10-Q

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, 2016

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” and “smaller reporting 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 ☐

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, 2016, there were 15,609,867 shares of the Registrant’s Class A common stock outstanding and 3,205,362 shares of the Registrant’s Class B common stock outstanding.

QAD INC.

INDEX

PART I - FINANCIAL INFORMATION			Page
	ITEM 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of April 30, 2016 and January 31, 2016	1
		Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended April 30, 2016 and 2015	2
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2016 and 2015	3
		Notes to Condensed Consolidated Financial Statements	4
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	31
	ITEM 4.	Controls and Procedures	33
PART II - OTHER INFORMATION
	ITEM 1.	Legal Proceedings	33
	ITEM 1A.	Risk Factors	33
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
	ITEM 3.	Defaults Upon Senior Securities	34
	ITEM 4.	Mine Safety Disclosure	34
	ITEM 5.	Other Information	34
	ITEM 6	Exhibits	34
	SIGNATURES		35

PART I

ITEM 1 – FINANCIAL STATEMENTS

QAD INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	April 30, 2016			January 31, 2016
Assets
Current assets:
Cash and equivalents	$	139,878		$	137,731
Accounts receivable, net of allowances of $2,518 and $2,642 at April 30, 2016 and January 31, 2016, respectively		44,829			65,512
Deferred tax assets, net		8,527			8,203
Other current assets		18,960			16,024
Total current assets		212,194			227,470
Property and equipment, net		32,269			32,080
Capitalized software costs, net		1,321			1,553
Goodwill		10,771			10,645
Deferred tax assets, net		12,261			11,919
Other assets, net		2,560			2,679
Total assets	$	271,376		$	286,346
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	428		$	422
Accounts payable		7,867			10,811
Deferred revenue		92,640			97,911
Other current liabilities		26,624			31,535
Total current liabilities		127,559			140,679
Long-term debt		14,082			14,191
Other liabilities		4,387			4,465
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding
Common stock:
Class A, $0.001 par value. Authorized 71,000,000 shares; issued 16,603,799 shares and 16,603,729 shares at April 30, 2016 and January 31, 2016, respectively		16			16
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares and 3,537,366 shares at April 30, 2016 and January 31, 2016, respectively		4			4
Additional paid-in capital		196,596			195,420
Treasury stock, at cost (1,331,008 shares and 1,365,885 shares at April 30, 2016 and January 31, 2016,  respectively)		(18,104	)		(18,717	)
Accumulated deficit		(45,041	)		(40,983	)
Accumulated other comprehensive loss		(8,123	)		(8,729	)
Total stockholders’ equity		125,348			127,011
Total liabilities and stockholders’ equity	$	271,376		$	286,346

See Accompanying Notes to Condensed Consolidated Financial Statements.

1

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share data)

(unaudited)

	Three Months Ended April 30,
	2016			2015
Revenue:
License fees	$	3,947		$	6,851
Subscription fees		11,492			9,419
Maintenance and other		32,836			33,383
Professional services		17,122			19,612
Total revenue		65,397			69,265
Costs of revenue:
License fees		725			929
Subscription fees		6,197			5,064
Maintenance and other		7,763			7,777
Professional services		17,425			18,328
Total cost of revenue		32,110			32,098
Gross profit		33,287			37,167
Operating expenses:
Sales and marketing		16,922			17,145
Research and development		11,134			10,657
General and administrative		8,005			8,441
Amortization of intangibles from  acquisitions		165			164
Total operating expenses		36,226			36,407
Operating (loss) income		(2,939	)		760
Other expense (income):
Interest income		(172	)		(57	)
Interest expense		174			183
Other expense (income), net		870			(119	)
Total other expense (income), net		872			7
(Loss) income before income taxes		(3,811	)		753
Income tax (benefit) expense		(1,069	)		204
Net (loss) income	$	(2,742	)	$	549
Basic net (loss) income per share
Class A	$	(0.15	)	$	0.03
Class B	$	(0.13	)	$	0.03
Diluted net (loss) income per share
Class A	$	(0.15	)	$	0.03
Class B	$	(0.13	)	$	0.02
Net (loss) income	$	(2,742	)	$	549
Other comprehensive income, net of tax:
Foreign currency translation adjustments		606			73
Total comprehensive (loss) income	$	(2,136	)	$	622

See Accompanying Notes to Condensed Consolidated Financial Statements.

2

QAD INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended April 30,
	2016			2015
Cash flows from operating activities:
Net (loss) income	$	(2,742	)	$	549
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		1,476			1,454
Provision for doubtful accounts and sales adjustments		49			311
Stock compensation expense		1,554			1,306
Change in fair value of derivative instrument		31			(245	)
Excess tax benefits from share-based payment arrangements		(222	)		(151	)
Changes in assets and liabilities:
Accounts receivable		21,430			26,823
Other assets		(2,960	)		(1,122	)
Accounts payable		(3,151	)		(4,456	)
Deferred revenue		(7,480	)		(11,157	)
Other liabilities		(6,850	)		(8,976	)
Net cash provided by operating activities		1,135			4,336
Cash flows from investing activities:
Purchase of property and equipment		(1,074	)		(1,140	)
Capitalized software costs		(12	)		(28	)
Net cash used in investing activities		(1,086	)		(1,168	)
Cash flows from financing activities:
Repayments of debt		(106	)		(102	)
Tax payments, net of proceeds, related to stock awards		(369	)		(391	)
Payment of contingent liability associated with acquisitions		—			(750	)
Excess tax benefits from share-based payment arrangements		222			151
Proceeds from issuance of common stock, net of issuance costs		—			8,365
Net cash (used in) provided by financing activities		(253	)		7,273
Effect of exchange rates on cash and equivalents		2,351			(103	)
Net increase in cash and equivalents		2,147			10,338
Cash and equivalents at beginning of period		137,731			120,526
Cash and equivalents at end of period	$	139,878		$	130,864
Supplemental disclosure of non-cash activities:
Obligations associated with dividend declaration	$	1,316		$	1,299

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 (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 accounting principles generally accepted in the United States of America 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, 2016. The Condensed Consolidated Financial Statements include the results of the Company and its wholly owned subsidiaries. The results of operations for the three months ended April 30, 2016 are not necessarily indicative of the results to be expected for the year ending January 31, 2017.

Recent Accounting Pronouncements

In May 2014, the FASB issued accounting standard update, or ASU, 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. GAAP with a five-step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2019. Early adoption would be permitted for the Company beginning in fiscal year 2018. The standard permits the use of either the retrospective or cumulative transition method. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

4

In April 2015, the FASB issued ASU 2015-03 - Interest - Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and is to be implemented retrospectively. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017.  Adoption of this ASU did not have a material impact on the Company’s financial statements.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, given that the authoritative guidance within ASU 2015-03 for debt issuance costs does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017.  Adoption of this ASU did not have a material impact on the Company’s financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes which requires deferred tax liabilities and assets be presented as noncurrent on the classified statement of financial position. ASU 2015-17 will be effective for the Company’s fiscal year beginning February 1, 2017. The standard permits the use of either prospective or retrospective application to all periods presented. The Company does not expect this adoption to have a significant impact on its consolidated financial statements.

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 currently 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 its adoption of ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company on January 1, 2017 and the Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

5

2. COMPUTATION OF NET (LOSS) INCOME PER SHARE

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

	Three Months Ended April 30,
	2016			2015
	(in thousands except per share data)
Net (loss) income	$	(2,742	)	$	549
Less: Dividends declared		(1,316	)		(1,299	)
Undistributed net loss	$	(4,058	)	$	(750	)
Net (loss) income per share – Class A Common Stock
Dividends declared	$	1,124		$	1,107
Allocation of undistributed net loss		(3,465	)		(639	)
Net (loss) income attributable to Class A common stock	$	(2,341	)	$	468
Weighted average shares of Class A common stock outstanding—basic		15,594			15,262
Weighted average potential shares of Class A common stock		—			786
Weighted average shares of Class A common stock and potential common shares outstanding—diluted		15,594			16,048
Basic net (loss) income per Class A common share	$	(0.15	)	$	0.03
Diluted net (loss) income per Class A common share	$	(0.15	)	$	0.03
Net (loss) income per share – Class B Common Stock
Dividends declared	$	192		$	192
Allocation of undistributed net loss		(593	)		(111	)
Net (loss) income attributable to Class B common stock	$	(401	)	$	81
Weighted average shares of Class B common stock outstanding—basic		3,204			3,196
Weighted average potential shares of Class B common stock		—			83
Weighted average shares of Class B common stock and potential common shares outstanding—diluted		3,204			3,279
Basic net (loss) income per Class B common share	$	(0.13	)	$	0.03
Diluted net (loss) income per Class B common share	$	(0.13	)	$	0.02

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.

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,
	2016		2015
	(in thousands)
Class A		2,807		326
Class B		349		60

3. FAIR VALUE MEASUREMENTS

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

6

The following table sets forth the financial assets and liabilities, measured at fair value, as of April 30, 2016 and January 31, 2016:

	Fair value measurement at reporting date using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable  Inputs (Level 3)
			(in thousands)
Money market mutual funds as of April 30, 2016 (a)	$	112,792
Money market mutual funds as of January  31, 2016 (a)	$	113,984
Liability related to the interest rate swap as of April 30, 2016 (b)			$	(706	)
Liability related to the  interest rate swap as of January 31, 2016 (b)			$	(675	)

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

(b) The 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.

Money market mutual funds are classified as part of “Cash and equivalents” in the accompanying Condensed Consolidated Balance Sheets. In addition, the amount of cash and equivalents, including cash deposited with commercial banks, was $27 million and $24 million as of April 30, 2016 and January 31, 2016, respectively.

The Company’s line of credit and notes payable both bear a variable market interest rate commensurate with the Company’s credit standing. Therefore, the carrying amounts outstanding under the line of credit and note payable reasonably approximate fair value based on Level 2 inputs.

There have been no transfers between fair value measurements levels during the three months ended April 30, 2016.

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

The fair values of the derivative instrument at April 30, 2016 and January 31, 2016 were as follows (in thousands):

	Liability
		Fair Value
	Balance Sheet Location	April 30, 2016			January 31, 2016
Derivative instrument:
Interest rate swap	Other liabilities	$	(706	)	$	(675	)
Total		$	(706	)	$	(675	)

7

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income for the three months ended April 30, 2016 and April 30, 2015 was $(31,000) and $245,000, respectively.

4. CAPITALIZED SOFTWARE COSTS

Capitalized software costs and accumulated amortization at April 30, 2016 and January 31, 2016 were as follows:

	April 30, 2016			January 31, 2016
	(in thousands)
Capitalized software costs:
Acquired software technology	$	3,458		$	3,458
Capitalized software development costs (1)		788			1,029
		4,246			4,487
Less accumulated amortization		(2,925	)		(2,934	)
Capitalized software costs, net	$	1,321		$	1,553

(1) Capitalized software development costs include the impact of foreign currency translation.

Acquired software technology costs relate to technology purchased as a result of the Company’s fiscal 2013 acquisitions of DynaSys and CEBOS. In addition to the acquired software technology, the Company has capitalized costs related to translations and localizations of QAD Enterprise Applications.

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during the first three months of fiscal 2017, approximately $0.3 million of costs and accumulated amortization were removed from the balance sheet.

Amortization of capitalized software costs was $0.2 million and $0.3 million for the three months ended April 30, 2016 and 2015, respectively. Amortization of capitalized software costs is included in “Cost of license fees” in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of April 30, 2016:

Fiscal Years	(in thousands)
2017 remaining	$	710
2018		566
2019		42
2020		3
	$	1,321

8

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the three months ended April 30, 2016 were as follows:

	Gross Carrying Amount		Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2016	$	26,253	$	(15,608	)	$	10,645
Impact of foreign currency translation		126		—			126
Balance at April 30, 2016	$	26,379	$	(15,608	)	$	10,771

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2016. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2015. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2016. The Company monitors the indicators for goodwill impairment testing between annual tests. No adverse events occurred during the three months ended April 30, 2016, that would cause the Company to test goodwill for impairment.

Intangible Assets

	April 30, 2016			January 31, 2016
	(in thousands)
Amortizable intangible assets
Customer relationships (1)	$	2,796		$	2,749
Trade name		515			515
		3,311			3,264
Less: accumulated amortization		(2,392	)		(2,191	)
Net amortizable intangible assets	$	919		$	1,073

(1) Customer relationships include the impact of foreign currency translation.

The Company’s intangible assets are related to the DynaSys and CEBOS acquisitions completed in fiscal 2013. Intangible assets are included in “Other assets, net” in the accompanying Condensed Consolidated Balance Sheets. As of April 30, 2016, all of the Company’s intangible assets were determined to have finite useful lives, and therefore were subject to amortization.

Amortization of intangible assets was $0.2 million for each of the first quarters of fiscal 2017 and 2016. The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of April 30, 2016:

Fiscal Years	(in thousands)
2017 remaining	$	499
2018		420
	$	919

9

6. DEBT

	April 30, 2016			January 31, 2016
	(in thousands)
Note payable	$	14,574		$	14,680
Less current maturities		(428	)		(422	)
Less loan origination costs, net		(64	)		(67	)
Long-term debt	$	14,082		$	14,191

Note Payable

Effective May 30, 2012, QAD Ortega Hill, LLC entered into a variable rate credit agreement (the “2012 Mortgage”) with Rabobank, N.A., to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 0.44% at April 30, 2016. The 2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Rabobank, N.A. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million. The unpaid balance as of April 30, 2016 was $14.6 million.

Credit Facility

The Company has an unsecured credit agreement with Rabobank, N.A. (the “Facility”). The Facility provides a commitment through July 15, 2017 for a $20 million line of credit for working capital or other business needs. The Company pays a commitment fee of 0.25% per annum of the daily average of the unused portion of the $20 million Facility. Borrowings under the Facility bore interest at a rate equal to one month LIBOR plus 0.75%. At April 30, 2016, the effective borrowing rate would have been 1.19%.

The Facility provides that the Company maintain certain financial and operating ratios which include, among other provisions, minimum liquidity on a consolidated basis of $25 million in cash and equivalents at all times, a current ratio (calculated using current liabilities excluding deferred revenue) of not less than 1.3 to 1.0 determined at the end of each fiscal quarter, a leverage ratio of not more than 1.5 to 1.0 determined at the end of each fiscal quarter, and a debt service coverage ratio of not less than 1.5 to 1.0 determined at the end of each fiscal year. The Facility also contains customary covenants that could restrict the Company’s ability to incur additional indebtedness.

As of April 30, 2016, there were no borrowings under the Facility and the Company was in compliance with all financial covenants.

7. 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, 2016	$	(8,729	)
Other comprehensive income before reclassifications		606
Amounts reclassified from accumulated other comprehensive loss		—
Net current period other comprehensive income		606
Balance as of April 30, 2016	$	(8,123	)

10

During the first quarter of fiscal 2017 there were no reclassifications from accumulated other comprehensive loss.

8. INCOME TAXES

The Company’s income tax provision for the first quarter of fiscal 2017 and 2016 reflects estimates of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events which are recorded in the period they occur.

