Sajan 10-Q 2011 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________ to ___________________

Commission File Number: 000-51560

Sajan, Inc.

(Exact name of registrant as specified in its charter)

Delaware	41-1881957
(State of incorporation)	(I.R.S. Employer Identification No.)
625 Whitetail Blvd., River Falls, Wisconsin	54022
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (715) 426-9505

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. x Yes    ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x Yes    ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨ Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes   x No

As of November 14, 2011, the registrant had 16,027,799 shares of common stock, $0.01 par value per share, outstanding.

Sajan, Inc.

Table of Contents

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	25
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. Removed and Reserved	25
Item 5. Other Information	25
Item 6. Exhibits	25
SIGNATURES	26
Exhibit Index	27

2

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

Sajan, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS	September 30,			December 31,
	2011 (Unaudited)			2010
Assets
Current assets:
Cash and cash equivalents	$	1,838,819		$	1,903,229
Restricted cash		-			1,000,000
Accounts receivable, net of allowance of $15,000		3,246,665			3,267,120
Deferred tax asset, net of allowance		54,180			54,180
Unbilled services		944,628			625,661
Prepaid expenses and other current assets		403,409			138,980
Total current assets		6,487,701			6,989,170
Property and equipment, net		820,405			747,540
Other assets:
Intangible assets, net		83,938			178,915
Capitalized software development costs, net		187,167			460,931
Other assets, net		25,178			27,649
Total other assets		296,283			667,495
Total assets	$	7,604,389		$	8,404,205
Liabilities and Stockholders’ Equity
Current liabilities:
Note payable – related party	$	750,000		$	250,000
Note payable – indemnification escrow		-			1,000,000
Current portion of capital lease obligation		24,932			-
Accounts payable		1,941,908			1,969,094
Accrued interest – related party		36,000			68,164
Accrued compensation and benefits		654,641			481,136
Accrued liabilities		697,291			832,043
Deferred revenue		840,639			319,964
Total current liabilities		4,945,411			4,920,401
Long-term liabilities:
Note payable – related party		-			750,000
Capital lease obligation, net of current portion		45,468			-
Total long-term liabilities		45,468			750,000
Total liabilities		4,990,879			5,670,401
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized and no shares issued outstanding		-			-
Common stock, $.01 par value, 35,000,000 shares authorized, 16,027,799 and 16,009,331 issued and outstanding at September 30, 2011 and December 31, 2010, respectively		160,277			160,093
Additional paid-in capital		6,478,622			6,339,183
Accumulated deficit		(3,901,878	)		(3,743,337	)
Accumulated other comprehensive loss:		-			-
Foreign currency adjustment		(123,511	)		(22,135	)
Stockholders’ equity		2,613,510			2,733,804
Total liabilities and stockholders’ equity	$	7,604,389		$	8,404,205

See notes to consolidated financial statements.

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Sajan, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Revenues:
Translation and consulting	$	5,185,758		$	4,209,245		$	15,816,444		$	11,551,767
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)		3,053,872			2,563,706			9,350,483			6,614,335
Sales and marketing		647,477			838,906			1,908,708			2,571,394
Research and development		443,608			327,184			1,235,749			1,288,376
General and administrative		986,425			816,533			2,890,473			2,994,117
Depreciation and amortization		173,746			217,009			552,953			682,748
Total operating expenses		5,305,128			4,763,338			15,938,366			14,150,970
Income (loss) from operations		(119,370	)		(554,093	)		(121,922	)		(2,599,203	)
Other income (expense):
Interest expense		(18,594	)		(21,843	)		(54,210	)		(90,259	)
Interest and other income		1,168			8,866			4,069			36,422
Other, net		(4,371	)		(883	)		13,522			(18,262	)
Total other (expense), net		(21,797	)		(13,860	)		(36,619	)		(72,099	)
Net income (loss) before income taxes		(141,167	)		(567,953	)		(158,541	)		(2,671,302	)
Income tax (benefit)		-			-			-			(62,311	)
Net income (loss)	$	(141,167	)	$	(567,953	)	$	(158,541	)	$	(2,608,991	)
Income (loss) per common share – basic and diluted	$	(.01	)	$	(.04	)	$	(.01	)	$	(0.18	)
Weighted average shares outstanding – basic & diluted		16,027,799			16,009,331			16,019,386			14,658,770

See notes to consolidated financial statements.

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Sajan, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(158,541	)	$	(2,608,991	)
Adjustments to reconcile net loss to net cash from operating activities:
Amortization of capitalized software costs		269,566			383,346
Amortization of license costs		94,977			120,227
Depreciation		188,410			179,037
Stock-based compensation expense		161,426			516,915
Deferred taxes		-			(61,818	)
Change in allowance for doubtful accounts		-			5,000
Decrease (increase) in current assets:
Accounts receivable		20,455			(150,862	)
Unbilled services		(318,967	)		(240,733	)
Prepaid expenses and other current assets		(261,958	)		(119,499	)
Increase (decrease) in current liabilities:
Accounts payable		(27,186	)		474,249
Accrued interest – related party		(32,164	)		48,031
Accrued compensation and benefits		173,505			223,106
Accrued liabilities		(134,752	)		(556,013	)
Deferred revenue		520,675			(78,151	)
Net cash flows provided by (used in) operating activities		495,446			(1,866,156	)
Cash flows from investing activities:
Purchases of property and equipment		(182,708	)		(136,680	)
Purchases of intangible assets		-			(2,051	)
Release of restricted cash		1,000,000			-
Capitalized software development costs		-			(82,517	)
Cash acquired in merger transaction		-			5,472,000
Payment of security deposit		-			(15,406	)
Deconsolidation of affiliate		-			(98,730	)
Payment of dissenter liability		(50,000	)		(366,943	)
Net cash flows provided by investing activities		767,292			4,769,673
Cash flows from financing activities:
Escrow proceeds returned for dissenter shares		19,790			-
Payments on note payable – indemnification escrow		(1,000,000	)		-
Payments on note payable – related party		(250,000	)		(285,645	)
Payments on merger costs		-			(540,254	)
Payments on capital lease obligation		(8,960	)		(8,799	)
Payments on mortgage long-term liability		-			(14,571	)
Proceeds from exercise of stock options		8,407			-
Net cash flows used in financing activities		(1,230,763	)		(849,269	)
Net increase (decrease) in cash and cash equivalents		31,975			2,054,248
Effect of exchange rate changes in cash		(96,385	)		(4,570	)
Cash and cash equivalents – beginning of period		1,903,229			120,493
Cash and cash equivalents – end of period	$	1,838,819		$	2,170,171
Cash paid for interest	$	86,374		$	69,409
Non-cash investing and financing transactions:
Note payable – related party acquired in merger	$	-		$	1,000,000
Short-term note payable – indemnification escrow and restricted cash acquired in merger	$	-		$	1,000,000
Reduction in line of credit via merger transaction	$	-		$	1,000,000
Dissenter accrual acquired in merger transaction	$	-		$	364,000
Purchase of fixed assets via capital lease obligation	$	79,360		$	-

See notes to consolidated financial statements.

