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, 2013 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 definition of “accelerated filer,” large 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 8, 2013, the registrant had 16,268,393 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 | 15 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 21 |
| Item 4. Controls and Procedures | 22 |
PART II. OTHER INFORMATION | |
| Item 1. Legal Proceedings | 22 |
| Item 1A. Risk Factors | 22 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| Item 3. Defaults Upon Senior Securities | 22 |
| Item 4. Mine Safety Disclosures | 22 |
| Item 5. Other Information | 22 |
| Item 6. Exhibits | 22 |
SIGNATURES | 23 |
EXHIBIT INDEX | 24 |
| 2 | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2013 (Unaudited) | December 31, 2012 | |||||
| Assets | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 1,479,206 | $ | 892,939 | ||
| Accounts receivable, net of allowance of $15,000 | 3,610,444 | 3,192,337 | ||||
| Deferred tax asset, net of allowance | 54,180 | 54,180 | ||||
| Unbilled services | 1,099,477 | 1,015,429 | ||||
| Prepaid expenses and other current assets | 391,365 | 438,674 | ||||
| Total current assets | 6,634,672 | 5,593,559 | ||||
| Property and equipment, net | 965,607 | 805,284 | ||||
| Other assets: | ||||||
| Intangible assets, net | 427,054 | 569,420 | ||||
| Capitalized software development costs, net | 438,848 | 301,552 | ||||
| Other assets | 25,529 | 26,562 | ||||
| Total other assets | 891,431 | 897,534 | ||||
| Total assets | $ | 8,491,710 | $ | 7,296,377 | ||
| Liabilities and Stockholders’ Equity | ||||||
| Current liabilities: | ||||||
| Line of credit | $ | 200,000 | $ | 400,000 | ||
| Current portion of capital lease obligations | 150,720 | 30,980 | ||||
| Accounts payable | 2,360,881 | 2,501,772 | ||||
| Accrued compensation and benefits | 724,319 | 519,958 | ||||
| Accrued liabilities | 248,359 | 299,771 | ||||
| Deferred revenue | 1,595,941 | 583,520 | ||||
| Total current liabilities | 5,280,220 | 4,336,001 | ||||
| Commitments and contingencies | ||||||
| Long-term liabilities: | ||||||
| Capital lease obligations, net of current portion | 88,401 | 7,549 | ||||
| Note payable – related party | 750,000 | 750,000 | ||||
| Total long-term liabilities | 838,401 | 757,549 | ||||
| Total liabilities | 6,118,621 | 5,093,550 | ||||
| Stockholders’ equity: | ||||||
| Preferred stock, $.01 par value, 10,000,000 shares authorized and no shares issued and outstanding | - | - | ||||
| Common stock, $.01 par value, 35,000,000 shares authorized; 16,268,393 shares issued and outstanding at September 30, 2013 and December 31, 2012 | 162,683 | 162,683 | ||||
| Additional paid-in capital | 7,137,899 | 6,968,032 | ||||
| Accumulated deficit | (4,728,696) | (4,728,664) | ||||
| Foreign currency adjustment | (198,797) | (199,224) | ||||
| Total stockholders’ equity | 2,373,089 | 2,202,827 | ||||
| Total liabilities and stockholders’ equity | $ | 8,491,710 | $ | 7,296,377 | ||
See notes to unaudited condensed consolidated financial statements.
| 3 | ||
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||
| Revenues: | ||||||||||||
| Translation and consulting | $ | 5,719,811 | $ | 5,155,120 | $ | 17,377,021 | $ | 15,331,619 | ||||
| Operating expenses: | ||||||||||||
| Cost of revenues (exclusive of depreciation and amortization) | 3,524,757 | 3,303,260 | 10,680,944 | 9,947,087 | ||||||||
| Sales and marketing | 824,369 | 571,371 | 2,398,043 | 1,814,143 | ||||||||
| Research and development | 289,041 | 182,517 | 657,825 | 948,323 | ||||||||
| General and administrative | 990,825 | 893,267 | 2,884,351 | 2,843,486 | ||||||||
| Loss on subsidiary closure | - | - | - | 80,113 | ||||||||
| Depreciation and amortization | 218,006 | 184,846 | 646,673 | 589,081 | ||||||||
| Total operating expenses | 5,846,998 | 5,135,261 | 17,267,836 | 16,222,233 | ||||||||
| Income (loss) from operations | (127,187) | 19,859 | 109,185 | (890,614) | ||||||||
| Other income (expense): | ||||||||||||
| Interest expense | (26,612) | (23,251) | (83,066) | (70,356) | ||||||||
| Other expense, net | (3,345) | (5,823) | (866) | (18,530) | ||||||||
| Total other (expense), net | (29,957) | (29,074) | (83,932) | (88,886) | ||||||||
| Income (loss) before income taxes | (157,144) | (9,215) | 25,253 | (979,500) | ||||||||
| Income tax expense | 6,011 | 33,575 | 25,285 | 33,575 | ||||||||
| Net Loss | (163,155) | (42,790) | (32) | (1,013,075) | ||||||||
| Effect of foreign currency translation adjustments | 35,505 | 18,452 | 427 | 30,350 | ||||||||
| Comprehensive income (loss) | $ | (127,650) | $ | (24,338) | $ | 395 | $ | (982,725) | ||||
| Loss per common share – basic and diluted | $ | (0.01) | $ | (0.00) | $ | (0.00) | $ | (0.06) | ||||
| Weighted average shares outstanding – basic & diluted | 16,268,393 | 16,185,804 | 16,268,393 | 16,183,600 | ||||||||
See notes to unaudited condensed consolidated financial statements.
