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EX-32 - SAJAN INC | v179100_ex32.htm |
EX-21.1 - SAJAN INC | v179100_ex21-1.htm |
EX-31.1 - SAJAN INC | v179100_ex31-1.htm |
EX-23.2 - SAJAN INC | v179100_ex23-2.htm |
EX-23.1 - SAJAN INC | v179100_ex23-1.htm |
EX-14.1 - SAJAN INC | v179100_ex14-1.htm |
EX-31.2 - SAJAN INC | v179100_ex31-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For
the fiscal year ended December 31, 2009
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period from _______________________ to
___________________
Commission
File Number: 000-51560
Sajan,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
41-1881957
|
(State
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
625
Whitetail Blvd., River Falls, Wisconsin
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54022
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (715) 426-9505
Securities
registered pursuant to Section 12(b) of the Act:
|
||
Title
of Each Class
|
Name
of Each Exchange on which Registered
|
|
None
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.01 par value per share
Preferred
Stock Purchase Rights
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨
Yes x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ¨
Yes x
No
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). ¨
Yes ¨
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer,” large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). ¨
Yes x
No
The
aggregate market value of the outstanding common stock, other than shares held
by persons who may be deemed affiliates of the registrant, as of the last day of
the registrant’s most recently completed second fiscal quarter was approximately
$8,611,024 based on the closing sales price of $1.18 per share as reported on
the pink OTC market. As of March 17, 2010, there were 16,009,331
shares of our common stock, $0.01 par value per share, outstanding.
DOCUMENTS
INCORPORATED IN PART BY REFERENCE
None.
2009
Annual Report on Form 10-K
Table
of Contents
Page
|
||
PART
I
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||
Item
1.
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Business
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2
|
Item
1A.
|
Risk
Factors
|
10
|
Item
1B.
|
Unresolved
Staff Comments
|
19
|
Item
2.
|
Properties
|
19
|
Item
3.
|
Legal
Proceedings
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20
|
Item
4.
|
Reserved
|
21
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PART
II
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
22
|
Item
6.
|
Selected
Financial Data
|
22
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
Item
8.
|
Financial
Statements and Supplementary Data
|
28
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
53
|
Item
9A.
|
Controls
and Procedures
|
54
|
Item
9B.
|
Other
Information
|
57
|
PART
III
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
58
|
Item
11.
|
Executive
Compensation
|
61
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
66
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
69
|
Item
14.
|
Principal
Accountant Fees and Services
|
69
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PART
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
71
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Signatures
|
74
|
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K 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 Annual Report on Form 10-K, 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., its
subsidiaries or its management identify forward-looking statements.
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 the management of Sajan, Inc. with respect to future events and are
subject to risks, uncertainties, assumptions and other factors (including the
risks contained in the section of this Annual Report on Form 10-K entitled “Risk
Factors”) relating to Sajan, Inc.’s industry, its operations and results of
operations, and any businesses that may be acquired by it. These factors
include:
|
·
|
rate
of growth in the global multi-lingual content delivery industry,
especially for software-as-a-service solutions within this
industry;
|
|
·
|
changes
in the utilization of our software and services by our
customers;
|
|
·
|
lack
of acceptance of any existing or new solutions we
offer;
|
|
·
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our
ability to continue increasing the number of our customers or the revenues
we derive from our recurring revenue
customers;
|
|
·
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continued
economic weakness and constrained globalization spending by businesses
operating in international markets;
|
|
·
|
our
ability to effectively develop new solutions that compete effectively with
the solutions that our current and future competitors
offer;
|
|
·
|
risk
of increased regulation of the Internet and business conducted via the
Internet;
|
|
·
|
our
ability to identify attractive acquisition opportunities, successfully
negotiate acquisition terms and effectively integrate any acquired
companies or businesses;
|
|
·
|
our
ability to effectively manage our
growth;
|
|
·
|
availability
capital on acceptable terms to finance our continued
growth;
|
|
·
|
risks
of conducting international commerce, including foreign currency exchange
rate fluctuations, changes in government policies or regulations, longer
payment cycles, trade restrictions, economic or political instability in
foreign countries where we may increase our business and reduced
protection of our intellectual
property;
|
|
·
|
our
ability to add sales and marketing, research and development or other key
personnel who are able to successfully sell or develop our
solutions;
|
|
·
|
our
ability to operate as a public company and comply with applicable
disclosure and other requirements and to hire additional personnel with
public company compliance
experience; and
|
|
·
|
other
risk factors included under “Risk Factors” in this Annual Report on Form
10-K.
|
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 the management of Sajan, Inc. 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, Inc.
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 and the pro
forma financial information included in this Annual Report on Form
10-K.
1
PART
I
ITEM
1. BUSINESS
An Important Note
on Language:
|
·
|
Throughout this Annual Report on
Form 10-K, unless specifically noted or the context otherwise requires,
references to the “Company”, “we”, “our” and “Sajan” are references to
Sajan, Inc., a Delaware corporation, and its direct and indirect
subsidiaries on a post-Merger basis and referenced to “MathStar, Inc. or
“MathStar” are to MathStar, Inc., a Delaware company on a pre-Merger
basis.
|
·
|
The consolidated financial
statements and accompanying notes to the consolidated financial statements
refer to MathStar, Inc. on a pre-Merger
basis.
|
General
Overview
Upon
effectiveness of the Merger, we provide, under the SajanTM name,
on-demand language translation solutions to customers selling products into
global markets. These customers use our solutions to translate product manuals,
instructions, warnings, and other product information into numerous languages.
We combine our internally developed proprietary technology and high quality
translation services to provide language translation solutions that are fast,
reliable, and user-friendly. By utilizing an integrated technology and a
service-based approach to language translation, we offer a comprehensive
solutions that allow customers to rely upon a single provider to meet all of
their language translation needs. Our hosted technology system delivers a secure
online solution that can be offered on a modular basis, which makes it
attractive in both small business settings and in large enterprise
environments.
We offer
our customers the ability to utilize our solutions under three different
models:
|
·
|
Technology
Enabled Service Model: we provide all of the customer’s language
translation requirements;
|
|
·
|
Managed
Service Model: customers use our technology and operations staff to manage
translators; and
|
|
·
|
Licensed
Software Model: a technology-only solution that is independently operated
by our customers.
|
Our
solutions are used to manage the end-to-end process of content globalization,
which is the project, process and delivery management of content translated and
localized into multiple languages across the enterprise. Content is localized
across the enterprise for a wide variety of high value-added purposes and uses,
most notably, product sales and marketing, packaging, user manuals, technical
support and training, as well as internal requirements.
Our
corporate offices are located in River Falls, Wisconsin, which is located
approximately 30 miles east of Minneapolis, Minnesota. Our River Falls corporate
offices contain our core Global Language Service operations, our administrative,
product management, marketing, sales, and professional services functions. Our
offices are located at 625 Whitetail Blvd., River Falls, Wisconsin 54022, and
our telephone number is (715) 426-9505.
In 2009,
we established Sajan Software Ltd (“Sajan Software”), which is a wholly-owned
subsidiary based in Dublin, Ireland. This facility serves as our global research
and development center and as headquarters for our product business. Our
leadership team for Sajan Software consists of our Chief Marketing Officer/Sajan
Software President, based at the corporate facility in the United States and
responsible for our product function, and our General Manager – Europe, based at
our location in Ireland and responsible for managing our language
services. Sajan-India Software Private Limited (“Sajan-India”), a
majority-owned subsidiary of Sajan Software based in New Delhi, India, houses
our development center at which we conduct substantially all of our software
development activities. Sajan-India is a majority-owned subsidiary of Sajan
Software.
Reverse
Merger Transaction
General. Pursuant
to an Agreement and Plan of Merger dated January 8, 2010 (the “Merger
Agreement”), by and among MathStar, Inc., (“MathStar”) a Delaware corporation,
and Sajan, Inc. a privately held Minnesota corporation whose business was
providing language translation technology and service; Garuda Acquisition, LLC,
a wholly-owned subsidiary of MathStar, now known as Sajan, LLC; and Thomas
Magne, solely in his capacity as agent for the holders of common stock of
pre-Merger Sajan, Inc. Under the terms of the Merger Agreement,
pre-Merger Sajan, Inc. was merged with and into Sajan, LLC, which was formerly
known as Garuda Acquisition, LLC (the “Merger”) and became a wholly-owned
subsidiary of MathStar. The Merger was closed and effective on
February 23, 2010.
2
Terms. Under the
terms of the Merger Agreement, the total consideration paid by MathStar in the
Merger to the former holders of common stock of Sajan, Inc. consisted
of:
|
·
|
approximately
$6.1 million in cash (the “Cash Merger Consideration”) with approximately
$5.1 million paid to the former stockholders of pre-Merger Sajan, Inc. at
closing and the remaining $1.0 million placed in an escrow account to be
held for 12 months to secure the indemnification obligations of Sajan, LLC
and the former stockholders of Sajan, Inc. to MathStar with respect to the
matters described in the Merger
Agreement;
|
|
·
|
6,827,834
shares of common stock of MathStar;
and
|
|
·
|
to
certain former stockholders who collectively owned a majority of the
outstanding common stock of pre-Merger Sajan, Inc., a promissory note in
the aggregate principal amount of $1
million.
|
Immediately
after the closing of the Merger, the former stockholders of pre-Merger Sajan,
Inc. owned approximately 43% of the outstanding shares of MathStar common
stock.
The
material terms of the Merger are described in more detail in the Current Report
on Form 8-K, filed with the Securities and Exchange Commission on February 24,
2010.
Approval. The
Merger was consummated under Delaware law and pursuant to the Merger Agreement.
Under Delaware law, MathStar was not required to obtain the approval of its
stockholders to complete the Merger because the constituent corporations in the
Merger were Garuda Acquisition, LLC (a wholly-owned subsidiary of MathStar now
known as Sajan, LLC) and pre-Merger Sajan, Inc. MathStar was not a constituent
corporation in the Merger. The Merger and the Merger Agreement were approved by
the MathStar board of directors and by MathStar as the sole member of Garuda
Acquisition, LLC. In addition, the Merger and the Merger Agreement were approved
by the holders of the requisite number of shares of common stock of Sajan, Inc.
at a special meeting of stockholders held on February 8, 2010.
Accounting
Treatment. As a result of the Merger, Sajan, LLC became a
wholly-owned subsidiary of MathStar, with the former stockholders of pre-Merger
Sajan, Inc. acquiring a number of shares of MathStar common stock representing
approximately 43% of MathStar’s outstanding shares immediately after the
Effective Date (the “Effective Date”). For accounting purposes, the Merger is
being accounted for as a reverse merger, which means pre-Merger Sajan, Inc. will
be deemed to have acquired MathStar. This accounting treatment was required
because after the Effective Date:
|
·
|
the
former stockholders of pre-Merger Sajan, Inc. own a large minority
interest in MathStar;
|
|
·
|
the
former members of the board of directors of pre-Merger Sajan, Inc.
constitute a majority of the members of the board of directors of
MathStar; and
|
|
·
|
the
members of MathStar’s management team consists entirely of the former
members of the management team of pre-Merger Sajan,
Inc.
|
Appointment of New Directors and
Executive Officers. On the Effective Date, and as provided in the Merger
Agreement, Merrill A. McPeak resigned as a member of the board of directors and
from all board committees of MathStar, and Alexander H. Danzberger, Jr. resigned
as Chief Executive Officer, Chief Financial Officer and Secretary of
MathStar.
On the
Effective Date, Benno G. Sand and Richard C. Perkins, as the remaining members
of the board of directors of MathStar, appointed Shannon Zimmerman, Angel
Zimmerman, Vern Hanzlik, Michael W. Rogers and Kris Tufto as members of the
board of directors of MathStar. In addition, they appointed Mr. Zimmerman as
MathStar’s President, Chief Executive Officer, Interim Chief Financial Officer
and Chairman; Ms. Zimmerman as Chief Operating Officer; Mr. Hanzlik as Chief
Marketing Officer; and Peter Shutte as Vice President of Worldwide
Sales.
Lock Up
Agreements. Immediately after the Merger, our Company had
16,009,331 shares of common stock outstanding, and former stockholders of
pre-Merger Sajan, Inc. owned a total of 6,827,834 shares of our common stock, or
approximately 42.6% of the shares outstanding. In connection with the
Merger, holders of 6,610,398 shares of our common stock signed lock-up
agreements (the “Lock-Up Agreements”) under which they agreed for a period of 12
months (for members of management of pre-Merger Sajan, Inc.) and six months (for
non-management shareholders) not to offer, sell or otherwise dispose of any of
their shares of MathStar common stock or options or warrants they hold to
acquire MathStar common stock. The form of the Lock-Up Agreement is filed
as Exhibit 10.16 to our Current Report on Form 8-K, filed with the Securities
and Exchange Commission (the “SEC”) on February 24, 2010, and which contains the
material terms of the Merger.
3
This
transaction is referred to throughout this report as the “Merger.”
Background
on MathStar
History. MathStar
was incorporated under Minnesota law in April 1997, and was reincorporated under
Delaware law on June 14, 2005. During the three months ended June 30,
2008, MathStar curtailed its operations as its board of directors evaluated
strategic alternatives, including, but not limited to, restarting the company,
merging with or acquiring another company, increasing operations in another
structure, or liquidation. Until it curtailed operations, MathStar
was a fabless semiconductor company engaged in the development, marketing and
selling of its high-performance, programmable platform field programmable object
array, or FPOA, chips and design tools required to program its
chips. Immediately before the date of the Merger, MathStar was a
“shell company”, as defined in Rule 12b-2 under the Securities and Exchange Act
of 1934, as amended, having no or nominal operations, and assets consisting
solely cash and cash equivalents.
Intellectual
Property. MathStar developed certain intellectual property
(primarily input/output blocks) for the production version of their FPOA chip,
fully depreciated on the date of the Merger. In addition, MathStar entered into
certain agreements to purchase previously developed intellectual property to
facilitate moving future FPOA chips to market more quickly and
economically. In addition to the software intellectual property,
MathStar had been granted two United States patents: (1) a patent granted in
November 2004 which expires in 2024, and (2) a patent granted in February 2006
which expires in 2026. MathStar also had six pending patent applications on file
with the United States Patent and Trademark Office, or USPTO. Finally, MathStar
had registered their MathStar, FPOA and ARRIX trademarks with the
USPTO and held their MathStar.com domain
name.
Prior to
the Merger, MathStar engaged a third-party investment banking firm to explore
the sale of its intellectual property and patents. We are
contemplating an independent valuation of MathStar’s intellectual
property. Depending on the valuation results, if obtained, we may
pursue similar sale opportunities.
Recent
Developments
Preferred Stock Purchase
Rights. On February 25, 2010, MathStar, Inc., entered into the
Tax Benefit Preservation Plan and Rights Agreement (the “Plan”) with Wells Fargo
Shareowner Services, a division of Wells Fargo Bank, National Association, as
Rights Agent. The Company’s board of directors adopted the Plan in an effort to
protect against a possible limitation on the ability to use its net operating
losses under the Internal Revenue Code of 1986, as amended (the “Code”), and
rules promulgated by the Internal Revenue Service. Under the Plan,
beginning March 12, 2010, for each share of the Company’s common stock held, the
holder of the common stock has the right to purchase one one-millionth of a
share of a new series of preferred stock of the Company.
Name Change: On February 26,
2010, the corporate name was changed from MathStar, Inc. to Sajan,
Inc. We will continue to provide language translation technology and
services under the Sajan name. We will also continue to trade on the
Pink OTC markets under the symbol “MATH.PK” until a new symbol becomes
effective.
Reincorporation: Before the
Merger, Sajan, Inc. was a Minnesota corporation. By merging into Sajan, LLC,
which is a wholly-owned subsidiary of MathStar, with Sajan, LLC as the surviving
company, Sajan, Inc. became a Delaware limited liability company. In addition,
in the Merger, the former stockholders of Sajan, Inc. were issued shares of
common stock of MathStar and thus became stockholders of a Delaware
corporation.
Products
and Services
Our
on-demand language translation solution incorporates an innovative technology
product that serves as a single platform to meet the needs of the smallest user
to the largest enterprise customer. The solution is a hosted platform and
requires no installed software. It is typically delivered as a software as a
service (SaaS) model. We combine both language translation services and our own
proprietary technology to give customers a single source solution to meet all of
their translation needs. In addition, some components of our solution may be
offered in a desktop version for off-line operation. The solution integrates
people, processes and data into a service and technology solution that is
designed to deliver measurable value in the form of cost reduction, reduced
production time, improved quality and integrated version control and audit
trail.
4
GCMS. Our Global
Communication Management System (“GCMS”) is our web-based technology platform.
We released version 5.0 of GCMS in October 2009. Our GCMS platform is an
integrated, fully SaaS-enabled solution suite that provides the tools to
authors, linguists, graphic artists, project operations and publishing staff
needed to automate the project cycle for content localization from creation to
delivery and to leverage enterprise translation memory (“TM”). Translation
services are traditionally delivered on a per word cost basis, with ancillary
fees for related services such as pre-and post-production content lay-out and TM
integration. TM is the repository of past translation work which, in the case of
GCMS, is parsed and stored contextually in a readily accessible data environment
using proprietary algorithms that attempts to match current content with past
translations. Properly optimized, the re-use of past translations from TM can
significantly reduce operating costs and is an asset that is often
under-utilized within the enterprise due to a lack of technology investment,
fragmented responsibility of TM across the enterprise, fragmented service
providers, or a lack of awareness of the economic value of TM. Our business
model and strategy are focused on providing services and technologies to remedy
such situations and facilitate enterprise customers’ optimization of TM. Our
solutions increase worker productivity, accelerate critical time-to-market for
customers, enhance the quality of globalized enterprise content, increase
operational efficiency and reduce operating costs.
GCMS
encapsulates a multilingual content repository, with built-in parsing technology
that maintains language segment context. Retention of language context is, we
believe, unique to our solutions and valuable for improving re-use of translated
content. GCMS also offers a workflow component that streamlines the language
translation process. Our solution comes standard with built-in version control
and audit trail, which is often well-suited for businesses in highly-regulated
industries, such as life sciences companies complying with requirements imposed
by the United States Food and Drug Administration. The GCMS is designed to be a
modular, secure, online solution that is appropriate for any business
environment. The application is an Internet-based development and computer
technology, commonly referred to as “cloud computing,” that provides high
availability and reliability to worldwide customers. In addition, we provide
business analytics directly to customers through our system. Using web services,
system features can be integrated to other business systems.
Technological
Features. We have developed a number of tools that are
designed to create value throughout the language translation process,
particularly in the pre-translation process of authoring or content creation.
Authoring Coach™ is a desktop tool, sold individually to any source content
producer, using a Windows™ based editor. It presents similar or like phrases,
sentences or paragraphs to the creator and enables the creator to draw from
previously translated content. The result is information that is more consistent
and reduces the need for new translation. In addition, we developed our TMate™
search technology to enhance intelligent multilingual search. TMate™ is our
proprietary advanced multilingual search algorithm.
Process. Utilizing
the GCMS platform, human translators who provide translation services to us are
first systematically ranked and qualified to ensure that a high-quality language
resource is performing translation on a particular project. Incorporating
pre-translation processes, such as Authoring Coach and advanced search using
TMate™, further differentiates the platform and we believe provides greater
price and value differentiation. We believe our technological advances, detailed
process methodology, and ISO 9000 practices result in reduced costs while
delivering a higher value to the customer. This method offers a blend of both
service and technology. Customers may sign in online, request translation of new
content, view the status of pending projects, and obtain completed projects. All
content is stored at a granular level, referred to as a segment, with language
context retained, and each translated segment is stored indefinitely. This
capability allows us to offer audit trail and version control, which are useful
to regulated businesses operating in industries where compliance is important.
An illustration of the content translation lifecycle is provided
below.
5
GCMS
Advantages. By utilizing a language management platform such
as GCMS, we believe that customers are able to reduce the time-to-market for
their products. The platform also enables enterprises to simultaneously launch
products into all markets, which can result in more rapid revenue growth and a
competitive advantage. The GCMS platform has been designed to ensure improved
quality of multilingual content. GCMS uses a patent pending component called
Context Intelligence™, which increases the contextual accuracy of re-used
multilingual content. For customers whose content accuracy and contextual
sensitivity is vital, the GCMS platform offers an attractive solution to these
problems. In 2008, our technology was ranked as the top language translation
technology by Common Sense Advisory in its report, “Translation Management
Systems, Assessments of Commercial and LSP-Specific TMS Offerings.”
We have a
patent pending on a number of components that make up the GCMS platform.
Specifically, the structure in which both source and target content is stored
results in a logical and contextually accurate placement of content. This means
that the content becomes more intelligent and can be used in ways that are more
meaningful for future language translation services.
ISO Certified. According to
leading industry analysts, approximately 10% of suppliers in this market claim
ISO certification. The certification requires significant investment of time and
money. The benefits to clients are the assurance of quality controls and defined
business structure. We received our ISO 9001:2000 certification in 2005, and are
currently ISO 9001:2008 certified.
Market
Description
Language
is often a barrier in global commerce. The demand for effective language
translation continues to grow. The industry has historically been very service
centric, but, as is the case in many service industries, price pressures and
other market demands impose the need for innovation and new solution
paradigms.
Language
translation services, although often treated like a commodity service, have
historically been expensive, labor intensive and relatively slow in delivery.
Human translators can typically translate 2,500 words per day on average,
although this varies based on the complexity of the subject matter. This creates
constraints on the available supply of translation services and, when positioned
against growing demand, we believe will provide translation technology
innovators with an advantage. As a result, based on the rising demand for
translation services and the looming shortage of human translators worldwide, we
expect a favorable pricing environment for Language Service Providers (LSPs) in
the coming years.
Global
economic challenges have created opportunities. As the U.S. Dollar declines
against foreign currency, this influences United States business executives to
seek revenue from foreign markets. We believe recent negative worldwide economic
conditions have hastened the trend towards globalization.
6
We
believe the shortage in human translators cast against a rising demand will
result in increased opportunities for companies that offer technology-based
solutions and improve the efficiency of language translation services. To
compete effectively, language translation companies need to obtain translation
in an accurate, timely, and cost effective manner. With advances in content
management and the growth of the Internet, providers will also need to integrate
their multilingual content with other enterprise systems to establish a cohesive
single repository of all global content. Content is no longer monolingual
content; it is multilingual. Industry analysts and general business analysts
have indicated that a more integrated solution, often referred to as the Global
Content Lifecycle, will be required to be successful in the future for both
global enterprises and for the LSPs that support them. As a result, language
translation is no longer likely to be treated as an afterthought in the
globalization process, but rather as an integral part of an enterprise system.
Further, as the annual spending by multinational companies for language
translation solutions accelerates over the next several years, we believe a more
technology-based solution will be required to keep pace with the rate of growth
in the amount of content and increasingly sophisticated content management
solutions.
Based on
the current globalization and language translation market dependence upon
non-technology oriented, small language translation firms (see chart below), we
believe that vendors who provide both language translation capabilities and
offer a strong technology platform will enjoy a competitive
advantage.
Market Revenues. Research
completed by Common Sense Advisory (“CSA”) confirms an opportune, growing market
According to CSA’s research, global language services market to reach $25
billion by 2013 (“Ranking of
Top 30 Language Services Companies”), nearly 90% of companies
outsource some or all of their translation and localization work (“Localization Vendor
Management”), and 67% of language buyers
say that a vendor’s automation capabilities are important (“Translation Management
Technology”).
The global
multi-lingual content delivery market is very fragmented. The combined
revenues of the world’s top 30 translation firms account for less than 27% of
the overall market, and most are service-only agencies. If ranked by revenue,
the top 30 language service providers worldwide would account for approximately
$3.8 billion of the $15 billion possible overall market in 2009. From the top
position to the 30th position, revenue ranges from $461 million to $20
million.
The
breakdown of LSPs in 2008, as outlined in the table below, reveals that small
providers constitute a very large portion of this market.
(CSA) Generally, these providers have little to offer in the way of
technology or value added services.
Revenue
|
Number of LSPs
|
|
Less
than $1 million
|
6,380
|
|
$1
million-$5 million
|
391
|
|
$5
million-$10 million
|
64
|
|
$10-$50
million
|
42
|
|
$50
million-$500 million
|
8
|
Market
Size. According to Common Sense Advisory, the worldwide global
multi-lingual content delivery market in 2009 was $15 billion and is
expected to grow to $22.5 billion by 2012 and $25 billion by 2013 (“Ranking of Top 30 Language Services
Companies”).
This equates into a 10.76% compound annual growth rate over the five-year
period. Human translation services account for over 90% of the global
translation market and are generally delivered through a network of freelance
linguists that freely associate among the LSPs on a per job
basis. Nearly 90% of companies outsource some or all of their
translation and localization work (“Localization Vendor
Management”), and 67% of language buyers
say that a vendor’s automation capabilities are important (“Translation Management
Technology”).
Region
|
Market
Share (%)
|
2009
US$
Millions
|
2010
US$
Millions
|
2011
US$
Millions
|
2012
US$
Millions
|
2013
US$
Millions
|
||||||||||||||||||
Europe
|
43 | 6,468 | 7,331 | 8,409 | 9,703 | 10,781 | ||||||||||||||||||
United
States
|
40 | 6,074 | 6,884 | 7,896 | 9,111 | 10,123 | ||||||||||||||||||
Asia
|
12 | 1,735 | 1,965 | 2,255 | 2,601 | 2,891 | ||||||||||||||||||
ROW
|
5 | 722 | 818 | 939 | 1,083 | 1,203 | ||||||||||||||||||
Growth
Totals
|
100 | % | 15,000 | 17,000 | 19,500 | 22,500 | 25,000 |
Source: Projected Language Services Revenues
for 2009-2013 in U.S. Millions of Dollars, Common Sense Advisory,
Inc.
7
The
ability of a traditional LSP to compete is growing more challenging. While
demand for the service may be rising, which should allow for price increases,
the buyers currently are demanding that providers hold or reduce prices. Without
technological differentiation, a traditional LSP will continue to operate at a
severe disadvantage, not only in its ability to manage the delivered cost, but
also to integrate and interoperate with technologies used by its clients such as
content management systems and other enterprise class business
systems.
Key Market Trends and
Influences. Several distinct trends and influences within the
global multi-lingual content delivery market have emerged, and we believe they
will provide significant opportunities for market innovation. The underlying
motivators for many of these include historic objectives such as cost reduction,
quality improvement and faster cycle time. However, new factors are rapidly
becoming apparent, such as revenue growth derived from foreign market
penetration, improving global customer experience and brand support
worldwide.
Competition
The
global multi-lingual content delivery market is highly competitive and
highly-fragmented with numerous existing competitors. We believe the principal
competitive factors in providing language translation solutions include the
ability to provide a comprehensive solution to customers; infrastructure that
supports cost effective and high quality delivery to customers; project
management expertise; quality and speed of service delivery; and corporate
reputation. We believe that we have competed favorably with respect to these
factors and have developed a strong reputation in our industry.
While
many potential customers utilize internal resources to address their translation
and localization requirements, we believe our primary competition is external
and within our industry. Competitors within our industry are
categorized into three primary segments: Language Service Providers, Technology
Only Providers, and Technology-Enabled Service Providers.
Language Service
Providers. The largest segment is comprised of competitors
that offer only human language translation services and make limited use of
technology on either an internal basis or as part of their solution. These
service vendors are abundant due to low barriers to entry and often have only a
small number of key, ongoing relationships. These providers make up the largest
segment of the translation market and account for approximately 75% of the
number of industry participants. The challenge for these providers is that they
have little that differentiates them from other providers, with no technology
and often unproven processes and quality controls. We believe that such firms
offer an opportunity to increase our scale, gain access to critical linguistic
skills and also open new geographic markets. We believe providing our
technologies and business processes to these organizations will solidify their
account base and enhance their margins.
Technology Only
Providers. The second segment consists of pure technology
providers. This group is a disparate collection of point solution and suite
providers to enterprises for handling their own translation requirements. These
technology solutions handle a wide range of requirements and leave much to the
customers to do on their own to integrate and operate across multiple
applications. Examples of competitive technology only companies are SDL Plc
(SDL), Across Systems GmbH, Kilgray Translation Technologies, LingoTek, Inc.,
Atril and Wordfast LLC.
Within
the category of technology only provider, there are two subsets. One subset
consists of providers that serve the translator market most often with what is
referred to as Translation Memory tools (a data management application). Often
these are inexpensive productivity tools used by translators or small language
service providers. The second subset are those technology providers that serve
corporate enterprises. These providers operate beyond data management and
include business process and analytics. These systems are often referred to as
Translation Management Systems (TMS). Technology providers as a whole represent
a very small portion of market participants. There has been a trend among the
technology solution providers towards new, more nimble entrants embracing SaaS
architecture over the more traditional enterprise software model.
Technology-Enabled Service
Providers. The third segment consists of companies like us
that combine both language translation services and comprehensive technology
solutions, often referred to as Technology-Enabled Service Providers. The
largest such company is publicly-held Lionbridge Technologies, Inc.
(“Lionbridge”), with 2008 revenues of $461 million. There is only a small number
of Technology-Enabled Service Providers. Within this group, based on the 2008
Common Sense Advisory report, we enjoy the highest ranking for our technology
offering, and we believe it is the only fully featured, fully SaaS-enabled
technology platform available.
