QAD INC.

INDEX

			Page
PART I - FINANCIAL INFORMATION

	ITEM 1.	Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets as of April 30, ~~2017~~2018 and January 31, ~~2017~~2018	1

		Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~Income (Loss) for the Three Months Ended April 30, ~~2017~~2018 and ~~2016~~2017	2

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, ~~2017~~2018 and ~~2016~~2017	3

		Notes to Condensed Consolidated Financial Statements	4

	ITEM 2.	~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations	1319

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	2431

	ITEM 4.	Controls and Procedures	2531

PART II - OTHER INFORMATION

	ITEM 1.	Legal Proceedings	2532

	~~ITEM 1A.~~ITEM1A.	Risk Factors	2532

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26 32

	ITEM 3.	Defaults Upon Senior Securities	2632

	ITEM 4.	Mine Safety Disclosure	2632

	ITEM 5.	Other Information	2632

	ITEM 6	Exhibits	2632

	SIGNATURES		2733

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE ~~LOSS~~INCOME (LOSS)

1. BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements fairly present the financial information contained therein. These statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial statements and footnotes are unaudited. In ~~management~~’smanagement’s opinion, all necessary adjustments, consisting of normal, recurring and non-recurring adjustments, have been included in the accompanying Condensed Consolidated Financial Statements to present fairly the financial position and operating results of QAD Inc. (“QAD” or the “Company”). The Condensed Consolidated Financial Statements do not include all disclosures required by GAAP accounting principles ~~generally accepted in the United States of America~~ for annual financial statements and should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, ~~2017.~~2018. The Condensed Consolidated Financial Statements include the results of the Company and its wholly owned subsidiaries. ~~The~~Because of seasonal and other factors, results of operations for the three months ended April 30, ~~2017~~2018 are not necessarily indicative of the results to be expected for the year ending January 31, ~~2018.~~2019.

The Company’s accounting policies are set forth in detail in Note 1 of the Notes to Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the year ended January 31,2018 with the Securities and Exchange Commission. Such Annual Report also contains a discussion of the Company’s critical accounting policies and estimates. The Company believes that these critical accounting policies and estimates affect its more significant estimates and judgments used in the preparation of the Company’s consolidated financial statements.

Effective February 1, 2018 the Company adopted the requirements of Accounting Standards Update (“ASU”) No.2014-09,Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method. The Company’s updated accounting policy on revenue recognition is described in Note 2 and in “Critical accounting policies” in Item 2 of this Form 10-Q.

Certain prior year amounts have been reclassified for consistency with the current year presentation. Adjustments were made to the operating activities section of the Condensed Consolidated Statements of Cash Flows. These reclassifications had no effect on the reported results of operations and no effect on previously reported cash flows from operating activities.

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during thethree months ended April 30, ~~2017,~~ 2018, that are of significance, or potential significance, to the Company.

Recent Accounting ~~Standards~~ Pronouncements Adopted

In 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 2016-16 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.

In 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 2016-15 was adopted by the Company effective February 1, 2018 on a retrospective basis, with no material changes reflected in the Condensed Consolidated Statement of Cash Flows.

In 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 985-605Software - 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 no 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 no 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 no 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

(in thousands)

Assets

Current assets:

Cash and equivalents

144,389

Accounts receivable, net

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

Capitalized software costs, net

1,050

Goodwill

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

Accounts payable

9,192

Deferred revenue

103,369

3,384

106,753

Other current liabilities

34,830

Total current liabilities

147,862

3,384

151,246

Long-term debt

13,194

Other liabilities

4,883

1,094

5,977

Stockholders’ equity

Common stock - Class A

Common stock - Class B

Additional paid-in capital

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

(in 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

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

8,238

License fees

664

Maintenance and other

7,865

Professional services

24,310

Total cost of revenue

41,067

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

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

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
	(in 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

In ~~May 2014,~~ February 2016, the FASB issued ASU ~~2014-09,~~~~Revenue from Contracts with Customers~~. The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. GAAP with a five-step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, ~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~, to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2019 and we do not plan to early adopt. The Company expects to adopt the requirements of the new standard in the first quarter of fiscal 2019, utilizing the modified retrospective method of transition.

The Company anticipates this standard might have a material impact on its consolidated financial statements. The Company has assigned internal resources and has hired third party consultants to assist in the evaluation of that impact. While the assessment of all potential impacts of the standard is on-going, the Company currently believes the most significant impact relates to accounting for software license revenue. The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated under the new standard. In addition, removal of current limitations on contingent revenue may result in revenue being recognized earlier for some contracts. The Company expects revenue related to subscription and professional services to remain substantially unchanged and is still in the process of evaluating the impact of the new standard on these arrangements.

~~Due to the complexity of some contracts, the actu~~al revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and vary in some instances. The Company is also continuing to evaluate the impact of the standard on recognition of costs related to obtaining customer contracts, primarily with respect to sales commissions. The commission accounting under the new standard is significantly different than the Company's current policy of expensing commissions upfront. The new standard will require the Company to defer direct and incremental commission costs to obtain new subscription and maintenance contracts and amortize those costs over the expected period of benefit. We are still evaluating the period of benefit but expect to be in the range of five to seven years.

While the Company continues to assess the potential impacts and disclosure requirements of the new standard, the Company cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements.

~~In February~~ 2016 ~~the FASB issued ASU 2016-02,~~-02, Leases (Topic ~~842)~~842). ASU ~~2016-02~~2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU ~~2016-02~~2016-02 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 ~~2016-02~~2016-02 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.~~2016-02.

In ~~October 2016,~~ January 2017, the FASB issued ASU ~~2016-16,~~~~Income Taxes: Intra-Entity Transfers of Assets Other than Inventory~~ which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 will be effective for the Company's fiscal year beginning February 1, 2018. The standard is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard.

~~In January~~ 2017 ~~the FASB issued ASU 2017-04,~~-04, Intangibles—Goodwill and Other (Topic ~~350)~~350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill to eliminate Step 2 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 2 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 ~~2017-04~~2017-04 will have a material impact on its consolidated financial statements.

2. REVENUE

~~In January 2017,~~QAD offers its software using the ~~FASB issued ASU 2017-01,~~~~Business Combinations: Clarifying~~same underlying technology via two models: a traditional on-premises licensing model and a cloud-based subscription model. The on-premises model involves the ~~Definition~~sale or license of software on a ~~Business,which~~perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the cloud-based subscription delivery model, QAD provides access to its software on a ~~more robust framework~~hosted basis as a service and customers generally do not have the contractual right to ~~use~~take possession of the software.

The Company generates revenue through sales of licenses and maintenance provided to its on-premises customers and through subscriptions of its cloud-based software. QAD offers professional services to both its on-premises and cloud customers to assist them with the design, testing and implementation of its software.

The Company determines revenue recognition through the following steps:

- Identification of the contract, or contracts, with a customer;

- Identification of the performance obligations in ~~determining~~the contract;

- Determination of the transaction price;

- Allocation of the transaction price to the performance obligations in the contract; and

- Recognition of revenue when, or as, we satisfy a ~~set~~performance obligation.

The Company records the amount of ~~assets~~revenue and ~~activities~~related costs by considering whether the entity is a ~~business.~~principal (gross presentation) or an agent (net presentation) by evaluating the nature of its promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The ~~amendments will~~transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies and tracks the performance obligations at contract inception so that the Company can monitor and account for the performance obligations over the life of the contract.

The Company’s contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance in addition to the licenses. The Company’s single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements.

For contracts with multiple performance obligations where the contracted price differs from the standalone selling price ("SSP") for any distinct good or service, the Company may be ~~effective~~required to allocate the contract’s transaction price to each performance obligation using its best estimate for the SSP. SSP is assessed annually using a historical analysis of contracts with customers executed in the most recently completed fiscal year to determine the range of selling prices applicable to a distinct good or service.

Subscription

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the cloud environment is made available to the customer. The initial subscription period is typically 12 to 60 months. The Company generally invoices its customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.

Software Licenses

Transfer of control for software is considered to have occurred upon electronic delivery of the license key that provides immediate availability of the product to the customer. The Company’s typical payment terms tend to vary by region but its standard payment terms are within 30-90 days of invoice.

Maintenance

Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone access to technical support personnel. The Company’s customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

Professional Services

Revenue from professional services is typically comprised of implementation, development, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. The Company recognizes revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.

Indirect Sales Channels

The Company executes arrangements through indirect sales channels via sales agents and distributors who are authorized to market its software products to end users. In arrangements with sales agents, QAD contracts directly with the customer and sales agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to market and distribute the Company’s software products to end users in specified territories and the distributor bears the risk of collection from the end user customer. The Company recognizes revenue from transactions with distributors when the distributor submits a signed agreement and transfer of control has occurred to the distributor in accordance with the five revenue recognition steps noted above. Revenue from distributor transactions is recorded on a net basis (the amount actually received by the Company from the distributor). QAD does not offer rights of return, product rotation or price protection to any of its distributors.

Disaggregated Revenue

The Company disaggregates revenue from contracts with customers by geography and by the customers’ industry within manufacturing, as it believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company’s revenue by geography is as follows:

	Three Months Ended April 30,
	2018		2017
	(in thousands)
North America	$	40,025	$	33,370
EMEA		25,087		20,881
Asia Pacific		12,559		12,166
Latin America		8,519		4,965
Total revenue	$	86,190	$	71,382

The Company’s revenue by industry is as follows:

	Three Months Ended April 30,
	2018		2017
	(in thousands)
Automotive	$	37,062	$	26,412
Consumer products and food and beverage		13,790		11,421
High technology and industrial products		24,995		22,842
Life sciences		10,343		10,707
Total revenue	$	86,190	$	71,382

Significant Judgments

More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s ~~fiscal year beginning February 1, 2018. Early adoption is permitted. The new guidance~~arrangements may be dependent on contract-specific terms and may vary in some instances.

Judgment is required to ~~be applied~~determine the SSP for each distinct performance obligation. The Company rarely licenses or sells products on a ~~prospective basis. The effect~~stand-alone basis, so the Company is required to estimate the range of ~~adoption of ASU 2017-01 will depend upon~~SSPs for each performance obligation. In instances where SSP is not directly observable because the ~~nature~~Company does not sell the license, product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company analyzes various factors, including its pricing methodology and consistency, size of the ~~Company's~~arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.

Revenue is recognized over time for the Company’s subscription, maintenance and fixed fee professional services that are separate performance obligations. For the Company’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

If a contract includes variable consideration, the Company exercises judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable consideration, the Company will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on the Company’s Condensed Consolidated Balance Sheets. QAD records a contract asset when the Company has transferred goods or services but does not yet have the right to consideration, or deferred revenue when the Company has received or has the right to receive consideration but has not yet transferred goods or services to the customer.

The contract assets indicated below are presented as other current and non-current assets in the Condensed Consolidated Balance Sheets. These assets primarily relate to professional services and subscription and consist of the Company’s rights to consideration for goods or services transferred but not billed as of April 30, 2018. The contract assets are transferred to receivables when the rights to consideration become unconditional, usually upon completion of a milestone.

