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 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 2020-06-22
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
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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 f10q1219ex31-1_majesco.htm
EX-31.2 f10q1219ex31-2_majesco.htm
EX-32.1 f10q1219ex32-1_majesco.htm
EX-32.2 f10q1219ex32-2_majesco.htm

Majesco Earnings 2019-12-31

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 f10q1219_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 December 31, 2019

 

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 February 3, 2020
Common Stock, $0.002 par value per share   43,235,701 shares

 

 

 

 

 

 

MAJESCO

 

INDEX TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2019

 

 

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)

 

   December 31,   March 31, 
   2019   2019 
ASSETS 

(Unaudited)

     
CURRENT ASSETS        
Cash and cash equivalents  $19,996   $11,329 
Short term investments   25,542    28,108 
Restricted cash   42    43 
Accounts receivable, net   26,259    17,366 
Unbilled accounts receivable   14,579    17,916 
Prepaid expenses and other current assets   13,985    15,598 
Total current assets   100,403    90,360 
Property and equipment, net   2,195    3,026 
Right-of-use asset, net   3,964     
Intangible assets, net   10,518    12,969 
Deferred income tax assets   6,957    7,816 
Unbilled accounts receivable, net of current portion   2,710    543 
Other assets   187    489 
Goodwill   34,144    34,145 
Total Assets  $161,078   $149,348 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Loan from bank-receivable financing and vehicle loan  $53   $442 
Lease liability   1,977     
Accounts payable   2,233    2,327 
Accrued expenses and other current liabilities   27,382    34,871 
Deferred revenue   18,172    10,988 
Total current liabilities   49,817    48,628 
Vehicle loan   52    109 
Lease liability, net of current portion   2,026     
Consideration payable for Exaxe Holdings Limited acquisition   2,931    2,951 
Other liabilities   1,208    1,089 
Total Liabilities   56,034    52,777 
Commitments and contingencies          
STOCKHOLDERS’ EQUITY          
Preferred stock, par value $0.002 per share – 50,000,000 shares authorized as of December 31, 2019 and March 31, 2019, and no shares issued and outstanding as of December 31, 2019 and March 31, 2019        
Common stock, par value $0.002 per share – 450,000,000 shares authorized as of December 31, 2019 and March 31, 2019; 43,235,701 shares issued and outstanding as of December 31, 2019 and 42,846,273 shares issued and outstanding as of March 31, 2019   87    86 
Additional paid-in capital   125,699    122,163 
Accumulated deficit   (20,002)   (26,499)
Accumulated other comprehensive loss   (740)   (412)
Total stockholders’ equity attributable to Majesco stockholders   105,044    95,338 
Non-controlling interests in consolidated subsidiaries       1,233 
Total Stockholders’ Equity   105,044    96,571 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $161,078   $149,348 

 

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 December 31,
2019
   Three Months ended December 31,
2018
   Nine Months ended December 31,
2019
   Nine Months ended December 31,
2018
 
Revenue  $37,175   $35,820   $108,534   $104,117 
Cost of revenue   19,323    18,293    55,130    53,340 
Gross profit  $17,852   $17,527   $53,404   $50,777 
Operating expenses                    
Research and development expenses  $4,712   $4,850   $14,639   $14,381 
Selling, general and administrative expenses   10,027    10,303    31,729    29,484 
Total operating expenses  $14,739   $15,153   $46,368   $43,865 
Income from operations  $3,113   $2,374   $7,036   $6,912 
Interest income   141    7    491    32 
Interest expense   (79)   (114)   (269)   (342)
Other income (expenses), net   138    (57)   578    553 
Gain on reversal of accrued contingent liability   1,359        1,359    835 
Income before provision for income taxes  $4,672   $2,210   $9,195   $7,990 
Provision for income taxes   797    483    3,130    2,543 
Net Income  $3,875   $1,727   $6,065   $5,447 
Earnings per share:                    
Basic  $0.09   $0.05   $0.14   $0.15 
Diluted  $0.09   $0.04   $0.14   $0.14 
Weighted average number of common shares outstanding                    
Basic   43,102,144    36,664,718    42,992,839    36,633,300 
Diluted   45,294,983    38,725,682    45,167,708    38,814,422 

 

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
December 31,
2019
   Three Months
ended
December 31,
2018
   Nine Months
ended
December 31,
2019
   Nine Months
ended
December 31,
2018
 
Net Income  $3,875   $1,727   $6,065   $5,447 
Other comprehensive income/(loss), net of tax:                    
Foreign currency translation adjustments   523    346    (376)   (892)
Unrealized gains (losses) on cash flow hedges   93    1,201    47    (170)
Other comprehensive income/(loss)  $616   $1,547   $(329)  $(1,062)
Comprehensive Income  $4,491   $3,274   $5,736   $4,385 

 

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)
 

   Preferred
Stock
   Common Stock
(shares)
   Stock
Amount
   Additional
Paid-In
Capital
   Accumulated deficit   Accumulated
Other
Comprehensive
Income
   Non-
Controlling
Interests
   Total
Stakeholder
Equity
 
Balance as of March 31, 2018 as reported        —    36,600,457   $73   $75,022   $(30,283)  $361         —   $45,173 
Net income                  $1,036           $1,036 
Issue of stock under ESOP and ESPP              $45               $45 
Stock based compensation              $658               $658 
Foreign currency translation adjustments                      $(579)      $(579)
Unrealized gains on cash flow hedges                      $(659)      $(659)
Balance as of June 30, 2018       36,600,457   $73   $75,725   $(29,247)  $(877)      $45,674 
Net income                  $2,829           $2,829 
Issue of stock under ESOP and ESPP              $234               $234 
Stock based compensation              $691               $691 
Foreign currency translation adjustments                      $(659)      $(659)
Unrealized gains on cash flow hedges                      $(712)      $(712)
Balance as of September 30, 2018       36,600,457   $73   $76,650   $(26,418)  $(2,248)      $48,057 
Net income                  $1,829           $1,829 
Net assets received on business combination                   603            603 
Acquisition of Exaxe Holdings Ltd. non-controlling interest                  $       $(1,238)  $(1,238)
Issue of stock under ESOP and ESPP              $190               $190 
Stock based compensation              $804               $804 
Foreign currency translation adjustments                      $346       $346 
Unrealized gains on cash flow hedges                      $1,201       $1,201 
Balance as of December 31, 2018       36,600,457   $73   $77,644   $(23,986)  $(701)   (1,238)  $51,792 

 

   Preferred
Stock
   Common Stock
(shares)
   Stock
Amount
   Additional
Paid-In
Capital
   Accumulated
deficit
   Accumulated
Other
Comprehensive
Income
   Non-
Controlling
Interests
   Total
Stakeholder
Equity
 
Balance as of March 31, 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 paid on business combination                  $(3,530)          $(3,530)
Balance as on March 31, 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 
Net income                  $908           $908 
Issue of stock under ESOP and ESPP       71,203       $402               $402 
Stock based compensation              $569               $569 
Acquisition of Exaxe Holdings Ltd. non-controlling interest                  $434       $(1,233)  $(799)
Foreign currency translation adjustments                      $(964)      $(964)
Unrealized gains on cash flow hedges                      $(163)      $(163)
Balance as of September 30, 2019       43,000,968   $86   $124,538   $(23,875)  $(1,356)  $   $99,393 
Net income                  $3,875           $3,875 
Issue of stock under ESOP and ESPP       134,733       $489               $489 
Stock based compensation       100,000    1   $672               $673 
Acquisition of Exaxe Holdings Ltd. non-controlling interest                  $(2)      $   $(2)
Foreign currency translation adjustments                      $523       $523 
Unrealized gains on cash flow hedges                      $93       $93 
Balance as of December 31, 2019       43,235,701   $87   $125,699   $(20,002)  $(740)  $   $105,044 

 

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)

 

   Nine Months
ended
December 31,
2019
   Nine Months
ended
December 31,
2018
 
Net cash flows from operating activities        
Net income  $6,065   $5,447 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation on property and equipment   1,185    1,142 
Amortization of intangibles   2,458    1,853 
Amortization of right-of-use asset   1,918     
Stock-based compensation   2,170    2,154 
Gain on sale of property and equipment   (10)   (4)
Unrealized cash flow hedges   47     
Deferred income taxes   840    540 
Change in operating assets and liabilities:         
Accounts receivable   (8,897)   (949)
Unbilled accounts receivable   1,180    (1,642)
Prepaid expenses and other current assets   1,345    (1,396)
Other non-current assets   287    (283)
Accounts payable   (92)   (336)
Lease liability   (1,879)    
Accrued expenses and other liabilities   (4,144)   5,643 
Deferred revenue and other non-current liabilities   7,293    586 
Net cash provided by operating activities  $9,766   $12,755 
Net cash flows from investing activities          
Purchase of property and equipment  $(495)  $(951)
Proceeds from the sale of property and equipment   10    57
Proceeds from sale of intangible assets       (21)
Purchase consideration paid on acquisition of business (net of cash acquired)   (3,530)   (6,581)
Payment on purchase of balance 10% share of Exaxe Holdings Limited   (805)    
Purchase of investments   (22,412)   (21,794)
Proceeds from sale of investments   24,960    18,495 
Net cash used in investing activities  $(2,272)  $(10,795)
Net cash flows from financing activities          
Payment of capital lease obligations  $   $(203)
Proceeds from share issued under ESPP and ESOP   1,366     
Proceeds of loan from bank       76,075 
Repayment of term loans       (1,667)
Repayment of loans from bank   (445)   (74,304)
Net cash provided by/(used in) financing activities  $921   $(99)
Effect of exchange rate changes on cash and cash equivalents and restricted cash   251    172 
Net increase in cash and cash equivalents, and restricted cash  $8,666   $2,033 
Cash and cash equivalents, and restricted cash, beginning of the period   11,372    9,152 
Cash, cash equivalents, and restricted cash at end of the period  $20,038   $11,185 
Supplementary disclosure of cash flow information          
Income taxes paid  $3,186   $2,119 

 

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.”

 

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, 2019 (the “Annual Report”). There have been no material changes to our significant accounting policies since the filing of the Annual Report other than Accounting Standards Codification (“ASC”) 842 for Lease accounting which has been included under Note 3. Recent Accounting Pronouncements.

