Former name, former address and former
fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated
filer,” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
As of September 30, 2012, the registrant had 16,185,804 shares
of common stock, $0.01 par value per share, outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Sajan, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
2012
(Unaudited)
|
|
|
December 31,
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
660,702
|
|
|
$
|
1,763,249
|
|
Accounts receivable, net of allowance of $15,000
|
|
|
3,144,274
|
|
|
|
3,501,898
|
|
Deferred tax asset, net of allowance
|
|
|
54,180
|
|
|
|
54,180
|
|
Unbilled services
|
|
|
1,146,335
|
|
|
|
823,617
|
|
Prepaid expenses and other current assets
|
|
|
456,356
|
|
|
|
415,794
|
|
Total current assets
|
|
|
5,461,847
|
|
|
|
6,558,738
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
853,669
|
|
|
|
758,440
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
605,651
|
|
|
|
944,791
|
|
Capitalized software development costs, net
|
|
|
158,410
|
|
|
|
123,003
|
|
Other assets
|
|
|
21,658
|
|
|
|
32,820
|
|
Total other assets
|
|
|
785,719
|
|
|
|
1,100,614
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,101,235
|
|
|
$
|
8,417,792
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligation
|
|
$
|
29,663
|
|
|
$
|
26,039
|
|
Acquisition liability - due to sellers
|
|
|
189,955
|
|
|
|
331,131
|
|
Accounts payable
|
|
|
2,568,521
|
|
|
|
2,507,490
|
|
Accrued interest – related party
|
|
|
96,164
|
|
|
|
51,123
|
|
Accrued compensation and benefits
|
|
|
507,342
|
|
|
|
665,793
|
|
Accrued liabilities
|
|
|
143,655
|
|
|
|
167,230
|
|
Deferred revenue
|
|
|
655,010
|
|
|
|
875,017
|
|
Total current liabilities
|
|
|
4,190,310
|
|
|
|
4,623,823
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
15,805
|
|
|
|
38,528
|
|
Note payable – related party
|
|
|
750,000
|
|
|
|
750,000
|
|
Total long-term liabilities
|
|
|
765,805
|
|
|
|
788,528
|
|
Total liabilities
|
|
|
4,956,115
|
|
|
|
5,412,351
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 10,000,000 shares authorized and no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.01 par value, 35,000,000 shares authorized; 16,185,804 and 16,165,970 issued
and outstanding at September 30, 2012 and December 31, 2011
|
|
|
161,857
|
|
|
|
161,659
|
|
Additional paid-in capital
|
|
|
6,817,275
|
|
|
|
6,695,069
|
|
Accumulated deficit
|
|
|
(4,689,425
|
)
|
|
|
(3,676,350
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency adjustment
|
|
|
(144,587
|
)
|
|
|
(174,937
|
)
|
Total stockholders’ equity
|
|
|
2,145,120
|
|
|
|
3,005,441
|
|
Total liabilities and stockholders’ equity
|
|
$
|
7,101,235
|
|
|
$
|
8,417,792
|
|
See notes to unaudited consolidated
financial statements.
Sajan, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (Unaudited)
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation and consulting
|
|
$
|
5,155,120
|
|
|
$
|
5,185,758
|
|
|
$
|
15,331,619
|
|
|
$
|
15,816,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization)
|
|
|
3,303,260
|
|
|
|
3,053,872
|
|
|
|
9,947,087
|
|
|
|
9,350,483
|
|
Sales and marketing
|
|
|
571,371
|
|
|
|
647,477
|
|
|
|
1,814,143
|
|
|
|
1,908,708
|
|
Research and development
|
|
|
182,517
|
|
|
|
443,608
|
|
|
|
948,323
|
|
|
|
1,235,749
|
|
General and administrative
|
|
|
893,267
|
|
|
|
986,425
|
|
|
|
2,843,486
|
|
|
|
2,890,473
|
|
Loss on subsidiary closure
|
|
|
-
|
|
|
|
-
|
|
|
|
80,113
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
184,846
|
|
|
|
173,746
|
|
|
|
589,081
|
|
|
|
552,953
|
|
Total operating expenses
|
|
|
5,135,261
|
|
|
|
5,305,128
|
|
|
|
16,222,233
|
|
|
|
15,938,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
19,859
|
|
|
|
(119,370
|
)
|
|
|
(890,614
|
)
|
|
|
(121,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(23,251
|
)
|
|
|
(18,594
|
)
|
|
|
(70,356
|
)
|
|
|
(54,210
|
)
|
Interest and other income
|
|
|
(308
|
)
|
|
|
1,168
|
|
|
|
2,665
|
|
|
|
4,069
|
|
Other, net
|
|
|
(5,515
|
)
|
|
|
(4,371
|
)
|
|
|
(21,195
|
)
|
|
|
13,522
|
|
Total other (expense), net
|
|
|
(29,074
|
)
|
|
|
(21,797
|
)
|
|
|
(88,886
|
)
|
|
|
(36,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,215
|
)
|
|
|
(141,167
|
)
|
|
|
(979,500
|
)
|
|
|
(158,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
33,575
|
|
|
|
-
|
|
|
|
33,575
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(42,790
|
)
|
|
$
|
(141,167
|
)
|
|
$
|
(1,013,075
|
)
|
|
$
|
(158,541
|
)
|
Loss per common share – basic and diluted
|
|
$
|
(.00
|
)
|
|
$
|
(.01
|
)
|
|
$
|
(.06
|
)
|
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
16,185,804
|
|
|
|
16,027,799
|
|
|
|
16,183,600
|
|
|
|
16,019,386
|
|
Net loss
|
|
$
|
(42,790
|
)
|
|
$
|
(141,167
|
)
|
|
$
|
(1,013,075
|
)
|
|
$
|
(158,541
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation adjustments
|
|
|
18,452
|
|
|
|
(130,191
|
)
|
|
|
30,350
|
|
|
|
(101,376
|
)
|
Comprehensive loss
|
|
$
|
(24,338
|
)
|
|
$
|
(271,358
|
)
|
|
$
|
(982,725
|
)
|
|
$
|
(259,917
|
)
|
See notes to unaudited consolidated
financial statements.
Sajan, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
|
|
Nine months ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,013,075
|
)
|
|
$
|
(158,541
|
)
|
Adjustments to reconcile net loss to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Loss on subsidiary closure
|
|
|
80,113
|
|
|
|
-
|
|
Amortization of capitalized software costs
|
|
|
104,510
|
|
|
|
269,566
|
|
Amortization of license costs
|
|
|
57,428
|
|
|
|
94,977
|
|
Amortization of intangible assets
|
|
|
200,974
|
|
|
|
|
|
Depreciation
|
|
|
226,170
|
|
|
|
188,410
|
|
Stock-based compensation expense
|
|
|
122,404
|
|
|
|
161,426
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
357,624
|
|
|
|
20,455
|
|
Unbilled services
|
|
|
(322,718
|
)
|
|
|
(318,967
|
)
|
Prepaid expenses and other current assets
|
|
|
(105,490
|
)
|
|
|
(261,958
|
)
|
Other assets
|
|
|
(2,276
|
)
|
|
|
|
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
61,031
|
|
|
|
(27,186
|
)
|
Accrued interest – related party
|
|
|
45,041
|
|
|
|
(32,164
|
)
|
Accrued compensation and benefits
|
|
|
(158,451
|
)
|
|
|
173,505
|
|
Accrued liabilities
|
|
|
(65,572
|
)
|
|
|
(134,752
|
)
|
Deferred revenue
|
|
|
(220,007
|
)
|
|
|
520,675
|
|
Net cash flows provided by (used in) operating activities
|
|
|
(632,294
|
)
|
|
|
495,446
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(336,250
|
)
|
|
|
(182,708
|
)
|
Purchases of intangible assets
|
|
|
(3,010
|
)
|
|
|
-
|
|
Increase in Capitalized Software Development
|
|
|
(138,679
|
)
|
|
|
-
|
|
Release of restricted cash
|
|
|
-
|
|
|
|
1,000,000
|
|
Payment of dissenter liability
|
|
|
-
|
|
|
|
(50,000
|
)
|
Net cash flows provided by (used in) investing activities
|
|
|
(477,939
|
)
|
|
|
767,292
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Escrow proceeds returned for dissenter shares
|
|
|
-
|
|
|
|
19,790
|
|
Payments on note payable – indemnification escrow
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Payments on note payable – related party
|
|
|
-
|
|
|
|
(250,000
|
)
|
Payments on capital lease obligation
|
|
|
(19,099
|
)
|
|
|
(8,960
|
)
|
Proceeds from exercise of stock options
|
|
|
-
|
|
|
|
8,407
|
|
Net cash flows used in financing activities
|
|
|
(19,099
|
)
|
|
|
(1,230,763
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,129,332
|
)
|
|
|
31,975
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes in cash
|
|
|
26,785
|
|
|
|
(96,385
|
)
|
Cash and cash equivalents – beginning
of period
|
|
|
1,763,249
|
|
|
|
1,903,229
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents – end of period
|
|
$
|
660,702
|
|
|
$
|
1,838,819
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amortization of loan fees
|
|
$
|
25,315
|
|
|
$
|
86,374
|
|
Non-cash investing and
financing transactions:
Cashless
exercise
of
stock
options
|
|
$
|
198
|
|
|
$
|
-
|
|
Purchase of fixed assets via capital lease obligation
|
|
$
|
-
|
|
|
$
|
79,360
|
|
Adjustment to intangible assets and acquisition liability - due to sellers due to finalization
of purchase price
|
|
$
|
141,176
|
|
|
$
|
-
|
|
See notes to unaudited consolidated
financial statements.