| 4 | ||
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
| Nine months ended September 30, | ||||||
| 2013 | 2012 | |||||
| Cash flows from operating activities: | ||||||
| Net loss | $ | (32) | $ | (1,013,075) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||
| Loss on subsidiary closure | - | 80,113 | ||||
| Depreciation and amortization | 646,673 | 589,082 | ||||
| Stock-based compensation expense | 169,867 | 122,404 | ||||
| Decrease (increase) in current assets: | ||||||
| Accounts receivable | (418,107) | 357,624 | ||||
| Unbilled services | (84,048) | (322,718) | ||||
| Prepaid expenses and other current assets | (105,686) | (105,490) | ||||
| Other assets | 1,057 | (2,276) | ||||
| Increase (decrease) in current liabilities: | ||||||
| Accounts payable | (140,891) | 17,253 | ||||
| Accrued liabilities | (51,412) | (20,531) | ||||
| Accrued compensation and benefits | 204,361 | (114,673) | ||||
| Deferred revenue | 1,012,421 | (220,007) | ||||
| Net cash flows provided by (used in) operating activities | 1,234,203 | (632,294) | ||||
| Cash flows from investing activities: | ||||||
| Purchases of property and equipment | (135,528) | (339,260) | ||||
| Capitalized software development costs | (242,254) | (138,679) | ||||
| Net cash flows used in investing activities | (377,782) | (477,939) | ||||
| Cash flows from financing activities: | ||||||
| Payments on line of credit | (200,000) | - | ||||
| Payments on capital lease obligations | (70,938) | (19,099) | ||||
| Net cash flows used in financing activities | (270,938) | (19,099) | ||||
| Net increase (decrease) in cash and cash equivalents | 585,483 | (1,129,332) | ||||
| Effect of exchange rate changes in cash | 784 | 26,785 | ||||
| Cash and cash equivalents – beginning of period | 892,939 | 1,763,249 | ||||
| Cash and cash equivalents – end of period | $ | 1,479,206 | 660,702 | |||
| Cash paid for taxes | $ | 34,697 | $ | - | ||
| Cash paid for interest, net of amortization of loan fees | $ | 68,190 | $ | 25,315 | ||
| Non-cash investing and financing transactions: | ||||||
| Cashless exercise of stock options | $ | - | $ | 198 | ||
| Adjustment to intangible assets and acquisition liability - due to sellers due to finalization of purchase price | $ | - | $ | 141,176 | ||
| Purchase of property and equipment via capital lease obligation | $ | 271,530 | $ | - | ||
See notes to unaudited condensed consolidated financial statements.
| 5 | ||
Sajan, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. | Nature of Business and Summary of Significant Accounting Policies |
Nature of Business / Basis of Presentation
Sajan, Inc. (the “Company” or “Sajan”), a Delaware corporation, provides language translation services and technology solutions to companies located throughout the world, particularly in the technology, consumer products, medical and life sciences, financial services, manufacturing, government, and retail industries that are selling products into global markets. The Company is located in River Falls, Wisconsin and has active, wholly-owned subsidiaries in the following countries:
· Ireland – Sajan Software Ltd.
· Spain – Sajan Spain S.L.A.
· Singapore – Sajan Singapore Pte. Ltd.
· Brazil - Sajan do Brasil Traduções Ltda.
The Company formerly had a wholly owned subsidiary in India, Sajan India Software Private Limited, which was closed in January 2012 (See Note 8).
Interim Financial Information
The condensed consolidated balance sheet as of December 31, 2012, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or any other period. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company, and notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 29, 2013. The financial information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to fairly present the results of the interim periods presented in order to make the consolidated financial statements not misleading.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Sajan, Inc. and its wholly-owned subsidiaries. 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.
| 6 | ||
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 $15,000 at both September 30, 2013 and December 31, 2012. Management believes all accounts receivable in excess of the allowance are fully collectible. The Company does not accrue interest on accounts receivable.
Income / Loss Per Common Share
Basic earnings (loss) per share is computed 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.
For the three months ended September 30, 2013 and 2012, we excluded options to purchase 1,535,675 and 1,138,050 shares, respectively, and warrants to purchase 176,026 shares because the Company had a net loss and inclusion of these shares would have been anti-dilutive. For the nine months ended September 30, 2013 and 2012, we excluded options to purchase 1,535,675 and 1,138,050 shares, respectively, and warrants to purchase 176,026 shares because the Company had a net loss and inclusion of these shares would have been anti-dilutive.