 

  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 Limited and Exaxe Holdings Limited (“Exaxe”) as of December 31, 2019.

 

  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 and marketable securities, accounts receivable, income taxes, goodwill, and stock-based compensation.

 

6

 

  

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

Recent Accounting Developments

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 supersedes the lease guidance under FASB ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term from operating leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors were originally required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, FASB issued ASU No. 2018-11, Targeted Improvements. This update still requires modified retrospective transition; however, it adds the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment in the current period instead of at the beginning of the earliest period presented. Under this option, comparative periods presented in the financial statements in which the new lease standard is adopted will continue to be presented in accordance with prior guidance. The Company has adopted the new accounting standard using the modified retrospective alternative effective April 1, 2019.

 

The adoption of the new standard had a material effect on the Company’s financial statements, with the most significant effects of adoption relating to (1) the recognition of new ROU assets and lease liabilities on its balance sheet for real estate operating leases; and (2) providing significant new disclosures about its leasing activities. Upon adoption, the Company recognized operating lease liabilities of approximately $5.8 million based on the present value of the remaining minimum rental payments for existing operating leases. The Company also recognized corresponding ROU assets of approximately $5.8 million. There is no impact to stockholders’ equity from the adoption.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU No. 2016-13”). ASU No. 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU No. 2016-13 will be effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted, and is to be applied using a modified retrospective approach. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements.

 

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 in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Based on its current assessment, the Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which permits the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”) from accumulated other comprehensive income (loss) to retained earnings. The new standard became effective for the Company beginning with the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which aligns the measurement and classification guidance for share-based payments to nonemployees with that for employees, with certain exceptions. It expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in the entity’s own operations and supersedes the guidance in ASC 505-50. The ASU retains the existing cost attribution guidance, which requires entities to recognize compensation cost for nonemployee awards in the same period and in the same manner (i.e., capitalize or expense) they would if they paid cash for the goods or services, but it moves the guidance to ASC 718. The guidance also allows nonpublic entities to account for nonemployee awards using certain practical expedients that are already available for employee awards, but the same accounting policies must be used for awards to both employees and nonemployees. The new standard became effective for the Company beginning with the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

7

 

 

In July 2018, the FASB issued ASU 2018-09 – Codification Improvements (“ASU 2018-09”), which facilitates amendments to a variety of topics to clarify, correct errors in, or make minor improvements to the accounting standards codification. The effective date of the standard is dependent on the facts and circumstances of each amendment. Some amendments do not require transition guidance and will be effective upon the issuance of this standard. A majority of the amendments in ASU 2018-09 became effective for the Company beginning with the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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 effective date is the first quarter of fiscal year 2021, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2021 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company is currently evaluating the impact of adopting ASU 2018-13 on its 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 Exchange Act, 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 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.

 

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.

 

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The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of December 31, 2019 and March 31, 2019:

 

Assets and Liabilities  As of 
   December 31,
2019
   March 31,
2019
 
Level 2        
Derivative financial instruments (included in the following line items in the consolidated balance sheets)        
Prepaid expenses and other current assets  $470   $132 
Other liabilities   (101)   (21)
Other assets   155    436 
Accrued expenses and other liabilities   (72)   (136)
   $452   $411 
Level 3          
Contingent consideration   (3,007)   (4,884)
   $(3,007)  $(4,884)
Total  $(2,555)  $(4,473)

 

The following table presents the change in level 3 instruments:

 

  

As of and for the 
three months ended

 
   December 31,
2019
   December 31,
2018
 
Opening balance  $(4,206)  $ 
Partial payment of contingent consideration        
Total gain recognized in the consolidated statements of income   1,199     
Closing balance  $(3,007)  $ 

 

  

As of and for the 
nine months ended

 
   December 31,
2019
   December 31,
2018
 
Opening balance  $(4,884)  $(835)
Partial payment of contingent consideration   678     
Total gain recognized in the consolidated statements of income   1,199    835 
Closing balance  $(3,007)  $ 

 

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

 

Contingent consideration pertaining to the acquisition of the consulting business of Agile as of December 31, 2015 has been classified under level 3 as the fair valuation of such contingent consideration and has been calculated using one or more significant inputs which are not based on observable market data. The fair value of the contingent consideration was estimated using a discounted cash flow technique with significant inputs that are not observable in the market. The significant inputs not supported by market activity included the Group’s probability assessments of expected future cash flows related to its acquisition of the consulting business of Agile during the earn-out period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the asset purchase agreement (the “Agile Agreement”) dated December 12, 2014, as amended on January 26, 2016.

 

The total gain attributable to changes in the estimated contingent consideration payable for the acquisition of the consulting business of Agile were $0 and $0 for the three and nine months ended December 31, 2019, respectively and $0 and $835 for the three and nine months ended December 31, 2018, respectively. The Group paid no earn-out consideration to Agile in the fiscal year ended March 31, 2019. The Group paid $1,100 to Agile as earn-out consideration in the fiscal year ended March 31, 2018.

 

During the quarter ended December 31, 2018, the Group and the shareholders of Agile determined that the final earnout targets under the Agile Agreement would not be met and that no further contingent consideration would therefore be due under the Agile Agreement. Accordingly, the accrued contingent consideration has been reversed in the consolidated statements of income during the three and nine months period ended December 31, 2018.

 

Contingent consideration pertaining to the acquisition of the stock of Exaxe as of March 31, 2019 has been classified under level 3 as the fair value of such contingent consideration has been calculated using one or more significant inputs which are not based on observable market data. The fair value of the contingent consideration was estimated using a discounted cash flow technique with significant inputs that are not observable in the market. The significant inputs not supported by market activity included the Group’s probability assessments of expected future cash flows related to its acquisition of the stock of Exaxe during the earn-out period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the share purchase agreement dated November 27, 2018 (the “Exaxe Agreement”).

  

The estimated contingent consideration payable for the acquisition of the stock of Exaxe was $3,007 at December 31, 2019 and $4,884 at March 31, 2019. The long-term contingent consideration has been evaluated for net present value. During the quarter ended December 31, 2019, 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 has been reversed in the income statement during the period ended December 31, 2019 and disclosed as a separate line item below the income from operations for the quarter. The total gain attributable to changes in the estimated contingent consideration payable for the acquisition of Exaxe were $1,359 and $1,359 for the three and nine months ended December 31, 2019.

 

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 counter-party (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).

 

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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 $2,801 at exchange rates in effect on December 31, 2019). 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 interest on this 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 Working Capital Overdraft Facility and the Short Term Loans Facility are for working capital purposes and subject to sub-limits. The interest on these facilities is based on the MCLR plus a margin to be agreed with Standard Chartered Bank at the time of each disbursement. The MCLR is to be determined on the date of each disbursement and is effective until repayment or maturity. Interest will accrue from the draw down date up to the repayment or maturity date. 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 Pre Shipment Financing Under Export Orders Facility is for the delivery of software ready for sale. The interest on this facility is based on the MCLR plus a margin to be agreed with Standard Chartered Bank at the time of each disbursement. The MCLR is to be determined on the date of utilization and is effective until repayment. Interest will accrue from the utilization date up to the repayment date.

 

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 December 31, 2019. There are no outstanding loans under this Combined Facility as of December 31, 2019.

 

Term Loan Facility

 

On March 23, 2016, Majesco entered into a Loan Agreement (the “Loan Agreement”) with HSBC Bank USA, National Association (“HSBC”) pursuant to which HSBC agreed to extend loans to Majesco in the amount of up to $10,000 and Majesco issued a promissory note to HSBC in the maximum principal amount of $10,000 or any lesser amount borrowed under the Loan Agreement (the “Note”, and together with the “Loan Agreement”, the “Facility”). The outstanding principal balance of the loan bore interest based on LIBOR plus a margin in effect on the first day of the relevant interest period. Until January 1, 2018, only interest was payable under the loan. Commencing on January 1, 2018, and on each January 1 and July 1 thereafter until July 1, 2020, installments of principal in the amount of $1,667 were due and payable semi-annually. All principal and interest outstanding under the Note was due and payable on March 1, 2021. The Facility was unsecured and supported by a letter of credit issued by a bank of $10,000, which was secured by a cash pledge of our parent company, Majesco Limited. On February 27, 2019, Majesco used a portion of the proceeds from its rights offering to repay the total amount outstanding under the Loan Agreement with HSBC and terminated this Facility.

 

Receivable Purchase Facility

 

On January 13, 2017, Majesco and its subsidiaries MSSI, and Cover-All Systems, jointly 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 serves as HSBC’s agent for the collection of receivables, and Majesco collects and otherwise enforces 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 Group expensed the discount, interest and other direct fees as incurred. The Receivable Purchase Agreement will provide additional liquidity to the Group for working capital and other general corporate purposes.

  

On November 29, 2018, the Group amended the Receivable Purchase Agreement to increase its limit to $15,000 until March 29, 2019, and $10,000 thereafter. HSBC received an arrangement fee of $10 in connection with this amendment. The amendment provided additional liquidity to Majesco for mergers and acquisitions and other general corporate purposes. There are no outstanding loans under this facility as of December 31, 2019. Majesco used proceeds from this facility to repay existing indebtedness and for capital expenditures, working capital and other general corporate purposes. 

 

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Exaxe Facilities

 

Exaxe Limited has a receivables purchase agreement with AIB Commercial Finance Limited (“AIB Commercial”) pursuant to which AIB Commercial will purchase up to € 200 in receivables from Exaxe Limited on a discounted basis. In addition, Exaxe Limited has an overdraft facility with Allied Irish Banks, p.l.c. (“AIB”) of up to € 100. The facility has a variable interest rate and is payable on demand at any time. This facility is secured by the assets of Exaxe Limited. As of December 31, 2019, there are no outstanding balances under these facilities.

