MJCO Majesco

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

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 Digital1^st™ 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 Digital1^st Insurance, our customers can respond to evolving market needs, growth and innovation opportunities and regulatory changes, which enables agility, innovation and speed while improving the effectiveness and efficiency of their business operations.

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

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

COVID-19 Pandemic

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

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

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

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

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.

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

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

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

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

Recent Accounting Developments

New Accounting Pronouncements not yet adopted

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

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

Recently adopted accounting pronouncements

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

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

Emerging Growth Company

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

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:

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

The following table presents the change in level 3 instruments:  

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

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

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

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

MSSIPL Facilities

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

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

Auto loans 

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

Receivable Purchase Facility

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

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

Exaxe Facilities

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

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

InsPro Facilities

Equipment financing obligations

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

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

Finance lease obligations

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

Cash Flow Hedges and Other Derivatives

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

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

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

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

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

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

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

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

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

Employee Stock Option Scheme of Majesco Limited — Plan 1

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

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

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

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

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

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

Majesco 2015 Equity Incentive Plan

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

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

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

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

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

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

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

Majesco Performance Bonus Plan

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

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

Majesco Employee Stock Purchase Plan

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

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

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

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

Total employee stock option plans expenses

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

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

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

Reimbursement of Expenses

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

Leases

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

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

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

Joint Venture Agreement

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

Services Agreements

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

Lease with Exaxe Sellers

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

Business Transfer Agreement and Memorandum of Understanding

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

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

Recognized amount of identifiable assets acquired and liabilities assumed

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:

The following table sets forth revenues by classification:

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

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

Capital Commitments

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

Operating Leases

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

Finance lease obligations

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

Leases

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

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

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

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

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

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

Transfer Pricing

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

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

INSPRO

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

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

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

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

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

Recognized amount of identifiable assets acquired and liabilities assumed

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

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

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

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

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

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

Changes in carrying amount of the goodwill

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:

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

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

Termination of Chief Financial Officer

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

Acquisition of Majesco

Agreement and Plan of Merger

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

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

Support Agreement

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

Promoter Support Agreement

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

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

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

Limited Guaranty

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

Letter Agreement

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