A reconciliation of the denominator in the basic and diluted income or loss per share is as follows:
| Three months ended September 30, | ||||||
| 2013 | 2012 | |||||
| Numerator: | ||||||
| Net loss | $ | (163,155) | $ | (42,790) | ||
| Denominator: | ||||||
| Weighted average common shares outstanding - basic & diluted | 16,268,393 | 16,185,804 | ||||
| Loss per common share - basic and diluted | $ | (0.01) | $ | (0.00) | ||
| Nine months ended September 30, | ||||||
| 2013 | 2012 | |||||
| Numerator: | ||||||
| Net loss | $ | (32) | $ | (1,013,075) | ||
| Denominator: | ||||||
| Weighted average common shares outstanding – diluted & diluted | 16,268,393 | 16,183,600 | ||||
| Loss per common share - basic and diluted | $ | (0.00) | $ | (0.06) | ||
| 7 | ||
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives, initially determined to be two to seven years, using the straight-line method. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in operating results. Repairs and maintenance costs are expensed as incurred.
Intangible Assets
The Company's intangible assets consist of customer lists and patents, are subject to amortization, and consist of the following:
| September 30, 2013 | December 31, 2012 | |||||
| Customer lists acquired | $ | 771,229 | $ | 771,229 | ||
| Patents and licenses | 517,883 | 517,883 | ||||
| Less accumulated amortization | (862,058) | (719,692) | ||||
| Total intangible assets, net | $ | 427,054 | $ | 569,420 | ||
Intangible assets are amortized over their expected useful lives of 3 to 15 years. Amortization of intangible assets was $47,455 and $75,630 for the three months ended September 30, 2013 and 2012, respectively and $142,366 and $235,621 for the nine months ended September 30, 2013 and 2012, respectively. Estimated amortization expense of intangible assets for the remainder of 2013 and the years ending December 31, 2014, 2015, 2016, 2017, and thereafter is $47,455, $189,821, $170,655, $3,686, $1,595, and $13,842 respectively. The weighted average remaining life of the intangibles is 3 years.
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 and nine months ended September 30, 2013 and 2012.
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 and nine months ended September 30, 2013, the Company capitalized approximately $0 and $242,000, respectively, related to software development activities. The amount capitalized for both the three and nine months ended September 30, 2012 was $139,000.
| 8 | ||
Capitalized software development costs consist of the following as of:
| September 30, 2013 | December 31, 2012 | |||||
| Capitalized software development costs | $ | 3,084,804 | $ | 2,865,655 | ||
| Less accumulated amortization | (2,645,956) | (2,564,103) | ||||
| Total capitalized software development costs, net | $ | 438,848 | $ | 301,552 | ||
When the projects are ready for their intended use, the Company amortizes such costs over their estimated useful lives of three years. Amortization of capitalized software was $43,398 and $17,730 for the three months ended and $104,958 and $104,510 for the nine months ended September 30, 2013 and 2012, respectively. Estimated amortization expense for capitalized software costs for the remainder of 2013 and the years ending December 31, 2014, 2015, and 2016 is expected to be $45,228, $180,912, $169,356, and $43,352, respectively.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all stock-based compensation at fair value. The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. For the three and nine months ended September 30, 2013, total stock-based compensation expense was approximately $70,000 and $170,000, respectively. For the three and nine months ended September 30, 2012, total stock-based compensation was $18,000 and $122,000, respectively. As of September 30, 2013, there was approximately $716,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s 2004 Long-Term Incentive Plan. That cost is expected to be recognized over a weighted-average period of three years.
In determining the compensation cost of the options granted during 2013 and 2012, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model, and the weighted average assumptions used in these calculations are summarized as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||
| Risk-free interest rate | 1.4 | % | 0.2 | % | 1.2 | % | 0.7 | % | |||||
| Expected life of options granted | 7 Yrs | 2.8 Yrs | 7 Yrs | 7 Yrs | |||||||||
| Expected volatility range | 89.0 | % | 76.6 | % | 88.4 | % | 68.6 | % | |||||
| Expected dividend yield | - | - | - | - | |||||||||
Using the Black-Scholes option pricing model, management has determined that the options issued in the three months ended September 30, 2013 and 2012 have a weighted-average grant date fair value of $0.99 and $0.36 per share, respectively. Options issued during the nine months ended September 30, 2013 and 2012 have a weighted-average grant date fair value of $0.86 per share and $0.60 per share, respectively.
Revenue Recognition
The Company derives revenues primarily from language translation services and professional consulting services.
Translation services utilize the Company’s proprietary translation management system – 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.
| 9 | ||
In accordance with Financial Accounting Standard Board (“FASB”) and SEC accounting guidance on revenue recognition, the Company considers revenue earned and realizable at the time services are performed and amounts are earned. Sajan considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. The Company recognizes revenue for translations services on a standard “per word” basis at the time the translation is completed. The Company recognizes revenue for professional services when the services have been completed in accordance with the statement of work.
Sajan’s agreements with its customers may provide the customer with a limited time period following delivery of the project for the customer to identify any non-conformities to the pre-defined project specifications. The Company has the opportunity to correct these items. Historically, errors in project deliverables have been minimal and accordingly, revenue is recognized as services are performed.