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Sajan, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business / Basis of Presentation

Sajan, Inc. (the “Company” or “Sajan”) provides language translation 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, houses our software development center.  In 2010, we also established a Global Language Service Center in Spain, Sajan Spain S.L. A. (“Sajan Spain”) to serve the European market.  All of these operations are wholly-owned subsidiaries of Sajan.

Sajan, Inc. was originally organized as a Wisconsin corporation in March 1998, reorganized as a Minnesota corporation in October 2001, and reorganized as a Delaware corporation in February 2010 as part of the Merger (as such term is defined in Note 2 to the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q).

Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2010, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 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 2010 Annual Report on Form 10-K filed with the SEC on March 30, 2011.  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 and Sajan Spain, from the effective date of their acquisition or formation.  All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Accounts Receivable

The Company extends unsecured credit to customers in the normal course of business. The Company provides an allowance for doubtful accounts when appropriate, the amount of which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions, on an individual customer basis. Normal accounts receivable are due 30 days after issuance of the invoice. Receivables are written off only after all collection attempts have failed, and are based on individual credit evaluation and specific circumstances of the customer. Accounts receivable have been reduced by an allowance for uncollectible accounts of approximately $15,000 at both September 30, 2011 and December 31, 2010. Management believes all accounts receivables in excess of the allowance are fully collectible. The Company does not accrue interest on accounts receivable.

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Income (Loss) Per Common Share

Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding. Basic per share amounts are computed, generally, by dividing net income (loss) by the weighted average number of common shares outstanding.

Diluted earnings (loss) per share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include unexercised stock options and warrants. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive, thereby reducing the loss or increasing the income per common share. In calculating diluted weighted average shares and per share amounts, stock options and warrants with exercise prices below average market prices, for the respective fiscal years in which they were dilutive, are considered to be outstanding using the treasury stock method. The treasury stock method requires the calculation of the number of additional shares by assuming the outstanding stock options and warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price during the year.  In the event that the Company is in a net loss situation, all options and warrants outstanding are excluded from the diluted weighted average share outstanding calculation as the effect of these options is anti-dilutive.

A reconciliation of the basic and diluted loss per share is as follows:

	Three months ended September 30,
	2011			2010
Numerator:
Net income (loss)	$	(141,167	)	$	(567,953	)
Denominator:
Weighted average common shares outstanding - basic and diluted		16,027,799			16,009,331
Income (loss) per common share - basic and diluted	$	(.01	)	$	(.04	)
Awards excluded from diluted income (loss) per share		1,989,980			1,796,756

	Nine months ended September 30,
	2011			2010
Numerator:
Net loss	$	(158,541	)	$	(2,608,991	)
Denominator:
Weighted average common shares outstanding - basic and diluted		16,019,386			14,658,770
Loss per common share - basic and diluted	$	(.01	)	$	(0.18	)
Awards excluded from diluted income (loss) per share		1,989,980			1,796,756

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.

7

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 and nine months ended September 30, 2011 was $76,444 and $269,566, respectively, and for the three and nine months ended September 30, 2010 was $120,863 and $383,346, respectively.   Estimated amortization expense for capitalized software costs are expected to be approximately $62,000 for the remainder of 2011 and $125,000 for the year ending December 31, 2012.

Capitalized software development costs consist of the following as of:

	September 30, 2011			December 31, 2010
Capitalized software development costs	$	2,548,825		$	2,565,172
Less accumulated amortization		(2,361,658	)		(2,104,241	)
Total capitalized software development costs, net	$	187,167		$	460,931

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock-based compensation at fair value. The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term.  For the three and nine months ended September 30, 2011, total stock-based compensation expense was approximately $54,000 ($0.00 per share) and $161,000 ($0.01 per share) respectively.  For the three and nine months ended September 30, 2010, total stock-based compensation was $60,000 ($.00 per share) and $517,000 ($0.04 per share), respectively.  As of September 30, 2011, there was approximately $628,000 of total unrecognized compensation cost related to nonvested 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 four 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 stock-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 exercises and forfeitures. An option’s expected term is the estimated period between the grant date and the exercise date of the option. As the expected term increases, the fair value of the option and the compensation cost will also increase. The expected-term assumption is generally calculated using historical stock option exercise data; however the Company does not have historical exercise data to develop such an assumption. As a result, the Company determined the expected term assumption using the simplified expected-term calculation as provided in SEC Staff Accounting Bulletin 107.

The Company calculates expected volatility for stock options and awards using its own stock price. Management expects and estimates substantially all director and employee stock options will vest, and therefore the forfeiture rate used is zero.  The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of grant.

In determining the compensation cost of the options granted during 2011 and 2010, 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:

8

	Three months ended September 30,
	2011			2010
Risk-free interest rate		1.5	%		1.3	%
Expected life of options granted	7 Yrs			7 Yrs
Expected volatility range		60.0	%		62.8	%
Expected dividend yield		-			-

Using the Black-Scholes option pricing model, management has determined that the options issued have a weighted-average grant date fair value for the three months ended September 30, 2011 and 2010 of $0.85 per share and $ 0.87 per share, respectively.

	Nine months ended September 30,
	2011			2010
Risk-free interest rate		1.93	%		1.5	%
Expected life of options granted	7 Yrs.			6.8 Yrs
Expected volatility range		60.0	%		62.9	%
Expected dividend yield		-			-

Using the Black-Scholes option pricing model, management has determined that the options issued have a weighted-average grant date fair value for the nine months ended September 30, 2011 and 2010 of $0.80 per share and $ 0.87 per share, respectively.

