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, 2016 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: 001-36600

 

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 Exchange Act).

¨ Yes    x No

 

As of October 31, 2016, the registrant had 4,796,383 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		22
Item 4. Controls and Procedures		22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Mine Safety Disclosures		23
Item 5. Other Information		23
Item 6. Exhibits		23
SIGNATURES		24
EXHIBIT INDEX		25

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

Sajan, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

Amounts in thousands except per share data

(Unaudited)

 

		September 30, 2016				December 31, 2015
Assets
Current assets:
Cash and cash equivalents		$	3,477			$	3,727
Accounts receivable, net of allowance			4,179				5,032
Unbilled services			1,296				646
Prepaid expenses and other current assets			793				684
Total current assets			9,745				10,089
Property and equipment, net			815				642
Other assets:
Intangible assets, net			151				114
Capitalized software development costs, net			-				43
Other assets			32				24
Total other assets			183				181
Total assets		$	10,743			$	10,912
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	3,605			$	3,297
Customer prepayments			318				831
Accrued compensation and benefits			840				704
Accrued liabilities			194				131
Total current liabilities			4,957				4,963
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; 4,796 and 4,783 shares issued and outstanding, respectively			48				48
Additional paid-in capital			10,870				10,634
Accumulated other comprehensive loss			(347	)			(335	)
Accumulated deficit			(4,785	)			(4,398	)
Total stockholders’ equity			5,786				5,949
Total liabilities and stockholders’ equity		$	10,743			$	10,912

 

See notes to unaudited condensed consolidated financial statements.

 

 

Sajan, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Amounts in thousands except per share data

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Revenues:		$	7,522			$	7,333			$	21,563			$	22,192
Operating expenses:
Cost of revenues (exclusive of depreciation and amortization)			4,729				4,706				13,755				13,598
Sales and marketing			1,010				974				2,998				2,780
Research and development			345				354				1,184				1,262
General and administrative			1,186				1,163				3,564				3,897
Depreciation and amortization			135				250				423				712
Total operating expenses			7,405				7,447				21,924				22,249
Income (loss) from operations			117				(114	)			(361	)			(57	)
Other income (expense):
Interest expense			(4	)			(11	)			(14	)			(47	)
Foreign currency transaction gain (loss)			(2	)			1				(6	)			(5	)
Total other expense			(6	)			(10	)			(20	)			(52	)
Income (loss) before income taxes			111				(124	)			(381	)			(109	)
Income tax expense			3				3				7				12
Net income (loss)			108				(127	)			(388	)			(121	)
Effect of foreign currency translation adjustments			(4	)			(3	)			(11	)			(38	)
Comprehensive income (loss)		$	104			($	130	)		($	399	)		($	159	)
Income (loss) per common share – basic & diluted		$	0.02			($	0.03	)		($	0.08	)		($	0.03	)
Weighted average shares outstanding – basic			4,785				4,781				4,783				4,780
Weighted average shares outstanding – diluted			4,799				4,781				4,783				4,780

  

See notes to unaudited condensed consolidated financial statements.

 

 

Sajan, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Amounts in thousands

(Unaudited)

  

		Nine months ended September 30,
		2016				2015
Cash flows from operating activities:
Net (loss) income		$	(388	)		$	(121	)
Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation			340				393
Amortization			83				319
Stock-based compensation expense			216				223
Changes in operating assets and liabilities:
Accounts receivable			853				(730	)
Unbilled services			(650	)			(273	)
Prepaid expenses and other assets			(117	)			(129	)
Accounts payable and accrued liabilities			372				364
Accrued interest – related party			-				(81	)
Accrued compensation and benefits			136				24
Customer prepayments			(513	)			(41	)
Net cash flows provided by (used in) operating activities			332				(52	)
Cash flows from investing activities:
Purchases of property and equipment			(513	)			(410	)
Payments on long term licenses			(77	)			(54	)
Net cash flows used in investing activities			(590	)			(464	)
Cash flows from financing activities:
Net proceeds from exercise of stock options and warrants			20				11
Payoff of note payable – related party			-				(750	)
Payments on capital lease obligations			-				(93	)
Net cash flows provided by (used in) financing activities			20				(832	)
Net change in cash and cash equivalents			(238	)			(1,348	)
Effect of exchange rate changes in cash			(12	)			(36	)
Cash and cash equivalents – beginning of period			3,727				4,662
Cash and cash equivalents – end of period		$	3,477			$	3,278
Cash paid for taxes		$	7			$	12
Cash paid for interest including loan fees		$	11			$	128

 

See notes to unaudited condensed consolidated financial statements.