The Company’s contract balances are as follows:

	As of
	April 30, 2018		Feb. 1, 2018
	(In thousands)
Contract assets, short-term	$	1,345	$	890
Contract assets, long-term		-		110
Total contract assets	$	1,345	$	1,000
Deferred revenue, short-term	$	103,369	$	115,454
Deferred revenue, long-term		1,366		1,644
Total deferred revenue	$	104,735	$	117,098

During the three months ended April 30,2018, the Company recognized $50.2 million of revenue that was included in the deferred revenue balance, as adjusted for Topic 606, at the beginning of the period. All other activity in deferred revenue is due to the timing of invoicing in relation to the timing of revenue recognition.

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future ~~acquisitions, if any.~~periods. Contracted but unsatisfied performance obligations were approximately $237.6 million as of April 30, 2018, of which the Company expects to recognize approximately $151.5 million of the revenue over the next 12 months and the remainder thereafter. In instances where the timing of revenue recognition differs from the timing of invoicing, QAD has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.

Deferred Revenue

QAD typically invoices its customers for subscription and support fees in advance on a quarterly or annual basis, with payment due at the start of the subscription or support term. Unpaid invoice amounts for non-cancelable services starting in future periods are included in accounts receivable and deferred revenue. The portion of deferred revenue that QAD anticipates will be recognized after the succeeding twelve-month period is recorded as non-current deferred revenue, and the remaining portion is recorded as current deferred revenue.

Deferred revenues consisted of the following:

	As of
	April 30, 2018		January 31, 2018
	(in thousands)
Deferred maintenance	$	72,141	$	80,811
Deferred subscription		28,483		31,034
Deferred professional services		2,297		3,523
Deferred license		21		756
Deferred other revenue		427		569
Deferred revenues, current		103,369		116,693
Deferred revenues, non-current (in Other liabilities)		1,366		2,156
Total deferred revenues	$	104,735	$	118,849

Practical Expedients and Exemptions

There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:

Application

●

The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.

	●	The Company generally expenses sales commissions and sales agent fees when incurred when the amortization period would have been one year or less. These costs are recorded within sales and marketing expense in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

	●	The Company also used the practical expedient to calculate contract acquisition costs based on a portfolio of contracts with similar characteristics instead of a contract by contract analysis.

●

The Company does not disclose the value of unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed (apply to time-and-material engagements).

Modified Retrospective Transition Adjustments

●

For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.

Costs to Obtain and Fulfill a Contract

The Company’s incremental direct costs of obtaining a contract consist of sales commissions and sales agent fees which are deferred and amortized ratably over the term of economic benefit which the Company has determined to be five years. These deferred costs are classified as current or non-current based on the timing of when the Company expects to recognize the expense. Incremental costs related to renewals are expensed as incurred because the term of economic benefit is one year or less. The current and non-current portions of deferred commissions are included in other current assets and other long-term assets, respectively, in the Company’s Condensed Consolidated Balance Sheets. At April 30,2018 and January 31,2018, the Company had $10.7 million and $10.1 million, respectively, of deferred commissions and sales agent fees. For the three months ended April 30,2018,$0.9 million of amortization expense related to deferred commissions and sales agent fees was recorded in sales and marketing expense in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

Costs to fulfill a contract, which are incurred upon initiation of certain services contracts and are related to initial customer setup, are included in other current assets and long-term assets in the Company’s Condensed Consolidated Balance Sheets. The amount of such cost at April 30,2018 and January 31,2018 was $1.5 million. These costs are amortized over the term of economic benefit which the Company has determined to be five years. During the three months ended April 30,2018,$0.1 million of amortization expense related to deferred setup costs was recorded in cost of subscription in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).

Recoverability of these costs is subject to various business risks. Quarterly, the Company compares the carrying value of these assets with the undiscounted future cash flows expected to be generated by them to determine if there is impairment. If impaired, these assets are reduced to an estimated fair value on a discounted cash flow basis. No impairment losses were recognized during the three months ended April 30, 2018.

2.3. COMPUTATION OF NET ~~LOSS~~ INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net ~~loss~~income (loss) per share:

Three Months Ended
April 30,

2017

2016

(in thousands except per share data)

Net loss
$ (2,571
)
$ (2,792
)
Less: Dividends declared
(1,331
)
(1,316
)
Undistributed net loss
$ (3,902
)
$ (4,108
)

Net loss per share – Class A Common Stock

Dividends declared
$ 1,138 $ 1,124
Allocation of undistributed net loss
(3,337
)
(3,508
)
Net loss attributable to Class A common stock
$ (2,199
)
$ (2,384
)

Weighted average shares of Class A common stock outstanding—basic
15,809 15,594
Weighted average potential shares of Class A common stock
— —
Weighted average shares of Class A common stock and potential common shares outstanding—diluted
15,809 15,594

Basic net loss per Class A common share
$ (0.14
)
$ (0.15
)
Diluted net loss per Class A common share
$ (0.14
)
$ (0.15
)

Net loss per share – Class B Common Stock

Dividends declared
$ 193 $ 192
Allocation of undistributed net loss
(565
)
(600
)
Net loss attributable to Class B common stock
$ (372
)
$ (408
)

Weighted average shares of Class B common stock outstanding—basic
3,210 3,204
Weighted average potential shares of Class B common stock
— —
Weighted average shares of Class B common stock and potential common shares outstanding—diluted
3,210 3,204

Basic net loss per Class B common share
$ (0.12
)
$ (0.13
)
Diluted net loss per Class B common share
$ (0.12
)
$ (0.13
)

	Three Months Ended April 30,
	2018			2017
	(in thousands except per share data)
Net income (loss)	$	1,397		$	(2,571	)
Less: Dividends declared		(1,359	)		(1,331	)
Undistributed net income (loss)	$	38		$	(3,902	)

Net income (loss) per share – Class A Common Stock
Dividends declared	$	1,164		$	1,138
Allocation of undistributed net income (loss)		32			(3,337	)
Net income (loss) attributable to Class A common stock	$	1,196		$	(2,199	)

Weighted average shares of Class A common stock outstanding—basic		16,076			15,809
Weighted average potential shares of Class A common stock		1,750			—
Weighted average shares of Class A common stock and potential common shares outstanding—diluted		17,826			15,809

Basic net income (loss) per Class A common share	$	0.07		$	(0.14	)
Diluted net income (loss) per Class A common share	$	0.07		$	(0.14	)

Net income (loss) per share – Class B Common Stock
Dividends declared	$	195		$	193
Allocation of undistributed net income (loss)		6			(565	)
Net income (loss) attributable to Class B common stock	$	201		$	(372	)

Weighted average shares of Class B common stock outstanding—basic		3,232			3,210
Weighted average potential shares of Class B common stock		182			—
Weighted average shares of Class B common stock and potential common shares outstanding—diluted		3,414			3,210

Basic net income (loss) per Class B common share	$	0.06		$	(0.12	)
Diluted net income (loss) per Class B common share	$	0.06		$	(0.12	)

Potential common shares consist of the shares issuable upon the release of restricted stock units (“RSUs”) and the exercise of stock options and stock appreciation rights (“SARs”). The ~~Company~~’sCompany’s unvested RSUs and unexercised SARs are not considered participating securities as they do not have rights to dividends or dividend equivalents prior to release or exercise.

The following table sets forth the number of potential common shares not included in the calculation of diluted earnings per share because their effects were anti-dilutive:

Three Months Ended

April 30,

Three Months Ended

April 30,

2017

2016

2018

2017

(in thousands)

Class A

3,036

2,807

—

3,036

Class B

389

349

—

389

3.4. FAIR VALUE MEASUREMENTS

When determining fair value, the Company uses a ~~three-tier~~three-tier value hierarchy which prioritizes the inputs used in measuring fair value. Whenever possible, the Company uses observable market data. The Company relies on unobservable inputs only when observable market data is not available. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following table sets forth the financial assets and liabilities, measured at fair value, as of April 30, ~~2017~~ 2018 and January 31, ~~2017:~~2018:

Fair value measurement at reporting date using

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

(in thousands)

Money market mutual funds as of April 30, 2017 ^(a)
$ 121,699
Money market mutual funds as of January 31, 2017 ^(a)
$ 116,043
Liability related to the interest rate swap as of April 30, 2017 ^(b)
$ (177 )
Liability related to the interest rate swap as of January 31, 2017 ^(b)
$ (190 )

Fair value measurement at reporting date using

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

(in thousands)

Money market mutual funds as of April 30, 2018 ^(a)

108,892

Money market mutual funds as of January 31, 2018 ^(a)

115,416

Asset related to the interest rate swap as of April 30, 2018^(b)

304

Asset related to the interest rate swap as of January 31, 2018 ^(b)

187

___________________________

(a) Money market mutual funds are recorded at fair value based upon quoted market prices.

(b) The ~~liability~~asset related to the interest rate swap is recorded at fair value based upon a valuation model that uses relevant observable market inputs at quoted intervals, such as forward yield curves.

Money market mutual funds are classified as part of ~~“Cash~~cash and ~~equivalents”~~equivalents in the accompanying Condensed Consolidated Balance Sheets. The amount of cash and equivalents deposited with commercial banks was $31$35.0 million and ~~$29~~$32.0 million as of April 30, ~~2017~~ 2018 and January 31, ~~2017,~~ 2018, respectively.

The ~~Company’s line of credit and notes~~Company’s note payable ~~both bear~~bears a variable market interest rate commensurate with the Company’s credit standing. Therefore, the carrying ~~amounts~~amount outstanding under the ~~line of credit and~~ note payable reasonably ~~approximate~~approximates fair value based on Level 2 inputs.

There have been no transfers between fair value measurements levels during the three months ended April 30, ~~2017.~~2018.

Derivative Instruments

The Company entered into an interest rate swap in May 2012 to mitigate the exposure to the variability of one month LIBOR for its floating rate debt described in Note 67 “Debt” within these Notes to Condensed Consolidated Financial Statements. The fair value of the interest rate swap is reflected as ~~a liability~~ an asset in the Condensed Consolidated Balance Sheets and the change in fair value is reported in “Other (income) expense” in the Condensed Consolidated Statements of Operations and Comprehensive ~~Loss.~~Income (Loss). The fair value of the interest rate swap is estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date.

The fair values of the derivative instrument at April 30, ~~2017~~ 2018 and January 31, ~~2017~~ 2018 were as follows (in thousands):

		Liability								Asset
			Fair Value								Fair Value
		Balance Sheet Location	April 30, 2017			January 31, 2017				Balance Sheet Location	April 30, 2018		January 31, 2018
Derivative instrument:	Derivative instrument:								Derivative instrument:
Interest rate swap		Other liabilities	$	(177	)	$	(190	)		Other assets, net	$	304	$	187
Total			$	(177	)	$	(190	)			$	304	$	187

The change in fair value of the interest rate swap recognized in the Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~Income (Loss) for the three months ended April 30, ~~2017~~ 2018 and ~~April 30, 2016~~2017 was ~~$13,000~~$117,000 and ~~$(31,000),~~$13,000, respectively.

