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 March 31, 2014 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.xYes ¨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 |
| (do not check if a smaller | |||
| reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).¨Yes xNo
As of May 6, 2014, the registrant had 16,268,391 shares of common stock, $0.01 par value per share, outstanding.
Sajan, Inc.
Table of Contents
| 2 |
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in thousands except per share data
| March 31, 2014 | December 31, 2013 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,205 | $ | 1,364 | ||||
| Accounts receivable, net of allowance | 3,926 | 3,810 | ||||||
| Unbilled services | 1,203 | 1,197 | �� | |||||
| Prepaid expenses and other current assets | 522 | 431 | ||||||
| Total current assets | 6,856 | 6,802 | ||||||
| Property and equipment, net | 969 | 1,000 | ||||||
| Other assets: | ||||||||
| Intangible assets, net | 385 | 446 | ||||||
| Capitalized software development costs, net | 348 | 393 | ||||||
| Other assets | 24 | 17 | ||||||
| Total other assets | 757 | 856 | ||||||
| Total assets | 8,582 | $ | 8,658 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 2,988 | 2,555 | ||||||
| Accrued interest – related party | 96 | 111 | ||||||
| Accrued compensation and benefits | 712 | 848 | ||||||
| Accrued liabilities | 158 | 195 | ||||||
| Current portion of capital lease obligations | 187 | 185 | ||||||
| Deferred revenue and customer prepayments | 1,489 | 1,423 | ||||||
| Total current liabilities | 5,630 | 5,317 | ||||||
| Commitments and contingencies | ||||||||
| Long-term liabilities: | ||||||||
| Capital lease obligations, net of current portion | 46 | 93 | ||||||
| Note payable – related party | 750 | 750 | ||||||
| Total long-term liabilities | 796 | 843 | ||||||
| Total liabilities | 6,426 | 6,160 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value, 10,000 shares authorized and no shares issued and outstanding | - | - | ||||||
| Common stock, $.01 par value, 35,000 shares authorized; 16,268 shares issued and outstanding | 163 | 163 | ||||||
| Additional paid-in capital | 7,279 | 7,215 | ||||||
| Accumulated deficit | (5,091 | ) | (4,691 | ) | ||||
| Foreign currency adjustment | (195 | ) | (189 | ) | ||||
| Total stockholders’ equity | 2,156 | 2,498 | ||||||
| Total liabilities and stockholders’ equity | $ | 8,582 | $ | 8,658 | ||||
See notes to unaudited condensed consolidated financial statements.
| 3 |
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
Amounts in thousands except per share data
| Three months ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenue from translation and consulting services | $ | 6,154 | $ | 5,524 | ||||
| Operating expenses: | ||||||||
| Cost of revenues (exclusive of depreciation and amortization) | 3,939 | 3,413 | ||||||
| Sales and marketing | 774 | 745 | ||||||
| Research and development | 460 | 172 | ||||||
| General and administrative | 1,098 | 949 | ||||||
| Depreciation and amortization | 241 | 188 | ||||||
| Total operating expenses | 6,512 | 5,467 | ||||||
| (Loss) income from operations | (358 | ) | 57 | |||||
| Other income (expense): | ||||||||
| Interest expense | (23 | ) | (29 | ) | ||||
| Foreign currency transaction gain | 1 | 1 | ||||||
| Total other (expense), net | (22 | ) | (28 | ) | ||||
| (Loss) income before income taxes | (380 | ) | 29 | |||||
| Income tax expense | 20 | 13 | ||||||
| Net (loss) income | (400 | ) | 16 | |||||
| Effect of foreign currency translation adjustments | (6 | ) | (52 | ) | ||||
| Comprehensive loss | $ | (406 | ) | $ | (36 | ) | ||
| (Loss) income per common share – basic & diluted | $ | (0.02 | ) | $ | 0.00 | |||
| Weighted average shares outstanding – basic | 16,268 | 16,268 | ||||||
| Weighted average shares outstanding – diluted | 16,268 | 16,423 | ||||||
See notes to unaudited condensed consolidated financial statements.