Revenue Recognition

The Company derives revenues primarily from language translation services, subscription hosting services, professional services or a combination thereof. The Company has two primary services models, each of which is described below.

Technology Enabled Service Model

In our Technology Enabled Service Model, the Company provides all of the customer’s language translation requirements. Services within the Technology Enabled Service Model include: language translation, account management, graphic design services, technical, consulting and professional services.  Language translation services are generally billed on a “per word” basis and other services 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 managed 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.

Managed Service Model

The Managed Service Model has five elements: language translation services, software license fees, post-contract customer support, transaction fees, and professional services. We recognize revenue as earned through transaction fees delivered through the Application Service Provider (ASP) and associated fees for professional services including, implementation, training, and project management provided to customers with installed systems.

9

 For ASP and other hosting arrangements, the Company evaluates whether the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third party to host the software. If we determine that the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third party to host the software, we recognize the license, professional services and hosting services revenues. For ASP and other hosting arrangements that do not meet the criteria for recognition, the Company accounts for the elements considering the multiple element arrangements using all applicable facts and circumstances, including whether (i) the element has stand-alone value, (ii) there is a general right of return and (iii) the revenue is contingent on delivery of other elements. The Company allocates revenue to each element of the arrangement that qualifies for treatment as a separate element based on vendor-specific objective evidence (“VSOE”), and if VSOE is not available, third party evidence, and if third party evidence is unavailable, estimated selling price. For professional services associated with ASP and hosting arrangements the Company determines do not have stand-alone value to the customer or are contingent on delivery of other elements, the Company recognizes the services revenue ratably over the term of the applicable agreement.

The Company bills service fees either on a time and materials basis or on a fixed-price schedule. In general, the Company’s consulting services are not essential to the functionality of the software. The Company’s software products are fully functional upon delivery and implementation and generally do not require any significant modification or alteration for customer use. Customers purchase the Company’s consulting services to facilitate the adoption of the Company’s technology and may use Company’s personnel to participate in the services being performed, but may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services. The Company recognizes revenue from consulting services as services are performed.

In addition, the Company may periodically license to customers certain software which would enable the customer to more efficiently manage and monitor the translation process.  In these situations, the Company would receive (1) license fees, and (2) fees for post-contract customer support (maintenance).

The Company recognizes revenue from license fees, based on VSOE when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is probable at the time the software application is shipped to the client.

The Company’s customers typically purchase maintenance annually.  Maintenance prices are based on a percentage of the product license fee. Customers purchasing maintenance receive product upgrades, Web-based technical support and telephone hot-line support. Unspecified product upgrades are not provided without the purchase of maintenance. The Company typically has not granted specific upgrade rights in its license agreements. Specified undelivered elements are allocated a relative fair value amount within a license agreement and the revenue allocated for these elements is deferred until delivery occurs.

Other

Sajan’s agreements with its customers may informally provide the customer with a limited time period following delivery during which the Company will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work. Revenue is recognized as services are delivered in accordance with the terms of the agreement with the customer, are not contingent, and are earned.

Revenues recognized in excess of billings are recorded as unbilled services. Billings in excess of revenues recognized are recorded as deferred revenues until revenue recognition criteria are met.

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.  

Foreign Currency Translation

For operations in local currency environments, assets and liabilities are translated at year-end exchange rates with cumulative translation adjustments included as a component of shareholders’ equity and income and expense items are translated at average foreign exchange rates prevailing during the year. For operations in which the U.S. dollar is not considered the functional currency, certain financial statements amounts are re-measured at historical exchange rates, with all other asset and liability amounts translated at year-end exchange rates. These re-measured adjustments are reflected in the results of operations. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations.

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New Accounting Pronouncements – Presentation of Comprehensive Income (ASU No. 2011-05)

ASU No. 2011-05 amends existing guidance to allow only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive financial statements consisting of an income statement followed by a statement of other comprehensive income.  ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with an early adoption permitted.  The Company will adopt ASU No. 2011-04 in fiscal 2012 and does not anticipate any material impact on the Company’s consolidated financial statements.

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. Actual results could differ from those estimates.

Reclassifications

Certain expense accounts for the three and nine months ended September 30, 2010 have been reclassified to conform to the current year presentation.  These reclassifications had no effect on net loss or stockholders’ equity.

2. Reverse Merger Transaction

Pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated January 8, 2010, by and among MathStar, Inc., a Delaware corporation, and Sajan, Inc. a privately held Minnesota corporation whose business is providing language translation technology and service; Garuda Acquisition, LLC, a wholly-owned subsidiary of MathStar, (“Garuda”)  now known as Sajan, LLC; and Thomas Magne, solely in his capacity as agent for the holders of common stock of Sajan, Inc., Sajan, Inc. was merged with and into Garuda Acquisition, LLC, (the “Merger”).   Garuda was the surviving entity in the Merger and subsequently changed its name to Sajan, LLC. As a result of the Merger, Sajan became a wholly-owned subsidiary of MathStar. MathStar continued the business of Sajan and operates as a provider of language translation technology and service under the Sajan name. The Merger was closed and effective on February 23, 2010.

MathStar paid $6,100,000 in cash, of which $5,100,000 was paid to existing stockholders of Sajan at closing and the remaining $1 million was paid to pre-Merger Sajan stockholders in March 2011.  As a result of the Merger, Sajan’s 5,573,742 shares of common stock were exchanged for 6,827,734 shares of MathStar common stock, or an exchange of 1 Sajan common share for 1.225 MathStar common shares. Options to purchase Sajan common stock issued under Sajan’s 2001 Stock Option Plan and certain non-plan options and warrants were converted into options and warrants to purchase MathStar common stock and remained outstanding as options and warrants to purchase shares of MathStar common stock.  Immediately after the closing of the Merger, the former stockholders of Sajan, Inc. owned approximately 43% of the outstanding shares of MathStar common stock. At the time of Merger, 112,500 shares, valued at $364,000 per management’s determination of fair value at the time of the Merger, were recorded for dissenter shares.  (See Note 9)

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For accounting purposes, Sajan is treated as the continuing reporting entity that acquired MathStar because Sajan obtained effective control of MathStar as a result of the Merger. This determination was based on the following facts: Sajan stockholders have a large minority interest in the combined entity, the governing board consists of a majority of Sajan board members, and the composition of the senior management is Sajan’s management team. Under this method of accounting, the recognition and measurement provisions of the accounting guidance for business combinations do not apply and, therefore, there is no recognition of goodwill or other intangible assets. Instead, the acquisition has been treated as the equivalent of Sajan issuing stock for the net monetary assets of MathStar, primarily cash, which are stated at their carrying value.

