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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

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

 

 

For the quarterly period ended July 31, 2018

 

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑  No ☐.

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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 ☐  (Do not check if a smaller reporting company)

Smaller reporting company ☐

 

 

 

Emerging growth company ☐

 

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

 

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

 

As of August 31, 2018, there were 16,357,168 shares of the Registrant’s Class A common stock outstanding and 3,263,906 shares of the Registrant’s Class B common stock outstanding. 

 

 

 

 

 

QAD INC.

INDEX

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of July 31, 2018 and January 31, 2018

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended July, 2018 and 2017

2

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2018 and 2017

3

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

 

 

ITEM 2.

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

23

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

 

 

ITEM 4.

Controls and Procedures

39

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

40

 

 

 

 

 

ITEM1A.

Risk Factors

40

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

40

 

 

 

 

 

ITEM 4.

Mine Safety Disclosure

40

 

 

 

 

 

ITEM 5.

Other Information

40

 

 

 

 

 

ITEM 6

Exhibits

40

 

 

 

 

 

SIGNATURES

41

 

 

 

 

PART I

 

ITEM 1 – FINANCIAL STATEMENTS

 

QAD INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 
   

July 31,

2018

   

January 31,

2018

 

Assets

               
                 

Current assets:

               

Cash and equivalents

  $ 139,528     $ 147,023  

Accounts receivable, net of allowances of $1,949 and $1,763 at July 31, 2018 and January 31, 2018, respectively

    54,258       83,518  

Other current assets

    21,116       15,856  

Total current assets

    214,902       246,397  

Property and equipment, net

    29,741       30,408  

Capitalized software costs, net

    1,405       990  

Goodwill

    11,095       11,023  

Deferred tax assets, net

    11,869       7,944  

Other assets, net

    10,931       3,055  

Total assets

  $ 279,943     $ 299,817  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Current portion of long-term debt

  $ 476     $ 466  

Accounts payable

    10,962       14,818  

Deferred revenue

    91,195       116,693  

Other current liabilities

    35,702       43,460  

Total current liabilities

    138,335       175,437  

Long-term debt

    13,075       13,313  

Other liabilities

    4,943       5,439  

Commitments and contingencies

               

Stockholders’ equity:

               

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

               

Common stock:

               

Class A, $0.001 par value. Authorized 71,000,000 shares; issued 16,605,215 shares at both July 31, 2018 and January 31, 2018

    16       16  

Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares at both July 31, 2018 and January 31, 2018

    4       4  

Additional paid-in capital

    192,421       200,456  

Treasury stock, at cost (528,565 shares and 892,700 shares at July 31, 2018 and January 31, 2018, respectively)

    (7,532

)

    (12,461

)

Accumulated deficit

    (53,655

)

    (75,559

)

Accumulated other comprehensive loss

    (7,664

)

    (6,828

)

Total stockholders’ equity

    123,590       105,628  

Total liabilities and stockholders’ equity

  $ 279,943     $ 299,817  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

1

 

 

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

 

 
   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Revenue:

                               

Subscription

  $ 22,439     $ 17,420     $ 43,950     $ 32,763  

License

    5,561       6,743       11,827       12,008  

Maintenance and other

    30,574       31,971       62,057       63,877  

Professional services

    25,969       19,824       52,899       38,692  

Total revenue

    84,543       75,958       170,733       147,340  
                                 

Costs of revenue:

                               

Subscription

    8,334       7,428       16,562       15,148  

License

    574       828       1,238       1,513  

Maintenance and other

    7,774       7,840       15,639       15,534  

Professional services

    23,754       20,598       48,064       39,365  

Total cost of revenue

    40,436       36,694       81,503       71,560  
                                 

Gross profit

    44,107       39,264       89,230       75,780  
                                 

Operating expenses:

                               

Sales and marketing

    19,502       17,697       39,448       35,284  

Research and development

    13,513       11,689       27,519       23,221  

General and administrative

    9,366       9,224       18,728       17,817  

Amortization of intangibles from acquisitions

          111             274  

Total operating expenses

    42,381       38,721       85,695       76,596  
                                 

Operating income (loss)

