Company Quick10K Filing
Majesco
Price8.36 EPS0
Shares45 P/E71
MCap375 P/FCF-73
Net Debt-20 EBIT10
TEV355 TEV/EBIT37
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-14
10-K 2020-03-31 Filed 2020-07-08
10-Q 2019-12-31 Filed 2020-02-10
10-Q 2019-09-30 Filed 2019-11-13
10-Q 2019-06-30 Filed 2019-08-13
10-K 2019-03-31 Filed 2019-05-30
10-Q 2018-12-31 Filed 2019-02-05
S-1 2018-12-06 Public Filing
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-08
10-K 2018-03-31 Filed 2018-06-22
10-Q 2017-12-31 Filed 2018-02-07
10-Q 2017-09-30 Filed 2017-11-07
10-Q 2017-06-30 Filed 2017-08-09
10-K 2017-03-31 Filed 2017-06-16
10-Q 2016-12-31 Filed 2017-02-02
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-08
10-K 2016-03-31 Filed 2016-05-23
10-Q 2015-12-31 Filed 2016-01-29
10-Q 2015-09-30 Filed 2015-11-03
10-Q 2015-06-30 Filed 2015-08-10
10-K 2015-03-31 Filed 2015-06-19
8-K 2020-08-12 Other Events
8-K 2020-08-10 Earnings, Exhibits
8-K 2020-08-08 Enter Agreement, Shareholder Rights, Regulation FD, Exhibits
8-K 2020-07-20 Regulation FD, Exhibits
8-K 2020-07-20 Enter Agreement, Shareholder Rights, Officers, Exhibits
8-K 2020-07-08 Officers
8-K 2020-06-29 Other Events
8-K 2020-06-22
8-K 2020-06-01
8-K 2020-05-28
8-K 2020-04-01
8-K 2020-03-13
8-K 2020-02-03
8-K 2020-02-03
8-K 2020-01-30
8-K 2019-11-05
8-K 2019-09-09
8-K 2019-09-09
8-K 2019-08-05
8-K 2019-07-17
8-K 2019-06-27
8-K 2019-06-04
8-K 2019-05-15
8-K 2019-05-07
8-K 2019-05-07
8-K 2019-04-25
8-K 2019-04-04
8-K 2019-04-01
8-K 2019-03-14
8-K 2019-03-12
8-K 2019-02-27
8-K 2019-02-26
8-K 2019-02-14
8-K 2019-02-06
8-K 2019-01-26
8-K 2019-01-15
8-K 2019-01-09
8-K 2018-12-27
8-K 2018-12-06
8-K 2018-11-29
8-K 2018-11-27
8-K 2018-10-29
8-K 2018-10-29
8-K 2018-10-01
8-K 2018-09-19
8-K 2018-08-13
8-K 2018-07-26
8-K 2018-07-25
8-K 2018-06-07
8-K 2018-06-01
8-K 2018-05-15
8-K 2018-05-09
8-K 2018-05-09
8-K 2018-04-26
8-K 2018-01-30
8-K 2018-01-24

MJCO 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1A. Risk Factors.
Item 6. Exhibits.
EX-31.1 f10q0620ex31-1_majesco.htm
EX-31.2 f10q0620ex31-2_majesco.htm
EX-32.1 f10q0620ex32-1_majesco.htm
EX-32.2 f10q0620ex32-2_majesco.htm

Majesco Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
15012090603002013201520172020
Assets, Equity
4011-18-47-76-1052013201520172020
Rev, G Profit, Net Income
35229-4-17-302013201520172020
Ops, Inv, Fin

10-Q 1 f10q0620_majesco.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number: 001-37466

 

Majesco

(Exact Name of Registrant as Specified in Its Charter)

 

California   77-0309142
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)
     

412 Mount Kemble Ave., Suite 110C

Morristown, NJ

  07960
(Address of principal executive offices)   (Zip code)

 

(973) 461-5200
(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange on Which Registered
Common Stock, par value $0.002 per share   MJCO   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

  Large accelerated filer ☐ Accelerated filer ☐
  Non-accelerated filer ☒ Smaller reporting company ☒
    Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at August 7, 2020
Common Stock, $0.002 par value per share   43,372,515 shares

 

 

 

 

  

MAJESCO

 

INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2020

 

 

i

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Majesco and Subsidiaries

Consolidated Balance Sheets
(All amounts are in thousands of US Dollars except share data and as stated otherwise)

 

   June 30,   March 31, 
   2020   2020 
ASSETS  (Unaudited)     
CURRENT ASSETS        
Cash and cash equivalents  $23,320   $35,240 
Short term investments   7,546    16,173 
Restricted cash   39    39 
Accounts receivable, net   29,678    26,156 
Unbilled accounts receivable   21,129    16,118 
Prepaid expenses and other current assets   8,355    7,266 
Total current assets   90,067    100,992 
Equipment, net   2,491    2,132 
Right-of-use asset, net   3,802    2,977 
Intangible assets, net   10,879    9,531 
Deferred income tax assets   9,894    7,195 
Unbilled accounts receivable, net of current portion   1,532    847 
Other assets   2,601    1,746 
Goodwill   40,224    34,095 
Total Assets  $161,490   $159,515 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Current portion of vehicle equipment and other loans  $646   $25 
Current portion of finance lease obligation   127     
Lease liability   1,961    1,399 
Accounts payable   5,261    4,159 
Accrued expenses and other current liabilities   19,596    22,746 
Deferred revenue   20,993    20,553 
Total current liabilities   48,584    48,882 
Vehicle, equipment and other loans, net of current portion   204    68 
Finance lease obligation, net of current portion   131     
Lease liability, net of current portion   1,631    1,611 
Other liabilities   2,016    2,341 
Total Liabilities   52,566    52,902 
Commitments and contingencies          
STOCKHOLDERS’ EQUITY          
Preferred stock, par value $0.002 per share – 50,000,000 shares authorized as of June 30, 2020 and March 31, 2020, and no shares issued and outstanding as of June 30, 2020 and March 31, 2020        
Common stock, par value $0.002 per share – 450,000,000 shares authorized, 43,349,678 shares issued (including 54,999 shares held as Treasury Stock) and 43,294,679 shares outstanding as of June 30, 2020 and 43,334,678 shares issued (including 49,250 shares held as Treasury Stock) and 43,285,428 shares outstanding as of March 31, 2020   87    87 
Additional paid-in capital   127,383    126,643 
Accumulated deficit   (15,098)   (16,385)
Accumulated other comprehensive loss   (3,448)   (3,732)
Total Stockholders’ Equity   108,924    106,613 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $161,490   $159,515 

  

See accompanying notes to the Consolidated Financial Statements.

 

1

 

 

Majesco and Subsidiaries

 

Consolidated Statements of Income (Unaudited)
(All amounts are in thousands of US Dollars except per share data and as stated otherwise)

  

   Three Months ended June 30,
2020
   Three Months ended June 30,
2019
 
Revenue  $41,247   $37,304 
Cost of revenue   21,878    17,434 
Gross profit   19,369    19,870 
Operating expenses          
Research and development expenses   3,818    5,470 
Selling, general and administrative expenses   11,627    11,826 
Merger and acquisition expenses   1,819     
Total operating expenses   17,264    17,296 
Income from operations   2,105    2,574 
Interest income   36    189 
Interest expense   (136)   (89)
Other income (expenses), net   21    (11)
Income before provision for income taxes  $2,026   $2,663 
Provision for income taxes   739    1,381 
Net Income  $1,287   $1,282 
Earnings per share:          
Basic  $0.03   $0.03 
Diluted  $0.03   $0.03 
Weighted average number of common shares outstanding          
Basic   43,348,966    42,912,982 
Diluted   45,050,609    44,896,086 

 

See accompanying notes to the Consolidated Financial Statements.

 

2

 

  

Majesco and Subsidiaries

 

Consolidated Statements of Comprehensive Income (Unaudited)
(All amounts are in thousands of US Dollars)

 

   Three Months
ended
June 30,
2020
   Three Months
ended
June 30,
2019
 
Net Income  $1,287   $1,282 
Other comprehensive income/(loss), net of tax:          
Foreign currency translation adjustments   (285)   66 
Unrealized gains (losses) on cash flow hedges   569    117 
Other comprehensive income  $284   $183 
Comprehensive income  $1,571   $1,465 

  

See accompanying notes to the Consolidated Financial Statements.

 

3

 

  

Majesco and Subsidiaries

 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(All amounts are in thousands of US Dollars except per share data and as stated otherwise)

 

   Common stock   Additional paid-in   Accumulated  

Accumulated other

 comprehensive

   Total Stakeholders’ 
   Shares   Amount   capital   deficit   income   equity 
                         
Balance as of April 1, 2020   43,285,428   $87   $126,643   $(16,385)  $(3,732)  $106,613 
Net income               1,287        1,287 
Issue of stock under ESOP and ESPP   9,023        61            61 
Stock based compensation           679            679 
Foreign currency translation adjustments                   (285)   (285)
Unrealized gains on cash flow hedges                   569    569 
Balance as of June 30, 2020   43,294,451   $87   $127,383   $(15,098)  $(3,448)  $108,924 

 

   Common Stock   Additional paid-in   Accumulated   Accumulated other comprehensive   Non-controlling   Total stakeholders’ 
   Shares   Amount   capital   deficit   income   interests   equity 
Balance as of April 1, 2019 as reported   42,846,273   $86   $122,163   $(23,792)  $(412)  $1,233   $99,278 
Net assets received on business combination               823            823 
Consideration payable on business combination               (3,530)           (3,530)
Balance as on April 1, 2019 as adjusted   42,846,273    86   $122,163   $(26,499)  $(412)  $1,233   $96,571 
Net income               1,282            1,282 
Issue of stock under ESOP and ESPP   83,492        475                475 
Stock based compensation           929                929 
Foreign currency translation adjustments                   66        66 
Unrealized gains on cash flow hedges                   117        117 
Balance as of June 30, 2019   42,929,765   $86   $123,567   $(25,217)  $(229)  $1,233   $99,440 

    

See accompanying notes to the Consolidated Financial Statements.

  

4

 

 

Majesco and Subsidiaries

 

Consolidated Statements of Cash Flows (Unaudited)
(All amounts are in thousands of US Dollars)

 

   Three Months
ended
June 30,
2020
   Three Months
ended
June 30,
2019
 
Net cash flows from operating activities        
Net income  $1,287   $1,282 
Adjustments to reconcile net income to net cash used in operating activities:          
Depreciation on property and equipment   409    408 
Amortization of intangibles   986    817 
Non-cash lease expense   580    629 
Stock-based compensation   679    929 
Gain on sale of property and equipment   (1)   (4)
Unrealized cash flow hedges   569    117 
Deferred income taxes   285    825 
Change in operating assets and liabilities:          
Accounts receivable   (2,123)   (888)
Unbilled accounts receivable   (4,999)   (3,351)
Prepaid expenses and other current assets   (405)   2,036 
Other non-current assets   (761)   113 
Accounts payable   850    343 
Lease liability   (629)   (617)
Accrued expenses and other liabilities   (6,888)   (6,603)
Deferred revenue and other non-current liabilities   (1,921)   1,070 
Net cash used in operating activities   (12,082)   (2,894)
Net cash flows from investing activities          
Purchase of property and equipment   (688)   (77)
Proceeds from the sale of property and equipment   1    4 
Purchase of intangible assets   (54)    
Purchase consideration paid on acquisition of business (net of cash acquired)   (7,422)   (3,530)
Purchase of investments   (6,591)   (9,026)
Proceeds from sale of investments   15,160    13,763 
Net cash provided by investing activities   406    1,134 
Net cash flows from financing activities          
Proceeds from shares issued under ESPP and ESOP   61    475 
Repayment of finance lease obligations   (59)    
Repayment of loans from bank   (225)   (315)
Net cash (used in)/provided by financing activities   (223)   160 
Effect of exchange rate changes on cash and cash equivalents and restricted cash   (21)   (96)
Net decrease in cash and cash equivalents, and restricted cash   (11,920)   (1,696)
Cash and cash equivalents, and restricted cash, beginning of the period   35,279    11,329 
Cash, cash equivalents, and restricted cash at end of the period  $23,359   $9,633 
Supplementary disclosure of cash flow information          
Interest paid  $136   $89 
Income taxes paid  $370   $341 

 

See accompanying notes to the Consolidated Financial Statements.

 

5

 

 

Majesco and Subsidiaries

 

Notes to Consolidated Financial Statements (Unaudited)
(All amounts are in thousands of US Dollars except per share data and as stated otherwise)

 

1 DESCRIPTION OF BUSINESS

 

Majesco (the “Company” and, together with its subsidiaries, the “Group”) is a global leader of cloud insurance software solutions for insurance business transformation. We provide technology, expertise, and leadership that helps insurers modernize, innovate and connect to build the future of their business and the insurance industry at speed and scale. We do this by providing technology that connects people and businesses to insurance in ways that are innovative, hyper-relevant, compelling and personal. In addition to the United States, we operate in Canada, Mexico, the United Kingdom, Malaysia, Singapore, Ireland and India. With our CloudInsurer® solutions, we offer cloud-based core insurance platforms, along with distribution management and data and analytics solutions. With our Digital1st™ solutions we offer a cloud-native, digital engagement and microservices platform-as-a-service for the insurance business and an ecosystem of partners with apps that provide innovative data sources and capabilities. These solutions enable Property & Casualty/General Insurance (“P&C”), and Life, Annuities, Pensions and Group/Voluntary Benefits (“L&A and Group”) providers to modernize and optimize their businesses across the end-to-end insurance value chain, better comply with policies and regulations, innovate with new business models, enter new markets, and launch new products and services for incumbents, greenfields and startups. Using this portfolio of solutions including our core P&C, L&A and Group and LifePlus insurance platforms, data and analytics, distribution management and Digital1st Insurance, our customers can respond to evolving market needs, growth and innovation opportunities and regulatory changes, which enables agility, innovation and speed while improving the effectiveness and efficiency of their business operations.

 

Majesco’s customers are insurers, managing general agents and other risk providers from the P&C, L&A and Group insurance segments worldwide.

 

Majesco’s common stock was listed and began trading on the NYSE American on June 29, 2015. Effective on February 26, 2019, Majesco transferred the listing of its common stock and began trading on the Nasdaq Global Market under the symbol “MJCO.”

 

COVID-19 Pandemic

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus, COVID-19 originating in Wuhan, China (and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is uncertain as to the full magnitude that the pandemic will have on Majesco’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and its impact on Majesco’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, Majesco is not able to estimate the effects that the COVID-19 outbreak will have on its results of operations, financial condition, or liquidity for fiscal year 2021.

 

As of the date of this Quarterly Report on Form 10-Q the Company has not experienced any delays in securing new customers and related revenues, cancelations of existing contracts, or delays in payments from existing customers, however, the longer this pandemic continues there may be additional impacts.

 

Although Majesco cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on Majesco’s results of future operations, financial position, liquidity, and capital resources, and those of the third parties on which Majesco relies in fiscal year 2021.

 

6

 

 

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

  a. Basis of Presentation

 

The consolidated financial statements reflect the Group’s financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).

 

All inter-company balances and transactions have been eliminated in consolidation.

 

Certain employees of the Group participate in benefit and stock-based compensation programs of our parent company Majesco Limited. The consolidated balance sheets include the outstanding equity-based compensation program of Majesco and Majesco Limited which are operated for the benefit of our employees.

 

  b. Significant Accounting Policies

 

For a description of all significant accounting policies, see Note 2, Summary of Significant Accounting Policies, of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 (the “Annual Report”).

