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

three

months ended

April 30, 2018,

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

Recent Accounting Pronouncements Adopted

October 2016,

the FASB issued ASU

2016

16,

Intra-Entity Transfers of Assets Other Than Inventory

, which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers other than inventory. The guidance is effective for annual periods, including interim periods within those annual periods, beginning after

December 15, 2017

with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. ASU

2016

was adopted by the Company effective

February 1, 2018

on a modified retrospective basis, resulting in a

$9.6

million decrease to accumulated deficit and a corresponding increase to deferred tax assets.

August 2016,

the FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230

) Classification of Certain Cash Receipts and Cash Payments

, that modifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after

December 15, 2017

and interim periods within those fiscal years, with earlier adoption permitted. ASU

2016

was adopted by the Company effective

February 1, 2018

on a retrospective basis, with

material changes reflected in the Condensed Consolidated Statement of Cash Flows.

May 2014,

the FASB issued ASU

2014

09,

“

Revenue from Contracts with Customers

(Topic

606

), which supersedes the revenue recognition requirements in

Revenue Recognition

(Topic

605

) and Subtopic

985

605

Software - Revenue Recognition

. Topic

605

and Subtopic

985

605

are collectively referred to as “Topic

605”

or “prior GAAP.” Under Topic

606,

revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic

606

requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted Topic

606

on the

first

day of fiscal

2019

using the modified retrospective transition method. Under this method, QAD evaluated contracts that were in effect at the beginning of fiscal

2019

as if those contracts had been accounted for under Topic

606.

The Company did

not

evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition method, periods prior to the adoption date were

not

adjusted and continue to be reported in accordance with historical, pre-Topic

606

accounting. A cumulative catch-up adjustment was recorded to beginning accumulated deficit to reflect the impact of all existing arrangements under Topic

606.

The most significant impacts of the adoption of Topic

606

are as follows:

●

Removal of vendor specific objective evidence (“VSOE”) under prior GAAP resulted in earlier recognition of license and services revenues in those instances where the Company sold a multi-element deal where services did

not

have VSOE. At adoption, QAD decreased accumulated deficit and deferred revenue by

$2.0

million as this revenue would otherwise have been recognized in future periods according to prior GAAP;

●

Removal of the limitation on contingent revenue resulted in revenue being recognized earlier for certain contracts. At adoption, QAD decreased accumulated deficit and increased contract assets by

$0.8

million as this revenue would otherwise have been recognized in future periods as invoiced according to prior GAAP;

●

Contracts containing a future option to the customer represented a material right which resulted in deferral of revenue. At adoption, QAD increased accumulated deficit and deferred revenue by

$0.3

million as this revenue would have been otherwise earned in previous periods according to prior GAAP;

●

Commission expenses related to new cloud and maintenance contracts are

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

five

years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by

$9.1

million at the adoption date;

●

Sales agent fees to obtain new cloud and maintenance contracts are

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

five

years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by

$1.0

million at the adoption date; and

●

Cloud environment setup costs incurred to fulfill new cloud customer contracts are

longer expensed as incurred; rather these costs are capitalized and amortized over the associated term of economic benefit which the Company has determined to be

five

years. As a result, QAD decreased accumulated deficit and increased other current and non-current assets by

$1.5

million at the adoption date.

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

$1.6

million.

Adjustments to beginning consolidated balance sheet accounts

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

first

day of fiscal

2019:

	Jan. 31, 2018			Topic 606			ASU2016-16 (1)		Feb. 1, 2018
	(in thousands)
Assets
Current assets:
Cash and equivalents	$	147,023		$	-		$	-	$	147,023
Accounts receivable, net		83,518			-			-		83,518
Other current assets		15,856			4,013			-		19,869
Total current assets		246,397			4,013			-		250,410
Property and equipment, net		30,408			-			-		30,408
Capitalized software costs, net		990			-			-		990
Goodwill		11,023			-			-		11,023
Deferred tax assets, net		7,944			(1,643	)		9,584		15,885
Other assets, net		3,055			8,421			-		11,476
Total assets	$	299,817		$	10,791		$	9,584	$	320,192

Liabilities and stockholders’ equity
Current portion of long-term debt	$	466		$	-		$	-	$	466
Accounts payable		14,818			-			-		14,818
Deferred revenue		116,693			(1,239	)		-		115,454
Other current liabilities		43,460			-			-		43,460
Total current liabilities		175,437			(1,239	)		-		174,198
Long-term debt		13,313			-			-		13,313
Other liabilities		5,439			(511	)		-		4,928
Stockholders’ equity
Common stock - Class A		16			-			-		16
Common stock - Class B		4			-			-		4
Additional paid-in capital		200,456			-			-		200,456
Treasury stock		(12,461	)		-			-		(12,461	)
Accumulated deficit		(75,559	)		12,541			9,584		(53,434	)
Accumulated other comprehensive loss		(6,828	)		-			-		(6,828	)
Total stockholders’ equity		105,628			12,541			9,584		127,753
Total liabilities and stockholders’ equity	$	299,817		$	10,791		$	9,584	$	320,192

