. INCOME TAXES

In determining the quarterly provision for income taxes, the Company calculated income tax expense based on actual quarterly results in the

first

quarters of fiscal years

2019

and

2018,

respectively. These results were adjusted for discrete items recorded during the period. Actual quarterly results were used in fiscal

2018

and

2019

since they provide a more reliable estimate of quarterly tax expense.

The Company recorded income tax expense of

$1.2

million and

$0.6

million for the

first

three

months of fiscal

2019

and

2018,

respectively. The Company’s effective tax rate increased to

46%

during the

first

quarter of fiscal

2019

compared to (

32%

) for the same period in the prior year. The increase in the effective tax rate is primarily due to taxable profits and an increase in foreign tax expense due to jurisdictional mix in the

first

quarter of fiscal

2019

compared to a loss for the same period of fiscal

2018.

When calculating the income tax expense for the

first

three

months of fiscal

2019,

the Company considered the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted

December 22, 2017.

The Tax Act imposed a deemed repatriation tax on accumulated earnings of foreign subsidiaries, reduced the U.S. corporate tax rate to

21%

and introduced a new tax on global intangible low taxed income (“GILTI”). Based on current available information and technical guidance, the Company maintained its provisional estimate of the fiscal

2018

deemed repatriation tax of

$10.0

million. This additional income tax expense was partially offset by net operating losses and tax credits. The Tax Act increased the Company’s fiscal

2018

U.S. estimated tax liability by

$2.0

million. This estimate

may

be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations and state tax conformity to federal tax changes. The Company elected to pay the estimated repatriation tax liability over a period of

eight

years as permitted by the Tax Act. The Company has

not

yet completed the accounting for the fiscal

2018

effects of the Tax Act because of the complexity and ambiguity of certain of its tax and accounting effects. The Company expects to refine and complete the accounting for the Tax Act during the remainder of fiscal

2019

as it obtains, prepares and analyzes additional information in accordance with Staff Accounting Bulletin

No.

118.

The Company included a provision for GILTI in the tax expense for the

first

three

months of fiscal

2019.

Cash taxes were

not

impacted by GILTI since the Company has sufficient tax credits to offset the additional liability. The GILTI provisions did

not

impact the Company’s effective tax rate since QAD’s U.S. deferred tax assets are fully valued. The Company has

not

recorded deferred taxes related to these GILTI provisions and has

not

yet determined its policy election with respect to whether it will treat GILTI as a current-period expense when incurred (the “period cost method”) or factor such amount into the measurement of deferred taxes (the “deferred method”). This decision will be made by year end as the GILTI guidance is issued.

The Company adopted ASU

2016

16,

Income taxes (Topic

740

) Intra-entity Transfers of Assets Other Than Inventory,

during the

three

months ended

April 30, 2018,

which required all income tax effects of intra-entity transfers of assets other than inventory to be recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) when the transfer occurs. As a result of the adoption, the Company recorded

$9.6

million to accumulated deficit and deferred tax assets at

February 1, 2018

to account for the intra-entity sale of Intellectual Property that occurred in the fiscal year

2018.

The gross amount of unrecognized tax benefits was

$1.8

million at

April 30, 2018,

including interest and penalties. The unrecognized tax benefits are reduced by deferred tax credits of

$0.9

million that would apply in settlement of the uncertain tax position. 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. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of

April 30, 2018,

the Company has accrued approximately

$0.2

million of interest and penalties expense related to unrecognized tax benefits.

The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-

not

standard. Management assessed historic, current and future financial projections by jurisdiction to draw its conclusion. During fiscal

2017,

a valuation allowance for U.S. federal and state deferred income tax assets was established. For the quarter ended

April 30, 2018,

the Company continues to maintain a full valuation allowance on its U.S. federal and state deferred income tax assets. At

April

30,

2018

and

January 31, 2018,

the valuation allowance attributable to deferred tax assets was

$33.8

million and

$33.7

million, respectively.

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

●

India for fiscal years ended

March

31,

2010,

2013

and

2014

●

Iowa for fiscal year ended

January 31, 2014

●

Kentucky for fiscal year ended

January

31,

2016

●

Netherlands for fiscal year ended

January 31, 2016