The Company recorded income tax (benefit) expense of $(1.1) million and $0.2 million in the first quarter of fiscal 2017 and fiscal 2016, respectively. The effective tax rate was 28% during the first quarter of fiscal 2017 compared to 27% for the same period in the prior year. The difference in rates was primarily due to jurisdictional mix and lower forecasted book income in fiscal 2017.  The estimated annual effective tax rate increased to 30% from 28% in the previous fiscal year 2016. The difference in rates is primarily due to jurisdictional mix.

The gross amount of unrecognized tax benefits was $1.5 million at April 30, 2016, including interest and penalties.  As a result of adoption of ASU 2013-11, the Company reduced its unrecognized tax benefits by $1.0 million with an accompanying reduction of deferred tax assets by $1.0 million.  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.  In the next twelve months, due to potential settlements with domestic tax authorities related to tax credits and lapse in statute of limitations, an estimated $0.1 million of gross unrecognized tax benefits may be recognized.

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 April 30, 2016, the Company has accrued approximately $0.2 million of interest and penalty expense relating to unrecognized tax benefits.

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, 1998, 1999, 2010, 2012, 2013 and 2014

· Thailand for fiscal year ended 2014

During the first three months of fiscal year 2017, QAD has settled the following audits with immaterial or no adjustments made as a result of the settlements:

· Italy for the fiscal years ended 2011, 2012, 2013 and 2014

· Wisconsin for the fiscal years ended 2012, 2013 and 2014

11

9. STOCKHOLDERS’ EQUITY

Issuance of Common Stock

On January 22, 2015, the Company closed an offering of 2,000,000 shares of Class A common stock. The net proceeds to the Company from the sale of the stock were $37.0 million after deducting underwriting discounts and commissions and offering expenses. On February 18, 2015 the offering underwriters exercised in full an option to purchase additional shares. As a result, 450,000 shares of Class A common stock were issued generating approximately $8.4 million in additional net proceeds.

Dividends

The following table sets forth the dividends that were declared by the Company during the first quarter of fiscal 2017:

Declaration Date	Record Date	Payable	Dividend Class A		Dividend Class B		Amount
4/12/2016	4/26/2016	5/3/2016	$	0.072	$	0.06	$	1,316,000

10. STOCK-BASED COMPENSATION

The Company’s equity awards consist of SARs and RSUs. For a description of the Company’s stock-based compensation plans, see Note 5 “Stock-Based Compensation” in Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 31, 2016.

Stock-Based Compensation

The following table sets forth reported stock-based compensation expense for the three months ended April 30, 2016 and 2015:

	Three Months Ended April 30,
	2016		2015
	(in thousands)
Cost of subscription	$	19	$	12
Cost of maintenance and other revenue		61		46
Cost of professional services		155		119
Sales and marketing		261		261
Research and development		227		148
General and administrative		831		720
Total stock-based compensation expense	$	1,554	$	1,306

SAR Information

The following table summarizes the activity for outstanding SARs for the three months ended April 30, 2016:

	SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2016		2,596		$	14.74
Granted		—			—
Exercised		(20	)		10.44
Expired		—			—
Forfeited		(6	)		12.16
Outstanding at April 30, 2016		2,570		$	14.78		4.6	$	14,640
Vested and expected to vest at April 30, 2016 (1)		2,566		$	14.78		4.6	$	14,616
Vested and exercisable at April 30, 2016		1,503		$	11.52		3.6	$	11,773

(1) The expected-to-vest SARs are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding SARs.

12

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, 2016, 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, 2016. The total intrinsic value of SARs exercised in the three months ended April 30, 2016 was $0.2 million.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.  During the quarter ended April 30, 2016, the Company withheld 3,400 shares for payment of these taxes at a value of $69,000.

At April 30, 2016, there was approximately $5.0 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 2.4 years.

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, 2016:

	RSUs			Weighted Average Grant Date Fair Value
	(in thousands)
Restricted stock at January 31, 2016		617		$	20.91
Granted		—			—
Released (1)		(45	)		20.41
Forfeited		(16	)		21.15
Restricted stock at April 30, 2016		556		$	20.94

(1) The number of RSUs released includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements.

The Company withholds, at the employee’s election, 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, 2016, the Company withheld 16,000 shares for payment of these taxes at a value of $0.3 million.

Total unrecognized compensation cost related to RSUs was approximately $8.2 million as of April 30, 2016. This cost is expected to be recognized over a weighted-average period of approximately 2.6 years.

13

11. DEFERRED REVENUES

Deferred revenues consisted of the following:

	April 30, 2016		January 31, 2016
	(in thousands)
Deferred maintenance revenue	$	73,594	$	79,533
Deferred subscription revenue		15,397		14,194
Deferred services revenue		1,984		2,332
Deferred license revenue		1,248		1,549
Deferred other revenue		417		303
Deferred revenues, current		92,640		97,911
Deferred revenues, non-current (in Other liabilities)		1,486		1,690
Total deferred revenues	$	94,126	$	99,601

Deferred maintenance and subscription revenues represent customer payments made in advance for support and subscription contracts. Support and subscription are billed in advance with corresponding revenues being recognized ratably over the support and subscription periods. Support is typically billed annually while subscription is typically billed quarterly. Deferred services revenues represent both prepayments for our professional services where revenues for these services are generally recognized as the Company completes the performance obligations for the prepaid services; and services already provided but deferred due to software revenue recognition rules. Deferred license revenues result from undelivered products or specified enhancements, customer specific acceptance provisions and software license transactions that cannot be segmented from undelivered consulting or other services.

12. 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

13. BUSINESS SEGMENT INFORMATION

The Company markets its products and services worldwide, primarily to companies in the manufacturing industry, including automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries. The Company sells and licenses its products through its direct sales force in four geographic regions: North America; Europe, the Middle East and Africa (“EMEA”); Asia Pacific; and Latin America and through distributors where third parties can extend sales reach more effectively or efficiently. The North America region includes the United States and Canada. The EMEA region includes Europe, the Middle East and Africa. The Asia Pacific region includes Asia and Australia. The Latin America region includes South America, Central America and Mexico. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, reviews the consolidated results within one operating segment.

License and subscription revenues are assigned to the geographic regions based on both the proportion of users in each region and sales effort. Maintenance revenue is allocated to the region where the end user customer is located. Services revenue is assigned based on the region where the services are performed.

	Three Months Ended April 30,
	2016		2015
Revenue:	(in thousands)
North America (1)	$	29,519	$	30,222
EMEA		19,792		21,802
Asia Pacific		11,680		11,725
Latin America		4,406		5,516
	$	65,397	$	69,265

(1) Sales into Canada accounted for 2% of North America total revenue in each of the three months ended April 30, 2016 and 2015.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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, 2016. 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”).

15

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, 2016, 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 recognition; b) accounts receivable allowances for bad debt and sales returns; c) capitalized software development costs; d) impairment assessments on goodwill and intangible assets; e) valuation of deferred tax assets and tax contingency reserves; and f) stock-based compensation are further discussed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2016. 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, 2016.

BUSINESS OVERVIEW

QAD Inc. (“QAD,” the “Company,” “we” or “us”) is a leading global provider of vertically-oriented, mission-critical enterprise software solutions for global manufacturing companies across the automotive, life sciences, consumer products, food and beverage, high technology and industrial products industries. Our mission is to deliver best-in-class software that allows our customers to operate more effectively on a global basis. QAD Enterprise Applications enables measurement and control of key business processes and supports operational requirements. We deliver our software solutions to our customers in a format that best meets their current and future needs - either in the cloud, on premise, or blended. Increasingly, our customers are selecting a cloud-based deployment as they expand their businesses globally and as they recognize the benefits of full featured ERP cloud-based software.

At the core of our solutions is our enterprise resource planning (“ERP”) suite called QAD Enterprise Applications or MFG/PRO. Our ERP suite is also deployed in the cloud as QAD Cloud ERP. QAD Enterprise Applications supports the core business processes of our global manufacturing customers, including key functions in the following areas: financials, customer management, manufacturing, demand and supply chain planning, supply chain execution, transportation management, service and support, enterprise asset management, analytics, enterprise quality management, interoperability, process and performance, and internationalization. We also focus on the foundation and technology of our applications, such as user interface and usability.

We have four principal sources of revenue:

• License purchases of Enterprise Applications;

• Subscription of Enterprise Applications through our cloud offering in a Software as a Service (“SaaS”) model as well as other hosted applications;

16

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

• 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 quarter of fiscal 2017, approximately 45% of our total revenue was generated in North America, 30% in EMEA, 18% in Asia Pacific and 7% in Latin America. The majority of our revenue is generated from global customers who have operations in multiple countries throughout the world. License and subscription revenues are assigned to the geographic regions based on both the proportion of users in each region and sales effort. Maintenance revenue is allocated to the region where the end user is located. Services revenue is assigned based on the region where the services are performed. 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, 2016, we employed approximately 1,690 full time employees worldwide, of which 620 employees were based in North America, 520 employees in EMEA, 470 employees in Asia Pacific and 80 employees in Latin America.

Our customer base and our target markets are primarily global manufacturing companies; therefore, our results are heavily influenced by the state of the manufacturing economy on a global basis. As a result, our management team monitors several economic indicators, with particular attention to the Global and Country Purchasing Managers’ Indexes (“PMI”). The PMI is a survey conducted on a monthly basis by polling businesses that represent the makeup of respective sectors. Since most of our customers are manufacturers, our revenue has historically correlated with fluctuations in the manufacturing PMI. Global macro economic trends and manufacturing spending are important barometers for our business, and the health of the U.S., Western European and Asian economies have a meaningful impact on our financial results.

Our business model is evolving as evidenced by subscription fees exceeding license fees in fiscal 2016. We continue to assess current business offerings and introduce more flexible license and service offerings in the cloud which have ratable revenue streams. The accounting impact of these cloud offerings and other business decisions are expected to result in an increase in the percentage of our recurring revenue, making for more predictable revenue over time, while correspondingly reducing our upfront perpetual license revenue stream. Recurring revenue, which we define as subscription revenue and maintenance revenue, made up approximately 68% of total revenue in the first quarter of fiscal 2017 compared with 62% in the same period last year. Over time, we expect our business model transition to expand our customer base by eliminating higher up-front licensing costs and providing more flexibility in how customers gain access to and pay for our products. We expect this business model transition will increase our long-term revenue growth rate by increasing total subscriptions and customer value over time.

OVERVIEW OF THE FISCAL 2017 FIRST QUARTER

A significant portion of our business is conducted in currencies other than the U.S. dollar, particularly the euro.  We operate in several geographical regions as described in Note 13 “Business Segment Information” within the Notes to Condensed Consolidated Financial Statements. In the first quarter of fiscal 2017, approximately 55% of our total revenue was generated outside of North America and we expect to continue generating a significant portion of our revenue outside the U.S. Weakening of the value of the U.S. dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues but also increasing our expenses denominated in currencies other than the U.S. dollar. Similarly, strengthening of the U.S. dollar compared to foreign currency exchange rates generally has the effect of reducing our revenues but also reducing our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the changes in results from one period to another period using constant currency. In order to calculate our constant currency results, we apply the current foreign currency exchange rates to the prior period results. In the table below, we present the change based on actual results in reported currency and in constant currency.

17

	Three Months Ended April 30, 2016			Three Months Ended April 30, 2015		Change in Constant Currency			Change due to Currency Fluctuations			Total Change as Reported
(in thousands)
Total revenue	$	65,397		$	69,265	$	(2,486	)	$	(1,382	)	$	(3,868	)
Cost of revenue		32,110			32,098		(486	)		474			(12	)
Gross profit		33,287			37,167		(2,972	)		(908	)		(3,880	)
Operating expenses		36,226			36,407		(242	)		423			181
(Loss) income from operations	$	(2,939	)	$	760	$	(3,214	)	$	(485	)	$	(3,699	)

Total revenue for the first quarter of fiscal 2017 decreased by 6%, to $65.4 million, when compared to the same period last year. Currency had an adverse impact on total revenue of $1.4 million. On a constant currency basis, total revenue decreased by $2.5 million, or 4%. The decline in revenue was driven by lower license and professional services revenue partially offset by growth in subscription revenue from our cloud offering.

While the impact of currency changes negatively affected our revenue, it also reduced our expenses. Total cost of revenue was relatively flat when compared to the same period last year, but on a constant currency basis, total cost of revenue increased 2% to $32.1 million. Similarly, operating expenses were relatively flat compared to the same period last year, but on a constant currency basis, operating expenses increased 1% to $36.2 million. The net unfavorable impact of currency fluctuations on our income from operations was $0.5 million.

License Revenue. License revenue is derived from software license fees that customers pay for our core product, QAD Enterprise Applications, and any add-on modules they purchase. In the first quarter of fiscal 2017, license revenue decreased by 42% to $3.9 million. On a constant currency basis license revenue decreased by $2.7 million, or 41%. During the first quarter of fiscal 2017 the number and size of license orders were lower when compared to the same period last year. Our revenue mix has continued to shift significantly from license to subscription revenue. Due to our focus on selling our products in the cloud, we expect cloud revenue to increase and license revenue to continue to decline.

At times, our license revenue is impacted by deferrals. When we enter into a multi-element transaction with fixed fee services or when we sell licenses for additional users under a pricing model that does not satisfy vendor specific objective evidence (“VSOE”) requirements, we may be required to recognize license revenue ratably over the longer of the maintenance period or expected services implementation timeframe rather than recognizing license revenue at the time of sale. Additionally, if at the time of the license sale we have not finalized the services agreement, we will defer the entire arrangement until the services agreement is signed.

We have more success closing license deals with existing customers and their affiliates than we do with companies that have no prior experience with QAD. Accordingly, we put greater focus pursuing opportunities where there is an existing QAD connection. As a result, a majority of our license revenue is generated from existing customers and their affiliates. We believe global economic volatility will continue to shape customers’ buying decisions, making it difficult to forecast sales cycles for our products and the timing of software license sales. In addition, we expect license revenue to decrease as our cloud business continues to grow and customers elect to use QAD products in the cloud in favor of purchasing licenses.

Subscription Revenue. Subscription revenue consists of monthly fees from customers to access our products via the cloud and other subscription offerings. Our cloud offering typically includes access to QAD software, hosting, support and product updates, if and when available. Included in subscription revenue are the fees for transition services such as set up, configuration, database conversion and migration. Sales of our QAD Cloud ERP represented over 85% of our total subscription revenue in the first quarter of fiscal 2017 and in the fiscal year 2016. Our cloud revenue represented approximately 14% and 12% of our total revenue in the first quarters of 2017 and 2016, respectively, and our cloud customer retention rate is in excess of 90%. We track our retention rate by calculating the annualized revenue of customer sites with contracts expected to be renewed during the period compared to the annualized revenue associated with the customer sites that have canceled during the period. The percentage of revenue not canceled is our retention rate.

18

In the first quarter of fiscal 2017, subscription revenue increased by 22% to $11.5 million compared to the first quarter of fiscal 2016. On a constant currency basis, subscription revenue increased by $2.4 million, or 26%, in the first quarter of fiscal 2017 when compared to the same period last year. Excluding a one-time recognition of $0.9 million in the first quarter of fiscal 2016, subscription revenue increased 35%. Growing our cloud solution and offering our products as SaaS continues to be a key strategic and growth initiative for us.

Our cloud customers include a mix of existing customers who have converted from our on-premise model and new customer implementations of our cloud solution. New customers typically generate less revenue up front as compared to customers who are converting to cloud. New customers tend to increase the number of users as their sites go live over time. Existing customers are already using our product at the time of conversion to the cloud; therefore, all sites and users generally go live from the conversion date. Subscription revenue is billed on a quarterly or annual basis and recognized ratably over the term of the agreement, typically 12 to 60 months. We expect cloud revenue in fiscal 2017 will continue to grow at a rate of approximately 30%.

Maintenance Revenue. We offer support services 24 hours a day, seven days a week in addition to providing software upgrades, which include additional or improved functionality, when and if available. In the first quarter of fiscal 2017, maintenance revenue decreased by 2% to $32.7 million which included an adverse currency impact of $0.5 million. On a constant currency basis maintenance revenue decreased by $0.1 million.

Maintenance revenue fluctuations are influenced by: (1) new license revenue growth; (2) annual renewal of support contracts; (3) fluctuations in currency rates; (4) adjustments to revenue as a result of revenue recognition rules; and (5) customer conversions to QAD Cloud ERP. The vast majority of our customers renew their annual support contracts. Over the last three years, our annual retention rate of customers subscribing to maintenance has been greater than 90%. Maintenance revenue is generally billed on an annual basis and recognized ratably over the term of the agreement, typically twelve months. As we convert more of our existing customers to the cloud we may experience a corresponding negative effect on maintenance revenue. When customers convert to QAD Cloud ERP they no longer pay separately for maintenance as those support services are included as a component of the subscription offering.

Professional Services Revenue. Our professional services business includes technical and application consulting, training, implementations, migrations and upgrades related to our solutions. In the first quarter of fiscal 2017, our professional services revenue decreased by 13% to $17.1 million. Currency had an adverse impact on first quarter professional services revenue of $0.4 million. On a constant currency basis professional services revenue decreased by $2.1 million, or 11%. Professional services projects are discretionary in nature and are affected by general economic conditions in the manufacturing industry and our customers' businesses. In the second half of fiscal 2016 and in the first quarter of fiscal 2017, several large engagements were delayed, resulting in lower utilization. We will continue to monitor the global economic environment and we believe we will have better results in the second half of the year. If necessary, we will adjust the level of our services resources and related expenses. We manage our partners and subcontractors to supplement our internal resources, which provides us with the flexibility to contend with these fluctuations in demand and helps us mitigate low utilization rates in slow times.

Our professional services organization provides our customers with expertise and assistance in planning and implementing our solutions whether in the cloud or on-premise. Consultants typically assist customers with the initial installation of a system, the conversion and transfer of the customer’s historical data into our software, and ongoing training, education, and system upgrades. We believe our professional services help customers implement our software more efficiently, support a customer’s success with our solution, strengthen our customer relationships, and add to our industry-specific knowledge base for use in future implementations and product innovations. Our professional services margins tend to range from about breakeven to 10%. We believe we offer competitive rates and view our professional services organization as a department supporting the implementation and deployment of our products and improving the overall customer experience. Professional services margins lower our overall operating margin as professional services margins are inherently lower than margins for our license, maintenance and subscription revenues. Professional services revenue may be impacted by currency fluctuations; however, since we generally use local resources our costs are also impacted by similar currency fluctuations, providing a natural hedge. As a result, our margins have not been significantly impacted by currency fluctuations.

19

Although our professional services are optional, many of our customers use these services for some of their planning, implementation, or related needs. Professional services are typically rendered under time and materials-based contracts with services typically billed on an hourly basis. Professional services are sometimes rendered under fixed-fee based contracts with payments due on specific dates or milestones.

Professional services revenue growth is contingent upon license and subscription revenue growth and customer upgrade cycles, which are influenced by the strength of general economic and business conditions and the competitive position of our software products. Our professional services business has competitive exposure to offshore providers which could create the risk of pricing pressure, fewer customer orders and reduced gross margins.

Cash Flow and Financial Condition. In the first quarter of fiscal 2017, we generated cash flow from operating activities of $1.1 million. Our cash and equivalents at April 30, 2016 totaled $139.9 million, with the only debt on our balance sheet of $14.6 million related to the mortgage of our headquarters. Our primary uses of cash have been funding investment in research and development and funding operations to drive revenue and earnings growth. In addition, we use cash for acquisitions, dividend payments, share repurchase programs and other equity-related transactions.

In fiscal 2017, we anticipate that our priorities for use of cash will be developing sales and services resources and continued investment in research and development to drive and support growth and long-term strategies. We will continue to evaluate acquisition opportunities that are complementary to our product footprint, solutions delivery and technology direction. We will also continue to assess share repurchases and dividend payments. We do not anticipate additional borrowing requirements in fiscal 2017.

RESULTS OF OPERATIONS

Revenue

	Three Months Ended April 30, 2016			Three Months Ended April 30, 2015			Change in Constant Currency			Change due to Currency Fluctuations			Total Change as Reported $			%
(in thousands)
Revenue
License fees	$	3,947		$	6,851		$	(2,701	)	$	(203	)	$	(2,904	)		-42	%
Percentage of total revenue		6	%		10	%
Subscription fees		11,492			9,419			2,363			(290	)		2,073			22	%
Percentage of total revenue		18	%		14	%
Maintenance and other		32,836			33,383			(23	)		(524	)		(547	)		-2	%
Percentage of total revenue		50	%		48	%
Professional services		17,122			19,612			(2,125	)		(365	)		(2,490	)		-13	%
Percentage of total revenue		26	%		28	%
Total revenue	$	65,397		$	69,265		$	(2,486	)	$	(1,382	)	$	(3,868	)		-6	%

20

Total Revenue.On a constant currency basis, total revenue was $65.4 million and $67.9 million for the first quarter of fiscal 2017 and 2016, respectively, representing a $2.5 million, or 4%, decrease from the same period last year. When comparing categories within total revenue at constant rates, our results for the first quarter of fiscal 2017 included decreases in our license and professional services categories while maintenance and other was flat and subscription increased. Revenue outside the North America region as a percentage of total revenue was 55% and 56% for the first quarter of fiscal 2017 and fiscal 2016, respectively. On a constant currency basis, total revenue decreased in our North America, Latin America and EMEA regions and increased in our Asia Pacific region during fiscal 2017 when compared to the same period last year. Our products are sold to manufacturing companies that operate mainly in the following six industries: automotive, consumer products, food and beverage, high technology, industrial products and life sciences. Given the similarities between food and beverage and consumer products as well as between high technology and industrial products, we aggregate them for management review. The following table presents revenue by industry for the first quarter of fiscal 2017 and 2016:

	Three months ended April 30,
	2016			2015
Automotive		32	%		30	%
Consumer products and food and beverage		19	%		22	%
High technology and industrial products		34	%		33	%
Life sciences		15	%		15	%
Total revenue		100	%		100	%

License Revenue. On a constant currency basis, license revenue was $3.9 million and $6.6 million for the first quarter of fiscal 2017 and 2016, respectively, representing a $2.7 million, or 41%, decrease from the same period last year. On a constant currency basis, license revenue decreased in our North America, Latin America and EMEA regions and remained relatively flat in our Asia Pacific region during the first quarter of fiscal 2017 when compared to the same period last year. One of the metrics that management uses to measure license revenue performance is the number of customers that have placed sizable license orders in the period. During the first quarter of fiscal 2017, no customers placed license orders totaling more than $0.3 million. This compared to the first quarter of fiscal 2016 in which five customers placed license orders totaling more than $0.3 million and no orders exceeded $1.0 million. In addition to the lower number of license orders greater than $0.3 million, we also recognized less revenue in the first quarter of fiscal 2017 related to previously deferred deals when compared to the same period last year. The growth in our cloud revenue is resulting in a shift in favor of subscription over licenses.

Subscription Revenue. On a constant currency basis, subscription revenue was $11.5 million and $9.1 million for the first quarter of fiscal 2017 and 2016, respectively, representing a $2.4 million, or 26%, increase from the same period last year. The increase in subscription revenue was primarily due to sales of our QAD Cloud ERP product offering which represented over 85% of total subscription revenue in the first quarter of fiscal 2017 and in the fiscal year 2016. QAD Cloud ERP revenue consists of new customers, QAD customers converting from on-premise and additional users and modules purchased from our existing cloud customers. On a constant currency basis, subscription revenue increased in our North America, EMEA and Asia Pacific regions and decreased in our Latin America region during the first quarter of fiscal 2017 when compared to the same period last year. During the first quarter of fiscal 2016 we recognized $0.9 million of subscription revenue in our Latin America region related to one customer where we had deferred revenue in previous periods related to a complex implementation. We recognized the revenue once the implementation and rollout of their users was completed and we received confirmation from the customer that the local requirements were being met by the service offering. Excluding the one-time recognition, overall subscription revenue growth on a constant currency basis would have been 35%.

The following table presents cloud revenue by region for the first quarter of fiscal 2017 and 2016:

	Three months ended April 30,
	2016			2015
North America		64	%		57	%
Asia Pacific		15	%		12	%
EMEA		14	%		13	%
Latin America		7	%		18	%
Total cloud revenue		100	%		100	%

21

The following table presents cloud revenue by industry for the first quarter of fiscal 2017 and 2016:

	Three months ended April 30,
	2016			2015
Automotive		40	%		48	%
Consumer products and food and beverage		16	%		15	%
High technology and industrial products		19	%		15	%
Life sciences		25	%		22	%
Total cloud revenue		100	%		100	%

We expect the growth rate of subscription revenue in the future to be primarily attributable to growth in sales of our QAD Cloud ERP product offering.

Maintenance and Other Revenue.On a constant currency basis, maintenance and other revenue was $32.8 million and $32.9 million for the first quarter of fiscal 2017 and 2016, respectively, representing a $0.1 million decrease compared to the same period last year. On a constant currency basis, maintenance and other revenue decreased in our North America region and increased in our EMEA, Latin America and Asia Pacific regions during the first quarter of fiscal 2017 when compared to the same period last year. The decrease in maintenance and other revenue was primarily attributable to the impact of customers converting to QAD Cloud ERP and customer cancellations partially offset by sales of maintenance in connection with sales of new licenses. When customers convert to QAD Cloud ERP they no longer pay for maintenance as those services are included as a component of the subscription offering.

Our total short-term deferred revenue as of April 30, 2016 was $92.6 million, of which $73.6 million was related to deferred maintenance and will be recognized over the period of the maintenance support. Deferred subscriptions totaled $15.4 million primarily related to hosting and cloud services we will provide over periods up to the next twelve months. Deferred services totaled $2.0 million and represents prepayments for our professional services where revenues for these services are recognized as we complete the performance obligations as well as services already provided but deferred due to software revenue recognition rules. Deferred license totaled $1.2 million and relates to undelivered products or specified enhancements, customer specific acceptance provisions and software license transactions that cannot be segmented from undelivered consulting or other services. The remaining short-term deferred revenue consists of development and marketing income. On a constant currency basis, short-term deferred revenue as of April 30, 2016 was $93.6 million, compared to $91.4 million as of April 30, 2015. There was a $1.0 million total adverse impact to deferred revenue from foreign currency, of which $0.8 million related to deferred maintenance. Products are generally shipped as orders are received or within a short period thereafter. In addition, maintenance contracts tend to be one year and are invoiced annually at renewal. Accordingly, we have historically operated with little backlog. Because of the generally short cycle between order and shipment and the relatively low amount of subscription revenue, we believe that our backlog as of any particular date is not currently significant.

Professional Services Revenue. On a constant currency basis, professional services revenue was $17.1 million and $19.2 million for the first quarter of fiscal 2017 and 2016, respectively, representing a $2.1 million, or 11%, decrease when compared to the same period last year. On a constant currency basis, professional services revenue decreased across all regions during the first quarter of fiscal 2017 when compared to the same period last year. The decrease in professional services revenue can be attributed to fewer engagements and a lower amount of professional services revenue per customer. A significant portion of our professional services revenue is generated from discretionary upgrade projects for existing customers. These projects are affected by general economic conditions in the manufacturing industry and our customers' businesses. As a result, global economic uncertainty can cause on-going projects to slow down, resulting in reduced monthly spend for our customers, while new projects can get delayed until conditions start to improve.

22

Cost of Revenue

	Three Months Ended April 30, 2016			Three Months Ended April 30, 2015			Change in Constant Currency			Change due to Currency Fluctuations		Total Change as Reported $			%
(in thousands)
Cost of revenue
Cost of license fees	$	725		$	929		$	196		$	8	$	204			22	%
Cost of subscription		6,197			5,064			(1,196	)		63		(1,133	)		-22	%
Cost of maintenance and other		7,763			7,777			(103	)		117		14			0	%
Cost of professional services		17,425			18,328			617			286		903			5	%
Total cost of revenue	$	32,110		$	32,098		$	(486	)	$	474	$	(12	)		0	%
Percentage of revenue		49	%		46	%

Cost of license fees includes license royalties, amortization of capitalized software costs and fulfillment. Cost of subscription includes salaries, benefits and bonuses of our cloud operations group, located in the United States and India; stock-based compensation for those employees; hardware and hosting costs; royalties; professional fees; travel expense; and an allocation of information technology and facilities costs. Cost of maintenance and other includes salaries, benefits and bonuses of our support group located around the world; stock-based compensation for those employees; travel expense; professional fees; fulfillment; and an allocation of information technology and facilities costs. Cost of professional services includes salaries, benefits and bonuses of employees fulfilling service contracts; stock-based compensation for those employees; third-party contractor expense; travel expense for services employees; and an allocation of information technology and facilities costs.

Total Cost of Revenue. On a constant currency basis, total cost of revenue (combined cost of license fees, cost of subscription, cost of maintenance and other and cost of professional services) was $32.1 million and $31.6 million for the first quarter of fiscal 2017 and 2016, respectively, and as a percentage of total revenue was 49% and 47% for the first quarter of fiscal 2017 and 2016, respectively. The non-currency related increase in cost of revenue of $0.5 million, or 2%, in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2015 was primarily due to higher hosting costs and higher professional fees associated with higher subscription revenue and lower travel expenses associated with lower services revenue. The lower utilization in professional services, as well as the change in revenue mix from license revenue to subscription revenue contributed to the increase in total cost of revenue as a percentage of total revenue. Since subscription revenue caries higher costs than license revenue, the overall cost of revenue increased.

Cost of License Fees.  On a constant currency basis, cost of license fees was $0.7 million and $0.9 million for the first quarter of fiscal 2017 and 2016, respectively. Cost of license fees as a percentage of license revenue was 18% and 14% for the first quarter of fiscal 2017 and 2016, respectively. The higher cost of license revenue percentage in the first quarter of fiscal 2017 was due to fixed amortization of capitalized software costs as a percentage of license revenue.

Cost of Subscription. On a constant currency basis, cost of subscription was $6.2 million and $5.0 million for the first quarter of fiscal 2017 and 2016, respectively, representing an increase of $1.2 million, or 24%. The non-currency related increase in cost of subscription of $1.2 million in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 was primarily due to higher hosting costs of $0.7 million and higher professional fees of $0.2 million. Cost of subscription as a percentage of subscription revenue was 54% for both the first quarter of fiscal 2017 and 2016. Excluding the one-time $0.9 million subscription recognition, cost of subscription as a percentage of subscription revenue would have been 59% for the first quarter of fiscal 2016. We plan to improve our subscription margins over time, but we also anticipate fluctuations in our subscription margins as we make investments to support future growth.

Cost of Maintenance and Other.  On a constant currency basis, cost of maintenance and other was $7.8 million and $7.7 million in the first quarter of fiscal 2017 and 2016, respectively. Cost of maintenance and other as a percentage of maintenance and other revenue was 24% and 23% for the first quarter of fiscal 2017 and 2016, respectively.

23

Cost of Professional Services.  On a constant currency basis, cost of professional services was $17.4 million and $18.0 million for the first quarter of fiscal 2017 and 2016, respectively, representing a decrease of $0.6 million, or 3%. The non-currency related decrease in cost of professional services of $0.6 million in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 was due primarily to cost relief from personnel who worked on projects in other departments of $0.4 million and lower travel of $0.2 million. Cost of professional services as a percentage of professional services revenue was 102% and 93% for the first quarter of fiscal 2017 and 2016, respectively. The higher cost of professional services percentage in the first quarter of fiscal 2017 was primarily due to lower utilization. While we expect lower professional services profitability to continue in the near term, we expect utilization will increase to historical levels over time.

Sales and Marketing

	Three Months Ended April 30, 2016			Three Months Ended April 30, 2015			Change in Constant Currency		Change due to Currency Fluctuations		Total Change as Reported $		%
(in thousands)
Sales and marketing	$	16,922		$	17,145		$	14	$	209	$	223		1	%
Percentage of revenue		26	%		25	%

Sales and marketing expense includes salaries, benefits, bonuses, stock-based compensation and travel expense for our sales and marketing employees in addition to costs of programs aimed at increasing revenue, such as trade shows, user group events, advertising and various sales and promotional programs. Sales and marketing expense also includes personnel costs of order processing, sales agent fees and an allocation of information technology and facilities costs.

On a constant currency basis, sales and marketing expense was $16.9 million in both the first quarter of fiscal 2017 and 2016. Changes within the expense categories of sales and marketing in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 consisted of higher salaries and related costs of $0.4 million as a result of higher headcount of approximately 5 people and higher marketing expense of $0.1 million which were offset by lower commissions of $0.3 million and lower sales agent fees of $0.2 million.

Research and Development

	Three Months Ended April 30, 2016			Three Months Ended April 30, 2015			Change in Constant Currency			Change due to Currency Fluctuations		Total Change as Reported $			%
(in thousands)
Research and development	$	11,134		$	10,657		$	(587	)	$	110	$	(477	)		-4	%
Percentage of revenue		17	%		16	%

Research and development is expensed as incurred and consists primarily of salaries, benefits, bonuses, stock-based compensation, training and travel expense for research and development employees and professional services, such as fees paid to software development firms and independent contractors. Research and development expense also includes an allocation of information technology and facilities costs, and is reduced by reimbursements from joint development projects. As part of our vertical focus we regularly seek joint development arrangements with our customers in order to enhance specific functionality and industry experience, although the number and size of joint development arrangements may fluctuate.

24

On a constant currency basis, research and development expense was $11.1 million and $10.5 million for the first quarter of fiscal 2017 and 2016, respectively, representing an increase of $0.6 million or 6%. The non-currency related increase in research and development expense of $0.6 million in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 consisted of higher salaries and related costs of $0.3 million as a result of higher headcount of approximately 7 people, higher travel of $0.1 million and higher stock compensation of $0.1 million.

General and Administrative

	Three Months Ended April 30, 2016			Three Months Ended April 30, 2015			Change in Constant Currency		Change due to Currency Fluctuations		Total Change as Reported $		%
(in thousands)
General and administrative	$	8,005		$	8,441		$	331	$	105	$	436		5	%
Percentage of revenue		12	%		12	%

General and administrative expense includes salaries, benefits, bonuses, stock-based compensation and travel expense for our finance, human resources, legal and executive personnel, as well as professional fees for accounting and legal services, bad debt expense and an allocation of information technology and facilities costs.

On a constant currency basis, general and administrative expense was $8.0 million and $8.3 million for the first quarter of fiscal 2017 and 2016, respectively, representing a decrease of $0.3 million, or 4%. The non-currency related decrease in general and administrative expense of $0.3 million in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 was primarily due to lower bad debt of $0.2 million and lower bonuses of $0.2 million partially offset by  higher stock compensation of $0.1 million.

Amortization of Intangibles from Acquisitions

Amortization of intangibles from acquisitions was $0.2 million for the first quarters of both fiscal 2017 and 2016. Amortization expense in each of the first quarters of fiscal 2017 and 2016 was due to the intangible assets acquired in our fiscal 2013 acquisitions of DynaSys and CEBOS.

Other Expense (Income)

	Three Months Ended			Increase (Decrease) Compared to Prior Period					Three Months Ended
	April 30, 2016			$			%		April 30, 2015
(in thousands)
Other (income) expense
Interest income	$	(172	)	$	(115	)	-202	%	$	(57	)
Interest expense		174			(9	)	-5	%		183
Other expense, net		870			989		831	%		(119	)
Total other (income) expense, net	$	872		$	865		12,357	%	$	7
Percentage of revenue		2	%							0	%

Net other expense was $0.9 million and breakeven for the first quarter of fiscal 2017 and fiscal 2016, respectively. The increase in net other expense was primarily related to higher foreign exchange losses of $0.7 million due to the decline of the U.S. dollar relative to the currencies of most of the foreign countries in which we operate, and the unfavorable change in the fair market value of the interest rate swap associated with the mortgage on our headquarters of $0.3 million.

25

Interest rate swap valuations and foreign exchange gains and losses are subject to changes which are inherently unpredictable. Our interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, subjecting us to non-cash volatility in our results of operations. The swap fixes the interest rate on our mortgage to 4.31% over the entire term of the mortgage and effectively lowered our interest rate from the previous mortgage rate of 6.5%. Although the agreement allows us to prepay the loan and exit the agreement early, we have no intention of doing so. As a result, we will have non-cash adjustments through earnings each reporting period. Over the term of the mortgage, however, the net impact of these mark-to-market adjustments on earnings will be zero.

Income Tax Expense

	Three Months Ended			Increase (Decrease) Compared to Prior Period					Three Months Ended
	April 30, 2016			$			%		April 30, 2015
(in thousands)
Income tax (benefit) expense	$	(1,069	)	$	(1,273	)	-624	%	$	204
Percentage of revenue		-2	%							0	%
Effective tax rate		28	%							27	%

We recorded income tax (benefit) expense of $(1.1) million and $0.2 million in the first quarter of fiscal 2017 and fiscal 2016, respectively. Our effective tax rate was 28% during the first quarter of fiscal 2017 compared to 27% for the same period in the prior year.  The difference in rates is primarily due to jurisdictional mix and lower forecasted book income in fiscal 2017.  Our estimated annual effective tax rate increased to 30% from 28% in the previous fiscal year 2016. The difference in rates is primarily due to jurisdictional mix.

The Company continues to benefit from operating in foreign locations with lower statutory income tax rates relative to the U.S. federal and state tax rate. This benefit is significantly reduced by withholding taxes and foreign base company sales and services income that is taxed both in the U.S. and in the foreign jurisdiction.

Non-GAAP Financial Measures

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of adjusted EBITDA, adjusted EBITDA margins, non-GAAP net income and non-GAAP earnings per diluted share each meet the definition of a non-GAAP financial measure.

We define the non-GAAP measures as follows:

• Non-GAAP adjusted EBITDA - EBITDA is GAAP net income before net interest expense, income tax expense, depreciation and amortization. Non-GAAP adjusted EBITDA is EBITDA less stock-based compensation expense and the change in the fair value of the interest rate swap.

• Non-GAAP adjusted EBITDA margins - Calculated by dividing non-GAAP adjusted EBITDA by total revenue.

• Non-GAAP net income - GAAP net income before stock-based compensation expense, amortization of purchased intangible assets, the change in fair value of the interest rate swap and certain income tax adjustments.

• Non-GAAP earnings per diluted share - Non-GAAP net income allocated to Class A and Class B shares divided by the weighted average diluted shares outstanding of each class.

26

QAD’s management uses non-GAAP measures internally to evaluate the business and believes that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure in evaluating QAD.

QAD non-GAAP measures reflect adjustments based on the following items:

EBITDA: We report EBITDA as a non-GAAP metric by excluding the effect of net interest expense, income tax expense, depreciation and amortization from net income because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe providing an EBITDA calculation is a more useful comparison of our operating results to the operating results of our peers.

Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from the non-GAAP adjusted EBITDA, non-GAAP net income and non-GAAP earnings per diluted share calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by QAD, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.

Amortization of purchased intangibles: We amortize purchased intangible assets in connection with our acquisitions. We have excluded the effect of amortization of purchased intangible assets, which include purchased technology, customer relationships, trade names and other intangible assets, from non-GAAP net income and non-GAAP earnings per diluted share calculations, because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe excluding amortization of purchased intangible assets provides a more useful comparison of our operating results to the operating results of our peers.

Change in fair value of the interest rate swap: We entered into an interest rate swap to mitigate our exposure to the variability of one month LIBOR for the floating rate debt related to the mortgage of our headquarters. We have excluded the gain/loss adjustments to record the interest rate swap at fair value from non-GAAP adjusted EBITDA, non-GAAP net income and non-GAAP earnings per diluted share calculations. We believe that these fluctuations are not indicative of our operational costs or meaningful in evaluating comparative period results because we currently have no intention of exiting the debt agreement early; and therefore over the life of the debt the sum of the fair value adjustments will be zero.

27

Income tax adjustments: Beginning in fiscal 2016, we began to compute and utilize a fixed long-term projected non-GAAP tax rate in order to provide better consistency across the interim reporting periods by eliminating the effects of non-recurring and period-specific items such as changes in the tax valuation allowance and tax effects of acquisition-related costs, since each of these can vary in size and frequency. When projecting the long-term rate we evaluated four years of historical and expected results excluding the impact of the following non-cash items: stock-based compensation expense, amortization of purchased intangibles and the change in fair value of the interest rate swap. The projected rate assumes no new acquisitions and takes into account other factors including our current business structure, our existing tax positions in various jurisdictions and key legislation in major jurisdictions where we operate. The non-GAAP tax rate is 25%. We intend to re-evaluate this long-term rate on an annual basis or if any significant events that may materially affect this long-term rate occur. This long-term rate could be subject to change for a variety of reasons, for example, significant changes in the geographic earnings mix, acquisition activity or fundamental tax law changes in major jurisdictions where we operate.

Our reconciliation of the non-GAAP financial measures of adjusted EBITDA, adjusted EBITDA margins, non-GAAP net income and non-GAAP earnings per diluted share to the most comparable GAAP measures for the three months ended April 30, 2016 and 2015 are as follows (in thousands, except per share data):

	Three Months Ended April 30,
	2016			2015
Total revenue	$	65,397		$	69,265
Net (loss) income		(2,742	)		549
Add back:
Net interest expense		2			126
Depreciation		1,044			999
Amortization		430			452
Income taxes		(1,069	)		204
EBITDA	$	(2,335	)	$	2,330
Add back:
Non-cash stock-based compensation		1,554			1,306
Change in fair value of interest rate swap		31			(245	)
Adjusted EBITDA	$	(750	)	$	3,391
Adjusted EBITDA margin		-1	%		5	%
Non-GAAP net (loss) income reconciliation
Net (loss) income	$	(2,742	)	$	549
Add back:
Non-cash stock-based compensation		1,554			1,306
Amortization of purchased intangible assets		345			344
Change in fair value of interest rate swap		31			(245	)
Income tax adjustments		(483	)		(351	)
Non-GAAP net (loss) income	$	(1,295	)	$	1,603
Non-GAAP (loss) earnings per diluted Class A share reconciliation
(Loss) earnings per diluted Class A share	$	(0.15	)	$	0.03
Add back:
Non-cash stock-based compensation		0.09			0.07
Amortization of purchased intangible assets		0.02			0.02
Change in fair value of interest rate swap		0.00			(0.01	)
Income tax adjustments		(0.03	)		(0.02	)
Non-GAAP (loss) earnings per diluted Class A share	$	(0.07	)	$	0.09
Shares used in computing (loss) earnings per diluted Class A share		15,594			16,048
Non-GAAP (loss) earnings per diluted Class B share reconciliation
(Loss) earnings per diluted Class B share	$	(0.13	)	$	0.02
Add back:
Non-cash stock-based compensation		0.07			0.06
Amortization of purchased intangible assets		0.02			0.02
Change in fair value of interest rate swap		0.00			(0.01	)
Income tax adjustments		(0.02	)		(0.02	)
Non-GAAP (loss) earnings per diluted Class B share	$	(0.06	)	$	0.07
Shares used in computing (loss) earnings per diluted Class B share		3,204			3,279

28

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of cash is from the sale of licenses, subscription, maintenance and professional services to our customers. Our primary use of cash is payment of our operating expenses which mainly consist of employee-related expenses, such as compensation and benefits, as well as general operating expenses for facilities and overhead costs. In addition to operating expenses, we also use cash for capital expenditures, payment of dividends, stock repurchases and investment in our growth initiatives, which include acquisitions of products, technology and businesses.

At April 30, 2016, our principal sources of liquidity were cash and equivalents totaling $139.9 million and net accounts receivable of $44.8 million. At April 30, 2016, our cash and equivalents consisted of current bank accounts, registered money market funds and time delineated deposits. Approximately 85% of our cash and equivalents were held in U.S. dollar denominated accounts as of April 30, 2016. We have a U.S. line of credit facility with Rabobank that permits unsecured short-term borrowings of up to $20 million. Our line of credit agreement contains customary covenants that could restrict our ability to incur additional indebtedness. Our line of credit is available for working capital or other business needs. We have not drawn on the line of credit during any of the last three fiscal years nor do we expect to draw on the line of credit during fiscal 2017.

Our primary commercial banking relationship is with Bank of America and its global affiliates. Our cash and equivalents are held by diversified financial institutions globally, and as of April 30, 2016, the portion of our cash and equivalents held by or invested through Bank of America was approximately 95%. Our largest cash concentration is in Ireland where we pool the cash generated by our EMEA subsidiaries. The majority of our cash and equivalents are held in investment accounts which are predominantly placed in money market mutual funds invested in U.S. Treasury and government securities. The remaining cash and equivalents are held in deposit accounts and certificates of deposit.

Our cash and equivalents are concentrated in a few locations around the world, with substantial amounts held outside of the U.S. The percentage of cash and equivalents held by foreign subsidiaries was approximately 64% and 62% as of April 30, 2016 and January 31, 2016, respectively. Subject to local law restrictions, certain amounts held outside the U.S. could be repatriated to the U.S. These repatriated amounts would likely be subject to U.S. income taxes under current U.S. tax law. We have provided for the U.S. income tax liability on foreign earnings, except for foreign earnings that are considered permanently reinvested outside the U.S. Our intent is that foreign permanently reinvested earnings will remain outside the U.S. Our U.S. liquidity needs will be met through ongoing cash flows from operations or through alternative means of cash flow such as the sale of stock or external borrowing. We regularly review our capital structure to ensure we have the proper liquidity available in the locations in which it is needed.

29

The following table summarizes our cash flows for the three months ended April 30, 2016 and 2015, respectively.

(in thousands)	Three Months Ended April 30, 2016			Three Months Ended April 30, 2015
Net cash provided by operating activities	$	1,135		$	4,336
Net cash used in investing activities		(1,086	)		(1,168	)
Net cash (used in) provided by financing activities		(253	)		7,273
Effect of foreign exchange rates on cash and equivalents		2,351			(103	)
Net increase in cash and equivalents	$	2,147		$	10,338

Typical factors affecting our cash provided by operating activities include our level of revenue and earnings for the period; the timing and amount of employee bonus payments and income tax payments; and the timing and amount of billings and cash collections from our customers, which is our largest source of operating cash flow. Net cash flows provided by operating activities were $1.1 million and $4.3 million for the first quarter of fiscal 2017 and 2016, respectively. The negative cash flow effect of changes in accounts receivable and other assets of $7.2 million, due primarily to collections in excess of billings, and a decrease in net income of $3.3 million was offset by the positive cash flow effect of changes in deferred revenue, other liabilities and accounts payable of $7.1 million.

Net cash used in investing activities consisted primarily of capital expenditures of $1.1 million for the first quarter of both fiscal 2017 and 2016. We continue to monitor our capital spending and do not believe we are delaying critical capital expenditures required to run our business.

Net cash provided by financing activities during the first quarter of fiscal 2016 included proceeds received from the sale of stock of $8.4 million after deducting offering expenses and underwriting discounts and commissions.

We have historically calculated accounts receivable days’ sales outstanding (“DSO”), using the countback, or last-in first-out, method. This method calculates the number of days of billed revenue represented by the accounts receivable balance as of period end. When reviewing the performance of our entities, DSO under the countback method is used by management. It is management’s belief that the countback method best reflects the relative health of our accounts receivable as of a given quarter-end or year-end because of the cyclical nature of our billings. Our billing cycle includes high annual maintenance renewal billings at year-end that will not be recognized as earned revenue until future periods.

DSO under the countback method was relatively consistent at 65 days and 73 days as of April 30, 2016 and 2015, respectively. DSO using the average method, which is calculated utilizing the accounts receivable balance and earned revenue for the most recent quarter, was 62 days and 67 days at April 30, 2016 and 2015, respectively. The aging of our accounts receivable remained consistent when compared with the same period last year. We believe our reserve methodology is adequate, our reserves are properly stated as of April 30, 2016 and the quality of our receivables remains good.

There have been no material changes in our contractual obligations or commercial commitments outside the ordinary course of business. Cash requirements for items other than normal operating expenses are anticipated for capital expenditures, dividend payments and other equity transactions. We may require cash for acquisitions of new businesses, software products or technologies complementary to our business.

We believe that our cash on hand, net cash provided by operating activities and available borrowings under our existing credit facility will provide us with sufficient resources to meet our current and long-term working capital requirements, debt service, dividend payments and other cash needs for at least the next twelve months.

30

Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates. See Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk” for further discussion.

CONTRACTUAL OBLIGATIONS

A summary of future obligations under our various contractual obligations and commitments as of January 31, 2016 was disclosed in our Annual Report on Form 10-K for the year ended January 31, 2016. During the quarter ended April 30, 2016 there have been no material changes in our contractual obligations or commercial commitments outside the ordinary course of business.

Credit Facility

We have an unsecured credit agreement with Rabobank, N.A. (the “Facility”). The Facility provides a commitment through July 15, 2017 for a $20 million line of credit for working capital or other business needs. We pay a commitment fee of 0.25% per annum of the daily average of the unused portion of the $20 million Facility. Borrowings under the Facility bore interest at a rate equal to one month LIBOR plus 0.75%. At April 30, 2016, the effective borrowing rate would have been 1.19%.

The Facility provides that we maintain certain financial and operating ratios which include, among other provisions, minimum liquidity on a consolidated basis of $25 million in cash and equivalents at all times, a current ratio (calculated using current liabilities excluding deferred revenue) of not less than 1.3 to 1.0 determined at the end of each fiscal quarter, a leverage ratio of not more than 1.5 to 1.0 determined at the end of each fiscal quarter, and a debt service coverage ratio of not less than 1.5 to 1.0 determined at the end of each fiscal year. The Facility also contains customary covenants that could restrict our ability to incur additional indebtedness.

As of April 30, 2016, there were no borrowings under the Facility and we were in compliance with all financial covenants.

Notes Payable

Effective May 30, 2012, QAD Ortega Hill, LLC entered into a variable rate credit agreement (the “2012 Mortgage”) with Rabobank, N.A., to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 0.44% at April 30, 2015. The 2012 Mortgage matures in June 2022 and is secured by our headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Rabobank, N.A. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million. The unpaid balance as of April 30, 2016 was $14.6 million.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Rates. We have operations in foreign locations around the world and we are exposed to risk resulting from fluctuations in foreign currency exchange rates. We have experienced significant foreign currency fluctuations during fiscal 2016 and the first quarter of fiscal 2017 due primarily to the volatility of the euro in relation to the U.S. dollar. The foreign currencies for which we currently have the most significant exposure are the euro, Brazilian real, British pound and Mexican peso. These foreign currency exchange rate movements could create a foreign currency gain or loss that could be realized or unrealized for us. Unfavorable movements in foreign currency exchange rates between the U.S. dollar and other foreign currencies may have an adverse impact on our operations. We did not have any foreign currency forward or option contracts or other material foreign currency denominated derivatives or other financial instruments open as of April 30, 2016.

31

We face two risks related to foreign currency exchange rates—translation risk and transaction risk. Translation risk relates to amounts invested in our foreign operations that are translated into U.S. dollars using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as the U.S. dollar weakens or strengthens against other currencies. Furthermore, we have exposure to foreign exchange fluctuations arising from the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes. Transaction risk is related to our international subsidiaries holding non-local currency net monetary accounts subject to revaluation into their local currency, which results in realized or unrealized foreign currency gains or losses.

For each of the three months ended April 30, 2016 and 2015, approximately 55% of our revenue was generated in foreign currencies. We also incurred a significant portion of our expenses in currencies other than the U.S. dollar, approximately 40% for each of the three months ended April 30, 2016 and 2015. Based on a hypothetical 10% strengthening of the U.S. dollar against all foreign currencies, our revenue would be adversely affected by approximately 5% partially offset by a positive effect on our expenses of approximately 4%, and our operating income would be adversely affected by approximately 25%.

For the three months ended April 30, 2016 and 2015, foreign currency transaction and remeasurement losses totaled $0.8 million $0.2 million, respectively, and are included in “Other (income) expense, net” in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. We performed a sensitivity analysis on the net U.S. dollar and euro-based monetary accounts subject to revaluation that are held by our international subsidiaries and on the non-functional currency assets, liabilities and intercompany balances that are remeasured into U.S. dollars. A hypothetical 10% adverse movement in all foreign currency exchange rates would result in foreign currency transaction and remeasurement losses of approximately $2.1 million.

These estimates assume adverse shifts in all foreign currency exchange rates against the U.S. dollar, which do not always move in the same direction or in the same degrees. Actual results may differ materially from the hypothetical analysis.

Interest Rates. We invest our surplus cash in a variety of financial instruments, consisting principally of short-term marketable securities with maturities of less than 90 days at the date of purchase. Our investment securities are held for purposes other than trading. Cash balances held by subsidiaries are invested primarily in registered money market funds with local operating banks. Based on an interest rate sensitivity analysis of our cash and equivalents we estimate that a 10% adverse change in interest rates from the 2016 fiscal year-end rates would not have a material adverse effect on our cash flows or financial condition for the next fiscal year.

Our debt is comprised of a loan agreement, secured by real property, which bears interest at the one month LIBOR rate plus 2.25%. In conjunction with the loan agreement, we entered into an interest rate swap. The swap agreement has an initial notional amount and schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31%. Additionally, we have an unsecured line of credit which bears interest at the one month LIBOR rate plus 0.75%. As of April 30, 2016 there were no borrowings under our unsecured line of credit.

32

Our interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, subjecting us to non-cash volatility in our results of operations. We prepared a sensitivity analysis using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in levels of interest rates across the entire yield curve, with all other variables held constant. Based upon the results of this analysis a 10% adverse change in interest rates from the April 30, 2016 rates would cause a $0.1 million reduction in our results of operations. We believe it is prudent to hedge the expected volatility of the variable rate mortgage on our corporate headquarters. The swap fixes the interest rate on our mortgage to 4.31% over the entire term of the mortgage and effectively lowers our interest rate from the previous mortgage rate of 6.5%. Although the agreement allows us to prepay the loan and exit the agreement early, we have no intention of doing so. As a result, we will have non-cash adjustments through earnings each reporting period. However, over the term of the mortgage, the net impact of these mark-to-market adjustments on earnings will be zero.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information required to be disclosed by us in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitations of internal controls. QAD’s management does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within QAD have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors reported in Item 1A within the Company’s Annual Report on Form 10-K for the year ended January 31, 2016.

33

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits
31.1	Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

34

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	QAD Inc.
	(Registrant)
Date: June 6, 2016	By:	/s/ DANIEL LENDER
		Daniel Lender
		Executive Vice President, Chief Financial Officer
		(on behalf of the Registrant)
	By:	/s/ KARA BELLAMY
		Kara Bellamy
		Senior Vice President, Corporate Controller
		(Chief Accounting Officer)

35

EX-31.1

Exhibit 31.1

CERTIFICATIONS UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Karl F. Lopker, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of QAD Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:  June 6, 2016

/s/ KARL F. LOPKER

Karl F. Lopker

Chief Executive Officer

QAD Inc.

EX-31.2

Exhibit 31.2

CERTIFICATIONS UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel Lender, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of QAD Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:  June 6, 2016

/s/ DANIEL LENDER

Daniel Lender

Chief Financial Officer

QAD Inc.

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

FURNISHED PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of QAD Inc. (the "Company") on Form 10-Q for the period ending April 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Karl F. Lopker, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date:  June 6, 2016
	/s/ KARL F. LOPKER
	Karl F. Lopker
	Chief Executive Officer
	QAD Inc.

In connection with the Quarterly Report of QAD Inc. (the "Company") on Form 10-Q for the period ending April 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel Lender, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date:  June 6, 2016
	/s/ DANIEL LENDER
	Daniel Lender
	Chief Financial Officer
	QAD Inc.

XML

Document and Entity Information - shares	3 Months Ended
	Apr. 30, 2016	May. 31, 2016
Entity Information [Line Items]
Entity Registrant Name	QAD INC
Entity Central Index Key	0001036188
Current Fiscal Year End Date	--01-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Apr. 30, 2016
Common Class A [Member]
Entity Information [Line Items]
Entity Common Stock, Shares Outstanding		15,609,867
Common Class B [Member]
Entity Information [Line Items]
Entity Common Stock, Shares Outstanding		3,205,362

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) - USD ($) $ in Thousands	Apr. 30, 2016	Jan. 31, 2016
Current assets:
Cash and equivalents	$ 139,878	$ 137,731
Accounts receivable, net of allowances of $2,518 and $2,642 at April 30, 2016 and January 31, 2016, respectively	44,829	65,512
Deferred tax assets, net	8,527	8,203
Other current assets	18,960	16,024
Total current assets	212,194	227,470
Property and equipment, net	32,269	32,080
Capitalized software costs, net	1,321	1,553
Goodwill	10,771	10,645
Deferred tax assets, net	12,261	11,919
Other assets, net	2,560	2,679
Total assets	271,376	286,346
Current liabilities:
Current portion of long-term debt	428	422
Accounts payable	7,867	10,811
Deferred revenue	92,640	97,911
Other current liabilities	26,624	31,535
Total current liabilities	127,559	140,679
Long-term debt	14,082	14,191
Other liabilities	$ 4,387	$ 4,465
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding	$ 0	$ 0
Common stock:
Additional paid-in capital	196,596	195,420
Treasury stock, at cost (1,331,008 shares and 1,365,885 shares at April 30, 2016 and January 31, 2016, respectively)	(18,104)	(18,717)
Accumulated deficit	(45,041)	(40,983)
Accumulated other comprehensive loss	(8,123)	(8,729)
Total stockholders' equity	125,348	127,011
Total liabilities and stockholders' equity	271,376	286,346
Common Class A [Member]
Common stock:
Common stock value	16	16
Common Class B [Member]
Common stock:
Common stock value	$ 4	$ 4

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) - USD ($) $ in Thousands	Apr. 30, 2016	Jan. 31, 2016
Current assets:
Accounts receivable, net of allowances	$ 2,518	$ 2,642
Stockholders' equity:
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock:
Treasury stock, at cost (in shares)	1,331,008	1,365,885
Common Class A [Member]
Common stock:
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	71,000,000	71,000,000
Common stock, shares issued (in shares)	16,603,799	16,603,729
Common Class B [Member]
Common stock:
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	4,000,000	4,000,000
Common stock, shares issued (in shares)	3,537,380	3,537,366

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Revenue:
License fees	$ 3,947	$ 6,851
Subscription fees	11,492	9,419
Maintenance and other	32,836	33,383
Professional services	17,122	19,612
Total revenue	65,397	69,265
Costs of revenue:
License fees	725	929
Subscription fees	6,197	5,064
Maintenance and other	7,763	7,777
Professional services	17,425	18,328
Total cost of revenue	32,110	32,098
Gross profit	33,287	37,167
Operating expenses:
Sales and marketing	16,922	17,145
Research and development	11,134	10,657
General and administrative	8,005	8,441
Amortization of intangibles from acquisitions	165	164
Total operating expenses	36,226	36,407
Operating (loss) income	(2,939)	760
Other expense (income):
Interest income	(172)	(57)
Interest expense	174	183
Other expense (income), net	870	(119)
Total other expense (income), net	872	7
(Loss) income before income taxes	(3,811)	753
Income tax (benefit) expense	(1,069)	204
Net (loss) income	(2,742)	549
Diluted net (loss) income per share
Net (loss) income	(2,742)	549
Other comprehensive income, net of tax:
Foreign currency translation adjustments	606	73
Total comprehensive (loss) income	(2,136)	622
Common Class A [Member]
Other expense (income):
Net (loss) income	$ (2,341)	$ 468
Basic net (loss) income per share
Earnings per share (in dollars per share)	$ (0.15)	$ 0.03
Diluted net (loss) income per share
Earnings per share (in dollars per share)	$ (0.15)	$ 0.03
Net (loss) income	$ (2,341)	$ 468
Common Class B [Member]
Other expense (income):
Net (loss) income	$ (401)	$ 81
Basic net (loss) income per share
Earnings per share (in dollars per share)	$ (0.13)	$ 0.03
Diluted net (loss) income per share
Earnings per share (in dollars per share)	$ (0.13)	$ 0.02
Net (loss) income	$ (401)	$ 81

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Cash flows from operating activities:
Net (loss) income	$ (2,742)	$ 549
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	1,476	1,454
Provision for doubtful accounts and sales adjustments	49	311
Stock compensation expense	1,554	1,306
Change in fair value of derivative instrument	31	(245)
Excess tax benefits from share-based payment arrangements	(222)	(151)
Changes in assets and liabilities:
Accounts receivable	21,430	26,823
Other assets	(2,960)	(1,122)
Accounts payable	(3,151)	(4,456)
Deferred revenue	(7,480)	(11,157)
Other liabilities	(6,850)	(8,976)
Net cash provided by operating activities	1,135	4,336
Cash flows from investing activities:
Purchase of property and equipment	(1,074)	(1,140)
Capitalized software costs	(12)	(28)
Net cash used in investing activities	(1,086)	(1,168)
Cash flows from financing activities:
Repayments of debt	(106)	(102)
Tax payments, net of proceeds, related to stock awards	(369)	(391)
Payment of contingent liability associated with acquisitions	0	(750)
Excess tax benefits from share-based payment arrangements	222	151
Proceeds from issuance of common stock, net of issuance of costs	0	8,365
Net cash (used in) provided by financing activities	(253)	7,273
Effect of exchange rates on cash and equivalents	2,351	(103)
Net increase in cash and equivalents	2,147	10,338
Cash and equivalents at beginning of period	137,731	120,526
Cash and equivalents at end of period	139,878	130,864
Supplemental disclosure of non-cash activities:
Obligations associated with dividend declaration	$ 1,316	$ 1,299

XML

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

3 Months Ended

Apr. 30, 2016

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS [Abstract]

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

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 (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 accounting principles generally accepted in the United States of America 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, 2016. The Condensed Consolidated Financial Statements include the results of the Company and its wholly owned subsidiaries. The results of operations for the three months ended April 30, 2016 are not necessarily indicative of the results to be expected for the year ending January 31, 2017.

Recent Accounting Pronouncements

In May 2014, the FASB issued accounting standard update, or ASU, 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. GAAP with a five-step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2019. Early adoption would be permitted for the Company beginning in fiscal year 2018. The standard permits the use of either the retrospective or cumulative transition method. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In April 2015, the FASB issued ASU 2015-03 - Interest - Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and is to be implemented retrospectively. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017.  Adoption of this ASU did not have a material impact on the Company’s financial statements.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, given that the authoritative guidance within ASU 2015-03 for debt issuance costs does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017.  Adoption of this ASU did not have a material impact on the Company’s financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes which requires deferred tax liabilities and assets be presented as noncurrent on the classified statement of financial position. ASU 2015-17 will be effective for the Company’s fiscal year beginning February 1, 2017. The standard permits the use of either prospective or retrospective application to all periods presented. The Company does not expect this adoption to have a significant impact on its consolidated financial statements.

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 currently 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 its adoption of ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company on January 1, 2017 and the Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

XML

COMPUTATION OF NET (LOSS) INCOME PER SHARE

3 Months Ended

Apr. 30, 2016

COMPUTATION OF NET (LOSS) INCOME PER SHARE [Abstract]

COMPUTATION OF NET (LOSS) INCOME PER SHARE

2. COMPUTATION OF NET (LOSS) INCOME PER SHARE

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

	Three Months Ended April 30,
	2016			2015
	(in thousands except per share data)
Net (loss) income	$	(2,742	)	$	549
Less: Dividends declared		(1,316	)		(1,299	)
Undistributed net loss	$	(4,058	)	$	(750	)
Net (loss) income per share – Class A Common Stock
Dividends declared	$	1,124		$	1,107
Allocation of undistributed net loss		(3,465	)		(639	)
Net (loss) income attributable to Class A common stock	$	(2,341	)	$	468
Weighted average shares of Class A common stock outstanding—basic		15,594			15,262
Weighted average potential shares of Class A common stock		—			786
Weighted average shares of Class A common stock and potential common shares outstanding—diluted		15,594			16,048
Basic net (loss) income per Class A common share	$	(0.15	)	$	0.03
Diluted net (loss) income per Class A common share	$	(0.15	)	$	0.03
Net (loss) income per share – Class B Common Stock
Dividends declared	$	192		$	192
Allocation of undistributed net loss		(593	)		(111	)
Net (loss) income attributable to Class B common stock	$	(401	)	$	81
Weighted average shares of Class B common stock outstanding—basic		3,204			3,196
Weighted average potential shares of Class B common stock		—			83
Weighted average shares of Class B common stock and potential common shares outstanding—diluted		3,204			3,279
Basic net (loss) income per Class B common share	$	(0.13	)	$	0.03
Diluted net (loss) income per Class B common share	$	(0.13	)	$	0.02

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.

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,
	2016		2015
	(in thousands)
Class A		2,807		326
Class B		349		60

XML

FAIR VALUE MEASUREMENTS

3 Months Ended

Apr. 30, 2016

FAIR VALUE MEASUREMENTS [Abstract]

FAIR VALUE MEASUREMENTS

3. FAIR VALUE MEASUREMENTS

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

The following table sets forth the financial assets and liabilities, measured at fair value, as of April 30, 2016 and January 31, 2016:

	Fair value measurement at reporting date using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable  Inputs (Level 3)
			(in thousands)
Money market mutual funds as of April 30, 2016 (a)	$	112,792
Money market mutual funds as of January  31, 2016 (a)	$	113,984
Liability related to the interest rate swap as of April 30, 2016 (b)			$	(706	)
Liability related to the  interest rate swap as of January 31, 2016 (b)			$	(675	)

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

(b) The 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.

Money market mutual funds are classified as part of “Cash and equivalents” in the accompanying Condensed Consolidated Balance Sheets. In addition, the amount of cash and equivalents, including cash deposited with commercial banks, was $27 million and $24 million as of April 30, 2016 and January 31, 2016, respectively.

The Company’s line of credit and notes payable both bear a variable market interest rate commensurate with the Company’s credit standing. Therefore, the carrying amounts outstanding under the line of credit and note payable reasonably approximate fair value based on Level 2 inputs.

There have been no transfers between fair value measurements levels during the three months ended April 30, 2016.

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

The fair values of the derivative instrument at April 30, 2016 and January 31, 2016 were as follows (in thousands):

	Liability
		Fair Value
	Balance Sheet Location	April 30, 2016			January 31, 2016
Derivative instrument:
Interest rate swap	Other liabilities	$	(706	)	$	(675	)
Total		$	(706	)	$	(675	)

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income for the three months ended April 30, 2016 and April 30, 2015 was $(31,000) and $245,000, respectively.

XML

CAPITALIZED SOFTWARE COSTS

3 Months Ended

Apr. 30, 2016

CAPITALIZED SOFTWARE COSTS [Abstract]

CAPITALIZED SOFTWARE COSTS

4. CAPITALIZED SOFTWARE COSTS

Capitalized software costs and accumulated amortization at April 30, 2016 and January 31, 2016 were as follows:

	April 30, 2016			January 31, 2016
	(in thousands)
Capitalized software costs:
Acquired software technology	$	3,458		$	3,458
Capitalized software development costs (1)		788			1,029
		4,246			4,487
Less accumulated amortization		(2,925	)		(2,934	)
Capitalized software costs, net	$	1,321		$	1,553

(1) Capitalized software development costs include the impact of foreign currency translation.

Acquired software technology costs relate to technology purchased as a result of the Company’s fiscal 2013 acquisitions of DynaSys and CEBOS. In addition to the acquired software technology, the Company has capitalized costs related to translations and localizations of QAD Enterprise Applications.

It is the Company’s policy to write off capitalized software development costs once fully amortized. Accordingly, during the first three months of fiscal 2017, approximately $0.3 million of costs and accumulated amortization were removed from the balance sheet.

Amortization of capitalized software costs was $0.2 million and $0.3 million for the three months ended April 30, 2016 and 2015, respectively. Amortization of capitalized software costs is included in “Cost of license fees” in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of April 30, 2016:

Fiscal Years	(in thousands)
2017 remaining	$	710
2018		566
2019		42
2020		3
	$	1,321

XML

GOODWILL AND INTANGIBLE ASSETS

3 Months Ended

Apr. 30, 2016

GOODWILL AND INTANGIBLE ASSETS [Abstract]

GOODWILL AND INTANGIBLE ASSETS

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the three months ended April 30, 2016 were as follows:

	Gross Carrying Amount		Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2016	$	26,253	$	(15,608	)	$	10,645
Impact of foreign currency translation		126		—			126
Balance at April 30, 2016	$	26,379	$	(15,608	)	$	10,771

The Company performed its annual goodwill impairment review during the fourth quarter of fiscal 2016. The analysis compared the Company’s market capitalization to its net assets as of the test date, November 30, 2015. As the market capitalization significantly exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2016. The Company monitors the indicators for goodwill impairment testing between annual tests. No adverse events occurred during the three months ended April 30, 2016, that would cause the Company to test goodwill for impairment.

Intangible Assets

	April 30, 2016			January 31, 2016
	(in thousands)
Amortizable intangible assets
Customer relationships (1)	$	2,796		$	2,749
Trade name		515			515
		3,311			3,264
Less: accumulated amortization		(2,392	)		(2,191	)
Net amortizable intangible assets	$	919		$	1,073

(1) Customer relationships include the impact of foreign currency translation.

The Company’s intangible assets are related to the DynaSys and CEBOS acquisitions completed in fiscal 2013. Intangible assets are included in “Other assets, net” in the accompanying Condensed Consolidated Balance Sheets. As of April 30, 2016, all of the Company’s intangible assets were determined to have finite useful lives, and therefore were subject to amortization.

Amortization of intangible assets was $0.2 million for each of the first quarters of fiscal 2017 and 2016. The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of April 30, 2016:

Fiscal Years	(in thousands)
2017 remaining	$	499
2018		420
	$	919

XML

DEBT

3 Months Ended

Apr. 30, 2016

DEBT [Abstract]

DEBT

6. DEBT

	April 30, 2016			January 31, 2016
	(in thousands)
Note payable	$	14,574		$	14,680
Less current maturities		(428	)		(422	)
Less loan origination costs, net		(64	)		(67	)
Long-term debt	$	14,082		$	14,191

Note Payable

Effective May 30, 2012, QAD Ortega Hill, LLC entered into a variable rate credit agreement (the “2012 Mortgage”) with Rabobank, N.A., to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was 0.44% at April 30, 2016. The 2012 Mortgage matures in June 2022 and is secured by the Company’s headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Rabobank, N.A. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million. The unpaid balance as of April 30, 2016 was $14.6 million.

Credit Facility

The Company has an unsecured credit agreement with Rabobank, N.A. (the “Facility”). The Facility provides a commitment through July 15, 2017 for a $20 million line of credit for working capital or other business needs. The Company pays a commitment fee of 0.25% per annum of the daily average of the unused portion of the $20 million Facility. Borrowings under the Facility bore interest at a rate equal to one month LIBOR plus 0.75%. At April 30, 2016, the effective borrowing rate would have been 1.19%.

The Facility provides that the Company maintain certain financial and operating ratios which include, among other provisions, minimum liquidity on a consolidated basis of $25 million in cash and equivalents at all times, a current ratio (calculated using current liabilities excluding deferred revenue) of not less than 1.3 to 1.0 determined at the end of each fiscal quarter, a leverage ratio of not more than 1.5 to 1.0 determined at the end of each fiscal quarter, and a debt service coverage ratio of not less than 1.5 to 1.0 determined at the end of each fiscal year. The Facility also contains customary covenants that could restrict the Company’s ability to incur additional indebtedness.

As of April 30, 2016, there were no borrowings under the Facility and the Company was in compliance with all financial covenants.

XML

ACCUMULATED OTHER COMPREHENSIVE LOSS

3 Months Ended

Apr. 30, 2016

ACCUMULATED OTHER COMPREHENSIVE LOSS [Abstract]

ACCUMULATED OTHER COMPREHENSIVE LOSS

7. 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, 2016	$	(8,729	)
Other comprehensive income before reclassifications		606
Amounts reclassified from accumulated other comprehensive loss		—
Net current period other comprehensive income		606
Balance as of April 30, 2016	$	(8,123	)

During the first quarter of fiscal 2017 there were no reclassifications from accumulated other comprehensive loss.

XML

INCOME TAXES

3 Months Ended

Apr. 30, 2016

INCOME TAXES [Abstract]

INCOME TAXES

8. INCOME TAXES

The Company’s income tax provision for the first quarter of fiscal 2017 and 2016 reflects estimates of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events which are recorded in the period they occur.

The Company recorded income tax (benefit) expense of $(1.1) million and $0.2 million in the first quarter of fiscal 2017 and fiscal 2016, respectively. The effective tax rate was 28% during the first quarter of fiscal 2017 compared to 27% for the same period in the prior year. The difference in rates was primarily due to jurisdictional mix and lower forecasted book income in fiscal 2017.  The estimated annual effective tax rate increased to 30% from 28% in the previous fiscal year 2016. The difference in rates is primarily due to jurisdictional mix.

The gross amount of unrecognized tax benefits was $1.5 million at April 30, 2016, including interest and penalties.  As a result of adoption of ASU 2013-11, the Company reduced its unrecognized tax benefits by $1.0 million with an accompanying reduction of deferred tax assets by $1.0 million.  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.  In the next twelve months, due to potential settlements with domestic tax authorities related to tax credits and lapse in statute of limitations, an estimated $0.1 million of gross unrecognized tax benefits may be recognized.

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 April 30, 2016, the Company has accrued approximately $0.2 million of interest and penalty expense relating to unrecognized tax benefits.

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, 1998, 1999, 2010, 2012, 2013 and 2014

· Thailand for fiscal year ended 2014

During the first three months of fiscal year 2017, QAD has settled the following audits with immaterial or no adjustments made as a result of the settlements:

· Italy for the fiscal years ended 2011, 2012, 2013 and 2014

· Wisconsin for the fiscal years ended 2012, 2013 and 2014

XML

STOCKHOLDERS' EQUITY

3 Months Ended

Apr. 30, 2016

STOCKHOLDERS' EQUITY [Abstract]

STOCKHOLDERS' EQUITY

9. STOCKHOLDERS’ EQUITY

Issuance of Common Stock

On January 22, 2015, the Company closed an offering of 2,000,000 shares of Class A common stock. The net proceeds to the Company from the sale of the stock were $37.0 million after deducting underwriting discounts and commissions and offering expenses. On February 18, 2015 the offering underwriters exercised in full an option to purchase additional shares. As a result, 450,000 shares of Class A common stock were issued generating approximately $8.4 million in additional net proceeds.

Dividends

The following table sets forth the dividends that were declared by the Company during the first quarter of fiscal 2017:

Declaration Date	Record Date	Payable	Dividend Class A		Dividend Class B		Amount
4/12/2016	4/26/2016	5/3/2016	$	0.072	$	0.06	$	1,316,000

XML

STOCK-BASED COMPENSATION

3 Months Ended

Apr. 30, 2016

STOCK-BASED COMPENSATION [Abstract]

STOCK-BASED COMPENSATION

10. STOCK-BASED COMPENSATION

The Company’s equity awards consist of SARs and RSUs. For a description of the Company’s stock-based compensation plans, see Note 5 “Stock-Based Compensation” in Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended January 31, 2016.

Stock-Based Compensation

The following table sets forth reported stock-based compensation expense for the three months ended April 30, 2016 and 2015:

	Three Months Ended April 30,
	2016		2015
	(in thousands)
Cost of subscription	$	19	$	12
Cost of maintenance and other revenue		61		46
Cost of professional services		155		119
Sales and marketing		261		261
Research and development		227		148
General and administrative		831		720
Total stock-based compensation expense	$	1,554	$	1,306

SAR Information

The following table summarizes the activity for outstanding SARs for the three months ended April 30, 2016:

	SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2016		2,596		$	14.74
Granted		—			—
Exercised		(20	)		10.44
Expired		—			—
Forfeited		(6	)		12.16
Outstanding at April 30, 2016		2,570		$	14.78		4.6	$	14,640
Vested and expected to vest at April 30, 2016 (1)		2,566		$	14.78		4.6	$	14,616
Vested and exercisable at April 30, 2016		1,503		$	11.52		3.6	$	11,773

(1) The expected-to-vest SARs are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding SARs.

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, 2016, 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, 2016. The total intrinsic value of SARs exercised in the three months ended April 30, 2016 was $0.2 million.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.  During the quarter ended April 30, 2016, the Company withheld 3,400 shares for payment of these taxes at a value of $69,000.

At April 30, 2016, there was approximately $5.0 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately 2.4 years.

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, 2016:

	RSUs			Weighted Average Grant Date Fair Value
	(in thousands)
Restricted stock at January 31, 2016		617		$	20.91
Granted		—			—
Released (1)		(45	)		20.41
Forfeited		(16	)		21.15
Restricted stock at April 30, 2016		556		$	20.94

(1) The number of RSUs released includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements.

The Company withholds, at the employee’s election, 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, 2016, the Company withheld 16,000 shares for payment of these taxes at a value of $0.3 million.

Total unrecognized compensation cost related to RSUs was approximately $8.2 million as of April 30, 2016. This cost is expected to be recognized over a weighted-average period of approximately 2.6 years.

XML

DEFERRED REVENUES

3 Months Ended

Apr. 30, 2016

DEFERRED REVENUES [Abstract]

DEFERRED REVENUES

11. DEFERRED REVENUES

Deferred revenues consisted of the following:

	April 30, 2016		January 31, 2016
	(in thousands)
Deferred maintenance revenue	$	73,594	$	79,533
Deferred subscription revenue		15,397		14,194
Deferred services revenue		1,984		2,332
Deferred license revenue		1,248		1,549
Deferred other revenue		417		303
Deferred revenues, current		92,640		97,911
Deferred revenues, non-current (in Other liabilities)		1,486		1,690
Total deferred revenues	$	94,126	$	99,601

Deferred maintenance and subscription revenues represent customer payments made in advance for support and subscription contracts. Support and subscription are billed in advance with corresponding revenues being recognized ratably over the support and subscription periods. Support is typically billed annually while subscription is typically billed quarterly. Deferred services revenues represent both prepayments for our professional services where revenues for these services are generally recognized as the Company completes the performance obligations for the prepaid services; and services already provided but deferred due to software revenue recognition rules. Deferred license revenues result from undelivered products or specified enhancements, customer specific acceptance provisions and software license transactions that cannot be segmented from undelivered consulting or other services.

XML

COMMITMENTS AND CONTINGENCIES

3 Months Ended

Apr. 30, 2016

COMMITMENTS AND CONTINGENCIES [Abstract]

COMMITMENTS AND CONTINGENCIES

12. 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.

XML

BUSINESS SEGMENT INFORMATION

3 Months Ended

Apr. 30, 2016

BUSINESS SEGMENT INFORMATION [Abstract]

BUSINESS SEGMENT INFORMATION

13. BUSINESS SEGMENT INFORMATION

The Company markets its products and services worldwide, primarily to companies in the manufacturing industry, including automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries. The Company sells and licenses its products through its direct sales force in four geographic regions: North America; Europe, the Middle East and Africa (“EMEA”); Asia Pacific; and Latin America and through distributors where third parties can extend sales reach more effectively or efficiently. The North America region includes the United States and Canada. The EMEA region includes Europe, the Middle East and Africa. The Asia Pacific region includes Asia and Australia. The Latin America region includes South America, Central America and Mexico. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, reviews the consolidated results within one operating segment.

License and subscription revenues are assigned to the geographic regions based on both the proportion of users in each region and sales effort. Maintenance revenue is allocated to the region where the end user customer is located. Services revenue is assigned based on the region where the services are performed.

	Three Months Ended April 30,
	2016		2015
Revenue:	(in thousands)
North America (1)	$	29,519	$	30,222
EMEA		19,792		21,802
Asia Pacific		11,680		11,725
Latin America		4,406		5,516
	$	65,397	$	69,265

(1) Sales into Canada accounted for 2% of North America total revenue in each of the three months ended April 30, 2016 and 2015.

XML

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS (Policies)

3 Months Ended

Apr. 30, 2016

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS [Abstract]

Basis of Presentation

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 (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 accounting principles generally accepted in the United States of America 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, 2016. The Condensed Consolidated Financial Statements include the results of the Company and its wholly owned subsidiaries. The results of operations for the three months ended April 30, 2016 are not necessarily indicative of the results to be expected for the year ending January 31, 2017.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the FASB issued accounting standard update, or ASU, 2014-09, Revenue from Contracts with Customers. The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. GAAP with a five-step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2019. Early adoption would be permitted for the Company beginning in fiscal year 2018. The standard permits the use of either the retrospective or cumulative transition method. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In April 2015, the FASB issued ASU 2015-03 - Interest - Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and is to be implemented retrospectively. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017.  Adoption of this ASU did not have a material impact on the Company’s financial statements.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, given that the authoritative guidance within ASU 2015-03 for debt issuance costs does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017.  Adoption of this ASU did not have a material impact on the Company’s financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes which requires deferred tax liabilities and assets be presented as noncurrent on the classified statement of financial position. ASU 2015-17 will be effective for the Company’s fiscal year beginning February 1, 2017. The standard permits the use of either prospective or retrospective application to all periods presented. The Company does not expect this adoption to have a significant impact on its consolidated financial statements.

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 currently 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 its adoption of ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company on January 1, 2017 and the Company is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

XML

COMPUTATION OF NET (LOSS) INCOME PER SHARE (Tables)

3 Months Ended

Apr. 30, 2016

COMPUTATION OF NET (LOSS) INCOME PER SHARE [Abstract]

Computation of basic and diluted net income per share

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

	Three Months Ended April 30,
	2016			2015
	(in thousands except per share data)
Net (loss) income	$	(2,742	)	$	549
Less: Dividends declared		(1,316	)		(1,299	)
Undistributed net loss	$	(4,058	)	$	(750	)
Net (loss) income per share – Class A Common Stock
Dividends declared	$	1,124		$	1,107
Allocation of undistributed net loss		(3,465	)		(639	)
Net (loss) income attributable to Class A common stock	$	(2,341	)	$	468
Weighted average shares of Class A common stock outstanding—basic		15,594			15,262
Weighted average potential shares of Class A common stock		—			786
Weighted average shares of Class A common stock and potential common shares outstanding—diluted		15,594			16,048
Basic net (loss) income per Class A common share	$	(0.15	)	$	0.03
Diluted net (loss) income per Class A common share	$	(0.15	)	$	0.03
Net (loss) income per share – Class B Common Stock
Dividends declared	$	192		$	192
Allocation of undistributed net loss		(593	)		(111	)
Net (loss) income attributable to Class B common stock	$	(401	)	$	81
Weighted average shares of Class B common stock outstanding—basic		3,204			3,196
Weighted average potential shares of Class B common stock		—			83
Weighted average shares of Class B common stock and potential common shares outstanding—diluted		3,204			3,279
Basic net (loss) income per Class B common share	$	(0.13	)	$	0.03
Diluted net (loss) income per Class B common share	$	(0.13	)	$	0.02

Number of potential common shares not included in the calculation of diluted net income per share

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,
	2016		2015
	(in thousands)
Class A		2,807		326
Class B		349		60

XML

FAIR VALUE MEASUREMENTS (Tables)

3 Months Ended

Apr. 30, 2016

FAIR VALUE MEASUREMENTS [Abstract]

Summary of financial assets and liabilities, measured at fair value

The following table sets forth the financial assets and liabilities, measured at fair value, as of April 30, 2016 and January 31, 2016:

	Fair value measurement at reporting date using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable  Inputs (Level 3)
			(in thousands)
Money market mutual funds as of April 30, 2016 (a)	$	112,792
Money market mutual funds as of January  31, 2016 (a)	$	113,984
Liability related to the interest rate swap as of April 30, 2016 (b)			$	(706	)
Liability related to the  interest rate swap as of January 31, 2016 (b)			$	(675	)

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

(b) The 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.

Fair values of the derivative instrument

The fair values of the derivative instrument at April 30, 2016 and January 31, 2016 were as follows (in thousands):

	Liability
		Fair Value
	Balance Sheet Location	April 30, 2016			January 31, 2016
Derivative instrument:
Interest rate swap	Other liabilities	$	(706	)	$	(675	)
Total		$	(706	)	$	(675	)

XML

CAPITALIZED SOFTWARE COSTS (Tables)

3 Months Ended

Apr. 30, 2016

CAPITALIZED SOFTWARE COSTS [Abstract]

Capitalized software costs and amortization

Capitalized software costs and accumulated amortization at April 30, 2016 and January 31, 2016 were as follows:

	April 30, 2016			January 31, 2016
	(in thousands)
Capitalized software costs:
Acquired software technology	$	3,458		$	3,458
Capitalized software development costs (1)		788			1,029
		4,246			4,487
Less accumulated amortization		(2,925	)		(2,934	)
Capitalized software costs, net	$	1,321		$	1,553

(1) Capitalized software development costs include the impact of foreign currency translation.

Estimated amortization expense

The following table summarizes the estimated amortization expense relating to the Company’s capitalized software costs as of April 30, 2016:

Fiscal Years	(in thousands)
2017 remaining	$	710
2018		566
2019		42
2020		3
	$	1,321

XML

GOODWILL AND INTANGIBLE ASSETS (Tables)

3 Months Ended

Apr. 30, 2016

GOODWILL AND INTANGIBLE ASSETS [Abstract]

Changes in carrying amount of goodwill

The changes in the carrying amount of goodwill for the three months ended April 30, 2016 were as follows:

	Gross Carrying Amount		Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2016	$	26,253	$	(15,608	)	$	10,645
Impact of foreign currency translation		126		—			126
Balance at April 30, 2016	$	26,379	$	(15,608	)	$	10,771

Intangible assets

	April 30, 2016			January 31, 2016
	(in thousands)
Amortizable intangible assets
Customer relationships (1)	$	2,796		$	2,749
Trade name		515			515
		3,311			3,264
Less: accumulated amortization		(2,392	)		(2,191	)
Net amortizable intangible assets	$	919		$	1,073

(1) Customer relationships include the impact of foreign currency translation.

Estimated amortization expense

The following table summarizes the estimated amortization expense relating to the Company’s intangible assets as of April 30, 2016:

Fiscal Years	(in thousands)
2017 remaining	$	499
2018		420
	$	919

XML

DEBT (Tables)

3 Months Ended

Apr. 30, 2016

DEBT [Abstract]

Debt

	April 30, 2016			January 31, 2016
	(in thousands)
Note payable	$	14,574		$	14,680
Less current maturities		(428	)		(422	)
Less loan origination costs, net		(64	)		(67	)
Long-term debt	$	14,082		$	14,191

XML

ACCUMULATED OTHER COMPREHENSIVE LOSS (Tables)

3 Months Ended

Apr. 30, 2016

ACCUMULATED OTHER COMPREHENSIVE LOSS [Abstract]

Components of accumulated other comprehensive loss, net of taxes

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

	Foreign Currency Translation Adjustments
	(in thousands)
Balance as of January 31, 2016	$	(8,729	)
Other comprehensive income before reclassifications		606
Amounts reclassified from accumulated other comprehensive loss		—
Net current period other comprehensive income		606
Balance as of April 30, 2016	$	(8,123	)

XML

STOCKHOLDERS' EQUITY (Tables)

3 Months Ended

Apr. 30, 2016

STOCKHOLDERS' EQUITY [Abstract]

Dividends declared

The following table sets forth the dividends that were declared by the Company during the first quarter of fiscal 2017:

Declaration Date	Record Date	Payable	Dividend Class A		Dividend Class B		Amount
4/12/2016	4/26/2016	5/3/2016	$	0.072	$	0.06	$	1,316,000

XML

STOCK-BASED COMPENSATION (Tables)

3 Months Ended

Apr. 30, 2016

STOCK-BASED COMPENSATION [Abstract]

Allocation of stock-based compensation expense

The following table sets forth reported stock-based compensation expense for the three months ended April 30, 2016 and 2015:

	Three Months Ended April 30,
	2016		2015
	(in thousands)
Cost of subscription	$	19	$	12
Cost of maintenance and other revenue		61		46
Cost of professional services		155		119
Sales and marketing		261		261
Research and development		227		148
General and administrative		831		720
Total stock-based compensation expense	$	1,554	$	1,306

Activity for outstanding SARs

The following table summarizes the activity for outstanding SARs for the three months ended April 30, 2016:

	SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2016		2,596		$	14.74
Granted		—			—
Exercised		(20	)		10.44
Expired		—			—
Forfeited		(6	)		12.16
Outstanding at April 30, 2016		2,570		$	14.78		4.6	$	14,640
Vested and expected to vest at April 30, 2016 (1)		2,566		$	14.78		4.6	$	14,616
Vested and exercisable at April 30, 2016		1,503		$	11.52		3.6	$	11,773

(1) The expected-to-vest SARs are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding SARs.

Summary of activity for RSUs

The following table summarizes the activity for RSUs for the three months ended April 30, 2016:

	RSUs			Weighted Average Grant Date Fair Value
	(in thousands)
Restricted stock at January 31, 2016		617		$	20.91
Granted		—			—
Released (1)		(45	)		20.41
Forfeited		(16	)		21.15
Restricted stock at April 30, 2016		556		$	20.94

(1) The number of RSUs released includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements.

XML

DEFERRED REVENUES (Tables)

3 Months Ended

Apr. 30, 2016

DEFERRED REVENUES [Abstract]

Deferred revenues

Deferred revenues consisted of the following:

	April 30, 2016		January 31, 2016
	(in thousands)
Deferred maintenance revenue	$	73,594	$	79,533
Deferred subscription revenue		15,397		14,194
Deferred services revenue		1,984		2,332
Deferred license revenue		1,248		1,549
Deferred other revenue		417		303
Deferred revenues, current		92,640		97,911
Deferred revenues, non-current (in Other liabilities)		1,486		1,690
Total deferred revenues	$	94,126	$	99,601

XML

BUSINESS SEGMENT INFORMATION (Tables)

3 Months Ended

Apr. 30, 2016

BUSINESS SEGMENT INFORMATION [Abstract]

License and subscription revenues assigned to geographic regions

License and subscription revenues are assigned to the geographic regions based on both the proportion of users in each region and sales effort. Maintenance revenue is allocated to the region where the end user customer is located. Services revenue is assigned based on the region where the services are performed.

	Three Months Ended April 30,
	2016		2015
Revenue:	(in thousands)
North America (1)	$	29,519	$	30,222
EMEA		19,792		21,802
Asia Pacific		11,680		11,725
Latin America		4,406		5,516
	$	65,397	$	69,265

(1) Sales into Canada accounted for 2% of North America total revenue in each of the three months ended April 30, 2016 and 2015.

