees. For the three months ended April 30, 2021 and 2020, $1.1 million and $1.0 million, respectively, of amortization expense related to deferred commissions and sales agent fees was recorded in “Sales and marketing” expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). 

 

Costs to fulfill a contract, which are incurred upon initiation of certain services contracts and are related to initial customer setup, are included in “Prepaid expenses and other current assets, net” and “Other assets, net” in the Company’s Condensed Consolidated Balance Sheets. At April 30, 2021 and January 31, 2021 the Company had deferred setup costs of $1.3 million. These costs are amortized over the term of economic benefit which the Company has determined to be five years. During the three months ended April 30, 2021 and 2020, $0.1 million of amortization expense related to deferred setup costs was recorded in “Cost of subscription” in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

 

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 three months ended April 30, 2021 and 2020. 

 

9

 
 

3.

COMPUTATION OF NET INCOME (LOSS) PER SHARE

 

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

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 
  

(in thousands except per share

data)

 

Net income (loss)

 $1,832  $(410

)

Less: Dividends declared

  (1,454

)

  (1,431

)

Undistributed net income (loss)

 $378  $(1,841

)

         

Net income (loss) per share Class A Common Stock

        

Dividends declared

 $1,254  $1,232 

Allocation of undistributed net income (loss)

  326   (1,585

)

Net income (loss) attributable to Class A common stock

 $1,580  $(353

)

         

Weighted average shares of Class A common stock outstanding—basic

  17,379   17,112 

Weighted average potential shares of Class A common stock

  1,067    

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

  18,446   17,112 
         

Basic net income (loss) per Class A common share

 $0.09  $(0.02

)

Diluted net income (loss) per Class A common share

 $0.09  $(0.02

)

         

Net income (loss) per share Class B Common Stock

        

Dividends declared

 $200  $199 

Allocation of undistributed net income (loss)

  52   (256

)

Net income (loss) attributable to Class B common stock

 $252  $(57

)

         

Weighted average shares of Class B common stock outstanding—basic

  3,330   3,321 

Weighted average potential shares of Class B common stock

  79    

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

  3,409   3,321 
         

Basic net income (loss) per Class B common share

 $0.08  $(0.02

)

Diluted net income (loss) per Class B common share

 $0.07  $(0.02

)

 

 

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

 

10

 

The following table sets forth the number of potential common shares not included in the calculation of diluted earnings per share because their effects were anti-dilutive:

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 
  

(in thousands)

 

Class A

  2   1,845 

Class B

     150 

 

 

 

4.

FAIR VALUE MEASUREMENTS

 

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

 

 

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

 

 

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

 

 

Level 3 - The contingent liability associated with acquisitions is recorded at fair value using a Monte Carlo valuation approach, as well as inputs that are not observable in the market. This measurement includes an assessment of the probability of achieving certain cloud bookings-growth milestones and discounting the amount of each potential payment accordingly.

 

The following table sets forth the financial assets and liability, measured at fair value, as of April 30, 2021 and January 31, 2021:

 

  

Fair value measurement at reporting date using

 
  

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

  

Significant
Other
Observable
Inputs
(Level 2)

  

Significant
Unobservable
Inputs
(Level 3)

 
  

(in thousands)

 

As of April 30, 2021

            

Money market mutual funds

 $117,109         

Certificates of deposit

 $11,838         

Liability related to the interest rate swap

     $(261

)

    

Contingent liability associated with acquisitions

         $(5,417)
             

As of January 31, 2021

            

Money market mutual funds

 $80,611         

Certificates of deposit

 $9,262         

Liability related to the interest rate swap

     $(325

)

    

Contingent liability associated with acquisitions

         $(4,751)

 

11

 

Money market mutual funds and certificates of deposit are classified as part of “Cash and equivalents” in the accompanying Condensed Consolidated Balance Sheets. The amount of cash and equivalents deposited with commercial banks was $24.2 million and $52.6 million at April 30, 2021 and January 31, 2021, 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.

 

The contingent liability associated with acquisitions is classified as part of “Other current liabilities” and “Other liabilities” in the accompanying Condensed Consolidated Balance Sheets.

 

There have been no transfers between fair value measurement levels during the three months ended April 30, 2021.

