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. All of these operations are wholly-owned subsidiaries of Sajan. In addition, in 2011 we acquired companies in Spain (“New
Global Europe”) and Canada (“New Global Canada”). In the first quarter of 2013, New Global Europe was merged
into Sajan Spain and New Global Canada was merged into Sajan, Inc.
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.
Interim Financial Information
The condensed consolidated balance sheet as of December 31,
2012, 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 months ended
March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 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, 2012 filed with the SEC on March 29, 2013. 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, Sajan, LLC,
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 March 31, 2013 and December 31, 2012.
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.
For the three months ended March 31, 2013, we excluded options
to purchase 1,057,000 shares and warrants to purchase 50,004 shares from the diluted weighted average shares outstanding calculation
because the inclusion of these shares would have been anti-dilutive. For the three months ended March 31, 2012, we excluded options
to purchase 1,366,050 shares and warrants to purchase 176,026 shares from the diluted weighted average share outstanding calculation
because the Company had a net loss and inclusion of these shares would have been anti-dilutive.
A reconciliation of the denominator in the basic and diluted
income or loss per share is as follows:
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Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,673
|
|
|
$
|
(789,601
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
16,268,393
|
|
|
|
16,179,193
|
|
Effect of dilutive stock options andwarrants
|
|
|
154,922
|
|
|
|
-
|
|
Weighted average common shares outstanding – diluted
|
|
|
16,423,315
|
|
|
|
16,179,193
|
|
Basic earnings per common share
|
|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
Diluted earnings per common share
|
|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
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 months ended March 31, 2013 and 2012.
Intangible Assets
Intangible assets consist of the following as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2013
|
|
|
December
31, 2012
|
|
Customer lists acquired
|
|
$
|
771,229
|
|
|
$
|
771,229
|
|
Patents and licenses
|
|
|
517,883
|
|
|
|
517,883
|
|
Total
|
|
|
1,289,112
|
|
|
|
1,289,112
|
|
Less accumulated amortization
|
|
|
(767,147
|
)
|
|
|
(719,692
|
)
|
Total intangible assets, net
|
|
$
|
521,965
|
|
|
$
|
569,420
|
|
Intangible assets are amortized over their expected useful lives
of 3 to 15 years. Amortization of intangible assets was $47,455 and $85,270 for the three months ended March 31, 2013 and 2012,
respectively. Estimated amortization expense of intangible assets for the years ending December 31, 2013, 2014, 2015, 2016, 2017,
and thereafter is $189,821, $189,821, $170,877, $3,463, $1,595, and $13,843 respectively. The weighted average remaining
life of the intangibles is 3 years.
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 March 31, 2013, the Company capitalized approximately $148,000 related to software development activities. No
amounts were capitalized during the three months ended March 31, 2012.
Capitalized software development costs consist of the following
as of:
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March 31, 2013
|
|
|
December 31, 2012
|
|
Capitalized software development costs
|
|
$
|
2,990,998
|
|
|
$
|
2,865,655
|
|
Less accumulated amortization
|
|
|
(2,563,585
|
)
|
|
|
(2,535,060
|
)
|
Change in foreign currency exchange rates
|
|
|
-
|
|
|
|
(29,043
|
)
|
Total capitalized software development costs, net
|
|
$
|
427,413
|
|
|
$
|
301,552
|
|
When the projects are ready for their intended use, the Company
amortizes such costs over their estimated useful lives of three years. Capitalized software amortization expense for the three
months ended March 31, 2013 and 2012 was $22,588 and $53,014, respectively. Estimated amortization expense for capitalized
software costs for the years ending December 31, 2013, 2014, 2015, and 2016 are expected to be approximately, $111,000, $150,000,
$138,000, and $28,000 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 months ended March
31, 2013 and 2012, total stock-based compensation expense was approximately $49,000 ($0.00 per share) and $54,000 ($0.00 per share),
respectively. As of March 31, 2013, there was approximately $435,000 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.