8.9. INCOME TAXES

In determining the quarterly provision for income taxes, ~~for~~ ~~the first quarter of fiscal 2018,~~ the Company calculated income tax expense based on actual quarterly results in the first quarters of fiscal years 2019 and ~~related income and statutory tax rates,~~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 ~~(benefit)~~ of ~~$0.6~~$1.2 million and ~~$(1.1)~~$0.6 million for the first three months of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively. The ~~Company~~’sCompany’s effective tax rate ~~decreased~~increased to 46% during the first quarter of fiscal 2019 compared to (32%) ~~from 28%~~ for the same period in the prior year. InThe increase in the ~~current fiscal quarter the Company did not benefit from its net operating losses. This~~effective tax rate is primarily due to ~~a valuation allowance recorded against U.S. deferred~~taxable profits and an increase in foreign tax ~~assets as of January 31, 2017 and foreign losses sustained~~expense due to jurisdictional mix in ~~a low tax jurisdiction. In determining the quarterly provision for income taxes for~~ the first quarter of fiscal ~~2017,~~2019 compared to a loss for the ~~Company calculated~~same period of fiscal 2018.

When calculating the income tax expense ~~based~~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 ~~annual~~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 ~~adjusted for discrete items recorded during the period.~~ 2018.

The gross amount of unrecognized tax benefits was $1.8 million at April 30, ~~2017,~~2018, including interest and penalties. ~~As a result of adoption of ASU 2013-11, the Company reduced its~~The unrecognized tax benefits are reduced by ~~$1.0 million with an accompanying reduction of~~ deferred tax ~~assets by $1.0 million.~~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~~’sCompany’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. ~~In the next twelve months, due to a favorable tax decision an estimated $0.1 million of gross unrecognized tax benefits will be recognized.~~

The ~~Company~~’sCompany’s policy is to recognize interest and penalties ~~if any,~~ related to unrecognized tax benefits as a component of income tax expense. As of April 30, ~~2017,~~2018, the Company has accrued approximately ~~$0.3~~$0.2 million of interest and ~~penalty~~penalties expense ~~relating~~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 ~~2014~~ and ~~2016~~

2014

●

Iowa for fiscal year ended January 31, 2014

●

~~China~~ ~~for calendar years 2013, 2014, 2015 and 2016~~

~~During the first quarter of fiscal 2018, the Company closed the following audit with no adjustment:~~

●

~~India~~Kentucky for fiscal ~~years~~year ended ~~March~~January 31,2016

●

Netherlands for fiscal year ended January 31, ~~2015~~2016

~~10.~~11. STOCK-BASED COMPENSATION

The ~~Company~~’sCompany’s equity awards consist of RSUs and SARs. For a description of the Company’s stock-based compensation plans, see Note 5 “Stock-Based Compensation” in Notes to Consolidated Financial Statements included in the Annual Report on Form ~~10-K~~10-K for the year ended January 31, ~~2017.~~2018.

Stock-Based Compensation

The following table sets forth reported stock-based compensation expense for the threemonths ended April 30, 2018 and 2017:

	Three Months Ended April 30,				Three Months Ended April 30,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Cost of subscription	$	25	$	22
Cost of maintenance and other revenue		77		67
Cost of subscription fees					$	49	$	25
Cost of maintenance and other						92		77
Cost of professional services		220		173		226		220
Sales and marketing		317		277		402		317
Research and development		253		236		315		253
General and administrative		876		833		1,022		876
Total stock-based compensation expense	$	1,768	$	1,608	$	2,106	$	1,768

RSU Information

The estimated fair value of RSUs was calculated based on the closing price of the ~~Company~~’sCompany’s common stock on the date of grant, reduced by the present value of dividends foregone during the vesting period.

The following table summarizes the activity for RSUs for the three months ended April 30, ~~2017:~~2018:

	RSUs			Weighted Average Grant Date Fair Value		RSUs			Weighted Average Grant Date Fair Value
	(in thousands)					(in thousands)

Restricted stock at January 31, 2017		623		$	20.56
Restricted stock at January 31, 2018							653		$	25.10
Granted		24			27.04		2			43.93
Released ⁽¹⁾		(5	)		24.39		(11	)		26.04
Forfeited		(4	)		19.79		(13	)		24.54
Restricted stock at April 30, 2017		638		$	20.78
Restricted stock at April 30, 2018							631		$	25.16

_________________________

~~(1)~~(1)

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

The Company withholds a portion of the released shares as consideration for the Company’s payment of applicable employee income taxes. During the three months ended April 30, ~~2017,~~ 2018, the Company withheld ~~2,000~~4,000 shares for payment of these taxes at a value of ~~$61,000.~~$0.2 million.

Total unrecognized compensation cost related to RSUs was approximately ~~$9.4~~$10.9 million as of April 30, ~~2017.~~ 2018. This cost is expected to be recognized over a weighted-average period of approximately 2.5 years.

SAR Information

The following table summarizes the activity for outstanding SARs for the three months ended April 30, ~~2017:~~2018:

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
— —
Exercised
(17
)
9.79
Expired
— —
Forfeited
— —
Outstanding at April 30, 2017
2,776 $ 15.54 4.2 $ 38,958
Vested and exercisable at April 30, 2017
1,786 $ 12.96 3.1 $ 29,730

SARs

(in thousands)

Weighted

Average

Exercise

Price per

Share

Weighted

Average

Remaining

Contractual

Term (years)

Aggregate

Intrinsic

Value

(in thousands)

Outstanding at January 31, 2018

3,024

17.78

Granted

—

Exercised

(339

)

9.25

Expired

—

Forfeited

)

19.40

Outstanding at April 30, 2018

2,684

18.86

4.2

66,381

Vested and exercisable at April 30, 2018

1,734

15.24

3.1

48,961

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~~’sCompany’s common stock based on the last trading day as of April 30, ~~2017,~~ 2018, and the exercise price for in-the-money SARs) that would have been received by the holders if all SARs had been exercised on April 30, ~~2017.~~ 2018. The total intrinsic value of SARs exercised in the three months ended April 30, ~~2017~~ 2018 was ~~$0.3~~$10.5 million.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the three months ended April 30, ~~2017,~~ 2018, the Company withheld ~~4,000~~93,000 shares for payment of these taxes at a value of ~~$0.1~~$3.9 million.

At April 30, ~~2017,~~ 2018, there was approximately ~~$4.3~~$4.9 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted-average period of approximately ~~2.3~~2.5 years.

Deferred maintenance and subscription revenues represent billings and customer payments made in advance for support and subscription contracts. Support and subscription are billed in advance with corresponding revenues being recognized ratably over the support and subscription periods. Support is typically billed annually while subscription is billed quarterly or annually. Deferred license revenues result from undelivered products or specified enhancements, customer specific acceptance provisions and software license transactions that cannot be segmented from undelivered consulting or other services. Deferred services revenues represent both prepayments for our professional services where revenues for these services are generally recognized as the Company completes the performance obligations for the prepaid services and services already provided but deferred due to software revenue recognition rules.

The Company sells software licenses and services to its customers under written agreements. Each agreement contains the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that may be awarded against the customer in the event the ~~Company~~’sCompany’s software is found to infringe upon certain intellectual property rights of a third party. The agreements generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects.

The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the agreements. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the agreements, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the ~~Company~~’sCompany’s consolidated results of operations, financial position or liquidity.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact should be construed as forward looking statements, including statements that are preceded or accompanied by such words as “may,” “believe,” “could,” “anticipate,” “projects,” “estimates,” “will likely result,” “should,” “would,” “might,” “plan,” “expect,” “intend” and words of similar meaning or the negative of these terms or other comparable terminology. Forward-looking statements are based on the ~~Company~~’sCompany’s current expectations and assumptions regarding its business, the economy and future conditions. A number of risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1A entitled “Risk Factors” within our Annual Report on Form 10-K for the year ended January 31, ~~2017.~~2018. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions, expectations and projections only as of the date hereof and are subject to risks, uncertainties and assumptions about our business. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements except as required by applicable securities laws. Readers should carefully review the risk factors and other information described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”).

The following discussion should be read in conjunction with the information included within our Annual Report on Form 10-K for the year ended January 31, ~~2017,~~2018, and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Our condensed consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of ~~management~~’smanagement’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical, including a) revenue; b) accounts receivable allowances for doubtful accounts; c) ~~capitalized software development costs; d)~~ goodwill and intangible assets —– impairment assessments; ~~e) valuation of deferred tax assets~~d) income taxes; and ~~tax contingency reserves; and f)~~e) stock-based compensation are further discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2017.~~2018. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the first three months of fiscal 2019 except as noted below.

Revenue. We offer our software using the same underlying technology via two models: a traditional on-premises licensing model and a cloud-based subscription model. The on-premises model involves the sale or license of software on a perpetual basis to customers who take possession of the software and install and maintain the software on their own hardware. Under the cloud-based subscription delivery model, we provide access to our software on a hosted basis as a service and customers generally do not have the contractual right to take possession of the software.

We generate revenue through sales of licenses and maintenance provided to our on-premises customers and through subscriptions of our cloud-based software. We offer professional services to both our on-premises and cloud customers to assist them with the design, testing and implementation of our software.

We record the amount of revenue and related costs by considering whether the entity is a principal (gross presentation) or an agent (net presentation) by evaluating the nature of our promise to the customer. Revenue is presented net of sales, value-added and other taxes collected from customers and remitted to government authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. We identify and track the performance obligations at contract inception so that we can monitor and account for the performance obligations over the life of the contract.

Our contracts which contain multiple performance obligations generally consist of the initial purchase of subscription or licenses and a professional services engagement. License purchases generally have multiple performance obligations as customers purchase maintenance in addition to the licenses. Our single performance obligation arrangements are typically maintenance renewals, subscription renewals and services engagements.

For contracts with multiple performance obligations where the contracted price differs from the standalone selling price ("SSP") for any distinct good or service, we may be required to allocate the contract’s transaction price to each performance obligation using our best estimate for the SSP. SSP is assessed annually using a historical analysis of contracts with customers executed in the most recently completed fiscal year ~~ended January 31, 2017.~~ to determine the range of selling prices applicable to a distinct good or service.

Subscription revenue is recognized ratably over the initial subscription period committed to by the customer commencing when the cloud environment is made available to the customer. The initial subscription period is typically 12 to 60 months. We generally invoice our customers in advance in quarterly or annual installments and typical payment terms provide that customers make payment within 30 days of invoice.

Transfer of control for software is considered to have occurred upon electronic delivery of the license key that provides immediate availability of the product to the customer. Our typical payment terms tend to vary by region but our standard payment terms are within 30-90 days of invoice.

Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product updates, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone access to technical support personnel. Our customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of customers renew their support services contracts annually and typical payment terms provide that customers make payment within 30 days of invoice.

