SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

QAD is a leading provider of flexible, cloud-based and on-premise enterprise software and services for global manufacturing companies. QAD Enterprise Applications supports operational requirements in the areas of financials, customer management, supply chain, manufacturing, service and support, analytics, business process management and integration. QAD's portfolio includes related solutions for quality management software, supply chain management software, transportation management software and business-to-business interoperability. Since

1979,

QAD solutions have enabled customers in the automotive, consumer products, food and beverage, high technology, industrial manufacturing and life sciences industries to better align operations with their strategic goals to become Effective Enterprises. QAD was founded in

1979,

incorporated in California in

1986

and reincorporated in Delaware in

1997.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of QAD Inc. and all of its subsidiaries. All subsidiaries are wholly-owned and all significant balances and transactions among the entities have been eliminated from the consolidated financial statements.

USE OF ESTIMATES

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles and, accordingly, include amounts based on informed estimates and judgments of management that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Company

’s financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

The Company considers certain accounting policies related to revenue, accounts receivable allowances for doubtful accounts, goodwill and intangible assets, income taxes, and accounting for stock-based compensation to be critical policies due to the significance of these items to its operating results and the estimation processes and management judgment involved in each.

FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS

The financial position and results of operations of the Company

’s foreign subsidiaries are generally determined using the country’s local currency as the functional currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rates on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to other comprehensive (loss) income, which is included in “Accumulated other comprehensive loss” within the Consolidated Balance Sheets.

Gains and losses resulting from foreign currency transactions and remeasurement adjustments of monetary assets and liabilities

not

held in an entity

’s functional currency are included in earnings. Foreign currency transaction and remeasurement losses (gains) for fiscal

2018,

2017

and

2016

totaled

$2.5

million,

$0.2

million and $(

0.5

) million, respectively, and are included in “Other (income) expense, net” in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income.

CASH AND EQUIVALENTS

Cash and equivalents consist of cash and short-term marketable securities with maturities of less than

days at the date of purchase. The Company considers all highly liquid investments purchased with an original maturity of

days or less to be cash equivalents. At

January 31,

2018

and

2017,

the Company’s cash and equivalents consisted of money market mutual funds invested in U.S. Treasury and government securities, deposit accounts and certificates of deposit.

ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consisted of the following as of

January 31:

	2018			2017
	(in thousands)
Accounts receivable	$	85,281		$	71,647
Less allowance for:
Doubtful accounts		(396	)		(1,090	)
Sales adjustments		(1,367	)		(1,116	)
Accounts receivable, net	$	83,518		$	69,441

Trade accounts receivable are recorded at the invoiced amount and do

not

bear interest. The collectability of accounts receivable is reviewed each period by analyzing balances based on age. Specific allowances are recorded for any balances that the Company determines

may

not

be fully collectible due to a customer

’s inability to pay. The Company also provides a general reserve based on historical data including analysis of write-offs and other known factors. Provisions to the allowance for bad debts are included as bad debt expense in “General and Administrative” expense. The determination to write-off specific accounts receivable balances is based on the likelihood of collection and past due status. Past due status is based on invoice date and terms specific to each customer. The

January 31, 2017

allowance for doubtful accounts included

$0.7

million related to a fully reserved customer account. During fiscal

2018

the collections legal process was exhausted and the

$0.7

million allowance for doubtful accounts was removed from the balance sheet, with a corresponding decrease in accounts receivable.

The Company does

not

generally provide a contractual right of return; however, in the course of business

sales adjustments related to customer dispute resolution

may

occur. A provision is recorded against revenue for estimated sales adjustments in the same period the related revenues are recorded or when current information indicates additional amounts are required. These estimates are based on historical experience, specifically identified customers and other known factors.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The carrying amounts of cash and equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. The Company

’s line of credit and note payable both bear a variable market interest rate, subject to certain minimum interest rates. Therefore, the carrying amounts outstanding under the line of credit and note payable reasonably approximate fair value.

Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising our customer base, and their dispersion across many different industries and locations throughout the world.

single customer accounted for

10%

or more of the Company

’s total revenue in any of the last

three

fiscal years. In addition,

single customer accounted for

10%

or more of accounts receivable at

January 31, 2018

2017.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Additions and significant improvements to property and equipment are capitalized, while maintenance and repairs are expensed as incurred. For financial reporting purposes, depreciation is generally expensed via the straight-line method over the useful life of

three

years for computer equipment and software,

five

years for furniture and office equipment,

years for building improvements, and

years for buildings. Leasehold improvements are depreciated over the shorter of the lease term or the useful life of

five

years.

Certain costs associated with software developed for internal use, including payroll costs for employees, are capitalized once the project has reached the application development stage and are included in property and equipment classified as software. These costs are amortized using the straight-line method over the expected useful life of the software, beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, maintenance, training and research and development costs are expensed as incurred.

Property and equipment, net consisted of the following as of

January 31:

	2018			2017
	(in thousands)
Buildings and building improvements	$	32,444		$	31,979
Computer equipment and software		17,312			16,027
Furniture and office equipment		7,632			6,748
Leasehold improvements		6,677			5,984
Land		3,850			3,850
Automobiles		54			54
		67,969			64,642
Less accumulated depreciation and amortization		(37,561	)		(33,770	)
	$	30,408		$	30,872

The changes in property and equipment, net, for the fiscal years ended

January 31

were as follows:

	2018			2017
	(in thousands)
Cost
Balance at February 1	$	64,642		$	64,925
Additions		3,720			3,267
Disposals		(1,874	)		(3,258	)
Impact of foreign currency translation		1,481			(292	)
Balance at January 31		67,969			64,642

Accumulated depreciation
Balance at February 1		(33.770	)		(32,845	)
Depreciation		(4,562	)		(4,326	)
Disposals		1,719			3,211
Impact of foreign currency translation		(948	)		190
Balance at January 31		(37,561	)		(33,770	)
Property and equipment, net at January 31	$	30,408		$	30,872

Depreciation and amortization expense of property and equipment for fiscal

2018,

2017

and

2016

was

$4.6

million,

$4.3

million, and

$4.0

million, respectively. There was

impairment of property and equipment assets during fiscal

2018,

2017

and

2016.

CAPITALIZED SOFTWARE COSTS

The Company capitalizes software development costs incurred in connection with the localization and translation of its products once technological feasibility has been achieved based on a working model. A working model is defined as an operative version of the computer software product that is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product and is ready for initial customer testing (usually identified as beta testing). In addition, the Company capitalizes software purchased from

third

parties or through business combinations as acquired software technology, if the related software under development has reached technological feasibility.

The amortization of capitalized software costs is the greater of the straight-line basis over

three

years, the expected useful life, or a computation using a ratio of current revenue for a product compared to the estimated total of current and future revenues for that product. The Company periodically compares the unamortized capitalized software costs to the estimated net realizable value of the associated product. The amount by which the unamortized capitalized software costs of a particular software product exceeds the estimated net realizable value of that asset would be reported as a charge to the Consolidated Statements of

Operations and Comprehensive (Loss) Income.

Capitalized software costs and accumulated amortization at

January 31

were as follows:

	2018			2017
	(in thousands)
Capitalized software costs:
Acquired software technology	$	—		$	3,458
Capitalized software development costs		1,516			748
		1,516			4,206
Less accumulated amortization		(526	)		(3,474	)
Capitalized software costs, net	$	990		$	732

Acquired software technology costs relate to technology purchased from 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 fiscal

2018,

$3.7

million of costs and accumulated amortization was removed from the balance sheet and was primarily related to the acquired software technology which was fully amortized during fiscal

2018.

Amortization of capitalized software costs for fiscal

2018,

2017

and

2016

was

$0.8

million,

$1.0

million and

$1.1

million, respectively. Amortization of capitalized software costs is included in “Cost of license fees” in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income.

Estimated amortization expense relating to the Company

’s capitalized software costs as of

January 31, 2018

$445,000,

$365,000

and

$180,000

in fiscal

2019,

2020

and

2021,

respectively.