 

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 Condensed Consolidated Financial Statements. The fair value of the interest rate swap is reflected as an asset or liability in the Condensed Consolidated Balance Sheets and the change in fair value is reported in “Other expense (income), net” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the interest rate swap is estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date.

 

The fair value of the derivative instrument at April 30, 2021 and January 31, 2021 was as follows (in thousands):

 

 

Liability

 
   

Fair Value

 
 

Balance Sheet
Location

 

April 30,
2021

  

January 31,
2021

 

Derivative instrument:

         

Interest rate swap

Other liabilities

 $(261

)

 $(325

)

Total

 $(261

)

 $(325

)

 

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) was $64,000 and $(251,000) for three months ended April 30, 2021 and 2020 respectively.

 

12

 
 

5.

CAPITALIZED SOFTWARE COSTS

 

Capitalized software costs and accumulated amortization at April 30, 2021 and January 31, 2021 were as follows:

 

  

April 30,

2021

  

January 31,

2021

 
  

(in thousands)

 

Capitalized software costs:

        

Capitalized software development costs

 $3,671  $3,655 

Acquired software technology

  9,391   6,191 

Impact of foreign currency translation

  7   - 
   13,069   9,846 

Less accumulated amortization

  (2,224

)

  (1,866

)

Capitalized software costs, net

 $10,845  $7,980 

 

The Company’s capitalized software development costs relate to translations and localizations of QAD Adaptive Applications. Acquired software technology costs relate to intellectual property purchased during the second and third quarters of fiscal 2019, the fourth quarter of fiscal 2021 and the first quarter of fiscal 2022.

 

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during the first three months of fiscal 2022, approximately $0.3 million of costs and accumulated amortization were removed from the Condensed Consolidated Balance Sheet, related to capitalized software development costs which were fully amortized during the first three months of fiscal 2022.

 

Amortization of capitalized software costs was $0.7 million and $0.3 million for the three months ended April 30, 2021 and 2020, respectively. Amortization of capitalized software costs is included in “Cost of subscription” and “Cost of license” in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of April 30, 2021 (in thousands):

 

 

Fiscal Years

 

Cost of License

  

Cost of

Subscription

  

Total

 

2022 remaining

 $847  $1,389  $2,236 

2023

  808   1,852   2,660 

2024

  363   1,852   2,215 

2025

  24   1,852   1,876 

Thereafter

  -   1,858   1,858 
  $2,042  $8,803  $10,845 

 

 

6.

BUSINESS COMBINATION

 

Foreign-Trade Zone Corporation

 

On April 5, 2021, the Company acquired all of the outstanding stock of Foreign-Trade Zone Corporation (FTZ Corp.), a leading provider of cloud-based Foreign-Trade Zone software and consulting services based in Mobile, Alabama. The Company is integrating FTZ Corp. into QAD Precision, the global trade and transportation division. The total consideration of approximately $12.6 million is comprised of $9.5 million in cash, net of cash acquired of $3.5 million, a contingent earnout consideration with an estimated fair value of $0.7 million and a promissory note of $2.4 million. The earnout consideration is between zero and $2.4 million based on FTZ Corp.’s cloud bookings growth over the next three years. The Company completed the acquisition for the purpose of expanding its product offering and driving revenue growth.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

 

Tangible assets, including cash acquired of $3.5 million

 $4,194 

Goodwill

  7,217 

Other intangible assets

  8,280 

Total assets acquired

  19,691 

Liabilities assumed

  (1,668)

Deferred tax liability

  (1,951)

Net assets acquired

 $16,072 

 

The Company believes the amount of goodwill resulting from the purchase price allocation is attributable to the expected synergistic benefits of being able to leverage FTZ Corp.’s software with the Company’s existing software to provide an integrated suite to the customer bases of both the Company and FTZ Corp. The acquired goodwill is not deductible for tax purposes.