Revenues recognized in excess of billings are recorded as unbilled services. Billings in excess of revenues recognized and deposits from customers are recorded as deferred revenues to the extent cash has been received. As of September 30, 2013 and December 31, 2012, the Company had unbilled services of $1,099,477 and $1,015,429, respectively, and deferred revenue of $1,595,941 and $583,520, respectively.
Cost of Revenues
Cost of revenues consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects. Cost of revenues excludes depreciation and amortization which is presented separately as a component of operating expenses.
Research and Development
Research and development expenses represent costs incurred for development of routine enhancements to our operating software system and include costs incurred during the preliminary project stage of development or related to training or maintenance activities. Research and development expenses consist primarily of salaries and related costs of our software engineering organization, fees paid to third party consultants and certain facility expenses. We expense all research and development expenses as incurred.
Foreign Currency Translation
For operations in local currency environments, assets and liabilities are translated at period-end exchange rates with cumulative translation adjustments included as a component of stockholders’ 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 period-end exchange rates. These re-measured adjustments are reflected in the results of operations. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Comprehensive Income (Loss).
Income Tax
Current income taxes are recorded based on statutory obligations for the current operating period for the various countries in which the Company has operations.
Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
| 10 | ||
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Reclassification
For comparability, certain 2012 amounts have been reclassified to conform with classifications adopted in 2013.
2. | Concentrations of Credit Risk |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.
Cash concentration – The Company places its cash at financial institutions with balances that, at times, may exceed federally insured limits. The Company evaluates the creditworthiness of these financial institutions in determining the risk associated with these deposits. The Company has not experienced any losses on such accounts.
Accounts receivable concentration – Concentrations of credit risk with respect to trade accounts receivable are limited due to the dispersion of customers across different industries and geographic regions. At September 30, 2013 and December 31, 2012, one customer accounted for approximately 20% and two customers accounted for 24% and 12% of accounts receivable, respectively.
Sales concentration – For the three months ended September 30, 2013, one customer accounted for 15% of net revenues and two customers accounted for 19% and 15% of net revenues, respectively, for the three months ended September 30, 2012. For the nine months ended September 30, 2013, one customer accounted for 17% of net revenues and two customers accounted for 18% and 12% of net revenues, respectively, in the same period of 2012.
3. | Segment Information and Major Customers |
The Company views its operations and manages its business as one reportable segment, providing language translation solutions to a variety of companies. 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.
| Three months ended September 30, | ||||||||||||
| 2013 | 2012 | |||||||||||
| Sales | Percent | Sales | Percent | |||||||||
| United States | $ | 4,115,738 | 72 | % | $ | 3,751,619 | 73 | % | ||||
| International | 1,604,073 | 28 | % | 1,403,501 | 27 | % | ||||||
| Total Sales | $ | 5,719,811 | 100 | % | $ | 5,155,120 | 100 | % | ||||
| Nine months ended September 30, | ||||||||||||
| 2013 | 2012 | |||||||||||
| Sales | Percent | Sales | Percent | |||||||||
| United States | $ | 11,873,366 | 68 | % | $ | 10,987,742 | 72 | % | ||||
| International | 5,503,655 | 32 | % | 4,343,877 | 28 | % | ||||||
| Total Sales | $ | 17,377,021 | 100 | % | $ | 15,331,619 | 100 | % | ||||
For the three and nine months ended September 30, 2013, one foreign country accounted for 11% and 10% of the net revenues, respectively, and one foreign country accounted for 12% of net revenues for the same respective periods in 2012.
| 11 | ||
4. | Related Party Transactions |
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, and currently has a maturity date of August 23, 2015. However, 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).
The note carries an interest rate of 8%. Amounts outstanding as of September 30, 2013 and December 31, 2012 are as follows:
| September 30, 2013 | December 31, 2012 | |||||
| Principal | $ | 750,000 | $ | 750,000 | ||
| Accrued interest | 126,164 | 111,288 | ||||
| Total | $ | 876,164 | $ | 861,288 | ||
Interest expense was approximately $15,000 and $45,000 for each of the three and nine months ended September 30, 2013 and 2012, respectively.
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 September 30, 2013 and 2012 was $85,983 for both periods. Rent expense for the nine months ended September 30, 2013 and 2012 was $257,949 and $248,590, respectively.
5. | Credit Facility |
In March 2012, we entered into a one year revolving working capital line of credit with Silicon Valley Bank (“SVB”), which permitted borrowings up to a principal amount equal to the lesser of (a) $1,500,000 or (b) 80% of the aggregate amount of our outstanding eligible domestic accounts receivable, subject to customary limitations and exceptions (the “2012 Credit Facility”). As of December 31, 2012, $400,000 had been drawn under the 2012 Credit Facility.
