QAD INC. 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. All statements and assumptions in this communication that do not directly and exclusively relate to historical facts could be deemed "forward-looking statements." These statements represent current intentions, expectations, beliefs or projections, and no assurance can be given that the results described in such statements will be achieved. Forward-looking statements include, among other things, statements about the potential benefits of the proposed acquisition byThoma Bravo pursuant to that certain Agreement and Plan of Merger (the "Merger Agreement"); the prospective performance and outlook of the Company's business, performance and opportunities; the ability of the parties to complete the proposed transaction and the expected timing of completion of the proposed transaction; as well as any assumptions underlying any of the foregoing. Forward-looking statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of the Company's control. Important factors that could cause actual results to differ materially from those described in forward-looking statements include, but are not limited to, (i) uncertainties as to the timing of the proposed transaction; (ii) the risk that the proposed transaction may not be completed in a timely manner or at all; (iii) the possibility that competing offers or acquisition proposals for the Company will be made; (iv) the possibility that any or all of the various conditions to the consummation of the proposed transaction may not be satisfied or waived, including the failure to receive any required regulatory approvals from any applicable governmental entities (or any conditions, limitations or restrictions placed on such approvals); (v) the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement, including in circumstances that would require the Company to pay a termination fee or other expenses; (vi) the effect of the pendency of the proposed transaction on the Company's ability to retain and hire key personnel, its ability to maintain relationships with its customers, suppliers and others with whom it does business, its business generally or its stock price; (vii) risks related to diverting management's attention from the Company's ongoing business operations; (viii) various risks related to health epidemics, pandemics and similar outbreaks, such as the COVID-19 pandemic, which may have material adverse effects on the Company's business, financial position, results of operations and/or cash flows; (ix) adverse economic, market or geo-political conditions that may disrupt the Company's business and cloud service offerings, including defects and disruptions in the Company's services, ability to properly manage cloud service offerings, reliance on third-party hosting and other service providers, and exposure to liability and loss from security breaches; (x) uncertainties as to demand for the Company's products, including cloud service, licenses, services and maintenance; (xi) the possibility of pressure to make concessions on pricing and changes in the Company's pricing models; (xii) risks related to the protection of the Company's intellectual property; (xiii) changes in the Company's dependence on third-party suppliers and other third-party relationships, including sales, services and marketing channels; (xiv) changes in the Company's revenue, earnings, operating expenses and margins; (xv) the reliability of the Company's financial forecasts and estimates of the costs and benefits of transactions; (xvi) the Company's ability to leverage changes in technology; (xvii) risks related to defects in the Company's software products and services; (xviii) changes in third-party opinions about the Company; (xix) changes in competition in the Company's industry; (xx) delays in sales; (xxi) timely and effective integration of newly acquired businesses; (xxii) changes in economic conditions in the Company's vertical markets and worldwide; (xxiii) fluctuations in exchange rates; and (xxiv) other factors as set forth from time to time in the Company's filings with theSEC (in particular the "Risk Factors" set forth therein), including its Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , as may be updated or supplemented by any subsequent Quarterly Reports on Form 10-Q or other filings with theSEC . Readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this communication or to reflect the occurrence of unanticipated events except as required by law. INTRODUCTION
The following discussion should be read in conjunction with the information
included within our Annual Report on Form 10-K for the year ended
CRITICAL ACCOUNTING POLICIES Our condensed consolidated financial statements are prepared applying certain critical accounting policies. TheSEC defines "critical accounting policies" as those that require application of management'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 withU.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 and b) income taxes, are further discussed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 , except as described in Note 1 "Basis of Presentation and Recent Accounting Pronouncements" within the Notes to Condensed Consolidated Financial Statements. 20
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BUSINESS OVERVIEW QAD (QAD, the Company, we or us) is a leading provider of next generation manufacturing and supply chain solutions in the cloud. Our solutions, called QAD Adaptive Applications, are designed specifically for automotive, life sciences, consumer products, food and beverage, high technology and industrial products manufacturers. QAD software offers a full set of core manufacturing enterprise resource planning and supply chain planning capabilities. Our architecture, called the QAD Enterprise Platform, allows manufacturers to upgrade existing functionality by module, and extend or create new applications, providing manufacturers with the flexibility they need to innovate and rapidly adapt to change.
We have four principal sources of revenue:
• Subscription of QAD Adaptive Applications through our cloud offering in a
Software as a Service (SaaS) model as well as other hosted applications;
• License purchases of QAD Adaptive Applications;
• Maintenance and support, including technical support, training materials,
product enhancements and upgrades; and
• Professional services, including implementations, technical and application
consulting, training, migrations and upgrades.
We operate primarily in the following four geographic regions: North America ,
Latin America , EMEA and Asia Pacific . In the first six months of fiscal 2022,
approximately 48% of our total revenue was generated in North America , 33% in
EMEA, 13% in Asia Pacific and 6% in Latin America . The majority of our revenue
is generated from global customers who have operations in multiple countries
throughout the world. 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 July 31, 2021 , we employed approximately 1,940
employees worldwide, of which 635 employees were based in North America , 635
employees in EMEA, 555 employees in Asia Pacific and 115 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
global manufacturing economy. As a result, our management team monitors several
economic indicators, with particular attention to the Global and Country
Purchasing 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 have transitioned our business model from selling perpetual licenses to
providing access to our software on a subscription basis as part of our cloud
offering. During the first six months of fiscal 2022, we closed virtually all of
our new customer deals in the cloud. On a rolling 12-month basis, subscription
billings grew by 23% with a three-year compound annual growth rate (CAGR) of
21%. Recurring revenue, which we define as subscription revenue plus maintenance
revenue, equaled 77% of total revenue for the first six months of fiscal 2022.
By reducing our customers' up-front costs and providing QAD Adaptive
Applications with continuous application and infrastructure support in secure
and resilient environments, we expect our cloud business model will be more
attractive than on-premises licenses. We expect recurring revenue to remain a
majority of total revenue as our subscription revenue continues to grow.
In late 2019, a novel strain of COVID-19 was identified, and in March 2020 , the
World Health Organization characterized the COVID-19 outbreak as a pandemic. The
COVID-19 pandemic has resulted in authorities implementing numerous measures to
try to contain and mitigate the virus, including travel bans and restrictions;
business shut-downs and limitations; quarantines and shelter-in-place; and
social distancing orders.