 

 

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, 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.

 

Interim Financial Information

 

The condensed consolidated balance sheet as of December 31, 2015, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other period. The accompanying condensed 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, 2015 filed with the SEC on March 16, 2016.  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 condensed consolidated financial statements not misleading.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Sajan, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued expenses, approximate their fair values due to their short maturities and/or market-consistent interest rates.

 

 

Accounts Receivable

 

The Company extends unsecured credit to customers in the normal course of business. The Company provides an allowance for doubtful accounts when appropriate, the amount of which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions on an individual customer basis. Normal accounts receivable are due 30 days after issuance of the invoice. Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and specific circumstances of the customer. Accounts receivable have been reduced by an allowance for uncollectible accounts of $30 at both September 30, 2016 and December 31, 2015. 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 income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding.

 

Diluted income (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 and nine months ended September 30, 2016, 399 and 433 options to purchase shares, respectively, were excluded because inclusion of these shares would have been anti-dilutive. For the three months and nine months ended September 30, 2015, all options and warrants to purchase shares were excluded 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,
		2016				2015
Numerator:
Net income (loss)		$	108			$	(127	)
Denominator:
Weighted average common shares outstanding - basic			4,785				4,781
Effect of dilutive stock options and warrants			14				-
Weighted average common shares  outstanding - diluted			4,799				4,781
Basic income (loss) per common share		$	0.02			$	(0.03	)
Diluted income (loss) per common share		$	0.02			$	(0.03	)

 

		Nine months ended September 30,
		2016				2015
Numerator:
Net loss		$	(388	)		$	(121	)
Denominator:
Weighted average common shares outstanding - basic			4,783				4,780
Effect of dilutive stock options and warrants			-				-
Weighted average common shares  outstanding - diluted			4,783				4,780
Basic (loss) per common share		$	(0.08	)		$	(0.03	)
Diluted (loss) per common share		$	(0.08	)		$	(0.03	)

 

 

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 are as follows:

		September 30, 2016				December 31, 2015
Customer lists acquired		$	784			$	784
Patents and licenses			404				327
Less accumulated amortization			(1,037	)			(997	)
Total intangible assets, net		$	151			$	114

 

Intangible assets are amortized over their expected useful lives of four to fifteen years and their weighted average remaining life is two years. Amortization of intangible assets was $13 and $64 for the three-month periods ended September 30, 2016 and 2015, respectively, and $84 and $192 for the nine-month periods ended September 30, 2016 and 2015, respectively. Estimated amortization expense of intangible assets for the years ending December 31, 2016, 2017, 2018, 2019 and thereafter is $53, $53, $53, $40, and $11, 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 were no indicators of impairment for the three and nine months ended September 30, 2016 and 2015.

 

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 are 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 are expensed as incurred. Capitalization ceases when the software project is substantially complete and ready for its intended use. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. The Company did not capitalize any additional software development costs in the three or nine months ended September 30, 2016 or 2015.

 

Total capitalized software development costs consist of the following as of:  

 

		September 30, 2016				December 31, 2015
Capitalized software development costs		$	543			$	543
Less accumulated amortization			(543	)			(500	)
Total capitalized software development costs, net		$	-			$	43

 

As of June 30, 2016, all capitalized software costs were fully amortized. Capitalized software amortization expense was $42 for the three months ended September 30, 2015 and $43 and $127 for the nine months ended September 30, 2016 and 2015, 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. Total stock-based compensation expense was $80 and $75 for the three months ended September 30, 2016 and 2015, respectively, and $216 and $223 for the nine months ended September 30, 2016 and 2015, respectively.  As of September 30, 2016, there was approximately $682 of total unrecognized compensation cost related to non-vested, share-based compensation arrangements granted under the Company’s 2004 Amended and Restated Long-Term Incentive Plan and 2014 Equity Incentive Plan. That cost is expected to be recognized over a weighted-average period of three years.