Sajan, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial
Statements
1.
|
Nature of Business and Summary of Significant Accounting Policies
|
Nature of Business / Basis of Presentation
Sajan, Inc. (the “Company” or “Sajan”),
a Delaware corporation, provides language translation services and technology solutions to companies located throughout the world,
particularly in the technology, consumer products, medical and life sciences, financial services, manufacturing, government, and
retail industries that are selling products into global markets. The Company is located in River Falls, Wisconsin.
In 2009, we established Sajan Software Ltd (“Sajan Software”),
which is based in Dublin, Ireland. The Ireland facility serves as both a Global Language Service Center and is home to Sajan Software,
the producer of Sajan’s technology tools. Sajan India Software Private Limited (“Sajan India”), based
in Delhi, India, was our software development center. This center was closed in January 2012 and these functions moved to our
River Falls headquarters. In 2010, we also established a Global Language Service Center in Spain, Sajan Spain S.L.A. (“Sajan
Spain”), to serve the European market. In 2011, we established a Global Language Service Center in Singapore,
Sajan Singapore Pte. Ltd. (“Sajan Singapore”), to serve the Asia Pacific market. In addition, in 2011 we acquired
companies in Spain (“New Global Europe”) and Canada (“New Global Canada”). All of these operations are
wholly-owned subsidiaries of Sajan. Effective as of May 7, 2012, Sajan, LLC was merged with and into Sajan, Inc. and Sajan, Inc.
was the surviving entity.
Interim Financial Information
The condensed consolidated balance sheet as of December 31,
2011, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial
information. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements
prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Operating results for the three and
nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December
31, 2012 or any other period. The accompanying consolidated financial statements and related notes should be read in conjunction
with the audited consolidated financial statements of the Company, and notes thereto, contained in our Annual Report on Form 10-K
for the year ended December 31, 2011 filed with the SEC on March 30, 2012. The financial information furnished in this
report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management,
are necessary to fairly present the results of the interim periods presented in order to make the consolidated financial statements
not misleading.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Sajan, Inc. and its wholly-owned subsidiaries, Sajan Software, Sajan India, Sajan Spain, Sajan Singapore, New
Global Europe and New Global Canada from the effective date of their acquisition or formation.
All significant intercompany accounts and transactions have
been eliminated in the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less at the date of purchase to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments,
which include cash equivalents, accounts receivable, accounts payable and other accrued expenses, approximate their fair values
due to their short maturities and/or market-consistent interest rates.
Accounts Receivable
The Company extends unsecured credit to customers in the normal
course of business. The Company provides an allowance for doubtful accounts when appropriate, the amount of which is based upon
a review of outstanding receivables, historical collection information, and existing economic conditions, on an individual customer
basis. Normal accounts receivable are due 30 days after issuance of the invoice. Receivables are written off only after all collection
attempts have failed, and are based on individual credit evaluation and specific circumstances of the customer. Accounts receivable
have been reduced by an allowance for uncollectible accounts of approximately $15,000 at both September 30, 2012 and December
31, 2011. Management believes all accounts receivable in excess of the allowance are fully collectible. The Company does not accrue
interest on accounts receivable.
Income (Loss) Per Common Share
Basic earnings (loss) per share is computed based on the weighted
average number of common shares outstanding. Basic per share amounts are computed, generally, by dividing net income (loss) by
the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed based on the
weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding
had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include unexercised stock
options and warrants. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments
unless their effect is anti-dilutive, thereby reducing the loss or increasing the income per common share. In calculating diluted
weighted average shares and per share amounts, stock options and warrants with exercise prices below average market prices, for
the respective fiscal years in which they were dilutive, are considered to be outstanding using the treasury stock method. The
treasury stock method requires the calculation of the number of additional shares by assuming the outstanding stock options and
warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price
during the year. In the event that the Company is in a net loss situation, all options and warrants outstanding are
excluded from the diluted weighted average shares outstanding calculation as the effect of these options is anti-dilutive.
A reconciliation of the denominator in the basic and diluted
income or loss per share is as follows:
|
|
Three months ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(42,790
|
)
|
|
$
|
(141,167
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
16,185,804
|
|
|
|
16,027,799
|
|
Loss per common share - basic and diluted
|
|
$
|
(.00
|
)
|
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
Awards excluded from diluted income (loss) per share
|
|
|
1,314,076
|
|
|
|
1,989,980
|
|
|
|
Nine months ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,013,075
|
)
|
|
$
|
(158,541
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
16,183,600
|
|
|
|
16,019,386
|
|
Loss per common share - basic and diluted
|
|
$
|
(.06
|
)
|
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
Awards excluded from diluted loss per share
|
|
|
1,314,076
|
|
|
|
1,989,980
|
|
Property and Equipment
Property and equipment are recorded at cost and depreciated
over their estimated useful lives, initially determined to be two to seven years, using the straight-line method. Upon retirement
or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting
gain or loss is included in operating results. Repairs and maintenance costs are expensed as incurred.
Long-lived Assets
The Company annually reviews its long-lived assets for events
or changes in circumstances that may indicate that the carrying amount of a long-lived asset may not be recoverable or exceeds
its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset. An impairment loss shall be measured
as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The Company's long-lived assets, which include intangibles and patents, are subject to amortization. There
was no impairment for the three and nine months ended September 30, 2012 and 2011. See Note 12 for change with customer lists
acquired at September 30, 2012.
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Customer lists acquired
|
|
$
|
774,239
|
|
|
$
|
912,405
|
|
Patents
|
|
|
504,838
|
|
|
|
504,838
|
|
Less accumulated amortization
|
|
|
(673,426
|
)
|
|
|
(472,452
|
)
|
Total intangible assets, net
|
|
$
|
605,651
|
|
|
$
|
944,791
|
|
Capitalized Software Development Costs
Sajan capitalizes software development costs incurred during
the application development stage related to new software or major enhancements to the functionality of existing software that
is developed solely to meet the entity’s internal operational needs and when no substantive plans exist or are being developed
to market the software externally. Costs capitalized include external direct costs of materials and services and internal payroll
and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as
incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization
and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. During the
three months ended September 30, 2012, the Company capitalized $139,000 related to software development activities.
Capitalized software development costs consist of the following
as of:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Capitalized software development costs
|
|
$
|
2,673,570
|
|
|
$
|
2,534,891
|
|
Less accumulated amortization
|
|
|
(2,522,335
|
)
|
|
|
(2,435,652
|
)
|
Change in foreign currency
|
|
|
7,175
|
|
|
|
23,764
|
|
Total capitalized software development costs, net
|
|
$
|
158,410
|
|
|
$
|
123,003
|
|
When the projects are ready for their intended use, the Company
amortizes such costs over their estimated useful lives of three years. During the three and nine months ended September 30, 2012,
the Company capitalized software costs of $138,679. As of September 30, 2012, these new costs and projects were not completed
or implemented. Capitalized software amortization expense for the three and nine months ended September 30, 2012 was $17,730 and
$104,510, respectively, and for the three and nine months ended September 30, 2011 was $76,444 and $269,566, respectively. Estimated
amortization expense for capitalized software costs are expected to be approximately $14,000 for the remainder of 2012 and $58,900,
$46,200, and $39,300 for the years ending December 31, 2013, 2014 and 2015, respectively.