21-------------------------------------------------------------------------------- Our priorities during the pandemic have been the health and well-being of our employees, our customers and their respective families and communities as well as maintaining continuity of service for our cloud and on-premises customers and those customers with implementation or upgrade projects. Beginning in the first fiscal quarter of fiscal 2021 and continuing through the first half of fiscal 2022, we took actions in response to the pandemic that focused on maintaining business continuity, supporting our employees, helping our customers and communities and preparing for the long-term success of our business. We are continuing to conduct business during the COVID-19 pandemic with substantial modifications to employee travel, employee work locations and virtualization, postponement or cancellation of certain sales and marketing events, among other modifications. In the first quarter of fiscal 2021, we closed our offices globally and our employees worked remotely. These actions have remained in effect through the first half of fiscal 2022 and are expected to extend into future quarters. The impact, if any, of these and any additional operational changes we may implement is uncertain, but actions we have taken to date in response to the pandemic have not materially impaired, and are not expected to materially impair our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. While the effects of the pandemic in the short to medium term remain uncertain, we do see growth in manufacturing activity with the global PMI level at a ten-year high. 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. OnJune 28, 2021 , we entered into a definitive agreement to be acquired byThoma Bravo (TB), a leading private equity investment firm focused on the software and technology-enabled services sector, in an all-cash transaction with an equity value of approximately$2 billion . Under the terms of the Merger Agreement, and subject to satisfaction of the conditions set forth therein, QAD shareholders will receive$87.50 per share of Class A Common Stock or Class B Common Stock. Assuming completion of the transaction, QAD will become a private company with the flexibility to continue investing in the development and deployment of Enterprise Resource Planning (ERP) software and related enterprise software for manufacturing companies around the world. During the first six months of fiscal 2022, we incurred transaction costs of$8.2 million resulting from the TB planned acquisition of QAD. These costs are reported in "General and administrative" expense in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. RESULTS OF OPERATIONS We operate in several geographical regions as described in Note 14 "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. Revenue Three Months Three Months Change in Change due Total Change Ended Ended Constant to Currency as Reported July 31, 2021 July 31, 2020 Currency Fluctuations $ % (in thousands) Revenue Subscription$ 38,426 $ 31,066 $ 6,292 $ 1,068 $ 7,360 24 % Percentage of total revenue 45 % 42 % License 2,784 3,043 (350 ) 91 (259 ) -9 % Percentage of total revenue 4 % 4 % Maintenance 26,440 26,486 (1,109 ) 1,063 (46 ) -0 % Percentage of total revenue 31 % 36 % Professional services 17,189 13,486 3,173 530 3,703 27 % Percentage of total revenue 20 % 18 % Total revenue$ 84,839 $ 74,081 $ 8,006 $ 2,752 $ 10,758 15 % 22
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Six Months Six Months Change in Change due Total Change
Ended Ended Constant to Currency as Reported
July 31, 2021 July 31, 2020 Currency Fluctuations $ %
(in thousands)
Revenue
Subscription $ 75,112 $ 61,837 $ 11,240 $ 2,035 $ 13,275 21 %
Percentage of total
revenue 45 % 42 %
License 5,899 4,264 1,456 179 1,635 38 %
Percentage of total
revenue 3 % 3 %
Maintenance 53,003 52,894 (2,069 ) 2,178 109 0 %
Percentage of total
revenue 32 % 36 %
Professional services 33,796 29,233 3,389 1,174 4,563 16 %
Percentage of total
revenue 20 % 19 %
Total revenue $ 167,810 $ 148,228 $ 14,016 $ 5,566 $ 19,582 13 %
Total Revenue. On a constant currency basis, total revenue was $84.8 million for
the second quarter of fiscal 2022, representing an $8.0 million , or 10%,
increase from $76.8 million for the same period last year. When comparing
categories within total revenue at constant rates, our results for the second
quarter of fiscal 2022 included increases in subscription and professional
services partially offset by decreases in maintenance and license. Revenue
outside the North America region as a percentage of total revenue was 51% and
47% for the second quarter of fiscal 2022 and 2021, respectively. On a constant
currency basis, total revenue increased in all regions during the second quarter
of fiscal 2022 when compared to the same period in the prior year.
On a constant currency basis, total revenue was $167.8 million for the first six
months of fiscal 2022, representing a $14.0 million , or 9%, increase from $153.8
million for the same period last year. When comparing categories within total
revenue at constant rates, our results for the first six months of fiscal 2022
included increases in subscription, license and professional services partially
offset by a decrease in maintenance. Revenue outside the North America region as
a percentage of total revenue was 52% and 49% for the first six months of fiscal
2022 and 2021, respectively. On a constant currency basis, total revenue
increased in all regions during the first six months of fiscal 2022 when
compared to the prior year.
Our services 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
following table presents revenue by industry for the three and six months ended
July 31, 2021 and 2020:
Three months ended Six months ended
July 31, July 31,
2021 2020 2021 2020
Automotive 30 % 30 % 29 % 31 %
Consumer products and food and beverage 16 % 18 % 16 % 17 %
High technology and industrial products 37 % 36 % 37 % 36 %
Life sciences and other 17 % 16 % 18 % 16 %
Total revenue 100 % 100 % 100 % 100 %
Subscription Revenue. Subscription revenue consists of recurring fees from customers to access our products via the cloud and other subscription offerings. Our cloud offerings typically include access to QAD software, hosting, application support, maintenance support and product updates, if and when available. Included in subscription revenue are one-time set up fees for technical services such as configuration of the database and access to the environment.