Revenue from professional services is typically comprised of implementation, development, training or other consulting services. Consulting services are generally sold on a time-and-materials or fixed fee basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. We recognize revenue for time-and-materials arrangements as the services are performed. In fixed fee arrangements, revenue is recognized as services are performed as measured by costs incurred to date, compared to total estimated costs to complete the services project. Management applies judgment when estimating project status and the costs necessary to complete the services projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Services are generally invoiced upon milestones in the contract or upon consumption of the hourly resources and payments are typically due 30 days after invoice.

We execute arrangements through indirect sales channels via sales agents and distributors who are authorized to market our software products to end users. In arrangements with sales agents, QAD contracts directly with the customer and the sales agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to market and distribute our software products to end users in specified territories and the distributor bears the risk of collection from the end user customer. We recognize revenue from transactions with distributors when the distributor submits a signed agreement and transfer of control has occurred to the distributor, in accordance with the five revenue recognition steps noted above. Revenue from distributor transactions is recorded on a net basis (the amount actually received by us from the distributor). We do not offer rights of return, product rotation or price protection to any of its distributors.

We disaggregate revenue from contracts with customers by geography and by the customers’ industry within manufacturing, as we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for our arrangements may be dependent on contract-specific terms and may vary in some instances.

Judgment is required to determine the SSP for each distinct performance obligation. We rarely license or sell products on a stand-alone basis, so we are required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because we do not sell the license, product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. In making these judgments, we analyze various factors, including our pricing methodology and consistency, size of the arrangement, length of term, customer demographics and overall market and economic conditions. Based on these results, the estimated SSP is set for each distinct product or service delivered to customers.

Revenue is recognized over time for our subscription, maintenance and fixed fee professional services that are separate performance obligations. For our professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization, specification variances and testing requirement changes.

If a group of agreements are entered at or near the same time and so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be combined as one arrangement for revenue recognition purposes. We exercise significant judgment to evaluate the relevant facts and circumstances in determining whether agreements should be accounted for separately or as a single arrangement. Our judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

If a contract includes variable consideration, we exercise judgment in estimating the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. When estimating variable considerations, we will consider all relevant facts and circumstances. Variable consideration will be estimated and included in the contract price only when it is probable that a significant reversal in the amount of revenue recognized will not occur.

QAD (“QAD”, the “Company”, “we” or “us”) is a ~~global leader in~~leading provider of flexible, cloud-based and on-premises enterprise software ~~solutions~~and services for global manufacturing ~~companies across~~companies. QAD Enterprise Applications support operational requirements in the areas of financials, customer management, supply chain, manufacturing, service and support, analytics, business process management and integration. QAD's portfolio also includes related solutions for quality management software, supply chain management software, transportation management software and business-to-business interoperability. Since 1979, QAD solutions have supported customers in the automotive, ~~life sciences,~~ consumer products, food and beverage, high technology, industrial manufacturing and industrial products industries. We offer full-featured, secure and flexible enterprise and supply chain solutions built for global manufacturing companies which can be delivered in the cloud, on premise or via a blended combination of sites on premise and in the cloud. ~~Our mission is~~life sciences industries to ~~provide best-in-class software that enables our customers to operate as effective enterprises~~better align operations with their ~~business processes running at peak efficiency and perfectly aligned~~strategic goals to their strategic goals. Our solutions, called QAD Enterprise Applications, enable measurement and control of key business processes and support operational requirements, including financials, manufacturing, demand and supply chain planning, customer management, business intelligence, business process management, supply chain execution, transportation management, service and support, enterprise asset management, analytics, enterprise quality management, interoperability, process and performance, and internationalization.become Effective Enterprises.

We operate primarily in the following four geographic regions: North America, Latin America, EMEA and Asia Pacific. In the first three months of fiscal ~~2018,~~2019, approximately ~~47%~~46% of our total revenue was generated in North America, 29% in EMEA, ~~17%~~15% in Asia Pacific and 7%10% in Latin America. The majority of our revenue is generated from global customers who have operations in multiple countries throughout the world. Subscription, license and maintenance revenues are ~~allocated~~generally assigned to the region where a majority of the end ~~user is~~users are located. ~~Services~~Professional services revenue is assigned based on the region where the services are ~~performed.~~delivered. A significant portion of our revenue and expenses are derived from international operations which are primarily conducted in foreign currencies. As a result, changes in the value of foreign currencies relative to the U.S. dollar have impacted our results of operations and may impact our future results of operations. At April 30, ~~2017,~~2018, we employed approximately ~~1,77~~51,870 employees worldwide, of which ~~630~~640 employees were based in North America, ~~560~~590 employees in EMEA, ~~490~~540 employees in Asia Pacific and 95100 employees in Latin America.

Our customer base and our target markets are primarily global manufacturing companies; therefore, our results are heavily influenced by the state of the manufacturing economy on a global basis. As a result, our management team monitors several economic indicators, with particular attention to the Global and Country Purchasing ~~Managers~~’Managers’ Indexes (“PMI”). The PMI is a survey conducted on a monthly basis by polling businesses that represent the makeup of respective sectors. Since most of our customers are manufacturers, our revenue has historically correlated with fluctuations in the manufacturing PMI. Global macro economic trends and manufacturing spending are important barometers for our business, and the health of the U.S., Western European and Asian economies have a meaningful impact on our financial results.

We are transitioning our business model from traditional ~~perpetual~~on-premises licensing to ~~cloud-based subscription.~~cloud-based subscriptions. During fiscal 2018 and the first three months of fiscal 2019, we closed most of our new customer deals in the cloud. In addition, we converted many of our existing customers from on-premises licenses to our cloud-based solution. Recurring revenue, which we define as subscription revenue plus maintenance revenue, grew 12% from prior year, and accounted for ~~66% and 68%~~61% of total revenue for the first ~~three months~~quarter of fiscal ~~2018 and 2017, respectively. By reducing our customers’ up-front costs and providing more flexibility in how customers gain access~~2019, compared to and pay for our products, we expect our cloud business model will be more attractive to our customers than perpetual licenses. We anticipate this will increase our long-term revenue growth rate by increasing total subscriptions and customer value over time. As a result of our increased sales in the cloud, our license revenue is declining66% one year ago. The decline as a percentage of total revenue was due to the large increase in ~~comparison~~professional services revenue which grew by 43% compared to ~~prior years,~~last year’s first quarter. We expect recurring revenue to remain a ~~trend that we believe will continue. This is putting adverse pressure on short-term profitability~~high percent of total revenue as ~~we invest~~our subscription revenue continues to ~~support growth of our cloud business and our sales and operational expenses are recognized ahead of revenue.~~grow.

We operate in several geographical regions as described in Note 13 “~~Business~~“Business Segment Information” within the Notes to Condensed Consolidated Financial Statements. In order to present our results of operations without the effects of changes in foreign currency exchange rates, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented in the following tables. In order to calculate our constant currency results, we apply the current foreign currency exchange rates to the prior period results.

Total Revenue. On a constant currency basis, total revenue was ~~$71.4~~$86.2 million for the first quarter of fiscal ~~2018,~~2019, representing ~~a $7.2~~an $11.4 million, or ~~11%~~15%, increase from ~~$64.2~~$74.8 million for the same period last year. Total revenue in the first quarter of fiscal 2019 included $3.2 million of additional revenue recognized in accordance with new revenue recognition rules under Topic 606 compared to applying the historical revenue recognition rules under Topic 605. For additional explanation of the revenue recognition differences between Topic 606 and Topic 605, refer to the Recent Accounting Pronouncements section of Note 1 in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. When comparing categories within total revenue at constant rates, our results for the first quarter of fiscal ~~2018~~2019 included ~~an increase~~increases in subscription, ~~revenue,~~ license ~~fees~~ and professional services revenue partially offset by a decrease in maintenance and other revenue. Revenue outside the North America region as a percentage of total revenue was ~~53%~~54% and ~~55%~~53% for the first quarter of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively. On a constant currency basis, total revenue increased across all regions during the first quarter of fiscal ~~2018~~2019 when compared to the ~~prior~~same period last year. Our products are sold to manufacturing companies that operate mainly in the following six industries: automotive, consumer products, food and beverage, high technology, industrial products and life sciences. Given the similarities between consumer products and food and beverage as well as between high technology and industrial products, we aggregate them ~~for management review. The~~in the following table which presents revenue by industry for the first quarter of fiscal ~~2018~~2019 and ~~2017:~~ 2018:

Subscription Revenue.Subscription revenue consists of recurring fees from customers to access our products via the cloud and other subscription offerings. Subscription revenue is billed on a quarterly or annual basis and recognized ratably over the term of the agreement, typically 12 to 60 months. On a constant currency basis, subscription revenue was ~~$15.3~~$21.5 million for the first quarter of fiscal ~~2018,~~2019, representing a ~~$4.0~~$5.7 million, or ~~35%~~36%, increase from ~~$11.3~~$15.8 million for the same period last year. On a constant currency basis, subscription revenue increased ~~across all~~in our North America, EMEA and Asia Pacific regions and remained relatively flat in our Latin America region during the first quarter of fiscal ~~2018~~2019 when compared to the prior year. The increase in subscription revenue was primarily due to sales of QAD Enterprise Applications in the cloud, which represented over 85% of total subscription revenue in the first quarter of fiscal 2018 and 2017. CloudSubscription revenue consists of new customer sites; existing Enterprise Applications users converting from ~~on-premise;~~on-premises; and additional users and modules purchased by our existing cloud customers. ~~Approximately~~Generally, about half of our new cloud ~~revenue comes~~deals come from existing customers converting Enterprise Applications users to cloud users and the other half comes from new customers and new ~~modules. Our cloud customer retention rate is in excess of 90%.~~ modules, although we may experience quarterly fluctuations.

We track our ~~cloud~~ retention rate by calculating the annualized revenue of customer sites with contracts up for renewal during the period compared to the annualized revenue associated with the customer sites that have canceled during the period. The percentage of revenue not canceled is our retention rate.

~~The following table presents cloud revenue by region for the first quarter of fiscal 2018 and 2017:~~

~~The following table presents cloud revenue by industry for the first quarter of fiscal 2018 and 2017:~~

~~We expect the growth~~ rate of subscription ~~revenue in the future to be primarily attributable to growth in sales of our QAD Enterprise Applications in the cloud.~~ ~~Growing our cloud solution~~ and ~~offering our products as SaaS continues to be a key strategic initiative for us.~~

~~License Revenue.~~ License revenue is derived from software license fees that customers pay for our core product, QAD Enterprise Applications, and any add-on modules they purchase. On a constant currency basis, license revenue was $5.3 million for the first quarter of fiscal 2018, representing a $1.4 million, or 36%, increase from $3.9 million for the same period last year. On a constant currency basis, license revenue increased in our North America, EMEA and Latin America regions and was flat in our Asia Pacific region during the first quarter of fiscal 2018 when compared to the same period last year. One of the metrics that management uses to measure license revenue performance is the number of customers that have placed sizable license orders in the period. During the first quarter of fiscal 2018, one customer placed a license order totaling more than $0.3 million and no orders exceeded $1.0 million. This compared to fiscal 2017 in which no customers placed license orders totaling more than $0.3 million. The majority of our license revenue has come from additional users and module purchases from our existing customers. We anticipate that license revenue will decrease as more new customers subscribe to our cloud-based products and more existing customers elect to subscribe to QAD products in the cloud instead of purchasing licenses.