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On March 28, 2013, we entered into a new credit facility by entering into a two year revolving working capital line of credit with SVB, which permits borrowings of up to a principal amount equal to the lesser of (a) $1,500,000 or (b) eighty percent (80%) of the aggregate amount of our outstanding eligible accounts receivable, subject to customary limitations and exceptions (the “2013 Credit Facility”). The 2013 Credit Facility matures on March 28, 2015. The unpaid principal amount borrowed under the 2013 Credit Facility accrues interest at a floating rate per annum equal to (a) 1.0% above the “prime rate” published from time to time in the money rates section of the Wall Street Journal (the “Prime Rate”) when the Liquidity Ratio 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. As of September 30, 2013, $200,000 is outstanding under the 2013 Credit Facility, and the principal amount of such borrowings is accruing interest at an interest rate of 4.25%.
The 2013 Credit Facility is governed by the terms of an Amended and Restated Loan and Security Agreement, dated as of March 28, 2013, entered into by and between us, as borrower, and SVB, as lender (the “A&R Loan Agreement”). The A&R Loan Agreement contains several financial and customary affirmative and negative covenants. The Company was in compliance with all covenants of the credit facility as of September 30, 2013.
The 2013 Credit Facility is secured by all of our domestic assets except for intellectual property (which we agreed not to pledge to others), and the pledge of our equity interests in our foreign subsidiaries that are controlled foreign corporations (as defined in the Internal Revenue Code). Our obligations under the A&R Loan Agreement are guaranteed on an unsecured basis by certain of our subsidiaries. The A&R Loan Agreement contains customary events of default, which, if triggered, permit SVB to exercise customary remedies such as acceleration of all then outstanding obligations arising under the A&R Loan Agreement, to terminate its obligations to lend under the 2013 Credit Facility, to apply a default rate of interest to such outstanding obligations, and to exercise customary remedies under the Uniform Commercial Code.
6. | Options and Warrants |
Amended and Restated 2004 Long-Term Incentive Plan
Over the past several years, shareholders have approved various modifications to the Amended and Restated 2004 Long-Term Incentive Plan (the “Plan”) so that as of September 30, 2013, 2,200,000 shares of the Company's common stock were reserved for the issuance of restricted stock and incentive and nonqualified stock options to directors, officers and employees of and advisors to the Company. Exercise prices are determined by the Board of Directors on the dates of grants. The Company issues new shares when stock options are exercised.
On September 30, 2013, 1,535,675 options in the Plan were outstanding with a weighted average exercise price of $1.64 per share.
7. | Income Taxes |
The Company has cumulative net operating losses available to offset future income for federal and state reporting purposes of approximately $31.2 million and $7.4 million, respectively, as of September 30, 2013. There are also available research and development credit carryforwards at September 30, 2013 of $0.7 million. 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 and nine month periods, relate solely to taxes due in foreign jurisdictions where the Company does business. 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.
The Company’s policies with respect to the recording of deferred tax assets and liabilities have not changed in 2013. All balances and valuation allowances as of December 31, 2012 were evaluated and no changes were deemed necessary as of September 30, 2013.
8. | Closure of India Operation |
In January 2012, the Company closed its software development operation in India and transferred those activities to other Sajan locations. The Company estimated the costs of shutdown to be $80,113 and recorded this amount as an expense in the first quarter of 2012. The Company expects to file final dissolution documents in the fourth quarter of 2013. Additionally, in connection with this closure in 2012, the Company recognized the unrealized foreign currency gain of $85,000 that existed at the time of closing the subsidiary.
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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.
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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,” “Sajan,” “we,” “us” or “our”), its subsidiaries or its management, identify forward-looking statements. Our forward-looking statements in this report generally relate to: (i) our intent to invest in growth initiatives, including sales and marketing programs and enhancements to our translation management system; (ii) our expectation to generate positive cash flow from operations; (iii) our estimates of operating expenses; and (iv) our beliefs regarding the adequacy of our capital resources.
Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors relating to the Company’s industry, its operations and results of operations, and any businesses that may be acquired by it. These factors include:
· our rate of growth in the global multilingual content delivery industry;
· our ability to effectively manage our growth;
· lack of acceptance of any existing or new solutions we offer;
· our ability to continue increasing the number of our customers or the revenues we derive from our recurring revenue customers;
· continued economic weakness and constrained globalization spending by businesses operating in international markets;
· our ability to effectively develop new solutions that compete effectively with the solutions that our current and future competitors offer;
· risk of increased regulation of the Internet and business conducted via the Internet;
· our ability to identify attractive acquisition opportunities, successfully negotiate acquisition terms and effectively integrate any acquired companies or businesses;
· availability of capital on acceptable terms to finance our operations and growth;
· risks of conducting international commerce, including foreign currency exchange rate fluctuations, changes in government policies or regulations, longer payment cycles, trade restrictions, economic or political instability in foreign countries where we may increase our business and reduced protection of our intellectual property;
· our ability to add sales and marketing, research and development or other key personnel who are able to successfully sell or develop our solutions;
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· our ability to operate as a public company and comply with applicable disclosure and other requirements and to hire additional personnel with public company compliance experience; and
· other risk factors included under “Risk Factors” in our Annual Report on Form 10–K filed with the Securities and Exchange Commission on March 29, 2013.
