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.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See
definitions of “accelerated filer,” large accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
As of May 8, 2017, the registrant had 4,796,383 shares of common
stock, $0.01 par value per share, outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in thousands except per share data
(Unaudited)
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,707
|
|
|
$
|
3,136
|
|
Accounts receivable, net of allowance
|
|
|
4,465
|
|
|
|
5,198
|
|
Unbilled services
|
|
|
815
|
|
|
|
1,022
|
|
Prepaid expenses and other current assets
|
|
|
645
|
|
|
|
644
|
|
Total current assets
|
|
|
9,632
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
667
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
144
|
|
|
|
157
|
|
Other assets
|
|
|
19
|
|
|
|
24
|
|
Total other assets
|
|
|
163
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,462
|
|
|
$
|
10,901
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,106
|
|
|
$
|
3,712
|
|
Customer prepayments
|
|
|
544
|
|
|
|
468
|
|
Accrued compensation and benefits
|
|
|
811
|
|
|
|
790
|
|
Accrued liabilities
|
|
|
255
|
|
|
|
276
|
|
Total current liabilities
|
|
|
4,716
|
|
|
|
5,246
|
|
|
|
|
|
|
|
|
|
|
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 shares issued and outstanding
|
|
|
48
|
|
|
|
48
|
|
Additional paid-in capital
|
|
|
10,992
|
|
|
|
10,929
|
|
Accumulated other comprehensive loss
|
|
|
(376
|
)
|
|
|
(371
|
)
|
Accumulated deficit
|
|
|
(4,918
|
)
|
|
|
(4,951
|
)
|
Total stockholders’ equity
|
|
|
5,746
|
|
|
|
5,655
|
|
Total liabilities and stockholders’ equity
|
|
$
|
10,462
|
|
|
$
|
10,901
|
|
|
|
|
|
|
|
|
|
|
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 March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,115
|
|
|
$
|
6,777
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization)
|
|
|
4,397
|
|
|
|
4,290
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
829
|
|
|
|
909
|
|
Research and development
|
|
|
409
|
|
|
|
404
|
|
General and administrative
|
|
|
1,304
|
|
|
|
1,217
|
|
Depreciation and amortization
|
|
|
133
|
|
|
|
142
|
|
Total operating expenses
|
|
|
7,072
|
|
|
|
6,962
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
43
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4
|
)
|
|
|
(7
|
)
|
Foreign currency transaction gain (loss)
|
|
|
-
|
|
|
|
(4
|
)
|
Total other (expense), net
|
|
|
(4
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
39
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
7
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
32
|
|
|
|
(200
|
)
|
Effect of foreign currency translation adjustments
|
|
|
(6
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
26
|
|
|
$
|
(188
|
)
|
Income (loss) per common share – basic & diluted
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
Weighted average shares outstanding – basic
|
|
|
4,796
|
|
|
|
4,783
|
|
Weighted average shares outstanding – diluted
|
|
|
4,801
|
|
|
|
4,783
|
|
See notes to unaudited condensed
consolidated financial statements.