 

  c. Principles of Consolidation

 

The Group’s consolidated financial statements include the accounts of Majesco and its subsidiaries, Majesco Canada Ltd., Majesco Software and Solutions Inc. (“MSSI”), Majesco Sdn. Bhd., Majesco UK Limited, Majesco Software and Solutions India Private Limited (“MSSIPL”), Majesco Asia Pacific Pte Ltd., Exaxe Holdings Limited (“Exaxe”) and Majesco Software Solutions Ireland Limited, and, since the date of their acquisition on April 1, 2020, InsPro Technologies Corporation, InsPro Technologies, LLC, Atiam Technologies, LP and InsPro Hosting Services, LLC.

 

  d. Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, marketable securities, accounts receivable, long-lived assets including goodwill, income taxes, , and stock-based compensation.

  

e.Cash and Cash Equivalents

 

The Company considers all short-term investments purchased with an original maturity date of three months or less to be cash equivalents.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

Recent Accounting Developments

  

New Accounting Pronouncements not yet adopted

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements, particularly its recognition of allowances for accounts receivable.  

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have upon its financial position and results of operations, if any.

 

Recently adopted accounting pronouncements

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes the requirement for an entity to calculate the implied fair value of goodwill (as part of step 2 of the current goodwill impairment test) in measuring a goodwill impairment loss. The standard will be effective for the Company beginning April 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this pronouncement did not have a material impact on its consolidated financial statements.

 

7

 

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The new standard became effective for the Company beginning with the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

Emerging Growth Company

 

We are an “emerging growth company” and “smaller reporting company” under the federal securities laws and are subject to reduced public company reporting requirements. We will remain an emerging growth company until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our shares that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, (c) the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the preceding three-year period and (d) the last day of our fiscal year containing the fifth anniversary of the date on which shares of our common stock were offered in connection with the completion of our merger with Cover-All, or March 31, 2021. Section 107 of the Jumpstart Our Business Startups Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have taken advantage of the extended transition period for complying with certain new or revised accounting standards. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards.

 

8

 

 

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Group’s financial instruments consist primarily of cash and cash equivalents, short term investments in time deposits, restricted cash, accounts receivable, unbilled accounts receivable, accounts payable, accrued liabilities and derivative financial instruments. The carrying amounts of cash and cash equivalents, short term investments in time deposits, restricted cash, accounts receivable, unbilled accounts receivable, accounts payable and accrued liabilities as of the reporting date approximate their fair market value due to the relatively short period of time of original maturity tenure of these instruments.

 

Basis of Fair Value Measurement

 

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:

 

  Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
     
  Level 2: Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
     
  Level 3: Unobservable inputs that are supported by little or no market activity, which require the Group to develop its own assumptions.

   

The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of June 30, 2020 and March 31, 2020:

 

Assets and Liabilities    
   June 30,
2020
   March 31,
2020
 
Level 2        
Derivative financial instruments (included in the following line items in the consolidated balance sheets)        
Prepaid expenses and other current assets  $138   $71 
Other liabilities   (419)   (760)
Other assets   42    23 
Accrued expenses and other liabilities   (553)   (1,092)
   $(792)  $(1,758)
Level 3          
Contingent consideration   (1,655)   (1,599)
   $(1,655)  $(1,599)
Total  $(2,447)  $(3,357)

 

The following table presents the change in level 3 instruments:  

 

    June 30,
2020
  June 30,
2019
 
Opening balance   $ (1,599)   $  
Total expense recognized in the consolidated statements of income     (56)      
Closing balance   $ (1,655)   $  

 

9

 

 

On November 27, 2018 (the “Agreement Date”) the Company entered into a share purchase agreement (the “Exaxe Agreement”) for the acquisition of all the issued share capital (collectively, the “Securities”) of Exaxe Holdings Limited, a private limited company incorporated in Ireland (“Exaxe”). On the Agreement Date, the Company completed the purchase of 90% of the Securities. The Company agreed to purchase, and the sellers agreed to sell to the Company, the remaining 10% of the Securities on August 1, 2019. The effective date of the transaction was October 1, 2018 in which all economic activity was included. The Company also agreed to make certain earnout payments to the sellers if certain adjusted EBITDA (as defined in the Exaxe Agreement) targets for Exaxe are met.

 

The contingent consideration payable for the acquisition of the business of Exaxe was $1,655 for the period ended June 30, 2020 and $1,599 at March 31, 2020. The long-term contingent consideration for Exaxe has been evaluated for fair value. During the year ended March 31, 2020, the Group and the former founders of Exaxe determined that the year 1 earn-out targets under the Exaxe share purchase agreement were not met and that no earn-out was payable to them towards the year 1 earn-out. Accordingly, the accrued deferred payment for year 1 was reversed in the consolidated statements of income during the quarter ended December 31, 2019. During the fourth quarter of the fiscal year ended March 31, 2020, the Company again reviewed the business projections of Exaxe based on the impact of COVID-19. During this exercise it was determined that one of the major customers of Exaxe in the business of selling door to door insurance was impacted significantly by the pandemic, which would have a negative impact on Exaxe’ s engagement with this customer going forward. Based on the circumstances it was determined that Exaxe would not be able to meet the full earn out targets for the remaining two years. Majesco carried out a fair valuation of the contingent consideration liability and reversed a further EUR 1,339 (approximately $1,473 at exchange rates in effect at November 27, 2018). All Euros are in thousands unless otherwise indicated.   

 

The total gain attributable to changes in the estimated contingent consideration payable for the acquisition of Exaxe was $2,832 for the year ended March 31, 2020.  The fair value of the liability has been determined as per exchange rates in effect as June 30, 2020, and an expense of $56 has been considered in the selling, general and administrative expenses in the consolidated statements of income for the first quarter ended June 30, 2020.

 

The fair value of derivative financial instruments is determined based on observable market inputs and valuation models. The derivative financial instruments are valued based on valuations received from the relevant counterparty (i.e., bank). The fair value of the foreign exchange forward contract and foreign exchange par forward contract has been determined as the difference between the forward rate on the reporting date and the forward rate on the original transaction, multiplied by the transaction’s notional amount (with currency matching).

 

5. BORROWINGS

 

MSSIPL Facilities

 

On May 9, 2017, MSSIPL and Standard Chartered Bank entered into an Export Invoice Financing Facility, Working Capital Overdraft Facility, Short Term Loans Facility, Bonds and Guarantees Facility and Pre Shipment Financing Under Export Orders Facility (the “Combined Facility”) pursuant to which Standard Chartered Bank agreed to a Combined Facility of up to 200 million Indian rupees (or approximately $2,600 at exchange rates in effect on June 30, 2020). The Export Invoice Financing Facility is for the financing of MSSIPL’s sale of services, as evidenced by MSSIPL’s invoice to the customer. Each amount drawn is required to be repaid within 90 days. The Working Capital Overdraft Facility and the Short-Term Loans Facility are for working capital purposes and subject to sub-limits. The Pre-Shipment Financing Under Export Orders Facility is for the delivery of software ready for sale. The Bonds and Guarantees Facility is for the issuance of guarantees and subject to commissions as agreed with Standard Chartered Bank from time to time.

 

The interest on the Combined Facility is based on the marginal cost of funds-based lending rate (the “MCLR”) plus a margin to be agreed with Standard Chartered Bank at the time of each drawdown. The MCLR is to be determined on the date of each disbursement and is effective until repayment. Interest will accrue from the utilization date to the date of repayment or payment of that utilization. The interest under the Combined Facility may be changed by Standard Chartered Bank upon the occurrence of certain market disruption events. The Combined Facility is secured by a first pari passu security interest over the current assets of MSSIPL. MSSIPL was in compliance under the terms of this Combined Facility as of June 30, 2020. There are no outstanding loans under this Combined Facility as of June 30, 2020.

 

10

 

 

Auto loans 

 

MSSIPL has obtained vehicle loans from HDFC Bank for the purchase of vehicles. The loans bear interest at a rate of 8.75% per annum, are payable in 60 monthly installments over a 5-year period and are secured by a pledge of the vehicles. The outstanding balance of these vehicle loans as of June 30, 2020 was $86.

  

Receivable Purchase Facility

 

On January 13, 2017, Majesco and its subsidiaries MSSI, and Cover-All Systems, jointly and severally entered into a Receivable Purchase Agreement with HSBC pursuant to which HSBC may advance funds against receivables at an agreed advance rate. The outstanding aggregate amount of all advances may not exceed a $10,000 facility limit. The facility bears interest at 2% plus the 90-day LIBOR rate. HSBC will also receive an arrangement fee equal to 0.20% of the facility limit and a facility review fee equal to 0.20% of the facility limit. Majesco will serve as HSBC’s agent for the collection of receivables, and Majesco will collect and otherwise enforce payment of the receivables. HSBC has a security interest in accounts of MSSI and Cover-All Systems. The term of the Receivable Purchase Agreement is for a minimum period of 12 months and shall continue unless terminated by either party. Either party may terminate the Receivable Purchase Agreement at any time upon 60 days’ prior written notice to the other party. The Receivable Purchase Agreement will provide additional liquidity to the Group for working capital and other general corporate purposes.

 

As of June 30, 2020, Majesco had $0 outstanding under this facility.

 

Exaxe Facilities

 

Majesco Software Solutions Ireland Limited (“Exaxe”) had a receivables purchase agreement with AIB Commercial Finance Limited (“AIB Commercial”) pursuant to which AIB Commercial would purchase up to EUR 200 in receivables from Majesco Software Solutions Ireland Limited on a discounted basis. In addition, Majesco Software Solutions Ireland Limited had an overdraft facility with Allied Irish Banks, p.l.c. (“AIB”) of up to EUR 100. The facility had a variable interest rate and is payable on demand at any time. This facility was secured by the assets of Majesco Software Solutions Ireland Limited. As of June 30, 2020, there were no outstanding balances under these facilities. Both facilities were terminated during the year ended March 31, 2020. 

 

On July 17, 2019, Majesco Software Solutions Ireland Limited and HSBC France, Dublin Branch, entered into a EUR 400 overdraft facility. The facility is for working capital purposes and is subject to review from time to time. Exaxe may terminate the facility at any time without penalty. Interest under the facility is payable at the rate of 3.5% per annum over the prevailing European Central Bank Rate on amounts up to EUR 400 and 7% per annum over such rate on amounts over EUR 400. The facility is secured by a fixed and floating charge over certain assets of Exaxe. Exaxe agreed to certain negative covenants under the facility, including not to create or allow any mortgage or security over its assets or revenues. As of June 30, 2020, there were no outstanding balances under this facility.

  

InsPro Facilities

 

Equipment financing obligations

 

On January 5, 2019, InsPro LLC entered into a financing arrangement with an unaffiliated company to finance the purchase of certain third-party perpetual software licenses and software subscription and maintenance. The amount financed was $802, which included $757 of cost of purchased software licenses and software subscription and maintenance services plus $45 of applicable sales tax. The financing arrangement commenced on January 5, 2019, has an annual interest rate of 6.1% and consists of 36 equal monthly payments of principal, interest and applicable sales tax of $24 commencing on February 1, 2019 and ending on January 1, 2022. The balance for this loan was $412 as of June 30, 2020. The Company’s right to use the purchased software licenses and software subscription and maintenance services is contingent on the Company remaining in compliance with the terms of this loan. As of June 30, 2020, the Company is in compliance with this loan. For the three months ended June 30, 2020, the interest expense on this loan was $7.

 

11

 

 

On February 28, 2019, InsPro LLC entered into a financing arrangement with an unaffiliated company to finance the purchase of perpetual software licenses for third party software products. The amount financed was $1,148. The financing arrangement has an annual interest rate of 7.13% and consists of 24 equal monthly payments of principal, interest of $51 which commenced in March 2019 and will end on February 1, 2021. The balance for this loan was $352 as of June 30, 2020. The Company’s right to use the purchased software licenses and software subscription and maintenance services is contingent on the Company remaining in compliance with the terms of this loan. As of June 30, 2020, the Company is in compliance with this loan. For the three months ended June 30, 2020, the interest expense on this loan was $8.

 

Finance lease obligations

 

The Company’s subsidiary, InsPro LLC, has entered into several finance lease obligations to purchase equipment used for operations (“Finance Leases”). The Company has the option to purchase the equipment at the end of each Finance Lease agreement for one dollar. The liability of these arrangements was $258 as of June 30, 2020.

  

6. DERIVATIVE FINANCIAL INSTRUMENTS

 

The following table provides information of fair values of derivative financial instruments:

 

   Asset   Liability 
   Noncurrent*   Current*   Noncurrent*   Current* 
As of June 30, 2020                
Designated as Cash Flow Hedges                
Foreign exchange forward contracts  $42   $138   $419   $553 
Total  $42   $138   $419   $553 
                     
As of March 31, 2020                    
Designated as Cash Flow Hedges                    
Foreign exchange forward contracts  $23   $71   $760   $887 
   $23   $71   $760   $887 

 

* The non-current and current portions of derivative assets are included in ‘Other assets’ and ‘Prepaid expenses and other current assets,’ respectively, and the noncurrent and current portions of derivative liabilities are included in ‘Other liabilities’ and ‘Accrued expenses and other current liabilities,’ respectively, in our consolidated balance sheets.

  

Cash Flow Hedges and Other Derivatives

 

We use foreign currency forward contracts and par forward contracts to hedge our risks associated with foreign currency fluctuations related to certain commitments and forecasted transactions. The use of hedging instruments is governed by our policies which are approved by our Board of Directors. We designate these hedging instruments as cash flow hedges. Derivative financial instruments we enter into that are not designated as hedging instruments in hedge relationships are classified as financial instruments at fair value in the consolidated statements of income.

 

The aggregate contracted USD notional amounts of the Group’s foreign exchange forward contracts outstanding amounted to $43,950 and $42,900 as of June 30, 2020 and March 31, 2020, respectively.

 

The outstanding forward contracts as of June 30, 2020 mature between one month and 37 months. As of June 30, 2020 the Group estimates that $(592), net of tax, of the net (loss)/gains related to derivatives designated as cash flow hedges recorded in accumulated other comprehensive income (loss) is expected to be reclassified into earnings within the next 37 months.

 

12

 

 

The related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.

  

The following table provides information on the amounts of pre-tax income/(loss) recognized in and reclassified from Accumulated Other Comprehensive Income (“AOCI”) of derivative instruments designated as cash flow hedges:

 

   Amount of
Income (Loss)
recognized in
AOCI (effective
portion)
   Amount of
(Loss)
reclassified
from AOCI to
Statement of
Operations
(Revenue)
 
For the three months ended June 30, 2020        
Foreign exchange forward contracts  $569   $(285)
Total  $569   $(285)
           
For the three months ended June 30, 2019          
Foreign exchange forward contracts  $117   $66 
Total  $117   $66 

 

7. ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Changes in accumulated other comprehensive income by component were as follows:

 

   Three months ended
June 30, 2020
   Three months ended
June 30, 2019
 
   Before
tax
   Tax
effect
   Net   Before
tax
   Tax
effect
   Net 
Other comprehensive income                        
Foreign currency translation adjustments                        
Opening balance  $(2,570)  $   $(2,570)  $(703)  $   $(703)
Change in foreign currency translation adjustments   (285)       (285)   66        66 
Closing balance  $(2,855)  $   $(2,855)  $(637)  $   $(637)
                               
Unrealized gains/(losses) on cash flow hedges                              
Opening balance  $(1,553)  $392   $(1,161)  $411   $(120)  $291 
Unrealized gains/(losses) on cash flow hedges   874    (220)   654    164    (47)   117 
Reclassified to consolidated statements of income   (113)   28    (85)            
Net change  $761   $(192)  $(569)  $164   $(47)  $117 
Closing balance  $(792)  $200   $(592)  $575   $(167)  $408 

  

8. INCOME TAXES

 

The Group recognized income tax provisions of $739 and $1,381 for the three months ended June 30, 2020 and June 30, 2019 respectively.

 

13

 

 

The effective tax rate is 36.5% and 51.9% for the three months ended June 30, 2020 and June 30, 2019 respectively, which differs from the statutory U.S. federal income tax rate of 21%, mainly due to the impact of different tax jurisdictions and disallowable expenses. 