 

On July 17, 2019, Majesco’s subsidiary Exaxe Limited, and HSBC France, Dublin Branch (“HSBC France”), entered into a € 400 (or approximately $448 at exchange rates in effect on December 31, 2019) overdraft facility (the “HSBC France Facility”). The HSBC France Facility is for working capital purposes. The HSBC France Facility is subject to review from time to time, and in any event a review shall occur in May 2020. Exaxe Limited may terminate the HSBC France Facility at any time without penalty. Interest under the HSBC France Facility is payable at the rate of 3.5% per annum over the prevailing European Central Bank Rate on amounts up to € 400 and 7% per annum over such rate on amounts over € 400. The HSBC France Facility is secured by the assets of Exaxe Limited. Exaxe Limited agreed to certain negative covenants under the HSBC France Facility, including not to create or allow any mortgage or security over its assets or revenues. All Euros are in thousands unless indicated otherwise. As of December 31, 2019, there are no outstanding balances under the HSBC France Facility.

  

Vehicle 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 December 31, 2019 is $52.

 

6. DERIVATIVE FINANCIAL INSTRUMENTS

 

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

 

   Asset   Liability 
   Noncurrent*   Current*   Noncurrent*   Current* 
As of December 31, 2019                
Designated as Cash Flow Hedges                
Foreign exchange forward contracts  $155   $470   $101   $72 
Total  $155   $470   $101   $72 
                     
As of March 31, 2019                    
Designated as Cash Flow Hedges                    
Foreign exchange forward contracts  $436   $132   $21   $136 
   $436   $132   $21   $136 

 

*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 $41,300 and $31,100 as of December 31, 2019 and March 31, 2019, respectively.

 

The outstanding forward contracts as of December 31, 2019 mature between one month and 37 months. As of December 31, 2019, the Group estimates that $47, 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 related cash flow impacts of all of our derivative activities are reflected as cash flows from operating activities.

 

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The following table provides information on the amounts of pre-tax (losses) 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 nine months ended December 31, 2019         
Foreign exchange forward contracts  $41   $(30)
Total  $41   $(30)
           
For the nine months ended December 31, 2018          
Foreign exchange forward contracts  $(239)  $(517)
Total  $(239)  $(517)

 

7. ACCUMULATED OTHER COMPREHENSIVE INCOME

 

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

 

   Three months ended
December 31,
2019
   Three months ended
December 31,
2018
 
   Before
tax
   Tax
effect
   Net of
Tax
   Before
tax
   Tax
effect
   Net of
Tax
 
Other comprehensive income                        
Foreign currency translation adjustments                              
Opening balance  $(1,602)  $   $(1,602)  $(945)  $   $(945)
Change in foreign currency translation adjustments   523        523    346        346 
Closing balance  $(1,079)  $   $1,079   $(599)  $   $(599)
                               
Unrealized gains/(losses) on cash flow hedges                              
Opening balance  $328   $(83)  $245   $(1,838)  $535   $(1,303)
Unrealized gains/(losses) on cash flow hedges   130    (33)   98    1,954    (569)   1,385 
Reclassified to Revenue   (6)   2    (5)   (259)   75    (184)
Net change  $124   $(31)  $93   $1,695   $(494)  $1,201 
Closing balance  $452   $(114)  $338   $(143)  $41   $(102)

 

   Nine months ended
December 31,
2019
   Nine months ended
December 31,
2018
 
   Before
tax
   Tax
effect
   Net of
Tax
   Before
tax
   Tax
effect
   Net of
Tax
 
Other comprehensive income                        
Foreign currency translation adjustments                        
Opening balance  $(703)  $   $(703)  $293   $   $293 
Change in foreign currency translation adjustments   (376)       (376)   (892)       (892)
Closing balance  $(1,079)  $   $(1,079)  $(599)  $   $(599)
                               
Unrealized gains/(losses) on cash flow hedges                              
Opening balance  $411   $(120)  $291   $96   $(28)  $68 
Unrealized gains/(losses) on cash flow hedges   71    (3)   68    278    (80)   198 
Reclassified to Revenue   (30)   9    (21)   (517)   149    (368)
Net change  $41   $6   $47   $(239)  $69   $(170)
Closing balance  $452   $(114)  $338   $(143)  $41   $(102)

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8. INCOME TAXES

 

The Group recognized income tax provisions of $797 and $3,130 for the three and nine months ended December 31, 2019, respectively, and recognized income tax provisions of $483 and $2,543 for the three and nine months ended December 31, 2018, respectively.

 

The effective tax rate is 25.6% and 38.4% for the three and nine months ended December 31, 2019, respectively, which differs from the statutory U.S. federal income tax rate of 21%, mainly due to the impact of different tax jurisdictions. 

 

9. EMPLOYEE STOCK OPTION PLAN

 

Majesco 2015 Equity Incentive Plan

 

During the three and nine months ended December 31, 2019, we recognized $617 and $1,883, respectively, in equity-based compensation expense in our consolidated financial statements compared to $684 and $1,542 during the three and nine months ended December 31, 2018, respectively.

 

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 December 31, 2019, 2,001,275 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 Nine months ended
December 31,

 
Variables (range)   2019     2018  
             
Expected volatility     41%–46 %     41%–50 %
Weighted-average volatility     46 %     41 %
Expected dividends     0 %     0 %
Expected term (in years)     3-5        3-5  
Risk-free interest rate     1.9 %     2.5 %

 

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As of December 31, 2019, there was $4,402 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 1.63 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, 2019   3,259,267   $4.79-7.72   8.08 years  $5.49 
Granted   160,000    8.05-10.02   9.55 years   8.71 
Exercised   (317,434)   4.79-7.53      4.24 
Cancelled   (209,292)   4.79-7.25     5.29 
Balance, December 31, 2019 (unaudited)   2,892,541   $4.79-10.02   7.76 years  $5.68 

 

Of the stock options outstanding, an aggregate of 2,057,115 were exercisable as of December 31, 2019.

 

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.

 

Restricted Stock Unit Awards

 

Restricted stock unit activity during the nine months ended December 31, 2019 was as follows: 

 

   Number of
RSUs
   Weighted
Average
Grant-Date
Fair Value
 
Balance, April 1, 2019   375,000   $7.49 
    Vested   (100,000)  $7.55 
    Granted   105,000    8.51 
Balance, December 31, 2019 (unaudited)   380,000   $8.42 

 

15

 

 

Warrants

 

As of December 31, 2019, there were warrants to purchase 25,000 shares of common stock outstanding. A summary of the terms of the outstanding warrants as of December 31, 2019 is as follows:

 

   Outstanding
and
Exercisable
Warrants
   Exercise
Price
Per Warrant
   Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise
Price
 
Balance, December 31, 2019 (unaudited)   25,000   $7.00   0.67 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 number of shares issuable upon exercise of the warrant may be reduced under certain circumstances of non-performance under the services agreement. 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.

 

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 nine months ended December 31, 2019, no options to purchase shares of common stock were granted under ESOP plan 1 of Majesco Limited.

 

As of December 31, 2019, the total future compensation cost related to non-vested options not yet recognized in the consolidated statements of income was $212, and the weighted average period over which these awards are expected to be recognized was 1.89 years. The weighted average remaining contractual life of options expected to vest as of December 31, 2019 is 8.76 years.

 

During the three and nine months ended December 31, 2019, we recognized $55 and $287, respectively, in equity-based compensation expense in our consolidated financial statements compared to $120 and $612 during the three and nine months ended December 31, 2018, respectively.

 

Majesco Limited calculated 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 Nine Months ended
December 31,
 
   2019   2018 
Weighted-average volatility   44%   - 
Expected dividends  $0.32    - 
Expected term (in years)   4-8 Years    - 
Risk-free interest rate   6.1% - 6.5%   - 

 

The summary of outstanding options of Majesco Limited as of December 31, 2019 is as follows:

 

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

Weighted-

Average
Exercise
Price

    668,904   $0.10 - $3.00    5.52   1.13
    500,798   $3.10 - $6.00    4.93   4.64
    115,500   $6.10 - $9.00    8.67   7.37
Balance, December 31, 2019   1,285,202           

 

Of the stock options of Majesco Limited outstanding and held by Group employees, an aggregate of 1,081,449 are exercisable as of December 31, 2019.

 

16

 

 

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 and nine months ended December 31, 2019, Majesco accrued $3,531 and $4,598, respectively, in incentive compensation expense in its consolidated financial statements compared to $3,215 and $9,249 during the three and nine months ended December 31, 2018, respectively.

 

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 December 31, 2019, we had issued and sold 144,457 shares under the ESPP.

 

10. EARNINGS PER SHARE

 

The basic and diluted earnings per share were as follows:

 

   Three months ended 
December 31,
 
   2019   2018 
         
Net Income  $3,875   $1,727 
           
Basic weighted average outstanding equity shares   43,102,144    36,664,718 
Adjustment for dilutive potential ordinary shares          
Options under Majesco 2015 Equity Plan   2,192,839    2,060,964 
Dilutive weighted average outstanding equity shares   45,294,983    38,725,682 
           
Earnings per share:          
Basic  $0.09   $0.05 
Diluted  $0.09   $0.04 

 

   Nine months ended 
December 31,
 
   2019   2018 
         
Net Income  $6,065   $5,447 
           
Basic weighted average outstanding equity shares   42,992,839    36,633,300 
Adjustment for dilutive potential ordinary shares          
Options under Majesco 2015 Equity Plan   2,174,869    2,181,122 
Dilutive weighted average outstanding equity shares   45,167,708    38,814,422 
           
Earnings per share:          
Basic  $0.14   $0.15 
Diluted  $0.14   $0.14 

  

17

 

 

Basic earnings per share amounts are calculated by dividing net income for the three and nine months ended December 31, 2019 and 2018 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 and nine month ended December 31, 2019 and 2018 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 68,000 and 68,000 shares of common stock issuable upon exercise of options for the three and nine months ended December 31, 2019, respectively, and 449,209 and 449,209 shares of common stock issuable upon exercise of options for the three and nine months ended December 31, 2018, respectively, granted to employees, as their inclusion would have been antidilutive.

 

11. RELATED PARTIES TRANSACTIONS

 

Reimbursement of Expenses

 

The Group reimbursed the insurance premium paid by Majesco Limited for the insurance policies maintained at the Majesco Limited group level. During the three and nine months ended December 31, 2019 MSSIPL paid $0 and $88, respectively and during the three and nine months ended December 31, 2018 MSSIPL paid $0 and $68, respectively, to Majesco Limited toward such insurance premium.