| 4 |
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Amounts in thousands
| Three months ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (400 | ) | $ | 16 | |||
| Adjustments to reconcile net (loss) income to net cash from operating activities: | ||||||||
| Depreciation | 135 | 82 | ||||||
| Amortization | 106 | 106 | ||||||
| Stock-based compensation expense | 64 | 49 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (116 | ) | (376 | ) | ||||
| Unbilled services | (6 | ) | (192 | ) | ||||
| Prepaid expenses and other current assets | (91 | ) | (157 | ) | ||||
| Other assets | (7 | ) | 1 | |||||
| Increase (decrease) in current liabilities: | ||||||||
| Accounts payable | 433 | 222 | ||||||
| Accrued liabilities | (37 | ) | 14 | |||||
| Accrued interest-related party | (15 | ) | 15 | |||||
| Accrued compensation and benefits | (136 | ) | (14 | ) | ||||
| Deferred revenue and customer prepayments | 66 | 505 | ||||||
| Net cash flows (used in) provided by operating activities | (4 | ) | 271 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (104 | ) | (72 | ) | ||||
| Capitalized software development costs | - | (148 | ) | |||||
| Net cash flows used in investing activities | (104 | ) | (220 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on capital lease obligations | (45 | ) | (7 | ) | ||||
| Net cash flows used in financing activities | (45 | ) | (7 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (153 | ) | 44 | |||||
| Effect of exchange rate changes in cash | (6 | ) | (52 | ) | ||||
| Cash and cash equivalents – beginning of period | 1,364 | 893 | ||||||
| Cash and cash equivalents – end of period | $ | 1,205 | $ | 885 | ||||
| Cash paid for taxes | $ | 16 | $ | 11 | ||||
| Cash paid for interest including loan fees | $ | 38 | $ | 14 | ||||
See notes to unaudited condensed consolidated financial statements.
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Sajan, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Amounts in thousands except per share data
| 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. |
Interim Financial Information
The condensed consolidated balance sheet as of December 31, 2013, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other period. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company, and notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 21, 2014. The financial information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to fairly present the results of the interim periods presented in order to make the consolidated financial statements not misleading.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Sajan, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued expenses, approximate their fair values due to their short maturities and/or market-consistent interest rates.
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Accounts Receivable
The Company extends unsecured credit to customers in the normal course of business. The Company provides an allowance for doubtful accounts when appropriate, the amount of which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions on an individual customer basis. Normal accounts receivable are due 30 days after issuance of the invoice. Receivables are written off only after all collection attempts have failed, and are based on individual credit evaluation and specific circumstances of the customer. Accounts receivable have been reduced by an allowance for uncollectible accounts of $15 at both March 31, 2014 and December 31, 2013. Management believes all accounts receivable in excess of the allowance are fully collectible. The Company does not accrue interest on accounts receivable.
Loss/Income Per Common Share
Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding.
Diluted (loss) earnings per share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued.
For the three months ended March 31, 2014, we excluded all options and warrants to purchase shares because the Company had a net loss and inclusion of these shares would have been anti-dilutive. For the three months ended March 31, 2013, we excluded options to purchase 1,057 shares and warrants to purchase 50 shares from the diluted weighted average shares outstanding calculation because the inclusion of these shares would have been anti-dilutive.
A reconciliation of the denominator in the basic and diluted loss or income per share is as follows:
| Three months ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Numerator: | ||||||||
| Net (loss) income | $ | (400 | ) | $ | 16 | |||
| Denominator: | ||||||||
| Weighted average common shares outstanding - basic | 16,268 | 16,268 | ||||||
| Effect of dilutive stock options and warrants | - | 155 | ||||||
| Weighted average common shares outstanding - diluted | 16,268 | 16,423 | ||||||
| Basic (loss) earnings per common share | $ | (0.02 | ) | $ | 0.00 | |||
| Diluted (loss) earnings per common share | $ | (0.02 | ) | $ | 0.00 | |||
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives, initially determined to be two to twelve years, using the straight-line method. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in operating results. Repairs and maintenance costs are expensed as incurred.
Intangible Assets
The Company's intangible assets consist of customer lists, patents and licenses, are subject to amortization, and consist of the following:
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| March 31, 2014 | December 31, 2013 | |||||||
| Customer lists acquired | $ | 784 | $ | 784 | ||||
| Patents and licenses | 193 | 193 | ||||||
| Less accumulated amortization | (592 | ) | (531 | ) | ||||
| Total intangible assets, net | $ | 385 | $ | 446 | ||||
Intangible assets are amortized over their expected useful lives of 4 to 15 years and their weighted average remaining life is 3 years. Amortization of intangible assets was $61 and $84 for the three months ended March 31, 2014 and 2013, respectively. Estimated amortization expense of intangible assets for the years ending December 31, 2014, 2015, 2016, 2017, 2018 and thereafter is $241, $185, $4, $2, $2 and $12, respectively.
Long-lived Assets
The Company annually reviews its long-lived assets for events or changes that may indicate that the carrying amount of a long-lived asset may not be recoverable or exceeds its fair value. There was no impairment for the three months ended March 31, 2014 and 2013.
Capitalized Software Development Costs
The Company capitalizes software development costs incurred during the application development stage related to new software or major enhancements to the functionality of existing software that is developed solely to meet the Company’s internal operational needs and when no substantive plans exist or are being developed to market the software externally. Costs capitalized include external direct costs of materials and services and internal payroll and payroll-related costs. Any costs during the preliminary project stage or related to training or maintenance is expensed as incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. During the three months ended March 31, 2014 and 2013, the Company capitalized $0 and $148, respectively, related to software development activities.
Capitalized software development costs consist of the following as of:
| March 31, 2014 | December 31, 2013 | |||||||
| Capitalized software development costs | $ | 746 | $ | 746 | ||||
| Less accumulated amortization | (398 | ) | (353 | ) | ||||
| Total capitalized software development costs, net | $ | 348 | $ | 393 | ||||
When the projects are ready for their intended use, the Company amortizes such costs over their estimated useful lives of three years. Capitalized software amortization expense was $45 and $23 for the three months ended March 31, 2014 and 2013, respectively. Amortization expense for capitalized software costs is expected to be $181, $169 and $43 in 2014, 2015, and 2016, respectively.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all stock-based compensation at fair value. The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. For the three months ended March 31, 2014 and 2013, total stock-based compensation expense was approximately $64 and $49, respectively. As of March 31, 2014, there was approximately $565 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s 2004 Long-Term Incentive Plan. That cost is expected to be recognized over a weighted-average period of three years.
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There were no options issued during the three months ended March 31, 2014. In determining the compensation cost of the options granted during the three months ended March 31, 2013, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model, and the weighted average assumptions used in these calculations are summarized as follows:
| Three months ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Risk-free interest rate | - | % | 0.9 | % | ||||
| Expected life of options granted | - | 7 Yrs | ||||||
| Expected volatility range | - | % | 87.7 | % | ||||
| Expected dividend yield | - | - | ||||||
Using the Black-Scholes option pricing model, management has determined that the options issued in the three months ended March 31, 2013 have a weighted-average grant date fair value of $0.69 per share.
Revenue Recognition
The Company derives revenues primarily from language translation services and professional consulting services.
Translation services utilize the Company’s proprietary translation management system – Transplicity – to provide a solution for all of the customer’s language translation requirements. Services include content analysis, translation memory and retrieval, language translation, account management, graphic design services, technical consulting and professional services. Services associated with translation of content are generally billed on a “per word” basis. Professional services, including technical consulting and project management, are billed on a per hour rate basis.
The Company considers revenue earned and realizable at the time services are performed and amounts are earned. Sajan considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. The Company recognizes revenue for translations services on a standard “per word” basis at the time the translation is completed. The Company recognizes revenue for professional services when the services have been completed in accordance with the statement of work.
Sajan’s agreements with its customers may provide the customer with a limited time period following delivery of the project for the customer to identify any non-conformities to the pre-defined project specifications. The Company has the opportunity to correct these items. Historically, errors in project deliverables have been minimal and accordingly, revenue is recognized as services are performed.
Revenues recognized in excess of billings are recorded as unbilled services. Billings in excess of revenues recognized and customer prepayment for services are recorded as deferred revenue and customer prepayments; to the extent cash has been received.
Cost of Revenues
Cost of revenues consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects.
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Research and Development
Research and development expenses primarily represent costs incurred for development of maintenance and enhancements to the Company’s operating software system and include costs incurred during the preliminary project stage of development or related to training or maintenance activities. To a lesser degree, research and development expenses also consist of costs to add features to the Company’s operating software system that could make portions of the system licensable to outside third parties. Research and development expenses consist primarily of salaries and related costs of software engineers, and fees paid to third party consultants. All research and development expenses are expensed as incurred.
Foreign Currency Translation
For operations in local currency environments, assets and liabilities are translated at year-end exchange rates with cumulative translation adjustments included as a component of shareholders’ equity. Income and expense items are translated at average foreign exchange rates prevailing during the year. For operations in which the U.S. dollar is not considered the functional currency, certain financial statements amounts are re-measured at historical exchange rates, with all other asset and liability amounts translated at year-end exchange rates. These re-measured adjustments are reflected in the results of operations. Gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations and Comprehensive (Loss) Income.
Income Tax
Current income taxes are recorded based on statutory obligations for the current operating period for the various countries in which the Company has operations.
Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Acquisition Expenses
The Company expenses all accounting and legal fees as well as out-of pocket costs related to potential acquisitions as they are incurred. The total of such costs in the three months ended March 31, 2014 and 2013 was $23 and $0, respectively.
Reclassification of Prior Year Balances
Certain amounts related to amortization of prepaid expenses in the financial statements for the three months ended March 31, 2013 have been reclassified to conform to the current year presentation. These reclassifications had no effect on net (loss) income or stockholders’ equity.
| 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.
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Cash concentration – The Company places its cash at financial institutions with balances that, at times, may exceed federally insured limits. The Company evaluates the creditworthiness of these financial institutions in determining the risk associated with these deposits. The Company has not experienced any losses on such accounts.
Accounts receivable concentration –Concentrations of credit risk with respect to trade accounts receivable are limited due to the dispersion of customers across different industries and geographic regions. At March 31, 2014 and December 31, 2013, one customer accounted for approximately 18% and 22% of accounts receivable, respectively.
Sales concentration– For the three months ended March 31, 2014 and 2013, one customer accounted for 12% and 16% of net revenues, respectively.
| 3. | Segment Information and Major Customers |
The Company views its operations and manages its business as one reportable segment, providing language translation solutions to a variety of companies, primarily in its targeted vertical markets. Factors used to identify the Company’s single operating segment include the financial information available for evaluation by the chief operating decision maker in making decisions about how to allocate resources and assess performance. The Company markets its products and services through its headquarters in the United States and its wholly-owned subsidiaries operating in Ireland, Spain, Singapore, and Brazil.
Net sales per geographic region, based on the billing location of the end customer, are summarized below.
| Three Months Ended March 31, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Sales | Percent | Sales | Percent | |||||||||||||
| United States | $ | 4,740 | 77 | % | $ | 3,792 | 69 | % | ||||||||
| Asia | 178 | 3 | % | 299 | 5 | % | ||||||||||
| Europe | 967 | 16 | % | 1,074 | 19 | % | ||||||||||
| Other International | 269 | 4 | % | 359 | 7 | % | ||||||||||
| Total Sales | $ | 6,154 | 100 | % | $ | 5,524 | 100 | % | ||||||||
For the three months ended March 31, 2014 and 2013, no individual foreign country accounted for more than 10% of net revenues.
| 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. The note has a maturity date of August 23, 2015, and carries an interest rate of 8%. No payments of the principal balances are allowed while there are amounts outstanding under the Company’s line of credit with Silicon Valley Bank (see Note 5).
Accrued interest was $96 as of March 31, 2014 and $111 as of December 31, 2013, and is subordinated to the Credit Facility (see Note 5). Interest expense was $15 in both three-month periods ended March 31, 2014 and 2013.
| 11 |
Lease
Sajan leases its office space under three non-cancelable operating leases from River Valley Business Center, LLC (“RVBC”), a limited liability company that is owned by Shannon and Angela Zimmerman. The space consists of approximately 20,000 square feet and is leased pursuant to three agreements. These lease agreements require the Company to pay a minimum monthly rental plus certain operating expenses and expire in January 2017. Payment of rent under these leases is secured by goods, chattels, fixtures and personal property of the Company. Rent expense for the three months ended March 31, 2014 and 2013 was $86 for both periods.
| 5. | Credit Facility |
In March 2012, the Company entered into a one year revolving working capital line of credit with Silicon Valley Bank (“SVB”). In March 2013, the line of credit was replaced with a new credit facility (the “Credit Facility”) with SVB which consists of a two year revolving working capital line of credit. The Credit Facility permits borrowings of up to a principal amount equal to the lesser of (a) $1,500 or (b) eighty percent (80%) of the aggregate amount of Sajan’s outstanding eligible accounts receivable, subject to customary limitations and exceptions. The Credit Facility matures on March 28, 2015. The unpaid principal amount borrowed under the Credit Facility accrues interest at a floating rate per annum equal to (a) 1.0% above the “prime rate” published from time to time in the money rates section of the Wall Street Journal (the “Prime Rate”) when the liquidity ratio is greater than or equal to 2.0 to 1.0 and (b) 2.25% above the Prime Rate when the liquidity ratio is less than 2.0 to 1.0. The interest rate floor is set at 4.0% per annum. The unused line of credit accrues interest at a rate of 0.3% per annum on the average unused portion. There was no outstanding balance as of March 31, 2014 under the Credit Facility.
The Credit Facility is governed by the terms of an Amended and Restated Loan and Security Agreement, dated as of March 28, 2013, entered into by and between Sajan and SVB (the “A&R Loan Agreement”). The A&R Loan Agreement contains several financial and customary affirmative and negative covenants, including requiring Sajan to maintain a consolidated minimum tangible net worth of at least $1,500, increasing as of the last day of each of our fiscal quarters by an amount equal to 25% of the sum of (i) net income for such quarter, (ii) any increase in the principal amount of outstanding subordinated debt during such quarter, and (iii) the net amount of proceeds received by Sajan in such quarter from the sale or issuance of equity securities. It also contains customary events of default, which, if triggered, permit SVB to exercise customary remedies such as acceleration of all then outstanding obligations arising under the A&R Loan Agreement, to terminate its obligations to lend under the Credit Facility, to apply a default rate of interest to such outstanding obligations, and to exercise customary remedies under the Uniform Commercial Code. The Company was in compliance with all covenants of the credit facility as of March 31, 2014.
The Credit Facility is secured by all of Sajan’s domestic assets except for intellectual property (which the Company has agreed not to pledge to others), and the pledge of the Company’s equity interests in its foreign subsidiaries that are controlled foreign corporations (as defined in the Internal Revenue Code). The obligations under the A&R Loan Agreement are guaranteed on an unsecured basis by certain of Sajan’s subsidiaries.
| 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 March 31, 2014, 2,200 shares of the Company's common stock were reserved for the issuance of restricted stock and incentive and nonqualified stock options to directors, officers and employees of and advisors to the Company. Exercise prices are determined by the Board of Directors on the dates of grants. The Company issues new shares when stock options are exercised.
As of March 31, 2014, 1,480 options and 176 warrants in the Plan were outstanding with a weighted average exercise price of $1.27 and $2.17 per share, respectively.
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| 7. | Income Taxes |
The Company has cumulative net operating losses available to offset future income for federal and state reporting purposes of $30,186 and $3,468, respectively, as of March 31, 2014. There are also available research and development credit carryforwards at March 31, 2014 of $709. The Company's federal and state net operating loss carryforwards expire in various calendar years from 2015 through 2030 and the tax credit carryforwards expire in calendar years 2020 through 2028. Accordingly, income tax expense recognized during the three months ended March 31, 2014 and 2013 relates solely to taxes due in foreign jurisdictions where the Company does business.
The Company’s policies with respect to the recording of deferred tax assets and liabilities have not changed in 2014. All balances and valuation allowances as of December 31, 2013 were evaluated and no changes were deemed necessary as of March 31, 2014.
| 8. | 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.