There were no options issued during the three months ended March
31, 2012. In determining the compensation cost of the options granted during the three months ended March 31, 2013, 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:
|
|
2013
|
|
|
2012
|
|
Risk-free interest rate
|
|
|
0.9
|
%
|
|
|
-
|
%
|
Expected life of options granted
|
|
|
7 years
|
|
|
|
-
|
|
Expected volatility range
|
|
|
87.7
|
%
|
|
|
-
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Using the Black-Scholes option pricing model, management has
determined that the options issued in the three months ended March 31, 2013 have a weighted-average grant date fair value of $0.69.
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 – Transplicity – 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 provide the
customer with a limited time period following delivery of the project for the customer to identify any non-conformities to the
pre-defined project specifications. The Company has the opportunity to correct these items. Historically, errors in project deliverables
have been minimal and accordingly, revenue is recognized as services are performed.
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.
As of March 31, 2013 and December 31, 2012, the Company had
unbilled services of $1,207,894 and $1,015,429, respectively. Unbilled services relates to revenue that has been recognized but
not billed as of each reporting date for services relating to projects that are completed or delivered but for which we had not
yet invoiced the customer. The Company recognizes un-invoiced revenue when all revenue recognition criteria are met. However, the
unbilled services are not included in accounts receivable until the customer is invoiced.
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.
We expense all research and development expenses as incurred.
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 stockholders’
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 Comprehensive Loss.
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.
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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 each of March 31, 2013 and December 31, 2012, one customer accounted for approximately 22% and two customers
accounted for 24% and 12% of accounts receivable, respectively.
Sales concentration
– For the three months ended
March 31, 2013 one customer accounted for 16.4% of revenue. No customers accounted for more than 10% of net revenues for the three
months ended March 31, 2012.
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, India, Spain, Canada and Singapore.
Net sales per geographic region, based on the billing location
of the end customer, are summarized below.
|
|
Three months ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Sales
|
|
|
Percent
|
|
|
Sales
|
|
|
Percent
|
|
United States
|
|
$
|
3,800,000
|
|
|
|
69
|
%
|
|
$
|
3,400,000
|
|
|
|
73
|
%
|
International
|
|
|
1,720,000
|
|
|
|
31
|
%
|
|
|
1,260,000
|
|
|
|
27
|
%
|
Total Sales
|
|
$
|
5,520,000
|
|
|
|
100
|
%
|
|
$
|
4,660,000
|
|
|
|
100
|
%
|
No individual foreign country accounted for 10% of consolidated
revenue in any period presented.
4.
|
Related Party Transactions
|
Notes Payable
Notes payable and accrued interest to related parties was approximately
$876,000 and $861,000 at March 31, 2013 and December 31, 2012, respectively, related to notes payable to 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 in the amount of $1 million. The Promissory Note had a term of one year and provided 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. On March 26, 2012, the Promissory
Note was amended to extend its maturity date to August 23, 2013, and on March 21, 2013, the Promissory Note was amended to extend
its maturity date to August 23, 2015. The other terms of the Promissory Note remain the same. The remaining principal balance of
$750,000 under the Zimmerman Note is not repayable while 2013 Credit Facility remains in place.
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 2013 Credit Facility
(See Note 6.)
Accrued interest was approximately $126,000 and $111,000 as
of March 31, 2013 and December 31, 2012, respectively. Interest expense was approximately $15,000 for the three months ended March
31, 2013 and 2012.
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 beneficial owners of the Company’s
outstanding voting common stock. The space consists of approximately 20,000 square feet and is leased pursuant to three 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. Rent expense
for the three months ended March 31, 2013 and 2012 was $85,983 and $76,624, respectively.
