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TMCNet:  SAJAN INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[July 23, 2014]

SAJAN INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 ("Securities Exchange Act ").


Forward-looking statements reflect the current view about future events.

When used in this Quarterly Report on Form 10-Q the words "anticipate," "will," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions or the negative of these terms, as they relate to Sajan, Inc. (the "Company," "Sajan," "we," "us" or "our"), its subsidiaries or its management, identify forward-looking statements. Our forward-looking statements in this report generally relate to: (i) our intent to invest in growth initiatives, including sales and marketing programs and enhancements to our translation management system; (ii) our 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 estimates of operating expenses; and (vii) our beliefs regarding the adequacy of our capital resources and our proposed offering of common stock.

Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements. Such statements reflect the current view of our management with respect to future events and are subject to risks, uncertainties, assumptions and other factors relating to the Company's industry, its operations and results of operations, and any businesses that may be acquired by it. These factors include: · our rate of growth in the global multilingual content delivery industry; · our ability to effectively manage our growth; · lack of acceptance of any existing or new solutions we offer; · our ability to continue increasing the number of our customers or the revenues we derive from our recurring revenue customers; · economic weakness and constrained globalization spending by businesses operating in international markets; · our ability to effectively develop new solutions that compete effectively with the solutions that our current and future competitors offer; · 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, including our ability to successfully complete our proposed offering of common stock; · risks of conducting international commerce, including foreign currency exchange rate fluctuations, changes in government policies or regulations, longer payment cycles, trade restrictions, economic or political instability in foreign countries where we may increase our business and reduced protection of our intellectual property; · our ability to add sales and marketing, research and development or other key personnel who are able to successfully sell or develop our solutions; · our ability to operate as a public company and comply with applicable disclosure and other requirements and to hire additional personnel with public company compliance experience; and 15 · other risk factors included under "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on March 21, 2014.

Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Although our management believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, Sajan does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the financial statements and the related notes included in our Annual Report Form on 10-K filed with the SEC on March 21, 2014.

General Overview Sajan, Inc. (the "Company" or "Sajan"), a Delaware corporation, provides language translation services and technology solutions to companies located throughout the world, particularly in the technology, consumer products, medical and life sciences, financial services, manufacturing, and retail industries that are selling products into global markets. The Company is located in River Falls, Wisconsin and has active, wholly-owned subsidiaries in the following countries: · Ireland - Sajan Software Ltd.

· Spain - Sajan Spain S.L.A.

· Singapore - Sajan Singapore Pte. Ltd.

· Brazil - Sajan do Brasil Traduções Ltda.

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 of 2013 has differentiated us from our competitors and has given us the opportunity to greatly expand our customer base. It drove our revenue growth during the 2013 and has continued to do so in the first two quarters of 2014. It has fueled a more aggressive sales strategy which has included the implementation of a strategic account management program, restructured incentive plans for sales personnel, additions to staff, and expanded international sales efforts. 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. As a result of these efforts our revenues in the second quarter 2014 were the largest in the Company's history and grew 18% over the same period in 2013.

From an operations standpoint, cost of revenues primarily consists of payments to outside translators. These costs can vary widely from quarter to quarter based on the type of project, the languages being translated, and the needs of our customers. Also included in our cost of revenues is the salary and benefits we pay to our operations staff. These costs tend to be more stable because our technology enables us to maintain a relatively consistent number of employees as revenue increases. However, we assess staffing on a regular basis and may hire additional staff in the future if customer and project demands necessitatedoing so.

16 We intend to continue to invest in Transplicity and other technologies in the foreseeable future to make our service offering more attractive to our customers, drive continued revenue growth, make our operations more efficient and, ultimately, improve profitability. These investments will result in increased research and development expense both in dollars and as a percentage of revenue in 2014. We believe that the cash we generate from operations and the availability of funds through our $1.5 million line of credit are adequate to fund these additional investments.

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 GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and judgments. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to the consolidated financial statements.

Our critical accounting policies are identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Discussion of Critical Accounting Policies and Estimates." There were no significant changes to our critical accounting policies during the three orsix months ended June 30, 2014.

Results of Operations - Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 The major components of revenues, cost of revenue, operating expenses, other income (expense), and income tax expense are discussed below.