Stock-Based Compensation
The Company measures and recognizes compensation expense for
all stock-based compensation at fair value. The Company recognizes stock-based compensation costs on a straight-line basis over
the requisite service period of the award, which is generally the option vesting term. For the three and nine months
ended September 30, 2012, total stock-based compensation expense was approximately $18,000 ($0.00 per share) and $122,000 ($0.01
per share) respectively. For the three and nine months ended September 30, 2011, total stock-based compensation expense was approximately
$54,000 ($0.00 per share) and $161,000 ($0.01 per share) respectively. As of September 30, 2012, there was approximately $211,000
of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s
2004 Long-Term Incentive Plan. That cost is expected to be recognized over a weighted-average period of three years. This is an
estimate based on options currently outstanding, and therefore this projected expense could be more in the future.
The Company’s determination of fair value of share-based
compensation awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well
as assumptions regarding a number of variables. These variables include, but are not limited to; the Company’s expected
stock price volatility, and actual and projected stock option exercise behaviors and forfeitures. An option’s expected term
is the estimated period between the grant date and the exercise date of the option. As the expected term increases, the fair value
of the option and the compensation cost will also increase. The expected-term assumption is generally calculated using historical
stock option exercise data; however the Company does not have historical exercise data to develop such an assumption. As a result,
the Company determined the expected term assumption using the simplified expected-term calculation as provided in SEC Staff Accounting
Bulletin 107.
The Company calculates expected volatility for stock options
and awards using its own stock price. Management expects and estimates substantially all director and employee stock options will
vest, and therefore the forfeiture rate used is zero. The risk-free rates for the expected terms of the stock options
are based on the U.S. Treasury yield curve in effect at the time of grant.
In determining the compensation cost of the options granted
during 2012 and 2011, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option
pricing model, and the weighted average assumptions used in these calculations are summarized as follows:
|
|
Three months ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate
|
|
|
0.2
|
%
|
|
|
1.5
|
%
|
Expected life of options granted
|
|
|
2.8 Yrs
|
|
|
|
7 Yrs
|
|
Expected volatility range
|
|
|
76.6
|
%
|
|
|
60.0
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Using the Black-Scholes option pricing model, management has
determined that the options issued in the three months ended September 30, 2012 and 2011 have a weighted-average grant date fair
value of $0.36 and $0.85.
|
|
Nine months ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate
|
|
|
0.7
|
%
|
|
|
1.93
|
%
|
Expected life of options granted
|
|
|
7 Yrs
|
|
|
|
7 Yrs.
|
|
Expected volatility range
|
|
|
68.6
|
%
|
|
|
60.0
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Using the Black-Scholes option pricing model, management has
determined that the options issued have a weighted-average grant date fair value for the nine months ended September 30, 2012
and 2011 of $0.60 per share and $ 0.80 per share, respectively.
Revenue Recognition
The Company derives revenues primarily from language translation
services and professional consulting services.
Translation services utilize the Company’s proprietary
translation management system – GCMS - to provide a solution for all of the customer’s language translation requirements.
Services include content analysis, translation memory and retrieval, language translation, account management, graphic design
services, technical consulting and professional services. Services associated with translation of content are generally
billed on a “per word” basis. Professional services, including technical consulting and project management are billed
on a per hour rate basis.
In accordance with Financial Accounting Standard Board (“FASB”)
and SEC accounting guidance on revenue recognition, the Company considers revenue earned and realizable at the time services are
performed and amounts are earned. Sajan considers amounts to be earned when (1) persuasive evidence of an arrangement has been
obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination
of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered
and products delivered and the collectability of those fees. The Company recognizes revenue for translations services on a standard
“per word” basis at the time the translation is completed. The Company recognizes revenue for professional services
when the services have been completed in accordance with the statement of work.
Sajan’s agreements with its customers may informally
provide the customer with a limited time period following delivery during which the Company will attempt to address any non-conformity
to previously agreed upon objective specifications relating to the work. Revenue is recognized as services are delivered in accordance
with the terms of the agreement with the customer, are not contingent, and are earned.
Revenues recognized in excess of billings are recorded as unbilled
services. Billings in excess of revenues recognized are recorded as deferred revenues to the extent cash has been received.
Cost of Revenues
Cost of revenues consists primarily of expenses incurred for
translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client
projects. Cost of revenues excludes depreciation and amortization which is presented separately as a component of operating expenses.
Research and Development
Research and development expenses represent costs incurred
for development of routine enhancements to our operating software system and include costs incurred during the preliminary project
stage of development or related to training or maintenance activities. Research and development expenses consist primarily of
salaries and related costs of our software engineering organization, fees paid to third party consultants and certain facility
expenses.
Foreign Currency Translation
For operations in local currency environments, assets and liabilities
are translated at year-end exchange rates with cumulative translation adjustments included as a component of shareholders’
equity and income and expense items are translated at average foreign exchange rates prevailing during the year. For operations
in which the U.S. dollar is not considered the functional currency, certain financial statements amounts are re-measured
at historical exchange rates, with all other asset and liability amounts translated at year-end exchange rates. These re-measured
adjustments are reflected in the results of operations. Gains and losses from foreign currency transactions are included in the
Consolidated Statements of Operations.
Income Tax
Current income taxes are recorded based on statutory obligations
for the current operating period for the various countries in which the Company has operations.
Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
Use of Estimates
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results could differ from those estimates.
2.
|
Concentrations of Credit Risk
|
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.
Cash Concentration –
The Company places its cash
at financial institutions with balances that, at times, may exceed federally insured limits. The Company evaluates the creditworthiness
of these financial institutions in determining the risk associated with these deposits. The Company has not experienced any losses
on such accounts.
Accounts receivable concentration –
Concentrations
of credit risk with respect to trade accounts receivable are limited due to the dispersion of customers across different industries
and geographic regions. At September 30, 2012 and December 31, 2011, one customer accounted for approximately 29% and 17% of accounts
receivable, respectively.
Sales concentration
– For the three months ended
September 30, 2012, two customers accounted for 18.5 % and 15.2% of net revenues and one customer accounted for 15.1% of net revenues
for the three month period ended September 30, 2011. For the nine months ended September 30, 2012, two customers accounted for
17.7% and 12.2% of net revenues and one customer accounted for 14.8% of net revenues for the same period of 2011.
3.
|
Segment Information and Major Customers
|
The Company views its operations and manages its business as
one reportable segment, providing language translation solutions to a variety of companies, primarily in its targeted vertical
markets. Factors used to identify the Company’s single operating segment include the financial information available
for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The
Company markets its products and services through its headquarters in the United States and its wholly-owned subsidiaries operating
in Ireland, Spain, Canada and Singapore.
Net sales per geographic region, based on the billing location
of the end customer, are summarized below.
|
|
Three months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Sales
|
|
|
Percent
|
|
|
Sales
|
|
|
Percent
|
|
United States
|
|
$
|
3,800,000
|
|
|
|
73
|
%
|
|
$
|
3,500,000
|
|
|
|
67
|
%
|
International
|
|
|
1,400,000
|
|
|
|
27
|
%
|
|
|
1,700,000
|
|
|
|
33
|
%
|
Total Sales
|
|
$
|
5,200,000
|
|
|
|
100
|
%
|
|
$
|
5,200,000
|
|
|
|
100
|
%
|
|
|
Nine months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Sales
|
|
|
Percent
|
|
|
Sales
|
|
|
Percent
|
|
United States
|
|
$
|
11,000,000
|
|
|
|
72
|
%
|
|
$
|
11,100,000
|
|
|
|
70
|
%
|
International
|
|
|
4,300,000
|
|
|
|
28
|
%
|
|
|
4,700,000
|
|
|
|
30
|
%
|
Total Sales
|
|
$
|
15,300,000
|
|
|
|
100
|
%
|
|
$
|
15,800,000
|
|
|
|
100
|
%
|
For the three and nine months ended September 30, 2012, one
foreign country accounted for 12.3% and 11.6% of the net revenues, respectively and 11.6% and 10.6% of net revenues for the same
periods in 2011.
