. STOCK-BASED COMPENSATION

Stock Plans

June 14, 2016,

the stockholders approved the QAD Inc.

2016

Stock Incentive Program (

2016

Program). The

2016

Program allows for equity awards in the form of incentive stock options, non-statutory stock options, restricted shares, rights to purchase stock, stock appreciation rights (SARs) and other stock rights. The stockholders authorized a maximum of

4,000,000

shares to be issued under the

2016

Program. Prior to

July 1, 2016,

stock awards were issued under the QAD Inc.

2006

Stock Incentive Program. As of

January 31, 2020,

2,762,000

Class A Common Shares were available for issuance.

The Company issues restricted stock units (RSUs) to employees under the

2016

Program, which are released

25%

after each year of service for

four

years and are contingent upon employment with the Company on the release date.

The Company issues performance stock units (PSUs) to certain executive employees under the

2016

Program. PSUs are released

1/3

after each year of service for

three

years and are contingent upon employment with the Company and achievement of pre-determined performance objectives. To determine the anticipated achievement of the performance objectives, management must make assumptions regarding the likelihood of the Company meeting those targets. The number of PSUs that vest will be predicated on the Company achieving performance objectives during the measurement period subsequent to the date of grant. Depending on the financial performance levels achieved, a percentage of the PSUs (

200%

of the target award) will vest to the grantees of those stock units. There is

guarantee that the Company’s outstanding PSUs will vest in whole or in part.

In prior years, the Company has issued equity awards in the form of stock-settled SARs to the President of the Company. A SAR is a contractual right to receive value tied to the post-grant appreciation of the underlying stock. Although the Company has the ability to grant stock-settled or cash-settled SARs, the Company has only granted stock-settled SARs. Upon vesting, a holder of a stock-settled SAR receives shares in the Company’s common stock equal to the intrinsic value of the SAR at time of exercise. Under the

2016

Program and

2006

Program, SARs have been granted for a term of

eight

years. They vest

25%

after each year of service for

four

years and are contingent upon employment with the Company on the vesting date. Economically, a stock-settled SAR provides the same compensation value as a stock option, but the employee is

not

required to pay an exercise price upon exercise of the SAR. Stock compensation expense, as required under ASC

718,

is the same for stock-settled SARs and stock options.

Equity awards are also issued to non-employee Board members that are newly-appointed or reelected at the Annual Meeting of Stockholders. They are granted Class A shares as stock payments that are fully vested on the date of grant. Equity awards to non-employee Board members are limited to

$250,000

per year, as determined for the Company’s financial accounting purposes as of the date of grant.

Under the

2016

Program, officers, directors, employees, consultants and other independent contractors or agents of the Company or subsidiaries of the Company who are responsible for or contribute to the management, growth or profitability of its business are eligible for selection by the program administrators to participate. However, incentive stock options granted under the

2016

Program

may

only be granted to a person who is an employee of the Company or

one

of its subsidiaries.

Stock-Based Compensation

The following table sets forth reported stock compensation expense included in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income for the fiscal years ended

January 31, 2020,

2019

and

2018:

	Years Ended January 31,
	2020		2019		2018
	(in thousands)
Stock-based compensation expense:
Cost of subscription	$	315	$	252	$	161
Cost of maintenance revenue		540		497		384
Cost of professional services		1,456		1,219		1,085
Sales and marketing		2,057		2,111		1,510
Research and development		1,863		1,620		1,226
General and administrative		5,123		4,423		4,558
Total stock-based compensation expense	$	11,354	$	10,122	$	8,924

RSU Information

The following table summarizes the activity for RSUs for the fiscal years ended

January 31, 2020,

2019

and

2018:

	RSUs (in thousands)			Weighted Average Grant Date Fair Value
Restricted stock at January 31, 2017		623		$	20.56
Granted		295			30.69
Released (1)		(245	)		20.48
Forfeited		(20	)		22.36
Restricted stock at January 31, 2018		653		$	25.10
Granted		300			51.70
Released (1)		(263	)		25.80
Forfeited		(27	)		30.63
Restricted stock at January 31, 2019		663		$	36.64
Granted		281			40.43
Released (1)		(267	)		32.71
Forfeited		(50	)		38.51
Restricted stock at January 31, 2020		627		$	39.86