On a constant currency basis, subscription revenue was$38.4 million for the second quarter of fiscal 2022, representing a$6.3 million , or 20%, increase from$32.1 million for the same period last year. On a constant currency basis, subscription revenue increased across all regions during the second quarter of fiscal 2022 when compared to the same period last year. One of the metrics that management uses to monitor subscription performance is the number of new subscription deals that have been signed in the period. In the second quarter of fiscal 2022 we closed 28 new subscription deals, including 20 new subscription customers and 8 conversions from existing customerswho previously purchased on-premises licenses. This compared to the second quarter of fiscal 2021 when we closed 25 new subscription deals, including 14 new subscription customers and 11 conversions from existing customerswho previously were running our solutions on-premises. The increase in subscription revenue consists of new customer sites, existing customers converting from on-premises, and additional users and modules purchased by our existing subscription customers. On a constant currency basis, subscription revenue was$75.1 million for the first six months of fiscal 2022, representing an$11.2 million , or 18%, increase from$63.9 million for the same period last year. On a constant currency basis, subscription revenue increased across all regions during the first six months of fiscal 2022 when compared to the prior year. In the first six months of fiscal 2022 we closed 61 new subscription deals, including 43 new subscription customers and 18 conversions from existing customerswho previously purchased on-premises licenses. This compared to the first six months of fiscal 2021 when we closed 39 new subscription deals, including 23 new subscription customers and 16 conversions from existing customerswho previously purchased on-premises licenses. 23
-------------------------------------------------------------------------------- We track our retention rate of subscription by calculating the annualized revenue of customer sites with contracts up for renewal at the beginning of 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. Our subscription customer retention rate is in excess of 95%.
The following table presents subscription revenue by region for the three and
six months ended
Three months ended Six months ended
July 31, July 31,
2021 2020 2021 2020
North America 55 % 58 % 55 % 58 %
EMEA 29 % 27 % 30 % 27 %
Asia Pacific 10 % 9 % 9 % 9 %
Latin America 6 % 6 % 6 % 6 %
Total subscription revenue 100 % 100 % 100 % 100 %
The following table presents subscription revenue by industry for the three and
six months ended
Three months ended Six months ended
July 31, July 31,
2021 2020 2021 2020
Automotive 32 % 34 % 31 % 35 %
Consumer products and food and beverage 17 % 15 % 16 % 15 %
High technology and industrial products 29 % 28 % 29 % 28 %
Life sciences and other 22 % 23 % 24 % 22 %
Total subscription revenue 100 % 100 % 100 % 100 %
License Revenue. License revenue is derived from software license fees that
customers pay for our core product, QAD Adaptive Applications, and any add-on
modules they purchase. Our revenue mix has continued to shift from license to
subscription revenue as a result of our business model transition as new
customers subscribe to our cloud-based offerings rather than purchase
traditional on-premises licenses and our existing customers convert to our
cloud-based offerings. While we expect license revenue to decline over time, we
do continue to experience quarterly fluctuations.
On a constant currency basis, license revenue was $2.8 million for the second
quarter of fiscal 2022, representing a $0.3 million , or 10%, decrease from $3.1
million for the same period last year. On a constant currency basis, license
revenue decreased in the North America and EMEA regions and increased in the
Latin America and Asia Pacific regions during the second quarter of fiscal 2022
when compared to the same period last year. The majority of our license revenue
has come from additional users and module purchases from our existing customers.
On a constant currency basis, license revenue was $5.9 million for the first six
months of fiscal 2022, representing a $1.5 million , or 34%, increase from $4.4
million for the same period last year. On a constant currency basis, license
revenue increased across all the regions during the first six months of fiscal
2022 when compared to the same period last year. The majority of our license
revenue has come from additional users and module purchases from existing
customers.
Maintenance. 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. Maintenance revenue is derived from our
on-premises customers who have purchased licenses and would like to receive
support services and software upgrades. Our maintenance contracts are generally
renewed on an annual basis.
On a constant currency basis, maintenance revenue was $26.4 million for the
second quarter of fiscal 2022, representing a $1.1 million , or 4%, decrease from
$27.5 million for the same period last year. On a constant currency basis,
maintenance revenue decreased in the North America , EMEA, and Asia Pacific
regions and increased in the Latin America region during the second quarter of
fiscal 2022 when compared to the same period last year. The decrease in
maintenance revenue period over period was primarily due to continued
conversions of existing customers' on-premises licenses to cloud subscriptions,
in addition to our historical attrition rates. When customers convert to the
cloud they no longer pay for maintenance as those support services are included
as a component of the subscription offering. Though we continue to see renewal
rates above 90%, conversions from on-premises licenses to cloud-based solutions
have resulted in decreases in maintenance revenue and we expect this trend to
continue in the future.
On a constant currency basis, maintenance revenue was $53.0 million for the
first six months of fiscal 2022, representing a $2.1 million , or 4%, decrease
from $55.1 million for the same period last year. On a constant currency basis,
maintenance revenue decreased in all regions during the first six months of
fiscal 2022 when compared to the prior year. The decrease in maintenance and
other revenue period over period is primarily due to conversions to the cloud,
in addition to our historical attrition rates.
24
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We track our maintenance retention rate by calculating the annualized revenue of
customer sites with contracts up for renewal at the beginning of 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 maintenance retention rate has remained in
excess of 90%.
Professional Services Revenue. Our professional services business includes
technical and application consulting in addition to training, implementations,
migrations and upgrades related to our solutions. Although our professional
services are optional, our customers use these services when planning,
implementing or upgrading our solutions whether in the cloud or on-premises.
Professional services revenue growth is contingent upon subscription revenue
growth and customer upgrade cycles, which are influenced by the strength of
general economic and business conditions.
On a constant currency basis, professional services revenue was $17.2 million
for the second quarter of fiscal 2022, representing a $3.2 million , or 23%,
increase from $14.0 million for the same period last year. On a constant
currency basis, professional services revenue increased in the North America ,
EMEA and Asia Pacific regions and decreased in the Latin America region during
the second quarter of fiscal 2022 when compared to the same period last year.
The increase in professional services revenue can be attributed to a large
implementation project for an automotive customer and increased engagements in
the EMEA region.
On a constant currency basis, professional services revenue was $33.8 million
for the first six months of fiscal 2022, representing a $3.4 million , or 11%,
increase from $30.4 million for the same period last year. On a constant
currency basis, professional services revenue increased in the North America and
EMEA regions and decreased in the Latin America and Asia Pacific regions during
the first six months of fiscal 2022 when compared to the prior year. The
increase in professional services revenue can be attributed to a large
implementation project for an automotive customer and increased engagements in
the EMEA region.