Sajan, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Amounts in thousands
(Unaudited)
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32
|
|
|
$
|
(200
|
)
|
Adjustments to reconcile net income (loss) income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
120
|
|
|
|
95
|
|
Amortization
|
|
|
13
|
|
|
|
47
|
|
Stock-based compensation expense
|
|
|
63
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
733
|
|
|
|
1,312
|
|
Unbilled services
|
|
|
207
|
|
|
|
(643
|
)
|
Prepaid expenses and other assets
|
|
|
4
|
|
|
|
(34
|
)
|
Accounts payable and accrued liabilities
|
|
|
(627
|
)
|
|
|
(297
|
)
|
Accrued compensation and benefits
|
|
|
21
|
|
|
|
58
|
|
Customer prepayments
|
|
|
76
|
|
|
|
(270
|
)
|
Net cash flows provided by operating activities
|
|
|
642
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(65
|
)
|
|
|
(439
|
)
|
Payments on long term licenses
|
|
|
-
|
|
|
|
(25
|
)
|
Net cash flows used in investing activities
|
|
|
(65
|
)
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
577
|
|
|
|
(322
|
)
|
Effect of exchange rate changes in cash
|
|
|
(6
|
)
|
|
|
6
|
|
Cash and cash equivalents – beginning of period
|
|
|
3,136
|
|
|
|
3,727
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents – end of period
|
|
$
|
3,707
|
|
|
$
|
3,411
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
7
|
|
|
$
|
4
|
|
Cash paid for interest including loan fees
|
|
$
|
4
|
|
|
$
|
7
|
|
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,
2016, 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 months ended
March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 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, 2016 filed with the SEC on March 17, 2017. 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 $100 at both March 31, 2017 and December 31, 2016. 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 ended March 31, 2017, 397 options to purchase
shares were excluded because inclusion of these shares would have been anti-dilutive. For the three months ended March 31, 2016
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 March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32
|
|
|
$
|
(200
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
4,796
|
|
|
|
4,783
|
|
Effect of dilutive stock options
|
|
|
4
|
|
|
|
-
|
|
Weighted average common shares outstanding - diluted
|
|
|
4,800
|
|
|
|
4,783
|
|
Basic income (loss) per common share
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
Diluted income (loss) per common share
|
|
$
|
0.01
|
|
|
$
|
(0.04
|
)
|
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:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Customer lists acquired
|
|
$
|
784
|
|
|
$
|
784
|
|
Patents and licenses
|
|
|
424
|
|
|
|
424
|
|
Less accumulated amortization
|
|
|
(1,064
|
)
|
|
|
(1,051
|
)
|
Total intangible assets, net
|
|
$
|
144
|
|
|
$
|
157
|
|
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 for
both three-month periods ended March 31, 2017 and 2016. Estimated amortization expense of intangible assets for the years ending
December 31, 2017, 2018, 2019, 2020, and thereafter is $53, $53, $40, $2, and $9, 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 months ended March 31, 2017 and 2016.
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 months ended March 31, 2017 or 2016.
There was no capitalized software amortization expense for the
three months ended March 31, 2017 and there was $34 in capitalized software amortization expense for the three months ended March
31, 2016.
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
$63 and $74 for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, there was approximately $357
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 no options to purchase shares of common stock issued
during the three months ended March 31, 2017 or 2016.
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
Revenue from Contracts with Customers
. In May 2014, the
Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers.”
This guidance provides a five-step analysis in determining when and how revenue is recognized so that an entity will recognize
revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the
goods and services. It also requires more detailed disclosures to enable users of financial statements to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued
ASU 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” which approved a one-year
deferral of the effective date of ASU 2014-09. As a result of this deferral, ASU 2014-09 is effective for the Company’s fiscal
2018, including interim periods within that reporting period. In addition, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12
in March 2016, April 2016 and May 2016, respectively, to provide interpretive clarifications on the new guidance in ASC Topic 606.
The Company is currently working through an adoption plan and has identified its revenue streams and completed a preliminary analysis
of how it currently accounts for revenue transactions compared to the revenue accounting required under the new standard.
The Company intends to complete its adoption plan in fiscal 2017. This plan includes a review of transactions supporting
each revenue stream to determine the impact of accounting treatment under ASC 606, evaluation of the method of adoption and completion
of a rollout plan for implementation of the new standard with affected functions in our organization. Because of the nature
of the work that remains, at this time the Company is unable to reasonably estimate the impact of adoption on its consolidated
financial statements. The Company plans to adopt the new guidance beginning January 1, 2018.
In November 2015, the 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 are 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 December
31, 2016 and 2015.
In
February 2016, the 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,
respectively. 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 March 31, 2017 three customers accounted for 18%, 13%, and 10%, respectively, of accounts receivable,
and at December 31, 2016 one customer accounted for approximately 11% of accounts receivable.
Sales concentration.