At the time of the Merger, the following amounts were allocated from MathStar’s net monetary assets and liabilities to Sajan:

Cash and cash equivalents	$	5,472,000
Restricted cash		1,000,000
Prepaid expenses and other assets		22,000
Accounts payable and accrued liabilities		(652,000	)
Notes payable – related party		(1,000,000	)
Net monetary assets	$	4,842,000

Cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable: The tangible assets and liabilities were valued at their respective carrying amounts by MathStar, except for adjustments to accrued lease obligations, necessary to state such amounts at their estimated fair values at the effective date of the Merger.

Accrued liabilities:  Sajan retained the accrued lease obligations under MathStar’s non-cancellable operating leases, pursuant to which total rent payments were $128,000 for the year ending December 31, 2011.   

Merger transaction costs: In connection with the Merger, MathStar incurred transaction costs of $543,000, including financial advisory, legal, accounting and due diligence costs, which were recorded as Merger transaction expenses on the consolidated statement of operations for the year ended December 31, 2009.  Sajan allocated approximately $540,000 of Merger-related costs which were allocated to additional paid-in capital for the three months ended March 31, 2010.

3. 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 – Cash and cash equivalents include all highly liquid investment assets with a maturity of ninety days or less at the time of purchase. 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.  As of September 30, 2011, one customer accounted for 22% of the accounts receivable and as of December 31, 2010, the same customer accounted for approximately 36% of accounts receivable.  

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4. Segment Information and Major Customers

The Company views its operations and manages its business as one reportable segment, providing language translation solutions to a variety of companies, primarily in its targeted vertical markets.  Factors used to identify the Company’s single operating segment include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance.  The Company markets its products and services through its headquarters in the United States and its wholly-owned subsidiaries operating in Ireland, Spain and India.

Net sales per geographic region, based on the billing location of end customer, are summarized below.  

	Three months ended September 30,
	2011					2010
	Sales		Percent			Sales		Percent
United States	$	3,473,850		67.0	%	$	3,310,510		78.7	%
International		1,711,908		33.0	%		898,735		21.3	%
Total Sales	$	5,185,758		100.0	%	$	4,209,245		100.0	%

	Nine months ended September 30,
	2011					2010
	Sales		Percent			Sales		Percent
United States	$	11,142,333		70.4	%	$	9,085,568		78.7	%
International		4,674,111		29.6	%		2,455,999		21.3	%
Total Sales	$	15,816,444		100.0	%	$	11,541,567		100.0	%

The Company’s largest customer accounted for 15.1% of net revenues for the three months ended September 30, 2011. Two customers accounted for 16.4% and 12.8% of net revenues for the same period in 2010.  For the nine months ended, September 30, 2011, one customer accounted for 14.8% of net revenues, while two customers accounted for 15.1% and 10.2% in the same period of 2010.

For the three and nine months ended September 30, 2011, International revenues in Spain accounted for 11.6% and 10.6% of the net revenues, respectively, and no individual foreign country accounted for more than 10% of consolidated revenue for the same periods in 2010.

5. Related Party Transactions

Note Payable

Notes payable and accrued interest to related parties was approximately $786,000 and $1,068,000 at September 30, 2011 and December 31, 2010, respectively, related to a note payable to officers and stockholders of the Company.   On February 23, 2010, the Company issued a Promissory Note to Shannon and Angela Zimmerman as part of the Merger consideration.  The Promissory Note documents the Company’s obligation to pay $1 million of the pro rata amount of the cash Merger consideration to the Zimmermans. 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.   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.  

On February 22, 2011, the Promissory Note was amended.  The amendment called for the payment of $250,000 of the principal amount immediately together with all accrued interest, but extended the due date on the remaining $750,000 principal amount of the Promissory Note to August 23, 2012.  The other terms of the Promissory Note remain the same.

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Accrued interest at September 30, 2011 was approximately $36,000.

Lease

Sajan leases its office space, under two non-cancelable operating leases, from River Valley Business Center, LLC (River Valley), 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 lease terms expire on January 31, 2017. These lease agreements require the Company to pay a minimum monthly rental plus certain operating expenses. Payment of rent under these leases is secured by goods, chattels, fixtures and personal property of the Company.

6. Accrued Liabilities

Accrued liabilities consisted of the following at:

	September 30,  2011		December 31,  2010
Legal and professional services	$	31,390	$	20,328
Professional translator services		565,147		551,586
Accrued lease obligations		-		213,029
Other		100,754		47,100
Total	$	697,291	$	832,043

7. Options and Warrants

Amended and Restated 2004 Long-Term Incentive Plan

As a result of the Merger, Sajan adopted the Mathstar Amended and Restated 2004 Long-Term Incentive Plan (the “Plan”).  Over the past several years, shareholders had approved various modifications to the Plan so that at the time of the Merger, 1,200,000 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 at exercise prices as determined by the Board of Directors on the dates of grants.  Subsequent to the Merger, on June 10, 2010, the stockholders of Sajan approved an amendment to increase the number of shares reserved for issuance by 1.0 million shares.  The total number of shares reserved under the Plan as of September 30, 2011 is 2,200,000.

Upon completion of the Merger, Sajan converted the options outstanding in their 2001 Stock Option Plan into 1.225 options of MathStar common stock.  

On September 30, 2011, 1,441,973 options in the Plan were outstanding with a weighted average exercise price of $1.73 per share.

8. Income Taxes

Our deferred income tax assets and liabilities are recognized for the differences between the financial statement and income tax reporting basis of assets and liabilities based on currently enacted rates and laws.  These differences include depreciation, net operating loss carryforwards, capital loss carryforwards, allowance for accounts receivable, stock options and warrants, prepaid expenses, unrealized loss on securities, capitalized software costs, cash  to accrual  conversion, and accrued liabilities.  Our current deferred tax asset as of both September 30, 2011 and December 31, 2010, was approximately $866,000.   Our current deferred tax liability as of both September 30, 2011 and December 31, 2010 was $812,000.