Total Cost of Revenue
Three Three
Months Months
Ended Ended Change in Change due Total Change as Reported
July 31, July 31, Constant to Currency
2021 2020 Currency Fluctuations $ %
(in thousands)
Cost of revenue
Cost of subscription $ 12,072 $ 10,739 $ (1,246 ) $ (87 ) $ (1,333 ) -12 %
Cost of license 548 565 19 (2 ) 17 3 %
Cost of maintenance 6,682 6,413 (123 ) (146 ) (269 ) -4 %
Cost of professional
services 14,987 13,106 (1,329 ) (552 ) (1,881 ) -14 %
Total cost of revenue
(787 ) $ (3,466 ) -11 %
Percentage of revenue 40 % 42 %
Six Months Six Months
Ended Ended Change in Change due Total Change as Reported
July 31, July 31, Constant to Currency
2021 2020 Currency Fluctuations $ %
(in thousands)
Cost of revenue
Cost of subscription $ 24,234 $ 21,087 $ (3,003 ) $ (144 ) $ (3,147 ) -15 %
Cost of license 1,086 966 (117 ) (3 ) (120 ) -12 %
Cost of maintenance 13,237 13,157 199 (279 ) (80 ) -1 %
Cost of professional
services 29,921 28,038 (698 ) (1,185 ) (1,883 ) -7 %
Total cost of revenue $ 68,478 $ 63,248 $ (3,619 ) $ (1,611 ) $ (5,230 ) -8 %
Percentage of revenue 41 % 43 %
Total cost of revenue consists of cost of subscription, cost of license, cost of
maintenance and cost of professional services. Cost of subscription includes
salaries, benefits, bonuses and other personnel expenses of our cloud operations
employees, stock-based compensation for those employees, hosting and hardware
costs, amortization of acquired software technology, third-party contractor
expense, royalties, professional fees, travel expense, and an allocation of
information technology and facilities costs. Cost of license includes license
royalties and amortization of capitalized software costs. Cost of maintenance
includes salaries, benefits, bonuses and other personnel expenses of our support
group, stock-based compensation for those employees, travel expenses,
professional fees and an allocation of information technology and facilities
costs. Cost of professional services includes salaries, benefits, bonuses and
other personnel expenses of our services employees, stock-based compensation for
those employees, third-party contractor expense, travel expense and an
allocation of information technology and facilities costs.
25
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Total Cost of Revenue. On a constant currency basis, total cost of revenue was
$34.3 million and $31.6 million for the second quarter of fiscal 2022 and 2021,
respectively, and as a percentage of total revenue was 40% and 42% in the second
quarter of fiscal 2022 and 2021, respectively. The non-currency related increase
in cost of revenue of $2.7 million , or 9%, in the second quarter of fiscal 2022
compared to the second quarter of fiscal 2021 was primarily due to higher
third-party contractor expense and higher personnel costs associated with higher
professional service revenue in addition to higher hosting costs associated with
the increase in subscription revenue, higher amortization of acquired software
costs and higher subscription salaries and related costs resulting from an
increase in headcount of 17 people within cloud support.
On a constant currency basis, total cost of revenue was $68.5 million and $64.9
million for the first six months of fiscal 2022 and 2021, respectively, and as a
percentage of total revenue was 41% and 43% for the first six months of fiscal
2022 and 2021, respectively. The non-currency related increase in cost of
revenue of $3.6 million , or 6%, for the first six months of fiscal 2022 compared
to the first six months of fiscal 2021 was primarily due to higher hosting costs
associated with the increase in subscription revenue, higher amortization of
acquired software costs, higher subscription salaries and related costs
resulting from an increase in headcount of 17 people within cloud support,
higher third-party contractor expense and higher professional services personnel
costs associated with higher professional service revenue.
Cost of Subscription. On a constant currency basis, cost of subscription was
$12.1 million for the second quarter of fiscal 2022, representing a $1.3
million , or 12%, increase from $10.8 million for the same period last year. The
non-currency related increase in cost of subscription of $1.3 million in the
second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 was
primarily due to higher hosting costs of $0.5 million , higher amortization of
acquired software costs of $0.5 million related to our recent acquisitions and
higher subscription salaries and related costs of $0.4 million resulting from an
increase in headcount of 17 people within cloud support. Cost of subscription as
a percentage of subscription revenue was 31% and 35% in the second quarter of
fiscal 2022 and 2021, respectively. We continue to focus on improving our
subscription margins over time by leveraging ongoing economies of scale and
implementing operational efficiencies. We have experienced and may experience in
the future 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.
On a constant currency basis, cost of subscription was $24.2 million for the
first six months of fiscal 2022, representing a $3.0 million , or 14%, increase
from $21.2 million for the same period last year. The non-currency related
increase in cost of subscription of $3.0 million for the first six months of
fiscal 2022 compared to the first six months of fiscal 2021 was due to higher
hosting costs of $1.2 million , higher amortization of acquired capitalized
software costs of $0.8 million related to our recent acquisitions and higher
salaries and related costs of $0.8 million , as a result of additional headcount
of 17 people. Cost of subscription as a percentage of subscription revenue was
32% and 34% for the first six months of fiscal 2022 and 2021, respectively.
Cost of License. On a constant currency basis, cost of license was approximately
$0.5 million for the second quarter of fiscal 2022 and 2021. License royalty
expense as a percent of license revenue remained consistent year over year.
On a constant currency basis, cost of license was $1.1 million for the first six
months of fiscal 2022, representing a $0.1 million , or 10%, increase from $1.0
million for the same period last year. The non-currency related increase in cost
of license of $0.1 million in the first six months of fiscal 2022 compared to
the first six months of fiscal 2021 was due to higher license royalty expense of
$0.1 million . License royalty expense as a percent of license revenue remained
relatively consistent year over year.
Cost of Maintenance. On a constant currency basis, cost of maintenance was $6.7
million for the second quarter of fiscal 2022, representing a $0.1 million , or
2%, increase from $6.6 million for the same period last year. The non-currency
related increase in cost of maintenance of $0.1 million in the second quarter of
fiscal 2022 compared to the second quarter of fiscal 2021 was primarily due to
higher salaries and related costs of $0.2 million . Cost of maintenance as a
percentage of maintenance revenue was 25% and 24% in the second quarter of
fiscal 2022 and 2021, respectively.