    1,726       543       3,535       (816

)

                                 

Other (income) expense:

                               

Interest income

    (743

)

    (493

)

    (1,267

)

    (661

)

Interest expense

    154       157       311       313  

Other (income) expense, net

    (269

)

    1,208       (673

)

    1,812  

Total other (income) expense

    (858

)

    872       (1,629

)

    1,464  
                                 

Income (loss) before income taxes

    2,584       (329

)

    5,164       (2,280

)

Income tax expense

    1,471       832       2,654       1,452  
                                 

Net income (loss)

  $ 1,113     $ (1,161 )   $ 2,510     $ (3,732

)

                                 

Basic net income (loss) per share

                               

Class A

  $ 0.06     $ (0.06

)

  $ 0.13     $ (0.20

)

Class B

  $ 0.05     $ (0.05

)

  $ 0.11     $ (0.17

)

Diluted net (loss) income per share

                               

Class A

  $ 0.05     $ (0.06

)

  $ 0.12     $ (0.20

)

Class B

  $ 0.05     $ (0.05

)

  $ 0.11     $ (0.17

)

                                 

Net income (loss)

  $ 1,113     $ (1,161

)

  $ 2,510     $ (3,732

)

Other comprehensive income, net of tax:

                               

Foreign currency translation adjustment

    (326

)

    1,132       (836

)

    1,772  

Total comprehensive income (loss)

  $ 787     $ (29

)

  $ 1,674     $ (1,960

)

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

2

 

 

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 
   

Six Months Ended

July 31,

 
   

2018

   

2017

 
                 

Cash flows from operating activities:

               

Net income (loss)

  $ 2,510     $ (3,732

)

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

               

Depreciation and amortization

    2,699       2,971  

Amortization of costs capitalized to obtain and fulfill contracts

    2,051        

Net change in valuation allowance

    4,553       2,957  

Other deferred income taxes

    (1,649

)

    (3,209

)

Loss on disposal of equipment

    4       12  

Provision for doubtful accounts and sales adjustments

    498       187  

Stock compensation expense

    5,470       4,360  

Change in fair value of derivative instrument

    (152 )     3  

Changes in assets and liabilities:

               

Accounts receivable

    27,033       28,110  

Costs capitalized to obtain and fulfill contracts

    (1,692

)

     

Other assets

    (894

)

    1,147  

Accounts payable

    (3,480

)

    (2,580

)

Deferred revenue

    (21,683

)

    (17,987

)

Other liabilities

    (6,122

)

    (4,601

)

Net cash provided by operating activities

    9,146       7,638  

Cash flows from investing activities:

               

Purchase of property and equipment

    (2,004

)

    (1,571

)

Acquisition of business, net of cash acquired

    (450

)

     

Capitalized software costs

    (536

)

    (480

)

Net cash used in investing activities

    (2,990

)

    (2,051

)

Cash flows from financing activities:

               

Repayments of debt

    (234

)

    (222

)

Tax payments related to stock awards

    (8,576

)

    (2,781

)

Cash dividends paid

    (2,731

)

    (2,675

)

Net cash used in financing activities

    (11,541

)

    (5,678

)

                 

Effect of exchange rates on cash and equivalents

    (2,110

)

    4,211  
                 

Net (decrease) increase in cash and equivalents

    (7,495

)

    4,120  
                 

Cash and equivalents at beginning of period

    147,023       145,082  
                 

Cash and equivalents at end of period

  $ 139,528     $ 149,202  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 305     $ 303  

Income taxes, net of refunds

  $ 1,632     $ 2,030  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3

 

 

QAD INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  

 

 

1.

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements fairly present the financial information contained therein. These statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements and footnotes are unaudited.  In management’s opinion, all necessary adjustments, consisting of normal, recurring and non-recurring adjustments, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the financial position and operating results of QAD Inc. (“QAD” or the “Company”). The Condensed Consolidated Financial Statements do not include all disclosures required by GAAP accounting principles for annual financial statements and should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2018. The Condensed Consolidated Financial Statements include the results of the Company and its wholly owned subsidiaries. Because of seasonal and other factors, results of operations for the three and six months ended July 31, 2018 are not necessarily indicative of the results to be expected for the year ending January 31, 2019.