8
We
believe that only two of the largest LSPs - SDL and Lionbridge - provide
legitimate technology offerings. Each takes a very different technological
approach. SDL has acquired many technology companies, both directly relating to
the global multi-lingual content delivery industry and others that are
peripheral to the industry. We believe that this has alienated SDL from some
buyers and partners, as SDL directly competes with them. Lionbridge promotes a
SaaS solution. This solution utilizes a legacy technology product called
LogoportTM, which
was originally designed as a Translation Memory solution. Lionbridge has
incorporated some web interfaces to this product.
We
believe the remaining LSPs, while potentially competent in the delivery of
language translation service, do not possess significant technology. If they do,
they are likely to be using Translation Memory tools to achieve some level of
content reuse so as to enable them to make some technological value
claim.
Marketing
and Sales
Substantially
all of our revenues have been generated through our internal direct sales force
and the efforts of our senior management team. As of March 15, 2010, we had 15
direct sales professionals in the United States and Europe.
Our sales
force has developed relationships with an increasing number of customers. Our
sales approach involves planning for a customer organization’s unique ongoing
requirements, including future versions of products, and ongoing support,
maintenance, and training, related to both technology products and content. A
significant focus of our near-term sales effort is to expand the breadth of
services and solutions we offer to customers and to gain a larger portion of
their language translation business.
Customers
All of
our customers sell products outside the United States and require content such
as warnings, instructions, directions, and other information to be translated
into a number of languages. Our customers are predominantly Fortune 1000
companies in the technology, medical, industrial, and manufacturing sectors.
Most of our customers are located in the United States, with a high
concentration located in the Midwest region. We anticipate that the percentage
of our customers located outside of the United States will increase as we expand
our sales efforts and Sajan Software hires additional sales
personnel.
Major
Customers
All of
our customers sell products outside the United States and require content such
as warnings, instructions, directions, and other information to be translated
into a number of languages. Our customers are predominantly Fortune 1000
companies in the technology, medical, industrial, and manufacturing sectors.
Most of our customers are located in the United States, with a high
concentration located in the Midwest region. We anticipate that the percentage
of our customers located outside of the United States will increase as we expand
our sales efforts and Sajan Software hires additional sales
personnel.
We derive
a significant portion of our revenues from a limited number of customers. For
the year ended December 31, 2009, our largest customer accounted for
approximately 14% of our revenue, and our ten largest customers accounted for
approximately 65% of our revenue.
Geographic
Areas of Operations
As an
international organization, we generate revenues worldwide. During
the year ended December 31, 2009, 83% of our revenues were generated within the
United States and 17% were generated internationally. Currently, our
largest international market is Spain, which accounted for 72% of our
international revenues.
Intellectual
Property
The
development, utilization and protection of technology is an important component
of our overall operating strategy. We have filed a patent application with the
U.S. Patent and Trademark Office covering aspects of our GCMS solution. We have
not filed any applications for patent protection in any country other than the
United States. As a result, we do not and will not have the right to enforce our
rights under any United States patent, if issued to us, in any foreign country,
or to prevent others in foreign countries from utilizing our proprietary
technology covered by that patent. We may apply for patent protection on our
future technology developments to the extent we believe such protection is
available and economically warranted. Despite these efforts, others could
independently develop technology that is similar to our technology, or offer or
sell products or services in foreign countries that use our
technology.
We have
registered and use domain names sajan.com, authoringcoach.com, and
sajansoftware.com. We use, or intend to use, and claim rights to
various trade names and trademarks to identify our language translation services
and products. We have obtained a registered U.S. mark for the Sajan logo. We
also use and claim rights to the “Sajan™”, “GCMS™”, “X-Content
Integration™”, “TMate™”, “Context Intelligence™” and “Authoring Coach™”
marks.
9
We intend
to protect our intellectual property to the extent such protection is warranted.
In addition to efforts to obtain patent and trademark rights, we rely on a
combination of trade secret, license, nondisclosure and other contractual
agreements and copyright laws to protect our intellectual property rights.
Existing trade secret and copyright laws afford us only limited protection. We
enter into confidentiality agreements with our employees and contractors, and
limit access to and distribution of our proprietary information. These
arrangements may not be adequate to deter misappropriation of our proprietary
information and we may not be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights.
Research
and Development
During
the years ended December 31, 2008 and 2009, we spent approximately $402,000 and
$595,000 on research and development, representing approximately 3.8% and 4.7%
of our total revenue, respectively. Research and development costs include
expenses related to software projects that we intend to sell or market where
technological feasibility has not been established. Research and development
expenses consist primarily of wages and benefits for product strategy and
development personnel. We have focused our research and development efforts more
recently on the commercialization of the GCMS platform and its component modules
for general release and independent use by participants in the content
globalization process and for the ability to host GCMS using cloud computing
methodologies. Functional development has continued in parallel on improving
ease of use, functionality, scalability and efficiency of TM
processing.
Our
research and development primarily occurs in the United States, India and
Ireland. We expect that on an annual basis, the dollar amount of research and
development expenses will increase as we continue to enhance and expand our
product offerings, but decrease as a percentage of revenues, as we anticipate
that our revenues will grow at a faster rate than the growth of research and
development spending.
Employees
As of
March 15, 2010, we had 75 full-time employees and one part-time employee. Our
employees include software development engineers, project managers, language
specialists, and graphic designers, as well as sales and marketing, quality
assurance and administrative team members. We have approximately 60 employees in
our River Falls, Wisconsin office, five employees in our Dublin, Ireland office,
and 10 employees in our New Delhi, India office. None of our employees is
covered by a collective bargaining agreement. We consider our relationship with
our employees to be good. In addition, we utilize the services of approximately
3,500 human translators, all of whom are independent contractors, and
utilize consultants to perform short-term project-based services, which is a
more cost-effective strategy than hiring additional full-time
employees.
Corporate
Information
General
Our
principal offices are located at 625 Whitetail Boulevard, River Falls, Wisconsin
54022. Our telephone number is (715) 426-9505.
The
Company’s fiscal year runs from January 1 through December
31. Neither the Company nor any of its predecessors have been in
bankruptcy, receivership or any similar proceeding.
ITEM
1A RISK FACTORS
You
should consider the following risk factors, in addition to the other information
presented or incorporated by reference into this Annual Report on Form 10-K, in
evaluating our business and your investment in us.
The
Company’s common stock involves a high degree of risk. Investors and potential
investors should carefully consider the following risk factors, together with
all of the other information included in this report, before making investment
decisions about shares of our common stock. The risks and uncertainties
described below are not the only risks and uncertainties facing the Company in
the future. Additional risks and uncertainties not presently known or that are
currently considered to be immaterial may also materially and adversely affect
the Company’s business operations or the stock price of the Company’s common
stock. If any of the following risks or uncertainties occurs, the Company’s
business, financial condition, operating results and future growth prospects
could materially suffer. In that event, the trading price of your securities
could decline, and you may lose all or part of your investment.
|
An
Important Note on Language: The risk factors sections
presented below refer to Sajan, Inc. on a post-Merger basis and unless
otherwise identified, financial information refers to pre-Merger Sajan,
Inc.
|
10
Risk
Related to Our Business and Industry
Our
past results may not be indicative of future results, and, therefore, we may be
unable to continue to grow at our historical growth rates.
Sajan,
Inc. began selling language translation services utilizing its proprietary
technology in 2002 and generated only nominal revenues during that year. From
2003 to 2009, however, revenue increased more rapidly. The annual revenues of
Sajan, Inc. for the year ended December 31, 2008 were approximately $10.7
million and increased to $12.7 million in the year ended December 31, 2009.
Increasing revenues by growing our business operation under the Sajan name is a
key component of our strategy. These expansion plans have placed and may
continue to place significant demands on our management and operational
resources. You should not consider recent revenue growth as indicative of our
future performance. In fact, in future periods, we may not have any revenue
growth, or our revenues could decline.
We
do not have long-term contracts with our customers who provide us with recurring
revenue, and our success will depend on our ability to maintain a high level of
customer satisfaction and a strong reputation in the global multi-lingual
content delivery industry.
Our
contracts with our customers who provide us with recurring revenue typically
allow the customer to cancel the contract for any reason with 30 days’
prior notice to us. Our continued success therefore depends significantly on our
ability to meet or exceed the expectations of these customers because
most of such customers do not make long-term commitments to use our solutions.
In addition, if our reputation in the global multi-lingual content delivery
industry is harmed or diminished for any reason, this may cause our recurring
revenue customers to terminate their relationships with us on short notice and
seek alternative globalization and translation solutions. If a significant
number of recurring revenue customers terminate their relationships with us, our
business, results of operations and financial condition would be adversely
affected in a short period of time.
We
rely on a limited number of customers, and the loss of or reduction in revenue
from a major customer could negatively affect our business, financial condition
and operations.
Sajan
derives a significant portion of our revenues from a limited number of large
customers. For the year ended December 31, 2009, our largest customer accounted
for approximately 14% of our revenue, and our ten largest customers accounted
for approximately 65% of our revenue. As a result of the concentration of our
revenue to a limited number of customers, we have experienced fluctuations in
collection of our revenues. The loss of any major customer or a significant
reduction in a large customer’s use of our language translation solutions could
materially reduce our revenue and cash flow and adversely affect our business,
financial condition and operations.
Continued
economic weakness and uncertainty could adversely affect our revenue, lengthen
our sales cycle and make it difficult for us to forecast operating results
accurately.
Our
revenues depend significantly on general economic conditions and the health of
large companies that sell products internationally. Economic weakness and
constrained globalization spending adversely affected our revenue growth rates
in 2009, and similar and continuing circumstances may result in slower growth or
reductions in our revenues and gross profits in the future. We have experienced,
and may experience in the future, reduced spending in our business due to the
current financial turmoil affecting the U.S. and global economy and other
macroeconomic factors affecting spending behavior. Uncertainty about future
economic conditions makes it difficult for us to forecast operating results and
to make decisions about future investments. In addition, economic conditions or
uncertainty may cause current and potential customers to reduce or delay
globalization expenditures, including purchases of our solutions. Our sales
cycle may lengthen if purchasing decisions are delayed as a result of uncertain
information technology or contracted development budgets or if contract
negotiations become more protracted or difficult as customers institute
additional internal approvals for globalization and information technology
purchases. Delays or reductions in globalization and information technology
spending could have a material adverse effect on demand for our software and
services, and consequently on our business, financial condition and results of
operations.
11
If
we are unable to attract new customers or sell additional solutions, or if our
customers do not increase their use of our solutions, our revenue growth and
profitability will be adversely affected.
To
increase our revenues and achieve and maintain profitability, we must regularly
add new customers and sell additional solutions, and our customers must increase
their use of our solutions they currently utilize. We intend to grow our
business by hiring additional inside sales personnel and increasing our
marketing activities. If we are unable to hire or retain quality sales
personnel, convert customer prospects into paying customers, or ensure the
effectiveness of our marketing programs, or if our existing or new customers do
not perceive our solutions to be of sufficiently high value and quality, we
might not be able to increase sales, and our operating results will be adversely
affected. In addition, if we fail to sell our new solutions to existing or new
customers, we will not generate anticipated revenues from these solutions, our
operating results will suffer and we might be unable to grow our revenues or
achieve or maintain profitability.
We
have incurred operating losses in the past and may incur operating losses in the
future.
For
the years ended December 31, 2008 and 2009, Sajan generated net income of
$234,000 and a net loss of $1.1 million, respectively. Throughout most of our
history, we have experienced net losses and negative cash flows from operations.
We expect our operating expenses to increase in the future as we expand our
operations. Furthermore, as a public company, we will incur significant legal,
accounting and other expenses that we did not incur as a private company. If our
revenues do not grow to offset these increased expenses, we may not be
profitable. We cannot assure you that we will be able to achieve or maintain
profitability.
Our
inability to adapt to rapid technological change could impair our ability to
remain competitive.
The
global multi-lingual content delivery industry in which we compete is
characterized by rapid technological change, introductions of new products and
evolving industry standards. Our ability to attract new customers and increase
revenues from customers will depend in significant part on our ability to
anticipate industry standards and to continue to enhance existing solutions or
introduce or acquire new solutions on a timely basis to keep pace with
technological developments. The success of any enhancement or new solution
depends on several factors, including the timely completion, introduction and
market acceptance of any enhancement to our solution. Any new solution we
develop or acquire might not be introduced in a timely or cost-effective manner
and might not achieve the broad market acceptance necessary to generate
significant revenues. If any of our competitors implements new technologies
before we are able to implement them, those competitors may be able to provide
more effective solutions than ours at lower prices. Any delay or failure in the
introduction of new or enhanced solutions could adversely affect our business,
results of operations and financial condition.
Our
business may be harmed by defects or errors in the services we provide to
customers.
Many of
the services we provide are critical to the business operations of our
customers. While we maintain general liability insurance, including coverage for
errors and omissions, defects or errors in the services we provide could
interrupt our customers’ abilities to provide products and services to their
customers, resulting in delayed or lost revenue. This could damage our
reputation through negative publicity, make it difficult to attract new and
retain existing customers, and cause customers to terminate our contracts and
seek damages. We may incur additional costs to correct errors or defects. There
can be no assurance that our general liability and errors and omissions
insurance coverage will be available in amounts sufficient to cover one or more
large claims, or that the insurer will not disclaim coverage as to any future
claims.
An
interruption or failure of our information technology and communications systems
could impair our ability to effectively provide our services, which could damage
our reputation and business.
The
provision of our services depends on the continuing operation of our information
technology and communications systems. Any damage to or failure of our systems
could result in interruptions in our services. Interruptions in our services
could reduce our revenues and profits, and the Sajan brand could be damaged if
people believe our system is unreliable. Our systems are vulnerable to damage or
interruption from terrorist attacks, floods, tornados, fires, power loss,
telecommunications failures, computer viruses or attempts to harm our systems.
Our data centers may be subject to break-ins, sabotage and intentional acts of
vandalism, and to other potential disruptions. Some of our systems may not be
fully redundant, and our disaster recovery planning may not be able to account
for all eventualities. The occurrence of a natural disaster, a decision to close
a facility we are using without adequate notice for financial reasons, or other
unanticipated problems at our data centers could result in lengthy interruptions
in our services. Any unscheduled interruption in our service will put a burden
on the entire organization and would result in an immediate loss of revenue. If
we experience frequent or persistent system failures on our web site, our
reputation and the Sajan brand could be permanently harmed. The steps required
to increase the reliability and redundancy of our systems are expensive, will
reduce our operating margins, and may not be successful in reducing the
frequency or duration of unscheduled downtime.
The
intellectual property of our customers may be damaged, misappropriated, stolen,
or lost while in our possession, subjecting us to litigation and other adverse
consequences.
In the
course of providing globalization and language translation services to our
customers, we take possession of or are granted access to certain intellectual
property of such customers. If such intellectual property is damaged,
misappropriated, stolen, or lost, we could suffer, among other
consequences:
12
|
·
|
claims
under indemnification provisions in customer agreements or other liability
for damages;
|
|
·
|
delayed
or lost revenue due to adverse customer
reaction;
|
|
·
|
negative
publicity; and
|
|
·
|
litigation
that could be costly and time
consuming.
|
Any
adverse impact attributable to any of the foregoing factors would have a
material adverse effect on our business and revenues.
We
rely on third parties for key aspects of the process of providing services to
our customers, and any failure or interruption in the services provided by these
third parties could harm our ability to operate our business and damage our
reputation.
We rely on third-party vendors,
including data center and bandwidth providers, and we also rely on third parties
for key aspects of the process of providing language translation services to our
customers. Our revenues and margins are subject to our ability to continue to
maintain satisfactory relationships with freelance linguists, who are in high
demand worldwide for specific languages. Any disruption in the network access or
co-location services provided by these third-party providers or any failure of
these third-party providers and freelance linguists to handle current or higher
volumes of use could significantly harm our business. Any financial or other
difficulties the providers face may have negative effects on our business, the
nature and extent of which cannot be predicted. We exercise little control over
these third party vendors, which increases our vulnerability to problems with
the services they provide. We also license technology and related databases from
third parties to facilitate aspects of our translation processes and our data
center and connectivity operations including, among others, Internet traffic
management and search services. Any errors, failures, interruptions or delays
experienced in connection with these third-party technologies and information
services could negatively impact our relationships with customers and adversely
affect the Sajan brand, and could expose us to liabilities to third
parties.
Evolving
regulation of the Internet may increase our expenditures related to compliance
efforts, which may adversely affect our financial condition.
As
Internet commerce continues to evolve, increasing regulation by federal, state
or foreign agencies becomes more likely. We are particularly sensitive to these
risks because the Internet is a critical component of our on-demand business
model. In addition, taxation of services provided over the Internet or other
charges imposed by government agencies or by private organizations for accessing
the Internet may be imposed. Any regulation imposing greater fees for Internet
use or restricting information exchange over the Internet could result in a
decline in the use of the Internet and the viability of Internet-based services,
which could harm our business.
We
depend on intellectual property rights to protect proprietary technologies,
although we may not be able to successfully protect these rights.
We rely
on our proprietary technology to enhance our software and service offerings. We
use a combination of patent, trademark, trade secret and copyright law in
addition to contractual restrictions to protect our technology. Although we have
filed a patent application with the U.S. Patent and Trademark Office covering
certain aspects of our technology, there can be no assurance that this
application will result in an issued patent or that such patent, if issued,
would adequately protect our technology or provide us with a competitive
advantage. We may apply for patent protection on our future technology
developments to the extent we believe such protection is available and
economically warranted. However, there is no assurance that we will file
additional applications for patent protection in the United States or in other
countries, that any application that we may file will result in an issued
patent, or that any issued patent will provide us with a competitive advantage.
We have not filed any applications for patent protection in any country other
than the United States. As a result, we do not have the right to enforce our
rights under any United States patent, if issued, in any foreign country, or to
prevent others in foreign countries from utilizing our proprietary technology
covered by that patent. Despite our efforts, there can be no assurance that
others will not independently develop technology that is similar to our
technology, or offer or sell products or services in foreign countries that
utilize our technology. The development by others of technology that is similar
to our technology, or the sale of products or services in foreign countries that
incorporate our technology, would harm our competitive position and have a
material adverse effect on our business, results of operations and financial
condition.
13
We
may be involved in disputes from time to time relating to our intellectual
property and the intellectual property of third parties.
We may
become parties to disputes from time to time over rights and obligations
concerning intellectual property, and we may not prevail in these disputes.
Third parties may raise claims against us alleging infringement or violation of
the intellectual property of that third party. Some third party intellectual
property rights may be extremely broad, and it may not be possible for us to
conduct our operations in such a way as to avoid violating those intellectual
property rights. Any such intellectual property claim could subject us to costly
litigation and impose a significant strain on our financial resources and
management personnel regardless of whether such claim has merit. Our liability
insurance, if any, many not cover potential claims of this type adequately or at
all, and we may be required to alter products or pay monetary damages or license
fees to third parties, which could have a material adverse affect on our
financial condition and results of operations.
Our
strategy includes pursuing acquisitions, and our potential inability to
successfully integrate newly-acquired companies, businesses or technologies may
adversely affect our financial results.
We
believe part of our growth will be driven by acquisitions of other companies or
their businesses or technologies. If we complete acquisitions, we face many
risks commonly encountered with growth through acquisitions,
including:
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incurring
significantly higher than anticipated capital expenditures and operating
expenses;
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failing
to assimilate the operations and personnel of the acquired company or
business;
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disrupting
our ongoing business;
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dissipating
our management resources;
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failing
to maintain uniform standards, controls and policies;
and
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impairing
relationships with employees and customers as a result of changes in
management.
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Fully
integrating an acquired company, business or technology into our operations may
take a significant amount of time. We cannot assure you that we will be
successful in overcoming these risks or any other problems encountered with
acquisitions. To the extent we do not successfully avoid or overcome the risks
or problems related to any acquisitions, our results of operations and financial
condition could be adversely affected. Future acquisitions also could impact our
financial position and capital needs, and could cause substantial fluctuations
in our quarterly and yearly results of operations. Acquisitions could include
significant goodwill and intangible assets, which may result in future
impairment charges that would reduce our stated earnings.
Our
ability to use our U.S. net operating loss carryforwards might be limited or
eliminated.
Upon
closing the Merger, we have net operating loss carryforwards of approximately
$49.2 million, which are potentially available for U.S. federal tax purposes.
These loss carryforwards expire between 2015 and 2029. To the extent these net
operating loss carryforwards are available, we intend to use them to reduce any
corporate income tax liability associated with our operations. Section 382 of
the U.S. Internal Revenue Code generally imposes an annual limitation on the
amount of net operating loss carryforwards that may be used to offset taxable
income when a corporation has undergone significant changes in stock ownership.
As a result, prior or future changes in ownership could put limitations on or
eliminate the availability of our net operating loss carryforwards to offset any
profit. Rules governing the use of net operating loss carryforwards are complex,
and any use of our net operating loss carryforwards could be challenged given
our Company’s change of control in 2007. To the extent our use of net operating
loss carryforwards is significantly limited or eliminated, any income generated
by us could be subject to corporate income tax earlier than if we were able to
use net operating loss carryforwards, which could result in lower profit. Future changes of control
may result in additional expiration of a portion of the remaining net operating
loss carryforward before it can be used. The use of our carryforward is
dependent upon the Company attaining profitable operations in the
future.
The
markets in which we operate are highly competitive, and our failure to compete
successfully would make it difficult for us to add and retain customers and
would reduce or impede the growth of our business.
The
markets for global multi-lingual content delivery software and services are
increasingly competitive and global. We expect competition to increase in the
future both from existing competitors and new companies that may enter our
markets. In addition to our existing competitors, we may face competition in the
future from companies that do not currently offer globalization or translation
services. We may also face competition from internal globalization departments
of Fortune 1000 and large emerging companies. Technology companies, information
technology services companies, business process outsourcing companies, web
consulting firms, technical support call centers, hosting companies and content
management providers may choose to broaden their range of services to include
globalization or language translation as they expand their operations
internationally. Increased competition could result in pricing pressure, reduced
sales, lower margins or the failure of our solutions to achieve or maintain
broad market acceptance. However, we cannot assure you that new or established
competitors will not offer solutions that are superior to or lower in price than
ours. We may not have sufficient resources to continue the investments in all
areas of software development and marketing needed to maintain our competitive
position. In addition, some of our competitors are better capitalized than us,
which may provide them with an advantage in developing, marketing or servicing
new solutions. Increased competition could reduce our market share, revenues and
operating margins, increase our costs of operations and otherwise adversely
affect our business.
14
If
we fail to retain our Chief Executive Officer and other key personnel, our
business would be harmed and we might not be able to implement our business plan
successfully.
Given the
complex nature of the technology on which our business is based and the speed
with which such technology advances, our future success is dependent, in large
part, upon our ability to attract and retain highly qualified managerial,
technical and sales personnel. In particular, Shannon Zimmerman, President and
Chief Executive Officer; Angel Zimmerman, Chief Operating Officer; and Vern
Hanzlik, Chief Marketing Officer and President of Sajan Software, are critical
to the management of our business and operations. Competition for talented
personnel is intense, and we cannot be certain that we can retain our
managerial, technical and sales personnel or that we can attract, assimilate or
retain such personnel in the future. Our inability to attract and retain such
personnel could have an adverse effect on our business, results of operations
and financial condition.
In
addition, we have not hired a full-time Chief Financial Officer. Mr. Zimmerman
serves in that capacity on an interim basis. Until we hire a full-time Chief
Financial Officer, we dilute his ability to function in both capacities. This
could have an adverse impact on our ability to expand our product offerings and
increase our business presence and operations. Further, our lack of a full-time
Chief Financial Officer will hinder our ability to prepare the consolidated
financial statements and notes to consolidated financial statements in
accordance with US GAAP or to review the financial and other information
prepared by external consultants and professionals to ensure accuracy and
completeness.
Our
continued growth could strain our personnel resources and infrastructure, and if
we are unable to implement appropriate controls and procedures to manage our
growth, we will not be able to implement our business plan
successfully.
We have
experienced a period of rapid growth in our headcount and operations. To the
extent that we are able to sustain such growth, it will place a significant
strain on our management, administrative, operational and financial
infrastructure. Our success will depend in part upon the ability of our senior
management to manage this growth effectively. To do so, we must continue to
hire, train and manage new employees as needed. If our new hires perform poorly,
or if we are unsuccessful in hiring, training, managing and integrating these
new employees, or if we are not successful in retaining our existing employees,
our business would be harmed. To manage the expected growth of our operations
and personnel, we will need to continue to improve our operational, financial
and management controls and our reporting systems and procedures. The additional
headcount we are adding will increase our cost base, which will make it more
difficult for us to offset any future revenue shortfalls by reducing expenses in
the short term. If we fail to successfully manage our growth, we will be unable
to execute our business plan.
We
may be exposed to potential risks relating to internal controls over financial
reporting and our ability to have those controls attested to by our independent
registered public accounting firm.
As a
public company, we are required, pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, to furnish a report by management on, among other things, the
effectiveness of our internal control over financial reporting. In addition,
beginning for the year ending December 31, 2010, the independent registered
public accounting firm auditing our financial statements must also attest to and
report on our management’s assessment of the effectiveness of our internal
control over financial reporting as well as the operating effectiveness of our
internal controls. The operations of Sajan, Inc. have never been subject to
these requirements, and our management will be required to evaluate our internal
control systems in order to allow our management to report on, and our
independent auditors attest to, our internal controls as a required part of our
Annual Report on Form 10-K for the fiscal year ending December 31, 2010, which
must be filed with the SEC on or before March 31, 2011.
15
In
planning and performing its audits of the consolidated financial statements of
Sajan, Inc. as of December 31, 2008 and 2009, Baker Tilly Virchow Krause, LLP,
the independent registered public accounting firm of Sajan, Inc., identified a
number of deficiencies in internal control that it considered to be material
weaknesses and other deficiencies that it considered to be significant
deficiencies. A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect and correct
misstatements on a timely basis. A material weakness is a deficiency, or
combination of deficiencies in internal controls, such that there is a
reasonable possibility that a material misstatement of the entity’s financial
statements will not be prevented, or detected and corrected on a timely basis. A
significant deficiency is a deficiency, or combination of deficiencies in
internal control that is less severe than a material weakness, yet important
enough to merit attention by those charged with governance. As a result, we will
be required to expend significant resources to develop the necessary
documentation and testing procedures required by Section 404, and there is a
risk that we will not comply with all of the necessary requirements.
Accordingly, there can be no assurance we will receive any required attestation
from our independent registered public accounting firm. If we cannot remediate
the material weaknesses in internal controls identified by our independent
registered public accounting firm, if we identify additional material weaknesses
in internal controls that cannot be remediated in a timely manner, or we are
unable to receive an attestation from our independent registered public
accounting firm with respect to internal controls, investors and others with
whom we do business may lose confidence in the reliability of our financial
statements, and in our ability to obtain equity or debt financing could
suffer.
Because
our long-term success depends, in part, on our ability to expand the sales of
our solutions to customers located outside of the United States, our business
will be susceptible to risks associated with international
operations.
We have
limited experience operating in foreign jurisdictions. In 2008, we opened
Sajan-India in New Delhi, India, and in 2009, we opened Sajan Software in
Dublin, Ireland. Our inexperience in operating our business outside of North
America increases the risk that our current and any future international
expansion efforts will not be successful. Conducting international operations
subjects us to risks that, generally, we have not faced in the United States,
including:
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fluctuations
in currency exchange rates;
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unexpected
changes in foreign regulatory
requirements;
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longer
accounts receivable payment cycles and difficulties in collecting accounts
receivable;
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difficulties
in managing and staffing international
operations;
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·
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potentially
adverse tax consequences, including the complexities of foreign
value-added tax systems and restrictions on the repatriation of
earnings;
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the
burdens of complying with a wide variety of foreign laws and different
legal standards, including laws and regulations related to
privacy;
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increased
financial accounting and reporting burdens and
complexities;
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political,
social and economic instability abroad, and terrorist attacks and security
concerns in general; and
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reduced
or varied protection for intellectual property rights in some
countries.
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The
occurrence of any one of these risks could negatively affect our international
business and, consequently, our results of operations generally. Additionally,
operating in international markets also requires significant management
attention and financial resources. We cannot be certain that the investment and
additional resources required in establishing, acquiring, operating or
integrating operations in other countries will produce desired levels of
revenues or profitability.
Our
management has limited experience operating as a public company.
The
members of our current management have limited experience operating a public
company. We have seven directors and four new members of management. Of these
individuals, only director and executive officer Vern Hanzlik and directors
Michael W. Rogers, Richard C. Perkins and Benno G. Sand, have experience
managing a public company. Therefore, most of our officers and directors have
had limited experience in complying with the various rules and regulations that
are required of a public company. We may not be able to operate successfully as
a public company, even if our business operations are successful. Our inability
to successfully operate as a public company could have a material adverse effect
on our business, financial condition and operating results and on our ability to
obtain equity or debt financing.
We
cannot predict the outcome of the lawsuit with Tiberius or the lawsuit with Ms.
Natzel, and an unfavorable outcome of either of these lawsuits could have a
material adverse effect on our business, financial condition and operating
results.
As
described in section titled “Legal Proceedings” above, MathStar and Sajan, among
others, are parties to a lawsuit involving Tiberius, and Sajan is a party to the
lawsuit filed by Mary Jo Natzel. Although our management believes that
Tiberius’s counterclaims and Ms. Natzel’s claims are without merit, we cannot
predict the outcome of either of these lawsuits. In the event of unexpected
future developments, it is possible that the ultimate resolution of these
lawsuits, if unfavorable, could have a material adverse effect on our business,
financial condition and operating results. Even if we ultimately prevail in the
lawsuits, legal and other fees associated with the lawsuits could be
significant. In addition, there may also be adverse publicity associated with
legal proceedings that could negatively affect the perception of our business,
regardless of whether the allegations made by Tiberius and Ms. Natzel are valid
or whether we are ultimately found liable. As a result, these lawsuits may have
a material adverse effect on our business, financial condition and operating
results.