On a constant currency basis, cost of maintenance was $13.2 million for the
first six months of fiscal 2022, representing a $0.2 million , or 1%, decrease
from $13.4 million for the same period last year. Expense categories were
relatively consistent year over year. Cost of maintenance as a percentage of
maintenance revenue was 25% for the first six months of fiscal 2022 and 2021.
Cost of Professional Services. On a constant currency basis, cost of
professional services was $15.0 million for the second quarter of fiscal 2022,
representing a $1.3 million , or 9%, increase from $13.7 million for the same
period last year. The non-currency related increase in cost of professional
services of $1.3 million in the second quarter of fiscal 2022 compared to the
second quarter of fiscal 2021 was primarily due to higher third-party contractor
expense of $0.7 million , higher salaries and related costs of $0.3 million ,
lower benefit from cross charges to support other departments of $0.3 million
and higher bonuses of $0.2 million partially offset by lower severance expense
of $0.3 million and a lower allocation of information technology and facilities
costs of $0.2 million . Cost of professional services as a percentage of
professional services revenues was 87% and 97% for the second quarter of fiscal
2022 and 2021, respectively. Our professional services strategy has been to
grow our partner network, perform more services via third party consulting and
perform more services remotely.
26
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On a constant currency basis, cost of professional services was $29.9 million
for the first six months of fiscal 2022, representing a $0.7 million , or 2%,
increase from $29.2 million for the same period last year. The non-currency
related increase in cost of professional services of $0.7 million for the first
six months of fiscal 2022 compared to the first six months of fiscal 2021 was
primarily due to higher third-party contractor expense of $0.8 million , higher
bonuses of $0.7 million and lower benefit from cross charges to support other
departments of $0.5 million partially offset by a lower allocation of
information technology and facilities costs of $0.6 million , lower travel costs
of $0.5 million and lower severance expense of $0.3 million . Cost of
professional services as a percentage of professional services revenues was 89%
and 96% for the first six months of fiscal 2022 and 2021, respectively. Our
professional services strategy has been to grow our partner network, perform
more services via third party consulting and perform more services remotely.
Sales and Marketing
Three Three
Months Months
Ended Ended Change in Change due Total Change as Reported
July 31, July 31, Constant to Currency
2021 2020 Currency Fluctuations $ %
(in thousands)
Sales and marketing $ 19,494 $ 17,420 $ (1,524 ) $ (550 ) $ (2,074 ) -12 %
Percentage of revenue 23 % 23 %
Six Months Six Months
Ended Ended Change in Change due Total Change as Reported
July 31, July 31, Constant to Currency
2021 2020 Currency Fluctuations $ %
(in thousands)
Sales and marketing $ 39,061 $ 35,977 $ (1,929 ) $ (1,155 ) $ (3,084 ) -9 %Percentage of revenue 23 % 24 % Sales and marketing expense includes salaries, benefits, commissions, bonuses, stock-based compensation, travel expense and other personnel costs of 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 sales agent fees and an allocation of information technology and facilities costs. On a constant currency basis, sales and marketing expense was$19.5 million for the second quarter of fiscal 2022, representing a$1.5 million , or 8%, increase from$18.0 million for the same period last year. The non-currency related increase in sales and marketing expense of$1.5 million in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 was primarily due to higher salaries and related costs of$0.8 million , higher commissions of$0.4 million , higher travel expenses of$0.4 million , higher professional fees of$0.3 million and higher marketing costs of$0.2 million . These increases in sales and marketing expense in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 were partially offset by lower bonuses of$0.3 million and lower severance expense of$0.3 million . On a constant currency basis, sales and marketing expense was$39.1 million for the first six months of fiscal 2022, representing a$2.0 million , or 5%, increase from$37.1 million for the same period last year. The non-currency related increase in sales and marketing expense of$2.0 million for the first six months of fiscal 2022 compared to the first six months of fiscal 2021 was primarily due to higher salaries and related costs of$1.6 million , higher commissions of$0.6 million , higher professional fees of$0.4 million , higher marketing costs of$0.3 million , higher bonuses of$0.2 million and higher stock-based compensation of$0.2 million . These increases in sales and marketing expense in the first six months of fiscal 2022 compared to the first six months of fiscal 2021 were partially offset by lower conference costs of$0.9 million and lower travel costs of$0.4 million . 27 -------------------------------------------------------------------------------- Research and Development Three Three Months Months Ended Ended Change in Change due Total Change as Reported July 31, July 31, Constant to Currency 2021 2020 Currency Fluctuations $ % (in thousands) Research and development$ 15,527 $ 13,161 $ (1,978 ) $ (388 )$ (2,366 ) -18 % Percentage of revenue 19 % 18 % Six Months Six Months Ended Ended Change in Change due Total Change as Reported July 31, July 31, Constant to Currency 2021 2020 Currency Fluctuations $ % (in thousands) Research and development$ 31,165 $ 27,178 $ (3,103 ) $ (884 )$ (3,987 ) -15 % Percentage of revenue 19 % 18 % Research and development is expensed as incurred and consists primarily of salaries, benefits, bonuses, stock-based compensation, travel expense and other personnel costs for research and development employees in addition to professional services, such as fees paid to software development firms and independent contractors. Research and development expense includes an allocation of information technology and facilities costs, and is reduced by capitalized localization and translation costs. On a constant currency basis, research and development expense was$15.5 million for the second quarter of fiscal 2022, representing a$2.0 million , or 15%, increase from$13.5 million for the same period last year. The non-currency related increase in research and development expense of$2.0 million in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 was primarily due to higher salaries and related costs of$2.0 million , as a result of higher headcount of 25 people. On a constant currency basis, research and development expense was$31.2 million for the first six months of fiscal 2022, representing a$3.1 million , or 11%, increase from$28.1 million for the same period last year. The non-currency related increase in research and development expense of$3.1 million in the first six months of fiscal 2022 compared to the first six months of fiscal 2021 was primarily due to higher salaries and related costs of$3.0 million , as a result of higher headcount of 25 people.