 

There were options to purchase 34 and 128 shares issued during the three and nine months ended September 30, 2016, respectively. There were no options to purchase shares issued during the three months ended September 30, 2015 and options to purchase 48 shares issued during the nine months ended September 30, 2015. In determining the compensation cost of the options granted, 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,
		2016				2015
Risk-free interest rate			1.1	%			-
Expected life of options granted			7 Yrs.				-
Expected volatility range			84.9	%			-
Expected dividend yield			-				-

 

Using the Black-Scholes option pricing model, management has determined that the options issued in the three months ended September 30, 2016 have a weighted-average grant date fair value of $3.10 per share.

 

		Nine months ended September 30,
		2016				2015
Risk-free interest rate			1.2	%			1.5	%
Expected life of options granted			7 Yrs.				7 Yrs.
Expected volatility range			84.2	%			85.4	%
Expected dividend yield			-				-

 

Using the Black-Scholes option pricing model, management has determined that the options issued in the nine months ended September 30, 2016 and 2015 have a weighted-average grant date fair value of $3.37 and $4.38 per share, respectively.

 

Revenue Recognition

 

The Company derives revenue primarily from language translation services and professional consulting services. 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. The price charged per word per language varies depending upon the language, the availability of translator resources and the extent to which the Company’s proprietary search algorithm has been applied to reuse prior translation work. In some cases the Company may generate revenue by allowing customers to utilize its operating system, for which the Company will also receive revenue on a per word basis similar to its services business model based upon the number of words processed through the Transplicity software platform. 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. Revenue for translation services is recognized on a standard “per word” basis at the time the translation is completed. Revenue for professional services is recognized when the services have been completed in accordance with the statement of work.

 

Revenues recognized in excess of billings are recorded as unbilled services. Billings in excess of revenues recognized and customer prepayments for services are recorded as customer prepayments to the extent cash has been received.

 

Cost of Revenues

 

Cost of revenues consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects.  

 

Research and Development

 

Research and development expenses primarily represent costs incurred for maintenance and development of 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 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 period. 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.

 

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.

 

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “Revenue from Contracts with Customers.” The new section will replace Section 605, “Revenue Recognition” and will create modifications to various other revenue accounting standards for specialized transactions and industries. Along with a concurrently issued International Financial Reporting Standard, ASC Section 606 is intended to conform revenue accounting principles and address the previously differing treatment between United States practice and that of much of the rest of the world. The section is also intended to enhance disclosures related to disaggregated revenue information.

 

In April 2015, FASB issued an Accounting Standards Update (“ASU”) that defers the effective date of ASC Section 606 by one year. As updated, ASC Section 606 is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. The Company will adopt the new provisions of this accounting standard at the beginning of fiscal year 2018. FASB does permit the early adoption of the new revenue standard, but not before the original effective date for annual periods beginning after December 15, 2016.  The Company is currently evaluating the method of adoption and the impact of adopting ASC Section 606 on its results of operations, cash flows, and financial position.

 

In November 2015, FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740), which amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. ASU 2015-17 simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The new standard will be effective beginning in the first quarter of 2018. Early adoption is permitted. The Company early adopted ASU 2015-17 effective December 31, 2015. The adoption of ASU 2015-17 did not have an impact on the Company’s consolidated balance sheet due to the full valuation allowance against the net deferred tax assets as of September 30, 2016 and December 31, 2015.

 

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on its results of operations, cash flows, and financial position.

 

2.	Concentrations of Credit Risk

 

Financial instruments that 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, 2016 one customer accounted for 12% of accounts receivable, and at December 31, 2015, a different customer accounted for approximately 12% of accounts receivable.

 

 

Sales concentration. For the three and nine months ended September 30, 2016 and 2015, no customers accounted for over 10% of the Company’s total revenue.

 

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, and Singapore.

 

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

  

		Three Months Ended September 30,
		2016								2015
		Revenues				Percent				Revenues				Percent
United States		$	6,063				81	%		$	5,583				76	%
Asia			131				2	%			203				3	%
Europe			1,002				13	%			1,212				17	%
Other International			327				4	%			335				4	%
Total Revenues		$	7,522				100	%		$	7,333				100	%

 

		Nine Months Ended September 30,
		2016								2015
		Revenues				Percent				Revenues				Percent
United States		$	16,725				78	%		$	17,021				77	%
Asia			440				2	%			579				3	%
Europe			3,337				15	%			3,505				16	%
Other International			1,060				5	%			1,087				4	%
Total Revenues		$	21,563				100	%		$	22,192				100	%

 

For the three and nine months ended September 30, 2016 and 2015, no single foreign country accounted for 10% or more of net revenues.