5.
|
Other Accrued Liabilities
|
Other accrued liabilities represent the following as of:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Legal and professional services
|
|
$
|
48,580
|
|
|
$
|
30,131
|
|
VAT tax obligations
|
|
|
73,669
|
|
|
|
80,806
|
|
Other
|
|
|
80,237
|
|
|
|
77,546
|
|
Total
|
|
$
|
202,486
|
|
|
$
|
188,483
|
|
In March 2012, we entered into a one-year revolving working
capital line of credit with Silicon Valley Bank (“SVB”), which permitted 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 “2012 Credit Facility”). As of December 31, 2012, $400,000 had been drawn
under the 2012 Credit Facility. Interest on the principal amount outstanding under the 2012 Credit Facility accrued at a floating
rate equal to the greater of 50 basis points above the U.S. prime rate and 4.0%, and was payable monthly on the first calendar
day of each month. The outstanding principal amount of any borrowings under the 2012 Credit Facility, along with any accrued and
unpaid interest thereon, was payable on the maturity date, March 28, 2013.
On March 28, 2013, we entered into a new credit facility by
entering into a two-year revolving working capital line of credit with SVB, which permits borrowings of up to a principal amount
equal to the lesser of (a) $1,500,000 or (b) eighty percent (80%) of the aggregate amount of our outstanding eligible accounts
receivable, subject to customary limitations and exceptions (the “2013 Credit Facility”). The 2013 Credit Facility
matures on March 28, 2015. The unpaid principal amount borrowed under the 2013 Credit Facility accrues interest at a floating rate
per annum equal to (a) 1.0% above the “prime rate” published from time to time in the money rates section of the Wall
Street Journal (the “Prime Rate”) when the Liquidity Ratio (as defined below) is greater than or equal to 2.0 to 1.0
and (b) 2.25% above the Prime Rate when the liquidity ratio is less than 2.0 to 1.0. The interest rate floor is set at 4.0% per
annum. “Liquidity Ratio” is defined to mean the ratio of (i) the amount of our unrestricted cash and cash equivalents
held at SVB plus (ii) the aggregate amount of our outstanding eligible accounts receivable, subject to customary limitations and
exceptions to (iii) all outstanding indebtedness that we owe to the SVB. As of March 31, 2013, we have borrowed $400,000 under
the 2013 Credit Facility, and the principal amount of such borrowings are accruing interest at an interest rate of 4.25%. Interest
on the principal amount outstanding under the 2013 Credit Facility is payable monthly on the last calendar day of each month with
the outstanding principal amount of any borrowings under the 2013 Credit Facility, along with any accrued and unpaid interest thereon,
payable on March 28, 2015.
The 2013 Credit Facility is governed
by the terms of an Amended and Restated Loan and Security Agreement, dated as of March 28, 2013, entered into by and between us,
as borrower, and SVB, as lender (the “A&R Loan Agreement”). The A&R Loan Agreement requires us to maintain
a consolidated minimum tangible net worth of at least $1,500,000
increasing as of the last
day of each of our fiscal quarters by an amount equal to 25% of the sum of (i) our net income for such quarter, (ii) any increase
in the principal amount of our outstanding subordinated debt during such quarter, and (iii) the net amount of proceeds received
by us in such quarter from the sale or issuance of equity securities. Losses in any quarter shall not reduce the required Tangible
Net Worth. “Tangible Net Worth” is defined to mean our and our subsidiaries’ consolidated total assets
minus
(a) any amounts attributable to (i) goodwill, (ii) intangible items including unamortized debt discount and expense, patents, trademarks,
copyrights, and research and development expenses except prepaid expenses, (iii) notes, accounts receivable and other obligations
owing to us from our officers or other affiliates, and (iv) reserves not already deducted from assets,
minus
(b) our total
liabilities,
plus
(c) our subordinated debt.
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 2013 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 that are controlled foreign corporations (as defined in the Internal
Revenue Code) is limited to 65% of the voting power of such equity interests. Our obligations under the A&R Loan Agreement
are guaranteed on an unsecured basis by certain of our subsidiaries. The A&R Loan Agreement contains customary events of default,
which, if triggered, permit SVB to exercise customary remedies such as acceleration of all then outstanding obligations arising
under the A&R Loan Agreement, to terminate its obligations to lend under the 2013 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 that were made to us under the A&R Loan Agreement
are senior in right of payment to loans made to us by certain of our directors, executive officers and stockholders. We entered
into a Subordination Agreement, dated as of March 28, 2012 (the “2012 Subordination Agreement”), 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). In connection
with the A&R Loan Agreement, we entered into a Subordination Agreement, dated as of March 21, 2013 (the “2013 Subordination
Agreement”), with SVB and the Zimmermans related to the Zimmerman Note. The 2013 Subordination Agreement replaced the 2012
Subordination Agreement and contains terms substantially similar to those of the 2012 Subordination Agreement. The Company does
not anticipate paying the Zimmerman Note in 2013 and therefore is classifying this as long-term indebtedness.