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Although our management believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, Sajan does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the financial statements and the related notes included in our Annual Report Form on 10-K filed with the SEC on March 29, 2013.
General Overview
Sajan, 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:
· Ireland – Sajan Software Ltd.
· Spain – Sajan Spain S.L.A.
· Singapore – Sajan Singapore Pte. Ltd.
· Brazil – Sajan do Brasil Traduções Ltda.
The Company formerly had a wholly owned subsidiary in India, Sajan India Software Private Limited, which was closed in January 2012 (See Note 8 to the Condensed Consolidated Financial Statements included in Part I, Item II of this Quarterly Report on Form 10-Q).
Discussion of Critical Accounting Policies and Estimates
Discussion of the financial condition and results of our operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and judgments. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to the consolidated financial statements.
Our critical accounting policies are identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Discussion of Critical Accounting Policies and Estimates.” There were no significant changes to our critical accounting policies during the three or nine months ended September 30, 2013.
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Results of Operations - Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
The major components of revenues, cost of revenue, operating expenses, other income (expense), and income tax expense are discussed below.
| Three Months Ended September 30, | |||||||||
| % Change | |||||||||
| Item | 2013 | 2012 | (Year Over Year) | ||||||
| Revenues | $ | 5,719,811 | $ | 5,155,120 | 11 | % | |||
| Operating expenses: | |||||||||
| Cost of revenues | 3,524,757 | 3,303,260 | 7 | % | |||||
| Sales and marketing | 824,369 | 571,371 | 44 | % | |||||
| Research and development | 289,041 | 182,517 | 58 | % | |||||
| General and administrative | 990,825 | 893,267 | 11 | % | |||||
| Depreciation and amortization | 218,006 | 184,846 | 18 | % | |||||
| Other income (expense): | |||||||||
| Interest expense | (26,612) | (23,251) | 14 | % | |||||
| Other expense, net | (3,345) | (5,823) | (43) | % | |||||
| Income tax expense | (6,011) | (33,575) | (82) | % | |||||
| Net loss | $ | (163,155) | $ | (42,790) | 281 | % | |||
Revenues
Revenues totaled $5.7 million for the three months ended September 30, 2013 compared to $5.2 million for the same period in 2012. This increase of $0.5 million, or 11%, is the result of an increase in projects from our domestic clients of 10% and an increase of 14% from our foreign clients. The increase in projects is due to several new, large clients that were acquired during the quarter which resulted from increased sales and marketing efforts.
Operating Expenses
Cost of Revenues. Cost of revenues increased $221,000, or 7%, for the three months ended September 30, 2013 compared to the same period in 2012. As a percentage of revenue, cost of revenues was 62% for the three months ended September 30, 2013 compared to 64% for the same interim period in 2012. The improvement in margin resulted from negotiated volume discounts with our top-rated translators and from a decrease in percentage in staff costs, which happens when the volume of business increases.
Sales and Marketing. Sales and marketing expense of $824,000 increased $253,000, or 44% for the three months ended September 30, 2013. As a percentage of revenue, sales and marketing expense was 14% for the three months ended September 30, 2013, compared to 11% for the same period in 2012. The increase in dollars and percentage are both primarily related to the restructuring of the commission program in January 2013 to better align customer needs with personal sales representation.
Research and Development. Research and development expense increased $107,000, or 58%, for the three months ended September 30, 2013 compared to the same period in 2012. As a percentage of revenue, research and development expense increased to 5% for the three months ended September 30, 2013 compared to 4% for the same period in 2012. The increase in dollars and percentage are primarily due to a reduction in the amount of internal software development costs capitalized compared to the same period in 2012.
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General and Administrative. General and administrative expense increased $98,000, or 11%, for the three months ended September 30, 2013 compared to the same period in 2012. As a percentage of revenue, general and administrative expense was 17% for both the three months ended September 30, 2013 and 2012. $52,000 of the increase was due to an increase in stock option expense which resulted from the Company having more options outstanding at September 30, 2013 compared to 2012.
Depreciation and Amortization. Depreciation and amortization expense increased $33,000, or 18%, for the three months ended September 30, 2013 compared to the same period in 2012. As a percentage of revenue, depreciation and amortization expense was 4% for both three months ended September 30, 2013 and 2012. The increase in dollars is related to higher asset balances plus capitalized software projects placed in service in 2013.
Interest Expense
Interest expense for three months ended September 30, 2013 was $27,000 as compared to $23,000 for the same period in 2012. The increase was due to higher borrowing against the Company’s line of credit in 2013 compared to 2012.
Income Tax Expense
Income tax expense was $6,000 for the three months ended September 30, 2013 as compared to $34,000 for the same period in 2012. The decrease is due to lower taxes paid on services performed in China and lower income taxes in Spain.
Results of Operations – Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
The major components of revenues, cost of revenue, operating expenses, and other income (expense) are discussed below.
| Nine months ended September 30, | |||||||||
| % Change | |||||||||
| Item | 2013 | 2012 | (Year Over Year) | ||||||
| Revenues | $ | 17,377,021 | $ | 15,331,619 | 13 | % | |||
| Operating expenses: | |||||||||
| Cost of revenues | 10,680,944 | 9,947,087 | 7 | % | |||||
| Sales and marketing | 2,398,043 | 1,814,143 | 32 | % | |||||
| Research and development | 657,825 | 948,323 | (31) | % | |||||
| General and administrative | 2,884,351 | 2,843,486 | 1 | % | |||||
| Loss on subsidiary closure | - | 80,113 | (100) | % | |||||
| Depreciation and amortization | 646,673 | 589,081 | 10 | % | |||||
| Other income (expense): | |||||||||
| Interest expense | (83,066) | (70,356) | 18 | % | |||||
| Other expense, net | (866) | (18,530) | (95) | % | |||||
| Income tax expense | (25,285) | (33,575) | (25) | % | |||||
| Net loss | $ | (32) | $ | (1,013,075) | (100) | % | |||
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Revenues
Revenues increased $2 million, or 13% for the nine months ended September 30, 2013 compared to the same period in 2012. The increase is a result from an 8% increase in projects from our domestic clients and a 27% increase from our foreign clients. The increase in projects is due to several new, large clients that were acquired during the nine months which resulted from increased sales and marketing efforts.
Operating Expenses
Cost of Revenues. Cost of revenues increased $734,000, or 7%, for the nine months ended September 30, 2013 compared to same period in 2012. As a percentage of revenue, cost of revenues was 62% for the nine months ended September 30, 2013 compared to 65% for the same interim period in 2012. The improvement in margin by 3% resulted from negotiated volume discounts with our top-rated translators and a decrease in percentage in staff costs which happens when the volume of business increases.
Sales and Marketing. Sales and marketing expense increased $584,000, or 32% for the nine months ended September 30, 2013 as compared to the same period in 2012. As a percentage of revenue, sales and marketing expense was 14% for the nine months ended September 30, 2013 compared to 12% for the same period in 2012. The increase in dollars and percentage of revenue is primarily the result of increased commission expense resulting from a restructuring of the commission program in January 2013 to better align customer needs with personal sales representation.
Research and Development. Research and development expense decreased by $290,000, or 31%, for the nine months ended September 30, 2013, compared to the same period in 2012. As a percentage of revenue, research and development expense was 4% for the nine months ended September 30, 2013 compared to 6% for the same period in 2012. The decrease in dollars and percentage of sales is due to a decrease of $150,000 in contract labor and an increase in the amount of capitalized costs for internally developed software.
General and Administrative. General and administrative expense increased $41,000, or 1%, during the nine months ended September 30, 2013 compared to the same period in 2012. As a percentage of revenue, general and administrative expense was 17% for the nine months ended September 30, 2013 compared to 19% for the same period in 2012. The decrease in percentage was due to our ability to keep costs relatively stable while revenue grew 13%.
Loss on subsidiary closure. Loss on subsidiary closure expense was a one-time item which occurred in 2012. See Note 8 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Depreciation and Amortization. Depreciation and amortization expense increased $58,000, or 10%, for the nine months ended September 30, 2013 compared to the same period in 2012. As a percentage of revenue, depreciation and amortization expense was 4% for both the nine months ended September 30, 2013 and 2012. The increase in dollars is related to higher asset balances plus capitalized software projects placed in service in 2013.
Interest Expense
Interest expense for the nine months ended September 30, 2013 was $83,000, a $13,000 increase compared to the same period in 2012. The increase was due to higher borrowing against the Company’s line of credit in 2013 compared to 2012.
Income Tax Expense
Income tax expense was $25,000 for the nine months ended September 30, 2013 as compared to $34,000 for the same period in 2012. The decreased expense relates to a decrease in income taxes on our operations in Spain which was partially offset by an increase in taxes paid on services performed in China.
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Non-GAAP Financial Measure – Adjusted EBITDA
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||
| Net loss | $ | (163,155) | $ | (42,790) | $ | (32) | $ | (1,013,075) | |||||
| Interest expense | 26,612 | 23,251 | 83,066 | 70,356 | |||||||||
| Income taxes | 6,011 | 33,575 | 25,285 | 33,575 | |||||||||
| Depreciation and amortization | 218,006 | 184,846 | 646,673 | 589,081 | |||||||||
| Stock-based compensation | 70,037 | 17,727 | 169,867 | 122,404 | |||||||||
| Adjusted EBITDA | $ | 157,511 | $ | 216,609 | $ | 924,859 | $ | (197,659) | |||||
We calculate Adjusted EBITDA by taking net loss calculated in accordance with GAAP, and adding interest expense, income taxes, depreciation and amortization, and stock-based compensation. We believe that this non-GAAP measure of financial results provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses this non-GAAP measure to compare our performance to that of prior periods for trend analyses and for budgeting and planning purposes. This measure is also used in financial reports prepared for management and our board of directors. We believe that the use of this non-GAAP financial measure provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with other companies, many of which present similar non-GAAP financial measures to investors.