 

4.	Related Party Transactions

 

Note Payable

 

The Company previously had a note payable in the amount of $750, plus accrued interest thereon, to Shannon and Angela Zimmerman. Shannon Zimmerman is currently, and prior to June 8, 2015 Angela Zimmerman, was an executive officer of the Company. Each is a director of the Company and a beneficial owner of the Company's outstanding voting common stock. The note had a maturity date of August 23, 2015, and carried an interest rate of 8%.  On August 20, 2015, the note payable, including accrued interest of $8, was paid in full. There was no interest expense in the first nine months of 2016 and interest expense for the three and nine months ended September 30, 2015 was $8 and $38, respectively.

 

Lease

 

Sajan leases its office space under three non-cancelable operating leases from River Valley Business Center, LLC, 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 was $86 in both three-month periods ended September 30, 2016 and 2015 and $258 in both nine-month periods ended September 30, 2016 and 2015.

 

 

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 (as amended from time to time, the “Credit Facility”) with SVB, which consisted of a two-year revolving working capital line of credit. On March 26, 2015, the maturity date of the Credit Facility was extended an additional two years to March 28, 2017 and the line of credit was increased up to a principal amount equal to the lesser of (a) $3,000 or (b) 85% of the aggregate amount of Sajan’s outstanding eligible accounts receivable, subject to customary limitations and exceptions.

 

Any 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 Company’s liquidity ratio is greater than or equal to 1.75 to 1.0 and (b) 2.25% above the Prime Rate when the Company’s liquidity ratio is less than 1.75 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 0.1875% per annum on the average unused portion. There was no outstanding balance as of September 30, 2016 or December 31, 2015 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, as amended on March 26, 2015 and May 5, 2015 (as amended, 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 $2,500, increasing as of the last day of each fiscal quarter 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 September 30, 2016 and December 31, 2015.

 

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

 

2014 Equity Incentive Plan

 

On June 12, 2014 the Company’s stockholders approved the 2014 Equity Incentive Plan as a replacement for the 2004 Amended and Restated Long-Term Incentive Plan. This plan allows the Company’s Board of Directors, or a committee of the Board, to grant awards to the Company’s employees (including its named executive officers), directors, and/or consultants of the Company and its affiliates. The awards may take the form of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, performance awards, and stock appreciation rights. A total of 375 shares were initially reserved for issuance under this plan. As of September 30, 2016, there are 142 shares of Company common stock reserved for issuance under this plan.

 

 

As of September 30, 2016, there were options to purchase a total of 524 shares outstanding with a weighted average exercise price of $4.86 per share. Prior to September 30, 2016, the Company had warrants to purchase 21 shares outstanding at $2.44 per share. During the quarter ended September 30, 2016, all warrants were exercised and resulted in the issuance of 14 shares of common stock.

 

7.	Income Taxes

 

The Company’s cumulative net operating loss available to offset future income for federal and state reporting purposes was $28,226 and $2,904, respectively, as of September 30, 2016.  Available research and development and foreign tax credit carry forwards at September 30, 2016 were $749. The difference between the amount of net operating loss carry forwards available for federal and state purposes is due to the fact that a substantial portion of the operating losses were generated in states in which the Company does not have ongoing operations. The Company's federal and state net operating loss carry forwards expire in various calendar years from 2016 through 2030 and the tax credit carry forwards expire in calendar years 2020 through 2028. Accordingly, income tax expense recognized during the nine months ended September 30, 2016 related only to annual state tax filings. The income tax expense recognized during the three and nine months ended September 30, 2015 related to taxes due in foreign jurisdictions where the Company does business and state tax filings.

 

The Company’s policies with respect to the recording of deferred tax assets and liabilities have not changed in 2016. All balances and valuation allowances as of December 31, 2015 were evaluated and no changes were deemed necessary as of September 30, 2016.