4.
|
Related Party Transactions
|
Notes Payable
Notes payable and accrued interest to related parties was approximately
$846,000 and $801,000 at September 30, 2012 and December 31, 2011, respectively, related to notes payable to directors, executive
officers and stockholders of the Company, Shannon and Angela Zimmerman. On February 23, 2010, the Company issued
a Promissory Note to Shannon and Angela Zimmerman as part of the consideration for the merger of Sajan, Inc. and Garuda Acquisition,
LLC, a wholly-owned subsidiary of MathStar, Inc. (for a discussion of this merger, see Note 1 of the Notes to Consolidated Financial
Statements in the Company’s Form 10-K for the year ended December 31, 2011 as filed with the SEC on March 30, 2012). The
Promissory Note documents the Company’s obligation to pay $1 million of the pro rata amount of the cash consideration for
the merger to the Zimmermans. The Promissory Note had a term of one year and provides for an interest rate of 8% per year to be
accrued until payment of the Promissory Note. On February 22, 2011, the Promissory Note was amended. The amendment
called for the payment of $250,000 of the principal amount immediately together with all accrued interest, but extended the due
date on the remaining $750,000 principal amount of the Promissory Note to August 23, 2012. The other terms of the Promissory Note
remain the same. On March 26, 2012, the Promissory Note was amended to extend its maturity date to August 23, 2013.
Upon the occurrence of an “event of default,” as
defined in the Promissory Note, and at any time thereafter, the unpaid principal balance, plus accrued interest, plus all other
amounts due under the Promissory Note will, at the option of the Zimmermans, be immediately due and payable, without notice or
demand. The obligations of the Company under the Promissory Note are unsecured and are subordinated to the Credit Facility. (See
Note 6.)
Accrued interest was approximately $96,000 and $51,000 as of
September 30, 2012 and December 31, 2011, respectively. Interest expense was approximately $15,000 and $45,000 for the three and
nine months ended September 30, 2012, respectively and $15,000 and $48,000 for the respective three and nine months ended September
30, 2011.
Lease
Sajan leases its office space, under three non-cancelable operating
leases, from River Valley Business Center, LLC (“RVBC”), a limited liability company that is owned by Shannon Zimmerman
and Angela Zimmerman, each of whom is an executive officer and director of the Company and a beneficial owner of the Company’s
outstanding voting common stock. During 2011, the space consisted of approximately 16,000 square feet and was leased pursuant
to two agreements. These lease agreements require the Company to pay a minimum monthly rental plus certain operating expenses
and expire in January 2017. Payment of rent under these leases is secured by goods, chattels, fixtures and personal property of
the Company. Effective February 28, 2012, the Company entered into a third lease for an additional 3,850 square feet of space
in the same building. The monthly lease payment for this additional space is $4,650. All other terms of the lease are the same
as the previous leases.
Accrued liabilities represent the following at:
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Legal and professional services
|
|
$
|
63,456
|
|
|
$
|
22,720
|
|
VAT tax obligations
|
|
|
79,400
|
|
|
|
71,185
|
|
Other
|
|
|
799
|
|
|
|
73,325
|
|
Total
|
|
$
|
143,655
|
|
|
$
|
167,230
|
|
In March 2012, we entered into a one-year revolving working
capital line of credit with Silicon Valley Bank (“SVB”), which permits borrowings up to a principal amount equal to
the lesser of (a) $1,500,000 or (b) 80% of the aggregate amount of our outstanding eligible domestic accounts receivable, subject
to customary limitations and exceptions (the “Credit Facility”). Interest on the principal amount outstanding under
the Credit Facility accrues at a floating rate equal to the greater of 50 basis points above the U.S. prime rate and 4.0%, and
is payable monthly on the first calendar day of each month. The outstanding principal amount of any borrowings under the Credit
Facility, along with any accrued and unpaid interest thereon, is payable on the maturity date, March 28, 2013.
The Credit Facility is governed by the terms of a Loan and
Security Agreement, dated as of March 28, 2012, entered into by and among Sajan, Inc. and Sajan, LLC, as borrowers, and SVB, as
lender (the “Loan Agreement”). The Loan Agreement requires us to maintain (a) a minimum liquidity ratio of 1.25:1.00,
measured monthly based on the ratio of (i) the amount of borrowers’ unrestricted cash and cash equivalents held at SVB plus
(ii) the aggregate amount of borrowers’ outstanding eligible domestic accounts receivable, subject to customary limitations
and exceptions to (iii) all outstanding indebtedness owing by borrowers to SVB and (b) a minimum EBITDA covenant, measured monthly
on a consolidated basis. In addition, we are required to provide certain financial information and compliance certificates to
SVB and comply with certain other customary affirmative and negative covenants. The Credit Facility is secured by all of our domestic
assets except for intellectual property (which we agreed not to pledge to others), and the pledge of our equity interests in our
foreign subsidiaries is limited to 65% of such equity interests. Our obligations under the Loan Agreement are also guaranteed
on an unsecured basis by certain of our subsidiaries. The Loan Agreement contains customary events of default, which, if triggered,
would permit SVB to exercise customary remedies such as acceleration of all then-outstanding obligations arising under the Loan
Agreement, to terminate its obligations to lend under the Credit Facility, to apply a default rate of interest to such outstanding
obligations, and to exercise customary remedies under the Uniform Commercial Code.
The loans made to us under the Loan Agreement are senior in
right of payment to loans made to us by certain of our directors, executive officers and stockholders. In connection with the
Loan Agreement, we entered into a Subordination Agreement, dated as of March 28, 2012, with SVB and Shannon and Angel Zimmerman
(the “Zimmermans”), relating to the promissory note issued by us to the Zimmermans on February 23, 2010, in the original
aggregate principal amount of $1,000,000 (the “Zimmerman Note”). (See Note 4) The Subordination Agreement provides
that we will not make principal payments on the Zimmerman Note prior to repaying the full amount of borrowings made under the
Credit Facility.
As of September 30, 2012, no borrowings had been drawn under
the Credit Facility. (See Note 12) At one month end during the quarter ended September 30, 2012, the Company was not in compliance
with one of the covenants of the Credit Facility. The Company received a waiver for this violation. The Company was in compliance
with all applicable covenants of the Credit Facility during the three months ended September 20, 2012.
Amended and Restated 2004 Long-Term Incentive Plan
Over the past several years, shareholders have approved various
modifications to the Amended and Restated 2004 Long-Term Incentive Plan (the “Plan”) so that as of September 30, 2012,
2,200,000 shares of the Company's common stock were reserved for the issuance of restricted stock and incentive and nonqualified
stock options to directors, officers and employees of and advisors to the Company. Exercise prices are determined by the board
of directors on the dates of grants. The Company issues new shares when stock options are exercised.
On September 30, 2012, 1,138,050 options in the Plan were outstanding
with a weighted average exercise price of $1.19 per share.
Our deferred income tax assets and liabilities are recognized
for the differences between the financial statement and income tax reporting basis of assets and liabilities based on currently
enacted rates and laws. These differences include depreciation, net operating loss carryforwards, capital loss carryforwards,
allowance for accounts receivable, stock options and warrants, prepaid expenses, unrealized loss on securities, capitalized software
costs, cash to accrual conversion, and accrued liabilities. Our current deferred tax asset as
of both September 30, 2012 and December 31, 2011, was approximately $591,000 . Our current deferred tax liability as of both September
30, 2012 and December 31, 2011 was approximately $537,000.
The cumulative net operating loss available to offset future
income for federal and state reporting purposes was approximately $31.6 million and $9.2 million, respectively as of September
30, 2012. Available research and development credit carryforwards at September 30, 2012, were $0.7 million. The difference
between the amount of net operating loss carryforward available for federal and state purposes is due to the fact that a substantial
portion of the operating losses were generated in states in which the Company does not have ongoing operations. No deferred taxes
have been provided for these losses. The Company's federal and state net operating loss carryforwards expire in various calendar
years from 2015 through 2030 and the tax credit carryforwards expire in calendar years 2020 through 2028.
Future utilization of available net operating loss carryforwards
may be limited under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) as a result of significant
changes in ownership. These limitations could result in reduction of these net operating loss carryforwards before they are utilized. Based
upon the provisions of Section 382 of the Code, as of September 30, 2012 approximately $1.6 million of net operating loss carryforwards
are limited as to future use. The amount of these losses which are available in any one year is approximately $0.6 million. No
limitations exist on the remaining $30.0 million of federal loss carryforwards.
Income tax expense was $34,000 for the three months ended September
30, 2012. The expense for the quarter relates to taxes withheld on services performed in China and income taxes on our operation
in Spain.
In assessing the recovery of the deferred tax assets, management
considers whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generations of future taxable income in the periods in which
those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. The Company has recorded a
valuation allowance to offset substantially all of its deferred taxes as the Company believes it is more likely than not that
it will be unable to fully utilize the deferred tax benefits. The valuation allowance was $12.3 million and $12.0 million
as of September 30, 2012 and December 31, 2011, respectively. In the event that the Company determines that a valuation allowance
is no longer required, any benefits realized from the use of the NOLs and credits acquired will reduce its deferred income tax
expense.