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, software development, 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; |
| · | 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; |
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| · | risk of increased regulation of the Internet and business conducted via the Internet; |
| · | our ability to identify attractive acquisition opportunities, successfully negotiate acquisition terms and effectively integrate any acquired companies or businesses; |
| · | availability of capital on acceptable terms to finance our operations and growth; |
| · | risks of conducting international commerce, including foreign currency exchange rate fluctuations, changes in government policies or regulations, longer payment cycles, trade restrictions, economic or political instability in foreign countries where we may increase our business and reduced protection of our intellectual property; |
| · | our ability to add sales and marketing, research and development or other key personnel who are able to successfully sell or develop our solutions; |
| · | our ability to operate as a public company and comply with applicable disclosure and other requirements and to hire additional personnel with public company compliance experience; and |
| · | other risk factors included under “Risk Factors” in our Annual Report on Form 10–K filed with the Securities and Exchange Commission on March 21, 2014. |
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 21, 2014.
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. |
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.
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Our critical accounting policies are identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 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 months ended March 31, 2014.
Results of Operations - Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
The major components of revenues, cost of revenue, operating expenses, other income (expense), and income tax expense are discussed below.
| Three Months Ended March 31, | % Change | |||||||||||
| Item | 2014 | 2013 | (Year Over Year) | |||||||||
| (in thousands) | (in thousands) | |||||||||||
| Revenues | $ | 6,154 | $ | 5,524 | 11 | % | ||||||
| Operating Expenses: | ||||||||||||
| Cost of Revenues | 3,939 | 3,413 | 15 | % | ||||||||
| Sales and Marketing | 774 | 745 | 4 | % | ||||||||
| Research and Development | 460 | 172 | 167 | % | ||||||||
| General and Administrative | 1,098 | 949 | 16 | % | ||||||||
| Depreciation and Amortization | 241 | 188 | 28 | % | ||||||||
| Other Income (Expense): | ||||||||||||
| Interest | (23 | ) | (29 | ) | (21 | )% | ||||||
| Foreign Currency Income | 1 | 1 | 0 | % | ||||||||
| Income Tax Expense | 20 | 13 | 54 | % | ||||||||
| Net income (Loss) | $ | (400 | ) | $ | 16 | |||||||
Revenues
Revenues totaled $6,154,000 in the first quarter of 2014 compared to $5,524,000 in the same period in 2013, or an increase of 11%. The increase was due to several factors, including the launch of Transplicity, which occurred in late March 2013, the implementation of a strategic account management program, and new customers in the United States. As a result, domestic revenue grew by 25% year-over-year. International revenue declined by $319,000, or 18%, due principally to a 20% decline in revenue from our largest customer.
Operating Expenses
Cost of Revenues.Cost of revenues in the first quarter of 2014 increased $526,000, or 15%, compared to the same period in 2013. For the same periods, as a percentage of revenue, cost of revenues was 64% in 2014 compared to 62% in 2013. The increase in dollars and percentage was due to hiring additional staff to service new clients added in late 2013and an increase in translator costs resulting from a change in mix of business towards higher cost languages. Translator costs can vary from quarter to quarter based on the specific language needs of our customers.
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Sales and Marketing.Sales and marketing expense in the first quarter of 2014 increased $29,000, or 4% compared to the same period in 2013. For the same periods, as a percentage of revenue, sales and marketing expense was 13% in 2014 compared to 14% in 2013. The small increase in dollars and decline in percentage were due to a combination of new staff and increased travel expense offset by lower commission expense. Commissions were lower due to fewer sales personnel making their sales quotas in the first quarter of 2014 compared to the same period in 2013.
Research and Development. Research and development expense in the first quarter of 2014 increased $288,000, or 167%, compared to the same period in 2013. For the same periods, as a percentage of revenue, research and development expense was 7% in 2014 compared to 3% in 2013. The increase in dollars and percentage are primarily due to two factors. First, there were no internal software development costs capitalized in the first quarter of 2014 compared to $148,000 in the same period in 2013. Second, we added additional development staff which resulted in higher compensation costs and hiring fees in 2014. These staff were added to accelerate enhancements to our operating system and to develop features that could make portions of our system licensable to third parties.
General and Administrative. General and administrative expense in the first quarter of 2014 increased $149,000, or 16%, compared to the same period in 2013. For the same periods, as a percentage of revenue, general and administrative expense was 18% in 2014 compared to 17% in 2013. The increase in dollars and percentage of revenue were primarily due to increased wages and benefits relating to the addition of a Chief Financial Officer in August 2013, additional stock compensation expense, and legal expenses related to evaluating potential acquisitions.