 

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, as amended.   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 include, but are not limited to: (i) our intent to invest in growth initiatives, including sales and marketing programs and enhancements to our translation management system; (ii) our expectations regarding the flow of business from our existing customers; (iii) our beliefs regarding the strength of our business model; (iv) our beliefs regarding the demand for translation services and the industry in general; (v) our expectation to generate positive cash flow from operations; (vi) our expectations regarding future revenue growth, including both organically and through acquisitions; (vii) our expectations regarding the addition of new operations staff members; (viii) our estimates of operating expenses; (ix) our beliefs regarding the adequacy of our capital resources; and (x) our beliefs regarding financial and business trends relating to our financial condition and results of operations.

        

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, among other things, our industry, operations and results of operations, and any businesses that we may acquire. These factors include:

 

	·	our rate of growth in the highly-fragmented 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;
	·	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 or integrate successfully sales and marketing, research and development, or other key personnel who are able to successfully sell or develop our solutions;
	·	our ability to operate as a public company and comply with applicable disclosure and other requirements and to hire additional personnel with public company compliance experience; and
	·	other risk factors included under “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 16, 2016.

 

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, we do 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 16, 2016.

 

General Overview

 

Sajan, Inc. (the “Company,” “Sajan,” “we,” “us” or “our”), 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, and retail industries that are selling products into global markets. Sajan 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.

 

Customers who purchase translation services from us need completely accurate, high-quality translation for materials that are critically important to their businesses, such as instruction manuals, training materials, marketing programs, legal documents, and websites. We provide these translation services in a fast, cost-effective manner through the use of our proprietary technology, Transplicity, as well as our network of outside translators and our internal staff, who manage the project to ensure all our customer deliverables are met.

 

Our customer base consists principally of large multi-national companies, but also includes smaller organizations that need high quality translation done in a timely and cost effective manner. We generally expect to receive ongoing business from established customers due to the increasing benefits that Transplicity and our business model afford as we continue to service a particular customer. The flow of such projects, however, can be unpredictable. Therefore our strategy has been a combination of enhancing and nurturing current customer relationships, and aggressively seeking new customer opportunities. We believe that demand for language translation services is growing and that we are positioned to capitalize on the highly-fragmented industry by leveraging technological solutions and pursuing strategic acquisition opportunities. Our success will be dependent upon maintaining a high level of customer satisfaction and a strong reputation, as well as achieving the benefits that we expect our business model to afford.

 

We believe that the launch of Transplicity as our translation technology platform in March 2013 and continued investments in our technology have differentiated us from our competitors and have given us the opportunity to greatly expand our customer base. Transplicity drove revenue growth of 17% in 2013, 18% in 2014, and 5% in 2015. Our focus in the future will be to continue to drive revenue growth by enhancing the capabilities of Transplicity and further investing in sales and marketing activities.

 

 

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 condensed 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, including those discussed below. 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, 2015 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Discussion of Critical Accounting Policies and Estimates.” There were no significant changes to our critical accounting policies during the three and nine months ended September 30, 2016.

 

Results of Operations - Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

 

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

 

		Three Months Ended September 30,
										% Change
Item		2016				2015				(Period Over Period)
		(in thousands)				(in thousands)
Revenues		$	7,522			$	7,333				3	%
Operating expenses:
Cost of revenues			4,729				4,706				0	%
Sales and marketing			1,010				974				4	%
Research and development			345				354				(3	%)
General and administrative			1,186				1,163				2	%
Depreciation and amortization			135				250				(46	%)
Income (loss) from operations			117				(114	)			203	%
Other income (expense):
Interest			(4	)			(11	)			(64	%)
Foreign currency			(2	)			1				300	%
Income tax expense			3				3				0	%
Net Income (Loss)		$	108			$	(127	)			185	%

 

Revenues

 

Revenues increased 3% in the third quarter of 2016 compared to the same period in 2015. Our top ten third quarter 2016 clients comprised 55% of our revenue and grew 15% over last year. Eight of these customers were also in our top ten during the 3^rd quarter of 2015. All of our revenue is project oriented and thus subject to fluctuations due to the timing and nature of the translation needs of our customers. This pattern was reflected in the third quarter of 2016 revenues attributable to our top ten, third quarter 2015 customers. We experienced an aggregate 58% revenue increase in four of these customers, while the other six customers had an aggregate 32% revenue decrease. This pattern was prevalent throughout much of our customer base during the quarter. Revenue from new customers who we had never done business with before 2016 totaled $252,000 during the quarter.