General and Administrative
Three Months Three Months
Ended Ended Change in Change due Total Change as Reported
July 31, July 31, Constant to Currency
2021 2020 Currency Fluctuations $ %
(in thousands)
General and administrative $ 20,886 $ 10,299 $ (10,399 ) $ (188 ) $ (10,587 ) -103 %
Percentage of revenue 25 % 14 %
Six Months Six Months
Ended Ended Change in Change due Total Change as Reported
July 31, July 31, Constant to Currency
2021 2020 Currency Fluctuations $ %
(in thousands)
General and administrative $ 33,462 $ 20,316 $ (12,718 ) $ (428 ) $ (13,146 ) -65 %
Percentage of revenue 20 % 14 %
General and administrative expense includes salaries, benefits, bonuses,
stock-based compensation, travel expense and other personnel costs related to
our finance, human resources, legal and executive personnel. General and
administrative expense also includes personnel costs of order processing,
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 $20.9
million for the second quarter of fiscal 2022, representing a $10.4 million , or
99%, increase from $10.5 million for the same period last year. The non-currency
related increase in general and administrative expense of $10.4 million in the
second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 was
primarily due to $7.6 million of transaction costs related to Thoma Bravo's
pending acquisition of QAD, a $0.9 million earn-out adjustment related to our
recent acquisitions, higher stock-based compensation of $0.9 million , higher
salaries and related costs of $0.6 million and higher bonuses of $0.5 million .
28-------------------------------------------------------------------------------- On a constant currency basis, general and administrative expense was$33.5 million for the first six months of fiscal 2022, representing a$12.7 million , or 61% increase from$20.8 million for the same period last year. The non-currency related increase in general and administrative expense of$12.7 million in the first six months of fiscal 2022 compared to the first six months of fiscal 2021 was primarily due to$8.2 million of transaction costs related toThoma Bravo's pending acquisition of QAD, higher stock-based compensation of$1.6 million , higher bonuses of$1.0 million , a$0.9 million earn-out adjustment related to our recent acquisitions, higher salaries and related costs of$0.9 million , higher legal fees of$0.7 million and higher consulting fees of$0.3 million . These increases in general and administrative expense in the first six months of fiscal 2022 compared to the first six months of fiscal 2021 were partially offset by lower bad debt expense of$0.5 million and a lower allocation of information technology and facilities costs of$0.5 million . The increase in legal fees primarily relates to litigation around customer license usage.
Amortization of Intangible Assets from Acquisitions
Amortization of intangible assets from acquisitions was$0.4 million and$0.6 million in the second quarter and first six months of fiscal 2022, respectively; compared to$65,000 and$129,000 in the second quarter and first six months of fiscal 2021, respectively. The increase relates to the amortization of intangible assets from the acquisitions of Allocation Network in the fourth quarter of fiscal 2021 andFTZ Corp. in the first quarter of fiscal 2022.
Total Other (Income) Expense
Increase (Decrease)
Three Months Compared Three Months
Ended to Prior Period Ended
July 31, 2021 $ % July 31, 2020
(in thousands)
Interest income $ (69 ) $ 144 68 % $ (213 )
Interest expense 176 21 14 % 155
Other (income) expense, net (508 ) (2,379 ) -127 % 1,871
Total other (income) expense, net $ (401 ) $ (2,214 ) -122 % $ 1,813
Percentage of revenue -1 % 2 %
Increase (Decrease)
Six Months Compared Six Months
Ended to Prior Period Ended
July 31, 2021 $ % July 31, 2020
(in thousands)
Interest income $ (143 ) $ 506 78 % $ (649 )
Interest expense 317 12 4 % 305
Other (income) expense, net (270 ) (909 ) -142 % 639
Total other (income) expense, net $ (96 ) $ (391 ) -133 % $ 295
Percentage of revenue 0 % 0 %
Total other (income) expense, net was $(0.4) million and $1.8 million for the
second quarter of fiscal 2022 and fiscal 2021, respectively. The change was
primarily due to lower foreign exchange losses of $2.3 million . The U.S. dollar
versus foreign currencies exchange rates in the countries where we conduct
business have fluctuated significantly since the onset of the global pandemic
COVID-19, most notably versus the euro and Mexican peso.
Total other (income) expense, net was $(0.1) million and $0.3 million for the
first six months of fiscal 2022 and fiscal 2021, respectively. The change was
primarily due to lower foreign exchange losses of $0.6 million and the favorable
change in fair value of the credit swap of $0.3 million partially offset by
lower interest income of $0.5 million . Interest rates have declined
substantially from the first six months of fiscal 2021 resulting in lower
interest income earned on our cash and equivalents.
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. 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.
29--------------------------------------------------------------------------------
Income Tax Expense
Increase (Decrease)
Three Months Compared Three Months
Ended to Prior Period Ended
July 31, 2021 $ % July 31, 2020
(in thousands)
Income tax expense $ 967 $ 527 120 % $ 440
Percentage of revenue 1 % 1 %
Effective tax rate -18 % 88 %
Increase (Decrease)
Six Months Compared Six Months
Ended to Prior Period Ended
July 31, 2021 % July 31, 2020
(in thousands) $
Income tax (benefit) expense $ (409 ) $ (1,844 ) -129 % $ 1,435
Percentage of revenue -0.2 % 1 %
Effective tax rate 8 % 132 %
In determining the provision for income taxes for the first six months of fiscal
2022, the Company calculated income tax expense based on the estimated annual
effective tax rate for the year for all jurisdictions except the U.S. We
calculated tax expense for the U.S. based on actual year-to-date tax expense
since this yielded a more accurate representation of tax expense through the
second quarter of fiscal 2022. In the prior year, the Company calculated income
tax expense based on actual quarterly results. The annual effective tax rate is
adjusted for discrete items recorded during the period. Actual results were used
in fiscal 2021 since the Company was expecting near breakeven results and
actuals provided a more reliable estimate of the quarterly tax expense.
The Company recorded income tax expense of $1.0 million and $0.4 million in the
second quarter of fiscal 2022 and 2021, respectively. The Company's effective
tax rate was (18%) during the second quarter of fiscal 2022 compared to 88% for
the same period in the prior year. The change in the effective tax rate was
primarily due to the change in method of calculating tax expense, a planned
intercompany sale of intellectual property and jurisdictional mix.