 

13

 

Identified intangible assets will be amortized to cost of subscription and operating expense, based upon the nature of the asset, ratably over the estimated useful life, as detailed in the table below (in thousands, except year amounts):

 

  

Estimated

useful life

(years)

  

Fair

value

  

Estimated

annual

amortization

 

Statement of operations

classification

Software technology

  5  $3,200  $640 

Cost of subscription

Customer relationships

  5   5,000   1,000 

Amortization of intangible assets from acquisitions

Trade Name

  5   80   16 

Amortization of intangible assets from acquisitions

              
      $8,280      

 

The Company has evaluated and continues to evaluate pre-acquisition contingencies relating to FTZ Corp. that existed as of the acquisition date. The Company has preliminarily determined that certain of these pre-acquisition contingencies are probable in nature and estimable as of the acquisition date and, accordingly, has recorded its best estimates for these contingencies as a part of the purchase price allocation. The Company continues to gather information and evaluate pre-acquisition contingencies that it has assumed. If the Company makes changes to the amounts recorded or identifies additional pre-acquisition contingencies during the remainder of the measurement period, such amounts will be recorded as adjustments to the purchase price allocation.

 

The financial results of FTZ Corp. are included in the Condensed Consolidated Financial Statements from the date of acquisition. Pro forma information has not been presented for operations of FTZ Corp. as the impact was not material to the Company’s Condensed Consolidated Financial Statements.

 

Allocation Network GmbH

 

On December 31, 2020, the Company acquired all of the outstanding stock of Allocation Network GmbH (Allocation Network), a best-in class provider of strategic sourcing and supplier management solutions founded in 1998 and headquartered in Munich, Germany. The total consideration of approximately $19.0 million is comprised of $14.2 million in cash, net of cash acquired of $0.9 million, and a contingent earnout consideration at an estimated fair value of $4.8 million. The earnout consideration is between zero and $10.2 million based on Allocation Network’s cloud bookings growth over the next three years. The Company completed the acquisition for the purpose of expanding its product offering and driving revenue growth.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

Tangible assets, including cash acquired of $0.9 million

 $3,420 

Goodwill

  12,785 

Other intangible assets

  7,751 

Total assets acquired

  23,956 

Liabilities assumed

  (1,576)

Deferred tax liability

  (2,549)

Net assets acquired

 $19,831 

 

The Company believes the amount of goodwill resulting from the purchase price allocation is attributable to the expected synergistic benefits of being able to leverage Allocation Network’s software with the Company’s existing software to provide an integrated suite to the customers of both the Company and Allocation Network. The acquired goodwill is not deductible for tax purposes.

 

Identified intangible assets will be amortized to cost of subscription and operating expense, based upon the nature of the asset, ratably over the estimated useful life, as detailed in the table below (in thousands, except year amounts):

 

  

Estimated

useful life

(years)

  

Fair

value

  

Estimated

annual

amortization

 

Statement of operations

classification

Software technology

  5  $6,056  $1,211 

Cost of subscription

Customer relationships

  5   1,695   339 

Amortization of intangible assets from acquisitions

              
      $7,751      

 

The Company has evaluated and continues to evaluate pre-acquisition contingencies relating to Allocation Network that existed as of the acquisition date. The Company has preliminarily determined that certain of these pre-acquisition contingencies are probable in nature and estimable as of the acquisition date and, accordingly, has recorded its best estimates for these contingencies as a part of the purchase price allocation. The Company continues to gather information and evaluate pre-acquisition contingencies that it has assumed. If the Company makes changes to the amounts recorded or identifies additional pre-acquisition contingencies during the remainder of the measurement period, such amounts recorded will be recorded as adjustments to the purchase price allocation.

 

14

 

The financial results of Allocation Network are included in the Condensed Consolidated Financial Statements from the date of acquisition. Pro forma information has not been presented for operations of Allocation Network as the impact was not material to the Company’s Condensed Consolidated Financial Statements.

 

 

7.

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill for the three months ended April 30, 2021 were as follows:

 

  

Gross Carrying

Amount

  

Accumulated

Impairment

  

Goodwill, Net

 
  

(in thousands)

 

Balance at January 31, 2021

 $40,944  $(15,608

)

 $25,336 

Additions

  7,217   -   7,217 

Impact of foreign currency translation

  (46

)

  -   (46

)

Balance at April 30, 2021

 $48,115  $(15,608

)

 $32,507 

 

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2021. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2020. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2021. The Company monitors the indicators for goodwill impairment testing between annual tests. No adverse events occurred during the three months ended April 30, 2021 that would cause the Company to test goodwill for impairment.