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which provides relief to taxpayers affected by the COVID-19. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The Company upon examining the provisions of the CARES Act and similar laws enacted internationally has applied for reliefs relating to deferment of social security payments, government assistance subsidies and certain other payroll and non-income tax credits granted, within and outside of the United States. Majesco has taken advantage of the FICA deferred tax program starting with the March 31, 2020 payroll and records the expense as incurred and maintains a payable in the amount of approximately $800 as of June 30, 2020. Taking advantage of this program does not impact our financial results or our financial position and is not anticipated to have a material impact on its business.

 

On July 20, 2020, the Treasury Department released final regulations under Internal Revenue Code Section 951A permitting a taxpayer to elect to exclude from its inclusion of global intangible low-taxed income (GILTI) items of income subject to the high effective rate of foreign tax. The final regulations adopt the threshold rate of foreign tax of 18.9% to determine whether an item is subject to “high tax”. The election can apply retroactively to tax years beginning after December 31, 2017. The Company continues to examine these new regulations but does not anticipate that it will have a material impact on its consolidated financial statements.

 

9. EMPLOYEE STOCK OPTION PLAN

 

Employee Stock Option Scheme of Majesco Limited — Plan 1

 

Certain employees of the Group participate in the Group’s parent company, Majesco Limited’s, employee stock option plan. The plan, termed as “ESOP plan 1,” became effective June 1, 2015, the effective date of the demerger from Mastek Ltd. Group employees who were issued options in the earlier ESOP plans of Mastek Ltd. were given options of Majesco Limited following the demerger. Under the plan, Majesco Limited also grants newly issued options to the employees of MSSIPL from time to time. During the three months ended June 30, 2020, no options to purchase shares of common stock were granted under ESOP plan 1 of Majesco Limited.

 

As of June 30, 2020, the total future compensation cost related to non-vested options not yet recognized in the consolidated statements of income was $123, and the weighted average period over which these awards are expected to be recognized was 1.66 years. The weighted average remaining contractual life of options expected to vest as of June 30, 2020 is 8.67 years.

 

During the three months ended June 30, 2020, we recognized $46, in equity-based compensation expense in our consolidated financial statements compared to $171 during the three months ended June 30, 2019. 

 

Majesco Limited calculates the fair value of each option grant on the date of grant using the Black-Scholes option-pricing method with the following assumptions:  

 

   For the
three Months
ended
June 30,
 
   2020   2019 
Weighted-average volatility       36%
Expected dividends       0%
Expected term (in years)       2-5 years  
Risk-free interest rate       6.60-7.10% 

 

The summary of outstanding options of Majesco Limited as of June 30, 2020 is as follows:

 

    No. of Options
Outstanding
    Exercise
Price
Per Share
    Weighted-
Average
Remaining
Contractual
Life
   

Weighted-

Average
Exercise
Price

Tranche 1     474,853     $ 0.10 - 3.00       5.14     1.12
Tranche 2     474,873     $ 3.10 - 6.00       4.52     4.34
Tranche 3     110,000     $ 6.10 - 9.00       8.19     6.85
Balance, June 30, 2020     1,059,726                      

 

Of the stock options of Majesco Limited outstanding and held by Group employees, an aggregate of 940,595 are exercisable as of June 30, 2020. 

 

14

 

 

Majesco 2015 Equity Incentive Plan

 

During the three months ended June 30, 2020, we recognized $633 in equity-based compensation expense in our consolidated financial statements compared to $758 during the three months ended June 30, 2019. 

 

In June 2015, Majesco adopted the Majesco 2015 Equity Incentive Plan (the “2015 Plan”). On May 9, 2018, the Board of Directors of Majesco approved an increase of 2,000,000 shares in the number of shares available for issuance under the 2015 Plan thereby increasing the number of shares available under such plan from 3,877,263 shares to 5,877,263 shares. This increase was approved by the shareholders of Majesco at the 2018 annual meeting of shareholders. Under the 2015 Plan, options, restricted stock and other equity incentive awards with respect to up to 5,877,263 shares may be granted by the Compensation Committee of the Board of Directors to our employees, consultants and directors at an exercise or grant price determined by the Compensation Committee of the Board of Directors on the date of grant. Options may be granted as incentive or nonqualified stock options with a term of not more than ten years. The 2015 Plan allows the grant of restricted or unrestricted stock awards or awards denominated in stock equivalent units or any combination of the foregoing, which may be paid in common stock or other securities, in cash, or in a combination of common stock or other securities and cash. As of June 30, 2020, 1,930,893 shares were available for grant under the 2015 Plan.

 

Majesco uses the Black-Scholes-Merton option-pricing model (“Black-Scholes”) to measure fair value of the share-based awards. The Black-Scholes model requires us to make significant judgments regarding the assumptions used within the model, the most significant of which are the expected stock price volatility, the expected life of the option award, the risk-free interest rate of return and dividends during the expected term.

 

  - Expected volatility is based on peer entities as historical volatility data for Majesco’s common stock is limited.

 

  - In accordance with ASC 718, Majesco uses the simplified method for estimating the expected term when measuring the fair value of employee stock options using the Black-Scholes option pricing model. Majesco believes the use of the simplified method is appropriate due to the employee stock options qualifying as “plain-vanilla” options under the criteria established by Staff Accounting Bulletins Topic 14.

 

  - The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yields for an equivalent term at the time of grant.

 

  -

Majesco does not anticipate paying dividends during the expected term.

 

    Unaudited
For the
three months
ended
June 30,
 
Variables (range)   2020     2019  
             
Expected volatility     41%–46 %     41%–46 %
Weighted-average volatility     46 %     46 %
Expected dividends     0 %     0 %
Expected term (in years)     3-5        3-5  
Risk-free interest rate     1.9 %     2.5 %

 

15

 

 

As of June 30, 2020, there was $3,568 of total unrecognized compensation costs related to non-vested share-based compensation arrangements previously granted by Majesco. That cost is expected to be recognized over a weighted-average period of 1.31 years.

 

Stock Option Awards

 

A summary of the outstanding common stock options under the 2015 Plan is as follows:

 

    Shares     Exercise Price
Per Share
    Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise
Price
 
Balance, April 1, 2020     2,865,874     $ 4.79-10.02     6.2 years   $ 5.68  
Granted     72,882       5.70-5.83     9.86 years     5.77  
Cancelled     (30,000 )    4.79-7.64           5.75  
Balance, June 30, 2020 (unaudited)     2,908,756     $ 4.79-10.02     5.98 years   $ 5.65  

 

Of the stock options outstanding, an aggregate of 2,164,532 were exercisable as of June 30, 2020.

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

 

We follow FASB ASC 718, Accounting for Stock Options and Other Stock-Based Compensation (“ASC 718”). Among other items, ASC 718 requires companies to record the compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. Our share-based awards include stock options and restricted stock awards. For restricted stock awards, the calculation of compensation expense under ASC 718 is based on the intrinsic value of the grant.

 

Majesco Performance Bonus Plan

 

Majesco established the Majesco Performance Bonus Plan (the “Performance Bonus Plan”). The Performance Bonus Plan is administered by the Compensation Committee of the Board of Directors of Majesco. The purpose of the Performance Bonus Plan is to benefit and advance the interests of the Group by rewarding select employees of the Group for their contributions to the Group’s financial success and thereby motivating them to continue to make such contributions in the future by granting them performance-based awards that are fully tax deductible to the Group.

 

During the three months ended June 30, 2020, Majesco accrued $2,553 in incentive compensation expense in its consolidated financial statements compared to $1,034 during the three months ended June 30, 2019.

 

Restricted Stock Unit Awards

 

Restricted stock unit activity during the three months ended June 30, 2020 was as follows: 

 

    Number of
RSUs
    Weighted
Average
Grant-Date
Fair Value
 
Balance, April 1, 2020     385,000     $ 7.75  
Exercised     (15,000 )      
Balance, June 30, 2020 (unaudited)     370,000     $ 7.75  

 

16

 

 

Majesco Employee Stock Purchase Plan

 

Majesco established the Majesco Employee Stock Purchase Plan (the “ESPP”). The ESPP is intended to be qualified under Section 423 of the Internal Revenue Code. If a plan is qualified under Section 423, employees who participate in the ESPP enjoy certain tax advantages. The ESPP allows employees to purchase shares of Majesco common stock at a discount, without being subject to tax until they sell the shares, and without having to pay any brokerage commissions with respect to the purchases.

 

The purpose of the ESPP is to encourage the purchase of Majesco common stock by our employees, to provide employees with a personal stake in our business and to help us retain our employees by providing a long-range inducement for such employees to remain in our employ.

 

The ESPP provides employees with the right to purchase shares of common stock through payroll deductions. The total number of shares available for purchase under the ESPP is 2,000,000. The ESPP Plan became effective January 1, 2016. As of June 30, 2020, we had issued and sold 155,580 shares under the ESPP.

 

Warrants

 

As of June 30, 2020, there were warrants to purchase 25,000 shares of common stock outstanding. A summary of the terms of the outstanding warrants as of June 30, 2019 and June 30, 2020 is as follows:

 

    Outstanding
and
Exercisable
Warrants
    Exercise
Price
Per Warrant
    Weighted-
Average
Remaining
Contractual Life
    Weighted-
Average
Exercise
Price
 
Balance, March 31, 2020     25,000     $ 7.00       0.4 years     $ 7.00  
Granted     —        —        —        —   
Balance, June 30, 2020 (unaudited)     25,000     $ 7.00       0.17 years     $ 7.00  

 

On September 1, 2015, Majesco issued to Maxim Partners LLC a five-year warrant to purchase 25,000 shares of common stock of Majesco at an exercise price of $7.00 per share. The warrant was issued in connection with the engagement of the holder to perform certain advisory services for the Group. The warrant may be exercised at any time after September 1, 2016 and will expire, if unexercised, on September 1, 2020. The warrant contains certain anti-dilution adjustment protection in case of certain future issuances of securities, stock dividends, split and other transactions affecting Majesco’ s securities. The holder of the warrant is entitled to piggyback registration rights in case of certain registered securities offerings by Majesco.

 

Total employee stock option plans expenses

 

The total amount of compensation expense recognized in Majesco’s consolidated statements of income in respect of employee stock option plans is as follows:

 

   For the
three months ended
June 30,
 
   2020   2019 
         
Cost of revenue   59    87 
Research and development expenses   25    35 
Selling, general and administrative expenses   595    807 
Total   679    929 

 

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10. EARNINGS PER SHARE

 

The basic and diluted earnings per share were as follows:

 

   Three months ended 
June 30,
 
   2020   2019 
         
Net Income  $1,287   $1,282 
           
Basic weighted average outstanding equity shares   43,348,966    42,912,982 
Adjustment for dilutive potential common shares          
Options under Majesco 2015 Equity Plan   1,701,642    1,983,104 
Dilutive weighted average outstanding equity shares          
    45,050,609    44,896,086 
Earnings per share:          
Basic  $0.03   $0.03 
Diluted  $0.03   $0.03 

 

Basic earnings per share amounts are calculated by dividing net income for the three months ended June 30, 2020 and 2019 attributable to common shareholders by the weighted average number of common shares outstanding during the same periods. Diluted earnings per share amounts are calculated by dividing the net income attributable to common shareholders by the sum of the weighted average number of shares of common stock outstanding during the three month periods plus the weighted average number of shares of common stock that would be issued upon the conversion of all the dilutive potential shares of common stock into shares of common stock as applicable pursuant to the treasury method.

   

The calculation of diluted earnings per share excluded no shares and options for the three months ended June 30, 2020 and 2,000 shares and options for the three months ended June 30, 2019 granted to employees, as their inclusion would have been antidilutive.

 

11. RELATED PARTIES TRANSACTIONS

 

Reimbursement of Expenses

 

On March 16, 2020, MSSIPL, a subsidiary of Majesco, entered into a cost sharing agreement (the “Cost Sharing Agreement”) with Majesco Limited, Majesco’s controlling shareholder. Pursuant to the Cost Sharing Agreement, effective as of April 1, 2019, a portion of the costs with respect to certain employees of Majesco Limited shall be charged to MSSIPL as payment for services rendered by such employees to Majesco and its subsidiaries. There will be no mark up and only a reimbursement for the proportion of the actual costs. The Cost Sharing Agreement may be terminated, among other reasons, by either party upon 60 days prior written notice. During the three months ended June 30, 2020, we recognized $43 as expense in the consolidated financial statements compared to $0 during the three months ended June 30, 2019.

 

Leases

 

MSSIPL entered into an operating lease for its operation facilities in Mahape, India, as lessee, with Majesco Limited, Majesco’s parent company, as lessor. The approximate aggregate annual rent payable to Majesco Limited under this lease agreement was $1,436. The lease became effective on June 1, 2015 and initially expired on May 31, 2020. MSSIPL may terminate the lease after three years with six months’ prior written notice to Majesco Limited. Majesco Limited may terminate the lease after five years with six months’ prior written notice to MSSIPL. On May 16, 2019, a new lease agreement between Majesco Limited and MSSIPL was signed for the leasing of additional office space by Majesco Limited to MSSIPL with effect from April 1, 2019, in continuation to the existing operating lease until May 31, 2020. The approximate aggregate annual rent payable to Majesco Limited under this additional lease agreement was $42.

 

On June 1, 2020, MSSIPL entered into an amendment to the lease with respect to its operation facilities in Mahape pursuant to which, effective as of June 1, 2020, the lease term was extended to November 30, 2020 and the monthly rent was approximately $94 (at exchange rates in effect at June 30, 2020).

  

   As of
June 30,
2020
   As of
March 31,
2020
 
           
Security deposits paid to Majesco Limited by MSSIPL for use of Mahape premises  $576   $576 

 

18

 

 

Rental expenses paid by MSSIPL to Majesco Limited for use of premises for the three months ended June 30, 2020 and June 30, 2019 was $308 and $354, respectively. As per terms of agreement MSSIPL reimbursed utility bills amounting to $65 and $96 for the three months ended June 30, 2020 and June 30, 2019, respectively.

 

Joint Venture Agreement

 

On September 24, 2015, MSSIPL and Mastek (UK) Limited, a wholly-owned subsidiary of Mastek Ltd. (“Mastek UK”), entered into a Joint Venture Agreement (the “Joint Venture Agreement”) pursuant to which the two companies agreed to work together to deliver services to third parties under the terms of the Joint Venture Agreement, which services comprise the delivery of development, integration and support services to third parties by use of Mastek Ltd.’s development, integration and support methodologies and tools. The Joint Venture Agreement is effective September 24, 2015 and will remain in force, unless terminated by either party upon three months’ notice in writing to the other of its intention to terminate the Joint Venture Agreement. The consideration for each party’s performance of its obligations under the Joint Venture Agreement is the performance of the other’s obligations under the same agreement, being services to the other. The services comprise in the case of Mastek Ltd., Mastek Ltd.’s development, integration and support methodologies and tools and business development services. In the case of MSSIPL, the services comprise the provision of leading edge technical expertise and advice. The parties will also exchange technical and business information.

 

Services Agreements

 

On May 16, 2019 an agreement between MSSIPL and Majesco Limited was signed pursuant to which MSSIPL will provide administrative support to Majesco Limited annually for approximately $4. This services agreement will terminate on March 31, 2022.

  

Lease with Exaxe Sellers

 

On October 14, 2004, Exaxe Consulting Limited entered into a lease (the “Lease”) with Norman Carroll (the Chief Executive Officer of Exaxe), Philip Naughton (the Executive Director – Business Development of Exaxe) and Luc Hemeryck (unrelated party) for certain real property facilities for a term which initially expired on October 13, 2025. Pursuant to a Deed of Assignment dated December 6, 2017 between Exaxe Consulting Limited and Majesco Software Solutions Ireland Limited (formerly Exaxe Limited), Exaxe Consulting Limited assigned Majesco Software Solutions Ireland Limited the Lease for the balance of the term. Pursuant to a Deed of Variation of the Lease executed in July 2019, the term of the Lease is expected to terminate on September 30, 2024. The monthly rental fee under the Lease is EUR 10.