We file a consolidated U.S. federal tax return. The Company’s
federal and state tax returns for the years ended 2008-2011 are still subject to examination. As a result of the adoption of ASC
740 –
Income Taxes
, effective October 1, 2007, we applied the requirements of ASC 740 to all tax positions for which
the statute of limitations remained open. ASC 740 was issued to address the non-comparability in reporting tax assets and
liabilities resulting from a lack of specific guidance in prior standards on consistent recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC 740 also provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosures
and transition. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income
taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statements of operations.
9.
|
Closure of India Operation
|
In January 2012, the Company implemented a plan to close the
software development operation in India and to transfer those activities to its River Falls headquarters. The Company terminated
the employees in January and is in the process of terminating the facility lease. There were limited assets and liabilities of
the operation. The Company expects to incur the following costs in connection with this action:
Loss on disposal of equipment and other assets
|
|
$
|
31,143
|
|
Employee severance
|
|
|
18,970
|
|
Lease termination
|
|
|
20,000
|
|
Professional fees and costs
|
|
|
10,000
|
|
Net loss
|
|
$
|
80,113
|
|
Total cash expenses will be approximately $50,000. Approximately
$27,000 was paid during the first nine months of 2012 and the remainder will be paid out in the fourth quarter of 2012.
The Company expenses legal costs as incurred. In the ordinary
course of business, the Company is subject to legal actions, proceedings and claims. As of the date of this report management
is not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on the Company’s
financial condition or results of operations.
The Company entered into a three year capital lease agreement
for the purchase of computer equipment in May 2011. The lease provides for the purchase of the equipment at the end of the lease
term for a nominal amount. The total amount financed under the lease is $79,000 and the monthly payments are $2,943.
On October 14, 2012, the Company and the previous owners of
New Global Europe, New Global Canada, and certain assets purchased by the Company entered into an agreement to formalize the purchase
price adjustments that were outlined in the Purchase Agreement dated October 14, 2011 (for a discussion of this acquisition, see
Note 3 of the Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year ended December 31, 2011
as filed with the SEC on March 30, 2012). The Company also completed its final valuation of the intangible assets acquired. As
a result of this amendment to the agreement, the Company has recorded a reduction in the remaining obligation to the former New
Global owners of $141,000 and a corresponding reduction of intangible assets as of September 30, 2012, see Note 1. The remaining
obligation to the former New Global owners of $190,000 was settled on October 14, 2012, through the payment of $95,000 and the
issuance of 82,589 shares of the Company’s common stock.
Also subsequent to September 30, 2012, the Company borrowed
$200,000 under its Credit Facility.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
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 (“
Securities Exchange Act ”). Forward-looking statements reflect the current
view about future events. When used in this Quarterly Report on Form 10-Q the words “anticipate,” “will,”
“believe,” “estimate,” “expect,” “future,” “intend,” “plan”
and similar expressions or the negative of these terms, as they relate to Sajan, Inc. (the “Company,” “Sajan,”
“we,” “us” or “our”), its subsidiaries or its management, identify forward-looking statements.
Our forward-looking statements in this report generally relate to: (i) our intent to invest in growth initiatives, including
sales and marketing programs, enhancements to our translation management database, and potential acquisitions; (ii) our expectation
to generate positive cash flow from operations; (iii) our estimates of operating expenses; (iv) our ability to obtain additional
financing; (v) our beliefs regarding the adequacy of our capital resources; and (vi) the expenses associated with the closure
of the Sajan India facility.
Forward-looking statements are based on information available
at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results,
levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking
statements. Such statements reflect the current view of our management with respect to future events and are subject to
risks, uncertainties, assumptions and other factors relating to the Company’s industry, its operations and results of operations,
and any businesses that may be acquired by it. These factors include:
|
·
|
our
rate of growth
in the global multilingual
content delivery
industry;
|
|
·
|
our
ability to effectively
manage our growth;
|
|
·
|
lack
of acceptance of
any existing or
new solutions we
offer;
|
|
·
|
our
ability to continue
increasing the
number of our customers
or the revenues
we derive from
our recurring revenue
customers;
|
|
·
|
continued
economic weakness
and constrained
globalization spending
by businesses operating
in international
markets;
|
|
·
|
our
ability to effectively
develop new solutions
that compete effectively
with the solutions
that our current
and future competitors
offer;
|
|
·
|
risk
of increased regulation
of the Internet
and business conducted
via the Internet;
|
|
·
|
our
ability to identify
attractive acquisition
opportunities,
successfully negotiate
acquisition terms
and effectively
integrate any acquired
companies or businesses;
|
|
·
|
availability
of capital on acceptable
terms to finance
our operations
and growth;
|
|
·
|
risks
of conducting international
commerce, including
foreign currency
exchange rate fluctuations,
changes in government
policies or regulations,
longer payment
cycles, trade restrictions,
economic or political
instability in
foreign countries
where we may increase
our business and
reduced protection
of our intellectual
property;
|
|
·
|
our
ability to add
sales and marketing,
research and development
or other key personnel
who are able to
successfully sell
or develop our
solutions;
|
|
·
|
our
ability to operate
as a public company
and comply with
applicable disclosure
and other requirements
and to hire additional
personnel with
public company
compliance experience; and
|
|
·
|
other
risk factors included
under “Risk
Factors”
in our Annual Report
on Form 10–K
filed with the
Securities and
Exchange Commission
on March 30, 2012.
|
Should one or more of these risks or uncertainties materialize,
or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed,
estimated, expected, intended or planned. Although our management believes that the expectations reflected in the forward-looking
statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Except as required
by applicable law, including the securities laws of the United States, Sajan does not intend to update any of the forward-looking
statements to conform these statements to actual results. The following discussion should be read in conjunction with the financial
statements and the related notes included in our Annual Report Form on 10-K filed with the SEC on March 30, 2012.
General Overview
Sajan provides on-demand language translation solutions
to customers selling products into global markets. These customers use our solutions to translate product sales and marketing
materials, packaging, user manuals, technical support and training documents, product manuals, instructions, warnings, and other
product information into numerous languages. We combine our internally developed proprietary technology and high quality translation
services to provide language translation solutions that are fast, reliable, and user-friendly. By utilizing an integrated technology
and a service-based approach to language translation, we offer comprehensive solutions that allow customers to rely upon a single
provider to meet all of their language translation needs. Our hosted technology system delivers a secure online solution that
can be offered on a modular basis, which makes it attractive in both small business settings and in large enterprise environments.
In 2009, we established Sajan Software Ltd (“Sajan Software”),
which is based in Dublin, Ireland. The Ireland facility serves as both a Global Language Service Center and is home to Sajan Software,
the producer of Sajan’s technology tools. Sajan India Software Private Limited (“Sajan India”), based in Delhi,
India, was our software development center. This center was closed in January 2012 and these functions were moved to our
River Falls headquarters. In 2010, we also established a Global Language Service Center in Spain, Sajan Spain S.L A (“Sajan
Spain”), to serve the European market. In 2011, we established a Global Language Service Center in Singapore,
Sajan Singapore Pte. Ltd. (“Sajan Singapore”), to serve the Asia Pacific market. All of these operations are wholly-owned
subsidiaries of Sajan.
In October 2011, we completed the acquisition of the New Global
Group (“New Global”) of companies. New Global is a provider of multilingual communication services and technologies
serving clients in the United States, Canada and Europe through offices in Montreal, Canada and Madrid, Spain. This acquisition
included the purchase of the outstanding stock of two subsidiaries of New Global, New Global Canada and New Global Europe, and
certain assets and liabilities of New Global LLC. The effective date of the acquisition was October 1, 2011. New Global Canada
and New Global Europe are now wholly-owned subsidiaries of Sajan.
Effective as of May 7, 2012, Sajan, LLC was merged with and
into Sajan, Inc, and Sajan, Inc. was the surviving entity in the merger.
Discussion of Critical Accounting Policies and Estimates
Discussion of the financial condition and results of
our operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The
preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates
and judgments. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions, and the impact of such differences may be material to the consolidated financial statements.
Our critical accounting policies are identified in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2011 in Management’s Discussion and Analysis of Financial Condition
and Results of Operations under the heading “Discussion of Critical Accounting Policies and Estimates.” There were
no significant changes to our critical accounting policies during the three and nine months ended September 30, 2012.
