QAD INC

On March 27, 2020, in response to the coronavirus (COVID-19) pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides additional economic stimulus to address the impact of the COVID-19 pandemic. In the first quarter of fiscal year 2021, the Company’s income tax provision was not significantly impacted by the CARES Act. The Company will continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects that may result from future legislation.

The COVID-19 global pandemic has impacted our operations during the first quarter of fiscal 2021.  We entered into the first quarter with businesses in China closed due to COVID-19; which impacted the performance of our Asia Pacific region.  By the middle of March, the virus had spread to many countries who in response to the global pandemic announced shelter in place, stay at home or lock down orders. Our priorities were first to safeguard the health and well-being of our employees, our customers and their respective families and communities.  Secondly, we wanted to ensure complete continuity of service for our cloud customers and those customers with implementation or upgrade projects in process.  We were pleased to demonstrate our ability to convert to remote work arrangements while continuing to deliver uninterrupted services and support to our customers.  We were also pleased to demonstrate our ability to continue delivering professional services projects remotely and as a result, our professional services revenue fared better than initially anticipated.  First quarter subscription and maintenance revenue performed as expected as the revenue is recurring in nature. License fees and professional services revenue were impacted by the global pandemic as our existing customers did not add users and some of our customers postponed their services projects or extended their scheduled go live dates. We implemented prudent expense management measures during the quarter to offset the negative impact of lower license fees and professional services revenue.  As a result, we reported a pre-tax profit of $0.6 million for the first quarter. These expense management measures allow us to maintain a solid financial position which gives us the ability to continue to adapt to changes due to COVID-19. Should the economic situation worsen, we can initiate further expense management measures. 

Our customers are global manufacturers and the closure of manufacturing sites, country borders and the increase in unemployment due to the COVID-19 global pandemic are having and will continue to have negative implications on demand for goods, the supply chain, production of goods and transportation.  Furthermore, the future impact to our manufacturing customers depends on the duration and spread of the virus.  The negative impact on our manufacturing customers has caused many of them to delay purchasing decisions, postpone services projects, reduce users, request extended payment terms, or request higher discounts.  We expect COVID-19 will have a negative impact on our financial results and liquidity in fiscal 2021.  While the effects of the pandemic in the short to medium term remain uncertain, our business has a strong cash position with little debt and cash flow remains positive.  For these reasons we believe our financial position is solid and our long term strategy is sound. 

On March 27, 2020, in response to the COVID-19 global pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides additional economic stimulus to address the impact of the COVID-19 pandemic. We do not expect there to be any significant benefit to our income tax provision as a result of the CARES Act, and we continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects that may result from the CARES Act or future legislation.  

Some of our customers who have been negatively impacted by the COVID-19 pandemic have requested and may continue to request changes to payment terms. Some may also be unable to pay their receivables as they become due. We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on February 1, 2020, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, which includes our accounts receivables and contract assets. Our expected loss allowance methodology for accounts receivable is developed using historical collection experience, consideration of current and anticipated future economic conditions and other relevant data. For the first quarter of fiscal 2021, our expected loss allowance included consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic. We recorded an increase of $0.5 million in estimated credit losses related to the impact of COVID-19 on our customers.  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, 2020 and the quality of our receivables remains good.