 

 

In 2016, we have been investing additional resources in new sales and marketing activities that we believe will result in new revenue in future periods. These efforts include the addition of a channel partner manager, a new sales representative devoted to domestic Life Science business, and the shifting of the focus of our VP of Life Sciences from an operational role to that of generating new Life Science business in Europe and other international markets. We have also created a Global Solutions Architect (“GSA”) program within the Company. The GSA is a dedicated team that will promote the customer experience which we expect to result in more new customers, as well as increased revenue from our current customers.

 

Operating Expenses

 

Cost of Revenues. Cost of revenues consists of outside translator costs and compensation costs for our internal personnel and were approximately the same in the third quarter of 2016 and the third quarter of 2015. As a percentage of revenues, cost of revenues were 63% in the third quarter of 2016 compared to 64% in the same period of 2015. Outside translator costs were 46% of revenues in the third quarter of 2016 compared to 48% in the same period of 2015. The reduced percentage was due to improvements in technology and good supply chain management. Compensation costs were 16% of revenues in both the third quarter of 2016 and 2015.

 

Sales and Marketing. Sales and marketing expense in the third quarter of 2016 increased $36,000, or 4%, compared to the same period in 2015. As a percentage of revenues, sales and marketing expense was 13% in both third quarter periods of 2016 and 2015. The increase in dollars was primarily due to higher compensation costs which relate to our revenue improvement efforts described above.

 

Research and Development.  Research and development expense in the third quarter of 2016 decreased $9,000, or 3%, compared to the same period of 2015. As a percentage of revenues, research and development expense was 5% in the third quarter of both 2016 and 2015.

 

General and Administrative.  General and administrative expense in the third quarter of 2016 increased $22,000, or 2%, compared to the same period of 2015. For the same periods, as a percentage of revenues, general and administrative expense was 16% in both 2016 and 2015.

 

Depreciation and Amortization.   Depreciation and amortization expense in the third quarter of 2016 decreased $115,000, or 46%, compared to the same period in 2015. The decrease was a result of lower average fixed asset balances, intangible assets that became fully amortized in 2015, and capitalized software development costs that became fully amortized in 2016. 

 

Interest Expense  

 

Interest expense in the third quarter of 2016 was $4,000 compared to $11,000 in the same period of 2015. The decline was due to the payoff in 2015 of our note payable and capital lease obligations.

 

Income Tax Expense

 

Income tax expense in the third quarter of 2016 and 2015 was $3,000. These taxes were due to state tax filings in the United States made during the quarter.

 

Operating Income (Loss)

 

We had income from operations of $108,000 in the third quarter of 2016 compared to a loss from operations of $127,000 in the same period in 2015. The increase was a combination of the aforementioned 3% increase in revenues, partially offset by increased sales and marketing expenses.

 

 

Results of Operations – Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

 

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

 

		Nine Months Ended September 30,
										% Change
Item		2016				2015				(Period Over Period)
		(in thousands)				(in thousands)
Revenues		$	21,563			$	22,192				(3	%)
Operating Expenses:
Cost of Revenues			13,755				13,598				1	%
Sales and Marketing			2,998				2,780				8	%
Research and Development			1,184				1,262				(6	%)
General and Administrative			3,564				3,897				(9	%)
Depreciation and Amortization			423				712				(41	%)
(Loss) from operations			(361	)			(57	)			533	%
Other Expense:
Interest			14				47				(70	%)
Foreign Currency			6				5				20	%
Income Tax  Expense			7				12				(42	)%
Net (Loss)		$	(388	)		$	(121	)			221	%

 

Revenues

 

Revenues decreased by 3% in the first nine months of 2016 compared to the same period in 2015. Our top ten 2016 customers comprised 56% of our revenue and grew 4% compared to the prior year. Nine of these customers were also in our top ten during 2015. All of our revenue is project oriented and thus subject to fluctuations due to the timing and nature of the translation needs of our customers. This pattern was reflected in the 2016 revenues attributable to our top ten 2015 customers. We experienced an aggregate 24% revenue increase in five of these customers, while the other five customers had an aggregate 23% revenue decrease. This pattern was prevalent throughout much of our customer base during the period. Revenue from new customers who we had never done business with before 2016 totaled $818,000 during the period.