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Goodwill is

not

amortized, but instead is subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill

may

be impaired. The Company tests goodwill for impairment in the

fourth

quarter of each fiscal year. The Company performs a

two

-step impairment test. Under the

first

step of the goodwill impairment test, the Company is required to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is

not

considered impaired and the

second

step is

not

performed. If the results of the

first

step of the impairment test indicate that the fair value of a reporting unit does

not

exceed its carrying amount, then the

second

step of the goodwill impairment test is required. The

second

step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.

Management evaluates the Company as a single reporting unit for business and operating purposes as almost all of the Company’s revenue streams are generated by the same underlying technology whether acquired, purchased or developed. In addition, the majority of the Company’s costs are, by their nature, shared costs that are

not

specifically identifiable to a geography or product line but relate to almost all products. As a result, there is a high degree of interdependency among the Company’s revenues and cash flows for levels below the consolidated entity and identifiable cash flows for a component separate from the consolidated entity are

not

meaningful. Therefore, the Company’s impairment test considers the consolidated entity as a single reporting unit.

Judgments about the recoverability of purchased finite lived intangible assets are made whenever events or changes in circumstances indicate that an impairment

may

exist. Each fiscal year the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of finite-lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate.

Assumptions and estimates about future values and remaining useful lives of intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in the Company

’s business strategy or internal forecasts.

The changes in the carrying amount of goodwill for the fiscal years ended

January 31,

2018,

and

2017

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		(87	)		—			(87	)
Balance at January 31, 2017		26,166			(15,608	)		10,558
Impact of foreign currency translation		465			—			465
Balance at January 31, 2018	$	26,631		$	(15,608	)	$	11,023

During each of the

fourth

quarters of fiscal

2018,

2017

and

2016,

an impairment analysis was performed at the enterprise level which compared the Company’s market capitalization to its net assets as of the test date,

November 30.

As the market capitalization substantially exceeded the Company’s net assets, there was

indication of goodwill impairment for fiscal

2018,

2017

and

2016.

Intangible assets were as follows:

	January 31, 2017
	(in thousands)
Amortizable intangible assets
Customer relationships	$	2,721
Trade name		515
		3,236
Less: accumulated amortization		(2,821	)
Net amortizable intangible assets	$	415

The Company

’s intangible assets as of

January 31, 2017

are related to the DynaSys and CEBOS acquisitions completed in fiscal

2013.

Intangible assets are included in “Other assets, net” in the accompanying Consolidated Balance Sheets. As of

January 31, 2018,

the Company’s intangible assets were fully amortized.

Amortization of intangible assets was

$0.4

million for the fiscal year

2018

and

$0.7

million for each of the fiscal years

2017

and

2016.

INCOME TAXES

Income tax expense includes U.S. (federal and state) and foreign income taxes. Tax legislation commonly known as the Tax Cuts and Jobs Act of

2017

(the “Tax Act”) includes a mandatory

one

-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which

U.S. deferred tax liability had been accrued have now been subject to U.S. federal income tax. Notwithstanding the U.S. taxation of these amounts, the Company intends to continue to invest most or all of these earnings, as well as its capital in these subsidiaries, indefinitely outside of the U.S. and does

not

expect to incur any significant, additional taxes related to such amounts.

Deferred tax assets and liabilities reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent the Company believes they will

not

be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including recent cumulative loss experience and expectations of future earnings, and investment in such jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.

The Company utilizes a

two

-step approach to recognizing and measuring uncertain income tax positions (tax contingencies). The

first

step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than

not

that the position will be sustained on audit, including resolution of related appeals or litigation processes. The

second

step is to measure the tax benefit as the largest amount which is more than

50%

likely of being realized upon ultimate settlement. The Company considers many factors when evaluating its tax positions and estimating its tax benefits, which

may

require periodic adjustments and which

may

not

accurately forecast actual outcomes. The Company includes interest and penalties related to its tax contingencies in income tax expense.

STOCK-BASED COMPENSATION

The Company accounts for share-based payments (“equity awards”) to employees in accordance with ASC

718,

Compensation—Stock Compensation

(“ASC

718”

), which requires that share-based payments (to the extent they are compensatory) be recognized in the Consolidated Statements of Income and Comprehensive Income based on the fair values of the equity awards as measured at the grant date. The fair value of an equity award is recognized as stock-based compensation expense ratably over the vesting period of the equity award. Determining the fair value of equity awards at the grant date requires judgment.

Fair Value of RSUs

The fair value of restricted stock units (“RSUs”) is determined on the grant date of the award as the market price of the Company

’s common stock on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period. Judgment is required in determining the present value of estimated dividends foregone during the vesting period. The Company estimates the dividends for purposes of this calculation based on the Company’s historical dividend payments per share, which has remained consistent over the last

three

years.

Fair Value of SARs

The fair value of stock-settled stock appreciation rights (“SARs”) is determined on the grant date of the award using the Black-Scholes-Merton valuation model. One of the inputs to the Black-Scholes-Merton valuation model is the fair market value of the Company

’s stock on the date of grant. Judgment is required in determining the remaining inputs to the Black-Scholes-Merton valuation model. These inputs include the expected life, volatility, the risk-free interest rate and the dividend rate. The following describes the Company’s policies with respect to determining these valuation inputs:

Expected Life

The expected life valuation input includes a computation that is based on historical vested SAR exercises and post-vest expiration patterns and an estimate of the expected life for SARs that were fully vested and outstanding. Furthermore, based on the Company’s historical pattern of SAR exercises and post-vest expiration patterns the Company determined that there are

two

discernible populations which include the Company’s directors and officers (“D&O”) and all other QAD employees. The estimate of the expected life for SARs that were fully vested and outstanding is determined as the midpoint of a range as follows: the low end of the range assumes the fully vested and outstanding SARs are exercised or expire unexercised on the evaluation date and the high end of the range assumes that these SARs are exercised or expire unexercised upon contractual term.

Volatility

The volatility valuation input is based on the historical volatility of the Company’s common stock, which the Company believes is representative of the expected volatility over the expected life of SARs.

Risk-Free Interest Rate

The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the SAR.

Dividend Ra

The dividend rate is based on the Company’s historical dividend payments per share.

The Company records deferred tax assets for equity awards that result in deductions on its income tax returns, based on the amount of stock-based compensation recognized and the fair values attributable to the vested portion of those equity awards. Because the deferred tax assets the Company records are based upon the stock-based compensation expenses in a particular jurisdiction, the aforementioned inputs that affect the fair values of equity awards

may

also indirectly affect the income tax expense. If the tax deduction is less than the deferred tax asset, the calculated shortfall would increase income tax expense. If the tax deduction is more than the deferred tax asset, the calculated windfall would decrease income tax expense.

COMPREHENSIVE

(LOSS)

INCOME

Comprehensive

(loss) income includes changes in the balances of items that are reported directly as a separate component of Stockholders’ Equity on the Consolidated Balance Sheets. The components of comprehensive (loss) income are net (loss) income and foreign currency translation adjustments. The Company does

not

provide for income taxes on foreign currency translation adjustments since it does

not

provide for taxes on the unremitted earnings of its foreign subsidiaries. The changes in “Accumulated other comprehensive loss” are included in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income.

REVENUE

The Company o

ffers its software using

two

models, a traditional on-premise licensing model and a cloud delivery model. The traditional model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the cloud delivery model the Company provides access to the software on a hosted basis as a service and customers generally do

not

have the contractual right to take possession of the software.

Revenue is recognized when

) persuasive evidence of an arrangement exists

) delivery has occurred or services has been rendered

) fees are fixed or determinable and

) collectability is probable. If we determine that any of the

four

criteria is

not

met, we will defer recognition of revenue until all the criteria are met.

Revenue is presented net of sales, use and value-added taxes collected from customers.

Software Revenue Recognition (On-Premise Model)

The majority of

the Company’s software is sold or licensed in multiple-element arrangements that include support services and often consulting services or other elements. Delivery of software is considered to have occurred upon electronic transfer of the license key that provides immediate availability of the product to the purchaser. Determining whether and when some of the above noted revenue recognition criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue reported. Typical payment terms vary by region. Occasionally, payment terms of up to

one

year

may

be granted for software license fees to customers with an established history of collections without concessions.