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

The following table summarizes the effects of adopting Topic

606

on the Company’s Condensed Consolidated Balance Sheet as of

April

30,

2018:

	As reported under Topic 606			Adjustments			Balances under Prior GAAP
	(i n thousands)
Assets
Current assets:
Cash and equivalents	$	144,389		$	-		$	144,389
Accounts receivable, net		56,909			-			56,909
Other current assets		23,538			(3,658	)		19,880
Total current assets		224,836			(3,658	)		221,178
Property and equipment, net		30,184			-			30,184
Capitalized software costs, net		1,050			-			1,050
Goodwill		10,974			-			10,974
Deferred tax assets, net		13,057			994			14,051
Other assets, net		11,147			(8,050	)		3,097
Total assets	$	291,248		$	(10,714	)	$	280,534

Liabilities and stockholders’ equity
Current portion of long-term debt	$	471		$	-		$	471
Accounts payable		9,192			-			9,192
Deferred revenue		103,369			3,384			106,753
Other current liabilities		34,830			-			34,830
Total current liabilities		147,862			3,384			151,246
Long-term debt		13,194			-			13,194
Other liabilities		4,883			1,094			5,977
Stockholders’ equity
Common stock - Class A		16			-			16
Common stock - Class B		4			-			4
Additional paid-in capital		196,058			-			196,058
Treasury stock		(10,035	)		-			(10,035	)
Accumulated deficit		(53,396	)		(15,192	)		(68,588	)
Accumulated other comprehensive loss		(7,338	)		-			(7,338	)
Total stockholders’ equity		125,309			(15,192	)		110,117
Total liabilities and stockholders’ equity	$	291,248		$	(10,714	)	$	280,534

The following table summarizes the effects of adopting Topic

606

on the Company’s Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income for the

three

months ended

April

30,

2018:

	As reported under Topic 606			Adjustments			Balances under Prior GAAP
	(i n thousands, except per share amounts)
Revenue
Subscription fees	$	21,511		$	(306	)	$	21,205
License fees		6,266			(1,170	)		5,096
Maintenance and other		31,483			73			31,556
Professional services		26,930			(1,750	)		25,180
Total revenue		86,190			(3,153	)		83,037
Cost of revenue:
Subscription fees		8,228			10			8,238
License fees		664			-			664
Maintenance and other		7,865			-			7,865
Professional services		24,310			-			24,310
Total cost of revenue		41,067			10			41,077
Gross profit		45,123			(3,163	)		41,960
Operating expenses:
Sales and marketing		19,946			(262	)		19,684
Research and development		14,006			(59	)		13,947
General and administrative		9,362			-			9,362
Total operating expenses		43,314			(321	)		42,993
Operating income		1,809			(2,842	)		(1,033	)
Other (income) expense
Interest income		(524	)		-			(524	)
Interest expense		157			-			157
Other (income) expense		(404	)		-			(404	)
Total other (income) expense, net		(771	)		-			(771	)
Income before income taxes		2,580			(2,842	)		(262	)
Income tax expense		1,183			(191	)		992
Net income	$	1,397		$	(2,651	)	$	(1,254	)
Basic income per share
Class A	$	0.07		$	(0.14	)	$	(0.07	)
Class B	$	0.06		$	(0.12	)	$	(0.06	)
Diluted income per share
Class A	$	0.07		$	(0.14	)	$	(0.07	)
Class B	$	0.06		$	(0.12	)	$	(0.06	)

The Company’s net cash provided by operating activities for the

three

months ended

April

30,

2018

did

not

change due to the adoption of Topic

606.

The following table summarizes the effects of adopting Topic

606

on the financial statement line items of the Company’s Condensed Consolidated Statement of Cash Flows for the

three

months ended

April

30,

2018:

	As reported under Topic 606			Adjustments			Balances under Prior GAAP
	(i n thousands)
Net income (loss)	$	1,397		$	(2,651	)	$	(1,254	)
Amortization of deferred costs		1,004			(1,004	)		-
Net change in valuation allowance		1,416			648			2,064
Changes in operating assets and liabilities:
Other assets		(4,454	)		279			(4,175	)
Deferred revenue		(11,020	)		2,728			(8,292	)

Recent Accounting Pronouncements

Not

Yet Adopted

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 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.

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.