 

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 is $1,436. The lease is effective June 1, 2015 and expires 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, 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 is $42.

 

MSSIPL also entered into a lease for its operations in Pune, India, with Mastek Ltd. as lessor. The approximate aggregate annual rent payable to Mastek Ltd. under this lease agreement is $237. The lease became effective on June 1, 2015 and expires on May 31, 2020. MSSIPL has also entered into a supplementary lease for its operations in Pune, India, with Mastek Ltd. as lessor. The approximate aggregate annual rent payable to Mastek Ltd. under this supplementary lease agreement is $110. The lease became effective on April 1, 2016 and expires on May 31, 2020. MSSIPL may terminate the lease after three years with six months’ prior written notice to Mastek Ltd. Mastek Ltd. may terminate the lease after five years. On June 1, 2018, MSSIPL gave notice to Mastek Ltd. of its termination of both leases with an effective termination date of November 30, 2018.

 

   As of
December 31,
2019
  

As of
March 31,
2019

 
         
Security deposits paid to Majesco Limited by MSSIPL for use of Mahape premises  $591   $552 
Security deposits paid to Mastek Ltd. by MSSIPL for use of Pune premises  $   $ 

 

18

 

 

Rental expenses paid by MSSIPL to Majesco Limited for use of premises for the three and nine months ended December 31, 2019 was $354 and $1,058, respectively, and $339 and $1,008 for the three and nine months ended December 31, 2018, respectively. Rental expenses paid by MSSIPL to Mastek Ltd. for use of premises for the three and nine months ended December 31, 2019 was $0 and $0, respectively, and $103 and $308 for the three and nine months ended December 31, 2018, 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 August 2, 2016, Majesco Limited and MSSIPL entered into a master service agreement, effective as of June 30, 2016 pursuant to which MSSIPL provided software development services to Majesco Limited. Under this agreement, MSSIPL charges Majesco Limited cost plus a margin for the services rendered. Software development charges charged by MSSIPL under the agreement for the three and nine months ended December 31, 2019 was $0 and $0, respectively, and $247 and $941 for the three and nine months ended December 31, 2018, respectively.  This agreement was terminated on April 1, 2019 following the closing of the business transfer pursuant to the Transfer Agreement discussed below.

 

On July 25, 2018, Majesco Limited and MSSIPL entered into an Intra Group Services Agreement (the “Intra-Group Agreement”) pursuant to which Majesco Limited provides certain sales and marketing services to MSSIPL in the Asia Pacific region (collectively, the “Services”). In consideration for the Services, MSSIPL pays Majesco Limited all direct and indirect operating costs of Majesco Limited incurred for the provision of the Services and which shall be allocated to MSSIPL on the basis of gross revenues plus a 10% mark-up. The mark-up will be subject to a periodic review. The Intra-Group Agreement is effective as of April 1, 2018 and will remain in effect until terminated. Each party may terminate the Intra-Group Agreement at any time upon 60 days prior written notice to the other. Expenses charged by Majesco Limited under the Intra-Group Agreement for the three and nine months ended December 31, 2019 were $0 and $0, respectively, and $14 and $88 for the three and nine months ended December 31, 2018, respectively. This agreement was terminated on April 1, 2019 following the closing of the business transfer pursuant to the Transfer Agreement discussed below.

 

Guarantee

 

During the three and nine months ended December 31, 2019, Majesco paid $0 and $0, respectively, and $8 and $27 for the three and nine months ended December 31, 2018, respectively, to Majesco Limited as arrangement fees and guarantee commission for the guarantee given by Majesco Limited to HSBC and ICICI Bank for the facilities taken by Majesco and its subsidiaries. Both facilities have been repaid and were terminated on June 30, 2019. 

 

Lease with Exaxe Sellers

 

On October 14, 2004, Exaxe Consulting Limited entered into a lease (the “Lease”) with Norman Carroll, Philip Naughton and Luc Hemeryck 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 Exaxe Limited, Exaxe Consulting Limited assigned Exaxe Limited the Lease for the balance of the term. Pursuant to a Deed of Variation of the Lease and Deed of Renunciation executed in September 2019, the term of the Lease is expected to terminate on August 31, 2024 The annual rental fee under the Lease is € 106 ($10 per month at exchange rates in effect on December 31, 2019).

  

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 $3,400 at exchange rates in effect on December 31, 2019). The transaction did not include real estate properties of Majesco Limited used in the business which continue to be rented by MSSIPL from Majesco Limited.

 

19

 

 

Effective as of May 16, 2019, MSSIPL and Majesco Limited entered into a Memorandum of Understanding (the “MOU”) in connection with the Transfer Agreement pursuant to which MSSIPL will have access to facilities including, but not limited to, hardware, software and administrative support services in consideration for 20,000 Indian rupees (or approximately $281 at exchange rates in effect on December 31, 2019). The term of the MOU commenced on May 15, 2019 and shall terminate on March 31, 2022.

 

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.

 

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
December 31,
2019

  

Three months
ended
December 31,
2018

 
         
USA  $33,115   $29,979 
UK   840    1,813 
Canada   93    144 
Ireland   1,263    1,726 
Malaysia   1,217    1,544 
Others   647    614 
   $37,175   $35,820 

 

  

Nine months
ended
December 31,
2019

  

Nine months
ended
December 31,
2018

 
         
USA  $96,561   $90,208 
UK   2,653    4,924 
Canada   213    330 
Ireland   3,399    1,726 
Malaysia   3,772    4,461 
Others   1,936    2,468 
   $108,534   $104,117 

  

20

 

 

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

 

  

As of
December 31,
2019

(unaudited)

   As of
March 31,
2019
 
USA  $575   $892 
India   1,473    1,944 
Canada   1    49 
UK   5    5 
Malaysia   87    133 
Ireland   54    3 
   $2,195   $3,026 

 

We provide a considerable volume of services to a number of significant customers. Therefore, the loss of a significant customer could materially reduce our revenues. The Group had one customer accounting for more than 10% of revenues for the three and nine months ended December 31, 2019 and one customer accounting for more than 10% of revenues for the three and nine months ended December 31, 2018. Presented in the table below is information about our top customer:

 

  

Three months ended
December 31,
2019

(unaudited)

  

Three months ended
December 31,
2018

(unaudited)

 
   Amount   % of
Combined
Category
   Amount   % of
Combined
Category
 
Top Customer                
Revenue  $2,212    6%  $5,796    16.2%
Accounts receivable and unbilled accounts receivable  $5,765    14.1%  $8,174    26.0%

 

  

Nine months ended
December 31,
2019

(unaudited)

  

Nine months ended
December 31,
2018

(unaudited)

 
   Amount   % of
Combined
Category
   Amount   % of
Combined
Category
 
Top Customer                
Revenue  $6,557    6%  $18,423    17.7%
Accounts receivable and unbilled accounts receivable  $5,765    14.1%  $8,174    26.0%

  

The top customer for the three and nine months ended December 31, 2019 was the same customer for both periods. The top customer for the three and nine months ended December 31, 2018 was the same customer for both periods.

 

21

 

 

13. COMMITMENTS

 

Capital Commitments

 

The Group had outstanding contractual commitments of $44 and $90 as of December 31, 2019 and March 31, 2019, 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 $788 and $2,432 for the three and nine months ended December 31, 2019, respectively, compared to $858 and $2,465 for the three and nine months ended December 31, 2018, respectively. 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 
2020  $1,977 
2021   1,049 
2022   626 
2023   607 
2024   179 
Thereafter   0 
   $4,438 
Less: Imputed interest   435 
Total minimum lease liability  $4,003 
      
Lease liabilities, current portion   1,977 
Lease liabilities, net of current portion   2,026 
Total lease liabilities  $4,003 

 

Facility Leases

 

Our subsidiary in India, MSSIPL, has entered into a lease for its operations in Mahape, India, as lessee, with Majesco Limited as lessor. The approximate aggregate annual rent payable to Majesco Limited under this lease agreement is $1,436. The lease became effective on June 1, 2015 and expires on May 31, 2020. MSSIPL paid Majesco Limited $354 and $1,058 in rent under the lease during the three and nine months ended December 31, 2019, respectively, and $339 and $1,008 during the three and nine months ended December 31, 2018, respectively. 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, 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 is $42.

 

MSSIPL also entered into a lease for its operations in Pune, India, with Mastek Ltd. as lessor. The approximate aggregate annual rent payable to Mastek Ltd. under this lease agreement is $237. The lease became effective on June 1, 2015 and expires on May 31, 2020. MSSIPL has also entered into a supplementary lease for its operations in Pune, India, with Mastek Ltd. as lessor. The approximate aggregate annual rent payable to Mastek Ltd. under this supplementary lease agreement is $110. The lease became effective on April 1, 2016 and expires on May 31, 2020. MSSIPL paid Mastek Ltd. $0 and $0 in rent under the leases during the three and nine months ended December 31, 2019, respectively, and $103 and $308 in rent under the leases during the three and nine months ended December 31, 2018, respectively. MSSIPL may terminate the lease after three years with six months’ prior written notice to Mastek Ltd. Mastek Ltd. may terminate the lease after five years. On June 1, 2018, MSSIPL gave notice to Mastek Ltd. of its termination of both leases with an effective termination date of November 30, 2018.

 

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Transition to ASC 842 Leases

 

ASC 842 Leases sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. It introduces a single, on-balance sheet lease accounting model for lessees.

 

The Company has adopted ASC 842, effective annual reporting period beginning April 1, 2019 and applied the standard to its leases, under the modified retrospective method, with the cumulative effect of initially applying the Standard, recognized on the date of initial application (April 1, 2019). Accordingly, the Company has not restated comparative information.

 

For transition, the Company has elected not to apply the requirements of ASC 842 to leases which are expiring within 12 months from the date of transition by class of asset. The Company has also used the practical expedient provided by the standard when applying ASC 842 to leases previously classified as operating leases and therefore, has not reassessed whether a contract, is or contains a lease, at the date of initial application, excluded initial direct costs from measuring the right of use asset at the date of initial application and used hindsight when determining the lease term if the contract contains options to extend or terminate the lease. The Company has used a single discount rate to a portfolio of leases with similar characteristics.