 

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, 2018 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 critical accounting policies and estimates affect its more significant estimates and judgments used in the preparation of the Company’s consolidated financial statements.

 

Effective February 1, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) No.2014-09, Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method. The Company’s updated accounting policy on revenue recognition is described in Note 2 and in “Critical accounting policies” in Item 2 of this Form 10-Q. 

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. Adjustments were made to the operating activities section of the Condensed Consolidated Statements of Cash Flows. These reclassifications had no effect on the reported results of operations and no effect on previously reported cash flows from operating activities. 

 

Recent Accounting Pronouncements

 

With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the three or six months ended  July 31, 2018, that are of significance, or potential significance, to the Company.

 

Recent Accounting Pronouncements Adopted

 

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers other than inventory. The guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. ASU 2016-16 was adopted by the Company effective February 1, 2018 on a modified retrospective basis, resulting in a $9.6 million decrease to accumulated deficit and a corresponding increase to deferred tax assets.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, that modifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, with earlier adoption permitted. ASU 2016-15 was adopted by the Company effective February 1, 2018 on a retrospective basis, with no material changes reflected in the Condensed Consolidated Statement of Cash Flows.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and Subtopic 985-605 Software - Revenue Recognition. Topic 605 and Subtopic 985-605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

4

 

 

The Company adopted Topic 606 on the first day of fiscal 2019 using the modified retrospective transition method. Under this method, QAD evaluated contracts that were in effect at the beginning of fiscal 2019 as if those contracts had been accounted for under Topic 606. The Company did not evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition method, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting. A cumulative catch-up adjustment was recorded to beginning accumulated deficit to reflect the impact of all existing arrangements under Topic 606.

 

 

The most significant impacts of the adoption of Topic 606 were as follows:

 

 

Removal of vendor specific objective evidence (“VSOE”) under prior GAAP resulted in earlier recognition of license and services revenues in those instances where the Company sold a multi-element deal where services did not have VSOE. At adoption, QAD decreased accumulated deficit and deferred revenue by $2.0 million as this revenue would otherwise have been recognized in future periods according to prior GAAP;

 

 

Removal of the limitation on contingent revenue resulted in revenue being recognized earlier for certain contracts. At adoption, QAD decreased accumulated deficit and increased contract assets by $0.8 million as this revenue would otherwise have been recognized in future periods as invoiced according to prior GAAP;

 

 

Contracts containing a future option to the customer represented a material right which resulted in deferral of revenue. At adoption, QAD increased accumulated deficit and deferred revenue by $0.3 million as this revenue would have been otherwise earned in previous periods according to prior GAAP;

 

 

Commission expenses related to new cloud and maintenance contracts are no longer expensed as incurred; rather these incremental commission costs and other associated fringe benefits are capitalized and amortized over the associated term of economic benefit which the Company has determined to be five years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by $9.1 million at the adoption date;

 

 

Sales agent fees to obtain new cloud and maintenance contracts are no longer be expensed as incurred; rather these costs will be capitalized and amortized over the associated term of economic benefit which the Company has determined to be five years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by $1.0 million at the adoption date; and

 

 

Cloud environment setup costs incurred to fulfill new cloud customer contracts are no longer expensed as incurred; rather these costs are capitalized and amortized over the associated term of economic benefit which the Company has determined to be five years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by $1.5 million at the adoption date.

 

The tax impact of the above adjustments was assessed and, at adoption, QAD increased accumulated deficit and decreased net deferred tax assets by $1.6 million.