~~Maintenance and Other Revenue~~. We offer support services 24 hours a day, seven days a week in addition to providing software upgrades, which include additional or improved functionality, when and if available. On a constant currency basis, maintenance and other revenue was $31.9 million for the first quarter of fiscal 2018, representing a $0.4 million, or 1%, decrease from $32.3 million for the same period last year. On a constant currency basis, maintenance and other revenue decreased in our Asia Pacific region, remained relatively flat in our North America and EMEA regions and increased in our Latin America region during the first quarter of fiscal 2018 when compared to the prior year. As our customers continue to embrace our cloud offerings we believe our maintenance revenue is likely to decline. When customers convert to the cloud, they generally cease using their perpetual licenses and therefore no longer require (or pay for) maintenance for those perpetual licenses. We continue to see renewal rates consistent with our historical experience, however, conversions from on-premise to cloud will result in future decreases in maintenance revenue.

~~The majority of our customers renew their annual support contracts. Over the last three years, our annual retention rate of customers subscribing to maintenance has been greater than 90%. We track our maintenance retention rate~~ by calculating the annualized revenue of customer sites with contracts up for renewal during the period compared to the annualized revenue associated with the customer sites that have canceled during the period. The percentage of revenue not canceled is our retention rate. Conversions to the cloud are not considered cancellations for purposes of this calculation. Our subscription customer retention rate is in excess of 90%.

The following table presents subscription revenue by region for the first quarter of fiscal 2019 and 2018:

Our maintenance retention rate ~~calculation.~~has remained in excess of 90% for the first quarter of fiscal 2019 and 2018.

Professional Services Revenue.Our professional services business includes technical consulting and application consulting, and training, implementations, migrations and upgrades related to our solutions. On a constant currency basis, professional services revenue was ~~$18.9~~$26.9 million for the first quarter of fiscal ~~2018,~~2019, representing a ~~$2.2~~$7.1 million, or ~~13%~~36%, increase from ~~$16.7~~$19.8 million for the same period last year. Total professional services revenue in the first quarter of fiscal 2019 includes $1.8 million of additional revenue recognized in accordance with the new revenue recognition rules under Topic 606 compared to applying the historical revenue recognition rules under Topic 605. On a constant currency basis, professional services revenue increased ~~in our North America, Asia Pacific and Latin America~~across all regions ~~and decreased in our EMEA region~~ during the first quarter of fiscal ~~2018~~2019 when compared to the prior year. ~~The increase in~~New implementations and existing customer upgrade projects continue to generate demand for our professional services. In addition, we also provided personnel augmentation services to one of our cloud customers, mainly through subcontractors at minimal margins. We expect professional services revenue ~~period over period can be attributed to a higher amount of professional~~will decrease from its current level when augmentation services ~~revenue per customer. In order to support the increase in professional services revenue, we~~ are ~~adding capacity through additional employees and partners in fiscal 2018.~~ completed.

Total cost of revenue consists of cost of subscription, cost of license, ~~fees,~~ cost of maintenance and other and cost of professional services. Cost of subscription includes salaries, benefits, bonuses of our cloud operations ~~group located in the U.S. and~~ ~~India;~~employees; stock-based compensation for those employees; third-party contractor ~~expense;~~expense, hosting and hardware costs; royalties; professional fees; ~~travel;~~travel expense; and an allocation of information technology and facilities costs. Cost of license ~~fees~~ includes license royalties, amortization of capitalized software costs and fulfillment. Cost of maintenance and other includes salaries, benefits and bonuses of our support group, stock-based compensation for those employees, travel expense, professional fees, fulfillment and an allocation of information technology and facilities costs. Cost of professional services includes salaries, benefits and bonuses, costs of fulfilling service contracts, stock-based compensation for those employees, third-party contractor expense, travel expense for services employees and an allocation of information technology and facilities costs.

Total Cost of Revenue.On a constant currency basis, total cost of revenue was ~~$34.9~~$41.1 million and ~~$31.8~~$36.2 million for the first quarter of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively and as a percentage of total revenue was ~~49% and 50%~~48% for the first quarter of fiscal ~~2018~~2019 and ~~2017, respectively.~~2018. The non-currency related increase in cost of revenue of ~~$3.1~~$4.9 million, or ~~10%~~14%, in the first quarter of fiscal ~~2018~~2019 compared to the ~~first quarter of fiscal 2017~~same period last year was primarily due to higher hosting ~~and personnel~~ costs associated with the growth of our cloud business and higher ~~professional services~~third-party contractor, travel and personnel costs associated with increased professional services revenue.

Cost of Subscription.On a constant currency basis, cost of subscription was ~~$7.7~~$8.2 million for the first quarter of fiscal ~~2018,~~2019, representing a ~~$1.5~~$0.4 million, or ~~24%~~5%, increase from ~~$6.2~~$7.8 million for the same period last year. The non-currency related increase in cost of subscription of ~~$1.5~~$0.4 million in the first quarter of fiscal ~~2018~~2019 compared to the ~~first quarter of fiscal 2017~~same period last year was primarily due to higher hosting costs of ~~$0.9~~$0.7 million ~~higher salaries~~partially offset by $0.2 million of personnel costs cross charged to our services department to support conversion and ~~related costs of $0.4 million as a result of higher headcount of approximately 34 people and higher third-party contractor costs of $0.2 million.~~upgrade projects. Cost of subscription as a percentage of subscription revenue was ~~50%~~38% and ~~54%~~50% in the first quarter of fiscal 2019 and 2018, ~~and 2017,~~ respectively. Subscription margins improved due to achieving greater economies of scale as we increase revenue as well as improved automation of some processes in our cloud operations department. We expect to continue to improve our subscription margins over time as we leverage ongoing economies of scale and operational efficiencies, but we also anticipate quarterly fluctuations in our subscription margins as we make investments in our data centers and cloud operations to support future growth. Our strategic investments in cloud growth may not match the timing of revenue increases.

Cost of ~~License Fees.~~License.On a constant currency basis, cost of license ~~fees~~ was $0.7 million for the first quarter of ~~both~~ fiscal 2019 and 2018 and ~~2017. Cost of license fees as~~primarily relates to royalties. As a ~~percentage~~percent of license revenue, ~~was 13% and 18% for the first quarter of fiscal 2018 and 2017, respectively. The higher~~ cost of license ~~revenue percentage in the first quarter of fiscal 2017 was due to fixed amortization of capitalized software costs as a percentage of license revenue.~~remained relatively consistent year over year.

Cost of Maintenance and Other.On a constant currency basis, cost of maintenance and other was ~~$7.7~~$7.9 million for the first quarter of ~~both~~ fiscal ~~2018~~2019 and ~~2017.~~2018. Cost of maintenance and other as a percentage of maintenance and other revenue was 25% and 24% in the first quarter of ~~both~~ fiscal 2019 and 2018, ~~and 2017.~~respectively.

Cost of Professional Services.On a constant currency basis, cost of professional services was ~~$18.8~~$24.3 million for the first quarter of fiscal ~~2018,~~2019, representing a ~~$1.7~~$4.5 million, or ~~10%~~23%, increase from ~~$17.1~~$19.8 million for the same period last year. The non-currency related increase in cost of professional services of ~~$1.7~~$4.5 million ~~in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017~~ was primarily due to higher third-party contractor costs of $2.0 million, higher salaries and related costs of ~~$0.7~~$1.0 million, as a result of higher headcount of approximately 3251 people, higher ~~bonuses~~travel of ~~$0.6~~$1.0 million and higher ~~third-party contractor~~information technology and facilities allocated costs of ~~$0.2~~$0.3 million. Cost of professional services as a percentage of professional services ~~revenues~~revenue was ~~99%~~90% and ~~102%~~99% for the first quarter of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively. Our ~~investment in additional resources will impact our~~ professional services ~~margins in fiscal 2018, and this is necessary to ensure we can fully support our customers as they expand their footprint~~margin in the ~~cloud.~~first quarter of fiscal 2019 included additional services revenue of $1.8 million recognized in accordance with Topic 606 rules which under Topic 605 would not have been recognized. Without the additional revenue related to Topic 606, cost of professional services as a percentage of revenue would have been 97% for the first quarter of fiscal 2019.

Sales and marketing expense includes salaries, benefits, commissions, bonuses, stock-based compensation and travel expense for our sales and marketing employees in addition to costs of programs aimed at increasing revenue, such as trade shows, user group events, lead generation, advertising and various sales and promotional programs. Sales and marketing expense also includes personnel costs of order processing, sales agent fees and an allocation of information technology and facilities costs. ~~We pay and expense commissions for cloud deals at the time the contract is signed, whereas the related revenue is recognized in future periods.~~

On a constant currency basis, sales and marketing expense was ~~$17.6~~$19.9 million for the first quarter of fiscal ~~2018,~~2019, representing a ~~$1.0~~$1.5 million, or 6%8%, increase from ~~$16.6~~$18.4 million for the same period last year. The non-currency related increase in sales and marketing expense of ~~$1.0~~$1.5 million in the first quarter of fiscal ~~2018~~2019 compared to the ~~first quarter of fiscal 2017~~same period last year was primarily due to higher ~~commissions~~salaries and related costs of ~~$0.6~~$0.9 million as a result of higher headcount of approximately 18 people, higher capitalized commission expense of $0.3 million and higher ~~bonuses~~travel of ~~$0.5~~$0.2 million.

Research and development is expensed as incurred and consists primarily of salaries, benefits, bonuses, stock-based compensation, training and travel expense for research and development employees and professional services, such as fees paid to software development firms and independent contractors. Research and development expense also includes an allocation of information technology and facilities costs, and is reduced by reimbursements from joint development projects. As part of our vertical focus we regularly seek to engage in joint development arrangements with our customers in order to enhance specific functionalitycapitalized localizations and ~~industry experience, although the number and size of joint development arrangements may fluctuate.~~translations costs.

On a constant currency basis, research and development expense was ~~$11.5~~$14.0 million for the first quarter of fiscal ~~2018,~~2019, representing a ~~$0.5~~$2.0 million, or 5%17%, increase from ~~$11.0~~$12.0 million for the same period last year. The non-currency related increase in research and development expense of ~~$0.5~~$2.0 million in the first quarter of fiscal ~~2018~~2019 compared to the ~~first quarter of fiscal 2017~~same period last year was primarily due to higher salaries and related costs of ~~$0.4~~$1.0 million, as a result of higher headcount of approximately 2021 people, and higher ~~bonuses~~third-party contractor costs of ~~$0.3~~$0.6 million.

General and administrative expense includes salaries, benefits, bonuses, stock-based compensation and travel expense for our finance, human resources, legal and executive personnel, as well as professional fees for accounting and legal services, bad debt expense and an allocation of information technology and facilities costs.