The cumulative net operating loss available to offset future income for federal and state reporting purposes was approximately $32.3 million and $9.1 million, respectively, as of September 30, 2011.  Available research and development credit carryforwards at September 30, 2011, were $.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.   The existing NOLs are available to offset taxable income from our operations in the United States.  As foreign operations grow, we may incur foreign income tax that will not be offset by our existing NOL’s.

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In connection with the Merger, the Company acquired $10.7 million of net deferred tax assets which included $9.8 million in federal net operating loss carryforwards, $0.2 million in state net operating loss carryforwards and $0.7 million of federal tax credit carryforwards.  The acquired net deferred tax assets have a full valuation allowance to fully reserve against those deferred tax assets as the Company believes it is more likely than not that it will be unable to fully utilize the acquired deferred tax benefits. 

Future utilization of available net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) as a result of significant changes in ownership. These limitations could result in reduction of these net operating loss carryforwards before they are utilized. Based upon the provisions of Section 382 of the Code, as of September 30, 2011 approximately $2.2 million of net operating loss carryforwards are limited as to future use.  The amount of these losses which are available in any one year is approximately $0.6 million.  No limitations exist on the remaining $30.0 million of federal loss carryforwards.

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.   As such, the Company has recorded a valuation allowance to offset a portion of its deferred taxes.  The valuation allowance was $12.3 million as of September 30, 2011 and December 31, 2010.

We file a consolidated U.S. federal tax return.  As a result of the adoption of ASC 740 – Income Taxes, effective October 1, 2007, we applied the requirements of ASC 740 to all tax positions for which the statute of limitations remained open.  ASC 740 was issued to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in prior standards on consistent recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  ASC 740 also provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosures and transition.  To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statements of operations.

9. Legal Proceedings

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.

10. Commitments

The Company entered into a three year capital lease agreement for the purchase of computer equipment in May 2011.  The lease provides for the purchase of the equipment at the end of the lease term for a nominal amount.  The total amount financed under the lease is $79,000 and the monthly payments are $2,943.

11. Subsequent Event – Acquisition

In October 2011, the Company completed the acquisition of the New Global Group (New Global) of companies.  New Global is a provider of multilingual communication services and technologies - serving clients in the United States, Canada and Europe through offices in Montreal, Canada and Madrid, Spain.  This acquisition included the purchase of the outstanding stock of two subsidiaries of New Global, New Global Canada and New Global Europe, and certain assets and liabilities of New Global LLC.  The effective date of the acquisition was October 1, 2011.

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The consideration for the acquisition if New Global included cash, Sajan common stock and the assumption of New Global liabilities and debt.  The assumed debt was repaid immediately upon closing of the transaction.  Half of the cash and stock portion of the consideration was paid at closing and the remaining half of the consideration will be paid on the first anniversary of the transaction.   The primary asset acquired was the New Global customer list, and it is anticipated that any excess of the purchase price over the net tangible assets acquired, will be allocated to these customer relationships and amortized over 5 years.

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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” or “Sajan”), 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; (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:

· our rate of growth in the global multi-lingual content delivery industry, especially for software-as-a-service solutions within this industry;

· changes in the utilization of our software and services by our customers;

· lack of acceptance of any existing or new solutions we offer;

· our ability to continue increasing the number of our customers or the revenues we derive from our recurring revenue customers;

· continued economic weakness and constrained globalization spending by businesses operating in international markets;

· our ability to effectively develop new solutions that compete effectively with the solutions that our current and future competitors offer;

· risk of increased regulation of the Internet and business conducted via the Internet;

· our ability to anticipate and avoid interruptions or failures in information technology and communications provided by us or third parties, or other errors in services that could damage our reputation and business;

· our ability to identify attractive acquisition opportunities, successfully negotiate acquisition terms and effectively integrate any acquired companies or businesses;

· our ability to effectively manage our growth;

· availability of capital on acceptable terms to finance our continued growth;

· risks of conducting international commerce, including foreign currency exchange rate fluctuations, changes in government policies or regulations, longer payment cycles, trade restrictions, economic or political instability in foreign countries where we may increase our business and reduced protection of our intellectual property;

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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;

· our ability to operate as a public company and comply with applicable disclosure and other requirements and to hire additional personnel with public company compliance experience; and

· other risk factors included under “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 30, 2011

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 and the pro forma financial information included in our Annual Report Form on 10-K filed with the SEC on March 30, 2011.

General Overview

Sajan, Inc. provides language translation solutions to customers selling products into global markets or those customers otherwise requiring accurate language translation of many varieties of content.  Sajan also offers its customers a robust Translation Management System (TMS) technology which is cloud-based to deliver business process automation, cost reduction and improve the quality of translated content.  These customers use our solutions to translate 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 a comprehensive solution that allow customers to rely upon a single provider to meet all of their language translation needs. For those customers requiring use of multiple service vendors, Sajan offers a complete Managed Service solution which provides the required flexibility, yet delivers the technology advantages.  The overall solution can be described as modular and highly scalable, it extends from small workgroup environments to large enterprises.

We offer our customers the ability to utilize our solutions under two different models:

· Technology Enabled Service Model: we provide all of the customer’s language translation requirements, and;

· Managed Service Model: customers use our technology and operations staff to manage translators or other language service vendors.

Our solutions are used to manage the end-to-end process of content globalization, which is the project, process and delivery management of content translated and localized into multiple languages across the enterprise. Content is localized across the enterprise for a wide variety of high value-added purposes and uses, most notably, product sales and marketing, packaging, user manuals, technical support and training, as well as internal requirements.

Merger Transaction

On February 23, 2010, pursuant to the Merger Agreement, by and among MathStar, a Delaware corporation, and Sajan, a privately held Minnesota corporation whose business was providing language translation technology and service, Garuda, a wholly-owned subsidiary of MathStar, and Thomas Magne, solely in his capacity as agent for the holders of common stock of pre-Merger Sajan, pre-Merger Sajan was merged with and into Garuda.  Garuda was the surviving entity in the Merger and subsequently changed its name to Sajan, LLC.  As a result of the Merger, pre-Merger Sajan became a wholly-owned subsidiary of MathStar. MathStar then changed its name to “Sajan, Inc.” and continues the language translation technology and service business of pre-Merger Sajan.   For accounting purposes, pre-Merger Sajan is treated as the continuing reporting entity that acquired MathStar because pre-Merger Sajan obtained effective control of MathStar as a result of the Merger.  This transaction is referred to throughout this report as the “Merger” and, unless otherwise indicated, we refer to the surviving public company following the Merger as “Sajan,” “Sajan, Inc.,” “we,” “us,” “our” or the “Company” and to MathStar prior to the Merger as “MathStar.”