 

On transition, the Company recognized a lease liability measured at the present value of the remaining lease payments. The ROU asset is recognized at its carrying amount as if the standard had been applied since the commencement of the lease, but discounted using the lessee’s incremental borrowing rate as at April 1, 2019. Accordingly, a ROU asset and a corresponding lease liability of $5,882 has been recognized.

 

Leases

 

We lease certain office space 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 right-of-use 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. All leases included in our right of use asset and lease liability consist of operating leases.

 

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

 

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

 

   Balance Sheet Caption  December 31,
2019
 
Assets:       
Operating lease assets  right-of-use assets, net  $3,964 
Liabilities:        
Current:        
Operating lease liabilities  lease liability  $1,977 
Long-term:        
Operating lease liabilities  lease liability, net of current portion   2,026 
Total lease liabilities     $4,003 

 

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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.

 

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

 

   Three months ended 
   December 31, 
   2019 (Unaudited) 
Cash paid for operating lease liabilities  $714 
Right-of-use assets obtained in exchange for new operating lease obligations  $ 
Weighted-average remaining lease term   2.5 years 
Weighted-average discount rate   5.1%

  

   Nine months ended 
   December 31, 
   2019 (Unaudited) 
Cash paid for operating lease liabilities  $2,141 
Right-of-use assets obtained in exchange for new operating lease obligations  $ 
Weighted-average remaining lease term   2.5 years 
Weighted-average discount rate   5.1%

  

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.

 

14. ACQUISITION

 

On November 27, 2018 (the “Effective Date”), the Company entered into a share purchase agreement (the “Agreement”) for the acquisition of all the issued share capital (collectively, the “Securities”) of Exaxe. On the Effective Date, the Company completed the purchase of 90% of the Securities. The Company purchased the remaining 10% of the Securities on August 1, 2019. The economic transfer date of Exaxe was October 1, 2018.

 

In consideration for the purchase of the Securities, on the Effective Date, the Company paid the sellers € 6,392 (or approximately $7,158 at exchange rates in effect on December 31, 2019). In addition, on August 1, 2019, the Company paid the sellers € 717 (or approximately $803) for the remainder of the Securities.

 

24

 

 

The Company also agreed to make certain earnout payments to the sellers if certain adjusted EBITDA (as defined in the 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, the Company has agreed to pay € 625(or approximately $700 at exchange rates in effect on December 31, 2019) to the sellers and an additional € 25(or approximately $28 at exchange rates in effect on December 31, 2019) 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 $1,400 at exchange rates in effect on December 31, 2019)). During the quarter ended December 31, 2019, 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-outs of adjusted EBITDA for Exaxe for the period of January 1, 2020 through December 31, 2020 is at least equal to 75% of the adjusted EBITDA target for such year, the Company has agreed to pay € 750 (or approximately $840 at exchange rates in effect on December 31, 2019) to the sellers and an additional € 30 (or approximately $34 at exchange rates in effect on December 31, 2019) for each full 1% increase above 75%, up to a maximum of 100% (with a maximum earn-out payment amount not to exceed €1,500 (or approximately $1,680 at exchange rates in effect on December 31, 2019)). If adjusted EBITDA for Exaxe for the period of January 1, 2021 through December 31, 2021 is at least equal to 75% of the adjusted EBITDA target for such year, the Company has agreed to pay € 875 (or approximately $980 at exchange rates in effect on December 31, 2019) to the sellers and an additional € 35 (or approximately $40 at exchange rates in effect on December 31, 2019) for each full 1% increase above 75%, up to a maximum of 100% (with a maximum earn-out payment amount not to exceed € 1,750 (or approximately $1,960 at exchange rates in effect on December 31, 2019)). In lieu of being paid to the sellers, a portion of these earn-out payments will be paid to key employees as bonuses if they remain employed by Exaxe at the earnout payment date. The Company may also withhold 15% of any earn-out payment if a seller who is a key employee leaves the employment of Exaxe prior to the end of the earn-out period (other than due to death, serious illness, compassionate grounds, by mutual agreement or termination for cause or misconduct). The Company will also be entitled to withhold and off set against any earn-out payment such amounts due and payable or which may become due and payable by the sellers to the Company with respect to claims under the agreement and related transaction documents.

 

The entire earn-out amount of € 4,500 (or approximately $5,040 at exchange rates in effect on December 31, 2019) (less any portion already paid) 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.

 

The Company 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, Exaxe Limited, 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 Exaxe Limited, respectively. The Company agreed to grant Norman Carroll and Philip Naughton stock options awards with respect to such number of shares of the Company’s common stock having an aggregate value of € 1,000 (or approximately $1,120 at exchange rates in effect on December 31, 2019) pursuant to the Company’s 2015 Plan.

  

In addition, in connection with the transaction, the parties have entered into a revised lease agreement with certain sellers (including Norman Carroll and Philip Naughton) for certain real property facilities leased by Exaxe Limited.

 

We have included the financial results of Exaxe in our consolidated financial statements from the date of acquisition. The purchase price for Exaxe was approximately $12,329. In connection with the Exaxe acquisition, we have recorded $10,339 of net assets and $1,990 of goodwill.

 

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The following table summarizes the amounts of identified assets acquired and liabilities assumed at the acquisition date:

 

Recognized amount of identifiable assets acquired and liabilities assumed

 

   Amount 
Cash  $297 
Accounts receivable   968 
Prepaid expenses and other current assets   498 
Property, plant and equipment   42 
Trade name   364 
Customer relationships   1,658 
Technology   7,314 
Deferred tax asset from prior net operating losses   167 
Accounts payable and other liabilities   (883)
Deferred revenue   (86)
Total fair value of assets acquired   10,339 
Total purchase consideration   12,329 
Goodwill  $1,990

 

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

 

Changes in carrying amount of the goodwill

 

   Three months
ended
December 31,
2019
   Nine months
ended
December 31,
2019
 
         
Opening value  $34,090   $34,145 
Changes on account of currency fluctuation   54    (1)
Impairment of Goodwill        
Closing value  $34,144   $34,144 

 

   Three months
ended
December 31,
2018
   Nine months
ended
December 31,
2018
 
         
Opening value  $32,216   $32,216 
Changes on account of currency fluctuation   (26)   (26)
Impairment of Goodwill        
Addition on account of business combination   2,536    2,536 
Closing value  $34,726   $34,726 

 

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:

 

   December 31, 2019 
                   Weighted 
                   Average 
                   Remaining 
   Gross           Net   Amortization 
   Carrying   Accumulated       Carrying   Period 
   Amount   Amortization   Impairment   Amount   (Years) 
Technology  $10,664   $4,801   $   $5,863    6 
Trade Name   352    45        307    9 
Customer relationship   8,326    4,308        4,018    4 
Customer Contract   2,950    2,950             
Software   1,038    708        330    2 
   $23,330   $12,812   $   $10,518      

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   March 31, 2019 
                   Weighted 
                   Average 
                   Remaining 
   Gross
Carrying
   Accumulated       Net
Carrying
   Amortization
Period
 
   Amount   Amortization   Impairment   Amount   (Years) 
Technology  $10,672   $3,118   $   $7,554    6 
Trade Name   353    18        335    9 
Customer relationship   8,328    3,753        4,575    4 
Customer Contract   2,950    2,950             
Software   3,844    3,339        505    2 
   $26,147   $13,178   $   $12,969      

 

Changes in the net carrying amount of intangible assets were as follows:

 

   Technology   Trade Name   Customer Relationship   Customer Contract   Software   Total 
March 31, 2019  $7,554   $335   $4,575   $   $505   $12,969 
Amortization   1,566    29    567        296    2,458 
Addition-Business acquisition                   37    37 
Foreign currency translation   (125)   1    10        84    (30)
December 31, 2019 (Unaudited)  $5,863   $307   $4,018   $   $330   $10,518 

 

Amortization expense of $822 and $2,458 for the three and nine months ended December 31, 2019, respectively, and $1,226 and $1,853 for the three and nine months ended December 31, 2018, respectively, was 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 
Years ending March 31  Expense 
2020  $3,228 
2021   2,919 
2022   2,020 
2023   1,954 
Thereafter   2,848 
Total  $12,969 

 

Details of identifiable intangible assets acquired are as follows:

 

   Weighted
average
amortization
period
(in years)
   Amount
assigned
   Residual
value
 
Technology   5   $7,314     
Trade name   10    364     
Customer relationships   15    1,658     
Total   6.96   $9,336     

 

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15. NON-CONTROLLING INTEREST

 

On November 27, 2018, the Company entered into a share purchase agreement for the acquisition of all the issued Securities of Exaxe. The Company completed the purchase of 90% of the Securities on November 27, 2018. The Company purchased the remaining 10% of the Securities on August 1, 2019 and there is no non-controlling interest as of December 31, 2019. The economic transfer date of Exaxe was October 1, 2018.

 

16. SUBSEQUENT EVENTS

 

On January 30, 2020, the Company, Majesco Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”) and InsPro Technologies Corporation (“InsPro”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, Merger Sub will merge with and into InsPro (the “Merger”) with InsPro surviving the Merger as a wholly-owned subsidiary of the Company. The Merger consideration to be paid by the Company on the closing date (the “Effective Time”) of the Merger, subject to certain adjustments as set forth in the Merger Agreement (including for cash and certain debt of InsPro), is $12 million in cash. Consummation of the Merger is subject to certain conditions, including, without limitation, adoption of the Merger Agreement by the requisite vote of InsPro’s stockholders, the accuracy of the representations and warranties (subject to customary materiality qualifiers), the absence of any Material Adverse Effect (as defined in the Merger Agreement) with respect to InsPro, InsPro’s compliance with its covenants and agreements contained in the Merger Agreement (subject to customary materiality qualifiers) and InsPro’s fairness advisor shall not have withdrawn, revoked or modified their fairness opinion, among others.