On a constant currency basis, general and administrative expense was ~~$8.6~~$9.4 million for the first quarter of fiscal ~~2018,~~2019, representing a ~~$0.7~~$0.5 million, or 9%6%, increase from ~~$7.9~~$8.9 million for the same period last year. The non-currency related increase in general and administrative expense of ~~$0.7~~$0.5 million in the first quarter of fiscal ~~2018~~2019 compared to ~~fiscal 2017~~the same period last year was primarily due to higher ~~bonuses~~salaries and related costs of ~~$0.4~~$0.2 million, higher stock compensation of $0.1 million and higher ~~professional~~legal and accounting fees of ~~$0.2~~$0.1 million.

Amortization of intangibles from acquisitions was $0.2 million for the first quarter of ~~both~~ fiscal 2018 and ~~2017, which~~zero for the first quarter of fiscal 2019. Amortization expense was due to the intangible assets acquired infrom our ~~fiscal 2013 acquisitions of~~ DynaSys and ~~CEBOS.~~ CEBOS acquisitions that became fully amortized at the end of fiscal 2018.

Net other (income) expense was ~~$0.6~~$(0.8) million and ~~$0.9~~$0.6 million for the first ~~quarter~~three months of fiscal ~~2018~~2019 and fiscal ~~2017,~~2018, respectively. The ~~decrease~~change in net other (income) expense was primarily related to lower foreign exchange losses of ~~$0.2~~$0.9 million and higher interest income of $0.4 million.

Interest rate swap valuations and foreign exchange gains and losses are subject to changes which are inherently unpredictable. Our interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, subjecting us to non-cash volatility in our results of operations. The swap fixes the interest rate on our mortgage to 4.31% over the entire term of the mortgage and effectively lowered our interest rate from the previous mortgage rate of 6.5%. Although the agreement allows us to prepay the loan and exit the agreement early, we have no intention of doing so. As a result, we will have non-cash adjustments through earnings each reporting period. Over the term of the mortgage, however, the net impact of these mark-to-market adjustments on earnings will be zero.

We recorded income tax expense ~~(benefit)~~ of ~~$0.6~~$1.2 million and ~~$(1.1)~~$0.6 million for the first quarter of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively. Our effective tax rate ~~decreased~~increased to 46% for the first quarter of fiscal 2019 compared to (32%) ~~from 28%~~ for the same period in the prior year. In ~~the current~~both fiscal ~~quarter~~periods we did not benefit from net operating losses. This is due to a valuation allowance recorded against U.S. deferred tax assets as of January 31, 2017 and foreign losses sustained in a low tax jurisdiction. In determining the quarterly provision for income taxes for the first quarter of fiscal 2018, we calculated our income tax expense based on actual quarterly results since they provided a more reliable estimate of quarterly tax expense. The increase in the effective tax rate was primarily due to taxable profits and ~~related income and statutory~~an increase in foreign tax ~~rates, adjusted for discrete items recorded during~~expense due to the ~~period. In determining the quarterly provision for income taxes for~~jurisdictional mix in the first quarter of fiscal ~~2017, we calculated income tax expense based on the estimated annual tax rate~~2019 compared to a loss for the ~~year, adjusted for discrete items recorded during the period.~~ same period of fiscal 2018.

Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use of non-GAAP financial information. Our measures of non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margins, non-GAAP pre-tax income and ~~cash taxes~~estimated income tax expense on GAAP earnings each meet the definition of a non-GAAP financial measure. We define the non-GAAP measures as follows:

~~QAD~~’sQAD’s management uses non-GAAP measures internally to evaluate the business and believes that presenting non-GAAP measures provides useful information to investors regarding the underlying business trends and performance of ~~the~~ our ongoing operations as well as useful metrics for monitoring our performance and evaluating it against industry peers. The non-GAAP financial measures presented should be used in addition to, and in conjunction with, results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure in evaluating the company.

Stock-based compensation expense: We have excluded the effect of stock-based compensation expense from our non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense which generally requires cash settlement by QAD, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.

Amortization of purchased intangible assets: We amortize purchased intangible assets in connection with our acquisitions. We have excluded the effect of amortization of purchased intangible assets, which include purchased technology, customer relationships, trade names and other intangible assets, from our non-GAAP pre-tax income calculation, because doing so makes internal comparisons to our historical operating results more consistent. In addition, we believe excluding amortization of purchased intangible assets provides a more useful comparison of our operating results to the operating results of our peers.

Change in fair value of the interest rate swap: We entered into an interest rate swap to mitigate our exposure to the variability of one-month LIBOR for our floating rate debt related to the mortgage of our headquarters. We have excluded the gain/loss adjustments to record the interest rate swap at fair value from our non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations. We believe that these fluctuations are not indicative of our operational costs or meaningful in evaluating comparative period results because we currently have no intention of exiting the debt agreement early; and therefore over the life of the debt the sum of the fair value adjustments will be ~~$0.~~zero.

~~Our~~The following table sets forth the reconciliation of the non-GAAP financial measures of adjusted EBITDA, adjusted EBITDA margins and non-GAAP pre-tax income to the most comparable GAAP measures for the three months ended April 30, ~~2017~~2018 and ~~2016 are as follows (in thousands):~~ 2017:

Our primary source of cash is from the sale of ~~subscription,~~subscriptions, licenses, maintenance and professional services to our customers. Our primary use of cash is payment of our operating expenses which mainly consist of employee-related expenses, such as compensation and benefits, as well as general operating expenses for facilities and overhead costs. In addition to operating expenses, we may also use cash for capital ~~expenditures,~~expenditures; payment of dividends and stock ~~repurchases,~~repurchases; and to invest in our growth initiatives, which ~~may~~ include acquisitions of products, technologies and businesses.

In fiscal 2018, we anticipate that our priorities for use of cash will be developing sales and services resources and continued investment in research and development to drive and support growth and profitability. We will continue to evaluate acquisition opportunities that are complementary to our product footprint, solutions delivery, technology direction and sales channels. We will also continue to assess share repurchases and dividend payments. We do not anticipate additional borrowing requirements in fiscal 2018.

At April 30, ~~2017,~~2018, our principal sources of liquidity were cash and equivalents totaling ~~$153.3~~$144.4 million and net accounts receivable of ~~$46.~~4$56.9 million. ~~At April 30, 2017, our~~Our cash and equivalents consisted of current bank accounts, registered money market funds and time delineated deposits. Approximately 85% of our cash and equivalents were held in U.S. dollar denominated accounts as of April 30, ~~2017.~~

We have a U.S. line of credit facility with Rabobank that permits unsecured short-term borrowings of up to $20 million. Our line of credit agreement contains customary covenants that could restrict our ability to incur additional indebtedness. Our line of credit is available for working capital or other business needs. We have not drawn on the line of credit during any of the last three fiscal years nor do we expect to draw on the line of credit during fiscal 2018. ~~Our line of credit expires in July 2017 and we~~ ~~do not expect to renew it.~~

Our primary commercial banking relationship is with Bank of America and its global affiliates. Our cash and equivalents are held by diversified financial institutions globally, and as of April 30, ~~2017,~~2018 the portion of our cash and equivalents held by or invested through Bank of America was approximately 95%. Our largest cash concentrations are in the United States and Ireland. The percentage of cash and equivalents held by foreign subsidiaries was 72% and 69% as of April 30, 2018 and January 31, 2018, respectively. The majority of our cash and equivalents are held in investment accounts which are predominantly placed in money market mutual funds and in U.S. Treasury and government securities funds. The remaining cash and equivalents are held in deposit accounts and certificates of deposit.

~~Our cash~~We are a U.S.-based multinational company subject to tax in multiple U.S. and ~~equivalents are concentrated in a few locations around the world, with substantial amounts held outside of the U.S. The percentage of cash and equivalents held by~~ foreign ~~subsidiaries was 66% and 67% as of April 30, 2017 and January 31, 2016, respectively. Subject~~tax jurisdictions. In addition to ~~local law restrictions, certain amounts held outside the U.S. could be repatriated to the U.S. These repatriated amounts would likely be subject to~~providing for U.S. income taxes ~~under current U.S. tax law. We have provided~~on earnings from the United States, we provide for ~~the~~ U.S. income ~~tax liability~~taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings ~~except for foreign earnings that~~ are considered permanently reinvested outside the ~~U.S. Our intent is that foreign~~United States. We do not anticipate changing our intention regarding permanently reinvested earnings ~~will remain outside~~as of the balance sheet date.

In December 2017, the U.S. ~~Our~~Tax Cuts and Jobs Act ("Tax Act") was signed into law. The Tax Act includes a mandatory one-time tax on accumulated earnings of our foreign subsidiaries which resulted in an estimated $2 million of additional U.S. ~~liquidity needs will~~tax. In spite of the U.S. taxation on these earnings, we intend to permanently reinvest the earnings in our foreign subsidiaries. We do not expect to incur significant additional taxes on repatriation of these earnings; however, foreign withholding taxes, currency translation, state taxes and currency control laws must always be met through ongoing cash flows from operations or through alternative means of cash flow such as the sale of stock or external borrowing. We regularly review our capital structure to ensure we have the proper liquidity available in the locations in which it is needed. considered.

The following table summarizes our cash flows for the ~~first quarter~~three months ended April 30, 2018 and 2017, ~~and 2016,~~ respectively.

Typical factors affecting our cash provided by operating activities include our level of revenue and earnings for the period; the timing and amount of employee bonus payments and income tax payments; and the timing and amount of billings and cash collections from our customers, which is our largest source of operating cash ~~flow. Net~~flow.Net cash flows provided by operating activities were $~~7.9~~$3.8 million and ~~$1.4~~$7.9 million for the first ~~quarter~~three months of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively. The ~~increase~~decrease in cash flows from operating activities was due primarily to higher payments for bonuses and commissions paid in the ~~positive cash flow effect~~first quarter of ~~changes in accounts receivable and other assets of $4.7 million and other liabilities and accounts payable of $1.5 million.~~fiscal 2019 related to our fourth quarter fiscal 2018 results.

Net cash used in investing activities consisted primarily of capital expenditures of ~~$0.7~~$1.1 million and ~~$1.1~~$0.7 million for the first ~~quarter~~three months of fiscal ~~2018~~2019 and ~~2017,~~2018, respectively. We continue to monitor our capital spending and do not believe we are delaying critical capital expenditures required to run our business.

Net cash used in financing activities consisted primarily of payments of withholding taxes on settlement of stock-based compensation and payment of dividends. We paid withholding taxes of $4.1 million and $0.2 million for the first three months of fiscal 2019 and 2018, respectively, on vested restricted stock units and exercised stock appreciation rights. In the first quarter of fiscal 2019, the Lopkers exercised their SAR grant and opted to receive shares net of the taxes owed. We elected to pay the taxes owed with cash on hand rather than sell shares to cover the taxes.