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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 Ltd, the producer of Sajan’s technology tools. Sajan India Software Private Limited (“Sajan – India”), based in Delhi, India, houses our development center at which we conduct substantially all of our software development activities. In 2010, we also established a Global Language Service Center in Spain, Sajan Spain S.L., to serve the European market.  All of these operations are wholly-owned subsidiaries of Sajan.

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, 2010 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Discussion of Critical Accounting Policies and Estimates.” There were no significant changes to our critical accounting policies during the three and nine months ended September 30, 2011.

Results of Operations - Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

For the three months ended September 30, 2011, net loss was $141,000 compared to net loss of $568,000 for the three months ended September 30, 2010. Operating results for the quarter reflect increased revenues and cost of revenues from additional translation services.   In addition, operating expenses (excluding cost of revenues) increased by $52,000.  The increase in operating expenses was primarily due to a decrease in sales and marketing costs, which resulted from lower compensation costs and the implementation of a new commission system; an increase in research and development costs, which resulted from an increase in compensation costs and recruiting fees; and an increase in general and administrative expenses, which resulted from an increase in incentive and stock based compensation costs, incremental costs associated with the expansion of our international operations and professional fees.

	Three Months Ended September 30,
							% Change
Item	2011			2010			(Year Over Year)
Revenues	$	5,185,758		$	4,209,245			23.2	%
Operating Expenses:
Cost of Revenues		3,053,872			2,563,706			19.1	%
Sales and Marketing		647,477			838,906			(22.8	)%
Research and Development		443,608			327,184			35.6	%
General and Administrative		986,425			816,533			20.8	%
Depreciation and Amortization		173,746			217,009			(19.9	)%
Other Income (Expense)		(21,797	)		(13,860	)		57.3	%
Net income (loss)	$	(141,167	)	$	(567,953	)

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The major components of revenues, cost of revenue, operating expenses and other income (expense) are discussed below.

Revenues

Revenues totaled $5.2 million for the three months ended September 30, 2011 compared to $4.2 million for the three months ended September 30, 2010. This $1 million or 23% increase resulted from an increase in the number of customers and the growth of business with existing customers.

Cost of Revenues

Cost of revenues increased $.49 million, or 19% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.   As a percentage of revenue, cost of revenues was 59% for the three months ended September 30, 2011 compared to 61% for the same interim period in 2010. The increase in dollar terms resulted from additional costs of approximately $ .5 million to process the translation of additional words, as well as additional costs of approximately $170,000 associated with an increase in the operations staff in River Falls and Ireland.  The cost of revenues as a percentage of revenue decreased as a result of a shift in the mix of business between customers, a shift in the mix of languages translated and the addition of new customers which required incremental implementation costs.

Cost of revenue excludes depreciation and amortization of $.2 million for the three months ended September 30, 2011 and September 30, 2010, which are included in operating expenses.

Operating Expenses

Total operating costs for the three months ended September 30, 2011 were approximately $2.3 million compared to $2.2 million for the three months ended September 30, 2010. The major components of these costs are sales and marketing, research and development, general and administrative expenses and depreciation and amortization expense. A more detailed discussion of the various components of our operating costs for the three months ended September 30, 2011 and 2010 appears below:

Sales and Marketing. Sales and marketing expense of approximately $.65 million for the three months ended September 30, 2011 decreased 23% from sales and marketing expense of approximately $.84 million for the three months ended September 30, 2010. The decrease in our expenses between the interim periods is the result of a $150,000 decrease in compensation expense related to the restructuring of our internal commission program and wages and a $73,000 decrease in stock based compensation.  These reductions were offset by an increase in marketing expenses.  As a percentage of revenue, sales and marketing expense was approximately 12% for the three months ended September 30, 2011, a decrease from approximately 20% for the same interim period in 2010, reflecting the economies of scale that resulted from an increase in revenues and the realignment of the commission structure.

Research and Development.  Research and development expense was approximately $.44 million for the three months ended September 30, 2011, compared to research and development expense of $.33 million for the three months ended September 30, 2010.  The increase for the three months ended September 30, 2011 resulted primarily from an increase in compensation expense for our development staff and an increase in recruiting fees associated with identifying and hiring staff with specific skills.  As a percentage of revenue, research and development expense increased slightly to 9% for the three months ended September 30, 2011 as compared to 8% for the three months ended September 30, 2010.

General and Administrative.  General and administrative expense was $.99 million and $.82 million for the three months ended September 30, 2011 and 2010, respectively, an increase of approximately $.17 million, or 21%.  As a percentage of revenue, general and administrative expense was 19% for the three months ended September 30, 2011 and September 30, 2010.  The increase in dollar terms reflects higher incentive and stock based compensation expenses of approximately $70,000, additional occupancy costs for our Ireland, India and Spain offices of approximately $30,000 and an increase of approximately $70,000 in legal and accounting fees in the quarter ended September 30, 2011 as compared with the prior year.

The Company anticipates that operating expenses overall will remain at approximately at current quarter levels, but may trend upward toward the end of the year to provide for increased sales and marketing programs.

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Depreciation and Amortization.  Depreciation and amortization expense was $.17 million and $.22 million for the three months ended September 30, 2011 and 2010, respectively, a decrease of approximately $43,000.  As a percentage of revenue, depreciation and amortization expense was 3% for the three months ended September 30, 2011 as compared to 5% for the three months ended September 30, 2010.

Other Income (Expense). Interest expense for three months ended September 30, 2011 was approximately $19,000, a $3,000 decrease compared to the three months ended September 30, 2010, which resulted from the repayment of a portion of our long term debt in the first quarter of 2011.   Interest and other income for the three months ended September 30, 2011 was approximately $1,000 compared to $9,000 for the three months ended September 30, 2010.    