XML

COMPUTATION OF NET (LOSS) INCOME PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Apr. 30, 2016	Apr. 30, 2015
Earnings Per Share, Diluted, by Common Class, Including Two Class Method [Line Items]
Net (loss) income	$ (2,742)	$ 549
Less: Dividends declared	(1,316)	(1,299)
Undistributed net loss	(4,058)	(750)
Net (loss) income per share [Abstract]
Dividends declared	1,316	1,299
Allocation of undistributed net loss	(4,058)	(750)
Net (loss) income attributable to common stock	(2,742)	549
Common Class A [Member]
Earnings Per Share, Diluted, by Common Class, Including Two Class Method [Line Items]
Net (loss) income	(2,341)	468
Less: Dividends declared	(1,124)	(1,107)
Undistributed net loss	(3,465)	(639)
Net (loss) income per share [Abstract]
Dividends declared	1,124	1,107
Allocation of undistributed net loss	(3,465)	(639)
Net (loss) income attributable to common stock	$ (2,341)	$ 468
Weighted average shares of common stock outstanding-basic (in shares)	15,594	15,262
Weighted average potential shares of common stock (in shares)	0	786
Weighted average shares of common stock and potential common shares outstanding-diluted (in shares)	15,594	16,048
Basic net (loss) income per common share (in dollars per share)	$ (0.15)	$ 0.03
Diluted net (loss) income per common share (in dollars per share)	$ (0.15)	$ 0.03
Antidilutive securities excluded from computation of net income per share (in shares)	2,807	326
Common Class B [Member]
Earnings Per Share, Diluted, by Common Class, Including Two Class Method [Line Items]
Net (loss) income	$ (401)	$ 81
Less: Dividends declared	(192)	(192)
Undistributed net loss	(593)	(111)
Net (loss) income per share [Abstract]
Dividends declared	192	192
Allocation of undistributed net loss	(593)	(111)
Net (loss) income attributable to common stock	$ (401)	$ 81
Weighted average shares of common stock outstanding-basic (in shares)	3,204	3,196
Weighted average potential shares of common stock (in shares)	0	83
Weighted average shares of common stock and potential common shares outstanding-diluted (in shares)	3,204	3,279
Basic net (loss) income per common share (in dollars per share)	$ (0.13)	$ 0.03
Diluted net (loss) income per common share (in dollars per share)	$ (0.13)	$ 0.02
Antidilutive securities excluded from computation of net income per share (in shares)	349	60

XML

FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands		Apr. 30, 2016	Jan. 31, 2016	Apr. 30, 2015	Jan. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Liability related to interest rate swap		$ (706)	$ (675)
Cash and cash equivalents deposited with commercial banks		139,878	137,731	$ 130,864	$ 120,526
Reported Value Measurement [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents deposited with commercial banks		27,000	24,000
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market mutual funds	[1]	112,792	113,984
Significant Other Observable Inputs (Level 2) [Member] | Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Liability related to interest rate swap	[2]	$ (705)	$ (675)

[1] Money market mutual funds are recorded at fair value based upon quoted market prices.

[2] The 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.

XML

FAIR VALUE MEASUREMENTS, Derivative Instruments (Details) - USD ($)	3 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Jan. 31, 2016
Derivatives, Fair Value [Line Items]
Fair value of derivative instrument	$ (706,000)		$ (675,000)
Interest Rate Swap [Member]
Derivatives, Fair Value [Line Items]
Change in fair value recognized in net income (loss)	(31,000)	$ 245,000
Interest Rate Swap [Member] | Other Liabilities [Member]
Derivatives, Fair Value [Line Items]
Fair value of derivative instrument	$ (706,000)		$ (675,000)

XML

CAPITALIZED SOFTWARE COSTS (Details) - USD ($) $ in Thousands		3 Months Ended
		Apr. 30, 2016	Apr. 30, 2015	Jan. 31, 2016
CAPITALIZED SOFTWARE COSTS [Abstract]
Acquired software technology		$ 3,458		$ 3,458
Capitalized software development costs	[1]	788		1,029
Capitalized software, gross		4,246		4,487
Less accumulated amortization		(2,925)		(2,934)
Capitalized software costs, net		1,321		1,553
Capitalized software development costs, write-off		300
Capitalized computer software amortization		200	$ 300
Estimated Amortization Expense [Abstract]
2017 remaining		499
2018		420
Total		919		$ 1,073
Capitalized Software [Member]
Estimated Amortization Expense [Abstract]
2017 remaining		710
2018		566
2019		42
2020		3
Total		$ 1,321

[1] Capitalized software development costs include the impact of foreign currency translation.

XML

GOODWILL AND INTANGIBLE ASSETS (Details) - USD ($) $ in Thousands		3 Months Ended
		Apr. 30, 2016	Apr. 30, 2015	Jan. 31, 2016
Gross Carrying Amount [Abstract]
Balance, beginning of period		$ 26,253
Impact of foreign currency translation		126
Balance, end of period		26,379
Accumulated Impairment [Abstract]
Balance, beginning of period		(15,608)
Impact of foreign currency translation		0
Balance, end of period		(15,608)
Goodwill, Net [Abstract]
Balance, beginning of period		10,645
Impact of foreign currency translation		126
Balance, end of period		10,771
Intangible Assets [Abstract]
Amortizable intangible assets, gross		3,311		$ 3,264
Less: accumulated amortization		(2,392)		(2,191)
Total		919		1,073
Amortization of intangible assets		165	$ 164
Estimated Amortization Expense [Abstract]
2017 remaining		499
2018		420
Total		919
Customer Relationships [Member]
Intangible Assets [Abstract]
Amortizable intangible assets, gross	[1]	2,796		2,749
Trade Name [Member]
Intangible Assets [Abstract]
Amortizable intangible assets, gross		$ 515		$ 515

[1] Customer relationships include the impact of foreign currency translation.

XML

DEBT, Long-term (Details) - USD ($) $ in Thousands	Apr. 30, 2016	Jan. 31, 2016
Long-term Debt [Abstract]
Note payable	$ 14,574	$ 14,680
Less current maturities	(428)	(422)
Less loan origination costs, net	(64)	(67)
Long-term debt	$ 14,082	$ 14,191

XML

DEBT, Note Payable (Details) - 2012 Mortgage [Member] - Rabobank N.A [Member] - Quad Ortega Hill LLC [Member] - USD ($)		3 Months Ended
	May. 30, 2012	Apr. 30, 2016
Notes Payable [Abstract]
Original principal amount	$ 16,100,000
Principal and interest	88,100
Final principal payment	$ 11,700,000
Unpaid balance		$ 14,600,000
LIBOR [Member]
Notes Payable [Abstract]
Basis spread on variable rate	2.25%
One month LIBOR		0.44%
Swap Agreement [Member]
Notes Payable [Abstract]
Initial notional amount of swap agreement	$ 16,100,000
Fixed interest rate	4.31%

XML

DEBT, Credit Facility (Details) - Rabobank N.A [Member] - Unsecured Credit Agreement [Member]	3 Months Ended
	Apr. 30, 2016 USD ($)
Credit Facility [Abstract]
Maximum borrowing capacity	$ 20,000,000
Unused capacity commitment fee	0.25%
Effective borrowing rate	1.19%
Liquidity on a consolidated basis, Minimum	$ 25,000,000
Current ratio, Minimum	1.3
Leverage ratio, Maximum	1.5
Debt service coverage ratio, Minimum	1.5
Borrowings outstanding	$ 0
LIBOR [Member]
Credit Facility [Abstract]
Basis spread on variable rate	0.75%

XML

ACCUMULATED OTHER COMPREHENSIVE LOSS (Details) $ in Thousands	3 Months Ended
	Apr. 30, 2016 USD ($)
Accumulated Other Comprehensive Income Loss [Line Items]
Balance as of beginning of period	$ (8,729)
Balance as of end of period	(8,123)
Foreign Currency Translation Adjustments [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Balance as of beginning of period	(8,729)
Other comprehensive income before reclassifications	606
Amounts reclassified from accumulated other comprehensive loss	0
Net current period other comprehensive loss	606
Balance as of end of period	$ (8,123)

XML

INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Apr. 30, 2016	Apr. 30, 2015	Jan. 31, 2016	Jan. 31, 2015
Income Tax Contingency [Line Items]
Income tax (benefit) expense	$ (1,069)	$ 204
Effective tax rate	28.00%	27.00%	30.00%	28.00%
Unrecognized tax benefits	$ 1,500
Reduction of unrecognized tax benefits	1,000
Reduction of deferred tax assets	1,000
Unrecognized tax benefits recognized in next twelve months	100
Unrecognized tax benefits, income tax penalties and interest accrued	$ 200
India [Member]
Income Tax Contingency [Line Items]
Years in which the company is currently under audit	fiscal years ended March 31, 1998, 1999, 2010, 2012 , 2013 and 2014
Thailand [Member]
Income Tax Contingency [Line Items]
Years for which the company settled audits	fiscal year ended 2014
Italy [Member]
Income Tax Contingency [Line Items]
Years in which the company is currently under audit	fiscal years ended 2011, 2012, 2013 and 2014
Wisconsin [Member]
Income Tax Contingency [Line Items]
Years for which the company settled audits	fiscal years ended 2012, 2013 and 2014

XML

STOCKHOLDERS' EQUITY (Details) - USD ($)			3 Months Ended
	Feb. 18, 2015	Jan. 22, 2015	Apr. 30, 2016	Apr. 30, 2015
Issuance of common stock [Abstract]
Net proceeds from stock issued			$ 0	$ 8,365,000
Dividends Declaration Date One [Member]
Dividends [Abstract]
Declaration date			Apr. 12, 2016
Record date			Apr. 26, 2016
Payable			May 03, 2016
Amount paid in cash			$ 1,316,000
Common Class A [Member]
Issuance of common stock [Abstract]
Stock issued (in shares)	450,000	2,000,000
Net proceeds from stock issued	$ 8,400,000	$ 37,000,000
Common Class A [Member] | Dividends Declaration Date One [Member]
Dividends [Abstract]
Dividend (in dollars per share)			$ 0.072
Common Class B [Member] | Dividends Declaration Date One [Member]
Dividends [Abstract]
Dividend (in dollars per share)			$ 0.06

XML

STOCK-BASED COMPENSATION (Details) - USD ($)		3 Months Ended
		Apr. 30, 2016	Apr. 30, 2015
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense		$ 1,554,000	$ 1,306,000
Cost of Subscription [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense		19,000	12,000
Cost of Maintenance and Other Revenue [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense		61,000	46,000
Cost of Professional Services [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense		155,000	119,000
Sales and Marketing [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense		261,000	261,000
Research and Development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense		227,000	148,000
General and Administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense		$ 831,000	$ 720,000
Stock Appreciation Rights (SARs) [Member]
Stock Appreciation Rights (SARs) [Roll Forward]
Outstanding at beginning of period (in shares)		2,596,000
Granted (in shares)		0
Exercised (in shares)		(20,000)
Expired (in shares)		0
Forfeited (in shares)		(6,000)
Outstanding at end of period (in shares)		2,570,000
Vested and expected to vest (in shares)	[1]	2,566,000
Vested and exercisable (in shares)		1,503,000
Weighted Average Exercise Price per Share [Abstract]
Outstanding at beginning of period (in dollars per share)		$ 14.74
Granted (in dollars per share)		0
Exercised (in dollars per share)		10.44
Expired (in dollars per share)		0
Forfeited (in dollars per share)		12.16
Outstanding at end of period (in dollars per share)		14.78
Vested and expected to vest (in dollars per share)	[1]	14.78
Vested and exercisable (in dollars per share)		$ 11.52
Additional Disclosures [Abstract]
Weighted average remaining contractual term, outstanding at end of period		4 years 7 months 6 days
Weighted average remaining contractual term, vested and expected to vest at end of period	[1]	4 years 7 months 6 days
Weighted average remaining contractual term, vested and exercisable at end of period		3 years 7 months 6 days
Aggregate intrinsic value, outstanding at end of period		$ 14,640,000
Aggregate intrinsic value, vested and expected to vest at end of period	[1]	14,616,000
Aggregate intrinsic value, vested and exercisable at end of period		11,773,000
Total intrinsic value of SARs exercised		$ 200,000
Number of shares withheld for payment of taxes (in shares)		3,400
Value of shares withheld for payment of taxes		$ 69,000.0
Total unrecognized compensation cost		$ 5,000,000
Weighted-average period to recognize total unrecognized compensation cost		2 years 4 months 24 days
Restricted Stock Units (RSUs) [Member]
Additional Disclosures [Abstract]
Number of shares withheld for payment of taxes (in shares)		16,000
Value of shares withheld for payment of taxes		$ 300,000
Total unrecognized compensation cost		$ 8,200,000
Weighted-average period to recognize total unrecognized compensation cost		2 years 7 months 6 days
Summary of Activity of RSUs [Roll Forward]
Restricted stock at beginning of period (in shares)		617,000
Granted (in shares)		0
Released (in shares)	[2]	(45,000)
Forfeited (in shares)		(16,000)
Restricted stock at end of period (in shares)		556,000
Weighted Average Grant Date Fair Value [Abstract]
Restricted stock at beginning of period (in dollars per share)		$ 20.91
Granted (in dollars per share)		0
Released (in dollars per share)	[2]	20.41
Forfeited (in dollars per share)		21.15
Restricted stock at end of period (in dollars per share)		$ 20.94

[1] The expected-to-vest SARs are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding SARs.

[2] The number of RSUs released includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements.

XML

DEFERRED REVENUES (Details) - USD ($) $ in Thousands	Apr. 30, 2016	Jan. 31, 2016
Deferred Revenue Arrangement [Line Items]
Deferred revenues, current	$ 92,640	$ 97,911
Deferred revenues, non-current (in Other liabilities)	1,486	1,690
Total deferred revenues	94,126	99,601
Deferred Maintenance Revenue [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenues, current	73,594	79,533
Deferred Subscription Revenue [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenues, current	15,397	14,194
Deferred Services Revenue [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenues, current	1,984	2,332
Deferred License Revenue [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenues, current	1,248	1,549
Deferred Other Revenue [Member]
Deferred Revenue Arrangement [Line Items]
Deferred revenues, current	$ 417	$ 303

XML

BUSINESS SEGMENT INFORMATION (Details) $ in Thousands		3 Months Ended
		Apr. 30, 2016 USD ($) Region Segment	Apr. 30, 2015 USD ($)
BUSINESS SEGMENT INFORMATION [Abstract]
Number of geographic regions | Region		4
Number of operating segments | Segment		1
Revenues From External Customers And Long Lived Assets [Line Items]
Revenue		$ 65,397	$ 69,265
Percentage of sales into Canada of North America total revenue		2.00%	2.00%
North America [Member] | Reportable Geographical Components [Member]
Revenues From External Customers And Long Lived Assets [Line Items]
Revenue	[1]	$ 29,519	$ 30,222
EMEA [Member] | Reportable Geographical Components [Member]
Revenues From External Customers And Long Lived Assets [Line Items]
Revenue		19,792	21,802
Asia Pacific [Member] | Reportable Geographical Components [Member]
Revenues From External Customers And Long Lived Assets [Line Items]
Revenue		11,680	11,725
Latin America [Member] | Reportable Geographical Components [Member]
Revenues From External Customers And Long Lived Assets [Line Items]
Revenue		$ 4,406	$ 5,516

[1] Sales into Canada accounted for 2% of North America total revenue in each of the three months ended April 30, 2016 and 2015.