Revenue Recognition
The Company derives revenues primarily from language translation
services and professional consulting services.
Translation services utilize the Company’s proprietary
translation management system – GCMS — to provide a solution for all of the customer’s language translation
requirements. Services include content analysis, translation memory and retrieval, language translation, account management, graphic
design services, technical consulting and professional services. Services associated with translation of content are
generally billed on a “per word” basis. Professional services, including technical consulting and project management
are billed on a per hour rate basis.
In accordance with Financial Accounting Standard Board (“FASB”)
and SEC accounting guidance on revenue recognition, the Company considers revenue earned and realizable at the time services are
performed and amounts are earned. Sajan considers amounts to be earned when (1) persuasive evidence of an arrangement has been
obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination
of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered
and products delivered and the collectability of those fees. The Company recognizes revenue for translations services on a standard
“per word” basis at the time the translation is completed. The Company recognizes revenue for professional services
when the services have been completed in accordance with the statement of work.
Sajan’s agreements with its customers may informally
provide the customer with a limited time period following delivery during which the Company will attempt to address any non-conformity
to previously agreed upon objective specifications relating to the work. Revenue is recognized as services are delivered in accordance
with the terms of the agreement with the customer, are not contingent, and are earned.
Revenues recognized in excess of billings are recorded as unbilled
services. Billings in excess of revenues recognized are recorded as deferred revenues to the extent cash has been received.
Income Taxes
Income taxes are provided for tax effects of transactions reported
in the consolidated financial statements and consist of income taxes currently due plus deferred income taxes related to timing
differences between the basis of certain assets and liabilities for financial statements and income tax reporting. Deferred taxes
are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse. A valuation allowance for the net deferred tax
assets is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
We have an accumulated NOL carryforward of approximately $31.6
million for federal income tax purposes and approximately $9.2 million for state income tax purposes. The NOL carryforward amounts
may be used to offset future income tax liabilities. Future utilization of available net operating loss carryforwards may be limited
under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) as a result of significant changes
in ownership. These limitations could result in reduction of these net operating loss carryforwards before they are utilized. Based
upon the provisions of Section 382 of the Code, as of December 31, 2011 approximately $1.6 million of net operating loss carryforwards
are limited as to future use. The amount of these losses which are available in any one year is approximately $0.6 million. No
limitations exist on the remaining $30.0 million of federal loss carryforwards. The Company is subject to Alternative Minimum
Tax (AMT), which only allows for the utilization of existing NOL carryforwards to offset 90% of AMT taxable income.
The Company is allowed to issue shares in each year subsequent
to February 23, 2010 in an amount not to exceed 10% of the share count at the beginning of such year without violating the Section
382 of the Code change of control limitations, even if such issuance were to constitute a change of control as defined in Section
382 of the Code.
Property and Equipment
Property and equipment are recorded at cost and depreciated
over their estimated useful lives, initially determined to be two to five years, using the straight-line method. Upon retirement
or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting
gain or loss is included in operating results. Repairs and maintenance costs are expensed as incurred.
Software Development Costs
Sajan capitalizes software development costs incurred during
the application development stage related to new software or major enhancements to the functionality of existing software that
is developed solely to meet the entity’s internal operational needs and when no substantive plans exist or are being developed
to market the software externally. Costs capitalized include external direct costs of materials and services and internal payroll
and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance are expensed as
incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization
and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. When
the projects are ready for their intended use, the Company amortizes such costs over their estimated useful lives of three years.
Long-lived Assets
The Company annually reviews its long-lived assets for events
or changes in circumstances that may indicate that the carrying amount of a long-lived asset may not be recoverable or exceeds
its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset. An impairment loss shall be measured
as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The Company's long-lived assets, which include intangibles and patents, are subject to amortization.
Stock-based Compensation
We measure and recognize compensation expense for all stock-based
compensation at fair value. Our determination of fair value of share-based compensation awards on the date of grant using an option-pricing
model is affected by our stock price as well as assumptions regarding a number of variables. These variables include, but are
not limited to, expected stock price volatility and actual and projected stock option exercise behaviors and forfeitures. An option’s
expected term is the estimated period between the grant date and the exercise date of the option. As the expected term increases,
the fair value of the option and the compensation cost will also increase. The expected-term assumption is generally calculated
using historical stock option exercise data. We do not have historical exercise data to develop such an assumption. In cases where
companies do not have historical data and where the options meet certain criteria, SEC Staff Accounting Bulletin 107 (“SAB
107”) provides the use of a simplified expected-term calculation. Accordingly, Sajan calculated the expected terms using
the SAB 107 simplified method.
Management expects and estimates that substantially all employee
stock options will vest, and therefore the forfeiture rate used was zero.
The risk-free rates for the expected terms of the stock options
are based on the U.S. Treasury yield curve in effect at the time of grant.
Source of Revenues
We generate revenues by providing language translation services
to customers for which we are paid based upon the number of words translated and by the languages involved. The price charged
per word per language varies depending upon the language, the availability of translator resources and the extent to which our
proprietary TMate search algorithm has been applied to reuse prior translation work. In some cases we may generate revenue by
allowing customers to utilize our operating system, for which we will also receive revenue on a per word basis similar to our
services business model based upon the number of words processed through our GCMS software platform.
Cost of Revenue
Cost of revenue is highly variable based upon the volume of
translation services revenue. We work with freelance linguists who complete the actual language translation, and they are paid
on a per word basis. The fixed component of cost of revenue is comprised of the global operations staff located in our River Falls,
Wisconsin location and also in our Ireland, Spain and Singapore locations, who are responsible for project and process management,
quality control, operational integration, vendor management and production operations. In the near term, our cost of revenues
may be affected by a number of factors including the mix of customers, the mix of language translated, staff levels and the extent
of new customer implementations in a given quarter. Over the long term, we expect cost of revenue will grow in absolute
dollars, as we expect to continue to grow our revenue, but decrease as a percentage of revenue due to economies of scale, more
efficient sourcing and operational efficiencies from ongoing utilization of our GCMS platform.
Sales and Marketing Expenses
Sales and marketing expense consists primarily of wages and
benefits for sales and marketing personnel, sales commissions, advertising and promotional costs, sales and marketing tools and
partner referral fees. Advertising costs consist of pay-per-click payments to search engines and print advertisements in trade
journals. Advertising costs are expensed as incurred. Promotional costs consist primarily of public relations, memberships and
event costs. As we move to accelerate our sales activities both domestically and internationally, and launch sales and marketing
initiatives for our product solutions, we expect sales, advertising and marketing expense to increase in dollar terms but to decrease
slightly as a percentage of total sales.
Research and Development Expenses
Research and development expenses represent costs incurred
for development of routine enhancements to our operating software system, costs incurred during the preliminary project stage
of development and costs incurred related to training or maintenance activities. Research and development expenses consist primarily
of salaries and related costs of our software engineering organization including costs related to software development tools and
licenses, fees paid to third party consultants and certain facility expenses.
We have focused our research and development efforts on the
industrialization of the GCMS platform and its component modules for use by the various participants involved in the content globalization
process. Functional development has focused on improving ease of use, functionality, scalability and efficiency of Translation
Memory processing.
General and Administrative Expenses
General and administrative expenses consist primarily of wages
and benefits for administrative, human resources, internal information technology support, finance and accounting personnel, professional
fees, certain taxes and other corporate expenses.
Depreciation and Amortization
Depreciation and amortization consist of the expense related
to property and equipment, capitalized software development costs, software license costs and intangible assets that are being
depreciated or amortized over the estimated useful lives of the assets using the straight-line method. Intangible assets primarily
relate to the value of customer lists obtained in the acquisition of New Global in October 2011.
Foreign Currency Translation
For operations in local currency environments, assets and liabilities
are translated at year-end exchange rates with cumulative translation adjustments included as a component of shareholders’
equity and income and expense items are translated at average foreign exchange rates prevailing during the year. For operations
in which the U.S. dollar is not considered the functional currency, certain financial statements amounts are re-measured
at historical exchange rates, with all other asset and liability amounts translated at year-end exchange rates. These re-measured
adjustments are reflected in the results of operations. Gains and losses from foreign currency transactions are included in the
Consolidated Statements of Operations.
Results of Operations - Three Months Ended September 30,
2012 Compared to Three Months Ended September 30, 2011
For the three months ended September 30, 2012, net loss was
$43,000 compared to net loss of $141,000 for the three months ended September 30, 2011. Operating results for the quarter reflect
slightly decreased revenues and increased cost of revenues from additional employee related costs. Total operating expenses were
$5.14 million in the quarter ended September 30, 2012 compared to $5.31 million in the quarter ended September 30, 2011.