Provided all other revenue recognition criteria have been met,

the Company recognizes license revenue on delivery using the residual method when VSOE exists for all of the undelivered elements (for example, support services, consulting, or other services) in the arrangement. Revenue is allocated to each undelivered element based on VSOE, which is the price charged when that element is sold separately or, for elements

not

yet sold separately, the price established by management if it is probable that the price will

not

change before the element is sold separately. The Company allocates revenue to undelivered support services (maintenance) based on rates charged to renew the support services annually after an initial period. Revenue is allocated to undelivered consulting services based on time and materials rates of stand-alone services engagements by role and by country. The Company reviews VSOE at least annually. If the Company is unable to establish or maintain VSOE for

one

or more undelivered elements within a multiple-element software arrangement, it could adversely impact revenues, results of operations and financial position because the Company

may

have to defer all or a portion of the revenue or recognize revenue ratably.

Multiple-element software arrangements for which VSOE does

not

exist for all undelivered elements typically occur when

the Company introduces a new product or product bundles for which the Company has

not

established VSOE for support services or fixed fee consulting or other services. In these instances, revenue is deferred and recognized ratably over the longer of the support services (maintenance period) or consulting services engagement, assuming there are

specified future deliverables. In the instances in which it has been determined that revenue on these bundled arrangements will be recognized ratably due to lack of VSOE, at the time of recognition, the Company allocates revenue from these bundled arrangement fees to all of the non-license revenue categories based on VSOE of similar support services or consulting services. The remaining arrangement fees, if any, are then allocated to software license fee revenues. The associated costs primarily consist of payroll and related costs to perform both the consulting services and provide support services and royalty expense related to the license and maintenance revenue. These costs are expensed as incurred and included in cost of maintenance, subscription and other revenue, cost of professional services and cost of license fees.

Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is

one

year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone access to technical support personnel.

Customers generally purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually.

The Company

occasionally resells

third

party systems as part of an end-to-end solution requested by customers. Hardware revenue is recognized on a gross basis in accordance with the guidance contained in ASC

605

45,

Revenue Recognition – Principal Agent Considerations.

Delivery is considered to occur when the product is shipped and title and risk of loss have passed to the customer.

The Company

executes arrangements through indirect sales channels via sales agents and distributors in which the indirect sales channels are authorized to market the Company’s software products to end users. In arrangements with sales agents, revenue is recognized on a sell-through basis once an order is received from the end user, collectability from the end user is probable, a signed license agreement from the end user has been received, delivery has been made to the end user and all other revenue recognition criteria have been satisfied. Sales agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to market and distribute our software products to end users in specified territories and the distributor bears the risk of collection from the end user customer. The Company recognizes revenue from transactions with distributors when the distributor submits a written purchase commitment, collectability from the distributor is probable, a signed license agreement is received from the distributor and delivery has occurred to the distributor, provided that all other revenue recognition criteria have been satisfied. Revenue from distributor transactions is recorded on a net basis (the amount actually received by the Company from the distributor). The Company does

not

offer rights of return, product rotation or price protection to any distributors.

Subscription Revenue Recognition

The Company

recognizes the following fees in subscription revenue: i) subscription fees from customers accessing the Company’s cloud and other subscription offerings, ii) transition fees for services such as set up, configuration, database conversion and migration, and iii) support fees on hosted products. Subscription arrangements do

not

generally provide customers with the right to take possession of the subscribed software.

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the customer has been given access to the cloud environment. Transition fees are recognized over the estimated life of the customer relationship once the customer has gone live. The initial subscription period is typically

months.

Subscription services are non-cancelable, though customers typically have the right to terminate their contracts if we materially fail to perform. The Company generally invoices customers in advance in quarterly or annual installments and typical payment terms provide that customers pay the Company within

days of invoice.

