LEASES

The Company leases certain office space, office equipment and autos with remaining lease terms of

one

year to

twelve

years under leases classified primarily as operating. QAD has options to terminate some of its leases early. The lease term represents the period up to the early termination date unless it is reasonably certain that QAD will

not

exercise the early termination option. For certain leases, QAD has options to extend the lease term for additional periods ranging from

one

year to

ten

years.

The Company treats a contract as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, the Company directs the use of the asset and obtains substantially all the economic benefits of the asset. These leases are recorded as right-of-use (“ROU”) assets and lease obligation liabilities for leases with terms greater than

months. ROU assets represent the Company’s right to use an underlying asset for the entirety of the lease term. Lease liabilities represent the Company's obligation to make payments over the life of the lease. An ROU asset and a lease liability are recognized at commencement of the lease based on the present value of the lease payments over the life of the lease. Initial direct costs are included as part of the ROU asset upon commencement of the lease. Since the interest rate implicit in a lease is generally

not

readily determinable, the Company uses an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value. QAD used the incremental borrowing rate on

February 1, 2019

for all leases that commenced prior to that date.

QAD reviews the impairment of ROU assets consistent with the approach applied for the Company’s other long-lived assets. The Company reviews the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset

may

not

be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations.

The Company has applied the practical expedient available for lessees in which lease and non-lease components are accounted for as a single lease component for all asset classes. The Company also elected the practical expedient to exclude short-term leases (leases with original terms of

months or less) from ROU asset and lease liability accounts.

A majority of the Company’s leases are operating and lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Variable payments change due to facts or circumstances occurring after the commencement date, other than the passage of time, and do

not

result in a remeasurement of lease liabilities. The Company’s variable lease payments include payments to lessors for taxes, maintenance, insurance and other operating costs as well as payments that are adjusted based on a CPI index or rate and payments in excess of fixed amounts, such as excess mileage charges on leased autos. The Company's lease agreements do

not

contain any significant residual value guarantees or restrictive covenants.

Supplemental balance sheet information related to leases was as follows (in thousands):

	July 31, 2019

Assets
Operating	$	18,097
Finance		98
Total lease assets, net	$	18,195

Liabilities
Current
Operating	$	4,812
Finance		43
Noncurrent
Operating		14,017
Finance		42
Total lease liabilities	$	18,914

The components of lease cost were as follows (in thousands):

	Three Months Ended		Six Months Ended
	July 31, 2019		July 31, 2019

Operating lease cost	$	1,509	$	2,965
Finance lease cost		14		14
Variable lease cost		397		769
Short-term lease cost		66		140
Net lease cost	$	1,986	$	3,888

Lease term and discount rate were as follows:

	July 31, 2019

Weighted-average remaining lease term (in years)
All leases		5.7
Weighted-average discount rate
All leases		6.14	%

Supplemental disclosures of cash flow information related to leases were as follows:

	Six Months Ended
	July 31, 2019

Cash flows related to lease liabilities
Operating cash flows related to operating leases	$	(3,095	) )
Financing cash flows related to finance leases		(11	)
Total cash flows related to lease liabilities	$	(3,106	)

Non-cash items
Leased assets obtained in exchange for new operating lease liabilities	$	7,696
Leased assets obtained in exchange for new finance lease liabilities		110
Total non-cash items	$	7,806

Maturities of lease liabilities were as follows as of

July 31, 2019 (

in millions):

	Operating
	Leases

Within 1 year	$	5.9
2 years		4.5
3 years		3.0
4 years		2.2
5 years		2.0
Thereafter		5.0
Total lease payments	$	22.6
Less: Imputed interest		(3.7	)
Present value of lease liabilities	$	18.9

As of

January 31, 2019

future minimum lease payments, as defined under the previous lease accounting guidance of ASC Topic

840,

under non-cancelable operating leases for the following

five

fiscal years and thereafter were as follows (in millions):

2020	$	5.6
2021		4.6
2022		2.8
2023		1.8
2024		1.5
Thereafter		2.8
Total	$	19.1

The Company is a lessor for certain office space owned by the Company and leased to others under non-cancelable leases with initial terms ranging from

six

months to

one

year. These lease agreements provide for a fixed base rent and automatically renew for periods from

six

months to

one

year unless terminated. All leases are considered operating leases. There are

rights to purchase the premises and

residual value guarantees. For the

three

and

six

months ended

July 31, 2019

the Company received

$0.2

and

$0.5

million, respectively, of lease income from company-owned locations.