 

Intangible Assets

 

  

April 30,

2021

  

January 31,

2021

 
  

(in thousands)

 

Amortizable intangible assets:

        

Customer relationships

 $8,039  $3,039 

Trade name

  80   - 

Impact of foreign currency translation

  (25

)

  - 

Less accumulated amortization

  (908

)

  (681

)

Amortizable intangible assets, net

 $7,186  $2,358 

 

The Company’s intangible assets are related to acquisitions completed in the second and third quarters of fiscal 2019, the fourth quarter of fiscal 2021 and the first quarter of fiscal 2022. Intangible assets are included in “Other assets, net” in the accompanying Condensed Consolidated Balance Sheets, and are amortized over an estimated five-year useful life.

 

Amortization of intangible assets from acquisitions was $0.2 million and $0.1 million for the three months ended April 30, 2021 and 2020, respectively. The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of April 30, 2021:

 

Fiscal Years

 

(in thousands)

 

2022 remaining

 $1,214 

2023

  1,619 

2024

  1,506 

2025

  1,355 

Thereafter

  1,492 
  $7,186 

 

15

 
 

8.

DEBT

 

  

April 30,

2021

  

January 31,

2021

 
  

(in thousands)

 

Note payable

 $12,235  $12,366 

Less current maturities

  (533

)

  (527

)

Less loan origination costs, net

  (11

)

  (14

)

Long-term debt

 $11,691  $11,825 

 

Note payable for FTZ Corp. acquisition

 $2,400  $- 

 

Effective May 30, 2012, QAD Ortega Hill, LLC, a consolidated entity of QAD Inc., entered into a variable rate credit agreement (the 2012 Mortgage) with Mechanics Bank (formerly Rabobank, N.A.), to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 0.11% at April 30, 2021. The 2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Mechanics Bank. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million when the loan matures on June 1, 2022. The unpaid balance as of April 30, 2021 was $12.2 million.

 

Included in other liabilities, the Company owed $2.4 million as part of the acquisition cost for FTZ Corp. The note is payable to the sellers of FTZ Corp. over four years and accrues interest at 4%. 

 

 

9.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

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

 

  

Foreign

Currency

Translation

Adjustments

 
  

(in thousands)

 

Balance as of January 31, 2021

 $(8,188

)

Other comprehensive loss before reclassifications

  (161

)

Amounts reclassified from accumulated other comprehensive loss

  - 

Net current period other comprehensive loss

  (161

)

Balance as of April 30, 2021

 $(8,349

)

 

 

During the three months ended April 30, 2021 there were no reclassifications from accumulated other comprehensive loss.

 

 

10.

INCOME TAXES

 

In determining the provision for income taxes for the first three months of fiscal 2022, the Company calculated income tax expense based on the estimated annual tax rate for the year, compared to the first three months of the prior year where the Company calculated income tax expense based on actual quarterly results. The annual effective tax rate was adjusted for discrete items recorded during the period. The estimated annual tax rate for the year was used in the current period because the Company is forecasting profits for the full fiscal year 2022.  Actual quarterly results were used in fiscal 2021 since they provided a more reliable estimate of quarterly tax expense since the Company was expecting near breakeven results.  

 

The Company recorded income tax (benefit) expense of $(1.4) million and $1.0 million for the first three months of fiscal 2022 and 2021, respectively. The Company’s estimated effective income tax rate was (302%) and 170% for the first quarter of fiscal 2022 and 2021, respectively. The effective tax rate will generally differ from the U.S. federal statutory tax rate of 21%, due to state taxes, permanent items including amounts disallowed under §162(m) of the Internal Revenue Code, the Company’s global tax strategy, and tax credits. The reduction in the effective tax rate for the three months ended April 30, 2021 compared to the three months ended April 30, 2020 was primarily due to a planned intercompany sale of intellectual property and the release of $2.0 million in the Company’s valuation allowance in the three months ended April 30, 2021 as a result of the acquisition of FTZ Corporation.

 

At April 30, 2021 and  January 31, 2021, the gross amount of unrecognized tax benefits was $1.3 million for both periods, including interest and penalties. The unrecognized tax benefits for the first three months of fiscal 2021 and fiscal 2020 were each reduced by $1.0 million with an accompanying reduction of deferred tax assets, as a result of the netting required under ASU 2013-11. The entire amount of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. This liability is classified as long-term unless the liability is expected to conclude within twelve months of the reporting date.

 

16

 

The Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. As of the first quarter of fiscal 2022 and 2021, the Company accrued approximately $0.1 million of interest and penalty expense relating to unrecognized tax benefits.