As of March 31, 2013, $400,000 had been drawn under the 2013
Credit Facility and as of December 31, 2012, $400,000 had been drawn under the 2012 Credit Facility. The Company was not
in compliance with certain financial covenants set forth in the 2012 Credit Facility at January 31, 2013 and February 28, 2013,
but such non-compliance did not result in acceleration of any of the Company’s obligations thereunder. The Company was in
compliance with all covenants of the 2013 Credit Facility at March 31, 2013.
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 March 31, 2013,
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 March 31, 2013, 1,438,050 options in the Plan were outstanding
with a weighted average exercise price of $1.72 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 deferred tax asset as of March
31, 2013 was approximately $371,000 and as of March 31, 2012, was approximately $591,000. Our deferred tax liability as of March
31, 2013 was approximately $317,000 and as of March 31, 2012 was $537,000.
The cumulative net operating loss available to offset future
income for federal and state reporting purposes was approximately $31.2 million and $7.4 million, respectively, as of March 31,
2013. Available research and development credit carryforwards at March 31, 2013 was $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 March 31, 2013 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 $29.6 million of federal loss carryforwards.
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 as
of both March 31, 2013 and December 31, 2012, 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 2009-2011 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 comprehensive
loss.
|
9.
|
Closure of India Operation
|
In January 2012, the Company closed its software development
operation in India and transferred those activities. 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 has been paid during 2012 and the remainder is expected to be paid out in the first half of 2013. The Company expects to
file final dissolution documents in the second quarter of 2013.
In connection with this closure in 2012, the Company recognized
the unrealized foreign currency gain of $85,000 that existed at the time of closing the subsidiary for the year ended December
31, 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.
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 and enhancements to our translation management system; (ii) our expectation to generate positive cash flow
from operations; (iii) our estimates of operating expenses; and (iv) our beliefs regarding the adequacy of our capital resources.
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:
|
|
·
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our rate of growth in the global multilingual content delivery industry;
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|
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|
·
|
our ability to effectively manage our growth;
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|
|
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|
|
|
·
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lack of acceptance of any existing or new solutions we offer;
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|
|
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|
·
|
our ability to continue increasing the number of our customers or the revenues we derive from our recurring revenue customers;
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·
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continued economic weakness and constrained globalization spending by businesses operating in international markets;
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|
·
|
our ability to effectively develop new solutions that compete effectively with the solutions that our current and future competitors offer;
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|
·
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risk of increased regulation of the Internet and business conducted via the Internet;
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|
|
|
·
|
our ability to
identify attractive acquisition opportunities, successfully negotiate acquisition terms and effect ively integrate any
acquired companies or businesses;
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·
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availability of capital on acceptable terms to finance our operations and growth;
|
|
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·
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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;
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·
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our ability to add sales and marketing, research and development or other key personnel who are able to successfully sell or develop our solutions;
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·
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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
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·
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other risk factors included under “Risk Factors” in our Annual Report on Form 10–K filed with the Securities and Exchange Commission on March 29, 2013.
|
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 29, 2013.
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 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 addition,
in 2011 we acquired companies in Spain (“New Global Europe”) and Canada (“New Global Canada”). In the first
quarter of 2013, New Global Europe was merged into Sajan Spain and New Global Canada was merged into Sajan, Inc.
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, 2012 in Management’s Discussion and Analysis of Financial Condition
and Results of Operations under the heading “Discussion of Critical Accounting Policies and Estimates” and are incorporated
by reference herein. There were no significant changes to our critical accounting policies during the three months ended March
31, 2013.