The Company

may

enter into multiple

element arrangements that

may

include a combination of subscription offering and other professional services or arrangements that

may

include both software and non-software elements. The Company allocates revenue to each element in an arrangement based on a selling price hierarchy in accordance with ASC

605

25,

Revenue Recognition - Multiple Deliverable Revenue Arrangements

. In order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. The Company evaluates each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the item has standalone value and delivery of any undelivered elements is probable and within the Company’s control. Subscription and support services have standalone value because they are routinely sold separately. Consulting services and other services have standalone value because the Company has sold consulting services separately and there are several

third

party vendors that routinely provide similar consulting services to the Company’s customers on a standalone basis. Relative selling price for a deliverable is based on its VSOE, if available, or Estimated Selling Price (“ESP”), if VSOE is

not

available. The Company has determined that

third

-party evidence (“TPE”) is

not

a practical alternative due to differences in the Company’s service offerings compared to other parties and the availability of relevant

third

-party pricing information. The determination for ESP is made through consultation with and approval by management taking into consideration the go

market strategy. As the Company’s go-to-market strategies evolve, there

may

be modifications of pricing practices in the future, which could result in changes in both VSOE and ESP.

For multiple-element arrangements that

may

include a combination of our subscription offerings and other professional services, the total arrangement fee is allocated to each element based on the VSOE / ESP value of each element. After allocation, the revenue associated with the subscription offering and other professional services are recognized as described above.

Professional Services

Revenue from consulting services, which

the Company calls professional services in the Consolidated Statements of Income and Comprehensive Income, are typically comprised of implementation, development, training or other consulting services sold along with on-premise and cloud Consulting services are generally sold on a time-and-materials basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials as the services are performed or upon written acceptance from customers, if applicable, assuming all other conditions for revenue recognition have been met. Consulting engagements can range anywhere from

one

day to many months and are based strictly on the customer’s requirements and complexities and are independent of the functionality of our software. The Company’s software, as delivered, can generally be used by the customer for the customer’s purpose upon installation. Further, implementation and integration services provided are generally

not

essential to the functionality of the software, as delivered, and do

not

result in any material changes to the underlying software code. On occasion, the Company enters into fixed fee arrangements in which customer payments are tied to achievement of specific milestones. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, as compared to total estimated costs to be incurred to complete the work. In milestone achievement arrangements, revenue is recognized as the respective milestones are achieved.

ADVERTISING EXPENSES

Advertising costs are expensed as incurred. Advertising expenses were

$0.7

million,

$1.1

million and

$0.9

million for fiscal years

2018,

2017

and

2016.

RESEARCH AND DEVELOPMENT

All costs incurred to establish the technological feasibility of the Company’s software products are expensed to research and development (“R&D”) as incurred. R&D expenses totaled

$47.7

million,

$43.6

million and

$41.2

million in fiscal years

2018,

2017

and

2016,

respectively.

OTHER (INCOME) EXPENSE, NET

The components of other (income) expense, net for fiscal

2018,

2017

and

2016

were as follows:

	Years Ended January 31,
	201 8			201 7			201 6
	(in thousands)
Interest income	$	(1,547	)	$	(696	)	$	(320	)
Interest expense		669			670			712
Fore ign exchange losses (gains)		2,466			180			(503	)
Change in fair value of interest rate swap		(377	)		(485	)		48
Other income, net		(77	)		(131	)		(302	)
Total other expense (income), net	$	1,134		$	(462	)	$	(365	)

COMPUTATION OF NET (LOSS) INCOME PER SHARE

Net (loss) income per share of Class A common stock and Class B common stock is computed using the

two

-class method. Holders of Class A common stock are entitled to cash or stock dividends equal to

120%

of the amount of such dividend payable with respect to a share of Class B Common Stock.