 

In addition, pursuant to the Merger Agreement, The Co-Investment Fund II, L.P. and Independence Blue Cross, LLC (collectively, the “Shareholders”) each entered into a voting agreement (the “Voting Agreement”) with the Company and Merger Sub. Pursuant to the Voting Agreement, the Shareholders agreed to vote their shares of InsPro’s common stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, in each case, in favor of, among other things, the adoption of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement and against (i) any competing proposal or competing transaction, (ii) the adoption of any competing transaction agreement and (iii) any other action that would in any manner (A) prevent, impede, frustrate or nullify any provision of the Merger Agreement, (B) change the voting rights of any class of InsPro’s capital stock or (C) otherwise interfere with or delay the transactions contemplated by the Merger Agreement. In addition, the Shareholders have agreed not to (i) subject to certain exceptions, transfer their shares of InsPro’s common stock and/or preferred stock, as applicable, and (ii) solicit alternative transactions or enter into discussions concerning, or provide confidential information in connection with, any alternative transaction. The Voting Agreements will terminate upon the earlier of the Effective Time or the termination of the Merger Agreement in accordance with its terms.

 

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

 

You should read the following discussion together with “Selected Financial Data,” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2019 and referred to herein as the “Annual Report,” and the consolidated financial statements and related notes for the quarter ended December 31, 2019 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.

 

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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 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;

 

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

  

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  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;

 

  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 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;

 

  the adverse outcome of legal proceedings against us;

 

  the risk that our customers internally develop new competitive products; and

 

  the impact of new accounting standards and changes we may need to make in anticipation or as a result of these standards.

 

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 December 31, 2019, 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

 

On January 30, 2020, the Company, Majesco Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”) and InsPro Technologies Corporation (“InsPro”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, Merger Sub will merge with and into InsPro (the “Merger”) with InsPro surviving the Merger as a wholly-owned subsidiary of the Company. The Merger consideration to be paid by the Company on the closing date (the “Effective Time”) of the Merger, subject to certain adjustments as set forth in the Merger Agreement (including for cash and certain debt of InsPro), is $12 million in cash. Consummation of the Merger is subject to certain conditions, including, without limitation, adoption of the Merger Agreement by the requisite vote of InsPro’s stockholders, the accuracy of the representations and warranties (subject to customary materiality qualifiers), the absence of any Material Adverse Effect (as defined in the Merger Agreement) with respect to InsPro, InsPro’s compliance with its covenants and agreements contained in the Merger Agreement (subject to customary materiality qualifiers) and InsPro’s fairness advisor shall not have withdrawn, revoked or modified their fairness opinion, among others.

 

In addition, pursuant to the Merger Agreement, The Co-Investment Fund II, L.P. and Independence Blue Cross, LLC (collectively, the “Shareholders”) each entered into a voting agreement (the “Voting Agreement”) with the Company and Merger Sub. Pursuant to the Voting Agreement, the Shareholders agreed to vote their shares of InsPro’s common stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, in each case, in favor of, among other things, the adoption of the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement and against (i) any competing proposal or competing transaction, (ii) the adoption of any competing transaction agreement and (iii) any other action that would in any manner (A) prevent, impede, frustrate or nullify any provision of the Merger Agreement, (B) change the voting rights of any class of InsPro’s capital stock or (C) otherwise interfere with or delay the transactions contemplated by the Merger Agreement. In addition, the Shareholders have agreed not to (i) subject to certain exceptions, transfer their shares of InsPro’s common stock and/or preferred stock, as applicable, and (ii) solicit alternative transactions or enter into discussions concerning, or provide confidential information in connection with, any alternative transaction. The Voting Agreements will terminate upon the earlier of the Effective Time or the termination of the Merger Agreement in accordance with its terms.

 

Three Months Ended December 31, 2019 Highlights

 

A few of our highlights of our three months ended December 31, 2019 were:

 

  Revenues of $37,175 with a gross profit of 48.0% of revenue;

 

  $4,712 (12.7% of revenue) in research and development (“R&D”) expenses;

 

  $10,027 (27.0 % of revenue) in selling, general and administrative expenses;

 

  Net income of $3,875; and

 

  Adjusted EBITDA of $4,985, representing 13.4% of revenue.

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Nine Months Ended December 31, 2019 Highlights

 

A few of our highlights of our nine months ended December 31, 2019 were:

 

  Revenues of $108,534 with a gross profit of 49.2% of revenue;

 

  $14,639 (13.5% of revenue) in R&D expenses;

 

  $31,729 (29.2% of revenue) in selling, general and administrative expenses;

 

  Net income of $6,065; and

 

  Adjusted EBITDA of $12,849, representing 11.8% 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, a reversal of accrual for contingent liability 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 and nine months ended December 31, 2019 and December 31, 2018, see “— Results of Operations — Three and Nine Months Ended December 31, 2019 Compared to Three and Nine Months Ended December 31, 2018 — Adjusted EBITDA”.

  

Agile Asset Acquisition

 

On January 1, 2015, we acquired substantially all of the insurance consulting business of Agile Technologies, LLC, a New Jersey limited liability company, a business and technology management consulting firm. Total consideration for the Agile asset acquisition amounted to approximately $8,500, including approximately $7,800 in earn-out payments over three years based on the satisfaction of certain time milestones and performance targets.

 

During the quarter ended September 30, 2018, we and the shareholders of Agile determined that the final earn-out targets under the Agile asset purchase agreement would not be met and that no further contingent consideration would therefore be due under the Agile asset purchase agreement. Accordingly, the accrued outstanding balance has been reversed in the income statement during the period ended September 30, 2018. We have no further obligations with respect to earn-out payments under the Agile asset purchase agreement.

 

Through this acquisition, we acquired the insurance-focused IT consulting business of Agile, as well as business process optimization capabilities and additional technology services including data architecture strategy and services. In connection with this acquisition, over 55 insurance technology professionals and other personnel formerly employed or engaged by Agile became our employees or independent contractors. This acquisition also resulted in the addition of approximately 20 customers to our customer base. In connection with this acquisition, we assumed office leases under which Agile was lessee in New Jersey, Georgia and Ohio, and acquired certain trademarks, service marks, domain names and business process framework of Agile.

 

Cover-All Merger

 

On June 26, 2015, Cover-All Technologies Inc., a provider of core insurance software and business analytics solution primarily focused on commercial lines for the property and casualty insurance industry listed on the NYSE American, merged with and into Majesco, with Majesco as the surviving corporation, in a stock-for-stock transaction. In the merger, each share of Cover-All common stock issued and outstanding immediately prior to the effective time of the merger (other than treasury shares) was automatically cancelled and extinguished and converted into the right to receive 0.21641 shares of common stock of Majesco. This exchange ratio resulted in holders of issued and outstanding Cover-All common stock and outstanding options and restricted stock units and other equity awards of Cover-All holding in the aggregate approximately 16.5% of the total capitalization of the combined company immediately following consummation of the merger.

 

Cover-All’s customers include insurance companies, agents, brokers and managing general agents throughout the United States and Puerto Rico. Cover-All’s software solutions and services are designed to enable customers to introduce new products quickly, expand their distribution channels, reduce costs and improve service to their customers. Cover-All’s business analytics solution enables customers to leverage their information assets for real time business insights and for better risk selection, pricing and financial reporting.

 

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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.

 

In consideration for the purchase of the Securities, on the Effective Date, we paid the sellers € 6,392 (or approximately $7,158 at exchange rates in effect on December 31, 2019) and € 717 (or approximately $803 at exchange rates in effect on December 31, 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 $700 at exchange rates in effect on December 31, 2019) to the sellers and an additional € 25 (or approximately $28 at exchange rates in effect on December 31, 2019) 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 $1,400 at exchange rates in effect on December 31, 2019)). During the quarter ended December 31, 2019, 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 income statement during the period ended December 31, 2019 and disclosed as a separate line item below the income from operations for the quarter.

 

The entire earn-out amount of € 4,500 (or approximately $5,040 at exchange rates in effect on December 31, 2019) (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, Exaxe Limited, 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 Exaxe Limited, 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 $1,120 at exchange rates in effect on December 31, 2019) pursuant to our 2015 equity incentive 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 Exaxe Limited.

 

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 and nine months ended December 31, 2019 and December 31, 2018. 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.

 

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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

 

Revenues are recognized based on the following general revenue recognition principles are met:

 

  Identify contract with a customer: There is an agreement between the company and a customer that creates enforceable rights and obligations. If required, the company combines two or more contracts and accounts for them as one contract for the purposes of revenue recognition.

 

  Identify performance obligations in the contract: Under the contracts the company establishes the different performance obligations. Determination of performance obligation is based on whether the customer can derive benefit from the product and services on its own or together with other resources and each of these benefits can be separately identified.

 

  Determine transaction price: The transaction price is the amount of consideration in the contract that the company expects to be entitled to receive in exchange for transferring the intellectual property and/or services to the customer. The company may enter in to fixed price contracts or variable priced contracts depending on the nature of the contract.

 

  Allocate transaction price to performance obligations in the contract: We allocate the transaction price to each performance obligation on the basis of the relative standalone selling price for each distinct deliverable.

 

  Recognize revenue when or as the company satisfies performance obligations: We recognize revenue when or as we satisfy each of the distinct performance by transferring the intellectual property or services that has been agreed upon with the customer. The revenue recognized is the amount allocated to that distinct obligation and the satisfaction of it. The obligation may be satisfied at a point of time or over a period of time. For performance obligations satisfied over a period of time, we recognize revenue based on the progress toward satisfaction of the obligation.

 

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.

 

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Time and Material Contracts — Professional services revenue consists primarily of revenue received for assisting with the development, implementation of our software, on-site support, and other professional consulting services. In determining whether professional services revenue should be accounted for, 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, which typically do involve significant customization to or development of the underlying software code; and whether milestones or acceptance criteria exist that affect the realization of the services rendered. Substantially all of our professional services arrangements are billed on a time and materials basis and, accordingly, are recognized as the services are performed. 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 months.

 

Fixed Price Contracts — For arrangements that do not qualify for separate accounting for the license and professional services revenues, including arrangements that involve significant modification or customization of the software, 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. Under the percentage-of completion method, 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.

 

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
Internal-use Software   1 – 5 years
Intellectual Property Rights   1 – 5 years
Customer Contracts   1 – 3 years
Customer Relationships   6 – 15 years
Technology   6 years
Trademark   10 years

 

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.

 

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.