For the three months ended March
31, 2017, two customers accounted for 13% and 11%, respectively, of the Company’s total revenue. For the three months ended
March 31, 2016, one customer accounted for 13% 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 March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Revenues
|
|
|
Percent
|
|
|
Revenues
|
|
|
Percent
|
|
United States
|
|
$
|
5,617
|
|
|
|
79
|
%
|
|
$
|
5,341
|
|
|
|
79
|
%
|
Asia
|
|
|
160
|
|
|
|
2
|
%
|
|
|
171
|
|
|
|
3
|
%
|
Europe
|
|
|
1,010
|
|
|
|
14
|
%
|
|
|
939
|
|
|
|
14
|
%
|
Other International
|
|
|
327
|
|
|
|
5
|
%
|
|
|
326
|
|
|
|
5
|
%
|
Total Revenues
|
|
$
|
7,115
|
|
|
|
100
|
%
|
|
$
|
6,777
|
|
|
|
100
|
%
|
For the three months ended March 31, 2017 and 2016, no single
foreign country accounted for 10% or more of net revenues.
|
4.
|
Related
Party Transactions
|
Lease
Sajan leases its office space under an operating lease from
River Valley Business Center, LLC (“RVBC”), a limited liability company that is owned by Shannon and Angela Zimmerman.
The space consists of approximately 24,000 square feet. This lease agreement requires the Company to pay a minimum monthly rental
plus certain operating expenses and expires in January 2022. Payment of rent under the lease is secured by goods, chattels, fixtures
and personal property of the Company. Rent expense was $86 in both three-month periods ended March 31, 2017 and 2016.
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. There was no outstanding balance as of March 31, 2017 and 2016 under the Credit Facility.
On April 12, 2017, the Company entered into an amendment (the
“Amendment”) to the Credit Facility. The Amendment extended the maturity date of the Credit Facility to March 27, 2018.
Additionally, the Amendment adjusted the interest rate provisions to provide that the unpaid principal amount borrowed under the
Credit Facility accrues interest at a floating rate per annum equal to (a) one half of one percent (0.5%) 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 1.75 to 1.0 and (b) one and three quarters of one percent (1.75%) above the Prime
Rate when the liquidity ratio is less than 1.75 to 1.0. The interest rate floor remains set at four percent (4.0%) per annum. Additionally,
the Amendment deletes the fee previously required to be paid based on the unused portion of 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, May 5, 2015 and April 12, 2017 (as amended, the “A&R Loan Agreement”). The A&R Loan Agreement requires
the Company to maintain a consolidated minimum tangible net worth of at least $4,000,000, increasing as of the last day of each
fiscal quarter by an amount equal to 25% of the sum of (i) the Company’s net income for such quarter, (ii) any increase in
the principal amount of the Company’s outstanding subordinated debt during such quarter, and (iii) the net amount of proceeds
received by the Company in such quarter from the sale or issuance of equity securities. Losses in any quarter do not reduce the
required tangible net worth. The Amendment also provides that following a permitted acquisition by the Company, the Company will
no longer have to comply with the tangible net worth covenant; rather, the Company will be required to maintain, on a consolidated
basis, EBITDA of at least $250,000 for the trailing six (6) month period ending on the last day of each month. The Company was
in compliance with all covenants of the Credit Facility as of March 31, 2017.
The Credit Facility is secured by all of the Company’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.
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 March 31, 2017, there are 195 shares of Company
common stock reserved for issuance under this plan.
As of March 31, 2017, there were options to purchase a total
of 463 shares outstanding with a weighted average exercise price of $4.80 per share.
The Company’s cumulative net operating loss available
to offset future income for federal and state reporting purposes was $28,399 and $2,963, respectively, as of March 31, 2017.
Available research and development and foreign tax credit carry forwards at March 31, 2017 were $781. 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 three months ended March 31,
2017 and 2016 related only to annual state tax filings.
The Company’s policies with respect to the recording of
deferred tax assets and liabilities have not changed in 2017. All balances and valuation allowances as of December 31, 2016 were
evaluated and no changes were deemed necessary as of March 31, 2017.
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.
On April 25, 2017, the Company entered into an Agreement and
Plan of Merger (the “Merger Agreement”) with Amplexor USA Inc., a Delaware corporation (“Buyer”), and Amplexor
Falcon, Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer (“Merger Sub”). Under the terms of
the Merger Agreement, Merger Sub will merge with and into the Company with the Company remaining as the surviving corporation (the
“Surviving Corporation”) and a wholly-owned subsidiary of Buyer (the “Merger”). The Merger requires the
approval of a majority of the issued and outstanding shares of common stock of the Company, and the Company expects to file with
the Securities and Exchange Commission (“SEC”), and mail to stockholders, a proxy statement on Schedule 14A inviting
stockholders to a special meeting to, among other things, consider and vote on a proposal to adopt the Merger Agreement and approve
the Merger. The Company expects this vote to occur sometime in July 2017.
