STOCK-BASED COMPENSATION

Stock Plans

June 14, 2016,

the stockholders approved the QAD Inc.

2016

Stock Incentive Program (

“2016

Program”). The

2016

Program allows for equity awards in the form of incentive stock options, non-statutory stock options, restricted shares, rights to purchase stock, stock appreciation rights (“SARs”) and other stock rights. The stockholders authorized a maximum of

4,000,000

shares to be issued under the

2016

Program. Prior to

July 1, 2016,

stock awards were issued under the QAD Inc.

2006

Stock Incentive Program. As of

January 31, 2018,

3,321,000

Class A Common Shares were available for issuance.

The Company issues restricted stock units (“RSUs”) to employees with the exception of the CEO and President of the Company. RSUs granted to employees under the

2016

Program and

2006

Program are generally released

25%

after each year of service for

four

years and are contingent upon employment with the Company on the release date. Stock-based compensation is typically issued out of treasury shares. At

January 31, 2018,

there were

281,000

RSUs of Class A Common Stock outstanding under the

2016

Program and

372,000

RSUs of Class A Common Stock outstanding under the

2006

Program.

The Company also issues equity awards in the form of stock-settled SARs to the CEO and President of the Company. A SAR is a contractual right to receive value tied to the post-grant appreciation of the underlying stock. Although the Company has the ability to grant stock-settled or cash-settled SARs, the Company has only granted stock-settled SARs. Upon vesting, a holder of a stock-settled SAR receives shares in the Company

’s common stock equal to the intrinsic value of the SAR at time of exercise. Under the

2006

Program, SARs have generally been granted for a term of

eight

years, they generally vest

25%

after each year of service for

four

years and are contingent upon employment with the Company on the vesting date. Economically, a stock-settled SAR provides the same compensation value as a stock option, but the employee is

not

required to pay an exercise price upon exercise of the SAR. Stock compensation expense, as required under ASC

718,

is the same for stock-settled SARs and stock options. At

January 31, 2018,

there were

380,000

SARs to purchase Class A Common Stock under the

2016

Program. At

January 31, 2018,

there were

2,276,000

and

368,000

SARs to purchase Class A Common Stock and Class B Common Stock, under the

2006

Program, respectively.

Equity compensation is also issued to non-employee Board members that are newly-appointed or reelected at the Annual Meeting of Stockholders.

They are granted Class A shares as stock payments that are fully vested on the date of grant. Equity awards to non-employee Board members are limited to

$250,000

per year, as determined for the Company’s financial accounting purposes as of the date of grant.

Under the

2016

Program, officers, directors, employees, consultants and other independent contractors or agents of the Company or subsidiaries of the Company who are responsible for or contribute to the management, growth or profitability of its business are eligible for selection by the program administrators to participate. However, incentive stock options granted under the

2016

Program

may

only be granted to a person who is an employee of the Company or

one

of its subsidiaries.

Stock- Based Compensation

The following table sets forth reported stock compensation expense included in the Company

’s Consolidated Statements of Operations and Comprehensive (Loss) Income for the fiscal years ended

January 31, 2018,

2017

and

2016:

	Years Ended January 31,
	2018		2017		2016
	(in thousands)
Stock-based compensation expense:
Cost of subscription	$	161	$	113	$	76
Cost of maintenance and other revenue		384		299		271
Cost of professional services		1,085		848		739
Sales and marketing		1,510		1,200		1,377
Research and development		1,226		1,009		900
General and administrative		4,558		3,854		4,077
Total stock-based compensation expense	$	8,924	$	7,323	$	7,440

RSU Information

The following table summarizes the activity for RSUs for the fiscal years ended

January 31, 2018,

2017

and

2016:

	RSUs (in thousands)			Weighted Average Grant Date Fair Value
Restricted stock at January 31, 2015		503		$	16.27
Granted		326			24.75
Released (1)		(192	)		15.58
Forfeited		(20	)		18.93
Restricted stock at January 31, 2016		617		$	20.91
Granted		307			18.54
Released (1)		(259	)		18.96
Forfeited		(42	)		20.69
Restricted stock at January 31, 2017		623		$	20.56
Granted		295			30.69
Released (1)		(245	)		20.48
Forfeited		(20	)		22.36
Restricted stock at January 31, 2018		653		$	25.10

(

)

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

January 31, 2018,

2017

and

2016,

the Company withheld

74,000

shares,

75,000

shares and

52,000

shares, respectively, for payment of these taxes. The value of the withheld shares for the fiscal years ended

January 31, 2018,

2017

and

2016

were

$2.4

million,

$1.5

million and

$1.4

million, respectively.

Total unrecognized compensation cost related to RSUs was approximately

$12.5

million as of

January 31, 2018.

This cost is expected to be recognized over a period of approximately

2.7

years.

SAR Information

The weighted average assumptions used to value SARs are shown in the following table.

	Years Ended January 31,
	2018			2017			2016
Expected life in years		5.50			5.25			5.00
Risk free interest rate		1.82	%		1.16	%		1.64	%
Volatility		33	%		36	%		41	%
Dividend rate		0.91	%		1.51	%		1.10	%

The following table summarizes the activity for outstanding SARs for the fiscal years ended

January 31, 2018,

2017

and

2016:

	Options/ SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2015		2,499		$	12.69
Granted		380			25.34
Exercised		(266	)		10.69
Expired		(12	)		14.22
Forfeited		(5	)		12.05
Outstanding at January 31, 2016		2,596		$	14.74
Granted		380			18.64
Exercised		(158	)		10.94
Expired		(17	)		12.56
Forfeited		(8	)		12.09
Outstanding at January 31, 2017		2,793		$	15.51
Granted		380			31.65
Exercised		(139	)		10.52
Expired		(10	)		9.74
Outstanding at January 31, 2018		3,024		$	17.78		4.0	$	72,901
Vested and exercisable at January 31, 2018		2,073		$	14.25		2.9	$	57,045

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company

’s common stock based on the last trading day as of

January 31, 2018

and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on

January 31, 2018.

The total intrinsic value of SARs exercised in the years ended

January 31, 2018,

2017

and

2016

was

$3.0

million,

$2.1

million and

$3.7

million, respectively. The weighted average grant date fair value per share of SARs granted in the years ended

January 31, 2018,

2017

and

2016

was

$9.59,

$5.43

and

$8.70,

respectively.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the fiscal years ended

January 31, 2018,

2017

and

2016,

the Company withheld shares

31,000,

25,000

and

44,000

shares for payment of these taxes. The value of the withheld shares for the fiscal years ended

January 31, 2018,

2017

and

2016

were

$1.0

million,

$0.6

million and

$1.1

million, respectively.

January 31, 2018,

there was approximately

$5.7

million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted average period of approximately

2.6

years.