 

Business Transfer Agreement and Memorandum of Understanding

 

On April 1, 2019, MSSIPL entered into a Business Transfer Agreement (the “Transfer Agreement”) with Majesco Limited, Majesco’s controlling shareholder. Pursuant to the Transfer Agreement, on May 15, 2019, MSSIPL purchased all of Majesco Limited’s insurance software business in India in a slump sale transaction, which included, among other things, Majesco Limited’s customer contracts and certain employees servicing this business, for a total value of approximately 243,745,000 Indian Rupees (approximately $3.5 million at exchange rates in effect at [May 15, 2019]). The transaction did not include real estate properties of Majesco Limited used in the business which will continue to be rented by MSSIPL from Majesco Limited. 

 

This being a transaction between entities under common control, the Company has followed the guidance as per FASB Business Combinations Topic 805 and recorded the assets, liabilities and reserves at respective book values as on April 1, 2019 pertaining to the transferred business and recorded resultant negative capital reserve which is adjusted in accumulated deficit of $2,707. 

  

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Recognized amount of identifiable assets acquired and liabilities assumed

 

    Amount  
Current assets   $ 1,038  
Current liabilities     (486 )
Fixed assets     271  
Total net book value of assets acquired     823  
Total purchase consideration     3,530  
Retained Earnings   $ 2,707  

 

12. SEGMENT INFORMATION

 

The Group operates in one segment as software solutions provider for the insurance industry. The Group’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM manages the Group’s operations on a consolidated basis for purposes of allocating resources. When evaluating the Group’s financial performance, the CODM reviews all financial information on a consolidated basis. A majority of the Group’s principal operations and decision-making functions are located in the United States.

 

The following table sets forth revenues by country based on the billing address of the customer:

 

   Three months
ended
June 30,
2020 (unaudited)
   Three months
ended
June 30,
2019
 
         
USA  $36,836   $33,023 
UK   1,497    1,087 
Canada   71    22 
Ireland   1,216    1,261 
Malaysia   949    1,289 
Others   678    622 
   $41,247   $37,304 

 

The following table sets forth revenues by classification:

 

   Three months
ended
June 30,
2020 (unaudited)
   Three months
ended
June 30,
2019
 
         
Property and Casualty  $30,321   $28,800 
Life and Annuities   10,874    8,281 
Others   52    223 
   $41,247   $37,304 

 

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The following table sets forth the Group’s equipment, net, by geographic region:

 

   

As of
June 30, 2020

(unaudited)

    As of
March 31,
2020
 
USA   $ 1,198     $ 630  
UK     7       6  
Canada            
Ireland     30       33  
Malaysia     62       70  
Others     1,194       1,393  
    $ 2,491     $ 2,132  

 

We provide a considerable volume of services to a number of significant customers. However, loss of a significant customer could materially reduce our revenues. The Group had no customer accounting for more than 10% of revenues for the three months ended June 30, 2020 and June 30, 2019. Presented in the table below is information about our top customer:

 

  

Three months ended
June 30, 2020

(unaudited)

  

Three months ended
June 30, 2019

(unaudited)

 
   Amount   % of
Combined
Category
   Amount   % of
Combined
Category
 
Top Customer                
Revenue  $1,722    4.2%  $2,722    7.3%
Accounts receivable and unbilled accounts receivable  $1,676    3.2%  $2,621    7.0%

 

13. COMMITMENTS

 

Capital Commitments

 

The Group had outstanding contractual commitments of $939 and $750 as of June 30, 2020 and March 31, 2020, respectively, for capital expenditures relating to the acquisition of property, equipment and new network infrastructure.

 

Operating Leases

 

The Group leases certain office premises under operating leases. Many of these leases include a renewal option on a periodic basis at the Group’s option, with the renewal periods ranging from two to five years. Rental expense for operating leases amounted to $747 for the three months ended June 30, 2020 compared to $840 for the three months ended June 30, 2019. The schedule for future minimum rental payments over the lease term in respect of operating leases is set forth below.

 

Year ending March 31,  Amount 
2021  $1,637 
2022   1,161 
2023   595 
2024   455 
2025   107 
Thereafter    
   $3,955 
Less: Imputed interest   364 
Total minimum lease liability  $3,591 
      
Lease liabilities, current portion   1,961 
Lease liabilities, net of current portion   1,631 
Total lease liabilities  $3,592 

 

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Finance lease obligations

 

The Company’s subsidiary, InsPro LLC, has entered into several finance lease obligations to purchase equipment used for operations (“Finance Leases”). The Company has the option to purchase the equipment at the end of each Finance Lease agreement for one dollar. The liability of these arrangements was $258 as of June 30, 2020.   

 

Leases

 

We lease certain office space, equipment and vehicles. We consider various factors such as market conditions and the terms of any renewal options that may exist to determine whether we will renew or replace the lease. A majority of our leases have remaining lease terms of one to seven years, typically with the option to extend the leases. Some of our leases may include the option to terminate. In the event we are reasonably certain to exercise the option to extend a lease, we will include the extended terms in the operating lease ROU asset and operating lease liability. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are our obligations under the lease agreements. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and lease expense for these leases is recognized on a straight-line basis over the lease term. Leases included in our ROU asset and lease liability consist of operating leases and finance leases.

 

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

22

 

 

The gross amounts of assets and liabilities related to operating leases are as follows:

 

   Balance Sheet Caption  June 30,
2020
 
Assets:        
Operating lease assets  ROU, net  $3,601 
Liabilities:        
Current:        
Operating lease liabilities  lease liability  $1,961 
Long-term:        
Operating lease liabilities  lease liability, net of current portion   

1,631

 
Total operating lease liabilities     $3,592 

  

ROU assets represent the Group’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of the lease payments over the lease term. As our leases do not provide a readily determinable implicit rate, we use an incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Operating lease expense is recognized on a straight-line basis over the lease term and included in selling, general and administrative expenses.

 

ROU, net also include lease assets of $201 of the Company’s subsidiary, InsPro LLC. InsPro LLC, has entered into several finance lease obligations to purchase equipment used for operations. The liability of these arrangements was $258 as of June 30, 2020, of which $127 is classified to current portion and the remaining $131 is classified to non-current portion.  

 

Information related to the Company’s ROU assets and related lease liabilities were as follows:

 

   Three months ended 
   June 30, 
   2020 (Unaudited) 
Cash paid for operating lease liabilities  $747 
ROU assets obtained in exchange for new operating lease obligations  $487 
Weighted-average remaining lease term   1.3 years 
Weighted-average discount rate   6.9%

 

Transfer Pricing

 

The Company’s India subsidiary, MSSIPL, received a Draft Assessment Order on December 26, 2018 for assessment year 2015 relating to MSSIPL ’s transfer pricing model. MSSIPL filed an application with the Dispute Resolution Panel (DRP) on January 24, 2019.

 

MSSIPL has filed an appeal against the DRP order to the Income Tax Appellate Tribunal (ITAT), for which a hearing was conducted on January 14 and 15, 2020. Further the Company has received a stay order on the Tax Demand. The Company believes it will be successful upon completion of the appeal process, but at this time cannot estimate the amount to be due, if any. The hearing scheduled on August 13, 2020 was adjourned to August 20, 2020.

 

14. ACQUISITION

 

INSPRO

 

On January 30, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) for the acquisition of InsPro Technologies Corporation (OTCBB: ITCC) (“InsPro”) which is based in Eddystone, PA. InsPro is software leader in the life and annuity insurance market and has experience in the accident & health, long term care, Medicare supplement market segments. The InsPro Enterprise platform is an insurance administration and marketing system that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business.

 

23

 

 

The transaction was structured as a cash for stock merger and, on April 1, 2020, pursuant to the Merger Agreement, InsPro merged with and into a wholly owned subsidiary of Majesco with InsPro surviving the merger as a privately held, wholly-owned subsidiary of the Company.

 

The Company paid $11,457 (the “Merger Consideration”) as consideration for the merger. The source of funds was available cash on hand. Specifically, holders of InsPro’s Series C Preferred Stock received $5.00 per There was no equity transferred or issued by the Company as part of the Merger Consideration. share in cash and holders of InsPro’s Series B Preferred Stock received $0.9747 per share in cash. As a result of the Merger Consideration being substantially less than the aggregate liquidation preference of InsPro’s Series C Preferred Stock and Series B Preferred Stock which were entitled to the two most senior liquidation preferences under InsPro’s Certificate of Incorporation, holders of InsPro’s common stock and Series A Preferred Stock did not receive any portion of the Merger Consideration. Additionally, each InsPro option or warrant outstanding immediately prior to the effective time of the merger, whether or not then vested and exercisable, was cancelled without the receipt of any consideration.

 

We have included the financial results of InsPro in our consolidated financial statements from the date of acquisition, April 1, 2020. In connection with the InsPro acquisition, we have recorded $5,350 of net assets and $6,107 of goodwill.

 

The following table summarizes the estimated amounts of identified assets acquired and liabilities assumed at the acquisition date. The Company is in the process of obtaining third-party valuations of certain intangible assets; thus, the provisional measurements of intangible assets, goodwill and deferred income tax assets are subject to change.

 

Recognized amount of identifiable assets acquired and liabilities assumed

 

    Amount  
Cash   $ 4,035  
Accounts receivable     1,392  
Prepaid expenses and other current assets     674  
Property, plant and equipment     303  
Intangible assets     1,023  
Operating lease ROU asset     623  
Other non current assets     102  
Unbilled accounts receivable     684  
Trade name and trademarks     196  
Customer relationships     673  
Technology     304  
Deferred income tax assets, net     3,002  
Accounts payable and other liabilities     (4,919 )
Deferred revenue     (2,080 )
Long term liabilities assumed     (662 )
Total fair value of assets acquired     5,350  
Total purchase consideration     11,457  
Goodwill   $ 6,107  

  

Of the approximately $7,300 of acquired intangible assets, approximately $196 was provisionally assigned to registered trademarks (9-year useful life), acquired technology of approximately $304 (7-year useful life), customer relationships of approximately $673 (8-year useful life). As noted earlier, the fair value of the acquired identifiable intangible assets is provisional pending receipt of the final valuations for these assets.

 

The goodwill of $6,107 recognized is attributable primarily to expected synergies and the assembled workforce of InsPro. None of the goodwill is expected to be deductible for income tax purposes.

 

The Company expensed acquisition related costs of approximately $2,500 of which approximately $1,800 were expensed in the current period and were included the consolidated income statements in the line item entitled merger and acquisition expenses.

 

The amounts of revenue and earnings of InsPro included in the Company’s consolidated statements of income from the acquisition date to the period ending June 30, 2020 are as follows:

 

The period ending June 30, 2020    
Revenue:  $3,700 
Earnings before tax: after expensing $1,000 towards acquisition related costs  $(900)

  

The following unaudited pro forma consolidated results of operations assume that the acquisition of InsPro was completed as of April 1, 2019:

 

Three months ended June 30, 2019    
Revenue:  $40,800 
Earnings before tax:  $2,000 

 

24

 

 

The changes in the varying amount of goodwill for all acquisitions are as follows:

 

Changes in carrying amount of the goodwill

 

   As of
June 30,
2020
   As of
March 31,
2020
 
         
Opening value  $34,095   $34,145 
Changes on account of currency fluctuation   22    (50)
Addition due to business combination   

6,107

     
Impairment of Goodwill        
Closing value  $

40,224

   $34,095 

  

Goodwill represents the cost of the acquired businesses in excess of the estimated fair value of assets acquired, identifiable intangible assets and liabilities assumed. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually or as circumstances warrant. If impairment is indicated and carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, then goodwill is written down. There are no indefinite-lived intangible assets.

 

The following table sets forth the major categories of the Group’s intangible assets and the weighted-average remaining amortization period for those assets that were not already fully amortized:

 

   June 30, 2020 
                   Weighted 
                   Average 
                   Remaining 
   Gross           Net   Amortization 
   Carrying   Accumulated       Carrying   Period 
   Amount   Amortization   Impairment   Amount   (Years) 
Customer contracts  $2,950   $(2,950)  $   $     
Customer relationships   8,977    (5,066)       3,911    4 
Trade Name   544    (68)       476    5 
Technology   10,826    (5,474)       5,352    2 
Software   4,864    (3,724)       1,140    1 
   $28,161   $(17,282)  $   $10,879      

 

25

 

 

   March 31, 2020 
                   Weighted 
                   Average 
                   Remaining 
   Gross
Carrying
   Accumulated       Net
Carrying
   Amortization
Period
 
   Amount   Amortization   Impairment   Amount   (Years) 
Customer contracts  $2,950   $(2,950)  $   $     
Customer relationships   8,286    (4,784)       3,502    4 
Trade Name   343    (53)       290    8 
Technology   10,446    (4,967)       5,479    3 
Software   1,011    (751)       260    1 
   $23,036   $(13,505)  $   $9,531      

 

Amortization expense of $986 and $817 for the three months ended June 30, 2020 and June 30, 2019, respectively, was recorded as expenses. The amortization expense of acquired intangible assets for each of the following five years and thereafter are expected to be as follows: recorded as cost of goods sold. The amortization expense of acquired intangible assets for each of the following five years and thereafter are expected to be as follows:

 

   Amortization 
Twelve months ending June 30,  Expense 
2021  $3,671 
2022   2,665 
2023   2,245 
2024   641 
2025   291 
Thereafter   1,366 
Total  $10,879 

  

 

15. NON-CONTROLLING INTEREST

 

On November 27, 2018, the Company entered into the Exaxe Agreement for the acquisition of the Securities of Exaxe. The Company completed the purchase of 90% of the Securities on November 27, 2018. The Company purchased, and the sellers sold to the Company, the remaining 10% of the Securities on August 1, 2019. The economic transfer date of Exaxe was October 1, 2018. Accordingly, the share of non-controlling interest as on June 30, 2020 and March 31, 2020 was $0 and $0, respectively.

 

16. SUBSEQUENT EVENTS

 

Termination of Chief Financial Officer

 

On July 8, 2020, the Company terminated without cause the services of its Chief Financial Officer. Pursuant to the terms of his employment agreement, he received two weeks of notice pay and, as severance, six months of his base salary, COBRA continuation and a prorated portion of his annual bonus. Effective as of July 8, 2020 Farid Kazani was appointed to serve as the Interim Chief Financial Officer.

 

Acquisition of Majesco

 

Agreement and Plan of Merger

 

On July 20, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with two entities affiliated with Thoma Bravo, L.P., Magic Intermediate, LLC (“Parent”) and Magic Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Parent, which was subsequently amended and restated on August 8, 2020 (as so amended and restated, the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as the surviving corporation and a wholly owned subsidiary of Parent. In the Merger, each share of common stock, par value $0.002 per share, of the Company that is issued and outstanding immediately prior to the effective time of the Merger, other than Excluded Shares (as defined in the Merger Agreement), will be converted into the right to receive $16.00 per share, subject to any required withholding of taxes. 

 

26

 

 

The consummation of the Merger is subject to certain conditions described in the Merger Agreement, including, but not limited to, obtaining the approval of the members of Majesco Limited to the divestment of Majesco Limited’s shares of the Company’s common stock for the consideration provided in the Merger Agreement (the “Divestment”) and delivery of a written consent to the Merger by Majesco Limited, obtaining a No Objection Certificate (as defined in the Merger Agreement) from the Indian tax authorities, obtaining the consent of the Reserve Bank of India, terminating certain intercompany contracts between the Company and Majesco Limited, the accuracy of the representations and warranties (subject to customary materiality qualifiers) and the absence of any Material Adverse Effect (as defined in the Merger Agreement) with respect of the Company and its subsidiaries. As a result of the Merger, the Company’s common stock will cease to be publicly traded and will be delisted from The Nasdaq Global Market. On August 12, 2020 the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) with respect to the Merger and Parent’s pending acquisition of Majesco. With early termination granted under the HSR Act, the transaction has received all applicable antitrust approvals.