Income Taxes

Income tax was zero for both three months ended September 30, 2011 and September 30, 2010.

Results of Operations – Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

For the nine months ended September 30, 2011, net loss was $159,000, compared to net loss of $2.6 million for the nine months ended September 30, 2010. Operating results for the quarter reflect increased revenues and cost of revenues from additional translation services which resulted in an increase in gross profit of $1.53 million.  In addition, operating expenses (excluding cost of revenue) decreased by approximately $949,000.  The decrease in operating expenses was primarily due to a decrease in sales and marketing costs, which resulted from lower compensation costs and the implementation of a new commission system and a decrease in general and administrative expenses, which resulted from lower professional fees and other costs associated with the Merger in 2010.

	Nine Months Ended September 30,
							% Change
Item	2011			2010			(Year Over Year)
Revenues	$	15,816,444		$	11,551,767			36.9	%
Operating Expenses:
Cost of Revenues		9,350,483			6,614,335			41.4	%
Sales and Marketing		1,908,708			2,571,394			(25.8	)%
Research and Development		1,235,749			1,288,376			(4.1	)%
General and Administrative		2,890,473			2,994,117			(3.5	)%
Depreciation and Amortization		552,953			682,748			(19.0	)%
Other Income (Expense):		(36,619	)		(72,099	)		(49.2	)%
Income tax benefit		-			(62,311	)		(100.0	)%
Net loss	$	(158,541	)	$	(2,608,991	)

The major components of revenues, cost of revenue, operating expenses and other income (expense) are discussed below.

Revenues

Revenues totaled $15.8 million for the nine months ended September 30, 2011 compared to $11.6 million for the nine months ended September 30, 2010. This increase of $4.2 million or 36.9% resulted from an increase in the number of customers and the growth of business with existing customers.

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Cost of Revenues

Cost of revenues increased $2.7 million, or 41.4% for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. As a percentage of revenue, cost of revenues was 59.1% for the nine months ended September 30, 2011 compared to 57.3% for the same interim period in 2010. The increase in dollar terms resulted from additional costs of approximately $1.9 million to process the translation of additional words, as well as additional costs of approximately $800,000 associated with an increase in the operations staff in River Falls and Ireland. The cost of revenues as a percentage of revenue increased as a result of a shift in the mix of business between customers, a shift in the mix of languages translated and the addition of new customers which required incremental implementation costs.

Cost of revenue excludes depreciation and amortization of $.55 million and $.68 million for the nine months ended September 30, 2011 and September 30, 2010, respectively, which are included in operating expenses.

Operating Expenses

Total operating costs for the nine months ended September 30, 2011 were approximately $6.6 million compared to $7.5 million for the nine months ended September 30, 2010.  The major components of these costs are sales and marketing, research and development, general and administrative expenses and depreciation and amortization expense. A more detailed discussion of the various components of our operating costs for the nine months ended September 30, 2011 and 2010 appears below:

Sales and Marketing. Sales and marketing expense of approximately $1.9 million for the nine months ended September 30, 2011 decreased 25.8% from sales and marketing expense of approximately $2.6 million for the nine months ended September 30, 2010. The decrease in our expenses between the interim periods is the result of a $330,000 decrease in compensation expense related to the restructuring of our internal commission program, a reduction of $170,000 in other compensation expenses due primarily to the departure of several senior sales staff in the second half of 2010 and lower stock based compensation expense of $135,000.    As a percentage of revenue, sales and marketing expense was approximately 12% for the nine months ended September 30, 2011, a decrease from approximately 22% for the same interim period in 2010, reflecting the economies of scale that resulted from an increase in revenues and the realignment of the sales staff and commission structure.

Research and Development.  Research and development expense of approximately $1.2 million decreased by $.1 million, or 4%, for the nine months ended September 30, 2011, compared to research and development expense of $1.3 million for the nine months ended September 30, 2010.  The decrease for the nine months ended September 30, 2011 resulted primarily from a reduction in stock based compensation costs of approximately $256,000 that were incurred as a result of the Merger transaction that was completed in the first quarter of 2010.  This decrease in costs was offset by an increase in staff costs of approximately $120,000 in our India development center, normal staff compensation increases and the recognition of recruitment fees to identify and hire new staff with specific skills.  As a percentage of revenue, research and development expense decreased to 8% for the nine months ended September 30, 2011 as compared to 11% for the nine months ended September 30, 2010.

General and Administrative.  General and administrative expense was $2.9 million and $3.0 million for the nine month periods ended September 30, 2011 and 2010, respectively.  As a percentage of revenue, general and administrative expense was 18% for the nine months ended September 30, 2011 as compared with 26% for the nine months ended September 30, 2010.  The decrease in dollar terms reflects a $365,000 decrease in professional fees which resulted from lower professional fees and other costs associated with the Merger in 2010.  This reduction was offset by higher regular and stock based compensation expenses of approximately $305,000, related to normal salary adjustments, the hiring of a CFO in August 2010, cost of stock option grants to employees during 2011 and cash incentive compensation.  In addition, we incurred higher occupancy costs for our Ireland, India and Spain offices as compared with the same period in 2010 which were offset by lower insurance costs.  Attorney fees to resolve our legal dispute are also included in General and Administrative expenses for the nine months ended September 30, 2011.

Depreciation and Amortization.  Depreciation and amortization expense was $.55 million and $.68 million for the nine months ended September 30, 2011 and 2010, respectively, a decrease of approximately $130,000.  As a percentage of revenue, depreciation and amortization expense was 3% for the nine months ended September 30, 2011 as compared to 6% for the nine months ended September 30, 2010.

Other Income (Expense). Interest expense for nine months ended September 30, 2011 was approximately $54,000, a $36,000 decrease compared to the nine months ended September 30, 2010, which resulted from elimination of the mortgage interest expense that related to the buildings owned by River Valley Business Center, LLC and leased by Sajan.  The interest expense was discontinued as a result of the deconsolidation of River Valley on February 23, 2010.  Interest and other income for the nine months ended September 30, 2011 was approximately $4,000 compared to $36,000 for the nine months ended September 30, 2010 due to the sale of old Mathstar inventory in the 2010 period. 

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Income Tax Benefit

Income tax benefit for the nine months ended September 30, 2011 was zero compared to income tax benefit of $.06 million for the nine months ended September 30, 2010.