 

5

 

 

Adjustments to beginning consolidated balance sheet accounts

 

The following table presents the cumulative effect adjustments, net of income tax effects, to beginning consolidated balance sheet accounts for the new accounting standards adopted by the Company on the first day of fiscal 2019:

 

   

Jan. 31, 2018

   

Topic 606

   

ASU2016-16 (1)

   

Feb. 1, 2018

 
   

(in thousands)

 

Assets

                               

Current assets:

                               

Cash and equivalents

  $ 147,023     $ -     $ -     $ 147,023  

Accounts receivable, net

    83,518       -       -       83,518  

Other current assets

    15,856       4,013       -       19,869  

Total current assets

    246,397       4,013       -       250,410  

Property and equipment, net

    30,408       -       -       30,408  

Capitalized software costs, net

    990       -       -       990  

Goodwill

    11,023       -       -       11,023  

Deferred tax assets, net

    7,944       (1,643

)

    9,584       15,885  

Other assets, net

    3,055       8,421       -       11,476  

Total assets

  $ 299,817     $ 10,791     $ 9,584     $ 320,192  
                                 

Liabilities and stockholders’ equity

                               

Current portion of long-term debt

  $ 466     $ -     $ -     $ 466  

Accounts payable

    14,818       -       -       14,818  

Deferred revenue

    116,693       (1,239

)

    -       115,454  

Other current liabilities

    43,460       -       -       43,460  

Total current liabilities

    175,437       (1,239

)

    -       174,198  

Long-term debt

    13,313       -       -       13,313  

Other liabilities

    5,439       (511

)

    -       4,928  

Stockholders’ equity

                               

Common stock - Class A

    16       -       -       16  

Common stock - Class B

    4       -       -       4  

Additional paid-in capital

    200,456       -       -       200,456  

Treasury stock

    (12,461

)

    -       -       (12,461

)

Accumulated deficit

    (75,559

)

    12,541       9,584       (53,434

)

Accumulated other comprehensive loss

    (6,828

)

    -       -       (6,828

)

Total stockholders’ equity

    105,628       12,541       9,584       127,753  

Total liabilities and stockholders’ equity

  $ 299,817     $ 10,791     $ 9,584     $ 320,192  

 

 


 

(1)

For further information about the adoption of Income taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory see Note 9 “Income Taxes.”

 

6

 

 

The following table summarizes the effects of adopting Topic 606 on the Company’s Condensed Consolidated Balance Sheet as of July 31, 2018:

 

   

As reported

under Topic 606

   

Adjustments

   

Balances under

Prior GAAP

 
   

(in thousands)

 

Assets

                       

Current assets:

                       

Cash and equivalents

  $ 139,528     $ -     $ 139,528  

Accounts receivable, net

    54,258       -       54,258  

Other current assets

    21,116       (4,194

)

    16,922  

Total current assets

    214,902       (4,194

)

    210,708  

Property and equipment, net

    29,741       -       29,741  

Capitalized software costs, net

    1,405       -       1,405  

Goodwill

    11,095       -       11,095  

Deferred tax assets, net

    11,869       1,047       12,916  

Other assets, net

    10,931       (7,697

)

    3,234  

Total assets

  $ 279,943     $ (10,844

)

  $ 269,099  
                         

Liabilities and stockholders’ equity

                       

Current portion of long-term debt

  $ 476     $ -     $ 476  

Accounts payable

    10,962       -       10,962  

Deferred revenue

    91,195       3,034       94,229  

Other current liabilities

    35,702       -       35,702  

Total current liabilities

    138,335       3,034       141,369  

Long-term debt

    13,075       -       13,075  

Other liabilities

    4,943       868       5,811  

Stockholders’ equity

                       

Common stock - Class A

    16       -       16  

Common stock - Class B

    4       -       4  

Additional paid-in capital

    192,421       -       192,421  

Treasury stock

    (7,532

)

    -       (7,532

)

Accumulated deficit

    (53,655

)

    (14,750

)

    (68,405

)

Accumulated other comprehensive loss

    (7,664

)

    4       (7,660

)

Total stockholders’ equity

    123,590       (14,746

)

    108,844  

Total liabilities and stockholders’ equity

  $ 279,943     $ (10,844

)

  $ 269,099  

 

7

 

 

The following table summarizes the effects of adopting Topic 606 on the Company’s Condensed Consolidated Statement of Income for the three months ended July 31, 2018:

 

   

As reported

under Topic 606

   

Adjustments

   

Balances under

Prior GAAP

 
   