 

The Company reviews its net deferred tax assets by entity at each balance sheet date to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. During the first three months of fiscal year 2022 management considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance was needed. Management assessed the transfer pricing methodology, the historical profits, the economics of the country in which the entity operates, the impact of COVID-19, the current and future customer base, the type and character of the deferred tax asset and any other current and relevant information by entity to draw its conclusion.

 

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

 

Jurisdiction

 

April 30,

2021

  

January 31,

2021

 

U.S. federal and state

 $27.1  $30.3 

Ireland

  12.1   12.0 

Brazil

  6.1   6.1 

South Africa

  0.2   0.2 

Total valuation allowance

 $45.5  $48.6 

 

 

At April 30, 2021 and  January 31, 2021, the worldwide valuation allowance attributable to deferred tax assets was $45.5 million and $48.6 million, respectively.

 

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

 

 

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

 

France for fiscal years ended January 31, 2018, 2019 and 2020

 

 

11.

STOCKHOLDERS EQUITY

 

Dividends

 

The following table sets forth the dividends that were declared by the Company during the first three months of fiscal 2022:

 

Declaration

Date

Record Date

Payable

 

Dividend

Class A

  

Dividend

Class B

  

Amount

(in thousands)

 

4/14/2021

4/28/2021

5/5/2021

 $0.072  $0.06  $1,454 

 

 

 

12.

STOCK-BASED COMPENSATION

 

The Company’s equity awards consist of RSUs, PSUs and SARs. For a description of the Company’s stock-based compensation plans, see Note 6 “Stock-Based Compensation” in Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 31, 2021.

 

Stock-Based Compensation

 

The following table sets forth reported stock-based compensation expense for the three months ended April 30, 2021 and 2020:

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 
  

(in thousands)

 

Cost of subscription

 $112  $107 

Cost of maintenance

  127   109 

Cost of professional services

  385   337 

Sales and marketing

  769   508 

Research and development

  609   451 

General and administrative

  1,635   893 

Total stock-based compensation expense

 $3,637  $2,405 

 

17

 

RSU Information

 

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

 

The following table summarizes the activity for RSUs for the three months ended April 30, 2021: 

 

  

RSUs

  

Weighted

Average

Grant Date

Fair Value

 
  

(in thousands)

     

Restricted stock at January 31, 2021

  698  $41.56 

Granted

  12   71.65 

Released (1)

  (8

)

  30.97 

Forfeited

  (11

)

  40.56 

Restricted stock at April 30, 2021

  691  $42.23 

 

 


 

(1)

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

 

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three months ended April 30, 2021, the Company withheld 3,000 shares for payment of these taxes at a value of $0.2 million.

 

Total unrecognized compensation cost related to RSUs was approximately $20.3 million as of April 30, 2021. This cost is expected to be recognized over a weighted-average period of approximately 2.3 years. 

 

PSU Information

 

The following table summarizes the activity for PSUs for the three months ended April 30, 2021:

 

  

PSUs

(in thousands)

  

Weighted
Average
Grant Date
Fair Value

 

Performance stock units at January 31, 2021

  153  $40.26 

Granted

      

Released

      

Forfeited

      

Performance stock units at April 30, 2021

  153  $40.26 

 

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three months ended April 30, 2021, the Company did not withhold shares for payment of these taxes as there were no shares released during the quarter.

 

Total unrecognized compensation cost related to PSUs was approximately $1.5 million as of April 30, 2021. This cost is expected to be recognized over a period of approximately 0.6 years.

 

18

 

SAR Information

 

The following table summarizes the activity for outstanding SARs for the three months ended April 30, 2021:

 

  

SARs

(in

thousands)

  

Weighted

Average

Exercise

Price per

Share

  

Weighted

Average

Remaining

Contractual

Term

(years)

  

Aggregate

Intrinsic

Value

(in

thousands)

 

Outstanding at January 31, 2021

  1,144  $27.01         

Granted

              

Exercised

              

Expired

              

Forfeited

              

Outstanding at April 30, 2021

  1,144  $27.01   2.6  $47,013 

Vested and exercisable at April 30, 2021

  1,002  $24.28   2.3  $43,525 

 

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 April 30, 2021, and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on April 30, 2021. The total intrinsic value of SARs exercised in the three months ended April 30, 2021 was zero.