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

	Years Ended January 31,
	2018			2017			2016
	(in thousands, except per share data)
Net (loss) income	$	(9,065	)	$	(15,450	)	$	8,912
Less: dividends declared		(5,367	)		(5,301	)		(5,235	)
Undistributed net (loss) income	$	(14,432	)	$	(20,751	)	$	3,677

Net (loss) income per share – Class A Common Stock
Dividends declared	$	4,596		$	4,531		$	4,466
Allocation of undistributed net (loss) income		(12,358	)		(17,742	)		3,140
Net (loss) income attributable to Class A common stock	$	(7,762	)	$	(13,211	)	$	7,606

Weighted average shares of Class A common stock outstanding — basic		15,942			15,715			15,466
Weighted average potential shares of Class A common stock		—			—			758
Weighted average shares of Class A common stock and potential common shares outstanding — diluted		15,942			15,715			16,224

Basic net (loss) income per Class A common share	$	(0.49	)	$	(0.84	)	$	0.49
Diluted net (loss) income per Class A common share	$	(0.49	)	$	(0.84	)	$	0.47
Net (loss) income per share – Class B Common Stock
Dividends declared	$	771		$	770		$	769
Allocation of undistributed net (loss) income		(2,074	)		(3,009	)		537
Net (loss) income attributable to Class B common stock	$	(1,303	)	$	(2,239	)	$	1,306

Weighted average shares of Class B common stock outstanding — basic		3,213			3,206			3,201
Weighted average potential shares of Class B common stock		—			—			82
Weighted average shares of Class B common stock and potential common shares outstanding — diluted		3,213			3,206			3,283

Basic net (loss) income per Class B common share	$	(0.41	)	$	(0.70	)	$	0.41
Diluted net (loss) income per Class B common share	$	(0.41	)	$	(0.70	)	$	0.40

Potential common shares consist of the shares issuable upon the release of restricted stock units (“RSUs”) and the exercise of stock options and stock appreciation rights (“SARs”). The Company

’s unvested RSUs, unexercised stock options and unexercised SARs are

not

considered participating securities as they do

not

have rights to dividends or dividend equivalents prior to release or exercise.

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:

	Years Ended January 31,
	2018		2017		2016
	(in thousands)
Class A		3,236		2,985		528
Class B		380		378		99

RECENT ACCOUNTING PRONOUNCEMENTS

With the exception of those discussed below, there have been

recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the

fiscal year ended

January 31, 2018,

that are of significance, or potential significance, to the Company.

Accounting Standards Adopted

March 2016,

the FASB issued

ASU

2016

regarding ASC Topic

718,

Improvements to Employee Share-Based Payment Accounting

. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will

longer be separately classified as a financing activity apart from other income tax cash flows. The standard also increases the amount of shares an employer can withhold for tax purposes without triggering liability accounting, clarifies that all cash payments made on an employee's behalf for withheld shares should be presented as a financing activity in the statements of cash flows, and provides an entity-wide accounting policy election to account for forfeitures as they occur.

The Company

elected to early adopt the new guidance in the

third

quarter of fiscal year

2017

which required the Company to reflect any adjustments as of

February

2016,

the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits in the Company’s provision for income taxes rather than paid-in capital for all periods in fiscal year

2017.

Additional amendments to the accounting for income taxes resulted in the recognition of prior year unrealized excess tax benefits. This recognition resulted in an increase to the Company’s deferred tax assets of

$2.2

million, an increase to valuation allowance

$1.2

million and an offset to opening accumulated deficit of

$1.0

million.

The Company

elected to account for forfeitures as they occur using a modified retrospective transition method, which resulted in a cumulative-effect adjustment of

$0.4

million to increase the

February 1, 2016

opening accumulated deficit. Additional amendments to the accounting for minimum statutory withholding tax requirements had

impact to opening accumulated deficit as of

February 1, 2016

as the Company does

not

withhold more than the minimum statutory requirements.

The Company

elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to net cash provided by operating activities and a decrease to net cash used in financing of

$0.8

million for fiscal

2016.

The presentation requirements for cash flows related to employee taxes paid for withheld shares had

impact to any of the periods presented in the Company’s consolidated cash flows statements since such cash flows have historically been presented as a financing activity.

April 2015,

the FASB issued ASU

2015

Interest - Imputation of Interest (Subtopic

2015

): 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 consolidated financial statements.

August 2015,

the FASB issued ASU

2015

15,

Interest-Imputation of Interest (Subtopic

835

): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements

, given that the authoritative guidance within ASU

2015

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 an impact on the Company’s consolidated financial statements.

