. INCOME TAXES

The domestic and foreign components of income before provision for (benefit from) income taxes consisted of the following:

	Years Ended January 31,
	2020			2019		2018
	(in thousands)
Domestic net income (loss) before income taxes	$	2,963		$	6,562	$	(4,793	)
Foreign net (loss) income before income taxes		(6,567	)		5,355		585
Consolidated net (loss) income before income taxes	$	(3,604	)	$	11,917	$	(4,208	)

Income tax expense is summarized as follows:

	Years Ended January 31,
	2020			2019			2018
	(in thousands)
Current:
U.S. federal	$	471		$	(829	)	$	2,862
State		130			(13	)		38
Foreign		2,149			3,784			2,433
Subtotal		2,750			2,942			5,333
Deferred:
U.S. federal		25			79			(519	)
State		(107	)		(30	)		19
Foreign		9,677			(1,502	)		24
Subtotal		9,595			(1,453	)		(476	)
Total	$	12,345		$	1,489		$	4,857

Actual income tax expense differs from that obtained by applying the statutory federal income tax rate to income before income taxes as follows:

	Years Ended January 31,
	2020			2019			2018
	(in thousands)
Computed expected tax (benefit) expense	$	(757	)	$	2,503		$	(1,431	)
State income taxes, net of federal income tax expense		(581	)		96			(157	)
Incremental tax expense from foreign operations		1,256			715			923
Equity compensation		(4,198	)		(2,916	)		(1,004	)
Foreign withholding taxes		1,103			1,089			794
Net increase in valuation allowance		16,179			3,224			5,448
Net change in uncertain tax positions		3			(71	)		(81	)
Non-deductible expenses		218			1,149			(407	)
Benefit of tax credits		(1,719	)		(3,483	)		(1,766	)
Subpart F income		27			101			302
U.S. Tax Reform (the “Tax Act”)		—			(1,312	)		1,951
Rate change impact		867			124			187
Other		(53	)		270			98
Total	$	12,345		$	1,489		$	4,857

December 22, 2017,

the United States signed into law the Tax Cuts and Job Act (the Tax Act), which imposes a repatriation tax on accumulated earnings of foreign subsidiaries, implements a territorial tax system together with a current tax on foreign earnings and lowers the general U.S. corporate income tax rate to

21%,

which was applied to fiscal years

2020

and

2019.

A U.S. corporate income tax rate of

35%

was used for fiscal

2018.

When calculating QAD’s income tax expense for fiscal

2020,

the Company considered the Tax Act. The Company calculated an estimate for global intangible low-tax income (GILTI) in the Company’s tax expense based on the final GILTI regulations released on

June 14, 2019

by the U.S. Department of Treasury. These regulations provide computational, definitional, and anti-avoidance rule guidance relating to the determination of a U.S. shareholder’s GILTI inclusion. In fiscal years

2020

and

2019,

tax expense was

not

impacted by GILTI since the Company experienced losses overseas.

The Company has elected to treat the deferred taxes related to GILTI provisions as a current-period expense when incurred (the period cost method).

The Company’s effective tax rate is affected by the relative amount of its foreign earnings. The Company’s foreign earnings are primarily generated from the following countries: China, India and Mexico. These countries have higher statutory and effective tax rates than the U.S. The Company is

not

able to realize related benefits from operating in Ireland due to a valuation allowance placed against its Irish principal.

As of

January 31, 2020,

the Company continues to maintain its permanent reinvestment assertion under APB

for all of its foreign subsidiaries as it relates to withholding taxes, state taxes and currency translation. These permanently reinvested earnings are approximately

$92

million at

January 31, 2020.

It is

not

practicable for the Company to determine the amount of the related unrecognized deferred income tax liability.

Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	January 31,
	2020			2019
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments	$	600		$	520
Accrued vacation		1,499			1,568
Tax credits		22,077			20,908
Deferred revenue		3,136			2,849
ASC 842 lease liabilities		4,142			—
Net operating loss carry forwards		15,475			10,597
Accrued expenses - other		2,038			1,802
Other comprehensive income		1,603			1,189
Section 263(a) interest capitalization		190			198
Intellectual property		6,250			7,917
Equity compensation		3,579			4,626
Carryforward of Irish amortization		3,614			1,630
Other		1,767			2,345
Total deferred tax assets		65,970			56,149
Less valuation allowance		(50,972	)		(34,898	)
Less netting of unrecognized tax benefits against deferred tax assets		(973	)		(886	)
Deferred tax assets, net of valuation allowance	$	14,025		$	20,365
Deferred tax liabilities:
Depreciation and amortization		(851	)		(804	)
Topic 606: capitalized commissions and cloud costs		(3,054	)		(2,891	)
ASC 842 right of use assets		(3,931	)		—
Other		(355	)		(498	)
Total deferred tax liabilities		(8,191	)		(4,193	)
Total net deferred tax assets	$	5,834		$	16,172

The Company reviews its net deferred tax assets by entity at each balance sheet date to determine whether a valuation allowance is necessary based on the more-likely-than-

not

standard. During fiscal year

2020,

management considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance was needed. Management assessed the transfer pricing methodology, the historical profits, the economics of the country in which the entity operates, the current and future customer base, the type and character of the deferred tax asset and any other current and relevant information by entity to draw its conclusion.