Three Months Ended June 30, % Change Item 2014 2013 (Year Over Year) (in thousands) (in thousands) Revenues $ 7,240 $ 6,133 18 % Operating Expenses: Cost of Revenues 4,331 3,743 16 % Sales and Marketing 863 839 3 % Research and Development 372 214 74 % General and Administrative 1,213 949 28 %Depreciation and Amortization 238 204 17 % Other Expense: Interest 21 27 (22 )% Foreign Currency 4 4 0 % Income Tax Expense 14 6 133 % Net Income $ 184 $ 147 25 % 17 Revenues Revenues totaled $7,240,000 in the second quarter of 2014 compared to $6,133,000 in the same period in 2013, an increase of 18%. The increase was due to several factors, including the continued acceptance of Transplicity which was launched in late March 2013, the implementation of a strategic account management program, and new customers in the United States. Revenue from international customers was approximately the same in the second quarter of 2014 compared to the same period in 2013. This was mainly a result of revenues from our largest customer, IBM, totaling $1,084,000 in the second quarter of 2014 compared to $1,094,000 in the same period in 2013. In the first quarter of 2014, we experienced a 20% decline in revenue from IBM compared to the first quarter of 2013. At that time we stated that the decline was in accordance with our expectations and that we believed that revenues from IBM for the remaining three quarters of 2014 would be similar to the comparable periods of 2013. This was in fact the case in the second quarter of 2014 and we expect revenue from IBM for the last two quarters of 2014 to be similar to the last two quarters of 2013.

Operating Expenses Cost of Revenues. Cost of revenues in the second quarter of 2014 increased $588,000, or 16%, compared to the same period in 2013. The increase was due to hiring additional staff to service new clients added in late 2013 and an increase in translator costs resulting from the 18% increase in revenue.

Translator costs can vary from quarter to quarter based on the specific language needs of our customers. Cost of revenues were 60% of revenue in the second quarter of 2014 compared to 61% in the same period in 2013. The improvement was due to not having to hire staff at the same rate as our 18% growth in revenue.

This operating efficiency is a result of our continued technology investments in Transplicity.

Sales and Marketing. Sales and marketing expense in the second quarter of 2014 increased $24,000, or 3%, compared to the same period in 2013. For the same periods, as a percentage of revenue, sales and marketing expense was 12% in 2014 compared to 14% in 2013. The increase in dollars was due principally to higher compensation costs. The decrease in percentage was due to modifications to commission plans which included higher revenue quotas for sales personnel.

Research and Development. Research and development expense in the second quarter of 2014 increased $158,000, or 74%, compared to the same period in 2013.

For the same periods, as a percentage of revenue, research and development expense was 5% in 2014 compared to 3% in 2013. The increase in dollars and percentage was primarily due to two factors. First, there were no internal software development costs capitalized in the second quarter of 2014 compared to $94,000 in the same period in 2013. Second, we added additional development staff which resulted in higher compensation costs in 2014. This staff was added to accelerate enhancements to our operating system and to develop features that could make portions of our system licensable to third parties.

General and Administrative. General and administrative expense in the second quarter of 2014 increased $264,000, or 28%, compared to the same period in 2013.

For the same periods, as a percentage of revenue, general and administrative expense was 17% in 2014 compared to 15% in 2013. The principal reason for the increase in dollars and percentage of revenue was due to incentive compensation of $151,000 being earned under the Company's Short-Term Incentive Plan. The Short-Term Incentive Plan was adopted by the board at the beginning of 2014 and rewards all eligible employees when the Company exceeds its pre-determined quarterly financial targets. The remaining increase in dollars was primarily due to increased wages and benefits relating to the addition of personnel, including a Chief Financial Officer in August 2013, and additional stock compensation expense.

Depreciation and Amortization. Depreciation and amortization expense in the second quarter of 2014 increased $34,000, or 17%, compared to the same period in 2013. The increase was a result of higher fixed asset balances.

Interest Expense Interest expense in the second quarter of 2014 decreased by $6,000 compared to the same period in 2013. The decrease was due to the Company having no amounts outstanding under its line of credit during the second quarter of 2014 compared to $400,000 outstanding during the same period in 2013.

18 Income Tax Expense Income tax expense in the second quarter of 2014 increased by $8,000 compared to the same period in 2013. The higher taxes are due to an increase in the Company's taxable activities in China.

Results of Operations - Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 The major components of revenues, cost of revenue, operating expenses and other income (expense) are discussed below.