We have historically calculated accounts receivable ~~days~~’days’ sales outstanding (“DSO”), using the countback, or last-in first-out, method. This method calculates the number of days of billed revenue represented by the accounts receivable balance as of period end. When reviewing the performance of our entities, DSO under the countback method is used by management. It is management’s belief that the countback method best reflects the relative health of our accounts receivable as of a given quarter-end or year-end because of the cyclical nature of our billings. Our billing cycle includes high annual maintenance renewal billings at year-end that will not be recognized as earned revenue until future periods.

DSO under the countback method was 55relatively consistent at 56 days and 6555 days as of April 30, ~~2017~~2018 and ~~2016,~~2017, respectively. DSO using the average method, which is calculated utilizing the accounts receivable balance and earned revenue for the most recent quarter, was 59 days and 58 days ~~and 62 days at~~ April 30, 2018 and 2017, ~~and 2016,~~ respectively. ~~The reduction in DSO was due to higher collections in excess of billings.~~ The aging of our accounts receivable remained consistent when compared with the same period last year. We believe our reserve methodology is adequate, our reserves are properly stated as of April 30, ~~2017~~2018 and the quality of our receivables remains good.

There have been no material changes in our contractual obligations or commercial commitments outside the ordinary course of business. Cash requirements for items other than normal operating expenses are anticipated for capital expenditures, dividend payments and other equity transactions. We may require cash for acquisitions of new businesses, software products or technologies complementary to our business.

We believe that our cash on hand, net cash provided by operating activities and available borrowings under our existing credit facility will provide us with sufficient resources to meet our current and long-term working capital requirements, debt service, dividend payments and other cash needs for at least the next twelve months.

Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange ~~rates.~~rates, for which we have put in place foreign currency contracts as part of our risk management strategy. See Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk” for further discussion.

A summary of future obligations under our various contractual obligations and commitments as of January 31, ~~201~~72018 was disclosed in our Annual Report on Form 10-K for the year ended January 31, ~~2017.~~2018. During the quarter ended April 30, ~~2017~~2018 there have been no material changes in our contractual obligations or commercial commitments outside the ordinary course of business.

~~We have~~ an unsecured credit agreement with Rabobank, N.A. (the “Facility”). The Facility provides a commitment through July 15, 2017 for a $20 million line of credit for working capital or other business needs. We pay a commitment fee of 0.25% per annum of the daily average of the unused portion of the $20 million Facility. Borrowings under the Facility bore interest at a rate equal to one month LIBOR plus 0.75%. At April 30, 2017, the effective borrowing rate would have been 1.74%. Our line of credit expires in July 2017 and we do not expect to renew it.

The Facility provides that we maintain certain financial and operating ratios which include, among other provisions, minimum liquidity on a consolidated basis of $25 million in cash and equivalents at all times, a current ratio (calculated using current liabilities excluding deferred revenue) of not less than 1.3 to 1.0 determined at the end of each fiscal quarter, a leverage ratio of not more than 1.5 to 1.0 determined at the end of each fiscal quarter, and a debt service coverage ratio of not less than 1.5 to 1.0 determined at the end of each fiscal year. The Facility also contains customary covenants that could restrict our ability to incur additional indebtedness.

Effective May 30, 2012 QAD Ortega Hill, LLC, our wholly owned limited liability company, entered into a variable rate credit agreement (the “2012 Mortgage”) with Rabobank, N.A., to refinance a pre-existing mortgage. The 2012 Mortgage has an original principal balance of $16.1 million and bears interest at the one month LIBOR rate plus 2.25%. One month LIBOR was ~~0.99%~~1.90% at April 30, ~~2017.~~2018. The 2012 Mortgage matures in June 2022 and is secured by our headquarters located in Santa Barbara, California. In conjunction with the 2012 Mortgage, QAD Ortega Hill, LLC entered into an interest rate swap with Rabobank, N.A. The swap agreement has an initial notional amount of $16.1 million and a schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31% for the entire term of the 2012 Mortgage. The terms of the 2012 Mortgage provide for QAD Ortega Hill, LLC to make net monthly payments of $88,100 consisting of principal and interest and one final payment of $11.7 million. The unpaid balance as of April 30, ~~2017~~2018 was ~~$14.2~~$13.7 million.

Foreign Exchange Rates.We have operations in foreign locations around the world and we are exposed to risk resulting from fluctuations in foreign currency exchange rates. We have experienced significant foreign currency fluctuations during fiscal ~~2017~~2018 and the first three months of fiscal ~~2018~~2019 due primarily to the volatility of the euro in relation to the U.S. dollar. The foreign currencies for which we currently have the most significant exposure are the euro ~~British pound~~ and Mexican peso. Foreign currency exchange rate movements could create a foreign currency gain or loss that could be realized or unrealized for us. Unfavorable movements in foreign currency exchange rates between the U.S. dollar and other foreign currencies may have an adverse impact on our operations. We did not have any foreign currency forward or option contracts or other ~~material~~ foreign currency denominated derivatives or other financial instruments open as of April 30, ~~2017.~~2018.

We face two risks related to foreign currency exchange ~~rates~~—rates—translation risk and transaction risk. Translation risk relates to amounts invested in our foreign operations that are translated into U.S. dollars using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as the U.S. dollar weakens or strengthens against other currencies. Furthermore, we have exposure to foreign exchange fluctuations arising from the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes. Transaction risk is related to our international subsidiaries holding non-local currency net monetary accounts subject to revaluation into their local currency, which results in realized or unrealized foreign currency gains or losses.

For the three months ended April 30, 2018 and 2017, approximately 54% and ~~2016, approximately~~ 50% ~~and 55%~~, respectively, of our revenue was generated in foreign currencies. We also incurred a significant portion of our expenses in currencies other than the U.S. dollar, approximately 41% and 40% for ~~each of~~ the three months ended April 30, 2018 and 2017, ~~and 2016.~~respectively. Based on a hypothetical 10% strengthening of the U.S. dollar against all foreign currencies, our revenue would be adversely affected by approximately 5% partially offset by a positive effect on our expenses of approximately 4%, and our operating income would be adversely affected by approximately ~~46%~~58%.

For the three months ended April 30, ~~2017~~2018 and ~~2016,~~2017, foreign currency transaction and remeasurement (gains) losses totaled ~~$0.6~~$(0.3) million and ~~$0.8~~$0.6 million, respectively, and are included in ~~“Other~~other (income) expense, ~~net”~~net in our Condensed Consolidated Statements of Operations and Comprehensive ~~Loss.~~Income (Loss). We performed a sensitivity analysis on the net U.S. dollar and euro-based monetary accounts subject to revaluation that are held by our international subsidiaries and on the non-functional currency assets, liabilities and intercompany balances that are remeasured into U.S. dollars. A hypothetical 10% adverse movement in all foreign currency exchange rates would result in foreign currency transaction and remeasurement losses of approximately $~~2.6~~$2.5 million.

These estimates assume adverse shifts in all foreign currency exchange rates against the U.S. dollar, which do not always move in the same direction or in the same degrees. Actual results may differ materially from the hypothetical analysis.

Interest Rates.We invest our surplus cash in a variety of financial instruments, consisting principally of short-term marketable securities with maturities of less than 90 days at the date of purchase. Our investment securities are held for purposes other than trading. Cash balances held by subsidiaries are invested primarily in registered money market funds with local operating banks. Based on an interest rate sensitivity analysis of our cash and equivalents we estimate that a 10% adverse change in interest rates from the ~~2017~~2018 fiscal year-end rates would not have a material adverse effect on our cash flows or financial condition for the next fiscal year.

Our long-term debt is comprised of a loan agreement, secured by real property, which bears interest at the one month LIBOR rate plus 2.25%. In conjunction with the loan agreement, we entered into an interest rate swap. The swap agreement has an initial notional amount and schedule matching that of the underlying loan that synthetically fixes the interest rate on the debt at 4.31%. ~~Additionally, we have an unsecured line of credit which bears interest at the one month LIBOR rate plus 0.75%. As of April 30, 2017 there were no borrowings under our unsecured line of credit.~~

Our interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, subjecting us to non-cash volatility in our results of operations. We prepared a sensitivity analysis using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in levels of interest rates across the entire yield curve, with all other variables held constant. Based upon the results of this analysis a 10% adverse change in interest rates from the April 30, ~~2017~~2018 rates would cause a $0.1 million reduction in our results of operations. We believe it is prudent to hedge the expected volatility of the variable rate mortgage on our corporate headquarters. The swap fixes the interest rate on our mortgage to 4.31% over the entire term of the mortgage and effectively lowers our interest rate from the previous mortgage rate of 6.5%. Although the agreement allows us to prepay the loan and exit the agreement early, we have no intention of doing so. As a result, we will have non-cash adjustments through earnings each reporting period. However, over the term of the mortgage, the net impact of these mark-to-market adjustments on earnings will be zero.

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting.~~There were~~We adopted and implemented Topic 606 in the first quarter of fiscal 2019, which impacted our consolidated balance sheet and our ongoing revenue recognition. See Note 2 “Revenue” within Notes to Condensed Consolidated Financial Statements, for more information on the impacts of adopting Topic 606 and ongoing considerations. In connection with the adoption of Topic 606, we modified our internal control over financial reporting (as this term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), including our accounting policies and procedures, operational processes and documentation practices. These modifications included:

Other than the impacts due to the adoption of Topic 606 described above, there have been no other changes in our internal control over financial reporting during ~~our~~the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent limitations of internal controls. QAD’s management does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within QAD have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.

The Company is not party to any material legal proceedings. From time to time, QAD is party, either as plaintiff or defendant, to various legal proceedings and claims which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the ~~Company~~’sCompany’s consolidated financial position, results of operations or liquidity.