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 statement of financial position. ASU

2015

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 adopted the provisions of this standard in the

fourth

quarter of fiscal

2017

with prospective application. Adoption of this ASU did

not

have a material impact on the Company’s consolidated financial statements.

Accounting Standards

Not

Yet Adopted

January 2017,

the FASB issued ASU

2017

01,

Business Combinations: Clarifying the Definition of a Business,

which provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments will be effective for the Company’s fiscal year beginning

February 1, 2018.

Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The effect of adoption of ASU

2017

will depend upon the nature of the Company's future acquisitions, if any.

January 2017,

the FASB issued ASU

2017

04,

Intangibles—Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment,

which simplifies the subsequent measurement of goodwill to eliminate Step

from the goodwill impairment test. In addition, it eliminates the requirements for any reporting unit with a

zero

or negative carrying amount to perform a qualitative assessment and, if that fails that qualitative test, to perform Step

of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. The amendments will be effective for the Company’s fiscal year beginning

February 1, 2020.

Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The Company does

not

believe adoption of ASU

2017

will have a material impact on its consolidated financial statements.

October 2016,

the FASB issued ASU

2016

16,

Income Taxes: Intra-Entity Transfers of Assets Other than Inventory

which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU

2016

will be effective for the Company's fiscal year beginning

February 1, 2018.

The standard is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard.

February 2016,

the FASB issued ASU

2016

02,

Leases (Topic

842

ASU

2016

requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU

2016

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

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 adoption of ASU

2016

02.

May 2014,

the FASB issued ASU

2014

09,

Revenue from Contracts with Customers (Topic

606

)

(“ASC Topic

606”

), which replaces the existing revenue recognition guidance. The new guidance creates a single, principle-based model for revenue recognition that expands and improves disclosures about revenue. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. The Company does

not

expect the adoption of ASC Topic

606

to have any impact on its total cash flows from operating, investing or financing activities.

The Company is continuing to assess the impact of adopting ASC Topic

606

on its financial position, results of operations and related disclosures. The Company believes the most significant impacts are as follows:

●	Removal of vendor specific objective evidence under current software revenue recognition will result in earlier recognition of license revenues in those instances where the Company sold a multi-element deal where services and/or maintenance did not have vendor specific objective evidence;

●	Removal of the current limitation on contingent revenue will result in revenue being recognized earlier for certain contracts;

●

Commission expense related to new cloud and

first

year maintenance contracts will

longer be expensed as incurred; rather these incremental commission costs and other associated fringe benefits will be capitalized and amortized over the associated term of economic benefit which the Company has determined to be

five

years;

●	Sales agent fees to obtain new cloud and first year maintenance contracts will no longer be expensed as incurred; rather these costs will be capitalized and amortized over the associated term of economic benefit which the Company has determined to be five years; and

●	Cloud environment set up costs will no longer be expensed as incurred; rather these costs will be capitalized and amortized over the associated term of economic benefit which the Company has determined to be five years.

The Company has identified changes to its accounting policies and practices and controls to support the new revenue recognition standard. Implementation of the policy and control changes are in progress along with the Company’s continued assessment of potential changes to its disclosures under the new guidance. The Company is currently assessing the tax impact from adoption.

The

two

permitted transition methods under the new standard are the full retrospective method, under which ASC Topic

606

would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown; or the modified retrospective method, under which the cumulative effect of applying ASC Topic

606

would be recognized at the date of initial application. ASC Topic

606

is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2017.

The Company adopted ASC Topic

606

starting on

February 1, 2018

and elected the modified retrospective transition approach.

The adoption of ASC Topic

606

will impact the opening consolidated balance sheet on

February 1, 2018,

for contingent revenue and license revenue, by decreasing accumulated deficit with a corresponding increase to contract assets and a decrease in deferred revenue. In addition, the impact to commissions, sales agent fees and set up costs will result in a decrease to accumulated deficit, offset by an increase in current and other assets. The Company is currently finalizing these opening balance sheet adjustments including completing the transition internal controls review. The Company expects the largest opening balance sheet adjustment will be the capitalization of commission expense.