 

Support Agreement

 

In connection with the Merger Agreement, on July 20, 2020, the Company entered into a support agreement with Majesco Limited, Parent and Merger Sub, which was subsequently amended on August 8, 2020 (as so amended, the “Support Agreement”), pursuant to which, among other things, Majesco Limited agreed to (i) issue notice through postal ballot to its members for their approval of the Divestment (such approval, the “Limited Shareholder Approval”) no later than August 12, 2020; (ii) notify the parties to the Support Agreement of the result of the votes of its members pursuant to the postal ballot no later than September 13, 2020, (iii) deliver its written consent to the Merger within one business day following the publication through the stock exchange in India of the Limited Shareholder Approval; and (iv) subject to receipt of the Limited Shareholder Approval, at any meeting of the shareholders of the Company, to cause its shares to be consented in favor of the Merger Agreement and the transactions contemplated thereby, and against certain transactions including any other Acquisition Proposal (as defined in the Merger Agreement).

 

Promoter Support Agreement

 

In connection with the Merger Agreement, on July 20, 2020, the Company entered into a promoter support agreement with Majesco Limited, Parent and certain promoters of Majesco Limited and their families named in the Promoter Support Agreement (the “Promoter Group”), which was subsequently amended and restated on August 8, 2020 (as so amended and restated, the “Promoter Support Agreement”), pursuant to which, among other things, the Promoter Group will issue their assent to the Divestment.

 

The Promoter Group also agreed that if (i) the board of directors of Majesco Limited fails to issue the postal ballot notice seeking the approval of the shareholders to the Divestment pursuant to the Merger or fails to convene a general meeting of its shareholders seeking their approval to the Divestment pursuant to the Merger or (ii) for any reason whatsoever the general meeting so convened does not take place, then the Promoter Group will requisition the board of directors of Majesco to convene an extraordinary general meeting or issue a postal ballot notice for the approval by the shareholders of Majesco Limited to the Divestment pursuant to the Merger. If the board of directors of Majesco Limited fails to act on receipt of such requisition, then the Promoter Group will be obligated to call and hold the extraordinary general meeting within three months and issue its unconditional and irrevocable assent to the Divestment pursuant to the Merger at such meeting.

 

The Promoter Group further agreed that, in the event that the Merger Agreement is terminated in accordance with its terms under circumstances where a Company Termination Fee (as defined in the Merger Agreement) is payable to Parent, then the Promoter Support Agreement will only terminate (A) if Parent or its designee, as applicable, actually receives the Company Termination Fee and (B) only on the date that is seven months following such termination of the Merger Agreement, provided that the terms and conditions of the Promoter Support Agreement will apply only to 50% of the shares or voting rights held by the Promoter Group in Majesco Limited, on a pro rata basis during such seven month period.

 

Limited Guaranty

 

On July 20, 2020, Thoma Bravo Discover Fund II, L.P., Thoma Bravo Discover Fund II-A, L.P. and Thoma Bravo Discover Executive Fund II, L.P. (each, a “Guarantor” and, collectively, the “Guarantors”) entered into a Limited Guaranty with the Company, which was subsequently amended on August 8, 2020 (as so amended, the “Guaranty”), pursuant to which, among other things, each such Guarantor has unconditionally agreed to guarantee, on a several and not joint basis, subject to the terms and conditions set forth in the Guaranty, its pro rata portion of the obligations of Parent to pay the Parent Termination Fee (as defined in the Merger Agreement) and the expense reimbursement obligations of Parent set forth in the Merger Agreement (in any event other than payment of the Merger consideration), up to a maximum amount equal to each such Guarantor’s respective pro rata portion of the Parent Termination Fee. The maximum aggregate guaranteed amount is $52,011,693.24 in the aggregate and the maximum aggregate liability of each guarantor shall in no event exceed such Guarantor’s pro rata portion of such amount.

 

Letter Agreement

 

On July 20, 2020, the Company entered into a letter agreement with Majesco Limited, which was subsequently amended on August 8, 2020, pursuant to which Majesco Limited agreed to reimburse, indemnify and hold the Company harmless from and against any and all costs or disbursements incurred by the Company in the event that the Merger Agreement is terminated by the Parent and Merger Sub upon the occurrence of certain events.

 

27

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2020 and referred to herein as the “Annual Report,” and the consolidated financial statements and related notes for the quarter ended June 30, 2020 included in Part I, Item I of this Quarterly Report on Form 10-Q. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described below in “Special Note Regarding Forward-Looking Statements” and in [Part II, Item 1A “Risk Factors.”] Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

All US dollar currency amounts in this MD&A are in thousands unless indicated otherwise. All Euros in this MD&A are in thousands unless indicated otherwise. Except where the context requires otherwise, references in this MD&A to “Majesco,” “Group,” “we” or “us” are to Majesco and its subsidiaries on a worldwide consolidated basis.

 

COVID-19 Pandemic

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus, COVID-19 originating in Wuhan, China (and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is uncertain as to the full magnitude that the pandemic will have on the Majesco’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and its impact on Majesco’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, Majesco is not able to estimate the effects that the COVID-19 outbreak will have on its results of operations, financial condition, or liquidity for fiscal year 2021.

 

As of the date of this Quarterly Report on Form 10-Q the Company has not experienced any delays in securing new customers and related revenues, cancelations of existing contracts, or delays in payments from existing customers, however, the longer this pandemic continues there may be additional impacts.

 

Although Majesco cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on Majesco’s results of future operations, financial position, liquidity, and capital resources, and those of the third parties on which Majesco relies in fiscal year 2021.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such as “may,” “will,” “might,” “projects,” “expects,” “plans,” “believes,” “anticipates,” “targets,” “intends,” “hopes,” “aims,” “can,” “should,” “could,” “would,” “goal,” “potential,” “approximately,” “estimate,” “pro forma,” “continue” or “pursue” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements with respect to the merger (the “Merger”) of the Company with and into Magic Intermediate, LLC; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing.

 

These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and the other documents referred to and relate to a variety of matters, including, but not limited to, other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of management, are not guarantees of performance and are subject to significant risks and uncertainty. These forward-looking statements should not be relied upon as predictions of future events and Majesco cannot assure you that the events or circumstances discussed or reflected in these statements will be achieved or will occur. Furthermore, if such forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by Majesco or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.

 

These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in “Item 1A. Risk Factors” in our Annual Report [and elsewhere in this Quarterly Report on Form 10-Q.] Important factors that could cause actual results to differ materially from those described in forward-looking statements contained herein include, but are not limited to:

 

  our ability to achieve increased market penetration for our product and service offerings and obtain new customers;

 

  our ability to raise future capital as needed to fund our growth and innovation plans;

 

  growth prospects of the property & casualty and life & annuity insurance industry;

 

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  the strength and potential of our technology platform and our ability to innovate and anticipate future customer needs;
     
  our ability to protect our intellectual property rights;

 

  our ability to compete successfully against other providers and products;

 

  our dependence on certain key customers and the risk of loss of these customers;

 

  security breaches affecting our systems, software, applications, and products;

 

  the unauthorized access, acquisition, disclosure, theft or compromise of proprietary or personal customer or consumer data and information;

 

  the risk of telecommunication or technological disruptions;

 

  our exposure to additional scrutiny and increased expenses as a result of being a public company;

 

  our ability to identify and complete acquisitions, manage growth and successfully integrate acquisitions;

 

  our financial condition, financing requirements and cash flow;

 

  market expectations regarding our potential growth and ability to implement our short and long-term strategies;
  uncertainties relating to the impact of COVID-19 on our business, operations and employees;

 

  the risk of loss of strategic relationships;

 

  the success of our research and development investments;

 

  changes in economic conditions, political conditions and trade protection measures and licensing requirements in the United States and in the foreign jurisdictions in which we operate;

 

  changes in laws or regulations affecting the insurance industry in particular;

 

  changes in tax laws, including to the international transfer pricing regime;

 

  restrictions and changes in laws on immigration;

 

  our inability to achieve sustained profitability;

 

  our ability to obtain, use or successfully integrate third-party licensed technology;

 

  our ability and cost of retaining and recruiting key personnel or the risk of loss of such key personnel;

 

  any adverse outcome of legal proceedings that may be commenced against us;

 

  the risk that our customers internally develop new competitive products;

 

  the impact of new accounting standards and changes we may need to make in anticipation or as a result of these standards; and
     
  the incurrence of unexpected costs, liabilities or delays relating to the Merger; the failure to satisfy the conditions to the Merger, including regulatory approvals; and the failure to obtain approval of the Merger by the shareholders of Majesco Limited.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to publicly update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.

 

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Overview

 

Majesco is a global leader of cloud insurance software solutions for insurance business transformation. We provide technology, expertise, and leadership that helps insurers modernize, innovate and connect to build the future of their business and the insurance industry at speed and scale. We do this by providing technology that connects people and businesses to insurance in ways that are innovative, hyper-relevant, compelling and personal. In addition to the United States, we operate in Canada, Mexico, the United Kingdom, Malaysia, Singapore, Ireland and India. With our CloudInsurer® solutions, we offer cloud-based core insurance platforms, along with distribution management and data and analytics solutions. With our Digital1st™ solutions we offer a cloud-native, digital engagement and microservices platform-as-a-service for the entire insurance business and an ecosystem of partners with apps that provide innovative data sources and capabilities. These solutions enable Property & Casualty/General Insurance (“P&C”), and Life, Annuities, Pensions and Group/ Voluntary Benefits (“L&A and Group”) providers to modernize and optimize their businesses across the end-to-end insurance value chain, better comply with policies and regulations, innovate with new business models, enter new markets and launch new products and services for incumbents, greenfields and startups. Using this portfolio of solutions including our core P&C, L&A and Group and LifePlus insurance platforms, data and analytics, distribution management and Digital1st Insurance, our customers can respond to evolving market needs, growth and innovation opportunities and regulatory changes, which enables agility, innovation and speed while improving the effectiveness and efficiency of their business operations.

 

Long-term, strong customer relationships are a key component of our success given the long-term nature of our contracts, opportunity for deeper relationships with our portfolio of solutions, and the importance of customer references for new sales. Our customers range from some of the largest global tier one insurance carriers in the industry to mid-market insurers, MGAs, startups and greenfields, including specialty, mutual and regional carriers. As of June 30, 2020, we served approximately 200 insurance companies on a worldwide basis.

 

We generate revenue from our global IP led business as well as from engagements in the insurance services space. The IP business is primarily driven through either an on-premise deployment or deployment of the platform on the cloud. While the on-premise model generates revenues from the licensing of our proprietary software (perpetual or annual license fees), and support and maintenance fees pursuant to contracts with customers, we have been witnessing a significant shift in the business model with customers preferring the cloud model which offers a speed to value benefit together with low upfront investments. The revenues from the cloud model are primarily from monthly subscriptions once the platform is deployed for use. Additionally, we also generate revenues from professional fees for services that the customer may engage Majesco for under both modes of deployment. License fees, support and maintenance and cloud subscription fees are usually managed through multi-year agreements, typically over a period of five to seven years. Insurance services revenues is primarily driven by professional services offered in the areas of transformation consulting, data, digital, testing and application development and management.

 

Recent Developments

 

Acquisition of Majesco

 

Agreement and Plan of Merger

 

On July 20, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with two entities affiliated with Thoma Bravo, L.P., Magic Intermediate, LLC (“Parent”) and Magic Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Parent, which was subsequently amended and restated on August 8, 2020 (as so amended and restated, the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as the surviving corporation and a wholly owned subsidiary of Parent. In the Merger, each share of common stock, par value $0.002 per share, of the Company that is issued and outstanding immediately prior to the effective time of the Merger, other than Excluded Shares (as defined in the Merger Agreement), will be converted into the right to receive $16.00 per share, subject to any required withholding of taxes.

 

The consummation of the Merger is subject to certain conditions as described in the Merger Agreement, including, but not limited to, obtaining the approval of the members of Majesco Limited to the divestment of Majesco Limited’s shares of the Company’s common stock for the consideration provided in the Merger Agreement (the “Divestment”) and delivery of a written consent to the Merger by Majesco Limited, obtaining a No Objection Certificate (as defined in the Merger Agreement) from the Indian tax authorities, obtaining the consent of the Reserve Bank of India, terminating certain intercompany contracts between the Company and Majesco Limited, the accuracy of the representations and warranties (subject to customary materiality qualifiers) and the absence of any Material Adverse Effect (as defined in the Merger Agreement) with respect of the Company and its subsidiaries. As a result of the Merger, the Company’s common stock will cease to be publicly traded and will be delisted from The Nasdaq Global Market. On August 12, 2020 the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) with respect to the Merger and Parent’s pending acquisition of Majesco. With early termination granted under the HSR Act, the transaction has received all applicable antitrust approvals.

 

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Support Agreement

 

In connection with the Merger Agreement, on July 20, 2020, the Company entered into a support agreement with Majesco Limited, Parent and Merger Sub, which was subsequently amended on August 8, 2020 (as so amended, the “Support Agreement”), pursuant to which, among other things, Majesco Limited agreed to (i) issue notice through postal ballot to its members for their approval of the Divestment (such approval, the “Limited Shareholder Approval”) no later than August 12, 2020; (ii) notify the parties to the Support Agreement of the result of the votes of its members pursuant to the postal ballot no later than September 13, 2020, (iii) deliver its written consent to the Merger within one business day following the publication through the stock exchange in India of the Limited Shareholder Approval; and (iv) subject to receipt of the Limited Shareholder Approval, at any meeting of the shareholders of the Company, to cause its shares to be consented in favor of the Merger Agreement and the transactions contemplated thereby, and against certain transactions including any other Acquisition Proposal (as defined in the Merger Agreement).

 

Promoter Support Agreement

 

In connection with the Merger Agreement, on July 20, 2020, the Company entered into a promoter support agreement with Majesco Limited, Parent and certain promoters of Majesco Limited and their families named in the Promoter Support Agreement (the “Promoter Group”), which was subsequently amended and restated on August 8, 2020 (as so amended and restated, the “Promoter Support Agreement”). pursuant to which, among other things, the Promoter Group will issue their assent to the Divestment.

 

The Promoter Group also agreed that if (i) the board of directors of Majesco Limited fails to issue the postal ballot notice seeking the approval of the shareholders to the Divestment pursuant to the Merger or fails to convene a general meeting of its shareholders seeking their approval to the Divestment pursuant to the Merger or (ii) for any reason whatsoever the general meeting so convened does not take place, then the Promoter Group will requisition the board of directors of Majesco to convene an extraordinary general meeting or issue a postal ballot notice for the approval by the shareholders of Majesco Limited to the Divestment pursuant to the Merger. If the board of directors of Majesco Limited fails to act on receipt of such requisition, then the Promoter Group will be obligated to call and hold the extraordinary general meeting within three months and issue its unconditional and irrevocable assent to the Divestment pursuant to the Merger at such meeting.

 

The Promoter Group further agreed that, in the event that the Merger Agreement is terminated in accordance with its terms under circumstances where a Company Termination Fee (as defined in the Merger Agreement) is payable to Parent, then the Promoter Support Agreement will only terminate (A) if Parent or its designee, as applicable, actually receives the Company Termination Fee and (B) only on the date that is seven months following such termination of the Merger Agreement, provided that the terms and conditions of the Promoter Support Agreement will apply only to 50% of the shares or voting rights held by the Promoter Group in Majesco Limited, on a pro rata basis during such seven month period.