There have been no material changes to the risk factors reported in Item 1A within the ~~Company~~’sCompany’s Annual Report on Form 10-K for the year ended January 31, ~~2017.~~2018.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Delaware	77-0105228
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐

	Emerging growth company ☐

	April 30, 2017			January 31, 2017			April 30, 2018			January 31, 2018
Assets
Current assets:
Cash and equivalents	$	153,348		$	145,082		$	144,389		$	147,023
Accounts receivable, net of allowances of $2,221 and $2,205 at April 30, 2017 and January 31, 2017, respectively		46,381			69,441
Accounts receivable, net of allowances of $1,902 and $1,763 at April 30, 2018 and January 31, 2018, respectively								56,909			83,518
Other current assets		15,851			15,351			23,538			15,856
Total current assets		215,580			229,874			224,836			246,397
Property and equipment, net		30,497			30,872			30,184			30,408
Capitalized software costs, net		641			732			1,050			990
Goodwill		10,646			10,558			10,974			11,023
Deferred tax assets, net		6,455			6,166			13,057			7,944
Other assets, net		1,978			2,688			11,147			3,055
Total assets	$	265,797		$	280,890		$	291,248		$	299,817

Liabilities and Stockholders’ Equity
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	450		$	446		$	471		$	466
Accounts payable		8,168			11,316			9,192			14,818
Deferred revenue		97,235			104,125			103,369			116,693
Other current liabilities		30,231			33,636			34,830			43,460
Total current liabilities		136,084			149,523			147,862			175,437
Long-term debt		13,654			13,767			13,194			13,313
Other liabilities		5,037			4,914			4,883			5,439
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding
Stockholders’ equity:
Preferred stock, $0.001 par value. Authorized shares; none issued or outstanding
Common stock:
Class A, $0.001 par value. Authorized 71,000,000 shares; issued 16,605,215 shares at both April 30, 2017 and January 31, 2017		16			16
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares at both April 30, 2017 and January 31, 2017		4			4
Class A, $0.001 par value. Authorized 71,000,000 shares; issued 16,605,215 shares at both April 30, 2018 and January 31, 2018								16			16
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,537,380 shares at both April 30, 2018 and January 31, 2018								4			4
Additional paid-in capital		199,069			197,594			196,058			200,456
Treasury stock, at cost (1,115,536 shares and 1,125,552 shares at April 30, 2017 and January 31, 2017, respectively)		(15,047	)		(15,170	)
Treasury stock, at cost (718,323 shares and 892,700 shares at April 30, 2018 and January 31, 2018, respectively)								(10,035	)		(12,461	)
Accumulated deficit		(65,029	)		(61,127	)		(53,396	)		(75,559	)
Accumulated other comprehensive loss		(7,991	)		(8,631	)		(7,338	)		(6,828	)
Total stockholders’ equity		111,022			112,686
Total liabilities and stockholders’ equity	$	265,797		$	280,890
Total stockholders’ equity								125,309			105,628
Total liabilities and stockholders’ equity							$	291,248		$	299,817

	Three Months Ended April 30,						Three Months Ended April 30,
	2017			2016			2018			2017

Cash flows from operating activities:
Net loss	$	(2,571	)	$	(2,792	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income (loss)							$	1,397		$	(2,571	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization		1,522			1,476			1,362			1,522
Provision for doubtful accounts and sales adjustments		113			49
Stock-based compensation expense		1,768			1,608
Amortization of deferred costs								1,004			-
Provision for doubtful accounts								270			113
Net change in valuation allowance								1,416			1,107
Other deferred income taxes								1,053			(1,389	)
Stock-based compensation expense								2,106			1,768
Change in fair value of interest rate swap		(13	)		31			(117	)		(13	)
Changes in assets and liabilities:
Accounts receivable		23,250			21,430			25,543			23,250
Other assets		(111	)		(2,964	)		(4,454	)		171
Accounts payable		(3,279	)		(3,151	)		(5,459	)		(3,279	)
Deferred revenue		(7,623	)		(7,480	)		(11,020	)		(7,623	)
Other liabilities		(5,174	)		(6,850	)		(9,316	)		(5,174	)
Net cash provided by operating activities		7,882			1,357			3,785			7,882
Cash flows from investing activities:
Purchase of property and equipment		(652	)		(1,074	)		(1,093	)		(652	)
Capitalized software costs		(143	)		(12	)		(179	)		(143	)
Net cash used in investing activities		(795	)		(1,086	)		(1,272	)		(795	)
Cash flows from financing activities:
Repayments of debt		(129	)		(106	)		(117	)		(129	)
Tax payments, net of proceeds, related to stock awards		(170	)		(369	)		(4,078	)		(170	)
Net cash used in financing activities		(299	)		(475	)		(4,195	)		(299	)

Effect of exchange rates on cash and equivalents		1,478			2,351			(952	)		1,478

Net increase in cash and equivalents		8,266			2,147
Net (decrease) increase in cash and equivalents								(2,634	)		8,266

Cash and equivalents at beginning of period		145,082			137,731			147,023			145,082

Cash and equivalents at end of period	$	153,348		$	139,878		$	144,389		$	153,348

Supplemental disclosure of non-cash activities:
Obligations associated with dividend declaration	$	1,331		$	1,316		$	1,359		$	1,331

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest							$	154		$	149
Income taxes, net of refunds							$	799		$	656

	April 30, 2018			January 31, 2018
	(in thousands)
Capitalized software development costs	$	1,480		$	1,516
Less accumulated amortization		(430	)		(526	)
Capitalized software costs, net	$	1,050		$	990

	Fair value measurement at reporting date using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
			(in thousands)
Money market mutual funds as of April 30, 2017 ^(a)	$	121,699
Money market mutual funds as of January 31, 2017 ^(a)	$	116,043
Liability related to the interest rate swap as of April 30, 2017 ^(b)			$	(177	)
Liability related to the interest rate swap as of January 31, 2017 ^(b)			$	(190	)

Fiscal Years	(in thousands)		(in thousands)
2018 remaining	$	443
2019		123
2020		70
2021		5
2019 remaining			$	360
2020				433
2021				249
2022				8
	$	641	$	1,050

	Gross Carrying Amount		Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2017	$	26,166	$	(15,608	)	$	10,558
Impact of foreign currency translation	��	88		-			88
Balance at April 30, 2017	$	26,254	$	(15,608	)	$	10,646

	April 30, 2017			January 31, 2017
	(in thousands)
Note payable	$	14,158		$	14,269
Less current maturities		(450	)		(446	)
Less loan origination costs, net		(54	)		(56	)
Long-term debt	$	13,654		$	13,767

	April 30, 2018			January 31, 2018
	(in thousands)
Note payable	$	13,708		$	13,825
Less current maturities		(471	)		(466	)
Less loan origination costs, net		(43	)		(46	)
Long-term debt	$	13,194		$	13,313

	Foreign Currency Translation Adjustments
	(in thousands)
Balance as of January 31, 2017	$	(8,631	)
Other comprehensive income before reclassifications		640
Amounts reclassified from accumulated other comprehensive loss		—
Net current period other comprehensive income		640
Balance as of April 30, 2017	$	(7,991	)

	Foreign Currency Translation Adjustments
	(in thousands)
Balance as of January 31, 2018	$	(6,828	)
Other comprehensive income before reclassifications		(510	)
Amounts reclassified from accumulated other comprehensive loss		-
Net current period other comprehensive loss		(510	)
Balance as of April 30, 2018	$	(7,338	)

	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		—			—
Exercised		(17	)		9.79
Expired		—			—
Forfeited		—			—
Outstanding at April 30, 2017		2,776		$	15.54		4.2	$	38,958
Vested and exercisable at April 30, 2017		1,786		$	12.96		3.1	$	29,730

	Three Months Ended			Three Months Ended			Change in Constant			Change due to Currency			Total Change as Reported						Three Months Ended			Three Months Ended			Change in Constant			Change due to Currency		Total Change as Reported
(in thousands)	April 30, 2017			April 30, 2016			Currency			Fluctuations			$			%			April 30, 2018			April 30, 2017			Currency			Fluctuations		$			%
Revenue
Subscription fees	$	15,343		$	11,492		$	3,996		$	(145	)	$	3,851			34	%	$	21,511		$	15,343		$	5,665		$	503	$	6,168			40	%
Percentage of total revenue		21	%		18	%														25	%		21	%
License fees		5,265			3,947			1,411			(93	)		1,318			33	%		6,266			5,265			744			257		1,001			19	%
Percentage of total revenue		7	%		6	%														7	%		7	%
Maintenance and other		31,906			32,836			(357	)		(573	)		(930	)		-3	%		31,483			31,906			(2,121	)		1,698		(423	)		-1	%
Percentage of total revenue		45	%		50	%														37	%		45	%
Professional services		18,868			17,122			2,181			(435	)		1,746			10	%		26,930			18,868			7,073			989		8,062			43	%
Percentage of total revenue		27	%		26	%														31	%		27	%
Total revenue	$	71,382		$	65,397		$	7,231		$	(1,246	)	$	5,985			9	%	$	86,190		$	71,382		$	11,361		$	3,447	$	14,808			21	%

	Three Months Ended April 30,						Three Months Ended April 30,
	2017			2016			2018			2017
Automotive		37	%		32	%		43	%		37	%
Consumer products and food and beverage		16	%		19	%		16	%		16	%
High technology and industrial products		32	%		34	%		29	%		32	%
Life sciences		15	%		15	%		12	%		15	%
Total revenue		100	%		100	%		100	%		100	%

	Three Months Ended April 30,
	2017			2016
North America		55	%		64	%
Asia Pacific		15	%		15	%
EMEA		21	%		14	%
Latin America		9	%		7	%
Total cloud revenue		100	%		100	%

	Three Months Ended			Increase (Decrease) Compared to Prior Period						Three Months Ended
(in thousands)	April 30, 2017			$			%			April 30, 2016
Other (income) expense
Interest income	$	(168	)	$	4			2	%	$	(172	)
Interest expense		156			(18	)		-10	%		174
Other expense, net		604			(266	)		-31	%		870
Total other expense, net	$	592		$	(280	)		-32	%	$	872
Percentage of revenue		1	%								2	%

	Three Months Ended			Increase (Decrease) Compared to Prior Period						Three Months Ended
(in thousands)	April 30, 2018			$			%			April 30, 2017
Other (income) expense
Interest income	$	(524	)	$	(356	)		-212	%	$	(168	)
Interest expense		157			1			1	%		156
Other (income) expense, net		(404	)		(1,008	)		-167	%		604
Total other (income) expense, net	$	(771	)	$	(1,363	)		-230	%	$	592
Percentage of revenue		1	%								1	%

	Three Months Ended			Increase Compared to Prior Period					Three Months Ended			Three Months Ended			Increase Compared to Prior Period					Three Months Ended
(in thousands)	April 30, 2017			$		%			April 30, 2016			April 30, 2018			$		%			April 30, 2017
Income tax expense (benefit)	$	620		$	1,693		158	%	$	(1,073	)
Income tax expense												$	1,183		$	563		91	%	$	620
Percentage of revenue		1	%							-2	%		1	%							1	%
Effective tax rate		-32	%							28	%		46	%							-32	%

	Three Months Ended April 30,
	2017			2016

Total revenue	$	71,382		$	65,397

Net loss		(2,571	)		(2,792	)
Add back:
Net interest (income) expense		(12	)		2
Depreciation		1,104			1,044
Amortization		416			430
Income taxes		620			(1,073	)
EBITDA	$	(443	)	$	(2,389	)
Add back:
Stock-based compensation expense		1,768			1,608
Change in fair value of interest rate swap		(13	)		31
Adjusted EBITDA	$	1,312		$	(750	)
Adjusted EBITDA margin		2	%		-1	%


Non-GAAP pre-tax income (loss) reconciliation
Loss before income taxes	$	(1,951	)	$	(3,865	)
Add back
Stock-based compensation expense		1,768			1,608
Amortization of purchased intangible assets		342			345
Change in fair value of interest rate swap		(13	)		31
Non-GAAP income (loss) before income taxes	$	146		$	(1,881	)

Cash taxes	$	648		$	640

	Exhibits

	31.1	Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	101.INS	XBRL Instance Document

	101.SCH	XBRL Taxonomy Extension Schema Document

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB	XBRL Taxonomy Extension Label Linkbase Document

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Date: June 8, ~~2017~~2018	By:	/s/ DANIEL LENDER
		Daniel Lender
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)

	By:	/s/ KARA BELLAMY
		Kara Bellamy
		Senior Vice President, Corporate Controller
		(Chief Accounting Officer)