(in thousands, except per share amounts)

 

Revenue

                       

Subscription fees

  $ 22,439     $ (251

)

  $ 22,188  

License fees

    5,561       (216

)

    5,345  

Maintenance and other

    30,574       40       30,614  

Professional services

    25,969       904       26,873  

Total revenue

    84,543       477       85,020  

Cost of revenue:

                       

Subscription fees

    8,334       4       8,338  

License fees

    574       -       574  

Maintenance and other

    7,774       -       7,774  

Professional services

    23,754       -       23,754  

Total cost of revenue

    40,436       4       40,440  

Gross profit

    44,107       473       44,580  

Operating expenses:

                       

Sales and marketing

    19,502       (22

)

    19,480  

Research and development

    13,513       (59

)

    13,454  

General and administrative

    9,366       -       9,366  

Total operating expenses

    42,381       (81

)

    42,300  

Operating income

    1,726       554       2,280  

Other (income) expense

                       

Interest income

    (743

)

    -       (743

)

Interest expense

    154       -       154  

Other income 

    (269

)

    -       (269

)

Total other income, net

    (858

)

    -       (858

)

Income before income taxes

    2,584       554       3,138  

Income tax expense

    1,471       112       1,583  

Net income

  $ 1,113     $ 442     $ 1,555  

Basic income per share

                       

Class A

  $ 0.06     $ 0.02     $ 0.08  

Class B

  $ 0.05     $ 0.02     $ 0.07  

Diluted income per share

                       

Class A

  $ 0.05     $ 0.02     $ 0.07  

Class B

  $ 0.05     $ 0.02     $ 0.07  

 

8

 

 

The following table summarizes the effects of adopting Topic 606 on the Company’s Condensed Consolidated Statement of Income for the six months ended July 31, 2018:

 

   

As reported

under Topic 606

   

Adjustments

   

Balances under

Prior GAAP

 
   

(in thousands, except per share amounts)

 

Revenue

                       

Subscription fees

  $ 43,950     $ (557

)

  $ 43,393  

License fees

    11,827       (1,386

)

    10,441  

Maintenance and other

    62,057       113       62,170  

Professional services

    52,899       (846

)

    52,053  

Total revenue

    170,733       (2,676

)

    168,057  

Cost of revenue:

                       

Subscription fees

    16,562       14       16,576  

License fees

    1,238       -       1,238  

Maintenance and other

    15,639       -       15,639  

Professional services

    48,064       -       48,064  

Total cost of revenue

    81,503       14       81,517  

Gross profit

    89,230       (2,690

)

    86,540  

Operating expenses:

                       

Sales and marketing

    39,448       (284

)

    39,164  

Research and development

    27,519       (118

)

    27,401  

General and administrative

    18,728       -       18,728  

Total operating expenses

    85,695       (402

)

    85,293  

Operating income

    3,535       (2,288

)

    1,247  

Other (income) expense

                       

Interest income

    (1,267

)

    -       (1,267

)

Interest expense

    311       -       311  

Other income

    (673

)

    -       (673

)

Total other income, net

    (1,629

)

    -       (1,629

)

Income before income taxes

    5,164       (2,288

)

    2,876  

Income tax expense

    2,654       (79

)

    2,575  

Net income

  $ 2,510     $ (2,209

)

  $ 301  

Basic income (loss) per share

                       

Class A

  $ 0.13     $ (0.12

)

  $ 0.01  

Class B

  $ 0.11     $ (0.10

)

  $ 0.01  

Diluted income (loss) per share

                       

Class A

  $ 0.12     $ (0.11

)

  $ 0.01  

Class B

  $ 0.11     $ (0.10

)

  $ 0.01  

 

9

 

 

The following table summarizes the effects of adopting Topic 606 on the financial statement line items of the Company’s Condensed Consolidated Statement of Cash Flows for the six months ended July 31, 2018:

 

   

As reported

under Topic 606

   

Adjustments

   

Balances under

Prior GAAP

 
   

(in thousands)

 

Net income (loss)

  $ 2,510     $ (2,209

)