The Company recorded income tax (benefit) expense of $(0.4) million and $1.4
million for the first six months of fiscal 2022 and 2021, respectively. The
Company's effective tax rate was 8% during the first six months of fiscal 2022
compared to 132% for the same period in the prior year. The change in the
effective tax rate for the six months ending July 31, 2021 , compared to the six
months ending July 31, 2020 , was primarily due to the change in method of
calculating tax expense, a planned intercompany sale of intellectual property
and the release of $2.0 million of the Company's valuation allowance as an
indirect result of the acquisition of FTZ Corp.
Non-GAAP Financial Measures
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 and non-GAAP pre-tax income each meet the definition of a non-GAAP
financial measure. We define the non-GAAP measures as follows:
? Non-GAAP adjusted EBITDA - EBITDA is GAAP net income before net interest
expense, income tax expense, depreciation and amortization. Non-GAAP adjusted
EBITDA is EBITDA less stock-based compensation expense, transaction costs
related to
of contingent consideration related to QAD's acquisitions of Allocation
Network
rate swap.
? Non-GAAP adjusted EBITDA margins - Calculated by dividing non-GAAP adjusted
EBITDA by total revenue.
? Non-GAAP pre-tax income - GAAP income before income taxes not including the
effects of stock-based compensation expense, amortization of purchased
intangible assets, transaction costs related to
acquisition of QAD, the change in fair value of contingent consideration
related to QAD's acquisitions of
change in fair value of the interest rate swap.
30-------------------------------------------------------------------------------- QAD'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 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.
QAD non-GAAP measures reflect adjustments based on the following items:
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. Therefore, over the life of the debt the sum of the fair value adjustments will be zero. Transaction costs related toThoma Bravo's acquisition of QAD: The Company has incurred transaction costs related toThoma Bravo's planned acquisition of QAD.The Company has excluded these costs from its non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations as these costs are one time in nature and omitting them will provide more consistent internal comparisons to the Company's historical operating results. In addition, the Company believes excluding the transaction costs provides a more useful comparison of its operating results to the operating results of its peers. Change in fair value of contingent consideration: In conjunction with the acquisitions ofAllocation Network GmbH andFTZ Corp. , the Company structured future earn out payments based on the bookings performance of each of the acquired companies. In accordance with GAAP, the Company recorded the fair market value of the future earnouts at the time of acquisition as contingent consideration and updates to the fair market value of the contingent consideration are recorded to general and administrative expense. QAD has excluded the change in fair value of the contingent consideration from its non-GAAP adjusted EBITDA and non-GAAP pre-tax income calculations because doing so makes internal comparisons to the Company's historical operating results more consistent. In addition, the Company believes excluding fair market value adjustments to the contingent consideration provides a more useful comparison of its operating results to the operating results of its peers. 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 and six months endedJuly 31, 2021 and 2020: Three Months Ended Six Months Ended July 31, July 31, 2021 2020 2021 2020 (in thousands) Total revenue$ 84,839 $ 74,081 $ 167,810 $ 148,228 Net (loss) income (6,322 ) 60 (4,490 ) (350 ) Add back: Net interest expense (income) 107 (58 ) 174 (344 ) Depreciation 1,103 1,474 2,349 2,770 Amortization 1,166 366 2,063 720 Income tax expense (benefit) 967 440 (409 ) 1,435 EBITDA$ (2,979 ) $ 2,282 $ (313 ) $ 4,231 Add back: Stock-based compensation expense 4,745 3,951 8,382 6,356 Transaction costs related toThoma Bravo acquisition of QAD 7,570 - 8,215 - Change in fair value of contingent consideration 893 - 893 - Change in fair value of interest rate swap (54 ) (32 ) (118 ) 219 Adjusted EBITDA$ 10,175 $ 6,201 $ 17,059 $ 10,806 Adjusted EBITDA margin 12 % 8 % 10 % 7 % Non-GAAP pre-tax income reconciliation (Loss) income before income taxes$ (5,355 ) $ 500 $ (4,899 ) $ 1,085 Add back: Stock-based compensation expense 4,745 3,951 8,382 6,356 Amortization of purchased intangible assets 866 72 1,466 143 Transaction costs related toThoma Bravo acquisition of QAD 7,570 - 8,215 - Change in fair value of contingent consideration 893 - 893 - Change in fair value of interest rate swap (54 ) (32 )
(118 ) 219
Non-GAAP income before income taxes
31
--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash is from the sale of 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, third-party hosting providers, third party contractors and other overhead costs. In addition to operating expenses, we may also use cash for capital expenditures, payment of dividends, payment of our mortgage, withholding taxes on settlement of stock-based compensation and stock repurchases, and to invest in our growth initiatives, which may include acquisitions of products, technologies and businesses. AtJuly 31, 2021 , our principal sources of liquidity were cash and equivalents totaling$136.5 million and net accounts receivable of$49.0 million . Our cash and equivalents consisted of current bank accounts, registered money market funds and time delineated deposits. Approximately 86% of our cash and equivalents were held inU.S. dollar denominated accounts as ofJuly 31, 2021 . Our primary commercial banking relationship is withBank of America and its global affiliates. Our largest cash concentrations are inthe United States andIreland . The percentage of cash and equivalents held outside ofthe United States was 65% and 58% as ofJuly 31, 2021 andJanuary 31, 2021 , respectively. The majority of our cash and equivalents are held in investment accounts which are predominantly placed in money market mutual funds and government securities funds. The remaining cash and equivalents are held in deposit and saving accounts and certificates of deposit. We are aU.S. -based multinational company subject to tax in multipleU.S. and foreign tax jurisdictions. In addition to providing forU.S. income taxes on earnings fromthe United States , we provide forU.S. income taxes on the earnings of our foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested.
As of the balance sheet date, the Company has no intention or plans to repatriate funds and believes it is appropriate to maintain the permanent reinvestment assertion for all of our foreign subsidiaries. In the future, should we decide to repatriate earnings, we would not expect to incur significant taxes; however, foreign withholding taxes, currency translation, state taxes and currency control laws must be considered.