In fiscal year

2020,

the Company continued to apply a valuation allowance against its U.S. federal and state net deferred tax assets due to a U.S.

three

-year cumulative loss and future earmarked investment in research and development. When the Company’s operating performance improves on a sustained basis, the conclusion regarding the need for a valuation allowance

may

change, resulting in the reversal of some or all of the valuation allowance in the future.

The Company reviewed the net deferred tax assets of its wholly-owned Irish subsidiary (the Irish principal). Based on the weight of evidence both positive and negative, it was determined that the negative evidence, which consisted of a

three

-year cumulative loss, a fiscal

2021

projected loss, and future earmarked investment outweighed the positive evidence. Management concluded that the weight of this negative evidence warranted placing a full valuation allowance on the Irish principal’s net deferred tax assets during the

second

quarter of fiscal

2020.

The valuation allowance on the Company’s Belgium entity was released after several years of consecutive profits and management’s conclusion that the entity is “more-likely-than-

not”

able to utilize the remaining net operating losses within the foreseeable future.

A valuation allowance has been established for select foreign jurisdictions along with U.S. federal and state net deferred tax assets. The following table discloses the Company’s valuation allowance by entity (in millions):

Jurisdiction	January 31, 2020		January 31, 2019
U.S. federal and state	$	30.3	$	24.7
Irish principal		11.6		-
Brazil		5.7		5.2
Germany		2.6		2.9
Hong Kong		0.6		1.2
South Africa		0.2		-
Belgium		-		0.9
Total valuation allowance	$	51.0	$	34.9

January 31, 2020

and

2019,

the worldwide valuation allowance attributable to deferred tax assets was

$51.0

million and

$34.9

million, respectively.

The Company has gross net operating loss carryforwards of

$67.5

million and tax credit carryforwards of

$22.1

million as of

January 31, 2020.

The majority of the Company’s net operating loss carryforwards do

not

expire. The Company’s foreign tax credits will begin to expire in fiscal year

2028.

The Company has

$7.0

million of U.S. and

$8.9

million of California R&D credits that have been valued. The Company has

$14,000

of U.S. R&D tax credit that will expire on

October 2020.

It is unlikely that these credits will be utilized before expiration. Australian and California R&D tax credits do

not

expire.

Unrecognized Tax Benefits and Other Considerations

During the fiscal year ended

January 31, 2020,

the Company increased its reserves for uncertain tax positions by

$3,000.

Interest and penalties on accrued but unpaid taxes are classified in the Consolidated Statements of Operations and Comprehensive (Loss) Income as income tax expense. The liability for unrecognized tax benefits that

may

be recognized in the next

twelve

months is classified as short-term in the Company’s Consolidated Balance Sheets while the remainder is classified as long-term.

The following table reconciles the gross amounts of unrecognized tax benefits at the beginning and end of the period:

	Years Ended January 31,
	2020			2019
	(in thousands)
Unrecognized tax benefits at beginning of the year	$	1,168		$	1,662
Decreases as a result of tax positions taken in a prior period		—			(26	)
Increases as a result of tax positions taken in the prior period		143			—
Reduction as a result of a lapse of the statute of limitations		(37	)		(44	)
Decreases as a result of settlements with taxing authorities		(103	)		(424	)
Unrecognized tax benefit at end of year	$	1,171		$	1,168

All of the unrecognized tax benefits included in the Consolidated Balance Sheet at

January 31, 2020

would impact the effective tax rate on income (loss) from continuing operations, if recognized.

The total amount of interest recognized in the Consolidated Statement of Operations and Comprehensive (Loss) Income for unpaid taxes was (

$20,000

) for the year ended

January 31, 2020.

The total amount of interest and penalties accrued in the Consolidated Balance Sheet at

January 31, 2020

was

$0.1

million.

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

2018

•

Germany for fiscal years ended

January 31, 2015,

2016

and

2017

During fiscal

2020,

the Company closed the following audits with immaterial or

adjustments:

	•	Tennessee for fiscal years ended January 31, 2014, 2015, 2016 and 2017
	•	India for fiscal years ended March 31, 2011 and 2014
	•	Switzerland for fiscal years ended January 31, 2014, 2015, 2016, 2017 and 2018
	•	Thailand for fiscal year ended January 31, 2017
	•	Netherlands for fiscal year ended January 31, 2016

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statute of limitations. The years that

may

be subject to examination will vary by jurisdiction. Below is a list of our material jurisdictions and the years open for audit as of

January 31,

2020:

Jurisdiction	Years Open for Audit
U.S. federal	Fiscal year 2017 and beyond
California	Fiscal year 2016 and beyond
Michigan	Fiscal year 2016 and beyond
New Jersey	Fiscal year 2016 and beyond
Australia	Fiscal year 2016 and beyond
France	Fiscal year 2017 and beyond
India	Fiscal years 2010, 2013 and 2018
Ireland	Fiscal year 2016 and beyond
United Kingdom	Fiscal year 2019 and beyond
China	Calendar year 2015 and beyond
Mexico	Calendar year 2015 and beyond