 

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.  During the three months ended April 30, 2021, the Company did not withhold shares for payment of these taxes as there were no exercises during the quarter.

 

At April 30, 2021, there was approximately $1.0 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 0.8 years.

 

 

13.

COMMITMENTS AND CONTINGENCIES

 

Indemnifications

 

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

 

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

 

Legal Actions

 

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

 

 

14.

BUSINESS SEGMENT INFORMATION

 

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

 

19

 

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

 

  

Three Months Ended

April 30,

 
  

2021

  

2020

 
  

(in thousands)

 

Revenue:

        

North America (1)

 $39,240  $37,002 

EMEA

  28,713   22,568 

Asia Pacific

  10,268   9,642 

Latin America

  4,750   4,935 
  $82,971  $74,147 

 

 


 

(1)

Sales into Canada accounted for 3% and 2% of North America total revenue in the three months ended April 30, 2021 and 2020, respectively.

 

 

 

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact should be construed as forward looking statements, including statements that are preceded or accompanied by such words as “may,” “believe,” “could,” “anticipate,” “projects,” “estimates,” “will likely result,” “should,” “would,” “might,” “plan,” “expect,” “intend” and words of similar meaning or the negative of these terms or other comparable terminology. Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, the economy and future conditions. A number of risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1A entitled “Risk Factors” within our Annual Report on Form 10-K for the year ended January 31, 2021. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions, expectations and projections only as of the date hereof and are subject to risks, uncertainties and assumptions about our business. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements except as required by applicable securities laws. Readers should carefully review the risk factors and other information described in other documents we file from time to time with the Securities and Exchange Commission (SEC).

 

INTRODUCTION

 

The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended January 31, 2021, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

CRITICAL ACCOUNTING POLICIES

 

Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical, including a) revenue and b) income taxes, are further discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, except as described in Note 1 “Basis of Presentation and Recent Accounting Pronouncements” within the Notes to Condensed Consolidated Financial Statements.

 

20

 

BUSINESS OVERVIEW

 

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

 

We have four principal sources of revenue:

 

 

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

 

 

License purchases of QAD Adaptive Applications;

 

 

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

 

 

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

 

We operate primarily in the following four geographic regions: North America, Latin America, EMEA and Asia Pacific. In the first three months of fiscal 2022, approximately 47% of our total revenue was generated in North America, 35% in EMEA, 12% in Asia Pacific and 6% in Latin America. The majority of our revenue is generated from global customers who have operations in multiple countries throughout the world. A significant portion of our revenue and expenses are derived from international operations which are primarily conducted in foreign currencies. As a result, changes in the value of foreign currencies relative to the U.S. dollar have impacted our results of operations and may impact our future results of operations. At April 30, 2021, we employed approximately 1,930 employees worldwide, of which 640 employees were based in North America, 625 employees in EMEA, 555 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 global manufacturing economy. As a result, our management team monitors several economic indicators, with particular attention to the Global and Country Purchasing Managers’ Indexes (PMI). The PMI is a survey conducted on a monthly basis by polling businesses that represent the makeup of respective sectors. Since most of our customers are manufacturers, our revenue has historically correlated with fluctuations in the manufacturing PMI. Global macro-economic trends and manufacturing spending are important barometers for our business, and the health of the U.S., Western European and Asian economies have a meaningful impact on our financial results.

 

We are transitioning our business model from traditional on-premises licensing to cloud-based subscriptions. During the first three months of fiscal 2022, we closed virtually all of our new customer deals in the cloud. On a rolling 12-month basis, subscription billings grew by 20% with a three-year compound annual growth rate (CAGR) of 22%. Recurring revenue, which we define as subscription revenue plus maintenance revenue, equaled 76% of total revenue for the fiscal 2022 first quarter. By reducing our customers’ up-front costs and providing QAD Adaptive Applications with continuous application and infrastructure support in secure and resilient environments, we expect our cloud business model will be more attractive than on-premises licenses. We expect recurring revenue to remain a majority of total revenue as our subscription revenue continues to grow.  

 

In late 2019, a novel strain of COVID-19 was identified, and in March 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. The COVID-19 pandemic has resulted in authorities implementing numerous measures to try to contain and mitigate the virus, including travel bans and restrictions; business shut-downs and limitations; quarantines and shelter-in-place; and social distancing orders.

