Notes to Unaudited Condensed Consolidated
Financial Statements
Amounts in thousands except per share
data
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1.
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Nature of Business and Summary of Significant Accounting
Policies
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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 and has active,
wholly-owned subsidiaries in the following countries:
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·
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Ireland –
Sajan Software Ltd.
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·
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Spain –
Sajan Spain S.L.A.
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·
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Singapore –
Sajan Singapore Pte. Ltd.
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·
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Brazil –
Sajan do Brasil Traduções Ltda.
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Interim Financial Information
The condensed consolidated balance sheet as of December 31,
2013, 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014
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, 2013 filed with the SEC on March 21, 2014. 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. 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 $15 at both March 31, 2014 and December 31, 2013. Management believes
all accounts receivable in excess of the allowance are fully collectible. The Company does not accrue interest on accounts receivable.
Loss/Income Per Common Share
Basic (loss) earnings per share is computed by dividing net
(loss) income by the weighted average number of common shares outstanding.
Diluted (loss) earnings per share is computed based on the
weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding
had the potentially dilutive common shares been issued.
For the three months ended March 31, 2014, we excluded all
options and warrants to purchase shares because the Company had a net loss and inclusion of these shares would have been anti-dilutive.
For the three months ended March 31, 2013, we excluded options to purchase 1,057 shares and warrants to purchase 50 shares from
the diluted weighted average shares outstanding calculation because the inclusion of these shares would have been anti-dilutive.
A reconciliation of the denominator in the basic and diluted
loss or income per share is as follows:
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Three months ended March
31,
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2014
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2013
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Numerator:
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|
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|
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Net (loss) income
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$
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(400
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)
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$
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16
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Denominator:
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Weighted average common shares outstanding - basic
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16,268
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16,268
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Effect of dilutive stock options and warrants
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-
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155
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Weighted average common shares outstanding - diluted
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16,268
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16,423
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Basic (loss) earnings per common share
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$
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(0.02
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)
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$
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0.00
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Diluted (loss) earnings per common share
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$
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(0.02
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)
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$
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0.00
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Property and Equipment
Property and equipment are recorded at cost and depreciated
over their estimated useful lives, initially determined to be two to twelve 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.
Intangible Assets
The Company's intangible assets consist of customer lists,
patents and licenses, are subject to amortization, and consist of the following:
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March 31, 2014
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December 31, 2013
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Customer lists acquired
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$
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784
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$
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784
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Patents and licenses
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193
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193
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Less accumulated amortization
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(592
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)
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(531
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)
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Total intangible assets, net
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$
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385
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$
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446
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Intangible assets are amortized over their expected useful
lives of 4 to 15 years and their weighted average remaining life is 3 years. Amortization of intangible assets was $61 and $84
for the three months ended March 31, 2014 and 2013, respectively. Estimated amortization expense of intangible assets for the
years ending December 31, 2014, 2015, 2016, 2017, 2018 and thereafter is $241, $185, $4, $2, $2 and $12, respectively.
Long-lived Assets
The Company annually reviews its long-lived assets for events
or changes that may indicate that the carrying amount of a long-lived asset may not be recoverable or exceeds its fair value.
There was no impairment for the three months ended March 31, 2014 and 2013.
Capitalized Software Development Costs
The Company 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 Company’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 is 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, 2014 and 2013, the Company capitalized $0 and $148, respectively, related to software development
activities.
Capitalized software development costs consist of the following
as of:
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March 31, 2014
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December 31, 2013
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Capitalized software development costs
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$
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746
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$
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746
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Less accumulated amortization
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(398
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)
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(353
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)
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Total capitalized software development costs, net
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$
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348
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$
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393
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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 was $45 and $23
for the three months ended March 31, 2014 and 2013, respectively. Amortization expense for capitalized software costs is expected
to be $181, $169 and $43 in 2014, 2015, and 2016, 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, 2014 and 2013, total stock-based compensation expense was approximately $64 and $49, respectively. As of March
31, 2014, there was approximately $565 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.
There were no options issued during the three months ended
March 31, 2014. 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:
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Three months ended March
31,
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2014
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2013
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Risk-free interest rate
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-
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%
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0.9
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%
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Expected life of options granted
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-
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7
Yrs
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Expected volatility range
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-
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%
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87.7
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%
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Expected dividend yield
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-
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-
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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
per share.
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.
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 and customer prepayment for services are recorded as deferred revenue and
customer prepayments; 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.
Research and Development
Research and development expenses primarily represent costs
incurred for development of maintenance and enhancements to the Company’s operating software system and include costs incurred
during the preliminary project stage of development or related to training or maintenance activities. To a lesser degree, research
and development expenses also consist of costs to add features to the Company’s operating software system that could make
portions of the system licensable to outside third parties. Research and development expenses consist primarily of salaries and
related costs of software engineers, and fees paid to third party consultants. All research and development expenses are expensed
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 shareholders’
equity. 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 and Comprehensive (Loss) Income.
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
generally accepted accounting principles 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.