Depreciation and Amortization. Depreciation and amortization expense in the first quarter of 2014 increased $53,000, or 28%, compared to the same period in 2013. The increase was a result of higher fixed asset balances plus capitalized software projects (principally related to the launch of Transplicity) placed in service in 2013.
Interest Expense
Interest expense in the first quarter of 2014 decreased by $6,000 compared to the same period in 2013. The Company had no amounts outstanding under its line of credit during the first quarter of 2014 compared to $400,000 outstanding during the same period in 2013.
Income Tax Expense
Income tax expense in the first quarter of 2014 was $20,000 compared to $13,000 in the same period in 2013. The higher taxes are due to an increase in the Company’s taxable activities in China and Brazil.
Non-GAAP Financial Measure – Adjusted EBITDA
| Three months ended March 31, | ||||||||
| (in thousands) | 2014 | 2013 | ||||||
| Net income (loss) | $ | (400 | ) | $ | 16 | |||
| Interest expense | 23 | 29 | ||||||
| Income taxes | 20 | 13 | ||||||
| Depreciation and amortization | 241 | 188 | ||||||
| Stock-based compensation | 64 | 49 | ||||||
| Adjusted EBITDA | $ | (52 | ) | $ | 295 | |||
We calculate Adjusted EBITDA by taking net income (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.
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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:
| Three months ended March 31, | ||||||||
| (in thousands) | 2014 | 2013 | ||||||
| Cash flows provided (used) by : | ||||||||
| Operating activities | $ | (4 | ) | $ | 271 | |||
| Investing activities | (104 | ) | (220 | ) | ||||
| Financing activities | (45 | ) | (7 | ) | ||||
| Net increase (decrease) in cash | (153 | ) | 44 | |||||
| Effect of exchange rate changes in cash | (6 | ) | (52 | ) | ||||
| Cash and equivalents, beginning of period | 1,364 | 893 | ||||||
| Cash and equivalents, end of period | $ | 1,205 | $ | 885 | ||||
Net Cash Provided by (Used in) Operating Activities
Net cash used by operating activities in the first quarter of 2014 was due to our adjusted EBITDA (see explanation of Adjusted EBITDA above) and to changes in our operating assets and liabilities. Net cash provided by operating activities in the same period in 2013 was due mainly to our net income during the period plus an increase in deferred revenue.
Net Cash Used in Investing Activities
Net cash used by investing activities in the first quarter of 2014 related to the purchase of equipment for the business. In the first quarter of 2013, $73,000 of the net cash used by investing activities related to the purchase of equipment for the business and $148,000 related to capitalized software costs.
Net Cash Used in Financing Activities
Net cash used in financing activities in the first quarters of 2014 and 2013 related to payments on our capital lease obligations.
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Sources of Capital
For the three months ended March 31, 2014, 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 March 31, 2014, the credit facility did not have an outstanding balance. The Company was in compliance with all covenants of the credit facility as of March 31, 2014.
Uses of Capital
Sajan’s primary uses of capital in the first quarter of 2014 were to fund our operations 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 credit facility will be sufficient to meet our working capital, investment in software development, and capital expenditure requirements for the foreseeable future. However, we may decide to raise additional funds through public or private financings or borrowings to accelerate the development of new products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies.
If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders or we may be subject to covenants that restrict how we conduct our business. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of March 31, 2014.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of March 31, 2014, 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
During the fiscal quarter ended March 31, 2014, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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.
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, 2013, as filed with the SEC on March 21, 2014.
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.
None.
See the attached Exhibit Index.
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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: May 7, 2014 | 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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Sajan, Inc.
Quarterly Report for the Quarter Ended March 31, 2014
| 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 | 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 | Certificate of Elimination of Series A Preferred Stock, filed with the Secretary of State of the State of Delaware on April 30, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on May 1, 2014). |
| 3.7 | 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). |
| 4.3 | Amendment No. 1 to Tax Benefit Preservation Plan and Rights Agreement by and between Sajan, Inc. and Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A, dated and filed May 1, 2014, SEC File No. 000-51360). |
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| 10.1 | Sajan 2014 Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2014). |
| 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 March 31, 2014, 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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