 

Our priorities during the pandemic have been the health and well-being of our employees, our customers and their respective families and communities as well as maintaining continuity of service for our cloud and on-premises customers and those customers with implementation or upgrade projects. Beginning in the first fiscal quarter of fiscal 2021 and continuing through the first quarter of fiscal 2022, we took actions in response to the pandemic that focused on maintaining business continuity, supporting our employees, helping our customers and communities and preparing for the long-term success of our business. We are continuing to conduct business during the COVID-19 pandemic with substantial modifications to employee travel, employee work locations, and virtualization, postponement or cancellation of certain sales and marketing events, among other modifications. In the first quarter of fiscal 2021, we closed our offices globally and our employees worked remotely. These actions remained in effect throughout fiscal 2021 and during the first quarter of fiscal 2022 and are expected to extend into future quarters. The impact, if any, of these and any additional operational changes we may implement is uncertain, but actions we have taken to date in response to the pandemic have not materially impaired, and are not expected to materially impair our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

 

21

 

While the effects of the pandemic in the short to medium term remain uncertain, we do see growth in manufacturing activity with the global PMI level at a ten-year high. Our business has a strong cash position with little debt and cash flow remains positive.  For these reasons, we believe our financial position is solid and our long-term strategy is sound. 

 

RESULTS OF OPERATIONS 

 

We operate in several geographical regions as described in Note 14 “Business Segment Information” within the Notes to Condensed Consolidated Financial Statements. In order to present our results of operations without the effects of changes in foreign currency exchange rates, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented in the following tables. In order to calculate our constant currency results, we apply the current foreign currency exchange rates to the prior period results.

 

 

Revenue

 

 

   

Three

Months

Ended

   

Three

Months

Ended

   

Change in

   

Change due

   

Total Change as Reported

 

(in thousands)

 

April 30,

2021

   

April 30,

2020

   

Constant

Currency

   

to Currency

Fluctuations

      $    

%

 

Revenue

                                               

Subscription

  $ 36,686     $ 30,771     $ 4,948     $ (967

)

  $ 5,915       19

%

Percentage of total revenue

    44

%

    41

%

                               

License

    3,115       1,221       1,806       (88

)

    1,894       155

%

Percentage of total revenue

    4

%

    2

%

                               

Maintenance

    26,563       26,408       (960

)

    (1,115 )     155       1

%

Percentage of total revenue

    32

%

    36

%

                               

Professional services

    16,607       15,747       216       (644

)

    860       5

%

Percentage of total revenue

    20

%

    21

%

                               

Total revenue

  $ 82,971     $ 74,147     $ 6,010     $ (2,814

)

  $ 8,824       12

%

 

Total Revenue. On a constant currency basis, total revenue was $83.0 million for the first quarter of fiscal 2022, representing a $6.0 million, or 8%, increase from $77.0 million for the same period last year. When comparing categories within total revenue at constant rates, our results for the first quarter of fiscal 2022 included increases in subscription, license and professional services partially offset by a decrease in maintenance. Revenue outside the North America region as a percentage of total revenue was 53% and 50% for the first quarter of fiscal 2022 and 2021, respectively. On a constant currency basis, total revenue increased in our North America, EMEA and Asia Pacific regions, and decreased in our Latin America region during the first quarter of fiscal 2022 when compared to the same period in the prior year.

 

Our products and services are sold to manufacturing companies that operate mainly in the following six industries: automotive, consumer products, food and beverage, high technology, industrial products and life sciences. Given the similarities between consumer products and food and beverage as well as between high technology and industrial products, we aggregate them for management review. The following table presents revenue by industry for the three months ended April 30, 2021 and 2020:

 

 

 

 

   

Three Months Ended April 30,

 
   

2021

   

2020

 

Automotive

    29

%

    33

%

Consumer products and food and beverage

    16

%

    16

%

High technology and industrial products

    36

%

    36

%

Life sciences and other

    19

%

    15

%

Total revenue

    100

%

    100

%

 

 

 

The change in percentage of revenue by industry for automotive in the first quarter of fiscal 2022 compared to the same quarter last year primarily relates to an increase of subscription and license revenue in the life sciences and high technology and industrial products industries as well as lower professional services revenue in the automotive industry.  The prior year period included several large automotive services implementation projects.