 

In 2016 we have been investing additional resources in new sales and marketing initiatives that we believe will result in new revenue in future periods. These efforts include the addition of a channel partner manager, a new sales representative devoted to domestic Life Science business, and the shifting of the focus of our VP of Life Sciences from an operational role to that of generating new Life Science business in Europe and other international markets. We also have also created a Global Solutions Architect (“GSA”) program within the Company. The GSA is a dedicated team that is promoting the customer experience, which we expect to result in more new customers, as well as increased revenue from our current customers.

 

 

Operating Expenses

 

Cost of Revenues. Cost of revenues in the first nine months of 2016 increased $157,000, or 1%, compared to the same period in 2015.   For the same periods, as a percentage of revenues, cost of revenues was 64% in 2016 compared to 61% in 2015. Outside translator costs were 47% of revenues in the first nine months of both 2016 and 2015. Compensation costs were 17% of revenues in the first nine months of 2016 compared to 15% of revenues in the same period of 2015. The increase in percentage was due to the aforementioned 3% decline in revenues and the addition of people to our worldwide operations team in the second half of 2015 in order to support our anticipated revenue growth. We believe these staff members are necessary to support expected growth in our business during the remainder of 2016.

 

Sales and Marketing. Sales and marketing expense in the first nine months of 2016 increased $218,000, or 8%, compared to the same period in 2015. For the same periods, as a percentage of revenues, sales and marketing expense was 14% in 2016 compared to 13% in 2015. The increase in dollars was due principally to higher compensation costs because of the addition of new staff members related to our revenue improvement efforts described above.

  

Research and Development.  Research and development expense in the first nine months of 2016 decreased $78,000, or 6%, compared to the same period in 2015. For the same periods, as a percentage of revenues, research and development expense was 5% in 2016 compared to 6% in 2015. The decrease in dollars and percentage of revenues is primarily due to open positions on the development staff.

 

General and Administrative.  General and administrative expense in the first nine months of 2016 decreased $333,000, or 9%, compared to the same period in 2015. For the same periods, as a percentage of revenues, general and administrative expense was 17% in 2016 compared to 18% in 2015. The decrease in dollars and percentage of revenues was due to several factors, most notably a decrease in the amount of incentive compensation paid under the Company’s Short-Term Incentive Plan, a decrease in professional recruiting fees related to a new COO that was hired in 2015 and a decrease in notice pay related to the retirement of an international employee in 2015.

 

Depreciation and Amortization.   Depreciation and amortization expense in the first nine months of 2016 decreased $289,000, or 41%, compared to the same period in 2015. The decrease was a result of lower average fixed asset balances, intangible assets that became fully amortized in 2015, and capitalized software development costs that became fully amortized in 2016. 

 

Interest Expense  

 

Interest expense in the first nine months of 2016 decreased by $33,000 compared to the same period in 2015.   The decline was due to the payoff in 2015 of our note payable and capital lease obligations.

 

Income Tax Expense

 

Income tax expense in the first nine months of 2016 decreased $5,000 compared to the same period in 2015. The majority of the decrease in taxes was due to a decrease in the Company’s taxable activities in Spain.

 

Operating Loss

 

The Company had a loss from operations of $388,000 in the first nine months of 2016 compared to a loss from operations of $121,000 in the same period in 2015. The increased loss was due to the aforementioned 3% decrease in revenues, additional operational personnel, and increased sales and marketing costs.

 

 

Non-GAAP Financial Measure – Adjusted EBITDA

 

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Net (loss) income		$	108			$	(127	)		$	(388	)		$	(121	)
Interest expense			4				11				14				47
Income taxes			3				3				7				12
Depreciation and amortization			135				250				423				712
Stock-based compensation			80				75				215				223
Adjusted EBITDA		$	330			$	212			$	271			$	873

 

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.