Acquisition Expenses
The Company expenses all accounting and legal fees as well
as out-of pocket costs related to potential acquisitions as they are incurred. The total of such costs in the three months ended
March 31, 2014 and 2013 was $23 and $0, respectively.
Reclassification of Prior Year Balances
Certain amounts related to amortization of prepaid expenses
in the financial statements for the three months ended March 31, 2013 have been reclassified to conform to the current year presentation.
These reclassifications had no effect on net (loss) income or stockholders’ equity.
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2.
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Concentrations of Credit Risk
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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 March 31, 2014 and December 31, 2013, one customer accounted for approximately 18% and 22% of accounts
receivable, respectively.
Sales concentration
– For the three months ended
March 31, 2014 and 2013, one customer accounted for 12% and 16% of net revenues, respectively.
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3.
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Segment Information and Major Customers
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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, Singapore, and Brazil.
Net sales per geographic region, based on the billing location
of the end customer, are summarized below.
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Three Months Ended March
31,
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2014
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2013
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Sales
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Percent
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Sales
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Percent
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United States
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$
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4,740
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|
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77
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%
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$
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3,792
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|
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69
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%
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Asia
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178
|
|
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|
3
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%
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299
|
|
|
|
5
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%
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Europe
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967
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|
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16
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%
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1,074
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|
|
|
19
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%
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Other International
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269
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|
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|
4
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%
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|
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359
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|
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|
7
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%
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Total Sales
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$
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6,154
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|
|
|
100
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%
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$
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5,524
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|
|
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100
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%
|
For the three months ended March 31, 2014 and 2013, no individual
foreign country accounted for more than 10% of net revenues.
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4.
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Related Party Transactions
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Note Payable
Note payable and accrued interest are payable to Shannon 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. The note was originally issued in February 2010 and had a one year term. The note has been amended and extended
several times; the most recent being March 21, 2013. The note has a maturity date of August 23, 2015, and carries an interest
rate of 8%. No payments of the principal balances are allowed while there are amounts outstanding under the Company’s line
of credit with Silicon Valley Bank (see Note 5).
Accrued interest was $96 as of March 31, 2014 and $111 as of
December 31, 2013, and is subordinated to the Credit Facility (see Note 5). Interest expense was $15 in both three-month
periods ended March 31, 2014 and 2013.
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 and Angela
Zimmerman. 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, 2014 and 2013 was $86 for both periods.
In March 2012, the Company entered into a one year revolving
working capital line of credit with Silicon Valley Bank (“SVB”). In March 2013, the line of credit was replaced with
a new credit facility (the “Credit Facility”) with SVB which consists of a two year revolving working capital line
of credit. The Credit Facility permits borrowings of up to a principal amount equal to the lesser of (a) $1,500 or (b) eighty
percent (80%) of the aggregate amount of Sajan’s outstanding eligible accounts receivable, subject to customary limitations
and exceptions. The Credit Facility matures on March 28, 2015. The unpaid principal amount borrowed under the 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 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. The unused line of credit accrues interest at a rate of 0.3% per annum on the average unused portion.
There was no outstanding balance as of March 31, 2014 under the Credit Facility.
The 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 Sajan and SVB (the “A&R
Loan Agreement”). The A&R Loan Agreement contains several financial and customary affirmative and negative covenants,
including requiring Sajan to maintain a consolidated minimum tangible net worth of at least $1,500, increasing as of the last
day of each of our fiscal quarters by an amount equal to 25% of the sum of (i) net income for such quarter, (ii) any increase
in the principal amount of outstanding subordinated debt during such quarter, and (iii) the net amount of proceeds received by
Sajan in such quarter from the sale or issuance of equity securities. It also 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 Credit Facility, to apply a default rate of interest to
such outstanding obligations, and to exercise customary remedies under the Uniform Commercial Code. The Company was in compliance
with all covenants of the credit facility as of March 31, 2014.
The Credit Facility is secured by all of Sajan’s domestic
assets except for intellectual property (which the Company has agreed not to pledge to others), and the pledge of the Company’s
equity interests in its foreign subsidiaries that are controlled foreign corporations (as defined in the Internal Revenue Code).
The obligations under the A&R Loan Agreement are guaranteed on an unsecured basis by certain of Sajan’s subsidiaries.
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, 2014,
2,200 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.
As of March 31, 2014, 1,480 options and 176 warrants in the
Plan were outstanding with a weighted average exercise price of $1.27 and $2.17 per share, respectively.
The Company has cumulative net operating losses available to
offset future income for federal and state reporting purposes of $30,186 and $3,468, respectively, as of March 31, 2014.
There are also available research and development credit carryforwards at March 31, 2014 of $709. 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. Accordingly, income tax expense recognized during the three months ended March 31, 2014 and
2013 relates solely to taxes due in foreign jurisdictions where the Company does business.
The Company’s policies with respect to the recording
of deferred tax assets and liabilities have not changed in 2014. All balances and valuation allowances as of December 31, 2013
were evaluated and no changes were deemed necessary as of March 31, 2014.
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.