 

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Maintenance and repairs are charged to combined 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 and Nine Months Ended December 31, 2019 Compared to Three and Nine Months Ended December 31, 2018

 

The following tables summarize our consolidated statements of income for the three and nine months ended December 31, 2019 and December 31, 2018, including as a percentage of revenues:

 

Statements of Income Data

 

   Three Months Ended (Unaudited) 
(U.S. Dollars; dollar amounts in thousands):  December 31,
2019
   %   December 31,
2018
   % 
Total revenues  $37,175        $35,820      
Total cost of revenues   19,323    52%   18,293    51%
Total gross profit   17,852         17,527      
Operating expenses:                    
Research and development expenses   4,712    11%   4,850    14%
Selling, general and administrative expenses   10,027    29%   10,303    29%
Total operating expenses   14,739         15,153      
Income from operations   3,113         2,374      
Interest income   141         7      
Interest expense   (79)        (114)     
Other income (expenses), net   138         (57)     
Gain on reversal of accrued contingent liability   1,359               
Income before provision for income taxes   4,672         2,210      
Income taxes   797         483      
Net income  $3,875    8%  $1,727    5%

 

   Nine Months Ended (Unaudited) 
(U.S. Dollars; dollar amounts in thousands):  December 31,
2019
   %   December 31,
2018
   % 
Total Revenues  $108,534        $104,117      
Total cost of revenues   55,130    49%   53,340    52%
Total gross profit   53,404         50,777      
Operating expenses:                    
Research and development expenses   14,639    13%   14,381    14%
Selling, general and administrative expenses   31,729    30%   29,484    27%
Total operating expenses   46,368         43,865      
Income from operations   7,036         6,912      
Interest income   491         32      
Interest expense   (269)        (342)     
Other income (expenses), net   578         553      
Gain on reversal of accrued contingent liability   1,359         835      
Income before provision for income taxes   9,195         7,990      
Income taxes   3,130         2,543      
Net income  $6,065    5%  $5,447    5%

 

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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):  December 31,
2019
   %   December 31,
2018
   % 
Geography: North America                
Legal Entity                
Majesco  $10,790    29%  $10,476    30%
Majesco Software and Solutions Inc.   22,325    60%   13,260    37%
Majesco Canada Ltd., Canada   94    %   144    %
Cover-All Systems, Inc.(1)       %   6,243    18%
   $33,209    89%  $30,123    85%
Geography:  Europe                    
Legal Entity                    
Majesco UK Limited, UK  $840    2%  $1,813    5%
Exaxe Limited   1,263    3%   1,726    5%
    2,103    6%   3,539    10%
Geography:  Other                    
Legal Entity                    
Majesco Sdn. Bhd., Malaysia  $1,217    4%  $1,544    4%
Majesco Asia Pacific Pte Ltd., Singapore   114    %   207    0%
Majesco Software and Solutions India Private Limited, India   532    1%   407    1%
   $1,863    5%  $2,158    5%
Total Revenues  $37,175        $35,820      

 

(1)Cover-All Systems, Inc. was merged into Majesco Software and Solutions Inc. on January 1. 2019.

 

   Nine Months Ended (Unaudited) 
(U.S. Dollars; dollar amounts in thousands):  December 31,
2019
   %   December 31,
2018
   % 
Geography: North America                
Legal Entity                
Majesco  $30,933    29%  $31,189    30%
Majesco Software and Solutions Inc.   65,628    60%   39,304    38%
Majesco Canada Ltd., Canada   213    %   474    0%
Cover-All Systems, Inc.(1)       %   19,571    19%
   $96,774    89%  $90,538    88%
Geography:  Europe                    
Legal Entity                    
Majesco UK Limited, UK  $2,653    3%  $4,924    5%
Exaxe Limited   3,399    3%   1,726    2%
    6,052    6%   6,650    7%
Geography:  Other                    
Legal Entity                    
Majesco Sdn. Bhd., Malaysia  $3,772    4%  $4,461    4%
Majesco Asia Pacific Pte Ltd., Singapore   338    %   916    1%
Majesco Software and Solutions India Private Limited, India   1,598    1%   1,552    1%
   $5,708    5%  $6,929    5%
Total Revenues  $108,534        $104,117      

 

(1)Cover-All Systems, Inc. was merged into Majesco Software and Solutions Inc. on January 1. 2019.

  

Revenues

 

Revenues for the three months ended December 31, 2019 were $37,175 compared to $35,820 for the three months ended December 31, 2018, reflecting an increase of 3.8%. The increase during the quarter was primarily on account of an increase in subscription revenues with projects going live and new business additions in P&C.

   

Revenues for the nine months ended December 31, 2019 were $108,534 compared to $104,117 for the nine months ended December 31, 2018, reflecting an increase of 4.2%. The increase during the nine months ended December 31, 2019 was on account of the growth in the North America business, with significant increase in product revenues, and due to the additional two quarter of revenues from the acquisition of Exaxe.

 

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Gross Profit

 

Gross profit was $17,852 for the three months ended December 31, 2019 compared with $17,527 for the three months ended December 31, 2018. Gross profit percentage for the three months ended December 31, 2019 decreased to 48.0% of revenue from 49.0% of revenue for the three months ended December 31, 2018 mainly on account of the inflationary impact to the business and investments being made to scale the business.

 

Gross profit was $53,404 for the nine months ended December 31, 2019 compared with $50,777 for the nine months ended December 31, 2018, representing an increase of 5.1%. The increase in margin has been primarily due to a better margin revenue mix. Gross profit percentage for the nine months ended December 31, 2019 increased to 49.2% of revenue from 48.8% of revenue for the nine months ended December 31, 2018.

  

Salaries and consultant fees were approximately $13,165 for the three months ended December 31, 2019 compared to $13,562 for the three months ended December 31, 2018. This represents a decrease of 3.0% in salaries and consultant fees due to a reduction in headcount. As a percentage of revenues, salaries and consultant fees decreased from 38.4% for the three months ended December 31, 2018 to 35.4% for the three months ended December 31, 2019.

 

Salaries and consultant fees were approximately $40,097 for the nine months ended December 31, 2019 compared to $38,816 for the nine months ended December 31, 2018. This represents an increase of 3.8% in salaries and consultant fees. As a percentage of revenues, salaries and consultant fees decreased from 37.5% for the nine months ended December 31, 2018 to 36.9% for the nine months ended December 31, 2019.

 

Operating Expenses

 

Operating expenses were $14,739 for the three months ended December 31, 2019 compared to $15,153 for the three months ended December 31, 2018. The decrease in operating expenses was primarily due to a decrease in R&D costs of $138 and a decrease in selling, general and administrative expenses of $376. The company continued to invest in R&D based on the product roadmap. The continued investment is maturing our products to being sold more as out of the box products. The decrease in selling, general and administrative expenses was primarily on account of significant marketing and branding activities that were undertaken in the previous year and a reduction in amortization of equity incentives costs. As a percentage of revenues, operating expenses decreased to 39.6% for the three months ended December 31, 2019 from 42.3% for the three months ended December 31, 2018. 

 

Operating expenses were $46,368 for the nine months ended December 31, 2019 compared to $43,865 for the nine months ended December 31, 2018. The increase in operating expenses was primarily due to an increase in R&D costs of $258 and an increase in selling, general and administrative expenses of $2,245. The increase in selling and general expenses was driven by the inclusion of the Exaxe business, one-time expenses related to our customer conference, and the year to date impact of the new management roles and bandwidth created in the company. As a percentage of revenues, operating expenses increased to 42.7% for the nine months ended December 31, 2019 from 42.1% for the nine months ended December 31, 2018. 

 

Income from Operations

 

Income from operations was $3,113 for the three months ended December 31, 2019 compared to $2,374 for the three months ended December 31, 2018. As a percentage of revenues, net income from operations was 8.4% for the three months ended December 31, 2019 compared to a net gain of 6.6% for the three months ended December 31, 2018. Income from operations was higher primarily due to an increase in revenue together with a change in revenue mix with high margin product revenues increasing.

 

Income from operations was $7,036 for the nine months ended December 31, 2019 compared to $6,912 for the nine months ended December 31, 2018. As a percentage of revenues, net income from operations was 6.5% for the nine months ended December 31, 2019 compared to a net gain of 6.6% for the nine months ended December 31, 2018

 

Other Income

 

Other income (expense), net was $138 for the three months ended December 31, 2019 compared to $(57) for the three months ended December 31, 2018. The increase is mainly due to an increase in currency exchange gain during the three months ended December 31, 2019.

 

Other income (expense), net was $578 for the nine months ended December 31, 2019 compared to $553 for the nine months ended December 31, 2018.

 

Tax provision

 

We recognized an income tax provision of $797 and $3,130 for the three and nine months ended December 31, 2019, respectively, and recognized an income tax provision of $483 and $2,543 for the three and nine months ended December 31, 2018, respectively.

 

The effective tax rate is 25.6% and 38.4% for the three and nine months ended December 31, 2019, respectively, which differs from the statutory U.S. federal income tax rate of 21%, mainly due to the impact of different tax jurisdictions. 

 

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Net income

 

Net income was $3,875 for the three months ended December 31, 2019 compared to net income of $1,727 for the three months ended December 31, 2018. Net income per share, basic and diluted, was $0.09 and $0.09, respectively, for the three months ended December 31, 2019 compared to net income per share, basic and diluted, of $0.05 and $0.04, respectively, for the three months ended December 31, 2018.

 

Net income was $6,065 for the nine months ended December 31, 2019 compared to net income of $5,447 for the nine months ended December 31, 2018. Net income per share, basic and diluted, was $0.14 and $0.14, respectively, for the nine months ended December 31, 2019 compared to net income per share, basic and diluted, of $0.15 and $0.14, respectively, for the nine months ended December 31, 2018.

 

Adjusted EBITDA

 

Adjusted EBITDA, a non-GAAP metric, was $4,985 for the three months ended December 31, 2019 compared to $4,830 for the three months ended December 31, 2018. Adjusted EBITDA, a non-GAAP metric, was $12,849 for the nine months ended December 31, 2019 compared to $12,607 for the nine months ended December 31, 2018.