Liquidity and Capital Resources

Summary cash flow data is as follows:

	Nine months ended September 30,
	2011			2010
Cash flows provided (used) by :
Operating activities	$	495,446		$	(1,866,156	)
Investing activities		767,292			4,769,673
Financing activities		(1,230,763	)		(849,269	)
Net increase in cash		31,975			2,054,248
Effect of exchange rate changes in cash		(96,385	)		(4,570	)
Cash and equivalents, beginning of period		1,903,229			120,493
Cash and equivalents, end of period	$	1,838,819		$	2,170,171

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2011 was $.5 million, which resulted primarily from the add-back of non-cash expenses related to depreciation, amortization and stock based compensation,  to our operating results for the period.  In addition, changes in certain current assets and current liabilities adversely affected the cash provided from operations during the period ended September 30, 2011.   Net cash of $1.9 million was used by operating activities for the nine months ended September 30, 2010, which resulted primarily from our $2.6 million loss from operations, offset by non-cash expenses for amortization, depreciation, and stock based compensation expense and decreases in certain current assets and current liabilities.

Net Cash Provided by Investing Activities

Net cash provided by investing activities of $.77 million for the nine months ended September 30, 2011 related to the release of $1.0 million of restricted cash acquired in the Merger, offset by the purchase of property and equipment and payments to certain stockholders who chose to dissent in connection with the Merger.  Net cash of $4.8 million provided by investing activities for the nine months ended September 30, 2010 related primarily to cash acquired in the Merger transaction of $5.5 million offset by payment for dissenter’s shares of $.38 million.

Net Cash Used in Financing Activities

Net cash of $1.2 million used in financing activities for the nine months ended September 30, 2011 primarily related to payments of a portion of our related party and payment in full of our $1.0 million indemnification escrow note payable, which related to the Merger.  Net cash of $.85 million used in financing activities for the nine months ended September 30, 2010 related to payments for Merger-related costs and repayment of short -term debt.

Sources of Capital

For the nine months ended September 30, 2011, our principal source of liquidity was funds generated from operations and cash and cash equivalents on hand.

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Uses of Capital

Sajan’s primary uses of capital resources for the nine months ended September 30, 2011 have been to fund operating activities, fund working capital and capital equipment needs and expand business operations internationally.  The Company intends to invest in more aggressive sales and marketing initiatives to further expand revenues and facilitate overall business growth, which may include acquisitions or other strategic initiatives.

We anticipate that we will continue to generate positive cash flow from operations, but we may require investment capital to fund investments in working capital, investments in our organizational infrastructure for the launch of our business products and, potentially, for acquisitions.

We believe that our cash, cash equivalents and marketable securities and operating cash flows will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

We may decide to raise additional funds through public or private financings or borrowings to fund our operations, to develop or enhance products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders or we may be subject to covenants that restrict how we conduct our business. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.

Off-Balance Sheet Arrangements  

The Company had no off-balance sheet arrangements as of September 30, 2011.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2011, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of  the Company’s disclosure controls and procedures (as defined in Exchange Rule 13a-15(e) and 15d-15(e)), and concluded that our disclosure controls and procedures are defined at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter covered by this report that have materially affected, or were reasonably likely to materially affect, such controls.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

A complete summary of our legal proceedings is included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011, as updated by our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011 and June 30, 2011, filed with the SEC on May 11, 2011, and August 12, 2011, respectively.  There have been no material developments with respect to such proceedings during the quarter ended September 30, 2011.

In addition to the legal proceedings described in the foregoing reports, we may be subject to legal actions, proceedings and claims in the ordinary course of business.  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 our financial condition or results of operations.

Item 1A.  Risk Factors.

There have been no material changes to the Company’s Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 30, 2011, other than the identification of a risk regarding interruption or failure in information technology or other errors in services that could damage our reputation and business.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Defaults upon Senior Securities.

None.

Item 4.   (Removed and Reserved.)

Item 5.  Other Information.

None.

Item 6.  Exhibits.

See the attached Exhibit Index

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2011	Sajan, Inc.
	By:	/s/ Shannon Zimmerman
		Shannon Zimmerman
		Chief Executive Officer and President
	By:	/s/ Timothy Clayton
		Timothy Clayton
		Chief Financial Officer

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EXHIBIT INDEX

SAJAN, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated January 8, 2010, among MathStar, Inc., Sajan, Inc., Garuda Acquisition, LLC, and Thomas Magne (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 11, 2010).
3.1	Certificate of Incorporation of MathStar, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed by MathStar, Inc. with the SEC on August 3, 2005, Registration No. 333-127164 (“Registration Statement”)).
3.2	Certificate of Amendment of the Certificate of Incorporation of MathStar, Inc. filed with the Delaware Secretary of State on May 23, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 23, 2008).
3.3	Certificate of Designation of Series A Preferred Stock filed with the Secretary of State of the State of Delaware on February 25, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated February 25, 2010 filed with the SEC).
3.4	Certificate of Ownership and Merger merging Sajan, Inc. into MathStar, Inc. filed with the SEC on March 3, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 3, 2010).
3.5	Certificate of Amendment to Amended Certificate of Incorporation of Sajan, Inc. filed with the Secretary of State of the State of Delaware on June 15, 2010 (incorporated by reference to Exhibit 3.4 to the Company’s Form 8-A12G/A filed with the SEC on June 23, 2010).
3.6	Bylaws of MathStar, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement).
4.1	Form of common stock certificate of Sajan, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-A/A filed with the SEC on June 23, 2010).
4.2	Tax Benefit Preservation Plan and Rights Agreement, dated as of February 25, 2010, between MathStar, Inc. and Wells Fargo Shareowner Services, a division of Wells Fargo Bank, National Association, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K dated February 25, 2010 filed with the SEC).
31.1	Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith).
31.2	Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) ( filed herewith).
32.1	Certification of principal executive officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101	The following financial information from Sajan’s Quarterly Report on Form 10-Q for the period ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Operations for the three-month and nine-month periods ended September 30, 2011 and 2010, (ii) the Consolidated Balance Sheet at September 30, 2011 and December 31, 2010, (iii) the Consolidated Statement of Cash Flows for the nine-month periods ended September 30, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements (filed herewith).*

*Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

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