The major components of revenues, cost of revenue, operating
expenses, other income (expense), and income tax benefit are discussed below.
|
|
Three Months Ended
|
|
|
% Change
|
|
Item
|
|
9/30/2012
|
|
|
9/30/2011
|
|
|
(Year Over Year)
|
|
Revenues
|
|
$
|
5,155,120
|
|
|
$
|
5,185,758
|
|
|
|
-0.6
|
%
|
Cost of Revenues
|
|
|
3,303,260
|
|
|
|
3,053,872
|
|
|
|
8.2
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
571,371
|
|
|
|
647,477
|
|
|
|
-11.8
|
%
|
Research and Development
|
|
|
182,517
|
|
|
|
443,608
|
|
|
|
-58.9
|
%
|
General and Administrative
|
|
|
893,267
|
|
|
|
986,425
|
|
|
|
-9.4
|
%
|
Depreciation and Amortization
|
|
|
184,846
|
|
|
|
173,746
|
|
|
|
6.4
|
%
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(23,251
|
)
|
|
|
(18,594
|
)
|
|
|
25.0
|
%
|
Interest and other income
|
|
|
(308
|
)
|
|
|
1,168
|
|
|
|
-126.4
|
%
|
Other expense
|
|
|
(5,514
|
)
|
|
|
(4,371
|
)
|
|
|
26.1
|
%
|
Loss before income taxes
|
|
|
(9,215
|
)
|
|
|
(141,167
|
)
|
|
|
-93.5
|
%
|
Income tax expense
|
|
|
33,575
|
|
|
|
-
|
|
|
|
100.0
|
%
|
Net loss
|
|
$
|
(42,790
|
)
|
|
$
|
(141,167
|
)
|
|
|
-69.7
|
%
|
Revenues
Revenues totaled $5.16 million for the three months ended September
30, 2012 and $5.19 million for the three months ended September 30, 2011. This slight decrease of $30,000 or 0.6%, resulted from
a decrease in the growth of business with existing customers.
Cost of Revenues
Cost of revenues increased $0.25 million, or 8.2% for the three
months ended September 30, 2012 compared to the three months ended September 30, 2011. As a percentage of revenue,
cost of revenues was 64.1% for the three months ended September 30, 2012 compared to 58.9% for the same interim period in 2011.
The increase in dollar terms resulted from additional employee related costs of approximately $52,000 related to normal salary
increases and increased staff resulting from the acquisition of New Global and the opening of our Singapore office, all which
were added in late 2011, and increased translator costs of $200,000. Cost of revenue excludes depreciation and amortization of
$0.18 million for the three months ended September 30, 2012 and $0.17 million for the three months ended September 30, 2011, which
are included in operating expenses.
Operating Expenses
Total operating costs, excluding costs of revenue, was approximately
$1.83 million for the three months ended September 30, 2012 compared to $2.25 million for the three months ended September 30,
2011. For the three months ended September 30, 2012, the major components of these costs were sales and marketing, research and
development, general and administrative expenses and depreciation and amortization expense. A discussion of the various components
of our operating costs for the three months ended September 30, 2012 and 2011 appears below:
Sales and Marketing.
Sales and marketing expense was
approximately $0.57 million and $0.65 million for the three months ended September 30, 2012 and 2011, respectively. The decrease
in expense was primarily related to the restructuring of the commission program. As a percentage of revenue, sales and marketing
expense was approximately 11.1% for the three months ended September 30, 2012, as compared to 12.5% for the same interim period
in 2011. The decrease in the percentage of revenues reflects the impact of the reduction in the commission program in the year.
Research and Development.
Research and development
expense of approximately $0.18 million decreased by $260,000 or 58.9% for the three months ended September 30, 2012 over research
and development expense of $0.44 million for the three months ended September 30, 2011. The decrease for the three months
ended September 30, 2012 is the result of a reduction in payroll costs by combining our USA and India software development centers
and capitalizing software development costs of approximately $140,000 associated with our product development activities. As a
percentage of revenue, research and development expense decreased to 3.5% for the three months ended September 30, 2012 compared
to 8.6% for the three months ended September 30, 2011.
General and Administrative.
General and administrative
expense was $0.89 million and $0.99 million for the three months ended September 30, 2012 and 2011, respectively, a decrease of
approximately $93,000, or 9.4%. As a percentage of revenue, general and administrative expense was 17.3% for the three months
ended September 30, 2012 as compared with 19.0% for the three months ended September 30, 2011. The decrease in dollar terms
reflects reduction of staff expenses of $30,000 and professional fees of $60,000.
Depreciation and Amortization.
Depreciation
and amortization expense was $0.18 million for the three months ended September 30, 2012 and $0.17 million for the three months
ended September 30, 2011. As a percentage of revenue, depreciation and amortization expense was 3.6% for the three months
ended September 30, 2012 as compared to 3.4% for the three months ended September 30, 2011.
Other Income (Expense).
Interest expense for
three months ended September 30, 2012 was approximately $23,000 as compared to $19,000 for the three months ended September 30,
2011, which resulted primarily from interest expense on a capital lease obligation which was entered into in May 2011.
Income Tax Expense
Income tax expense was $34,000 for the three months ended September
30, 2012 as compared to no expense or benefit for the three months ended September 30, 2011. The expense for the quarter relates
to taxes withheld on services performed in China and income taxes on our operation in Spain.
Results of Operations – Nine Months Ended September
30, 2012 Compared to Nine Months Ended September 30, 2011
For the nine months ended September 30, 2012, net loss was
$1,013,000, compared to net loss of $159,000 for the nine months ended September 30, 2011. Operating results for the year to date
reflect decreased revenues and increased cost of revenues from additional translation services which resulted in a decrease in
gross profit of approximately $1.08 million. In addition, operating expenses, excluding costs of revenue, decreased by $0.31
million. The decrease in operating expenses was primarily due to a restructuring of the commission program in early 2012, a reduction
in professional fees offset by costs associated with annual salary adjustments, as well as costs associated with our Singapore
office which opened in the fourth quarter of 2011, and the company’s new project for software being at a stage to meet the
requirements for capitalization.
The major components of revenues, cost of revenue, operating
expenses and other income (expense) are discussed below.
|
|
Nine Months Ended
|
|
|
% Change
|
|
Item
|
|
9/30/2012
|
|
|
9/30/2011
|
|
|
(Year Over Year)
|
|
Revenues
|
|
$
|
15,331,619
|
|
|
$
|
15,816,444
|
|
|
|
-3.1
|
%
|
Cost of Revenues
|
|
|
9,947,087
|
|
|
|
9,350,483
|
|
|
|
6.4
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
1,814,143
|
|
|
|
1,908,708
|
|
|
|
-5.0
|
%
|
Research and Development
|
|
|
948,323
|
|
|
|
1,235,749
|
|
|
|
-23.3
|
%
|
General and Administrative
|
|
|
2,843,486
|
|
|
|
2,890,473
|
|
|
|
-1.6
|
%
|
Loss on subsidiary closure
|
|
|
80,113
|
|
|
|
-
|
|
|
|
-0.9
|
%
|
Depreciation and Amort
|
|
|
589,081
|
|
|
|
552,953
|
|
|
|
6.5
|
%
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(70,356
|
)
|
|
|
(54,210
|
)
|
|
|
29.8
|
%
|
Interest and other income
|
|
|
2,665
|
|
|
|
4,069
|
|
|
|
-34.5
|
%
|
Other expense
|
|
|
(21,195
|
)
|
|
|
13,522
|
|
|
|
-256.7
|
%
|
Loss before income taxes
|
|
|
(979,500
|
)
|
|
|
(158,541
|
)
|
|
|
517.8
|
%
|
Income tax expense
|
|
|
33,575
|
|
|
|
-
|
|
|
|
100.0
|
%
|
Net loss
|
|
$
|
(1,013,075
|
)
|
|
$
|
(158,541
|
)
|
|
|
539.0
|
%
|
Revenues
Revenues totaled $15.33 million for the nine months ended September
30, 2012 compared to $15.81 million for the nine months ended September 30, 2011. This decrease of $0.48 million, or 3.1%, resulted
from slower than anticipated first quarter revenue from both existing and new customers.
Cost of Revenues
Cost of revenues increased $0.60 million, or 6.4%, for the
nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a percentage of revenue,
cost of revenues was 64.9% for the nine months ended September 30, 2012 compared to 59.1% for the same interim period in 2011.