The Merger Agreement contains representations, warranties and
covenants of the parties. Until the earlier of the termination of the Merger Agreement or the consummation of the merger, the Company
has agreed to operate its business and the business of its subsidiaries in the ordinary course and has agreed to certain other
operating covenants, as set forth more fully in the Merger Agreement. Under certain circumstances and upon compliance with certain
notice and other specified conditions set forth in the Merger Agreement, the Company may terminate the Merger Agreement to accept
a superior proposal, which would require a termination fee of $1,500,000 to be paid to the Buyer.
For further information regarding the Merger, please refer
to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as our Current
Report on Form 8-K filed on April 26, 2017 along with the Merger Agreement, which is attached as Exhibit 2.1 thereto. The foregoing
description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Merger Agreement.
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 complete the Merger and the anticipated timing of
doing so; (ii) our expectations regarding the satisfaction of closing conditions of the Merger; (iii) our intent to enhance current
customer relationships and seek new customer opportunities; (iv) our expectations regarding the flow of business from our existing
customers; (v) our beliefs regarding the strength of our business model; (vi) our beliefs regarding the demand for translation
services and the industry in general; (vii) our expectations regarding future revenue growth; (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:
|
·
|
the satisfaction of closing conditions for the Merger, including the receipt of affirmative votes of a majority of the issued and outstanding shares of our common stock approving the Merger and adopting the Merger Agreement;
|
|
·
|
the possibility that the Merger will not be completed, or if completed, not completed on a timely basis;
|
|
·
|
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;
|
|
·
|
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 17, 2017.
|
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 17, 2017.
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.
Pending Merger with Amplexor
On April 25, 2017, the Company entered into an Agreement and
Plan of Merger (the “Merger Agreement”) with Amplexor USA Inc., a Delaware corporation (“Buyer”), and Amplexor
Falcon, Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer (“Merger Sub”). Under the terms of the
Merger Agreement, Merger Sub will merge with and into the Company with the Company remaining as the surviving corporation (the
“Surviving Corporation”) and a wholly-owned subsidiary of Buyer (the “Merger”).
At the effective time of the Merger, each
share of the Company’s common stock, par value $0.01 per share (the “Company Common Stock”), that is issued and
outstanding immediately prior to the effective time of the Merger (other than shares held in the Company’s treasury immediately
prior to the effective time of the Merger, which will be cancelled and retired without payment, and any dissenting shares) will
be cancelled and converted into the right to receive the merger consideration of $5.83 per share in cash, without interest and
subject to any applicable withholding taxes. Each option to acquire shares of Company Common Stock (each, a “Company Stock
Option”) that is outstanding immediately prior to the effective time of the Merger, whether or not then vested or exercisable,
will, by virtue of the Merger and without any action on the part of Buyer, Merger Sub, the Company, the holder of that Company
Stock Option or any other person, immediately accelerate and vest and become exercisable and will be cancelled and converted into
the right to receive from Buyer and the Surviving Corporation an amount in cash, without interest, equal to the product of (i)
the aggregate number of shares of Company Common Stock subject to such Company Stock Option, multiplied by (ii) the excess, if
any, of the per share merger consideration over the per share exercise price of such Company Stock Option, less any applicable
tax withholding.
Among
other closing conditions that are customary in transactions of this type, the closing of the Merger and related transactions is
contingent upon the satisfaction or waiver of the following: (a)
the holders of a majority of the outstanding shares
of Company Common Stock must have adopted the Merger Agreement and approved the completion of the Merger at a special meeting of
stockholders; (b) the Company must have received regulatory approvals, if any, required by applicable law to complete the Merger;
(c) the Company must have entered into an amended and restated employment agreement with Shannon Zimmerman; and (d)
there
must not have occurred any event, change or effect that would, individually or in the aggregate, reasonably be expected to have
a material adverse effect on the Company.
The Merger Agreement contains customary
representations and warranties by the Company, Buyer and Merger Sub. The Merger Agreement also contains customary covenants and
agreements, including with respect to the operation of the business of the Company between signing and closing, restrictions on
the Company regarding soliciting and responding to alternative business combination transactions, governmental filings and approvals,
and other matters.