  $ 301  

Amortization of costs capitalized to obtain and fulfill contracts

    2,051       (1,636

)

    415  

Net change in valuation allowance

    4,553       648       5,201  

Changes in operating assets and liabilities:

                       

Costs capitalized to obtain and fulfill contracts

    (1,692

)

    1,366       (326

)

Other assets

    (894

)

    (325

)

    (1,219

)

Deferred revenue

    (21,683

)

    2,152       (19,531

)

Net cash provided by operating activities

    9,146       (4

)

    9,142  

Effect of exchange rates on cash and equivalents

    (2,110

)

    4       (2,106

)

 

Recent Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in its first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2016-02 on its consolidated financial statements and expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption of ASU 2016-02.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill to eliminate Step 2 from the goodwill impairment test. In addition, it eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if that fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. The amendments will be effective for the Company’s fiscal year beginning February 1, 2020. Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The Company does not believe adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.

 

 

2.

REVENUE

 

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

 

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

 

The Company determines revenue recognition through the following steps:

 -

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

 -

Identification of the performance obligations in the contract;

 -

Determination of the transaction price;

 -

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

 -

Recognition of revenue when, or as, we satisfy a performance obligation.

 

The Company records the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

 

10

 

 

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.

 

Subscription

 

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the cloud environment is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.

 

Software Licenses

 

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

 

Maintenance

 

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

 

Professional Services

 

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

 

11

 

 

Indirect Sales Channels

 

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

 

Disaggregated Revenue

 

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

 

The Company’s revenue by geography is as follows:

 

   

Three Months Ended

July 31,

   

Six Months Ended

July 31,

 
   

2018

   

2017

   

2018

   

2017

 
   

(in thousands)

   

(in thousands)

 

North America

  $ 39,288     $ 35,156     $ 79,313     $ 68,526  

EMEA

    26,906       22,227       51,993       43,108  

Asia Pacific

    12,866       12,967       25,425       25,133  

Latin America

    5,483       5,608       14,002       10,573  
Total revenue   $ 84,543     $ 75,958     $ 170,733     $ 147,340  

 

The Company’s revenue by industry is as follows:

 

   

Three Months Ended

July 31,

   

Six Months Ended

July 31,

 
   

2018

   

2017

   

2018

   

2017

 
   

(in thousands)

   

(in thousands)

 

Automotive

  $ 34,663     $ 28,864     $ 71,725     $ 55,276  

Consumer products and food and beverage

    13,527       11,394       27,317       22,815  

High technology and industrial products

    25,363       24,306       50,358       47,148  

Life sciences

    10,990       11,394       21,333       22,101  

Total revenue

  $ 84,543     $ 75,958     $ 170,733     $ 147,340  

 

 

Significant Judgments

 

More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

 

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

 

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.

 

12

 

 

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

 

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

 

Contract Balances  

 

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

 

The contract assets indicated below are presented as other current and non-current assets in the Condensed Consolidated Balance Sheets. These assets primarily relate to professional services and subscription and consist of the Company’s rights to consideration for goods or services transferred but not billed as of July 31, 2018. 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:

 

   

As of

 
   

July 31,

2018

   

Feb. 1,

2018

 
   

(In thousands)

 

Contract assets, short-term

  $ 1,372     $ 890  

Contract assets, long-term

    -       110  

Total contract assets

  $ 1,372     $ 1,000  

Deferred revenue, short-term

  $ 91,195     $ 115,454  

Deferred revenue, long-term

    1,054       1,644  

Total deferred revenue

  $ 92,249     $ 117,098  

 

During the three and six months ended July 31, 2018, the Company recognized $49.7 million and $99.9 million of revenue, respectively, that was included in the deferred revenue balance, as adjusted for Topic 606, at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

 

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $238.1 million as of July 31, 2018, of which the Company expects to recognize approximately $146.2 million of the revenue over the next 12 months and the remainder thereafter. In instances where the timing of revenue recognition differs from the timing of invoicing, QAD has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

 

13

 

 

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:

 

   

As of

 
   

July 31,

2018

   

January 31,

2018

 
   

(in thousands)

 