(

)

The number of RSUs released includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the fiscal years ended

January 31, 2020,

2019

and

2018,

the Company withheld

82,000

shares,

81,000

shares and

74,000

shares, respectively, for payment of these taxes. The value of the withheld shares for the fiscal years ended

January 31, 2020,

2019

and

2018

were

$3.5

million,

$4.3

million and

$2.4

million, respectively.

Total unrecognized compensation cost related to RSUs was approximately

$19.6

million as of

January 31, 2020.

This cost is expected to be recognized over a period of approximately

2.7

years.

PSU Information

The estimated fair value of PSUs was calculated based on the closing price of the Company’s common stock on the date of grant, reduced by the present value of dividends foregone during the vesting period. The vesting is subject to attainment of specified performance criteria. Each fiscal quarter, QAD estimates the probability of the achievement of the performance goal and recognizes any related stock-based compensation expense using the graded-vesting method. The amount of stock-based compensation expense recognized in any

one

period can vary based on the attainment or expected attainment of the performance goal. If the performance goal is

not

met,

compensation expense is recognized and any previously recognized compensation expense is reversed.

Stock-based compensation expense related to performance-based restricted stock grants for fiscal year

2020

was

$0.8

million.

The following table summarizes the activity for PSUs for the fiscal year ended

January 31, 2020:

	PSUs (in thousands)			Weighted Average Grant Date Fair Value
Performance stock units at January 31, 2019		—		$	—
Granted		93			39.82
Released		—			—
Forfeited		(3	)		39.82
Performance stock units at January 31, 2020		90		$	39.82

Total unrecognized compensation cost related to PSUs was approximately

$1.3

million as of

January 31, 2020.

This cost is expected to be recognized over a period of approximately

1.6

years.

SAR Information

The weighted average assumptions used to value SARs are shown in the following table.

	Years Ended January 31,
	2019			2018
Expected life in years		5.50			5.50
Risk free interest rate		2.80	%		1.82	%
Volatility		31	%		33	%
Dividend rate		0.54	%		0.91	%

The following table summarizes the activity for outstanding SARs for the fiscal years ended

January 31, 2020,

2019

and

2018:

	Options/ SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2017		2,793		$	15.51
Granted		380			31.65
Exercised		(139	)		10.52
Expired		(10	)		9.74
Outstanding at January 31, 2018		3,024		$	17.78
Granted		380			53.50
Exercised		(390	)		9.43
Expired		(5	)		9.17
Forfeited		(476	)		37.14
Outstanding at January 31, 2019		2,533		$	20.81
Granted		—			—
Exercised		(1,184	)		16.19
Expired		—			—
Forfeited		—			—
Outstanding at January 31, 2020		1,349		$	24.86		3.3	$	34,018
Vested and exercisable at January 31, 2020		1,064		$	20.70		2.7	$	30,691

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock based on the last trading day as of

January 31, 2020

and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on

January 31, 2020.

The total intrinsic value of SARs exercised in the years ended

January 31, 2020,

2019

and

2018

was

$26.5

million,

$12.4

million and

$3.0

million, respectively. The weighted average grant date fair value per share of SARs granted in the years ended

January 31, 2019

and

2018

was

$16.99

and

$9.59,

respectively.

SARs were granted in fiscal

2020.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the fiscal years ended

January 31, 2020,

2019

and

2018,

the Company withheld

56,000,

104,000

and

31,000

shares for payment of these taxes. The value of the withheld shares for the fiscal years ended

January 31, 2020,

2019

and

2018

were

$2.7

million,

$4.4

million and

$1.0

million, respectively.

January 31, 2020,

there was approximately

$2.6

million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted average period of approximately

2.1

years.