Results of Operations - Three Months Ended March 31, 2013
Compared to Three Months Ended March 31, 2012
For the three months ended March 31, 2013, net income was $16,000
compared to the net loss of $790,000 for the three months ended March 31, 2012. Operating results for the quarter reflect significantly
increased revenues and increased cost of revenues, primarily from additional outsourced translator expenses. In addition, operating
expenses increased $34,000.
The major components of revenues, operating expenses, other
income (expense), and income tax expense are discussed below.
|
|
Three months ended March 31,
|
|
|
% Change
|
|
Item
|
|
2013
|
|
|
2012
|
|
|
(Year Over Year)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,524,202
|
|
|
$
|
4,663,731
|
|
|
|
18.5%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
3,412,746
|
|
|
|
3,121,765
|
|
|
|
9.3%
|
|
Sales and Marketing
|
|
|
740,081
|
|
|
|
602,562
|
|
|
|
22.8%
|
|
Research and Development
|
|
|
163,391
|
|
|
|
446,726
|
|
|
|
(63.4)%
|
|
General and Administrative
|
|
|
949,751
|
|
|
|
966,210
|
|
|
|
(1.7)%
|
|
Shutdown Expenses
|
|
|
-
|
|
|
|
80,113
|
|
|
|
(100.0)%
|
|
Depreciation and amortization
|
|
|
205,906
|
|
|
|
220,916
|
|
|
|
(6.8)%
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(29,042
|
)
|
|
|
(17,826
|
)
|
|
|
62.9%
|
|
Other income, net
|
|
|
5,735
|
|
|
|
2,786
|
|
|
|
105.9%
|
|
Income Tax expense
|
|
|
13,347
|
|
|
|
-
|
|
|
|
100.0%
|
|
Net income (loss)
|
|
$
|
15,673
|
|
|
$
|
(789,601
|
)
|
|
|
(102.0)%
|
|
Revenues
Revenues totaled $5.5 million for the three months ended March
31, 2013 compared to $4.7 million for the three months ended March 31, 2012. This increase of $0.8 million or 18.5% is the result
of an increase in projects from existing clients and increased revenue from new clients.
Operating Expenses
Total operating costs for the three months ended March 31, 2013
were $5.5 million compared to $5.4 million for the three months ended March 31, 2012. For the three months ended March 31, 2013,
the major components of these costs were costs of revenue, 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 March 31, 2013 and 2012 appears below:
Cost of Revenues.
Cost of revenues increased $0.3 million,
or 9.3% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. As a percentage
of revenue, cost of revenues was 61.8% for the three months ended March 31, 2013 compared to 66.9% for the same interim period
in 2012. The increase in dollar terms resulted from additional outsourced costs of $470,000 related to the increase in revenues.
These increases were offset by a decrease of $160,000 in payroll related costs in the three months ended March 31, 2013. The cost
of revenues as a percentage of revenue decreased as a result of an increase in outsourced costs and a decrease in payroll related
costs, and increase in revenues as compared with the same period in the prior year.
Cost of revenue excludes depreciation and amortization of $0.2
million for both three-month periods ended March 31, 2013 and March 31, 2012, which are included in operating expenses.
Sales and Marketing.
Sales and marketing expense increased
$0.1 million, or 22.8%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. For the quarter
ended March 31, 2013, an increase in payroll and related expenses was primarily due to an increase in commission expense. As a
percentage of revenue, sales and marketing expense was approximately 13.4% for the three months ended March 31, 2013, as compared
to 12.9% for the same interim period in 2012. The increase in the percentage of revenues reflects the impact of the increase in
commission expense.
Research and Development.
Research and development
expense of approximately $0.2 million decreased $280,000, or 63.4%, for the three months ended March 31, 2013 compared to the research
and development expense of $0.4 million for the three months ended March 31, 2012. The decrease for the three months ended
March 31, 2013 is due to decreases of $115,000 in payroll and related expenses, $20,000 in dues and subscriptions and miscellaneous
expenses, and a decrease in the maintenance of our internal software development which reduced costs by $148,000. As a percentage
of revenue, research and development expense decreased to 3.0% for the three months ended March 31, 2013 compared to 9.6% for the
three months ended March 31, 2012, primarily due to the decrease in expenses in the first quarter of 2013.