 

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,
(amounts in thousands)		2016				2015
Cash flows provided by (used in) :
Operating activities		$	332			$	(52	)
Investing activities			(590	)			(464	)
Financing activities			20				(832	)
Net (decrease) in cash			(238	)			(1,348	)
Effect of exchange rate changes in cash			(12	)			(36	)
Cash and equivalents, beginning of period			3,727				4,662
Cash and equivalents, end of period		$	3,477			$	3,278

 

Net Cash Provided by (Used in) Operating Activities

 

The increase in the net cash generated in the first nine months of 2016 compared to the first nine months of 2015 was principally due to the positive impact of a decrease in accounts receivable and increase in accounts payable, offset by the net loss for the period, an increase in unbilled services, and a decrease in customer prepayments.

 

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities in both periods relates principally to the purchase of property and equipment and payments on long-term licenses for the business.

 

Net Cash Provided by (Used in) Financing Activities

 

In the first nine months of 2016, cash provided by financing activities consisted of funds received from the exercise of warrants. In the first nine months of 2015, cash used in financing activities includes the $750,000 payment in full of the note payable to a related party and payments made on capital lease obligations.

 

Sources of Capital

 

In both periods presented, our principal source of liquidity was our cash and cash equivalents and our funds generated from the operations of the business. 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, we also have a credit facility with Silicon Valley Bank which allows us to borrow up to the lesser of $3,000,000 or 85% of our outstanding eligible accounts receivable. As of September 30, 2016, the credit facility did not have an outstanding balance. We were in compliance with all covenants of the credit facility as of September 30, 2016.

 

Uses of Capital

 

Our primary uses of capital in the first nine months of 2016 were to fund our operations and working capital needs and to make investments in equipment and technology. We intend to utilize our cash and cash equivalents as well as our funds generated from operations to support our business, including investing in technology, increasing our sales and marketing activities both domestically and internationally, enhancing Transplicity, our translation management system, and where appropriate, acquiring businesses, technologies and products that may add to our operations and client base. We currently have no current understandings, commitments, or arrangements in place for such acquisitions.

 

We believe that our existing capital resources, including cash and cash equivalents, operating cash flows, and the availability of cash under our credit facility, will be sufficient to meet our working capital, investment in technology, and capital expenditure requirements for at least the next 12 months.

 

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 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, 2016.

 

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

 

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2016, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

 

 

 Changes in Internal Control over Financial Reporting

 

During the fiscal quarter ended September 30, 2016 there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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, 2015, as filed with the SEC on March 16, 2016.

 

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

 

During the quarter ended September 30, 2016, the Company issued an aggregate of 5,217 shares of common stock pursuant to the cashless exercise of ten unregistered warrants to acquire an aggregate of 12,231 shares of common stock. The issuances were exempt from registration by virtue of Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”). The exercises occurred as follows:

 

-

On August 23, 2016, 922 shares were issued at an exercise price of $2.44 per share.

-

On August 24, 2016, 918 shares were issued at an exercise price of $2.44 per share.

-

On September 7, 2016, 343 shares were issued at an exercise price of $2.44 per share.

-

On September 12, 2016, 465 shares were issued at an exercise price of $2.44 per share.

-

On September 20, 2016, 235 shares were issued at an exercise price of $2.44 per share.

-

On September 21, 2016, 2,042 shares were issued at an exercise price of $2.44 per share.

-

On September 23, 2016, 292 shares were issued at an exercise price of $2.44 per share.

 

During the quarter ended September 30, 2016, the Company issued an aggregate of 8,423 shares of common stock pursuant to the cash exercise of two unregistered warrants. The warrants were exercised on September 21, 2016 and 8,423 shares were issued at an exercise price of $2.44 per share. The Company issued the shares pursuant to Rule 506 of Regulation D promulgated under the Securities Act.

 

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.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated:  November 8, 2016	Sajan, Inc.
	By:	/s/ Shannon Zimmerman
		Shannon Zimmerman
		Chief Executive Officer and President

  

	By:	/s/ Thomas Skiba
		Thomas Skiba
		Chief Financial Officer

 

 

 

Exhibit Index

Sajan, Inc.

Quarterly Report for the period ended September 30, 2016

  

3.1		Certificate of Incorporation of the Company as amended through June 16, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on July 23, 2014).
3.2		Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed by MathStar Inc. with the SEC on August 3, 2005, Registration No. 333-127164 (“Registration Statement”)).
4.1		Form of common stock certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on July 23, 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 September 30, 2016, 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).