 

The following is an unaudited reconciliation of U.S. GAAP net income to EBITDA and Adjusted EBITDA for the three and nine months ended December 31, 2019 and the three and nine months ended December 31, 2018:

 

   Unaudited 
   Three Months ended 
(U.S. dollars, in thousands):  December 31,
2019
   December 31,
2018
 
Net Income  $3,875   $1,727 
Add:          
Provision for income taxes   797    483 
Depreciation and amortization   1,200    1,201 
Interest expense   79    113 
Less:          
Interest income   (141)   (7)
Other income (expenses), net   (138)   57 
EBITDA  $5,672   $3,574 
Add:          
Stock-based compensation   672    814 
Merger and acquisition expenses       442 
Less:          
Reversal of accrual for contingent consideration liability   (1,359)     
Adjusted EBITDA   4,985    4,830 
Revenue   37,175    35,820 
Adjusted EBITDA as a % of Revenue   13.41%   13.48%

  

   Unaudited 
   Nine Months ended 
(U.S. dollars, in thousands):  December 31,
2019
   December 31,
2018
 
Net Income  $6,065   $5,447 
Add:          
Provision for income taxes   3,130    2,543 
Depreciation and amortization   3,643    3,075 
Interest expense   269    342 
Less:          
Interest income   (491)   (32)
Other income (expenses), net   (578)   (553)
EBITDA  $12,038   $10,822 
Add:          
Stock-based compensation   2,170    2,178 
Merger and acquisition expenses       442 
Less:          
Reversal of accrual for contingent consideration liability   (1,359)   (835)
Adjusted EBITDA   12,849    12,607 
Revenue   108,534    104,117 
Adjusted EBITDA as a % of Revenue   11.84%   12.11%

 

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Liquidity and Capital Resources

 

Our cash, cash equivalents and restricted cash and short term investments position was $45,580 at December 31, 2019 and $14,527 at December 31, 2018.

 

Net cash provided by operating activities was $9,766 for the nine months ended December 31, 2019 and $12,755 for the nine months ended December 31, 2018. We had accounts receivable of $26,259 at December 31, 2019 and $17,366 at March 31, 2019. Days outstanding increased to 101 days at the end of December 31, 2019 as compared to 85 days at the end of March 31, 2019.

 

Net cash used in investing activities amounted to $(2,272) for the nine months ended December 31, 2019 compared to $(10,795) for the nine months ended December 31, 2018 primarily due to the payment of the purchase price for the acquisition of the India business from Majesco Limited, investments in short term investment, and purchases of property, equipment and intangible assets during the nine months ended December 31, 2019.

 

Sale / (purchase) of investments in mutual funds, acquisition of business and certificate of deposits (net) was $(2,548) for the nine months ended December 31, 2019 and $(3,299) for the nine months ended December 31, 2018. Restricted cash was $42 at December 31, 2019 and $50 at December 31, 2018.

 

Net cash provided by / (used in) financing activities was $921 for the nine months ended December 31, 2019 compared to $(99) for the nine months ended December 31, 2018 mainly due to the proceeds from shares issued under the Majesco Employee Stock Purchase Plan.

 

On February 25, 2019, we completed a rights offering pursuant to which we received approximately $43,477 in gross proceeds from the sale of 6,123,463 shares of our common stock to shareholders who exercised their subscription rights (including both basic and over-subscriptions) in the rights offering. We used a portion of the proceeds from our rights offering to purchase the remaining 10% of the share capital of Exaxe and to repay $5,000, which constituted the total amount outstanding under our loan agreement with HSBC Bank USA, National Association, and terminated this facility. We expect to use the remaining proceeds from the rights offering to fund future acquisitions and for general corporate purposes, including to fund any earn-out payments under the Exaxe acquisition.

 

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, our subsidiary, Majesco Software and Solutions India Pvt. Ltd. (“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 $2,801 at exchange rates in effect on December 31, 2019). 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 interest on this 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 Working Capital Overdraft Facility and the Short Term Loans Facility are for working capital purposes and subject to sub-limits. The interest on these facilities is based on the MCLR plus a margin to be agreed with Standard Chartered Bank at the time of each borrowing. The MCLR is to be determined on the date of each disbursement and is effective until repayment or maturity. Interest will accrue from the draw down date up to the repayment or maturity date. 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 Pre Shipment Financing Under Export Orders Facility is for the purchase of raw material, processing, packing, transportation, warehousing and other expenses and overheads incurred by MSSIPL to ready goods for sale. The interest on this facility is based on the MCLR plus a margin to be agreed with Standard Chartered Bank at the time of each borrowing. The MCLR is to be determined on the date of utilization and is effective until repayment. Interest will accrue from the utilization date up to the repayment date.

 

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 December 31, 2019. There were no outstanding loans under this Combined Facility as of December 31, 2019.

 

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Term Loan Facility

 

On March 23, 2016, we entered into a Loan Agreement (the “Loan Agreement”) with HSBC Bank USA, National Association (“HSBC”) pursuant to which HSBC agreed to extend loans to us in the amount of up to $10,000 and we issued a promissory note to HSBC in the maximum principal amount of $10,000 or any lesser amount borrowed under the Loan Agreement (the “Note”, and together with the “Loan Agreement”, the “Facility”). The outstanding principal balance of the loan bore interest based on LIBOR plus a margin in effect on the first day of the relevant interest period. Until January 1, 2018, only interest was payable under the loan. Commencing on January 1, 2018, and on each January 1 and July 1 thereafter until July 1, 2020, installments of principal in the amount of $1,667 were due and payable semi-annually. All principal and interest outstanding under the Note was due and payable on March 1, 2021. The Facility was unsecured and supported by a letter of credit issued by a bank of $10,000, which was secured by a cash pledge of our parent company, Majesco Limited. On February 27, 2019, we used a portion of the proceeds from our rights offering to repay the total amount outstanding under the Loan Agreement with HSBC and terminated this facility.

 

Receivable Purchase Facility

 

On January 13, 2017, Majesco and its subsidiaries, Majesco Software and Solutions Inc. (“MSSI”) and Cover-All Systems, jointly entered into a Receivable Purchase Agreement with HSBC (the “Receivable Purchase Agreement”) 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 serves as HSBC’s agent for the collection of receivables, and Majesco collects and otherwise enforces 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 us for working capital and other general corporate purposes.

 

On November 29, 2018, we amended the Receivable Purchase Agreement to increase its limit to $15,000 until March 29, 2019, and $10,000 thereafter. HSBC received an arrangement fee of $10 in connection with this amendment. The amendment will provide additional liquidity to Majesco for mergers and acquisitions and other general corporate purposes. There are no outstanding loans under this facility as of December 31, 2019. We used proceeds from this facility to repay existing indebtedness and for capital expenditures, working capital and other general corporate purposes.

 

Exaxe Facilities

 

Exaxe Limited has a receivables purchase agreement with AIB Commercial Finance Limited (“AIB Commercial”) pursuant to which AIB Commercial will purchase up to € 200 in receivables from Exaxe Limited on a discounted basis. In addition, Exaxe Limited has an overdraft facility with Allied Irish Banks, p.l.c. (“AIB”) of up to € 100. The facility has a variable interest rate and is payable on demand at any time. This facility is secured by the assets of Exaxe Limited. As of December 31, 2019, there are no outstanding balances under these facilities.

 

On July 17, 2019, Majesco’s subsidiary Exaxe Limited, and HSBC France, Dublin Branch (“HSBC France”), entered into a € 400 (or approximately $448 at exchange rates in effect on December 31, 2019) overdraft facility (the “HSBC France Facility”). The HSBC France Facility is for working capital purposes. The HSBC France Facility is subject to review from time to time and in any event a review shall occur in May 2020. Exaxe may terminate the HSBC France Facility at any time without penalty. Interest under the HSBC France Facility is payable at the rate of 3.5% per annum over the prevailing European Central Bank Rate on amounts up to € 400 and 7% per annum over such rate on amounts over € 400. The HSBC France Facility is secured by a fixed and floating charge over certain assets of Exaxe. Exaxe agreed to certain negative covenants under the HSBC France Facility, including not to create or allow any mortgage or security over its assets or revenues. As of December 31, 2019, there are no outstanding balances under this HSBC France Facility.

 

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Vehicle 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 December 31, 2019 is $52.

 

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 $0 under the Combined Facility, $0 under our receivable purchase facility and $52 under our auto loans at December 31, 2019, compared to $0, $415 and $137, respectively, as of March 31, 2019.

 

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 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 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 December 31, 2019 were $19,996 and $25,542, 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 December 31, 2019, are variable and are based on LIBOR plus a fixed margin. As of December 31, 2019, we had $0 and $0 in borrowings outstanding under our receivable purchase facility with HSBC and our Combined Facility, respectively. As of December 31, 2019, we had borrowed $52 under our auto loans. 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 December 31, 2019 and 2018, respectively, compared to 11% and 11% for the nine months ended December 31, 2019 and 2018, respectively. The effect of foreign exchange rate changes on cash and cash equivalents resulted in a gain/(loss) of $240 and $115 for the three months ended December 31, 2019 and December 31, 2018, respectively, compared to gain of $251 and $172 for the nine months ended December 31, 2019 and December 31, 2018, respectively. For the three months ended December 31, 2019 and December 31, 2018, we had a foreign exchange gain/(loss) of approximately $523 and $346, respectively, compared to a foreign exchange gain/(loss) of $(376) and $(892) for the nine months ended December 31, 2019 and December 31, 2018, 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 $41,300 and $31,100 as of December 31, 2019 and March 31, 2019, respectively. The aggregate contracted Great Britain Pound (“GBP”) notional amounts of the Group’s foreign exchange forward contracts outstanding amounted to GBP 0 and GBP 0 as of December 31, 2019 and March 31, 2019, respectively. The outstanding forward contracts as of December 31, 2019 mature between one month and 37 months. As of December 31, 2019, we estimate that $47, 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 December 31, 2019 are designated as in hedge relationship and there will be no impact on our 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 December 31, 2019                
Designated as hedging instruments under Cash Flow Hedges                
Foreign exchange forward contracts  $155   $470   $101   $72 
Total  $155   $470   $101   $72 

 

* 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 Liabilities,’ respectively in the Consolidated Balance Sheet.

 

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 and nine months ended December 31, 2019.