General and Administrative.
General and administrative
expense was $0.9 million and $1.0 million for the three months ended March 31, 2013 and 2012, respectively, a decrease of approximately
$16,000, or 1.7%. The slight reduction in expense is primarily due to decreased travel and internet expenses of $48,000 which
was offset by an increase in professional fees of $29,000. As a percentage of revenue, general and administrative expense was 17.2%
for the three months ended March 31, 2013 as compared with 20.7% for the three months ended March 31, 2012.
Depreciation and Amortization.
Depreciation
and amortization expense was $0.2 million for both three months ended March 31, 2013 and 2012, respectively. As a percentage
of revenue, depreciation and amortization expense was 3.7% for the three months ended March 31, 2013 as compared to 4.7% for the
three months ended March 31, 2012.
Other Income (Expense).
Interest expense for the
three months ended March 31, 2013 and 2012 was approximately $29,000 and $18,000, respectively. This increase resulted from borrowings
on the 2013 Credit Facility.
Income Tax Expense
Income tax expense was $13,000 for the three months ended March
31, 2013 as compared to no expense or benefit for the three months ended March 31, 2012. The increased expense relates to taxes
paid on services performed in China and income taxes on our operation in Spain.
Liquidity and Capital Resources
Summary cash flow data is as follows:
|
|
Three months ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows provided by (used in) :
|
|
|
|
|
|
|
Operating activities
|
|
$
|
270,682
|
|
|
$
|
(927,889
|
)
|
Investing activities
|
|
|
(221,176
|
)
|
|
|
(90,916
|
)
|
Financing activities
|
|
|
(7,249
|
)
|
|
|
(6,092
|
)
|
Net Increase (decrease) in cash
|
|
|
42,257
|
|
|
|
(1,024,897
|
)
|
Effect of exchange rate changes in cash
|
|
|
(50,651
|
)
|
|
|
57,455
|
|
Cash and equivalents, beginning of year
|
|
|
892,939
|
|
|
|
1,763,249
|
|
Cash and equivalents, end of period
|
|
$
|
884,545
|
|
|
$
|
795,807
|
|
Net Cash Provided (Used) by Operating Activities
Net cash provided by operating activities for the three months
ended March 31, 2013 was $0.3 million. Net cash used by operating activities for the three months ended March 31, 2012 was
$0.9 million as a result of a net loss from operations.
Net Cash Used by Investing Activities
Net cash of $0.2 million used by investing activities for the
three months ended March 31, 2013 primarily related to purchases of equipment for use in the business and capitalized software
development costs. Net cash of $0.1 million used by investing activities for the three months ended March 31, 2012 primarily related
to purchases of equipment for use in the business.
Net Cash Used by Financing Activities
Net cash of $7,000 used in financing activities for the three
months ended March 31, 2013 and net cash used in financing activities of $6,000 for the three months ended March 31, 2012 related
to payments on our capital lease obligation for both periods.
Sources of Capital
For the three months ended March 31, 2013, our principal source
of liquidity was funds generated from net income in the quarter, increase in accounts payable and deferred revenues.
In March 2012, we entered into a one-year revolving working
capital line of credit with Silicon Valley Bank (“SVB”), which permitted 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 “2012 Credit Facility”). As of December 31, 2012, $400,000 had been drawn
under the 2012 Credit Facility. Interest on the principal amount outstanding under the 2012 Credit Facility accrued at a floating
rate equal to the greater of 50 basis points above the U.S. prime rate and 4.0%, and was payable monthly on the first calendar
day of each month. The outstanding principal amount of any borrowings under the 2012 Credit Facility, along with any accrued and
unpaid interest thereon, was payable on the maturity date, March 28, 2013.