 

22

 

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 $36.7 million for the first quarter of fiscal 2022, representing a $5.0 million, or 16%, increase from $31.7 million for the same period last year. On a constant currency basis, subscription revenue increased across all regions during the first quarter of fiscal 2022 when compared to the same period last year. One of the metrics that management uses to monitor subscription performance is the number of new cloud deals that have been signed in the period. In the first quarter of fiscal 2022 we closed 33 new subscription deals, including 23 new customers and 10 conversions from existing customers who previously purchased on-premises licenses. This compared to the first quarter of fiscal 2021 when we closed 14 new subscription deals, including 9 new customers and 5 conversions from existing customers who previously were running our solutions on-premises. The increase in subscription revenue consists of new customer sites, existing customers converting from on-premises, and additional users and modules purchased by our existing cloud customers.

 

We track our retention rate of subscription by calculating the annualized revenue of customer sites with contracts up for renewal at the beginning of the period compared to the annualized revenue associated with the customer sites that have canceled during the period. The percentage of revenue not canceled is our retention rate. Our subscription customer retention rate is in excess of 95%.

 

The following table presents subscription revenue by region for the three months ended April 30, 2021 and 2020:

 

   

Three Months Ended April 30,

 
   

2021

   

2020

 

North America

    55

%

    58

%

EMEA

    30

%

    27

%

Asia Pacific

    9

%

    9

%

Latin America

    6

%

    6

%

Total subscription revenue

    100

%

    100

%

 

 

The following table presents subscription revenue by industry for the three months ended April 30, 2021 and 2020: 

 

   

Three Months Ended April 30,

 
   

2021

   

2020

 

Automotive

    31

%

    35

%

Consumer products and food and beverage

    15

%

    15

%

High technology and industrial products

    29

%

    28

%

Life sciences and other

    25

%

    22

%

Total subscription revenue

    100

%

    100

%

 

 

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

 

On a constant currency basis, license revenue was $3.1 million for the first quarter of fiscal 2022, representing a $1.8 million, or 138%, increase from $1.3 million for the same period last year. On a constant currency basis, license revenue increased in our North America, EMEA and Asia Pacific regions and decreased in our Latin America region during the first quarter of fiscal 2022 when compared to the same period last year. License revenue generated in both periods is from existing customers purchasing additional users and modules. License revenue in the prior year was negatively impacted by the onset of the COVID-19 pandemic.

 

Maintenance. We offer support services 24 hours a day, seven days a week in addition to providing software upgrades, which include additional or improved functionality, when and if available. Maintenance revenue is derived from our on-premises customers who have purchased licenses and would like to receive support services and software upgrades. Our maintenance contracts are generally renewed on an annual basis.

 

23

 

On a constant currency basis, maintenance revenue was $26.6 million for the first quarter of fiscal 2022, representing a $0.9 million, or 3%, decrease from $27.5 million for the same period last year. On a constant currency basis, maintenance revenue decreased in all our regions during the first quarter of fiscal 2022 when compared to the same period last year. The decrease in maintenance revenue period over period was primarily due to customer cancellations and continued conversions of existing customers’ on-premises licenses to cloud subscriptions. 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.

 

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

 

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

 

On a constant currency basis, professional services revenue was $16.6 million for the first quarter of fiscal 2022, representing a $0.2 million, or 1%, increase from $16.4 million for the same period last year. On a constant currency basis, professional services revenue remained consistent in our North America region, and increased in EMEA while decreasing in Asia Pacific and Latin America regions during the first quarter of fiscal 2022 when compared to the same period last year. Our strategy continues to be to outsource more professional services to our partners in order to have a large global partner network to meet our growth goals and customer demand.

 

Total Cost of Revenue

 

   

Three

Months

Ended

   

Three

Months

Ended

   

Change in

   

Change due

   

Total Change as Reported

 
   

April 30,

2021

   

April 30,

2020

   

Constant

Currency

   

to Currency

Fluctuations

      $    

%

 

(in thousands)

                                               

Cost of revenue

                                               

Cost of subscription

  $ 12,162     $ 10,348     $ (1,757 )   $ (57 )   $ (1,814 )     -18

%

Cost of license

    538       401       (136 )     (1 )     (137 )     -34

%

Cost of maintenance

    6,555       6,744