Deferred maintenance

  $ 61,650     $ 80,811  

Deferred subscription

    27,821       31,034  

Deferred professional services

    1,589       3,523  

Deferred license

    96       756  

Deferred other revenue

    39       569  

Deferred revenues, current

    91,195       116,693  

Deferred revenues, non-current (in Other liabilities)

    1,054       2,156  

Total deferred revenues

  $ 92,249     $ 118,849  

 

Practical Expedients and Exemptions

 

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

 

Application

 

 

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

 

 

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

 

 

The Company also used the practical expedient to calculate contract acquisition costs based on a portfolio of contracts with similar characteristics instead of a contract by contract analysis.

 

 

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

 

Modified Retrospective Transition Adjustments

 

 

For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.

 

Costs to Obtain and Fulfill a Contract

 

The Company’s incremental direct costs of obtaining a contract consist of sales commissions and sales agent fees which are deferred and amortized ratably over the term of economic benefit which the Company has determined to be five years. These deferred costs are classified as current or non-current based on the timing of when the Company expects to recognize the expense. Incremental costs related to renewals are expensed as incurred because the term of economic benefit is one year or less. The current and non-current portions of deferred commissions are included in other current assets and other long-term assets, respectively, in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2018 and January 31, 2018, the Company had $10.6 million and $10.1 million, respectively, of deferred commissions and sales agent fees. For the three and six months ended July 31, 2018, $0.9 million and $1.8 million, respectively, of amortization expense related to deferred commissions and sales agent fees 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 other current assets and long-term assets in the Company’s Condensed Consolidated Balance Sheets. At July 31, 2018 and January 31, 2018 the Company had deferred setup costs of $1.6 million and $1.5 million, respectively. These costs are amortized over the term of economic benefit which the Company has determined to be five years. During the three and six months ended July 31, 2018, $0.1 million and $0.3 million, respectively, of amortization expense related to deferred setup costs was recorded in cost of subscription in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

 

14

 
 

 

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 or six months ended July 31, 2018.

 

 

3.

COMPUTATION OF NET INCOME (LOSS) PER SHARE

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2018

   

2017

   

2018

   

2017

 
   

(in thousands, except per share data)

   

(in thousands, except per share data)

 

Net income (loss)

  $ 1,113     $ (1,161

)

  $ 2,510     $ (3,732

)

Less: Dividends declared

    (1,372

)

    (1,344

)

    (2,731

)

    (2,675

)

Undistributed net loss

  $ (259

)

  $ (2,505

)

  $ (221

)

  $ (6,407

)

                                 

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

                               

Dividends declared

  $ 1,176     $ 1,151     $ 2,340     $ 2,290  

Allocation of undistributed net loss

    (222

)

    (2,145

)

    (190

)

    (5,483

)

Net income (loss) attributable to Class A common stock

  $ 954     $ (994

)

  $ 2,150     $ (3,193

)

                                 

Weighted average shares of Class A common stock outstanding— basic

    16,266       15,914       16,173       15,863  

Weighted average potential shares of Class A common stock

    1,661             1,713        

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

    17,927       15,914       17,886       15,863  
                                 

Basic net income (loss) per Class A common share

  $ 0.06     $ (0.06

)

  $ 0.13     $ (0.20

)

Diluted net income (loss) per Class A common share

  $ 0.05     $ (0.06

)

  $ 0.12     $ (0.20

)

                                 

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

                               

Dividends declared

  $ 196     $ 193     $ 391     $ 385  

Allocation of undistributed net loss

    (37

)

    (360

)

    (31

)

    (924

)

                                 

Net income (loss) attributable to Class B common stock

  $ 159     $ (167

)

  $ 360     $ (539

)

                                 

Weighted average shares of Class B common stock outstanding— basic

    3,263       3,212       3,248       3,211  

Weighted average potential shares of Class B common stock

    171             177        

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

    3,434       3,212       3,425       3,211  
                                 

Basic net income (loss) per Class B common share

  $ 0.05     $ (0.05

)

  $ 0.11     $ (0.17

)

Diluted net income (loss) per Class B common share

  $ 0.05     $ (0.05

)

  $ 0.11     $ (0.17

)

 

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

 

15

 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2018

   

2017

   

2018

   

2017

 
   

(in thousands)

   

(in thousands)

 

Class A

    351       3,219       179       3,129  

Class B

          384             387  

  

 

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.