16
We
may need additional financing in the future, which may not be available, and any
such financing will likely dilute our existing stockholders.
We may
require additional financing in the future, which could be sought from a number
of sources, including, but not limited to, additional sales of equity or debt
securities or loans from banks or other financial institutions. There can be no
certainty that any such financing will be available to us or, if available, on
terms favorable to us. If additional funds are raised by the issuance of our
equity securities, such as through the issuance of stock, convertible
securities, or the issuance and exercise of warrants, then the ownership
interests of our existing stockholders will be diluted and our ability to
utilize accumulated net operating loss carryforwards could be impaired or
terminated. If we raise additional funds by issuing debt or other instruments,
we may become subject to certain operational limitations, and such securities
may have rights senior to those of our common stock. The current recession may
cause any debt or equity financing to be more difficult to obtain, more costly
and more dilutive. If adequate funds are not available on acceptable terms, we
may be unable to fund the operation or expansion of our business. Our failure to
obtain any necessary financing in a timely manner and on favorable terms could
have a material adverse effect on our business strategy and on our financial
performance and stock price, and could require us to delay or abandon our growth
strategy.
Risks
Related to Ownership of Our Common Stock
An active
trading market in our common stock may not develop or be adequately maintained,
and our common stock may be subject to volatile price and volume
fluctuations.
An active
trading market in our common stock may not develop or be adequately maintained.
Shares of our common stock are quoted on the Pink OTC Markets system and are not
listed on any stock exchange, which may limit your ability to sell your shares
in our company. The overall market for securities in recent years has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. These fluctuations have
been extremely volatile and are often unrelated or disproportionate to operating
performance. Consequently, you may not be able to sell our common stock at
prices equal to or greater than the price you paid for your shares. In addition
to the factors discussed elsewhere in this section, many factors, most of which
are outside of our control, could cause the market price of our common stock to
decrease significantly, including:
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variations
in our quarterly operating results;
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decreases
in market valuations of similar
companies;
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the
failure of securities analysts to cover our common stock or changes in
financial estimates by analysts who cover us, our competitors or our
industry; and
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fluctuations
in stock market prices and volumes.
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These
broad market fluctuations could result in extreme fluctuations in the price of
our common stock, which could cause a decline in the value of our common
stock.
Our
quarterly results of operations may fluctuate in the future, which could result
in volatility in our stock price.
Our
quarterly revenues and results of operations have varied in the past and may
fluctuate as a result of a variety of factors. If our quarterly revenues or
results of operations fluctuate, the price of our common stock could decline
substantially. Fluctuations in our results of operations may be due to a number
of factors, including, but not limited to, those listed below and identified
throughout this “Risk Factors” section:
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our
ability to retain and increase sales to current customers and attract new
customers, including our ability to maintain and increase our number of
recurring revenue customers;
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the
timing and success of introductions of new solutions or upgrades by us or
our competitors;
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the
strength of the economy, in particular as it affects globalization
activity;
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changes
in our pricing policies or those of our
competitors;
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17
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competition,
including entry into the industry by new competitors and new offerings by
existing competitors;
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the
amount and timing of expenditures related to operating as a public
company, expanding our operations, research and development, acquisitions,
or introducing new solutions; and
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changes
in the payment terms for our
solutions.
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Due to
these and other factors, including the risks discussed in this Current Report on
Form 8-K, you should not rely on quarter-to-quarter comparisons of our results
of operations as an indication of our future performance.
Future
sales of our shares may cause the market price of our securities to drop
significantly, even if our business is doing well.
The
former Sajan stockholders will not be able to sell any of their shares of our
common stock until August 23, 2010 (February 23, 2011 for directors and
executive officers). The presence of these additional shares trading in the
public market may have an adverse effect on the market price of our common
stock. Any such sale could cause the market price of our common stock to
decline.
We
may be unable to cause our securities to be listed on the NASDAQ Stock Market,
which could limit investors’ ability to make transactions in our securities and
subject stockholders to additional trading restrictions.
We intend
to continue to be listed on the Pink Quote system of the Pink OTC Market until
such time we satisfy the relevant listing requirements to have our common stock
listed on the NASDAQ Global Market or the NASDAQ Capital Market. However, there
can be no assurance we will ever be able to meet NASDAQ’s initial listing
requirements, in which case our securities may continue to be listed on the Pink
OTC Market indefinitely.
If we are
unable to cause our securities to be listed on the NASDAQ Stock Market, we and
our stockholders could face significant material adverse consequences,
including:
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·
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a
limited availability of market quotations for our
securities;
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·
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a
determination that our common stock is a “penny stock,” which will require
brokers trading in our common stock to adhere to more stringent rules,
possibly resulting in a reduced level of trading activity in the secondary
trading market for our common
stock;
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a
limited amount of news and analyst coverage;
and
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a
decreased ability to issue additional securities or obtain additional
financing in the future.
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Current
members of our management own a significant percentage of the outstanding shares
of our common stock, which could limit other stockholders’ influence on
corporate matters.
As of the
closing of the Merger, Shannon Zimmerman and Angel Zimmerman, who are directors
and executive officers after the Merger, collectively own approximately 32.7% of
the outstanding shares of our common stock. Accordingly, these individuals are
able to exert substantial influence over our affairs, including the election and
removal of directors and all other matters requiring stockholder approval,
including the future merger, consolidation or sale of our company. This
concentrated control could discourage others from initiating any potential
merger, takeover, or other change-of-control transactions that may otherwise be
beneficial to our stockholders. Furthermore, this concentrated control will
limit the practical effect of the stockholders’ participation in our corporate
matters, through stockholder votes and otherwise. As a result, the return on
your investment in our common stock through the sale of your shares could be
adversely affected.
Provisions
in our charter documents, our Tax Benefit Preservation Plan, and Delaware law
may inhibit a takeover, which could limit the price potential investors might be
willing to pay in the future for our common stock and could entrench
management.
Our
certificate of incorporation and bylaws and our Tax Benefit Preservation Plan
contain provisions that may discourage unsolicited takeover proposals that
stockholders may consider to be in our best interests. Our board of directors
has the ability to designate the terms of and issue new series of preferred
stock which could be issued to create different or greater voting rights which
may affect an acquiror’s ability to gain control of our company. Our Tax Benefit
Preservation Plan, which is designed to protect our stockholder value and
safeguard valuable tax attributes by reducing the likelihood of an unintended
ownership change, could also discourage a change of control. As a Delaware
corporation, we are subject to anti-takeover provisions under Delaware law,
which could delay or prevent a change of control. Together, these provisions may
make it more difficult to remove management and may discourage transactions that
otherwise could involve payment of a premium over prevailing market prices for
our shares.
18
Our
certificate of incorporation grants our board of directors the power to
designate and issue additional shares of common and preferred
stock.
Our
authorized capital consists of eighteen million shares of MathStar common stock
and ten million shares of undesignated preferred stock. Pursuant to authority
granted by our certificate of incorporation, our board of directors, without any
action by our stockholders, may designate and issue shares in such classes or
series (including classes or series of preferred stock) as it deems appropriate,
and establish the rights, preferences, and privileges of such shares, including
dividends, liquidation, and voting rights. The rights of holders of other
classes or series of preferred stock that may be issued could be superior to the
rights of our common stock. The designation and issuance of shares of capital
stock having preferential rights could adversely affect other rights appurtenant
to the shares of our common stock. Any issuances of additional capital stock
(common or preferred), will dilute the percentage of ownership interest of our
stockholders.
Our
certificate of incorporation and bylaws limit directors’ liability to
stockholders.
As
permitted by Delaware law, our certificate of incorporation and bylaws provide
that each director shall have no personal liability for monetary damages for any
breach of fiduciary duties to us, subject to certain exceptions. These
provisions may reduce the likelihood of derivative litigation against directors
and may discourage stockholders from bringing a lawsuit against directors for
any breach of our fiduciary duties.
We
do not intend to pay dividends on our common stock for the foreseeable
future.
We
currently intend to retain all future earnings for the operation and expansion
of our business and, therefore, do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future. Any payment of cash
dividends on our common stock will be at the discretion of our board of
directors and will depend upon our results of operations, earnings, capital
requirements, financial condition, future prospects, contractual restrictions
and other factors deemed relevant by our board of directors. Therefore, you
should not expect to receive dividend income from shares of our common
stock.
ITEM
1B UNRESOLVED STAFF COMMENTS
None.
ITEM
2 PROPERTIES
Our
primary operations are based in River Falls, Wisconsin, which is located
approximately 20 miles east of the Twin Cities in Minnesota. We lease 16,000
square feet of office space from River Valley Business Center, LLC (“RVBC”)
under two leases which expire in January 2017. Rents for these facilities
averaged approximately $26,000 per month during the year ended December 31,
2009. RVBC is a “related person” as defined in Item 404 of Regulation S-K of the
SEC because it is controlled by Shannon and Angela Zimmerman, each of whom is a
principal executive officer and a director of our company. For financial
accounting and reporting purposes under ASC 810 – Consolidation, (formerly FIN
46(R)), the financial statements of RVBC have been consolidated with the
financial statements of Sajan, Inc. for the years ended December 31, 2008 and
2009. However, neither Sajan nor MathStar has any direct economic interest in
the assets of RVBC, nor is either the principal obligor for any of the
liabilities of RVBC. As a result of the Merger, the financial statements of RVBC
will not be consolidated with our financial statements for the year ending
December 31, 2010.
Sajan
Software leases approximately 1,000 square feet of office space in Dublin,
Ireland. Sajan-India leases approximately 2,000 square feet of office space in
New Delhi, India. Combined rents for these facilities averaged approximately
$4,000 dollars per month during the year ended December 31, 2009. We believe all
of our facilities are suitable and adequate for current operating
needs.
MathStar’s
primary location, before the Effective Date of the Merger, was in Hillsboro,
Oregon, near Portland, where we lease approximately 14,000 square feet of office
space under a lease expiring on August 31, 2011. We also lease
approximately 1,000 square feet in a facility near Minneapolis, Minnesota. Rents
under these lease agreements averaged approximately $29,000 dollars per month
during the year ended December 31, 2009. As of December 31, 2009, we
vacated the Hillsboro space, as we were no longer using it. MathStar’s
financials prior to the Merger recorded an accrual for the lease termination
costs, net present value, of $540,000 dollars.
19
ITEM
3 LEGAL PROCEEDINGS
Tiberius
Litigation
As
reported in MathStar’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009 filed with the SEC on November 9, 2009, on October 8, 2009,
legal counsel for Tiberius Capital II, LLC (“Tiberius”), sent by email to
MathStar’s legal counsel a copy of a Complaint labeled “Draft — Subject to
Completion” (the “Tiberius Complaint”). The Tiberius Complaint named Tiberius,
individually and on behalf of all others similarly situated, as plaintiff. It
named MathStar, Feltl and Company (“Feltl”), Sajan, Inc., Perkins Capital
Management, Inc., Richard C. Perkins, Merrill A. McPeak, Benno G. Sand, John C.
Feltl and Joseph P. Sullivan, as defendants (collectively, the “Minnesota
Parties”). Mr. Perkins and Mr. Sand are members of MathStar’s board of directors
and Merrill A. McPeak served as a director of MathStar from the date the
litigation commenced through the Effective Date (collectively, the “MathStar
Directors”).
The
Tiberius Complaint stated that Tiberius was bringing a class action lawsuit on
behalf of a class (the “Class”) consisting of all those who purchased MathStar’s
securities between May 11, 2009 and September 30, 2009. The caption on the
Tiberius Complaint stated that it was to be filed in the United States District
Court for the Southern District of New York. The Tiberius Complaint alleged (1)
violations of Section 13(d) of the Exchange Act and the Rules of the SEC
thereunder against the Minnesota Parties except Sajan, Inc. for alleged failure
to report that such Minnesota Parties were acting as a “group” for purposes of
purchasing MathStar’s shares of common stock; (2) breaches of Section 14(a) of
the Exchange Act and the Rules of the SEC thereunder against the Minnesota
Parties except Sajan, Inc. for alleged misstatements in MathStar’s proxy
statement filed with the SEC on June 17, 2009 (the “Proxy Statement”) and in
connection with MathStar’s annual meeting of stockholders held on July 10, 2009;
(3) violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
by the SEC thereunder against the Minnesota Parties except Sajan, Inc. for
alleged misstatements made in the Proxy Statement and in an alleged fraud on the
market by such Minnesota Parties; (4) violations of Section 14 of the Exchange
Act and Rule 14e-3 promulgated by the SEC thereunder against the Minnesota
Parties except Sajan, Inc. for actions taken by such Minnesota Parties in
connection with an alleged “creeping” tender offer; (5) control party liability
under Section 20(a) of the Exchange Act against the MathStar Directors for
alleged violations of Sections 14(a) and 14(e) of the Exchange Act and Rule
10b-5 thereunder; (6) breach of fiduciary duty against the MathStar Directors;
and (7) civil conspiracy against the Minnesota Parties. In the Tiberius
Complaint, Tiberius requested that the Court enter a judgment in favor of
Tiberius and the Class and against the Minnesota Parties declaring that MathStar
violated “§10b-5, §13d, §14a and §14e” of the Exchange Act and rules promulgated
thereunder, including Regulation FD; enter judgment in favor of Tiberius and the
Class and against the MathStar Directors in the amount of $10 million in
compensatory and punitive damages; award Tiberius all of its costs incurred in
connection with the action, including reasonable attorneys’ fees; and grant such
other and further relief as the Court deems to be just and
equitable.
On
October 14, 2009, the Minnesota Parties filed a Complaint in the United States
District Court for the District of Minnesota captioned “MathStar, Inc., Feltl
and Company, Inc., Sajan, Inc., Perkins Capital Management, Inc., Richard C.
Perkins, Merrill A. McPeak, Benno G. Sand, John C. Feltl and Joseph P. Sullivan,
Plaintiffs, v. Tiberius Capital II, LLC, Defendant” (the “Minnesota Complaint”).
In the Minnesota Complaint, the Minnesota Parties state that Tiberius is
threatening to bring a class action lawsuit against them, as set forth in the
Tiberius Complaint. The Minnesota Complaint also alleges a claim of tortious
interference with prospective economic advantage against Tiberius on behalf of
MathStar, Sajan, Inc. and Feltl. The Minnesota Complaint requests judgment in
favor of the Minnesota Parties declaring that their actions described in the
Minnesota Complaint were lawful; declaring that the Minnesota Parties have not
violated any legal duties to Tiberius; declaring that the proposed Tiberius
Complaint is without merit; awarding money damages to MathStar, Sajan, Inc. and
Feltl in an amount to be determined at trial to compensate such Minnesota
Parties for Tiberius’ tortious interference with their economic advantage;
awarding the Minnesota Parties their costs, disbursements and reasonable
attorneys’ fees; and awarding the Minnesota Parties such other and further
relief as the Court deems to be just, proper and equitable. The Minnesota
Complaint was served on Tiberius on October 21, 2009.
On
November 9, 2009, Tiberius served and filed its Answer and Counterclaim denying
liability under the Minnesota Complaint and asserting substantially the same
claims set forth in the Tiberius Complaint and, in addition, asserting common
law claims for fraud against the Minnesota Parties except Sajan, Inc. and
against all of the Minnesota Parties for wrongful interference with the
prospectively advantageous, successful completion of its tender offer for
MathStar’s shares of common stock. On December 8, 2009, Tiberius served and
filed an Answer and Amended Counterclaim in which it added a jurisdictional
allegation and asserted claims for declaratory relief under its other claims.
The Minnesota Parties filed timely motions to dismiss the Counterclaim and
Amended Counterclaim on several grounds. The motions were fully briefed, and
oral arguments took place before the Court on February 9, 2010. A ruling on the
motions is expected the spring of 2010. A case scheduling conference was held on
January 14, 2010 before the Magistrate Judge, at which it was determined
that a schedule will be established following a ruling on the
motions. We believe the claims are without merit and plan to
vigorously defend this lawsuit.
20
|
An
Important Note on Language: The following
section refers to Sajan, Inc. on a pre-Merger basis, as a privately-held
Minnesota corporation, now known as Sajan, LLC
post-Merger.
|
Litigation
by Sajan, Inc. Stockholder
On
February 11, 2010, Mary Jo Natzel, a shareholder of Sajan, Inc., initiated a
lawsuit against Shannon Zimmerman and Angel Zimmerman (the “Zimmermans”) and
Sajan, Inc. in the Minnesota District Court, Hennepin County, Fourth Judicial
District. Ms. Natzel seeks declaratory, injunctive and monetary relief in an
amount in excess of $50,000 against Sajan, Inc. and the Zimmermans. The Natzel
complaint relates to an October 2001 stock split alleged to be ineffective as to
Shannon Zimmerman’s shares and resulting underpayment to Ms. Natzel of
distributions made by Sajan, Inc. while it was a corporation taxed under
Subchapter S of the Internal Revenue Code. The complaint also alleges oral
misrepresentations in 2001 by Mr. Zimmerman to Howard Natzel, the spouse of Mary
Jo Natzel, regarding the dollar amount of cash invested by the Zimmermans into
Sajan, Inc. prior to Mr. Natzel’s investment in October 2001 of $50,000 to
purchase shares of common stock of Sajan, Inc. The complaint alleges breaches by
the Zimmermans of their duties to Ms. Natzel entitling her to relief under
common law, Minnesota Statutes Section 316.03, and Minnesota Statutes Chapter
302A; illegal conduct or actions by the Zimmermans unfairly prejudicial towards
Ms. Natzel under Minnesota Statues Section 302A.751 and Section 205A.467;
underpayment of Subchapter S distributions; declaratory judgments that each
of the Zimmermans owns 225 shares of common stock of Sajan, Inc. prior to the
Effective Date; injunctive relief prohibiting Sajan, Inc. and the Zimmermans
from distributing the Merger proceeds to the Zimmermans or ordering the
Zimmermans to deposit the Merger proceeds into the court and ordering the
Zimmermans and Sajan, Inc. to calculate and pay supplemental Subchapter S
distributions to the former stockholders of Sajan, Inc.; and an order requiring
the Zimmermans to disgorge and pay to Ms. Natzel the amount by which they have
been unjustly enriched to Ms. Natzel’s detriment. In the Merger, Sajan, LLC
assumed the obligations of Sajan, Inc. On February 24, 2010, we received a
notice of motion for temporary restraining order banning the distribution to the
former stockholders of Sajan, Inc. any of the proceeds to be received in the
Merger. After a hearing on February 25, 2010, the motion was
denied. The Company and the Zimmermans served and filed their Joint
and Separate Answer on March 3, 2010. We anticipate that the court
will issue a scheduling order in mid-2010. We believe the claims are without
merit and intend to vigorously defend this lawsuit.
ITEM
4
|
RESERVED
|
21
PART
II
ITEM
5
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Since
October 23, 2008, our common stock has been quoted on the Pink Quote system of
the Pink OTC Markets. From October 27, 2005 through October 23, 2008,
our common stock was listed on the NASDAQ Market, LLC under the symbol
“MATH”. Before October 27, 2005, there was no public market for our
common stock.
The
following table shows the high and low sales prices for our common stock as
reported on the NASDAQ Stock Market, LLC or the Pink OTC Markets, as applicable,
for the 2009 and 2008 fiscal quarters. The high and low sale prices
reported on the Pink OTC Markets reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily reflect actual
transactions.
Market Price (high/low)
|
||||||||
For the Fiscal Year
|
2009
|
2008
|
||||||
First
Quarter
|
$
|
0.94
– 0.77
|
$
|
3.75
– 2.45
|
||||
Second
Quarter
|
$
|
1.22
– 0.80
|
$
|
2.90
– 1.05
|
||||
Third
Quarter
|
$
|
1.64
– 1.17
|
$
|
1.43
– 1.05
|
||||
Fourth
Quarter
|
$
|
1.50
– 1.15
|
$
|
1.09
– 0.66
|
As of
March 15, 2010, we had approximately 209 record holders of our common
stock.
Dividend
Policy
Holders
of our common stock are entitled to receive such dividends as are declared by
our board of directors out of funds legally available for the payment of
dividends. We presently intend to retain any earnings to fund the
development of our business. Accordingly, we do not anticipate paying
any dividends on our common stock for the forseeable future. Any
future determination as to declaration and payment of dividends will be made at
the discretion of our board of directors.
ITEM
6
|
SELECTED
FINANCIAL DATA
|
Not
applicable.
ITEM
7
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
|
|
An
Important Note on Language:
|
·
|
Results of Operations refer to
MathStar, Inc. on a pre-merger
basis.
|
|
·
|
Liquidity and Capital Resources
refers to both MathStar, Inc. and Sajan, Inc. historically and designate
as such in the respective
sections.
|
|
·
|
Sources of Capital and Uses of
Capital refers to Sajan, Inc. on a pre-Merger and post-Merger basis,
respectively.
|
|
·
|
The consolidated financial
statements and accompanying notes to the consolidated financial statements
refer to MathStar, Inc. on a pre-Merger
basis.
|
The
following discussion should be read in conjunction with the financial statements
and related notes that appear elsewhere in this Annual Report on Form
10-K. This discussion contains forward-looking statements that
involve significant uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those discussed in “Risk Factors” elsewhere in this
report. For further information, see the section titled “Cautionary
Notice Regarding Forward-Looking Statements” above.
22
BUSINESS
OVERVIEW
Until we
curtailed operations in the second quarter of 2008, we were a fabless
semiconductor company engaged in the development, marketing and selling of our
high-performance, programmable platform FPOA chips and design tools required to
program our chips. During the three months ended March 31, 2008, sales did
not materialize as expected, and the development of the next generation of FPOA
fell behind schedule. As a result, on May 20, 2008, the Board of Directors
voted to suspend research and development activities and curtail ongoing
operations while analyzing strategic alternatives. The Board of Directors
explored these strategic alternatives, which included restarting the company,
merging with or acquiring another company, increasing operations in another
structure or liquidation. We engaged a third party investment banking firm to
explore the sale of intellectual property and patents and potential merger and
acquisition alternatives.
RESULTS
OF OPERATIONS:
YEAR
ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
Revenues and Cost of
Revenues. We recognized revenues for the year ended December 31, 2009 of
$.10 million compared to $.54 million for the year ended December 31, 2008.
Revenue in 2009 consisted of one sale of FPOAs to one customer. Revenues in 2008
consisted of the sale of production chips of $.53 million and $.004 million in
evaluation boards. Cost of revenues was $.11 million and $1.20 million for the
years ended December 31, 2009 and 2008, respectively. Cost of revenues for 2008
consisted of product costs of $.04 million, scrap costs of $.37 million, a
noncash charge to increase the excess and obsolete inventory reserve of $.78
million, and other costs of $.01 million. The scrap costs in 2008 were for
proprietary inventory that could not be sold and was subsequently disposed. The
excess and obsolete inventory reserve was required because, due to our curtailed
sales and operations, we are unable to determine the probability of future FPOA
sales.
Research and
Development. Research and development costs decreased 99% or
$7.23 million to $.04 million for the year ended December 31, 2009 compared to
$7.27 million for the year ended December 31, 2008. The $7.23 million
decrease was primarily the result of our continued suspended research and
development activities based on our Board of Directors' 2008 decision to curtail
operations that decreased employee related expenses of $2.80 million, consulting
and contractor payments of $1.58 million, design tool costs of $2.10 million,
application IP charges of $.52 million, building and equipment rent of $.12
million, maintenance costs of $.02 million, recruiting and other costs of $.06
million, and travel costs of $.05 million.
Selling, General and
Administrative. Selling, general and administrative costs
decreased 54% or $2.55 million to $2.20 million for the year ended
December 31, 2009 from $4.75 million for the year ended December 31,
2008. The $2.55 million decrease was primarily the result of sales activities
being suspended and general activities being reduced as the Board of Directors
continued curtailed operations while evaluating strategic options. Decreased
expenses include compensation costs of $1.90 million, advertising and product
promotions of $.04 million, travel of $.26 million, insurance of $.04 million,
computer hardware and software expenses of $.06 million and general expenses due
to curtailing operations of $.56 million offset by increased investment banking
activity costs of $.17 million and an increase in consulting and contract fees
of $.14 million with the use of consultants rather than employees and additional
professional fees.
Restructuring and Impairment
Charges. For the year ended December 31, 2009, we recorded
restructuring and impairment charges of $.59 million. On
December 31, 2008, we recorded restructuring and impairment charges of
$2.62 million. See further discussion of these restructuring and impairment
charges in Note 3 of the consolidated financial statements.
Other Income
(Expense). Other income for the year ended December 31,
2009 consisted of interest income on invested cash balances of $0.09
million. Other income for the year ended December 31, 2008 of $.68
million consisted of interest income on invested cash balances and foreign
currency losses of $.70 million and $.02 million, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
MathStar Historical
Financial Results (pre-Merger)
As of
December 31, 2009, our future capital requirements depended on many factors,
including the strategic direction the company chose, sales levels, the type and
structure of any strategic transaction chosen, and working capital needs. The
Company believed its cash on hand and investment securities would be sufficient
to meet current obligations as well as projected expenditures for the next
twelve months at current spending levels. However, long-term financing
requirements would depend significantly on the strategic direction chosen and
could not be quantified until a strategic alternative was
decided.
23
Net
Cash Used in Operating Activities
Net cash
used in operating activities was $2.07 million and $14.05 million for the years
ended December 31, 2009 and 2008, respectively. Net cash used for operating
activities for the year ended December 31, 2009 was to fund our limited
operations. Net cash used for operating activities for the year
December 31, 2008 was for severance and shut down expenses of $2.62
million, costs associated with evaluating strategic alternatives of $.11 million
and general operating costs of $11.32 million.
Net
Cash Provided by Investing Activities
For the
years ended December 31, 2009 and 2008, cash provided by investing
activities was $3.36 million and $21.48 million, respectively. Net cash provided
by investing activities for the year ended December 31, 2009 related to proceeds
from the sale of held-to-maturity and available-for-sale securities. Net cash
provided in 2008 was from the sale of investment securities less the purchase of
lab equipment.
Net
Cash Provided by Financing Activities
Net cash
provided by financing activities was $0 for both years ended December 31,
2009 and 2008. The net effect of exchange rate changes for the year
ended December 31, 2008 was $.01 million.
Contractual
Cash Obligations
The
following tables show the future payments that we are obligated to make based on
agreements in place as of December 31, 2009 (in thousands); these expenses
are for non-cancellable commitments for design licenses and operating
leases.
The
Company has entered into a non-cancellable long-term commitment with Synopsys in
2008 for the purchase of design tools. Payments under this agreement for the
years ended December 31, 2009 and 2008 were $.30 million and $0,
respectively. Payments under this agreement will be $.20 million
during the year ending December 31, 2010 and are included in accrued
liabilities on our balance sheet.
The
Company leases its office and research facilities and certain office equipment
under non-cancellable operating leases. Total rent expense under these operating
leases was $.33 million and $.37 million for the years ended December 31,
2009 and 2008, respectively. Payments under these agreements will be
$.36 million during the year ending December 31, 2010 and $.26 million during
the year ending December 31, 2011.
Future
minimum lease payments under non-cancellable operating leases at
December 31, 2009 are as follows (in thousands):
Year Ending December 31,
|
Purchase Obligations
|
Operating Leases
|
||||||
2010
|
$ | 151 | $ | 358 | ||||
2011
|
- | 257 | ||||||
$ | 151 | $ | 615 |
Summary
cash flow data pre-Merger is as follows (in thousands):
MathStar, Inc.
|
||||||||
Years Ended December
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows provided (used) by :
|
||||||||
Operating
activities
|
$ | (2,069 | ) | $ | (14,048 | ) | ||
Investing
activities
|
3,352 | 21,482 | ||||||
Financing
activities
|
- | - | ||||||
Effect
of exchange rate change on cash
|
- | (6 | ) | |||||
Net
increase (decrease) in cash
|
1,283 | 7,428 | ||||||
Cash,
beginning of year
|
11,767 | 4,339 | ||||||
Cash,
end of year
|
$ | 13,050 | $ | 11,767 |
24
At
December 31, 2009 we had cash of $13.1 million compared to cash of $11.77
million on December 31, 2008. The primary use of our cash during the
year ended December 31, 2009 resulted from funding our limited
operations. The increase in cash resulted mainly from investing
activities from the sale of our available-for-sale.
Sajan Historical Financial
Results (pre-Merger)
The
summary cash flow data below represents cash flows provided and used by
operating, investing and financing activities (in thousands) of Sajan for the
years ended December 31, 2009 and 2008, and predate the Merger with
MathStar.
Years Ended December
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows provided (used) by :
|
||||||||
Operating
activities
|
$ | 574 | $ | 1,071 | ||||
Investing
activities
|
(1,084 | ) | (1,053 | ) | ||||
Financing
activities
|
254 | 100 | ||||||
Net
increase (decrease) in cash
|
(256 | ) | 118 | |||||
Effect
of exchange rate changes in cash and cash equivalents
|
(4 | ) | - | |||||
Cash,
beginning of year
|
381 | 263 | ||||||
Cash,
end of year
|
$ | 121 | $ | 381 |
Sajan’s Sources of Capital
(pre-Merger)
At
December 31, 2009, Sajan’s principal source of liquidity was our bank line of
credit, as we were in a net borrowing position. From inception until 2006, we
were funded largely by internally generated funds, bank loans and customer
advances. In 2006, we raised $2.0 million of outside capital to fund investments
in their sales and marketing organization to accelerate growth.
Sajan’s Uses of Capital
(post-Merger)
Sajan’s
primary uses of capital resources to date have been to fund operating activities
and expansion of business operations internationally. The capital
obtained by way of the recent merger will be used to grow and support the
business in a variety of different ways. The Company intends
to increase investments in research and development. This will
help extend Sajan's differentiation and provided greater value to its
global clients. We have a product roadmap influenced heavily by voice of
market and will seek to accelerate key feature releases. We also intend to
use its capital for purchasing strategic companies which add benefit to
Sajan. This may include both language translation service companies and
technology companies. Finally, we will invest in more aggressive sales and
marketing initiatives to assist in overall business growth.
Since the
Merger and in the immediate future, we anticipate that we will generate positive
cash flow from operations, but we may require investment capital to fund monthly
cash flow requirements, investments in our organizational infrastructure for the
launch of our business products and, potentially, for acquisitions. This was a
primary motivation for the Merger, in addition to providing access to public
market securities for the liquidity of former Sajan stockholders and also access
to capital on an efficient basis.
Following
the completion of the Merger, we believe that our cash, cash equivalents and
marketable securities and operating cash flows will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 12
months. Thereafter, we may need to raise additional funds through public or
private financings or borrowings to fund our operations, to develop or enhance
products, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If required, additional
financing may not be available on terms that are favorable to us, if at all. If
we raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders will be reduced and
these securities might have rights, preferences and privileges senior to those
of our current stockholders or we may be subject to covenants that restrict how
we conduct our business. No assurance can be given that additional financing
will be available or that, if available, such financing can be obtained on terms
favorable to our stockholders and us.
25
Since
January 1, 2007, inflation and changing prices have not had a material effect on
our business. In light of the current economic recession, we are unable to
predict whether inflation or changing prices will materially affect our business
in the foreseeable future.
CRITICAL
ACCOUNTING POLICIES
MathStar’s
consolidated financial statements and accompanying notes have been prepared in
accordance with accounting principles generally accepted in the United States of
America applied on a consistent basis. The preparation of these
consolidated financial statements requires us to make a number of estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We evaluate these estimates and assumptions on
an ongoing basis. We base these estimates on the information
currently available to us and on various other assumptions that we believe are
reasonable under the circumstances. Actual results could vary
materially from these estimates under different assumptions or
conditions.
Our
significant accounting policies are discussed in Note 2, “Significant Accounting
Policies,” of the notes to our audited consolidated financial statements
included in this report. We believe that the following critical
accounting policies affect the more significant estimates and assumptions used
in the preparation of our consolidated financial statements:
Revenue
Recognition
MathStar
recognizes revenue as services are performed and amounts are earned. We consider
amounts to be earned when (1) persuasive evidence of an arrangement has
been obtained; (2) services are delivered; (3) the fee is fixed or
determinable; and (4) collection is reasonably assured. Determination of
criteria (3) and (4) is based on management’s judgments regarding the
fixed nature of the fee charged for services rendered and products delivered and
the ability to collect those fees.
Certain
of our production chip sales are made to distributors under agreements providing
price protection and right of return on unsold merchandise. Revenue and cost
relating to such distributor sales are deferred until the product is sold by the
distributor or return privileges and price protection rights terminate, at which
time related estimated distributor resale revenue, estimated effects of
distributor price adjustments, and estimated costs are reflected in
income.
For
arrangements with multiple elements, we recognize revenue when vendor-specific
objective evidence ("VSOE") exists for all undelivered elements of the
arrangement or at the point when all elements have been delivered. We do not
provide software maintenance and support or have any continuing obligations post
delivery. When more than one element is contained in a single arrangement,
we allocate revenue in accordance with ASC 605-25-5, Multiple-Element
Arrangements, based on objective evidence of fair value, provided that
each element meets the criteria as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the customer on a
standalone basis and there is objective and verifiable evidence of the fair
value of the separate element. Fair value is generally determined based upon the
price charged when the element is sold separately. For most multiple element
arrangements to date the fair value of each element has not been objectively
determinable; therefore, all revenue under such arrangements has been recognized
on delivery of the final element in the arrangement
Research and
Development
Research
and development expenses represent costs incurred for designing and engineering
our FPOA chip and developing design tools and applications to enable customers
to more easily program our chip. Research and development expenses consist
primarily of salaries and related costs of our engineering organization; fees
paid to third party consultants associated with chip and application
development; an allocation of facilities; and depreciation expenses. We expense
all research and development costs related to the development of our FPOA chips.
Development of certain design tools and application IP includes software
available for resale. Such research and development expenses are required to be
expensed until the technological feasibility of the software is
established.
Accounts
Receivable
Accounts
receivable are initially recorded at invoice value upon the shipment of products
or services to customers. They are stated net of allowances for uncollectible
accounts, which represent estimated losses resulting from the inability of
customers to make the required payments. When determining the allowances for
uncollectible accounts, we take several factors into consideration, including
our prior history of accounts receivable write-offs, the type of customer and
our knowledge of specific customers.
26
Inventory
Inventory
is valued at the lower of cost or market and held as an asset until such time as
it is consumed or sold. Inventory is consumed on a first in, first out basis. On
a quarterly basis, management reviews the inventory balance for inventory that
is not forecasted to be used in the normal course of business. A reserve will be
established for any amount deemed excessive or obsolete. This will result in a
non-cash charge to cost of sales. If and when the inventory is written off, the
inventory reduction is offset against the reserve. If the level of future sales
differs significantly from that of the forecast, any future inventory write-off
could result in additional charges to the income statement.
Stock-Based
Compensation
We
measure stock-based compensation expense based on the fair value of the award on
the date of grant. We recognize compensation expense for the fair value of
restricted stock grants issued based on the closing stock price on the date of
grant and account for restricted stock by amortizing the grant date fair value
over the vesting period.
We
account for stock-based compensation to nonemployees using the fair value method
prescribed by ASC 505 - Equity. Compensation cost for
awards granted to nonemployees is measured based on the fair value of the award
at the measurement date, which is the date performance is satisfied or services
are rendered by the nonemployee. Compensation cost is remeasured each period
prior to the establishment of the measurement date. Compensation costs, if any,
are amortized over the underlying awards vesting terms.
The
application of ASC 718 – Compensation – Stock
Compensation includes the use of a number of estimates to compute the
fair value of options granted. Such estimates include the use of an appropriate
valuation model, and assumptions including stock price volatility, expected
terms and forfeiture rates. We have developed an index based on five comparable
companies within the semiconductor industry to use as a volatility index due to
the short period of time we have been public. Average option life has been
calculated using the "simplified" method as prescribed in SEC Staff Accounting
Bulletin 107. Estimated forfeiture rates are determined based on historical
results. Changes in such assumptions could have a material impact on the
financial statements. The only awards remaining are to the officers remaining as
employees and members of the Board of Directors.
Capitalization of
Software
We were
developing certain design tool software and application IP for use on its FPOA
chips. The accounting for development costs of these applications is covered
under ASC 985, "Accounting for
the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs are capitalized once technological feasibility of an
application is established and such costs are determined to be recoverable.
Judgment is required in determining when technological feasibility is
established, and this determination is evaluated on a project by project basis.
For design tools and basic application IP of established algorithms, we define
technological feasibility of an application development project to be the point
at which a feasibility assessment is complete and a detailed technical design
document is established. For design tools and complex applications of new
algorithms or where a technical design document is not sufficiently detailed,
technological feasibility is the point at which a working model has been
created. All costs incurred prior to establishing technological feasibility are
expensed when incurred and are included within research and development expense.
Costs after that date are capitalized and then amortized to cost of sales based
on the greater of a straight-line basis over the useful life of the applications
or the ratio of current sales to the total current and anticipated future
sales.
We
evaluate future recoverability of capitalized amounts on a quarterly basis. The
recoverability of capitalized application software is evaluated based on
estimated future revenues of each specific application reduced by the future
costs of completing and disposing of that product.
Investments
The
Company invests available funds in government securities, money market funds and
high quality securities. The investment criteria is based on the desire to
preserve capital, maintain adequate balances to meet obligations, minimize risk
of principal loss, and yield maximization within the investment guidelines.
Trading and available-for-sale securities are valued at fair value and
held-to-maturity securities are reported at amortized cost.
Income
Taxes
We
account for income taxes in accordance with ASC 740 Accounting for Income Taxes.
The asset and liability approach of ASC 740 requires the recognition of deferred
tax assets and liabilities for the tax consequences of temporary differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes using enacted tax rates in effect for the years in
which the differences are expected to reverse. We have recorded a full valuation
allowance to offset our net deferred tax assets based upon our history of
generating losses and the related uncertainty about our ability to generate
sufficient taxable income to realize these benefits.
27
OFF
BALANCE SHEET ARRANGEMENTS
We do not
have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in these relationships.
ITEM
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
ITEM
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
OF FINANCIAL INFORMATION
CONTENTS
Page(s)
|
||
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
29
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
||
Consolidated
Balance Sheets of MathStar, Inc. as of December 31, 2009 and
2008
|
31
|
|
Consolidated
Statements of Operations of MathStar, Inc. for the Years Ended December
31, 2009 and 2008
|
32
|
|
Consolidated
Statements of Stockholders’ Equity of MathStar, Inc. for the Years Ended
December 31, 2009 and 2008
|
33
|
|
Consolidated
Statements of Cash Flows of MathStar, Inc. for the Years Ended December
31, 2009 and 2008
|
34
|
|
Notes
to Consolidated Financial Statements of MathStar Inc. for the Years Ended
December 31, 2009 and 2008
|
35
|
28
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the
Stockholders, Audit Committee and Board of Directors
MathStar,
Inc.
We have
audited the accompanying consolidated balance sheet of MathStar, Inc. as of
December 31, 2009, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended December 31,
2009. These consolidated financial statements are the responsibility
of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of its internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MathStar, Inc. as of
December 31, 2009 and the results of their operations and cash flows for the
year then ended , in conformity with U.S. generally accepted accounting
principles.
/s/ Baker
Tilly Virchow Krause, LLP
Minneapolis,
Minnesota
March 31,
2010
29
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of MathStar, Inc.:
In
our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
MathStar, Inc. and its subsidiaries at December 31, 2008, and the results
of their operations and their cash flows for the year ended December 31,
2008 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
As
described in Note 1 of the consolidated financial statements, during 2008
the Company curtailed operations and is currently evaluating strategic
alternatives including, but not limited to, restarting the Company, merging with
or acquiring another company, increasing operations in another structure or
liquidation. As of the date of this report, the Company has not committed to any
of the strategic alternatives being evaluated.
PricewaterhouseCoopers LLP
Portland,
Oregon
March 31,
2009
30
MATHSTAR,
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except per share data)
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 13,050 | $ | 11,767 | ||||
Investments
in marketable securities—short-term
|
- | 2,530 | ||||||
Accounts
receivable
|
- | 176 | ||||||
Prepaid
expenses and other current assets
|
54 | 222 | ||||||
TOTAL
CURRENT ASSETS
|
13,104 | 14,695 | ||||||
Property
and equipment, net
|
- | 60 | ||||||
Investments
in marketable securities—long-term
|
- | 785 | ||||||
Put
option
|
- | 26 | ||||||
Other
assets
|
16 | 23 | ||||||
TOTAL
ASSETS
|
$ | 13,120 | $ | 15,589 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 37 | $ | 16 | ||||
Other
accrued liabilities
|
702 | 519 | ||||||
TOTAL
CURRENT LIABILITIES
|
739 | 535 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Lease
obligations and other long-term liability
|
213 | 151 | ||||||
TOTAL
LONG-TERM LIABILITIES
|
213 | 151 | ||||||
TOTAL
LIABILITIES
|
952 | 686 | ||||||
Commitment
and contingency (Note 9)
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Preferred
stock, $0.01 par value, 10,000 shares authorized; no shares issued and
outstanding at December 31, 2009 and 2008
|
- | - | ||||||
Common
stock, $0.01 par value; 18,000 shares authorized; 9,181 shares issued and
outstanding at December 31, 2009 and 2008
|
92 | 92 | ||||||
Additional
paid-in capital
|
155,940 | 155,924 | ||||||
Accumulated
deficit
|
(143,864 | ) | (141,113 | ) | ||||
TOTAL
STOCKHOLDERS’ EQUITY
|
12,168 | 14,903 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 13,120 | $ | 15,589 |
See
notes to consolidated financial statements.
31
MATHSTAR,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
Years ended December
31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 95 | $ | 536 | ||||
Cost
of Revenues
|
105 | 1,195 | ||||||
Gross
Loss
|
(10 | ) | (659 | ) | ||||
Operating
Expenses:
|
||||||||
Research
and development
|
36 | 7,267 | ||||||
Selling,
general and administrative
|
2,200 | 4,749 | ||||||
Restructuring
and impairment charges
|
593 | 2,618 | ||||||
2,829 | 14,634 | |||||||
Operating
loss
|
(2,839 | ) | (15,293 | ) | ||||
Interest
and other income
|
88 | 702 | ||||||
Other
income (expense)
|
- | (20 | ) | |||||
Total
other income (expense)
|
88 | 682 | ||||||
Net
loss
|
$ | (2,751 | ) | $ | (14,611 | ) | ||
Basic
and diluted net loss per share
|
$ | (0.30 | ) | $ | (1.59 | ) | ||
Weighted-average
basic and diluted shares outstanding
|
9,181 | 9,181 |
See
notes to consolidated financial statements.
32
MATHSTAR,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands, except per share data)
Years
Ended December 31, 2009 and 2008
Common
Stock
|
Additional
|
Accumulated
Other
Comprehensive
|
Accumulated
|
Stockholders’
|
||||||||||||||||||||
Shares
|
Par
Value
|
Paid-In
Capital
|
(Loss)
Income
|
Deficit
|
Equity
|
|||||||||||||||||||
Balances
at December 31, 2007
|
45,907 | $ | 459 | $ | 155,539 | $ | - | $ | (126,502 | ) | $ | 29,496 | ||||||||||||
1
for 5 reverse stock split
|
(36,726 | ) | (367 | ) | 367 | - | - | - | ||||||||||||||||
Stock-based
employee compensation
|
- | - | 18 | - | - | 18 | ||||||||||||||||||
Mark
to market – available-for-sale securities
|
- | - | - | (43 | ) | - | (43 | ) | ||||||||||||||||
Transfer
loss from available-for-sale securities to trading
securities
|
- | - | - | 43 | - | 43 | ||||||||||||||||||
Net
loss
|
- | - | - | - | (14,611 | ) | (14,611 | ) | ||||||||||||||||
Balances
at December 31, 2008
|
9,181 | 92 | 155,924 | - | (141,113 | ) | 14,903 | |||||||||||||||||
Stock-based
employee compensation
|
- | - | 16 | - | - | 16 | ||||||||||||||||||
Net
loss
|
- | - | - | - | (2,751 | ) | (2,751 | ) | ||||||||||||||||
Balances
at December 31, 2009
|
9,181 | $ | 92 | $ | 155,940 | $ | - | $ | (143,864 | ) | $ | 12,168 |
See
notes to consolidated financial statements.
33
MATHSTAR,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOW
(in
thousands, except per share data)
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
Loss
|
$ | (2,751 | ) | $ | (14,611 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
7 | 171 | ||||||
Loss
on asset disposal
|
- | 58 | ||||||
Issuance
of put option
|
- | (26 | ) | |||||
Mark
to market, trading securities
|
(40 | ) | 43 | |||||
Mark
to market, put option
|
26 | - | ||||||
Asset
impairment charges
|
- | 1,006 | ||||||
Amortization
of discount on held-to-maturity securities
|
3 | 74 | ||||||
Loss
on sale of available-for-sale securities
|
- | 7 | ||||||
Non-cash
changes in inventory
|
- | 734 | ||||||
Stock-based
employee compensation
|
16 | 18 | ||||||
Restructuring
and impairment charges
|
593 | 563 | ||||||
Gain
on sale of marketable securities
|
- | (42 | ) | |||||
Foreign
currency remeasurement
|
4 | (44 | ) | |||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable
|
176 | 95 | ||||||
Inventory
|
- | (111 | ) | |||||
Prepaid
expenses and other assets
|
175 | 804 | ||||||
Accounts
payable
|
21 | (914 | ) | |||||
Deferred
revenue
|
- | (162 | ) | |||||
Accrued
expenses
|
(299 | ) | (1,711 | ) | ||||
Net
cash used in operating activities
|
(2,069 | ) | (14,048 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
- | (50 | ) | |||||
Proceeds
from sale of equipment
|
- | 23 | ||||||
Proceeds
from held-to-maturity securities
|
2,527 | 22,558 | ||||||
Proceeds
from available-for-sale securities
|
- | 4,460 | ||||||
Proceeds
from sale of trading securities
|
825 | - | ||||||
Purchases
of held-to-maturity securities
|
- | (2,931 | ) | |||||
Purchases
of available-for-sale securities
|
- | (2,685 | ) | |||||
Restricted
cash
|
- | 107 | ||||||
Net
cash provided by investing activities
|
3,352 | 21,482 | ||||||
Effect
of exchange rate changes on cash
|
- | (6 | ) | |||||
Net
increase in cash and cash equivalents
|
1,283 | 7,428 | ||||||
Cash
and cash equivalents:
|
||||||||
Beginning
of year
|
11,767 | 4,339 | ||||||
End
of year
|
$ | 13,050 | $ | 11,767 |
See
notes to consolidated financial statements.
34
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
1.
|
Nature of Business, Basis of
Presentation and Liquidity –
|
The
accompanying consolidated financial statements as of December 31, 2009 and 2008
for the years ended December 31, 2009 and 2008 include accounts
of MathStar Holdings B.V. and its wholly-owned subsidiary, MathStar
Limited, collectively MathStar, Inc. (“MathStar” or the
“Company”). The consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America. All material intercompany accounts and transactions have
been eliminated in consolidation. During the quarter ended March 31, 2009,
MathStar, Inc. closed its wholly-owned subsidiaries, MathStar Holdings B.V.
and MathStar Limited and formed Garuda Acquisition, LLC, a Delaware limited
liability company for the purpose of an acquisition. (Note
10)
During
fiscal years 2007 and 2008, sales did not materialize as expected, and our
development of the next generation of FPOA chips fell even further behind
schedule. As a result, on May 20, 2008, the Board of Directors voted to
suspend research and development activities and ongoing operations while
analyzing strategic alternatives to protect stockholder value. The Board of
Directors explored these strategic alternatives, including merger, acquisition,
increasing operations in another structure or liquidation. MathStar engaged a
third-party investment banking firm to explore the sale of intellectual
property and patents and potential merger and acquisition
alternatives. On January 8, 2010, the Company entered into an
Agreement and Plan of Merger with Sajan, Inc. attached as Exhibit 2.1 to our
Current Report on Form 8-K filed with the SEC on January 11, 2010. On
February 23, 2010, the Company completed a transaction. (Note
10)
The
accompanying consolidated financial statements for the year ended December 31,
2008 were prepared on a basis which assumed that the Company would continue as a
going concern and contemplated the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. Although the
Company has incurred recurring losses and negative cash flows from operations,
the Company has met all financial obligations with vendors, key suppliers, and
strategic partners, both prior and subsequent to curtailing operations. As of
December 31, 2009, the Company has sufficient cash and investments to meet all
known obligations as well as projected expenditures for the next twelve months
at current spending levels. With the closing of the transaction on February 23,
2010 (Note 10), the Company believes it has adequate cash to fund operations for
the next 12 months.
2.
|
Significant Accounting Policies
–
|
Use of
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that may affect certain reported
amounts and disclosures in the consolidated financial statements and
accompanying notes. 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.
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. Investments classified as trading or
available-for-sale are recorded at fair value. Investments recorded as
held-to-maturity are recorded at amortized cost, which, as of December 31,
2009 and 2008 was $0 and $2,530, respectively. The estimated activity of these
investments is more fully disclosed in Note 4 of the consolidated financial
statements.
Revenue
Recognition
We
recognize revenue as services are performed and amounts are earned. We consider
amounts to be earned when (1) persuasive evidence of an arrangement has been
obtained; (2) services are delivered; (3) the fee is fixed or determinable; and
(4) collection is reasonably assured. Determination of criteria (3) and (4) is
based on management’s judgments regarding the fixed nature of the fee charged
for services rendered and products delivered and the ability to collect those
fees.
35
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
Certain
of our production chip sales are made to distributors under agreements providing
price protection and right of return on unsold merchandise. Revenue and cost
relating to such distributor sales are deferred until the product is sold by the
distributor or return privileges and price protection rights terminate, at which
time related estimated distributor resale revenue, estimated effects of
distributor price adjustments, and estimated costs are reflected in
income.
For
arrangements with multiple elements, we recognize revenue when vendor-specific
objective evidence ("VSOE") exists for all undelivered elements of the
arrangement or at the point when all elements have been delivered. We do not
provide software maintenance and support or have any continuing obligations post
delivery. When more than one element is contained in a single arrangement,
we allocate revenue in accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification ASC 605-25-5,
Multiple-Element
Arrangements, based on objective evidence of fair value, provided that
each element meets the criteria as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the customer on a
standalone basis and there is objective and verifiable evidence of the fair
value of the separate element. Fair value is generally determined based upon the
price charged when the element is sold separately. For most multiple element
arrangements to date the fair value of each element has not been objectively
determinable; therefore, all revenue under such arrangements has been recognized
on delivery of the final element in the arrangement.
In accordance with ASC
605, Revenue
Recognition,
we recognize revenue from the sale of products or services in the
following four general areas.
Production
Chips
Production
chip revenues consist of sales of our field programmable object arrays
(“FPOAs”). Our FPOAs are a new class of semiconductor integrated
circuit or chip, which is a small electronic device made out of a semiconductor
material that is used for a variety of electronic devices, including personal
computers, audio and video equipment and other electronic products and
systems. Our FPOA consists of very small, pre-designed, high-speed
computing and data storage elements, or silicon objects, arranged in a grid
pattern, along with internal and external memory and data input and output
channels. We sell our FPOA chips in a blank state as standard
off-the-shelf products. Our chips can be programmed for application-specific
functionality by using a combination of industry standard design tools, our
physical layer design tools and our library of application intellectual property
(IP).
Evaluation
Boards and Licenses
Revenues
generated from evaluation boards and licenses consist primarily of the hardware
and license agreements necessary in order for our customers to program, or map,
their intellectual property applications, or algorithms, to our FPOA
chips.
Application
IP
Our
internal-use software, or Application IP, are existing applications (algorithms)
developed by the Company to provide to customers with an established algorithm
we have developed for sale to customers to ease the transition to FPOA
technology and accelerate their time to market for initial
products. We recognize revenue from the sale of Application IP in
accordance with ASC 350-40, Internal-Use
Software.
NRE
and Other
Our
design flow software enables engineers to design, verify, program and debug
their algorithms and protocols on our Arrix product family, which is the
foundation of our FPOA architecture. Our NRE revenues are derived
when we assist the customer with development of their initial design and
prototype to accelerate their time to market.
Research and
Development
Research
and development expenses represent costs incurred for designing and engineering
our FPOA chip and developing design tools and applications to enable customers
to more easily program our chip. Research and development expenses consist
primarily of salaries and related costs of our engineering organization; fees
paid to third party consultants associated with chip and application
development; an allocation of facilities; and depreciation expenses. We expense
all research and development costs related to the development of our FPOA chips.
Development of certain design tools and application IP includes software
available for resale. Such research and development expenses are required to be
expensed until the technological feasibility of the software is
established.
36
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
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. The Company does not accrue interest on accounts
receivable.
Inventory
Inventory
is valued at the lower of cost or market and held as an asset until such time as
it is consumed or sold. Inventory is consumed on a first in, first out basis. On
a quarterly basis, management reviews the inventory balance for inventory that
is not forecasted to be used in the normal course of business. A reserve will be
established for any amount deemed excessive or obsolete. This will result in a
non-cash charge to cost of sales. If and when the inventory is written off, the
inventory reduction is offset against the reserve. If the level of future sales
differs significantly from that of the forecast, any future inventory write-off
could result in additional charges to the income statement. In June 2008, we
chose to curtail sales and operations and were unable to forecast if any of our
remaining chip inventory would be sold. All inventory currently held is fully
reserved as of December 31, 2009 and 2008 due to our curtailed sales activity
and inability to predict future sales.
Property and
Equipment
Property
and equipment are recorded at cost and depreciated over their estimated useful
lives, initially determined to be two to five 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. In connection with the curtailment of operations, certain
useful lives were re-evaluated and shortened to five months from the date of
announcement.
During
the year ended December 31, 2009, we recorded an impairment for the remaining
value of the property and equipment due to continued curtailment of operations
of $53. (Note 3)
Warranties
We
provide warranties on the products we sell. To date, the costs incurred under
these warranties have been immaterial.
Patents
The
Company has filed applications for patents with the U.S. Patent and Trademark
Office. The legal fees and application costs associated with obtaining patents
from the U.S. Patent and Trademark Offices are expensed as incurred based on
uncertainty as to the recoverability of these amounts. As of December
31, 2009, three patents had been granted by the U.S. Patent and Trademark
Office. The Company has suspended pursuit of the remaining patent
applications until an evaluation of benefits and costs could be
completed.
Long-Lived
Assets
The
recoverability of long-lived assets is assessed periodically or whenever adverse
events or changes in circumstances or business climate indicate that the
expected cash flows previously anticipated warrant a reassessment. When such
reassessments indicate the potential of impairment, all business factors are
considered and, if the carrying value of such assets is not likely to be
recovered from future undiscounted operating cash flows, they will be written
down for financial reporting purposes. During 2008, all assets related to
curtailed operations were either disposed of or written down to fair market
value. As of December 31, 2008, we had long-lived assets with a net book
value of $60. We disposed of our remaining long-lived assets during
fiscal 2009.
Stock-Based
Compensation
We
measure stock-based compensation expense based on the fair value of the award on
the date of grant. We recognize compensation expense for the fair value of
restricted stock grants issued based on the closing stock price on the date of
grant. (Note 5)
37
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
Capitalization of
Software
The
Company was developing certain design tool software and application IP for use
on its FPOA chips. The accounting for development costs of these applications is
covered under ASC 985, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed." Software development
costs are capitalized once technological feasibility of an application is
established and such costs are determined to be recoverable. Judgment is
required in determining when technological feasibility is established, and this
determination is evaluated on a project by project basis. For design tools and
basic application IP of established algorithms, we define technological
feasibility of an application development project to be the point at which a
feasibility assessment is complete and a detailed technical design document is
established. For design tools and complex applications of new algorithms or
where a technical design document is not sufficiently detailed, technological
feasibility is the point at which a working model has been created. All costs
incurred prior to establishing technological feasibility are expensed when
incurred and are included within research and development expense. Costs after
that date are capitalized and then amortized to cost of sales based on the
greater of a straight-line basis over the useful life of the applications or the
ratio of current sales to the total current and anticipated future
sales.
We
evaluate future recoverability of capitalized amounts on a quarterly basis. The
recoverability of capitalized application software is evaluated based on
estimated future revenues of each specific application reduced by the future
costs of completing and disposing of that product.
Investments
The
Company invests available funds in government securities, money market funds and
high quality securities. The investment criteria is based on the desire to
preserve capital, maintain adequate balances to meet obligations, minimize risk
of principal loss, and yield maximization within the investment guidelines.
Trading and available-for-sale securities are valued at fair value and
held-to-maturity securities are reported at amortized cost.
Concentration of Credit
Risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents. The Company places its
cash and cash equivalents primarily in checking and money market accounts with
one financial institution that management considers creditworthy. However, the
Federal Deposit Insurance Corporation does not insure most of these
accounts.
During
2008, we had two significant customers that represented 75% and 9% of our
revenue during the year ended December 31, 2008 and 100% and 0% our
accounts receivable balance as of December 31, 2008, respectively. The
outstanding receivable as of December 31, 2008 has been subsequently
collected. During 2009, we had one sale to one customer and the
invoice was paid in full.
Earnings Per
Share
Basic
earnings per share are computed by dividing the net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share gives effect to all dilutive potential
common shares outstanding during the period, including stock options and
warrants using the treasury stock method. Potential dilutive shares for
convertible notes payable are determined based on the if-converted method.
Options and warrants to purchase 663 and 737 shares of common stock were
outstanding at December 31, 2009 and 2008, respectively, but were not
included in the computation of net loss per share, as their effect was
anti-dilutive. (Note 6)
Income
Taxes
We
account for income taxes in accordance with ASC 740 Accounting for Income Taxes.
The asset and liability approach of ASC 740 requires the recognition of deferred
tax assets and liabilities for the tax consequences of temporary differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes using enacted tax rates in effect for the years in
which the differences are expected to reverse. We have recorded a full valuation
allowance to offset our net deferred tax assets based upon our history of
generating losses and the related uncertainty about our ability to generate
sufficient taxable income to realize these benefits.
38
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
3.
|
Restructuring
and Impairment Charges –
|
On May
20, 2008, the Company announced a curtailment of operations as it evaluated
strategic alternatives to preserve stockholder value. This decision
resulted in restructuring and impairment charges of $3,500 for the year ended
December 31, 2008. Management determined that it was highly likely that
certain operational assets would not be used and no alternatives existed. In
accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived
Assets, these assets were deemed to be impaired and either held-for-sale
or abandoned and written down to their fair market value. A plan to locate
potential buyers was put in place for their disposal, and no further
depreciation expense was charged to the Company’s operating activity for these
assets.
In
addition, the Company evaluated assets that were not abandoned or held-for-sale
and determined that the estimated useful lives of these assets should be
shortened. As well, in accordance with ASC 420, Exit or Disposal Cost
Obligations, certain one-time charges relating to severance to terminated
employees, and fees associated with early contract terminations no longer used
and giving economic benefit to the Company, were recorded. As the liabilities
for these charges were settled, payment was made against the
liability.
During
the quarter ended September 30, 2008, the Company ceased all operations in
Minnesota and is no longer utilizing the facility covered under a
non-cancellable lease arrangement. We recognized a restructuring charge of $17
for the potential liability of this lease. Management believes that
no further charges will be incurred for this activity, except for potential
termination of non-cancellable lease liabilities for the Hillsboro, Oregon
facility, which will depend on the strategic direction chosen by the Company.
The amount of the potential lease termination liability will not be known until
the strategic direction is identified. We recorded a liability of $540, net of
assumptions for sublease income related to the lease termination, for the year
ended December 31, 2009 because the lease, which expires in August 2011, was
abandoned. Total commitments under these leases are $615 and $886 as of
December 31, 2009 and 2008, respectively. Below is the detail of
restructuring and impairment charges for the years ended December 31, 2009 and
2008.
Year Ended
December 31, 2009
|
Year Ended
December 31, 2008
|
|||||||
Inventory
abandoned
|
$ | - | $ | 349 | ||||
Increase
(decrease) in excess and obsolete reserve
|
- | 533 | ||||||
Charged
to cost of sales
|
- | 882 | ||||||
Severance
|
- | 1,506 | ||||||
Fair
market adjustment of assets held-for-sale
|
- | 328 | ||||||
Lease
termination
|
540 | 57 | ||||||
Assets
abandoned
|
53 | 727 | ||||||
Charged
to operating expenses as restructuring and impairment
charges
|
593 | 2,618 | ||||||
Total
charges for restructuring and impairment
|
$ | 593 | $ | 3,500 |
Severance
expense of $0 and $1,506 for the years ended December 31, 2009 and 2008 impacted
approximately 75 employees, which accounted for a majority of the Company's
workforce. The following is a roll forward of the restructuring liability for
the years ended December 31, 2009 and December 31,
2008. We recorded $540 and $53 in restructuring and impairment
charges for the year ended December 31, 2009 for lease terminations and
abandoned assets.
Restructuring
Liability
|
||||
Liability
as of March 31, 2008
|
$ | - | ||
Additions
|
1,506 | |||
Payments
|
(943 | ) | ||
Liability
as of June 30, 2008
|
563 | |||
Additions
|
17 | |||
Payments
|
(568 | ) | ||
Liability
as of September 30, 2008
|
12 | |||
Additions
|
- | |||
Payments
|
(8 | ) | ||
Liability
as of December 31, 2008
|
4 | |||
Additions
|
540 | |||
Payments
|
(4 | ) | ||
Liability
as of December 31, 2009
|
$ | 540 |
39
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
No
further charges will be incurred for this activity due to the
Merger. See Note 10, Subsequent Events, for
further information on the Merger.
4.
|
Select
Balance Sheet Information –
|
Investment
Securities
December 31,
2009
|
December 31,
2008
|
|||||||
Short-term
|
||||||||
Held-to-maturity
|
||||||||
Corporate
bonds and notes
|
$ | - | $ | 2,530 | ||||
Total
short-term investments
|
- | 2,530 | ||||||
Long-term
|
||||||||
Trading
|
||||||||
Auction
preferred securities
|
- | 785 | ||||||
Total
long-term investments
|
- | 785 | ||||||
Total
investments
|
$ | - | $ | 3,315 |
Investment
classified as held-to-maturity have timed maturities to meet forecasted cash
needs and are reported at amortized cost, as the Company has the ability and
intent to hold these securities to maturity. Amortized cost approximates fair
value for held-to-maturity investments. Investments with maturities beyond one
year are classified as long-term investment securities.
Assets
measured at fair value on a recurring basis at December 31, 2009 and 2008
are as follows:
Fair Value Measurement at Reporting Date Using
|
||||||||||||||||||||||||||||||||
Description
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant Unobservable
Inputs (Level 3)
|
Total
|
||||||||||||||||||||||||||||
12/31/09
|
12/31/08
|
12/31/09
|
12/31/08
|
12/31/09
|
12/31/08
|
12/31/09
|
12/31/08
|
|||||||||||||||||||||||||
Put
option
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 26 | $ | - | $ | 26 | ||||||||||||||||
Trading
securities
|
- | - | - | - | - | 785 | - | 785 | ||||||||||||||||||||||||
Total
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 811 | $ | - | $ | 811 |
We have
auction preferred securities (APS), which are preferred equity instruments in a
closed-end mutual fund that provide liquidity through an auction process
conducted by an independent auction agent that resets the applicable dividend
rate at pre-determined calendar intervals, generally every 28 days. These
instruments are senior equity securities that have a liquidation preference of
$26 per share plus the amount of accumulated but unpaid dividends. Upon the
liquidation, dissolution or winding up of the fund, APS holders are entitled to
receive their liquidation preference before any distribution or payment is made
to holders of the fund's common shares. Dividends declared and payable on the
APS have a priority over dividends on the fund's common shares. Outstanding APS
may be redeemed at the option of the fund upon giving notice to APS
holders.
The
Company generally invests in these securities as part of its overall cash
management program. During the first quarter of 2008, the Company's APS failed
to auction due to sell orders exceeding buy orders. The funds associated with
failed auctions will not be accessible until a successful auction occurs, the
fund redeems outstanding APS or an active secondary market is created and a
buyer is identified outside of the auction process.
At
December 31, 2008, there was insufficient observable APS market information
available to determine the fair value of the Company's investments in APS.
Therefore, the Company estimated Level 3 fair values for these securities
by incorporating assumptions that market participants would use in their
estimates of fair value. Despite the failed auctions, the Company's APS continue
to be highly rated by the rating agencies. Of the original $2,680 in APS
purchased, $1,852 was redeemed on May 27, 2008 at face value. We
sold our remaining investments during the year ended December 31,
2009.
40
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
Below is
a reconciliation of the beginning and ending balances for each type of security
valued using a Level 3 valuation at December 31, 2009 and
2008.
Fair Value Measurement Using
Significant Unobservable Inputs
(Level 3)
|
||||||||
Put Option
|
Auction
Preferred
Securities
|
|||||||
Beginning
balance as of December 31, 2007
|
$ | - | $ | - | ||||
Total
gains (losses) realized/unrealized including in earnings
|
- | (43 | ) | |||||
Purchases
|
- | 2,680 | ||||||
Settlements
|
- | (1,852 | ) | |||||
Issuance
of put option
|
26 | - | ||||||
Ending
balance as of December 31, 2008
|
26 | 785 | ||||||
Total
gains (losses) realized/unrealized included in earnings
|
(26 | ) | 40 | |||||
Purchases
|
- | - | ||||||
Settlements
|
- | (825 | ) | |||||
Ending
balance as of December 31, 2009
|
$ | - | $ | - |
On
November 14, 2008, we accepted an offer from UBS AG ("UBS"), which provided
us with rights related to our APS (the "Rights"). The Rights permitted us to
require UBS to purchase our APS at any time during the period from June 30,
2010 until July 2, 2012 at par value, which is defined as the price equal
to the liquidation preference of the APS plus accrued but unpaid dividends or
interest. Conversely, UBS had the right, in its discretion, to purchase or sell
our APS at any time until July 2, 2012 so long as we receive payment at par
value upon any sale or disposition.
The
Rights represented a firm agreement in accordance with ASC 815, Derivatives and Hedging,
which defines a firm agreement as an agreement with an unrelated party, binding
on both parties and usually legally enforceable, with the following
characteristics: a) the agreement specifies all significant terms,
including the quantity to be exchanged, the fixed price, and the timing of the
transaction; and b) the agreement includes a disincentive for
nonperformance that is sufficiently large to make performance probable. The
enforceability of the Rights results in a put option and should be recognized as
a free-standing asset separate from the APS. At December 31, 2009 and 2008, we
recorded $0 and $26 as the fair value of the put option asset with a
corresponding credit to interest income, net. The put option does not meet the
definition of a derivative instrument under ASC 815. Therefore, we have elected
to measure the put option at fair value under ASC 825, Financial Instruments, which
permits an entity to elect the fair value option for recognized financial
assets, in order to match the changes in the fair value of the APS. As a result,
unrealized gains and losses will be included in earnings in future periods. We
expect that future changes in the fair value of the put option will approximate
fair value movements in the related APS. Prior to accepting the UBS offer, we
recorded our APS as investments available-for-sale. We recorded unrealized gains
and losses on our available-for-sale debt securities, net of a tax benefit, in
accumulated other comprehensive income in the stockholders' equity section of
our balance sheets. Such an unrealized loss did not reduce net income for the
applicable accounting period.
In
connection with our acceptance of the UBS offer in November 2008, resulting in
our right to require UBS to purchase our APS at par value beginning on
June 30, 2010, we transferred our APS from investments available-for-sale
to trading securities in accordance with ASC 320, Investments-Debt and Equity
Securities. Prior to our agreement with UBS, our intent was to hold the
APS until the market recovered. The unrealized loss on our APS was $43 as of
December 31, 2008. Upon transfer to trading securities, we immediately
recognized a loss of $43, which is included in interest income, net, for the
amount of the unrealized loss not previously recognized in earnings for the year
ended December 31, 2008. During the year ended December 31, 2009, we sold our
trading securities for $825 and recognized a gain of $40 which is included in
interest income, net.
Inventory
December 31,
2009
|
December 31,
2008
|
|||||||
Raw
materials and subassemblies
|
$ | - | $ | - | ||||
Finished
goods
|
- | 446 | ||||||
- | 446 | |||||||
Less:
Reserve for excess and obsolete inventory
|
- | (446 | ) | |||||
Total
inventory, net
|
$ | - | $ | - |
41
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
Prepaid and Other Current
Assets
December 31,
2009
|
December 31,
2008
|
|||||||
Interest
receivable
|
$ | - | $ | 61 | ||||
Prepaid
insurance
|
27 | 105 | ||||||
Prepaid
rent
|
27 | 26 | ||||||
Other
|
- | 30 | ||||||
Total
prepaid and other current assets
|
$ | 54 | $ | 222 |
Property and
Equipment
December 31,
2009
|
December 31,
2008
|
|||||||
Computer
equipment
|
$ | 51 | $ | 50 | ||||
Purchased
software
|
91 | 91 | ||||||
Equipment
|
- | - | ||||||
Furniture
and fixtures
|
380 | 198 | ||||||
522 | 339 | |||||||
Less
accumulated depreciation
|
(522 | ) | (279 | ) | ||||
Total
property and equipment, net
|
$ | - | $ | 60 |
Depreciation
expense was $7 and $162 for the years ended December 31, 2009 and 2008,
respectively. In 2008, the Company disposed of assets with a net book value of
$823, which resulted in a loss of $58. During the year ended December
31, 2009, the Company recorded an impairment of $53 which is included in
restructuring and impairment charges on the consolidated statements of
operations.
Other
Assets
As of
December 31, 2009 and 2008, the Company had $16 and $23 in security deposits for
leases in Hillsboro, Oregon and Eden Prairie, Minnesota.
Amortization
expense associated with capitalized application software was $0 and $9 for the
years ended December 31, 2009 and 2008, respectively. The remainder of the
capitalized IP was written off in conjunction with the decision to curtail
operations in 2008.
Accrued
Expenses
December 31,
2009
|
December 31,
2008
|
|||||||
Accrued
lease obligations
|
$ | 327 | $ | 47 | ||||
Accrued
compensation
|
- | 9 | ||||||
Accrued
professional fees
|
221 | 148 | ||||||
Accrued
license contracts
|
151 | 302 | ||||||
Accrued
restructuring charges
|
- | 4 | ||||||
Other
|
3 | 9 | ||||||
Total
accrued expenses
|
$ | 702 | $ | 519 |
42
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
5.
|
Stock-based
Compensation –
|
Under ASC
718, Compensation – Stock
Compensation, the Company has elected to use the modified prospective
transition method, which requires the Company to record compensation expense in
accordance with the provisions of ASC 718 only for options issued after
January 1, 2006. Stock based compensation expense for the years ended
December 31, 2009 and 2008 was $16 ($0.00 per share) and $21 ($0.00 per
share), respectively. For the year ended December 31, 2009, $16 was
charged to selling, general and administrative expense, including expenses for
cheap stock. For the year ended December 31, 2008, $2 was credited to
research and development and $23 was charged to selling, general and
administrative expense, including expenses for restricted stock and cheap
stock.
The
Company’s determination of fair value of share-based compensation awards on the
date of grant using an option-pricing model is affected by the Company’s stock
price as well as assumptions regarding a number of variables. These variables
include, but are not limited to, the Company’s expected stock price volatility,
and actual and projected stock option exercise behaviors and forfeitures. An
option’s expected term is the estimated period between the grant date and the
exercise date of the option. As the expected term increases, the fair value of
the option and the compensation cost will also increase. The expected-term
assumption is generally calculated using historical stock option exercise data.
The Company does not have historical exercise data to develop such an
assumption. In cases where companies do not have historical data and where the
options meet certain criteria, SEC Staff Accounting Bulletin 107 (“SAB 107”)
provides the use of a simplified expected-term calculation. Accordingly, the
Company calculated the expected terms using the SAB 107 simplified
method.
The
Company calculates expected volatility for stock options and awards using its
own stock price and comparable within the semiconductor industry to use as a
volatility index due to the short period of time it has been public. Management
expects and estimates that substantially all director stock options will vest,
and therefore the forfeiture rate used was zero. Due to the
curtailment of operations, it was determined that there was a high probability
that all options granted to employees would be forfeited rather than exercised.
As such, the forfeiture rate on those options was increased to 100% in the
Black-Scholes model, and associated expenses were adjusted.
The
risk-free rates for the expected terms of the stock options are based on the
U.S. Treasury yield curve in effect at the time of grant.
In
determining the compensation cost of the options granted during 2009 and 2008,
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:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Risk-free
interest rate
|
2.41 | % | 2.63 | % | ||||
Expected
life of options granted
|
6.25
Yrs
|
6.25
Yrs
|
||||||
Expected
volatility range
|
58.4 | % | 64.3 | % | ||||
Expected
dividend yield
|
- | % | - | % |
Using the
Black-Scholes option pricing model, management has determined that the options
and warrants issued in 2009 and 2008 have a weighted-average grant date fair
value of $0.84 and $0.45 per share, respectively.
Stock Option
Plans
In
October 2004, the Company adopted and in June 2005 its stockholders approved the
2004 Amended and Restated Long-Term Incentive Plan (the "2004 Plan"). Under the
2004 Plan, 1,633 shares of the Company's common stock were reserved for the
issuance of restricted stock and incentive and nonqualified stock options to
directors, officers and employees of and advisors to the Company at exercise
prices as determined by the Board of Directors on the dates of grants. With the
approval of stockholders at the 2006 and 2007 annual meetings, 300 and 1,367
additional shares were reserved, respectively, under the 2004
Plan.
43
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
Shares
Available for
Grant
|
Number of
Options
|
Weighted-Average
Exercise Price
|
||||||||||
Outstanding
at December 31, 2007
|
46 | 670 | $ | 18.13 | ||||||||
Net
increase in authorized shares
|
600 | - | - | |||||||||
Options
granted
|
(30 | ) | 30 | 2.34 | ||||||||
Options
forfeited
|
596 | (596 | ) | 16.74 | ||||||||
Options
cancelled
|
(163 | ) | - | - | ||||||||
Restricted
stock cancelled
|
- | - | - | |||||||||
Options
exercised
|
- | - | - | |||||||||
Outstanding
at December 31, 2008
|
1,049 | 104 | $ | 21.54 | ||||||||
Net
increase in authorized shares
|
- | - | - | |||||||||
Options
granted
|
(22 | ) | 22 | 1.20 | ||||||||
Options
forfeited/cancelled
|
44 | (44 | ) | 12.98 | ||||||||
Options
exercised
|
- | - | - | |||||||||
Outstanding
at December 31, 2009
|
1,071 | 82 | $ | 19.45 | ||||||||
Exercisable
at December 31, 2009
|
- | 59 | $ | 26.58 |
The
following table summarizes information about stock options outstanding at
December 31, 2009:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Range of Exercise Prices
|
Number
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
Number
Outstanding
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||
$0.72
|
2 | 8.95 | $ | 0.72 | 2 | $ | 0.72 | |||||||||||||
$0.88
|
5 | 9.16 | 0.88 | - | - | |||||||||||||||
$1.30
|
17 | 4.51 | 1.30 | - | - | |||||||||||||||
$3.10
- $5.35
|
4 | 3.83 | 4.81 | 4 | 4.81 | |||||||||||||||
$8.45
|
3 | 7.38 | 8.45 | 2 | 8.45 | |||||||||||||||
$17.25
- $24.45
|
16 | 1.27 | 17.61 | 16 | 17.61 | |||||||||||||||
$30.00
- $31.50
|
18 | 5.69 | 30.67 | 18 | 30.67 | |||||||||||||||
$41.25
|
17 | 2.07 | 41.25 | 17 | 41.25 | |||||||||||||||
82 | 3.84 | $ | 19.45 | 59 | $ | 26.58 |
Options
outstanding at December 31, 2009 and 2008 had an aggregate intrinsic value of $8
and $0, respectively. Options exercisable at December 31, 2009
had a weighted average contractual term of 3.47 years and an aggregate
intrinsic value of $2 compared to options exercisable at December 31, 2008
with a weighted average contractual term of 4.97 years and an aggregate
intrinsic value of $0.
The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2009 and 2008 was $0.68 and $1.48, respectively. There were no
options exercised during the years ended December 31, 2009 and 2008. The
total fair value of shares vested for the years ended December 31, 2009 and
2008 were $127 and $896, respectively.
The
following table shows the status of the Company's unvested shares as of
December 31, 2009 and 2008 and changes during the years then
ended:
44
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
Shares
|
Weighted Average
Grant Date Fair
Value
|
|||||||
Unvested
at December 31, 2007
|
456 | $ | 6.92 | |||||
Granted
|
25 | 1.39 | ||||||
Vested
|
(64 | ) | 7.87 | |||||
Forfeited
|
(396 | ) | 6.42 | |||||
Unvested
at December 31, 2008
|
21 | 6.87 | ||||||
Granted
|
17 | 1.30 | ||||||
Vested
|
(15 | ) | 21.33 | |||||
Forfeited
|
- | - | ||||||
Unvested
at December 31, 2009
|
23 | $ | 0.99 |
Stock
options outstanding at December 31, 2009 and 2008 include options to
purchase 30 and 78 shares that were granted to non-employees and options to
purchase 52 and 26 shares that were granted to employees. Compensation expense
related to stock options that will be amortized into future operating expenses
was $3 at December 31, 2009. That cost is expected to be recognized over a
weighted-average period of 2 years.
Cheap
Stock
In 2005,
the Company issued options to purchase 1,065 shares to certain employees at a
price below the fair market value on the date of grant. The difference between
the fair value and the exercisable value is expensed over the vesting period of
four years. For the years ended December 31, 2009 and 2008, we recaptured a
net $6 and $3 due to the termination of employees. All options issued after our
initial public offering were issued at the fair value at the date of grant, and
no cheap stock expense was incurred.
6.
|
Stockholders’
Equity –
|
Authorized
Shares
The
Company's authorized capital consists of 28,000 shares of capital stock, of
which 18,000 shares have been designated as common stock ($0.01 per share par
value), and 10,000 shares have been designated as preferred stock ($0.01 per
share par value). In addition, as of December 31, 2009, 1,200 of the 18,000
shares of common stock had been reserved for issuance under the Company's stock
option plans. Each share of common stock entitles the holder to one
vote.
Stock
Split
On
May 23, 2008, the Board of Directors and stockholders declared a
one-for-five reverse stock split. The accompanying consolidated financial
statements and related notes give retroactive effect to this reverse stock
split.
Warrants
There was
no stock-based compensation expense related to warrants vested during the years
ended December 31, 2009 and 2008. The weighted average remaining
contractual life of the warrants outstanding is 1.6 years.
The
following table summarizes warrant activity:
Warrants
Outstanding
|
Price Range Per
Share
|
|||||
Outstanding
at December 31, 2007
|
3,364 |
$4.41
- $7.20
|
||||
Warrants
issued
|
- | |||||
Warrants
exercised
|
- | |||||
Adj.
for 1 for 5 reverse split
|
(2,691 | ) | ||||
Warrants
expired
|
(40 | ) | ||||
Outstanding
at December 31, 2008
|
633 |
$22.05—$36.00
|
||||
Warrants
exercised
|
- | |||||
Warrants
expired
|
(52 | ) | ||||
Outstanding
at December 31, 2009
|
581 |
$22.05—$36.00
|
45
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
7.
|
Income
Taxes –
|
The
Company has not recorded any income tax benefit for losses recorded since
inception.
The
components of deferred income taxes are as follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
operating loss carryforwards
|
$ | 11,363 | $ | 47,954 | ||||
Research
and experimentation credit carryforwards
|
3,888 | 3,886 | ||||||
Stock
options, warrants, restricted stock, accrued expenses,
reserves
|
621 | 696 | ||||||
Total
deferred tax assets
|
15,872 | 52,536 | ||||||
Valuation
allowance
|
(15,872 | ) | (52,536 | ) | ||||
Net
deferred tax asset
|
$ | - | $ | - |
The
Company has federal and state net operating loss carryforwards of approximately
$27,833.
The
Company has established valuation allowances to fully offset its deferred tax
assets due to uncertainty about the Company's ability to generate the future
taxable income necessary to realize these deferred tax assets, particularly in
light of the Company's recent history of significant operating
losses. The net operating loss carryforwards and the valuation
allowance have been reduced by $92,668 and $37,832, respectively, to reflect
limitations under the provisions of the Internal Revenue Code, Section 382
resulting from certain changes in ownership.
The valuation allowance
decreased by $36,664 and increased by $5,888 for the years ended December 31,
2009 and 2008, respectively. Future utilization of available
net operating loss carryforwards may be limited under Internal Revenue Code
Section 382 as a result of significant changes in ownership. These
limitations could result in reduction of these net operating loss carryforwards
before they are utilized. See Note 10 relating to the Tax Benefit Preservation
Plan and Rights Agreement.
The
Company's federal and state net operating loss carryforwards expire in various
calendar years from 2015 through 2029. Available research and development credit
carryforwards at December 31, 2009, represent federal and state amounts of
$3,231 and $1,007, respectively, with expiration dates in calendar years 2020
through 2028.
The
Company's effective income tax rate differs from the U.S. Federal income tax
rate as shown below for the years ended December 31:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Tax
expense (benefit) at the federal statutory rate
|
(35.00 | )% | (35.00 | )% | ||||
State
income tax (benefit), net of federal income tax effect
|
(5.82 | )% | (5.61 | )% | ||||
Research
credits
|
- | % | (1.97 | )% | ||||
Permanent
differences
|
7.71 | % | (.04 | )% | ||||
Tax
provision to tax return true-up
|
(9.39 | )% | 2.06 | % | ||||
Other
|
0 | % | 2.32 | % | ||||
Increase
in valuation allowance
|
42.50 | % | 38.25 | % | ||||
Effective
tax rate
|
0.00 | % | 0.00 | % |
The
Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement with the relevant tax authority.
The Company had no significant unrecognized tax benefits as of December 31, 2009
and 2008 and, likewise, no significant unrecognized tax benefits that, if
recognized, would affect the effective tax rate. Any interest or penalties
are expensed as general and administrative expense as incurred. The
statute of limitations remains open for tax years ended December 31, 2006
through 2009 for federal income tax purposes. These open years remain subject to
examination by major tax jurisdictions as of December 31, 2009.
46
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
8.
|
401(k)
Savings Plan –
|
During
2000, the Company established a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. This plan covers substantially
all employees who meet minimum age and service requirements and allows
participants to defer a portion of their annual compensation on a pre-tax basis.
The Company may make contributions to the plan at the discretion of the Board of
Directors. The Company has made no contributions to the plan. The plan was
terminated on December 31, 2008.
9.
|
Commitments
and Contingencies –
|
Operating
Leases
The
Company leases its office and research facilities and certain office equipment
under non-cancellable operating leases. Total rent expense under these operating
leases was $325 and $370 for the years ended December 31, 2009 and 2008,
respectively.
Future
minimum lease payments under non-cancellable operating leases at
December 31, 2009 are as follows:
Year Ending December 31,
|
||||
2010
|
$
|
358
|
||
2011
|
257
|
|||
$
|
615
|
As
disclosed in Note 3, the Company recorded a lease termination charge of $540 for
the year ended December 31, 2009.
Other Long-Term
Commitments
Purpose
Obligations. The Company has entered into a non-cancellable
long-term commitment with Synopsys for the purchase of design tools. Payments
under this agreement for the year ended December 31, 2009 were
$302. Payments under this agreement will be $151 during the year
ending December 31, 2010 and are included in accrued liabilities on our
balance sheet.
Legal
proceedings. In the ordinary course of business, the Company
is subject to legal proceedings and claims. In the opinion of management, the
amount of ultimate liability with respect to these actions may or may not
materially affect the financial position of the Company nor can an estimate be
made. The Company expenses legal costs during the period incurred.
On
October 8, 2009, legal counsel for Tiberius Capital II, LLC (Tiberius), sent by
email to legal counsel for MathStar, Inc. (MathStar) a copy of a draft complaint
naming MathStar, Sajan and others as defendants. (Note 10) The
complaint stated that Tiberius was bringing a class action lawsuit on behalf of
a class consisting of all those who purchased MathStar’s securities between May
11, 2009 and September 30, 2009. The complaint was to be filed in the United
States District Court for the Southern District of New York. The complaint
alleged (1) violations of Section 13(d) of the Securities Exchange Act of 1934
(the Exchange Act) and the Rules of the Securities and Exchange Commission (the
SEC) thereunder against the defendants except Sajan for alleged failure to
report that such defendants were acting as a “group” for purposes of purchasing
MathStar’s shares of common stock; (2) breaches of Section 14(a) of the Exchange
Act and the Rules of the SEC thereunder against the defendants except Sajan for
alleged misstatements in MathStar’s proxy statement filed with the SEC on June
17, 2009 (the Proxy Statement) and in connection with MathStar’s annual meeting
of stockholders held on July 10, 2009; (3) violations of Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated by the SEC thereunder against the
defendants except Sajan for alleged misstatements made in the Proxy Statement
and in an alleged fraud on the market by such defendants; (4) violations of
Section 14 of the Exchange Act and Rule 14e-3 promulgated by the SEC thereunder
against the defendants except Sajan for actions taken by such defendants in
connection with an alleged “creeping” tender offer; (5) control party liability
under Section 20(a) of the Exchange Act against the MathStar directors for
alleged violations of Sections 14(a) and 14(e) of the Exchange Act and Rule
10b-5 thereunder; (6) breach of fiduciary duty against the MathStar directors;
and (7) civil conspiracy against the defendants. In the complaint, Tiberius
requested that the court enter a judgment in favor of Tiberius and the
plaintiff’s class and against the defendants declaring that MathStar violated
“§10b-5, §13d, §14a and §14e” of the Exchange Act and rules promulgated
thereunder, including Regulation FD; enter judgment in favor of Tiberius and the
plaintiffs class and against the MathStar directors in the amount of $10,000,000
in compensatory and punitive damages; award Tiberius all of its costs incurred
in connection with the action, including reasonable attorneys’ fees; and grant
such other and further relief as the Court deems to be just and equitable. The
Tiberius complaint was never filed in court or served on the
defendants.
47
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
On
October 14, 2009, the defendants named in the Tiberius complaint (the “Minnesota
Parties”) filed a Complaint in the United States District Court for the District
of Minnesota captioned “MathStar, Inc., Feltl and Company, Inc., Sajan, Inc.,
Perkins Capital Management, Inc., Richard C. Perkins, Merrill A. McPeak, Benno
G. Sand, John C. Feltl and Joseph P. Sullivan, Plaintiffs, v. Tiberius Capital
II, LLC, Defendant” (the “Minnesota Complaint”). In the Minnesota Complaint, the
Minnesota Parties state that Tiberius is threatening to bring a class action
lawsuit against them, as set forth in the draft Tiberius complaint. The
Minnesota Complaint also alleges a claim of tortious interference with
prospective economic advantage against Tiberius on behalf of MathStar, Sajan and
Feltl and Company, Inc. (“F&C”). The Minnesota Complaint requests judgment
in favor of the Minnesota Parties declaring that their actions described in the
Minnesota Complaint were lawful; declaring that the Minnesota Parties have not
violated any legal duties to Tiberius; declaring that the proposed Tiberius
Complaint is without merit; awarding money damages to MathStar, Sajan and
F&C in an amount to be determined at trial to compensate such Minnesota
Parties for Tiberius’ tortious interference with their economic advantage;
awarding the Minnesota Parties their costs, disbursements and reasonable
attorneys’ fees; and awarding the Minnesota Parties such other and further
relief as the Court deems to be just, proper and equitable. The Minnesota
Complaint was served on Tiberius on October 21, 2009.
On
November 9, 2009, Tiberius served and filed its Answer and Counterclaim denying
liability under the Minnesota Complaint and asserting substantially the same
claims set forth in the draft Tiberius complaint and, in addition, asserting
common law claims for fraud against the Minnesota Parties except Sajan and
against all of the Minnesota Parties for wrongful interference with the
prospectively advantageous, successful completion of its tender offer for
MathStar’s shares of common stock. On December 8, 2009, Tiberius served and
filed an Answer and Amended Counterclaim in which it added a jurisdictional
allegation and asserted claims for declaratory relief under its other claims.
The Minnesota Parties filed timely motions to dismiss the Tiberius Counterclaim
and Amended Counterclaim on several grounds. The motions were fully briefed, and
oral arguments took place before the Court on February 9, 2010. A ruling on the
motions is expected mid-2010. A case scheduling conference was held on January
14, 2010 before the Magistrate Judge, at which it was determined that a schedule
will be established following a ruling on the motions.
The
Company believes the Tiberius complaint is without merit and it is not liable
for any of these claims.
10.
|
Subsequent
Events –
|
Chief Accounting Officer
Resignation
On
February 4, 2010, the MathStar’s Chief Accounting Officer resigned.
Chief Executive Officer
Resignation
On
February 23, 2010, the MathStar’s Chief Executive Officer and Chief Financial
Officer resigned.
Reverse Merger
Transaction
Pursuant
to an Agreement and Plan of Merger dated January 8, 2010, by and among MathStar,
Inc., a Delaware corporation, and Sajan, Inc. a privately held Minnesota
corporation whose business is providing language translation technology and
service; Garuda Acquisition, LLC, a wholly-owned subsidiary of MathStar, now
known as Sajan, LLC; and Thomas Magne, solely in his capacity as agent for the
holders of common stock of Sajan, Inc. Under the terms of the Merger
Agreement, and upon satisfaction of the conditions set forth in the Merger
Agreement, Sajan, Inc. was merged with and into Garuda Acquisition, LLC, which
survived the Merger and changed its name to Sajan, LLC. In the Merger, Sajan
became a wholly-owned subsidiary of MathStar. MathStar will continue the
business of Sajan and operate as a provider of language translation technology
and service under the Sajan name. The Merger was closed and effective on
February 23, 2010.
At
closing, MathStar paid $6.10 million in cash, of which $5.10 million was paid to
existing stockholders of Sajan and $1.00 million was placed in escrow to be held
for 12 months to secure the indemnification obligations of Sajan and its
stockholders to MathStar under the Merger Agreement. In addition, in the Merger,
MathStar issued a one year $1.00 million promissory note to the majority
stockholders of Sajan.
48
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
In
exchange for the acquisition by MathStar of all outstanding capital stock of
Sajan, MathStar issued a total of approximately 7,000 shares of MathStar common
stock to former Sajan stockholders at the closing, and MathStar reserved, as of
the closing, approximately 945 shares of MathStar common stock for issuance upon
the exercise of options and warrants pursuant to the Merger.
As a
result of the Merger, each outstanding share of Sajan common stock was converted
into 1.225 shares of MathStar common stock. Options to purchase Sajan common
stock issued under Sajan’s 2001 Plan and certain non-plan options and warrants
were converted into options and warrants to purchase MathStar common stock and
will remain outstanding as options and warrants to purchase shares of MathStar
common stock. Immediately after the closing of the Merger, the former
stockholders of Sajan, Inc. owned approximately 43% of the outstanding shares of
MathStar common stock.
Pursuant
to the Merger, Sajan merged with and into Garuda, with Garuda as the surviving
entity. For accounting purposes, Sajan is treated as the continuing reporting
entity that acquired MathStar because Sajan obtained effective control of
MathStar as a result of the Merger. This determination was based on the
following facts: Sajan stockholders will have a large minority interest in the
combined entity, the governing board will consist of a majority of Sajan board
members, and the composition of the senior management will be Sajan’s management
team. Under this method of accounting, the recognition and measurement
provisions of the accounting guidance for business combinations do not apply
and, therefore, there is no recognition of goodwill or other intangible assets.
Instead, the acquisition has been treated as the equivalent of Sajan issuing
stock for the net monetary assets of MathStar, primarily cash, which are stated
at their carrying value. Because of the Merger, the historical results in future
Quarterly Reports on Form 10-Q and annual reports on Form 10-K will represent
those of Sajan.
At the
time of the merger between MathStar and Sajan, the following amounts are being
allocated of MathStar’s net monetary assets and liabilities at the date of the
Merger to Sajan, as follows (in thousands):
Cash
and cash equivalents
|
$ | 5,421 | ||
Restricted
cash
|
1,000 | |||
Prepaid
expenses and other assets
|
22 | |||
Accounts
payable and accrued liabilities
|
(652 | ) | ||
Notes
payable – related party
|
(1,000 | ) | ||
Net
monetary assets
|
$ | 4,791 |
Cash and cash equivalents,
restricted cash, prepaid expenses and other assets, accounts
payable: The tangible assets and liabilities were valued at their
respective carrying amounts by MathStar, except for adjustments to accrued lease
obligations, necessary to state such amounts at their estimated fair values at
the acquisition date.
Accrued liabilities: Sajan
retains the accrued lease obligations under MathStar’s non-cancellable operating
leases, pursuant to which total rent expense is projected to be $358 and $257
for the years ending December 31, 2010 and 2011, respectively. In addition,
Sajan retains MathStar’s non-cancellable long-term commitment with Synopsys for
the purchase of design tools. Payments under this agreement will be $151 during
the year ending December 31, 2010.
Merger transaction costs:
MathStar incurred merger transaction costs of $543, including financial
advisory, legal, accounting and due diligence costs, which are recorded as
merger transaction expenses on the consolidated statement of operations for the
year ended December 31, 2009.
The
accompanying unaudited pro forma combined financial statements are presented as
if Sajan and MathStar had been operating as a combined entity. The unaudited pro
forma combined balance sheet as of December 31, 2009 presents the financial
position assuming the acquisition had occurred on December 31, 2009. The
unaudited pro forma combined statement of operations for the year ended December
31, 2009 presents the results of operations assuming the acquisition had
occurred on January 1, 2009. All material adjustments to reflect the acquisition
are set forth in the column “Pro Forma Adjustments”. The pro forma data is for
informational purposes only and may not necessarily reflect future results of
operations and financial position or what the results of operations or financial
position would have been had Sajan and MathStar been operating as a combined
entity for the specific periods.
49
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
MATHSTAR,
INC.
|
UNAUDITED
PRO FORMA COMBINED BALANCE SHEETS
|
(in
thousands, except per share data)
|
December 31, 2009
|
Sajan, Inc.,
Subsidiaries,
and Affiliate
|
Deconsolidation of
River Valley
Business Center,
LLC
|
Sajan, Inc. and
Subsidiaries
|
MathStar, Inc.
|
Cash Pay Out
Adjustments
|
Pro forma
Adjustments
|
Record MathStar Net
Assets Adjustments
|
Unaudited Pro forma Total
|
|||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 120 | $ | 91 | $ | 29 | $ | 13,050 | $ | (5,100 | ) A | $ | 61 |
B,C
|
$ | 5,421 | F,J | $ | 5,511 | |||||||||||||
Restricted
cash
|
- | - | - | - | - | - | 1,000 | E | 1,000 | |||||||||||||||||||||||
Accounts
receivable, net of allowance of $10,000
|
2,871 | 30 | 2,841 | - | - | - | - | 2,841 | ||||||||||||||||||||||||
Deferred
tax asset
|
660 | - | 660 | - | - | - | - | 660 | ||||||||||||||||||||||||
Unbilled
services
|
257 | - | 257 | - | - | - | - | 257 | ||||||||||||||||||||||||
Other
current assets
|
39 | 110 | (71 | ) | 54 | - | - | 7 | F | (64 | ) | |||||||||||||||||||||
Total
current assets
|
3,947 | 231 | 3,716 | 13,104 | (5,100 | ) | 61 | 6,428 | 10,205 | |||||||||||||||||||||||
Property
and equipment, net
|
3,350 | 2,571 | 779 | - | - | - | - | 779 | ||||||||||||||||||||||||
Other
assets:
|
||||||||||||||||||||||||||||||||
Intangible
assets, net
|
337 | - | 337 | - | - | - | - | 337 | ||||||||||||||||||||||||
Capitalized
software development costs, net
|
877 | - | 877 | - | - | - | - | 877 | ||||||||||||||||||||||||
Other
assets, net
|
24 | 24 | - | 16 | - | - | 15 | F | 15 | |||||||||||||||||||||||
Total
other assets
|
1,238 | 24 | 1,214 | 16 | - | - | 15 | 1,229 | ||||||||||||||||||||||||
Total
assets
|
$ | 8,535 | $ | 2,826 | $ | 5,709 | $ | 13,120 | $ | (5,100 | ) | $ | 61 | $ | 6,443 | $ | 12,213 | |||||||||||||||
Liabilities
and Stockholders' Equity
|
||||||||||||||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||||||||||||||
Checks
issued in excess of bank balance
|
$ | 113 | $ | - | $ | 113 | $ | - | $ | - | $ | - | $ | - | $ | 113 | ||||||||||||||||
Current
portion of capital lease obligations
|
11 | - | 11 | - | - | - | - | 11 | ||||||||||||||||||||||||
Current
portion of long-term debt
|
105 | 105 | - | - | - | - | - | - | ||||||||||||||||||||||||
Cash
paid out at closing
|
- | - | - | - | (5,100 | ) A | - | - | - | |||||||||||||||||||||||
Note
payable - related party
|
293 | 31 | 262 | - | - | (262 |
) C
|
1,000 | E | 1,000 | ||||||||||||||||||||||
Note
payable - indemnification
|
- | - | - | - | - | - | 1,000 | E | 1,000 | |||||||||||||||||||||||
Line
of credit
|
1,000 | - | 1,000 | - | - | - | (1,000 | ) J | - | |||||||||||||||||||||||
Accounts
payable
|
901 | 51 | 850 | 37 | - | - | 28 | F | 878 | |||||||||||||||||||||||
Accrued
interest - related party
|
23 | - | 23 | - | - | (23 | ) C | - | - | |||||||||||||||||||||||
Accrued
compensation and benefits
|
505 | - | 505 | - | - | - | - | 505 | ||||||||||||||||||||||||
Other
accrued liabilities
|
748 | - | 748 | 702 | - | (461 | ) D | 717 | F,K | 1,004 | ||||||||||||||||||||||
Deferred
revenue
|
337 | 6 | 331 | - | - | - | - | 331 | ||||||||||||||||||||||||
Total
current liabilities
|
4,036 | 193 | 3,843 | 739 | (5,100 | ) | (746 | ) | 1,745 | 4,842 | ||||||||||||||||||||||
Long-term
liabilities:
|
||||||||||||||||||||||||||||||||
Long-term
debt, net of current portion
|
2,412 | 2,412 | - | - | - | - | - | - | ||||||||||||||||||||||||
Other
long-term liability
|
20 | - | 20 | 213 | - | - | 213 | F | 233 | |||||||||||||||||||||||
Deferred
tax liabilities
|
605 | - | 605 | - | - | - | - | 605 | ||||||||||||||||||||||||
Total
long-term liabilities
|
3,037 | 2,412 | 625 | 213 | - | - | 213 | 838 | ||||||||||||||||||||||||
Total
liabilities
|
7,073 | 2,605 | 4,468 | 952 | (5,100 | ) | (746 | ) | 1,958 | 5,680 | ||||||||||||||||||||||
Stockholders'
equity:
|
||||||||||||||||||||||||||||||||
Common
stock
|
57 | - | 57 | 92 | - | - | 103 | F,K | 160 | |||||||||||||||||||||||
Additional
paid-in capital
|
1,919 | - | 1,919 | 155,940 | - | 263 | H,I | 4,382 | F,K | 6,564 | ||||||||||||||||||||||
Accumulated
deficit
|
(709 | ) | - | (709 | ) | (143,864 | ) | - | 544 | B,D,H,I | - | (165 | ) | |||||||||||||||||||
Accumulated
other comprehensive loss:
|
||||||||||||||||||||||||||||||||
Foreign
currency adjustment
|
(23 | ) | - | (23 | ) | - | - | - | - | (23 | ) | |||||||||||||||||||||
Stockholders'
equity
|
1,244 | - | 1,244 | 12,168 | - | 807 | 4,485 | 6,536 | ||||||||||||||||||||||||
Non-controlling
interest in subsidiary
|
(3 | ) | - | (3 | ) | - | - | - | - | (3 | ) | |||||||||||||||||||||
Non-controlling
interest in equity of affiliate
(River
Valley Business Center, LLC)
|
221 | 221 | - | - | - | - | - | - | ||||||||||||||||||||||||
Total
equity
|
1,462 | 221 | 1,241 | 12,168 | - | 807 | 4,485 | 6,533 | ||||||||||||||||||||||||
Total
liabilities and stockholders' equity
|
$ | 8,535 | $ | 2,826 | $ | 5,709 | $ | 13,120 | $ | (5,100 | ) | $ | 61 | $ | 6,443 | $ | 12,213 |
MathStar,
Inc.
Common
stock, $.01 par value, 18,000 shares authorized, 9,181 (pre merger) and 16,009
(pro forma) issued and outstanding at December 31, 2009
Preferred
stock, $.01 par value, 10,000 shares authorized, no shares issued and
outstanding at December 31, 2009
SEE NOTES
TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
50
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
MATHSTAR,
INC.
|
UNAUDITED
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
|
(in
thousands, except per share data)
|
For the year ended December 31,
2009
|
Sajan,
Inc.,
Subsidiaries,
and
Affiliate
|
Deconsolidation
of
River Valley
Business Center,
LLC
|
Adjustments
|
Sajan,
Inc. and
Subsidiaries
|
MathStar,
Inc.
|
Pro
forma
Adjustments
|
Unaudited
Pro
forma
Total
|
||||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||||||
Translation
and consulting income
|
$ | 11,640 | $ | - | $ | - | $ | 11,640 | $ | - | $ | - | $ | 11,640 | ||||||||||||||
Technology
income
|
1,019 | - | - | 1,019 | - | - | 1,019 | |||||||||||||||||||||
Rental
income
|
67 | 406 | 339 | G | - | - | - | - | ||||||||||||||||||||
Other
revenue
|
- | - | - | - | 95 | - | 95 | |||||||||||||||||||||
Total
revenues
|
12,726 | 406 | 339 | 12,659 | 95 | - | 12,754 | |||||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||
Cost
of revenues (exclusive of amortization and depreciation included in
general and administrative below)
|
7,002 | - | - | 7,002 | 105 | - | 7,107 | |||||||||||||||||||||
Sales
and marketing
|
3,414 | - | - | 3,414 | - | 158 | I | 3,572 | ||||||||||||||||||||
Research
and development
|
596 | - | - | 596 | 36 | 3 | I | 635 | ||||||||||||||||||||
General
and administrative
|
2,875 | 246 | 339 | G | 2,968 | 2,200 | (705 | ) H | 4,463 | |||||||||||||||||||
Restructuring
and impairment charges
|
- | - | - | - | 593 | - | - | |||||||||||||||||||||
Total
operating expenses
|
13,887 | 246 | 339 | 13,980 | 2,934 | (544 | ) | 15,777 | ||||||||||||||||||||
Income
(loss) from operations
|
(1,161 | ) | 160 | - | (1,321 | ) | (2,839 | ) | 544 | (3,023 | ) | |||||||||||||||||
Other
income (expense):
|
||||||||||||||||||||||||||||
Interest
expense
|
(209 | ) | (165 | ) | - | (44 | ) | - | - | (44 | ) | |||||||||||||||||
Interest
and other income
|
4 | - | - | 4 | 88 | - | 92 | |||||||||||||||||||||
Other
expense
|
(38 | ) | - | - | (38 | ) | - | - | (38 | ) | ||||||||||||||||||
Total
other income (expense)
|
(243 | ) | (165 | ) | - | (78 | ) | 88 | - | 10 | ||||||||||||||||||
Net
loss before income taxes and non-controlling interests in subsidiary and
affiliate
|
(1,404 | ) | (5 | ) | - | (1,399 | ) | (2,751 | ) | 544 | (3,013 | ) | ||||||||||||||||
Income
tax benefit
|
(308 | ) | - | - | (308 | ) | - | - | (308 | ) | ||||||||||||||||||
Net
loss before non-controlling interest
|
(1,096 | ) | (5 | ) | - | (1,091 | ) | (2,751 | ) | 544 | (3,298 | ) | ||||||||||||||||
Less
Non-controlling interest in subsidiary
|
(4 | ) | - | - | (4 | ) | - | - | (4 | ) | ||||||||||||||||||
Less
Non-controlling interest in affiliate (River Valley Business
Center)
|
(5 | ) | (5 | ) | - | - | - | - | - | |||||||||||||||||||
Net
loss attributable to Sajan, Inc. and subsidiaries
|
$ | (1,087 | ) | $ | - | $ | - | $ | (1,087 | ) | $ | (2,751 | ) | $ | 544 | $ | (3,294 | ) | ||||||||||
Loss
per common share - Basic and diluted
|
$ | (0.19 | ) | $ | (0.19 | ) | $ | (0.30 | ) | $ | (0.21 | ) | ||||||||||||||||
Weighted
average shares outstanding - Basic and diluted
|
5,686 | 5,686 | 9,181 | 16,009 |
SEE NOTES
TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
51
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
NOTES
TO UNAUDITED PRO FROM FINANCIAL STATEMENTS (in thousands)
The
MathStar Merger is a reconsideration event for the lease between Sajan and River
Valley Business Center, LLC (affiliate). Based on the change in ownership, the
Company is no longer considered the primary beneficiary of the lease with River
Valley Business Center, LLC (affiliate). The pro forma unaudited financial
statements are presented with the deconsolidation of the affiliate.
A
|
Merger
document notes cash of $5,100 paid at the time of closing to the
stockholders of Sajan.
|
|
B
|
l
|
Transaction
costs of $261 related fees and expenses by MathStar.
|
l
|
Transaction
costs of $85 related fees and expense by Sajan.
|
|
C
|
Payment
of note payable – related party of $262 and accrued interest – related
party of $23 as required by the Merger agreement.
|
|
D
|
l
|
Transaction
costs accrued of $282 related fees and expenses by
MathStar.
|
l
|
Transaction
costs accrued of $179 related fees and expenses by
Sajan.
|
|
E
|
l
|
Merger
agreement provides for a note payable for one year of $1,000 to the
majority stockholders of Sajan.
|
l
|
Merger
agreement provides for $1,000 to be placed in escrow for the
indemnification obligations.
|
|
F
|
Record
net monetary assets of MathStar of $4,791 for the issuance of 9,181 shares
of common stock and the conversion of Sajan shares at 1.225 per
share.
|
|
G
|
Rent
expense paid by Sajan to River Valley Business Center, LLC which will no
longer be accounted for as a variable interest entity.
|
|
H
|
l
|
Transaction
costs of $543 related fees and expenses by MathStar.
|
l
|
Transaction
costs of $264 related fees and expenses by Sajan.
|
|
l
|
Stock
options and warrants repriced based on terms of Merger
document. Expense of $102 for the modification for vested
equity instruments.
|
|
Additional
expense to be recorded for the modifications in the years ending December
31:
|
2010
|
$ | 17 | ||
2011
|
16 | |||
2012
|
16 | |||
2013
|
16 | |||
$ | 65 |
I
|
Stock
options and warrants repriced based on terms of Merger
document. Expense of $161 for the modification for vested
equity instruments.
|
|
Additional
expense to be recorded for the modifications in the years ending December
31:
|
2010
|
$ | 156 | ||
2011
|
80 | |||
2012
|
77 | |||
$ | 313 |
J
|
Pay
off of line of credit of $1,000.
|
|
K
|
Accrual
for 113 dissenter’s common shares with a fair value of
$306.
|
Tax
Benefit Preservation Plan and Rights Agreement
On
February 25, 2010, MathStar, Inc., entered into the Tax Benefit Preservation
Plan and Rights Agreement (the “Plan”) with Wells Fargo Shareowner Services, a
division of Wells Fargo Bank, National Association, as Rights Agent. MathStar’s
Board of Directors adopted the Plan in an effort to protect against a possible
limitation on the ability to use its net operating losses (NOL) under the
Internal Revenue Code of 1986, as amended, and rules promulgated by the Internal
Revenue Service.
52
MATHSTAR,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except per share data)
December
31, 2009
In
connection with the Plan, MathStar’s Board of Directors authorized a series of
25 shares of Preferred Stock designated as Series A Preferred Stock, with a par
value of $0.001 per share. The Series A Preferred Stock issuable upon
the exercise of the rights under the Plan, would be non-redeemable and rank
junior to all other series of MathStar’s preferred stock. Each whole
share of Series A Preferred Stock would be entitled to dividends, upon
declaration by the Board of Directors, and entitled to receive a preferential
liquidation of $1 per whole share.
Under the
Plan, beginning March 12, 2010, for each share of MathStar’s common stock held,
the holder of the common stock has the right to purchase one one-millionth of a
share of Series A Preferred Stock at an exercise price of the right at
$8.50. The rights expire in five years unless the Board of Directors
redeems or exchanges the rights; repeal of the tax law related to limitation on
the ability to use NOL; the NOL can no longer be carried forward; or the Board
of Director decides to extend the term of the Plan.
The
rights distributed on February 25, 2010, cannot be exercised until one of two
triggering events occurs as defined in the Plan.
Upon a
triggering event occurring related to the exercise of the right, MathStar would
account for the value of rights as a dividend and record a charge to retained
earnings (accumulated deficit) and additional paid-in capital. After
the merger with Sajan, there are 16,009 common shares outstanding resulting in
1.6 of Series A Preferred Stock purchase rights.
Name
Change
On
February 26, 2010, the corporate name was changed from MathStar, Inc. to Sajan,
Inc. The Company will continue to trade on the Pink Sheets markets
under the symbol “MATH.PK” until a new symbol is effective.
ITEM
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On
February 19, 2010, MathStar dismissed its independent registered public
accounting firm, PricewaterhouseCoopers LLP, and it appointed Baker Tilly
Virchow Krause, LLP as its new independent registered public accounting firm.
Baker Tilly Virchow Krause, LLP acted as Sajan’s independent accountant prior to
the closing of the Merger. The decision to change accounting firms was approved
by the audit committee of MathStar’s board of directors.
The
reports of PricewaterhouseCoopers LLP on the financial statements of MathStar
for the fiscal years ended December 31, 2007 and 2008 did not contain an adverse
opinion or disclaimer of opinion, and they were not qualified or modified as to
uncertainty, audit scope, or accounting principle, with the exception of an
explanatory paragraph for the year ended December 31, 2008 discussing MathStar’s
curtailed operations and evaluation of strategic alternatives including, but not
limited to, restarting MathStar, merging with or acquiring another company,
increasing operations in another structure or liquidation. It also disclosed
that as of the report date, MathStar had not committed to any of the strategic
alternatives being evaluated.
During
MathStar’s fiscal years ended December 31, 2007 and 2008 and through February
19, 2010, there were no disagreements with PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make
reference to the subject matter of the disagreement(s) in connection with its
reports on the financial statements for such years, and there were no
“reportable events” as defined in Item 304(a)(1)(v) of Regulation
S-K.
MathStar
had previously provided PricewaterhouseCoopers LLP with a copy of its Current
Report on Form 8-K filed on February 24, 2010, and requested
PricewaterhouseCoopers LLP to furnish MathStar with a letter addressed to
the U.S. Securities and Exchange Commission stating whether it agrees with the
above statements and, if not, stating the respects in which it does not agree
with such statements. PricewaterhouseCoopers LLP’s response letter, dated
February 19, 2010, is filed as Exhibit 16.2 to the Current Report on Form 8-K
filed on February 24, 2010.
53
ITEM
9A(T). CONTROLS AND PROCEDURES
DISCLOSURE
CONTROLS AND PROCEDURES
This
report includes the certifications of our Chief Executive Officer and Chief
Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934
(the “Exchange Act”). See Exhibits 31.1 and 31.2 to this report. This Item 9A(T)
includes information concerning the controls and control evaluations referred to
in those certifications.
Background
On
January 11, 2010, we filed a Current Report on Form 8-K in which we announced
that we had entered into an Agreement and Plan of Merger with Sajan, Inc.,
a Minnesota corporation; Garuda Acquisition, LLC, a wholly-owned subsidiary of
MathStar now known as Sajan, LLC; and Thomas Magne, solely in his capacity as
agent for the holders of common stock of Sajan, Inc. Under the terms of the
Merger Agreement, and upon satisfaction of the conditions set forth in the
Merger Agreement, Sajan, Inc. was merged with and into Garuda Acquisition, LLC
(the “Merger”), which survived the Merger and changed its name to “Sajan, LLC.”
In the Merger, Sajan became a wholly-owned subsidiary of MathStar. The Merger
was closed and effective on February 23, 2010.
On
February 24, 2010, we filed a Current Report on Form 8-K with the SEC in which
we announced the closing of our Merger.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
As
required by Rule 13a-15(b) under the Exchange Act, our management carried out an
evaluation, with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) of the
Exchange Act), as of the period covered by this report. Disclosure controls and
procedures are defined by as controls and other procedures that are designed to
ensure that information required to be disclosed by us in reports filed with the
SEC under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in reports
filed under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or person
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based upon their evaluation and the identification of
certain material weaknesses in internal control over financial reporting
described below, our management (including our Chief Executive Officer and Chief
Financial Officer) concluded that our disclosure controls and procedures were
ineffective as of December 31, 2009.
Nevertheless,
as a result of the completion of our independent review of certain transactions,
and remedial actions taken by management, we believe that the consolidated
financial statements contained in this report present fairly, in all material
respects, our financial position, results of operations, and cash flows as of
the dates, and for the periods, presented in conformity with generally accepted
accounting principles in the Unites States of America (“GAAP”). Further, as of
December 31, 2009, MathStar was a non-operating public shell
company.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is a set of processes designed by, or under the supervision of, a
company’s principal executive and principal financial officers, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
GAAP and includes those policies and procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect our transactions and dispositions of our
assets,
|
|
·
|
provide
reasonable assurance our transactions are recorded as necessary to permit
preparation of our financial statements in accordance with GAAP, and that
receipts and expenditures are being made only in accordance with
authorizations of our management and directors,
and
|
54
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statement.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. It should be noted that any system
of internal control, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system will
be met. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the
supervision and with the participation of management, including its principal
executive officer and principal financial officer, the Company’s management
assessed the design and operating effectiveness of internal control over
financial reporting as of December 31, 2009 based on the framework set
forth in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on
this assessment, management concluded that the Company’s internal control over
financial reporting was not effective as of December 31, 2009. Baker
Tilly Virchow Krause, LLP, an independent registered public accounting firm, is
not required to issue, and thus has not issued, an attestation report on the
Company’s internal control over financial reporting as of December 31,
2009.
In
connection with the assessment described above, management identified the
following control deficiencies that represent material weaknesses at December
31, 2009:
·
|
MathStar
failed to maintain an effective control environment and had insufficient
oversight of the design and operating effectiveness of the Company’s
disclosure controls and internal controls over financial reporting;
insufficient oversight to ensure the 302 sub-certifications were
completed; infrequent review of its corporate governance documents,
policies and procedures; lack of proper segregation of duties; and
insufficient oversight to ensure the transition of system
administrator rights for the financial application, servers, backup
devices and utilities to Sajan, Inc. upon completion of the
Merger.
|
|
·
|
Both
MathStar and Sajan failed to maintain effective controls over the
period-end financial reporting process, including controls with respect to
journal entries, account reconciliations and proper segregation of duties.
Journal entries, both recurring and nonrecurring, were not always
accompanied by sufficient supporting documentation and were not adequately
reviewed and approved for validity, completeness and accuracy. Account
reconciliations over balance sheet accounts were not always properly
performed and approved for validity and accuracy of supporting
documentation.
|
|
·
|
MathStar
did not maintain proper segregation of duties. In certain instances,
persons responsible to review transactions for validity, completeness and
accuracy were also responsible for
preparation.
|
|
·
|
The
Sajan financial reporting team did not possess the requisite skill sets,
knowledge, education or experience to prepare the consolidated financial
statements and notes to consolidated financial statements in accordance
with US GAAP or to review the financial statements and notes to the
financial statements prepared by external consultants and professionals to
ensure accuracy and completeness.
|
·
|
The
Company failed to maintain effective controls within the purchasing and
accounts payable function, including appropriate security access and use
of purchase orders and the automatic three-way match option within the
financial application.
|
|
·
|
MathStar
failed to maintain effective general computer controls, including ensuring
proper security access within the financial application and to ensure
backups were performed in accordance with generally accepted
practices. Sajan failed to ensure that Administrator passwords
for servers, the financial application and other technological devices
used to store and support the financial application software and files
were obtained from MathStar and timely
changed.
|
·
|
MathStar
failed to design sufficient controls to mitigate risks within the
financial reporting, expenditures, fixed asset, equity, payroll and
treasury functions. In addition, insufficient corporate
governance and general computer controls were designed and operating
effectively to provide overriding risk mitigation at the entity
level.
|
55
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
MathStar’s
internal controls over financial reporting were essentially performed by three
individuals during fiscal 2009. This was due to the Company’s
reduction in workforce when the operations were curtailed in 2008.
Sajan has
retained the services of a Minnesota-based business consulting firm specializing
in audit, compliance, financial management and support. Sajan’s consulting firm
is preparing an outline of recommended actions for management to assess and
report the design and operating effectiveness of its disclosure controls and
internal controls over financial reporting in the Company’s Annual Report on
Form 10-K for the fiscal year ending December 31, 2010 and to report changes in
internal control over financial reporting in its Quarterly Reports on Form 10-Q
beginning with the reporting period for the three months ended March 31,
2010. A wide range of remediation activities, which are summarized
below under the caption “Management’s Remediation Plan,” incorporated herein by
this reference, are based on our assessment of MathStar’s disclosure controls
and procedures and internal controls over financial reporting and performed by
both MathStar and Sajan for the year ended December 31, 2009.
MANAGEMENT’S
REMEDIATION PLAN
Although
the control deficiencies identified in section “Evaluation of Disclosure
Controls and Procedures” included MathStar, Inc., operations within that entity
were virtually non-existent as of December 31, 2009 and we do not anticipate
MathStar operations to continue going forward. Therefore, a specific remediation
plan to address deficiencies related solely to those operations was not designed
or included below. Rather, we have designed and plan to implement, or
in some cases have already implemented, the specific remediation initiatives
described below as they relate to Sajan, Inc. on a post-Merger
basis:
·
|
Prior
to filing this Annual Report on Form 10-K, the Sajan Board of Directors
was expanded to seven members and the Audit Committee was expanded to four
members. The Board of Directors, through its Audit Committee is committed
to, and is more actively involved in, providing additional oversight of
the Company’s internal controls, more formal review of our consolidated
financial statements, reviewing management’s analysis of actual
expenditures compared to its approved budget, reviewing expense reports
and supporting documentation for reimbursements to our Chief Executive
Officer, monitoring the interim management reports on the effectiveness of
our internal controls, discussing complex or unusual accounting
transactions with management and our independent registered public
accounting firm, and reviewing the draft periodic reports we anticipate
filing with the SEC.
|
·
|
Prior
to filing this Annual Report on Form 10-K, we designed and implemented
robust corporate governance including: (1) direct oversight of our
internal controls by the Audit Committee of our Board of Directors; (2)
review of our Annual Report on Form 10-K and Quarterly Reports on Form
10-Q by the Audit Committee of our Board of Directors prior to filing with
the SEC beginning with this Annual Report on Form 10-K; (3) adoption and
communication of our Code of Business Conduct and Ethics to our employees
and consultants; (4) adoption and communication of our Policy on Insider
Trading to our employees and consultants; (5) revision of policies within
our employee handbook to ensure that appropriate disciplinary actions may
be taken in the event an employee fails to properly perform their
responsible internal controls or intentionally overrides any internal
control and completion of employee training on the policy revisions; (6)
adoption of charters for our Audit, Compensation, Governance and
Nominating Committees of our Board of Directors; (7) adoption and training
for our employees on our Whistleblower Policy, which includes our
anonymous reporting system; (8) adoption of our policy on reporting and
investigating complaints regarding accounting, internal accounting
controls or auditing matters and concerns regarding questionable
accounting or auditing matters; (9) communication to our global workforce
by our Chief Executive Officer and Interim Chief Financial Officer on the
importance of internal control compliance and reporting of noncompliance;
and (10) Board adoption of our operating budget and our strategic
plan.
|
·
|
Prior
to filing this Annual Report on Form 10-K , we implemented a procedure
that ensures timely review of the consolidated financial statements, notes
to our consolidated financial statements, and our Annual and Quarterly
Reports on Forms 10-K and 10-Q by our Chief Executive Officer and the
Audit Committee, and in some cases our full Board of Directors, prior to
filing with the SEC.
|
·
|
Prior
to filing this Annual Report on Form 10-K , we secured the administrator
passwords for the financial application, the servers and other devices
used to support and backup the financial application, and replicated
backup files to our corporate location and will complete a validation of
their integrity.
|
56
·
|
We
will design and implement a formalized financial reporting process that
includes balance sheet reconciliations, properly prepared, supported and
reviewed journal entries, properly segregated duties, and properly
completed and approved close checklist and
calendar.
|
|
·
|
We
have formalized responsibilities for a Chief Financial
Officer. Our Chief Executive Officer is currently interviewing
well-qualified individuals to fill this position. Final
candidates will be interviewed by Company management and members of our
Board of Directors.
|
·
|
Our
Chief Executive Officer is evaluating the depth and breadth of knowledge
of US GAAP and external reporting requirements among the current members
of the accounting staff. We are committed to additional hires
of experienced individuals to prepare and approve the consolidated
financial statements and footnote disclosures in accordance with US
GAAP.
|
·
|
We
have contracted with an internal control specialist to develop and assist
us with the design, implementation and testing of our internal controls as
well as design of remediation efforts as necessary for proper
compliance.
|
·
|
We
have relied and will continue to rely upon outside professionals to assist
with our external reporting requirements to ensure timely filing of our
required reports with the SEC.
|
·
|
We
have initiated efforts to ensure our employees understand the continued
importance of internal controls and compliance with corporate policies and
procedures. We will implement a reporting and certification process for
management involved in the performance of internal controls and the
preparation of the Company’s consolidated financial statements. This
certification process will be conducted quarterly and managed by our
internal audit consultant.
|
·
|
We
have begun a formal feasibility assessment of implementing an ERP system
to replace our current financial software application during our current
fiscal year. As part of this assessment, we will thoroughly
review the roles and responsibilities of our staff involved in the
performance of our financial close process and other internal controls to
ensure duties are properly segregated, access rights within our new
financial software application comply with designated roles and
responsibilities and support the proper segregation of duties. In
addition, we will assess the feasibility of generating consolidated
financial statements directly from the financial application and eliminate
our current manual consolidation
process.
|
ITEM
9B OTHER INFORMATION
None.
57
PART
III
ITEM
10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
MANAGEMENT
An Important Note
on Language: Throughout Part III, unless the context otherwise
requires, references to the “Company” and “we” and “our” are references to
Sajan, Inc., a Delaware corporation on a post-merger basis and references to
“MathStar, Inc.” and “MathStar” are to MathStar, Inc., a Delaware corporation,
on a pre-merger basis.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
current Board of Directors, consists of Shannon Zimmerman (Chairman), Angel
Zimmerman, Vern Hanzlik, Richard Perkins, Michael Rogers, Benno Sand and Kris
Tufto. The following table sets forth the name and position of each
of our current directors and executive officers.
Name
|
Age
|
Positions
|
||
Shannon
Zimmerman
|
37
|
President,
Chief Executive Officer, Interim Chief Financial Officer and
Chairman
|
||
Angela
(Angel) Zimmerman
|
37
|
Chief
Operating Officer and a Director
|
||
Vern
Hanzlik
|
52
|
Chief
Marketing Officer, President of Sajan Software Ltd. and a
Director
|
||
Peter
Shutte
|
48
|
Vice
President of Worldwide Sales
|
||
Richard
C. Perkins
|
56
|
Director
|
||
Michael
W. Rogers
|
54
|
Director
|
||
Benno
G. Sand
|
55
|
Director
|
||
Kris
Tufto
|
51
|
Director
|
The
biographies of the above-identified individuals are set forth
below:
Shannon Zimmerman. Mr.
Zimmerman became the Company’s President, Chief Executive Officer, interim Chief
Financial Officer and Chairman on the date of the Merger, and continues to hold
these positions. He co-founded pre-Merger Sajan, Inc. in 1998 along with Angela
Zimmerman, and served as its Chairman and Chief Executive Officer from inception
until the date of the Merger. Mr. Zimmerman is the spouse of Angela Zimmerman.
Mr. Zimmerman has served in technology focused and strategic business leadership
roles in the telecommunications, healthcare, manufacturing, and service
industries.
Mr.
Zimmerman’s experience as Chief Executive and co-founder of pre-Merger Sajan,
Inc. gives him unique insights into the Company’s challenges, opportunities and
operations.
Angela (Angel) Zimmerman. Ms.
Zimmerman became the Company’s Chief Operating Officer and a director, and Chief
Operating Officer and a member of the board of managers of Sajan, LLC on the
date of the Merger. She co-founded pre-Merger Sajan, Inc. in 1998, and served as
its President, Chief Operating Officer, Treasurer and a director from inception
until the date of the Merger. Ms. Zimmerman is the spouse of Shannon
Zimmerman.
Ms.
Zimmerman’s experience as Chief Operating Officer and co-founder of pre-Merger
Sajan, Inc. gives her unique insights into the Company’s challenges,
opportunities and operations.
Vern Hanzlik. Mr. Hanzlik
became the Company’s Chief Marketing Officer and a director, as well as a member
of the board of managers of Sajan, LLC on the date of the Merger. He served as a
director of pre-Merger Sajan, Inc. from April 2006 until the date of the Merger,
as its Chief Marketing Officer from December 2006 until the date of the Merger,
and as President of Sajan Software since June 2009. Mr. Hanzlik was a co-founder
of Stellent, Inc., which was a publicly-held provider of content and document
management software and services located in Eden Prairie, Minnesota, until it
was acquired by Oracle Corporation in 2006. While with Stellent, Inc., he served
as Vice President of Product Marketing and Business Development from 1995 to
1999, as President and Chief Executive Officer from 1999 through March 2003, and
as Executive Vice President of Compliance and Strategic Alliances from January
2004 through February 2006.
58
Mr.
Hanzlik’s experience as Chief Marketing Officer and President of Sajan,
Software, Ltd., our international subsidiary company provides the board with a
global perspective from a sales and marketing, operations and growth strategy
perspective.
Peter Shutte. Mr. Shutte
became Vice President of Worldwide Sales of the Company and Sajan, LLC on the
date of the Merger. He served as its Vice President of Business Development of
pre-Merger Sajan, Inc. from February 2009 until August 2009. Mr.
Shutte also served as its Vice President of Worldwide Sales from June 2009 until
August 2009 and continued as its Vice President of Worldwide Sales position
until the date of the Merger. From 2006 through 2008, he provided
sales consulting services for Openwater Networks, Inc. a privately-held
enterprise software company. Mr. Shutte also served as Vice President of Sales
of Nsite, a SaaS-based business process management system company, which was
acquired by Business Objects in 2006. From 1999 to 2004, he served as Director
of Enterprise Sales of WebEx, once a publicly-held on-line web conferencing
company, now owned by Cisco Systems, Inc. Mr. Shutte was a co-founder of
Workgroup Technology, a product data management and product lifecycle management
company that focused on the management of parametric technologies pro/engineer
data. With Workgroup Technology, from 1992 to 1999, he served as Director of
North America Channel Sales and as General Manager of European
Operations.
Benno G. Sand. Mr. Sand has
been a Director of the Company since August 2001 and a member of the board of
managers of Sajan, LLC since December 3, 2009. He is Executive Vice President,
Business Development, Investor Relations and Secretary at FSI International,
Inc. (NASDAQ: FSII), a global supplier of wafer-cleaning and resist-processing
equipment and technology, and he has served in such positions since January
2000. Mr. Sand also serves on the board of Digitiliti, Inc. (DIGI: OTC), which
develops and markets on-line management services. He also serves on the boards
of several subsidiaries of FSI International, Inc. and other privately-held
companies. Throughout his career, Mr. Sand has served as a director of various
public and private companies and several community organizations.
Mr.
Sand’s extensive knowledge of the capital markets and accounting issues from his
experience as Executive Vice President, Business Development, Investor Relations
and Secretary at FSI International, a public reporting company listed on the
NASDAQ exchange, as well as his director position with Digitiliti, Inc., brings
to our Board the perspective of a leader facing the same set of current external
economic, social and governance issues.
Richard C. Perkins, CFA. Mr.
Perkins has been a Director of the Company since February 26, 2009 and a member
of the board of managers of Sajan, LLC since December 3, 2009. He is a Chartered
Financial Analyst (“CFA”), has been Executive Vice President and Portfolio
Manager of Perkins Capital Management, Inc. since 1990, and has over 30 years of
experience in the investment business. From 1978 until 1990, Mr. Perkins was an
Investment Executive with Piper, Jaffray & Hopwood, Incorporated, an
investment banking firm. From 1975 through 1977, he was a Grain Merchandiser
with General Mills, Inc. Mr. Perkins served as President of the Board of
Directors, YMCA Camp Olson in Rochester, Minnesota from 1983 through 1986 and
again from 2004 through 2006. He has also served on the boards of several
privately-held companies.
Mr.
Perkin’s extensive knowledge of the capital markets and accounting issues from
his experience as Executive Vice President and Portfolio Manager of Perkins
Capital Management and Investment Executive with Piper, Jaffray & Hopwood,
Inc., is invaluable to our Board’s discussions of the Company’s capital and
liquidity needs.
Michael W. Rogers. Mr. Rogers became a
Director of the Company and a member of the board of managers of Sajan, LLC on
the date of the Merger. He served as a member of the board of directors of
pre-Merger Sajan, Inc. from April 2006 until the date of the Merger. From March
2002 until 2006, he served as a consultant to several early-stage technology
companies. In 1985, Mr. Rogers founded Ontrack Data International, Inc., a once
publicly-held provider of computer data recovery services and electronic
discovery services located in Eden Prairie, Minnesota, which was acquired by
Kroll, Inc. in June 2002. He served as Chief Executive Officer of Ontrack Data
International, Inc. from 1986 to 2001, and as Chairman from 1989 to
2002.
Mr.
Rogers brings to the Board, entrepreneurial experience and expertise in
early-stage technology companies.
Kris Tufto. Mr. Tufto joined the
Company’s board of directors and the board of managers of Sajan, LLC on the date
of the Merger. He served as a member of pre-Merger Sajan, Inc.’s board of
directors from February 2006 until the date of the Merger. From April 2005 until
February 2006, he served as an executive with or consultant to several
early-stage technology companies. Mr. Tufto was President and Chief Executive
Officer of Jasc Software, Inc., a provider of digital imaging software based in
Eden Prairie, Minnesota, from March 1998 through March 2005. Jasc Software, Inc.
was acquired by Corel Corporation in 2004.
Mr.
Tufto, also brings to the Board, entrepreneurial experience and expertise in
early-stage technology companies.
59
CORPORATE
GOVERNANCE
BOARD
OF DIRECTORS
Our Board
of Directors consists of seven members. Our Board of Directors
has determined that Richard C. Perkins, Benno G Sand, Michael W. Rogers and Kris
Tufto are independent directors under the listing standards of The NASDAQ Stock
Market. Presently, we are not required to comply with the director
independence requirements of any securities exchange. Under our
corporate bylaws, a director elected for an indefinite term serves until the
next regular meeting of the stockholders and until the director’s successor is
elected and qualified, or until the earlier death, resignation removal or
disqualification of the director.
BOARD
DIVERSITY
Given the
recent change from a shell company to an operating company as a result of the
Merger, we have not determined whether or not to adopt a policy on diversity
related to the composition of our Board of Directors.
BOARD
LEADERSHIP STRUCTURE
Mr.
Zimmerman serves as the Chairman of the Board. Mr. Zimmerman is also
the Company’s Chief Executive Officer, Interim Chief Financial Officer and
President. Given the recent change from a shell company to an
operating company as a result of the Merger, Mr. Zimmerman currently serves as
both the Chairman and Chief Executive Officer. The Board is
evaluating whether to appoint a separate chairman of the Board or in the
alternative appoint a lead independent director. The Board is also
evaluating its role in risk oversight, how it will administer its oversight
function and the effect risk oversight has on the Board’s leadership
structure.
FAMILY
RELATIONSHIPS
Shannon
Zimmerman, the Company’s Chief Executive Officer and Angel Zimmerman, the
Company’s Chief Operating Officer are spouses. Mr. Zimmerman’s
sister-in-law, who is also Ms. Zimmerman’s sister, is the Company’s
Controller. The Controller’s husband is the Company’s Vice President
of North American Client Services and he reports directly to the Chief Operating
Officer. The Chief Operating Officer and the Controller report
directly to the Chief Executive Officer.
BOARD COMMITTEES
Our Board
of Directors has a standing audit committee, a standing compensation committee
and a standing governance and nominating committee.
Audit
Committee. The audit committee is responsible, among its other
duties and responsibilities, for overseeing our accounting and financial
reporting processes, the audits of our consolidated financial statements, the
qualifications of our independent registered public accounting firm, and the
performance of our internal audit function and independent registered public
accounting firm. The audit committee reviews and assesses the
qualitative aspects of our financial reporting, our processes to manage business
and financial risk, and our compliance with significant applicable legal,
ethical, and regulatory requirements. The audit committee is directly
responsible for the appointment, compensation, retention, and oversight of our
independent registered public accounting firm. The audit committee
also oversees our policies regarding related party transactions. The
members of our audit committee are Benno G. Sand, who serves as chair of the
committee, Richard C. Perkins, Michael W. Rogers and Kris Tufto. Our
Board of Directors has determined that Mr. Benno Sand is an “audit committee
financial expert,” as that term is defined under the Securities and Exchange
Commission rules implementing Section 407 of the Sarbanes-Oxley Act of
2002. Our Board of Directors has determined that each member of our
audit committee is independent under the listing standards of The NASDAQ Stock
Market and each member of our audit committee is independent pursuant to Rule
10A-3 of the Exchange Act. The Board of Directors has determined that
each of the audit committee members is able to read and understand fundamental
financial statements and that at least one member of the audit committee has
past employment experience in finance or accounting.
Compensation
Committee. The compensation committee is responsible, among
its other duties and responsibilities, for establishing the compensation and
benefits of our chief executive officer and other executive officers, monitoring
compensation arrangements applicable to our chief executive officer and other
executive officers in light of their performance, effectiveness, and other
relevant considerations, and administering our equity incentive
plans. The members of our compensation committee are Kris Tufto, who
serves as chair of the committee, Michael Rogers and Benno Sand. Our
Board of Directors has determined that the composition of our compensation
committee meets the independence requirements of The NASDAQ Stock Market
required for approval of the compensation of our chief executive officer and
other executive officers.
60
Governance and Nominating
Committee. The governance and nominating committee is
responsible for recommending candidates for election to the board of
directors. The committee is also responsible, among its other duties
and responsibilities, for making recommendations to the board of directors or
otherwise acting with respect to corporate governance policies and practices,
including board size and membership qualifications, new director orientation,
committee structure and membership, succession planning of our chief executive
officer and other key executive officers, and communications with
stockholders. The members of our nominating and corporate governance
committee are Michael Rogers, who serves as the chair of the committee, Benno
Sand and Kris Tufto. Our Board of Directors has determined that the
composition of our nominating and corporate governance committee meets the
independence requirements of The NASDAQ Stock Market required for director
nominations.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
During
the past ten years, no officer, director, control person or promoter
of the Company has been involved in any legal proceedings respecting: (i) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; (ii) any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (iii) being subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking activities; or (iv) being found by a court of competent
jurisdiction (in a civil action), the commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or vacated.
CODE
OF ETHICS
We
adopted a Code of Ethics on March 30, 2010 which governs the conduct of our
officers, directors and employees in order to promote honesty, integrity,
loyalty and the accuracy of our financial statements. Our Code of
Ethics replaces the MathStar Code of Business Conduct and Ethics in its
entirety. You may
obtain a copy of the Code of Ethics without charge by writing us and requesting
a copy, attention: Shannon Zimmerman, 625 Whitetail Drive, River Falls,
Wisconsin 54022 or by calling us at (715) 426-9505. Our Code of
Ethics is also available on our website at www.sajan.com. Any
amendment to, or waiver from, the provisions of the Code of Ethics for the CEO
and Senior Financial Officers that applies to any of those officers will be
posted to the same location on our website.
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s officers,
directors and persons considered to be beneficial owners of more than ten
percent of a registered class of the Company’s equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and NASDAQ. Officers, directors and
greater-than-ten-percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to the Company, or written
representations that no applicable filings were required, the Company believes
that all such filings were filed on a timely basis for the fiscal year
2009.
ITEM
11 EXECUTIVE COMPENSATION
SUMMARY
COMPENSATION TABLE
MathStar’s
Summary Compensation Table
The
following table sets forth information about compensation awarded, earned by or
paid to MathStar’s named executive officers – its principal executive officer,
principal financial officer and other executive officers for whom it is required
to disclose compensation under Item 402 of Registration Statement S-K – for
the years ended December 31, 2009 and 2008.
61
Name and Principal Position
|
Year
|
Salary
|
Stock Option
Awards (1)
|
Other Annual
Compensation
|
Total
|
|||||||||||||
Alexander
H. Danzberger, Jr.
|
2009
|
$ | 120,000 | $ | 11,800 | $ | - | $ | 131,800 | |||||||||
Former Chief Executive Officer
and Chief Financial Officer (2)
|
2008
|
$ | - | $ | - | $ | - | $ | - | |||||||||
Douglas
M. Pihl
|
2009
|
$ | 117,115 | $ | - | $ | 121,776 |
(5)
|
$ | 238,891 | ||||||||
Former
Chief Executive Officer and Chief Financial Officer (3)
|
2008
|
$ | 216,286 | $ | 20,767 | $ | 226,278 |
(6)
|
$ | 463,331 | ||||||||
John
M. Jennings
|
2009
|
$ | 83,135 | $ | - | $ | - | $ | 83,135 | |||||||||
Former Chief Accounting
Officer (4)
|
2008
|
$ | 135,665 | $ | 11,153 | $ | 85,011 |
(7)
|
$ | 231,829 |
(1)
|
Includes the full grant date fair
value of each award under ASC Topic 718, Compensation
– Stock Compensation. The amounts do not
reflect the actual amounts that may be realized by the executive
officers. Refer to “Note 5 – Stock-Based Compensation” in
the audited financial statements included in Item 8 of this Annual Report
on Form 10-K for a discussion of the assumptions used in calculating
the expense.
|
(2)
|
Mr. Danzberger was retained as
Chief Executive Officer and Chief Financial Officer of MathStar effective
August 14, 2009, and resigned from such positions on the Effective
Date.
|
(3)
|
Mr. Pihl resigned as an officer
and director of MathStar effective July 14,
2009.
|
(4)
|
Mr. Jennings resigned as Chief
Accounting Officer of MathStar effective February 4,
2010.
|
(5)
|
Consists of $5,782 in health and
life insurance premiums and a net $115,994 severance payment. Takes into
account the $119,441 repaid by Mr. Pihl to MathStar in
2009.
|
(6)
|
Consists of $9,992 in health and
life insurance premiums and a $216,286 severance
payment.
|
(7)
|
Consists of $5,011 in health and
life insurance premiums and an $80,000 severance
payment.
|
Disclosure to Summary
Compensation Table
Under the
terms of an agreement signed August 14, 2009, but effective as of
August 1, 2009 (the “AHA Agreement”), between MathStar and A.
Harris & Associates, LLC (“AHA”), of which Mr. Danzberger is the
President and sole member, MathStar paid AHA a $20,000 retention fee, paid to
AHA a monthly retainer of $20,000, and reimbursed AHA its reasonable
out-of-pocket expenses. Under the AHA Agreement, MathStar also granted to AHA a
five-year option on August 14, 2009 to purchase 15,000 shares of MathStar’s
common stock. The five-year option vested upon completion of the Merger. Mr.
Danzberger resigned as an officer of MathStar, and the AHA Agreement terminated,
both on the date of the Merger.
At a
meeting of the board of directors of MathStar held on May 20, 2008, and in
connection with the curtailment of MathStar’s operations before the Merger, the
board approved severance amounts for all of MathStar employees, including
Douglas M. Pihl, then its Chief Executive Officer. The severance payments
subsequently were made to all of MathStar’s employees, including a $216,286
severance payment to Mr. Pihl under a Severance Agreement dated as of
July 14, 2008 (the “2008 Severance Agreement”). Because it was not the
board’s intent to pay Mr. Pihl a severance payment until his employment
with MathStar was severed, on May 7, 2009, MathStar entered into an
agreement with Mr. Pihl (the “Amendment”), under which the parties amended
the 2008 Severance Agreement. Under the Amendment, Mr. Pihl paid back to
MathStar the severance payment that MathStar had paid to him under the 2008
Severance Agreement, net of withholdings, consisting of a payment of $118,112,
plus interest, for a total repayment amount of $119,441. The Amendment provided
for a severance payment by MathStar to Mr. Pihl equal to 12 months of
Mr. Pihl’s salary in effect at the time of his severance from employment
with MathStar unless MathStar terminated his employment for “cause” or
Mr. Pihl died while employed by MathStar, as described in the Amendment.
Under the Amendment, Mr. Pihl and MathStar also agreed that at the time of
any severance payment by MathStar to Mr. Pihl, the parties would enter into
a severance agreement substantially in the form attached to the
Amendment.
On
July 14, 2009, Mr. Pihl resigned his position as President, Chief
Executive Officer and Chief Financial Officer of MathStar and from MathStar’s
board of directors. As a result of Mr. Pihl’s resignation in
July 2009, on August 5, 2009, MathStar and Mr. Pihl entered into
a Severance and Release Agreement (the “2009 Severance Agreement”), the form of
which was attached to the Amendment and included as Exhibit A to
Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on
May 8, 2009. Under the 2009 Severance Agreement, MathStar made a severance
payment of $216,286 to Mr. Pihl in 2009. All costs associated with the 2009
Severance Agreement were accrued as of June 30, 2009.
62
As
described above, on May 20, 2008, the board approved severance payments for
all of MathStar’s employees, including a severance payment equal to six months
of base pay for John M. Jennings. The Severance Agreement with John M. Jennings,
dated July 14, 2008, provided for a severance payment to Mr. Jennings
of $80,000, which was paid to him by MathStar on July 31, 2008. The
Severance Agreement also provided that MathStar, pursuant to federal and state
law, would provide, for a period of 18 months after the date of
Mr. Jennings’ termination, a continuation of the group medical insurance
coverage previously provided to him by MathStar. In addition, the Severance
Agreement provided that effective August 1, 2008, Mr. Jennings was
converted to an exempt hourly employee, with an hourly rate of $115. The
Severance Agreement also contained agreements by Mr. Jennings to release
MathStar from certain claims, not to initiate any litigation against MathStar
with regard to such claims, and regarding confidentiality. Effective February 4,
2010, Mr. Jennings resigned as Chief Accounting Officer of
MathStar.
Grants of Options and Other
Awards. During 2009, MathStar did not approve or grant any bonus, option,
restricted stock award, non-equity incentive plan award or other award to
Mr. Pihl or Mr. Jennings.
Retirement Benefits. MathStar
terminated its 401(k) Plan on December 31, 2009. Although MathStar could have
matched employee contributions to the 401(k) Plan at its discretion, it did not
do so.
Perquisites and Other
Benefits. Historically, MathStar’s senior management has participated in
MathStar’s other benefit plans on the same basis as other employees. These plans
included medical and dental insurance, life insurance, accidental death and
dismemberment and short and long-term disability insurance. All of these plans
were terminated on July 31, 2009.
Summary
Compensation Table for Pre-Merger Sajan, Inc.
The
following table summarizes the compensation for fiscal 2009 and 2008 of
pre-Merger Sajan, Inc.’s chief executive officer (interim chief financial
officer) and the next three most highly compensated executive officers serving
as executive officers as of December 31, 2009. These six individuals comprise
our named executive officers or “NEOs.”
Name and Principal Position
|
Year
|
Salary
|
Stock Option
Awards (1)
|
Other Annual
Compensation
|
Total
|
|||||||||||||
Shannon
Zimmerman
|
2009
|
$ | 140,000 | $ | - | $ | 111,430 |
(2)
|
$ | 251,430 | ||||||||
President,
Chief Operating Officer, Interim Chief Financial Officer
|
2008
|
$ | 140,000 | $ | - | $ | 126,110 |
(3)
|
$ | 266,110 | ||||||||
Vern
Hanzlik (4)
|
2009
|
$ | 150,000 | $ | 204,000 | $ | 4,070 |
(5)
|
$ | 358,070 | ||||||||
Chief
Marketing Officer, President of Sajan, Software Ltd.
|
2008
|
$ | 150,000 | $ | - | $ | 7,576 |
(6)
|
$ | 157,576 | ||||||||
Angela
Zimmerman
|
2009
|
$ | 110,000 | $ | - | $ | 2,017 |
(7)
|
$ | 112,017 | ||||||||
Chief
Operating Officer
|
2008
|
$ | 110,000 | $ | - | $ | 7,401 |
(8)
|
$ | 117,401 | ||||||||
Peter
Shutte (9)
|
2009
|
$ | 95,640 | $ | 214,200 | $ | 32,125 |
(10)
|
$ | 341,965 | ||||||||
Vice
President of Worldwide Sales
|
2008
|
$ | - | $ | - | $ | - | $ | - |
(1)
|
A
discussion of the assumptions used in calculating the stock option award
amounts may be found in the “Stock-Based Compensation” note to the audited
financial statements included in the Current Report on Form 8-K filed
February 24, 2010.
|
(2)
|
Figure
includes commissions of $95,640 and $4,165 in employer paid retirement
contributions, and $11,625 for family health and life insurance premiums,
which includes coverage for Ms.
Zimmerman.
|
(3)
|
Figure
includes $104,000 in commission payments, $4,030 in bonus payment, $7,440
in employer-paid retirement contributions, and $10,640 for family health
and life insurance premiums, which includes coverage for Ms.
Zimmerman.
|
(4)
|
Mr.
Hanzlik was appointed President of Sajan, Software Ltd. in June
2009.
|
(5)
|
Figure
includes $4,070 for family health and life insurance
premiums.
|
(6)
|
Figure
includes bonus of $3,546 and $4030 in health and life insurance
premiums.
|
(7)
|
Figure
relates to employer paid retirement contributions for 2009 of $2,017 and
disability insurance premiums of $72. Ms. Zimmerman’s health
insurance premiums are included in Mr. Zimmerman’s compensation because he
carries the family coverage.
|
63
(8)
|
Figure
relates to $4,029 in bonus payment, $88 in disability insurance premiums,
and $3,284 in employer-paid retirement
contributions.
|
(9)
|
Mr.
Shutte became Sajan’s Vice President of Worldwide Sales on January 15,
2009.
|
(10)
|
Figure
includes commissions of $27,208, $2,650 in employer-paid retirement
contributions, $642 in health and life insurance premiums and $1,625 in
cash contributions paid in lieu of health
insurance.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END - 2009
The
following table sets forth information about unexercised options that were held
at December 31, 2009 by the named executive officers of MathStar:
MathStar’s
Outstanding Equity Awards
Option Awards
|
|||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option Exercise
Price ($)
|
Option
Expiration
Date
|
|||||||||
Alexander
H Danzberger, Jr.
|
0 | 15,000 |
(1)
|
$ | 1.30 |
8/14/14
|
|||||||
$ | |||||||||||||
John
M. Jennings
|
8,000 | - | $ | 31.50 |
7/15/15
|
||||||||
1,500 | 1,500 |
(2)
|
$ | 8.45 |
5/16/17
|
(1)
|
This
stock option was granted to A. Harris & Associates, LLC, a
single-member limited liability company of which Mr. Danzberger is the
sole member and president, under the MathStar, Inc. Amended and Restated
2004 Long-Term Incentive Plan. The option vested on the date of
the Merger.
|
|
(2)
|
The
options were to vest as to 750 shares on each of May 16, 2010 and 2011 if
Mr. Jennings is then an employee of MathStar. Mr. Jennings resigned
as Chief Accounting Officer effective February 4,
2010.
|
Outstanding
Equity Awards for Pre-Merger Sajan, Inc.
The
following table sets forth information about unexercised options that were held
at December 31, 2009 by the named executive officers of pre-Merger Sajan,
Inc.:
Option Awards (1)
|
|||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option Exercise
Price ($)
|
Option
Expiration
Date
|
|||||||||
Vern
Hanzlik
|
5,625 | - | $ | 2.00 |
4/1/11
|
||||||||
25,000 | 25,000 | $ | 2.00 |
1/2/17
|
|||||||||
0 | 200,000 | $ | 2.72 |
6/2/19
|
|||||||||
125,000 | 100,000 | $ | 2.00 |
1/2/17
|
|||||||||
Peter
Shutte
|
58,363 | 151,637 | $ | 2.72 |
6/2/19
|
(1)
|
The
amount reflected in this table reflect the pre-Merger Sajan, Inc. shares
and option
prices.
|
64
EMPLOYMENT
AND CHANGE-IN-CONTROL AGREEMENTS
On May
19, 2006, pre-Merger Sajan, Inc. entered into employment agreements with each of
Shannon Zimmerman and Angel Zimmerman, which were amended effective as of
February 1, 2010. The employment agreements were assumed in the Merger by Sajan,
LLC, which is now a wholly-owned subsidiary of the Company. Under the employment
agreements, Mr. Zimmerman receives an annual base salary of $185,000 and Ms.
Zimmerman receives an annual base salary of $150,000. The employment
agreements require Sajan LLC to pay severance in an amount equal to the
then-current annual salary upon termination of employment by Sajan LLC other
than for cause or upon termination of employment by the employee for Sajan LLC’s
breach. The employment agreements contain confidentiality, invention assignment,
non-solicitation and non-competition provisions.
On
January 1, 2007, as amended on June 2, 2009 and February 1, 2010,
pre-Merger Sajan, Inc. entered into an
employment agreement with Vern Hanzlik. The employment agreement was assumed in
the Merger by Sajan, LLC which is a wholly-owned subsidiary of the Company.
Under the employment agreement, Mr. Hanzlik receives an annual base salary of
$175,000. The employment agreement requires Sajan LLC to pay severance in an
amount equal to one month of the then-current annual salary upon termination of
employment by Sajan LLC other than for cause or upon termination of employment
by the employee for Sajan LLC’s breach. Pursuant to the terms of the employment
agreement, pre-Merger Sajan, Inc. granted to Mr. Hanzlik an option to purchase
275,000 shares of common stock of pre-Merger Sajan, Inc., of which 200,000
shares have vested (converted into 245,000 shares of Company common stock in the
Merger) and 75,000 shares are not vested (91,875 Company common stock shares as
converted pursuant to the Merger), which will vest on January 1, 2011. The
employment agreement contains confidentiality, invention assignment,
non-solicitation and non-competition provisions. The employment agreement was
amended on June 2, 2009 pursuant to which Mr. Hanzlik became the President of
Sajan Software. As provided in the amendment, pre-Merger Sajan, Inc. granted Mr.
Hanzlik an additional option to purchase 200,000 shares of pre-Merger Sajan,
Inc. common stock (245,000 Company common stock shares as converted pursuant to
the Merger), which vests upon achievement of certain financial targets set forth
in the agreement or established by the board of directors for each of 2010, 2011
and 2012.
Peter
Shutte receives an annual base salary of $135,000. Pursuant to an employment
offer letter dated January 9, 2009, which was amended June 3, 2009, pre-Merger
Sajan, Inc. granted to Mr. Shutte an option to purchase 210,000 shares of common
stock of pre-Merger Sajan, Inc. (converted into 257,250 shares of Company common
stock in the Merger), of which 45,880 shares of pre-Merger Sajan, Inc. common
stock (56,203 Company common stock shares as converted pursuant to the Merger)
have vested as of February 15, 2010. Mr. Shutte also entered into a
confidentiality and noncompete agreement on January 15, 2009.
COMPENSATION
OF DIRECTORS
In
anticipation of the completion of the Merger, Messrs. Sand and Perkins, previous
directors of MathStar, Inc. were appointed to the board of managers of Sajan,
LLC on December 9, 2009 and served in both capacities until the date of the
Merger when they became directors of the Company. The table below
delineates director compensation for the Company directors while on MathStar’s
board of directors for the year ended December 31, 2009. Compensation
received by executive management directors is included in the respective
executive compensation tables above. No compensation was paid to the
board of managers of Sajan, LLC during the year ended December 31,
2009.
MathStar, Inc.
|
||||||||||||
Name
|
Fees Earned
or
Paid in Cash
|
Option
Awards (1)(2)
|
Total
Compensation
|
|||||||||
Benno
G. Sand
|
$ | 34,000 | $ | 700 | $ | 34,787 | ||||||
Merrill
A. McPeak (3)
|
$ | 32,250 | $ | 700 | $ | 33,037 | ||||||
Richard
C. Perkins
|
$ | 31,500 | $ | 2,650 | $ | 34,169 | ||||||
Morris
Goodwin, Jr. (3)
|
$ | 2,250 | $ | 0 | $ | 2,250 | ||||||
Michael
O. Maerz (3)
|
$ | 10,500 | $ | 0 | $ | 10,500 |
65
(1)
|
The
amounts shown for option awards reflect the aggregate full grant date
value as determined under ASC Topic 718 – Compensation – Stock
Compensation. Refer to “Note 5 – “Stock -Based
Compensation” in the audited financial statements included in Item 8 of
this Annual Report on Form 10-K for a discussion of the assumptions used
in calculating the award amount. On February 26, 2009, Mr.
Perkins was automatically granted a 10-year option under the 2004
Incentive Plan to purchase 5,000 shares of MathStar common stock at an
exercise price of $0.88 per share with a grant date fair value of $2,650.
This option vests annually as to one-third of the shares subject to the
option on each of February 26, 2010, 2011 and 2012, but only if Mr.
Perkins is then a director of the Company. On October 26, 2009, each of
Mr. Sand and Mr. McPeak was automatically granted a 10-year option under
the 2004 Incentive Plan to purchase 1,000 shares at an exercise price of
$1.30 per share with a grant date fair value of $700. Mr. Sand’s option
vests as to all of the shares on October 25, 2010, but only if he is then
a director of MathStar. Mr. McPeak’s option is fully
vested.
|
(2)
|
As
of December 31, 2009, Mr. Sand had outstanding options to
purchase 15,667 shares, which were vested as to 14,667 shares and not
vested as to 1,000 shares; Mr. McPeak had outstanding options to
purchase 9,000 shares, which were vested as to 8,000 shares and not vested
as to 1,000 shares; Mr. Perkins had outstanding options to purchase
5,000 shares, which were not vested; and Mr. Goodwin and
Mr. Maerz had no outstanding options.
|
(3)
|
Mr. Goodwin
resigned from MathStar’s board of directors on February 23, 2009, and
Mr. Maerz resigned from MathStar’s board of directors on
June 22, 2009. Mr. McPeak resigned from MathStar’s board of directors
on the date of the
Merger.
|
MathStar Board of Director
Compensation Structure
MathStar’s
non-employee directors received a cash retainer of $1,500 per quarter plus a
meeting fee of $750 per board meeting. The chairperson of the Audit Committee
received $1,000 per meeting of the Audit Committee, and the other members of the
Audit Committee received $750 per meeting of the Audit Committee. The
chairpersons of the Compensation Committee and the Governance Committee received
$750 per Committee meeting, and the other members of such Committees received
$500 per committee meeting.
Under the
2004 Incentive Plan, non-employee directors automatically receive an option to
purchase 5,000 shares of the Company’s common stock when they are initially
elected or appointed to our board of directors, which vests as to one-third of
the shares subject to the option on the first, second and third anniversary
dates of the date of grant so long as they are directors of the
Company. Non-employee directors also automatically receive an option
to purchase 1,000 shares upon each anniversary date of the initial grant to them
so long as they are then the Company directors, which vests as to all of the
shares subject to the option on the first anniversary date of the date of grant
of the option if they are then directors of the Company. The exercise
price of these options is equal to the closing price of the Company’s common
stock on the grant date of the option, and all options expire 10 years after the
date of grant. Under the automatic grant provisions of the 2004 Incentive Plan,
on February 26, 2009, Mr. Perkins received a 10-year option to purchase 5,000
shares at an exercise price of $0.88 per share, and on October 26, 2009, Mr.
Sand and Mr. McPeak each received a 10-year option to purchase 1,000 shares at
an exercise price of $1.30 per share. In addition, under the automatic grant
provisions of the 2004 Incentive Plan, as of the date of the Merger, each of
Michael W. Rogers and Kris Tufto, as independent directors of the Company, was
automatically granted a 10-year option to purchase 5,000 shares at an exercise
price equal to the fair market value of the Company’s common stock as of the
date of the Merger.
Sajan Board of Director
Compensation Structure
The
Compensation Committee of the Company’s Board of Directors is currently
developing a director compensation structure for presentation to the full Board
of Directors.
ITEM
12
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table contains certain information regarding the beneficial ownership
of Sajan’s common stock as of March 15, 2010 (except as otherwise indicated) by
(i) each person who is known by Sajan to own beneficially more than 5% of the
outstanding shares of our common stock; (ii) each director of Sajan; (iii) each
executive officer of Sajan; and (iv) all executive officers and directors as a
group. This information is based on information received from or on
behalf o the named individuals. Unless otherwise noted, each person
or group identified possesses sole voting and investment power with respect to
such shares.
66
Name and Address (1)
|
Common Shares
Beneficially Owned (2)
|
Percentage of
Common Shares (2)
|
||||||
Officers
and Directors
|
||||||||
Shannon
Zimmerman
|
2,618,437 | 16.4 | % | |||||
Angel
Zimmerman
|
2,618,437 | 16.4 | % | |||||
Vern
Hanzlik
|
291,266 |
(3)
|
1.8 | % | ||||
Peter
Shutte
|
59,952 |
(4)
|
* | |||||
Kris
Tufto
|
15,891 |
(5)
|
* | |||||
Michael
W. Rogers
|
22,203 |
(6)
|
* | |||||
Benno
G. Sand
c/o
FSI International, Inc.
3455
Lyman Boulevard
Chaska,
MN 55318
|
17,334 |
(7)
|
* | |||||
Richard
C. Perkins
c/o
Perkins Capital Management, Inc.
730
East Lake Street
Wayzata,
MN 55391
|
1,666 |
(8)
|
* | |||||
All directors and executive
officers as a group (8 individuals) (9)
|
5,640,686 |
(10)
|
34.5 | % | ||||
Greater
than 5% stockholders
|
||||||||
S.
Muoio & Co., LLC
509
Madison Ave., Suite 446
New
York, NY 10022
|
845,470 |
(11)
|
5.3 | % |
(1)
|
Unless
otherwise indicated the business address of each individual is c/o Sajan,
625 Whitetail Blvd., River Falls, Wisconsin
54022.
|
(2)
|
Based
on 16,009,331 shares of common stock outstanding. Such number does not
include shares of MathStar common stock issuable upon exercise of
outstanding stock options and warrants. Each figure showing the percentage
of outstanding shares owned beneficially has been calculated by treating
as outstanding and owned the shares which could be purchased by the
indicated person(s) on March 15, 2010 or within 60 days of March 15, 2010
upon the exercise of stock options and
warrants.
|
(3)
|
Includes
options to purchase 251,891 shares of common stock that are currently
exercisable or will become exercisable within 60 days of March 15,
2010.
|
(4)
|
Includes
options to purchase 59,952 shares of common stock based that are
exercisable within 60 days of March 15,
2010.
|
(5)
|
Includes
options to purchase 6,891 shares of common stock that are currently
exercisable or will become exercisable within 60 days of March 15,
2010.
|
67
(6)
|
Includes
options to purchase 6,891 shares of common stock that are currently
exercisable or will become exercisable within 60 days of March 15,
2010.
|
(7)
|
Includes
options to purchase 14,667 shares of common stock that are currently
exercisable or will become exercisable within 60 days of March 15,
2010.
|
(8)
|
Consists
of an option to purchase 1,666 shares of common stock that will become
exercisable within 60 days of March 15, 2010. Does not includes 96,420
shares or warrants to purchase 4,667 shares of common stock held in client
accounts for which Perkins Capital Management, Inc. (“PCM”) is the
investment advisor. Mr. Perkins is the holder of 20% of the outstanding
equity interests and Executive Vice President/Portfolio Manager of PCM and
disclaims beneficial ownership over these 96,420 shares and warrants to
purchase 4,667 shares.
|
(9)
|
Consists
of Ms. Zimmerman and Messrs. Zimmerman, Hanzlik, Shutte, Rogers, Tufto,
Sand and Perkins.
|
(10)
|
Consists
of 5,298,728 outstanding shares of common stock and options to purchase a
total of 341,958 shares of common stock. See Footnotes 3, 4, 5, 6, 7 and 8
above.
|
(11)
|
Reflects
information derived from Amendment No. 3 to a Schedule 13D filed on July
1, 2009 with the SEC by S. Muoio & Co. LLC (“SMC”) and Salvatore Muoio
and a Form 4 filed with the SEC by SMC and Mr. Muoio on October 1, 2009.
According to the Schedule 13D, as amended, and the Form 4, Mr. Muoio and
SMC share voting and dispositive power with respect to these shares, and
Mr. Muoio is the managing member of SMC, an investment management firm
that serves as the general partner and/or investment manager to a number
of private investment vehicles and managed accounts. Reflects information
derived from Amendment No. 3 to a Schedule 13G filed with the SEC on March
18, 2010 by S. Muoio & Co. LLC (“SMC”) and Salvatore
Muoio. According to the Schedule 13G, Mr. Muoio and SMC share
voting and dispositive power with respect to these shares, and Mr. Muoio
is the managing member of SMC, an investment management firm that serves
as the general partner and/or investment manager to a number of private
investment vehicles and managed
accounts.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth the aggregate information regarding grants under all
equity compensation plans as of December 31, 2009:
Plan
category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation
plans
approved by
security
holders
|
65,834 | $ | 20.46 | 1,134,166 | ||||||||
Equity
compensation
plans
not approved by
security
holders
|
—
|
—
|
—
|
|||||||||
Total
|
68
ITEM
13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
CERTAIN
RELATIONSHIPS AND TRANSACTIONS
Sajan,
LLC and River Valley Business Center, LLC (“RVBC”) are parties to two office
lease agreements. RVBC owns a two-story commercial office building located near
River Falls, Wisconsin. RVBC is owned and operated by Shannon Zimmerman and
Angel Zimmerman, both of whom are executive officers, directors and significant
stockholders of the Company. Under the terms of a lease agreement dated February
1, 2010, Sajan, LLC leases 12,000 square feet of space which comprises the
entire second floor of the building, and pays monthly rent of approximately
$19,000. Under the terms of a lease agreement dated February 1, 2010, Sajan, LLC
leases an additional 4,100 square feet of space which comprises a portion of the
first floor of the building and pays monthly rent of approximately $6,500. Both
of these leases will expire on January 31, 2017. Sajan, LLC may not assign
either of the lease agreements without the prior written consent of RVBC. In the
lease agreements, Sajan, LLC granted RVBC a security interest in all goods,
chattels, fixtures and personal property of Sajan, LLC located in the premises
to secure rents and other amounts that may be due under the lease agreements.
Management of Sajan, LLC believes, based on an informal assessment conducted by
a commercial real estate agent familiar with commercial properties in the River
Falls, Wisconsin area, that the rent paid for the leased premises is competitive
with rents paid for similar commercial office space in the River Falls,
Wisconsin market. The foregoing lease agreements were authorized by the
disinterested members of the pre-Merger Sajan, Inc. board of directors before
the date of the Merger.
Sajan,
Inc. and JB Computing Solutions, Inc. (“JB Computing”) are parties to a
professional services agreement. The sole owner of JB Computing is
Joe Bechtel, the brother-in-law of the Company’s CEO and COO, and the husband of
the Controller. JB Computing provides the Vice President of North
American client services to Sajan, Inc. During 2009, JB Computing was paid
approximately $135,000 for services rendered. JB Computing has
provided services to Sajan, Inc. since 2002.
DIRECTOR
INDEPENDENCE
As of the
date of the Merger, the following individuals became members of the board of
directors of the Company: Shannon Zimmerman, Angela Zimmerman, Vern Hanzlik,
Michael W. Rogers and Kris Tufto. Messrs. Benno G. Sand and Richard C. Perkins
remained on the board of directors of MathStar.
Presently,
we are not required to comply with the director independence requirements of any
securities exchange. In determining whether our directors are independent,
however, we have elected to be guided by the rules of the NASDAQ Stock
Market LLC. Under the NASDAQ rules, each of Mr. Rogers, Mr. Tufto, Mr. Sand and
Mr. Perkins qualifies as an independent director. Accordingly, our board of
directors is composed of a majority of independent directors.
All
ongoing and future transactions between us and any of our officers and directors
or their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available from
unaffiliated third parties and such transactions or loans, including any
forgiveness of loans, will require prior approval in each instance by a majority
of our uninterested “independent” directors or the members of our board who do
not have an interest in the transaction, in either case who had access, at our
expense, to our attorneys or independent legal counsel.
ITEM
14
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Audit
and Non-Audit Services and Fees
The
following table summarizes the fees we were billed for audit and non-audit
services rendered for fiscal years 2009 and 2008. Our predecessor auditor,
PricewaterhouseCoopers LLP, audited the Company’s consolidated financial
statements for 2008 and reviewed the quarterly filings through September 30,
2009. On February 19, 2010, we replaced our predecessor auditor with
Baker Tilly Virchow Krause LLP. Baker Tilly Virchow Krause audited
the Company’s consolidated financial statements for fiscal years
2009.
Successor Independent Registered
Public Accounting Firm
|
Predecessor Public Accounting Firms
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Audit
Fees
|
$ | 20,630 | $ | - | $ | 50,000 | $ | 172,800 | ||||||||
Audit-Related
Fees
|
- | - | - | - | ||||||||||||
Tax
Fees
|
- | - | - | - | ||||||||||||
All
Other Fees
|
8,135 | - | 209,035 | - | ||||||||||||
Total
|
$ | 28,765 | $ | - | $ | 259,035 | $ | 172,800 |
69
Audit
Fees. The fees identified under this caption were for
professional services rendered for years ended 2009 and 2008 in connection with
the audit of our annual financial statements and review of the financial
statements included in our quarterly reports on Form 10-Q. The
amounts also include fees for services that are normally provided by the
independent public registered accounting firm in connection with statutory and
regulatory filings and engagements for the years identified.
Audit-Related
Fees. The fees identified under this caption were for
assurance and related services that were related to the performance of the audit
or review of our financial statements and were not reported under the caption
“Audit Fees.” This category may include fees related to the
performance of audits and attestation services not required by statute or
regulations, and accounting consultations about the application of generally
accepted accounting principles to proposed transactions.
Tax Fees. The fees
identified under this caption were for tax compliance, tax planning, tax advice
and corporate tax services. Corporate tax services encompass a
variety of permissible services, including technical tax advice related to tax
matters; assistance with withholding-tax matters; assistance with state and
local taxes; preparation of reports to comply with local tax authority transfer
pricing documentation requirements; and assistance with tax audits.
All Other
Fees. The fees identified under this caption were for services
related to potential acquisitions, due diligence and review of merger-related
documents and filings.
Approval
Policy. Our entire Board of Directors approves in advance all
services provided by our independent registered public accounting
firm. All engagements of our independent registered public accounting
firm and predecessor public accounting firm in years ended 2009 and 2008 were
pre-approved by the Board of Directors and the engagements of the Company’s
predecessor independent registered accounting firm was pre-approved by the Audit
Committee of the Board of Directors.
70
PART
IV
ITEM
15
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
FINANCIAL
STATEMENTS
Item
|
Page
|
|
Reports
of Independent Registered Public Accounting Firm
|
29
|
|
Balance
Sheets – December 31, 2009 and December 31, 2008
|
31
|
|
Statements
of Operations – Years ended December 31, 2009 and December 31,
2008
|
32
|
|
Statements
of Stockholders’ Equity – Years ended December 31, 2009 and December 31,
2008
|
33
|
|
Statements
of Cash Flows – Years ended December 31, 2009 and December 31,
2008
|
34
|
|
Notes
to Financial Statements
|
35
|
EXHIBITS
Exhibit No.
|
Description
|
|
2.1
|
Agreement
and Plan of Merger, dated January 8, 2010, among MathStar, Inc., Sajan,
Inc., Garuda Acquisition, LLC, and Thomas Magne (incorporated by reference
to Exhibit 2.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission (“ SEC ”) on January
11, 2010).
|
|
3.1
|
Certificate
of Incorporation of MathStar, Inc. (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-1 filed by
MathStar, Inc. with the SEC on August 3, 2005, Registration
No. 333-127164 {“Registration Statement”}).
|
|
3.2
|
Certificate
of Amendment of the Certificate of Incorporation of MathStar, Inc.
filed with the Delaware Secretary of State on May 23, 2008
(incorporated by reference to Exhibit 3.1 to the Current Report on
Form 8-K filed with the SEC on May 23, 2008).
|
|
3.3
|
Certificate
of Designation of Series A Preferred Stock filed with the Secretary of
State of the State of Delaware on February 25, 2010 (incorporated by
reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated
February 25, 2010 filed with the SEC).
|
|
3.4
|
Certificate
of Ownership and Merger merging Sajan, Inc. into MathStar, Inc. filed with
the Securities and Exchange Commission on March 3, 2010 (incorporated by
reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the
SEC on March 3, 2010).
|
|
3.5
|
Bylaws
of MathStar, Inc. (incorporated by reference to Exhibit 3.2 to
the Registration Statement).
|
|
4.1
|
Form
of common stock certificate of MathStar, Inc. (incorporated by
reference to Exhibit 4.1 to the Registration
Statement).
|
|
4.2
|
Tax
Benefit Preservation Plan and Rights Agreement, dated as of February 25,
2010, between MathStar, Inc. and Wells Fargo Shareowner Services, a
division of Wells Fargo Bank, National Association, as Rights Agent,
together with the following exhibits thereto: Exhibit A - Form of
Certificate of Designation of Series A Preferred Stock of MathStar,
Inc.; Exhibit B — Form of Right Certificate; Exhibit C — Summary
of Rights to Purchase Shares of Preferred Stock of MathStar, Inc.
(incorporated by reference to Exhibit 4.1 of the Company’s Current Report
on Form 8-K dated February 25, 2010 filed with the Securities and Exchange
Commission).
|
|
10.1
|
MathStar,
Inc. 2004 Amended and Restated Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on May 17, 2007).
|
71
10.2
|
Form
of Incentive Stock Option Agreement (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
10.3
|
Form
of Non-Statutory Stock Option Agreement for Vern
Hanzlik (incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
10.4
|
Form
of Incentive Stock Option Agreement for Peter Shutte (incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the
SEC on February 24, 2010).
|
|
10.5
|
Form
of Non-Statutory Stock Option Agreement for non-employee
directors (incorporated by reference to Exhibit 10.5 to the Current
Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
10.6
|
Form
of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 10.6 to the Current Report on Form 8-K filed with the SEC on
February 24, 2010).
|
|
10.7
|
Employment
Agreement, dated May 19, 2006, and as amended on February 1, 2010, between
Sajan, Inc. and Angela Zimmerman (incorporated by reference to
Exhibit 10.8 to the Current Report on Form 8-K filed with the SEC on
February 24, 2010).
|
|
10.8
|
Employment
Agreement, dated May 19, 2006, and as amended on February 1, 2010, between
Sajan, Inc. and Shannon Zimmerman (incorporated by reference to
Exhibit 10.8 to the Current Report on Form 8-K filed with the SEC on
February 24, 2010).
|
|
10.9
|
Employment
Agreement, dated January 1, 2007, and as amended on June 2, 2009 and
February 1, 2010, between Sajan, Inc. and Vern Hanzlik (incorporated
by reference to Exhibit 10.9 to the Current Report on Form 8-K filed with
the SEC on February 24, 2010).
|
|
10.10
|
Employment
Offer Letter, dated January 9, 2009, and as amended June 3, 2009, between
Sajan, Inc. and Peter Shutte (incorporated by reference to Exhibit
10.10 to the Current Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
10.11
|
Office
Lease Agreement dated June 1, 2005, as amended on September 23, 2005,
and as further amended on July 24, 2007 by and between Mark Tanasbourne,
LLC and MathStar, Inc. (incorporated by reference to
Exhibit 10.12 to the Registration Statement).
|
|
10.12
|
Standard
Office Lease Agreement (No. 1) between Sajan, Inc. and River Valley
Business Center, LLC, dated February 1, 2010 (incorporated by
reference to Exhibit 10.12 to the Current Report on Form 8-K filed with
the SEC on February 24, 2010).
|
|
10.13
|
Standard
Office Lease Agreement (No. 2) between Sajan, Inc. and River Valley
Business Center, LLC, dated February 1, 2010 (incorporated by
reference to Exhibit 10.13 to the Current Report on Form 8-K filed with
the SEC on February 24, 2010).
|
|
10.14
|
Promissory
Note, dated February 23, 2010, in the original principal amount of
$1,000,000 issued by MathStar, Inc. to Shannon and Angel
Zimmerman (incorporated by reference to Exhibit 10.14 to the Current
Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
10.15
|
Escrow
Agreement, dated February 23, 2010, among MathStar, Inc., Sajan, LLC and
Thomas Magne, as representative for the shareholders of Sajan,
Inc. (incorporated by reference to Exhibit 10.15 to the Current
Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
10.16
|
Form
of Lock-Up Agreement (incorporated by reference to Exhibit 10.16 to
the Current Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
14.1
|
Code
of Ethics adopted March 30,
2010.
|
72
16.1
|
Letter
from HLB Tautges Redpath, Ltd. (incorporated by reference to Exhibit
16.1 to the Current Report on Form 8-K filed with the SEC on February 24,
2010)
|
|
16.2
|
Letter
from PricewaterhouseCoopers, LLP (incorporated by reference to Exhibit
16.2 to the Current Report on Form 8-K filed with the SEC on February 24,
2010).
|
|
21.1
|
Subsidiaries
of Sajan, Inc.
|
|
23.1
|
Consent
from Baker Tilly Virchow Krause, LLP
|
|
23.2
|
Consent
from PricewaterhouseCoopers, LLP
|
|
31.1
|
Certification
of principal executive officer pursuant to
Rule 13a-14(a)/15d-14(a)
|
|
31.2
|
Certification
of principal financial officer pursuant to
Rule 13a-14(a)/15d-14(a)
|
|
32
|
Certification
of principal executive officer and principal financial officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002
|
73
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
SAJAN,
INC.
|
||
/s/ Shannon
Zimmerman
|
3/31/10
|
|
Shannon
Zimmerman
|
||
Chief
Executive Officer, President and
|
||
Interim
Chief Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Shannon
Zimmerman
|
3/31/10
|
||
Shannon
Zimmerman, Director, Chairman, Chief Executive Officer, President and
Interim Chief Financial Officer (Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer)
|
|||
/s/ Angela
Zimmerman
|
3/31/10
|
||
Angela
(Angel) Zimmerman, Director
|
|||
/s/ Vern
Hanzlik
|
3/31/10
|
||
Vern
Hanzlik, Director
|
|||
/s/ Michael W.
Rogers
|
3/31/10
|
||
Michael
W. Rogers, Director
|
|||
/s/ Kris
Tufto
|
3/31/10
|
||
Kris
Tufto, Director
|
|||
/s/ Richard C
Perkins
|
3/31/10
|
||
Richard
C. Perkins, Director
|
|||
/s/ Benno G.
Sand
|
3/31/10
|
||
Benno
G. Sand, Director
|
74