Six Months Ended June 30, % Change Item 2014 2013 (Year Over Year) (in thousands) (in thousands) Revenues $ 13,394 $ 11,657 15 % Operating Expenses: Cost of Revenues 8,270 7,156 16 % Sales and Marketing 1,637 1,585 3 % Research and Development 832 385 116 % General and Administrative 2,311 1,897 22 % Depreciation and Amortization 479 393 22 % Other Expense: Interest 44 56 (21 )% Foreign Currency 3 3 0 % Income Tax Expense 34 19 79 % Net (Loss) Income $ (216 ) $ 163 Revenues Revenues totaled $13,394,000 in the first six months of 2014 compared to $11,657,000 in the same period in 2013, an increase of 15%. The increase was due to several factors, including the continued acceptance of Transplicity, which was launched in late March 2013, the implementation of a strategic account management program, and new customers in the United States. Offsetting these increases was an 8% decline in international revenue during the first six months of 2014 compared to the same period in 2013. The decrease was due principally to a 10% decline in revenue from our largest customer, IBM. Substantially all of this decline occurred in the first quarter of 2014, and second quarter 2014 revenue from IBM was comparable to the same period a year ago. We expect that revenues from IBM for the last two quarters of 2014 will be similar to thelast two quarters of 2013.

Operating Expenses Cost of Revenues. Cost of revenues in the first six months of 2014 increased $1,114,000, or 16%, compared to the same period in 2013. For the same periods, as a percentage of revenue, cost of revenues was 62% in 2014 compared to 61% in 2013. The increase in dollars and percentage was due to hiring additional staff in the first quarter to service new clients added in late 2013 and to the 15% increase in revenue. Translator costs can vary from period to period based on the specific language needs of our customers.

Sales and Marketing. Sales and marketing expense in the first six months of 2014 increased $52,000, or 3%, compared to the same period in 2013. For the same periods, as a percentage of revenue, sales and marketing expense was 12% in 2014 compared to 14% in 2013. The increase in dollars was due principally to higher compensation costs. The decrease in percentage was due to modifications in the commission plans which included higher revenue quotas for sales personnel.

19 Research and Development. Research and development expense in the first sixmonths of 2014 increased $447,000, or 116%, compared to the same period in 2013.

For the same periods, as a percentage of revenue, research and development expense was 6% in 2014 compared to 3% in 2013. The increase in dollars and percentage are primarily due to two factors. First, there were no internal software development costs capitalized in the first six months of 2014 compared to $242,000 in the same period in 2013. Second, we added additional development staff, which resulted in higher compensation costs and hiring fees in 2014. This staff was added to accelerate enhancements to our operating system and to develop features that could make portions of our system licensable to third parties.

General and Administrative. General and administrative expense in the first six months of 2014 increased $414,000, or 22%, compared to the same period in 2013.

For the same periods, as a percentage of revenue, general and administrative expense was 17% in 2014 compared to 16% in 2013. The principal reason for the increase in dollars and percentage of revenue was due to incentive compensation of $151,000 being earned in the second quarter under the Company's Short-Term Incentive Plan. The Short-Term Incentive Plan was adopted by the board at the beginning of 2014 and rewards all eligible employees when the Company exceeds its pre-determined quarterly financial targets. The remaining increase in dollars were primarily due to increased wages and benefits relating to the addition of personnel, including a Chief Financial Officer in August 2013, additional stock compensation expense and legal expenses related to evaluating potential acquisitions.

Depreciation and Amortization. Depreciation and amortization expense in the first six months of 2014 increased $86,000, or 22%, compared to the same period in 2013. The increase was a result of higher fixed asset balances plus capitalized software projects (principally related to the launch of Transplicity) placed in service in 2013.

Interest Expense Interest expense in the first six months of 2014 decreased by $12,000 compared to the same period in 2013. The decrease was due to the Company having no amounts outstanding under its line of credit during the first six months of 2014 compared to $400,000 outstanding during the first six months of 2013.

Income Tax Expense Income tax expense in the first half of 2014 increased by $15,000 compared to the same period in 2013. The higher taxes are due to an increase in the Company's taxable activities in China.

Non-GAAP Financial Measure - Adjusted EBITDA Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 Net income (loss) $ 184 $ 147 $ (216 ) $ 163 Interest expense 21 27 44 56 Income taxes 14 6 34 19Depreciation and amortization 238 204 479 393 Stock-based compensation 65 51 129 100 Adjusted EBITDA $ 522 $ 435 $ 470 $ 731 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.

20 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.

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