Our management does not consider this non-GAAP measure in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of this non-GAAP financial measure is that it excludes significant expenses and income that are required by GAAP to be recorded in our consolidated financial statements. In addition, it is subject to inherent limitations as it reflects the exercise of judgments by management about which expenses and income are excluded or included in determining this non-GAAP financial measure. In order to compensate for these limitations, management presents this non-GAAP financial measure in connection with GAAP results. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures and not to rely on any single financial measure to evaluate our business.
Liquidity and Capital Resources
Summary cash flow data is as follows:
| Nine months ended September 30, | |||||||
| 2013 | 2012 | ||||||
| Cash flows provided (used) by : | |||||||
| Operating activities | $ | 1,234,203 | $ | (632,294) | |||
| Investing activities | (377,782) | (477,939) | |||||
| Financing activities | (270,938) | (19,099) | |||||
| Net increase (decrease) in cash | 585,483 | (1,129,332) | |||||
| Effect of exchange rate changes in cash | 784 | 26,785 | |||||
| Cash and equivalents, beginning of period | 892,939 | 1,763,249 | |||||
| Cash and equivalents, end of period | $ | 1,479,206 | $ | 660,702 | |||
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Net Cash Provided by (Used in) Operating Activities
Net cash provided for the nine months ended September 30, 2013 was mainly due to our adjusted EBITDA (see explanation of Adjusted EBITDA above) and to an increase in deferred revenue during the period. Net cash used for the nine months ended September 30, 2012 was due mainly to our net loss during the period.
Net Cash Used in Investing Activities
Net cash used for the nine months ended September 30, 2013 and 2012 primarily related to the purchase of equipment for the business and capitalized software costs.
Net Cash Used in Financing Activities
Net cash used for the nine months ended September 30, 2013 related to payments on our line of credit and capital lease obligations. Net cash used for the nine months ended September 30, 2012 related to payments on our capital lease obligations.
Sources of Capital
For the nine months ended September 30, 2013, our principal source of liquidity was funds generated from operations. As described in Note 5 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the Company has a credit facility with Silicon Valley Bank which allows us to borrow up to the lesser of $1,500,000 or 80% of its aggregate outstanding domestic accounts receivable. As of September 30, 2013, $200,000 had been drawn under the credit facility. The Company was in compliance with all covenants of the credit facility as of September 30, 2013.
Uses of Capital
Sajan’s primary uses of capital for the nine months ended September 30, 2013 were to fund our operations, our investments in working capital and purchases of equipment. We intend to utilize our cash and our line of credit facility to support our business, including investing in software development, ongoing sales and marketing activities both domestically and internationally, enhancement to our translation management system, and where appropriate, acquisitions of companies that may add to our operations and client base.
We believe that our cash and cash equivalents, operating cash flows, and proceeds from our new credit facility will be sufficient to meet our working capital, investment in software development, and capital expenditure requirements for at least the next 12 months. Thereafter, we may need to raise additional funds through public or private financings or borrowings to fund our operations, to develop or enhance products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies.
If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders or we may be subject to covenants that restrict how we conduct our business. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of September 30, 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2013, 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 designed 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, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Effective August 29, 2013, Thomas Skiba was hired as the Chief Financial Officer of the Company. By separating the roles of Chief Executive Officer and Chief Financial Officer, we believe that we will enhance the effectiveness and the supervision of our internal control over financial reporting. There were no other changes in internal control during the period covered by this report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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, 2012, as filed with the SEC on March 29, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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 12, 2013 | Sajan, Inc. | |
| By: | /s/ Shannon Zimmerman | |
| Shannon Zimmerman | ||
| Chief Executive Officer and President | ||
| By: | /s/ Thomas Skiba | |
| Thomas Skiba | ||
| Chief Financial Officer | ||
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Item 6. Exhibits
| 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 Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on January 11, 2010). | |
| 3.1 | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the 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 the Company filed with the Delaware Secretary of State on May 23, 2008 (incorporated by reference to Exhibit 3.1 to the 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 of the Company’s Current Report on Form 8-K filed with the SEC on February 25, 2010). | |
| 3.4 | Certificate of Ownership and Merger merging Sajan, Inc. into MathStar, Inc. filed with the Securities and Exchange Commission on March 3, 2010 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on March 3, 2010). | |
| 3.5 | Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Registration Statement). | |
| 4.1 | Form of common stock certificate of the Company (incorporated by reference to Exhibit 4.1 to the Registration Statement). | |
| 4.2 | Tax Benefit Preservation Plan and Rights Agreement, dated as of February 25, 2010, between the Company and Wells Fargo Shareowner Services, a division of Wells Fargo Bank, National Association, as Rights Agent, together with the following exhibits thereto: Exhibit A - Form of Certificate of Designation of Series A Preferred Stock of the Company; Exhibit B — Form of Right Certificate; Exhibit C — Summary of Rights to Purchase Shares of Preferred Stock of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 25, 2010). | |
10.1 | Employment Agreement, between the Company and Tom Skiba, dated August 29, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 29, 2013). | |
| 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 the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated Balance Sheets, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Cash Flows, and (iv) Notes to the Consolidated Financial Statements (filed herewith). |
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