 

The following table sets forth the financial assets, measured at fair value, as of July 31, 2018 and January 31, 2018:

 

   

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

   

Significant Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 
           

(in thousands)

         

Money market mutual funds as of July 31, 2018 (a)

  $ 107,131                  

Money market mutual funds as of January 31, 2018 (a)

  $ 115,416                  

Asset related to the interest rate swap as of July 31, 2018 (b)

          $ 339          

Asset related to the interest rate swap as of January 31, 2018 (b)

          $ 187          

___________________________

(a) Money market mutual funds are recorded at fair value based upon quoted market prices.

(b) The asset 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.

 

Money market mutual funds are classified as part of “Cash and equivalents” in the accompanying Condensed Consolidated Balance Sheets. The amount of cash and equivalents deposited with commercial banks was unchanged at $32 million as of July 31, 2018 and January 31, 2018.

 

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

 

There have been no transfers between fair value measurement levels during the six months ended July 31, 2018.

 

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

 

The fair values of the derivative instrument at July 31, 2018 and January 31, 2018 were as follows (in thousands):

 

 

Asset

 
     

Fair Value

 
 

Balance Sheet

Location

 

July 31,

2018

   

January 31,

2018

 

Derivative instrument:

                 

Interest rate swap

Other assets, net

  $ 339     $ 187  
Total     $ 339     $ 187  

 

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) was $35,000 and $152,000 for the three and six months ended July 31, 2018 and $(16,000) and $(3,000) for the three and six months ended July 31, 2017.

  

16

 
 

 

 

5.

CAPITALIZED SOFTWARE COSTS

 

Capitalized software costs and accumulated amortization at July 31, 2018 and January 31, 2018 were as follows:

 

   

July 31,

2018

   

January 31,

2018

 
   

(in thousands)

 

Capitalized software costs:

               

Capitalized software development costs

  $ 1,787     $ 1,516  

Acquired software technology

    135       -  
      1,922       1,516  

Less accumulated amortization

    (517

)

    (526

)

Capitalized software costs, net

  $ 1,405     $ 990  

 

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

 

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during the first six months of fiscal 2019, approximately $0.3 million of costs and accumulated amortization were removed from the balance sheet.

 

Amortization of capitalized software costs was $0.1 million and $0.3 million for the three and six months ended July 31, 2018 and $0.2 million and $0.4 million for the three and six months ended July 31 2017. Amortization of capitalized software costs is included in “Cost of license” in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of July 31, 2018:

 

Fiscal Years

 

(in thousands)

 

2019 remaining

  $ 312  

2020

    580  

2021

    395  

2022

    78  

Thereafter

    40  
    $ 1,405  

 

 

6.

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill for the six months ended July 31, 2018 were as follows:

 

   

Gross Carrying

Amount

   

Accumulated

Impairment

   

Goodwill, Net

 
   

(in thousands)

 

Balance at January 31, 2018

  $ 26,631     $ (15,608

)

  $ 11,023  

Additions

    243       -       243  

Impact of foreign currency translation

    (171

)

    -       (171

)

Balance at July 31, 2018

  $ 26,703     $ (15,608

)

  $ 11,095  

 

17

 

 

Additions to goodwill relate to an immaterial acquisition that occurred during the second quarter of fiscal 2019 due to the excess purchase price over the estimated fair value of acquired net assets. Pro forma financial information for the acquisition has not been presented, as the effects were not material to the Company’s historical consolidated financial statements.

 

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2018. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2017. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2018. The Company monitors the indicators for goodwill impairment testing between annual tests. No adverse events occurred during the six months ended July 31, 2018 that would cause the Company to test goodwill for impairment.

 

Intangible Assets

 

   

July 31,

2018

 
    (in thousands)  

Amortizable intangible assets

       

Customer relationships

  $ 190  

Less: accumulated amortization