The following table summarizes our cash flows for the six months endedJuly 31, 2021 and 2020: Six Months Ended July 31, (in thousands) 2021 2020 Net cash provided by operating activities$ 21,365 $ 16,024 Net cash used in investing activities (10,462 ) (1,951 ) Net cash used in financing activities (16,570 ) (9,127 ) Effect of foreign exchange rates on cash and equivalents (345 ) (956 ) Net (decrease) increase in cash and equivalents$ (6,012 ) $ 3,990 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-related compensation payments, vendor payments and 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 cash flows provided by operating activities were$21.4 million and$16.0 million for the first six months of fiscal 2022 and 2021, respectively. The increase in cash flows from operating activities was due primarily to the positive cash flow effect of changes in other liabilities of$10.4 million related to higher accrued compensation expense, higher accrued professional fees and higher accrued travel expense partially offset by a higher net loss of$(4.1) million . 32 -------------------------------------------------------------------------------- Net cash used in investing activities consisted primarily of acquisitions and capital expenditures. During the first quarter of fiscal 2022, we acquiredFTZ Corp. in order to enhance our product offering in our global trade and transportation division. The total purchase price, excluding future earn-out payments, was$9.5 million , net of cash acquired of$3.5 million . Net cash used in investing activities included capital expenditures of$0.4 million and$1.3 million for the first six months of fiscal 2022 and 2021, respectively. The decrease in capital expenditures primarily relates to lower building improvements and computer equipment in the first six months of fiscal 2022 compared to the same period in the prior year. 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. In the first six months of fiscal 2022 and 2021, we paid employee payroll taxes of$13.3 million and$5.9 million , respectively, on vested restricted stock units, vested performance stock units and exercised stock appreciation rights. In the first six months of fiscal 2022 and 2021, we made dividend payments of$2.9 million . We have historically calculated accounts receivable 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 46 and 49 days atJuly 31, 2021 and 2020, respectively. DSO using the average method, which is calculated utilizing the accounts receivable balance and earned revenue for the most recent quarter, was 52 days and 51 days as ofJuly 31, 2021 and 2020, respectively. In connection with our acquisition ofAllocation Network GmbH in the fourth quarter of fiscal 2021, we entered into an agreement that included future payments over three years from the acquisition date that are contingent upon cloud bookings growth. The potential undiscounted amount of all future cash payments under the contingent consideration agreements is between zero and$10.2 million . In connection with our acquisition ofFTZ Corp. in the first quarter of fiscal 2022, we entered into an agreement that included future payments over three years from the acquisition date that are contingent upon cloud bookings growth. The potential undiscounted amount of all future cash payments under the contingent consideration agreements is between zero and$2.4 million . We signed a note payable for$2.4 million as part of the acquisition cost forFTZ Corp. The note is payable to the sellers ofFTZ Corp. over four years with$0.6 million paid each year and accrues interest at 4%. Cash requirements for items other than normal operating expenses are anticipated for capital expenditures and other equity transactions. We may require cash for acquisitions of new businesses, software products or technologies complementary to our business. We expect to use a significant amount of cash to pay for legal expenses, transaction costs and employee equity-related payments related toThoma Bravo's acquisition of QAD. We believe we have enough cash on hand to pay for the liabilities arising because of this transaction. We are continuing to monitor the impact of COVID-19 on our operating results and liquidity and believe the global pandemic could negatively impact operating results and liquidity throughout fiscal 2022. We have previously implemented, and continue to maintain, cost savings measures in the areas of travel, personnel expense and discretionary spending. We continue to monitor our costs and if needed, we will reduce costs further throughout fiscal 2022. Because we have$136.5 million of cash and equivalents our only debt is the mortgage of our corporate headquarters of$12.1 million and a note payable for theFTZ Corp. acquisition of$2.4 million , we believe we are in a solid position to withstand possible negative impacts to our revenue, operating income and liquidity from COVID-19 in fiscal 2022. We believe that our cash on hand and net cash provided by operating activities will provide us with sufficient resources to meet our current and long-term working capital requirements, debt service 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. See Part I, Item 3, "Quantitative and Qualitative Disclosures about Market Risk" for further discussion.
CONTRACTUAL OBLIGATIONS A summary of future obligations under our various contractual obligations and commitments as ofJanuary 31, 2021 was disclosed in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 . OnJune 28, 2021 , we entered into a definitive agreement to be acquired byThoma Bravo (TB), a leading private equity investment firm focused on the software and technology-enabled services sector, in an all-cash transaction with an equity value of approximately$2 billion . Under the terms of the Merger Agreement, and subject to satisfaction of the conditions set forth therin, QAD shareholders will receive$87.50 per share of Class A Common Stock or Class B Common Stock. During the three and six months endedJuly 31, 2021 there have been no other material changes in our contractual obligations or commercial commitments outside the ordinary course of business. 33
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Notes Payable EffectiveMay 30, 2012 ,QAD Ortega Hill, LLC , a consolidated entity ofQAD Inc. , entered into a variable rate credit agreement (the 2012 Mortgage) with Mechanics Bank (formerlyRabobank, 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 0.09% atJuly 31, 2021 . The 2012 Mortgage matures inJune 2022 and is secured by the Company's headquarters located inSanta Barbara, California . In conjunction with the 2012 Mortgage,QAD Ortega Hill, LLC entered into an interest rate swap with Mechanics Bank. 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 forQAD Ortega Hill, LLC to make net monthly payments of$88,100 consisting of principal and interest and one final payment of$11.7 million when the loan matures onJune 1, 2022 . The unpaid balance as ofJuly 31, 2021 was$12.1 million .
Included in other liabilities, the Company owes
Obligations associated with acquisitions
We estimate the fair value of the contingent consideration issued in business combinations using aMonte Carlo valuation approach, as well as unobservable inputs, such as forecasted financial information, reflecting our assessment of the assumptions market participants would use to value these liabilities. The fair value of our liability-classified contingent consideration is remeasured at each reporting period with any changes in the fair value recorded as income or expense. In connection with our acquisition ofAllocation Network GmbH in the fourth quarter of fiscal 2021, we entered into an agreement that included future payments that are contingent upon cloud bookings growth over the next three years. The potential undiscounted amount of all future cash payments under the contingent consideration agreements is between zero and$10.2 million . In connection with our acquisition ofFTZ Corp. in the first quarter of fiscal 2022, we entered into an agreement that included future payments that are contingent upon cloud bookings growth over the next three years. The potential undiscounted amount of all future cash payments under the contingent consideration agreements is between zero and$2.4 million . 34
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