Subject to certain limited exceptions,
the Merger Agreement prohibits the Company’s solicitation of proposals relating to alternative business combination transactions
and restricts the Company’s ability to furnish non-public information to, or participate in any discussions or
negotiations with, any third party with respect to any such transaction.
The
Merger Agreement includes a remedy of specific performance for the
Company, Buyer and Merger Sub
.
The Merger Agreement also contains termination rights for each of the
Company and Buyer
.
Among those rights, the Company or Buyer may terminate the Merger Agreement if the Merger has not occurred on or before October
25, 2017 or if the stockholders of the Company do not adopt the Merger Agreement and approve the Merger at the special meeting.
The
Merger Agreement further provides that upon termination of the Merger Agreement under specified circumstances, including termination
by the Company to accept and enter into a definitive agreement with respect to an unsolicited superior proposal, the Company will
be required to pay a termination fee of $1,500,000 (the “Company Termination Fee”). A superior proposal is a bona fide
written proposal made by a third party
involving the direct or indirect acquisition pursuant to a tender offer, exchange
offer, merger, consolidation or other business combination, of all or substantially all of the Company’s consolidated assets
or a majority of the outstanding Company Common Stock, that the Company’s board of directors determines in good faith (after
consultation with outside legal counsel and financial advisors) is more favorable from a financial point of view to the holders
of Company Common Stock than the transactions contemplated by the Merger Agreement, taking into account (a) all financial considerations,
(b) the identity of the third party making the superior proposal, (c) the anticipated timing, conditions (including any financing
condition or the reliability of any debt or equity funding commitments) and prospects for completion of such superior proposal,
(d) the other terms and conditions of such superior proposal and the implications thereof on the Company, including relevant legal,
regulatory and other aspects of such superior proposal deemed relevant by the Company Board and (e) any revisions to the terms
of the Merger Agreement and the Merger proposed by Buyer after receipt of the superior proposal.
Any
such termination of the Merger Agreement by the Company is subject to certain conditions, including the Company’s compliance
with certain notice and other procedures set forth in the Merger Agreement, the entrance into a definitive agreement by the Company
with a third party with respect to such alternative business combination transaction and payment of the Company Termination Fee
by the Company to Buyer.
Under the terms of the Merger Agreement,
the directors and officers of Merger Sub, in each case, immediately prior to the effective time of the Merger will, from and after
the effective time, be appointed as the directors and officers, respectively, of the Surviving Corporation until their successors
are duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the certificate
of incorporation and bylaws of the Surviving Corporation.
The board of directors
of the Company and a special committee of independent directors of the board of directors of the Company, among other things, (i)
declared the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement fair to and in the best
interests of the Company and its stockholders, (ii) approved and declared advisable the Merger Agreement, the Merger and the other
transactions contemplated by the Merger Agreement, (iii) recommended that the Company’s stockholders approve the Merger and
adopt the Merger Agreement and (iv) directed that the approval of the Merger and the adoption of the Merger Agreement be submitted
to the stockholders of the Company.
Amplexor International
S.A., the direct or indirect owner of all of the equity interests of Buyer and the Merger Sub has guaranteed all obligations and
liabilities of any nature of Buyer under the Merger Agreement.
The foregoing
summary of the material terms of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference
to the Merger Agreement. The Merger Agreement has been provided solely to inform investors of its terms. The representations, warranties
and covenants contained in the Merger Agreement were made only for purposes of such agreement and as of specific dates, were made
solely for the benefit of the parties to the Merger Agreement, and are intended not as statements of fact, but rather as a way
of allocating risk to one of the parties if those statements prove to be inaccurate. In addition, the representations, warranties
and covenants in the Merger Agreement may have been qualified by disclosures not reflected in the text of the Merger Agreement
and may apply standards of materiality in a way that is different from what may be viewed as material by stockholders of, or other
investors in, the Company. Investors are not third-party beneficiaries under the Merger Agreement and should not rely on the representations,
warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company,
Buyer, Merger Sub or any of their respective subsidiaries or affiliates.
Additional
Information and Where to Find It
In
connection with the transaction, the Company expects to file with the Securities Exchange Commission (the “SEC”), and
mail to stockholders, a proxy statement on Schedule 14A inviting stockholders to a special meeting to, among other things, consider
and vote on a proposal to adopt the Merger Agreement and approve the Merger.
Stockholders are urged to carefully
read these materials (and any amendments or supplements) and any other relevant documents that Sajan, Inc. files with the SEC when
they become available because they will contain important information.
These materials
will be made available free of charge on the Company’s website at www.sajan.com/company/investor-relations/ when available.
In addition, all of these materials (and all other materials filed by the Company with the SEC) will be available at no charge
from the SEC through its website at www.sec.gov. Stockholders may also obtain free copies of the documents filed by the Company
with the SEC by contacting the Company’s Corporate Secretary, Thomas P. Skiba, by mail at Sajan, Inc., 625 Whitetail Boulevard,
River Falls, Wisconsin 54022 or by phone at (715) 426-9505.
Participants
in the Solicitation
This Form 10-Q is neither a solicitation of a proxy, an
offer to purchase nor a solicitation of an offer to sell shares of the Company. The Company and its directors, executive
officers and certain other members of management and employees may be deemed to be participants in soliciting proxies from
its stockholders in connection with the proposed Merger. Information regarding the Company’s directors and executive
officers is set forth in the Company’s Amendment No. 1 to its Annual Report on Form 10-K filed with the SEC on April
28, 2017. Information regarding other persons who may, under the rules of the SEC, be considered to be participants in the
solicitation of the Company’s stockholders in connection with the proposed Merger will be set forth in the
proxy statement for the Company’s special stockholder meeting. Additional information regarding these individuals
and Sajan’s directors and officers and any direct or indirect interests they may have in the proposed Merger will be
set forth in the definitive proxy statement when and if it is filed with the SEC in connection with the proposed Merger.
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, 2016 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, 2017.
Results of Operations - Three Months Ended March 31, 2017
Compared to Three Months Ended March 31, 2016
The major components of revenues, cost of revenues, operating
expenses, other income (expense), and income tax expense are discussed below.
|
|
Three Months Ended March 31,
|
|
|
|
|
Item
|
|
2017
|
|
|
2016
|
|
|
% Change
(Period Over Period)
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
Revenues
|
|
$
|
7,115
|
|
|
$
|
6,777
|
|
|
|
5
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
4,397
|
|
|
|
4,290
|
|
|
|
2
|
%
|
Sales and marketing
|
|
|
829
|
|
|
|
909
|
|
|
|
(9
|
%)
|
Research and development
|
|
|
409
|
|
|
|
404
|
|
|
|
1
|
%
|
General and administrative
|
|
|
1,304
|
|
|
|
1,217
|
|
|
|
7
|
%
|
Depreciation and amortization
|
|
|
133
|
|
|
|
142
|
|
|
|
(6
|
%)
|
Income (loss) from operations
|
|
|
43
|
|
|
|
(185
|
)
|
|
|
123
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
(43
|
%)
|
Foreign currency
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
nm
|
|
Income tax expense
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
75
|
%
|
Net Income (Loss)
|
|
$
|
32
|
|
|
$
|
(200
|
)
|
|
|
116
|
%
|
Revenues
Revenues totaled $7,115,000 in the first quarter of 2017 compared
to $6,777,000 in the same period of 2016, an increase of 5%. All of the Company’s revenue is project oriented and thus subject
to fluctuations due to the timing and nature of the translation needs of our customers. During the first quarter of 2017, the Company’s
top twenty revenue producing clients grew in total by 13%. Twelve of these clients had overall revenue growth aggregating 61%,
six had revenue declines aggregating 27%, and two were new clients that did not have revenue in the first quarter of 2016.
Operating Expenses
Cost of Revenues.
Cost of revenues in the first quarter
of 2017 increased $107,000, or 2%, compared to the same period in 2016. As a percentage of revenues, cost of revenues was
62% of revenue in the first quarter of 2017 compared to 63% in the same period in 2016. Outside translator costs were 44% of revenues
in the first quarter of 2017 compared to 46% in the same period last year. Translator costs can vary from quarter to quarter based
on the specific language needs of our customers. The decline was due to internal efforts to reduce the rates we pay to outside
translators and increased use of technology. Compensation costs for our internal operations personnel were 18% in both the first
quarter of 2017 and 2016.
Sales and Marketing.
Sales and marketing expense in the
first quarter of 2017 decreased $80,000, or 9%, compared to the same period in 2016. As a percentage of revenues, sales and marketing
expense was 12% in first quarter of 2017 compared to 13% in the same period last year. The decrease was primarily due to lower
compensation costs, which relate to having fewer staff members in sales and marketing in 2017.
Research and Development.
Research and development
expense in the first quarter of 2017 increased $5,000, or 1%, compared to the same period of 2016. As a percentage of revenues,
research and development expense was 6% in the first quarter of both 2017 and 2016.
General and Administrative.
General and administrative
expense in the first quarter of 2017 increased $87,000, or 7%, compared to the same period of 2016. For the same periods, as a
percentage of revenues, general and administrative expense was 18% in both 2017 and 2016. The increase was due principally to $123,000
of legal and other costs related to the pending Merger with Amplexor. Also contributing to the increase was incentive compensation
of $49,000 earned under the Company’s Short-Term Incentive Plan. The Short-Term Incentive Plan has been in existence since
the fourth quarter of 2013 and rewards all eligible employees when the Company exceeds its pre-determined quarterly financial targets.
There were no amounts paid in the first quarter of 2016 because the Company did not meet its financial target. These increases
were offset by lower compensation costs due to a decrease in the number of staff and lower professional fees.
Depreciation and Amortization.
Depreciation
and amortization expense in the first quarter of 2017 decreased $9,000, or 6%, compared to the same period in 2016. The decrease
was a result of capitalized software development costs that became fully amortized in 2016, offset by higher depreciation expense
due to increased fixed asset balances.
Income (Loss) from Operations
We had income from operations of $43,000 in the first quarter
of 2017 compared to a loss from operations of $185,000 in the same period in 2016. The increase was a combination of the aforementioned
5% increase in revenues, lower translator cost rates, and decreased sales and marketing expenses. These improvements were partially
offset by increased general and administrative expenses.
Interest Expense
Interest expense in the first quarter of 2017 was $4,000 compared
to $7,000 in the same period of 2016. The decline was due to a decrease in interest and fees paid on our line of credit.
Income Tax Expense
Income tax expense in the first quarter of 2017 was $7,000 compared
to $4,000 in the same period of 2016. The increase was due to additional state tax filings in the United States made during the
quarter.
Non-GAAP Financial Measure – Adjusted EBITDA
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
32
|
|
|
$
|
(200
|
)
|
Interest expense
|
|
|
4
|
|
|
|
7
|
|
Income taxes
|
|
|
7
|
|
|
|
4
|
|
Depreciation and amortization
|
|
|
133
|
|
|
|
142
|
|
Merger related costs
|
|
|
123
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
63
|
|
|
|
74
|
|
Adjusted EBITDA
|
|
$
|
362
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
We calculate Adjusted EBITDA by taking net income (loss) calculated
in accordance with GAAP, and adding interest expense, income taxes, depreciation and amortization, Merger-related costs, 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:
|
|
Three months ended March 31,
|
|
(amounts in thousands)
|
|
2017
|
|
|
2016
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
642
|
|
|
$
|
142
|
|
Investing activities
|
|
|
(65
|
)
|
|
|
(464
|
)
|
Net increase (decrease) in cash
|
|
|
577
|
|
|
|
(322
|
)
|
Effect of exchange rate changes in cash
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Cash and equivalents, beginning of period
|
|
|
3,136
|
|
|
|
3,727
|
|
Cash and equivalents, end of period
|
|
$
|
3,707
|
|
|
$
|
3,411
|
|
Net Cash Provided by Operating Activities
The increase in the net cash generated in the first three months
of 2017 compared to the first three months of 2016 was principally due to the positive impact of improved earnings, a decrease
in accounts receivable and unbilled revenue offset by a decrease in accounts payable.
Net Cash Used in Investing Activities
Net cash used in investing activities in both periods relates
principally to the purchase of property and equipment.
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 March 31, 2017, the credit facility did not have an outstanding balance and we were in compliance with all the credit facility’s
covenants.
Uses of Capital
Our primary uses of capital in the first three months of 2017
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, and enhancing Transplicity, our translation
management system.
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 March
31, 2017.
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 March 31, 2017, 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 March 31, 2017 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.