 

Limited Guaranty

 

On July 20, 2020, Thoma Bravo Discover Fund II, L.P., Thoma Bravo Discover Fund II-A, L.P. and Thoma Bravo Discover Executive Fund II, L.P. (each, a “Guarantor” and, collectively, the “Guarantors”) entered into a Limited Guaranty with the Company, which was subsequently amended on August 8, 2020 (as so amended, the “Guaranty”), pursuant to which, among other things, each such Guarantor has unconditionally agreed to guarantee, on a several and not joint basis, subject to the terms and conditions set forth in the Guaranty, its pro rata portion of the obligations of Parent to pay the Parent Termination Fee (as defined in the Merger Agreement) and the expense reimbursement obligations of Parent set forth in the Merger Agreement (in any event other than payment of the Merger consideration), up to a maximum amount equal to each such Guarantor’s respective pro rata portion of the Parent Termination Fee. The maximum aggregate guaranteed amount is $52,011,693.24 in the aggregate and the maximum aggregate liability of each guarantor shall in no event exceed such Guarantor’s pro rata portion of such amount.

 

Letter Agreement

 

On July 20, 2020, the Company entered into a letter agreement with Majesco Limited, which was subsequently amended on August 8, 2020, pursuant to which Majesco Limited agreed to reimburse, indemnify and hold the Company harmless from and against any and all costs or disbursements incurred by the Company in the event that the Merger Agreement is terminated by the Parent and Merger Sub upon the occurrence of certain events.

 

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Three Months Ended June 30, 2020 Highlights

 

A few of our highlights of our three months ended June 30, 2020 were:

 

  Revenues of $41,247 with a gross profit of 47.0% of revenue;

 

  $3,818 (9.3% of revenue) in research and development (“R&D”) expenses;

 

  $11,627 (28.2 % of revenue) in selling, general and administrative expenses;

 

  Net income of $1,287; and

 

  Adjusted EBITDA of $5,998, representing 14.5% of revenue.

 

Use of Non-GAAP Financial Measures

 

In evaluating our business, we consider and use EBITDA as a supplemental measure of operating performance. We define EBITDA as earnings before interest, taxes, depreciation and amortization. We present EBITDA because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We define Adjusted EBITDA as EBITDA before stock-based compensation and mergers and acquisitions expenses.

 

The terms EBITDA and Adjusted EBITDA are not defined under U.S. generally accepted accounting principles (“U.S. GAAP”) and are not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and when assessing our operating performance, investors should not consider EBITDA or Adjusted EBITDA in isolation, or as a substitute for net income (loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Among other things, EBITDA and Adjusted EBITDA do not reflect our actual cash expenditures. Other companies may calculate similar measures differently than us, limiting their usefulness as comparative tools. We compensate for these limitations by relying on U.S. GAAP results and using EBITDA and Adjusted EBITDA only supplementary.

 

For an unaudited reconciliation of U.S. GAAP net income to EBITDA and Adjusted EBITDA for the three months ended June 30, 2020 and June 30, 2019, see “— Results of Operations — Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 — Adjusted EBITDA”.

 

Exaxe Acquisition

 

On November 27, 2018 (the “Effective Date”), we entered into a share purchase agreement (the “Exaxe Agreement”) for the acquisition of all the issued share capital (collectively, the “Securities”) of Exaxe Holdings Limited, a private limited company incorporated in Ireland (“Exaxe”). Exaxe is an EMEA (Europe, the Middle East and Africa) based cloud software leader in the life, pensions and wealth management segment.  Headquartered in Dublin, Ireland, Exaxe serves a growing list of top European insurers. This acquisition will strengthen and expand our software offerings in EMEA for the individual life, pensions and wealth management market while complementing the Group’s software and Group focused customer base in the UK. On the Effective Date, we consummated the purchase of 90% of the Securities. As agreed to, we purchased the remaining 10% of the Securities on August 1, 2019.

 

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In consideration for the purchase of the Securities, on the Effective Date, we paid the sellers € 6,392 (or approximately $7,252 at exchange rates in effect on November 27, 2018) and € 717 (or approximately $812 at exchange rates in effect on August 1, 2019)  for the remainder of the Securities on August 1, 2019.

 

We also agreed to make certain earn-out payments to the sellers if certain adjusted EBITDA (as defined in the Exaxe Agreement) targets for Exaxe are met. If adjusted EBITDA for Exaxe for the period of January 1, 2019 through December 31, 2019 is at least equal to 75% of the adjusted EBITDA target for such year, we have agreed to pay € 625 (or approximately $703 at exchange rates in effect on June 30, 2020) to the sellers and an additional € 25 (or approximately $28 at exchange rates in effect on June 30, 2020) for each full 1% increase above 75%, up to a maximum of 100% (with a maximum earn-out payment amount not to exceed € 1,250 (or approximately $1,406 at exchange rates in effect on June 30, 2020)). During the quarter ended June 30, 2020, we and the former founders of Exaxe determined that the year 1 earn-out targets under the Exaxe share purchase agreement were not met and that no earn-out was payable to them towards the year 1 earn-outs. Accordingly, the accrued deferred payment for year 1 has been reversed in the Consolidated Statements of Income during the period ended June 30, 2020 and disclosed as a separate line item below the income from operations for the quarter.

 

During the fourth quarter of the fiscal year ended March 31, 2020, we again reviewed the business projections of Exaxe based on the impact of COVID-19. During this exercise we determined that one of the major customers of Exaxe in the business of selling door to door insurance was impacted significantly by the pandemic, which would have a negative impact on Exaxe’ s engagement with this customer going forward. Based on the circumstances we determined that Exaxe would not be able to meet the full earn out targets for the remaining two years. We carried out a fair valuation of the contingent consideration liability and reversed a further EUR 1,339 (approximately $1,473 at exchange rates in effect at November 27, 2018).

 

The total gain attributable to changes in the estimated contingent consideration payable for the acquisition of Exaxe was $2,832 for the year ended March 31, 2020.  The fair value of the liability has been determined as per exchange rates in effect as June 30, 2020, and expense of $56 has been considered in the operating expense of the quarter ended June 30, 2020.

 

The entire earn-out amount of € 4,500 (or approximately $5,061 at exchange rates in effect on June 30, 2020) (less any portion already paid or written off for not meeting requirements for a particular period) will become due and payable upon a sale of beneficial interests in a majority of the outstanding shares of Exaxe or its subsidiary or a sale or other disposal in whole or substantial part of the undertaking or assets of Exaxe or its subsidiary before the end of the earn-out period.

 

We will also be restricted from making certain changes to the business of Exaxe, or diverting or redirecting Exaxe’s orders, revenue, customers, clients, suppliers or employees during the earn-out period.

 

In connection with the transaction, on the Effective Date, Majesco Software Solutions Ireland, a subsidiary of Exaxe, entered into employment agreements with each of Norman Carroll (the Chief Executive Officer of Exaxe) and Philip Naughton (the Executive Director – Business Development of Exaxe) pursuant to which Norman Carroll and Philip Naughton will act as SVP Ireland/UK Operations and Executive Director Business Development of Majesco Software Solutions Ireland, respectively. We agreed to grant Norman Carroll and Philip Naughton stock options awards with respect to such number of shares of our common stock having an aggregate value of € 1,000 (or approximately $1,134 at exchange rates in effect on November 27, 2018) pursuant to the 2015 Plan.

 

In addition, in connection with the transaction, we entered into a revised lease agreement with certain sellers (including Norman Carroll and Philip Naughton) for certain real property facilities leased by Majesco Software Solutions Ireland.

 

InsPro Acquisition

 

On January 30, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) for the acquisition of InsPro Technologies Corporation (OTCBB: ITCC) (“InsPro”) which is based in Eddystone, PA. InsPro is a software leader in the life and annuity insurance market and has experience in the accident & health, long term care, Medicare supplement market segments. The InsPro Enterprise platform is an insurance administration and marketing system that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business. InsPro processes over 15 million policies for some of the leading blue-chip insurance carriers and third-party administrators in the United States, including several customers who process more than a million policies each. The expertise, talent and experience that the InsPro team brings is critical to meeting the demands of today’s digital customer and reinforces our commitment to creating a future of insurance that is agile, nimble and fast. InsPro also strengthens and supports our strategy to continue leading the industry with innovative, cloud-based solutions that help carriers take advantage of current market opportunities.

 

The transaction was structured as a cash for stock merger and on April 1, 2020 pursuant to the Merger Agreement, InsPro merged with and into our wholly owned subsidiary (the “Merger”). We paid approximately $11,457 (the “Merger Consideration”) as consideration for the Merger.

 

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We always look at additional acquisitions to complement our service offerings and growth strategy. Our success, in the near term, will depend, in large part, on our ability to: (a) successfully integrate our acquisitions into our business, (b) build up momentum for new sales, (c) cross-sell to existing customers and (d) exceed customer satisfaction through our state of the art products and solutions.

 

Inflation

 

Although we cannot accurately determine the amounts attributable thereto, our net revenues and results of operations have been affected by inflation experienced in the U.S., Indian and other economies in which we operate through increased costs of employee compensation and other operational expenses during the three months ended June 30, 2020 and June 30, 2019. To the extent permitted by the marketplace for our products and services, we attempt to recover increases in costs by periodically increasing prices. However, there can be no assurance that we will be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 

 

Currency Fluctuations

 

We are affected by fluctuations in currency exchange rates with respect to our contracts. We hedge a substantial portion of our foreign currency exposure. For more information, see “— Quantitative and Qualitative Disclosures About Market Risk.”

 

Critical Accounting Policies

 

Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition, intangible assets and goodwill.

 

Revenue Recognition

 

We have historically sold codebase solutions which required significant customization before the solution was ready for use by the customer and required us to provide continued services and support to ensure that the solution served the purposes of the customer. Over the years we have made significant investments in R&D and successfully transformed the codebase solution into a single package out of the box product, rich in functionality and content with easy and seamless upgrade capabilities. With this, on all our new sales and deployments, our obligation is now limited to the deployment of the contracted product on the environment for which it was sold (cloud-based or on-premise). The product is ready to use and the customer may choose to use the product as is, choose to retain our consultants to install, assist in implementation and customize the environment, contract with a third party to carry out this work or do it themselves with the toolkit that comes with the product. Revenues for license fees for sales of our out-of-the-box product offerings is recorded at the time of delivery as there is no significant ongoing service obligation after the point of sale. When our customers contract us for consulting and maintenance services, we account for the revenues from those standalone elements over the life of the contract.

 

In addition, we have made further investments to create a robust and market-leading cloud platform that is well positioned to take advantage of significant opportunities in the insurance marketplace. We invoice customers a subscription-based fee for our cloud platform. Revenue from subscription fees is recognized ratably over the life of the contract.

 

Time and Material Contracts — Professional services revenue consists primarily of revenue received for assisting with the implementation of our software, on-site support, and other professional consulting services. In determining how professional services revenue should be accounted, we review the nature of our software products; whether they are ready for use by the customer upon receipt; the nature of our implementation services and whether milestones or acceptance criteria exist that affect the realization of the services rendered. For all of our professional services arrangements that are billed on a time and materials basis revenue is recognized as the services are rendered as per the agreement. If there is significant uncertainty about the project completion or receipt of payment for professional services, revenue is deferred until the uncertainty is sufficiently resolved. Payments received in advance of rendering professional services are deferred and recognized when the related services are performed. Work performed and expenses incurred in advance of invoicing are recorded as unbilled receivables. These amounts are billed in the subsequent month.

 

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Fixed Price Contracts — For Professional services that are performed under a fixed price contract against measurable delivery milestones revenues are recognized using the percentage of completion method. Under the percentage-of completion method, which is deemed a significant estimate by the Company, revenue recognized is equal to the ratio of costs expended to date to the anticipated total contract costs, based on current estimates of costs to complete the project. If there are milestones or acceptance provisions associated with the contract, the revenue recognized will not exceed the most recent milestone achieved or acceptance obtained. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss would be recognized in the current period.

 

License Contracts - For arrangements that do not qualify for separate accounting for the license and professional services revenues that include milestones or customer specific acceptance criteria that may affect collection of the software license fees or where payment for the software license is tied to the performance of professional services, software license revenue is generally recognized together with the professional services revenue using the percentage-of-completion method as explained above. This is mainly relevant for the legacy versions of the Majesco platform which required heavy implementation/customization work to be performed and maintained for the software to operate as desired. However, with the new version of the software which is a single package out of the box product, rich in functionality and content with easy and seamless upgrade capabilities, our obligation is now limited to the deployment of the contracted product on the environment for which it was sold. Revenues for license fees for sales of our out-of-the-box product offerings is recorded at the time of delivery.

 

Sales Commissions – In accordance with our compensation policy we pay one-time sales commissions for new business generated related to professional services contracts and subscription and subscription services. The majority of our commissions incurred in fiscal years 2020 and 2019 related to professional services contracts. Substantially all of our professional services contracts have durations of one year or less and as such commissions for these contracts are expensed as incurred. Commission costs related to subscription contracts were de minimis in fiscal year 2021 and 2020 and expensed as incurred.

 

Revenue is shown net of applicable service tax, sales tax, value added tax and other applicable taxes. We have accounted for reimbursements received for out of pocket expenses incurred as revenues in the Consolidated Statements of Income.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the cost of the acquired businesses in excess of the estimated fair value of assets acquired, identifiable intangible assets and liabilities assumed. Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually or as circumstances warrant. If impairment is indicated and carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, then goodwill is written down. There are no indefinite-lived intangible assets.

 

Intangible assets other than goodwill are amortized over their estimated useful lives on a straight line basis. The estimated useful life of an identifiable intangible asset is based on a number of factors, including the effects of obsolescence, demand, competition, the level of maintenance expenditures required to obtain the expected future cash flows from the asset and other economic factors (such as the stability of the industry, known technological advances, etc.).

 

The estimated useful lives of intangible assets are as follows:

 

Non-compete agreements     3 years
Leasehold benefit     Ascertainable life or primary period of lease, whichever is less
Intellectual property rights     1 – 5 years
Customer contracts     1 – 3 years
Customer relationships     6 – 15 years
Technology     5 – 7 years
Trademark     9 – 10 years

 

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Impairment of Long-Lived Assets and Intangible Assets

 

We review long-lived assets and certain identifiable intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During this review, we re-evaluate the significant assumptions used in determining the original cost and estimated lives of long-lived assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in the use of the asset, cash flows and other indicators of value. Management then determines whether the remaining useful life continues to be appropriate or whether there has been an impairment of long-lived assets based primarily upon whether expected future undiscounted cash flows are sufficient to support the assets’ recovery. If impairment exists, we adjust the carrying value of the asset to fair value, generally determined by a discounted cash flow analysis.

 

Acquisition Accounting

 

We allocate the purchase price of an acquired business, using the acquisition method of accounting, to its tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over fair value of net assets acquired is recorded as goodwill. Certain assumptions and judgements are used to estimate the fair value of acquired assets and liabilities. We engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets. We may adjust the preliminary purchase price allocation, after the acquisition closing date and through the end of the measurement period of one year or less, as we finalize the valuation of acquired assets and liabilities. Changes in estimates used in the preliminary purchase price allocation could have a material effect on the final valuation and result in changes to goodwill and intangible assets. Additionally, if forecasts supporting the valuation of intangible assets or goodwill are not achieved, then an impairment charge could be recorded.

 

Property and Equipment

 

Property and equipment are stated at actual cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives. The cost and the accumulated depreciation for premises and equipment sold, retired or otherwise disposed of are removed from the stated values and the resulting gains and losses are included in the Consolidated Statements of Income.

 

Maintenance and repairs are charged to Consolidated Statements of Income when incurred. Cost of assets not put to use before the balance sheet date are disclosed under the caption “capital work in progress.”

 

The estimated useful lives of assets are as follows:

 

Leasehold Improvements   5 years or lease period, whichever is less
Computers   2 years
Plant and Equipment   2 – 5 years
Furniture and Fixtures   5 years
Vehicles   5 years
Office Equipment   2 – 5 years

 

Results of Operations

 

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

 

The following tables summarize our Consolidated Statements of Income for the three months ended June 30, 2020 and June 30, 2019, including as a percentage of revenues:

 

Statements of Income Data

 

   Three Months Ended (Unaudited) 
(U.S. Dollars; dollar amounts in thousands):  June 30,
2020
   %   June 30,
2019
   % 
Total revenues  $41,247        $37,304      
Total cost of revenues   21,878    47%   17,434    53%
Total gross profit   19,369         19,870      
Operating expenses:                    
Research and development expenses   3,818    9%   5,470    15%
Selling, general and administrative expenses   11,627    28%   11,826    32%
Merger and acquisition expenses   1,819               
Total operating expenses   17,264         17,296      
Income from operations   2,105         2,574      
Interest income   36         189      
Interest expense   (136)        (89)     
Other income (expenses), net   21         (11)     
Income before provision for income taxes   2,026         2,663      
Income taxes   739         1,381      
Net income  $1,287    3%  $1,282    3%

 

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The following table represents revenues by each subsidiary and corresponding geographical region:

 

   Three Months Ended (Unaudited) 
(U.S. Dollars; dollar amounts in thousands):  June 30,
2020
   %   June 30,
2019
   % 
Geography: North America                
Legal Entity                
Majesco  $8,845    22%  $10,430    28%
Majesco Software and Solutions Inc.   24,439    59%   22,593    61%
Majesco Canada Ltd., Canada   71    %   22    %
InsPro Technologies Inc.   3,745    9%       %
   $37,100    90%  $33,045    89%
Geography:  Europe                    
Legal Entity                    
Majesco UK Limited, UK  $1,497    4%  $1,087    3%
Majesco Software Solutions Ireland Limited   1,216    3%   1,261    3%
    2,713    7%   2,348    6%
Geography:  Other                    
Legal Entity                    
Majesco Sdn. Bhd., Malaysia  $949    2%  $1,289    4%
Majesco Asia Pacific Pte Ltd., Singapore   173    %   116    %
Majesco Software and Solutions India Private Limited, India   312    1%   506    1%
   $1,434    3%  $1,911    5%
Total Revenues  $41,247        $37,304      

 

Revenues

 

Revenues for the three months ended June 30, 2020 were $41,247 compared to $37,304 for the three months ended June 30, 2019, reflecting an increase of 10.6%. The increase in revenue is primarily from the inclusion of the InsPro business. There has been a significant shift in the revenue mix of the Company as well compared to the same period in the previous year. Product revenue (license fees, cloud subscription fees and support & maintenance) now represents 48.2% of the revenue compared to 42.8% of the revenue during the same quarter in the previous year. The share of revenue from Services (delivery and consulting services) has decreased from 57.2% of revenue in the same period in the previous year to 51.8% in the reported quarter.

 

Gross Profit

 

Gross profit was $19,369 for the three months ended June 30, 2020 compared to $19,870 for the three months ended June 30, 2019. Gross profit percentage for the three months ended June 30, 2020 decreased to 47.0% of revenue from 53.3% of revenue for the three months ended June 30, 2019. The primary reason for the decline is that in the period ended June 30, 2019, there was a one-time license fee recognition due to ASC 606 accounting which impacted the gross margin. In the period ended June 30, 2020, the gross margin has also been impacted due to the inclusion of the InsPro business which has a lower gross margin compared to the organic Majesco business.

 

Operating Expenses

 

Operating expenses were $17,264 for the three months ended June 30, 2020 compared to $17,296 for the three months ended June 30, 2019. As a percentage of revenue operating expenses reduced from 46.4% of revenue in the period ended June 30, 2019 to 41.9% of revenue in the period ended June 30, 2020. The below factors have impacted the operating expenses of the Company:

 

The Company has rationalized its R&D investments in the international business through transition from a geographical investment approach to a more global product management and development structure and repurposed some of the teams to deliver new business

 

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  The Company has made investments into SG&A by adding senior leadership roles and strengthening its sales and marketing engine but had significant cost savings in the period ended June 30, 2020 in travel and other variable operating expenses due to the COVID 19 pandemic
     
  In the period ended June 30, 2020 the Company incurred approximately $ 1,800 in one-time transaction expenses for the acquisition of InsPro

  

Income from Operations

 

Income from operations was $2,105 for the three months ended June 30, 2020 compared to $2,574 for the three months ended June 30, 2019. As a percentage of revenues, net income from operations was 5.1% for the three months ended June 30, 2020 compared to 6.9% for the three months ended June 30, 2019. Income from operations was lower primarily due to a one-time expense incurred on the acquisition of Inspro which was 4.4% of the revenue for the period ended June 30, 2020.

 

Other Income

 

Other income (expense), net was $21 for the three months ended June 30, 2020 compared to $(11) for the three months ended June 30, 2019.

 

Tax provision

 

We recognized an income tax provision of $739 for the three months ended June 30, 2020 and $1,381 for the three months ended June 30, 2019. 

 

The effective tax rate is 36.5% and 51.9% for the three months ended June 30, 2020 and June 30, 2019 respectively, which differs from the statutory U.S. federal income tax rate of 21%, mainly due to the impact of different tax jurisdictions and disallowable expenses. 

 

Net income

 

Net income was $1,287 for the three months ended June 30, 2020 compared to net income of $1,282 for the three months ended June 30, 2019. Net income per share, basic and diluted, was $0.03 and $0.03, respectively, for the three months ended June 30, 2020 and 2019.

 

Adjusted EBITDA

 

Adjusted EBITDA, a non-GAAP metric, was $5,998 for the three months ended June 30, 2020 compared to $4,729 for the three months ended June 30, 2019. 

 

The following is an unaudited reconciliation of U.S. GAAP net income to EBITDA and Adjusted EBITDA for the three months ended June 30, 2020 and June 30, 2019: 

 

   Three Months Ended (Unaudited) 
(U.S. dollars, in thousands):  June 30,
2020
   June 30,
2019
 
Net Income  $1,287   $1,282 
Add:          
Provision for income taxes   739    1,381 
Depreciation and amortization   1,395    1,226 
Interest expense   136    89 
Less:          
Interest income   (36)   (189)
Other income (expenses), net   (21)   11 
EBITDA  $3,500   $3,800 
Add:          
Stock-based compensation   679    929 
Merger and acquisition expenses   1,819     
Adjusted EBITDA  $5,998   $4,729 
Revenue  $41,247   $37,304 
Adjusted EBITDA as a % of Revenue   14.54%   12.68%

   

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Liquidity and Capital Resources

 

Our cash, cash equivalents and restricted cash and short term investments position was $30,905 at June 30, 2020 and $11,708 at June 30, 2019.

 

Net cash used in operating activities amounted to $(12,082) for the three months ended June 30, 2020 which was primarily driven by the payment of annual bonuses to employees and an increase in receivables compared to $(2,894) for the three months ended June 30, 2019.

 

Net cash provided by investing activities amounted to $406 for the three months ended June 30, 2020 compared to $1,134 for the three months ended June 30, 2019. During the three months ended June 30, 2020, the payment of the purchase price for the acquisition of the InsPro in the amount of $11,457 was made, along with regular purchases of property, equipment and intangible assets. These payments were made, mainly by liquidating short term investments.

 

Net cash (used in)/provided by financing activities was $(223) for the three months ended June 30, 2020 compared to $160 for the three months ended June 30, 2019 mainly due to the payment of finance lease obligations. 

 

We believe that our cash flows from operations and available borrowings are sufficient to meet our liquidity requirements for the next twelve months, including capital expenditures.

 

Financing Arrangements

 

MSSIPL Facilities

 

On May 9, 2017, MSSIPL and Standard Chartered Bank entered into an Export Invoice Financing Facility, Working Capital Overdraft Facility, Short Term Loans Facility, Bonds and Guarantees Facility and Pre Shipment Financing Under Export Orders Facility (the “Combined Facility”) pursuant to which Standard Chartered Bank agreed to a Combined Facility of up to 200 million Indian rupees (or approximately $2,600 at exchange rates in effect on June 30, 2020). The Export Invoice Financing Facility is for the financing of MSSIPL’s sale of services, as evidenced by MSSIPL’s invoice to the customer. Each amount drawn is required to be repaid within 90 days. The Working Capital Overdraft Facility and the Short Term Loans Facility are for working capital purposes and subject to sub-limits. The Pre-Shipment Financing Under Export Orders Facility is for the delivery of software ready for sale. The Bonds and Guarantees Facility is for the issuance of guarantees and subject to commissions as agreed with Standard Chartered Bank from time to time.

 

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The interest on the Combined Facility is based on the marginal cost of funds based lending rate (the “MCLR”) plus a margin to be agreed with Standard Chartered Bank at the time of each drawdown. The MCLR is to be determined on the date of each disbursement and is effective until repayment. Interest will accrue from the utilization date to the date of repayment or payment of that utilization. The interest under the Combined Facility may be changed by Standard Chartered Bank upon the occurrence of certain market disruption events. The Combined Facility is secured by a first pari passu security interest over the current assets of MSSIPL. MSSIPL was in compliance under the terms of this Combined Facility as of June 30, 2020. There are no outstanding loans under this Combined Facility as of June 30, 2020.

 

Receivable Purchase Facility

 

On January 13, 2017, Majesco and its subsidiaries MSSI, and Cover-All Systems, jointly and severally entered into a Receivable Purchase Agreement with HSBC pursuant to which HSBC may advance funds against receivables at an agreed advance rate. The outstanding aggregate amount of all advances may not exceed a $10,000 facility limit. The facility bears interest at 2% plus the 90-day LIBOR rate. HSBC will also receive an arrangement fee equal to 0.20% of the facility limit and a facility review fee equal to 0.20% of the facility limit. Majesco will serve as HSBC’s agent for the collection of receivables, and Majesco will collect and otherwise enforce payment of the receivables. HSBC has a security interest in accounts of MSSI and Cover-All Systems. The term of the Receivable Purchase Agreement is for a minimum period of 12 months and shall continue unless terminated by either party. Either party may terminate the Receivable Purchase Agreement at any time upon 60 days’ prior written notice to the other party. The Receivable Purchase Agreement will provide additional liquidity to the Group for working capital and other general corporate purposes.

 

As of June 30, 2020, Majesco had $0 outstanding under this facility. Majesco used proceeds from this facility to repay existing indebtedness and for capital expenditures, working capital and other general corporate purposes. 

 

Exaxe Facilities

 

Majesco Software Solutions Ireland Limited (“Exaxe”) had a receivables purchase agreement with AIB Commercial Finance Limited (“AIB Commercial”) pursuant to which AIB Commercial would purchase up to EUR 200 in receivables from Majesco Software Solutions Ireland Limited on a discounted basis. In addition, Majesco Software Solutions Ireland Limited had an overdraft facility with Allied Irish Banks, p.l.c. (“AIB”) of up to EUR 100. The facility had a variable interest rate and is payable on demand at any time. This facility was secured by the assets of Majesco Software Solutions Ireland Limited. As of March 31, 2020, there were no outstanding balances under these facilities. Both facilities were terminated during the year ended March 31, 2020. 

 

On July 17, 2019, Majesco Software Solutions Ireland Limited and HSBC France, Dublin Branch, entered into a EUR 400 overdraft facility. The facility is for working capital purposes and is subject to review from time to time. Exaxe may terminate the facility at any time without penalty. Interest under the facility is payable at the rate of 3.5% per annum over the prevailing European Central Bank Rate on amounts up to EUR 400 and 7% per annum over such rate on amounts over EUR 400. The facility is secured by a fixed and floating charge over certain assets of Exaxe. Exaxe agreed to certain negative covenants under the facility, including not to create or allow any mortgage or security over its assets or revenues. As of June 30, 2020, there were no outstanding balances under this facility.

 

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Auto loans 

 

MSSIPL has obtained vehicle loans from HDFC Bank for the purchase of vehicles. The loans bear interest at a rate of 8.75% per annum, are payable in 60 monthly installments over a 5-year period and are secured by a pledge of the vehicles. The outstanding balance of these vehicle loans as of June 30, 2020 was $86.

 

InsPro Facilities 

 

Equipment financing obligations

 

On January 5, 2019, InsPro LLC entered into a financing arrangement with an unaffiliated company to finance the purchase of certain third party perpetual software licenses and software subscription and maintenance. The amount financed was $802, which included $757 of cost of purchased software licenses and software subscription and maintenance services plus $45 of applicable sales tax. The financing arrangement commenced on January 5, 2019, has an annual interest rate of 6.1% and consists of 36 equal monthly payments of principal, interest and applicable sales tax of $24 commencing on February 1, 2019 and ending on January 1, 2022. The balance for this loan was $412 as of June 30, 2020. The Company’s right to use the purchased software licenses and software subscription and maintenance services is contingent on the Company remaining in compliance with the terms of this loan. As of June 30, 2020, the Company is in compliance with this loan. For the three months ended June 30, 2020, the interest expense on this loan was $7.

 

On February 28, 2019, InsPro LLC entered into a financing arrangement with an unaffiliated company to finance the purchase of perpetual software licenses for third party software products. The amount financed was $1,148. The financing arrangement has an annual interest rate of 7.13% and consists of 24 equal monthly payments of principal, interest of $51 which commenced in March 2019 and will end on February 1, 2021. The balance for this loan was $352 as of June 30, 2020. The Company’s right to use the purchased software licenses and software subscription and maintenance services is contingent on the Company remaining in compliance with the terms of this loan. As of June 30, 2020, the Company is in compliance with this loan. For the three months ended June 30, 2020, the interest expense on this loan was $8.

 

Finance lease obligations

 

The Company’s subsidiary, InsPro LLC, has entered into several finance lease obligations to purchase equipment used for operations (“Finance Leases”). The Company has the option to purchase the equipment at the end of each finance lease agreement for one dollar. The liability of these arrangements was $258 as of June 30, 2020.

 

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Dividends and Redemption

 

We have not paid any dividends since we became a stand-alone public company in 2015. It has otherwise been our policy to invest earnings in growth rather than distribute earnings as common stock dividends. This policy is expected to continue but is subject to regular review by our Board of Directors.

 

Contractual Obligations

 

In the normal course of our business, we are party to a variety of contractual obligations as summarized in our Annual Report. These contractual obligations are considered by us when assessing our liquidity requirements. There have been no material changes to our contractual obligations as disclosed in the Annual Report, other than those which occur in the ordinary course of business. We had borrowed $344 under our auto and equipment loans as of June 30, 2020 as compared to $93 as of June 30, 2019. In addition, we have $764 outstanding under equipment financing lease obligations as of June 30, 2020.

 

Off-Balance Sheet Arrangements

 

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

 

Emerging growth company

 

We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and are subject to reduced public company reporting requirements. In addition, Section 107 of the Jumpstart Our Business Startups Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have taken advantage of the extended transition period for complying with new or revised accounting standards. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We are exposed to market risk primarily due to fluctuations in foreign currency exchange rates and interest rates, each as described more fully below. We do not hold or issue derivative financial instruments for trading or speculative purposes.

 

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Interest Rate Sensitivity

 

Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents and investments. We do not use derivative financial instruments to hedge our interest rate exposure. Our cash and cash equivalents and short term investments as of June 30, 2020 were $23,320 and $7,546, respectively.

 

We invest primarily in highly liquid, money market funds and bank fixed deposits. Because of the short-term nature of the majority of the interest-bearing securities we hold, we believe that a 10% fluctuation in the interest rates applicable to our cash and cash equivalents and investments would not have a material effect on our financial condition or results of operations.

 

The rate of interest on our Combined Facility, our receivable purchase facility and our auto loans which were in effect as of June 30, 2020, are variable and are based on LIBOR plus a fixed margin. We had borrowed $344 under our auto and equipment loans as of June 30, 2020 as compared to $93 as of June 30, 2019. In addition, we have $764 outstanding under equipment financing lease obligations as of June 30, 2020. Interest under the Exaxe overdraft facility is variable and based on prevailing European Central Bank Rate. We had no amounts outstanding under that facility at June 30, 2020. We believe that a 10% fluctuation in the interest rates applicable to our borrowings would not have a material effect on our financial condition or results of operations.

 

Foreign Currency Exchange Risk

 

Our reporting currency is the U.S. dollar. However, payments to us by customers outside the U.S. are generally made in the local currency. Accordingly, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, Canadian dollar, Indian rupee, British pound, Malaysian ringgit, Singapore dollar, Irish pound and Mexican peso. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy.

 

We generated approximately 10% and 11% of our gross revenues outside of the United States for the three months ended June 30, 2020 and 2019, respectively. The effect of foreign exchange rate changes on cash and cash equivalents resulted in a loss of $21 and $96 for the three months ended June 30, 2020 and June 30, 2019, respectively. For the three months ended June 30, 2020 and June 30, 2019, we had a foreign exchange gain/(loss) of approximately $(63) and $66, respectively.

 

We use foreign currency forward contracts and par forward contracts to hedge our risks associated with foreign currency fluctuations related to certain commitments and forecasted transactions. The use of hedging instruments is governed by our policies which are approved by our Board of Directors. We designate these hedging instruments as cash flow hedges. Derivative financial instruments we enter into that are not designated as hedging instruments in hedge relationships are classified as financial instruments at fair value in the statements of income.

 

The aggregate contracted USD notional amounts of the Group’s foreign exchange forward contracts outstanding amounted to $43,950 and $42,900 as of June 30, 2020 and March 31, 2020, respectively. The outstanding forward contracts as of June 30, 2020 mature between one month and 37 months. As of June 30, 2020, we estimate that $(592), net of tax, of the net (loss)/gains related to derivatives designated as cash flow hedges recorded in accumulated other comprehensive income (loss) is expected to be reclassified into earnings within the next 37 months. The outstanding foreign exchange forward contracts in U.S. dollars as of June 30, 2020 are designated as in hedge relationship and there will be no impact on our Consolidated Statements of Income due to a strengthening or weakening of 10% in the foreign exchange rates.

   

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The fair value of derivative financial instruments is determined based on observable market inputs and valuation models. The derivative financial instruments are valued based on valuations received from the relevant counterparty (i.e., bank). The fair value of the foreign exchange forward contract and foreign exchange par forward contract has been determined as the difference between the forward rate on reporting date and the forward rate on the original transaction, multiplied by the transaction’s notional amount (with currency matching). The following table provides information of fair values of derivative financial instruments:

 

   Assets   Liability 
   Noncurrent*   Current*   Noncurrent*   Current* 
As of June 30, 2020                
Designated as hedging instruments under Cash Flow Hedges                
Foreign exchange forward contracts  $42   $138   $419   $553 
Total  $42   $138   $419   $553 

 

*The noncurrent and current portions of derivative assets are included in ‘Other Assets’ and ‘Prepaid Expenses and Other Current Assets,’ respectively, and the noncurrent and current portions of derivative liabilities are included in ‘Other Liabilities’ and ‘Accrued Expenses and Other Current Liabilities,’ respectively in the Consolidated Balance Sheets.

 

For more information on foreign currency translation adjustments and cash flow hedges and other derivative financial instruments, see Notes 6 and 7 to our consolidated financial statements for the three months ended June 30, 2020.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 

 

As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2020. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, due to the material weakness in our internal controls over financial reporting for income taxes noted below, our disclosure controls and procedures were not effective at June 30, 2020.

 

In connection with management’s evaluation of disclosure controls and procedures, during the second quarter of fiscal 2020 as part of the preparation of our income tax returns, we identified a material weakness related to the application of certain provisions of the Internal Revenue Code. Management put in place a remediation plan to address the material weakness as further described below.

 

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Material Weakness in Internal Control Over Financial Reporting

 

In connection with management’s assessment of internal controls over financial reporting during the second quarter of fiscal 2020 as part of the preparation of the Company’s income tax returns, we identified a material weakness related to the application of certain provisions of the Internal Revenue Code.

 

Remediation of the identified material weakness and strengthening our internal control environment surrounding income taxes has been a priority for us since it was identified during the second quarter of fiscal 2020. With oversight from the Audit Committee, management designed and begun implementing changes in processes and controls to remediate the material weakness identified and has enhanced the Company’s internal control over financial reporting as follows:

 

Designed and implemented controls to ensure that data required to prepare tax provisions and annual income tax returns is complete and accurate. These controls include holding quarterly meetings with our third party tax provider to discuss changes in tax law, key aspects of our quarterly / annual provisions and required updates to provisions, deciding a course of action and documenting such actions, review and approval of the tax data by senior members of our finance team and final discussion, review and approval of third party prepared provisions and returns.

 

During the fourth quarter of fiscal 2020, we engaged an international accounting firm with global tax expertise as our new third-party tax advisor to prepare our tax provisions and domestic corporate income tax returns commencing with fiscal 2020 annual provision and returns.

 

During the fourth quarter of fiscal 2020, our tax advisor reconstructed the 2019 U.S. portion of our deferred income tax components which included conducting an E&P study using fiscal 2015 as the base year which coincides with the demerger of Majesco Limited.

 

  During the first quarter of fiscal 2021, we engaged a global accounting firm with tax expertise as our global tax services provider. We believe this to be a significant step in our remediation process as it will strengthen the communication and coordination efforts of our domestic and international tax operations which will result in a more seamless process in preparing our quarterly and annual tax provisions and tax compliance requirements.

 

We intend to hire a global tax manager with that individual being responsible for managing our global tax processes and coordinating efforts between the Company, including our subsidiaries and our new tax advisor to ensure our tax compliance needs are met in a timely fashion.

 

We have commenced the testing of the new and enhanced controls which is expected to be completed in the third quarter of our fiscal year 2021.

 

Changes in Internal Control over Financial Reporting

 

Other than the controls implemente to remediate the material weakness as noted above, there were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1A. Risk Factors. 

 

Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report. Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

 

The global COVID-19 pandemic has adversely affected, and may in the future adversely affect, our business, results of operations and financial condition.

 

In December 2019, COVID-19 began to impact the population of Wuhan, China. The continued spread of COVID-19 globally has resulted in a widespread health crisis that is adversely affecting the global economy and financial markets. In light of the uncertain and rapidly evolving situation relating to COVID-19, we have taken precautionary measures intended to minimize the risk of COVID-19 to our employees, our customers, and the communities in which we operate, which could negatively impact our business. National, state and local authorities have recommended social distancing and imposed quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, although intended to protect the population, are having serious adverse impacts on domestic and foreign economies of uncertain severity and duration. As of the date of this Quarterly Report on Form 10-Q, the COVID-19 outbreak has not caused material financial impact to our business. Financial impacts associated with the COVID-19 outbreak may include, but are not limited to, delays in critical development and commercialization activities and potential incremental costs associated with mitigating the effects of the outbreak, furloughs of employees disruption of supply chains, demand for our product and services, restrictions on the movement of employees, and a decline in value of assets held by us, including equipment. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, the COVID-19 outbreak is ongoing, and its dynamic nature, including uncertainties relating to the ultimate spread of the virus, the severity of the disease, the duration of the outbreak and actions that may be taken by governmental authorities to contain the outbreak or to treat its impact, makes it difficult to accurately forecast any effects on our results of operations for 2021 and beyond.

 

As a result of COVID-19 and the measures designed to contain the spread of the virus, we may not have the materials or capacity to continue our development efforts according to our schedule. Further, there may be logistics issues, including our ability and to quickly resume operations, if necessary, and transportation demands that may cause further delays. While the disruptions and restrictions on the ability to travel, quarantines, and reduced operation as well as general limitations on movement are expected to be temporary, the duration of the disruption, and related financial impact, cannot be estimated at this time. Should the disruption continue for an extended period of time, the impact on the development and commercialization of our technology could have a material adverse effect on our results of operations and cash flows.

 

The macro-economic environment in the United States and abroad has adversely affected, and may in the future adversely affect, our ability to raise capital, which may potentially impact our ability to grow our operations.

 

The outbreak of COVID-19 has caused significant disruptions to the global financial markets, which could increase the cost of capital and could impact our ability to raise additional capital, which could negatively affect our liquidity in the future. If we are unable to raise funds as and when we need them, this may impact the Company’s strategic and growth initiatives. Therefore, unfavorable macroeconomic conditions, including as a result of COVID-19 and any resulting recession or slowed economic growth, could have a negative impact on our business. It is not possible at this time to estimate the impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain.

 

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If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. We are required to furnish a report by management on, among other things, the effectiveness of internal control over financial reporting. This assessment will include disclosure of any material weaknesses identified by management in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from an issuer’s independent registered public accounting firm on the effectiveness of its internal control over financial reporting. However, for as long as we remain an emerging growth company under the JOBS Act, we may take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.

 

Our compliance with Section 404 of the Sarbanes-Oxley Act may require that we incur substantial accounting expense and expend significant management efforts. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we may be unable to assert that our internal control over financial reporting is effective. In connection with management’s assessment of internal controls over financial reporting during the second quarter of fiscal 2020 as part of the preparation of the Company’s income tax returns, we identified a material weakness related to the application of certain provisions of the Internal Revenue Code. Management has put in place a remediation plan to address the material weakness as further set forth in Item 9A.  Although we have put in place a plan to remediate our material weakness and expect it to be fully remediated by third quarter of our 2021 fiscal year, we cannot assure you that there will not be new material weaknesses or significant deficiencies in its internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines that we have a material weakness or significant deficiency in our internal control over financial reporting once that firm begin its Section 404 reviews, we could lose investor confidence in the accuracy and completeness of our financial reports, the value of our common stock could decline, and we could be subject to sanctions or investigations by regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

   

We may fail to realize all of the anticipated benefits of the acquisition of InsPro, such benefits may take longer to realize than expected or we may encounter significant difficulties integrating InsPro’s business into our operations. If the acquisition does not achieve its intended benefits, our business, financial condition, and results of operations could be materially and adversely affected.

 

We believe that the acquisition of InsPro will result in certain benefits, including certain cost synergies, drive product innovations and operational efficiencies; however, to realize these anticipated benefits, the business of InsPro must be successfully combined with our business. The combination of two independent businesses is a complex, costly, and time-consuming process that will require significant management attention and resources. The integration process may disrupt the businesses and, if implemented ineffectively, would limit the expected benefits of this acquisition to us. The failure to meet the challenges involved in integrating the two businesses and to realize the anticipated benefits could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.

 

The overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other business relationships, and diversion of management’s attention. The difficulties of combining the operations of the companies include, among others:

 

  the diversion of management’s attention to integration matters;

 

  difficulties in achieving anticipated cost savings, synergies, business opportunities, and growth prospects from the combination;

 

  difficulties in the integration of operations and systems;

 

  conforming standards, controls, procedures, accounting and other policies, business cultures, and compensation structures between the two companies;

 

  difficulties in the assimilation of employees and corporate cultures; and

 

  challenges in attracting and retaining key personnel.

 

Many of these factors are outside of our control and any one of these factors could result in increased costs, decreases in the amount of expected revenues, and additional diversion of management’s time and energy, which could materially adversely impact our business, financial condition, and results of operations. In addition, even if the operations are integrated successfully, the full benefits, including the synergies, cost savings, revenue growth, or other benefits that are expected, may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration of our businesses. All of these factors could decrease or delay the expected accretive effect of the acquisition, and negatively impact our business, operating results, and financial condition. As a result, we cannot provide any assurance that the acquisition of Exaxe will result in the realization of the full benefits that we anticipate.

  

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The announcement and pendency of our agreement to be acquired by funds affiliated with Thoma Bravo, L.P. (“Thoma Bravo”) may have an adverse effect on our business and operating results.

 

On July 20, 2020, we entered into the Merger Agreement with Magic Intermediate, LLC (“Parent”), which was amended and restated on August 8, 2020, pursuant to which Parent agreed to acquire us subject to the terms and conditions set forth therein. Our pending acquisition by Parent may have an adverse effect on our revenue in the near term if our customers delay, defer, or cancel purchases or orders pending completion of the transaction. In addition, the announcement and pendency of the transaction may cause reluctance by customers to begin or continue to do business with us due to potential uncertainty about the direction of our products and solutions following consummation of the transaction. We are subject to additional risks in connection with the announcement and pendency of the proposed transaction, including:

 

difficulties maintaining existing and/or establishing business relationships, including relationships with significant customers, suppliers and partners;
   
disruption to our business, including increased costs and diversion of management time and resources that could otherwise have been devoted to other opportunities that may have been beneficial to us;
   
the restrictions imposed on our business and operations pursuant to certain covenants set forth in the Merger Agreement, which may prevent us from pursuing certain opportunities, responding to competitive pressures and industry developments, or taking certain actions without Thoma Bravo’s approval;
   
adverse effects on our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles following completion of the proposed transaction, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment following the proposed transaction;
   
the outcome of the legal proceedings that may be instituted against us, our directors, executive officers and others relating to the proposed transaction; and
   
the diversion of our employees’ attention due to activities related to the proposed transaction.

  

The failure to complete our pending acquisition by Parent may adversely affect our business, financial condition, operating results, and stock price.

 

Consummation of the Merger transaction with Parent remains subject to certain customary closing conditions, including, without limitation, adoption of the Merger Agreement by stockholders and the absence of legal impediments and regulatory clearances. There can be no assurance that these conditions to the completion of the Merger will be satisfied in a timely manner or at all. If the Merger is not completed, our stock price could fall to the extent its current price reflects an assumption that the acquisition will be completed. Furthermore, if the Merger is not completed, we may suffer other consequences that could adversely affect our business, financial condition, operating results, and stock price, including the following:

 

any disruptions to our business resulting from the announcement and pendency of the proposed transaction, including adverse changes in our relationships with customers, suppliers, partners and employees, may continue or intensify in the event the acquisition is not consummated or is significantly delayed;
   
we would have incurred significant costs, including professional services fees and other transaction costs, in connection with the proposed Merger that we would be unable to recover;
   
we may have to pay Parent a termination fee of $25,500 under certain circumstances that give rise to the termination of the Merger Agreement;
   
we may be subject to negative publicity or be negatively perceived by the investment or business communities;
   
we may be subject to legal proceedings related to the transactions contemplated by the Merger Agreement;
   
we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and
   
we may experience a departure of employees.

 

The Merger Agreement with Parent may limit our ability to pursue alternative transactions, which could deter a third party from proposing an alternative transaction.

 

The Merger Agreement contains provisions that may limit our ability to pursue an alternative acquisition transaction. These or other provisions may discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay.

  

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Item 6. Exhibits.

 

Exhibit No.   Description
10.1  

Lease Amendment, dated as of June 1, 2020, by and between Majesco Software and Solutions India Pvt. Ltd. and Majesco Limited (Incorporated by refence to Exhibit 10.1 to Majesco’s Current Report on Form 8-K, filed with the SEC on June 2, 2020)

     
10.2+   Amendment to Employment Agreement between Majesco and Manish Shah dated June 22, 2020 (Incorporated by refence to Exhibit 10.1 to Majesco’s Current Report on Form 8-K, filed with the SEC on June 23, 2020)
     
31.1*   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of 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

 

*Filed herewith.
  
+Denotes a management contract or compensatory plan

 

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SIGNATURES

 

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.

 

  MAJESCO
     
Date: August 14, 2020 By: /s/ Adam Elster
    Adam Elster, Chief Executive Officer
(Principal Executive Officer)
     
Date: August 14, 2020 By: /s/ Farid Kazani
    Farid Kazani, Interim Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

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