On March 28, 2013, we entered into a new credit facility, which
replaced the 2012 Credit Facility and consists of a two-year revolving working capital line of credit with SVB, which permits borrowings
of up to a principal amount equal to the lesser of (a) $1,500,000 or (b) eighty percent (80%) of the aggregate amount of our outstanding
eligible accounts receivable, subject to customary limitations and exceptions (the “2013 Credit Facility”). The 2013
Credit Facility matures on March 28, 2015. The unpaid principal amount borrowed under the 2013 Credit Facility accrues interest
at a floating rate per annum equal to (a) 1.0% above the “prime rate” published from time to time in the money rates
section of the Wall Street Journal (the “Prime Rate”) when the Liquidity Ratio (as defined below) is greater than or
equal to 2.0 to 1.0 and (b) 2.25% above the Prime Rate when the liquidity ratio is less than 2.0 to 1.0. The interest rate floor
is set at 4.0% per annum. “Liquidity Ratio” is defined to mean the ratio of (i) the amount of our unrestricted cash
and cash equivalents held at SVB plus (ii) the aggregate amount of our outstanding eligible accounts receivable, subject to customary
limitations and exceptions to (iii) all outstanding indebtedness that we owe to the SVB. As of March 31, 2013 we have borrowed
$400,000 under the 2013 Credit Facility, and the principal amount of such borrowings are accruing interest at an interest rate
of 4.25%. Interest on the principal amount outstanding under the 2013 Credit Facility is payable monthly on the last calendar day
of each month with the outstanding principal amount of any borrowings under the 2013 Credit Facility, along with any accrued and
unpaid interest thereon, payable on March 28, 2015.
The 2013 Credit Facility is governed by the terms of an Amended
and Restated Loan and Security Agreement, dated as of March 28, 2013, entered into by and between us, as borrower, and SVB, as
lender (the “A&R Loan Agreement”). The A&R Loan Agreement requires us to maintain a consolidated minimum tangible
net worth of at least $1,500,000, increasing as of the last day of each of our fiscal quarters by an amount equal to 25% of the
sum of (i) our net income for such quarter, (ii) any increase in the principal amount of our outstanding subordinated debt during
such quarter, and (iii) the net amount of proceeds received by us in such quarter from the sale or issuance of equity securities.
Losses in any quarter shall not reduce the required Tangible Net Worth. “Tangible Net Worth” is defined to mean our
and our subsidiaries’ consolidated total assets
minus
(a) any amounts attributable to (i) goodwill, (ii) intangible
items including unamortized debt discount and expense, patents, trademarks, copyrights, and research and development expenses except
prepaid expenses, (iii) notes, accounts receivable and other obligations owing to us from our officers or other affiliates, and
(iv) reserves not already deducted from assets,
minus
(b) our total liabilities,
plus
(c) our subordinated debt.
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 2013 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 that are controlled foreign corporations (as defined in the Internal
Revenue Code) is limited to 65% of the voting power of such equity interests. Our obligations under the A&R Loan Agreement
are guaranteed on an unsecured basis by certain of our subsidiaries. The A&R Loan Agreement contains customary events of default,
which, if triggered, permit SVB to exercise customary remedies such as acceleration of all then outstanding obligations arising
under the A&R Loan Agreement, to terminate its obligations to lend under the 2013 Credit Facility, to apply a default rate
of interest to such outstanding obligations, and to exercise customary remedies under the Uniform Commercial Code.
As of March 31, 2013, $400,000 had been drawn under the 2013
Credit Facility and as of December 31, 2012, $400,000 had been drawn under the 2012 Credit Facility. The Company was not
in compliance with certain financial covenants set forth in the 2012 Credit Facility at January 31, 2013 and February 28, 2013,
but such non-compliance did not result in acceleration of any of the Company’s obligations thereunder. The Company was in
compliance with all covenants of the 2013 Credit Facility at March 31, 2013.
Uses of Capital
Sajan’s primary uses of capital resources for the three
months ended March 31, 2013 were to fund our operations, our investments in working capital and purchases of equipment. We intend
to utilize our cash and our line of credit facility to support our business, including investing in software development, 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 proceeds for our new credit facility will be sufficient to meet our working capital, investment in software development,
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 March
31, 2013.