The increase in dollars resulted primarily from additional staff costs of approximately $400,000 from normal salary increases
and increased staff resulting from the acquisition of New Global and the opening of our Singapore office, all of which were added
in late 2011.
Cost of revenue excludes depreciation and amortization of $0.59
million for both nine-months ended September 30, 2012 and $0.55 million for the nine-month period ended September 30, 2011, which
are included in operating expenses.
Operating Expenses
Total operating expenses, excluding cost of revenues, for the
nine months ended September 30, 2012 were approximately $6.20 million compared to $6.59 million for the nine months ended September
30, 2011. The major components of these costs are sales and marketing, research and development, general and administrative expenses
and depreciation and amortization expense. A more detailed discussion of the various components of our operating costs for the
nine months ended September 30, 2012 and 2011 appears below:
Sales and Marketing
. Sales and marketing expense of
approximately $1.81 million for the nine months ended September 30, 2012 decreased 5.0% from sales and marketing expense of approximately
$1.91 million for the nine months ended September 30, 2011. The decrease in expenses between the interim periods is the result
of a restructuring of the commission program at the beginning of 2012. As a percentage of revenue, sales and marketing expense
was approximately 11.8% for the nine months ended September 30, 2012, a decrease from approximately 12.1% for the same interim
period in 2011, reflecting the economies of scale that resulted from a decrease in revenues.
Research and Development
. Research and development
expense of approximately $0.95 million decreased by $288,000, or 23.3%, for the nine months ended September 30, 2012, compared
to the same expense of $1.24 million for the nine months ended September 30, 2011. The decrease for the nine months ended
September 30, 2012 resulted primarily from a reduction in staff costs by closing our India research and development center and
consolidating it with our USA based center and capitalizing software development costs of $140,000 associated with our product
development activities. As a percentage of revenue, research and development expense was 6.2% for the nine months ended September
30, 2012, a decrease from approximately 7.8% for the same interim period in 2011.
General and Administrative
. General and administrative
expense was $2.92 million and $2.89 million for the nine months ended September 30, 2012 and 2011, respectively, an increase of
approximately $34,000, or 1.1%. As a percentage of revenue, general and administrative expense was 19.1% for the nine months
ended September 30, 2012 as compared with 18.3% for the nine months ended September 30, 2011. The increase in dollar terms
reflects approximately a $100,000 increase in facility costs as additional office locations were added in Singapore and Canada
in late 2011, and our India office was closed in early 2012. These increases were offset by a $147,000 decrease in attorney fees
to resolve our legal dispute in 2011, which are included in General and Administrative expenses for the nine months ended September
30, 2011.
Depreciation and Amortization
. Depreciation
and amortization expense was $0.59 million and $0.55 million for the nine months ended September 30, 2012 and 2011, respectively,
an increase of approximately $36,000. As a percentage of revenue, depreciation and amortization expense was 3.8% for
the nine months ended September 30, 2012 as compared to 3.5% for the nine months ended September 30, 2011.
Loss on Subsidiary Closure.
In the first quarter of
2012, the Company closed its India software development operation. As a result of this decision, the Company incurred a loss of
approximately $80,000 in the quarter related to the write off of assets, severance payments and recognition of additional lease
obligations and professional fees.
Other Income (Expense)
.
Interest expense
for the nine months ended September 30, 2012 was approximately $70,000, a $16,000 increase compared to the nine months ended September
30, 2011, which resulted primarily from interest expense on a capital lease obligation which was entered into in May 2011. Interest
and other income was approximately $3,000 and $4,000 for the nine-month periods ended September 30, 2012 and 2011, respectively.
Income Tax Expense
Income tax expense was $34,000 for the nine months ended September
30, 2012 as compared to no expense or benefit for the nine months ended September 30, 2011. The increased expense relates to taxes
withheld on services performed in China and income taxes on our operation in Spain.
Liquidity and Capital Resources
Summary cash flow data is as follows:
|
|
Nine months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows provided (used) by :
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(635,294
|
)
|
|
$
|
495,446
|
|
Investing activities
|
|
|
(474,939
|
)
|
|
|
767,292
|
|
Financing activities
|
|
|
(19,099
|
)
|
|
|
(1,230,763
|
)
|
Net increase (decrease) in cash
|
|
|
(1,129,332
|
)
|
|
|
31,975
|
|
Effect of exchange rate changes in cash
|
|
|
26,785
|
|
|
|
(96,385
|
)
|
Cash and equivalents, beginning of period
|
|
|
1,763,249
|
|
|
|
1,903,229
|
|
Cash and equivalents, end of period
|
|
$
|
660,702
|
|
|
$
|
1,838,819
|
|
Net Cash (Used in) Provided by Operating Activities
Net cash used in operating activities for the nine months ended
September 30, 2012 was $0.64 million and was used to fund our operations, fund investments in working capital and expand our operations
internationally. Net cash provided by operating activities for the nine months ended September 30, 2011 was a result of
a significantly lower net loss, and lower investment in working capital.
Net Cash (Used in) Provided by Investing Activities
Net cash of $0.47 million used by investing activities for
the nine months ended September 30, 2012 primarily related to purchases of equipment for use in the business. Net cash of $0.77
million provided by investing activities for the nine months ended September 30, 2011 related to the release of funds from a restricted
escrow account, which were used to make the payments on a note payable.
Net Cash Used in Financing Activities
Net cash of $19,000 used in financing activities for the nine
months ended September 30, 2012 primarily related to payments on our capital lease obligation. Net cash used in financing activities
of $1.23 million for the nine months ended September 30, 2011 related to amounts used to make payments on a note payable.
Sources of Capital
For the nine months ended September 30, 2012, our principal
source of liquidity was funds generated from operations and cash reserves.
In March 2012 we entered into a one-year revolving working
capital line of credit with Silicon Valley Bank (“SVB”), which permits borrowings up to a principal amount equal to
the lesser of (a) $1,500,000 or (b) 80% of the aggregate amount of our outstanding eligible domestic accounts receivable, subject
to customary limitations and exceptions (the “Credit Facility”). As of September 30, 2012, no borrowings had been
drawn under the Credit Facility. Interest on the principal amount outstanding under the Credit Facility accrues at a floating
rate equal to the greater of 50 basis points above the U.S. prime rate and 4.0%, and is payable monthly on the first calendar
day of each month. The outstanding principal amount of any borrowings under the Credit Facility, along with any accrued and unpaid
interest thereon, is payable on the maturity date, March 28, 2013. The facility is governed by the terms of a Loan and Security
Agreement (the “Loan Agreement”) which requires compliance with certain financial and other covenants, is secured
by all of our domestic assets except intellectual property (which we agreed not to pledge to others), and is guaranteed on an
unsecured basis by certain of our subsidiaries. The Loan Agreement contains customary events of default, which, if triggered,
would permit SVB to exercise customary remedies such as acceleration of all then-outstanding obligations arising under the Loan
Agreement.
Uses of Capital
Sajan’s primary uses of capital resources for the nine
months ended September 30, 2012 were to fund our loss from operations, our investments in working capital and purchases of equipment.
We intend to utilize our current capital resources and our new line of credit facility to support our business, including ongoing
sales and marketing activities both domestically and internationally, enhancement to our translation management system, and where
appropriate, acquisitions of companies that may add to our operations and client base.
We believe that our cash and cash equivalents, operating cash
flows, and cash available from our new credit facility will be sufficient to meet our operating, working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, we may need to raise additional funds through public or private financings
or borrowings to fund our operations, to develop or enhance products, to fund expansion, to respond to competitive pressures or
to acquire complementary products, businesses or technologies.
If required, additional financing may not be available on terms
that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges
senior to those of our current stockholders or we may be subject to covenants that restrict how we conduct our business. No assurance
can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable
to our stockholders and us.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of September
30, 2012.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
As a smaller reporting company, we are not required to provide
disclosure pursuant to this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2012, our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Exchange Rule 13a-15(e) and 15d-15(e)), and concluded that our disclosure controls and
procedures are defined at a reasonable assurance level and are effective to provide reasonable assurance that information required
to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Effective August 16, 2012, Timothy Clayton resigned as Chief
Financial Officer of the Company and Shannon Zimmerman, the Company’s President and Chief Executive Officer, was appointed
to the additional position of Chief Financial Officer. Although having a separate Chief Financial Officer enhances internal controls
over financing reporting, we maintain a separate Controller and do not believe that having a combined Chief Executive Officer
and Chief Financial Officer has materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting.