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| RMKR > SEC Filings for RMKR > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
This report contains forward-looking statements within the meaning of
Section 72A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual events and/or future results of operations may
differ materially from those contemplated by such forward-looking statements, as
a result of the factors described herein, and in the documents incorporated
herein by reference, including those factors described under "Risk Factors."
Overview
We are a leading provider of sales and marketing solutions, combining hosted
application software and execution services designed to drive more revenue for
our clients. We have three primary product lines as follows: contract sales,
lead development and training sales. We have developed an integrated solution,
the Rainmaker Revenue Delivery PlatformSM, that combines proprietary, on-demand
application software and advanced analytics with expert sales and marketing
execution services, which can include marketing strategy development, websites,
e-commerce portal creation and hosting, both inbound and outbound e-mail, direct
mail, chat and telesales services. Our Revenue Delivery Platform combines
(1) our proprietary technology platform, including hosted application software,
(2) our proprietary database of corporate buyers of technology products and
services, (3) our data development and analytics services and (4) our sales and
marketing execution services. We are headquartered in Silicon Valley in
Campbell, California, and have additional operations in Austin, Texas, Montreal,
Canada, and Manila, Philippines. Our current clients consist primarily of large
enterprises operating in the computer hardware and software, telecom and
financial services industries.
Our strategy for long-term, sustained growth is to maintain and improve our position as a leading global provider of integrated sales and marketing solutions. Key elements of our strategy include continuing to enhance the execution of our service offerings to generate more revenue for our existing clients thereby increasing our revenue, continuing to seek cross-selling opportunities to increase the range of services provided to our approximately 90 existing clients, expand our offerings to address international opportunities, signing new clients, continuing to identify new services and capabilities that enhance or complement our Revenue Delivery Platform and selectively pursuing strategic acquisitions.
Prior to 2005, substantially all of our net revenue was derived from the commissions we earned on the sale of service contract renewals, software licenses and subscriptions, and warranties. Since 2005, we have added multiple sources of revenue, including lead development services and hosted application software.
Background
We completed our initial public offering in November 1999, raising net proceeds of approximately $37 million. During the period from the initial public offering through 2004, we focused on expanding our market share of the sale of service contracts for our clients.
In February 2005, we completed our first acquisition, Sunset Direct, which added a new service offering-the generation of sales leads, or lead generation, for clients. Sunset Direct provided us with new clients for our service contract sales solution. We relocated most of our operations from California to Sunset Direct's lower cost location in Texas. Our net revenues grew to $32.1 million in 2005 from $15.3 million in 2004. This growth was due both to $3.9 million, or 25%, year-over-year growth (excluding acquisitions) in our service contract sales solution and $12.9 million from our lead development services. In 2005, we incurred losses of $5.0 million, due in part to redundancy, severance and other transition costs incurred in moving our base of operations to Texas.
We achieved our first profitable quarter in the period ended March 31, 2006 due primarily to revenue growth from existing and new customers and the lower costs resulting from the relocation of our operations to Texas. Our acquisition of ViewCentral in September 2006 added hosted application software for training sales to
our service offerings and a significant new customer base. We reported net revenue of $48.9 million for the year 2006, representing year-over-year growth, excluding acquisitions, of 49%, in addition to the $1.2 million of net revenue from our hosted application software for training sales offering. We were profitable in each quarter of 2006 and reported net income of $3.4 million for the year.
In January 2007, we acquired CAS Systems to provide additional complementary lead development functionality, customers, execution expertise and an international presence with its location near Montreal, Canada. In July 2007, we purchased all of the outstanding stock of Qinteraction Limited, which operates an offshore call center located in the Philippines. Qinteraction provides a variety of business solutions including inbound sales and order taking, inbound customer care, outbound telemarketing and lead generation, logistics support, and back-office processing. The nature of these services are highly complimentary to our existing Lead Development and Contract Sales product offerings.
We reported net revenue of $66.3 million in 2008, representing a 10% decline over the prior year. We reported a net loss of $30.6 million for the year. In February 2008, we received written notification from Dell, our then largest customer, that they would be terminating our service agreement. For the year ended December 31, 2008, Dell accounted for 9% of our net revenue. During the year ended December 31, 2007, Dell accounted for approximately 29% of our net revenue. Excluding Dell, we reported net revenue of $60.3 million in 2008, and $51.9 million in 2007, representing a 16% increase over the prior year.
Net Revenue
We derive revenue from the following: the sale of service contract renewals, software licenses and subscriptions, and warranties (Contract Sales); from the provision of services related to the development of qualified leads and appointments (Lead Development); and from the licensing of our hosted application software platform for our clients' training sales (Training Sales).
Service Contract Renewals, Software Licenses and Subscriptions, and Warranty Extensions (Contract Sales). We sell, on behalf of our clients, service contract renewals, software licenses and subscriptions and warranty extensions. We earn commissions on the sale of these services to our clients' customers, which we report as our revenue. We are typically responsible for the complete sales process, including marketing and customer identification and order processing. We also take responsibility for collecting the amount paid by our client's customer. As a result, when we complete a sale, we record the full amount of the sale on our balance sheet as accounts receivable. We record revenue for the commissions we earn on the transaction, which is based on a fixed percentage of the renewal amount based on the agreement with our client. We record the difference between the sale amount and our commission as an account payable, representing the amount we will remit to our client according to our payment terms, generally 30 to 60 days from the initial sale. Our clients' customers pay us by credit card, check or on payment terms which are generally 30 days from sale, and none of our clients' customers represented more than 10% of our revenue. Because our revenue from sales of service contract renewals, software licenses and subscriptions, and warranty extensions are commission-based, this revenue can vary significantly. Our agreements with our clients for these services typically have two to three year terms, with automatic renewal provisions. These agreements are generally terminable on 90 to 180 days notice by either party.
We recently started to provide hosted application software which enables our clients' resellers to renew service contracts with end-users directly. In these situations we earn commissions on sales by our clients or their resellers but take no responsibility or credit risk for collection from the end user of the services.
Lead Development. We provide lead development services to generate, qualify and develop corporate leads, turning these prospects into sales opportunities and qualified appointments for our clients' field sales forces and for their channel partners. Our agreements with our clients are generally for fixed fees, have terms ranging from three months to one year and require us to provide fixed resources for the term of the contract.
Some of our contracts contain performance requirements. For the significant majority of our lead generation agreements, we recognize revenue as our services are provided; for our performance based contracts, we recognize revenue as we meet the performance objectives. To the extent that our clients pay us in advance of the provision of services, we record deferred revenue and recognize the revenue ratably over the contract period.
Application Software (Training Sales). We license our hosted application software that our clients use to manage their online and in-person training programs. The licenses are usually for one year terms, and are often paid in advance. These advance payments are recorded as deferred revenue, and recognized ratably over the contract period.
Gross Margin
Gross margin is calculated as net revenue less the costs associated with selling our clients' products or delivering our services to our clients. Cost of services include compensation costs of sales personnel, sales commissions and bonuses, costs of designing, producing and delivering marketing services, credit card fees, bad debts, and salaries and other personnel expenses related to fee-based activities. Costs of services also include the cost of allocated facility and telephone usage for our telesales representatives as well as other direct costs associated with the delivery of our services. Cost of services related to training sales relates primarily to the cost of personnel to support our hosted application. Most of the costs of services are personnel related and are mostly variable in relation to our net revenue. Bonuses and sales commissions will typically change in proportion to net revenue or profitability. Commission and bonus expense included in gross margin are related to incentives paid to our telesales representatives for incremental sales of our clients' contracts and leads generated. Our gross margins will fluctuate in the future with changes in our product mix.
Sales and Marketing Expenses
Sales and marketing expenses are primarily costs associated with client acquisition, including compensation costs of marketing and sales personnel, sales commissions, bonuses, marketing and promotional expenses, participation in trade shows and conferences and client integration costs. Commission expense included in sales and marketing expenses relates to the variable compensation paid to our sales people who generate sales growth from new and existing clients. The sales cycle required to generate new clients varies within our product mix. In some cases, the lead time to create a new client can be substantial and we will incur sales and marketing costs for efforts that may not be successful.
Technology and Development Expenses
Technology and development expenses include costs associated with the technology infrastructure that supports our Rainmaker Revenue Delivery Platform. These costs include compensation and related costs for technology personnel, consultants, purchases of non-capitalizable software and hardware, and support and maintenance costs related to our systems. We have also invested in the continued development of our Revenue Delivery Platform. Technology and Development Expenses do not include depreciation of hardware and software systems.
General and Administrative Expenses
General and administrative expenses include costs associated with the administration of our business and consist primarily of compensation and related costs for administrative personnel, insurance, and legal and other professional fees. Most of these costs relate to personnel, insurance and facilities and are relatively fixed. In 2007 we were required to be compliant with the management assessment and auditor attestation provisions of Section 404 of the Sarbanes-Oxley Act of 2002. We incurred substantial additional costs in 2007 to achieve this compliance with the Sarbanes-Oxley Act. In 2008, our Sarbanes-Oxley related audit expenses decreased as we were not required to have to have an audit of the Company's internal controls for the 2008 fiscal year as required
under Section 404(b) of Sarbanes-Oxley as our "non-affiliated market capitalization" fell below the $50 million level as of June 30, 2008 and, accordingly, we exited the accelerated filer status as of December 31, 2008. Going forward we expect to continue to incur significant costs in general and administrative expenses in future years to maintain compliance.
Stock-Based Compensation
Effective in the first quarter of fiscal 2006, we adopted accounting provisions pursuant to the requirements of SFAS 123(R), "Share Based Payment." SFAS 123(R) addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123(R) requires us to expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist of depreciation and amortization of property, equipment and software licenses, and intangible assets. We have completed the acquisition of six businesses in the past four years, and accordingly have been increasing our intangible amortization expense. In the first quarter of 2007, we completed the acquisition of CAS Systems, and in the third quarter of 2007, we completed the acquisition of Qinteraction Limited. We expect amortization expense to decrease significantly in 2009 due to the company taking a charge to write-down a significant portion of its amortizable intangible assets in the 4th quarter of 2008. See the discussions below regarding the Goodwill and Other Intangible Assets and the Impairment of Goodwill & Other Intangible Assets.
Interest and Other Income (Expense), Net
Interest and other income (expense), net reflects income received on cash and cash equivalents, interest expense on leases to secure equipment, software and other financing agreements, foreign currency gains/losses, and other income and expense.
Critical Accounting Policies/Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. Although actual results have historically been reasonably consistent with management's expectations, future results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management has discussed the development of our critical accounting policies with the audit committee of the board of directors and has reviewed the disclosures of such policies and management's estimates in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
We disclosed our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Management believes there have been no significant changes during the year ended December 31, 2008.
Use of Estimates
The preparation of the financial statements and related disclosures, in conformity with accounting principles generally accepted in the U.S., requires us to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We evaluate our estimates
on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The policies that contain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes include:
• revenue recognition;
• the allowance for doubtful accounts;
• impairment of long-lived assets, including goodwill, intangible assets and property and equipment;
• measurement of our deferred tax assets and corresponding valuation allowance;
• allocation of purchase price in business combinations;
• fair value estimates for the expense of employee stock options.
We have other equally important accounting policies and practices. However, once adopted, these policies either generally do not require us to make significant estimates or assumptions or otherwise only require implementation of the adopted policy, not a judgment as to the application of policy itself. Despite our intention to establish accurate estimates and assumptions, actual results could differ materially from those estimates under different assumptions or conditions.
Revenue Recognition and Financial Statement Presentation
Substantially all of our revenue is generated from the sale of service contract renewals, lead development services and software licenses for hosted application software for training sales. We recognize revenue from the sale of our clients' service contract renewals under the provisions of Staff Accounting Bulletin ("SAB") 104 "Revenue Recognition" and on the "net basis" in accordance with EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Revenue from the sale of service contract renewals is recognized when an order from the client's customer is received; the service contract agreement is delivered; the fee is fixed or determinable; the collection of the receivable is reasonably assured; and no significant post-delivery obligations remain unfulfilled. Revenue from lead development services we perform is recognized as the services are delivered and is generally earned ratably over the service contract period. Some of our lead development service revenue is earned when we achieve certain attainment levels and is recognized upon customer acceptance of the service. We earn revenue from our licensing of hosted software applications for training sales ratably over each contract period, having considered EITF 00-03: Application of AICPA SOP 97-2, "Software Revenue Recognition," to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware, which distinguishes hosting services that might fall under the scope of SOP 97-2: Software Revenue Recognition. Since these software licenses are usually paid in advance, we record a deferred revenue liability on our balance sheet that represents the prepaid portions of licenses that will be earned over the next one to two years.
We also evaluate our agreements for multiple element arrangements, taking into consideration the guidance from both EITF 00-21: Revenue Arrangements with Multiple Deliverables, and TPA 5100.39: Software Revenue Recognition for Multiple-Element Arrangements. Our agreements typically do not contain multiple deliverables. However, in the few instances where our agreements have contained multiple deliverables, they do not have value to our customers on a standalone basis, and therefore the deliverables are considered together as one unit of accounting. Revenue is recorded using a proportional performance model, where revenue is recognized as performance occurs, based on the relative value of the performance that has occurred at that point in time compared to that of the total contract, or deferred until all elements are delivered as appropriate.
Our revenue recognition policy involves significant judgments and estimates about collectibility. We assess the probability of collection based on a number of factors, including past transaction history and/or the creditworthiness of our clients' customers, which is based on current published credit ratings, current events and
circumstances regarding the business of our clients' customer and other factors that we believe are relevant. If we determine that collection is not reasonably assured, we defer revenue recognition until such time as collection becomes reasonably assured, which is generally upon receipt of cash payment.
In addition we provide an allowance in accrued liabilities for the cancellation of service contracts that occurs within a specified time after the sale, which is typically less than 30 days. This amount is calculated based on historical results and constitutes a reduction of the net revenue we record for the commission we earn on the sale.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients and clients' customers to make required payments of amounts due to us. The allowance is comprised of specifically identified account balances for which collection is currently deemed doubtful. In addition to specifically identified accounts, estimates of amounts that may not be collectible from those accounts whose collection is not yet deemed doubtful but which may become doubtful in the future are made based on historical bad debt write-off experience. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. At December 31, 2008 and 2007, our allowance for potentially uncollectible accounts was $550,000 and $285,000, respectively.
Goodwill and Other Intangible Assets
We apply the guidance of the Financial Accounting Standards Board (FASB) Statement No. 141, Business Combinations in accounting for the assets related to our acquisitions. Goodwill represents the excess of the acquisition purchase price over the estimated fair value of net tangible and intangible assets acquired. Goodwill is not amortized, but instead tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. In our analysis of goodwill and other indefinite lived intangible assets we apply the guidance of FASB Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142) in determining whether any impairment conditions exist. In our analysis of other finite lived amortizable intangible assets, we apply the guidance of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), in determining whether any impairment conditions exist. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Intangible assets are attributable to the various technologies, customer relationships and trade names of the businesses we have acquired.
In the 1st quarter of 2008, we performed our annual goodwill impairment evaluation required under SFAS 142 and concluded that no impairment indicators existed at that time. In the 4th quarter of 2008, we changed the annual goodwill impairment evaluation date required under SFAS 142, from January 31 to October 31 to better align this evaluation with our annual planning and budgeting process. As of October 31, 2008, we started to perform our annual impairment analysis of goodwill in accordance with SFAS 142. At that time, our initial indications determined that goodwill was impaired. Additionally in the 4th quarter of 2008, our market capitalization declined significantly with the price of our stock as a result of declining sales and overall market conditions. Due to the decline in our market capitalization at December 31, 2008, depressed market conditions, deteriorating industry trends, and a significant downward revision of our forecasts, we again tested for the potential impairment of goodwill as these were considered triggering events under SFAS 142, and for amortizable intangible assets under SFAS 144.
Prior to our goodwill impairment testing under SFAS 142 in the 4th quarter of 2008, we also assessed the fair value of our long-lived assets including our other finite-lived amortized intangible assets under SFAS 144. Based on this analysis, we determined that the carrying value of our amortizable intangible assets exceeded their fair value based upon the estimated discounted cash flows related to the assets and we recorded impairment charges of approximately $1.1 million related to intangible assets held at the Lead Development reporting unit, and approximately $1.1 million related to intangible assets held at the Rainmaker Asia reporting unit.
SFAS 142 provides for a two-step approach to determining whether and by how much goodwill has been impaired. The first step requires a comparison of the fair value of the reporting unit to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second step must be performed to determine the amount, if any, of actual impairment. Step 1 of the impairment analysis determined that the carrying value of our Lead Development and Rainmaker Asia reporting units, subsequent to the impairment of our other finite-lived amortizable intangible assets noted above, was greater than their fair value, and that the goodwill relating to these reporting units was impaired. Upon completion of Step 2 of the analysis, we recorded a goodwill impairment charge of approximately $6.1 million on the Lead Development reporting unit and approximately $5.4 million on the Rainmaker Asia reporting unit, representing the entire balance of goodwill at these reporting units. The impairment evaluations for goodwill and other intangible assets included reasonable and supportable assumptions and were based on estimates of projected future cash flows.
We report segment results in accordance with SFAS No. 131, Segment Reporting (SFAS 131). We have identified three operating segments in accordance with SFAS 131: Contract Sales, Lead Development, and Rainmaker Asia. The Company's chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by detailed information listing revenues by customer, for purposes of making operating decisions and assessing financial performance. Further, our operating segments have similar long-term average gross margins. Accordingly, the Company has concluded that we have one reportable segment. However, in accordance with SFAS 142, we are required to test goodwill for impairment at the reporting unit level which is an operating segment or one level below an operating segment. Thus, our reporting units for goodwill impairment testing are our operating segments of Contract Sales, Lead Development and Rainmaker Asia.
Long-Lived Assets
Long-lived assets (excluding goodwill) including our purchased intangible assets . . .
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